-----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, IUD4uhqUnadur8aIlZMU/kyYwOwcpnIkig9iCmNM+/Ro3hXZA0nCfltgEYXp4kA0 A7Lj5av8hwNnTJLiE9dWDQ== 0000023675-05-000057.txt : 20050805 0000023675-05-000057.hdr.sgml : 20050805 20050805135638 ACCESSION NUMBER: 0000023675-05-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050805 DATE AS OF CHANGE: 20050805 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: 051002041 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 jun10q.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 June 30, 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 July 31, 2005: 52,403,690 CNF INC. FORM 10-Q Quarter Ended June 30, 2005 INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2005 and December 31, 2004 3 Statements of Consolidated Income - Three and Six Months Ended June 30, 2005 and 2004 5 Statements of Consolidated Cash Flows - Six Months Ended June 30, 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 33 Item 6. Exhibits 34 Signatures 35 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CNF INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) June 30, December 31, ASSETS 2005 2004 ------------ ------------ Current Assets Cash and cash equivalents $ 551,673 $ 386,897 Marketable securities 132,261 446,300 Trade accounts receivable, net 481,929 425,783 Other accounts receivable (Note 2) 68,657 134,577 Operating supplies, at lower of average cost or market 18,345 16,665 Prepaid expenses 42,444 48,092 Deferred income taxes 49,192 51,453 Assets of discontinued operations (Note 2) 6,411 5,128 ------------ ------------ Total Current Assets 1,350,912 1,514,895 ------------ ------------ Property, Plant and Equipment, at cost Land 142,857 142,857 Buildings and leasehold improvements 631,294 618,698 Revenue equipment 726,734 677,499 Other equipment 217,845 210,102 ------------ ------------ 1,718,730 1,649,156 Accumulated depreciation and amortization (823,900) (789,835) ------------ ------------ 894,830 859,321 ------------ ------------ Other Assets Deferred charges and other assets (Note 4) 38,876 56,618 Capitalized software, net 47,891 50,347 Assets of discontinued operations (Note 2) 15,958 15,220 ------------ ------------ 102,725 122,185 ------------ ------------ Total Assets $ 2,348,467 $ 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) June 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004 ------------ ------------ Current Liabilities Accounts payable $ 243,076 $ 252,867 Accrued liabilities 216,262 226,437 Self-insurance accruals 86,991 86,095 Current maturities of long-term debt 15,030 112,727 Income taxes payable 736 - Liabilities of discontinued operations (Note 2) 25,644 34,705 ------------ ------------ Total Current Liabilities 587,739 712,831 Long-Term Liabilities Long-term debt and guarantees 583,939 601,344 Self-insurance accruals 103,538 102,512 Employee benefits (Note 5) 216,299 245,989 Other liabilities and deferred credits 18,272 20,296 Deferred income taxes 15,463 29,200 Liabilities of discontinued operations (Note 2) 729 6,862 ------------ ------------ Total Liabilities 1,525,979 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 666,660 and 742,995 shares, respectively 7 7 Additional paid-in capital, preferred stock 101,392 113,002 Deferred compensation, Thrift and Stock Plan (44,743) (49,117) ------------ ------------ Total Preferred Shareholders' Equity 56,656 63,892 ------------ ------------ Common stock, $.625 par value; authorized 100,000,000 shares; issued 59,709,342 and 58,544,254 shares, respectively 37,337 36,590 Additional paid-in capital, common stock 462,715 429,134 Retained earnings 508,723 426,300 Deferred compensation, restricted stock (4,463) (5,744) Cost of repurchased common stock (Note 7) (7,676,708 and 6,364,868 shares, respectively) (223,355) (157,069) ------------ ------------ 780,957 729,211 Accumulated Other Comprehensive Loss (Note 6) (15,125) (15,736) ------------ ------------ Total Common Shareholders' Equity 765,832 713,475 ------------ ------------ Total Shareholders' Equity 822,488 777,367 ------------ ------------ Total Liabilities and Shareholders' Equity $ 2,348,467 $ 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 Six Months Ended June 30, June 30, ----------------------- ----------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- REVENUES $1,033,875 $ 924,382 $1,981,558 $1,771,302 Costs and Expenses Operating expenses (Note 4) 818,567 748,028 1,587,300 1,439,845 Selling, general and administrative expenses 84,498 79,783 163,724 154,228 Depreciation 27,250 25,292 53,718 50,502 ----------- ----------- ----------- ----------- 930,315 853,103 1,804,742 1,644,575 ----------- ----------- ----------- ----------- OPERATING INCOME 103,560 71,279 176,816 126,727 ----------- ----------- ----------- ----------- Other Income (Expense) Investment income 5,535 1,408 10,162 2,135 Interest expense (9,688) (10,011) (20,154) (17,347) Miscellaneous, net (2,012) (3,957) (3,616) (4,525) ----------- ----------- ----------- ----------- (6,165) (12,560) (13,608) (19,737) ----------- ----------- ----------- ----------- Income from Continuing Operations Before Taxes 97,395 58,719 163,208 106,990 Income Tax Provision (Note 9) 29,239 22,900 54,201 41,726 ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS 68,156 35,819 109,007 65,264 ----------- ----------- ----------- ----------- Discontinued Operations, net of tax (Note 2) Gain (Loss) from Disposal 2,951 - (6,825) - Income (Loss) from Discontinued Operations - 1,686 - (1,330) ----------- ----------- ----------- ----------- 2,951 1,686 (6,825) (1,330) Net Income 71,107 37,505 102,182 63,934 Preferred Stock Dividends 2,036 2,022 4,025 4,044 ----------- ----------- ----------- ----------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 69,071 $ 35,483 $ 98,157 $ 59,890 =========== =========== =========== =========== Weighted-Average Common Shares Outstanding (Note 1) Basic 52,166,814 50,319,659 52,257,396 50,075,246 Diluted 56,016,513 56,883,738 56,333,732 56,981,429 Earnings (Loss) per Common Share (Note 1) Basic Net Income from Continuing Operations $ 1.27 $ 0.67 $ 2.01 $ 1.22 Gain (Loss) from Disposal, net of tax 0.05 - (0.13) - Income (Loss) from Discontinued Operations, net of tax - 0.04 - (0.02) ----------- ----------- ----------- ----------- Net Income Available to Common Shareholders $ 1.32 $ 0.71 $ 1.88 $ 1.20 =========== =========== =========== =========== Diluted Net Income from Continuing Operations $ 1.19 $ 0.61 $ 1.87 $ 1.11 Gain (Loss) from Disposal, net of tax 0.05 - (0.12) - Income (Loss) from Discontinued Operations, net of tax - 0.03 - (0.02) ----------- ----------- ----------- ----------- Net Income Available to Common Shareholders $ 1.24 $ 0.64 $ 1.75 $ 1.09 =========== =========== =========== =========== The accompanying notes are an integral part of these statements. CNF INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Dollars in thousands) Six Months Ended June 30, -------------------------- 2005 2004 ------------ ------------ Cash and Cash Equivalents, Beginning of Period $ 386,897 $ 38,183 ------------ ------------ Operating Activities Net income 102,182 63,934 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operations, net of tax 6,825 1,330 Depreciation and amortization, net of accretion 59,315 57,621 Increase (Decrease) in deferred income taxes (11,476) 9,560 Amortization of deferred compensation 5,022 6,569 Provision for uncollectible accounts 2,336 3,199 Equity in earnings of joint venture (7,454) (5,380) Loss (Gain) from sales of property and equipment, net (351) 278 Changes in assets and liabilities: Receivables (26,118) (40,887) Prepaid expenses 5,648 (995) Accounts payable (11,307) 26,057 Accrued incentive compensation (20,221) 24,628 Accrued liabilities, excluding accrued incentive compensation 8,439 11,497 Self-insurance accruals 1,922 (10,818) Income taxes 27,383 12,278 Employee benefits (30,871) (8,052) Deferred charges and credits 22,601 10,299 Other (7,201) (3,355) ------------ ------------ Net Cash Provided by Operating Activities 126,674 157,763 ------------ ------------ Investing Activities Capital expenditures (90,704) (45,035) Software expenditures (4,911) (7,068) Proceeds from sales of property and equipment, net 2,347 4,429 Net decrease (increase) in marketable securities 314,039 (16,260) ------------ ------------ Net Cash Provided by (Used in) Investing Activities 220,771 (63,934) ------------ ------------ Financing Activities Net proceeds from issuance of long-term debt - 292,587 Repayment of long-term debt and guarantees (112,715) (142,911) Proceeds from exercise of stock options 32,263 17,055 Payments of common dividends (10,527) (10,050) Payments of preferred dividends (4,861) (5,004) Repurchases of common stock (74,568) - ------------ ------------ Net Cash Provided by (Used in) Financing Activities (170,408) 151,677 ------------ ------------ Net Cash Provided by Continuing Operations 177,037 245,506 ------------ ------------ Net Cash Provided by (Used in) Discontinued Operations (12,261) 10,012 ------------ ------------ Increase in Cash and Cash Equivalents 164,776 255,518 ------------ ------------ Cash and Cash Equivalents, End of Period $ 551,673 $ 293,701 ============ ============ Supplemental Disclosure Cash paid for income taxes, net $ 37,246 $ 31,813 ============ ============ Cash paid for interest, net of amounts capitalized $ 26,197 $ 16,686 ============ ============ 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: (Dollars in thousands except per share data) Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Numerator: Continuing operations (after preferred stock dividends), as reported $ 66,120 $ 33,797 $ 104,982 $ 61,220 Add-backs: Dividends on Series B preferred stock, net of replacement funding 297 343 561 651 Interest expense on convertible subordinated debentures, net of trust dividend income -- 636 -- 1,590 ----------- ----------- ----------- ----------- Continuing operations 66,417 34,776 105,543 63,461 ----------- ----------- ----------- ----------- Discontinued operations 2,951 1,686 (6,825) (1,330) ----------- ----------- ----------- ----------- Available to common shareholders $ 69,368 $ 36,462 $ 98,718 $ 62,131 =========== =========== =========== =========== Denominator: Weighted-average common shares outstanding 52,166,814 50,319,659 52,257,396 50,075,246 Stock options and restricted stock 711,059 941,041 937,696 762,311 Series B preferred stock 3,138,640 3,539,705 3,138,640 3,539,705 Convertible subordinated debentures -- 2,083,333 -- 2,604,167 ----------- ----------- ----------- ----------- 56,016,513 56,883,738 56,333,732 56,981,429 =========== =========== =========== =========== Earnings (Loss) per Diluted Share: Continuing operations $ 1.19 $ 0.61 $ 1.87 $ 1.11 Discontinued operations 0.05 0.03 (0.12) (0.02) ----------- ----------- ----------- ----------- Available to common shareholders $ 1.24 $ 0.64 $ 1.75 $ 1.09 =========== =========== =========== =========== The periods ended June 30, 2004 include the dilutive effect of convertible subordinated debentures, which were redeemed on June 1, 2004. Stock-Based Compensation Employees 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 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: (Dollars in thousands, Three Months Ended Six Months Ended except per share data) June 30, June 30, ------------------------ ------------------------ 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net income available to common shareholders, as reported $ 69,071 $ 35,483 $ 98,157 $ 59,890 Stock-based compensation cost included in reported income, net of tax (18) 762 395 1,410 Additional compensation cost, net of tax, that would have been included in net income if the fair- value method had been applied (1,613) (2,401) (3,163) (4,843) ----------- ----------- ----------- ----------- Adjusted net income as if the fair-value method had been applied $ 67,440 $ 33,844 $ 95,389 $ 56,457 =========== =========== =========== =========== Earnings per share: Basic: As reported $ 1.32 $ 0.71 $ 1.88 $ 1.20 =========== =========== =========== =========== Adjusted $ 1.29 $ 0.67 $ 1.83 $ 1.13 =========== =========== =========== =========== Diluted: As reported $ 1.24 $ 0.64 $ 1.75 $ 1.09 =========== =========== =========== =========== Adjusted $ 1.21 $ 0.61 $ 1.70 $ 1.03 =========== =========== =========== =========== 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. 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 transition method to adopt. The impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based awards granted in the future, as well as the assumptions and the fair value model used to value the awards, and the market value of CNF common stock. 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. Accordingly, CNF 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. 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 in 2004, continuing operations has been allocated general corporate overhead charges that were previously allocated to the discontinued Forwarding segment. These corporate overhead charges of $4.5 million and $8.2 million in the second quarter and first half of 2004, respectively, were allocated from discontinued operations to Con-Way Transportation Services ("Con-Way") and Menlo Worldwide Logistics ("Logistics") based on segment revenue and capital employed. Results of discontinued operations are summarized below: Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ (Dollars in thousands) 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Revenues $ -- $ 520,700 $ -- $1,024,764 Income (Loss) from Discontinued Operations Income (Loss) before income taxes -- 2,765 -- (2,180) Income tax (provision) benefit -- (1,079) -- 850 ----------- ----------- ----------- ----------- $ -- $ 1,686 $ -- $ (1,330) =========== =========== =========== =========== Gain (Loss) from Disposal, net of tax $ 2,951 $ -- $ (6,825) $ -- =========== =========== =========== =========== 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: June 30, December 31, (Dollars in thousands) 2005 2004 ------------ ------------ Assets Current assets $ 6,411 $ 5,128 Employee benefits and long-lived assets 15,958 15,220 ------------ ------------ Total Assets 22,369 20,348 ============ ============ Liabilities Accounts payable and accrued liabilities 24,814 33,243 Other 830 1,462 ------------ ------------ Current Liabilities 25,644 34,705 Long-term liabilities 729 6,862 ------------ ------------ Total Liabilities 26,373 41,567 ------------ ------------ Net Liabilities $ 4,004 $ 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 Menlo Worldwide'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 through CNF's 2007 fiscal year. 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. Disposition of MWF and Forwarding Segment 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. In the second quarter of 2005, CNF recognized a $3.0 million net gain due in part to the reversal of previously accrued income taxes pertaining to EWA, which related to an IRS settlement of issues related to tax years prior to 2002. 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 cumulative disposal-related tax benefit of $46.8 million was realizable, and as a result, the remaining $43.2 million of the recognized tax benefit was fully offset by a valuation allowance of an equal amount. 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 June 30, 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. 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. EWA's restructuring reserves decreased to $25.1 million at June 30, 2005 from $33.8 million at December 31, 2004. Restructuring reserves at June 30, 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"), Menlo Worldwide, and CNF Other. Menlo Worldwide 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 second quarter of 2004 were $3.9 million and $0.6 million, respectively, and in the first half of 2004, were $7.2 million and $1.0 million, respectively. In April 2005, Con-Way Logistics was integrated with Logistics. As a result, for the periods presented, the operating results of Con-Way Logistics have been reclassified to conform to the current-period presentation. Financial Data Management evaluates segment performance primarily based on revenue and operating income (loss), except for Vector, which is evaluated based on MW's proportionate share of Vector's income before taxes. Accordingly, interest expense, investment income and other non-operating items 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. (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2005 2004 2005 2004 ----------- ----------- ----------- ----------- External Revenues Con-Way Transportation Services $ 713,939 $ 640,861 $1,354,264 $1,219,341 Menlo Worldwide Logistics 317,036 282,569 618,985 550,755 CNF Other 2,900 952 8,309 1,206 ----------- ----------- ----------- ----------- $1,033,875 $ 924,382 $1,981,558 $1,771,302 =========== =========== =========== =========== Intersegment Revenue Con-Way Transportation Services $ 16,238 $ 12,125 $ 31,922 $ 23,201 Menlo Worldwide Logistics -- 62 -- 203 - CNF Other 11,358 6,564 20,959 12,664 ----------- ----------- ----------- ----------- $ 27,596 $ 18,751 $ 52,881 $ 36,068 =========== =========== =========== =========== Total Revenues before Intersegment Eliminations Con-Way Transportation Services $ 730,177 $ 652,986 $1,386,186 $1,242,542 Menlo Worldwide Logistics 317,036 282,631 618,985 550,958 CNF Other 14,258 7,516 29,268 13,870 Intersegment Revenue Eliminations (27,596) (18,751) (52,881) (36,068) ----------- ----------- ----------- ----------- $1,033,875 $ 924,382 $1,981,558 $1,771,302 =========== =========== =========== =========== Operating Income (Loss) Con-Way Transportation Services $ 95,329 $ 63,859 $ 158,885 $ 112,790 Menlo Worldwide Logistics 5,634 5,358 10,664 10,335 Vector 4,941 2,988 8,976 5,380 ----------- ----------- ----------- ----------- 10,575 8,346 19,640 15,715 ----------- ----------- ----------- ----------- CNF Other (822) (926) (187) (1,778) ----------- ----------- ----------- ----------- 105,082 71,279 178,338 126,727 ----------- ----------- ----------- ----------- Reconciliation of segments to consolidated amount: Income tax related to Vector, an equity-method investment (Note 4) (1,522) -- (1,522) -- ----------- ----------- ----------- ----------- $ 103,560 $ 71,279 $ 176,816 $ 126,727 =========== =========== =========== =========== 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 Menlo Worldwide, LLC ("MW") owns a majority interest in Vector, MW's portion of Vector's operating results are reported in the Menlo Worldwide 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. In the United States, the joint venture partners are responsible for income taxes applicable to their share of Vector's U.S. federal taxable income. Accordingly, MW's portion of U.S federal income taxes on Vector's domestic income is reported in CNF's tax provision. In foreign tax jurisdictions, Vector is responsible for income taxes on its foreign income rather than the joint venture partners. In accordance with GAAP, MW's portion of Vector's income taxes on its foreign income is reported in operating income as a component of equity-method income rather than in CNF's tax provision. 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 U.S. federal income taxes on income that will be incurred by CNF, but does include a $1.5 million provision for MW's portion of Vector's income taxes on foreign income. MW's undistributed earnings from Vector at June 30, 2005 and December 31, 2004, before provision for CNF's related parent income taxes, were $34.6 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 June 30, 2005 and December 31, 2004 was $34.6 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 June 30, 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 June 30, 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 June 30, 2005 and December 31, 2004. The following table summarizes the components of net periodic benefit expense for the CNF Retirement Plan: Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ (Dollars in thousands) 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Service cost - benefits earned during the quarter $ 12,120 $ 12,083 $ 24,004 $ 27,474 Interest cost on benefit obligation 12,924 12,445 25,788 28,297 Expected return on plan assets (14,122) (12,227) (28,726) (27,802) Net amortization and deferral 1,173 1,677 1,734 3,814 ----------- ----------- ----------- ----------- Net periodic benefit expense $ 12,095 $ 13,978 $ 22,800 $ 31,783 =========== =========== =========== =========== In the presentation above, the portion of benefit expense that relates to discontinued operations was immaterial in the second quarter and first half of 2005 and was $1.9 million and $7.2 million for the second quarter and first half of 2004, respectively. CNF currently estimates that it will contribute $75 million to its Pension Plans in 2005, including $55.0 million already contributed through July 2005. The following table summarizes the components of net periodic benefit expense for the Postretirement Plan: Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ (Dollars in thousands) 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Service cost - benefits earned during the quarter $ 121 $ 550 $ 262 $ 1,037 Interest cost on benefit obligation 535 1,666 1,098 3,143 Net amortization and deferral 347 79 377 149 ----------- ----------- ----------- ----------- Net periodic benefit expense $ 1,003 $ 2,295 $ 1,737 $ 4,329 =========== =========== =========== =========== In the presentation above, the portion of benefit expense that relates to discontinued operations was immaterial in the second quarter and first half of 2005 and was $1.8 million and $2.8 million in the second quarter and first half of 2004, respectively. 