-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VnzcxNx9cpDSV9bDEuKlfceQZ6as19/4aJRK4rBC/WGgWZEUMQJtJc4hzs+Ejr/Q UdSwKvhuDfe9OJDCGzHcaw== 0000023675-97-000003.txt : 19970328 0000023675-97-000003.hdr.sgml : 19970328 ACCESSION NUMBER: 0000023675-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSOLIDATED FREIGHTWAYS INC CENTRAL INDEX KEY: 0000023675 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 941444798 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05046 FILM NUMBER: 97564220 BUSINESS ADDRESS: STREET 1: 3240 HILLVIEW AVE CITY: PALO A LTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4154942900 10-K 1 10K DOCUMENT Page 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 Commission File Number 1-5046 CONSOLIDATED FREIGHTWAYS, INC. DBA CNF TRANSPORTATION INC. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 3240 Hillview Avenue, Palo Alto, California 94304 Telephone Number (415) 494-2900 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common Stock ($.625 par value) New York Stock Exchange Pacific Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: 9-1/8% Notes Due 1999 Medium-Term Notes, Series A 7.35% Notes Due 2005 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes___X___ No_______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ___X__ No ______ Aggregate market value of voting stock held by persons other than Directors, Officers and those shareholders holding more than 5% of the outstanding voting stock, based upon the closing price per share Composite Tape on January 31, 1996: $735,960,184. Number of shares of Common Stock outstanding as of January 31, 1997: 45,001,442 DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV Consolidated Freightways, Inc. 1996 Annual Report to Shareholders (only those portions referenced herein are incorporated in this Form 10-K). Part III Proxy Statement dated March 24, 1997 (only those portions referenced herein are incorporated in this Form 10-K). PAGE 2 CONSOLIDATED FREIGHTWAYS, INC. DBA CNF TRANSPORTATION INC. FORM 10-K Year Ended December 31, 1996 ___________________________________________________________________________ INDEX Item Page PART I 1. Business 3 2. Properties 11 3. Legal Proceedings 12 4. Submission of Matters to a Vote of Security Holders 12 PART II 5. Market for the Company's Common Stock and Related Security Holder Matters 12 6. Selected Financial Data 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 8. Financial Statements and Supplementary Data 13 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III 10. Directors and Executive Officers of the Company 14 11. Executive Compensation 15 12. Security Ownership of Certain Beneficial Owners and Management 15 13. Certain Relationships and Related Transactions 15 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15 SIGNATURES 16 INDEX TO FINANCIAL INFORMATION 19 PAGE 3 CONSOLIDATED FREIGHTWAYS, INC. dba CNF TRANSPORTATION INC. FORM 10-K Year Ended December 31, 1996 ___________________________________________________________________________ PART I ITEM 1. BUSINESS (a) General Development of Business On December 2, 1996, Consolidated Freightways, Inc. (the Registrant) completed the previously announced tax-free distribution (the Spin-off) to its shareholders of a new publicly traded company, Consolidated Freightways Corporation (CFC), composed of its long-haul motor carrier and related businesses. The Registrant's shareholders received one share of CFC stock for every two shares of the Registrant's stock owned on November 15, 1996. Following the Spin-off, the Registrant began doing business as CNF Transportation Inc., and intends to seek shareholder approval to change its name at the annual shareholders meeting to be held April 28, 1997. The Registrant is now a company that participates through subsidiaries in regional trucking, truckload and intermodal rail, domestic and international air cargo services, ocean forwarding, contract logistics and related transportation activities. These operations are organized into three primary business segments: regional trucking and full-service truckload (Con-Way Transportation Services); air freight and ocean forwarding (Emery Worldwide); and Other which is comprised of a third-party contract logistics company (Menlo Logistics), Road Systems, a trailer manufacturer, and VantageParts, a wholesale truck parts distributor. Consolidated Freightways, Inc. was incorporated in Delaware in 1958 as a successor to a business originally established in 1929. It is herein referred to as the "Registrant" or "Company". (b) Financial Information About Industry Segments The operations of the Company are primarily conducted in the U.S. but to an increasing extent are conducted in major foreign countries. An analysis by industry group of revenues, operating income, depreciation and capital expenditures for the years ended December 31, 1996, 1995 and 1994, and identifiable assets as of those dates is presented in Note 13 on pages 37 and 38 of the 1996 Annual Report to Shareholders and is incorporated herein by reference. Geographic group information is also presented therein. Intersegment revenues and earnings thereon have been eliminated. PAGE 4 (c) Narrative Description of Business The Company, for reporting purposes, has designated three principal operating segments: the Con-Way Transportation Services Group which provides one- and two-day, less-than-truckload service as well as highway, rail and multi-modal logistics services; the Emery Worldwide Group which is responsible for all domestic and international air freight activities and ocean forwarding services; and the Other group which is comprised of the full-service contract logistics subsidiary, Menlo Logistics, Road Systems and VanatageParts. Each segment is described in greater detail as follows: CON-WAY TRANSPORTATION SERVICES Con-Way Transportation Services, Inc. (CTS) is a time-definite and day- definite freight transportation company with business units that provide regional and inter-regional LTL freight transportation; full-service truckload freight service and expedited shipping. CTS serves the regional and national markets utilizing a dedicated highway fleet and intermodal rail stack train resources for regional, inter-regional and transcontinental transportation; urgent or emergency ground expedited shipping; local and interstate container drayage and international shipping; assembly and distribution logistics programs. CTS has four main operating units consisting of three regional carriers as well as a truckload operation. Beginning in 1996, CTS began operations of Con-Way NOW, an expedited and emergency ground shipping company initially serving the Midwest. Con-Way Regional Carriers CTS has three regional motor carrier units, each of which operates dedicated regional trucking networks principally serving core geographic territories with next-day and second-day service. The regional carriers serve manufacturing, industrial, commercial and retail business-to-business customers with a fleet of approximately 23,500 trucks, tractors and trailers at December 31, 1996. Con-Way Western Express (CWX) was founded in May 1983 and today operates in 13 western states and serves Canada and Mexico. At December 31, 1996, CWX operated 63 service centers. Con-Way Central Express (CCX) was founded in June 1983 and today serves 23 states of the central and northeast U.S. (including New Jersey and metropolitan New York City), and Ontario, Canada. At December 31, 1996 CCX operated 205 service centers Con-Way Southern Express was founded in April 1987 and was combined with CTS' south-western regional operation in December 1994 to form a single operating unit under the Con-Way Southern Express (CSE) name. CSE serves a 14-state southern market from Texas to the Carolinas and Florida, and also serves Puerto Rico and Mexico. CSE operated 100 service centers at December 31, 1996. CTS has completed regional service expansions that allow the regional carriers to provide next-day and second-day freight delivery between their principal geographic regions, utilizing existing infrastructure. CTS can now provide full regional service throughout the U.S. and parts of Canada. The joint service offering is intended to generate additional business by allowing each regional carrier to PAGE 5 compete for new traffic and provide coverage of regional market lanes not individually serviced as part of the regional carrier's core territory. In 1996, a new subsidiary, Con-Way NOW, began operations in the Midwest serving the expedited surface shipment market with plans for expansion in 1997. Con-Way Truckload Services Con-Way Truckload Services (CWT), formerly known as Con-Way Intermodal, is a full-service, multi-modal truckload company. CWT provides door-to-door transcontinental movement of truckload shipments by rail container stack train and rail trailer, utilizing nationwide operating alliances with major railroads. It also provides expedited inter-regional and regional over-the- road truckload service with a fleet of company-owned trucks and trailers. Additionally, CWT provides rail freight forwarding with domestic intermodal marketing services, assembly and distribution services, and local and interstate container drayage. Employees CTS's domestic employment has increased to approximately 14,300 employees at December 31, 1996 from approximately 12,400 at December 31, 1995 and 9,700 employees at December 31, 1994. Customers There is a broad diversity in the customers served, size of shipments, commodities transported and length of haul. No single customer or commodity accounted for more than a small fraction of total revenues. Competition The regional trucking companies face competition as national LTL companies extend into regional markets, and acquire and combine formerly independent regional carriers into inter-regional groups. Competitors include both national LTL companies and regional companies, some of which may have greater financial and other resources than CTS. CTS has sought to meet these competitive challenges by, among other things, new service offerings, continued expansion by its regional carrier networks, extension of next-day and second-day service and enhanced inter-regional network capabilities. Fuel Fuel prices have increased significantly in the last year after remaining stable for the two prior years. CTS's average annual diesel fuel cost per gallon (without tax) has increased approximately 20% in 1996 compared with 1995. The 1995 fuel cost remained virtually unchanged compared with the per gallon cost of 1994. To recapture the fuel cost increases, CTS implemented a fuel surcharge beginning in the second-half of 1996. PAGE 6 Federal and State Regulation Regulation of motor carriers has changed substantially in recent years. The process started with the Motor Carrier Act of 1980, which allowed easier access to the industry by new trucking companies, removed many restrictions on expansion of services by existing carriers, and increased price competition by narrowing the antitrust immunities available to the industry's collective ratemaking organizations. This deregulatory trend was continued by subsequent legislation. The process culminated with federal pre-emption of most economic regulation of intrastate trucking regulatory bodies effective January 1, 1995, and with legislation to terminate the Interstate Commerce Commission (ICC) effective January 1, 1996. Currently, the motor carrier industry is subject to federal regulation by the Federal Highway Administration (FHWA) and the Surface Transportation Board (STB), both of which are units of the United States Department of Transportation (DOT). The FHWA performs certain functions inherited from the ICC relating chiefly to motor carrier registration, cargo and liability insurance, extension of credit to motor carrier customers, and leasing of equipment by motor carriers from owner-operators. In addition, the FHWA enforces comprehensive trucking safety regulations relating to driver qualifications, driver hours of service, safety-related equipment requirements, vehicle inspection and maintenance, recordkeeping on accidents, and transportation of hazardous materials. As pertinent to the general freight trucking industry, the STB has authority to resolve certain types of pricing disputes and authorize certain types of intercarrier agreements under jurisdiction inherited from the ICC. At the state level, federal preemption of economic regulation does not prevent the states from regulating motor vehicle safety on their highways. In addition, federal law allows all states to impose insurance requirements on motor carriers conducting business within their borders, and empowers most states to require motor carriers conducting interstate operations through their territory to make annual filings verifying that they hold appropriate registrations from FHWA. Motor carriers also must pay state fuel taxes and vehicle registration fees, which normally are apportioned on the basis of mileage operated in each state. EMERY WORLDWIDE Emery Worldwide (EWW), the Company's air freight unit, was formed when the Company purchased Emery Air Freight Corporation in April 1989. EWW provides global air cargo services to 200 countries through an integrated, combination carrier, freight system designed for the movement of parcels and packages of all sizes and weights. In North America, EWW provides these services through a system of sales offices and service centers, and overseas through foreign subsidiaries, branch sales offices, service centers and agents. In 1996, international revenues comprised nearly 40% of Emery's total commercial revenues. EWW provides door-to-door service within North America by using its own airlift system, supplemented with commercial airlines. International services are performed by operating primarily as an air freight forwarder using commercial airlines, and PAGE 7 with controlled lift used on a limited basis. Emery also operated approximately 2,000 trucks, vans and tractors at December 31, 1996. As of December 31, 1996, EWW utilized a fleet of 71 dedicated aircraft, 48 of which are leased on a long-term basis, while 9 were owned and 14 were contracted on a short-term basis to supplement nightly volumes and to provide feeder services. The nightly lift capacity of the aircraft fleet, excluding charters, was over 4 million pounds. EWW's hub-and-spoke system is based at the Dayton, Ohio International Airport where a leased air cargo facility (Hub) and related support facilities are located. The Hub handles all types of shipments, ranging from small packages to heavyweight cargo, with a total effective sort capacity of approximately 1.2 million pounds per hour. The operation of the Hub in conjunction with EWW's airlift system enables it to maintain a high level of service reliability. Through a separate subsidiary of the Company, Emery Worldwide Airlines, Inc. (EWA), the Company provides nightly cargo airline services under a contract with the U.S. Postal Service (USPS) to carry Express and Priority Mail, using 24 aircraft, of which 4 were leased on a long-term basis and 20 were owned at December 31, 1996. The ten year USPS contract was awarded to EWA in 1993 with service beginning in January 1994. The Company has recognized approximately $110 million of revenue each year in 1996, 1995 and 1994, respectively, from contracts to carry Express and Priority Mail for the USPS. Operating subsidiaries of EWW include Emery Expedite!, a rapid response freight handling subsidiary providing door-to-door delivery of shipments in North America and overseas. EWW's logistics subsidiary, Emery Global Logistics, continues to expand its service capabilities, and now operates warehouse and distribution centers for customers in six countries. Emery Customs Brokerage provides full service customs clearance regardless of mode or carrier. Another subsidiary, Emery Ocean Services, is a global freight forwarder and non-vessel operating common carrier that provides full and less-than-container load service. Employees As of December 31, 1996, EWW had nearly 10,000 full-time and regular part-time employees compared with approximately 9,000 at December 31, 1995. EWW had approximately 8,000 employees at December 31, 1994. Technology An important element in the movement of goods is the rapid movement of information to track freight, optimize carrier selections, and interlink and analyze customer data. Starting in 1996, EWW began to invest in what is expected to be a $70 million multi-year technology program to upgrade its hardware and software systems architecture, including the tracking system at its Hub in Dayton, Ohio. The system will provide enhanced tracking information for shipments to reduce missorts, avoid potential overloads and to signal freight with specialized handling requirements. PAGE 8 Customers EWW services, among others, the automotive, aerospace, machinery, metals, electronic and electrical equipment, chemical, apparel, film and technology industries. Service industries and governmental entities also utilize EWW's services. Both U.S. and international operations of EWW have a wide variety of customers. No single customer accounted for more then 10% of EWW's total commercial revenues in 1996. Competition The heavy air-freight market within North America is highly competitive and price and service sensitive. The Company believes that, in 1996, EWW had the largest market share, based on revenues, in the North American heavy air-freight segment. EWW competes with other integrated air freight carriers as well as freight forwarders. The North Atlantic market is especially price sensitive due to abundant airlift capacity. Competition in international markets is also service and price sensitive. In these markets, which the Company believes are typically more fragmented than the North American market, EWW competes with international airlines and air freight forwarders. EWW's competitors in North American and international markets include companies which may have greater financial and other resources than EWW. Fuel EWW purchases substantially all of its jet fuel from major oil companies, refiners and trading companies on annual contracts with prepayment and/or volume discounts. These contract purchases are supplemented by spot purchases. The price of jet fuel has increased significantly in 1996 following only a slight increase in 1995. EWW's 1996 weighted average cost per gallon (without tax) increased over 21% compared with the 1995 cost per gallon. EWW began to recover a portion of these higher costs starting in November 1996 with a fuel index fee. The 1995 weighted average price per gallon was less than 2% higher than 1994. EWW believes that it has the flexibility to continue its operations without material interruption unless there are significant curtailments of its jet fuel supplies. Neither EWW nor the operators of the aircraft it charters have experienced any material fuel supply problems. There is a four million gallon fuel storage facility at the Hub. Regulation of Air Transportation The air transportation industry is subject to federal regulation under the Federal Aviation Act of 1958, as amended (Aviation Act) and regulations issued by the Department of Transportation (DOT) pursuant to the Aviation Act. EWW, as an air freight forwarder, and EWA, as an airline, are subject to different regulations. Air freight forwarders are exempted from most DOT economic regulations and are not subject to Federal Aviation Administration (FAA) safety regulations, except security-related rules. Airlines are subject to economic regulation by the DOT, and maintenance, operating and other safety-related regulation by the FAA. Thus, PAGE 9 EWA and other airlines conducting operations for EWW are subject to DOT and FAA regulation while EWW is not covered by most DOT and FAA regulations. Regulation of Ground Transportation When EWW provides ground transportation of cargo having prior or subsequent air movement, the ground transportation is exempt from the motor carrier registration requirements and economic regulations which were inherited from the ICC by FHWA and STB, respectively. Such ground transportation, however, is subject to comprehensive trucking safety regulation by FHWA as described in the Con-Way Transportation Services section. In addition, EWW holds FHWA motor carrier registrations which can be utilized in providing non-exempt ground transportation. For a description of applicable state regulations, refer to the discussion in the Con-Way Transportation Services section. Environmental Matters During recent years, operations at several airports have been subject to restrictions or curfews on arrivals or departures during certain night-time hours designed to reduce or eliminate noise for surrounding residential areas. None of these restrictions have materially affected EWW's operations. If such restrictions were to be imposed with respect to the airports at which EWW's activities are centered, and no alternative airports were available to serve the affected areas, there could be a material adverse effect on EWW's operations. As provided in the Aviation Act, the FAA is authorized to establish aircraft noise standards. Under the National Emission Standards Act of 1967, as amended, the administrator of the Environmental Protection Agency is authorized to issue regulations setting forth standards for aircraft emissions. EWW believes that its present fleet of owned, leased or chartered aircraft is operating in compliance with currently applicable noise and emission laws. The Aviation Noise and Capacity Act of 1990 establishes a national aviation noise policy. The FAA has promulgated regulations under this Act regarding the phase-in requirements for compliance. This legislation and the related regulations will require all of EWW's and EWA's owned and leased aircraft eligible for operation in the contiguous United States to either undergo modifications or otherwise comply with Stage 3 noise restrictions by year- end 1999. OTHER Menlo Logistics Menlo Logistics, Inc. (MLI), founded in 1990, provides full-service contract logistics services for technology, manufacturing and industrial, food and beverage and retail businesses. MLI assists its customers in managing their supply and distribution networks, including transportation management, dedicated contract warehousing, dedicated contract carriage, just-in-time delivery programs, customer order processing and freight bill payment and auditing. At December 31, 1996, MLI had a workforce of approximately 1,500 employees. PAGE 10 As contract logistics is a relatively new industry, competition is expected to come from new entrants into the markets MLI serves. MLI addresses the increased competition by utilizing technologies and its established experience. Refer to the Con-Way Transportation Services section for discussion of federal and state regulation affecting the transportation activities of MLI. Road Systems and VantageParts Two non-carrier operations that are included in the Other segment for reporting purposes generate a majority of their revenues from sales to other subsidiaries of the Company and in prior years from the spun-off entity, CFC. Road Systems, primarily manufactures and rebuilds trailers, converter dollies and other transportation equipment. VantageParts serves as a distributor and remanufacturer of vehicle component parts and accessories to the heavy-duty truck and trailer industry, as well as the maritime, construction, aviation and other industries. GENERAL The research and development activities of the Company are not significant. During 1996, 1995 and 1994 there was no single customer of the Company that accounted for more than 10% of consolidated revenues. The total number of employees is presented in the "Five Year Financial Summary" on page 40 of the 1996 Annual Report to Shareholders and is incorporated herein by reference. The Company has been designated a Potentially Responsible Party (PRP) by the EPA with respect to the disposal of hazardous substances at various sites. The Company expects its share of the clean-up cost will not have a material adverse effect on the Company's financial position or results of operations. The Company expects the costs of complying with existing and future federal, state and local environmental regulations to continue to increase. On the other hand, it does not anticipate that such cost increases will have a materially adverse effect on the Company. (d) Financial Information About Foreign and Domestic Operations and Export Sales Information as to revenues, operating income and identifiable assets for each of the Company's business segments and for its foreign operations in 1996, 1995 and 1994 is contained in Note 13 on pages 37 and 38 of the 1996 Annual Report to Shareholders and is incorporated herein by reference. PAGE 11 ITEM 2. PROPERTIES The following summarizes the freight service centers operated by the Company at December 31, 1996: Owned Leased Total Con-Way Transportation Services 53 319 372 Emery Worldwide 12 243 255 The following table sets forth the location and square footage of the Company's principal freight service centers at December 31, 1996: Location Square Footage CTS - freight service centers Chicago, IL 113,116 Charlotte, NC 102,743 Des Plains, IL 100,440 Columbus, OH 86,537 Oakland, CA 85,600 Dallas, TX 82,000 Atlanta, GA 56,160 Cincinnati, OH 55,618 Detroit, MI 66,320 St. Louis, MO 49,065 Carlstadt, NJ 48,360 Santa Fe Springs, CA 45,936 Jackson, MS 44,596 Knoxville, TN 44,460 Aurora, IL 44,235 South Bend, IN 39,320 Milwaukee, WI 36,560 Ft. Wayne, IN 35,400 Pontiac, MI 34,450 Sacramento, CA 25,968 Braintree, MA 22,160 EWW - freight service centers * Dayton, OH 620,000 Los Angeles, CA 78,264 Chicago, IL 59,976 Boston, MA 42,236 Indianapolis, IN 38,500 * Facility partially or wholly financed through the issuance of industrial revenue bonds. Principal amount of debt is secured by the property. PAGE 12 ITEM 3. LEGAL PROCEEDINGS The legal proceedings of the Company are summarized in Note 12 on page 37 of the 1996 Annual Report to Shareholders and are incorporated herein by reference. Discussions of certain environmental matters are presented in Item 1 and Item 7. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is listed for trading on the New York and Pacific Stock Exchanges under the symbol "CNF". The Company's common stock price for each of the quarters in 1996 and 1995 is included in Note 14 on page 39 of the 1996 Annual Report to Shareholders and is incorporated herein by reference. Cash dividends on common shares had been paid in every year from 1962 to 1990. In June 1990 the Company's Board of Directors suspended the quarterly dividend. In December 1994, the Board of Directors reinstated a $.10 per share quarterly cash dividend on common stock. The amounts of quarterly dividends declared on common stock for the last two years are included in Note 14 on page 39 of the 1996 Annual Report to Shareholders and are incorporated herein by reference. Under the terms of the restructured TASP Notes, as set forth in Note 14 on pages 30 and 31 of the 1996 Annual Report to Shareholders, the Company is restricted from paying dividends in an aggregate amount in excess of $10 million plus one half of the cumulative net income applicable to common shareholders since the commencement of the agreement. Effective March 15, 1995, all of the 690,000 shares of the Company's Series C Preferred Stock were converted to 6,900,000 shares of common stock. As of December 31, 1996, there were 16,090 holders of record of the common stock ($.625 par value) of the Company. The number of shareholders is also presented in the "Five Year Financial Summary" on page 40 of the 1996 Annual Report to Shareholders and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data is presented in the "Five Year Financial Summary" on page 40 of the 1996 Annual Report to Shareholders and is incorporated herein by reference. PAGE 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in the "Financial Review and Management Discussion" on pages 18 through 20, inclusive, of the 1996 Annual Report to Shareholders and is incorporated herein by reference. Certain statements included or incorporated by reference herein constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties. Any such forward-looking statements contained or incorporated by reference herein should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks" or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. In that regard, the following factors, among others, could cause actual results and other matters to differ materially from those in such forward-looking statements: changes in general business and economic conditions; increasing domestic and international competition and pricing pressure; changes in fuel prices; uncertainty regarding the Company's ability to improve results of operations; labor matters, including changes in labor costs, renegotiation of labor contracts and the risk of work stoppages or strikes; changes in governmental regulation; environmental and tax matters; and matters relating to the recently completed Spin-off of Consolidated Freightways Corporation (CFC). In that regard, the Company is or may be subject to substantial liabilities with respect to certain matters relating to CFC's business and operations, including, without limitation, guarantees of certain indebtedness of CFC and liabilities for employment-related matters. Although CFC is, in general, either the primary obligor or jointly and severally liable with the Company with respect to these matters, a failure to pay or other default by CFC with respect to the obligations as to which the Company is or may be, or may be perceived to be, liable, whether because of CFC's bankruptcy or insolvency or otherwise, could lead to substantial claims against the Company. As a result of the foregoing, no assurance can be given as to future results of operations or financial condition. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Report of Independent Public Accountants are presented on pages 21 through 40, inclusive, of the 1996 Annual Report to Shareholders and are incorporated herein by reference. The unaudited quarterly financial data is included in Note 14 on page 39 of the 1996 Annual Report to Shareholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PAGE 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The identification of the Company's Directors is presented on pages 3 through 8, inclusive, of the Proxy Statement dated March 24, 1997 and those pages are incorporated herein by reference. The Executive Officers of the Company, their ages at December 31, 1996 and their applicable business experience are as follows: Donald E. Moffitt, 64, Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Moffitt joined Consolidated Freightways Corporation of Delaware, the Company's nationwide, full-service trucking subsidiary, as an accountant in 1955 and advanced to Vice President - Finance in 1973. In 1975, he transferred to the Company as Vice President - - Finance and Treasurer and in 1981, was elected Executive Vice President - Finance and Administration. In 1983, he assumed the additional duties of President, CF International and Air, Inc., where he directed the Company's international and air freight businesses. Mr. Moffitt was elected Vice Chairman of the Board of the Company in 1986. He retired as an employee and as Vice Chairman of the Board of Directors in 1988 and returned to the Company as Executive Vice President - Finance and Chief Financial Officer in 1990. Mr. Moffitt was named President and Chief Executive Officer of the Company and was elected to the Board of Directors in 1991. In 1995, Mr. Moffitt was named Chairman of the Board of Directors. Mr. Moffitt is a member of the Boards of Directors of the U.S. Chamber of Commerce, the California Business Roundtable, the Conference Board and the Business Advisory Council of the Northwestern University Transportation Center. He also serves on the boards of the San Francisco Bay Area Council, Boy Scouts of America and the American Red Cross, and is a member of the Board of Trustees of the Automotive Safety Foundation and the National Commission Against Drunk Driving. He is a former member of the Board of Directors and the Executive Committee of the Highway Users Federation. Mr. Moffitt is Chairman of the Executive Committee and serves on the Director Affairs Committee of the Company. David I. Beatson, 49, President and Chief Executive Officer of Emery Air Freight Corporation and Senior Vice President of the Company. Mr. Beatson joined CF AirFreight in 1977, advancing through several increasingly responsible positions to Vice President of National Accounts. After leaving the Company for a time, he returned to EWW in 1991 as Vice President of Sales and Marketing. He became President and Chief Executive Officer of Emery Air Freight Corporation in 1994. Gregory L. Quesnel, 48, Executive Vice President and Chief Financial Officer of the Company. Mr. Quesnel joined Consolidated Freightways Corporation of Delaware in 1975 as Director of Financial Accounting. Through several increasingly responsible financial positions, he advanced to become the top financial officer of CFCD. In 1989, he was elected Vice President-Accounting for the Company and in 1990, was named Vice President and Treasurer. Mr. Quesnel became Senior Vice President-Finance and Chief Financial Officer of the Company in 1991 and Executive Vice President and Chief Financial Officer in 1993. PAGE 15 Robert T. Robertson, 55, President and Chief Executive Officer of Con-Way Transportation Services, Inc. and Senior Vice President of the Company. Mr. Robertson joined CFCD in 1970 as a sales representative and advanced to Manager of Eastern Area Sales by 1973. He transferred to Texas in 1976 where he became involved in CFCD's operations and was promoted to Division Manager in 1978. In 1983, he was named Vice President and General Manager of Con-Way Transportation Services, Inc. In 1986, Mr. Robertson was elected President of CTS. Eberhard G.H. Schmoller, 53, Senior Vice President, General Counsel and Secretary of the Company. Mr. Schmoller joined CFCD in 1974 as a staff attorney and in 1976 was promoted to CFCD assistant general counsel. In 1983, he was appointed Vice President and General Counsel of CF AirFreight and assumed the same position with EWW after the acquisition in 1989. Mr. Schmoller was named Senior Vice President and General Counsel of the Company in 1993. ITEM 11. EXECUTIVE COMPENSATION The required information for Item 11 is presented on pages 12 through 16, inclusive, of the Proxy Statement dated March 24, 1997, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The required information for Item 12 is included on pages 9, 10 and 30 of the Proxy Statement dated March 24, 1997 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Exhibits Filed 1. Financial Statements See Index to Financial Information. 2. Financial Statement Schedules See Index to Financial Information. 3. Exhibits See Index to Exhibits. (b) Reports on Form 8-K A Form 8-K dated December 2, 1996, was filed on December 17, 1996, under Item 5, Other Information, to report the previously announced spin- off to the Company's shareholders of the stock of the new publicly traded company Consolidated Freightways Corporation, composed of the long-haul carrier and related businesses. Included in the filing were amended By- laws, as of December 9, 1996. PAGE 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSOLIDATED FREIGHTWAYS, INC. dba CNF TRANSPORTATION INC. (Registrant) March 26, 1997 /s/Donald E. Moffitt Donald E. Moffitt Chairman, President and Chief Executive Officer March 26, 1997 /s/Gregory L. Quesnel Gregory L. Quesnel Executive Vice President and Chief Financial Officer March 26, 1997 /s/Gary D. Taliaferro Gary D. Taliaferro Vice President and Controller PAGE 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. March 26, 1997 /s/Donald E. Moffitt Donald E. Moffitt Chairman of the Board, President and Chief Executive Officer March 26, 1997 _______________________ Robert Alpert, Director March 26, 1997 /s/Earl F. Cheit Earl F. Cheit, Director March 26, 1997 /s/Richard A. Clarke Richard A. Clarke, Director March 26, 1997 ________________________ Margaret G. Gill, Director March 26, 1997 /s/Robert Jaunich II Robert Jaunich II, Director March 26, 1997 /s/W. Keith Kennedy, Jr. W. Keith Kennedy, Jr., Director March 26, 1997 /s/Richard B. Madden Richard B. Madden, Director PAGE 18 SIGNATURES March 26, 1997 /s/Robert D. Rogers Robert D. Rogers, Director March 26, 1997 /s/William J. Schroeder William J. Schroeder, Director March 26, 1997 /s/Robert P. Wayman Robert P. Wayman, Director PAGE 19 CONSOLIDATED FREIGHTWAYS, INC. dba CNF TRANSPORTATION INC. FORM 10-K Year Ended December 31, 1996 ___________________________________________________________________________ INDEX TO FINANCIAL INFORMATION CNF Transportation Inc. and Subsidiaries The following Consolidated Financial Statements of CNF Transportation Inc. and Subsidiaries appearing on pages 21 through 39, inclusive, of the Company's 1996 Annual Report to Shareholders are incorporated herein by reference: Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1996 and 1995 Statements of Consolidated Income - Years Ended December 31, 1996, 1995 and 1994 Statements of Consolidated Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Statements of Consolidated Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements In addition to the above, the following consolidated financial information is filed as part of this Form 10-K: Page Consent of Independent Public Accountants 20 Report of Independent Public Accountants 20 Schedule II - Valuation and Qualifying Accounts 21 The other schedules have been omitted because either (1) they are neither required nor applicable or (2) the required information has been included in the consolidated financial statements or notes thereto. PAGE 20 SIGNATURE CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 2- 81030, 33-52599, 33-60619, 33-60625 and 33-60629. /s/Arthur Andersen LLP ARTHUR ANDERSEN LLP San Francisco, California March 26, 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of CNF Transportation Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in CNF Transportation Inc.'s 1996 Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 24, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The Schedule II--Valuation and Qualifying Accounts on page 21 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP ARTHUR ANDERSEN LLP San Francisco, California January 24, 1997 PAGE 21 SCHEDULE II CNF TRANSPORTATION INC. VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1996 (In thousands) DESCRIPTION ALLOWANCE FOR DOUBTFUL ACCOUNTS ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD 1996 $16,870 $16,729 $ - $(14,887)(a) $18,712 1995 $15,889 $11,017 $ - $(10,036)(a) $16,870 1994 $17,506 $ 5,067 $ - $ (6,684)(a) $15,889 (a) Accounts written off net of recoveries. PAGE 22 INDEX TO EXHIBITS ITEM 14(a)(3) Exhibit No. (3) Articles of incorporation and by-laws: 3.1 Consolidated Freightways, Inc. Certificates of Incorporation, as amended. (Exhibit 3(a)(2) to the Company's Quarterly Report Form 10-Q for the quarter ended March 31, 1987*) 3.2 Consolidated Freightways, Inc. By-laws, as amended, December 9, 1996 (Exhibit 3.1 to the Company's Form 8-K dated December 2, 1996*). (4) Instruments defining the rights of security holders, including debentures: 4.1 Consolidated Freightways, Inc. Stockholder Rights Plan. (Exhibit 1 on Form 8-A dated October 27, 1986*) 4.2 Certificate of Designations of the Series B Cumulative Convertible Preferred Stock. (Exhibit 4.1 as filed on Form SE dated May 25, 1989*) 4.3 Indenture between the Registrant and Bank One, Columbus, NA, as successor trustee, with respect to 9-1/8% Notes Due 1999, Medium- Term Notes, Series A and 7.35% Notes due 2005. (Exhibit 4.1 as filed on Form SE dated March 20, 1990*) 4.4 Form of Security for 9-1/8% Notes Due 1999 issued by Consolidated Freightways, Inc. (Exhibit 4.1 as filed on Form SE dated August 25, 1989*) 4.5 Officers' Certificate dated as of August 24, 1989 establishing the form and terms of debt securities issued by Consolidated Freightways, Inc. (Exhibit 4.2 as filed on Form SE dated August 25, 1989*) 4.6 Form of Security for Medium-Term Notes, Series A to be issued by Consolidated Freightways, Inc. (Exhibit 4.1 as filed on Form SE dated September 18, 1989*) 4.7 Officers' Certificate dated September 18, 1989, establishing the form and terms of debt securities to be issued by Consolidated Freightways, Inc. (Exhibit 4.2 as filed on Form SE dated September 19, 1989*) 4.8 Indenture between the Registrant and The First National Bank of Chicago Bank, trustee, with respect to debt securities. (Exhibit 4(d) as filed on Form S-3 dated June 27, 1995*) 4.9 Indenture between the Registrant and Bank One, Columbus, NA, trustee, with respect to subordinated debt securities. (Exhibit 4(e) as filed on Form S-3 dated June 27, 1995*) 4.10 Form of Security for 7.35% Notes due 2005 issued by Consolidated Freightways, Inc. (Exhibit 4.4 as filed on Form S-4 dated June 27, 1995*) * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. PAGE 23 Instruments defining the rights of security holders of long-term debt of Consolidated Freightways, Inc., and its subsidiaries for which financial statements are required to be filed with this Form 10-K, of which the total amount of securities authorized under each such instrument is less than 10% of the total assets of Consolidated Freightways, Inc. and its subsidiaries on a consolidated basis, have not been filed as exhibits to this Form 10-K. The Company agrees to furnish a copy of each applicable instrument to the Securities and Exchange Commission upon request. Exhibit No. (10) Material contracts: 10.1 Consolidated Freightways, Inc. Long-Term Incentive Plan of 1978, as amended through Amendment No. 7.(Exhibit 10.1 as filed on Form SE dated March 25, 1991*#) 10.2 Consolidated Freightways, Inc. Long-Term Incentive Plan of 1988 as amended through Amendment 3. (Exhibit 10.2 as filed on Form SE dated March 25, 1991*#) 10.3 Consolidated Freightways, Inc. Stock Option Plan of 1978, as amended through Amendment No. 1. (Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1981*#) 10.4 Consolidated Freightways, Inc. Stock Option Plan of 1988 as amended. (Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1987 as amended in Form S-8 dated December 16, 1992*#) 10.5 Forms of Stock Option Agreement (with and without Cash Surrender Rights) under the Consolidated Freightways, Inc. Stock Option Plan of 1988. (Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1987*#) 10.6 Form of Consolidated Freightways, Inc. Deferred Compensation Agreement. (Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1981*#) 10.7 Consolidated Freightways, Inc. Retirement Plan (formerly Emery Air Freight Corporation Pension Plan), as amended effective through January 1, 1985, and amendments dated as of October 30, 1987.(Exhibit 4.22 to the Emery Air Freight Corporation Quarterly Report on Form 10-Q dated November 16, 1987**) * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. ** Incorporated by reference to indicated reports filed under the Securities Act of 1934, as amended, by Emery Air Freight Corporation File No. 1-3893. # Designates a contract or compensation plan for Management or Directors. PAGE 24 Exhibit No. 10.8 Emery Air Freight Plan for Retirees, effective October 31, 1987. (Exhibit 4.23 to the Emery Air Freight Corporation Quarterly Report on Form 10-Q dated November 16, 1987**) 10.9 Consolidated Freightways, Inc. Common Stock Fund (formerly Emery Air Freight Corporation Employee Stock Ownership Plan, as effective October 1, 1987 ("ESOP"). (Exhibit 4.33 to the Emery Air Freight Corporation Annual Report on Form 10-K dated March 28, 1988**) 10.10 Employee Stock Ownership Trust Agreement, dated as of October 8, 1987, as amended, between Emery Air Freight Corporation and Arthur W. DeMelle, Daniel J. McCauley and Daniel W. Shea, as Trustees under the ESOP Trust. (Exhibit 4.34 to the Emery Air Freight Corporation Annual Report on Form 10-K dated March 28, 1988**) 10.11 Amended and Restated Subscription and Stock Purchase Agreement dated as of December 31, 1987 between Emery Air Freight Corporation and Boston Safe Deposit and Trust Company in its capacity as successor trustee under the Emery Air Freight Corporation Employee Stock Ownership Plan Trust ("Boston Safe"). (Exhibit B to the Emery Air Freight Corporation Current Report on Form 8-K dated January 11, 1988**) 10.12 Supplemental Subscription and Stock Purchase Agreement dated as of January 29, 1988 between Emery Air Freight Corporation and Boston Safe. (Exhibit B to the Emery Air Freight Corporation Current Report on Form 8-K dated February 12, 1988**) 10.13 Trust Indenture, dated as of November 1, 1988, between City of Dayton, Ohio and Security Pacific National Trust Company (New York), as Trustee and Bankers Trust Company, Trustee. (Exhibit 4.1 to Emery Air Freight Corporation Current Report on Form 8-K dated December 2, 1988**) 10.14 Bond Purchase Agreement dated November 7, 1988, among the City of Dayton, Ohio, the Emery Air Freight Corporation and Drexel Burnham Lambert Incorporated. (Exhibit 28.7 to the Emery Air Freight Corporation Current Report on Form 8-K dated December 2, 1988**) 10.15 Lease agreement dated November 1, 1988 between the City of Dayton, Ohio and Emery Air Freight Corporation. (Exhibit 10.1 to the Emery Air Freight Corporation Annual Report on Form 10-K for the year ended December 31, 1988**) 10.16 Consolidated Freightways, Inc. Directors' Election Form for deferral payment of director's fees. # 10.17 Consolidated Freightways, Inc. 1993 Executive Deferral Plan. (Exhibit 10.22 to the Company's Form 10-K for the year ended December 31, 1992*#). * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. ** Incorporated by reference to indicated reports filed under the Securities Act of 1934, as amended, by Emery Air Freight Corporation File No. 1-3893. # Designates a contract or compensation plan for Management or Directors. PAGE 25 Exhibit No. 10.18 $350 million Amended and Restated Credit Agreement dated November 21, 1996 among Consolidated Freightways, Inc. and various financial institutions. 