-----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, TxrorTTpxa1vJPj8AwnJ8weiRnSrtLxhZD9i9ju1P6JO1xhZ++yi3pYSsriyt/t6 DtQREIoO7tfKgSpmKL/Phw== 0000023675-05-000034.txt : 20050510 0000023675-05-000034.hdr.sgml : 20050510 20050509194436 ACCESSION NUMBER: 0000023675-05-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05046 FILM NUMBER: 05813579 BUSINESS ADDRESS: STREET 1: 3240 HILLVIEW AVE CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 6504942900 MAIL ADDRESS: STREET 1: 1717 NW 21ST AVE CITY: PORTLAND STATE: OR ZIP: 97209 FORMER COMPANY: FORMER CONFORMED NAME: CNF TRANSPORTATION INC DATE OF NAME CHANGE: 19970509 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED FREIGHTWAYS INC DATE OF NAME CHANGE: 19920703 10-Q 1 f10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A COMMISSION FILE NUMBER 1-5046 CNF Inc. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 3240 Hillview Avenue, Palo Alto, California 94304 Telephone Number (650) 494-2900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ----- ----- Number of shares of Common Stock, $.625 par value, outstanding as of April 30, 2005: 52,633,451 CNF INC. FORM 10-Q Quarter Ended March 31, 2005 ______________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2005 and December 31, 2004 3 Statements of Consolidated Income - Three Months Ended March 31, 2005 and 2004 5 Statements of Consolidated Cash Flows - Three Months Ended March 31, 2005 and 2004 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 31 Item 4. Controls and Procedures 32 PART II. OTHER INFORMATION Item 1. Legal Proceedings 33 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34 Item 4. Submission of Matters to a Vote of Security Holders 35 Item 6. Exhibits 36 Signatures 37 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) March 31, December 31, ASSETS 2005 2004 ------------ ------------ Current Assets Cash and cash equivalents $ 675,057 $ 386,897 Marketable securities 155,975 446,300 Trade accounts receivable, net 461,531 425,783 Other accounts receivable (Note 2) 73,735 134,577 Operating supplies, at lower of average cost 18,407 16,665 or market Prepaid expenses 50,308 48,092 Deferred income taxes 51,655 51,453 Assets of discontinued operations (Note 2) 5,128 5,128 ------------ ------------ Total Current Assets 1,491,796 1,514,895 ------------ ------------ Property, Plant and Equipment, at cost Land 142,857 142,857 Buildings and leasehold improvements 624,585 618,698 Revenue equipment 691,525 677,499 Other equipment 211,994 210,102 ------------ ------------ 1,670,961 1,649,156 Accumulated depreciation and amortization (811,243) (789,835) ------------ ------------ 859,718 859,321 ------------ ------------ Other Assets Deferred charges and other assets (Note 4) 40,107 56,618 Capitalized software, net 49,135 50,347 Assets of discontinued operations (Note 2) 14,777 15,220 ------------ ------------ 104,019 122,185 ------------ ------------ Total Assets $2,455,533 $2,496,401 ============ ============ The accompanying notes are an integral part of these statements. CNF INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts) March 31, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004 ------------ ------------ Current Liabilities Accounts payable $ 246,021 $ 252,867 Accrued liabilities 201,118 226,437 Self-insurance accruals 81,228 86,095 Current maturities of long-term debt 115,030 112,727 Liabilities of discontinued operations (Note 2) 23,446 34,705 ------------ ------------ Total Current Liabilities 666,843 712,831 Long-Term Liabilities Long-term debt and guarantees 585,148 601,344 Self-insurance accruals 104,572 102,512 Employee benefits (Note 5) 256,492 245,989 Other liabilities and deferred credits 16,410 20,296 Deferred income taxes 26,041 29,200 Liabilities of discontinued operations (Note 2) 2,666 6,862 ------------ ------------ Total Liabilities 1,658,172 1,719,034 ------------ ------------ Commitments and Contingencies (Note 8) Shareholders' Equity Preferred stock, no par value; authorized 5,000,000 shares: Series B, 8.5% cumulative, convertible, $.01 stated value; designated 1,100,000 shares; issued 674,450 and 742,995 shares, respectively 7 7 Additional paid-in capital, preferred stock 102,577 113,002 Deferred compensation, Thrift and Stock Plan (46,930) (49,117) ------------ ------------ Total Preferred Shareholders' Equity 55,654 63,892 Common stock, $.625 par value; authorized 100,000,000 shares; issued 59,484,400 and 58,544,254 shares, respectively 37,196 36,590 Additional paid-in capital, common stock 457,018 429,134 Retained earnings 450,110 426,300 Deferred compensation, restricted stock (5,158) (5,744) Cost of repurchased common stock (Note 7) (6,753,497 and 6,364,868 shares, respectively) (182,111) (157,069) ------------ ------------ 757,055 729,211 Accumulated Other Comprehensive Loss (Note 6) (15,348) (15,736) ------------ ------------ Total Common Shareholders' Equity 741,707 713,475 ------------ ------------ Total Shareholders' Equity 797,361 777,367 ------------ ------------ Total Liabilities and Shareholders' Equity $2,455,533 $2,496,401 ============ ============ The accompanying notes are an integral part of these statements. CNF INC. STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (Dollars in thousands except per share amounts) Three Months Ended March 31, --------------------------- 2005 2004 ------------ ------------ REVENUES $ 947,683 $ 846,920 Costs and Expenses Operating expenses (Note 4) 768,733 691,817 Selling, general and administrative expenses 79,226 74,445 Depreciation 26,468 25,210 ------------ ------------ 874,427 791,472 ------------ ------------ OPERATING INCOME 73,256 55,448 ------------ ------------ Other Income (Expense) Investment income 4,627 727 Interest expense (10,466) (7,336) Miscellaneous, net (1,604) (568) ------------ ------------ (7,443) (7,177) Income from Continuing Operations Before Taxes 65,813 48,271 Income Tax Provision 24,962 18,826 ------------ ------------ INCOME FROM CONTINUING OPERATIONS 40,851 29,445 ------------ ------------ Discontinued Operations, net of tax (Note 2) Loss from Disposal (9,776) - Loss from Discontinued Operations - (3,016) ------------ ------------ (9,776) (3,016) Net Income 31,075 26,429 Preferred Stock Dividends 1,989 2,022 ------------ ------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 29,086 $ 24,407 ============ ============ Weighted-Average Common Shares Outstanding (Note 1) Basic 52,348,984 49,835,663 Diluted 56,610,719 57,125,185 Earnings (Loss) per Common Share (Note 1) Basic Net Income from Continuing Operations $ 0.74 $ 0.55 Loss from Disposal, net of tax (0.18) - Loss from Discontinued Operations, net of tax - (0.06) ------------ ------------ Net Income Available to Common Shareholders $ 0.56 $ 0.49 ============ ============ Diluted Net Income from Continuing Operations $ 0.69 $ 0.50 Loss from Disposal, net of tax (0.17) - Loss from Discontinued Operations, net of tax - (0.05) ------------ ------------ Net Income Available to Common Shareholders $ 0.52 $ 0.45 ============ ============ The accompanying notes are an integral part of these statements. CNF INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Dollars in thousands) Three Months Ended March 31, -------------------------- 2005 2004 ------------ ------------ Cash and Cash Equivalents, Beginning of Period $ 386,897 $ 38,183 ------------ ------------ Operating Activities Net income 31,075 26,429 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operations, net of tax 9,776 3,016 Depreciation and amortization, net of accretion 29,271 28,437 Decrease in deferred income taxes (3,361) (324) Amortization of deferred compensation 2,865 3,187 Provision for uncollectible accounts 908 1,662 Equity in earnings of joint venture (4,035) (2,392) Loss (Gain) on sales of property and equipment, net (37) 517 Changes in assets and liabilities: Receivables (4,459) (17,745) Prepaid expenses (2,216) (11,992) Accounts payable (4,386) 16,352 Accrued incentive compensation (38,868) (6,911) Accrued liabilities, excluding accrued incentive compensation 11,777 20,331 Self-insurance accruals (2,807) (14,485) Income taxes 21,340 16,311 Employee benefits 10,503 14,378 Deferred charges and credits 17,082 4,209 Other (8,026) (876) ------------ ------------ Net Cash Provided by Operating Activities 66,402 80,104 ------------ ------------ Investing Activities Capital expenditures (26,991) (11,806) Software expenditures (2,471) (4,431) Proceeds from sales of property and equipment, net 497 2,037 Net decrease in marketable securities 290,325 37,115 ------------ ------------ Net Cash Provided by Investing Activities 261,360 22,915 ------------ ------------ Financing Activities Repayment of long-term debt and guarantees (12,708) (14,053) Proceeds from exercise of stock options 26,064 433 Payments of common dividends (5,276) (5,001) Payments of preferred dividends (4,861) (5,004) Repurchases of common stock (32,264) - ------------ ------------ Net Cash Used in Financing Activities (29,045) (23,625) ------------ ------------ Net Cash Provided by Continuing Operations 298,717 79,394 ------------ ------------ Net Cash Provided by (Used in) Discontinued Operations (10,557) 21,163 ------------ ------------ Increase in Cash and Cash Equivalents 288,160 100,557 ------------ ------------ Cash and Cash Equivalents, End of Period $ 675,057 $ 138,740 ============ ============ Supplemental Disclosure Cash Paid (Refunded) for income taxes, net $ 6,188 $ 7,081 ============ ============ Cash Paid for interest, net of amounts capitalized $ 2,098 $ 2,296 ============ ============ The accompanying notes are an integral part of these statements. CNF INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Principal Accounting Policies Basis of Presentation Pursuant to the rules and regulations of the Securities and Exchange Commission, the accompanying consolidated financial statements of CNF Inc. and its wholly owned subsidiaries ("CNF") have been prepared by CNF, without audit by an independent registered public accounting firm. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements included in CNF's 2004 Annual Report on Form 10-K. Results for the periods presented are not necessarily indicative of annual results. In December of 2004, CNF completed the sale of Menlo Worldwide Forwarding, Inc. and its subsidiaries and Menlo Worldwide Expedite!, Inc. (hereinafter collectively referred to as "MWF") to United Parcel Service, Inc. and United Parcel Service of America, inc. (collectively, "UPS"). As a result, for the periods presented, the results of operations, net assets, and cash flows of the Menlo Worldwide Forwarding ("Forwarding") segment have been segregated and reported as discontinued operations, as more fully discussed in Note 2, "Discontinued Operations." In addition to MWF, the Forwarding segment also includes Emery Worldwide Airlines, Inc. ("EWA"), a separate wholly owned subsidiary of CNF, which was not sold to UPS. Earnings per Share ("EPS") Basic EPS is computed by dividing reported earnings (loss) by the weighted- average common shares outstanding. Diluted EPS is calculated as follows: Three Months Ended (Dollars in thousands except per share data) March 31, -------------------------- 2005 2004 ------------ ------------ Numerator: Continuing operations (after preferred stock dividends), as reported $ 38,862 $ 27,423 Add-backs: Dividends on Series B preferred stock, net of replacement funding 264 308 Interest expense on convertible subordinated debentures, net of trust dividend income -- 954 ------------ ------------ Continuing operations 39,126 28,685 ------------ ------------ Discontinued operations (9,776) (3,016) ------------ ------------ Available to common shareholders $ 29,350 $ 25,669 ============ ============ Denominator: Weighted-average common shares outstanding 52,348,984 49,835,663 Stock options and restricted stock 1,086,424 601,625 Series B preferred stock 3,175,311 3,562,897 Convertible subordinated debentures -- 3,125,000 ------------ ------------ 56,610,719 57,125,185 ============ ============ Earnings (Loss) per Diluted Share: Continuing operations $ 0.69 $ 0.50 Discontinued operations (0.17) (0.05) ------------ ------------ Available to common shareholders $ 0.52 $ 0.45 ============ ============ Diluted shares for the periods presented reflect the effect of CNF's redemption in June 2004 of its convertible subordinated debentures. Stock-Based Compensation Officers and non-employee directors have been granted options under CNF's stock option plans to purchase common stock of CNF at prices equal to the market value of the stock on the date of grant. CNF accounts for stock-based compensation utilizing the intrinsic-value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no compensation expense is recognized for fixed-option plans because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the dates of grant. The following table sets forth the effect on net income and earnings per share if CNF had applied the fair-value based method and recognition provisions of SFAS 123, " Accounting for Stock-Based Compensation," to stock- based compensation: Three Months Ended (Dollars in thousands, except per share data) March 31, -------------------------- 2005 2004 ------------ ------------ Net income available to common shareholders, as reported $ 29,086 $ 24,407 Stock-based compensation cost included in reported income, net of tax 413 648 Additional compensation cost, net of tax, that would have been included in net income if the fair-value method had been applied (1,550) (2,442) ------------ ------------ Adjusted net income as if the fair-value method had been applied $ 27,949 $ 22,613 ============ ============ Earnings per share: Basic: As reported $ 0.56 $ 0.49 ============ ============ Adjusted $ 0.53 $ 0.45 ============ ============ Diluted: As reported $ 0.52 $ 0.45 ============ ============ Adjusted $ 0.50 $ 0.42 ============ ============ The effect of applying SFAS 123 may not be indicative of the future effect. Foreign Currency Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local currency are included in results of operations. In the first quarter of 2004, CNF concluded that it would no longer assume indefinite reinvestment of past and future earnings of MWF's foreign subsidiaries and accordingly, recorded a deferred tax asset of $9.4 million to recognize the associated tax effect of MWF's accumulated foreign currency translation adjustment. The deferred tax asset was recorded in Assets of Discontinued Operations in the Consolidated Balance Sheets, as it relates to the discontinued Forwarding segment. In the third quarter of 2004, the accumulated foreign currency translation adjustment associated with the Forwarding segment was included in CNF's third-quarter impairment charge, as more fully discussed in Note 2, "Discontinued Operations." CNF did not change its assumptions regarding the repatriation of the foreign earnings of its other subsidiaries. New Accounting Standards In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"), a revision of SFAS 123 that supersedes APB 25 and its related implementation guidance. SFAS 123R eliminates the alternative to use APB 25's intrinsic-value method of accounting that was provided in SFAS 123 as originally issued, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions) over the period during which an employee is required to provide service in exchange for the award. SFAS 123R also amends FASB Statement No. 95, "Statement of Cash Flows," to require that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as financing cash flows, rather than as a reduction of taxes paid. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on factors that cannot be predicted, including when employees exercise stock options. The effective date of SFAS 123R is as of the beginning of the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005, which for CNF is the first quarter of 2006. CNF is currently assessing the impact that SFAS 123R will have on its financial statements. Reclassification Certain amounts in the prior-period financial statements have been reclassified to conform to the current-period presentation. 2. Discontinued Operations Discontinued operations in the periods presented relate to the sale of MWF and to EWA. For the periods presented, the results of operations, net assets, and cash flows of discontinued operations have been segregated from continuing operations, except where otherwise noted. As required by EITF 87-24, "Allocation of Interest to Discontinued Operations," for periods prior to the disposition of MWF, continuing operations has been allocated general corporate overhead charges that were previously allocated to the discontinued Forwarding segment. These corporate overhead charges of $3.7 million in the first quarter of 2004 were allocated from discontinued operations to Con-Way and Logistics based on segment revenue and capital employed. Results of discontinued operations are summarized below: Three Months Ended March 31, -------------------------- (Dollars in thousands) 2005 2004 ------------ ------------ Revenues $ $ 504,064 Loss from Discontinued Operations Loss before income tax benefit -- (4,945) Income tax benefit -- 1,929 ------------ ------------ $ -- $ (3,016) ============ ============ Loss from Disposal, net of tax $ (9,776) $ -- ============ ============ The assets and liabilities of discontinued operations, which are presented in the Consolidated Balance Sheets under the captions "Assets (or Liabilities) of Discontinued Operations," consisted of the following: March 31, December 31, (Dollars in thousands) 2005 2004 ------------ ------------ Assets Current assets $ 5,128 $ 5,128 Employee benefits and long-lived assets 14,777 15,220 ------------ ------------ Total Assets 19,905 20,348 ------------ ------------ Liabilities Accounts payable and accrued liabilities 22,366 33,243 Other 1,080 1,462 ------------ ------------ Current Liabilities 23,446 34,705 Long-term liabilities 2,666 6,862 ------------ ------------ Total Liabilities 26,112 41,567 ------------ ------------ Net Liabilities $ 6,207 $ 21,219 ============ ============ Menlo Worldwide Forwarding Impairment Charge On October 5, 2004, CNF and Menlo Worldwide, LLC ("MW") entered into a stock purchase agreement with UPS to sell all of the issued and outstanding capital stock of MWF. CNF completed the sale on December 19, 2004, as more fully discussed below. Although the stock purchase agreement was entered into on October 5, 2004, decisions by CNF's management and its Board of Directors and the third-quarter sale negotiations with UPS established CNF's commitment to sell MWF as of September 30, 2004. In the process of evaluating several strategic alternatives for MW's Forwarding segment, CNF was approached by UPS in the third quarter of 2004 with interest in acquiring MWF. Accordingly, in the third quarter of 2004, CNF classified MWF as held for sale and recognized a $260.5 million impairment charge to write down the recorded book value of MWF to its anticipated selling price, less costs to sell. The impairment charge was based on the agreement to sell MWF, as described below, and primarily represents the estimated write-down to the fair value of MWF's goodwill and long-lived assets, including MWF's accumulated foreign currency translation adjustment, as well as estimated selling costs. Stock Purchase Agreement The stock purchase agreement excludes certain assets and liabilities of MWF and includes certain assets and liabilities of CNF or its subsidiaries related to the business conducted by MWF. Among the assets and liabilities so excluded are those related to EWA, and the obligation related to MWF employees covered under CNF's domestic pension, postretirement medical and long-term disability plans. Under the agreement, UPS agreed to pay to CNF an amount equal to MWF's cash position as of December 31, 2004, and to pay the estimated present value of CNF's retained obligations related to MWF employees covered under CNF's long-term disability and postretirement medical plans, as agreed to by the parties or, in the absence of such agreement, as determined by an independent actuary. In addition, UPS assumed indebtedness associated with the MWF business, including approximately $110 million of debt owed by MWF in connection with the City of Dayton, Ohio, Special Facilities Revenue Refunding Bonds, certain capital leases and other debt, other letters of credit, and overdraft facilities. Under the stock purchase agreement, CNF has agreed to a three-year non-compete covenant that, subject to certain exceptions, will limit CNF's annual air freight and ocean forwarding and/or customs brokerage revenues to $175 million. CNF has also agreed to indemnify UPS against certain losses that UPS may incur after the closing of the sale with certain limitations. Any losses related to these indemnification obligations or any other costs, including any future cash expenditures, related to the sale that have not been estimated and recognized at this time will be recognized in future periods as an additional loss from disposal when and if incurred. Loss on Sale of MWF Upon completion of the sale of MWF on December 19, 2004, CNF received cash consideration of $150 million, subject to certain post-closing adjustments, including adjustments for cash held by MWF at closing and MWF's net working capital as of closing. In connection with the sale, CNF in 2004 recognized a fourth-quarter loss from disposal of $15.8 million (net of a $3.6 million tax benefit), as the adjusted carrying value of MWF exceeded the cash consideration, including amounts received at closing and expected to be received in the future. Following settlement of the MWF cash balance in March 2005, CNF received cash of $29.4 million and recognized an additional first-quarter loss from disposal of $9.8 million, primarily to recognize the difference between the actual cash received and CNF's estimate of the cash position at December 31, 2004, and to accrue additional estimated transaction costs. CNF recognized a tax benefit on its losses from the disposal of MWF, which are treated as capital losses for tax purposes. Under current tax law, capital losses can only be used to offset capital gains. CNF does not currently forecast any significant capital gains in the tax carry-forward period. Based in part on the amount of capital gains actually recognized for tax purposes, only $3.6 million of the total disposal-related tax benefit of $48.2 was realizable in 2004, and as a result, the remaining $44.6 million of the recognized tax benefit was fully offset by an equal valuation allowance. Excluded Assets and Liabilities As described above, the stock purchase agreement excludes, and CNF has retained, the obligations related to MWF employees covered under certain CNF- sponsored employee benefit plans, including domestic pension, postretirement and long-term disability plans that cover the noncontractual employees and former employees of both continuing and discontinued operations. These plans also include certain pension plans that cover only the current and former employees of the discontinued Forwarding segment (the "Forwarding Plans"). For financial reporting purposes, the prepaid benefit cost of the Forwarding Plans is reported in Assets of Discontinued Operations while the accrued benefit cost related to MWF employees covered under the other legally separate CNF-sponsored plans are reported in Employee Benefits of continuing operations. Under the stock purchase agreement, UPS agreed to pay to CNF the estimated present value of CNF's retained obligations related to MWF employees covered under CNF's long-term disability and postretirement medical plans, as agreed to by the parties or, in the absence of such agreement, as determined by an independent actuary. Accordingly, CNF in December 2004 recorded in Other Accounts Receivable a receivable for its estimate of the present value of these employee benefit obligations. As of March 31, 2005, UPS and CNF had not reached agreement as to the amount to be paid by UPS for the employee benefit obligations retained by CNF, and it is possible that the amount ultimately paid will be based upon an estimate prepared by an independent actuary. As more fully discussed below under "Estimates and Critical Accounting Policies," CNF's estimate of the present value of these employee benefit obligations is an actuarial determination that depends upon a number of assumptions and factors. If CNF's estimate is different than the amount actually payable by UPS, that difference would be recognized as a gain or loss from disposal when and if incurred. The stock purchase agreement also excludes the assets and liabilities of EWA, including restructuring reserves related to its 2001 restructuring plan. EWA's restructuring reserves decreased to $27.4 million at March 31, 2005 from $33.8 million at December 31, 2004, primarily due to settlement of obligations. Restructuring reserves at March 31, 2005 were primarily reported in Liabilities of Discontinued Operations and consisted primarily of CNF's estimated exposure related to the labor matters described below, as well as other estimated remaining restructuring-related obligations. In connection with the cessation of its air carrier operations in 2001, EWA terminated the employment of all of its pilots and crew members. Those pilots and crew members are represented by the Air Line Pilots Association ("ALPA") union under a collective bargaining agreement. Subsequently, ALPA filed a grievance on behalf of the pilots and crew members protesting the cessation of EWA's air carrier operations and MWF's use of other air carriers. The ALPA matters are the subject of litigation in U.S. District Court and, depending on the outcome of that litigation, may be subject to binding arbitration. Based on CNF's current evaluation, management believes that it has provided for its estimated exposure related to the ALPA matters. However, there can be no assurance in this regard as CNF cannot predict with certainty the ultimate outcome of these matters. 