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: (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net income $ 71,107 $ 37,505 $ 102,182 $ 63,934 Other comprehensive income (loss): Unrealized loss on marketable securities -- (1,833) -- (2,044) Foreign currency translation adjustment (Note 1) 223 (1,741) 611 8,118 ----------- ----------- ----------- ----------- 223 (3,574) 611 6,074 ----------- ----------- ----------- ----------- Comprehensive income $ 71,330 $ 33,931 $ 102,793 $ 70,008 =========== =========== =========== =========== The following is a summary of the components of Accumulated Other Comprehensive Loss, net of tax: June 30, December 31, (Dollars in thousands) 2005 2004 ------------ ------------ Accumulated foreign currency translation adjustments (Note 1) $ (445) $ (1,056) Minimum pension liability adjustment (14,680) (14,680) ------------ ------------ Accumulated other comprehensive loss $ (15,125) $ (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 June 30, 2005, CNF repurchased a total of 1,655,500 shares at a cost of $74.6 million. CNF generally expects the remaining purchases to be made ratably throughout the remainder of the program. 8. Commitments and Contingencies Purchase Commitments At June 30, 2005, Con-Way was obligated under purchase commitments to acquire $24.0 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, 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. 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 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. In addition, CNF, on behalf of EWA, conducted its own investigation into the allegations. CNF 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. 9. Income Taxes CNF's effective tax provision rate of 30.0% and 33.2% in the second quarter and first half of 2005, respectively, declined from 39.0% in the same periods of last year, due primarily to a $7.0 million second- quarter reversal in 2005 of previously accrued income taxes that related to an IRS settlement of issues related to tax years prior to 2002. Excluding the effect of the second-quarter reversal of accrued taxes, the effective tax provision rate in the second quarter and first half of 2005 was 37.2% and 37.7%, respectively, compared to 39.0% in the same periods of last year. The lower effective tax rates in 2005 were also due to an increase in tax-exempt interest income and the effect of the GAAP classification of income taxes on Vector's increasing foreign income. As more fully discussed in Note 4, "Investment in Unconsolidated Joint Venture," of Item 1, "Financial Statements," MW's portion of U.S. federal income taxes on Vector's domestic income is reported in CNF's tax provision. However, under GAAP, MW's portion of Vector's income taxes on its foreign income is reported in operating income as a component of equity-method income and is not a component of CNF's tax provision. 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, logistics 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; Menlo Worldwide, a provider of integrated contract logistics solutions; and CNF Other, which includes certain corporate activities and Road Systems, a trailer manufacturer. Menlo Worldwide 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 unit 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 Menlo Worldwide, LLC ("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 The following table compares CNF's consolidated operating results (dollars in thousands, except per share amounts): Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------ 2005 2004 2005 2004 ------------ ------------ ------------ ----------- Net Income (Loss) Continuing Operations (1),(2) $ 66,120 $ 33,797 $ 104,982 $ 61,220 Discontinued Operations (2) 2,951 1,686 (6,825) (1,330) ------------ ------------ ------------ ----------- Available to Common Shareholders $ 69,071 $ 35,483 $ 98,157 $ 59,890 ============ ============ ============ =========== Diluted Earnings (Loss) per Share Continuing Operations $ 1.19 $ 0.61 $ 1.87 $ 1.11 Discontinued Operations 0.05 0.03 (0.12) (0.02) ------------ ------------ ------------ ----------- Available to Common Shareholders $ 1.24 $ 0.64 $ 1.75 $ 1.09 ============ ============ ============ =========== 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 in 2004, continuing operations has been allocated general corporate overhead charges that were previously allocated to the discontinued Forwarding segment. These corporate overhead charges of $4.5 million in the second quarter and $8.2 million in the first half of 2004 were allocated from discontinued operations to Con-Way and Logistics based on segment revenue and capital employed. CNF's second-quarter net income available to common shareholders increased 94.7% from the same period last year to $69.1 million ($1.24 per diluted share), as net income from continuing operations rose 95.6% to $66.1 million ($1.19 per diluted share). In the first half of the year, net income available to common shareholders grew 63.9% to $98.2 million ($1.75 per diluted share), as net income from continuing operations rose 71.5% to $105.0 million ($1.87 per diluted share). First-half net income from continuing operations in 2005 was offset by a $6.8 million net loss ($0.12 per diluted share) from discontinued operations, which reflects a $9.8 million first-quarter loss related to the disposition of MWF and a $3.0 million second-quarter gain ($0.05 per diluted share) due in part to the reversal of accrued taxes pertaining to EWA. Continuing Operations The following table compares CNF's segment operating results (dollars in thousands): (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues Con-Way Transportation Services $ 713,939 $ 640,861 $ 1,354,264 $ 1,219,341 Menlo Worldwide Logistics 317,036 282,569 618,985 550,755 CNF Other 2,900 952 8,309 1,206 ------------ ------------ ------------ ------------ $ 1,033,875 $ 924,382 $ 1,981,558 $ 1,771,302 ============ ============ ============ ============ Operating Income(Loss) Con-Way Transportation Services $ 95,329 $ 63,859 $ 158,885 $ 112,790 Menlo Worldwide Logistics 5,634 5,358 10,664 10,335 Vector 4,941 2,988 8,976 5,380 ------------ ------------ ------------ ------------ 10,575 8,346 19,640 15,715 ------------ ------------ ------------ ------------ CNF Other (822) (926) (187) (1,778) ------------ ------------ ------------ ------------ 105,082 71,279 178,338 126,727 ------------ ------------ ------------ ------------ Reconciliation of segments to consolidated amount: Income tax related to Vector, an equity-method investment (Note 4) (1,522) -- (1,522) -- ------------ ------------ ------------ ------------ $ 103,560 $ 71,279 $ 176,816 $ 126,727 ============ ============ ============ ============ CNF's revenue for the second quarter and first half of 2005 increased 11.8% and 11.9%, respectively, from the same periods last year, with higher revenue at all reporting segments. Consolidated operating income in 2005 rose 45.3% in the second quarter and grew 39.5% in the first half of the year on significantly higher operating income from Con-Way and improved operating results from Menlo Worldwide. Con-Way's second- quarter and first-half operating income in 2005 increased 49.3% and 40.9%, respectively, due largely to revenue growth of 11.4% and 11.1%, respectively, and improved regional-carrier operating margins. Con-Way's revenue increases in 2005 reflect regional-carrier tonnage growth and yield improvement on increased fuel surcharges. Improved operating margins at Con-Way primarily reflect a decline in employee costs as a percentage of revenue, due largely to lower incentive compensation that resulted from variations in operating income and other performance factors relative to plan. Menlo Worldwide's operating income in the second quarter and first half of 2005 increased 26.7% and 25.0%, respectively, due primarily to an increase in income from Vector's foreign operations. Reported segment income from Vector increased 65.4% to $4.9 million in the second quarter of 2005 and grew 66.8% to $9.0 million in the first half of 2005. Logistics' operating income in the second quarter and first half of 2005 increased 5.2% and 3.2%, respectively, on revenue growth of 12.2% and 12.4%, respectively. Other net expense decreased $6.4 million in the second quarter of 2005 and $6.1 million in the first half of 2005 due primarily to increases in investment income, which rose $4.1 million and $8.0 million, respectively, on increased average cash equivalents and marketable securities. Interest expense in the second quarter of 2005 decreased $0.3 million and increased in the first half of 2005 by $2.8 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, the $128.9 million redemption in June 2004 of 5% Convertible Debentures, and the $100.0 million repayment in June 2005 of 7.35% Notes. In 2005, second-quarter and first-half net decreases in other miscellaneous non-operating expenses reflect $2.7 million of costs in 2004 associated with the redemption of the Convertible Debentures. CNF's effective tax provision rate of 30.0% and 33.2% in the second quarter and first half of 2005, respectively, declined from 39.0% in the same periods of last year, due primarily to a $7.0 million second- quarter reversal in 2005 of previously accrued income taxes that related to an IRS settlement of issues related to tax years prior to 2002. Excluding the effect of the second-quarter reversal of accrued taxes, the effective tax provision rate in the second quarter and first half of 2005 was 37.2% and 37.7%, respectively, compared to 39.0% in the same periods of last year. The lower effective tax rates in 2005 were also due to an increase in tax-exempt interest income and the effect of the GAAP classification of income taxes on Vector's increasing foreign income. As more fully discussed in Note 4, "Investment in Unconsolidated Joint Venture," of Item 1, "Financial Statements," MW's portion of U.S. federal income taxes on Vector's domestic income is reported in CNF's tax provision. However, under GAAP, MW's portion of Vector's income taxes on its foreign income is reported in operating income as a component of equity-method income and is not a component of CNF's tax provision. 