10.19 Official Statement of the Issuer's Special Facilities Revenue Refunding Bonds, 1993 Series E and F dated September 29, 1993 among the City of Dayton, Ohio and Emery Air Freight Corporation. (Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). 10.20 Trust Indenture, dated September 1, 1993 between the City of Dayton, Ohio and Banker's Trust Company as Trustee. (Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). 10.21 Supplemental Lease Agreement dated September 1, 1993 between the City of Dayton, Ohio, as Lessor, and Emery Air Freight Corporation, as Lessee. (Exhibit 10.3 to the Company's Form 10-Q for the quarterly period ended September 30, 1993*). 10.22 Supplemental Retirement Plan dated January 1, 1990. (Exhibit 10.31 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.23 Directors' 24-Hour Accidental Death and Dismemberment Plan. (Exhibit 10.32 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.24 Executive Split-Dollar Life Insurance Plan dated January 1, 1994. (Exhibit 10.33 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.25 Board of Directors' Compensation Plan dated January 1, 1994. (Exhibit 10.34 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.26 Excess Benefit Plan dated January 1, 1987. (Exhibit 10.35 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.27 Directors' Business Travel Insurance Plan. (Exhibit 10.36 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.28 Deferred Compensation Plan for Executives dated October 1, 1993. (Exhibit 10.37 to the Company's Form 10-K for the year ended December 31, 1993*#) 10.29 Amended and Restated 1993 Nonqualified Employee Benefit Plans Trust Agreement dated January 1, 1995. (Exhibit 10.38 to the Company's Form 10-K for the year ended December 31, 1994.*#) * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. ** Incorporated by reference to indicated reports filed under the Securities Act of 1934, as amended, by Emery Air Freight Corporation File No. 1-3893. # Designates a contract or compensation plan for Management or Directors. PAGE 26 Exhibit No. 10.30 Consolidated Freightways, Inc. Equity Incentive Plan for Non- Employee Directors. (Attachment to the Company's 1994 Proxy Statement dated March 18, 1994.*#) 10.31 Amended and Restated Retirement Plan for Directors of Consolidated Freightways, Inc. dated January 1, 1994. (Exhibit 10.40 to the Company's Form 10-K for the year ended December 31, 1994.*#) 10.32 Consolidated Freightways, Inc. 1996 Return on Equity Plan dated March 4, 1996. (Exhibit 10.36 to the Company's Form 10-K for the year ended December 31, 1995*#) 10.33 Employee Benefit Matters Agreement by and between Consolidated Freightways, Inc. and Consolidated Freightways Corporation dated December 2, 1996. 10.34 Distribution Agreement between Consolidated Freightways, Inc., and Consolidated Freightways Corporation dated November 25, 1996. 10.35 Transition Services Agreement between CNF Service Company, Inc. and Consolidated Freightways Corporation dated December 2, 1996. 10.36 Tax Sharing Agreement between Consolidated Freightways, Inc., and Consolidated Freightways Corporation dated December 2, 1996. 10.37 CNF Transportation Inc. Executive Incentive Plan for 1997. # 10.38 CNF Service Company Executive Incentive Plan for 1997. # 10.39 Con-Way Transportation Services, Inc. Incentive Plan for 1997. # 10.40 Emery Worldwide Incentive Plan for 1997. # 10.41 CNF Transportation Inc. Special Bonus Plan for 1997. # (12) Computation of ratios of earnings to fixed charges (13) Annual report to security holders: CNF Transportation Inc. 1996 Annual Report to Shareholders (Only those portions referenced herein are incorporated in this Form 10-K. Other portions such as "Letter to Shareholders" are not required and, therefore, are not "filed" as part of this Form 10-K.) (21) Significant Subsidiaries of the Company. (27) Financial Data Schedule * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. # Designates a contract or compensation plan for Management or Directors. PAGE 27 Exhibit No. (99) Additional documents: 99.1 Consolidated Freightways, Inc. dba CNF Transportation Inc. 1997 Notice of Annual Meeting and Proxy Statement dated March 24, 1997. (Only those portions referenced herein are incorporated in this Form 10-K. Other portions are not required and, therefore, are not "filed" as a part of this Form 10-K.*) 99.2 Note Agreement dated as of July 17, 1989, between the ESOP, Consolidated Freightways, Inc. and the Note Purchasers named therein. (Exhibit 28.1 as filed on Form SE dated July 21, 1989*) 99.3 Guarantee and Agreement dated as of July 17, 1989, delivered by Consolidated Freightways, Inc. (Exhibit 28.2 as filed on Form SE dated July 21, 1989*). 99.4 Form of Restructured Note Agreement between Consolidated Freightways, Inc., Thrift and Stock Ownership Trust as Issuer and various financial institutions as Purchasers named therein, dated as of November 3, 1992. (Exhibit 28.4 to the Company's Form 10-K for the year ended December 31, 1992*). 99.5 Form of Restructured Guarantee and Agreement between Consolidated Freightways, Inc., as Issuer and various financial institutions as Purchasers named therein, dated as of November 3, 1992. (Exhibit 28.5 to the Company's Form 10-K for the year ended December 31, 1992*). The remaining exhibits have been omitted because either (1) they are neither required nor applicable or (2) the required information has been included in the consolidated financial statements or notes thereto. * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. # Designates a compensation plan for Management or Directors. EX-10 2 EXHIBIT 10.16 EXHIBIT 10.16 ------------- CNF TRANSPORTATION INC. 1997 Director's Election Form Indicate amount of deferral under (A), timing of deferral under (B), or select (C) if no deferral is elected. In the event I earn any CNF Transportation Inc. director's fees in 1996, I hereby elect to defer payment of such fees and any interest equivalent as follows: A. ( ) To defer annual retainer and all meeting fees and chair fees, if applicable. ( ) To defer the annual retainer portion of such fees. B. ( ) To be paid in the year following the year in which I cease to be a director of CNF Transportation Inc. ( ) To be paid in equal annual installments for _____ year(s) but not to exceed five (5) years, commencing in the year following the year in which I cease to be a director of CNF Transportation Inc. ( ) To be paid in the year following _____ year(s) (insert 1 or any multiple of years) after the year in which fees are deferred (but in no event later than the year following the year I cease to be a director of CNF Transportation Inc.). ( ) To be paid in equal annual installments for _____ year(s) but not to exceed five (5) years, commencing in the year following _______ year(s) (insert 1 or any multiple of years) after the year in which fees are deferred (but in no event later than the year I cease to be a director of CNF Transportation Inc.). I understand that payment of any amount deferred hereunder will be made by January 31st of the year in which such payment is to be made. I further understand that any amount deferred will be credited with interest equivalents at the end of each calendar quarter following the date of deferral and continuing until such deferred amount is paid to me. Interest equivalents shall be calculated at the published Bank of America NT & SA prime rate as of the date credited and shall be paid on prior interest equivalents credited on amounts deferred. I also understand that no trust is created hereby and that in the event of my death, any amounts unpaid shall be paid to my designated beneficiary in a lump sum. I designate as my beneficiary ________________________________________ C. ( ) I do not elect to defer payments of any fees earned in 1997. _____________________ _____________________ Date of this Election Signature of Director EX-10 3 EXHIBIT 10.18 EXHIBIT 10.18 ------------- $350,000,000 AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 21, 1996 among Consolidated Freightways, Inc. (to be renamed CNF Transportation, Inc.) The Banks Party Hereto ABN-AMRO Bank, N.V., Bank of America National Trust and Savings Association, The First National Bank of Chicago and Morgan Guaranty Trust Company of New York, as LC Issuing Banks ABN-AMRO Bank, N.V., Bank of America National Trust and Savings Association and The First National Bank of Chicago, as Co-Agents and Morgan Guaranty Trust Company of New York, as Agent TABLE OF CONTENTS Page ARTICLE 1 Definitions Section 1.01. Definitions 2 Section 1.02. Accounting Terms and Determinations 18 Section 1.03. Types of Borrowings 18 ARTICLE 2 The Credits Section 2.01. Commitments to Lend 19 Section 2.02. Notice of Committed Borrowing 19 Section 2.03. Money Market Borrowings 20 Section 2.04. Notice to Banks; Funding of Loans 24 Section 2.05. Notes 25 Section 2.06. Maturity of Loans 25 Section 2.07. Interest Rates 25 Section 2.08. Facility Fee 29 Section 2.09. Optional Termination or Reduction of Commitments 30 Section 2.10. Method of Electing Interest Rates 30 Section 2.11. Mandatory Termination of Commitments 31 Section 2.12. Optional Prepayments 32 Section 2.13. General Provisions as to Payments 32 Section 2.14. Funding Losses 33 Section 2.15. Computation of Interest and Fees 33 Section 2.16. Letters of Credit 33 Section 2.17. Maximum Interest Rate 40 ARTICLE 3 Conditions Section 3.01. Conditions to Effectiveness 41 Section 3.02. Consequence of Effectiveness 42 Section 3.03. Credit Extensions 42 ARTICLE 4 Representations and Warranties Section 4.01. Corporate Existence and Power 43 Section 4.02. Corporate and Governmental Authorization; No Contravention 43 Section 4.03. Binding Effect 44 Section 4.04. Financial Information 44 Section 4.05. Litigation 45 Section 4.06. Compliance with ERISA 45 Section 4.07. Environmental Matters 45 Section 4.08. Taxes 46 Section 4.09. Subsidiaries 46 Section 4.10. Not an Investment Company 46 Section 4.11. Full Disclosure 46 Section 4.12. Spin-Off 47 ARTICLE 5 Covenants Section 5.01. Information 47 Section 5.02. Payment of Obligations 49 Section 5.03. Maintenance of Property; Insurance 49 Section 5.04. Conduct of Business and Maintenance of Existence 50 Section 5.05. Compliance with Laws 50 Section 5.06. Inspection of Property, Books and Records 50 Section 5.07. Debt 51 Section 5.08. Minimum Consolidated Net Worth 52 Section 5.09. Negative Pledge 52 Section 5.10. Consolidations, Mergers and Sales of Assets 54 Section 5.11. Use of Proceeds 55 Section 5.12. Fixed Charge Coverage 55 Section 5.13. Transactions with Third Party Affiliates 55 ARTICLE 6 Defaults Section 6.01. Events of Default 56 Section 6.02. Notice of Default 59 Section 6.03. Cash Cover 59 ARTICLE 7 The Agent and the Co-Agents Section 7.01. Appointment and Authorization 59 Section 7.02. Agent and Affiliates 59 Section 7.03. Action by Agent 59 Section 7.04. Consultation with Experts 60 Section 7.05. Liability of Agent 60 Section 7.06. Indemnification 60 Section 7.07. Credit Decision 60 Section 7.08. Successor Agent 61 Section 7.09. Agent=s Fee 61 Section 7.10. Co-Agents 61 ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair 61 Section 8.02. Illegality 62 Section 8.03. Increased Cost and Reduced Return 63 Section 8.04. Taxes 64 Section 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans 66 Section 8.06. Substitution of Banks 67 ARTICLE 9 Miscellaneous Section 9.01. Notices 68 Section 9.02. No Waivers 68 Section 9.03. Expenses; Indemnification 69 Section 9.04. Sharing of Set-offs 69 Section 9.05. Amendments and Waivers 70 Section 9.06. Successors and Assigns 70 Section 9.07. Collateral 72 Section 9.08. Governing Law; Submission to Jurisdiction 72 Section 9.09. Counterparts; Integration 72 Section 9.10. Waiver of Jury Trial 73 Section 9.11. Confidentiality 73 Commitment Schedule AMENDED AND RESTATED CREDIT AGREEMENT AGREEMENT dated as of November 21, 1996 among CONSOLIDATED FREIGHTWAYS, INC., the BANKS party hereto, ABN-AMRO BANK, N.V., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, THE FIRST NATIONAL BANK OF CHICAGO and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as LC Issuing Banks, ABN-AMRO BANK, N.V., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION and THE FIRST NATIONAL BANK OF CHICAGO, as Co-Agents, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. WHEREAS, the Borrower, the banks referred to therein and Morgan Guaranty Trust Company of New York, as Agent for such banks, are parties to an Amended and Restated Credit Agreement dated as of January 10, 1995 under which both loans and letters of credit are available to the Borrower on the terms and conditions provided therein; WHEREAS, The Long-Term Credit Bank of Japan, Ltd. and First Interstate Bank of Oregon, N.A. (the "Terminating Banks") desire to terminate their commitments and participations in letters of credit under said Credit Agreement; WHEREAS, the other parties thereto desire to amend and restate said Credit Agreement as provided in this Agreement and, upon satisfaction of the conditions specified in Section 3.01, said Credit Agreement will be so amended and restated; WHEREAS, The Bank of New York and NationsBank of Texas, N.A. (the "New Banks") desire to become parties to said Credit Agreement (as so amended and restated) as Banks with Commitments and participations in letters of credit as provided herein; WHEREAS, in order to induce the Banks, the LC Issuing Banks, the Co-Agents and the Agent to enter into this Agreement, certain Subsidiaries of the Borrower are willing to guaranty the obligations of the Borrower under this Agreement and the Notes issued pursuant hereto; and WHEREAS, the Banks are willing to make loans to the Borrower and the LC Issuing Banks are willing to issue letters of credit at the request of the Borrower on the terms and conditions provided herein; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.1. Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "Adjusted CD Rate" has the meaning set forth in Section 2.07(b). "Adjusted London Interbank Offered Rate" has the meaning set forth in Section 2.07(c). "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks and the LC Issuing Banks under the Financing Documents, and its successors in such capacity. "Aggregate Usage" means, at any time, the sum of (i) the aggregate outstanding principal amount of the Loans at such time plus (ii) the aggregate outstanding amount of the LC Liabilities at such time. "Agreement", when used with reference to this Agreement, means this Amended and Restated Credit Agreement dated as of November 21, 1996, as it may be amended from time to time. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.07(b). "Assignee" has the meaning set forth in Section 9.06(c). "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or pursuant to Section 2.10(c) or Article 8. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means Consolidated Freightways, Inc., a Delaware corporation, and its successors. "Borrowing" has the meaning set forth in Section 1.03. "CD Base Rate" has the meaning set forth in Section 2.07(b). "CD Loan" means a Committed Loan which bears interest at a CD Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election. "CD Margin" means a rate per annum determined in accordance with the Pricing Schedule. "CD Rate" means a rate of interest determined pursuant to Section 2.07(b) on the basis of an Adjusted CD Rate. "CD Reference Banks" means Bank of America National Trust and Savings Association, The First National Bank of Chicago and Morgan Guaranty Trust Company of New York. "Co-Agents" means ABN-AMRO Bank, N.V., Bank of America National Trust and Savings Association and The First National Bank of Chicago, in their capacities as co-agents hereunder. "Commitment" means, as the context requires, either (a) the commitment of a Bank to extend credit to the Borrower hereunder or (b) the amount of such commitment, which is (i) with respect to any Bank listed on the Commitment Schedule, the amount set forth opposite the name of such Bank on the Commitment Schedule or (ii) with respect to any Assignee, the amount of the transferor Bank=s Commitment assigned to such Assignee pursuant to Section 9.06(c), in each case as such amount may be reduced from time to time pursuant to Section 2.09 or 2.11 or changed as a result of an assignment pursuant to Section 9.06(c). "Commitment Schedule" means the Commitment Schedule attached hereto. "Committed Loan" means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Consolidated Debt" means at any date the Debt of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "Consolidated EBITDAR" means, for any period, the sum of (i) the consolidated income before income taxes of the Borrower and its Consolidated Subsidiaries for such period plus (ii) to the extent deducted in determining such consolidated income before income taxes, the sum of (A) Consolidated Interest Expense, (B) depreciation and amortization and (C) Consolidated Rental Expense, provided that, for any period or portion of a period prior to the Spin-Off, Consolidated EBITDAR shall be calculated on a pro forma basis assuming that the Spin-Off and related distribution of shares had occurred prior to that period. "Consolidated Fixed Charges" means, for any period, the sum of Consolidated Interest Expense and Consolidated Rental Expense for such period, provided that, for any period or portion of a period prior to the Spin-Off, Consolidated Fixed Charges shall be calculated on a pro forma basis assuming that the Spin- Off and related distribution of shares had occurred prior to that period. "Consolidated Interest Expense" means, for any period, the interest expense of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "Consolidated Net Worth" means at any date the consolidated shareholders= equity of the Borrower and its Consolidated Subsidiaries determined as of such date. "Consolidated Rental Expense" means, for any period, the rental expense for operating leases of the Borrower and its Consolidated Subsidiaries determined on a consolidated basis for such period. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "Continuing Director" means (i) any individual who is a director of the Borrower on November 21, 1996 and (ii) any individual who becomes a director of the Borrower after November 21, 1996 and is elected or nominated for election as a director of the Borrower by a majority of the individuals who were Continuing Directors immediately before such election or nomination. "Credit Extension" means the making of a Loan or the issuance or extension of a Letter of Credit. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all obligations of such Person to reimburse banks for drawings under letters of credit or payments with respect to bankers= acceptances, which obligations remain unpaid for more than three Domestic Business Days after they become due, or, if later, after such Person is notified of the due date thereof, (vi) all obligations of the types referred to in clauses (i) to (v), inclusive, of this definition which are secured by a Lien on any asset of such Person, whether or not such obligations are otherwise obligations of such Person; provided that the amount of Debt attributed, for purposes of this Agreement, to any such obligation that is not otherwise an obligation of such Person shall be limited to the lesser of (x) the net book value of the assets of such Person by which such obligation is secured or (y) the amount of such obligation secured thereby (excluding accrued interest for the current period); and (vii) all Guarantees by such Person of obligations of others of the types referred to in clauses (i) to (v), inclusive, of this definition (which Guarantees shall be deemed to constitute Debt in an amount equal to the lesser of (x) the maximum amount of such Guarantee and (y) the amount of such obligation of others Guaranteed thereby). "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close; provided that, when used in Section 2.16 with reference to any LC Issuing Bank, the term "Domestic Business Day" shall not include any day on which commercial banks are authorized to close in the jurisdiction where the LC Office of such LC Issuing Bank is located. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.07(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Emery Receivables Facility" means the Credit Agreement dated January 14, 1993, as amended, among Emery Receivables Corporation, Emery Air Freight Corporation, Consolidated Freightways, Inc. and the financial institutions referred to therein. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.07(c) on the basis of a London Interbank Offered Rate. "Euro-Dollar Reference Banks" means the principal London offices of ABN-AMRO Bank, N.V., The First National Bank of Chicago and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.07(c). "Event of Default" has the meaning set forth in Section 6.01. "Existing Agreement" means the Amended and Restated Credit Agreement dated as of January 10, 1995 among the Borrower, the banks referred to therein, and Morgan Guaranty Trust Company of New York, as Agent, as in effect from time to time prior to the Effective Date. "Existing Bank" means a "Bank" (as such term is defined in the Existing Agreement) that is a party to the Existing Agreement immediately prior to the Effective Date. "Existing Letters of Credit" means the letters of credit issued on or before the Effective Date and either (i) listed in Exhibit J hereto or (ii) issued after the date hereof under (and in accordance with the provisions of) the Existing Agreement. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Agent. "Financing Documents" means this Agreement, the Subsidiary Guaranty Agreement and the Notes. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(a)) or any combination of the foregoing. "Group of Loans" means at any time a group of Loans consisting of (i) all Committed Loans which are Base Rate Loans at such time or (ii) all Committed Loans which are Fixed Rate Loans of the same type having the same Interest Period at such time; provided that, if a Committed Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnitee" has the meaning set forth in Section 9.03(b). "Insignificant Subsidiaries" means Subsidiaries which, if aggregated and considered as a single Subsidiary, would not have total assets, shareholders= equity or revenues in excess of 10% of the consolidated total assets, consolidated shareholders= equity or consolidated revenues, respectively, of the Borrower and its Consolidated Subsidiaries, all calculated at the date of the most recent financial statements delivered to the Banks pursuant to Section 5.01 or, in the case of revenues, for the twelve calendar months then ended; provided that, prior to the delivery of such financial statements for the year ending December 31, 1996, such amounts shall be calculated on the basis of the pro forma balance sheet as of June 30, 1996 and the pro forma statement of income for the six months then ended set forth in the Borrower=s current report on Form 8-K dated August 26, 1996. "Interest Period" means: (a) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable notice; provided that: (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (ii) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Euro-Dollar Business Day of a calendar month; and (iii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (b) with respect to each CD Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable notice; provided that: (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (ii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (c) with respect to each Money Market LIBOR Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending one week, two weeks, three weeks or any whole number of months thereafter, as the Borrower may elect in accordance with Section 2.03; provided that: (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (ii) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Euro-Dollar Business Day of a calendar month; and (iii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; and (d) with respect to each Money Market Absolute Rate Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such number of days thereafter (but not less than seven days) as the Borrower may elect in accordance with Section 2.03; provided that: (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (ii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan or otherwise. "LC Issuing Banks" means ABN-AMRO Bank, N.V., Bank of America National Trust and Savings Association, The First National Bank of Chicago and Morgan Guaranty Trust Company of New York, in their capacities as issuers of Letters of Credit. "LC Liabilities" means, at any time, the sum, without duplication, of (i) the aggregate amount available for drawing under all Letters of Credit outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations in respect of previous drawings made under Letters of Credit. "LC Office" means, with respect to each LC Issuing Bank, the office at which it books the Letters of Credit issued by it hereunder. "LC Payment Date" has the meaning set forth in Section 2.16(f). "LC Reimbursement Date" means, with respect to any Letter of Credit, an LC Payment Date applicable to such Letter of Credit, or, if later, the Domestic Business Day next succeeding the Domestic Business Day on which the Agent shall have notified the Borrower of such LC Payment Date and of the amount payable by the LC Issuing Bank under such Letter of Credit on such LC Payment Date. "Letter of Credit" means (i) any Existing Letter of Credit and (ii) any financial stand-by letter of credit (including without limitation a Workers= Compensation Letter of Credit) issued hereunder after the Effective Date. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Lien" means (i) with respect to any asset (including without limitation any account receivable), any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset and (ii) with respect to any account receivable, any sale of such account receivable. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed (x) to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset and (y) not to own subject to a Lien any asset which it leases under a lease that is classified as an operating lease under generally accepted accounting principles. "Loan" means a Domestic Loan, a Euro-Dollar Loan or a Money Market Loan and "Loans" means Domestic Loans, Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.07(c). "Material Commitments" means commitments to extend credit which, if extended, would constitute Debt of the Borrower and/or one or more of its Subsidiaries in an aggregate amount exceeding $35,000,000. For purposes of this definition, any commitment for less than $1,000,000 shall be excluded, but commitments arising from one or more related or unrelated transactions shall be aggregated if each such commitment is for $1,000,000 or more. "Material Debt" means Debt (other than the Notes) of the Borrower and/or one or more of its Subsidiaries in an aggregate outstanding principal amount exceeding $35,000,000. For purposes of this definition, if the Debt arising from any single transaction has an outstanding principal amount less than $1,000,000, it shall be excluded, but Debts arising from one or more related or unrelated transactions shall be aggregated if the Debt arising from each such transaction has an outstanding principal amount of $1,000,000 or more. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $35,000,000. "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; provided that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(a)). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "Notice of Interest Rate Election" has the meaning set forth in Section 2.10. "Obligor" means each of the Borrower and the Subsidiary Guarantors, and "Obligors" means all of the foregoing. "Outstanding Credit Exposure" means, as to any Bank at any time, the sum of (i) the aggregate principal amount of its Loans outstanding at such time plus (ii) its Outstanding LC Exposure at such time. "Outstanding LC Exposure" means, as to any Bank at any time, an amount equal to its Percentage of the LC Liabilities at such time. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Percentage" means, with respect to each Bank, the percentage that such Bank=s Commitment constitutes of the aggregate amount of the Commitments. "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Pricing Schedule" means the Pricing Schedule attached hereto. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Quarterly Dates" means each March 31, June 30, September 30 and December 31. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Reimbursement Obligations" means, at any time, the aggregate of all obligations of the Borrower then outstanding under Section 2.16 to reimburse an LC Issuing Bank for amounts paid by such LC Issuing Bank in respect of any drawing under any Letter of Credit. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks having at least 60% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, having at least 60% of the aggregate amount of the Outstanding Credit Exposures. "Spin-Off" means the distribution by the Borrower to its shareholders of 100% of the capital stock of Consolidated Freightways Corporation (which will be the sole shareholder of Consolidated Freightways Corporation of Delaware and Leland James Service Corporation) substantially in the manner described in the Registration Statement on Form 10 filed by Consolidated Freightways Corporation with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower. "Subsidiary Guarantors" means Con-Way Transportation Services, Inc., a Delaware corporation, Con-Way Truckload Services, Inc., a Delaware corporation, Emery Air Freight Corporation, a Delaware corporation, Emery Worldwide Airlines, Inc., a Nevada corporation, Menlo Logistics, Inc., a California corporation, and each other Subsidiary which becomes a party to the Subsidiary Guaranty Agreement pursuant to Article 3 thereof, and their respective successors. "Subsidiary Guaranty Agreement" means a Subsidiary Guaranty Agreement among the Borrower, the Subsidiary Guarantors and the Agent, as executed and delivered pursuant to Section 3.01(c) and as the same may be amended from time to time in accordance with the terms thereof. "TASP Notes" means (i) $55,000,000 aggregate principal amount of the 8.50% Series A Guaranteed ESOP Notes due January 1, 2006 and $62,000,000 aggregate principal amount of the 8.62% Series B Guaranteed ESOP Notes due January 1, 2009, each issued pursuant to separate Note Agreements, each dated as of July 17, 1989, among Consolidated Freightways, Inc. Thrift and Stock Ownership Trust ("TASP"), the Borrower and certain institutional investors and (ii) $33,000,000 aggregate principal amount of the 9.00% Restructured Notes due January 1, 2006, issued under separate Restructured Note Agreements, each dated as of November 3, 1992, among TASP, the Borrower and certain institutional investors. "Taxes" has the meaning set forth in Section 8.04(a). "Terminating Banks" has the meaning set forth in the recitals hereto. "Termination Date" means November 21, 2001, or, if such day is not a Euro-Dollar Business Day, the next succeeding Euro-Dollar Business Day unless such Euro- Dollar Business Day falls in another calendar month, in which case the Termination Date shall be the next preceding Euro-Dollar Business Day. "Third Party Affiliate" means (i) any Person or any group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Wholly-Owned Subsidiary" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors= qualifying shares) are at the time directly or indirectly owned by the Borrower. "Workers= Compensation Letter of Credit" means any letter of credit which is used to secure obligations of the Borrower or its Subsidiaries under workers= compensation or similar laws. Section 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower=s independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower=s compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. Section 1.3. Types of Borrowings. The term "Borrowing denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Section 2.01 or 2.03 on the same date, all of which Loans are of the same type (subject to Article 8) and, except in the case of Base Rate Loans, have the same Interest Period or initial Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). ARTICLE 2 The Credits Section 2.1. Commitments to Lend. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time prior to the Termination Date; provided that, immediately after each such Loan is made, the sum of (i) the aggregate outstanding principal amount of all Committed Loans made by such Bank plus (ii) its Outstanding LC Exposure shall not exceed its Commitment. Each Borrowing pursuant to this Section shall be in an aggregate principal amount of $10,000,000 or any larger integral multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.03(b)) and shall be made from the several Banks ratably in accordance with their respective Percentages. Within the foregoing limits, the Borrower may borrow under this Section, prepay Loans to the extent permitted by Section 2.12 and reborrow at any time prior to the Termination Date under this Section. Section 2.2. Notice of Committed Borrowing. The Borrower shall give the Agent notice (a "Notice of Committed Borrowing") not later than (x) 12:00 Noon (New York City time) on the date of each Base Rate Borrowing, (y) 1:00 P.M. (New York City time) on the second Domestic Business Day before each CD Borrowing and (z) 1:00 P.M. (New York City time) on the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate, a CD Rate or a Euro-Dollar Rate, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period; provided that the Borrower may not deliver a Notice of Committed Borrowing if after giving effect to the requested Borrowing there would be more than ten Committed Fixed Rate Borrowings outstanding. Section 2.3. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks to make offers to make Money Market Loans to the Borrower on any day prior to the Termination Date. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than (x) 1:00 P.M. (New York City time) on the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) 11:30 A.M. (New York City time) on the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger integral multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 10:15 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger integral multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the AMoney Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000 of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000 of 1%) (the AMoney Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent=s notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 11:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a ANotice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $10,000,000 or a larger integral multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. Section 2.4. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank=s share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than (x) 12:00 Noon (New York City time) on the date of each Borrowing other than a Base Rate Borrowing and (y) 1:00 P.M. (New York City time) on the date of each Base Rate Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. Unless the Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Agent will, promptly upon receipt thereof, make the funds so received from the Banks available to the Borrower at the Agent=s aforesaid address. (c) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank=s share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent, within one Domestic Business Day after demand, such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank=s Loan included in such Borrowing for purposes of this Agreement. Section 2.5. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank=s Loans. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the ANote" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank=s Note pursuant to Section 3.01(b), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and type of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement, or any error in the making thereof, shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.6. Maturity of Loans. (a) Each Committed Loan shall mature, and the principal amount thereof shall be due and payable, on the Termination Date. (b) Each Money Market Loan included in any Money Market Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. Section 2.7. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Date and, with respect to the principal amount of any Base Rate Loan converted to a CD Loan or a Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan or any portion thereof shall, as a result of clause (b)(ii) of the definition of Interest Period, have an Interest Period of less than 30 days, such portion shall bear interest for each day during such Interest Period at the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate __________ * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup AA" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. ' 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation=s (or such successor=s) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, three months after the first day thereof. The "Adjusted London Interbank Offered Rate" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Loan on the day before such payment was due and (ii) the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the Base Rate for such day). (e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. Section 2.8. Facility Fee. The Borrower shall pay to the Agent, for the account of the Banks ratably in accordance with their respective Percentages, a facility fee for each day at the Facility Fee Rate for such day (determined in accordance with the Pricing Schedule). Such facility fee shall accrue for each day (i) from and including the Effective Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the aggregate amount of the Commitments (whether used or unused) on such day and (ii) if any Committed Loans or LC Liabilities remain outstanding after the Commitments terminate in their entirety, then for each day from and including the date on which the Commitments terminate in their entirety to but excluding the first day thereafter on which no Committed Loans or LC Liabilities remain outstanding, on the aggregate outstanding amount of the Committed Loans and the LC Liabilities on such day. Fees accrued under this Section shall be payable quarterly on each Quarterly Date and on the date on which the Commitments terminate in their entirety (and, if later, the first day thereafter on which no Committed Loans or LC Liabilities remain outstanding). Section 2.9. Optional Termination or Reduction of Commitments. The Borrower may, upon at least three Domestic Business Days= notice to the Agent, (i) terminate the Commitments at any time, if no Loans or LC Liabilities are outstanding at such time, or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000 or any larger integral multiple of $1,000,000, the aggregate amount of the Commitments in excess of the Aggregate Usage. Section 2.10. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to CD Loans as of any Domestic Business Day or to Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are CD Loans, the Borrower may elect to convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to continue such Loans as CD Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans; and (iii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or CD Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Agent at least three Euro-Dollar Business Days before the conversion or continuation selected in such notice is to be effective (unless the relevant Loans are to be converted from Domestic Loans of one type to Domestic Loans of the other type or continued as Domestic Loans of the same type for an additional Interest Period, in which case such notice shall be delivered to the Agent at least three Domestic Business Days before such conversion or continuation is to be effective). A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $10,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Fixed Rate Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as CD Loans or Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Group of Fixed Rate Loans, such Loans shall be converted to Base Rate Loans on the last day of the then current Interest Period applicable thereto. Section 2.11. Mandatory Termination of Commitments. Unless previously terminated, the Commitments shall terminate on the Termination Date, and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. Section 2.12. Optional Prepayments. (a) The Borrower may (i) upon at least one Domestic Business Day=s notice to the Agent, prepay any Base Rate Loans (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a)), (ii) upon at least three Domestic Business Days= notice to the Agent, prepay any Group of CD Loans or (iii) upon at least three Euro-Dollar Business Days= notice to the Agent, prepay any Group of Euro-Dollar Loans, in each case in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger integral multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group or Borrowing. In connection with any such prepayment of any Fixed Rate Loan, the Borrower shall comply with the provisions of Section 2.14. (b) Except as provided in subsection (a) above, the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank=s ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. Section 2.13. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 1:00 P.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended in accordance with this Section 2.13, by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. Section 2.14. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to another type of Loan (whether such payment or conversion is pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(d), or if the Borrower fails to borrow, prepay, convert or continue any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a) or 2.10(a), the Borrower shall pay to each Bank within 15 days after demand an amount calculated as provided in Exhibit I hereto to compensate such Bank for any loss incurred by it (or by an existing or scheduled Participant in the related Loan) in obtaining, liquidating or employing deposits from third parties, provided that such Bank shall have delivered to the Borrower a certificate setting forth such amount and the calculation thereof in reasonable detail. Section 2.15. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and all letter of credit fees and facility fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.16. Letters of Credit. (a) On the Effective Date, each LC Issuing Bank that has issued an Existing Letter of Credit on or before the Effective Date shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from such LC Issuing Bank, a participation in such Existing Letter of Credit and the related LC Liabilities in proportion to its Percentage. Concurrently with such sale, the participations in the Existing Letters of Credit sold to the Existing Banks under the Existing Agreement shall be automatically cancelled without further action by any of the parties thereto. (b) Subject to the terms and conditions set forth in this Agreement (including without limitation the condition set forth in Section 3.03(b)), (i) ABN-AMRO Bank, N.V., as LC Issuing Bank, agrees to issue Letters of Credit hereunder from time to time after the Effective Date and before the Termination Date upon the request of the Borrower, provided that immediately after each such Letter of Credit is issued, the aggregate outstanding amount of LC Liabilities in respect of all Letters of Credit issued by ABN-AMRO Bank, N.V., as LC Issuing Bank, shall not exceed $100,000,000; (ii) Bank of America National Trust and Savings Association, as LC Issuing Bank, agrees to issue Letters of Credit hereunder from time to time after the Effective Date and before the Termination Date upon the request of the Borrower, provided that, immediately after each such Letter of Credit is issued, the aggregate outstanding amount of LC Liabilities in respect of all Letters of Credit issued by Bank of America National Trust and Savings Association, as LC Issuing Bank, shall not exceed $100,000,000; (iii) The First National Bank of Chicago, as LC Issuing Bank, agrees to issue Letters of Credit hereunder from time to time after the Effective Date and before the Termination Date upon the request of the Borrower, provided that (x) immediately after each such Letter of Credit is issued, the aggregate outstanding amount of LC Liabilities in respect of all Letters of Credit issued by The First National Bank of Chicago, as LC Issuing Bank, shall not exceed $100,000,000 and (y) The First National Bank of Chicago, as LC Issuing Bank, shall not issue any Letter of Credit in respect of any obligation under the Borrower=s public debt or the TASP Notes; and (iv) Morgan Guaranty Trust Company of New York, as LC Issuing Bank, agrees to issue Letters of Credit hereunder from time to time after the Effective Date and before the Termination Date upon the request of the Borrower, provided that immediately after each such Letter of Credit is issued, the aggregate outstanding amount of LC Liabilities in respect of all Letters of Credit issued by Morgan Guaranty Trust Company of New York, as LC Issuing Bank, shall not exceed $125,000,000. Upon the issuance by an LC Issuing Bank of a Letter of Credit in accordance with this subsection (b), such LC Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from such LC Issuing Bank, a participation in such Letter of Credit and the related LC Liabilities in proportion to its Percentage. (c) No Letter of Credit issued on or after the Effective Date shall have an original expiry date later than one year after the issuance thereof. No Letter of Credit shall be extended on or after the Effective Date unless (i) such extension is for a period not exceeding one year and (ii) the LC Issuing Bank agrees to so extend such Letter of Credit (or, in the case of an "evergreen" Letter of Credit, its ability to give a notice to prevent such extension expires) no earlier than three months before the then existing expiry date. No Letter of Credit shall have an original or extended expiry date later than the fifth Domestic Business Day prior to the Termination Date. (d) The Borrower shall give the relevant LC Issuing Bank at least three Domestic Business Days= prior notice of (x) the issuance of each Letter of Credit to be issued by it after the Effective Date and (y) each extension of a Letter of Credit issued by it, specifying in each case (i) the date of such issuance or extension, (ii) the expiry date or extended expiry date of such Letter of Credit (which shall comply with subsection (c) above), (iii) the proposed terms of such Letter of Credit and (iv) the nature of the transactions proposed to be supported thereby. The issuance of any Letter of Credit after the Effective Date shall be subject to the conditions precedent set forth in Article 3 (the LC Issuing Bank having no duty to ascertain whether such conditions precedent are satisfied, other than to confirm with the Agent on the date of issuance that such issuance will not cause the Aggregate Usage to exceed the aggregate amount of the Commitments) and subject to the additional conditions precedent that such Letter of Credit shall be satisfactory to such LC Issuing Bank and that the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as such LC Issuing Bank shall have reasonably requested. The extension of any Letter of Credit shall be subject to the conditions precedent set forth in Article 3 (the LC Issuing Bank having no duty to ascertain whether such conditions precedent are satisfied). Upon issuing or extending any Letter of Credit, the LC Issuing Bank shall promptly notify the Agent of such issuance or extension, and the Agent shall promptly notify each Bank thereof and of the amount of such Bank=s participation in such Letter of Credit. (e) The Borrower shall pay to the Agent, for the account of the Banks ratably in accordance with their respective Percentages, a letter of credit fee at (i) the LC Fee Rate on the aggregate amount available for drawings under each Letter of Credit (other than Workers= Compensation Letters of Credit) outstanding from time to time and (ii) the LC Fee Rate minus 0.05% per annum on the aggregate amount available for drawings under each Workers= Compensation Letter of Credit outstanding from time to time. Each such fee shall be payable in arrears on the last day of each fiscal quarter of the Borrower for so long as such Letter of Credit is outstanding and on the expiry date thereof. The Borrower shall pay to each LC Issuing Bank additional fronting fees and expenses in the amounts and at the times agreed between the Borrower and such LC Issuing Bank. The LC Issuing Banks shall furnish to the Agent upon request such information as the Agent shall require in order to calculate the amount of any fee payable under this subsection (e). "LC Fee Rate" means, for any day, a rate per annum equal to the Euro-Dollar Margin for such day. (f) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit, the relevant LC Issuing Bank shall notify the Agent and the Agent shall promptly notify the Borrower and each other Bank as to the amount to be paid by the Issuing Bank as a result of such demand and the proposed payment date (the "LC Payment Date"). The responsibility of such LC Issuing Bank to the Borrower and each Bank shall be only to determine that the documents (including each demand for payment) delivered under each Letter of Credit issued by it in connection with such presentment shall be in conformity in all material respects with such Letter of Credit. Each LC Issuing Bank shall endeavor to exercise the same care in the issuance and administration of the Letters of Credit issued by it as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by such LC Issuing Bank, each Bank shall be unconditionally and irrevocably liable without regard to the occurrence of any Event of Default or any condition precedent whatsoever, to reimburse such LC Issuing Bank on demand for (i) such Bank=s Percentage of the amount of each payment made by such LC Issuing Bank under each Letter of Credit issued by it to the extent such amount is not reimbursed by the Borrower pursuant to subsection (g) below plus (ii) interest on the foregoing amount to be reimbursed by such Bank, for each day from the date of such LC Issuing Bank=s demand for such reimbursement (or, if such demand is made after 11:00 A.M. (New York City time) on such date, from the next succeeding Domestic Business Day) to the date on which such Bank pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Rate for such day. (g) The Borrower shall be irrevocably and unconditionally obligated to reimburse each LC Issuing Bank on or by the applicable LC Reimbursement Date for any amounts paid by such LC Issuing Bank upon any drawing under any Letter of Credit issued by it, without presentment, demand, protest or other formalities of any kind; provided that neither the Borrower nor any Bank shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Borrower or such Bank to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of such LC Issuing Bank in determining whether a request presented under any Letter of Credit issued by it complied with the terms of such Letter of Credit or (ii) such LC Issuing Bank=s failure to pay under any Letter of Credit issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. All such amounts paid by such LC Issuing Bank and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to (x) the Base Rate for such day if such day falls on or before the applicable LC Reimbursement Date and (y) the sum of 2% plus the Base Rate for such day if such day falls after such LC Reimbursement Date. Each LC Issuing Bank will pay to each Bank ratably in accordance with its Percentage all amounts received from the Borrower for application in payment, in whole or in part, of the Reimbursement Obligations in respect of any Letter of Credit issued by such LC Issuing Bank, but only to the extent such Bank has made payment to such LC Issuing Bank in respect of such Letter of Credit pursuant to subsection (f). (h) If, after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank or LC Issuing Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any tax, reserve, special deposit or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or participations therein, and the result shall be to increase the cost to any Bank or LC Issuing Bank of issuing or maintaining any Letter of Credit or any participation therein, or reduce any amount receivable by any Bank or LC Issuing Bank hereunder in respect of any Letter of Credit (which increase in cost, or reduction in amount receivable, shall be the result of such Bank=s or LC Issuing Bank=s reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, upon demand by such Bank or LC Issuing Bank, the Borrower agrees to pay to such Bank or LC Issuing Bank, from time to time as specified by such Bank or LC Issuing Bank, such additional amounts as shall be sufficient to compensate such Bank or LC Issuing Bank for such increased costs or reductions in amount incurred by such Bank or LC Issuing Bank. A certificate of such Bank or LC Issuing Bank submitted by such Bank or LC Issuing Bank to the Borrower shall be conclusive as to the amount thereof in the absence of manifest error. (i) The Borrower=s obligations under this Section 2.16 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any LC Issuing Bank, any Bank or any beneficiary of a Letter of Credit. The Borrower further agrees with the LC Issuing Banks and the Banks that the LC Issuing Banks and the Banks shall not be responsible for, and the Borrower=s Reimbursement Obligations in respect of any Letter of Credit shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower, any of its Subsidiaries, the beneficiary of any Letter of Credit or any financing institution or other party to whom any Letter of Credit may be transferred or any claims or defenses whatsoever of the Borrower or any of its Subsidiaries against the beneficiary of any Letter of Credit or any such transferee. No LC Issuing Bank shall be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit issued, extended or renewed by it. The Borrower agrees that any action taken or omitted by an LC Issuing Bank or any Bank under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith and without gross negligence, shall be binding upon the Borrower and shall not put such LC Issuing Bank or any Bank under any liability to the Borrower. (j) To the extent not inconsistent with subsection (i) above, each LC Issuing Bank shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants and other experts selected by such LC Issuing Bank. Each LC Issuing Bank shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Required Banks as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Notwithstanding any other provision of this Section 2.16, each LC Issuing Bank shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Required Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Banks and all future holders of participations in any Letters of Credit. (k) The Borrower hereby agrees to indemnify and hold harmless each Bank, each LC Issuing Bank and the Agent, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, costs or expenses which such Bank, such LC Issuing Bank or the Agent may incur (or which may be claimed against such Bank, such LC Issuing Bank or the Agent by any Person whatsoever) by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit or any actual or proposed use of any Letter of Credit, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which an LC Issuing Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to such LC Issuing Bank hereunder (but nothing herein contained shall affect any rights the Borrower may have against any defaulting Bank); provided that the Borrower shall not be required to indemnify any Bank, any LC Issuing Bank or the Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of an LC Issuing Bank in determining whether a request presented under any Letter of Credit issued by it complied with the terms of such Letter of Credit or (ii) an LC Issuing Bank=s failure to pay under any Letter of Credit issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit; and provided further that the foregoing indemnity shall not apply with respect to any costs or expenses arising out of any claim by any Person other than the beneficiary or account party under the relevant Letter of Credit unless such costs and expenses shall have been reasonably incurred. Nothing in this subsection (k) is intended to limit the obligations of the Borrower under any other provision of this Agreement. (l) Each Bank shall, ratably in accordance with its Percentage, indemnify each LC Issuing Bank, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees= gross negligence or willful misconduct or such LC Issuing Bank=s failure to pay under any Letter of Credit issued by it after the presentation to it of a request strictly complying with the terms and conditions of the Letter of Credit) that such indemnitees may suffer or incur in connection with this Section 2.16 or any action taken or omitted by such indemnitees hereunder. (m) In its capacity as a Bank, each LC Issuing Bank shall have the same rights and obligations as any other Bank. The obligations of the LC Issuing Banks under the Financing Documents are several and not joint. Section 2.17. Maximum Interest Rate. (a) Nothing contained in this Agreement or the Notes shall require the Borrower to pay interest for the account of any Bank at a rate exceeding the maximum rate permitted by applicable law. (b) If the amount of interest payable for the account of any Bank on any interest payment date in respect of the immediately preceding interest computation period, computed pursuant to Section 2.07, would exceed the maximum amount permitted by applicable law to be charged by such Bank, the amount of interest payable for its account on such interest payment date shall be automatically reduced to such maximum permissible amount. (c) If the amount of interest payable for the account of any Bank in respect of any interest computation period is reduced pursuant to subsection (b) of this Section and the amount of interest payable for its account in respect of any subsequent interest computation period, computed pursuant to Section 2.07, would be less than the maximum amount permitted by applicable law to be charged by such Bank, then the amount of interest payable for its account in respect of such subsequent interest computation period shall be automatically increased to such maximum permissible amount; provided that at no time shall the aggregate amount by which interest paid for the account of any Bank has been increased pursuant to this subsection (c) exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to subsection (b) of this Section. ARTICLE 3 Conditions Section 3.1. Conditions to Effectiveness. This Agreement shall become effective on the date on which all of the following conditions to effectiveness shall be satisfied (but shall not become effective unless such date is on or before January 2, 1997): (a) the Agent shall have received counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received in form satisfactory to it facsimile or other written confirmation from such party that it has executed a counterpart hereof); (b) the Agent shall have received a duly executed Note for the account of each Bank dated on or before the Effective Date complying with the provisions of Section 2.05; (c) the Agent shall have received counterparts of a Subsidiary Guaranty Agreement, substantially in the form of Exhibit H hereto, duly executed by each of the Obligors listed on the signature pages thereof; (d) the Borrower shall have paid in full (or made arrangements satisfactory to the Agent for paying in full) on the Effective Date all loans outstanding under the Existing Agreement, all interest and fees accrued under the Existing Agreement to but excluding the Effective Date and all other amounts (if any) then due and payable by the Borrower thereunder; (e) the Agent shall have received an opinion of Eberhard G.H. Schmoller, Esq., general counsel for the Borrower, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (f) the Agent shall have received an opinion of Davis Polk & Wardwell, special counsel for the Agent, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (g) the Agent shall have received a certificate of an officer of the Borrower stating that the distribution of the capital stock of Consolidated Freightways Corporation to the Borrower=s shareholders pursuant to the Spin-Off has commenced; (h) the Agent shall have received a copy of a favorable private letter ruling from the Internal Revenue Service to the effect that the Spin-Off will be "tax free" to the Borrower; and (i) the Agent shall have received all documents the Agent may reasonably request relating to the existence of the Obligors, the corporate authority for and the validity of the Financing Documents and any other matters relevant hereto, all in form and substance satisfactory to the Agent. The Agent shall promptly notify the Borrower, the Banks and the LC Issuing Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. Section 3.2. Consequence of Effectiveness. (a) On the Effective Date, without further action by any of the parties thereto, (i) the Existing Agreement will be automatically amended and restated to read as this Agreement reads, (ii) the rights and obligations of the Terminating Banks under the Existing Agreement will terminate, provided that their rights under Sections 2.13, 8.04, and 9.03(b) of the Existing Agreement will survive, and (iii) the obligations of the Subsidiary Guarantors under the existing Subsidiary Guaranty Agreement dated as of January 10, 1995 will terminate. (b) On and after the Effective Date, the rights and obligations of the parties hereto shall be governed by the provisions hereof, and the rights and obligations of the parties hereto that are also parties to the Existing Agreement with respect to the period prior to the Effective Date shall continue to be governed by the provisions thereof as in effect prior to the Effective Date, except that all interest and fees accrued under the Existing Agreement to but excluding the Effective Date shall be paid on the Effective Date. Section 3.3. Credit Extensions. The obligation of any Bank to make a Loan on the occasion of any Borrowing and the obligation of an LC Issuing Bank to issue or extend a Letter of Credit on the occasion of a request therefor by the Borrower (or to permit an automatic extension of an "evergreen" Letter of Credit) are each subject to the satisfaction of the following conditions (in addition to those set forth in Section 2.16(d), if applicable): (a) receipt (i) by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be, in the case of a Borrowing or (ii) by such LC Issuing Bank of a notice as required by Section 2.16, in the case of a Letter of Credit; (b) the fact that, after giving effect to such Credit Extension, the Aggregate Usage will not exceed the aggregate amount of the Commitments; (c) the fact that, immediately before and after such Credit Extension, no Default shall have occurred and be continuing; and (d) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of such Credit Extension. Each Credit Extension hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Credit Extension as to the facts specified in clauses (b), (c) and (d) of this Section. ARTICLE 4 Representations and Warranties The Borrower represents and warrants that: Section 4.1. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Section 4.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each Obligor of the Financing Documents to which it is a party are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of such Obligor or of any agreement, judgment, injunction, order, decree or other instrument binding upon such Obligor or any Subsidiary or result in the creation or imposition of any Lien on any asset of such Obligor or any Subsidiary. Section 4.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower, in each case enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency or similar laws affecting creditors= rights generally and general principles of equity. The Subsidiary Guaranty Agreement, when executed and delivered by each Obligor, will constitute a valid and binding agreement of such Obligor, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency or similar laws affecting creditors= rights generally and general principles of equity. Section 4.4. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1995 and the related statements of consolidated income, consolidated cash flows and consolidated shareholders= equity for the fiscal year then ended, reported on by Arthur Andersen LLP and set forth in the Borrower=s 1995 Annual Report to Shareholders, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited condensed consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 1996 and the related unaudited condensed statements of consolidated income and consolidated cash flows for the six months then ended, set forth in the Borrower=s quarterly report for the fiscal quarter ended June 30, 1996 as filed with the Securities and Exchange Commission on Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such six-month period (subject to normal year-end adjustments). (c) Excluding the effects of the Spin-Off, as such effects were projected in the Borrower=s current report on Form 8-K dated August 26, 1996, there has been no material adverse change since June 30, 1996 in the business, financial position, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.5. Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official (i) in which there is a reasonable possibility that a final judgment in excess of $30,000,000 will be entered or filed against the Borrower or any of its Subsidiaries, (ii) in which there is a reasonable possibility of an adverse decision which could, in a manner not involving the payment of damages, materially adversely affect the business of the Borrower and its Subsidiaries, considered as a whole, or (iii) which in any manner draws into question the validity of any Financing Document. Section 4.6. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan, except to the extent that noncompliance could not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. Section 4.7. Environmental Matters. In the ordinary course of its business, the Borrower conducts periodic reviews of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of such reviews, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely (after taking into account the Borrower=s reserves for such liabilities and costs) to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.8. Taxes. United States Federal income tax returns of the Borrower and its Subsidiaries have been examined and closed through the fiscal year ended December 31, 1983. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. Section 4.9. Subsidiaries. Each of the Borrower=s corporate Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Each Subsidiary Guarantor is a Wholly-Owned Subsidiary of the Borrower. Section 4.10. Not an Investment Company. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.11. Full Disclosure. All information heretofore furnished by the Borrower to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to the Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee) the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations under this Agreement. Section 4.12. Spin-Off. The Spin-Off will be "tax free" to the Borrower as described in the ruling referred to in Section 3.01(h). ARTICLE 5 Covenants The Borrower agrees that, so long as any Bank has any Commitment or any Outstanding LC Exposure hereunder or any amount payable under any Note remains unpaid: Section 5.1. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the audited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related audited statements of consolidated income, consolidated cash flows and consolidated shareholders= equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by Arthur Andersen LLP or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, the condensed consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter, the related condensed statement of income for such quarter and the related condensed statements of income and consolidated cash flows for the portion of the Borrower=s fiscal year ended at the end of such quarter, setting forth in the case of such statements of consolidated income and consolidated cash flows in comparative form the figures for the corresponding periods of the Borrower=s previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation and consistency by the chief financial officer or the chief accounting officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.07, 5.08, 5.09 and 5.12 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer=s certificate delivered simultaneously therewith pursuant to clause (c) above; (e) within five Domestic Business Days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, which could, when aggregated with any liability incurred after June 30, 1996 by any member of the ERISA Group as a result of any other such withdrawal liability, reorganization, insolvency or termination, give rise to aggregate liabilities of the ERISA Group in excess of $5,000,000, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, which could, when aggregated with any liability incurred after June 30, 1996 by any member of the ERISA Group as a result of any other such withdrawal, give rise to aggregate liabilities of the ERISA Group in excess of $5,000,000, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Agent, at the request of any Bank, may reasonably request. Section 5.2. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same are contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. Section 5.3. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will maintain, and will cause each Subsidiary to maintain, with financially sound and reputable insurers, insurance against liabilities to third parties, casualties affecting property used in its business and other risks of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations; provided that, in lieu of any such insurance, the Borrower or any Subsidiary may maintain a system or systems of self-insurance and reinsurance which will accord with sound practices of similarly situated corporations maintaining such systems and with respect to which the Borrower or such Subsidiary will maintain adequate insurance reserves, all in accordance with generally accepted accounting principles and in accordance with sound insurance principles or practice. Section 5.4. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) any merger or consolidation permitted by Section 5.10 or (ii) the termination of the corporate existence of any Subsidiary (other than a Subsidiary Guarantor) if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. Section 5.5. Compliance with Laws. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder), except where (i) the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) failures to comply therewith could not, in the aggregate, have a material adverse effect on the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries. Section 5.6. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities. The Borrower will permit, and will cause its Subsidiaries (except Insignificant Subsidiaries) to permit, representatives of any Bank, at such Bank=s expense, to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent accountants, in each case to the extent reasonably requested by such Bank to enable it to evaluate the credit of the Borrower and the Subsidiary Guarantors, confirm the Borrower=s compliance with the provisions of the Financing Documents, exercise and enforce such Bank=s rights under the Financing Documents or otherwise make decisions relating thereto, but subject to any limitations imposed by law or by confidentiality agreements binding on the Borrower or the relevant Subsidiary. Such visits, inspections, examinations and discussions shall be conducted at such reasonable times and as often as the relevant Bank or Banks may reasonably request. Section 5.7. Debt. (a) The ratio of Consolidated Debt to Consolidated Net Worth shall not at any time exceed 1.65 to 1. (b) Total Debt of all Subsidiaries will at no time exceed $50,000,000; provided that, for purposes of this subsection (b), such total Debt shall not include: (i) Debt of a Subsidiary owing to the Borrower; (ii) Debt of a Subsidiary owing to another Subsidiary (except, in the case of Debt held by a Subsidiary that is not wholly owned, directly or indirectly, by the Borrower, the portion of such Debt allocable, on a pro rata basis, to the minority interest); (iii) Guarantees by a Subsidiary of Debt of the Borrower or Debt of another Subsidiary; (iv) Debt of a Subsidiary outstanding on June 30, 1996 or any refinancing of such Debt, provided that the principal amount of refinancing Debt excluded from total Debt pursuant to this clause (iv) shall not exceed the principal amount of the Debt refinanced thereby; (v) Debt of a Subsidiary secured by a purchase money Lien permitted by Section 5.09(c); provided that the aggregate outstanding principal amount of all Debt excluded from total Debt pursuant to this clause (v) shall not at any time exceed $150,000,000; (vi) for a period of 90 days after the Effective Date (but not thereafter), Debt outstanding under the Emery Receivables Facility not exceeding $35,000,000 in aggregate outstanding principal amount; and (vii) Guarantees by a Subsidiary of Debt of an ESOP Trust. As used herein, the term "ESOP Trust" means a trust created under an employee stock ownership plan as defined in Section 407(d)(6) of ERISA which purchases capital stock of the relevant Subsidiary for the benefit of employees of such Subsidiary and its subsidiaries. Section 5.8. Minimum Consolidated Net Worth. Consolidated Net Worth shall not at any time be less than $350,000,000; provided that such amount shall be increased (i) as of December 31, 1996 by an amount equal to 50% of the consolidated net income of the Borrower and its Consolidated Subsidiaries for the six months then ended, if such consolidated net income is positive, and (ii) as of the last day of each fiscal year thereafter by an amount equal to 50% of the consolidated net income of the Borrower and its Consolidated Subsidiaries for such fiscal year, if such consolidated net income is positive. Section 5.9. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal amount not exceeding $115,000,000; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event at the request of the Borrower or any of its Subsidiaries or for the benefit of any of their respective creditors; (c) any purchase money Lien on any property constituting a fixed asset or a surface or air transportation vehicle used in the freight business hereafter acquired by the Borrower or any Subsidiary or hereafter constructed or improved by the Borrower or any Subsidiary, to secure or provide for the payment of all or a part of the purchase price thereof, or any Debt incurred to finance the purchase thereof or cost of construction or cost of improvement of such property and for which a bona fide firm commitment in writing was executed prior to, contemporaneously with or within 180 days after acquisition of such property, or the completion of construction or improvement thereof, as the case may be, provided that no such Lien shall extend to any other property of the Borrower or any Subsidiary; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrower or a Subsidiary and not created in contemplation of such event at the request of the Borrower or any of its Subsidiaries or for the benefit of any of their respective creditors; (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary and not created in contemplation of such acquisition at the request of the Borrower or any of its Subsidiaries or for the benefit of any of their respective creditors; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (g) any Lien on (i) the common stock of any Subsidiary Guarantor, but only if after giving effect to such Lien, the Borrower would own, directly or indirectly, at least 80% of the common stock of such Subsidiary Guarantor free and clear of Liens or (ii) the common stock of any other Subsidiary; (h) Liens arising in the ordinary course of its business which (i) do not secure Debt, (ii) do not secure any obligation in an amount exceeding $50,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (i) Liens securing the Emery Receivables Facility; (j) any Lien (other than Liens securing the Emery Receivables Facility) on accounts receivable if, immediately after such Lien arises, the aggregate uncollected balance of all accounts receivable sold or subjected to Liens (other than Liens securing the Emery Receivables Facility) by the Borrower and its Subsidiaries (excluding accounts receivable charged off in accordance with the charge-off policies applicable to the unsold accounts receivable of the Borrower and its Subsidiaries) would not exceed 10% of the consolidated accounts receivable of the Borrower and its Subsidiaries as of the end of its then most recently ended fiscal quarter; and (k) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt or other obligations in an aggregate principal amount at any time outstanding not to exceed the sum of $15,000,000 plus 10% of Consolidated Net Worth as of the end of the immediately preceding fiscal quarter of the Borrower. Section 5.10. Consolidations, Mergers and Sales of Assets. The Borrower will not, and will not permit any Subsidiary to, consolidate or merge with, or sell, lease or otherwise transfer any of its assets to, any Person, except that nothing in this Section 5.10 shall prohibit: (a) the merger of a Subsidiary into the Borrower, (b) the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary, (c) the sale, lease or other transfer of any aircraft either (i) in the ordinary course of business or (ii) for fair value if after giving effect thereto, the aggregate consideration received for all aircraft sold, leased or otherwise transferred under this clause (ii) during any fiscal year of the Borrower does not exceed $150,000,000; (d) any sale, lease or other transfer of any asset (including aircraft not permitted to be sold, leased or otherwise transferred pursuant to clause (c) above) either (i) in the ordinary course of business or (ii) for fair value if after giving effect thereto, the aggregate consideration received for all of their assets sold, leased or otherwise transferred under this clause (ii) during any fiscal year of the Borrower does not exceed $100,000,000; or (e) the Spin-Off; provided that, in the case of (x) any such merger or consolidation or (y) any such sale, lease or other transfer of any asset not in the ordinary course of business, no Default shall have occurred and be continuing after giving effect thereto. Section 5.11. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. Section 5.12. Fixed Charge Coverage. The ratio of Consolidated EBITDAR to Consolidated Fixed Charges will not, for any period of four consecutive fiscal quarters, be less than 1.875 to 1. Section 5.13. Transactions with Third Party Affiliates. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Third Party Affiliate; provided that nothing in this Section 5.13 shall prohibit: (a) the Borrower from declaring or paying any lawful dividend so long as, after giving effect thereto, no Default shall have occurred and be continuing; (b) the Borrower or any Subsidiary from making sales to or purchases from any Third Party Affiliate and, in connection therewith, extending credit or making payments, or from making payments for services rendered by any Third Party Affiliate, if such sales or purchases are made or such services are rendered in the ordinary course of business and on an arm=s-length basis; (c) the Borrower or any Subsidiary from making payments of principal, interest and premium on any Debt of the Borrower or such Subsidiary held by a Third Party Affiliate if the terms of such Debt are established on an arm=s-length basis; or (d) the Borrower or any Subsidiary from participating in, or effecting any transaction in connection with, any joint enterprise or other joint arrangement with any Third Party Affiliate if the Borrower or such Subsidiary participates in the ordinary course of its business and on a basis no less advantageous than the basis on which such Third Party Affiliate participates. ARTICLE 6 Defaults Section 6.1. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay any principal of any Loan or Reimbursement Obligation when due, or shall fail to pay within three Domestic Business Days of the due date thereof any interest, fees or other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.07 to 5.12, inclusive, or in Section 3.01 of the Subsidiary Guaranty Agreement; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in any Financing Document (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Borrower by the Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in any Financing Document or any amendment thereof or in any certificate, financial statement or other document delivered pursuant to any Financing Document shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Debt within three Domestic Business Days after such payment is due or, if longer, within any grace period otherwise applicable to such payment; (f) any event or condition shall occur which results in the acceleration of the maturity of Material Debt or enables the holders of Material Debt or any Person acting on their behalf to accelerate the maturity thereof, or any default by the Borrower or any Subsidiary shall occur which results in the termination of Material Commitments prior to the scheduled termination thereof or enables Persons extending Material Commitments to terminate such Material Commitments prior to the scheduled termination thereof; (g) the Borrower or any Subsidiary (except Insignificant Subsidiaries) shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Subsidiary (except Insignificant Subsidiaries) seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Subsidiary (except Insignificant Subsidiaries) under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $35,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $35,000,000; (j) a final judgment or order for the payment of money in excess of $35,000,000 shall be entered or filed against the Borrower or any Subsidiary and such judgment or order shall continue unsatisfied, unvacated and unstayed for a period of 30 days; (k) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of the Borrower, or Continuing Directors shall cease to constitute a majority of the Borrower=s board of directors; (l) the Borrower shall cease to own, directly or indirectly, at least 80% of the common stock of each Subsidiary Guarantor free and clear of all Liens; or (m) the Borrower or any Subsidiary Guarantor shall take any action that causes the guarantee by any Subsidiary Guarantor set forth in the Subsidiary Guaranty Agreement to be revoked or invalidated, or to cease to be in full force and effect (other than pursuant to Section 4.03 of the Subsidiary Guaranty Agreement), or the Borrower or any Subsidiary Guarantor (or any Person acting on behalf of the Borrower or any Subsidiary Guarantor) shall deny or disaffirm any of the obligations of any Subsidiary Guarantor set forth in the Subsidiary Guaranty Agreement; then, and in every such event, the Agent shall (i) if requested by the Required Banks, by notice to the Borrower terminate the Commitments and they shall thereupon terminate and (ii) if requested by Banks holding Notes evidencing at least 60% in aggregate principal amount of the Loans outstanding, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to any Obligor, without any notice to the Obligors or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. Section 6.2. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. Section 6.3. Cash Cover. The Borrower agrees, in addition to the provisions of Section 6.01 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by the Agent upon instruction from Banks having at least 60% of the aggregate amount of the Outstanding LC Exposures, pay (and, in the case of any of the Events of Default specified in clause (g) or (h) above with respect to any Obligor, forthwith, without any demand or the taking of any other action by the Agent or any Bank, it shall pay) to the Agent an amount in immediately available funds equal to the then aggregate amount of the LC Liabilities to be held as security therefor for the benefit of the Banks and the LC Issuing Banks. ARTICLE 7 The Agent and the Co-Agents Section 7.1. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to the Agent by the terms thereof, together with all such powers as are reasonably incidental thereto. Section 7.2. Agent and Affiliates. Morgan Guaranty Trust Company of New York and each Bank identified as a Co-Agent herein shall have the same rights and powers under the Financing Documents as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent or a Co-Agent. Morgan Guaranty Trust Company of New York and each Bank identified as a Co-Agent herein and their respective affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent or a Co-Agent hereunder. Section 7.3. Action by Agent. The obligations of the Agent under the Financing Documents are only those expressly set forth therein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default (except as expressly provided in Article 6) and shall not have a fiduciary relationship with any Bank. Section 7.4. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for an Obligor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.5. Liability of Agent. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of the Financing Documents or any other instrument or writing furnished in connection therewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Section 7.6. Indemnification. Each Bank shall, ratably in accordance with its Percentage, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees= gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. Section 7.7. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent, the Co-Agents or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent, the Co-Agents or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under the Financing Documents. Section 7.8. Successor Agent. The Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right, after consultation with the Borrower, to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent=s resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. Section 7.9. Agent=s Fee. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. Section 7.10. Co-Agents. No Bank identified as a "Co-Agent" herein shall have any right, power, obligation, liability, responsibility or duty of any kind under the Financing Documents (except those applicable to it in its capacity as a Bank) or any fiduciary relationship with any other Bank. ARTICLE 8 Change in Circumstances Section 8.1. Basis for Determining Interest Rate Inadequate or Unfair . If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of CD Loans or Euro-Dollar Loans, Banks having 50% or more of the aggregate principal amount of the affected Loans advise the Agent that the Adjusted CD Rate or the Adjusted London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, or to continue or convert outstanding Loans as or into CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended and (ii) each outstanding CD Loan or Euro- Dollar Loan, as the case may be, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto, unless the Borrower shall have elected pursuant to Section 2.10 to convert such CD Loan or Euro-Dollar Loan into a Fixed Rate Loan of the other type and the circumstances described in Sections 8.01(a) and 8.01(b) do not exist with respect to such other type. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest on the unpaid principal amount thereof for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. Section 8.2. Illegality. If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day. Section 8.3. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 30 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank=s obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 30 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will use its best efforts promptly to notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Section 8.4. Taxes. (a) Any and all payments by the Borrower to or for the account of any Bank or the Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise or similar taxes imposed on it, by the jurisdiction of such Bank=s Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Bank or the Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, or charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Bank or the Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank at the time such Bank first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 8.04(a). (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(a) with respect to Taxes imposed by the United States; provided that should a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.04, then such Bank will change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Bank, is not otherwise disadvantageous to such Bank. Section 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans. (a) If (i) the obligation of any Bank to make, or continue or convert outstanding Loans as or into, Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days= prior notice to such Bank through the Agent, have elected that the provisions of this Section 8.05(a) shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, all Loans which would otherwise be made by such Bank as (or continued as or converted into) CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks). If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer exist, the principal amount of each such Base Rate Loan shall be converted into a CD Loan or Euro-Dollar Loan, as the case may be, on the first day of the next succeeding Interest Period applicable to the related CD Loans or Euro-Dollar Loans of the other Banks. (b) If (i) any Bank has demanded compensation under Section 8.03 with respect to its CD Loans or Euro- Dollar Loans or (ii) the Borrower has become obligated to pay any Taxes or other amounts to or for the account of any Bank pursuant to Section 8.04, and the Borrower shall, by at least five Euro-Dollar Business Days= prior notice to the Banks through the Agent, have elected that the provisions of this Section 8.05(b) shall apply to all of the Banks, then the Borrower shall, on the fifth Euro-Dollar Business Day following such notice, prepay in full the then outstanding principal amount of each outstanding Euro-Dollar Loan or CD Loan, as the case may be, of each Bank, together with accrued interest thereon. Section 8.6. Substitution of Banks. If (i) any Bank has demanded compensation under Section 8.03 or (ii) the Borrower has become obligated to pay any Taxes or other amounts to or for the account of any Bank pursuant to Section 8.04 (such Bank, in either case, being called a "Selling Bank"), the Borrower shall have the right, with the assistance of the Agent, to seek one or more banks or other institutions satisfactory to the Borrower, the LC Issuing Banks and the Agent (collectively, the "Purchasing Banks") willing to purchase the Selling Bank=s Note and its share of any unpaid Reimbursement Obligations and assume the Commitment of the Selling Bank, all on the terms specified in this Section 8.06. The Selling Bank shall be obligated to sell its Note and its share of any unpaid Reimbursement Obligations to such Purchasing Bank or Banks (which may include one or more of the Banks) within 15 days after receiving notice from the Borrower requiring it to do so, at an aggregate price equal to the outstanding principal amount thereof, plus unpaid interest accrued thereon to but excluding the date of sale. In connection with any such sale, and as a condition thereof, the Borrower shall pay to the Selling Bank all fees accrued for its account hereunder to but excluding the date of such sale, plus, if demanded by the Selling Bank at least two Domestic Business Days prior to such sale, (i) the amount of any compensation which would be due to the Selling Bank under Section 2.14 if the Borrower had prepaid the outstanding Fixed Rate Loans of the Selling Bank on the date of such sale and (ii) any additional compensation, Taxes or other amounts accrued for its account under Section 8.03 or 8.04, as applicable, to but excluding said date (it being understood that the Selling Bank shall retain its right to be compensated after the date of such sale for any such accrued amounts remaining unpaid). Upon such sale, the Purchasing Bank or Banks shall assume the Commitment of the Selling Bank, and the Selling Bank shall be released from its obligations hereunder to a corresponding extent. If any Purchasing Bank is not already one of the Banks, the Selling Bank, as assignor, such Purchasing Bank, as assignee, the Borrower, the LC Issuing Banks and the Agent shall enter into an assignment and assumption agreement substantially in the form of Exhibit G hereto, whereupon such Purchasing Bank shall be a Bank party to this Agreement, shall be deemed to be an Assignee hereunder and shall have all the rights and obligations of a Bank with a Commitment equal to its ratable share of the Commitment of the Selling Bank. Upon the consummation of any sale pursuant to this Section 8.06, the Selling Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, each Purchasing Bank receives a new Note. If the Selling Bank is also an LC Issuing Bank, its obligation to issue or extend Letters of Credit (or permit an automatic extension of an "evergreen" Letter of Credit) shall terminate concurrently with such sale and its status as an LC Issuing Bank (but not its right to indemnification hereunder) shall terminate when the LC Liabilities relating to all Letters of Credit issued by it have been reduced to zero. ARTICLE 9 Miscellaneous Section 9.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower, an LC Issuing Bank, a Co-Agent or the Agent, at its address or telex number or facsimile number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telex number or facsimile number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telex number or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when such facsimile is transmitted to the facsimile transmission number specified in or pursuant to this Section 9.01 and telephonic confirmation of receipt thereof is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Agent or the LC Issuing Banks under Article 2 or Article 8 shall not be effective until received. Section 9.2. No Waivers. No failure or delay by the Agent, any Bank or any LC Issuing Bank in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.3. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent, including fees and disbursements of special counsel for the Agent, in connection with the preparation and administration of the Financing Documents, any waiver or consent thereunder or any amendment thereof or any Default thereunder or any event or condition reasonably alleged by any Bank to be a possible Default thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent and each Bank, including fees and disbursements of counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Agent, each Co-Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Financing Documents (other than the provisions thereof relating to Letters of Credit as to which indemnification is provided in Section 2.16(k)) or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee=s own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Section 9.4. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive (i) payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank or (ii) payment of a proportion of its participation in the LC Liabilities which is greater that the proportion received by any other Bank in respect of its participation in the LC Liabilities, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes or the LC Liabilities (as the case may be) held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata and all such payments with respect to the LC Liabilities shall be shared pro rata by the Banks participating therein; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Notes and the LC Liabilities. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note or the LC Liabilities, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. Section 9.5. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent or any LC Issuing Bank are affected thereby, by the Agent or such LC Issuing Bank, as the case may be); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan, any Reimbursement Obligation or any fees hereunder or for any termination of any Commitment or (iv) change any provision of this Section or change the percentage of the Commitments, the Outstanding Credit Exposures or the Outstanding LC Exposures or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of the Financing Documents. Section 9.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans or its Outstanding LC Exposure. Within five Domestic Business Days after such grant, unless such grant consists solely of a participating interest in the Money Market Loans of such Bank, such Bank shall notify the Borrower of the name of such Participant and the amount of its participating interest. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower or the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank=s rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or, subject to the next sentence, a proportionate part of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto (an "Assignment and Assumption Agreement") executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower (which shall not be unreasonably withheld), the LC Issuing Banks and the Agent; provided that if an Assignee is another Bank or an affiliate of such transferor Bank, the consent of the Borrower and the Agent shall not be required; and provided further that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans. No assignment of only a proportionate part of the rights and obligations of a Bank under this Agreement and the Notes may be made unless each of (i) the part assigned (i.e., the "Assigned Amount" set forth in the related Assignment and Assumption Agreement) and (ii) the part retained by the transferor Bank equals or exceeds $10,000,000. Upon execution and delivery of an Assignment and Assumption Agreement and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such Assignment and Assumption Agreement, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank=s rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower=s prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 9.7. Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any Amargin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 9.8. Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to the Financing Documents or the transactions contemplated thereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 9.9. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. Section 9.10. Waiver of Jury Trial. EACH OF THE BORROWER, THE AGENT, THE CO-AGENTS, THE LC ISSUING BANKS AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. Section 9.11. Confidentiality. The Agent, each LC Issuing Bank and each Bank agrees to keep confidential any proprietary or financial information obtained by the Agent, such LC Issuing Bank or such Bank, as the case may be, based on a review of the books and records of the Borrower or any Subsidiary pursuant to Section 5.06 and any other information to the extent such information has been stated by the Borrower to be confidential; provided that nothing herein shall prevent the Agent, any LC Issuing Bank or any Bank from disclosing such information (i) to the Agent, any LC Issuing Bank or any other Bank in connection with the transactions contemplated by the Financing Documents, (ii) to the officers, directors, employees, agents, attorneys and accountants of such party and its affiliates who have a need to know such information in accordance with customary banking practices and who receive such information having been made aware of the restrictions set forth in this Section, (iii) upon the order of any court or administrative agency, (iv) upon the request or demand of any regulatory agency or authority having jurisdiction over such party, (v) which has been publicly disclosed, (vi) which has been obtained from any Person other than the Borrower and its Subsidiaries, provided that such Person is not known to it to be bound by a confidentiality agreement with the Borrower or its Subsidiaries or known to it to be otherwise prohibited from transmitting the information to it by a contractual, legal or fiduciary obligation, (vii) in connection with the exercise of any remedy under the Financing Documents or (viii) to any actual or proposed participant or assignee of all or any of its rights under the Financing Documents, provided that such proposed participant or assignee shall have agreed in writing, for the benefit of the Borrower as a third- party beneficiary, to be bound by the provisions of this Section. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.5 CONSOLIDATED FREIGHTWAYS, INC. By /s/ R. Guy Kraines Title: Assistant Treasurer 3240 Hillview Avenue Palo Alto, California 94304 Facsimile number: (415) 813- 0158 Telephone number: (415) 813- 5321 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Diana H. Imhof Title: Vice President ABN-AMRO BANK, N.V. By /s/ Jeffrey A. French Title: Group Vice President & Director By /s/ L.T. Osborne Title: Group Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ James P. Johnson Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By /s/ David Dixon Title: Authorized Agent MELLON BANK, N.A. By /s/ Mack Clapp Title: First Vice President THE BANK OF NEW YORK By /s/ Elizabeth T. Ying Title: Vice President CREDIT SUISSE By /s/ Maria N. Gaspara Title: Associate By /s/ Marilou Palenzuela Title: Member of Senior Management THE INDUSTRIAL BANK OF JAPAN, LIMITED, SAN FRANCISCO AGENCY By /s/ Yoh Nakahara Title: General Manager NATIONSBANK OF TEXAS, N.A. By /s/ Chas A. McDonell Title: Vice President PNC BANK, NATIONAL ASSOCIATION By /s/ Phil Liebscher Title: Vice President UNION BANK OF CALIFORNIA, N.A. By /s/ Robert John Vernagallo Title: Vice President UNITED STATES NATIONAL BANK OF OREGON By /s/ Dale Parshall Title: Assistant Vice President ABN-AMRO BANK, N.V., as LC Issuing Bank 101 California Street Suite 4550 San Francisco, CA 94111-5612 Attn:Jeffrey A. French Telex number: 278137 ABNSF UR Facsimile number: (415) 362-3524 Telephone number: (415) 984-3703 By /s/ Jeffrey A. French Title: Group Vice President & Director By /s/ L.T. Osborne Title: Group Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as LC Issuing Bank By /s/ James P. Johnson Title: Vice President 555 California Street San Francisco, CA 94104 Attn:James P. Johnson Facsimile number: (415) 622-4585 Telephone number: (415) 622-2126 with a copy to: Bank of America National Trust and Savings Association 1850 Gateway Boulevard Concord, CA 94520 Attn:Jill Wilson Customer Services Officer Global Payment Operations Domestic Account Administration 5693 Facsimile number: (510) 885-7531 Telephone number: (510) 885-7040 THE FIRST NATIONAL BANK OF CHICAGO, as LC Issuing Bank By /s/ David Dixon Title: Authorized Agent One First National Plaza 10th Floor, Suite 0374 Chicago, Illinois 60670 Attention:David Dixon Facsimile number: (312) 732-3885 Telephone number: (312) 732-8142 with a copy to: The First National Bank of Chicago 300 South Riverside Plaza 7th Floor Chicago, Illinois 60670 Attention:Mark Klatt Facsimile number: (312) 954-1963 Telephone number: (312) 954-1906 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as LC Issuing Bank By /s/ Diana H. Imhof Title: Vice President J.P. Morgan Services Inc. Attention: International Trade Services 500 Stanton Christiana Road Newark, Delaware 19713 Facsimile number: (302) 634-1838 Telephone number: (302) 634-1825 with a copy to: 60 Wall Street New York, New York 10260-0060 Attention:Diana Imhof Telex number: 177615 Facsimile number: (212) 648-5018 Telephone number: (212) 648-6948 ABN-AMRO BANK, N.V., as Co-Agent 101 California Street Suite 4550 San Francisco, CA 94111-5612 Attn:Jeffrey A. French Telex number: 278137 ABNSF UR Facsimile number: (415) 362-3524 Telephone number: (415) 984-3703 By /s/ Jeffrey A. French Title: Group Vice President & Director By /s/ L.T. Osborne Title: Group Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Co-Agent 555 California Street San Francisco, CA 94104 Attn:James P. Johnson Credit Products 3838 Facsimile number: (415) 622-4585 Telephone number: (415) 622-2126 By /s/ James P. Johnson Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Co-Agent By /s/ David Dixon Title: Authorized Agent One First National Plaza 10th Floor, Suite 0374 Chicago, Illinois 60670 Attention:David Dixon Facsimile number: (312) 732-3885 Telephone number: (312) 732-8142 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Diana H. Imhof Title: Vice President J.P. Morgan Services Inc. 500 Stanton Christiana Road Newark, Delaware 19713 Attention:Jeannie Mattson Facsimile number: (302) 634-1092 Telephone number: (302) 634-1938 with a copy to: 60 Wall Street New York, New York 10260-0060 Attention:Diana Imhof Telex number: 177615 Facsimile number: (212) 648-5018 Telephone number: (212) 648-6948 The undersigned Terminating Banks sign this amendment and restatement of the Existing Agreement solely for the purpose of satisfying the provisions of Section 9.05 thereof requiring such an amendment to be signed by all Banks party thereto. The signatures of the undersigned Terminating Banks shall be effective when, and only when, the Agent receives for their account payment of all principal of and accrued interest on their respective loans outstanding under the Existing Credit Agreement on the Effective Date. THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY By /s/ Motokazu Uematsu Title: Deputy General Manager FIRST INTERSTATE BANK OF OREGON, N.A. By /s/ Daniel S. Park Title: Vice President COMMITMENT SCHEDULE bank commitment Morgan Guaranty Trust Company of New York $35,000,000 ABN-AMRO Bank N.V. $35,000,000 Bank of America National Trust and Savings $35,000,000 Association The First National Bank of Chicago $35,000,000 Mellon Bank, N.A. $35,000,000 The Bank of New York $25,000,000 Credit Suisse $25,000,000 The Industrial Bank of Japan, Limited $25,000,000 San Francisco Agency NationsBank of Texas, N.A. $25,000,000 PNC Bank, National Association $25,000,000 Union Bank of California, N.A. $25,000,000 United States National Bank of Oregon $25,000,000 TOTAL $350,000,000 EX-10 4 EXHIBIT 10.33 EXHIBIT 10.33 ------------- EMPLOYEE BENEFIT MATTERS AGREEMENT This EMPLOYEE BENEFIT MATTERS AGREEMENT (the "Agreement") is made as of this 2nd of December, 1996 by and between CONSOLIDATED FREIGHTWAYS, INC., a Delaware corporation ("CFI") and CONSOLIDATED FREIGHTWAYS CORPORATION, a Delaware corporation (the "Company"). RECITALS WHEREAS, CFI is the holder of all of the issued and outstanding shares of common stock of the Company; WHEREAS, the employees of the Company and its Subsidiaries are covered by various employee benefit plans sponsored by CFI which are limited to employees of CFI and its Subsidiaries; and WHEREAS, CFI has determined that it will distribute all of the shares of the Company's common stock to the holders of the common stock of CFI, which will cause the Company and its Subsidiaries to no longer be Subsidiaries of CFI; NOW, THEREFORE, CFI and the Company agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings, such meanings to be equally applicable to both the singular and plural forms of the terms defined: ADR Agreement. The Alternative Dispute Resolution Agreement entered into between CFI and the Company dated the same date as this Agreement, the form of which is attached as Annex 1 to the Distribution Agreement. Company Employee. A person described in 2.3. Distribution. The distribution of Company common stock pursuant to the Distribution Agreement. Distribution Agreement. The Distribution Agreement entered into between CFI and the Company dated November 25, 1996 and governing the distribution of Company common stock to the holders of CFI common stock. Distribution Date. The date on which all the shares of Company common stock are delivered to the distribution agent pursuant to the Distribution Agreement. Subsidiary. A corporation that is a member of a controlled group of corporations, within the meaning of Internal Revenue Code Section 1563, with CFI or with the Company, except that the Company and its Subsidiaries shall not be treated as Subsidiaries of CFI. ARTICLE II SEPARATION OF BENEFIT PLANS 2.1 Adoption of Company Plans. The Company and its Subsidiaries shall, as of the Distribution Date, cease participating in the employee benefit plans sponsored by CFI. As of the Distribution Date, the Company shall adopt employee benefit plans covering Company Employees that are substantially the same as the employee benefit plans sponsored by CFI covering Company Employees prior to the Distribution Date except as follows. The Company shall not be obligated to duplicate or replace the CFI employee benefit plans that are limited to executive employees and may adopt such new executive employee benefit plans as it shall decide in its absolute discretion. 2.2 Separate Responsibilities. CFI and the Company agree that CFI shall have sole responsibility for its employee benefit plans, arrangements and policies for employees of CFI and its Subsidiaries and that the Company shall have sole responsibility for its employee benefit plans, arrangements and policies for Company Employees. CFI and the Company intend that, to the extent possible, Company Employees shall look solely to the Company and its plans, arrangements and policies for the provision of employee benefits, except certain executive benefits discussed in this Agreement, and that employees of CFI and its Subsidiaries shall look solely to CFI and its plans, arrangements and policies for the provision of employee benefits. 2.3 Identification of Company Employees. "Company Employees" shall be determined as follows: (a) All persons actively employed by the Company or a Subsidiary of the Company on the Distribution Date shall be Company Employees, unless described in (b). (b) Persons who accept employment with CNF Service Company, Inc. as of the Distribution Date shall not be Company Employees. (c) The persons formerly employed by the Company or a Subsidiary of the Company who are listed on a schedule attached hereto shall be Company Employees. ARTICLE III TAX QUALIFIED RETIREMENT PLANS 3.1 Adoption of Company SASP. The Company shall adopt a Stock and Savings Plan (the "Company SASP") as follows: (a) The Company SASP shall be effective as of the Distribution Date. (b) Subject to Section 2.1, and to (c), (d) and (e) below, the Company SASP shall be in a form satisfactory to the Company in its sole discretion. (c) The Company SASP shall be qualified under Sections 401(a) and 401(k) of the Code and shall have a related trust qualified under Section 501(a) of the Code. The Company shall file, or cause the administrator of the Company SASP to file, with the Internal Revenue Service an Application for Determination with respect to the Company SASP within the remedial amendment period prescribed by applicable law and regulations. The Company shall amend the Company SASP as may be required by the Internal Revenue Service as a condition for receipt of a favorable determination letter within the time required by the Internal Revenue Service for adoption of such amendment. (d) The Company SASP shall credit service performed before the Distribution Date for CFI and its Subsidiaries under applicable service crediting rules as if such service were performed for the Company. (e) The Company SASP shall provide for matching contributions invested in Company common stock, but need not include an employee stock ownership plan with Company stock purchased by borrowing. 3.2 TASP Spinoff. The Consolidated Freightways, Inc. Thrift and Stock Plan (the "TASP" consists of two plans: a 401(k) plan (the "TASP 401(k)") and an employee stock ownership plan (the "TASP ESOP"). Accounts under the TASP 401(k) are invested at the direction of participants in several funds, including a fund for common stock of CFI (the "CFI Stock Fund"). The TASP ESOP is invested primarily in a special class of convertible preferred stock of CFI (the "Preferred Stock") and in common stock of CFI. The TASP ESOP holds shares of Preferred Stock in a suspense account that secures loans to the TASP ESOP. Preferred Stock is converted to common stock of CFI before distribution to participants or upon transfer to a person other than the trustee of the TASP. On the Distribution Date, the TASP will receive common stock of the Company with respect to its shares of CFI common stock. As soon as practicable after the Distribution Date, and in any event within 180 days after such date, CFI and the Company shall cause the portion of the TASP that covers Company Employees to be spun off from the TASP and to be merged into the Company SASP. In connection with the spinoff and merger, the following shall apply: (a) CFI shall direct the trustee of the TASP to transfer assets held for the benefit of Company Employees under the TASP to the trustee of the Company SASP. The trustee of the TASP shall make such transfer even though the Company SASP has not yet received a favorable determination letter from the Internal Revenue Service with respect to the qualification of the Company SASP under Section 401(a) of the Code if the Company demonstrates to CFI's reasonable satisfaction that the Company has preserved its right to make remedial amendments required by the Internal Revenue Service as a condition of a favorable determination. (b) CFI shall cause the fiduciaries of the TASP to provide an accounting to the fiduciaries of the Company SASP with respect to all assets and accounts transferred to the Company SASP. The accounting shall be reasonably satisfactory to the Company for purposes of proper allocation of assets, earnings, gains and losses to the accounts of participants under the Company SASP. (c) CFI shall cause IRS Form 5310A to be filed with the Internal Revenue Service, giving notice of the spinoff and merger, at least 30 days before the date of the spinoff and merger. (d) The Company SASP shall include a CFI Stock Fund and an investment fund for common stock of the Company (the "Company Stock Fund") for participant-directed investment of accounts. Common stock of CFI held in accounts of Company Employees in the TASP 401(k) and the TASP ESOP shall be transferred in kind in the spinoff and merger and shall be placed initially in the CFI Stock Fund of the Company SASP, credited to the participant-directed accounts of such Company Employees. Common stock of the Company held in accounts of Company Employees in the TASP 401(k) as a result of the Distribution shall be transferred in kind in the spinoff and merger and shall be placed initially in the Company Stock Fund of the Company SASP, credited to the participant-directed accounts of such Company Employees. Common stock of the Company held in accounts of Company Employees in the TASP ESOP as a result of the Distribution shall be transferred in kind in the spinoff and merger and shall be placed in the matching accounts of such Company Employees in the Company SASP and shall not be subject to participant-directed investment. The Company SASP shall provide that participants may direct the sale of shares out of the CFI Stock Fund but may not direct investment of any additional amounts into it. As of the next calendar quarter end following the third anniversary of the Distribution Date, the CFI Stock Fund shall be closed and its assets moved into another investment fund selected by each participant or, for participants who fail to make a selection, by the Administrative Committee for the Company SASP. (e) The TASP 401(k) shall include a Company Stock Fund, in addition to the existing CFI Stock Fund, for participant-directed investment of accounts. The Company common stock distributed on shares of CFI common stock held for TASP participants who are not Company Employees in the CFI Stock Fund and in the TASP ESOP shall become the assets of the Company Stock Fund. The TASP shall provide that participants may direct the sale of shares out of the Company Stock Fund but may not direct investment of any additional amounts into it. As of the next calendar quarter end following the third anniversary of the Distribution Date, the Company Stock Fund shall be closed and its remaining assets moved into another investment fund selected by each participant or, for participants who fail to make a selection, by the Administrative Committee for the TASP. (f) The accounts to be transferred from the TASP ESOP to the Company SASP will include accounts holding Preferred Stock. Such Preferred Stock will be automatically converted to Common Stock of CFI upon transfer to the trustee of the Company SASP and shall be placed in the CFI Stock Fund of the Company SASP as provided in (d). (g) After the spinoff and merger, the TASP will allocate to Company Employees dividends and distributions on CFI capital stock that are paid after the spinoff to holders as of a date before the spinoff and matching contributions on their elective deferrals for the partial quarter before the Distribution. For purposes of determining the right to such matching contributions, Company Employees shall be credited with service for CFC and its Subsidiaries after the Distribution as though it were performed for CFI and its Subsidiaries. Post-spinoff allocations of such dividends, distributions and matching contributions shall be transferred to the trustee of the Company SASP as soon as practicable after they are made. 3.3 Adoption of Company Pension Plan. The Company shall adopt a defined benefit pension plan (the "Company Pension Plan") to cover Company Employees as follows: (a) The Company Pension Plan shall be effective as of the Distribution Date. Company Employees shall start to accrue benefits under the Company Pension Plan and shall cease to accrue benefits under the Consolidated Freightways, Inc. Retirement Plan (the "CFI Retirement Plan") as of the Distribution Date. (b) Subject to Section 2.1, and to (c), (d) and (e) below, the Company Pension Plan shall be in a form satisfactory to the Company in its sole discretion. (c) The Company Pension Plan shall be qualified under Section 401(a) of the Code and have a related trust qualified under Section 501(a) of the Code. The Company shall file, or cause the administrator of the Company Pension Plan to file with the Internal Revenue Service an Application for Determination with respect to the Company Pension Plan within the remedial amendment period prescribed by applicable law and regulations. The Company shall amend the Company Pension Plan as may be required by the Internal Revenue Service as a condition for receipt of a favorable determination letter within the time required by the Internal Revenue Service for adoption of any such amendment. (d) Benefits with respect to the transfer described in Section 3.4 below shall be preserved in accordance with applicable law, including but not limited to the requirements of Section 411(d)(6) of the Internal Revenue Code. (e) Subject to the transfer of assets and liabilities provided for under Section 3.4, the Company Pension Plan shall credit service performed before the Distribution Date for CFI and its Subsidiaries under applicable service crediting rules as if such service were performed for the Company. (f) After the transfer described in Section 3.4, the CFI Retirement Plan shall have no obligation to Company Employees. The Company Pension Plan shall be a continuation of the CFI Retirement Plan with respect to benefits accrued by Company Employees under the CFI Retirement Plan. The transfer described in Section 3.4 shall not be a plan termination. 3.4 Retirement Plan Spinoff. On the Distribution Date, CFI and the Company shall cause the portion of the CFI Retirement Plan consisting of the liability for benefits of Company Employees accrued through the Distribution Date to be spun off from the CFI Retirement Plan along with related assets, to become the initial liabilities and assets of the Company Pension Plan. In connection with the spinoff and merger, the following shall apply: (a) The assets of the CFI Retirement Plan to be transferred to the Company Pension Plan will be equal to the lump sum present value of such liability as of the date of the spinoff and merger. Present value shall be based on the accumulated benefit obligation for benefits already accrued and on an interest rate selected by CFI with the approval of the actuary who performed the most recent annual valuation of the CFI Retirement Plan. CFI shall direct the trustee of the CFI Retirement Plan to transfer such assets to the trustee of the Company Pension Plan. (b) If the Pension Benefit Guaranty Corporation ("PBGC") asserts that the interest rate selected pursuant to (a) is not acceptable for calculating the amount of assets to be transferred from the CFI Retirement Plan to the Company Pension Plan, the parties shall make commercially reasonable efforts to reach an agreement with the PBGC on the interest rate to be used. In the event that a lower interest rate than the rate selected pursuant to (a) is used in response to such an agreement or to other actions of the PBGC, the Company shall pay CFI an amount equal to the increase in the amount of assets transferred resulting from use of such lower interest rate. The Company shall pay such amount in cash in five equal annual installments including interest at the prevailing commercial prime lending rate of the bank with which CFI has its principal banking relationship on the date of the transfer of CFI Retirement Plan assets. Such installments shall commence with the first anniversary of the date of such transfer. (c) CFI shall file IRS Form 5310A with the Internal Revenue Service, giving notice of the spinoff and merger, at least 30 days before the date of the spinoff and merger. (d) The trustee of the CFI Retirement Plan shall make the transfer of assets under (a) even though the Company Pension Plan has not yet received a favorable determination letter with respect to qualification under Section 401(a) of the Internal Revenue Code if the Company demonstrates to CFI's reasonable satisfaction that the Company has preserved its right to make remedial amendments required by the Internal Revenue Service as a condition of a favorable determination. (e) The trustee of the CFI Retirement Plan and any other fiduciary under the CFI Retirement Plan with applicable responsibility shall determine and identify the assets of the CFI Retirement Plan that shall be transferred to the Company Pension Plan. After the transfer, the fiduciaries of the Company Pension Plan shall be responsible for the custody and investment of Company Pension Plan assets. (f) If any employees of CNF Service Company, Inc. (or an affiliate) become employed by Leland James Service Corporation within three years after the Distribution Date immediately following termination of employment with CNF Service Company, Inc. (or such affiliate), with no intervening period, as a result of termination of any services under the Transition Services Agreement between CNF Service Company, Inc. and the Company dated the same date as this Agreement, an additional transfer of assets and liabilities shall be made from the CFI Retirement Plan to the Company Retirement Plan. Such transfer shall consist of the liability for benefits accrued for such employees under the CFI Retirement Plan through the date of the employment termination together with assets equal to the present value of such liability determined on the basis described in (a) above. Such transfer of assets and liabilities shall be completed within 90 days after the end of such three year period. (g) On the date of the transfer of assets and liabilities, the trustee of the CFI Retirement Plan shall transfer to the trustee of the CFC Pension Plan assets equal to a conservative estimate by the actuary for the CFI Retirement Plan of the amount provided in (a) above. When a final determination of the amount of the transfer is made, the amount necessary to adjust from the estimate to the final amount shall be transferred between the trustees of the plans. The investment risk with respect to the estimated assets shall pass from the CFI Retirement Plan to the CFC Pension Plan on the date they are transferred. The amount to be transferred in an adjustment to the final amount shall be credited with interest for the period from the date of the transfer of assets and liabilities to the date of the adjustment transfer at the rate of interest selected under (a) above. 3.5 Adoption of Company Common Stock Fund. The Company shall adopt a frozen defined contribution plan (the "Company Common Stock Fund") as follows: (a) The Company Common Stock Fund shall be effective as of the Distribution Date. (b) Subject to Section 2.1, and to (c) below, the Company Common Stock Fund shall be in a form satisfactory to the Company in its sole discretion. (c) The Company Common Stock Fund shall be qualified under Section 401(a) of the Code and have a related trust qualified under section 501(a) of the Code. The Company shall file, or cause the administrator of the Company Common Stock Fund to file, with the Internal Revenue Service an Application for Determination with respect to the Company Common Stock Fund within the remedial amendment period prescribed by applicable law and regulations. The Company shall amend the Company Common Stock Fund as may be required by the Internal Revenue Service as a condition for receipt of a favorable determination letter within the time required by the Internal Service for the adoption of any such amendment. (d) Assets of the Company Common Stock Fund shall be invested in accordance with provisions of the plan document and the related trust. 3.6 Common Stock Fund Spinoff. On the Distribution Date, CFI and the Company shall cause the accounts in the Consolidated Freightways, Inc. Common Stock Fund (the "CFI Common Stock Fund") to be spun off from the CFI Common Stock Fund, to become the accounts of the Company Common Stock Fund. In connection with the spinoff and merger, the following shall apply: (a) CFI shall direct the trustee of the CFI Common Stock Fund to transfer assets equal in value on the transfer date to the balance of the accounts for the Company Employees to the trustee for the Company Common Stock Fund. The trustee shall transfer a combination of CFI common stock and the Company common stock received on the plan's shares of CFI common stock on the Distribution Date. The CFI Common Stock Fund shall sell the stock of the Company held after the spinoff and merger at a time selected by the appropriate fiduciary for such plan in its absolute discretion and use the proceeds of sale to acquire stock of CFI. (b) CFI shall cause the fiduciaries of the CFI Common Stock Fund to provide an accounting to the fiduciaries of the Company Common Stock Fund with respect to all assets and accounts transferred to the Company Common Stock Fund. The accounting shall be reasonably satisfactory to the Company for purposes of proper allocation of assets, earnings, gains and losses to the accounts of participants under the Company Common Stock Fund. (c) CFI shall file IRS Form 5310A with the Internal Revenue Service, giving notice of the spinoff and merger, at least 30 days before the date of the spinoff and merger. ARTICLE IV EXECUTIVE BENEFIT PLANS 4.1 Top-Hat Plans. CFI shall retain the obligation to pay Company Employees the accounts in the Consolidated Freightways, Inc. Executive Deferred Compensation Plan (the "CFI Deferral Plan") accumulated from compensation deferred up to the Distribution Date. CFI shall retain the obligation to pay Company Employees benefits accrued under the Consolidated Freightways, Inc. Supplemental Retirement and Excess Benefit Plan (the "CFI SERP") as of the Distribution Date based on service and compensation up to that date and the offsetting CFI Retirement Plan benefits accrued as of that date. Assets in the trust related to the CFI Deferral Plan and the CFI SERP shall remain in such trust. CFI shall amend the CFI Deferral Plan and the CFI SERP to provide that events, such as termination of employment or retirement, triggering distribution of benefits from the CFI Deferral Plan and the CFI SERP shall be determined for Company Employees on the basis of employment with and retirement from the Company and its Subsidiaries. The Company shall provide CFI with information about such events after the Distribution Date to assist CFI in the administration of the CFI Deferral Plan and the CFI SERP. 4.2 Stock Option Plans. The existing stock options on CFI common stock shall be handled as follows: (a) Each outstanding option ("CFI Option") as of the Distribution Date shall be adjusted with respect to both the number of shares subject to such option and the exercise price per share so that (i) the ratio of exercise price to stock price remains constant and (ii) the aggregate "spread" (i.e., the excess of the fair market value of a share of CFI common stock subject to such option and the per share exercise price) inherent in such option after giving effect to the Distribution, is equal to the aggregate "spread" inherent in such option prior to giving effect to the Distribution ("CFI Spread"). (b) Each outstanding option held by Company Employees ("CFI-CFC Option") provides generally that following a termination of employment from CFI or any of its affiliates, an optionee will have 90 days to exercise his or her options before they expire. Prior to the Distribution Date, the stock option agreements under the Consolidated Freightways, Inc. Stock Option Plan of 1988 (the "CFI Stock Plan") that are held by Company Employees shall be amended to provide that all options shall become fully vested and exercisable 30 days prior to the Distribution. Accordingly, effective as of the Distribution Date, each Company Employee who will be considered a terminated employee under the CFI Stock Plan shall have 90 days after such termination of employment (the "90 Day Period") to exercise his or her CFI-CFC Options to purchase CFI stock. After the 90 Day Period such options shall expire. (c) For purposes of determining the CFI Spread: (1) the fair market value of a share of CFI common stock prior to the Distribution (the "CFI Pre- Distribution Value") shall be deemed to be equal to the average of the daily closing prices for a share of CFI common stock on the NYSE for the five trading days immediately preceding (and includingbut excluding) the Distribution Date; (2) the fair market value of a share of CFI common stock following the Distribution shall be equal to (A) the CFI Pre-Distribution Value minus (B) the fair market value of a share of Company common stock; and (3) the fair market value of a share of Company common stock shall be deemed to be equal to the average of the daily closing prices for a share of Company common stock in "when issued" trading on NASDAQ for the five trading days immediately preceding (and includingbut excluding) the Distribution Date. ARTICLE V Welfare Benefit Plans 5.1 Medical and Dependant Care Account Benefits. As of the Distribution Date, the Company shall establish a Welfare Benefits Plan (the "Company Welfare Plan") qualified under Section 125 of the Code to provide medical and dependent care account benefits to Company Employees covered under the Consolidated Freightways, Inc. Welfare Benefits Plan (the "CFI Welfare Plan") in 1996 before the Distribution Date, and the following shall apply: (a) Subject to 2.1, and to (b) and (c) below, the Company Welfare Plan shall be in a form satisfactory to the Company in its sole discretion. (b) The Company Welfare Plan shall have a first plan year that is a short plan year beginning on the Distribution Date and ending December 31, 1996. Compensation reduction elections by participants under the CFI Welfare Plan for the 1996 plan year shall continue in effect as to the Company Welfare Plan. (c) For 1996, the Company Welfare Plan shall provide for medical spending accounts and dependent care spending accounts under substantially the same terms as the CFI Welfare Plan. CFI shall transfer to the Company the unused account balances of Company Employees under the CFI Welfare Plan. The Company shall credit the amounts transferred with respect to each participant and each account to corresponding accounts under the Company Welfare Plan. Claims for reimbursement from medical and dependent care spending accounts under the CFI Welfare Plan by Company Employees that have not been paid as of the Distribution Date shall be paid by the Company under the Company Welfare Plan. The fiduciary of the Company Welfare Plan shall have the authority to determine whether or not claims under the Company Welfare Plan are properly submitted or are payable. Upon request, CFI or the administrator of the CFI Welfare Plan shall deliver or make available to the Company and the administrator of the Company Welfare Plan all records of participants that are relevant to administration of the Company Welfare Plan. 5.2 Health Plan Deductibles and Coverage Limits, COBRA Coverage. The Company shall adopt health plans to cover Company Employees effective as of the Distribution Date and the following shall apply: (a) On and after the Distribution Date neither CFI nor any of the welfare benefit plans sponsored by CFI shall provide coverage to Company Employees. (b) For the period from the Distribution Date to December 31, 1996, Company Employees who were participants under the Consolidated Freightways, Inc. Health Plan (the "CFI Health Plan") as of the Distribution Date shall be credited with amounts paid under the CFI Health Plan for plan deductibles against any corresponding deductibles under a Company plan health or medical plan. Benefits provided under the CFI Health Plan to a Company Employee with respect to 1996 claims will be counted toward any coverage limits applicable to a Company Employee under any Company health or medical plan for the coverage period ending December 31, 1996. For purposes of this paragraph (b), deductibles and benefits paid for eligible dependants of Company Employees shall be taken into account. (c) The Company shall provide group health plan continuation coverage as required under Sections 601 through 607 of ERISA ("COBRA coverage") for Company Employees and related "qualified beneficiaries" for "qualifying events" that occur before or after the Distribution Date. 5.3 Retiree Health Benefits. The Company and its Subsidiaries shall be obligated to provide health benefits to retired Company Employees, with the obligation applying to the entity that employed the retiree at the time of retirement. To the extent permitted by the Company's Health Plan and applicable law, the Company may eliminate or change retiree health benefits. 5.4 Long-Term Disability Benefits. The Company and its Subsidiaries shall be obligated to provide long-term disability benefits to disabled Company Employees, with the obligation applying to the entity the disabled individual was employed by at the time of disability. 5.5 Severance Benefits. A termination of employment with the Company, CFI, or any subsidiary of the Company or CFI immediately followed by employment with any other such entity shall not be deemed a severance of employment for purposes of any policy, plan, program or agreement that provides for the payment of severance, salary continuation or similar benefits. If any person employed by Leland James Service Corporation immediately prior to the Distribution Date loses such employment simultaneously with the Distribution Date as a direct result of the transaction provided for by the Distribution Agreement and for no other reason and is not employed by CNF Service Company, Inc. or another CFI Subsidiary, CFI shall be responsible for any severance, salary continuation or similar benefits payable upon such loss of employment. 