3. Reporting Segments CNF discloses segment information in the manner in which the components are organized for making operating decisions, assessing performance and allocating resources. For financial reporting purposes, CNF is divided into three reporting segments: Con-Way Transportation Services ("Con-Way"), MW, and CNF Other. MW consists of the operating results of Menlo Worldwide Logistics ("Logistics") and Vector SCM, LLC ("Vector"), a joint venture with General Motors ("GM") that is accounted for as an equity-method investment. Certain corporate activities and the results of Road Systems, a trailer manufacturer, are reported in the CNF Other reporting segment. In December of 2004, CNF sold MWF. As a result, for the periods presented, the results of operations, net assets, and cash flows of the Forwarding segment have been segregated as discontinued operations and excluded from the reporting segment financial data summarized below. Prior to the reclassification, the combined operating results of MWF and a portion of the operations of EWA were reported in continuing operations as the Forwarding segment. As more fully discussed in Note 2, "Discontinued Operations", for periods prior to the disposition of MWF, continuing operations has been allocated certain corporate overhead charges that were previously allocated to the discontinued Forwarding segment. The additional corporate overhead charges allocated to Con-Way and Logistics in the first quarter of 2004 were $3.2 million and $0.5 million, respectively. Financial Data Management evaluates segment performance primarily based on revenue and operating income (loss); therefore, other non-operating items, consisting primarily of interest income or expense, are not reported in segment results. Corporate expenses are generally allocated based on measurable services provided to each segment or, for general corporate expenses, based on segment revenue and capital employed. Inter-segment revenue and related operating income have been eliminated to reconcile to consolidated revenue and operating income. Three Months Ended (Dollars in thousands) March 31, -------------------------- 2005 2004 ------------ ------------ External Revenues Con-Way Transportation Services $ 659,373 $ 593,876 Menlo Worldwide - Logistics 282,901 252,790 ------------ ------------ 942,274 846,666 CNF Other 5,409 254 ------------ ------------ $ 947,683 $ 846,920 ============ ============ Intersegment Revenue Con-Way Transportation Services $ 1,619 $ 1,262 Menlo Worldwide - Logistics -- -- ------------ ------------ 1,619 1,262 CNF Other 9,601 6,100 ------------ ------------ $ 11,220 $ 7,362 ============ ============ Total Revenues before Intersegment Eliminations Con-Way Transportation Services $ 660,992 $ 595,138 Menlo Worldwide - Logistics 282,901 252,790 ------------ ------------ 943,893 847,928 CNF Other 15,010 6,354 Intersegment Revenue (11,220) (7,362) Eliminations ------------ ------------ $ 947,683 $ 846,920 ============ ============ Operating Income (Loss) Con-Way Transportation Services $ 62,933 $ 47,866 Menlo Worldwide Logistics 5,653 6,042 Vector 4,035 2,392 ------------ ------------ 9,688 8,434 CNF Other 635 (852) ------------ ------------ $ 73,256 $ 55,448 ============ ============ 4. Investment in Unconsolidated Joint Venture Vector is a joint venture formed with GM in December 2000 for the purpose of providing logistics management services on a global basis for GM, and ultimately for customers in addition to GM. Although MW owns a majority interest in Vector, MW's portion of Vector's operating results are reported in the MW reporting segment as an equity-method investment based on GM's ability to control certain operating decisions. Vector is organized as a limited liability company that has elected to be taxed as a partnership. Therefore, the joint venture partners are responsible for income taxes applicable to their share of Vector's taxable income. MW's portion of Vector's net income, which is reported as a reduction of operating expenses in the accompanying Statements of Consolidated Income, does not include any provision for income taxes that will be incurred by CNF. MW's undistributed earnings from Vector at March 31, 2005 and December 31, 2004, before provision for CNF's related parent income taxes, was $31.2 million and $27.2 million, respectively. Vector participates in CNF's centralized cash management system, and, consequently, Vector's domestic trade accounts payable are paid by CNF and settled through Vector's affiliate accounts with CNF. In addition, excess cash balances in Vector's bank accounts, if any, are invested by CNF and settled through affiliate accounts, which earn interest income based on a rate earned by CNF's cash-equivalent investments and marketable securities. As a result of Vector's excess cash invested by CNF, Vector's affiliate receivable from CNF as of March 31, 2005 and December 31, 2004 was $29.7 million and $15.5 million, respectively. As required by the Vector Agreements, CNF provides Vector with a $20 million line of credit for Vector's working capital and capital expenditure requirements. Under the credit facility, which matures on December 13, 2005, Vector may obtain loans with an annual interest rate based on the rate CNF pays under its $400 million revolving credit facility. At March 31, 2005, CNF provided a portion of its $20 million credit commitment to Vector through CNF's guarantee of $2.5 million of uncommitted local currency overdraft facilities available to Vector by international banks. At March 31, 2005 and December 31, 2004, there was no balance outstanding under Vector's uncommitted local currency overdraft facilities and no borrowings were directly payable to CNF. CNF's capital transactions with Vector, including cash advances to and from Vector under CNF's centralized cash management system and credit facility described above, are reported as adjustments to MW's investment in Vector in Deferred Charges and Other Assets in CNF's Consolidated Balance Sheets. 5. Employee Benefit Plans Employees of CNF and its subsidiaries in the U.S. are covered under the CNF Postretirement Medical Plan (the "Postretirement Plan") and several defined benefit pension plans (the "Pension Plans"). The Pension Plans consist of a plan that covers the non-contractual employees and former employees of CNF's continuing and discontinued operations (the "CNF Retirement Plan"), as well as certain pension plans that cover only the current and former employees of the discontinued Forwarding segment (the "Forwarding Plans"). As more fully discussed in Note 2, "Discontinued Operations," CNF completed the sale of MWF in December 2004. Accordingly, amounts related to the legally separate Forwarding Plans are not included in the employee benefit disclosures below and are reported as discontinued operations. As a result, the employee benefit plan interim disclosures presented below are provided only for the CNF Retirement Plan and the Postretirement Plan (collectively "the CNF Benefit Plans"). Based on CNF's intention to retain the CNF Benefit Plans following the sale of MWF, the obligation related to employees of MWF and EWA covered by these plans is included in Employee Benefits of continuing operations in CNF's Consolidated Balance Sheets at March 31, 2005 and December 31, 2004. The following table summarizes the components of net periodic benefit expense for the CNF Retirement Plan: Three Months Ended March 31, -------------------------- (Dollars in thousands) 2005 2004 ------------ ------------ Service cost - benefits earned during the quarter $ 11,884 $ 15,391 Interest cost on benefit obligation 12,864 15,852 Expected return on plan assets (14,604) (15,575) Net amortization and deferral 561 2,137 ------------ ------------ Net periodic benefit expense $ 10,705 $ 17,805 ============ ============ In the presentation above, the portion of benefit expense that relates to discontinued operations was immaterial in the first quarter of 2005 and $5.3 million in the first quarter of 2004. CNF currently estimates that it will contribute $75 million to its Pension Plans in 2005, composed of a $30 million payment made in the second quarter and $45 million of payments anticipated in the third quarter. The following table summarizes the components of net periodic benefit expense for the Postretirement Plan: Three Months Ended March 31, -------------------------- (Dollars in thousands) 2005 2004 ------------ ------------ Service cost - benefits earned during the quarter $ 141 $ 488 Interest cost on benefit obligation 563 1,477 Net amortization and deferral 30 69 ------------ ------------ Net periodic benefit expense $ 734 $ 2,034 ============ ============ In the presentation above, the portion of benefit expense that relates to discontinued operations was immaterial in the first quarter of 2005 and $1.0 million in the first quarter of 2004. 6. Comprehensive Income Comprehensive income, which is a measure of all changes in equity except those resulting from investments by owners and distributions to owners, was as follows: Three Months Ended (Dollars in thousands) March 31, -------------------------- 2005 2004 ------------ ------------ Net income $ 31,075 $ 26,429 Other comprehensive income (loss): Unrealized loss on marketable securities -- (211) Foreign currency translation adjustment (Note 1) 388 9,859 ------------ ------------ 388 9,648 ------------ ------------ Comprehensive income $ 31,463 $ 36,077 ============ ============ The following is a summary of the components of Accumulated Other Comprehensive Loss, net of tax: March 31, December 31, (Dollars in thousands) 2005 2004 ------------ ------------ Accumulated foreign currency translation adjustments (Note 1) $ (668) $ (1,056) Minimum pension liability adjustment (14,680) (14,680) ------------ ------------ Accumulated other comprehensive loss $ (15,348) $ (15,736) ============ ============ 7. Common Stock Repurchase Program In January 2005, CNF's Board of Directors authorized a two-year stock repurchase program providing for the repurchase of up to $300 million in common stock in open market purchases and privately negotiated transactions. As of March 31, 2005, CNF repurchased a total of 694,000 shares at a cost of $32.3 million. CNF generally expects the remaining purchases to be made ratably throughout the remainder of the program. 8. Commitments and Contingencies Purchase Commitments At March 31, 2005, Con-Way was obligated under purchase commitments to acquire $70.9 million of revenue equipment for delivery in 2005. Spin-Off of CFC On December 2, 1996, CNF completed the spin-off of Consolidated Freightways Corporation ("CFC") to CNF's shareholders. CFC was, at the time of the spin- off, and remains a party to certain multiemployer pension plans covering some of its current and former employees. The cessation of its U.S. operations in 2002 resulted in CFC's "complete withdrawal" (within the meaning of applicable federal law) from these multiemployer plans, at which point it became obligated, under federal law, to pay its share of any unfunded vested benefits under those plans. It is possible that the trustees of CFC's multiemployer pension plans may assert claims that CNF is liable for amounts owing to the plans as a result of CFC's withdrawal from those plans and, if so, there can be no assurance that those claims would not be material. CNF has received requests for information regarding the spin-off of CFC from representatives from some of the pension funds, and, in accordance with federal law, CNF has responded to those requests. Based on advice of legal counsel and its knowledge of the facts, CNF believes that it would ultimately prevail if any such claims were made, although there can be no assurance in this regard. CNF believes that the amount of those claims, if asserted, could be material, and a judgment against CNF for all or a significant part of these claims could have a material adverse effect on CNF's financial condition, cash flow and results of operations. Prior to the enactment in April 2004 of the Pension Funding Equity Act of 2004, if the multiemployer funds had asserted such claims against CNF, CNF would have had a statutory obligation to make cash payments to the funds prior to any arbitral or judicial decisions on the funds' determinations. Under the facts related to the CFC withdrawals and the law in effect after enactment of the Pension Funding Equity Act of 2004, CNF would no longer be required to make such payments to the multiemployer funds unless and until final decisions in arbitration proceedings, or in court, upheld the funds' determinations. As a result of the matters discussed above, CNF can provide no assurance that matters relating to the spin-off of CFC and CFC's bankruptcy will not have a material adverse effect on CNF's financial condition, cash flows or results of operations. Other In February 2002, a lawsuit was filed against EWA in the District Court for the Southern District of Ohio, alleging violations of the Worker Adjustment and Retraining Notification Act (the "WARN Act") in connection with employee layoffs and ultimate terminations due to the August 2001 grounding of EWA's airline operations and the shutdown of the airline operations in December 2001. The court subsequently certified the lawsuit as a class action on behalf of affected employees laid off between August 11 and August 15, 2001. The WARN Act generally requires employers to give 60-days notice, or 60-days pay and benefits in lieu of notice, of any shutdown of operations or mass layoff at a site of employment. The estimated range for potential loss on this matter is zero to approximately $8 million. CNF intends to continue to vigorously defend the lawsuit. In September 2003, CNF received notice from the United States Attorney's Office for the District of Columbia that EWA is being considered for possible civil action under the False Claims Act for allegedly submitting false invoices to the U.S. Postal Service ("USPS") for payment under the Priority Mail contract. EWA subsequently entered into a tolling agreement with the government in order to give the parties more time to investigate the allegations. In November 2004, CNF representatives met with the government to discuss the government's allegations, and at that time received certain information relating to the government's investigation. EWA is continuing with its own investigation of the allegations, and as a result, is currently unable to predict the outcome of this matter. Under the False Claims Act, the government would be entitled to recover treble damages, plus penalties, if a court were to ultimately conclude that EWA knowingly submitted false invoices to the USPS. CNF is a defendant in various other lawsuits incidental to its businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material impact on CNF's financial condition, cash flows, or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Management's Discussion and Analysis of Financial Condition and Results of Operations (referred to as "Management's Discussion and Analysis") is intended to assist in a historical and prospective understanding of CNF's results of operations, financial condition and cash flows, including a discussion and analysis of the following: * Overview of Business * Results of Operations * Liquidity and Capital Resources * Estimates and Critical Accounting Policies * Other Matters This discussion and analysis should be read in conjunction with the information included in CNF's 2004 Annual Report on Form 10-K. Overview of Business CNF provides transportation and supply chain management services for a wide range of manufacturing, industrial, and retail customers. For financial reporting purposes, CNF is divided into three reporting segments: Con-Way Transportation Services ("Con-Way"), primarily a provider of regional less- than-truckload ("LTL") freight services; MW, a provider of integrated contract logistics solutions; and CNF Other, which includes certain corporate activities and Road Systems, a trailer manufacturer. MW consists of the operating results of Menlo Worldwide Logistics ("Logistics") and Vector, a joint venture with GM that is accounted for as an equity-method investment. CNF's operating results are generally expected to depend on the number and weight of shipments transported, the prices received on those shipments, and the mix of services provided to customers, as well as the fixed and variable costs incurred by CNF in providing the services and the ability to manage those costs under changing shipment levels. Con-Way primarily transports shipments through a freight service center network while Logistics and Vector manage the logistics functions of their customers and primarily utilize third-party transportation providers for the movement of customer shipments. As more fully discussed under "Results of Operations - Discontinued Operations," CNF and MW in 2004 sold Menlo Worldwide Forwarding ("MWF") to UPS. Accordingly, the results of operations, net assets, and cash flows of the Menlo Worldwide Forwarding ("Forwarding") segment have been segregated and reported as discontinued operations. Results of Operations CNF's net income from continuing operations (after preferred stock dividends and income taxes) in the first quarter of 2005 rose 41.7% to $38.9 million ($0.69 per diluted share), due primarily to significantly higher operating income from Con-Way. Net income from continuing operations was offset by a $9.8 million net loss ($0.17 per diluted share) from discontinued operations, which reflects a loss related to the disposition of MWF. The resulting net income available to common shareholders in the first quarter of 2005 was $29.1 million ($0.52 per diluted share), a 19.2% increase from $24.4 million ($0.45 per diluted share) in last year's first quarter. The following table compares CNF's consolidated operating results (dollars in thousands, except per share amounts): Three Months Ended March 31, -------------------------- 2005 2004 ------------ ------------ Revenues $ 947,683 $ 846,920 Operating Income 73,256 55,448 Net Income (Loss) Continuing Operations 1, 2 $ 38,862 $ 27,423 Discontinued Operations 2 (9,776) (3,016) ------------ ------------ Available to Common Shareholders $ 29,086 $ 24,407 ============ ============ Diluted Earnings (Loss) per Share Continuing Operations $ 0.69 $ 0.50 Discontinued Operations (0.17) (0.05) ------------ ------------ Available to Common Shareholders $ 0.52 $ 0.45 ============ ============ 1 After preferred stock dividends 2 As required by EITF 87-24, "Allocation of Interest to Discontinued Operations," for periods prior to the disposition of MWF, continuing operations has been allocated general corporate overhead charges that were previously allocated to the discontinued Forwarding segment. These corporate overhead charges of $3.7 million in the first quarter of 2004 were allocated from discontinued operations to Con-Way and Logistics based on segment revenue and capital employed. Continuing Operations In the first quarter of 2005, CNF's revenue increased 11.9% to $947.7 million, due to higher revenue at all reporting segments, which benefited from improved economic conditions. Consolidated operating income in the first quarter of 2005 rose 32.1%, on significantly higher operating income from Con-Way and improved operating results from MW. Con-Way's operating income in the first quarter of 2005 increased 31.5% on revenue growth of 11.0%. MW reported higher operating income in the first quarter of 2005 due primarily to an increase in operating income from Vector, partially offset by lower operating income from Logistics. Vector's operating income in the first quarter of 2005 increased $1.6 million to $4.0 million while Logistics reported a 6.4% decrease in operating income. Other net expense in the first quarter of 2005 increased 3.7% to $7.4 million, due primarily to increases in interest expense and other net non- operating expenses, partially offset by a $3.9 million increase in interest income on cash equivalents and marketable securities. Interest expense in the first quarter of 2005 rose $3.1 million, due largely to the net effect on interest from financing transactions, including the $292.6 million net issuance in April 2004 of 6.7% Senior Debentures and the $128.9 million redemption in June 2004 of 5% Convertible Debentures. Miscellaneous net non- operating expenses in the first quarter of 2005 reflects a $0.6 million decline in the income from corporate-owned life insurance policies that were terminated in the third quarter of 2004 and a $0.3 million decline in foreign exchange gain. In the first quarter of 2005, the increase in net income from continuing operations (after income taxes and preferred stock dividends) was substantially due to improved operating income on higher revenue. Higher non-operating expense was more than offset by a lower effective tax rate, which declined to 37.9% in the first quarter of 2005 from 39.0% in the first quarter of 2004, due primarily to higher net income and the reversal of reserves on certain tax issues. Con-Way Transportation Services The following table compares operating results (dollars in thousands), operating margins, and the percentage increase in selected operating statistics of the Con-Way reporting segment: Three Months Ended March 31, -------------------------- 2005 2004 ------------ ------------ Summary of Operating Results Revenues $ 659,373 $ 593,876 Operating Income 62,933 47,866 Operating Margin 9.5% 8.1% 2005 vs. 2004 -------------- Selected Regional-Carrier Operating Statistics Revenue per day +11.6% Yield +4.6 Weight per day +6.6 Weight per shipment +4.0 Con-Way's revenue in the first quarter of 2005 rose 11.0% due to a 10.9% increase in revenue from Con-Way's regional carriers and revenue growth of 13.5% from the Con-Way Supply Chain Group, which includes Con-Way NOW, Con- Way Air Express, Con-Way Truckload, and Con-Way Logistics. Beginning in the second quarter of 2005, the Con-Way Logistics business will be integrated with Menlo Worldwide Logistics, as more fully discussed below under "Menlo Worldwide - Logistics." First-quarter revenue per day from the regional carriers in 2005 rose 11.6% from 2004 on a 6.6% increase in weight per day ("weight") and a 4.6% increase in revenue per hundredweight ("yield"). Management believes a portion of the weight improvement in 2005 was from market-share gains, due in part to a spot-quote program that contributed to an increase in the number of shipments in excess of 10,000 pounds. Yield increases in the first quarter of 2005 primarily reflect an increase in fuel surcharges. Excluding fuel surcharges, first quarter yield in 2005 increased 0.7% from 2004. Yields in 2005 also benefited from continued growth in higher-rated interregional joint services and general rate increases in June 2004, but were adversely affected by a 4.0% increase in weight per shipment, which was largely driven by the spot-quote program described above. Rates typically decline when weight per shipment increases, as freight with a higher weight per shipment typically has a lower transportation cost per unit of weight. Con-Way's operating income in the first quarter of 2005 increased 31.5%, due largely to higher revenue and improved margins from the regional carriers. First-quarter operating income in 2005 was affected by purchased transportation costs, which rose 20.9% from the prior year and increased as a percent of revenue to 14.7% from 13.5%. Fuel costs in the first quarter of 2005 increased 52.0% from the first quarter of 2004, but those higher costs were recovered through the fuel surcharges discussed above. First-quarter employee costs in 2005 increased 4.9% from the prior year due largely to increases in employee headcount, but decreased as a percent of revenue due in part to increased productivity and a decline in employee benefits cost as a percent of revenue. Menlo Worldwide The Menlo Worldwide reporting segment consists of the operating results of Logistics and Vector. MW reported first-quarter revenue in 2005 of $282.9 million, an 11.9% increase from 2004. First-quarter operating income for MW was $9.7 million, a 14.9% increase from last year. Although MW owns a majority equity interest, the operating results of Vector are reported as an equity-method investment based on GM's ability to control certain operating decisions. Accordingly, CNF's Consolidated Statements of Income do not include any revenue from Vector and only MW's proportionate share of the net income from Vector is reported as a reduction of operating expenses. The following table compares operating results (dollars in thousands) and operating margins of the MW reporting segment: Three Months Ended March 31, -------------------------- 2005 2004 ------------ ------------ Summary of Operating Results Logistics Revenues $ 282,901 $ 252,790 Purchased Transportation (198,405) (174,770) ------------ ------------ Net Revenues 84,496 78,020 Operating Income 5,653 6,042 Operating Margin 2.0% 2.4% Vector Operating Income $ 4,035 $ 2,392 Menlo Worldwide - Logistics Logistics' revenue in the first quarter of 2005 increased 11.9% from the first quarter of 2004, due principally to increases in revenue from carrier- management and warehouse-management services of 10.4% and 17.9%, respectively. Carrier-management revenue is attributable to contracts for which Logistics manages the transportation of freight but subcontracts the actual transportation and delivery of products to third parties, which Logistics refers to as purchased transportation. Despite double-digit percentage growth in carrier- and warehouse-management services, Logistics' net revenue (revenue less purchased transportation) in the first quarter of 2005 increased 8.3% over last year's first quarter, due largely to a 13.5% increase in purchased transportation costs. Logistics' operating income in the first quarter of 2005 decreased 6.4% from the first quarter of 2004, reflecting margin declines, which were due primarily to higher purchased transportation costs on carrier-management services, lower customer shipment volumes on transaction-based warehouse- management services and administrative costs related to expansion in international markets. Management will seek to increase margins by renegotiating certain customer and vendor contracts on carrier-management services and reducing costs in line with lower customer shipment volumes on warehouse-management services. Beginning in the second quarter of 2005, Logistics will integrate the Con-Way Logistics business into its operations. The integration of the two businesses is intended to provide an enterprise solution offering for Logistics' customers that want to use Con-Way as a primary transportation provider. The integration is also expected to expand Con-Way Logistics' multi-client warehousing service to Logistics' larger warehouse network. Menlo Worldwide - Vector Operating Results First-quarter operating income reported from MW's equity investment in Vector increased to $4.0 million in 2005 from $2.4 million in 2004, due primarily to higher operating income earned in GM's international regions, partially offset by a decline in operating income from GM's North America region. Improved operating income in GM's international regions was substantially due to the revised compensation principles in GM's European region, as described below. North America In August 2003, the Vector Agreements were amended, primarily to expedite the transition of logistics services in the North America region from GM to Vector, as more fully discussed in Note 3, "Investment in Unconsolidated Joint Venture," of Item 8, "Financial Statements and Supplementary Data," in CNF's 2004 Annual Report on Form 10-K. Prior to the 2003 amendment, agreements pertaining to Vector provided that Vector would be compensated by sharing in efficiency gains and cost savings achieved through the implementation of Approved Business Cases ("ABCs") and other special projects in GM's North America region and GM's three international regions. An ABC is a project, developed with and approved by GM, aimed at reducing costs, assuming operational responsibilities, and/or achieving operational changes. Under the amended Vector Agreements, Vector is compensated for its management of logistics for all of GM's North America operations rather than through its sharing in efficiency gains and cost savings under individual ABCs. In each year of a five-year period retroactive to January 1, 2003, Vector will be compensated with a management fee based on shipment volumes ("volume-based compensation") and, beginning in 2004, can earn additional compensation if certain performance criteria are achieved ("performance-based compensation"). In accordance with GAAP, compensation under the volume-based management fee is recognized as vehicles are shipped while performance-based compensation is recognized on the achievement of specified levels of cost savings, which will generally not be determinable until the fourth quarter of each contract year. Vector will also be compensated by GM for its direct and administrative costs in North America, subject to certain limitations. For other special projects in GM's North America region, Vector is compensated under ABCs. CNF expects a declining amount of volume-based compensation in each successive year covered under the amended Vector agreements for North America. CNF does not currently expect to earn performance-based compensation in 2005, except for special projects compensated under ABCs, based primarily on current-year increases in fuel and other transportation costs that CNF believes will prevent the attainment of performance criteria in 2005. International Effective January 1, 2005, for the 2005 calendar year, all of the ABCs for GM's European region were amended to compensate Vector with cost reimbursement and a management fee based on vehicle production volumes, rather than through separately approved ABCs. As a result of the amendment, compensation earned from GM's European region in the first quarter of 2005 increased $2.6 million from the same quarter last year. After 2005, Vector's compensation for GM's European region will again be based on separately approved ABCs, unless further amendments are negotiated. The compensation principles for GM's Latin America and Asia/Pacific regions are unaffected by the 2005 amendments in the European region. Call Right and Put Right Under the Vector Agreements, GM has the right to purchase MW's membership interest in Vector ("Call Right") and MW has the right to require GM to purchase MW's membership interest in Vector ("Put Right"). The Call Right and Put Right are exercisable at the sole discretion of GM and MW, respectively. Under the amended Vector Agreements, the amount payable by GM to MW under the Put Right is based on a mutually agreed-upon estimated value for MW's membership interest as of the contract amendment date and will decline on a straight-line basis over an 8-year period beginning January 1, 2004. Exercise of MW's Put Right or GM's Call Right would result in MW retaining any commercialization contracts involving customers other than GM. CNF Other Segment The CNF Other segment consists of the results of Road Systems and certain corporate activities. A majority of the revenue from Road Systems was from sales to Con-Way. The CNF Other segment reported first-quarter operating income of $0.6 million in 2005 compared to an operating loss of $0.9 million in 2004. The first quarter of 2005 included a $1.4 million gain from corporate insurance activities, while