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 Six Months Ended June 30, June 30, ------------------------- ------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Summary of Operating Results Revenues $ 713,939 $ 640,861 $ 1,354,264 $ 1,219,341 Operating Income 95,329 63,859 158,885 112,790 Operating Margin 13.4% 10.0% 11.7% 9.3% 2005 vs.2004 2005 vs.2004 -------------- -------------- Selected Regional-Carrier Operating Statistics Revenue per day +11.7% +11.7% Yield +6.1 +5.4 Weight per day +5.3 +5.9 Weight per shipment +2.0 +3.0 Con-Way's revenue in the second quarter and first half of 2005 rose 11.4% and 11.1%, respectively, from the same periods in 2004 due to higher revenue from Con-Way's regional carriers and continued growth from the Con-Way Supply Chain Group, which includes Con-Way NOW, Con-Way Air Express, and Con-Way Truckload. Revenue per day from the regional carriers in the second quarter of 2005 rose 11.7% from the second quarter of 2004 on a 5.3% increase in weight per day ("weight") and a 6.1% increase in revenue per hundredweight ("yield"). For the first half of 2005, revenue per day from the regional carriers rose 11.7% from the same period last year on a 5.9% increase in weight and a 5.4% increase in yield. Management believes a portion of the weight improvement in 2005 was from market-share gains. Yield increases in the second quarter and first half of 2005 primarily reflect an increase in fuel surcharges. Excluding fuel surcharges, yields in 2005 increased 1.8% and 1.3% from the second quarter and first half of 2004, respectively. Yields in 2005 also benefited from continued growth in higher-rated interregional joint services and general rate increases in June 2004 and April 2005. Yields in 2005 were adversely affected by 2.0% and 3.0% increases in weight per shipment in the second quarter and first half of 2005, respectively, which were largely driven by a spot- quote program that contributed to an increase in the number of shipments in excess of 10,000 pounds. Rates generally decline when weight per shipment increases, as freight with a higher weight per shipment generally has a lower transportation cost per unit of weight. Con-Way's second-quarter and first-half operating income in 2005 increased 49.3% and 40.9%, respectively, due largely to higher revenue and improved operating margins from the regional carriers. Fuel costs in the second quarter and first half of 2005 increased 59.7% and 56.0%, respectively, and purchased transportation costs in the same comparative periods increased 11.7% and 15.7%, respectively. However, fuel costs and the effect of fuel-related increases in purchased transportation costs were recovered through the fuel surcharges discussed above. Second-quarter and first-half employee costs in 2005 increased 4.1% and 4.5%, respectively, but declined as a percent of revenue. Employee costs in 2005 reflect increases in base compensation and employee benefits, partially offset by lower incentive compensation. Base compensation in the second quarter and first half of 2005 rose 8.8% and 8.3%, respectively, due primarily to headcount increases attributable to higher business volumes, and to a lesser extent, wage and salary rate increases. Second-quarter and first-half incentive compensation in 2005 declined by $10.3 million and $11.9 million, respectively, based on variations in operating income and other performance measures relative to plan. Employee benefits expense increased 4.2% and 2.5% in the second quarter and first half of 2005, respectively, due largely to growth in headcount. Menlo Worldwide The Menlo Worldwide reporting segment consists of the operating results of Logistics and Vector. Menlo Worldwide in 2005 reported second- quarter operating income of $10.6 million, an increase of 26.7% over last year. In the first half of 2005, segment income was $19.6 million, a 25.0% improvement over the same prior-year period. 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 Menlo Worldwide reporting segment: Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Summary of Operating Results Logistics Revenues $ 317,036 $ 282,569 $ 618,985 $ 550,755 Purchased Transportation (226,013) (199,064) (438,896) (385,682) ------------ ------------ ------------ ------------ Net Revenues 91,023 83,505 180,089 165,073 Operating Income 5,634 5,358 10,664 10,335 Operating Margin on Revenue 1.8% 1.9% 1.7% 1.9% Operating Margin on Net Revenue 6.2% 6.4% 5.9% 6.3% Vector Operating Income $ 4,941 $ 2,988 $ 8,976 $ 5,380 Menlo Worldwide - Logistics Logistics' revenue in the second quarter and first half of 2005 increased 12.2% and 12.4%, respectively, due to increases in revenue from carrier-management and warehouse-management services. In 2005, revenue from carrier-management services in the second quarter and first half grew 13.6% and 12.5%, respectively, while revenue from warehouse- management services rose 10.8% and 14.3%, 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. Logistics' net revenue (revenue less purchased transportation) in the second quarter and first half of 2005 increased 9.0% and 9.1%, respectively, as purchased transportation costs grew at a higher rate than revenue. Logistics' operating income in the second quarter and first half of 2005 increased 5.2% and 3.2%, respectively, over the same periods of last year, as revenue growth was partially offset by margin declines, which were due primarily to higher purchased transportation costs on increased carrier-management services and, to a lesser degree, lower customer shipment volumes on certain transaction-based warehouse-management contracts. In 2005, second-quarter and first-half purchased transportation costs grew 13.5% and 13.8%, respectively. The effect of fuel-related increases in purchased transportation costs were largely recovered through customer pricing. Margins in the second quarter and first half of 2005 were also adversely affected by higher administrative costs, which were due in part to executive termination benefits and expansion in international markets, partially offset by cost reductions from the integration of Con-Way Logistics, as described below. Beginning in the second quarter of 2005, Logistics integrated the Con- Way Logistics business into its operations. Accordingly, the operating results of Con-Way Logistics are reported in the Menlo Worldwide Logistics' reporting segment and prior periods have been reclassified to conform to the current-period presentation. The integration of the two businesses is intended to provide an enterprise solution offering for Logistics' customers who want to use Con-Way as a primary transportation provider in addition to those customers who want a vendor-neutral transportation solution. The integration is also expected to expand Con- Way Logistics' multi-client warehousing service to Logistics' larger warehouse network. Menlo Worldwide - Vector Operating Results Second-quarter segment income reported from MW's equity investment in Vector increased to $4.9 million in 2005 from $3.0 million in 2004, and for the six-month period, improved to $9.0 million in 2005 from $5.4 million last year. Higher reported segment income from Vector was due primarily to higher income earned in GM's international regions, partially offset by a decline in income from GM's North America region. Improved income in GM's international regions was substantially due to increased business levels and 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 Compensation earned from GM's European region in the second quarter and first half of 2005 increased $2.2 million and $4.8 million, respectively, from the same periods last year, due primarily to increased business levels and an amendment to ABCs for GM's European region. 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. 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 second-quarter operating loss decreased to $0.8 million in 2005 from $0.9 million in 2004, while the $0.2 million operating loss in the first half of 2005 decreased from $1.8 million in 2004. The first half of 2005 primarily reflects a $1.4 million first-quarter gain from corporate insurance activities, while the same period of last year included a $1.5 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 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 Menlo Worldwide'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 through CNF's 2007 fiscal year. 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. Disposition of MWF and Forwarding Segment 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. In the second quarter of 2005, CNF recognized a $3.0 million net gain due in part to the reversal of previously accrued income taxes pertaining to EWA, which related to an IRS settlement of issues related to tax years prior to 2002. 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 cumulative disposal-related tax benefit of $46.8 million was realizable, and as a result, the remaining $43.2 million of the recognized tax benefit was fully offset by a valuation allowance of an equal amount. 