5.6 Other Welfare Benefits. Except as otherwise provided in 2.1 and this Article V, welfare benefits provided by CFI and its Subsidiaries and by the Company and its Subsidiaries for their respective employees after the Distribution Date shall not be affected by each other and each company may provide or elect not to provide benefits in its sole discretion. ARTICLE VI Miscellaneous 6.1 Rights of Employees. This Agreement is not intended to give any individual employee or former employee of CFI or the Company or any of their Subsidiaries any personal right or interest. No employee, shall have any right under this Agreement to maintain employment with CFI, the Company or any Subsidiary, become employed by CFI, the Company or any Subsidiary or accrue any benefit with respect to employment. No employee, former employee, beneficiary or dependent shall have any right to be designated as a Company Employee or to be retained as the responsibility of CFI. 6.2 Entire Agreement. This Agreement, together with the Distribution Agreement, embodies the entire Agreement and understanding of the parties with respect to the matters provided for herein and shall supersede any and all prior agreements, arrangements and understanding relating to such matters. No amendment, waiver of compliance with any provision or condition hereof or consent pursuant to this Agreement shall be effective unless evidenced by an instrument in writing signed by the parties. 6.3 Governing Law. The interpretation and performance of the Agreement shall be governed by the laws of the state of California without regard to the choice of law provisions thereof. 6.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be delivered by hand, mailed by registered or certified mail (return receipt requested), or sent by cable, telegram, telecopy (confirmed by regular, first-class mail), to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: if to CFI: Consolidated Freightways, Inc. 3240 Hillview Avenue Palo Alto, California 94304 Attn: General Counsel if to the Company: Consolidated Freightways Corporation 175 Linfield Drive Menlo Park, California 94025 Attn: General Counsel 6.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together will constitute one and the same instrument. 6.6 Termination. This Agreement shall be terminated if the Distribution Agreement is terminated or if the distribution of Company stock fails to occur. If the Agreement terminates under this Section 6.6, no party shall have any liability to any person under the Agreement. 6.7 Successors and Assigns. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. 6.8 Titles and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 6.9 Legal Enforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. 6.10 Further Assurances. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its reasonable efforts to: (a) Execute and deliver such further documents and take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof, and (b) Take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any consents and approvals and make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement. 6.11 Dispute Resolution. Any dispute between the parties concerning the performance of this Agreement shall be resolved in accordance with the provisions of the ADR Agreement. CFI CONSOLIDATED FREIGHTWAYS, INC. By /S/D.E. MOFFIT President and CEO Executed: November 25, 1996 Company CONSOLIDATED FREIGHTWAYS CORPORATION By /S/S.D. RICHARDS Executed: December 2, 1996 EX-10 5 EXHIBIT 10.34 EXHIBIT 10.34 ------------- DISTRIBUTION AGREEMENT between CONSOLIDATED FREIGHTWAYS, INC. and CONSOLIDATED FREIGHTWAYS CORPORATION TABLE OF CONTENTS ARTICLE I DEFINITIONS 1.1 General 1 ARTICLE II THE DISTRIBUTION 2.1 Cooperation Prior to the Distribution 5 2.2 Conditions to Distribution 5 2.3 The Distribution 6 2.4 Sale of Fractional Shares 6 2.5 Odd-Lot Program 7 ARTICLE III TRANSACTIONS RELATING TO THE DISTRIBUTION 3.1 The Reorganization 7 3.2 Company Board 13 3.3 Company Charter and Bylaws 13 3.4 Other Agreements 13 3.5 Operation in the Ordinary Course of Business 13 3.6 Insurance 14 3.7 Collections and Payments after the Distribution Date 14 3.8 Certain Post-Distribution Transactions 14 ARTICLE IV INDEMNIFICATION 4.1 Indemnification by CFI 15 4.2 Indemnification by the Company 15 4.3 Limitations on Indemnification Obligations 16 4.4 Procedures for Indemnification 17 4.5 Releases 19 4.6 Environmental Liabilities 20 ARTICLE V ACCESS TO INFORMATION; SERVICES 5.1 Access to Information 20 5.2 Production of Witnesses 21 5.3 Provision of Services 21 5.4 Reimbursement 21 5.5 Retention of Records 22 5.6 Confidentiality 22 5.7 Provision of Corporate Records 23 5.8 Privileged Matters 23 ARTICLE VI REPRESENTATIONS, WARRANTIES AND COVENANTS 6.1 Financial Statements 24 6.2 Form 10 and Information Statement 24 6.3 Marks 24 ARTICLE VII SHARED CLAIMS 7.1 Acknowledgment. 25 7.2 Notification. 25 7.3 Cooperation. 25 7.4 Liability. 26 7.5 Non-Shared Liabilities. 26 ARTICLE VIII MISCELLANEOUS 8.1 Complete Agreement; Construction 26 8.2 Expenses 26 8.3 Governing Law 27 8.4 Notices 27 8.5 Amendments and Waivers 27 8.6 Counterparts 28 8.7 Successors and Assigns 28 8.8 Termination 28 8.9 No Third-Party Beneficiaries 28 8.10 Titles and Headings 28 8.11 Legal Enforceability 28 8.12 Further Assurances 29 8.13 No Solicitation of Employees 29 8.14 Dispute Resolution 30 DISTRIBUTION AGREEMENT This DISTRIBUTION AGREEMENT (the "Agreement") is made as of this 25th of November, 1996 by and between CONSOLIDATED FREIGHTWAYS, INC., a Delaware corporation ("CFI"), and CONSOLIDATED FREIGHTWAYS CORPORATION, a Delaware corporation (the "Company"). RECITALS WHEREAS, CFI is the holder of all of the issued and outstanding shares of common stock, $.01 par value per share, of the Company (the "Company Common Stock"); WHEREAS, the Board of Directors of CFI (the "CFI Board") has determined that it is advisable to distribute (the "Distribution") all of the shares of Company Common Stock to the holders of the common stock, $.01 par value per share, of CFI (the "CFI Common Stock"); WHEREAS, CFI and the Company have determined that it is necessary and desirable to set forth the principal corporate transactions required to effect the Distribution and certain other agreements that will govern certain matters relating to the Distribution and the relationships thereafter between CFI and the Company; NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1 General. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): Action: any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. ADR Agreement: the Alternative Dispute Resolution Agreement to be entered into by CFI and the Company as of the Distribution Date, the form of which is attached hereto as Annex 1. Affiliate: as defined in Rule 12b-2 under the Exchange Act. CFI Group: At any time following the Distribution, CFI and all entities which are Affiliates of CFI at such time. Code: the Internal Revenue Code of 1986, as amended. Commission: the Securities and Exchange Commission. Company Group: at any time following the Distribution, the Company and all entities which are Affiliates of the Company at such time. Distribution Agent: The Bank of New York. Distribution Date: the date as determined by the CFI Board or a committee thereof on which the Distribution takes place by delivery of the shares of Company Common Stock to the Distribution Agent. Distribution Ratio: the ratio of CFI Common Stock to Company Common Stock to be distributed in the Distribution. Employee Benefit Matters Agreement: the Employee Benefit Matters Agreement to be entered into by CFI and the Company as of the Distribution Date, the form of which is attached hereto as Annex 2. Environmental Liabilities: means any Liabilities arising from, under or relating to any environmental, health or safety law, rule, regulation, Action, threatened Action, order or consent decree. Exchange Act: the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. Form 10: the registration statement on Form 10 filed by the Company with the Commission to effect the registration of the Company Common Stock under the Exchange Act. Information Statement: the Information Statement on Form 14C filed by the Company with the Commission and included in the Form 10 at the time of its effectiveness. Insurance Proceeds: those monies (i) received by an insured from an insurance carrier on an insurance claim or (ii) paid by an insurance carrier on behalf of an insured on an insurance claim, in either case net of any applicable deductibles, retentions, or costs paid by such insured, but such term does not refer to proceeds received from an insurer on an employee benefits group insurance policy. IRS: the Internal Revenue Service. Liabilities: any and all debts, liabilities, obligations, absolute or contingent, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, direct or indirect, whenever arising, including all costs and expenses relating thereto, and including, without limitation, those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking including those arising under this Agreement. LJSC: Leland James Service Corporation, a Delaware Corporation. Losses: any and all debts, losses, Liabilities, claims, damages, obligations, payments or costs and expenses, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, direct or indirect (including, without limitation, the costs and expenses of any and all Actions, threatened Actions, demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened Actions). Other Agreements: the ADR Agreement, the Employee Benefit Matters Agreement, the Reimbursement Agreement, the Services Agreement, the Tax Sharing Agreement and the Maintenance, License and Easement Agreement to be entered into by CFCD (as defined) and CF Properties (as defined) as of the Distribution Date, the form of which is attached hereto as Annex 8. Record Date: the close of business on the date to be determined by the CFI Board or a committee thereof as the record date for the determination of stockholders of record of CFI entitled to receive the Distribution. Reimbursement Agreement: the Reimbursement and Indemnification Agreement to be entered into between CFI and Consolidated Freightways Corporation of Delaware ("CFCD") as of October 1, 1996, the form of which is attached hereto as Annex 3. Securities Act: the Securities Act of 1933, as amended. Services Agreement: the Transition Services Agreement to be entered into by CNF Service Company, Inc. and the Company as of the Distribution Date, the form of which is attached hereto as Annex 4. Subsidiaries: the term "Subsidiaries" as used herein with respect to any entity shall, unless otherwise indicated, be deemed to refer to both direct and indirect subsidiaries of such entity. Tax Sharing Agreement: the Tax Sharing Agreement to be entered into by CFI and the Company as of the Distribution Date, the form of which is attached hereto as Annex 5. ARTICLE II THE DISTRIBUTION 2.1 Cooperation Prior to the Distribution. Prior to the Distribution: (a) CFI and the Company shall prepare, and the Company shall file with the Commission, the Form 10. CFI and the Company shall prepare, and CFI shall mail, promptly after the effectiveness of the Form 10, to the holders of CFI Common Stock, the Information Statement, which shall set forth appropriate disclosure concerning the Company, the Distribution and other matters. The Company shall use reasonable efforts to cause the Form 10 to become effective under the Exchange Act. (b) CFI and the Company shall cooperate in preparing, filing with the Commission and causing to become effective any registration statements or amendments thereto that are appropriate to reflect the establishment of or amendments to any employee benefit and other plans contemplated by the Employee Benefit Matters Agreement. (c) The Company shall prepare, file and pursue an application to permit listing of the Company Common Stock on the Nasdaq National Market (and/or such other exchange as the Company deems appropriate), under the symbol "CFWY" (or such other symbol as the Company deems appropriate). 2.2 Conditions to Distribution. The CFI Board shall in its discretion establish the Record Date and the Distribution Date and all appropriate procedures in connection with the Distribution. The Distribution shall be subject to satisfaction of each of the following conditions, among other things: (i) the consummation of certain internal corporate reorganizations; (ii) the successful renegotiation of certain CFI credit facilities and debt instruments, including the execution of certain consents, waivers and amendments thereto by lenders, and the maintenance of CFI's investment grade debt ratings; (iii) the establishment of a separate credit facility for CFCD; (iv) the receipt of certain third-party consents relating to certain contracts, licenses and other agreements; (v) the receipt of rulings from the IRS or an opinion of special tax counsel to CFI to the effect that, among other things, the Distribution will generally qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended; (vi) the receipt of a letter from the staff of the Commission confirming that it will take no action with respect to certain matters relating to the Distribution; (vii) the Form 10 having become effective and no stop order being in effect; (viii) there not being in effect any statute, rule, regulation or order of any court, governmental or regulatory body that prohibits or makes illegal the transactions contemplated by the Distribution; (ix) approval for listing of the Company Common Stock on the Nasdaq National Market; and (x) declaration of the special dividend by the CFI Board. The CFI Board reserves the right in its discretion, other than with respect to those set forth in clauses (i), (v), (vi), (vii) and (x), to waive the satisfaction of any condition to the Distribution; provided, however, that the CFI Board may abandon, defer or modify the Distribution and the related transactions at any time prior to the Distribution Date. 2.3 The Distribution. On the Distribution Date, subject to the conditions set forth in this Agreement, CFI shall deliver to the Distribution Agent a certificate or certificates representing the number of then outstanding shares of Company Common Stock to be distributed in the Distribution, endorsed in blank, and shall instruct the Distribution Agent to distribute to each holder of record of CFI Common Stock on the Record Date a certificate or certificates representing one share of Company Common Stock for every two shares of CFI Common Stock so held. The Company agrees to provide all certificates for shares of Company Common Stock that the Distribution Agent shall require in order to effect the Distribution. 2.4 Sale of Fractional Shares. The Distribution Agent shall not distribute any fractional shares of Company Common Stock ("Fractional Shares") to any holder of CFI Common Stock. The Distribution Agent shall be instructed to aggregate all such Fractional Shares and sell them in an orderly manner after the Distribution Date in the open market at then-prevailing prices and, after completion of all such sales, distribute a pro rata portion of the proceeds from such sales to each holder of CFI Common Stock who would otherwise have received a Fractional Share. CFI will bear the cost of brokerage commissions incurred in connection with such sales. 2.5 Odd-Lot Program. In connection with the Distribution, the Company shall offer to holders of CFI Common Stock who would otherwise receive fewer than 100 shares of Company Common Stock in the Distribution a program by which such holders may instruct the Distribution Agent to sell such shares of Company Common Stock on their behalf. The Company shall cause such program to be conducted in accordance with the terms and conditions described in the Information Statement. ARTICLE III TRANSACTIONS RELATING TO THE DISTRIBUTION 3.1 The Reorganization. (a) Prior to the Distribution Date, CFI shall take all steps necessary to establish CFCD as a wholly owned subsidiary of the Company. (b) Prior to the Distribution Date, CFI shall take all steps necessary to establish LJSC as a wholly owned subsidiary of the Company; provided, however, that immediately prior to the Distribution or simultaneously therewith, the LJSC administrative service departments identified on Schedule 3.1(b) shall be transferred to CNF Service Company, Inc., a wholly owned subsidiary of CFI. (c) Prior to the Distribution Date, CFI shall take all steps necessary to merge Vantage Parts into CFI. (d) Prior to the Distribution Date, CFI shall take all steps necessary to establish Milne & Craighead as a wholly owned, indirect subsidiary of CFCD. (e) Prior to the Distribution Date, CFI shall take all steps necessary to effect the transfer of all real property owned by CFCD and/or LJSC and set forth on Schedule 3.1(e) to CF Properties, Inc., a wholly owned subsidiary of CFI ("CF Properties"), and to effect the transfer of CFI's Gresham terminal and land under CFI's Santa Fe Springs and Hayward Terminals to CFCD. In consideration of such transfers, the Company hereby agrees to continue to use Con-Way rail services until January 1, 1997. (f) The Company acknowledges that any and all rights in the software programs (including without limitation all source and object code and all documentation therefor, and all versions thereof) developed by, or on behalf of, the Company, CFI or its Affiliates prior to the Distribution Date, and all other intellectual property rights, including without limitation all copyrights, patent rights, know-how and trade secret rights, and including, without limitation, the right to sue for any past, present or future infringement of any of the foregoing, are vested in CFI. The Company will execute and deliver any instruments or take such other actions as CFI may reasonably request in order to confirm such assignment and to otherwise effectuate the purposes and terms of this Agreement. (g) CFI hereby grants to the Company, effective as of the termination of the Services Agreement, a royalty-free, worldwide, perpetual and non-transferable, license without right of sublicense, (except as to subsidiaries who agree in writing to be bound by the terms of this license), to use and create derivative works of the software programs (including without limitation all source and object code and documentation therefor) owned by CFI which pertain to the Company's administrative and business functions and activities, in the form they exist as of the termination of the Services Agreement, which the Company uses in its business as of the Distribution Date as set forth on Schedule 3.1(g) hereto (collectively, the "Licensed Materials"). CFI shall take such steps necessary to provide to the Company, at CFI's expense, and with minimal interruption of the operations of CFI and its Affiliates, copies of the Licensed Materials, together with copies of any related third-party licenses (subject to the proviso set forth in the immediately following sentence), and reasonable instruction as to their installation and use. In addition, CFI shall, as soon as practicable after the Distribution Date, make reasonable efforts to obtain on behalf of the Company, at CFI's expense with respect to initial purchase, acquisition and original installation fees only, all consents or separate licenses for third-party software which the Company uses in its business as of the Distribution Date, or which are incorporated into the Licensed Materials, or which are necessary for the Company to have the right to use the Licensed Materials to the extent contemplated herein and be able to receive the services contemplated under the Services Agreement, and such third-party licenses shall be at least as broad in scope and term as were similar licenses for CFI prior to the Distribution Date; provided, however, that if CFI determines that the terms upon which any such license may be obtained are commercially unreasonable, CFI shall have the right to obtain a license for reasonably comparable software in full satisfaction of the above- mentioned obligation. Where use of third-party software is limited to a specified number of users or similarly restricted, an equitable division shall be made as set forth on Schedule 3.1(g). Each of CFI and the Company further acknowledges and agrees that: (i) The use of the Licensed Materials is to be limited to the internal business use of the Company, or its Affiliates and their authorized customers who in the ordinary course of business with the Company request access to the Licensed Materials in connection with products or services otherwise provided by the Company. (ii) The Company's, its Affiliates' and authorized customers' right to use the Licensed Materials which require a third-party license is conditioned upon the Company's, its Affiliates and authorized customers observing the applicable terms and conditions in any third party licenses relating to the Licensed Materials and as to Affiliates and authorized customers the obtaining of any necessary consents or separate licenses from such third party vendors. CFI shall make reasonable efforts to obtain all consents or separate licenses from third party licensors necessary for the Company to have the right to use the Licensed Materials to the extent contemplated herein and be able to receive the services contemplated under the Services Agreement. (iii) The Company shall assume all Liabilities relating to the Company's use, and use by any of the Company's Affiliates or authorized customers, of the Licensed Materials after the Distribution Date (including, without limitation, as relates to maintenance costs) and shall indemnify and hold harmless CFI against all Liabilities and expenses (including reasonable attorneys' fees and costs of litigation) which CFI may incur, which arise out of the use of the Licensed Materials by the Company, its Affiliates or authorized customers after the Distribution Date. (iv) CFI shall assume all Liabilities relating to the Company's use of software requiring a third- party license where CFI has taken a license from such third party and (A) a license for the Company is available at a commercially reasonable cost but CFI has failed to provide the Company with the applicable third-party license to the extent required by this Agreement, or (B) in the event that CFI is not able to obtain such a license at a commercially reasonable cost, CFI has failed to provide the Company with reasonably comparable software and shall indemnify and hold harmless the Company against all Losses, Liabilities and expenses (including reasonable attorneys' fees and cost of litigation) which the Company may incur, which arise out of claims by owners of the third party software arising out of such failure of CFI to obtain such third-party licenses for the Company. The Company shall assume all Liabilities relating to the use of third- party software obtained on its behalf by CFI including, without limitation, as relates to maintenance costs. (v) The Licensed Materials constitute confidential information and shall remain the property of CFI, subject to the license granted herein. The Company agrees to hold the same in confidence and not to disclose or distribute the same unless such information subsequently becomes publicly available through no fault of the Company. (vi) CFI shall assume all Liabilities relating to CFI's use, and use by CFI's Affiliates or authorized customers, of the Licensed Materials and any materials not licensed to the Company, and shall indemnify and hold harmless the Company against all Losses, Liabilities and expenses (including reasonable attorneys' fees and cost of litigation) which the Company may incur, which arise out of the use of the Licensed Materials or any of the materials not licensed to the Company by CFI, its Affiliates or authorized customers. (vii) The Company may request additional worldwide, perpetual and non-transferable licenses from CFI which are not currently used by it in its business. CFI may grant such licenses in its sole discretion. The licenses requested and granted as of the date hereof are listed in Schedule 3.1(g) as "Additional Licenses." The Company shall pay the costs of copying such software and purchasing any required third party licenses related thereto. The Company shall assume all Liabilities relating to the Company's use thereof (including, without limitation, as relates to maintenance costs) and shall indemnify and hold harmless CFI against all Liabilities and expenses whatsoever (including reasonable attorneys' fees and costs of litigation) which CFI may incur, which arise out of, or are in any way related to the use of such software by the Company, its Affiliates or authorized customers. (viii) The Company shall pay its proportional share of the development costs of the Licensed Materials identified in Schedule 3.1(g) as "Under Development" as incurred after the Distribution Date. Any cost of "cloning" a second copy, if any, shall be part of the development costs. The Company shall not, however, pay a proportional share of the development costs where such Licensed Materials are used in connection with the provision of services to the Company under the Services Agreement, to the extent that the Company has already paid such proportional share in accordance with the Services Agreement. (ix) Because of the extensive number of software programs used by the parties, the parties expect that some programs may inadvertently be omitted from, or included on, Schedule 3.1(g). In such event, the parties shall determine in good faith whether such programs should be added or deleted as Licensed Materials and related third- party software used by the Company as of the date hereof, "Additional Licenses" or "Under Development"; provided, however, that the parties acknowledge that the programs listed on Schedule X have been intentionally omitted from Schedule 3.1(g). (h) CFI hereby grants to the Company and its Subsidiaries a limited, non-exclusive, non-transferable, royalty-free worldwide right and license, without right of sublicense (except to subsidiaries who agree in writing to be bound by the terms of this license) to use the trademarks, trade names and service marks set forth on Schedule 3.1(h)(i) (collectively, the "Marks") for the nine- month period beginning on the Distribution Date. On or prior to the Distribution Date, CFI and the Company shall enter into a Trademark License Agreement, substantially in the form included on Schedule 3.1(h)(ii) in order to effect the license from CFI to the Company (and its Subsidiaries) of the marks (the "Additional Marks") set forth on Schedule 3.1(h)(ii). The Company agrees to comply and to cause its Subsidiaries to comply with reasonable quality standards set by CFI, and subject to CFI's reasonable rights of inspection as to compliance with such quality standards, as relates to the use of the Marks and the Additional Marks, and CFI acknowledges that the Company and its Subsidiaries currently meet all such standards. On or prior to the Distribution Date, CFI shall assign to the Company, pursuant to a Trademark Assignment in the form included on Schedule 3.1(h)(i) (X) the Marks, effective as of the end of the nine- month period commencing on the Distribution Date, (Y) the trademarks, trade names and service marks relating to "CF Air" and "CF Air Freight" (and as stylized), effective as of the third anniversary of the Distribution Date. On or prior to the Distribution Date, CFI shall assign to the Company, pursuant to the Copyright Assignment and the Patent Assignment in the forms included on Schedule 3.1(h)(iii), the patents and copyrights set forth on Schedule 3.1(h)(iii), effective as of the Distribution Date. (i) Company shall indemnify and hold CFI, and its subsidiaries, Affiliates, officers, directors and subsidiaries, harmless from and against any and all Liabilities arising out of the Company's activities under the Marks and the Additional Marks. (j) Prior to the Distribution Date, CFI and the Company shall take all steps necessary to increase the outstanding shares of Company Common Stock so that, immediately prior to the Distribution, CFI will hold a number of shares of Company Common Stock sufficient to enable it to complete the Distribution based on the Distribution Ratio. 3.2 Company Board. CFI and the Company shall take all steps necessary to elect as directors of the Company, on or prior to the Distribution Date, the persons named in the Form 10 to constitute the board of directors of the Company on the Distribution Date. 3.3 Company Charter and Bylaws. On or prior to the Distribution Date, (a) CFI shall approve and cause the Amended and Restated Certificate of Incorporation of the Company substantially in the form of Annex 6 hereto to be filed with the Secretary of State of Delaware and to be in effect on the Distribution Date and (b) CFI shall adopt the Amended and Restated Bylaws of the Company substantially in the form of Annex 7 hereto to be in effect on the Distribution Date. 3.4 Other Agreements. On or prior to the Distribution Date, CFI and the Company shall enter into, and/or (where applicable) shall cause their respective Subsidiaries to enter into, the Other Agreements and any other agreements necessary or appropriate in connection with the transactions contemplated hereby and thereby. In the event of a conflict between the terms of this agreement and the terms of any of the Other Agreements or any such other agreements, (including without limitation Section 5.04 of the Tax Sharing Agreement) the terms of such Other Agreement or other agreement shall govern. 3.5 Operation in the Ordinary Course of Business. Prior to the Distribution Date, the Company shall, and shall cause each of its Subsidiaries to, conduct its business and operations in the ordinary course of business, consistent with past practice, and shall, and shall cause each of its Subsidiaries to, continue to ship products, pay accounts payable and invoices, deposit and accept payments, and make capital expenditures in the ordinary course of business, all consistent with past practice. The Company shall not, and shall cause each of its Subsidiaries not to, undertake any arrangement with the intent to delay receipt of any funds by the Company or its Subsidiaries until on or after the Distribution Date or to accelerate any payment to be made by the Company or its Subsidiaries prior to the Distribution Date, except in each case in the ordinary course of business consistent with past practice. 3.6 Insurance. The Company and each other member of the Company Group does hereby release CFI and each other member of the CFI Group from all Liabilities arising from or in connection with the insurance policies described on Schedule 3.6(b), excluding occurrences which commenced on or prior to October 1, 1996, except the policies covering underground storage tank liability, which shall be released as of the Distribution Date. The Company and each other member of the Company Group does hereby acknowledge that these policies are cancelled or terminated as to CFCD and its Subsidiaries as of October 1, 1996, except to the extent of claims referred to in the preceding sentence. The Company and each other member of the Company Group expressly waives any and all rights under section 1542 of the Civil Code of California, which provides as follows: "A General Release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the Release, which if known by him must have materially affected his settlement with the debtor." 3.7 Collections and Payments after the Distribution Date. Except as may be explicitly provided in this Agreement and the Other Agreements, any cash receipts arising out of or relating to the assets, Liabilities or operations of the Company or its past or present Subsidiaries received on or after the Distribution Date shall be retained by the Company and such Subsidiaries and any Liabilities or obligations, other than any Liabilities or obligations relating to LJSC and arising on or prior to the Distribution Date, arising out of, relating to or asserted on the basis of the assets, Liabilities or operations of the Company or its past or present Subsidiaries due and unpaid on and after the Distribution Date or incurred on and after the Distribution Date shall be payable by the Company and such Subsidiaries. The Company and CFI shall settle all payments received from account debtors of either of them to the effect that amounts properly owing to the Company are received by the Company and amounts properly owing to CFI are received by CFI, with such settlements to occur by wire transfer (a) daily, for the three-month period beginning on the Distribution Date and (b) weekly, thereafter. 3.8 Certain Post-Distribution Transactions. The Company. (i) The Company shall, and shall cause each of its Subsidiaries to, comply with each representation and statement made, or to be made, to the IRS in connection with the IRS private letter ruling issued to CFI on September 23, 1996 (the "Ruling") or any other ruling to be obtained by the Company and CFI acting together from any taxing authority with respect to any transaction contemplated by this Agreement; and (ii) until the third anniversary of the Distribution Date, neither the Company nor any of its Subsidiaries shall (A) make a material disposition, by means of a sale or exchange of assets or capital stock, a distribution to stockholders or otherwise, of its assets, (B) repurchase or issue any Company capital stock (other than stock issued pursuant to employee plans), or (C) cease the active conduct of its businesses independently, with its own employees and without material change, unless, in each of cases (A), (B) and (C), in the opinion of counsel to the Company, which opinion shall be reasonably satisfactory to CFI, or pursuant to a supplemental IRS private letter ruling reasonably satisfactory to CFI, such act or omission would not adversely affect the tax consequences of the Distribution to CFI or the stockholders of CFI, as set forth in the Ruling or any other ruling issued by any taxing authority; and the Company has no present intention to take any such actions. ARTICLE IV INDEMNIFICATION 4.1 Indemnification by CFI. Except as otherwise provided by any of the Other Agreements or as contemplated by Section 4.5 or Article VII hereof, effective as of the Distribution Date, CFI and each other member of the CFI Group agree to indemnify, defend and hold harmless the Company, each other member of the Company Group, and their present or former officers, directors, shareholders, agents, employees, representatives, successors-in-interest, parents, Affiliates, insurers, attorneys and assigns (the "Company Indemnitees") from and against any and all Losses of the Company Indemnitees arising out of or related in any manner to any item set forth on Schedule 4.1. 4.2 Indemnification by the Company. Except as otherwise provided by any of the Other Agreements or as contemplated by Section 4.5 or Article VII hereof, effective as of the Distribution Date, the Company and each other member of the Company Group agree to indemnify, defend and hold harmless CFI, each other member of the CFI Group, and their present or former officers, directors, shareholders, agents, employees, representatives, successors-in-interest, parents, Affiliates, insurers, attorneys and assigns (the "CFI Indemnitees") from and against any and all Losses of the CFI Indemnitees arising out of or related in any manner to any item set forth on Schedule 4.2. 4.3 Limitations on Indemnification Obligations. The amount that either CFI or the Company (an "Indemnifying Party") is or may be required to pay to an indemnified party ("Indemnitee") pursuant to Section 4.1 or 4.2, or any other Section of this Agreement providing for indemnification, shall be reduced by any Insurance Proceeds or other amounts actually recovered by or on behalf of such Indemnitee, in reduction of the related Loss. If an Indemnitee shall have received the payment required by this Agreement from an Indemnifying Party in respect of any Loss and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received (up to but not in excess of the amount of any indemnity payment made hereunder). No insurer or other third party shall: (a) be relieved of the responsibility to pay any claims which it would otherwise be obligated to pay in the absence of the foregoing indemnification provisions; (b) solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect to any claims which it would otherwise be obligated to pay; or (c) be entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions. Any Indemnifying Party shall succeed to the rights of any Indemnitee with respect to any matter contemplated by this Section 4.3. 4.4 Procedures for Indemnification. (a)(i) If an Indemnitee shall receive notice or otherwise learn of the assertion of any claim or commencement of any proceeding (including any governmental investigation) by a person who is not a party to this Agreement (or any Affiliate of either party) (a "Third-Party Claim") with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to this Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof promptly after becoming aware of such Third-Party Claim setting forth the particulars as to such claim or proceeding in reasonable detail; provided that the failure of any Indemnitee to give notice as provided in this Section 4.4(a) shall not relieve the related Indemnifying Party of its obligations under this Article IV, unless such Indemnifying Party is actually prejudiced by such failure to give notice and then only to the extent of such actual prejudice. (ii) An Indemnifying Party may, to the extent it wishes within thirty days of receipt of notice of a Third Party claim and at its cost and expense, elect to defend or to seek to settle or compromise any Third-Party Claim; provided that the Indemnitee may participate in such settlement or defense through its chosen counsel at its sole cost and expense. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third-Party Claim, such Indemnifying Party shall not be liable to such Indemnitee under this Article IV for any legal or other expenses (except expenses approved in advance by the Indemnifying Party) subsequently incurred by such Indemnitee in connection with the defense thereof; provided that if the defendants in any such Third-Party Claim include both the Indemnifying Party and one or more Indemnitees and in any Indemnitee's reasonable judgment a conflict of interest between one or more of such Indemnitees and such Indemnifying Party exists in respect of such claim, such Indemnitees shall have the right to employ separate counsel to represent such Indemnitees and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party; provided further if and to the extent that there is a conflict of defenses or positions among the Indemnitees, the Indemnitees shall have the right to retain such number of additional separate counsel, reasonably satisfactory to the Indemnifying Party, as is reasonably necessary to avoid such conflicts, and the Indemnifying Party shall be responsible for the reasonable fees and expenses of such additional separate counsel; provided further that the Indemnitee may participate in the settlement or defense of a Third-Party Claim through counsel chosen by such Indemnitee if the fees and expenses of such counsel shall be borne by such Indemnitee. If an Indemnifying Party elects not to assume responsibility for defending a Third-Party Claim, such Indemnitee may defend or seek to compromise or settle such Third-Party Claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. Notwithstanding the foregoing, the Indemnifying Party shall not be liable for any settlement of any Third-Party Claim effected without its written consent. The Indemnifying Party shall not, except with the consent of the Indemnitee, (i) enter into any such settlement that does not include as an unconditional term thereof the giving by the person or persons asserting such Third-Party Claim to all Indemnitees an unconditional release from all Liability with respect to such Third-Party Claim, or (ii) consent to entry of any judgment. (b) Any claim on account of a Loss that does not result from a Third-Party Claim shall be asserted by written notice given by the Indemnitee to the Indemnifying Party. Such Indemnifying Party shall have a period of thirty (30) days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such thirty-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such thirty-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party under this Agreement or under applicable law (except as provided in the ADR Agreement). (c) In addition to any adjustments required pursuant to Section 4.3, if the amount of any Loss shall, at any time subsequent to the payment required by this Agreement, be reduced by recovery, settlement or otherwise, the amount of such reduction that has been received by the Indemnitee, less any expenses properly incurred in connection therewith, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (d) In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall have all rights of subrogation and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third-Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. (e) Notwithstanding anything to the contrary herein or in the Other Agreements, the foregoing indemnification provisions and procedures shall apply to any other indemnification agreements herein or in the Other Agreements. 4.5 Releases. (a) Subject to Article VII and effective on the Distribution Date, the Company and each other member of the Company Group releases and forever discharges CFI, each other member of the CFI Group, and their present or former officers, directors, shareholders, agents, employees, representatives, successors-in-interest, parents, Affiliates, insurers, attorneys and assigns of and from any and all Liabilities (other than those for which indemnification is available under (i) this Article IV or (ii) any Other Agreement (subject to the provisions of Section 4.3)). (b) Subject to Article VII and effective on the Distribution Date, CFI and each other member of the CFI Group releases and forever discharges the Company, each other member of the Company Group and their present or former officers, directors, shareholders, agents, employees, representatives, successors-in-interest, parents, Affiliates, insurers, attorneys and assigns of and from any and all Liabilities (other than those for which indemnification is available under this Article IV and any Other Agreement (subject to the provisions of Section 4.3)). (c) The Company and each other member of the Company Group, and CFI and each other member of the CFI Group, expressly waive any and all rights under section 1542 of the Civil Code of California, which provides as follows: "A General Release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the Release, which if known by him must have materially affected his settlement with the debtor." 4.6 Environmental Liabilities. Notwithstanding anything contained herein or in any Other Agreement to the contrary, neither party shall have any obligation to indemnify the other party with respect to any Environmental Liabilities. ARTICLE V ACCESS TO INFORMATION; SERVICES 5.1 Access to Information. From and after the Distribution Date, CFI shall, and shall cause its Subsidiaries to, afford to the Company and its authorized accountants, counsel and other designated representatives (collectively, "Representatives") reasonable access (including using reasonable efforts to give access to the person or firms possessing information) and duplicating rights during normal business hours to all administrative records, books, contracts and instruments, and all Company- owned computer software and computer data and other Company- owned data and information (collectively, but excluding all software not owned by the Company, "Information") within CFI's or any such Subsidiary's possession or control relating to the Company or any Company Subsidiary and to any property owned by CFI that was leased or operated by the Company or any Company Subsidiary, insofar as such access is reasonably required by the Company or any Company Subsidiary. Similarly, the Company shall, and shall cause its Subsidiaries to, afford to CFI and its Representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing Information) and duplicating rights during normal business hours to Information within the Company's or any such Subsidiary's possession or control relating to CFI or any CFI Subsidiary or relating to the Company prior to the Distribution Date and to any property owned by the Company that was leased or operated by CFI or any CFI Subsidiary (other than the Company and its Subsidiaries), insofar as such access is reasonably required by CFI or any CFI Subsidiary. Information may be requested under this Article V for, without limitation, audit, accounting, claim, litigation and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations and for performing this Agreement and the transactions contemplated hereby. 5.2 Production of Witnesses. After the Distribution Date, each of CFI and the Company shall, and shall cause its respective Subsidiaries to, use reasonable efforts to make available to the other party and its Subsidiaries, upon written request, its directors, officers, employees and agents as witnesses to the extent that any such person may reasonably be required in connection with any legal, administrative or other proceedings in which the requesting party may from time to time be involved. 5.3 Provision of Services. In addition to any services contemplated to be provided following the Distribution Date by any Other Agreement, each party, upon written request, shall make available to the other party, during normal business hours and in a manner that will not interfere unreasonably with such party's business, its financial, tax, accounting, legal, employee benefits and similar staff services (collectively, "Services") whenever and to the extent that they may be reasonably required in connection with the preparation of tax returns, audits, claims, litigation or administration of employee benefit plans, and otherwise to assist in effecting an orderly transition following the Distribution. 