the same quarter of last year included a $1.1 million operating loss from sales of corporate properties. Discontinued Operations Discontinued operations in the periods presented relate to the sale of MWF and to EWA. For the periods presented, the results of operations, net assets, and cash flows of discontinued operations have been segregated from continuing operations, except where otherwise noted. The operating results and net assets of discontinued operations are summarized in Note 2, "Discontinued Operations," of Item 1, "Financial Statements." Menlo Worldwide Forwarding Impairment Charge On October 5, 2004, CNF and Menlo Worldwide, LLC ("MW") entered into a stock purchase agreement with UPS to sell all of the issued and outstanding capital stock of MWF. CNF completed the sale on December 19, 2004, as more fully discussed below. Although the stock purchase agreement was entered into on October 5, 2004, decisions by CNF's management and its Board of Directors and the third-quarter sale negotiations with UPS established CNF's commitment to sell MWF as of September 30, 2004. In the process of evaluating several strategic alternatives for MW's Forwarding segment, CNF was approached by UPS in the third quarter of 2004 with interest in acquiring MWF. Accordingly, in the third quarter of 2004, CNF classified MWF as held for sale and recognized a $260.5 million impairment charge to write down the recorded book value of MWF to its anticipated selling price, less costs to sell. The impairment charge was based on the agreement to sell MWF, as described below, and primarily represents the estimated write-down to the fair value of MWF's goodwill and long-lived assets, including MWF's accumulated foreign currency translation adjustment, as well as estimated selling costs. Stock Purchase Agreement The stock purchase agreement excludes certain assets and liabilities of MWF and includes certain assets and liabilities of CNF or its subsidiaries related to the business conducted by MWF. Among the assets and liabilities so excluded are those related to EWA, and the obligation related to MWF employees covered under CNF's domestic pension, postretirement medical and long-term disability plans. Under the agreement, UPS agreed to pay to CNF an amount equal to MWF's cash position as of December 31, 2004, and to pay the estimated present value of CNF's retained obligations related to MWF employees covered under CNF's long-term disability and postretirement medical plans, as agreed to by the parties or, in the absence of such agreement, as determined by an independent actuary. In addition, UPS assumed indebtedness associated with the MWF business, including approximately $110 million of debt owed by MWF in connection with the City of Dayton, Ohio, Special Facilities Revenue Refunding Bonds, certain capital leases and other debt, other letters of credit, and overdraft facilities. Under the stock purchase agreement, CNF has agreed to a three-year non-compete covenant that, subject to certain exceptions, will limit CNF's annual air freight and ocean forwarding and/or customs brokerage revenues to $175 million. CNF has also agreed to indemnify UPS against certain losses that UPS may incur after the closing of the sale with certain limitations. Any losses related to these indemnification obligations or any other costs, including any future cash expenditures, related to the sale that have not been estimated and recognized at this time will be recognized in future periods as an additional loss from disposal when and if incurred. For additional details, refer to the stock purchase agreement filed as an exhibit to CNF's Form 8-K dated October 5, 2004 and the amendment to the stock purchase agreement filed as an exhibit to CNF's Form 8-K dated December 21, 2004. Loss on Sale of MWF Upon completion of the sale of MWF on December 19, 2004, CNF received cash consideration of $150 million, subject to certain post-closing adjustments, including adjustments for cash held by MWF at closing and MWF's net working capital as of closing. In connection with the sale, CNF in 2004 recognized a fourth-quarter loss from disposal of $15.8 million (net of a $3.6 million tax benefit), as the adjusted carrying value of MWF exceeded the cash consideration, including amounts received at closing and expected to be received in the future. Following settlement of the MWF cash balance in March 2005, CNF received cash of $29.4 million and recognized an additional first-quarter loss from disposal of $9.8 million, primarily to recognize the difference between the actual cash received and CNF's estimate of the cash position at December 31, 2004, and to accrue additional estimated transaction costs. CNF recognized a tax benefit on its losses from the disposal of MWF, which are treated as capital losses for tax purposes. Under current tax law, capital losses can only be used to offset capital gains. CNF does not currently forecast any significant capital gains in the tax carry-forward period. Based in part on the amount of capital gains actually recognized for tax purposes, only $3.6 million of the total disposal-related tax benefit of $48.2 was realizable in 2004, and as a result, the remaining $44.6 million of the recognized tax benefit was fully offset by an equal valuation allowance. Excluded Assets and Liabilities As described above, the stock purchase agreement excludes, and CNF has retained, the obligations related to MWF employees covered under certain CNF- sponsored employee benefit plans, including domestic pension, postretirement and long-term disability plans that cover the noncontractual employees and former employees of both continuing and discontinued operations. These plans also include certain pension plans that cover only the current and former employees of the discontinued Forwarding segment (the "Forwarding Plans"). For financial reporting purposes, the prepaid benefit cost of the Forwarding Plans is reported in Assets of Discontinued Operations while the accrued benefit cost related to MWF employees covered under the other legally separate CNF-sponsored plans are reported in Employee Benefits of continuing operations. Under the stock purchase agreement, UPS agreed to pay to CNF the estimated present value of CNF's retained obligations related to MWF employees covered under CNF's long-term disability and postretirement medical plans, as agreed to by the parties or, in the absence of such agreement, as determined by an independent actuary. Accordingly, CNF in December 2004 recorded in Other Accounts Receivable a receivable for its estimate of the present value of these employee benefit obligations. As of March 31, 2005, UPS and CNF had not reached agreement as to the amount to be paid by UPS for the employee benefit obligations retained by CNF, and it is possible that the amount ultimately paid will be based upon an estimate prepared by an independent actuary. As more fully discussed below under "Estimates and Critical Accounting Policies," CNF's estimate of the present value of these employee benefit obligations is an actuarial determination that depends upon a number of assumptions and factors. If CNF's estimate is different than the amount actually payable by UPS, that difference would be recognized as a gain or loss from disposal when and if incurred. The stock purchase agreement also excludes the assets and liabilities of EWA, including restructuring reserves related to its 2001 restructuring plan. EWA's restructuring reserves decreased to $27.4 million at March 31, 2005 from $33.8 million at December 31, 2004, primarily due to settlement of obligations. Restructuring reserves at March 31, 2005 were primarily reported in Liabilities of Discontinued Operations and consisted primarily of CNF's estimated exposure related to the labor matters described below, as well as other estimated remaining restructuring-related obligations. In connection with the cessation of its air carrier operations in 2001, EWA terminated the employment of all of its pilots and crew members. Those pilots and crew members are represented by the Air Line Pilots Association ("ALPA") union under a collective bargaining agreement. Subsequently, ALPA filed a grievance on behalf of the pilots and crew members protesting the cessation of EWA's air carrier operations and MWF's use of other air carriers. The ALPA matters are the subject of litigation in U.S. District Court and, depending on the outcome of that litigation, may be subject to binding arbitration. Based on CNF's current evaluation, management believes that it has provided for its estimated exposure related to the ALPA matters. However, there can be no assurance in this regard as CNF cannot predict with certainty the ultimate outcome of these matters. Liquidity and Capital Resources Cash and cash equivalents rose to $675.1 million at March 31, 2005 from $386.9 million at December 31, 2004, as $66.4 million provided by operating activities and $261.4 million provided by investing activities significantly exceeded $29.0 million used in financing activities. Cash provided by investing activities primarily reflects a $290.3 decrease in short-term marketable securities, partially offset by capital expenditures of $27.0 million. CNF's cash flows are summarized in the table below. Three Months Ended (Dollars in thousands) March 31, -------------------------- 2005 2004 ------------ ------------ Operating Activities Net income $ 31,075 $ 26,429 Discontinued operations 9,776 3,016 Non-cash adjustments (1) 25,611 31,087 ------------ ------------ 66,462 60,532 Changes in assets and liabilities Receivables (4,459) (17,745) Accounts payable and accrued liabilities, excluding accrued incentive compensation 7,391 36,683 Accrued incentive compensation (38,868) (6,911) Income taxes 21,340 16,311 Employee benefits 10,503 14,378 Deferred charges and credits 17,082 4,209 All other changes in assets and liabilities (13,049) (27,353) ------------ ------------ (60) 19,572 Net Cash Provided by Operating Activities 66,402 80,104 ------------ ------------ Net Cash Provided by Investing Activities 261,360 22,915 ------------ ------------ Net Cash Used in Financing Activities (29,045) (23,625) ------------ ------------ Net Cash Provided by Continuing Operations 298,717 79,394 Net Cash Provided by (Used in) Discontinued Operations (10,557) 21,163 ------------ ------------ Increase in Cash and Cash Equivalents $ 288,160 $ 100,557 ============ ============ (1) "Non-cash adjustments" refer to depreciation, amortization, deferred income taxes, provision for uncollectible accounts, equity in earnings of joint venture, and non-cash gains and losses. Continuing Operations Operating Activities Cash flow from continuing operations in the first quarter of 2005 was $66.4 million, a $13.7 million decline from last year's first quarter. Net income before non-cash items in the first quarter of 2005 exceeded the same quarter of last year; however, in 2005, that improvement was more than offset by a larger first-quarter decline in accrued incentive compensation. Accrued incentive compensation decreased $38.9 million in the first quarter of 2005, while the prior-year first quarter reflects a $6.9 million reduction. In both periods, changes in accrued incentive compensation reflect CNF's payment schedule for its employee incentive plans, under which total incentive compensation earned in an award year is paid to employees with a partial payment in December of the award year and a final payment in February of the next award year. In both 2005 and 2004, first-quarter payments for incentive compensation exceeded expense accruals. Receivables in the first quarter of 2005 used $4.5 million as a revenue-driven increase in receivables was partially offset by $29.4 million received from UPS in connection with the sale of MWF and a decline in CNF's receivable for income tax refunds. CNF's income tax receivable, as reported in Other Receivables in CNF's Consolidated Balance Sheets, decreased based on taxable income. Cash used in accrued incentive compensation and receivables was partially offset by positive cash flows from a $17.1 million decline in deferred charges, which primarily reflects a reduction in MW's investment in Vector. MW's investment in Vector consists of MW's proportionate share of Vector's undistributed earnings and any affiliate receivable or payable between CNF and Vector, as more fully discussed in Note 4, "Investment in Unconsolidated Joint Venture," in Item 1, "Financial Statements." In the first quarter of 2005, Vector transferred excess cash to CNF, which increased CNF's affiliate payable to Vector and contributed to a $10.2 million decline in MW's investment in Vector. Investing Activities Investing activities in the first quarter of 2005 provided $261.4 million compared to $22.9 million provided in the first quarter of 2004. In both periods presented, investing activities consisted primarily of capital expenditures and the fluctuations in short-term marketable securities. Capital expenditures in the first quarter of 2005 increased $15.2 million from the first quarter of 2004 due substantially to expenditures at Con-Way, which increased its tractor and trailer acquisitions to $16.2 million in the first quarter of 2005 from $6.7 million in the first quarter of 2004. Investments in marketable securities decreased in the first quarter of 2005 and 2004 by $290.3 million and $37.1 million, respectively, primarily from the conversion of auction-rate securities into cash. Financing Activities Financing activities in the first quarter of 2005 used cash of $29.0 million compared to $23.6 million used in the first quarter of 2004. In the first quarter of 2005, cash used in financing activities includes $32.3 million use for the repurchase of common stock under CNF's common stock repurchase program described below. Financing activities in both periods presented also reflect dividend payments and scheduled principal payments for the Thrift and Stock Plan notes guaranteed by CNF. Cash provided by the exercise of stock options increased to $26.1 million in the first quarter of 2005 from $0.4 million in the same quarter last year, due primarily to an increase in the market price for CNF's common stock. In January 2005, the Board of Directors authorized the repurchase of up to $300 million in CNF's common stock from time to time during the next two years in open market purchases and privately negotiated transactions. CNF currently estimates it will repurchase approximately $150 million of CNF's common stock annually in 2005 and 2006. CNF has a $400 million revolving credit facility that matures on March 11, 2010. The revolving credit facility is available for cash borrowings and for the issuance of letters of credit up to $400 million. At March 31, 2005, no borrowings were outstanding under the facility and $189.9 million of letters of credit were outstanding, leaving $210.1 million of available capacity for additional letters of credit or cash borrowings, subject to compliance with financial covenants and other customary conditions to borrowing. CNF had other uncommitted unsecured credit facilities totaling $120.0 million at March 31, 2005, which are available to support letters of credit, bank guarantees, and overdraft facilities; at that date, a total of $39.9 million was outstanding under these facilities. Of the total letters of credit outstanding at March 31, 2005, $219.4 million provided collateral for CNF workers' compensation and vehicular self-insurance programs. See "Other Matters - Forward-Looking Statements" below, and Note 5, "Debt and Other Financing Arrangements," in Item 8, "Financial Statements and Supplementary Data," of CNF's 2004 Annual Report on Form 10-K for additional information concerning CNF's $400 million credit facility and some of its other debt instruments. Defined Benefit Pension Plans CNF periodically reviews the funding status of its defined benefit pension plans for non-contractual employees, and makes contributions from time to time as necessary in order to comply with the funding requirements of the Employee Retirement Income Security Act ("ERISA"). CNF applies the recognition and measurement criteria of GAAP in reporting the effect of its pension plans in its consolidated financial statements. However, pension funding requirements are determined by ERISA rather than GAAP. CNF currently estimates that it will contribute $75 million in 2005, composed of a $30 million payment made in the second quarter and $45 million of payments anticipated in the third quarter. CNF also made defined benefit pension plan contributions of $90.8 million in 2004, $75.0 million in 2003, and $76.2 million in 2002, and $13.1 million in 2001 but made no contributions from 1996 through 2000, due in part to the high rate of return realized on plan assets and for the lack of tax deductibility of funding during that period. Contractual Cash Obligations CNF's contractual cash obligations as of December 31, 2004 are summarized in CNF's 2004 Annual Report on Form 10-K under Item 7, "Management's Discussion and Analysis - Liquidity and Capital Resources - Contractual Cash Obligations." In the first quarter of 2005, there have been no material changes in CNF's contractual cash obligations outside the ordinary course of business. At March 31, 2005, Con-Way was obligated under purchase commitments to acquire $70.9 million of revenue equipment for delivery in 2005. CNF currently anticipates capital expenditures of approximately $235 million in 2005, including its obligations under purchase commitments described above. Other CNF's ratio of total debt to capital decreased to 46.8% at March 31, 2005 from 47.9% at December 31, 2004, due primarily to the increase in retained earnings resulting from net income earned in the first quarter of 2005. Discontinued Operations On December 19, 2004, CNF completed the sale of MWF to UPS for $150 million in cash, subject to adjustment for cash held by MWF at closing and the net capital of MWF as of closing. In March 2005, CNF received $29.4 million from UPS for the reimbursable cash held by MWF at closing, with no adjustment for net capital. As more fully discussed under " Results of Operations - Discontinued Operations," UPS agreed to pay to CNF an amount equal to CNF's retained obligations related to MWF employees covered under CNF's long-term disability and postretirement medical plans, as agreed to by parties or, in the absence of such agreement, as determined by an independent actuary. Accordingly, CNF in December 2004 recorded in Other Accounts Receivable a receivable for its estimate of the present value of these employee benefit obligations. As of March 31, 2005, UPS and CNF had not reached agreement as to the amount to be paid by UPS for the employee benefit obligations retained by CNF, and it is possible that the amount ultimately paid will be based upon an estimate prepared by an independent actuary. Estimates and Critical Accounting Policies The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to adopt accounting policies and make significant judgments and estimates. In many cases, there are alternative policies or estimation techniques that could be used. CNF maintains a process to evaluate the appropriateness of its accounting policies and estimation techniques, including discussion with and review by the Audit Committee of its Board of Directors and its independent auditors. Accounting policies and estimates may require adjustment based on changing facts and circumstances and actual results could differ from estimates. The policies and estimates discussed below include those that are most critical to the financial statements. Self-Insurance Reserves CNF uses a combination of insurance and self-insurance programs to provide for the costs of medical, casualty, liability, vehicular, cargo and workers' compensation claims. In the measurement of these costs, CNF considers historical claims experience, medical costs, demographic and severity factors and other assumptions. Self-insurance accruals are developed based on the estimated, undiscounted cost of claims, including those claims incurred but not reported as of the balance sheet date. The long-term portion of self- insurance accruals relates primarily to workers' compensation and vehicular claims that are payable over several years. The actual costs may vary from estimates. Income Taxes In establishing its deferred income tax assets and liabilities, CNF makes judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. CNF records deferred tax assets and liabilities and periodically evaluates the need for a valuation allowance to reduce deferred tax assets to realizable amounts. The likelihood of a material change in CNF's expected realization of these assets is dependent on future taxable income, future capital gains, its ability to use foreign tax credit carry forwards and carry backs, final U.S. and foreign tax settlements, and the effectiveness of its tax planning strategies in the various relevant jurisdictions. CNF is also subject to examination of its income tax returns for multiple years by the IRS and other tax authorities. CNF periodically assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision and related accruals for income taxes. Disposition and Restructuring Estimates As more fully discussed under "Results of Operations - Discontinued Operations," CNF's management made significant estimates and assumptions in connection with the restructuring of EWA in 2001 and the disposition of MWF in 2004. Actual results could differ from estimates, which could affect related amounts reported in the financial statements. Uncollectible Accounts Receivable CNF and its subsidiaries report accounts receivable at net realizable value and provide an allowance for uncollectible accounts when collection is considered doubtful. Con-Way provides for uncollectible accounts based on various judgments and assumptions, including revenue levels, historical loss experience, and composition of outstanding accounts receivable. Logistics, based on the size and nature of its client base, performs a frequent and periodic evaluation of its customers' creditworthiness and accounts receivable portfolio and recognizes expense from uncollectible accounts when losses are both probable and reasonably estimable. Defined Benefit Pension Plans CNF has defined benefit pension plans that cover employees and former non- contractual employees in the United States. The amount recognized as pension expense and the accrued pension liability depend upon a number of assumptions and factors, the most significant being the discount rate used to measure the present value of pension obligations, the assumed rate of return on plan assets, which are both affected by economic conditions and market fluctuations, and the rate of compensation increase. CNF assumed a discount rate of 6.25% for purposes of calculating its pension expense in both 2005 and 2004. CNF adjusts its discount rate periodically by taking into account changes in high-quality corporate bond yields and the guidance of its outside actuaries. In determining the appropriate discount rate, CNF in 2004 began utilizing a bond model that incorporates expected cash flows of plan obligations. The bond model uses a selected portfolio of Moody's Aa-or-better rated bonds with cash flows and maturities that match the projected benefit payments of CNF's pension plans. CNF's discount rate is equal to the yield on the portfolio of bonds, which will typically exceed the Moody's Aa corporate bond index due to the long duration of expected benefit payments from CNF's plan. If all other factors were held constant, a 0.25% decline in the discount rate would result in an estimated $6 million increase in 2005 annual pension expense. CNF adjusts its assumed rate of return on plan assets based on historical returns and current market expectations. The rate of return is based on a mean-expected 20-year return on the current asset allocation and the effect of actively managing the plan, net of fees and expenses. For purposes of calculating its pension expense, CNF assumed a rate of return on plan assets of 8.5% in 2005, a decline from an assumption of 9.0% in 2004. Using year- end plan asset values, a 0.5% decline in the assumed rate of return on plan assets would result in an estimated $4 million increase in 2005 annual pension expense. The determination of CNF's accrued pension benefit cost includes an unrecognized actuarial loss that results from the cumulative difference between estimated and actual values for the year-end projected pension benefit obligation and the fair value of plan assets. Under GAAP, any portion of the unrecognized actuarial loss or gain that exceeds ten percent of the greater of the projected benefit obligation or fair value of plan assets must be amortized as an expense over the average service period for employees, approximately thirteen years for CNF. Lower amortization of the unrecognized actuarial loss reduces the annual pension expense in 2005 by approximately $6 million from the annual pension expense in 2004. Goodwill and Other Long-Lived Assets CNF performs an impairment analysis of long-lived assets whenever circumstances indicate that the carrying amount may not be recoverable. For assets that are to be held and used, an impairment charge is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than carrying value. If impairment exists, a charge is recognized for the difference between the carrying value and the fair value. Fair values are determined using quoted market values, discounted cash flows, or external appraisals, as applicable. Assets held for disposal are carried at the lower of carrying value or estimated net realizable value. Other Matters Cyclicality and Seasonality CNF's businesses operate in industries that are affected directly by general economic conditions and seasonal fluctuations, which affect demand for transportation services. In the trucking and air freight industries, for a typical year, the months of September and October usually have the highest business levels while the months of December, January and February usually have the lowest business levels. Business Interruption CNF and its subsidiaries rely on CNF Service Company for the performance of shared administrative and technology services in the conduct of their businesses. CNF's computer facilities and its administrative and technology employees are located at the Administrative and Technology ("AdTech") Center, a centralized shared-service facility. Although CNF maintains backup systems and has disaster recovery processes and procedures in place, a sustained interruption in the operation of these facilities, whether due to terrorist activities, earthquakes, floods or otherwise, could have a material adverse effect on CNF's financial condition, cash flows, and results of operations. Homeland Security CNF is subject to compliance with cargo security and transportation regulations issued by the Department of Homeland Security and the Department of Transportation. CNF is not able to accurately predict how new governmental regulation will affect the transportation industry. However, CNF believes that any additional security measures that may be required by future regulations could result in additional costs and could have an adverse effect on its ability to serve customers and on its financial condition, results of operations, and cash flows. Employees The workforce of CNF and its subsidiaries is not affiliated with labor unions. Consequently, CNF believes that the operations of its subsidiaries have significant advantages over comparable unionized competitors (particularly in the trucking industry) in providing reliable and cost- competitive customer services, including greater efficiency and flexibility. There can be no assurance that CNF's subsidiaries will be able to maintain their current advantages over certain of their competitors. New Accounting Standards In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"), a revision of SFAS 123 that supersedes APB 25 and its related implementation guidance. SFAS 123R eliminates the alternative to use APB 25's intrinsic-value method of accounting that was provided in SFAS 123 as originally issued, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions) over the period during which an employee is required to provide service in exchange for the award. SFAS 123R also amends FASB Statement No. 95, "Statement of Cash Flows," to require that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as financing cash flows, rather than as a reduction of taxes paid. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on factors that cannot be predicted, including when employees exercise stock options. The effective date of SFAS 123R is as of the beginning of the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005, which for CNF is the first quarter of 2006. CNF is currently assessing the impact that SFAS 123R will have on its financial statements. Forward-Looking Statements Certain statements included herein constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties, and should not be relied upon as predictions of future events. All statements other than statements of historical fact are forward-looking statements, including any projections of earnings, revenues, weight, yield, volumes, income or other financial or operating items, any statements of the plans, strategies, expectations or objectives of CNF or its management for future operations or other future items, any statements concerning proposed new products or services, any statements regarding CNF's estimated future contributions to pension plans, any statements as to the adequacy of reserves, any statements regarding the outcome of any claims that may be brought against CNF by CFC's multi-employer pension plans or any statements regarding future economic conditions or performance, any statements regarding the outcome of legal and other claims and proceedings against CNF; any statements of estimates or belief and any statements or assumptions underlying the foregoing. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative of those terms or other variations of those terms or comparable terminology or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data and methods that may be incorrect or imprecise and there can be no assurance that they will be realized. In that regard, the following factors, among others and in addition to the matters discussed elsewhere in this document and other reports and documents filed by CNF with the Securities and Exchange Commission, could cause actual results and other matters to differ materially from those discussed in such forward-looking statements: * changes in general business and economic conditions, including the global economy; * the creditworthiness of CNF's customers and their ability to pay for services rendered; * increasing competition and pricing pressure; * changes in fuel prices; * the effects of the cessation of EWA's air carrier operations; * the possibility that CNF may, from time to time, be required to record impairment charges for long-lived assets; * the possibility of defaults under CNF's $400 million credit agreement and other debt instruments, including defaults resulting from additional unusual charges or from any costs or expenses that CNF may incur, and the possibility that CNF may be required to repay certain indebtedness in the event that the ratings assigned to its long-term senior debt by credit rating agencies are reduced; * labor matters, including the grievance by furloughed pilots and crew members, labor organizing activities, work stoppages or strikes; enforcement of and changes in governmental regulations, including the effects of new regulations issued by the Department of Homeland Security; * environmental and tax matters; * matters relating to CNF's 1996 spin-off of CFC, including the possibility that CFC's multi-employer pension plans may assert claims against CNF, that CNF may not prevail in those proceedings and may not have the financial resources necessary to satisfy amounts payable to those plans, and matters relating to CNF's defined benefit pension plans; * matters relating to the sale of MWF, including CNF's obligation to indemnify UPS for certain losses in connection with the sale; As a result of the foregoing, no assurance can be given as to future financial condition, cash flows, or results of operations. See Note 8, "Commitments and Contingencies" in Item 1, "Financial Statements." ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CNF is exposed to a variety of market risks, including the effects of interest rates, fuel prices, and foreign currency exchange rates. CNF enters into derivative financial instruments only in circumstances that warrant the hedge of an underlying asset, liability or future cash flow against exposure to some form of interest rate, commodity or currency-related risk. Additionally, the designated hedges should have high correlation to the underlying exposure such that fluctuations in the value of the derivatives offset reciprocal changes in the underlying exposure. CNF is subject to the effect of interest rate fluctuations on the fair value of its long-term debt. Based on the fixed interest rates and maturities of its long-term debt, fluctuations in market interest rates would not significantly affect operating results or cash flows, but may have a material effect on the fair value of long-term debt, as more fully discussed in Note 5, "Debt and Other Financing Arrangements," in Item 8, "Financial Statements and Supplementary Data," in CNF's 2004 Annual Report on Form 10-K. CNF has market risk for changes in the price of diesel fuel. When fuel costs exceed certain specified thresholds, CNF seeks to charge customers a fuel surcharge that is adjusted weekly based on a national index. Fuel surcharges are common in the transportation industry and generally have been accepted by customers. However, although CNF's risk associated with fuel price increases is currently eliminated by revenue from fuel surcharges, competitive pressures may limit CNF's ability to continue to maintain or increase its fuel surcharges in response to rising fuel prices. In addition, the relationship between revenue recognized from CNF's fuel surcharges and fuel costs incurred by CNF may vary, and as a result, fluctuations in the market price of fuel may have a positive or negative effect on CNF's operating margins. The assets and liabilities of CNF's foreign subsidiaries are denominated in foreign currencies, which create exposure to changes in foreign currency exchange rates. However, the market risk related to foreign currency exchange rates is not material to CNF's financial condition, results of operations, or cash flows. ITEM 4. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. CNF's management, with the participation of CNF's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of CNF's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, CNF's Chief Executive Officer and Chief Financial Officer have concluded that CNF's disclosure controls and procedures are effective as of the end of such period. (b) Internal Control Over Financial Reporting. There have not been any changes in CNF's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, CNF's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Certain legal proceedings of CNF are also discussed in Note 2, "Discontinued Operations," and Note 8, "Commitments and Contingencies," of Part 1, Item 1, "Financial Statements." On February 16, 2000, a DC-8 cargo aircraft operated by EWA personnel crashed shortly after take-off from Mather Field, near Sacramento, California. The crew of three was killed. Menlo Worldwide Forwarding, Inc. ("MWF, Inc."), EWA and CNF Inc. were named as defendants in wrongful death lawsuits brought by the families of the three deceased crew members, seeking compensatory and punitive damages. The lawsuits brought by two of the three families have now been settled, with each settlement fully covered by insurance. The parties to the lawsuit filed by the family of the third deceased crew member have concluded settlement negotiations on all material terms of settlement, but the final documents have not yet been signed. The settlement of that lawsuit also will be fully covered by insurance. EWA, MWF, Inc., MW and CNF Inc. are named as defendants in a lawsuit filed in state court in California by approximately 140 former EWA pilots and crew members. The lawsuit alleges wrongful termination in connection with the termination of EWA's air carrier operations, and seeks $500 million and certain other unspecified damages. CNF believes that the lawsuit's claims are without merit, and is vigorously defending the lawsuit. In 2003, prior to the sale of MWF to UPS, CNF became aware of information that Emery Transnational, a Philippines-based joint venture in which MWF, Inc. may be deemed to be a controlling partner, may have made certain payments in violation of the Foreign Corrupt Practices Act. CNF promptly notified the Department of Justice and the Securities and Exchange Commission of this matter, and MWF, Inc. instituted policies and procedures in the Philippines designed to prevent such payments from being made in the future. CNF was subsequently advised by the Department of Justice that it is not pursuing an investigation of this matter. CNF has conducted an internal investigation of approximately 40 other MWF, Inc. international locations and has shared the results of the internal investigation with the SEC. The internal investigation revealed that Menlo Worldwide Forwarding (Thailand) Limited, a Thailand-based joint venture, also may have made certain payments in violation of the Foreign Corrupt Practices Act. MWF, Inc. made certain personnel changes and instituted policies and procedures in Thailand designed to prevent such payments from being made in the future. In December 2004, CNF completed the sale of its air freight forwarding business (including the stock of MWF, Inc., Emery Transnational and Menlo Worldwide Forwarding (Thailand) Limited) to an affiliate of UPS. In connection with that sale, CNF agreed to indemnify UPS for certain losses resulting from violations of the Foreign Corrupt Practices Act. CNF is currently unable to predict whether it will be required to make payments under the indemnity. Certain current and former officers of CNF, EWA and MWF, Inc. and certain current and former directors of CNF were named as defendants in a purported shareholder derivative suit filed in September 2003 in California Superior Court for the County of San Mateo. The complaint alleged breach of fiduciary duty, gross mismanagement, waste and abuse of control relating to the management, control and operation of EWA and MWF, Inc. CNF was named only as a nominal defendant and no relief was sought against it. CNF maintains insurance for the benefit of its officers and directors, and the applicable insurance carriers were notified of the claims asserted in the lawsuit. On November 5, 2004, the Court granted preliminary approval to a settlement negotiated by the parties, and on February 4, 2005, the Court gave final approval of the settlement. Under terms of the non-monetary settlement, the individually named defendants expressly denied any wrongdoing or liability. The Court's final judgment of dismissal with prejudice was subject to a 60- day appeals period that passed with no appeal filed. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table provides a summary of shares repurchased by the CNF during the quarter ended March 31, 2005: Maximum Dollar Total Average Total Number of Value of Shares Number of Price Shares Purchased that May Yet Be Shares Paid per as Part of Purchased Under Purchased Share Publicly Announced the Program [1] [1] Program [1] ------------------------------------------------------------- January 1, 2005 - January 31, 2005 14,000 $ 46.91 14,000 $ 299,343,254 February 1, 2005 - February 28, 2005 449,000 $ 45.52 449,000 $ 278,902,912 March 1, 2005 - March 31, 2005 231,000 $ 48.34 231,000 $ 267,735,939 ---------- ------------------ Total 694,000 $ 46.49 694,000 $ 267,735,939 ========== ================== [1] In January 2005, CNF's Board of Directors authorized a two-year stock repurchase program providing for the repurchase of up to $300 million in common stock in open market purchases and privately negotiated transactions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Shareholders Meeting held April 19, 2005, the following proposals were presented with the indicated voting results: For the purpose of electing members of the Board of Directors, the votes representing shares of common and preferred stock were cast as follows: Nominee For Against - -------------- ---------- ---------- Michael J. Murray 48,620,325 967,658 Robert D. Rogers 47,994,049 1,593,934 William J. Schroeder 48,615,357 972,626 Chelsea C. White III 48,607,301 980,682 The following directors did not stand for election and continued in office as directors after the Annual Shareholders Meeting: W. Keith Kennedy, Jr., John J. Anton, William R. Corbin, Margaret G. Gill, Robert Jaunich II, Admiral Henry H. Mauz, Jr., John C. Pope, Peter W. Stott, and Robert P. Wayman. The appointment of KPMG LLP as independent public accountants for the year 2005 was approved by the following vote: For 48,725,773; Against 657,310; Abstain 204,900. ITEM 6. EXHIBITS Exhibit No. (3) Articles of Incorporation and By-laws 3.1 CNF Inc. Bylaws, as amended April 25, 2005 (Exhibit 3.1 to CNF's Report on Form 8-K filed on April 28, 2005*) (10) Material Contracts 10.1 CNF Inc. 1997 Equity and Incentive Plan, as amended as of January 27, 2003 (Exhibit A to CNF's Proxy Statement dated March 24, 2003.*#) 10.2 CNF Inc. Amended and Restated 2003 Equity Incentive Plan for Non- Employee Directors#. 10.3 Summary of Certain Compensation Arrangements#. 10.4 Form of Restricted Stock Award Agreement for directors of CNF (Exhibit 99.1 to CNF's Report on Form 8-K filed on April 28, 2005*#) 10.5 CNF Inc. Nonqualified Executive Benefit Plans Trust Agreement 2004 Restatement dated as of December 30, 2004 between CNF Inc. and Wachovia Bank, NA# 10.6 CNF Inc. Nonqualified Director Benefit Plans Trust Agreement 2004 Restatement dated as of December 30, 2004 between CNF Inc. and Wachovia Bank, NA# (31) Certification of Officers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32) Certification of Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Previously filed with the Securities and Exchange Commission and incorporated herein by reference. # Designates a contract or compensation plan for Management or Directors. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company (Registrant) has duly caused this Form 10-Q Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. CNF Inc. (Registrant) May 9, 2005 /s/ Kevin Schick ------------------ Kevin Schick Senior Vice President and Chief Financial Officer EX-10 2 ex102.txt EXHIBIT 10.2 Exhibit 10.2 CNF INC. AMENDED AND RESTATED 2003 EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS 1. Introduction CNF Inc., a Delaware corporation (the "Company") established the CNF Inc. 2003 Equity Incentive Plan for Non-Employee Directors (the "Original Plan") for those members of the Company's Board of Directors who are not employees of the Company or any of its subsidiaries. This document amends and restates in its entirety the Original Plan (the Original Plan, as so amended and restated, is referred to herein as the "Plan") to reflect certain amendments to the Original Plan made pursuant to Section 10. All grants of Awards made under the Original Plan, or under the Original Plan as heretofore amended, shall constitute valid Awards granted under and governed by the terms of the Plan, and shall not be affected by this amendment and restatement of the Original Plan. The effective date of the Plan (the "Effective Date") is April 22, 2003, the date that the Original Plan was approved by stockholders of the Company. The Plan permits the grant of stock options and restricted stock awards to non-employee directors of the Company, although currently only restricted stock awards are being granted under the Plan. The purposes of the Plan are to encourage directors to own shares of the Company's stock and thereby to align their interests more closely with the interests of the other stockholders of the Company, to encourage the highest level of director performance by providing directors with a direct interest in the Company's attainment of its financial goals, and to provide a financial incentive that will help attract and retain the most qualified directors. 2. Definitions The following terms shall have the meanings set forth below. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. (a) "Award" means a Restricted Stock Award or an Option Award. (b) "Award Agreement" has the meaning given to the term in Section 5 hereof. (c) "Board" or "Board of Directors" means the Board of Directors of the Company. (d) "Change in Control" means the occurrence of an event described in any one of the following clauses (i) through (iv): (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (A) the Company or its affiliates, (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or its affiliates, and (C) any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of the common stock, par value $0.625 per share, of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding voting securities; (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the Effective Date or whose appointment, election or nomination for election was previously so approved or recommended; (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined above), directly or indirectly, acquired 25% or more of the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates); (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or there is consummated an agreement for the sale or disposition by the Company of assets having an aggregate book value at the time of such sale or disposition of more than 75% of the total book value of the Company's assets on a consolidated basis (or any transaction having a similar effect), other than any such sale or disposition by the Company (including by way of spin-off or other distribution) to an entity, at least 50% of the combined voting power of the voting securities of which are owned immediately following such sale or disposition by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; (e) "Committee" means a committee consisting of members of the Board who are empowered hereunder to take actions in the administration of the Plan. The Committee shall be so constituted at all times as to permit the Plan to comply with applicable NYSE rules and with Rule 16b-3 ("Rule 16b- 3") promulgated under the Securities Exchange Act of 1934 (the "1934 Act"). Members of the Committee shall be appointed from time to time by the Board, shall serve at the pleasure of the Board and may resign at any time upon written notice to the Board. (f) "Director" means a member of the Board who is not an employee of the Company. For purposes of the Plan, an employee is an individual whose wages are subject to the withholding of federal income tax under Section 3401 of the Internal Revenue Code. (g) "Effective Date" has the meaning given to that term in Section 1 hereof. (h) "Fair Market Value" per share of Stock as of a particular date means (i) the closing sales price per share of Stock on the national securities exchange on which the Stock is principally traded, for the last preceding date on which there was a sale of such Stock on such exchange, or (ii) if the shares of Stock are then traded in an over-the- counter market, the average of the closing bid and asked prices for the shares of Stock in such over-the-counter market for the last preceding date on which there was a sale of such Stock in such market, or (iii) if the shares of Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine. (i) "Internal Revenue Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. (j) "NYSE" means the New York Stock Exchange. (k) "Option" means an option to purchase Stock. (l) "Option Award" means an Award of an Option pursuant to Section 7 hereof. (m) "Restricted Stock Award" means an Award of Stock granted to a Director pursuant to Section 6 hereof. (n) "Restricted Stock Award Amount" means (i) for each director receiving a Restricted Stock Award pursuant to Section 6(a)(i), an amount equal to $65,000 for each full year during the director's term (for a total of $195,000 for a three-year term), (ii) for each Class I and Class III director receiving a Restricted Stock Award pursuant to Section 6(a)(ii), an amount equal to $65,000 for each full year remaining until such director is next scheduled for election or re-election to the Board (for a total of $130,000 for Class I directors and $65,000 for Class III directors) and (iii) for each newly-appointed director receiving a Restricted Stock Award pursuant to Section 6(a)(iv), an amount equal to $65,000 for each full year remaining until such director is next scheduled for election, plus a pro rata portion of $65,000 for each partial year remaining until such director is next scheduled for election. For purposes of this definition, a period of greater than 11 but less than 12 months shall be considered a full year. (o) "Restricted Stock Award Date" means, for a Restricted Stock Award to be made in any year pursuant to Section 6(a), the earlier to occur of (A) the date of the annual directors meeting occurring during such year and (B) April 30 of that year. (p) "Stock" means the Common Stock, $0.625 par value, of the Company. 3. Plan Administration The Plan shall be administered by the Committee. Subject to the other provisions of the Plan, the Committee is authorized to determine the manner in which Awards will vest (including the authority to determine whether, and to what extent, an Award may vest upon retirement of a Director from the Board), to specify other terms, provisions, and conditions of the Awards, and to do all things necessary or desirable in connection with the administration of the Plan. Notwithstanding the foregoing, and subject to Section 4(c) hereof, the Committee shall not have the authority to lower the exercise price of any outstanding Option, nor shall the Committee have the authority to settle, cancel or exchange any outstanding Option in consideration for the grant of a new Award with a lower exercise price. 4. Stock Subject to the Plan (a) Number of Shares Available Under the Plan. Subject to subsections (b) and (c) of this Section 4, the maximum number of shares of Stock that may be issued or transferred pursuant to Awards under the Plan shall not exceed 300,000 shares, and no more than 150,000 shares of Stock may be issued or transferred pursuant to Restricted Stock Awards. Shares of Stock that are issued as Restricted Stock Awards or that are issuable upon exercise of an Option shall be applied to reduce the maximum number of shares of Stock remaining available for use under the Plan. The shares of Stock to be delivered under the Plan shall be made available, at the discretion of the Committee, either from authorized but unissued shares of Stock or from shares of Stock held by the Company as treasury shares, including shares purchased in the open market. (b) Effect of Forfeitures and Terminations on Shares Available. Any shares of Stock that are subject to a Restricted Stock Award and which are forfeited shall be available for reissuance under the Plan. In the event that any Option Award hereunder lapses or otherwise terminates prior to being fully exercised, any shares of Stock allocable to the unexercised portion of such Award shall be available for future Restricted Stock Awards or Options Awards under the Plan. (c) If: (i) any recapitalization, reclassification, spin-off, split-up or consolidation of Stock is effected; (ii) the outstanding shares of Stock are exchanged, in connection with a merger or consolidation of the Company or a sale by the Company of all or a part of its assets, for a different number or class of shares of stock or other securities of the Company or for shares of the stock or other securities of any other corporation; (iii) new, different or additional shares or other securities of the Company or of another company are received by the holders of Stock; (iv) any distribution is made to the holders of Stock other than a cash dividend; or (v) any other change in capitalization or similar event is determined by the Committee to have occurred; then the appropriate adjustments will be made to: (i) the number and class of shares or other securities that may be issued or transferred pursuant to outstanding Options or Restricted Stock Awards; (ii) the number and class of shares or other securities available for issuance under the Plan; (iii) the purchase price to be paid per share under outstanding Options; and (iv) the number of Options to be issued under Section 7(a) hereof. Upon the dissolution or liquidation of the Company, the Plan shall terminate, and, except as otherwise provided herein, all Options previously granted shall terminate on the date of such dissolution or liquidation of the Company; provided that a Director shall have the right to exercise any Option held by him immediately prior to such dissolution or liquidation to the full extent not theretofore exercised. Adjustments under this subsection (c) shall be made according to the sole discretion of the Committee, and its decision shall be binding and conclusive, subject to any legally required approval of the Board of Directors or of any other entity. Except as otherwise provided in this subsection (c), the issuance by the Company of shares of capital stock of any class or securities convertible into shares of capital stock of any class shall not affect Options or Restricted Stock Awards hereunder. (d) General Adjustment Rules. No adjustment or substitution provided for in this Section 4 shall require the Company to issue a fractional share of Stock, and the total substitution or adjustment with respect to each Award shall be limited by deleting any fractional share. 5. Participation Each Director shall receive Awards on the terms and conditions set forth under the Plan. Each Director receiving an Award shall enter into an agreement (an "Award Agreement") with the Company, in such form as the Committee shall determine and which is consistent with the provisions of the Plan. In the event of any inconsistency between the provisions of the Plan and any such agreement entered into hereunder, the provisions of the Plan shall govern. 