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 June 30, 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. EWA's restructuring reserves decreased to $25.1 million at June 30, 2005 from $33.8 million at December 31, 2004. Restructuring reserves at June 30, 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 $551.7 million at June 30, 2005 from $386.9 million at December 31, 2004, as $126.7 million provided by operating activities and $220.8 million provided by investing activities exceeded $170.4 million used in financing activities. Cash provided by investing activities primarily reflects a $314.0 million decrease in short-term marketable securities, partially offset by capital expenditures of $90.7 million. CNF's cash flows are summarized in the table below. Six Months Ended June 30, ----------------------------- (Dollars in thousands) 2005 2004 -------------- -------------- Operating Activities Net income $ 102,182 $ 63,934 Discontinued operations 6,825 1,330 Non-cash adjustments (1) 47,392 71,847 -------------- -------------- 156,399 137,111 Changes in assets and liabilities Receivables (26,118) (40,887) Accounts payable and accrued liabilities, excluding accrued incentive compensation (2,868) 37,554 Accrued incentive compensation (20,221) 24,628 Income taxes 27,383 12,278 Employee benefits (30,871) (8,052) Deferred charges and credits 22,601 10,299 All other changes in assets and liabilities 369 (15,168) -------------- -------------- (29,725) 20,652 Net Cash Provided by Operating Activities 126,674 157,763 -------------- -------------- Net Cash Provided by (Used in) Investing Activities 220,771 (63,934) -------------- -------------- Net Cash Provided by (Used in) Financing Activities (170,408) 151,677 -------------- -------------- Net Cash Provided by Continuing Operations 177,037 245,506 Net Cash Provided by (Used in)Discontinued Operations (12,261) 10,012 -------------- -------------- Increase in Cash and Cash Equivalents $ 164,776 $ 255,518 ============== ============== (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 half of 2005 was $126.7 million, a $31.1 million decline from the same prior-year period. Net income before non-cash items in the first half of 2005 exceeded the same period of last year; however, in 2005, that improvement was offset by a net use of cash from changes in assets and liabilities. Receivables in the first half of 2005 used $26.1 million as a revenue- driven increase in receivables was partially offset by a $29.4 million first-quarter payment received from UPS in connection with the sale of MWF. Accrued incentive compensation decreased $20.2 million in the first half of 2005, while the prior-year period reflects a $24.6 million increase. 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 2005, $55.1 million in February payments for incentive compensation exceeded first- half expense accruals of $34.9 million, while in 2004, $47.3 million in first-half expense accruals exceeded $22.7 million in February payments. Based primarily on taxable income, CNF's current tax accounts changed by $27.4 million, as CNF accrued a $0.7 million income tax payable at June 30, 2005, compared to a $26.7 million income tax receivable at December 31, 2004, as reported in Other Receivables in CNF's financial statements. The net use of cash from the net decreases in employee benefit liabilities for the first half of 2005 and 2004 reflects the net effect of defined benefit pension plan funding contributions of $52.5 million and $40.0 million, respectively, as described below under "- Defined Benefit Pension Plans," partially offset by expense accruals for CNF's defined benefit plan obligation. Cash provided by changes in deferred charges and credits in the first half of 2005 primarily reflects a $19.1 million decline in Vector's affiliate receivable from CNF, as more fully discussed in Note 4, "Investment in Unconsolidated Joint Venture," in Item 1, "Financial Statements." In the same period of last year, Vector's affiliate receivable from CNF declined by $4.8 million. Investing Activities Investing activities in the first half of 2005 provided $220.8 million compared to $63.9 million used in the first half of 2004. In both periods presented, investing activities consisted primarily of capital expenditures and fluctuations in short-term marketable securities. Capital expenditures in the first half of 2005 increased $45.7 million from the first half of 2004 due substantially to expenditures at Con- Way, which acquired $63.5 million of tractors and trailers in the first half of 2005, compared to $23.8 million in the first half of 2004. Investments in marketable securities decreased in the first half of 2005 by $314.0 million, primarily from the conversion of auction-rate securities into cash, while the same period of 2004 reflects a $16.3 million increase in marketable securities. Financing Activities Financing activities in the first half of 2005 used cash of $170.4 million compared to $151.7 million provided in the first half of 2004. In the first half of 2005, cash used in financing activities includes $74.6 million used for the repurchase of common stock under CNF's repurchase program described below. Financing activities in 2005 reflect the repayment at maturity on June 1 of $100 million 7.35% Notes, while 2004 reflects the $292.6 million net issuance of 6.7% Senior Debentures and the $128.9 million redemption of 5% Convertible Debentures. 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 $32.3 million in the first half of 2005 from $17.1 million in the same period 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 a two- year period in open market purchases and privately negotiated transactions. CNF currently estimates it will repurchase approximately $150 million of CNF's common stock annually in each of 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 June 30, 2005, no borrowings were outstanding under the facility and $219.2 million of letters of credit were outstanding, leaving $180.8 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 $35.0 million at June 30, 2005, which are available to support letters of credit, bank guarantees, and overdraft facilities; at that date, a total of $12.4 million was outstanding under these facilities. Of the total letters of credit outstanding at June 30, 2005, $218.7 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, including $55.0 million already contributed through July 2005. 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 half of 2005, there have been no material changes in CNF's contractual cash obligations outside the ordinary course of business. As discussed above, CNF repaid its $100 million 7.35% Notes on June 1, 2005. At June 30, 2005, Con-Way was obligated under purchase commitments to acquire $24.0 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 42.1% at June 30, 2005 from 47.9% at December 31, 2004, due primarily to the increase in retained earnings resulting from net income earned in the first half of 2005 and the repayment in June of $100 million 7.35% Notes. In June 2005, Standard & Poor's affirmed its investment-grade rating on CNF's senior unsecured debt and upgraded its outlook to "positive" from "stable." 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 June 30, 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 for 2005, CNF 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 an 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 eleven years for CNF. Lower amortization of the unrecognized actuarial loss will reduce 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 transportation industry, 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 in Portland, Oregon. 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 advantages over comparable unionized competitors 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. 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 transition method to adopt. The impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based awards granted in the future, as well as the assumptions and the fair value model used to value the awards, and the market value of CNF common stock. 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-termsenior 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." 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. 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 June 30, 2005: Total Number Maximum Dollar Total Average of Shares Purchased Value of Shares Number of Price as Part of that May Yet Be shares Paid per Publicly Announced Purchased Under Purchased[1] Share Program [1] the Program[1] ------------------------------------------------------------- April 1, 2005 - April 30, 2005 189,000 $ 43.61 189,000 $ 259,493,440 May 1, 2005 - May 31, 2005 510,500 $ 43.95 510,500 $ 237,059,471 June 1, 2005 - June 30, 2005 262,000 $ 44.38 262,000 $ 225,432,306 ----------- ----------- Total 961,500 $ 44.00 961,500 $ 225,432,306 =========== =========== [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 6. EXHIBITS Exhibit No. (10) Material Contracts 10.1 Summary of Material Executive Employee Agreements (Item 1.01 to CNF's Report on Form 8-K filed on June 6, 2005.*#) 10.2 Employment Agreement between the Company and John H. Williford dated June 4, 2005 (Exhibit 99.1 to CNF's Report on Form 8-K filed on June 6, 2005.*) 10.3 Severance Agreement between the Company and David S. McClimon dated June 3, 2005. # 10.4 Severance Agreement between CTS and David S. McClimon dated June 3, 2005. # 10.5 Severance Agreement between the Company and Bryan M. Millican dated June 3, 2005. # 10.6 Letter dated June 2, 2005 terminating Severance Agreement between CTS and Douglas W. Stotlar dated March 1, 2005. # (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) August 5, 2005 /s/Kevin Schick --------------------- Kevin Schick Senior Vice President and Chief Financial Officer EX-10 2 ex103.txt EXHIBIT 10.3 Exhibit 10.3 SEVERANCE AGREEMENT THIS AGREEMENT is made as of June 3, 2005 by and between CNF Inc., a Delaware corporation (the "Company"), and David S. McClimon (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on June 3, 2005 (the "Effective Date") and shall continue in effect through December 31, 2006; provided, however, that commencing on January 1, 2006, and each January 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second paragraph of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive (i) shall not have any right to be retained in the employ of the Company, and (ii) shall remain subject to discharge to the same extent as if this Agreement had not been entered into by the Company and the Executive. 4. Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full- time duties with the Company as a result of incapacity due to disability, including physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the Change in Control, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the Change in Control. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post termination compensation and benefits as such payments become due (other than severance payments under any severance plan as in effect immediately prior to the Date of Termination). Such post termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the Change in Control. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof; provided, however, that the Executive shall not be entitled to the Severance Payments unless and until the Executive (or, in the event of the Executive's death, the executor, personal representative or administrator of the Executive's estate) has signed a written waiver and release substantially in the form set forth on Exhibit A hereto. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) during the Term the Executive's employment is terminated by the Company without Cause following a Potential Change in Control but prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) during the Term the Executive terminates his employment for Good Reason following a Potential Change in Control but prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person or (iii) during the Term the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). An Executive will not be considered to have been terminated by reason of the divestiture of a facility, sale or other disposition of a business or business unit, or the outsourcing of a business activity with which the Executive is affiliated, notwithstanding the fact that such divestiture, sale or outsourcing takes place within two years following a Change in Control, if the Executive is offered comparable employment by the successor company and such successor company agrees to assume the Company's obligations to the Executive under this Agreement. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the Executive's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the Change in Control and (ii) the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs the Change in Control. (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability and accident benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the Change in Control, at no greater cost to the Executive than the cost to the Executive immediately prior to such Date of Termination or Change in Control; provided, however, that any across the board changes to life, disability or accident benefits similarly affecting all or substantially all employees of the Company and any entity in control of the Company shall not be deemed a breach of this Section 6.1(B). Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. If the Executive dies during the thirty-six (36) month period following the Date of Termination, life, disability and accident benefit coverage of the Executive's dependents shall continue for the remainder of the thirty-six (36) month period. (C) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall provide health and dental benefits to the Executive and his dependents under the terms of the Company's health and dental plan as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(C) shall be reduced to the extent benefits of the same type are received by or made available to the Executive following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. If the Executive dies at a time when health and dental benefits are being provided under this Section 6.1(C) to the Executive's dependents, the Company shall continue to provide the dependents with health and dental benefits for the remainder of the thirty-six (36) month period on the same basis as if the Executive had survived throughout that period. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) should not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or should otherwise not be subject to the Excise Tax and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross Up Payment attributable to such reduction (plus that portion of the Gross Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes). In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross Up Payment), the Company shall make an additional Gross Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 The payments provided in subsection (A) of Section 6.1 hereof and in subsections (A) and (B) of Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall be paid by the Executive to the Company not later than the fifth (5th) business day after demand by the Company. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarter (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than to the extent provided in Section 6.1(B) and 6.1(C) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. All notices and other communications provided for in this Agreement (i) shall be in writing, (ii) shall be hand delivered, sent by overnight courier or by United States registered mail, return receipt requested and postage prepaid, addressed, in the case of the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, and (iii) shall be effective only upon actual receipt. To the Company: CNF Inc. 3240 Hillview Avenue Palo Alto, CA 94304 Attention: General Counsel 11. Miscellaneous. Except as otherwise expressly provided herein, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any written agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. 14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be finally settled exclusively by arbitration in Palo Alto, California, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in Section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to disability, including physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. In the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board and, in the event of an arbitration as contemplated by Section 14.2, to the arbitrator, by clear and convincing evidence that Cause exists. (G) "Change in Control" means the occurrence of an event described in any one of the following clauses (1) through (5): (1) 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), 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; (2) 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; (3) 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 hereinabove defined), 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 (4) 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; provided, however, that a Change in Control shall be deemed not to have occurred under this clause (4) if, immediately prior to the consummation of any sale or disposition of a business unit that is taken into account in determining whether a Change in Control has occurred, the Executive is employed by, and is party to a severance agreement with, such business unit. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean CNF Inc. and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. In addition, when used in the context of the Executive's employment, "Company" shall mean the Company or any of its subsidiaries. (J) "Common Stock" shall mean the common stock, par value $0.625 per share, of the Company. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to disability, including physical or mental illness, the Executive shall have been absent from the full- time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under Section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control and during the Term of any one of the following acts by the Company, or failures by the Company to act, unless such act or failure to act is corrected within 30 days of receipt by the Company of notice of the Executive's intent to terminate for Good Reason hereunder: (I) the failure of the successor company, following the Change in Control, to assume this Agreement and all obligations hereunder, as of the date of such Change in Control; (II) the assignment to the Executive of any duties inconsistent with the Executive's status as an executive of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (III)a reduction by the Company in the Executive's annual base salary (except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company) or incentive compensation opportunity (both short-term and long- term, valued in a manner consistent with the valuation methodology used by the Company prior to the Change in Control), each as in effect immediately prior to the Change in Control or as the same may thereafter be increased from time to time; (IV) the relocation of the Executive's principal place of employment to a location that results in an increase in the Executive's one way commute of at least 50 miles more than the Executive's one way commute immediately prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control; (V) the failure by the Company to pay to the Executive when due any portion of the Executive's current compensation; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all or substantially all employees of the Company and any entity in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to disability, including physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (Q) "Gross Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (T) "Person" shall mean 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) (U) "Potential Change in Control" shall be deemed to have occurred if: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a 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 Change in Control; (III)any Person becomes the Beneficial Owner, 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 adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. CNF INC. By: _______________________ Name: Kevin C. Schick Title: Senior Vice President and Chief Financial Officer EXECUTIVE ______________________________________________ Name: David S. McClimon Address: Severance Agreement McClimon CNF 2005 EXHIBIT A WAIVER AND RELEASE OF CLAIMS In consideration of, and subject to, the payment to be made to me by CNF Inc. (the "Company") of the "Severance Payments" (as defined in the Severance Agreement, dated as of June 3, 2005, entered into between me and the Company (the "Agreement")), I hereby waive any claims I may have for employment or re-employment by the Company or any subsidiary of the Company after the date hereof, and I further agree to and do release and forever discharge the Company or any subsidiary of the Company, and their respective past and present officers, directors, shareholders, insurers, employees and agents from any and all claims and causes of action, known or unknown, arising out of or relating to my employment with the Company or any subsidiary of the Company, or the termination thereof, including, but not limited to, wrongful discharge, breach of contract, tort, fraud, the Civil Rights Acts, Age Discrimination in Employment Act, Employee Retirement Income Security Act of 1974, Americans with Disabilities Act, or any other federal, state or local legislation or common law relating to employment or discrimination in employment or otherwise. Notwithstanding the foregoing or any other provision hereof, nothing in this