5.4 Reimbursement. Except to the extent otherwise provided in any Other Agreement, each party providing Information, witnesses or Services under Section 5.1, 5.2 or 5.3 to the other party shall be entitled to receive from the recipient, upon the presentation of invoices therefor, payment for all out-of-pocket costs and expenses as may be reasonably incurred in providing such Information, witnesses or Services. For purposes of this Section 5.4, salaries and other compensation payable to employees of either party shall be deemed to be an out-of- pocket cost or expense reimbursable hereunder. 5.5 Retention of Records. Except as otherwise required by law or agreed to in writing, each of CFI and the Company shall retain, and shall cause its respective Subsidiaries to retain following the Distribution Date, all significant information ("Information") relating to the business of the other and the other's subsidiaries, for a period (a "Retention Period") consistent with the document retention policies in effect at CFI and the Company, respectively. In addition, such Information shall not be destroyed or otherwise disposed of if during such period a party shall request in writing that any of the Information be retained for additional specific and reasonable periods of time at the expense of the party so requesting. After the applicable Retention Period, any party may destroy or otherwise dispose of any Information at any time, provided that, prior to such destruction or disposal, (a) such party shall provide no less than ninety (90) days' prior written notice to the other party, identifying the Information proposed to be destroyed or disposed of, and (b) if the recipient of such notice shall request in writing prior to the scheduled date for such destruction or disposal that any of the Information proposed to be destroyed or disposed of be delivered to such requesting party, the party proposing the destruction or disposal shall promptly arrange for the delivery of such of the Information as was requested at the expense of the requesting party. 5.6 Confidentiality. CFI and each other member of the CFI Group on the one hand, and the Company and each other member of the Company Group on the other hand, shall use commercially reasonable efforts to hold, and cause their Representatives to hold, in strict confidence, all Information concerning the other in their possession or furnished by the other or the other's Representatives pursuant to this Agreement or any of the Other Agreements (except to the extent that such Information is (a) in the public domain through no fault of such party or (b) later lawfully acquired on a non-confidential basis from other sources which are not subject to any confidentiality litigation with the subject party by such party or subsequently developed by such party), and neither party shall release or disclose such Information to any other person, except to its auditors, attorneys, financial advisors, bankers and other consultants and advisors, and on terms and conditions substantially the same as the terms and conditions on which such party releases its own Information, unless compelled to disclose by judicial or administrative process or, as advised by its counsel, by other requirements of law. 5.7 Provision of Corporate Records. (a) Except as may otherwise be provided in any Other Agreement, CFI shall arrange as soon as practicable following the Distribution Date, to the extent not previously delivered, for the transportation (at the Company's cost) to the Company of the Company's, books and records in its possession, except to the extent such items are already in the possession of the Company. Such books and records shall be the property of the Company, but shall be available to CFI for review and duplication until CFI shall notify the Company in writing that such records are no longer of use to CFI. (b) Except as otherwise provided in any Other Agreement, the Company shall arrange as soon as practicable following the Distribution Date, to the extent not previously delivered, for the transportation (at CFI's cost) to CFI of CFI's and its Subsidiaries' books and records in its possession, except to the extent such items are already in the possession of CFI or a Subsidiary of CFI. Such books and records shall be the property of CFI, but shall be available to the Company for review and duplication until the Company shall notify CFI in writing that such records are no longer of use to the Company. 5.8 Privileged Matters. The Company and CFI recognize that legal and other professional services that have been and will be provided prior to the Distribution Date have been and will be rendered for the benefit of both CFI and the Company and that both CFI and the Company should be deemed to be the client for the purposes of asserting all privileges related thereto. No party may waive any privilege which could be asserted under any applicable law, and in connection with which the other party has a material interest, without the consent of the other party, except to the extent reasonably required in connection with any litigation with third parties. ARTICLE VI REPRESENTATIONS, WARRANTIES AND COVENANTS The Company and each other member of the Company Group make the following representations and warranties to, and covenants with, CFI, for its benefit and for the benefit of each other member of the CFI Group, each and all of which shall survive the execution and delivery of this Agreement and the Distribution Date. 6.1 Financial Statements. The consolidated balance sheets of the Company and its Subsidiaries and the consolidated statements of earnings and consolidated statement of cash flows for the Company and its Subsidiaries, each in the form included in the Information Statement, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Company and its Subsidiaries as of the dates indicated therein and the results of operations and cash flows for the periods indicated therein. 6.2 Form 10 and Information Statement. The Form 10 and the Information Statement each do not misstate any material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, there shall be excluded therefrom any information provided by CFI to the extent that such information relates solely to CFI and not to the Company ("CFI Information"). 6.3 Marks. None of CFI's existing trademarks, trade names and service marks that are not also Marks or Additional Marks ("CFI marks" as set forth in Schedule 6.3) infringe in any manner any of the Marks or Additional Marks or otherwise interfere with the Company's expected use of the Marks or Additional Marks, and none of the Company nor any other member of the Company Group shall, at any time, bring or join in any suit, claim or other proceeding or action adverse to CFI or any other member of the CFI Group relating to the use of the CFI marks. ARTICLE VII SHARED CLAIMS 7.1 Acknowledgment. Each party acknowledges that, from and after the Distribution Date, there may be claims and proceedings against such party and its Subsidiaries (other than workers' compensation claims which pertain to any persons who remain employed by LJSC on the day after the Distribution Date ("Excluded Claims") which shall remain the sole responsibility of LJSC) that relate (in whole or in part) to activities alleged to have transpired prior to the Distribution Date and with respect to which it would be fair and appropriate to apportion Liability therefor between the parties ("Shared Claims"). 7.2 Notification. If any party shall receive notice or otherwise learn of the assertion of any claim or the commencement of any proceeding which such party believes may constitute a Shared Claim (including, without limitation, any such claim or proceeding that names or identifies the other party or any of its Subsidiaries as a responsible party), such party shall (i) immediately assume the defense thereof and shall in all respects respond thereto in a timely manner and (ii) promptly provide written notice thereof to the other party, setting forth the particulars as to such claim or proceeding in reasonable detail; provided that the failure of such party to give such notice shall not relieve the other party of any obligation to accept Liability unless it is actually prejudiced by such failure and then only to the extent of such actual prejudice. 7.3 Cooperation. The parties shall cooperate with each other in the defense or settlement of Shared Claims to the effect that (i) subject to the provisions of Section 7.2, the party bearing the greater Liability shall be responsible for the control and administration of any Shared Claim and (ii) the other party shall cooperate with such party with respect to such control and administration. 7.4 Liability. The parties shall seek to apportion Liability between them with respect to any Shared Claim, and in so doing shall take cognizance of all relevant factors, including but not limited to, the time and duration of any alleged activity giving rise thereto. If the parties are unable to agree on an apportionment of Liability within thirty days of receipt of notification as provided in Section 7.2, they shall submit the matter for resolution as provided in the ADR Agreement. 7.5 Non-Shared Liabilities. Anything to the contrary contained in this Article VII notwithstanding, claims or proceedings arising out of or relating to LJSC, its employees and operations on or prior to the Distribution Date (other than Excluded Claims) shall be allocated as described below. The Company shall assume and indemnify CFI against all Losses and Liabilities arising out of or related to personnel matters that are caused by employees who are employed by LJSC immediately following the Distribution Date. CFI shall assume and indemnify the Company against all other Losses and Liabilities arising out of or related to LJSC on or prior to the Distribution Date, including all other personnel matters. If employees of both the Company and CFI cause any such Losses or Liabilities relating to LJSC, then they shall be Shared Claims and dealt with as provided in this Article VII. ARTICLE VIII MISCELLANEOUS 8.1 Complete Agreement; Construction. This Agreement and the Other Agreements, including any schedules and exhibits hereto or thereto, shall constitute the entire agreement between the parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter. 8.2 Expenses. Except as otherwise set forth in this Agreement and the Other Agreements, (i) CFI will pay all out-of-pocket costs and expenses that are necessary to effect the Distribution and incurred prior to the Distribution and (ii) each party shall bear its costs and expenses arising after the Distribution in connection with the Distribution; provided, however, CFI shall pay the reasonable moving and relocation costs of separating employees of CFI and CFC in Portland into two buildings, including design and architectural fees, phone and data connections infrastructure and labor associated with the move, excluding any other capital improvements, except that CFI shall pay for the costs of wheelchair ramp access, ADA required upgrades and lobby expansion. 8.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the principles of conflicts of laws thereof. 8.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be delivered by hand, mailed by registered or certified mail (return receipt requested), or sent by cable, telegram, telecopy (confirmed by regular, first-class mail), to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: if to CFI: Consolidated Freightways, Inc. 3240 Hillview Avenue Palo Alto, California 94304 Attn: General Counsel if to the Company: Consolidated Freightways Corporation 175 Linfield Drive Menlo Park, California 94025 Attn: General Counsel 8.5 Amendments and Waivers. This Agreement may not be altered or amended, nor may rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver. No waiver of any term, provision or condition of or failure to exercise or delay in exercising any rights or remedies under this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, provision, condition, right or remedy or as a waiver of any other term, provision or condition of this Agreement. 8.6 Counterparts. This Agreement may be executed in one or more counterparts each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same Agreement. 8.7 Successors and Assigns. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. 8.8 Termination. This Agreement may be terminated and the Distribution abandoned at any time prior to the Distribution Date by and in the sole discretion of the CFI Board without the approval of the Company or the shareholders of CFI. In the event of such termination, no party shall have any Liability of any kind to any other party on account of such termination except that expenses incurred in connection with the transactions contemplated hereby shall be paid as provided in Section 8.2. 8.9 No Third-Party Beneficiaries. Except for the provisions of Article IV relating to Indemnitees, this Agreement is solely for the benefit of the parties hereto and their respective Affiliates and should not be deemed to confer upon third parties (including any employee of the CFI Group or the Company Group) any remedy, claim, reimbursement, cause of action or other right other than those existing without reference to this Agreement. 8.10 Titles and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 8.11 Legal Enforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. 8.12 Further Assurances. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its reasonable efforts to (i) execute and deliver such further documents and take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof, and (ii) take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any consents and approvals and make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement. The parties hereto further agree to cooperate with respect to the facilities in Portland, Oregon to be used by the parties or their respective Subsidiaries in accordance with the Services Agreement to the effect of minimizing any disruptions that a party (or its Subsidiaries) may experience as a result of the technical and logistical interdependencies of such facilities. 8.13 No Solicitation of Employees. For a period of three years after the Distribution Date, neither CFI nor the Company, nor any of their Subsidiaries, will directly solicit the employment of any employee of the other company, or any of its Subsidiaries, without the prior written consent of such other company; provided, however, that if the Company shall cease to receive services provided by CNF Service Company, Inc. pursuant to the Services Agreement after the Distribution Date, it may solicit employees (employed either at the time of notification by the Company of the termination of services, or in the preceding six months) from the groups that had been providing such services. 8.14 Dispute Resolution. Any dispute between the parties concerning the performance of this Agreement shall be resolved in accordance with the provisions of the ADR Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. CONSOLIDATED FREIGHTWAYS, INC. By:/S/ D E MOFFITT Its: President and CEO CONSOLIDATED FREIGHTWAYS CORPORATION By:/s/S D Richards Its: Senior Vice President and General Counsel Acknowledged and Agreed by the following entities with respect to the indicated Sections of this Agreement: EMERY AIR FREIGHT CORPORATION (with respect to Sections 4.1, 4.5 and 5.6) By:/s/W F McDonald__________ Its: Vice President CON-WAY TRANSPORTATION SERVICES, INC. (with respect to Sections 4.1, 4.5 and 5.6) By:/s/ R R Magnan___________ Its: Vice President MENLO LOGISTICS, INC. (with respect to Sections 4.1, 4.5 and 5.6) By:/s/John Williford________ Its: President CONSOLIDATED FREIGHTWAYS CORPORATION OF DELAWARE (with respect to Sections 3.6, 4.2, 4.5, 5.6, 6.1, 6.2 and 6.3) By:/s/S D Richards__________ Its: Vice President and General Counsel CANADIAN FREIGHTWAYS LIMITED (with respect to Sections 3.6, 4.2, 4.5, 5.6, 6.1, 6.2 and 6.3) By:/s/K A Johnson___________ Its: Secretary and Treasurer EX-10 6 EXHIBIT 10.35 EXHIBIT 10.35 ------------- TRANSITION SERVICES AGREEMENT between CNF SERVICE COMPANY, INC. and CONSOLIDATED FREIGHTWAYS CORPORATION TABLE OF CONTENTS ARTICLE 1 SERVICES TO BE PROVIDED Section 1.1 General Description; Provision of Services; Volume Discounts 2 Section 1.2 Performance Levels 2 Section 1.3 Instructions 3 Section 1.4 Consents; Indemnification; Assets 3 Section 1.5 Systems Availability and Data Integrity 5 Section 1.6 Systems Users 5 ARTICLE 2 PAYMENT FOR SERVICES Section 2.1 Costs 6 Section 2.2 Invoices; Payment Procedures 6 Section 2.3 Disputed Fees 7 ARTICLE 3 TERM; TERMINATION OF SERVICES Section 3.1 Term 7 Section 3.2 Termination of Services 8 ARTICLE 4 COOPERATION Section 4.1 Cooperation 8 Section 4.2 Provider Administrative Records 9 Section 4.3 Periodic Review of Services 9 ARTICLE 5 FORCE MAJEURE Section 5.1 Force Majeure 9 ARTICLE 6 CONFIDENTIALITY Section 6.1 Confidentiality 10 ARTICLE 7 MISCELLANEOUS Section 7.1 Notices 12 Section 7.2 Severability 13 Section 7.3 Binding Effect; Assignment 13 Section 7.4 No Third Party Beneficiaries 13 Section 7.5 Interpretation 13 Section 7.6 Jurisdiction and Consent to Service 13 Section 7.7 Entire Agreement 14 Section 7.8 Governing Law 14 Section 7.9 Counterparts 14 Section 7.10 Relationship of the Parties 14 Section 7.11 Waiver 15 Section 7.12 Sole Remedy; No Damages 15 Section 7.13 Indemnification 15 Exhibit A - Services TRANSITION SERVICES AGREEMENT TRANSITION SERVICES AGREEMENT ("Agreement") dated as of December 2, 1996, by and between CNF Service Company, Inc., a corporation organized under the laws of the State of Delaware (together with its wholly owned subsidiaries, "Provider"), and Consolidated Freightways Corporation, a corporation organized under the laws of the State of Delaware (together with its wholly owned subsidiaries, "Recipient"). W I T N E S S E T H WHEREAS, Provider is a wholly owned subsidiary of Consolidated Freightways, Inc., a Delaware corporation ("CFI"); WHEREAS, pursuant to that certain Distribution Agreement dated as of the date hereof (the "Distribution Agreement"), all of the shares of common stock of Recipient are being distributed (the "Distribution") to the stockholders of CFI; WHEREAS, prior to the Distribution, Leland James Service Corporation, a Delaware corporation ("LJSC") provided services to Consolidated Freightways Corporation of Delaware ("CFCD"), the principal operating subsidiary of Recipient; WHEREAS, in connection with the Distribution, certain service capabilities of LJSC are being transferred to Provider; WHEREAS, in order for Recipient to operate CFCD effectively in a transition period following the consummation of the Distribution, Recipient desires to enter into certain arrangements with Provider with respect to the performance of certain transition services; WHEREAS, Provider is willing to enter into such transition arrangements on the terms and conditions set forth herein. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 SERVICES TO BE PROVIDED Section 1.1 General Description; Provision of Services; Volume Discounts. (a) The purpose of this Agreement is to set forth the terms upon which Recipient is to receive certain services from Provider on an interim basis after the Distribution on the terms and subject to the conditions herein (the "Services"). (b) Pursuant to the terms and conditions of this Agreement, Provider shall provide, and Recipient shall purchase, the Services as described in Exhibit A hereto; provided, however, that each of the parties hereto acknowledges and agrees that Services may be added to, or deleted from, Exhibit A by mutual consent of the parties at any time (and the Service Fees (as defined) adjusted appropriately). Section 1.2 Performance Levels. In providing the Services, Provider shall perform according to the performance levels maintained by LJSC in the past; or, should any instance arise in which none of such performance levels applies, Provider shall act to substantially the same extent, in substantially the same manner and with substantially the same degree of care and diligence as LJSC would have acted, prior to the Distribution, if it had provided such Services to CFCD. Each Service shall be provided priority no less favorably than in the past, consistent with past practices and without discrimination against Recipient. Section 1.3 Instructions. The parties agree that the Services provided by Provider shall be essentially ministerial in nature so that Provider shall, in all matters requiring the exercise of discretion, follow Recipient's instructions, which shall be promptly provided to Provider by Recipient to the extent requested by Provider and which must be provided in writing if so requested. With respect to post-Distribution occurrences for which Provider is to perform Services as set forth in numbers 25, 26, 27, 28, 31 and 32 on Exhibit A, the parties agree that Provider shall be under no obligation to perform any (or any part of) such Services without clear, written instructions from Recipient. Notwithstanding the foregoing, Provider shall not be required to follow any such instructions that, in Provider's reasonable judgment, are inconsistent with the proper performance of its responsibilities, or that require the exercise of discretion, including without limitation the making of decisions regarding the hiring or firing of employees. The parties agree that it is their intent that Provider not be deemed a fiduciary with respect to plans subject to the Employee Retirement Income Securities Act of 1974, as amended. Section 1.4 Consents; Indemnification; Assets. (a) If the provision of any of the Services by Provider to Recipient would place CFI, Provider or any other subsidiary of CFI in violation or breach of any contract or license (other than software licenses, which are addressed in Section 3.1(g) of the Distribution Agreement) between any such entity and any third party, then Recipient and Provider shall use their respective commercially reasonable efforts, with all costs thereof to be borne by Recipient to obtain forthwith any consent required for Provider to provide such Services to Recipient, and Recipient shall indemnify and hold harmless Provider against all Losses and Liabilities relating to any claims arising from any such alleged violation or breach, such indemnification to be provided in a like manner to the provision of indemnification under the Distribution Agreement. If, after the exercise of such efforts, such consent cannot be obtained, Provider shall use commercially reasonable efforts to provide Recipient with functionally equivalent Services with any additional costs required in providing such Services to be borne by Recipient. Recipient shall indemnify and hold harmless Provider against all Losses and Liabilities (including, without limitation, as relates to software maintenance costs to the extent not otherwise paid by Recipient as contemplated by Section 2.1) which arise from or in any way relate to (i) the use of any software or hardware provided by Recipient or (ii) the use of any software or hardware in connection with the performance of the Services hereunder provided to Recipient, such indemnification to be provided in a like manner to the provision of indemnification under the Distribution Agreement. The provisions of this Section 1.4(a) shall not alter the agreement of Recipient and Provider's parent company as provided in Section 3.1(g) of the Distribution Agreement. (b) The Service Fees (as defined) to be paid by Recipient hereunder shall subsume all costs incurred by Provider in connection with the performance of its obligations hereunder and in respect of which separate payment or indemnification by Recipient is not otherwise contemplated hereby, including, but not limited to, personnel (including fringe benefits and management fees relating thereto), computer hardware, computer time, printers, voice and data telecommunications equipment, file cabinets, paper files, administrative records, photocopies, incidentals and all other assets owned by Provider after the Distribution which are needed in connection with the provision of such Services on a routine and non-routine basis and during peak and non-peak periods; and any such equipment may be replaced from time to time by Provider with functionally equivalent or upgraded equipment. (c) (i) All data, software or other property or assets owned or created by Recipient (other than the intellectual property rights which Recipient has acknowledged to be vested in CFI pursuant to Section 3.1(f) of the Distribution Agreement) shall remain the sole and exclusive property and responsibility (including, without limitation, with respect to maintenance, modification and upgrade) of Recipient. Provider shall not acquire any rights in any such data, software or other property or assets, including any derivative works of Recipient-owned software or data created by Provider, pursuant to this Agreement or Provider's performance hereunder. (ii) All data, software or other property or assets which are owned by Provider, including without limitation derivative works thereof and new data or software created by Provider at Provider's sole expense pursuant to the provision of Services ("Provider Software") shall be the sole and exclusive property and responsibility (including, without limitation, with respect to maintenance, modification and upgrade) of Provider and any interest of Recipient therein shall be limited to the Licensed Materials (as defined in the Distribution Agreement) and the Additional Licenses (as defined in the Distribution Agreement), if any. Recipient shall not acquire any other rights in any such data, software or other property or assets pursuant to this Agreement or Recipient's performance hereunder. (d) If as a result of unanticipated events or conditions, Recipient reasonably determines that it requires modification of any of the Services or software used in connection therewith upon Recipient's request, Provider shall so modify the Services or software used in connection therewith upon Recipient's request (i) to the extent commercially reasonable, (ii) to the extent such modifications do not adversely affect Provider's ability to maintain its computer systems in connection with its continuing business, and (iii) at Recipient's sole cost and expense subject to Recipient's approval of Provider's estimate. Moreover, Provider may suggest modification of software and may, in its sole discretion, offer to share in the cost thereof if it determines that any such modifications may be beneficial to Provider. Recipient shall have exclusive ownership rights to any software modifications it pays for solely, and shared rights to such modifications with respect to which, and only to the extent that, it shares in the payment therefor. (e) Provider shall provide all support and assistance reasonably requested by Recipient, at an arm's- length, negotiated price, in connection with the transfer of any and all Services from Provider to Recipient or any of its affiliates or an alternative third-party service provider selected by Recipient. Specifically, upon the request of Recipient, during the term of this Agreement, Provider shall deliver to Recipient (or as directed by Recipient), at the Recipient's request and with minimal interruption to the operations of Provider or its affiliates, all data and programs owned by Recipient or licensed by Recipient from third party vendors, and all backup or archival copies thereof (or any part thereof as specified by Recipient), in hard copy, electronic, magnetic or any other form which is then in Provider's possession or control, as requested by Recipient, and (in the event that this Agreement is terminated) copies of all material licensed pursuant to Section 3.1(g) of the Distribution Agreement by Recipient from Provider (with reasonable instructions for the installation and use thereof). Section 1.5 Systems Availability and Data Integrity. Provider shall maintain, consistent with past practices, operational recovery procedures to insure the availability of systems and the integrity of data relating to the Services at all times. In the event of the unavailability of any such systems or the loss or destruction of any such data, Provider shall use commercially reasonable efforts consistent with past practices to restore such systems and recover or replace such data as quickly and completely as possible. Section 1.6 Systems Users. In each case as it relates to Recipient's employees, consultants, affiliates or authorized customers during the term of this Agreement the addition or deletion of authorized users ("Users"), including persons authorized at the application-level or system-level, in regard to any computer system, the modification of computer system authority or access granted to any person, and the control generally of access to and use of computer systems, is to be at the direction of Recipient, and Provider shall permit no changes in such access or use without prior written notice to and consent from Recipient. No User will be allowed system authority or access greater than at the application level without the prior written consent of Provider. Each party shall indemnify and hold harmless the other against all degradations in performance levels caused by users authorized for system level access on behalf of, or at the request of, such first party, such indemnification to be provided in a like manner to the provision of indemnification under the Distribution Agreement. ARTICLE 2 PAYMENT FOR SERVICES Section 2.1 Costs. The prices charged for the Services shall initially be those set forth in Exhibit A, which have been negotiated on an arm's-length basis (the "Service Fees"). The Service Fees shall be adjusted on an arm's-length basis every 3 months, except that the Service Fees for the period from the Distribution Date through March 31, 1997 shall be as indicated on Exhibit A and Provider shall, not less than 3 months before any proposed adjustment to Service Fees, provide Recipient with details of any proposed adjustment and justification therefor. The Parties shall negotiate in good faith to reach an agreement within 30 days. Recipient shall not be charged a fee for any improvements or upgrades to facilities or equipment without its prior written consent; provided, however, that Recipient acknowledges and agrees that its failure to timely provide any such consent may adversely affect its abilities to receive Services hereunder, and Provider shall not be liable for any harm to Recipient resulting therefrom. Notwithstanding the immediately preceding sentence, all maintenance fees relating to software used in connection with the provision of Services hereunder, and a proportionate share of all consultants' fees relating to the Year 2000 software conversion project, shall be billed separately from the Service Fees and shall be paid by Recipient together therewith. Section 2.2 Invoices; Payment Procedures. (a) Not later than 30 days after the end of each calendar month Provider shall send Recipient an invoice that includes a detailed breakdown of all Service Fees for such month. All invoices shall be sent to: Consolidated Freightways Corporation, attention: Controller, mailing address: 175 Linfield Drive, Menlo Park, CA 94025. All payments of such invoices shall be made by wire transfer or interbank transfer in immediately available funds to Provider's account at such banks as Provider shall designate to Recipient in writing and shall be made within 15 days after the date of any invoice. (b) Recipient shall establish and maintain an account ("Payroll Account") from which Provider shall be authorized to draw in order to meet Recipient's gross payroll obligations, and Recipient shall ensure that such Payroll Account is sufficiently funded at all times. Notwithstanding any other provision hereof, (i) Recipient shall reimburse Provider for each payroll paid by Provider to the employees of the Recipient for the period contemplated above, to the extent that Provider elects to provide funds despite a deficiency in the Payroll Account, and (ii) Recipient shall provide each such reimbursement by wire transfer of immediately available funds on the day of the issuance of that payroll to such employees. Section 2.3 Disputed Fees. In the event that Recipient and Provider have a good faith dispute with respect to the amount of payment for Services actually rendered (other than with respect to the underlying schedule of fees for Services generally), Recipient shall withhold payment only of any unpaid amount in dispute, and shall deliver to Provider promptly (and within 15 days following receipt of any invoice from Provider that is the basis of such dispute) a written statement describing the dispute, which statement shall provide a reasonably detailed breakdown of the disputed payment amounts. The parties agree to use their best efforts to resolve any such dispute hereunder within 15 days following Provider's receipt of Recipient's statement describing the dispute. In the event the parties cannot resolve the dispute within such time period, each discrepancy or disagreement which cannot be so resolved shall be submitted to a firm of nationally recognized independent certified public accountants (agreed upon by Provider and Recipient), who shall promptly deliver a report setting forth their calculation of each item that was the subject of discrepancy or disagreement, which report shall be final and binding on the parties. The fees and expenses of such firm shall be borne one-half by Provider and one-half by Recipient and each party shall bear its own other expenses in connection therewith. ARTICLE 3 TERM; TERMINATION OF SERVICES Section 3.1 Term. (a) The term of this Agreement shall commence on the date hereof and shall continue in effect until the close of business on the third anniversary of the date hereof. (b) Notwithstanding anything to the contrary in this Agreement, the provisions of Articles 5 and 6 and Sections 1.1(c) (solely as relates to indemnification), 1.4(a) (solely as relates to indemnification), 1.6 (solely as relates to indemnification), 4.2, 7.6, 7.7, 7.8, 7.11, 7.12 and 7.13 shall survive any termination of this Agreement or the provision of Services hereunder. Section 3.2 Termination of Services. Recipient may at any time, upon six months' irrevocable written notice to Provider, terminate all the Services or any Service (or any portion thereof) on a Service by Service basis. Provider may, at any time after the first anniversary of the date hereof, terminate any or all of the Services on six months' irrevocable written notice to Recipient; provided, however, Recipient shall be entitled to continue receiving the telecommunication and data processing services through the third anniversary date in its sole discretion. The provision of all Services pursuant hereto shall in any event terminate on or prior to the third anniversary of the date hereof. Upon termination of any Service, all administrative records (which term is not to be construed to include Provider Software) relating to that Service as such records relate solely to Recipient which have not already been transferred to the sole possession of Recipient shall be so transferred, it being understood that Provider may retain copies of such records. ARTICLE 4 COOPERATION Section 4.1 Cooperation. Each of the parties shall cooperate with and provide assistance to the other consistent with the terms and conditions hereof (including, without limitation, any limitations relating to software) to enable (i) the full performance of all obligations hereunder, (ii) the review and audit of books and administrative records as they relate to the provision of Services, and (iii) Recipient, or any of its affiliates or third party service provider, to assume the performance of any and all Services upon termination or prior thereto; such cooperation and assistance to include without limitation providing the other party, its representatives and its agents (including, without limitation, its outside auditors) with reasonable access, during normal business hours and upon reasonable advance notice, to its employees, representatives and agents and its books, administrative records, offices and properties relating to the Services. Nothing in this section 4.1 shall operate to grant any right to Recipient of Provider-owned software, data or other intellectual property. Section 4.2 Provider Administrative Records. Provider shall keep administrative records regarding the provision of Services as LJSC has kept records for itself regarding such Services prior to the Distribution, and for each Service shall retain such records for a period of twelve months following the cessation of Provider's provision of that Service to Recipient. Recipient, its agents and representatives shall have reasonable access during normal business hours and upon reasonable advance notice to such records (which term is not to be construed to include Provider Software) from the date hereof through the end of the period for retaining such records pursuant to this Section 4.2. Section 4.3 Periodic Review of Services. From time to time during the term of this Agreement, but not less frequently than once each month, the parties shall meet and discuss the nature, quality, and level of Services covered by this Agreement, any concerns either party may have in regard to such matters, and any amendments either party may wish to make to the Services specified in Exhibit A. ARTICLE 5 FORCE MAJEURE Section 5.1 Force Majeure. Each party shall be relieved of its obligations hereunder if and to the extent that any of the following events or conditions directly or indirectly hinder, limit or make impracticable the performance by that party of any of its obligations hereunder: Act of God, war, riot, fire, earthquake, explosion, flood, sabotage, national defense requirement, strike, lockout, job action, injunction, act or order of a governmental agency or instrumentality thereof (whether of fact or law), act of a public enemy, embargo or other concerted act of workers, telecommunications failures or electrical failures; provided, that Provider shall continue to have in place at all times disaster recovery procedures consistent with past practices of LJSC regarding CFCD to enable rapid recovery from any such event or condition. Such procedures may be subject to revision by Provider from time to time as may be required in the ordinary course of business, provided, that such revisions do not adversely affect the levels of protection afforded by such procedures. Prior to being relieved of any obligations hereunder Provider shall have used commercially reasonable efforts (consistent with past practices) to remove or otherwise address the effects of any such event or condition as soon as practicable. Recipient shall be liable for all costs incurred by Provider in connection with any Service that Provider fails to complete and provide as a result of any such event or condition. ARTICLE 6 CONFIDENTIALITY Section 6.1 Confidentiality. The parties acknowledge that in connection with the provision of Services hereunder, each may gain access to confidential and proprietary information regarding the other's financial and business affairs (hereinafter "Confidential Information" or "Information"). Each party hereby agrees to use commercially reasonable efforts to: (a) confine its access to and examination of Confidential Information to the minimum Information necessary to enable Provider to provide the Services hereunder and Recipient to operate its business; (b) limit access to such Information only to those individuals who reasonably need to receive such access to enable Provider to provide the Services hereunder and Recipient to operate its business; (c) inform such individuals of the confidential nature of such Information and take all reasonable steps to secure the compliance of such individuals with the terms of this Article 6; (d) use such Information solely to enable Provider to provide the Services hereunder and Recipient to operate its business; (e) keep such Information confidential and not disclose it to any third party in any manner except as may be required by law or court order; and (f) provide the other party with reasonable access to that party's employees, representatives and agents and its books and administrative records relating to the relevant business (including, without limitation, any and all computer access reports and security access reports) in order for the other party to monitor compliance with this Article 6. Notwithstanding the foregoing, disclosures of Information may be made to third parties: (i) with the prior written consent of the party whose Information it is, (ii) if the Information is in the public domain and has entered the public domain through no fault of the party seeking to make such disclosure or its affiliates or representatives, (iii) if the Information is lawfully acquired by the party seeking to make such disclosure or its affiliates or representatives from sources other than the party whose Information it is or its affiliates or representatives and none of the party seeking to make such disclosure, its affiliates or its representatives is aware that such source was under any obligation (whether contractual, legal or fiduciary) to the party whose Information it is or any of its affiliates or representatives to keep such Information confidential or (iv) to the extent disclosure is compelled by law or court order. Each party shall be responsible for any breach of this Article 6 caused by itself or any of its employees, agents or representatives. Anything contained herein to the contrary notwithstanding, the parties acknowledge and agree that irreparable damage would occur in the event that any provision of this Article 6 was not performed in accordance with its terms, and that the parties shall be entitled to specific performance as the sole remedy. ARTICLE 7 MISCELLANEOUS Section 7.1 Notices. All notices, requests, demands, consents, waivers and other communications required or permitted to be given under this Agreement (excluding invoices as described in Section 2.2 above) shall be in writing and may be given by any of the following methods: (a) personal delivery; (b) facsimile transmission; (c) registered or certified mail, postage prepaid, return receipt requested; or (d) overnight delivery service. Notices shall be sent to the appropriate party at its address or facsimile number given below (or at such other address or facsimile number for such party or other person as shall be specified by notice given hereunder): If to Provider to: CNF Service Company, Inc. 1717 N.W. 21st Avenue Portland, OR 97209 Attention: Controller Fax No.: with a copy to: Consolidated Freightways, Inc. 3240 Hillview Avenue Palo Alto, CA 94304 Attention: General Counsel Fax No.: (415) 494-8372 If to Recipient to: Consolidated Freightways Corporation 175 Linfield Drive Menlo Park, CA 94025 Attention: General Counsel Fax No.: All such notices, requests, demands, waivers and communications shall be deemed received upon (i) actual receipt thereof by the addressee or (ii) actual delivery thereof to the appropriate address. Section 7.2 Severability. Should any provision of this Agreement for any reason be declared invalid or unenforceable, such declaration shall not affect the validity or enforceability of any of the other provisions of this Agreement, which other provisions shall remain in full force and effect and the application of such invalid or unenforceable provision to persons or circumstances other than those as to which it has been held invalid or unenforceable shall be valid and enforced to the fullest extent permitted by law. Section 7.3 Binding Effect; Assignment. This Agreement and all of the provisions hereof shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, directly or indirectly, including, without limitation, by operation of law, by any party hereto without the prior written consent of the other party hereto; provided, (i) that either of the parties hereto may without such prior written consent transfer or assign its rights hereunder to one or more of its affiliates, but no such transfer arrangement shall release the transferring party of its obligations hereunder and (ii) that Provider may subcontract to any party so long as Provider remains liable for the performance of Services provided by any such subcontractor. Section 7.4 No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties and their respective successors and permitted assigns, and shall not be deemed to confer upon or give to any other party any remedy, claim, liability, reimbursement, cause of action or other right. Section 7.5 Interpretation. The section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. Section 7.6 Jurisdiction and Consent to Service. In accordance with the laws of the State of Oregon, and without limiting the jurisdiction or venue of any other court, the parties (a) agree that any suit, action or proceeding arising out of or relating to this Agreement (other than proceedings arising under Section 2.3 above with respect to the amount of payment for Services) shall be brought solely in the state or federal courts of Oregon; (b) consent to the exclusive jurisdiction of each such court in any suit, action or proceeding relating to or arising out of this Agreement; (c) waive any objection which any of them may have to the laying of venue in any such suit, action or proceeding in any such court; and (d) agree that service of any court paper may be made in any manner as may be provided under the applicable laws or court rules governing service of process in such court. Section 7.7 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof, and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. Any conflicts between the language herein and the language used in the Distribution Agreement shall be resolved in favor of the language used herein. Section 7.