6. Restricted Stock Awards (a) Restricted Stock Awards. Subject to Section 10 hereof, so long as there are sufficient shares of Stock available for issuance or transfer pursuant to Restricted Stock Awards under the Plan: (i) on the Restricted Stock Award Date in each year during the term of the Plan, commencing with the Restricted Stock Award Date in 2005, each Director who is elected or re- elected to the Board at the annual meeting of shareholders during such year shall automatically be granted an Award consisting of a number of shares of Restricted Stock determined based on the applicable Restricted Stock Award Amount; (ii) in addition to the grants described in subsection (i) above, on the Restricted Stock Award Date in 2005, each Class I Director (other than W. Keith Kennedy, Jr.) and each Class III Director then serving on the Board shall automatically be granted an Award consisting of a number of shares of Restricted Stock determined based on the applicable Restricted Stock Award Amount; (iii) if he is serving on the Board on the Restricted Stock Award Date in 2006, W. Keith Kennedy, Jr. shall automatically be granted an Award consisting of a number of shares of Restricted Stock having a value, at the time of grant, of $65,000; (iv) at any time upon a director's appointment to the Board, such director shall automatically be granted an Award consisting of a number of shares of Restricted Stock determined based on the applicable Restricted Stock Award Amount. (b) Purchase Price. Directors under the Plan shall not be required to pay any purchase price for the shares of Stock to be acquired pursuant to a Restricted Stock Award, unless otherwise required under applicable law or regulations for the issuance of shares of Stock that are nontransferable and subject to a substantial risk of forfeiture until specific conditions are met. If so required, the price at which shares of Stock shall be sold to Directors under the Plan pursuant to an Award shall be the minimum purchase price required in such law or regulations, as determined by the Board in the exercise of its sole discretion. The purchase price, if any, of shares of Stock sold by the Company hereunder shall be payable by the Director in cash or by check at the time such Award is granted. (c) Number of Shares Awarded. The number of shares of Stock included in each such Restricted Stock Award shall be determined by dividing the dollar value of such Award by the Fair Market Value of a share of Stock as of the date of grant. In no event shall the Company be required to issue fractional shares. Whenever under the terms of this Section 6(c) a fractional share of Stock would otherwise be required to be issued, an amount in lieu thereof shall be paid in cash based upon the Fair Market Value of such fractional share. (d) Forfeiture of Awards. If a Director voluntarily resigns or is removed for cause as a Board member before the restrictions applicable to a Restricted Stock Award lapse pursuant to the Terms and Conditions of Restricted Stock herein, the shares of Stock granted pursuant to such Restricted Stock Award shall be forfeited. (e) Restrictions. Except as otherwise provided in the Plan, shares of Stock received pursuant to a Restricted Stock Award may not be sold, assigned, pledged, hypothecated, transferred or otherwise disposed of until the restrictions applicable to such Stock have lapsed pursuant to the Terms and Conditions of Restricted Stock herein. (f) Terms and Conditions of Restricted Stock. Each Restricted Stock Award granted pursuant to the Plan shall be evidenced by a Award Agreement. The Award Agreement may contain such terms, provisions and conditions as may be determined by the Committee and not inconsistent with the Plan. Restrictions on Stock covered by a Restricted Stock Award shall lapse and be removed (and the shares of Stock acquired by a Director pursuant to a Restricted Stock Award shall vest) in a manner determined by the Committee at the time the Award is granted and set forth in the applicable Award Agreement. Restrictions may lapse and Restricted Stock Awards vest based on either or both of (A) the attainment of performance goals by the Company, or (B) the continued service on the Board by the Director. All performance-based Restricted Stock Awards will have a minimum vesting period of one (1) year. With respect to any shares of Restricted Stock subject to restrictions which lapse solely based on the Director's continued service on the Board, such restrictions shall lapse over a vesting schedule (so long as the Director continues to serve on the Board) no shorter in duration than three years from the date of grant; provided, that such vesting schedule may provide for partial or installment vesting during such period. In addition, unless otherwise determined by the Committee and set forth in the applicable Award Agreement, all restrictions on Stock covered by a Restricted Stock Award shall lapse and be removed (and the shares of Stock acquired by a Director pursuant to a Restricted Stock Award shall vest) upon any of the following events: (i) Upon the termination of a Director's service as a board member as a result of death, disability, failure to be nominated for election as a director or failure to be elected by stockholders as a Board member; or (ii) In the event of a Change in Control. (g) Privileges of a Stockholder. A Director shall have all voting, dividend, liquidation and other rights with respect to Stock received by him as a Restricted Stock Award under this Restricted Stock Awards section, whether or not restrictions have lapsed. However, if the Company shall at any time pay or make any dividend or other distribution upon the Stock payable in securities or other property (except money), a proportionate part of such securities or other property shall be set aside and delivered to any Director then holding a Restricted Stock Award upon lapse of all restrictions applicable to such Restricted Stock Award. Prior to the time that any such securities or other property are delivered to a Director in accordance with the foregoing, the Director shall, subject to the same forfeiture provisions applicable to the Restricted Stock Award to which such securities or other property relates, be the owner of such securities or other property and shall have the right to vote the securities, receive any dividends payable on such securities and in all other respects shall be treated as the owner. If securities or other property which have been set aside by the Company in accordance with this Section are not delivered to a Director because restrictions applicable to such Restricted Stock Award do not lapse and such Stock is forfeited, then such securities or other property shall be forfeited to the Company and shall be dealt with by the Company as it shall determine in its sole discretion. (h) Enforcement of Restrictions. The Committee shall cause a legend to be placed on the Stock certificates issued pursuant to each Restricted Stock Award referring to the restrictions imposed in the Plan and, in addition, may in its sole discretion require one or more of the following methods of enforcing such restrictions: (i) Requiring the Director to keep the Stock certificates, duly endorsed, in the custody of the Company while the restrictions remain in effect; or (ii) Requiring that the Stock certificates, duly endorsed, be held in the custody of a third party while the restrictions remain in effect. 7. Option Awards (a) Option Awards. Subject to Section 10 hereof, at any time and from time to time during the term of the Plan and so long as there are sufficient shares available for issuance or transfer pursuant to Awards under the Plan, the Committee may grant an Option to purchase shares of Stock to any Director. (b) Exercise Price for Options. The exercise price per share of Stock covered by each Option shall be the Fair Market Value of the Stock as of the date the Option is granted. The exercise price of an Option granted under the Plan shall be subject to adjustment as provided in Section 4(c) hereof. (c) Term; Termination. Unless earlier terminated, each Option shall expire ten (10) years from the date that the Option was granted. Except as otherwise determined by the Committee and set forth in the applicable Award Agreement, no Option granted to a Director (to the extent otherwise exercisable) may be exercised, and such Option shall terminate, after the first to occur of the following events: (i) The expiration of three (3) months from the date the Director ceases to serve as a director of the Company by reason of such Director's voluntary resignation; (ii) The expiration of twelve (12) months from the date the Director ceases to serve as a director of the Company other than by reason of such Director's voluntary resignation, removal for cause; or (iii) The expiration of three (3) years from the date that the Director retires from the Board; or (iv) The removal of the Director for cause. (d) Terms and Conditions of Options; Vesting. Each Option granted pursuant to the Plan shall be evidenced by an Award Agreement. The Award Agreement may contain such terms, provisions and conditions as may be determined by the Committee and not inconsistent with the Plan. Each Option granted under the Plan shall vest and become exercisable in a manner determined by the Committee at the time the Award is granted and set forth in the applicable Award Agreement. Vesting of Options may be based upon either or both of (i) the attainment of performance goals by the Company, or (ii) the continued service on the Board by the Director. All performance-based Options will have a minimum vesting period of one (1) year. No Option shall be exercisable prior to vesting. Notwithstanding the foregoing, each Option shall become immediately exercisable as to all shares covered by such Option in the event a Director's service as a director terminates as a result of death, disability, failure to be nominated for election as a director or failure to be elected by stockholders as a Board member. Unless otherwise determined by the Committee and set forth in the applicable Award Agreement, each Option shall vest and become immediately exercisable in the event of a Change in Control. (e) Assignability of Options. Each Option granted pursuant to the Plan shall, during the Director's lifetime, be exercisable only by the Director, and the Option shall not be transferable by the Director by operation of law or otherwise other than by will or the laws of descent and distribution. (f) Exercise of Options. An Option may be exercised in whole or in part, to the extent it is then exercisable, only by written notice to the Company at its principal office accompanied by payment in cash or by check of the full exercise price for the shares with respect to which the Option, or portion thereof, is exercised. However, the Committee may, in its discretion, (i) allow payment, in whole or in part, through the delivery of shares of Stock which have been owned by the Director for at least six months, duly endorsed for transfer to the Company with a fair market value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (ii) allow payment, in whole or in part, through the surrender of shares of Stock then issuable upon exercise of the Option having a fair market value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the delivery of a notice that the Director has placed a market sell order with a broker with respect to shares of Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, provided that the Company shall not deliver such shares until payment of such proceeds is received by the Company; or (iv) allow payment through any combination of the consideration provided in the foregoing clauses (i), (ii) and (iii). 8. Rights of Directors Nothing contained in the Plan or in any Option or Restricted Stock Award granted under the Plan shall interfere with or limit in any way the right of the stockholders of the Company to remove any Director from the Board pursuant to the Certificate of Incorporation or bylaws of the Company, nor confer upon any Director any right to continue in the service of the Company. 9. General Restrictions (a) Investment Representations. The Company may require any Director to whom an Option or Restricted Stock Award is granted, as a condition of receiving such Option or Restricted Stock Award or exercising an Option, to give written assurances in substance and form satisfactory to the Company and its counsel to the effect that such person is acquiring the Option or Stock subject to the Restricted Stock Award or Option for his own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with Federal and applicable state securities laws. (b) Compliance With Securities Laws. Each Option or Restricted Stock Award shall be subject to the requirement that, if at any time counsel to the Company shall determine that the listing, registration or qualification of the shares subject to such Option or Restricted Stock Award upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance of shares thereunder, such Restricted Stock Award or Option may not be accepted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Committee. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification. (c) Taxes. Each Director shall make appropriate arrangements for the satisfaction of any applicable federal, state or local income or other tax withholding requirements applicable to any Restricted Stock Award or Option granted hereunder. In addition, each Director shall provide the Company with a copy of any election, which such Director may make under Section 83(b) of the Code with respect to a Restricted Stock Award. 10. Plan Amendment, Modification and Termination The Board may at any time and from time to time alter, amend, modify, suspend or terminate the Plan in whole or in part; provided, however, that no amendment or modification shall be effective without stockholder approval (a) if such approval is required by law or NYSE rules or (b) if such amendment or modification either eliminates or revises the succeeding proviso; and provided further, however, that the Board (or Committee) may amend the number of shares subject to, or the dollar value of, Awards granted pursuant to Sections 6(a) and 7(a) hereof only if it shall have received advice to such effect from an outside compensation consultant. No amendment, modification or termination of the Plan shall in any manner adversely affect any Options or Restricted Stock Awards theretofore granted under the Plan without the consent of the Director holding such Options or Restricted Stock Awards. 11. Requirements of Law (a) Compliance with Law. The issuance of Stock and the payment of cash pursuant to the Plan shall be subject to all applicable laws, rules and regulations. (b) Rule 16b-3. Awards and transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Board or the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board or the Committee. Moreover, in the event the Plan does not include a provision required by Rule 16b-3 to be stated therein in order to qualify the Plan as a formula plan, such provision (other than one relating to eligibility requirements, or the price and amount of Awards) shall be deemed automatically to be incorporated by reference into the Plan. (c) Governing Law. The Plan and all agreements hereunder shall be construed in accordance with and governed by the laws of the State of California. 12. Duration of the Plan The Plan shall terminate ten years after the date the Plan is first approved by stockholders of the Company or at such earlier time as may be determined by the Board, and no Option Awards or Restricted Stock Awards shall be granted after such termination. EX-10 3 ex103.txt EXHIBIT 10.3 Exhibit 10.3 Exhibit 10.3 Summary of Certain Compensation Arrangements Arrangements Made on January 24, 2005 and Disclosed in a Report on Form 8-K Filed on January 28, 2005 (For subsequent developments and certain changes to the arrangements described below, please see "Arrangements Made on March 1, 2005 and Disclosed in a Report on Form 8-K Filed on March 4, 2005" and "Arrangements Made on April 25, 2005 and Disclosed in a Report on Form 8-K Filed on April 28, 2005," set forth below.) On January 24, 2005, the Company's Compensation Committee, together with (in the case of the compensation of the Company's interim Chief Executive Officer), the other independent members of the Board of Directors, approved the following: Salary Increases: - ----------------------------------------------------------------------------- |Officer |Title |Current Salary|% Increase|New Salary| - ----------------------------------------------------------------------------- | | | | | | - ----------------------------------------------------------------------------- |W. Keith |Interim Chief Executive |$750,000 |0% |$750,000 | |Kennedy, Jr.|Officer | | | | |(1) | | | | | - ----------------------------------------------------------------------------- |Robert L. |President & CEO, Menlo |$300,040 |4.0% |$312,052 | |Bianco |Logistics, Inc. | | | | - ----------------------------------------------------------------------------- |Jennifer W. |Senior Vice President, |$260,000 |19.2% |$310,000 | |Pileggi (2) |General Counsel & | | | | | |Secretary | | | | - ----------------------------------------------------------------------------- |Chutta |Senior Vice President and|$441,012 |0% |$441,012 | |Ratnathicam |Chief Financial Officer | | | | |(3) | | | | | - ----------------------------------------------------------------------------- |Kevin C. |Vice President and |$241,540 |4.1% |$251,472 | |Schick (4) |Controller, Con-Way | | | | | |Transportation Services, | | | | | |Inc. | | | | - ----------------------------------------------------------------------------- |Douglas W. |Senior Vice President |$425,100 |0% |$425,100 | |Stotlar (5) | | | | | - ----------------------------------------------------------------------------- |John H. |Senior Vice President |$498,784 |5.5% |$526,240 | |Williford | | | | | |(6) | | | | | - ----------------------------------------------------------------------------- | | | | | | - ----------------------------------------------------------------------------- (1)Dr. Kennedy began receiving a salary as interim Chief Executive Officer on October 1, 2004. Prior to that time, he received a special annualized retainer of $350,000 for serving as the Chairman of the Board.In 2004, Dr. Kennedy also received an annual Board retainer of $30,000 that was paid to all members of the Board of Directors, and Board meeting fees of $16,500. Dr. Kennedy will not receive a Board retainer or Board meeting fees in 2005, for so long as he serves as interim Chief Executive Officer. (2)Ms. Pileggi was appointed Senior Vice President, General Counsel and Secretary effective December 28, 2004; she formerly served as Vice President and Corporate Counsel of Menlo Worldwide, LLC, a subsidiary of CNF Inc. (3)As previously announced, Mr. Ratnathicam notified CNF of his intention to retire as Senior Vice President and Chief Financial Officer, effective March 31, 2005. (4)As previously announced, Mr. Schick was appointed Senior Vice President and Chief Financial Officer, effective March 31, 2005. (5)Mr. Stotlar was appointed Senior Vice President of CNF Inc. and President and Chief Executive Officer of Con-Way Transportation Services, Inc., effective December 3, 2004. Mr. Stotlar received a 26.4% raise, from $336,284 to $425,100, upon such appointment. (6)Mr. Williford is also President and Chief Executive Officer of Menlo Worldwide, LLC. 2005 Incentive Compensation Awards. The annual incentive compensation awards are based upon performance objectives approved by the Compensation Committee. The 2005 awards to Ms. Pileggi and Mr. Ratnathicam are based on the pre-tax, pre-incentive income of the Company; the awards to Messrs. Williford and Bianco are based on the pre-tax, pre-incentive income of Menlo Worldwide, LLC; and the awards to Messrs. Stotlar and Schick are based on the pre-tax, pre-incentive income of Con-Way Transportation Services, Inc. The maximum incentive compensation for any officer is equal to twice his or her target award. In 2004, Dr. Kennedy did not participate in the CNF Inc. Incentive Compensation Plan, and will not participate in the Plan in 2005. On January 24, 2005, the independent members of the Board of Directors approved a discretionary cash bonus for Dr. Kennedy in the amount of $1,000,000. - ----------------------------------------------------------------------------- |Officer |Title |Target |Target |Maximum | | | |Award, as |Award |Award ($) | | | |Percentage |($) | | | | |of Salary | | | - ----------------------------------------------------------------------------- | | | | | | - ----------------------------------------------------------------------------- |W. Keith |Interim Chief Executive |N/A |N/A |N/A | |Kennedy, Jr.|Officer | | | | - ----------------------------------------------------------------------------- |Robert L. |President & CEO, Menlo |60% |$186,014|$372,029 | |Bianco |Logistics, Inc. | | | | - ----------------------------------------------------------------------------- |Jennifer W. |Senior Vice President, General|75% |$232,518|$465,036 | |Pileggi |Counsel & Secretary | | | | - ----------------------------------------------------------------------------- |Chutta |Senior Vice President and |75% |$330,759|$661,518 | |Ratnathicam |Chief Financial Officer | | | | |(1) | | | | | - ----------------------------------------------------------------------------- |Kevin C. |Vice President and Controller,|45% |$108,693|$217,386 | |Schick |Con-Way Transportation | | | | | |Services, Inc. | | | | - ----------------------------------------------------------------------------- |Douglas W. |Senior Vice President |100% |$425,100|$850,200 | |Stotlar | | | | | - ----------------------------------------------------------------------------- |John H. |Senior Vice President |100% |$526,200|$1,052,400| |Williford | | | | | - ----------------------------------------------------------------------------- | | | | | | - ----------------------------------------------------------------------------- (1)The target and maximum award amounts for Mr. Ratnathicam in the table above are based on employment for all of 2005. Under the terms of the CNF Inc. Incentive Compensation Plan, Mr. Ratnathicam will be eligible to receive a pro rata portion of the incentive compensation award, based on the three months in 2005 in which he will serve as Senior Vice President and Chief Executive Officer prior to his retirement effective March 31, 2005. Value Management Plan Awards for Three-Year Cycle Ending December 31, 2007. Value Management awards are governed by the terms of the Company's Value Management Plan. Two-thirds of each award is based upon EBITDA (earnings before interest, taxes, depreciation and amortization) and ROCE (return on capital employed), and one-third on relative total shareholder return for the three-year cycle. The performance objectives are approved by the Compensation Committee. Payments on the awards set forth in the table below are payable in 2008, based on actual performance for the three-year period commencing January 1, 2005 and ending December 31, 2007. The maximum Value Management Plan award for any officer is equal to twice his or her target award. Dr. Kennedy and Mr. Ratnathicam did not receive Value Management Plan Awards for the three-year cycle ending December 31, 2007. A copy of the Value Management Plan is included as Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q filed on May 7, 2004. The foregoing description of the Value Management Plan is qualified in its entirety by reference to such exhibit. - ----------------------------------------------------------------------------- |Officer |Title |Target |Target |Maximum | | | |Award |Award |Award ($) | | | |(% of |($) | | | | |Salary)| | | - ----------------------------------------------------------------------------- | | | | | | - ----------------------------------------------------------------------------- |W. Keith |Interim Chief Executive Officer |N/A |N/A |N/A | |Kennedy, Jr.| | | | | - ----------------------------------------------------------------------------- |Robert L. |President & CEO, Menlo Logistics, |65% |$202,834|$405,668 | |Bianco |Inc. | | | | - ----------------------------------------------------------------------------- |Jennifer W. |Senior Vice President, General |115% |$356,528|$713,056 | |Pileggi |Counsel & Secretary | | | | - ----------------------------------------------------------------------------- |Chutta |Senior Vice President and Chief |N/A |N/A |N/A | |Ratnathicam |Financial Officer | | | | - ----------------------------------------------------------------------------- |Kevin C. |Vice President and Controller, |40% |$100,526|$201,052 | |Schick |Con-Way Transportation Services, | | | | | |Inc. | | | | - ----------------------------------------------------------------------------- |Douglas W. |Senior Vice President |150% |$637,650|$1,275,300| |Stotlar | | | | | - ----------------------------------------------------------------------------- |John H. |Senior Vice President |150% |$789,360|$1,578,720| |Williford | | | | | - ----------------------------------------------------------------------------- | | | | | | - ----------------------------------------------------------------------------- Stock Option Awards. Each stock option award described in the table below is made pursuant to, and is governed by the terms of, the Company's 1997 Equity and Incentive Plan and a stock option agreement entered into by the Company and the executive. These documents provide that the options have a term of ten years, will vest in equal annual installments over three years, commencing January 1, 2006, or earlier in certain circumstances (including in the event of death or disability or upon a Change in Control). Upon retirement at age 65 or pursuant to the "Rule of 85" (providing for an unreduced retirement benefit upon early retirement), the options continue to vest in accordance with their terms. Except as noted above, unvested options are forfeited upon termination of the executive's employment. - ----------------------------------------------------------------------------- |Officer |Title |Non- |Incentive |Total |Exercise | | | |Qualified |Stock |Option |Price | | | |Option |Option |Shares | | | | |Shares |Shares | | | - ----------------------------------------------------------------------------- | | | | | | | - ----------------------------------------------------------------------------- |W. Keith |Interim Chief |0 |0 |0 |N/A | |Kennedy, Jr.|Executive Officer | | | | | - ----------------------------------------------------------------------------- |Robert L. |President & CEO, Menlo|8,000 |0 |8,000 |$46.02 | |Bianco |Logistics, Inc. | | | | | - ----------------------------------------------------------------------------- |Jennifer W. |Senior Vice President,|13,328 |2,172 |15,500 |$46.02 | |Pileggi |General Counsel & | | | | | | |Secretary | | | | | - ----------------------------------------------------------------------------- |Chutta |Senior Vice President |0 |0 |0 |N/A | |Ratnathicam |and Chief Financial | | | | | | |Officer | | | | | - ----------------------------------------------------------------------------- |Kevin C. |Vice President and |4,000 |0 |4,000 |$46.02 | |Schick |Controller, Con-Way | | | | | | |Transportation | | | | | | |Services, Inc. | | | | | - ----------------------------------------------------------------------------- |Douglas W. |Senior Vice President |0 |0 |0 |$46.02 | |Stotlar (1) | | | | | | - ----------------------------------------------------------------------------- |John H. |Senior Vice President |33,328 |2,172 |35,500 |$46.02 | |Williford | | | | | | |(2) | | | | | | - ----------------------------------------------------------------------------- | | | | | | | - ----------------------------------------------------------------------------- (1)Mr. Stotlar also received a grant of 40,000 stock options and 30,000 shares of restricted stock in December 2004 in connection with his appointment as Senior Vice President of CNF Inc. and President and Chief Executive Officer of Con-Way Transportation Services, Inc. (2) Mr. Williford also received a grant of 30,000 shares of restricted stock in December 2004. On January 24, 2005, the Company's Board of Directors, based on the recommendation of the Director Affairs Committee, approved the following changes to the compensation payable to members of the Board: Cash Compensation. Each director will receive an annual cash retainer of $70,000. In addition, the chair of the Audit Committee will receive an annual chair cash retainer of $15,000, and the chairs of the Compensation, Director Affairs and Finance Committees each will receive an annual chair cash retainer of $8,000. Each member of the Audit Committee, other than the chair, will also receive an additional committee retainer of $5,000. Each of the retainers described above are payable quarterly in advance. Directors will no longer receive any fees for attending Committee or Board meetings. Equity Compensation. Each director will receive grants of restricted stock having a notional value of $65,000 per year for each year of the director's three-year term. Except during a transition period, each director will receive a grant of restricted stock having a value at the time of grant of $195,000 (3 years at $65,000 per year) in the year that the director is elected or re-elected to the Board, and will not receive a restricted stock grant under this program in the subsequent two years. Each such grant of restricted stock will be granted in April (following election or re-election to the Board) and will vest one-third per year, commencing on the anniversary date of the grant, or earlier upon the occurrence of certain events such as death, disability, retirement or a Change in Control. The transition period operates as follows. Following CNF's annual meeting of shareholders in April 2005, current directors elected or re-elected to the Board in 2005 will receive a grant of restricted stock having a value of $195,000 at the time of grant. Current directors who are scheduled for election or re-election in 2006 will receive a grant of restricted stock having a value of $65,000 at the time of grant, which will vest one-third per year commencing on the anniversary date of the grant, and then receive a grant of restricted stock having a value of $195,000 in 2006, if they are elected or re-elected to the Board. Directors who are scheduled for election or re-election in 2007 will receive a grant of restricted stock having a value of $130,000 at the time of grant, which will vest one-third per year commencing on the anniversary date of the grant, and then receive a grant of restricted stock having a value of $195,000 in 2007, if they are elected or re-elected to the Board. New directors appointed to the Board will receive an initial grant of restricted stock having a value of $195,000, $130,000 or $65,000, depending on when they are next scheduled for election to the Board, and then receive a grant of restricted stock having a value of $195,000 when they are elected. These awards will vest in the same manner as those described in the preceding paragraph. Prior to the Board's approval of the changes described above, each director received an automatic grant of 2,500 stock options and a grant of 499 shares of restricted stock, effective January 1, 2005. To implement the changes to the directors' equity compensation described above, the January 1 grants of stock options and restricted stock have been cancelled. Dr. Kennedy will not receive a Board retainer, meeting fees or other compensation in 2005 in his capacity as Chairman and a member of the Board of Directors, for so long as he serves as interim Chief Executive Officer. Arrangements Made on March 1, 2005 and Disclosed in a Report on Form 8-K Filed on March 4, 2005 On March 1, 2005, the Company's Compensation Committee approved the following compensation for Kevin C. Schick, effective upon his promotion to Senior Vice President and Chief Executive Officer of the Company on March 31,2005. 