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OREGON (REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF) AS TO ALL MATTERS, INCLUDING BUT NOT LIMITED TO MATTERS OF VALIDITY, CONSTRUCTION, EFFECT, PERFORMANCE AND REMEDIES. Section 7.9 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. Section 7.10 Relationship of the Parties. Provider and Recipient each acknowledge that they are separate entities, each of which has entered into this Agreement for independent business reasons. Except as provided below in this Section 7.10, the relationship of Provider to Recipient hereunder is that of an independent contractor and nothing herein shall be deemed or construed to create a relationship of partnership, employment, agency, joint venture, or any other relationship. Except as provided below in this Section 7.10, neither party shall transact any business in the name of the other party or obligate or commit the other party in any manner. In recognition of the fact that some of the Services to be provided by Provider pursuant to this Agreement will require that personnel employed by Provider engage in business dealings with customers, vendors, or others with whom Recipient does business and that it is to Recipient's advantage for such business dealings to be conducted on behalf of and in the name of Recipient, Recipient may authorize Provider to use any of its names, whenever (a) necessary or appropriate in providing Services or other assistance hereunder and (b) Recipient explicitly so instructs Provider, in writing. Recipient shall indemnify and hold harmless Provider against all Losses and Liabilities incurred by Provider and arising from this Section 7.10, such indemnification to be provided in a like manner to the provision of indemnification under the Distribution Agreement. Section 7.11 Waiver. Any failure by either party to comply with any obligation, covenant or agreement herein or to fulfill any condition herein may be waived only by a written notice from the party entitled to the benefits thereof. No failure by either party hereto to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or future exercise of that right or any other right hereunder by that party. Section 7.12 Sole Remedy; No Damages. If Recipient becomes dissatisfied with the quality or level of Services provided hereunder, claims any breach of this Agreement by Provider or otherwise becomes dissatisfied with any matter relating hereto or arising herefrom, its sole remedy shall be termination of all or a part of the Services without right to seek actual, compensatory or consequential damages. RECIPIENT HEREBY ACKNOWLEDGES AND AGREES THAT IT IS HEREBY WAIVING CERTAIN LEGAL RIGHTS AND REMEDIES, AND THAT THIS WAIVER IS A FUNDAMENTAL ELEMENT OF THE BARGAIN BETWEEN THE PARTIES HERETO, WITHOUT WHICH PROVIDER WOULD NOT HAVE ENTERED INTO THIS AGREEMENT. RECIPIENT HEREBY ACKNOWLEDGES AND AGREES FURTHER THAT, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, PROVIDER MAY, BUT SHALL IN NO EVENT BE OBLIGATED TO, ADVANCE FUNDS OR INCUR COSTS IN CONNECTION WITH ITS PERFORMANCE HEREUNDER. Section 7.13 Indemnification. Recipient, at its own expense, shall indemnify, defend and hold Provider, its subsidiaries and their present or former officers, directors, shareholders, agents, employees, representatives, successors-in-interest, parents, affiliates, insurers, attorneys and assigns (collectively, the "Indemnified Parties") harmless from and against any claims, judgments, losses, deficiencies, damages, punitive or exemplary damages, fines or penalties, liabilities, costs and expenses (including reasonable attorneys' fees, charges and disbursements) whether required to be paid to a third party or otherwise incurred in connection with or arising from any claim, suit, action or proceeding ("Claim") against the Indemnified Party to the extent the basis of such Claim is that: (i) Recipient has failed to pay any amounts owed to third parties in connection with the Services provided by Provider under this Agreement; (ii) a third party has been or may be injured or damaged in any way by any breach of Recipient of any of its duties, representations or warranties under this Agreement; (iii) Recipient or any of its employees, agents, or services acted improperly in connection with the notification, investigation, adjustment or settlement of claims and losses arising out of the Services described in Exhibit A, and (iv) there is any other liability or obligation arising out of Provider's administration or operation of the Services or functions described in Exhibit A, except to the extent that same arises from the gross negligence or willful misconduct of Provider. The provision of indemnification under this Section 7.13 shall be in a like manner to the provision of indemnification under the Distribution Agreement. IN WITNESS WHEREOF, the parties have each caused this Agreement to be executed by its duly authorized representative as of the day and year first above written. CNF SERVICE COMPANY, INC., on behalf of itself and its wholly owned subsidiaries By: /s/D E Moffitt___________ Name: Donald E. Moffitt Title: President and CEO CONSOLIDATED FREIGHTWAYS CORPORATION, on behalf of itself and its wholly owned subsidiaries By: /s/S D Richards__________ Name: Stephen D. Richards Title: Senior Vice President and General Counsel EX-10 7 EXHIBIT 10.36 EXHIBIT 10.36 ------------- CFI TAX SHARING AGREEMENT TAX SHARING AGREEMENT This Tax Sharing Agreement (the "Agreement"), dated as of this 2nd day of December, 1996, by and between Consolidated Freightways, Inc., a Delaware corporation ("CFI"), and Consolidated Freightways Corporation, a Delaware corporation ("Holdings"). WHEREAS, CFI and Holdings have entered into a Distribution Agreement dated as of November 25, 1996 (the "Distribution Agreement"), providing for the distribution by CFI of the common stock of Holdings to the holders of CFI common stock as of the close of the day on the Distribution Date, and setting forth the terms and conditions which will govern certain relationships between the parties; and WHEREAS, CFI and Holdings desire to set forth their agreement on the proper allocation among CFI, Holdings and their subsidiaries of federal, state, local and foreign taxes and to provide for future cooperation with respect to tax matters; NOW, THEREFORE, in consideration of their mutual promises, the parties agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): "Affiliate" means any corporation which is a member of the Consolidated Group. "CFI Affiliate" means any corporation, partnership or other entity directly or indirectly controlled by CFI, other than Holdings or any Holdings Affiliate. "CFI Businesses" means the present and future subsidiaries, divisions and business of any member of the CFI Group, other than the present and future subsidiaries, divisions and business of any member of the Holdings Group. CFI Businesses shall include all former subsidiaries, divisions and businesses other than the Holdings Businesses. "CFI Group" means the group of corporations that immediately after the Distribution Date are members of the affiliated group of which CFI is the common parent (within the meaning of section 1504 of the Code). "Code" means the Internal Revenue Code of 1986 (or, if relevant, the Internal Revenue Code of 1954), as amended, or any successor thereto, as in effect for the taxable period in question. "Combined Jurisdiction" means, for any taxable period, any jurisdiction in which Holdings or a Holdings Affiliate could be or is included in a consolidated or combined return with CFI or a CFI Affiliate for Other Tax purposes for such period. "Consolidated Group" means the affiliated group of corporations (within the meaning of section 1504 of the Code) of which CFI is the common parent. "Distribution" means the transfer by CFI of its ownership of Holdings and the Holdings Affiliates from CFI by means of a distribution of the stock of Holdings to CFI shareholders. "Distribution Date" means the date determined by the CFI Board of Directors as of which the Distribution shall be effected. "Final Determination" means the final resolution of liability for any Tax for a taxable period (i) by the appropriate IRS form which binds the taxpayer on the date of acceptance by or on behalf of the IRS, or by a comparable form under the laws of other jurisdictions; except that any such form that reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund and/or the right of the Taxing Authority to assert a further deficiency shall not constitute a Final Determination; (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under section 7121 or section 7122 of the Code, or comparable agreements under the laws of other jurisdictions; (iv) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the Tax imposing jurisdiction; or (v) by any other final disposition, including by reason of the expiration of the applicable statute of limitations. "Holdings Affiliate" means any former or current corporation, partnership or other entity directly or indirectly controlled by Holdings. "Holdings Businesses" means the present and future subsidiaries, divisions and business of any member of the Holdings Group. Holdings Businesses shall include all former subsidiaries, divisions and businesses. "Holdings Group" means the group of corporations that immediately after the Distribution Date are members of the affiliated group of corporations of which Holdings is the common parent (within the meaning of section 1504(a) of the Code). "IRS" means the Internal Revenue Service. "Other Taxes" is defined in Section 3.05. "Representative" means with respect to any person or entity, any of such person's or entity's directors, officers, employees, agents, consultants, advisors, accountants, attorneys and representatives. "Restructuring Taxes" means all Taxes resulting from the disposition of Holdings stock undertaken to effect the Holdings Distribution. "Ruling Request" means the private letter ruling request filed by CFI with the IRS dated February 22, 1996, as supplemented from time to time, with respect to certain tax aspects of the Distribution. "Tax" means any of the Taxes. "Tax Controversy" is defined in Section 4.02. "Tax Return" means any return, filing, questionnaire or other document required to be filed, including requests for extensions of time, filings made with estimated Tax payments, claims for refund and amended returns that may be filed, for any taxable period with any Taxing Authority (whether domestic or foreign) in connection with any Tax (whether or not a payment is required to be made with respect to such filing) or any information reporting requirement. "Taxes" means any and all forms of taxation, whether created or imposed by a national, municipal, state, federal, or other governmental body (a "Taxing Authority") and, without limiting the generality of the foregoing, shall include net income, alternative or add-on minimum, any special estimated tax payments required pursuant to section 847 of the Code, gross income, sales, use, ad valorem, gross receipts, value added, franchise, profits, license, transfer, recording, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profit, custom duty, or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any related interest, penalties or other additions to tax, or additional amounts imposed by any such Taxing Authority on the Consolidated Group or any member thereof. "Taxing Authority" is defined under the term "Taxes." ARTICLE II PREPARATION AND FILING OF TAX RETURNS Section 2.01. Manner of Filing. All Tax Returns (relating to pre-Distribution and post-Distribution taxable periods) filed by CFI and CFI Affiliates and Holdings and Holdings Affiliates after the Distribution Date shall be prepared on a basis which is consistent with the rulings of Taxing Authorities or opinions of tax counsel retained or approved by CFI and which are issued in connection or relate directly to the Distribution and shall be filed on a timely basis (including extensions) by the party responsible for such filing under this Agreement. Section 2.02. Pre-Distribution Federal Tax Returns (a) Holdings will join, and will cause each Holdings Affiliate to join, in all pre-Distribution federal Tax Returns for the Consolidated Group to the extent they are eligible to join in such returns under the provisions of the Code and the regulations thereunder. Holdings will neither elect to file separate returns for such periods nor will it cause or permit any of the Holdings Affiliates to so elect. (b) Holdings hereby irrevocably designates, and Holdings agrees to cause each of the Holdings Affiliates to so designate, CFI as its agent to take any and all actions necessary or incidental to the filing of Form 1122 (or any amendment thereto) with respect to any taxable period in which Holdings or any of the Holdings Affiliates is a member of the Consolidated Group, and Holdings agrees to deliver, and to cause each Holdings Affiliate to deliver, executed copies of Form 1122 (or any amendment thereto) to CFI, if required, with respect to any such year. (c) CFI shall timely prepare and file, or cause to be timely prepared and filed, all pre-Distribution federal Tax Returns for the Consolidated Group. This shall include all tax items required to be reported by the Holdings Group for taxable periods ending before or including the Distribution Date. Holdings shall provide CFI, with respect to Holdings and Holdings Affiliates, its federal Tax Returns and supporting schedules and additional information requested by CFI for the 1996 taxable period ending on the Distribution Date on a timely basis, as reasonably determined by CFI, in order for CFI to timely file the Tax Returns for the Consolidated Group. Upon request, CFI shall deliver to Holdings copies of the relevant portions of the Consolidated Group Tax Return for 1996, as determined by CFI, within 30 days after the day that it is filed. (d) All Tax Returns relating to taxable periods ending before or including the Distribution Date and submitted after the date of this Agreement by Holdings shall be prepared, and all items of such Tax Returns shall be reported (in the absence of a controlling change in law or circumstances, except with the consent of CFI, which consent shall not be unreasonably withheld), in a manner that is consistent with past practices, elections, accounting methods, conventions, and principles of taxation (collectively, "Tax Practices") used for the most recent taxable periods for which Tax Returns involving similar items have been filed prior to the Distribution Date. All decisions relating to the preparation of Tax Returns under Section 2.02 (including whether items are reported consistent with past Tax Practices) shall be made in the reasonable discretion of CFI. However, any decisions regarding intercompany transactions, as defined under Treas. Reg. 1.1502-13, shall be made as mutually agreed upon by the parties or by CFI if mutual agreement is not reached, with CFI's decision being subject to arbitration under Section 5.04. Section 2.03. Post-Distribution Federal Tax Returns. Holdings shall prepare and file, or cause to be filed, all post-Distribution federal Tax Returns for the Holdings Group for taxable periods beginning after the Distribution Date. CFI shall prepare and file, or cause to be prepared and filed, all post-Distribution federal Tax Returns for the CFI Group for taxable periods beginning after the Distribution Date. CFI and Holdings agree to notify each other within 60 days after such post-Distribution federal Tax Returns are filed regarding any utilization by either party of minimum tax credits generated in pre-Distribution taxable periods. In addition CFI agrees to provide to Holdings periodic estimates of the amount of minimum tax credits generated in pre-Distribution years which are expected to be utilized in post-Distribution returns of the CFI Group. CFI agrees to provide such estimates within 60 days after each quarterly federal estimated tax payment and within 60 days after an application for automatic extension of time (Form 7004) is filed. Holdings acknowledges that such estimates are subject to change and CFI shall have no liability for any changes or inaccuracies in such estimates. ARTICLE III PAYMENT OF TAXES Section 3.01. Allocation of Tax Liability. (a) For purposes of this Agreement, the Consolidated Group's federal regular income tax liability for all periods ending before or including the Distribution Date shall be allocated in accordance with section 1552(a)(2) of the Code and Treasury Regulations sections 1.1552-1(a)(2) and 1.1502- 33(d)(3). Accordingly, the consolidated federal regular income tax liability to be allocated to each Affiliate included in the federal Tax Return of the Consolidated Group in the following manner: (1) Step 1. Each Affiliate shall first be allocated that percentage of the consolidated federal regular income tax liability which is equal to the percentage that the total federal regular income tax liability of such Affiliate, if computed on a separate return basis, (with the adjustments provided by Treasury Regulation section 1.1552- 1(a)(2)) would be to the total amount of the federal regular income tax of all Affiliates so computed. (2) Step 2. An additional amount shall be allocated to each Affiliate equal to one hundred percent (100%) of the excess, if any, of (A) the "separate return tax liability" of such Affiliate for the taxable year (as computed pursuant to Treasury Regulation section 1.1552-1(a)(2)), over (B) the tax liability of such Affiliate in accordance with Step 1 of this Section 3.01(a). (3) Step 3. The total of any additional amounts allocated to Affiliates pursuant to Step 2 of this Section 3.01(a) (including amounts allocated as a result of a carryback) shall be paid by such Affiliates to those other Affiliates which had such losses, deductions, or credits in proportion to the tax benefit derived by the Consolidated Group from the losses, credits and deductions of all Affiliates, as determined by CFI. (4) For the purposes of this Agreement, Holdings' allocable share of the consolidated federal regular income tax liability, as determined under this Section, is the aggregate amount of liability allocated to Holdings and any Holdings Affiliate. CFI's allocable share of the consolidated federal income tax liability, as determined under this Section, is the aggregate amount of liability allocated to CFI and any CFI Affiliate. (b) For purposes of this Agreement, the Consolidated Group's federal minimum tax liability and environmental tax liability for all periods ending before or including the Distribution Date shall be allocated in accordance with the allocation method set out in Proposed Regulations 1.1502- 55 and 1.1552-1(g) issued on December 30, 1992 (the "Proposed Regulations"). If temporary or final regulations are issued which differ from the Proposed Regulations, this Agreement will be amended to reflect such changes to the extent and for an effective date deemed necessary or desirable by CFI. Section 3.02. Alternative Minimum Tax Credits. A portion of any consolidated minimum tax credit of the Consolidated Group will be allocated to a Holdings Affiliate which ceases to be a member of the Consolidated Group on the Distribution Date in accordance with the allocation method set forth in the Proposed Regulations. To the extent such Holdings Affiliate was not allocated a corresponding amount of alternative minimum tax in an earlier or the same tax year, Holdings shall pay to CFI an amount equal to the amount of any such credit utilized by the Holdings Affiliate on an estimated basis on or before June 30 following the taxable year in which the credit is utilized by such Holdings Affiliate. Subsequent thereto, a final settlement payment, if necessary, will be made within 10 days of filing the Tax Return for such taxable year or, if later, 10 days after receipt of notice of the amount of the settlement payment required. Any payment required under this Section shall be accompanied by a calculation setting forth the basis for the amount paid. In calculating minimum tax credit utilization and payment responsibility under this Section, minimum tax credits allocated to Holdings Affiliates under this Section shall be deemed used first. If temporary or final regulations are issued which differ from the Proposed Regulations, this Agreement will be amended to reflect such changes to the extent and for an effective date deemed necessary or desirable by CFI. Section 3.03. Payment of Consolidated Federal Income Tax. (a) CFI shall pay all Taxes due with respect to the consolidated federal income tax liability (including any minimum tax or environmental tax liability) of the Consolidated Group for all taxable periods ending before or including the Distribution Date. Holdings shall pay to CFI an amount equal to Holdings' and Holdings Affiliates' share of such Taxes as determined in the manner provided in Section 3.01. Furthermore, Holdings shall make estimated tax payments to CFI or receive refunds on or before the statutory payment dates under a method generally consistent with past practices as reasonably determined by CFI. CFI hereby acknowledges that, upon resolution of the intercompany accounts as of the Distribution Date, all federal Taxes have been paid by Holdings and Holdings Affiliates with respect to federal consolidated Tax Returns that have been filed for any period up to and including the year ended December 31, 1995, and Holdings and Holdings Affiliates shall have no further liability in respect thereof except as otherwise provided in this Agreement. (b) Except as otherwise provided in this Agreement, Holdings shall pay all Taxes due with respect to the federal income tax liability (including any minimum tax or environmental tax liability) of the Holdings Group for periods beginning after the Distribution Date. Section 3.04. Tax Deficiencies and Refunds as to CFI Filed Returns. (a) If as a result of any audit, amendment or other change in a federal income Tax Return as filed by CFI or any CFI Affiliate with respect to any taxable period ending before or including the Distribution Date, there is an additional amount of federal income Taxes (including minimum tax and environmental tax) due and payable, or a refund of federal income Taxes previously paid (whether by payment, credit, offset against other federal income Taxes due or otherwise), any such deficiency shall be paid by, and any such refund shall be payable to, CFI. (b) Holdings shall pay to CFI any federal income Taxes paid by CFI as a result of any audit, amendment or other change in a Consolidated Group Tax Return allocable to the Holdings' Businesses (as determined under Section 3.01) with respect to any taxable periods ending before or including the Distribution Date. In determining the amount due under this Section 3.04(b), the amount of federal income Taxes paid by CFI shall include any additional tax payments or deposits made by CFI for a taxable year subsequent to the filing of the federal income tax return for the taxable year, it being expressly recognized by Holdings that no portion of such payments were charged to Holdings or a Holdings Affiliate through the intercompany accounts. (c) CFI shall pay to Holdings, reduced by reasonable administrative costs (including legal and accounting expenses) incurred by CFI or a CFI Affiliate, the amount of any refund of federal income Taxes received (including by offset against other federal Taxes due) as a result of any audit, amendment or other change in a Consolidated Group Tax Return allocable to the Holdings Businesses (as determined under Section 3.01) with respect to any taxable period ending before or including the Distribution Date. (d) For purposes of both (b) and (c) of this Section, the amount of any federal Taxes paid or federal Taxes received (including by way of offset) as a result of any audit, amendment or other change to a Consolidated Group Tax Return shall be taken into account in the year to which they relate and the Tax liability (including Other Taxes) for such year shall be recomputed and allocated accordingly. Section 3.05 Penalties and Interest (a) Any interest incurred by the Consolidated Group shall be paid by the Affiliate to whom it is attributable. The total amount of interest incurred by the Consolidated Group will be apportioned to and paid by each Affiliate according to (1) the ratio of the interest incurred by each Affiliate so computed, plus (2) the additional interest, if any, that such Affiliate would have paid on a separate return basis over the allocated interest determined under (1) above. Interest computed by an Affiliate on a separate return basis shall be calculated using the interest rate or rates applicable to the consolidated deficiency. Any additional amount allocated to an Affiliate determined under (2) above shall be paid to the Affiliate whose income or deduction would have given rise to a refund on a separate return basis, but in no case shall an Affiliate which incurs interest under (2) above be required to pay more interest to such receiving Affiliate than such receiving Affiliate would have received on a separate return basis. In calculating the allocable share of any interest payable by a Holdings Affiliate with respect to any federal audit adjustments, only interest actually payable to the IRS, and not interest abated as a result of tax deposits, shall be taken into account. CFI shall have sole discretion to determine how tax deposits are allocated among taxable periods and audit items. CFI shall act in good faith in making such determination, with an intention to minimize the overall out- of-pocket costs and financial reporting impacts on CFI and Holdings. (b) Any interest received by the Consolidated Group as a result of any refund of Tax shall be allocated to the Affiliate whose income or deductions gave rise to the refund. The amount of interest received by the Consolidated Group will be apportioned to and received by each Affiliate according to (1) the ratio of the interest to be received by each Affiliate computed on a separate return basis to the total of all the interest received by Affiliates so computed, plus (2) the additional interest, if any, that such Affiliate would have received on a separate return basis over the allocated interest determined under (1) above. Any additional amount allocated to an Affiliate determined under (2) above shall be received from the Affiliate whose income or deductions caused such interest not to be received by the Consolidated Group, but in no case shall an Affiliate which receives such interest receive more interest than such Affiliate would have received on a separate return basis. (c) Any penalties incurred by the Consolidated Group shall be paid by the Affiliate whose actions, income or deductions caused such penalties. If a penalty was caused by more than one Affiliate, such penalty shall be allocated proportionately to those Affiliates that would have incurred a penalty on a separate return basis. Any excess penalty will be allocated in proportion to the actions, income or deductions of each Affiliate which caused or contributed to the penalty regardless of whether such Affiliate's actions, income or deductions exceeded the minimum threshold required for the penalty to be imposed. (d) For purposes of this Agreement, Holdings' allocable share of any interest or penalties, as determined under this Section, is the aggregate amount of liability allocated to Holdings and any Holdings Affiliate. CFI's allocable share of any interest or penalties, as determined under this Section, is the aggregate amount of liability allocated to CFI and any CFI Affiliate. Section 3.06. Other Tax Returns of Holdings. (a) Holdings shall prepare and file, or cause to be prepared and filed, all appropriate Tax Returns or other filings relating to Taxes other than federal income taxes ("Other Taxes") imposed on any member of the Holdings Group or the Holdings Businesses except for returns and filings with respect to Combined Jurisdictions. (b) For any Combined Jurisdictions, CFI or a CFI Affiliate, as appropriate, shall be responsible for the preparation and filing of all returns and filings relating to any Other Taxes imposed upon any member of the Holdings Group for the same taxable periods with respect to which CFI is responsible for filing federal income tax returns under Section 2.02. For this purpose, Holdings (or the appropriate Holdings Affiliate) shall provide CFI (or the appropriate CFI Affiliate) such schedules and additional information requested by CFI for any period for which such Tax Return has not been filed as of the date hereof by the later of (i) 15 days after such request or (ii) 60 days prior to the date on which such Tax Return shall be due. Unless required by law, as reasonably determined by CFI, CFI shall file such Tax Return consistent with such schedules and additional information provided by Holdings or Holdings Affiliates. CFI shall deliver to Holdings copies of relevant portions of each Tax Return no later than 60 days after the day that such Tax Return is filed. Unless required by law, as reasonably determined by CFI, CFI shall not amend any such Tax Return to reflect any change in information provided by Holdings Businesses without the written consent of Holdings. (c) CFI hereby acknowledges that all Other Taxes have been paid with respect to Tax Returns that have been filed (in any Combined Jurisdiction in which unitary or nexus consolidation principles have been agreed upon by CFI and Holdings or a Holdings Affiliate) on or before the Distribution Date. Liability for payment of all Other Taxes imposed by any Combined Jurisdiction shall be allocated between the CFI Group and the Holdings Group. The allocation shall be made in such manner as CFI shall reasonably deem appropriate; provided, however, that the liability of the Holdings Group shall not exceed the greater of (i) the total amount that the Holdings Group would have paid if the members of the Holdings Group filed their own return for Other Taxes not combined with any other member of the CFI Group, or (ii) a pro rata share of the combined liability of the members of the Holdings Group and the CFI Group. CFI shall be liable for the Other Taxes remaining after payment of the Holdings Group's allocable share of the Other Taxes. (d) To the extent there is an Other Tax liability, but the Holdings Group has a net aggregate loss in a Combined Jurisdiction, the Holdings Group shall be entitled to the benefit of the net aggregate loss, to the extent reasonably determined by CFI, except limited (i) to the extent of its nexus within the state, and (ii) to the extent such benefit is eliminated or reduced by the fact that Holding Group's inclusion in the Combined Jurisdiction increases the liability of the combined group. (e) To the extent that a refund is obtained by CFI Businesses or Holdings Businesses and such refund relates to Other Taxes in Combined Jurisdictions, Holdings or a Holdings Affiliate shall be entitled to receive its proportionate share of such refunds as determined by CFI (or a member of the CFI Group, as appropriate), in accordance with the principles of Section 3.06(c) or (d). (f) CFI and Holdings shall be responsible for the filing of their respective Tax Returns for (i) non-Combined Jurisdictions, and (ii) jurisdictions outside the United States that are due with respect to all taxable periods and for the payment of all Taxes due or payable in connection therewith. (g) If as a result of any audit, amendment or other change in a Combined Jurisdiction Tax Return as filed by CFI or a CFI Affiliate with respect to any taxable period ending before or including the Distribution Date, there is an additional amount of Taxes due and payable, or a refund of Taxes previously paid (whether by payment, credit, offset against other Taxes due or otherwise), any such deficiency shall be paid by, and any such refund shall be payable to, CFI or the CFI Affiliate. Holdings shall pay to CFI any Taxes incurred as a result of any audit, amendment or other change in a Combined Jurisdiction Tax Return with respect to any taxable period ending before or including the Distribution Date in a manner consistent with the provisions outlined in Section 3.06(c) and (d). CFI or a CFI Affiliate shall pay to Holdings the amount of any refund of Other Taxes received (including by offset against Other Taxes due) as a result of any audit, amendment or other change to a Tax Return attributable to the Holdings Businesses with respect to any taxable period ending before or including the Distribution Date in a manner consistent with the provisions outlined in Section 3.06(e). (h) Notwithstanding the provisions of Section 3.06(g), if Holdings or a Holdings Affiliate wishes to make advance payment of, or enter into a cash bond with respect to, any Taxes for which it would bear the burden under this Agreement prior to the date that payment of such Taxes is required by the relevant Taxing Authority, CFI shall permit Holdings to make such advance payment or enter into such cash bond and shall take such reasonable actions as may be necessary to effectuate the same. Section 3.07. Restructuring Taxes. (a) Notwithstanding any other provision of this Agreement to the contrary, Holdings shall pay and shall indemnify and hold harmless CFI from and against any and all Restructuring Taxes and from and against any costs whatsoever connected with such taxes, including, but not limited to, fees, interest, penalties and reasonable attorney's fees to the extent any portion of such Restructuring Taxes would not have resulted: (i) but for a Ruling Misrepresentation or Omission (as defined in Section 3.07(b)); or (ii) but for the fact that, within three (3) years after the Distribution Date, either Holdings or any member of the Holdings Group has (A) made a material disposition outside the Holdings Group by means of a sale or exchange of assets or capital stock (except (x) the issuance by Holdings of its own stock in an amount which does not exceed 10% of Holding's issued and outstanding stock immediately following the Distribution Date and (y) dispositions, if any, disclosed in the Ruling Request), (B) made a distribution to its stockholders or otherwise of any assets of the Holdings Group (other than dividends paid in the ordinary course of business), (C) made any repurchase of any Holdings Group capital stock (excluding repurchases in connection with employee benefit plans which comply with Revenue Procedure 91-63), (D) has voluntary ceased to engage in the active conduct of a trade or business within the meaning of section 355(b)(2) of the Code, or (E) Holdings has liquidated or merged with any other corporation (including a member of the Holdings Group) unless, prior to each of cases (A), (B), (C), (D) and (E), Holdings has received an opinion of counsel to the Holdings Group (which opinion shall be reasonably satisfactory to CFI) or a favorable supplemental IRS ruling letter satisfactory to CFI, that such act would not adversely affect the tax consequences of the Distribution to CFI or the shareholders of CFI, as set forth in any ruling issued by the IRS or in any opinion of counsel to CFI obtained in lieu of such a ruling. (b) For purposes of paragraph (a), a "Ruling Misrepresentation or Omission" means with respect to Holdings or a Holdings Affiliate (i) the failure of Holdings or a member of the Holdings Group to comply in all material respects with each written representation and statement regarding Holdings or a Holdings Affiliate made to the IRS in the Ruling Request or in a certificate provided to counsel to the CFI Group for use in preparing its tax opinion with respect to the Distribution, or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Ruling Request (or certificate provided to counsel) or the omission to state in the Ruling Request (or certificate provided to counsel) a material fact required to be stated therein or necessary to make the statements therein not misleading, but only, in the case of both clause (i) and (ii), insofar as any such statement or omission was made in reliance upon, and in conformity with, written information furnished by Holdings a Holdings Affiliate, or a Representative of either specifically for use in the preparation of the Ruling Request (or certificate provided to counsel). Section 3.08. Manner of Payment. (a) Any payment required to be made pursuant to Sections 3.04, 3.05, 3.06, 3.07 or Section 3.10 with respect to any Tax Return shall be made by wire transfer by the party obligated to make such payment (i) in the case of a refund of Tax, within 10 days after receipt (whether by way of payment, credit, or offset against any payments due or otherwise) of such refund or (ii) in the case of the payment of Tax with respect to any such Tax Return, within 10 days after the later of (x) such payment of Tax or (y) the delivery of written demand for the payment hereunder to the party obligated to make such payment hereunder. Any payment described in clause (i) and any demand for payment described in clause (ii) shall be accompanied by a calculation consistent with past Tax Practices setting forth the basis for the amount paid or demanded. Any payment not made within the prescribed time period shall thereafter bear interest at the federal underpayment rate established pursuant to section 6621(a)(2) (substituting "5 percentage points" for "3 percentage points" in the case any demand for payment described in clause (ii) in an amount exceeding $100,000). (b) Notwithstanding the foregoing, in the case of payments due from Holdings as a result of any IRS audit adjustments which result in a deferred tax asset for Holdings for taxable years following the Distribution Date, at Holdings' request CFI shall enter into a note agreement on reasonable commercial terms permitting Holdings to make installment payments of the amounts due hereunder over a period not longer than the lesser of (i) 4 years, or (ii) the period over which such deferred tax asset is amortized by Holdings. Section 3.09. Liability for Taxes with Respect to Post- Distribution Taxable Periods. Unless otherwise provided in this Agreement, the CFI Group and the Holdings Group severally shall pay all Taxes and shall be entitled to receive and retain all refunds of Taxes with respect to taxable periods beginning after the Distribution Date which are attributable to the CFI Businesses and the Holdings Businesses, respectively. Section 3.10. Carrybacks and Carryforwards. (a) In the event that Holdings, any Holdings Affiliate or the Holdings Group incurs a loss or realizes a tax credit in a Tax Return filed for periods after the Distribution Date, loss or tax credit will not be carried back to any Consolidated Group Tax Return without the specific consent of CFI. CFI need consent only if the carryback of such loss or credit to the Consolidated Group return will cause no detriment to CFI's tax position. In determining whether a carryback is likely to cause a detriment to its tax position, CFI may take into account audit risks resulting from claiming a carryback. If CFI agrees to carryback such loss or credit, or is required by law to carryback such loss or credit, Holdings shall be entitled to its allocable share of any refund of Tax obtained by the Consolidated Group (or any member of the Consolidated Group in a Combined Jurisdiction) as a result of the carryback of losses or credits of any member of the Holdings Group from any taxable period beginning after the Distribution Date to any taxable period ending before or including the Distribution Date. Such refund is limited to the net amount received by CFI (by refund, offset against other Taxes or otherwise), net of any net Tax cost incurred by CFI or a CFI Affiliate, which would include the reduction of minimum tax credits previously utilized by CFI, resulting from such refund, and shall be paid in the manner and at the time specified in Section 3.08. In determining the net amount received by CFI as a result of a carryback of losses or tax credits by Holdings or a Holdings Affiliate, amounts carried back by Holdings or a Holdings Affiliate shall be considered to reduce the Consolidated Group's tax burden only to the extent that such carrybacks reduce the Consolidated Group's tax burden after first taking into account all other tax credits and carrybacks available to the Consolidated Group. Holdings shall indemnify CFI for any interest, fines and penalties resulting from the carryback of any item under this paragraph. Notwithstanding this Section 3.10, Holdings and any member of the Holdings Group shall have the right, in its sole discretion, to make the election under section 172(b)(3) of the Code, which would eliminate or limit the carryback of any loss or credit of the Holdings Group to any taxable period ending before or including the Distribution Date. (b) If CFI has a carryback of losses or credits from any member of the CFI Group from any taxable period beginning after the Distribution Date to any taxable period ending before or including the Distribution, CFI shall be entitled to any refund received from the Taxing Authority attributable to the carryback. To the extent such refund is reduced as a result of the inclusion of the Holdings Group in the Tax Return to which the item is carried back and results in additional minimum tax credits or other credits being made available to the Holdings Group, Holdings shall pay to CFI the amount of any tax savings when and if the additional benefits are realized by Holdings. (c) Within 180 days following the close of the CFI tax year in which the Distribution Date occurs, CFI shall provide a schedule of the relevant carryforward items allocable to Holdings for tax years following the Distribution Date. CFI shall indemnify Holdings for any interest, fines or penalties resulting from the overstatement of the carryforward items or CFI shall reimburse Holdings for any Tax benefits (including interest at the rate specified in Section 3.08) foregone by Holdings as a result of the understatement of the carryforward items. Notwithstanding the foregoing, CFI shall not be required to so indemnify or reimburse Holdings (i) with respect to any overstated allocation of alternative minimum tax credits made by CFI on a good faith basis, or (ii) to the extent the overstatement or understatement of any carryforward items other than alternative minimum tax credits results (x) from a change in law or regulation (including the retroactive effectiveness of any such law or regulation), (y) from an audit or other adjustments to the Tax Returns as filed, or (z) from incorrect information supplied by Holdings. ARTICLE IV COOPERATION AND EXCHANGE OF INFORMATION Section 4.01. Cooperation. (a) CFI and Holdings shall cooperate (and shall cause any member of their group to cooperate) fully at such time and to the extent reasonably requested by the other party in connection with the preparation and filing of any return or the conduct of any audit, dispute, proceeding suit or action concerning any issues or any other matter contemplated hereunder. Such cooperation shall include, without limitation, (i) the retention and provision on demand of books, records, documentation or other information relating to any Tax Return until the later of (x) the expiration of the applicable federal or state statute of limitation (giving effect to any extension, waiver, or mitigation thereof) and (y) in the event any claim has been made under this Agreement for which such information is relevant, until a Final Determination with respect to such claim; (ii) the provision of additional information with respect to and explanation of Tax Practices and material provided under clause (i) of this section; (iii) the execution of any document that may be necessary or reasonably helpful in connection with the filing of any Tax Return by any member of the CFI Group or the Holdings Group, or in connection with any audit, proceeding, suit or action addressed in the preceding sentence; and (iv) the use of the parties' reasonable best efforts to obtain any documentation from a governmental authority or third party that may be necessary or helpful in connection with the foregoing. Each party shall make its employees and facilities available on a mutually convenient basis to facilitate such cooperation. (b) CFI and Holdings shall use reasonable efforts to keep each other advised as to the status of Tax audits and litigation involving any items reportable on a consolidated federal income Tax Return or a combined Tax Return with respect to the Holdings Businesses for pre-Distribution periods and which (i) give rise to a Tax which could be assessed against Holdings (or any Affiliate thereof) or (ii) could give rise to a liability of Holdings (or any Affiliate thereof) under this Agreement (either of which constitutes a "Liability Issue"). The primary person for dealing with the Holdings Liability Issues in Tax audits shall be a Holdings Representative. CFI and Holdings shall promptly furnish each other copies of any inquiries or requests for information from any Taxing Authority or any other administrative, judicial or other governmental authority concerning any Liability Issue. CFI shall notify Holdings as to which inquiries or information requests it desires to monitor and, with respect to such matters, Holdings will submit for CFI approval (which shall not be unreasonably withheld) the information to be provided to a Taxing Authority or any governmental authority in