1. Increase in annual base salary from $251,472 to $310,000. 2. Target incentive compensation award equal to 75% of annual base salary (subject to a maximum equal to 150% of annual base salary), with actual payout to be determined based upon the Company's actual 2005 pre-tax, pre-incentive income versus target. 3. Grant of 11,500 stock options. 4. Target Value Management Plan award equal to 115% of annual base salary for the three-year cycle commencing on January 1, 2005. Arrangements Made on April 25, 2005 and Disclosed in a Report on Form 8-K Filed on April 28, 2005 On April 25, 2005, the Company's Compensation Committee, together with the other independent members of the Board of Directors, approved the following compensation for Douglas W. Stotlar, effective upon his promotion to President and Chief Executive Officer of the Company on April 25, 2005. 1. Increase in annual base salary from $425,100 to $650,000. 2. Target incentive compensation award equal to 100% of annual base salary(subject to a maximum equal to 200% of annual base salary) with actual payout (i) to be prorated based on the portion of the calendar year in which he serves as President and Chief Executive Officer and (ii) to be determined based upon the Company's actual 2005 pre-tax, pre-incentive income versus target. 3. Grant of (i) 79,673 stock options having an exercise price of $43.93 per share, which shall be subject to the standard terms applicable to option awards made to executives of the Company, and (ii) 23,690 shares of restricted stock, which shall be subject to the standard terms applicable to restricted stock awards made to executives of the Company. (Grants are based on a total target value of 4 times annual base salary of $650,000, with 60% allocated to stock options and 40% allocated to shares of restricted stock). 4. A relocation package, to include (i) a mortgage subsidy as partial compensation for differences in housing costs between Palo Alto, California and Ann Arbor, Michigan, in an amount and for a term to be determined by the Compensation Committee, (ii) payment of reasonable relocation expenses, and (iii) gross-up for taxes payable in connection with non-deductible relocation expenses. On April 25, 2005, the Company's Compensation Committee, together with the other independent members of the Board of Directors, also approved a discretionary cash bonus of $1,000,000 for Dr. Kennedy in consideration of his contributions as Interim Chief Executive Officer of the Company during the first part of 2005. Dr. Kennedy, who will continue to serve as Chairman of the Board of Directors, will receive compensation solely in his capacity as Chairman during the remainder of 2005 as described below under "Director Compensation." Such compensation was approved by the independent members of the Board of Directors. During the remainder of 2005,Dr. Kennedy will receive an annualized Chair retainer of $750,000, in recognition of his increased responsibilities and time commitment as Chair to ensure that the Board's strategic direction is communicated to and embraced by the new Chief Executive Officer, Mr. Stotlar, during the first few months following his assumption of such executive responsibilities. Dr. Kennedy will not receive any additional compensation during the remainder of 2005 as an officer or employee and the Chair retainer noted above shall constitute his total compensation as a member of the Board of Directors. In 2006, Dr. Kennedy will receive a Chair retainer in an amount to be determined by the independent members of the Board of Directors, as well as a grant of restricted stock having a value at the time of grant of $65,000. On January 24, 2005, the Company's Board of Directors, based on the recommendation of the Director Affairs Committee and advice from an outside compensation consultant, approved certain compensation payable to members of the Board, including grants of restricted stock awards. Following a transition period, each director will receive a restricted stock grant in April of the year in which he or she is elected or re-elected to the Board of Directors at the Company's Annual Meeting of Shareholders. The grants will have a value at the time of grant of $65,000 for each year of the director's term (or $195,000 for a 3-year term), and will vest one-third per year commencing on the anniversary date of the grant. Transitional grants will be made to incumbent directors who are not standing for election in 2005, and directors who are appointed to the Board in the future to fill vacancies. The material terms of these awards were disclosed in a Report on Form 8-K filed on January 28, 2005. The 2005 restricted stock grants were made on April 25, 2005, and are set forth below. Prior to such grants the Board, based on the recommendation of the Director Affairs Committee, approved a form of Restricted Stock Award Agreement to govern the restricted stock awards. The Restricted Stock Award Agreement provides that (i) all unvested shares of restricted stock will vest upon a director's death or disability; (ii) all unvested shares of restricted stock that are scheduled to vest on the grant anniversary date next following a Change in Control will vest upon a Change in Control; (iii) all unvested shares of restricted stock that are scheduled to vest on the grant anniversary date next following a director's retirement after attaining age 72 will vest upon such retirement; and (iv) all unvested shares of restricted stock that are scheduled to vest during the calendar year in which the director leaves the Board at the end of his or her term will vest upon such departure. A copy of the form of the Restricted Stock Award Agreement is filed as Exhibit 99.1 to the Company's Report on Form 8-K filed on April 28, 2005. The foregoing description of the Restricted Stock Award Agreement is qualified in its entirety by reference to such exhibit. - ----------------------------------------------------------------------------- |Name of Director|Amount of Grant (in |Number of Shares of Restricted | | |Dollars)* |Stock | - ----------------------------------------------------------------------------- |John J. Anton |$130,000 |2,961 | - ----------------------------------------------------------------------------- |William R. |$65,000 |1,480 | |Corbin | | | - ----------------------------------------------------------------------------- |Margaret G. Gill|$65,000 |1,480 | - ----------------------------------------------------------------------------- |Robert Jaunich |$65,000 |1,480 | |II | | | - ----------------------------------------------------------------------------- |Henry H. Mauz, |$65,000 |1,480 | |Jr. | | | - ----------------------------------------------------------------------------- |Michael J. |$195,000 |4,441 | |Murray | | | - ----------------------------------------------------------------------------- |John C. Pope |$130,000 |2,961 | - ----------------------------------------------------------------------------- |Robert D. Rogers|$195,000 |4,441 | - ----------------------------------------------------------------------------- |William J. |$195,000 |4,441 | |Schroeder | | | - ----------------------------------------------------------------------------- |Peter W. Stott |$130,000 |2,961 | - ----------------------------------------------------------------------------- |Robert P. Wayman|$65,000 |1,480 | - ----------------------------------------------------------------------------- |Chelsea C. White|$195,000 |4,441 | |III | | | - ----------------------------------------------------------------------------- * Messrs. Murray, Rogers, Schroeder and White, who were elected or re-elected (as applicable) to the Board in 2005, received a grant of restricted stock having a value of $195,000 at the time of grant. Ms.Gill and Messrs. Corbin, Jaunich, Mauz and Wayman, who are scheduled for election or re-election (as applicable) in 2006, received a grant of restricted stock having a value of $65,000 at the time of grant, and will receive a grant of restricted stock having a value of $195,000 in 2006 if they are elected or re-elected to the Board. Messrs. Anton, Pope and Stott, who are scheduled for election or re-election (as applicable) in 2007, received a grant of restricted stock having a value of $130,000 at the time of grant, and will receive a grant of restricted stock having a value of $195,000 in 2007 if they are elected or re-elected to the Board. All of the grants described above will vest one-third per year commencing on the anniversary date of the grant. EX-10 4 ex105.txt EXHIBIT 10.5 Exhibit 10.5 CNF INC. NONQUALIFIED EXECUTIVE BENEFIT PLANS TRUST AGREEMENT 2004 RESTATEMENT This Trust Agreement (the "Trust Agreement") is made this 30th day of December, 2004, by and between CNF INC. ("the Company") and WACHOVIA BANK, N.A. ("the Trustee"). Recitals (a) WHEREAS, the Company has adopted the nonqualified deferred compensation plans and Agreements (the "Arrangements") listed in Attachment A; (b) WHEREAS, the Company has incurred or expects to incur liability under the terms of such Arrangements with respect to the individuals participating in such Arrangements (the "Participants"); (c) WHEREAS, the Company has established a Trust (the "Trust") and contributed to the Trust assets held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Participants and their beneficiaries in such manner and at such times as specified in the Arrangements and in a Trust Agreement with a prior trustee most recently amended by a 1997 Restatement; (d) WHEREAS, the Company and the Trustee wish to amend the Trust Agreement by entering into this 2004 Restatement and, after the 2004 Restatement is signed by the parties, the Company will remove the prior trustee of the Trust as soon as practicable; (e) WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Arrangements, to the extent they cover employees rather than non-employee directors, as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and (f) WHEREAS, it is the intention of the Company to make further contributions to the Trust to provide itself with a source of funds (the "Fund") to assist it in satisfying its liabilities under the Arrangements. NOW, THEREFORE, the Company appoints Wachovia Bank, N.A. as Trustee of the Trust effective with the date on which the prior trustee's removal takes effect and the parties agree that the Trust shall be, effective on that same date, comprised, held and disposed of as follows: Section 1. Establishment of The Trust (a) The Trust is intended to be a trust, of which the Company is the "grantor", within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (b) The Company shall be considered a grantor for the purposes of the Trust. (c) The Trust shall be irrevocable. (d) The Trustee shall accept the assets transferred to it by the prior Trustee, consisting primarily of cash and/or life insurance policies on the lives of Participants, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (e) The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Participants and general creditors as herein set forth. Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Arrangements and this Trust Agreement shall be unsecured contractual rights of Participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the general creditors of the Company under federal and state law in the event the Company is Insolvent, as defined in Section 3(a) herein. (f) Within ninety (90) days following the end of each plan year, the Company shall irrevocably deposit additional cash or other property into the Trust in an appropriate amount sufficient to pay to each plan Participant or beneficiary the benefits accrued pursuant to the terms of the Arrangements as of the close of such plan year. Such a deposit may take the form of an assignment of all, or a percentage interest in, a promissory note evidencing a debt obligation to the Company from one of its subsidiaries (a "Subsidiary Note"). For all purposes of this Trust Agreement, a Subsidiary Note shall be valued at the stated principal balance due under it. (g) Upon a Potential CNF Change in Control, as defined herein, the Company shall, as soon as possible, but in no event later than thirty (30) days following the occurrence of the Potential CNF Change in Control, substitute Marketable Assets for any Subsidiary Notes held by the Trust and any other property other than Marketable Assets and transfer additional Marketable Assets to the Trust so that the Trust will hold Marketable Assets in an amount that is no less than 100% but no more than 120% of the benefits accrued pursuant to the terms of the Arrangements as of the date on which the Potential CNF Change in Control occurred. For 12 months following a Potential CNF Change in Control, the Company shall have no right to substitute a Subsidiary Note for assets of the Trust or to direct that Trust assets be invested in Subsidiary Notes. In the event a CNF Change in Control, as defined herein, does not occur within 12 months following a Potential CNF Change in Control, the Company shall have the right, after the expiration of such 12 months, to substitute one or more Subsidiary Notes for part or all of the assets of the Trust or to direct that Trust assets be invested in Subsidiary Notes. Any Marketable Assets contributed to the Trust must be satisfactory to the Trustee in its sole and absolute discretion. (h) Upon a CNF Change in Control, the Company shall, as soon as possible, but in no event later than thirty (30) days following the occurrence of the CNF Change in Control, substitute Marketable Assets for any Subsidiary Notes held by the Trust and any other property other than Marketable Assets and transfer additional Marketable Assets to the Trust so that the Trust will hold Marketable Assets in an amount that is no less than 100% but no more than 120% of the sum of (A) the benefits accrued pursuant to the terms of the Arrangements as of the date on which the CNF Change in Control occurred plus (B) an expense reserve for the Trustee in the amount of $125,000. After a CNF Change in Control described in Section 15(a)(4)(i) through (iv), the Company shall no longer have any right to substitute a Subsidiary Note for assets of the Trust or to direct that Trust assets be invested in Subsidiary Notes. (i) Upon a Unit Change in Control, the Company shall, as soon as possible, but in no event later than thirty (30) days following the occurrence of such Unit Change in Control, substitute Marketable Assets for any Subsidiary Notes held by the Trust and any other property other than Marketable Assets and transfer additional Marketable Assets to the Trust so that the Trust will hold Marketable Assets in an amount that is no less than 100% but no more than 120% of the benefits accrued pursuant to the terms of the Arrangements with respect to Participants to whom such Unit Change in Control applies, as of the date on which the Unit Change in Control occurred. For 12 months following a Unit Change in Control, the Company shall have no right to substitute a Subsidiary Note for assets of the Trust or to direct that Trust assets be invested in Subsidiary Notes if the effect of such substitution or direction would be to cause the Trust to hold Marketable Assets with a value less than the benefits accrued pursuant to the terms of the Arrangements with respect to Participants to whom such Unit Change in Control applies. The Company shall have the right, after the expiration of such 12 months, to substitute one or more Subsidiary Notes for part or all of the assets of the Trust or to direct that Trust assets be invested in Subsidiary Notes. Section 2. Payments to Participants and Their Beneficiaries (a) Prior to a CNF Change in Control, benefit payments due under an Arrangement will be made by the Company or by the Trustee at the direction of the Company. The entitlement of a Participant or his or her beneficiaries to benefits under an Arrangement shall be determined by the committee responsible for administration of the Arrangement, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Arrangement. (b) The Company may make payment of benefits directly to the Participants or their beneficiaries as they become due under the terms of the Arrangements. If, as a result of the Company's payment of benefits, the Trust holds assets in excess of 120% of the amount necessary to pay the benefits payable pursuant to the terms of the Arrangements, together with anticipated fees and expenses of the Trustee, the Trustee shall promptly transfer from the Trust to the Company the amount of the benefits paid by the Company. (c) If payment is by the Trustee and the Trust does not have sufficient Marketable Assets to make payments of benefits in accordance with the terms of the Arrangements, the Company shall make the balance of each such payment as it falls due in accordance with the Arrangements. The Trustee shall notify the Company where principal and earnings are not sufficient. Nothing in this Agreement shall relieve the Company of its liabilities to pay benefits due under the Arrangements except to the extent such liabilities are met by application of assets of the Trust. (d) After a Potential CNF Change in Control or a CNF Change in Control, the Company shall deliver to the Trustee a schedule of benefits accrued under the Arrangements. After a Unit Change in Control, the Company shall deliver to the Trustee a schedule of benefits accrued under the Arrangements with respect to each Participant to whom the Unit Change in Control applies. After a Unit Change in Control (with respect to the benefits of Participants to whom the Unit Change in Control applies), a Potential CNF Change in Control, or a CNF Change in Control -- (1) The Trustee shall pay benefits due in accordance with such schedule, unless the Company pays the benefits pursuant to Section 2(a). (2) The committee responsible for administration of the Arrangements shall continue to make the determination of benefits due to Participants or their beneficiaries and shall provide the Trustee with an updated schedule of benefits due. (3) A Participant or the beneficiary of a deceased Participant may make application to the Trustee for an independent decision as to the amount or form of their benefits due under the Arrangements pursuant to the procedures set forth in Attachment B. (4) In making any determination required or permitted to be made by the Trustee under this Section, the Trustee shall, in each such case, reach its own independent determination, in its absolute and sole discretion, as to the Participant's or beneficiary's entitlement to a payment hereunder and shall make payment from the Trust in accordance with that determination. (5) In making its determination, the Trustee may consult with and make such inquiries of such persons, including the Participant or beneficiary, the Company, legal counsel, actuaries or other persons, as the Trustee may reasonably deem necessary. Any reasonable costs incurred by the Trustee in arriving at its determination shall be reimbursed by the Company and, to the extent not paid by the Company within a reasonable time, shall be charged to the Trust. (6) The Company waives any right to contest any amount paid over by the Trustee hereunder pursuant to a good faith determination made by the Trustee notwithstanding any claim by or on behalf of the Company (absent a manifest abuse of discretion by the Trustee) that such payments should not be made. (e) The Trustee agrees that it will not itself institute any action at law or at equity, whether in the nature of an accounting, interpleading action, request for a declaratory judgment or otherwise, requesting a court or administrative or quasi-judicial body to make the determination required to be made by the Trustee under this Section 2 in the place and stead of the Trustee. The Trustee may (and, if necessary or appropriate, shall) institute an action to collect a contribution due the Trust following a CNF Change in Control or in the event that the Trust should ever experience a short-fall in the amount of assets necessary to make payments pursuant to the terms of the Arrangements. Section 3. Trustee Responsibility Regarding Payments To The Trust Beneficiary When The Company Is Insolvent (a) The Trustee shall cease payment of benefits to Participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing that the Company is Insolvent. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants or their beneficiaries. (2) Unless the Trustee has actual knowledge that the Company is Insolvent, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (3) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Participants or their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Arrangements or otherwise. (4) The Trustee shall resume the payment of benefits to Participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants or their beneficiaries under the terms of the Arrangements for the period of such discontinuance, less the aggregate amount of any payments made to Participants or their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments When a Short-Fall of The Trust Assets Occurs (a) If there are not sufficient assets for the payment of current and expected future benefits pursuant to Section 2 or Section 3(c) hereof and the Company does not otherwise make such payments within a reasonable time after demand from the Trustee, the Trustee shall allocate the Trust assets among the Participants or their beneficiaries in the following order of priority: (1) vested Participants (regardless of whether they are actively employed) and their beneficiaries; and (2) non-vested Participants (regardless of whether they are actively employed) and their beneficiaries. (b) Within each category, assets shall be allocated pro-rata with respect to the total present value of benefits expected for each Participant or beneficiary within the category, and payments to each Participant or beneficiary shall be made to the extent of the assets allocated to each Participant or beneficiary. (c) Upon receipt of a contribution from the Company necessary to make up for a short-fall in the payments due, the Trustee shall resume payments to all the Participants and beneficiaries under the Arrangements. Following a CNF Change in Control, the Trustee shall have the right and duty to compel a contribution to the Trust from the Company to make-up for any short-fall. Section 5. Payments to the Company Except as provided in Section 2(b) or Section 3 hereof, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Participants and their beneficiaries pursuant to the terms of the Arrangements. Section 6. Investment Authority (a) The Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the Fund, if it acts for the exclusive benefit of the Participants and their beneficiaries, in good faith and as a prudent person would act in accomplishing a similar task and in accordance with the terms of this Trust Agreement and any applicable federal or state laws, rules or regulations. (b) Subject to the Company's power to direct the investment of the Fund prior to a CNF Change in Control pursuant to Section 6(c), the Trustee shall have the power in investing and reinvesting the Fund in its sole discretion: (1) To invest and reinvest in any readily marketable common and preferred stocks, bonds, notes, debentures (including convertible stocks and securities but not including any stock or security of the Trustee other than a de minimis amount held in a collective or mutual fund), certificates of deposit or demand or time deposits (including any such deposits with the Trustee) and shares of investment companies and mutual funds, without being limited to the classes or property in which the Trustees are authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the Fund; (2) To invest and reinvest all or any portion of the Fund collectively through the medium of any proprietary mutual fund that may be established and maintained by the Trustee; (3) To commingle for investment purposes all or any portion of the Fund with assets of any other similar trust or trusts established by the Company with the Trustee for the purpose of safeguarding deferred compensation or retirement income benefits of its employees and/or directors; (4) To retain any property at any time received by the Trustee; (5) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future; (6) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person; (7) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof any assessments levied with respect to any such property to deposited; (8) To extend the time of payment of any obligation held by it; (9) To hold uninvested any moneys received by it, without liability for interest thereon, but only in anticipation of payments due for investments, reinvestments, expenses or disbursements; (10) To exercise all voting or other rights with respect to any property held by it and to grant proxies, discretionary or otherwise; (11) For the purposes of the Trust, to borrow money from others, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it; (12) To employ suitable contractors and counsel, who may be counsel to the Company or to the Trustee, and to pay their reasonable expenses and compensation from the Fund to the extent not paid by the Company; (13) To register investments in its own name or in the name of a nominee; to hold any investment in bearer form; and to combine certificates representing securities with certificates of the same issue held by it in other fiduciary capacities or to deposit or to arrange for the deposit of such securities with any depository, even though, when so deposited, such securities may be held in the name of the nominee of such depository with other securities deposited therewith by other persons, or to deposit or to arrange for the deposit of any securities issued or guaranteed by the United States government, or any agency or instrumentality thereof, including securities evidenced by book entries rather than by certificates, with the United States Department of the Treasury or a Federal Reserve Bank, even though, when so deposited, such securities may not be held separate from securities deposited therein by other persons; provided, however, that no securities held in the Fund shall be deposited with the United States Department of the Treasury or a Federal Reserve Bank or other depository in the same account as any individual property of the Trustee, and provided, further, that the books and records of the Trustee shall at all times show that all such securities are part of the Trust Fund; (14) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, respectively, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom; (15) To hold and retain policies of life insurance, annuity contracts, and other property of any kind which policies are contributed to the Trust by the Company or any subsidiary of the Company or are purchased by the Trustee; (16) To hold any other class of assets which may be contributed by the Company and that is deemed reasonable by the Trustee, unless expressly prohibited herein; (17) To loan any securities at any time held by it to brokers or dealers upon such security as may be deemed advisable, and during the terms of any such loan to permit the loaned securities to be transferred into the name of and voted by the borrower or others; and (18) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Fund. (c) Prior to a CNF Change in Control, the Company shall have the right, subject to this Section to direct the Trustee with respect to investments. (1) The Company may at any time direct the Trustee to segregate all or a portion of the Fund in a separate investment account or accounts and may appoint one or more investment managers and/or an investment committee established by the Company to direct the investment and reinvestment of each such investment account or accounts. In such event, the Company shall notify the Trustee of the appointment of each such investment manager and/or investment committee. No such investment manager shall be related, directly or indirectly, to the Company, but members of the investment committee may be employees of the Company. (2) Thereafter (until a CNF Change in Control), the Trustee shall make every sale or investment with respect to such investment account as directed in writing by the investment manager or investment committee. It shall be the duty of the Trustee to act strictly in accordance with each direction. The Trustee shall be under no duty to question any such direction of the investment manager or investment committee, to review any securities or other property held in such investment account or accounts acquired by it pursuant to such directions or to make any recommendations to the investment managers or investment committee with respect to such securities or other property. (3) Notwithstanding the foregoing, the Trustee, without obtaining prior approval or direction from an investment manager or investment committee, shall invest cash balances held by it from time to time in short term cash equivalents including, but not limited to, through the medium of any short term common, collective or commingled trust fund established and maintained by the Trustee subject to the instrument establishing such trust fund, U.S. Treasury Bills, commercial paper (including such forms of commercial paper as may be available through the Trustee's Trust Department), certificates of deposit (including certificates issued by the Trustee in its separate corporate capacity), and similar type securities, with a maturity not to exceed one year; and, furthermore, sell such short term investments as may be necessary to carry out the instructions of an investment manager or investment committee regarding more permanent type investment and directed distributions. (4) The Trustee shall neither be liable nor responsible for any loss resulting to the Fund by reason of any sale or purchase of an investment directed by an investment manager or investment committee nor by reason of the failure to take any action with respect to any investment which was acquired pursuant to any such direction in the absence of further directions of such investment manager or investment committee. (d) Following a CNF Change in Control, the Trustee shall have the sole and absolute discretion in the management of the Trust assets and shall have all the powers set forth under Section 6(b). In investing the Trust assets, the Trustee shall consider: (1) the needs of the Arrangements; (2) the need for matching of the Trust assets with the liabilities of the Arrangements; and (3) the duty of the Trustee to act solely in the best interests of the Participants and their beneficiaries. (e) The Trustee shall have the right, in its sole discretion, to delegate its investment responsibility to an investment manager who may be an affiliate of the Trustee. In the event the Trustee shall exercise this right, the Trustee shall remain, at all times responsible for the acts of an investment manager. The Trustee shall have the right to purchase an insurance policy or an annuity to fund the benefits of the Arrangements. (f) The Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets (other than securities issued by the Trustee or the Company) of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity; provided, however, that, following a Potential CNF Change in Control or a CNF Change in Control - (1) No such substitution shall be permitted unless the Trustee determines that the fair market values of the substituted assets are equal. (2) Assets owned by the Trust may not be substituted with obligations of the Company, its subsidiaries or its successors. (3) The restrictions of Sections 1(f), 1(g), 1(h) and 1(i) shall apply with respect to assets that are Subsidiary Notes and the amount of Marketable Assets. (g) In no event may the Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by the Company, other than a de minimis amount held in common investment vehicles in which the Trustee invests. This restriction does not apply to the investment in Subsidiary Notes authorized by Sections 1(g). All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee (including the Company or any person designated by the Company, as indicated in Section 6(c)), and shall in no event be exercisable by or rest with plan Participants. (h) In the event that the Trustee is directed to invest in a Subsidiary Note pursuant to this Section 6, the Trustee shall hold such Subsidiary Note exclusively without liability for any failure to diversify or as may otherwise be required of trustees by applicable law. Section 7. Insurance Contracts (a) To the extent that the Trustee is directed by the Company prior to a CNF Change in Control to invest part or all of the Trust Fund in insurance contracts, the type and amount thereof shall be specified by the Company. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified. (b) Each insurance contract issued shall provide that the Trustee shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a CNF Change in Control, be subject to the direction of the Company. After a CNF Change in Control, the Trustee shall have all such rights. (c) The Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against an insurance policy held in the Trust Fund. (d) No insurer shall be deemed to be a party to the Trust and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by the insurer. Section 8. Disposition of Income During the term of the Trust, all income received by the Trust, net of expenses and taxes payable by the Trust, shall be accumulated and reinvested within the Trust. Section 9. Accounting by The Trustee The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within forty-five (45) days following the close of each calendar year and within forty-five (45) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. In the event the Company objects to such a written accounting, Trustee may have its accounting settled by a court of competent jurisdiction. The Trustee shall be entitled to hold and to commingle the assets of the Trust in one Fund for investment purposes but at the direction of the Company prior to a CNF Change in Control, the Trustee shall create one or more sub-accounts. Section 10.Responsibility of The Trustee (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Arrangements or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute, subject, however to Section 2(e) hereof. (b) The Company hereby indemnifies the Trustee against losses, liabilities, claims, costs and expenses in connection with the administration of the Trust as a result of the Trustee's following directions given by the Company or reliance on information provided by the Company. To the extent the Company fails to make any payment on account of an indemnity provided in this paragraph 10(b), in a reasonably timely manner, the Trustee may obtain payment from the Trust. If the Trustee undertakes or defends any litigation for the purpose of protecting a Participant's or beneficiary's rights under the Arrangements, the Company agrees to indemnify the Trustee against the Trustee's costs, reasonable expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) Prior to a CNF Change in Control, the Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. Following a CNF Change in Control the Trustee shall select independent legal counsel and may consult with counsel or other persons with respect to its duties and with respect to the rights of Participants or their beneficiaries under the Arrangements. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder and may rely on any determinations made by such agents and information provided to it by the Company. (e) The Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein. (f) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 11.Compensation and Expenses of The Trustee The Trustee's compensation shall be as agreed in writing from time to time by the Company and the Trustee. The Company shall pay all administrative expenses and the Trustee's fees and shall promptly reimburse the Trustee for any fees and expenses of its agents. If not so paid, the fees and expenses shall be paid from the Trust. Section 12.Resignation and Removal of The Trustee (a) The Trustee may resign at any time by written notice to the Company, which shall be effective sixty (60) days after receipt of such notice unless the Company and the Trustee agree otherwise. (b) The Trustee may be removed by the Company on sixty days (60) days notice or upon shorter notice accepted by the Trustee. (c) If the Trustee resigns or is removed within two years after a CNF Change in Control, the Trustee may apply to a court of competent jurisdiction to select a successor Trustee in accordance with the provisions of Section 12(b) prior to the effective date of the Trustee's resignation or removal. (d) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. (e) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 13 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 13.Appointment of Successor (a) Subject to Section 12(c), if the Trustee resigns or is removed in accordance with Section 12(a) or (b), the Company shall appoint a bank or trust company in good standing, organized and doing business under the laws of the United States or a state thereof, with a market capitalization exceeding $100,000,000 and authorized under the laws governing its organizaton to exercise corporate trustee powers, as a successor to replace the Trustee upon resignation or removal. The successor Trustee shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Section 8 and 9 hereof. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. Section 14.Amendment or Termination (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company; provided that - (1) After a CNF Change in Control has occurred, no amendment may be made to the Trust without the approval of seventy- five percent (75%) of all Participants (counting the beneficiaries of a deceased Participant as a single Participant) except as may be required to maintain the tax status or the ERISA status of this Trust. (2) No such amendment shall increase the duties or responsibilities of the Trustee unless the Trustee consents thereto in writing. (b) The Trust shall not terminate until the date on which Participants and their beneficiaries have received all of the benefits due to them under the terms and conditions of the Arrangements; provided that, upon the written approval of seventy-five percent (75%) of all Participants (counting the beneficiaries of a deceased Participant as a Participant), the Company may terminate this Trust prior to the time all benefit payments under the Arrangements have been made. Upon termination of the Trust, the Trustee shall make a final accounting and shall distribute to the Company the net balance of any remaining assets of the Trust. Upon making such a distribution, the Trustee shall be relieved from all further liability. Section 15.Change in Control (a) For purposes of this Trust Agreement, the following terms shall be defined as set forth below: (1) "Affiliate" means an entity described in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (2) "CNF Change in Control" means any of the following: (i) Any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding voting securities; (ii) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the effective date of the Trust, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the effective date of the Trust or whose appointment, election or nomination for election was previously so approved or recommended; (iii)There is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person, directly or indirectly, acquired 25% or more of the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates); or (iv) The stockholders of the Company approve a plan of complete liquidation of the Company or there is consummated an agreement for the sale or disposition by the Company of assets having an aggregate book value at the time of such sale or disposition of more than 75% of the total book value of the Company's assets on a consolidated basis (or any transaction having a similar effect), other than any such sale or disposition by the Company (including by way of spin- off or other distribution) to an entity, at least 50% of the combined voting power of the voting securities of which are owned immediately following such sale or disposition by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; (3) "Marketable Assets" means cash or any asset the Trustee may invest in pursuant to Section 6(b)(1) or Section 6(c)(3). (4) "Person" means any person, as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (A) the Company or its Affiliates, (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or its Affiliates, and (C) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock, $0.625 par value per share, of the Company). (5) "Potential CNF Change in Control" means any of the following: (i) The Company enters into an agreement, the consummation of which would result in the occurrence of a CNF Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions, including but not limited to proxy contests or consent solicitations, which, if consummated, would constitute a CNF Change in Control; (iii)Any Person becomes the "beneficial owner", as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates); or (iv) The Board of Directors of the Company adopts a resolution to the effect that, for purposes of this Trust Agreement, a Potential CNF Change in Control has occurred. (6) "Unit Change in Control" means any of the following: (i) There is consummated the sale or other disposition by the Company, however effected, of either of the two primary business units of the Company, whether in a single transaction or in a series of transactions occurring within an 18-month period, and whether or not such business unit constitutes part of a larger enterprise at the time of the sale or other disposition; provided, however, that this clause (i) shall apply only to Participants who are employed by the Company; and provided further, that the Board of Directors of the Company may, upon notice to the affected Participants given at any time, terminate this clause (i) without the consent of such Participants, except that any such notice shall not be effective to terminate this clause (i) if a CNF Change in Control or a Unit Change in Control occurs pursuant to this clause (i) within ninety (90) days after such notice is given; or (ii) There is consummated the sale or other disposition, however effected, of either of the primary business units of the Company, whether or not such business unit constitutes part of a larger enterprise at the time of the sale or other disposition; provided, however, that this clause (ii) shall apply only to Participants (i) who, immediately prior to such sale or other disposition, were employed by the business unit that is sold or otherwise disposed of and (ii) who are not employed by the Company or any of its subsidiaries immediately following such sale or other disposition. As used in clauses (i) and (ii) above, "primary business units" means Con-Way Transportation Services, Inc., and Menlo Worldwide Forwarding, Inc., and a "sale or other disposition" of a business unit includes: (A) a sale by the Company of the then outstanding shares of capital stock of the business unit having more than 50% of the then existing voting power of all outstanding securities of the business unit, whether by merger, consolidation or otherwise; (B) the sale of all or substantially all of the assets of the business unit; and (C) any other transaction or course of action (including, without limitation, a spin-off or other distribution) engaged in, directly or indirectly, by the Company or the business unit that has a substantially similar effect as the transactions of the type referred to in clause (a) or (b) above; it being the intent that a sale or other disposition of a business unit occurs even if (x) such business unit constitutes part of a larger enterprise at the time of the relevant sale or disposition transaction and (y) such sale or disposition transaction involves such larger enterprise (such as, by way of example and without limitation, when one or more business units are subsidiaries of a common parent and either (A) the common parent is spun-off or (B) there is consummated a sale of the stock or other equity interests in the common parent having more than 50% of the then existing voting power of all outstanding securities of the common parent). The foregoing notwithstanding, (1) a sale or other disposition of a business unit shall not be deemed to have occurred for purposes of clauses (i) and (ii) above (x) except in the case of a transaction described in clause (B) above, so long as the Company or any of its Affiliates, individually or collectively, own the then outstanding shares of capital stock of the business unit having 50% or more of the then existing voting power of all outstanding securities of the business unit, or (y) in the event of the sale of shares of capital stock of the business unit (or the sale of shares or other equity interests in any parent company of such business unit) to any trustee or other fiduciary holding securities under an employee benefit plan of the Company, the business unit or any other Affiliate of the Company, and (2) a sale or other disposition of a business unit shall not be deemed to have occurred for purposes of clause (ii) above in the event of the sale or distribution of shares of capital stock (including, without limitation, a spin-off) of the business unit to shareholders of the Company, or the sale of assets of the business unit to any corporation or other entity owned, directly or indirectly, by the shareholders of the Company, in either case in substantially the same proportions as their ownership of stock in the Company. (b) The General Counsel of the Company shall have the specific authority to determine whether a Potential CNF Change in Control, a CNF Change in Control, or a Unit Change in Control has transpired and shall be required to give the Trustee notice of a Potential CNF Change in Control, a CNF Change in Control, or a Unit Change in Control. The Trustee shall be entitled to rely upon such notice, but if the Trustee receives notice of a Potential CNF Change in Control, a CNF Change in Control, or a Unit Change in Control from another source, the Trustee shall make its own independent determination. Section 16.Miscellaneous (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) The Company hereby represents and warrants that all of the Arrangements have been established, maintained and administered in accordance, in material respects, with all applicable laws, including without limitation, ERISA. (c) Benefits payable to Participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (d) This Trust Agreement shall be governed by and construed in accordance with the laws of North Carolina. (e) The CNF Inc. 2005 Deferred Compensation Plan for Executives and the CNF Inc. 2005 Supplemental Excess Retirement Plan are intended to meet the requirements of Section 409A of the Internal Revenue Code, the regulations thereunder, and any additional guidance provided by the Treasury Department. The CNF Inc. Deferred Compensation Plan for Executives and the CNF Inc. Supplemental Excess Retirement Plan are intended to be exempt from such requirements. Any provision of this Trust Agreement that would cause any Arrangement to fail to meet such requirements shall be void and, notwithstanding any other provisions of this Trust Agreement, the Trust Agreement may be amended by the Company and the Trustee to comply with such requirements. IN WITNESS WHEREOF, this Trust Agreement has been executed on behalf of the parties hereto on the day and year first above written. CNF INC. WACHOVIA BANK, N.A. as TRUSTEE By: /s/ Mark C. Thickpenny By: /s/ Shelley C. Anderson ------------------------ ------------------------- Its: Vice President - Treasurer Its: AVP Attachment A The following Arrangements are covered by this Trust: CNF Inc. Deferred Compensation Plan for Executives CNF Inc. 2005 Deferred Compensation Plan for Executives CNF Inc. Supplemental Excess Retirement Plan CNF Inc. 2005 Supplemental Excess Retirement Plan Attachment B Claims Procedures (Applicable in the event of a Potential CNF Change in Control, a CNF Change in Control, or a Unit Change in Control, as provided in Section 2(d)(3)) Presentation of Claim. Any Participant or Beneficiary of a deceased Participant may deliver to the Trustee a written claim for a determination as to the amount or form of the benefits distributable to such Claimant from the Arrangements. A claim must be made within one year following the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. Notification of Decision. The Trustee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Trustee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Arrangements upon which such denial was based; (iii)a description of any additional material or information necessary for the Claimant to clarify or perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth below. Review of a Denied Claim. Within six months after receiving a notice from the Trustee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Trustee a written request to review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Trustee, in its sole and absolute discretion, may grant. Decision on Review. The Trustee shall render its decision on review promptly and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Trustee's decision must be rendered within 60 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Arrangement provisions upon which the decision was based; and (c) such other matters as the Trustee deems relevant. EX-10 5 ex106.txt EXHIBIT 10.6 Exhibit 10.6 CNF INC. NONQUALIFIED DIRECTOR BENEFIT PLANS TRUST AGREEMENT 2004 RESTATEMENT This Trust Agreement (the "Trust Agreement") is made this 30th day of December, 2004, by and between CNF INC. ("the Company") and WACHOVIA BANK, N.A. ("the Trustee"). Recitals (a) WHEREAS, the Company has adopted the nonqualified deferred compensation plans and Agreements (the "Arrangements") listed in Attachment A; (b) WHEREAS, the Company has incurred or expects to incur liability under the terms of such Arrangements with respect to the individuals participating in such Arrangements (the "Participants"); (c) WHEREAS, the Company has established a Trust (the "Trust") and contributed to the Trust assets held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Participants and their beneficiaries in such manner and at such times as specified in the Arrangements and in a Trust Agreement with a prior trustee most recently amended by a 1997 Restatement; (d) WHEREAS, the Company and the Trustee wish to amend the Trust Agreement by entering into this 2004 Restatement and, after the 2004 Restatement is signed by the parties, the Company will remove the prior trustee of the Trust as soon as practicable; (e) WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Arrangements, to the extent they cover employees rather than non-employee directors, as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and (f) WHEREAS, it is the intention of the Company to make further contributions to the Trust to provide itself with a source of funds (the "Fund") to assist it in satisfying its liabilities under the Arrangements. NOW, THEREFORE, the Company appoints Wachovia Bank, N.A. as Trustee of the Trust effective with the date on which the prior trustee's removal takes effect and the parties agree that the Trust shall be, effective on that same date, comprised, held and disposed of as follows: Section 1. Establishment of The Trust (a) The Trust is intended to be a trust, of which the Company is the "grantor", within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (b) The Company shall be considered a grantor for the purposes of the Trust. (c) The Trust shall be irrevocable. (d) The Trustee shall accept the assets transferred to it by the prior Trustee, consisting primarily of cash and/or life insurance policies on the lives of Participants, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (e) The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Participants and general creditors as herein set forth. Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Arrangements and this Trust Agreement shall be unsecured contractual rights of Participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the general creditors of the Company under federal and state law in the event the Company is Insolvent, as defined in Section 3(a) herein. (f) Within ninety (90) days following the end of each plan year, the Company shall irrevocably deposit additional cash or other property into the Trust in an appropriate amount sufficient to pay to each plan Participant or beneficiary the benefits accrued pursuant to the terms of the Arrangements as of the close of such plan year. Such a deposit may take the form of an assignment of all, or a percentage interest in, a promissory note evidencing a debt obligation to the Company from one of its subsidiaries (a "Subsidiary Note"). For all purposes of this Trust Agreement, a Subsidiary Note shall be valued at the stated principal balance due under it. (g) Upon a Potential CNF Change in Control, as defined herein, the Company shall, as soon as possible, but in no event later than thirty (30) days following the occurrence of the Potential CNF Change in Control, substitute Marketable Assets for any Subsidiary Notes held by the Trust and any other property other than Marketable Assets and transfer additional Marketable Assets to the Trust so that the Trust will hold Marketable Assets in an amount that is no less than 100% but no more than 120% of the benefits accrued pursuant to the terms of the Arrangements as of the date on which the Potential CNF Change in Control occurred. For 12 months following a Potential CNF Change in Control, the Company shall have no right to substitute a Subsidiary Note for assets of the Trust or to direct that Trust assets be invested in Subsidiary Notes. In the event a CNF Change in Control, as defined herein, does not occur within 12 months following a Potential CNF Change in Control, the Company shall have the right, after the expiration of such 12 months, to substitute one or more Subsidiary Notes for part or all of the assets of the Trust or to direct that Trust assets be invested in Subsidiary Notes. Any Marketable Assets contributed to the Trust must be satisfactory to the Trustee in its sole and absolute discretion. (h) Upon a CNF Change in Control, the Company shall, as soon as possible, but in no event later than thirty (30) days following the occurrence of the CNF Change in Control, substitute Marketable Assets for any Subsidiary Notes held by the Trust and any other property other than Marketable Assets and transfer additional Marketable Assets to the Trust so that the Trust will hold Marketable Assets in an amount that is no less than 100% but no more than 120% of the sum of (A) the benefits accrued pursuant to the terms of the Arrangements as of the date on which the CNF Change in Control occurred plus (B) an expense reserve for the Trustee in the amount of $125,000. After a CNF Change in Control described in Section 15(a)(4)(i) through (iv), the Company shall no longer have any right to substitute a Subsidiary Note for assets of the Trust or to direct that Trust assets be invested in Subsidiary Notes. Section 2. Payments to Participants and Their Beneficiaries (a) Prior to a CNF Change in Control, benefit payments due under an Arrangement will be made by the Company or by the Trustee at the direction of the Company. The entitlement of a Participant or his or her beneficiaries to benefits under an Arrangement shall be determined by the committee responsible for administration of the Arrangement, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Arrangement. (b) The Company may make payment of benefits directly to the Participants or their beneficiaries as they become due under the terms of the Arrangements. If, as a result of the Company's payment of benefits, the Trust holds assets in excess of 120% of the amount necessary to pay the benefits payable pursuant to the terms of the Arrangements, together with anticipated fees and expenses of the Trustee, the Trustee shall promptly transfer from the Trust to the Company the amount of the benefits paid by the Company. (c) If payment is by the Trustee and the Trust does not have sufficient Marketable Assets to make payments of benefits in accordance with the terms of the Arrangements, the Company shall make the balance of each such payment as it falls due in accordance with the Arrangements. The Trustee shall notify the Company where principal and earnings are not sufficient. Nothing in this Agreement shall relieve the Company of its liabilities to pay benefits due under the Arrangements except to the extent such liabilities are met by application of assets of the Trust. (d) After a Potential CNF Change in Control or a CNF Change in Control, the Company shall deliver to the Trustee a schedule of benefits accrued under the Arrangements. After a Potential CNF Change in Control or a CNF Change in Control -- (1) The Trustee shall pay benefits due in accordance with such schedule, unless the Company pays the benefits pursuant to Section 2(a). (2) The committee responsible for administration of the Arrangements shall continue to make the determination of benefits due to Participants or their beneficiaries and shall provide the Trustee with an updated schedule of benefits due. (3) A Participant or the beneficiary of a deceased Participant may make application to the Trustee for an independent decision as to the amount or form of their benefits due under the Arrangements pursuant to the procedures set forth in Attachment B. (4) In making any determination required or permitted to be made by the Trustee under this Section, the Trustee shall, in each such case, reach its own independent determination, in its absolute and sole discretion, as to the Participant's or beneficiary's entitlement to a payment hereunder and shall make payment from the Trust in accordance with that determination. (5) In making its determination, the Trustee may consult with and make such inquiries of such persons, including the Participant or beneficiary, the Company, legal counsel, actuaries or other persons, as the Trustee may reasonably deem necessary. Any reasonable costs incurred by the Trustee in arriving at its determination shall be reimbursed by the Company and, to the extent not paid by the Company within a reasonable time, shall be charged to the Trust. (6) The Company waives any right to contest any amount paid over by the Trustee hereunder pursuant to a good faith determination made by the Trustee notwithstanding any claim by or on behalf of the Company (absent a manifest abuse of discretion by the Trustee) that such payments should not be made. (e) The Trustee agrees that it will not itself institute any action at law or at equity, whether in the nature of an accounting, interpleading action, request for a declaratory judgment or otherwise, requesting a court or administrative or quasi-judicial body to make the determination required to be made by the Trustee under this Section 2 in the place and stead of the Trustee. The Trustee may (and, if necessary or appropriate, shall) institute an action to collect a contribution due the Trust following a CNF Change in Control or in the event that the Trust should ever experience a short-fall in the amount of assets necessary to make payments pursuant to the terms of the Arrangements. Section 3. Trustee Responsibility Regarding Payments To The Trust Beneficiary When The Company Is Insolvent (a) The Trustee shall cease payment of benefits to Participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing that the Company is Insolvent. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants or their beneficiaries. (2) Unless the Trustee has actual knowledge that the Company is Insolvent, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (3) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Participants or their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Arrangements or otherwise. (4) The Trustee shall resume the payment of benefits to Participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants or their beneficiaries under the terms of the Arrangements for the period of such discontinuance, less the aggregate amount of any payments made to Participants or their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments When a Short-Fall of The Trust Assets Occurs (a) If there are not sufficient assets for the payment of current and expected future benefits pursuant to Section 2 or Section 3(c) hereof and the Company does not otherwise make such payments within a reasonable time after demand from the Trustee, the Trustee shall allocate the Trust assets among the Participants or their beneficiaries in the following order of priority: (1) vested Participants (regardless of whether they are actively employed) and their beneficiaries; and (2) non-vested Participants (regardless of whether they are actively employed) and their beneficiaries. (b) Within each category, assets shall be allocated pro-rata with respect to the total present value of benefits expected for each Participant or beneficiary within the category, and payments to each Participant or beneficiary shall be made to the extent of the assets allocated to each Participant or beneficiary. (c) Upon receipt of a contribution from the Company necessary to make up for a short-fall in the payments due, the Trustee shall resume payments to all the Participants and beneficiaries under the Arrangements. Following a CNF Change in Control, the Trustee shall have the right and duty to compel a contribution to the Trust from the Company to make-up for any short-fall. Section 5. Payments to the Company Except as provided in Section 2(b) or Section 3 hereof, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Participants and their beneficiaries pursuant to the terms of the Arrangements. Section 6. Investment Authority (a) The Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the Fund, if it acts for the exclusive benefit of the Participants and their beneficiaries, in good faith and as a prudent person would act in accomplishing a similar task and in accordance with the terms of this Trust Agreement and any applicable federal or state laws, rules or regulations. (b) Subject to the Company's power to direct the investment of the Fund prior to a CNF Change in Control pursuant to Section 6(c), the Trustee shall have the power in investing and reinvesting the Fund in its sole discretion: (1) To invest and reinvest in any readily marketable common and preferred stocks, bonds, notes, debentures (including convertible stocks and securities but not including any stock or security of the Trustee other than a de minimis amount held in a collective or mutual fund), certificates of deposit or demand or time deposits (including any such deposits with the Trustee) and shares of investment companies and mutual funds, without being limited to the classes or property in which the Trustees are authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the Fund; (2) To invest and reinvest all or any portion of the Fund collectively through the medium of any proprietary mutual fund that may be established and maintained by the Trustee; (3) To commingle for investment purposes all or any portion of the Fund with assets of any other similar trust or trusts established by the Company with the Trustee for the purpose of safeguarding deferred compensation or retirement income benefits of its employees and/or directors; (4) To retain any property at any time received by the Trustee; (5) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future; (6) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person; (7) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof any assessments levied with respect to any such property to deposited; (8) To extend the time of payment of any obligation held by it; (9) To hold uninvested any moneys received by it, without liability for interest thereon, but only in anticipation of payments due for investments, reinvestments, expenses or disbursements; (10) To exercise all voting or other rights with respect to any property held by it and to grant proxies, discretionary or otherwise; (11) For the purposes of the Trust, to borrow money from others, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it; (12) To employ suitable contractors and counsel, who may be counsel to the Company or to the Trustee, and to pay their reasonable expenses and compensation from the Fund to the extent not paid by the Company; (13) To register investments in its own name or in the name of a nominee; to hold any investment in bearer form; and to combine certificates representing securities with certificates of the same issue held by it in other fiduciary capacities or to deposit or to arrange for the deposit of such securities with any depository, even though, when so deposited, such securities may be held in the name of the nominee of such depository with other securities deposited therewith by other persons, or to deposit or to arrange for the deposit of any securities issued or guaranteed by the United States government, or any agency or instrumentality thereof, including securities evidenced by book entries rather than by certificates, with the United States Department of the Treasury or a Federal Reserve Bank, even though, when so deposited, such securities may not be held separate from securities deposited therein by other persons; provided, however, that no securities held in the Fund shall be deposited with the United States Department of the Treasury or a Federal Reserve Bank or other depository in the same account as any individual property of the Trustee, and provided, further, that the books and records of the Trustee shall at all times show that all such securities are part of the Trust Fund; (14) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, respectively, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom; (15) To hold and retain policies of life insurance, annuity contracts, and other property of any kind which policies are contributed to the Trust by the Company or any subsidiary of the Company or are purchased by the Trustee; (16) To hold any other class of assets which may be contributed by the Company and that is deemed reasonable by the Trustee, unless expressly prohibited herein; (17) To loan any securities at any time held by it to brokers or dealers upon such security as may be deemed advisable, and during the terms of any such loan to permit the loaned securities to be transferred into the name of and voted by the borrower or others; and (18) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Fund. (c) Prior to a CNF Change in Control, the Company shall have the right, subject to this Section to direct the Trustee with respect to investments. (1) The Company may at any time direct the Trustee to segregate all or a portion of the Fund in a separate investment account or accounts and may appoint one or more investment managers and/or an investment committee established by the Company to direct the investment and reinvestment of each such investment account or accounts. In such event, the Company shall notify the Trustee of the appointment of each such investment manager and/or investment committee. No such investment manager shall be related, directly or indirectly, to the Company, but members of the investment committee may be employees of the Company. (2) Thereafter (until a CNF Change in Control), the Trustee shall make every sale or investment with respect to such investment account as directed in writing by the investment manager or investment committee. It shall be the duty of the Trustee to act strictly in accordance with each direction. The Trustee shall be under no duty to question any such direction of the investment manager or investment committee, to review any securities or other property held in such investment account or accounts acquired by it pursuant to such directions or to make any recommendations to the investment managers or investment committee with respect to such securities or other property. (3) Notwithstanding the foregoing, the Trustee, without obtaining prior approval or direction from an investment manager or investment committee, shall invest cash balances held by it from time to time in short term cash equivalents including, but not limited to, through the medium of any short term common, collective or commingled trust fund established and maintained by the Trustee subject to the instrument establishing such trust fund, U.S. Treasury Bills, commercial paper (including such forms of commercial paper as may be available through the Trustee's Trust Department), certificates of deposit (including certificates issued by the Trustee in its separate corporate capacity), and similar type securities, with a maturity not to exceed one year; and, furthermore, sell such short term investments as may be necessary to carry out the instructions of an investment manager or investment committee regarding more permanent type investment and directed distributions. (4) The Trustee shall neither be liable nor responsible for any loss resulting to the Fund by reason of any sale or purchase of an investment directed by an investment manager or investment committee nor by reason of the failure to take any action with respect to any investment which was acquired pursuant to any such direction in the absence of further directions of such investment manager or investment committee. (d) Following a CNF Change in Control, the Trustee shall have the sole and absolute discretion in the management of the Trust assets and shall have all the powers set forth under Section 6(b). In investing the Trust assets, the Trustee shall consider: (1) the needs of the Arrangements; (2) the need for matching of the Trust assets with the liabilities of the Arrangements; and (3) the duty of the Trustee to act solely in the best interests of the Participants and their beneficiaries. (e) The Trustee shall have the right, in its sole discretion, to delegate its investment responsibility to an investment manager who may be an affiliate of the Trustee. In the event the Trustee shall exercise this right, the Trustee shall remain, at all times responsible for the acts of an investment manager. The Trustee shall have the right to purchase an insurance policy or an annuity to fund the benefits of the Arrangements. (f) The Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets (other than securities issued by the Trustee or the Company) of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity; provided, however, that, following a Potential CNF Change in Control or a CNF Change in Control - (1) No such substitution shall be permitted unless the Trustee determines that the fair market values of the substituted assets are equal. (2) Assets owned by the Trust may not be substituted with obligations of the Company, its subsidiaries or its successors. (3) The restrictions of Sections 1(f), 1(g), 1(h) and 1(i) shall apply with respect to assets that are Subsidiary Notes and the amount of Marketable Assets. (g) In no event may the Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by the Company, other than a de minimis amount held in common investment vehicles in which the Trustee invests. This restriction does not apply to the investment in Subsidiary Notes authorized by Sections 1(g). All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee (including the Company or any person designated by the Company, as indicated in Section 6(c)), and shall in no event be exercisable by or rest with plan Participants. (h) In the event that the Trustee is directed to invest in a Subsidiary Note pursuant to this Section 6, the Trustee shall hold such Subsidiary Note exclusively without liability for any failure to diversify or as may otherwise be required of trustees by applicable law. Section 7. Insurance Contracts (a) To the extent that the Trustee is directed by the Company prior to a CNF Change in Control to invest part or all of the Trust Fund in insurance contracts, the type and amount thereof shall be specified by the Company. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified. (b) Each insurance contract issued shall provide that the Trustee shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a CNF Change in Control, be subject to the direction of the Company. After a CNF Change in Control, the Trustee shall have all such rights. (c) The Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against an insurance policy held in the Trust Fund. (d) No insurer shall be deemed to be a party to the Trust and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by the insurer. Section 8. Disposition of Income During the term of the Trust, all income received by the Trust, net of expenses and taxes payable by the Trust, shall be accumulated and reinvested within the Trust. Section 9. Accounting by The Trustee The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within forty-five (45) days following the close of each calendar year and within forty-five (45) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. In the event the Company objects to such a written accounting, Trustee may have its accounting settled by a court of competent jurisdiction. The Trustee shall be entitled to hold and to commingle the assets of the Trust in one Fund for investment purposes but at the direction of the Company prior to a CNF Change in Control, the Trustee shall create one or more sub-accounts. Section 10.Responsibility of The Trustee (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Arrangements or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute, subject, however to Section 2(e) hereof. (b) The Company hereby indemnifies the Trustee against losses, liabilities, claims, costs and expenses in connection with the administration of the Trust as a result of the Trustee's following directions given by the Company or reliance on information provided by the Company. To the extent the Company fails to make any payment on account of an indemnity provided in this paragraph 10(b), in a reasonably timely manner, the Trustee may obtain payment from the Trust. If the Trustee undertakes or defends any litigation for the purpose of protecting a Participant's or beneficiary's rights under the Arrangements, the Company agrees to indemnify the Trustee against the Trustee's costs, reasonable expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) Prior to a CNF Change in Control, the Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. Following a CNF Change in Control the Trustee shall select independent legal counsel and may consult with counsel or other persons with respect to its duties and with respect to the rights of Participants or their beneficiaries under the Arrangements. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder and may rely on any determinations made by such agents and information provided to it by the Company. (e) The Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein. (f) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 11.Compensation and Expenses of The Trustee The Trustee's compensation shall be as agreed in writing from time to time by the Company and the Trustee. The Company shall pay all administrative expenses and the Trustee's fees and shall promptly reimburse the Trustee for any fees and expenses of its agents. If not so paid, the fees and expenses shall be paid from the Trust. Section 12.Resignation and Removal of The Trustee (a) The Trustee may resign at any time by written notice to the Company, which shall be effective sixty (60) days after receipt of such notice unless the Company and the Trustee agree otherwise. (b) The Trustee may be removed by the Company on sixty days (60) days notice or upon shorter notice accepted by the Trustee. (c) If the Trustee resigns or is removed within two years after a CNF Change in Control, the Trustee may apply to a court of competent jurisdiction to select a successor Trustee in accordance with the provisions of Section 12(b) prior to the effective date of the Trustee's resignation or removal. (d) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. (e) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 13 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 13.Appointment of Successor (a) Subject to Section 12(c), if the Trustee resigns or is removed in accordance with Section 12(a) or (b), the Company shall appoint a bank or trust company in good standing, organized and doing business under the laws of the United States or a state thereof, with a market capitalization exceeding $100,000,000 and authorized under the laws governing its organizaton to exercise corporate trustee powers, as a successor to replace the Trustee upon resignation or removal. The successor Trustee shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Section 8 and 9 hereof. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. Section 14.Amendment or Termination (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company; provided that - (1) After a CNF Change in Control has occurred, no amendment may be made to the Trust without the approval of seventy- five percent (75%) of all Participants (counting the beneficiaries of a deceased Participant as a single Participant) except as may be required to maintain the tax status or the ERISA status of this Trust. (2) No such amendment shall increase the duties or responsibilities of the Trustee unless the Trustee consents thereto in writing. (b) The Trust shall not terminate until the date on which Participants and their beneficiaries have received all of the benefits due to them under the terms and conditions of the Arrangements; provided that, upon the written approval of seventy-five percent (75%) of all Participants (counting the beneficiaries of a deceased Participant as a Participant), the Company may terminate this Trust prior to the time all benefit payments under the Arrangements have been made. Upon termination of the Trust, the Trustee shall make a final accounting and shall distribute to the Company the net balance of any remaining assets of the Trust. Upon making such a distribution, the Trustee shall be relieved from all further liability. Section 15.Change in Control (a) For purposes of this Trust Agreement, the following terms shall be defined as set forth below: (1) "Affiliate" means an entity described in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (2) "CNF Change in Control" means any of the following: (i) Any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding voting securities; (ii) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the effective date of the Trust, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the effective date of the Trust or whose appointment, election or nomination for election was previously so approved or recommended; (iii)There is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person, directly or indirectly, acquired 25% or more of the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates); or (iv) The stockholders of the Company approve a plan of complete liquidation of the Company or there is consummated an agreement for the sale or disposition by the Company of assets having an aggregate book value at the time of such sale or disposition of more than 75% of the total book value of the Company's assets on a consolidated basis (or any transaction having a similar effect), other than any such sale or disposition by the Company (including by way of spin- off or other distribution) to an entity, at least 50% of the combined voting power of the voting securities of which are owned immediately following such sale or disposition by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; (3) "Marketable Assets" means cash or any asset the Trustee may invest in pursuant to Section 6(b)(1) or Section 6(c)(3). (4) "Person" means any person, as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (A) the Company or its Affiliates, (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or its Affiliates, and (C) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock, $0.625 par value per share, of the Company). (5) "Potential CNF Change in Control" means any of the following: (i) The Company enters into an agreement, the consummation of which would result in the occurrence of a CNF Change in Control; (ii) The Company or any Person publicly announces an intention to take or to consider taking actions, including but not limited to proxy contests or consent solicitations, which, if consummated, would constitute a CNF Change in Control; (iii)Any Person becomes the "beneficial owner", as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates); or (iv) The Board of Directors of the Company adopts a resolution to the effect that, for purposes of this Trust Agreement, a Potential CNF Change in Control has occurred. (b) The General Counsel of the Company shall have the specific authority to determine whether a Potential CNF Change in Control or a CNF Change in Control has transpired and shall be required to give the Trustee notice of a Potential CNF Change in Control or a CNF Change in Control. The Trustee shall be entitled to rely upon such notice, but if the Trustee receives notice of a Potential CNF Change in Control or a CNF Change in Control from another source, the Trustee shall make its own independent determination. Section 16.Miscellaneous (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) The Company hereby represents and warrants that all of the Arrangements have been established, maintained and administered in accordance, in material respects, with all applicable laws, including without limitation, ERISA. (c) Benefits payable to Participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (d) This Trust Agreement shall be governed by and construed in accordance with the laws of North Carolina. (e) The CNF Inc. 2005 Deferred Compensation Plan for Directors is intended to meet the requirements of Section 409A of the Internal Revenue Code, the regulations thereunder, and any additional guidance provided by the Treasury Department. The CNF Inc. Deferred Compensation Plan for Directors is intended to be exempt from such requirements. Any provision of this Trust Agreement that would cause any Arrangement to fail to meet such requirements shall be void and, notwithstanding any other provisions of this Trust Agreement, the Trust Agreement may be amended by the Company and the Trustee to comply with such requirements. IN WITNESS WHEREOF, this Trust Agreement has been executed on behalf of the parties hereto on the day and year first above written. CNF INC. WACHOVIA BANK, N.A. as TRUSTEE By: /s/ Mark C. Thickpenny By: /s/ Shelley C. Anderson ------------------------ ------------------------- Its: Vice President - Treasurer Its: AVP Attachment A The following Arrangements are covered by this Trust: CNF Inc. Deferred Compensation Plan for Directors CNF Inc. 2005 Deferred Compensation Plan for Directors Attachment B Claims Procedures (Applicable in the event of a Potential CNF Change in Control or a CNF Change in Control, as provided in Section 2(d)(3)) Presentation of Claim. Any Participant or Beneficiary of a deceased Participant may deliver to the Trustee a written claim for a determination as to the amount or form of the benefits distributable to such Claimant from the Arrangements. A claim must be made within one year following the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. Notification of Decision. The Trustee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Trustee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Arrangements upon which such denial was based; (iii)a description of any additional material or information necessary for the Claimant to clarify or perfect the claim, and an explanation of why such material or information is necessary; and Review of a Denied Claim. Within six months after receiving a notice from the Trustee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Trustee a written request to review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Trustee, in its sole and absolute discretion, may grant. Decision on Review. The Trustee shall render its decision on review promptly and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Trustee's decision must be rendered within 60 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Arrangement provisions upon which the decision was based; and (c) such other matters as the Trustee deems relevant. EX-31 6 ex31.txt EXHIBIT 31 Exhibit 31(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Douglas W. Stotlar, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CNF Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 9, 2005 /s/ Douglas W. Stotlar ------------------------- Douglas W. Stotlar Chief Executive Officer Exhibit 31(b) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kevin Schick, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CNF Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 9, 2005 /s/ Kevin Schick -------------------- Kevin Schick Chief Financial Officer EX-32 7 ex32.txt EXHIBIT 32 Exhibit 32(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of CNF Inc. (the "Company") for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas W. Stotlar, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 9, 2005 /s/ Douglas W. Stotlar - --------------------------- Name: Douglas W. Stotlar Title: Chief Executive Officer Exhibit 32(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of CNF Inc. (the "Company") for the period ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin Schick, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 9, 2005 /s/ Kevin Schick - --------------------- Name: Kevin Schick Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----