response to the inquiries or requests. Holdings agrees to timely notify CFI regarding any proposed written communication (i.e., communications not related to inquiries or requests for information) by Holdings or a Holdings Affiliate to any such Taxing Authority or other governmental authority with respect to such Liability Issue and CFI shall subsequently notify Holdings as to which Liability Issues CFI desires to monitor. Upon request by CFI, Holdings shall provide copies of such written communications and documents to be submitted therewith and receive approval from CFI to submit such communications (which approval shall not be unreasonably withheld and shall be given on a timely basis) prior to submission to the Taxing Authority or other governmental authority. CFI shall have the right to consult with Holdings regarding any responses attributable to such requests. CFI shall indemnify Holdings for any costs which would not have been incurred, but for CFI's failure to grant approval to Holdings to submit information for which CFI's approval is required by this section; provided, however, this indemnification shall not apply to CFI actions or decisions made pursuant to Section 2.02(b). Furthermore, CFI and Holdings, as the case may be, shall each promptly furnish to the other upon receipt a copy of information document requests, a notice of proposed adjustment, revenue agent's report or similar report or notice of deficiency together with all relevant documents and memos related to the foregoing documents, notices or reports, received by any member of the CFI Group or any member of the Holdings Group, as the case may be, relating to any Liability Issue. (c) CFI shall advise Holdings with respect to items reported in a revenue agent's report and provide periodic updates, as necessary, as to the resolution of any such items relating to the Consolidated Group that may affect any member of the Holdings Group after the Distribution Date. (d) Holdings shall promptly notify CFI of any inquiries by any Taxing Authority or other administrative, judicial or other governmental authority that relates to any Other Taxes that may be imposed on CFI or a CFI Affiliate. Section 4.02. Contest Provisions. (a) Subject to the cooperation provisions of Section 4.01, CFI shall have full responsibility for and discretion in handling any Tax controversy, including, without limitation, an audit, technical advice request, arbitration or dispute resolution procedure, protest to the Appeals Division of the IRS, and litigation in Tax Court or any other court of competent jurisdiction (a "Tax Controversy"), involving a Tax Return of the Consolidated Group or a Tax Return for a Combined Jurisdiction. However, upon request by Holdings, and subject to CFI approval (which may not be unreasonably withheld) and the cooperation provisions of Section 4.01, Holdings shall have full responsibility and discretion in the handling, at Holdings' expense of any Tax Controversy with respect to any item reported on a Holdings or Holdings Affiliate Tax Return that would give rise to a payment of Tax for which Holdings would be liable, or a refund of Tax for which Holdings would be entitled to receive payment, under Article III hereof. If CFI approval is not granted to Holdings for the handling of a Tax Controversy item, CFI shall provide Holdings with a timely written response which sets out the reasons for not granting the approval. Furthermore, CFI shall be subject to the cooperation provisions of Section 4.01 and shall allow Holdings, at Holdings' expense, the right to consult with CFI with respect to such Tax Controversy. (b) In addition to the cooperation and contest provisions of Section 4.01 and Section 4.02(a), in the event that a notice of deficiency is received by CFI from any Taxing Authority and such notice relates in whole or in part to Restructuring Taxes for which Holdings would be liable to CFI pursuant to Section 3.06 hereof (the "Holdings Restructuring Issue") then -- (1) CFI, upon receiving written request from Holdings, which shall be given no later than a date reasonably necessary to permit preparation and timely filing of a petition in the Tax Court for redetermination of the deficiency, shall timely file such petition at Holdings' expense; provided, however, that upon the request of Holdings, CFI shall, at Holdings' expense: (A) pay the amount of the deficiency (provided that Holdings has loaned to CFI no later than three (3) business days before CFI pays such deficiency, without interest and until a Final Determination of the Holdings Restructuring Issue, 100 percent of the amount of the portion of the deficiency relating to the Holdings Restructuring Issue; (B) file a claim for refund of such Tax; and (C) if the claim is denied, bring an action in a court of competent jurisdiction seeking the refund of such Tax; and (2) In the event that a judgment of the Tax Court or other court of competent jurisdiction results in an adverse determination with respect to the Holdings Restructuring Issue and CFI notifies Holdings that it does not intend to appeal such Holdings Restructuring Issue, then Holdings shall have the right to cause CFI to appeal such adverse determination at Holdings' expense. (3) Holdings and its Representatives, at Holding's expense, shall be entitled to participate in all conferences, meetings, or proceedings with any Tax Authority, the subject matter of which is or includes the Holdings Restructuring Issue. Holdings and its Representatives, at Holding's expense, shall be entitled to participate in all appearances before any court, the subject matter of which includes the Holdings Restructuring Issue. (4) All actions taken under this Section 4.02(b) at Holding's request or direction shall be at Holdings' expense. (5) The right to participate referred to in Section 4.02(b)(3) hereof shall include the submission and content of documentation, protests, memoranda of fact and law and briefs, the conduct of oral arguments or presentations, the selection of witnesses, and the negotiations of stipulations of fact with respect to the Holdings Restructuring Issue. (6) Within five (5) business days of the receipt by CFI of a refund of any amounts loaned to it by Holdings under paragraph (b)(1) above (including any interest received by CFI), CFI shall pay such refunded amount and interest, if any to Holdings net of any net Tax detriment (as determined by CFI) incurred by CFI or a CFI Affiliate resulting from such refund. Section 4.03. Information for Shareholders. CFI shall provide each shareholder which receives Holdings stock pursuant to the Distribution with the information necessary for each such shareholder to comply with the requirements of section 355 of the Code and the Treasury Regulations with respect to statements that such shareholders must file with their federal income tax returns demonstrating the applicability of section 355 to the Distribution. ARTICLE V MISCELLANEOUS Section 5.01. Tax Indemnification. (a) Holdings shall indemnify and hold harmless CFI and each CFI Affiliate from and against any liability, cost or expense, including, without limitation, any fine, penalty, interest, charge, attorney's fee or accountant's fee arising out of fraudulent or negligent information, workpapers, documents and other items prepared by Holdings or a Holdings Affiliate used in the preparation of any Tax Return filed by CFI and/or the Consolidated Group for any period during which Holdings or a Holdings Affiliate was or has been a member of the Consolidated Group. (b) Except as set forth in Section 5.01(a), CFI shall indemnify and hold harmless Holdings and each Holdings Affiliate from and against any liability, cost or expense, including, without limitation, any fine, penalty, interest, charge, attorney's fee or accountant's fee arising out of fraudulent or negligent preparation of any Tax Return filed by CFI and/or the Consolidated Group for any period during which Holdings or a Holdings Affiliate was or has been a member of the Consolidated Group. Section 5.02. Breach. CFI shall indemnify and hold harmless each member of the Holdings Group and Holdings shall indemnify and hold harmless each member of the CFI Group from and against any payment required to be made under this Agreement as a result of the breach by a member of the CFI Group or the Holdings Group, as the case may be, of any obligation under this Agreement. Section 5.03. Disclaimers. (a) CFI disclaims all knowledge of or responsibility for the content or accuracy of any separate returns or filings made by Holdings or Holdings Affiliates except to the extent such returns include information provided by CFI pursuant to Section 3.10(c). (b) Holdings disclaims all knowledge of or responsibility for the content or accuracy of any (i) separate returns or filings made by CFI or CFI Affiliates, (ii) Tax Returns or filings made by or on behalf of the Consolidated Group or any member thereof for any period except to the extent such federal Tax Returns or filings reflect items of the Holdings Businesses, and (iii) Tax Returns or filings in Combined Jurisdictions, except to the extent such Tax Returns or filings reflect items of the Holdings Businesses. Section 5.04. Resolution of Certain Disputes. (a) Disagreements between CFI and Holdings with respect to amounts that either claims is owed by the other (or by an Affiliate of the other) under this Agreement or other matters under this Agreement that are not resolved by mutual agreement shall be resolved by arbitration pursuant to this Section 5.04. Until the time of a final resolution by the arbitrator selected pursuant to Section 5.04(b), the time period for any payments described in Section 3.08 (other than loans required by Section 4.02(c)) shall be tolled. Such tolling, however, shall not affect the accrual of interest. (b) Selection of the Arbitrator. Any arbitrator selected pursuant to this Section 5.04(b) shall have at least ten years of experience in the field of corporate taxation, shall be an attorney licensed to practice law in any state of the United States or a certified public accountant licensed to practice in any state of the United States and shall not be or have been routinely employed by, retained or affiliated with either party. The parties shall first attempt to agree on a mutually satisfactory arbitrator. If the parties are unable to agree on a mutually satisfactory arbitrator within 30 days after either party notifies the other in writing of a disagreement requiring arbitration pursuant to this Section 5.04 (15 days in the case of a disagreement with respect to Section 4.01 or Section 4.02), each party shall select an arbitrator. The two arbitrators thus selected shall agree on and select a third arbitrator. If the two arbitrators cannot agree on such third arbitrator within 30 days (15 days in the case of a disagreement with respect to Section 4.01 or Section 4.02), the parties shall each select a different arbitrator and renew the foregoing procedure. If the position of arbitrator is vacated by virtue of events outside the control of the parties, the person or persons who originally selected the arbitrator to fill such position shall select a new arbitrator to fill the position, unless the parties agree to continue the arbitration with the remaining arbitrators. When used hereafter, the term "arbitrator" may refer to the three arbitrators so selected when appropriate and a decision of a majority of such arbitrators shall constitute a decision by the arbitrator in the appropriate context. (c) Arbitration Procedures. (1) The arbitration shall be conducted in accordance with the rules set forth in Exhibit A. The arbitration shall not be conducted under the auspices of the American Arbitration Association. (2) Each party within 30 days after engagement of the arbitrator shall submit to the arbitrator a written statement of the party's position (including, where relevant, the total net amount it asserts is owed by it or is due to it) regarding the total amount in dispute, together with a copy of such calculation. (3) The arbitrator shall base his or her decision on the following standards. In the case of a factual dispute between the parties, the arbitrator shall make a determination of the facts. In the case of a dispute regarding a legal issue, including the proper application of the Tax laws or the proper interpretation of this Agreement, the arbitrator shall make a determination in accordance with his or her best legal judgment. Upon making determinations with respect to all factual and legal issues in dispute, the arbitrator shall determine the amount due by one party to the other or such other matter with respect to the matter subject to the arbitration. Where relevant, as to each matter in dispute, the arbitrator shall find in favor of the party whose statement submitted pursuant to paragraph (2) above proposed the amount closest to the amount so determined. (4) The arbitrator shall render a written decision stating only the result of such decision as soon as practicable. The arbitrator shall also orally explain the bases of such decision to both parties as soon as practicable. If and only if both parties request, the arbitrator shall state the basis of such decision in writing. As to each matter in dispute, the arbitrator's decision shall be in an amount equal to one of the total amounts asserted by one of the parties in the written statements submitted pursuant to paragraph (2) above. The arbitrator shall not, and is not authorized, to render a decision in any other amount. (5) The arbitrator's decision shall be final and binding on the parties. No appeal to any court is contemplated by this Agreement and each party, to the maximum extent permissible by law, waives and relinquishes all rights and entitlements to appeal such decision. Section 5.05. Notices. Any notice, demand, claim or other communication under this Agreement shall be in writing and shall be deemed given upon delivery if delivered personally or by courier, upon mailing if sent by certified mail, return receipt requested, postage prepaid, or upon completion of transmission if sent by telecopy or facsimile, to the parties at the following address: CFI at: 3240 Hillview Avenue Palo Alto, CA 94304 Attn: General Counsel Holdings at:175 Linfield Drive Menlo Park, CA 94025 Attn: General Counsel Section 5.06. Complete Agreement. This Agreement and the Exhibit thereto constitute the entire agreement of the parties concerning the subject matter hereof, supersede all other agreements, whether or not written, in respect of any Tax between or among CFI and CFI Affiliates, on the one hand, and Holdings and Holdings Affiliates, on the other hand. This Agreement may not be amended except by an agreement in writing, signed by the parties hereto. Section 5.07. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the principles of conflict of laws of the State of California. Section 5.08. Successors and Assigns. A party's rights and obligations under this Agreement may not be assigned without the prior written consent of the other party. All of the provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Section 5.09. No Third-Party Beneficiaries. This Agreement is solely for the benefit of the parties to this Agreement and their respective Affiliates and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, claim of action or other right in excess of those existing without the Agreement. Section 5.10. Legal Enforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of the prohibition or unenforceability without invalidating the remaining provisions. Any prohibition or unenforceability of any provision of this Agreement in any jurisdiction shall not invalidate or render unenforceable the provision in any other jurisdiction. Section 5.11. Expenses. Unless otherwise provided in this Agreement, each party shall bear any and all expenses that arise from their respective obligations under this Agreement (including Arbitration). In the event either party to this Agreement brings an action or proceeding for breach or enforcement of this Agreement, the prevailing party in such action or proceeding, whether or not such action or proceeding proceeds to final judgment, shall be entitled to recover as an element of its costs, and not as damages, such reasonable attorneys' fees as may be awarded in the action or proceeding in addition to whatever other relief to which the prevailing party may be entitled. Section 5.12. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signature thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. CONSOLIDATED FREIGHTWAYS, INC. By: /S/Donald E. Moffitt_____________ Its: President and CEO CONSOLIDATED FREIGHTWAYS CORPORATION By: /s/Stephen D. Richards__________ Its: S.V.P. and General Counsel EX-10 8 EXHIBIT 10.37 EXHIBIT 10.37 ------------- CNF TRANSPORTATION INC. EXECUTIVE INCENTIVE PLAN FOR 1997 THE PLAN In order to motivate certain employees of CNF Transportation Inc. (CNFT) more effectively and efficiently, The Company (CNFT) establishes an Incentive Plan (Plan) under which payments will be made to eligible executive personnel of CNFT out of calendar year 1997 Incentive Profits. DESIGNATION OF PARTICIPANTS Participants in this Plan shall be all full-time executive personnel of CNFT. A master list of all Plan participants will be maintained in the office of the President of CNFT. ELIGIBILITY FOR PAYMENT Participants will commence participation at the beginning of the first full calendar quarter following becoming eligible. Calendar quarters begin January 1, April 1, July 1, and October 1 or the first working day thereafter. An employee who commences participation in the 1997 Plan during the 1997 Plan year, and who participates less than four full quarters, will receive a pro rata payment based on the number of full calendar quarters of Plan participation. Subject to the following exceptions, no person shall receive any payment under this Plan unless on the date that the payment is actually made that person is then currently (i) employed by CNFT and (ii) a Plan participant. EXCEPTION 1. A Plan participant who is employed by CNFT through December 31, 1997 but leaves that employment or otherwise becomes ineligible after December 31, 1997 but before the final payment is made relating to 1997, unless terminated for cause, shall be entitled to receive payments under this Plan resulting from 1997 Incentive Profits. EXCEPTION 2. An appropriate pro rata payment will be made (1) to a Plan participant who retires prior to December 31, 1997 pursuant to the CNF Transportation Inc. Retirement Plan or to the provisions of the Social Security Act and who, at the time of retirement, was an eligible participant in this Plan, (2) to the heirs, legatees, administrators or executors of a Plan participant who dies prior to December 31, 1997 and who, at the time of death, was an eligible participant in this Plan, (3) to an eligible Plan participant who is placed on an approved Medical, Sabbatical, or Military Leave of Absence prior to December 31, 1997, or (4) to an eligible Plan participant who is transferred to another subsidiary of CNF Transportation Inc. (CNFT) and who remains an employee through December 31, 1997. METHOD OF PAYMENT Each Plan participant will be assigned an incentive participation factor as a percent of annual compensation. The Incentive Participation Factor will be allocated 100% to the assigned profit goal. Incentive compensation for the assigned goals will be earned on a pro rata basis for accomplishments between the Minimum level and the Incentive Factor Goals and will continue to be earned ratably for performance over the Incentive Factor Goal. No incentive will be earned by a participant until the Minimum Profit Goal is achieved. There is a maximum percent of accomplishment for any performance goal of 200%. PERSONAL DATA SHEET A "Personal Data Sheet" for calculation of incentive earnings will be prepared for each Plan participant which designates (1) the unit to which the participant is assigned, (2) his assigned incentive participation factor, (3) the minimum level of achievement required for each assigned goal, (4) the incentive factor level of achievement for each assigned goal, and (5) the incentive earnings at the incentive factor level for each assigned goal. DATE OF PAYMENT The President of CNFT may authorize a partial payment of the estimated annual earned incentive, in December, 1997. The final payment to eligible participants, less any previous partial payment, will be made on or before March 15, 1998. INCENTIVE PROFIT Incentive Profit is defined as earnings before deducting any amounts expensed under any CNFT and qualified CNFS incentive plans and before deducting income taxes. ANNUAL COMPENSATION Annual Compensation for incentive purposes for each Plan participant is his annualized salary before any incentive or other special compensation as of the first pay period following the date the participant becomes eligible to participate in this Plan. The term "special compensation" used herein does not include deferred salary arrangements wherein the participant could have chosen to receive the deferred salary in the Plan year. MAXIMUM PAYMENT Payments under this Plan are limited as noted on the "Personal Data Sheet". LAWS GOVERNING PAYMENTS No payment shall be made under this Plan in an amount which is prohibited by law. AMENDMENT, SUSPENSION, AND ADMINISTRATION OF PLAN The Board of Directors of CNFT may at any time amend, suspend, or terminate the operation of this Plan, by thirty-day written notice to the Plan participants, and will have full discretion as to the administration and interpretation of this Plan. No participant in this Plan shall at any time have any right to receive any payment under this Plan until such time, if any, as any payment is actually made. DURATION OF PLAN This Plan is for the calendar year 1997 only. EX-10 9 EXHIBIT 10.38 EXHIBIT 10.38 ------------- CNF SERVICE COMPANY EXECUTIVE INCENTIVE PLAN FOR 1997 THE PLAN In order to motivate certain employees of CNF Service Company (CNFS) more effectively and efficiently, The Company (CNFS) establishes an Incentive Plan (Plan) under which payments will be made to eligible executive personnel of CNFS out of calendar year 1997 Incentive Profits. DESIGNATION OF PARTICIPANTS Participants in this Plan shall be all full-time executive personnel of CNFS. A master list of all Plan participants will be maintained in the office of the President of CNFS. ELIGIBILITY FOR PAYMENT Participants will commence participation at the beginning of the first full calendar quarter following becoming eligible. Calendar quarters begin January 1, April 1, July 1, and October 1 or the first working day thereafter. An employee who commences participation in the 1997 Plan during the 1997 Plan year, and who participates less than four full quarters, will receive a pro rata payment based on the number of full calendar quarters of Plan participation. Subject to the following exceptions, no person shall receive any payment under this Plan unless on the date that the payment is actually made that person is then currently (i) employed by CNFS and (ii) a Plan participant. EXCEPTION 1. A Plan participant who is employed by CNFS through December 31, 1997 but leaves that employment or otherwise becomes ineligible after December 31, 1997 but before the final payment is made relating to 1997, unless terminated for cause, shall be entitled to receive payments under this Plan resulting from 1997 Incentive Profits. EXCEPTION 2. An appropriate pro rata payment will be made (1) to a Plan participant who retires prior to December 31, 1997 pursuant to the CNF Transportation Inc. Retirement Plan or to the provisions of the Social Security Act and who, at the time of retirement, was an eligible participant in this Plan, (2) to the heirs, legatees, administrators or executors of a Plan participant who dies prior to December 31, 1997 and who, at the time of death, was an eligible participant in this Plan, (3) to an eligible Plan participant who is placed on an approved Medical, Sabbatical, or Military Leave of Absence prior to December 31, 1997, or (4) to an eligible Plan participant who is transferred to another subsidiary of CNF Transportation Inc. (CNFT) and who remains an employee through December 31, 1997. METHOD OF PAYMENT Each Plan participant will be assigned an incentive participation factor as a percent of annual compensation. The Incentive Participation Factor will be allocated 100% to the assigned profit goal. Incentive compensation for the assigned goals will be earned on a pro rata basis for accomplishments between the Minimum level and the Incentive Factor Goals and will continue to be earned ratably for performance over the Incentive Factor Goal. No incentive will be earned by a participant until the Minimum Profit Goal is achieved. There is a maximum percent of accomplishment for any performance goal of 200%. PERSONAL DATA SHEET A "Personal Data Sheet" for calculation of incentive earnings will be prepared for each Plan participant which designates (1) the unit to which the participant is assigned, (2) his assigned incentive participation factor, (3) the minimum level of achievement required for each assigned goal, (4) the incentive factor level of achievement for each assigned goal, and (5) the incentive earnings at the incentive factor level for each assigned goal. DATE OF PAYMENT The President of CNFS may authorize a partial payment of the estimated annual earned incentive, in December, 1997. The final payment to eligible participants, less any previous partial payment, will be made on or before March 15, 1998. INCENTIVE PROFIT Incentive Profit is defined as earnings before deducting any amounts expensed under any CNFT and qualified CNFS incentive plans and before deducting income taxes. ANNUAL COMPENSATION Annual Compensation for incentive purposes for each Plan participant is his annualized salary before any incentive or other special compensation as of the first pay period following the date the participant becomes eligible to participate in this Plan. The term "special compensation" used herein does not include deferred salary arrangements wherein the participant could have chosen to receive the deferred salary in the Plan year. MAXIMUM PAYMENT Payments under this Plan are limited as noted on the "Personal Data Sheet". LAWS GOVERNING PAYMENTS No payment shall be made under this Plan in an amount which is prohibited by law. AMENDMENT, SUSPENSION, AND ADMINISTRATION OF PLAN The Board of Directors of CNFS may at any time amend, suspend, or terminate the operation of this Plan, by thirty-day written notice to the Plan participants, and will have full discretion as to the administration and interpretation of this Plan. No participant in this Plan shall at any time have any right to receive any payment under this Plan until such time, if any, as any payment is actually made. DURATION OF PLAN This Plan is for the calendar year 1997 only. EX-10 10 EXHIBIT 10.39 EXHIBIT 10.39 ------------- CON-WAY TRANSPORTATION SERVICES, INC. INCENTIVE PLAN FOR 1997 THE PLAN In order to motivate certain of its employees more effectively and efficiently, Con-Way Transportation Services, Inc. (CTS) establishes an Incentive Plan (Plan) under which payments will be made to eligible supervisory, managerial, and regular full-time nonsalaried personnel out of calendar year 1997 Incentive Profits. DESIGNATION OF PARTICIPANTS Participants in the Plan shall be all full-time supervisory, managerial, and regular nonsalaried personnel of CTS Administration. A master list of Plan participants will be maintained in the office of the President of CTS. ELIGIBILITY FOR PARTICIPATION Participants will commence participation at the beginning of the first full calendar quarter following becoming eligible. Calendar quarters begin January 1, April 1, July 1, and October 1 or the first working day thereafter. An employee who commences participation in the 1997 Plan during the 1997 Plan year, and who participates less than four full quarters, will receive a pro rata payment based on the number of full calendar quarters of Plan participation. Subject to the following exceptions, no person shall receive any payment under this Plan unless on the date that the payment is actually made that person is then currently (i) employed by CTS or any of its subsidiaries and (ii) a Plan participant. EXCEPTION 1. A Plan participant who is employed by CTS or any of its subsidiaries through December 31, 1997 but leaves that employment or otherwise becomes ineligible after December 31, 1997 but before the final payment is made relating to 1997, unless terminated for cause, shall be entitled to receive payments under this Plan resulting from 1997 Incentive Profits. EXCEPTION 2. An appropriate pro rata payment will be made (1) to a Plan participant who retires prior to December 31, 1997 pursuant to the CNF Transportation Inc. Retirement Plan or to the provisions of the Social Security Act and who, at the time of retirement, was an eligible participant in this Plan, (2) to the heirs, legatees, administrators or executors of a Plan participant who dies prior to December 31, 1997 and who, at the time of death, was an eligible participant in this Plan, (3) to an eligible Plan participant who is placed on an approved Medical, Sabbatical, or Military Leave of Absence prior to December 31, 1997, or (4) to an eligible Plan participant who is transferred to another subsidiary of CNF Transportation Inc. and who remains an employee through December 31, 1997. METHOD OF PAYMENT Each Plan participant will be assigned an incentive participation factor as a percent of Annual Compensation in accordance with the enclosed Personal Data Sheet. The incentive participation factor will be allocated 100% to the assigned profit goal. Incentive for assigned goals will be earned on a pro rata basis for accomplishment between the Minimum level and the Incentive Factor Goal. Incentive earnings over the Incentive Factor Goal will continue to earn at the same pro rata relationship that exists between minimum level and factor goal. No incentive will be earned by a participant until CTS has achieved its Minimum Profit Goal. The maximum percent of accomplishment for any goal is 200%. Actual incentive payout is subject to the CTS ICP pool, thus Incentive Earnings will be adjusted proportionately to the amount in the pool. PERSONAL DATA SHEET A "Personal Data Sheet" for calculation of incentive earnings will be prepared for each Plan participant which designates (1) the unit to which the participant is assigned, (2) his assigned incentive par- ticipation factor, (3) the minimum level of achievement required for each assigned goal, (4) the incentive factor level of achievement for each assigned goal, and (5) the incentive earnings at the incentive factor level for each assigned goal. DATE OF PAYMENT The President of CTS may authorize a partial payment of the estimated annual earned incentive, in December 1997. The final payment to eligible participants, less any previous partial payment, will be made on or before March 15, 1998. INCENTIVE PROFIT Incentive profit is defined as the consolidated earnings of all of the companies comprising CTS, before deducting any amounts expensed under this or any similar incentive or bonus plan and before deducting in- come taxes and excluding interest income and expense. ANNUAL COMPENSATION Annual Compensation for incentive purposes for each Plan participant is his annualized salary or hourly base pay before any incentive, overtime, or other special compensation as of the first pay period following the date the participant becomes eligible to participate in this Plan. MAXIMUM PAYMENT Payments under this Plan are limited as noted on the "Personal Data Sheet". LAWS GOVERNING PAYMENTS No payment shall be made under this Plan in an amount which is prohibited by law. AMENDMENT, SUSPENSION, AND ADMINISTRATION OF PLAN The Board of Directors of CTS may at any time amend, suspend, or terminate the operation of this Plan, by thirty-day written notice to the Plan participants, and will have full discretion as to the administration and interpretation of this Plan. No participant in this Plan shall at any time have any right to receive any payment under this Plan until such time, if any, as the payment is actually made. DURATION OF PLAN This Plan is for the calendar year 1997 only. EX-10 11 EXHIBIT 10.40 EXHIBIT 10.40 ------------- EMERY WORLDWIDE INCENTIVE PLAN FOR 1997 THE PLAN In order to motivate certain employees more effectively and efficiently, Emery Worldwide (EWW) establishes an Incentive Plan (Plan) under which payments will be made to designated participants out of calendar year 1997 Incentive Profits. DESIGNATION OF PARTICIPANTS Participants in the Plan shall be designated supervisory and managerial personnel of EWW. A master list of Plan participants will be maintained in the office of the President of EWW. ELIGIBILITY FOR PARTICIPATION Participants will commence participation at the beginning of the first full calendar quarter following becoming eligible. Calendar quarters begin January 1, April 1, July 1 and October 1 or the first working day thereafter. An employee who commences participation in the 1997 Plan during the 1997 Plan year, and who participates less than four full quarters, will receive a pro rata payment based on the number of full calendar quarters of Plan participation. Subject to the following exceptions, no person shall receive any payment under this Plan unless on the date that the payment is actually made that person is then currently (i) employed by EWW or any of its subsidiaries and (ii) a Plan participant. EXCEPTION 1. A Plan participant who is employed by EWW through December 31, 1997 but leaves that employment or otherwise becomes ineligible after December 31, 1997 but before the final payment is made relating to 1997, unless terminated for cause, is entitled to receive payments under this Plan resulting from 1997 Incentive Profits. EXCEPTION 2. An appropriate pro rata payment will be made (1) to a Plan participant who retires prior to December 31, 1997 pursuant to the CNF Transportation Inc. Retirement Plan or to the provisions of the Social Security Act and who, at the time of retirement, was an eligible participant in this Plan, (ii) to the heirs, legatees, administrators or executors of a Plan participant who dies prior to December 31, 1997 and who, at the time of death, was an eligible participant in this Plan, (iii) to an eligible Plan participant who is placed on approved Medical, Sabbatical, or Military Leave of Absence prior to December 31, 1997, or (iv) to an eligible Plan participant who is transferred to another subsidiary of CNF Transportation Inc. and who remains an employee through December 31, 1997. METHOD OF PAYMENT Each Plan participant will be assigned an incentive participation factor as a percent of annual compensation. The President of Emery will assign each Plan participant to an operating unit (service center, division, total company, etc.) to earn incentive. The participation factor may be further indexed to specific performance goals such as revenue, profit, service, etc. Incentive compensation will be paid from an ICP pool earned ratably between the Minimum and Incentive Factor Profit Goals and will continue to be earned ratably over the Incentive Factor Goal. Incentive Factor Plan Goals and minimum levels of accomplish- ment will be established for all performance goals. No incentive will be earned by a participant until the system Minimum Profit Goal is achieved. Actual incentive payout is subject to the ICP pool. Incentive Compensation will be adjusted proportionately to the amount in the ICP pool, thus actual system incentive payout for all goals can never surpass the percent of accomplishment for system profit. Company profit contributions will be paid first and other participation factors thereafter. There is a maximum percent of accomplishment for any performance goal of 200%. PERSONAL DATA SHEET A "Personal Data Sheet" for calculation of incentive earnings will be prepared for each Plan participant which designates (1) the unit to which the participant is assigned, (2) his assigned incentive par- ticipation factor and the allocation of that factor to specific Performance Goals, (3) the minimum level of achievement required for each assigned goal, (4) the incentive factor level of achievement for each assigned goal, and (5) the incentive earnings at the incentive factor level for each assigned goal. DATE OF PAYMENT The President of EWW may authorize a partial payment of the estimated annual earned incentive, in December 1997. The final payment to eligible participants, less any previous partial payment, will be made on or before March 15, 1998. INCENTIVE PROFIT Incentive Profit is defined as the earnings of Emery Worldwide, Emery Custom Brokers, Emery Ocean Services, Emery Global Logistics, Emery Expedite and Emery Worldwide Airlines before deducting any amounts expensed under this or any similar incentive or bonus plan and before deducting income taxes and excluding interest income and expense. ANNUAL COMPENSATION Annual Compensation for incentive purposes for each Plan participant is his annual earnings for 1997 before any incentive or bonus payments earned during the period of Plan participation eligibility. MAXIMUM PAYMENT Payments under this plan are limited as noted on the "Personal Data Sheet". LAWS GOVERNING PAYMENTS No payment shall be made under this Plan in an amount which is prohibited by law. AMENDMENT, SUSPENSION, AND ADMINISTRATION OF PLAN The Board of Directors of EWW may at any time amend, suspend, or terminate the operation of this Plan, by thirty-day written notice to the Plan participants, and will have full discretion as to the administration and interpretation of this Plan. No participant in this Plan shall at any time have any right to receive any payment under this Plan until such time, if any, as any payment is actually made. DURATION OF PLAN This Plan is for the calendar year 1997 only. EX-10 12 EXHIBIT 10.41 EXHIBIT 10.41 ------------- CNF TRANSPORTATION INC. SPECIAL BONUS PLAN FOR 1997 THE PLAN In order to motivate certain key employees more effectively, CNF Transportation Inc. (CNFT) establishes a Special Bonus Plan for 1997 (Plan) under which payments will be made to designated executive personnel out of calendar year 1997 profits. DESIGNATION OF PARTICIPANTS Participants in this Plan shall be designated full-time executive personnel of CNFT subsidiaries. A master list of all Plan participants will be maintained in the office of the Chief Financial Officer of CNFT. METHOD OF PAYMENT Each Plan participant will be assigned specific Operating Profit Ratio (O/R) performance goals. Compensation for the assigned goals will be earned on a pro rata basis for accomplishments between the Minimum level and the Target O/R Goal. No special 1997 bonus will be earned by a participant until the Minimum O/R Goal is achieved. Payments under this Plan are limited to 100 percent of each participant's annual compensation. OPERATING RATIO Operating Ratio is defined as: 1) operating expense before taxes, interest and non-operating expenses, but, including all amounts expensed under any qualified (Company) incentive and bonus plans; divided by 2) net revenue. Full year results will be used. ANNUAL COMPENSATION Annual Compensation for Bonus Plan purposes for each Plan participant is annualized salary (ie. weekly base salary as of January 1, 1997 multiplied by 52) excluding any incentive or other special compensation as of the first pay period following the date the participant becomes eligible to participate in this Plan. The term "special compensation" used herein includes deferred salary arrangements wherein the participant could have chosen to receive the deferred salary in the Plan year. PERSONAL DATA SHEET A "Personal Data Sheet" for calculation of Bonus Plan earnings will be prepared for each Plan participant which designates (1) the unit to which the participant is assigned, (2) the minimum level of achievement required for the assigned O/R goal, (3) the target level of achievement for the assigned O/R goal, and (4) the earnings at the target level for the assigned O/R goal. ELIGIBILITY FOR PAYMENT Eligible employees will commence participation on January 1, 1997. An employee who commences participation after the January 1 date will receive a pro rata payment based on the number of full calendar quarters of Plan participation. Subject to the following exceptions, no person shall receive any payment under this Plan unless on the date that the payment is actually made that person is then currently (i) employed by CNF Transportation Inc. or any of its subsidiaries and (ii) a Plan participant. EXCEPTION 1. A Plan participant who is employed by CNFT or any of its subsidiaries through December 31, 1997 but leaves that employment or otherwise becomes ineligible after December 31, 1997 but before the final payment is made relating to 1997, unless terminated for cause, shall be entitled to receive payments under this Plan resulting from 1997 Incentive Profits. EXCEPTION 2. An appropriate pro rata payment will be made (1) to a Plan participant who retires prior to December 31, 1997 pursuant to the CNF Transportation Inc. Retirement Plan or to the provisions of the Social Security Act and who, at the time of retirement, was an eligible participant in this Plan, (2) to the heirs, legatees, administrators or executors of a Plan participant who dies prior to December 31, 1997 and who, at the time of death, was an eligible participant in this Plan, (3) to an eligible Plan participant who is placed on an approved Medical, Sabbatical, or Military Leave of Absence prior to December 31, 1997, or (4) to an eligible Plan participant who is transferred to another subsidiary of CNFT and who remains an employee through December 31, 1997. DATE OF PAYMENT The Chief Executive Officer of CNFT will select a date for payment to eligible participants. Such date will be no later than March 15, 1998. LAWS GOVERNING PAYMENTS No payment shall be made under this Plan in an amount which is prohibited by law. AMENDMENT, SUSPENSION, AND ADMINISTRATION OF PLAN The Board of Directors of CNFT may at any time amend, suspend, or terminate the operation of this Plan, by thirty-day written notice to the Plan participants, and will have full discretion as to the administration and interpretation of this Plan. No participant in this Plan shall at any time have any right to receive any payment under this Plan until the date for payment. DURATION OF PLAN This Plan is effective from January 1, 1997 through December 31, 1997 only. EX-12 13 EXHIBIT 12 Exhibit 12 ---------- CONSOLIDATED FREIGHTWAYS, INC. dba CNF TRANSPORTATION INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Year Ended December 31, 1996 1995 1994 1993 1992 (dollars in thousands) Fixed Charges: Interest Expense $ 39,766 $ 33,407 $ 27,065 $ 29,890 $ 33,023 Capitalized Interest 2,092 731 793 531 4 Preferred Dividends 12,645 12,419 12,475 12,551 12,618 Total Interest 54,503 46,557 40,333 42,972 45,645 Interest Component of Rental Expense 48,704 43,202 41,416 34,464 32,219 Fixed Charges 103,207 89,759 81,749 77,436 77,864 Less: Capitalized Interest 2,092 731 793 531 4 Preferred Dividends 12,645 12,419 12,475 12,551 12,618 Net Fixed Charges $ 88,470 $ 76,609 $ 68,481 $ 64,354 $ 65,242 Earnings: Income from continuing operations before Taxes $ 147,132 $ 152,942 $ 165,129 $ 66,202 $ (26,783) Add: Net Fixed Charges 88,470 76,609 68,481 64,354 65,242 Total Earnings $ 235,602 $ 229,551 $ 233,610 $ 130,556 $ 38,459 Ratio of Earnings to Fixed Charges: Total Earnings $ 235,602 $ 229,551 $ 233,610 $ 130,556 $ 38,459 Fixed Charges (1) 103,207 89,759 81,749 77,436 77,864 Ratio 2.3 x 2.6 x 2.9 x 1.7 x 0.5 x(2) (1) Fixed Charges represent interest on capital leases and short-term and long-term debt, capitalized interest, dividends on shares of the Series B Cumulative Convertible Preferred Stock used to pay debt service on notes issued by the Company's Thrift and Stock Plan (the "TASP"), and the applicable portion of the consolidated rent expense which approximates the interest portion of lease payments. (2) Earnings were inadequate to cover fixed charges for the period shown; the deficiency was $39.4 million for the year ended December 31, 1992.
EX-13 14 EXHIBIT 13 EXHIBIT 13 ---------- 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 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 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 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 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 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 * 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 * 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 (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.
EX-21 15 EXHIBIT 21 Page 1 EXHIBIT 21 CONSOLIDATED FREIGHTWAYS, INC. DBA CNF TRANSPORTATION INC. SIGNIFICANT SUBSIDIARIES OF THE COMPANY December 31, 1996 The Company and its significant subsidiaries were: State or Percent of Province or Stock Owned Country of Parent and Significant Subsidiaries by Company Incorporation Consolidated Freightways, Inc. (dba CNF Transportation Inc.) Delaware Significant Subsidiaries of Consolidated Freightways, Inc. Con-Way Transportation Services, Inc. 100 Delaware Con-Way Truckload Services, Inc. 100 Delaware Emery Air Freight Corporation 100 Delaware Emery Worldwide Airlines, Inc. 100 Nevada Menlo Logistics, Inc. 100 California Road Systems, Inc. 100 California EX-27 16 EXHIBIT 27
5 1000 YEAR DEC-31-1996 DEC-31-1996 82094 0 561093 (18712) 32916 815895 1259368 (506719) 2081866 815086 477201 0 133117 275126 100036 2081866 0 3662183 0 3470035 45016 0 39766 147132 66951 80181 (52633) 0 0 18956 1.59 1.47
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