Waiver and Release of Claims shall adversely affect (i) my rights under the Agreement; (ii) my rights to benefits other than severance benefits under plans, programs and arrangements of the Company or any subsidiary or parent of the Company which are accrued but unpaid as of the date of my termination; or (iii) my rights to indemnification under any indemnification agreement, applicable law and the certificates of incorporation and bylaws of the Company and any subsidiary or parent of the Company, and my rights under any director's and officers' liability insurance policy covering me. I acknowledge that I have signed this Waiver and Release of Claims voluntarily, knowingly, of my own free will and without reservation or duress, and that no promises or representations have been made to me by any person to induce me to do so other than the promise of payment set forth in the first paragraph above and the Company's acknowledgment of my rights reserved under the second paragraph above. I understand that this release will be deemed to be an application for benefits under the Agreement and that my entitlement thereto shall be governed by the terms and conditions of the Agreement and any applicable plan. I expressly hereby consent to such terms and conditions. I acknowledge that I have been given not less than forty-five (45) days to review and consider this Waiver and Release of Claims (unless I have signed a written waiver of such review and consideration period), and that I have had the opportunity to consult with an attorney or other advisor of my choice and have been advised by the Company to do so if I choose. I may revoke this Waiver and Release of Claims seven days or less after its execution by providing written notice to the Company. I acknowledge that it is my intention and the intention of the Company in executing this Waiver and Release of Claims that the same shall be effective as a bar to each and every claim, demand and cause of action hereinabove specified. In furtherance of this intention, I hereby expressly waive any and all rights and benefits conferred upon me by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE, to the extent applicable to me, and expressly I consent that this Waiver and Release of Claims shall be given full force and effect according to each and all of its express terms and provisions, including as well those related to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified. SECTION 1542 provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR." I acknowledge that I may hereafter discover claims or facts in addition to or different from those which I now know or believe to exist with respect to the subject matter of this Waiver and Release of Claims and which, if known or suspected at the time of executing this Waiver and Release of Claims, may have materially affected this settlement. Finally, I acknowledge that I have read this Waiver and Release of Claims and understand all of its terms. _________________________ Signature of Executive _________________________ Print Name _________________________ Date Signed EX-10 3 ex104.txt EXHIBIT 10.4 Exhibit 10.4 SEVERANCE AGREEMENT THIS AGREEMENT is made as of June 3, 2005 by and between Con-Way Transportation Services, Inc. (the "Company"), a wholly owned subsidiary of CNF Inc., a Delaware corporation ("CNF"), and David S. McClimon (the "Executive"). WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on June 3, 2005 and shall continue in effect through December 31, 2006; provided, however, that commencing on January 1, 2006, and each January 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control of the Company shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control of the Company occurred. Notwithstanding anything in this Agreement to the contrary, unless a Change in Control of the Company has previously occurred, this Agreement shall terminate, and be of no further force or effect, upon the occurrence of a "Change in Control" of CNF (within the meaning of Section 15 of the severance agreement between the Executive and CNF dated as of June 3, 2005 (the "CNF Severance Agreement")), provided that the CNF Severance Agreement remains in effect at the time of such Change in Control of CNF. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second paragraph of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control of the Company and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive (i) shall not have any right to be retained in the employ of the Company, and (ii) shall remain subject to discharge to the same extent as if this Agreement had not been entered into by the Company and the Executive. 4. Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control of the Company during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control of the Company, (ii) the date of a Change in Control of the Company, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control of the Company and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to disability, including physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control of the Company and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the Change in Control of the Company, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of CNF's or the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the Change in Control of the Company. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control of the Company and during the Term, the Company shall pay, or shall make satisfactory arrangements with CNF to pay, to the Executive the Executive's normal post- termination compensation and benefits as such payments become due (other than severance payments under any severance plan as in effect immediately prior to the Date of Termination). Such post- termination compensation and benefits shall be determined under, and paid in accordance with, the CNF's or Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the Change in Control of the Company. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control of the Company and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof; provided, however, that the Executive shall not be entitled to the Severance Payments unless and until the Executive (or, in the event of the Executive's death, the executor, personal representative or administrator of the Executive's estate) has signed a written waiver and release substantially in the form set forth on Exhibit A hereto. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control of the Company by the Company without Cause or by the Executive with Good Reason, if (i) during the Term the Executive's employment is terminated by the Company without Cause following a Potential Change in Control of the Company but prior to a Change in Control of the Company (whether or not a Change in Control of the Company ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control of the Company, (ii) during the Term the Executive terminates his employment for Good Reason following a Potential Change in Control of the Company but prior to a Change in Control of the Company (whether or not a Change in Control of the Company ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person or (iii) during the Term the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control of the Company (whether or not a Change in Control of the Company ever occurs). (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the Executive's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the Change in Control and (ii) the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs the Change in Control. (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability and accident benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the Change in Control, at no greater cost to the Executive than the cost to the Executive immediately prior to such Date of Termination or Change in Control; provided, however, that any across the board changes to life, disability or accident benefits similarly affecting all or substantially all employees of the Company and any entity in control of the Company shall not be deemed a breach of this Section 6.1(B). Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. If the Executive dies during the thirty-six (36) month period following the Date of Termination, life, disability and accident benefit coverage of the Executive's dependents shall continue for the remainder of the thirty-six (36) month period. (C) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall provide health and dental benefits to the Executive and his dependents under the terms of the Company's health and dental plan as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(C) shall be reduced to the extent benefits of the same type are received by or made available to the Executive following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. If the Executive dies at a time when health and dental benefits are being provided under this Section 6.1(C) to the Executive's dependents, the Company shall continue to provide the dependents with health and dental benefits for the remainder of the thirty-six (36) month period on the same basis as if the Executive had survived throughout that period. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control of the Company or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control of the Company or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control of the Company, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) should not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or should otherwise not be subject to the Excise Tax and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes). In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 The payments provided in subsection (A) of Section 6.1 hereof and in subsections (A) and (B) of Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall be paid by the Executive to the Company not later than the fifth (5th) business day after demand by the Company. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control of the Company and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control of the Company and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than to the extent provided in Section 6.1(B) and 6.1(C) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, CNF and the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of CNF and the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control of the Company, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. All notices and other communications provided for in this Agreement (i) shall be in writing, (ii) shall be hand delivered, sent by overnight courier or by United States registered mail, return receipt requested and postage prepaid, addressed, in the case of the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, and (iii) shall be effective only upon actual receipt. To the Company: Con-Way Transportation Services, Inc. 110 Parkland Plaza Ann Arbor, MI 48103 Attention: Vice President - Controller 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any written agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control of the Company, by the Company other than for Cause or by the Executive for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Michigan. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. 14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be finally settled exclusively by arbitration in Ann Arbor, Michigan, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in Section 280G(b)(3) of the Code. (D) "Board" shall mean the Board of Directors of the Company. (E) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to disability, including physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. In the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board and, in the event of an arbitration as contemplated by Section 14.2, to the arbitrator, by clear and convincing evidence that Cause exists. (F) A "Change in Control of the Company" means the occurrence of any one of the following events: (I) a sale by CNF of the then outstanding shares of capital stock of the Company having more than 50% of the then existing voting power of all outstanding securities of the Company, whether by merger, consolidation or otherwise; (II) the sale of all or substantially all of the assets of the Company; or (III)any other transaction or course of action engaged in, directly or indirectly, by the Company or CNF that has a substantially similar effect as the transactions of the type referred to in clause (I) or (II) above. The foregoing notwithstanding, a Change in Control of the Company shall not be deemed to have occurred (A) by reason of the occurrence of a "Change in Control" of CNF (within the meaning of Section 15 of the CNF Severance Agreement), (B) except in the case of a transaction described in clause (II) above, so long as CNF or any of its Affiliates, individually or collectively, own the then outstanding shares of capital stock of the Company having 50% or more of the then existing voting power of all outstanding securities of the Company, (C) in the event of the sale of shares of capital stock of the Company to any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any other Affiliate of CNF, or (D) in the event of the sale or distribution of shares of capital stock of the Company to shareholders of CNF, or the sale of assets of the Company to any corporation or other entity owned, directly or indirectly, by the shareholders of CNF, in either case in substantially the same proportions as their ownership of stock in CNF. (G) "CNF" shall mean CNF Inc. and any successor to its business and/or assets. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean Con-Way Transportation Services, Inc. and, except in determining under Section 15(F) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. In addition, when used in the context of the Executive's employment, "Company" shall mean the Company or any of its subsidiaries. (J) "Common Stock" shall mean the common stock, par value $1.00 per share, of the Company. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to disability, including physical or mental illness, the Executive shall have been absent from the full- time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under Section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control of the Company and during the Term of any one of the following acts by the Company, or failures by the Company to act, unless such act or failure to act is corrected within 30 days of receipt by the Company of notice of the Executive's intent to terminate for Good Reason hereunder: (I) the failure of the successor company, following the Change in Control of the Company, to assume this Agreement and all obligations hereunder, as of the date of such Change in Control of the Company; (II) the assignment to the Executive of any duties inconsistent with the Executive's status as an executive of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control of the Company; (III)a reduction by the Company in the Executive's annual base salary (except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company) or incentive compensation opportunity (both short-term and long- term, valued in a manner consistent with the valuation methodology used by the Company prior to the Change in Control of the Company), each as in effect immediately prior to the Change in Control of the Company or as the same may thereafter be increased from time to time; (IV) the relocation of the Executive's principal place of employment to a location that results in an increase in the Executive's one way commute of at least 50 miles more than the Executive's one way commute immediately prior to the Change in Control of the Company, except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control of the Company; (V) the failure by the Company to pay to the Executive when due any portion of the Executive's current compensation; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of CNF's or the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control of the Company (except for across the board changes similarly affecting all or substantially all employees of the Company and any entity in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control of the Company, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to disability, including physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by CNF or the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (T) "Person" shall mean 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). (U) "Potential Change in Control of the Company" shall be deemed to have occurred if: (I) CNF or the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control of the Company; or (II) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control of the Company has occurred. (W) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (X) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (Y) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Z) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (AA) "Total Payments" shall mean those payments so described in Section 6.2 hereof. CON-WAY TRANSPORTATION SERVICES, INC. By:__________________________________ Name: Michael D. Yuenger Title: Vice President EXECUTIVE _____________________________________ Name: David S. McClimon Address: Severance Agreement McClimon CTS 2005 EXHIBIT A WAIVER AND RELEASE OF CLAIMS In consideration of, and subject to, the payment to be made to me by Con-Way Transportation Services, Inc. (the "Company") of the "Severance Payments" (as defined in the Severance Agreement, dated as of June 3, 2005, entered into between me and the Company (the "Agreement")), I hereby waive any claims I may have for employment or re-employment by the Company or any subsidiary of the Company after the date hereof, and I further agree to and do release and forever discharge the Company or any subsidiary of the Company, and their respective past and present officers, directors, shareholders, insurers, employees and agents from any and all claims and causes of action, known or unknown, arising out of or relating to my employment with the Company or any subsidiary of the Company, or the termination thereof, including, but not limited to, wrongful discharge, breach of contract, tort, fraud, the Civil Rights Acts, Age Discrimination in Employment Act, Employee Retirement Income Security Act of 1974, Americans with Disabilities Act, or any other federal, state or local legislation or common law relating to employment or discrimination in employment or otherwise. Notwithstanding the foregoing or any other provision hereof, nothing in this Waiver and Release of Claims shall adversely affect (i) my rights under the Agreement; (ii) my rights to benefits other than severance benefits under plans, programs and arrangements of the Company or any subsidiary or parent of the Company which are accrued but unpaid as of the date of my termination; or (iii) my rights to indemnification under any indemnification agreement, applicable law and the certificates of incorporation and bylaws of the Company and any subsidiary or parent of the Company, and my rights under any director's and officers' liability insurance policy covering me. I acknowledge that I have signed this Waiver and Release of Claims voluntarily, knowingly, of my own free will and without reservation or duress, and that no promises or representations have been made to me by any person to induce me to do so other than the promise of payment set forth in the first paragraph above and the Company's acknowledgment of my rights reserved under the second paragraph above. I understand that this release will be deemed to be an application for benefits under the Agreement and that my entitlement thereto shall be governed by the terms and conditions of the Agreement and any applicable plan. I expressly hereby consent to such terms and conditions. I acknowledge that I have been given not less than forty-five (45) days to review and consider this Waiver and Release of Claims (unless I have signed a written waiver of such review and consideration period), and that I have had the opportunity to consult with an attorney or other advisor of my choice and have been advised by the Company to do so if I choose. I may revoke this Waiver and Release of Claims seven days or less after its execution by providing written notice to the Company. I acknowledge that it is my intention and the intention of the Company in executing this Waiver and Release of Claims that the same shall be effective as a bar to each and every claim, demand and cause of action hereinabove specified. In furtherance of this intention, I hereby expressly waive any and all rights and benefits conferred upon me by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE, to the extent applicable to me, and expressly I consent that this Waiver and Release of Claims shall be given full force and effect according to each and all of its express terms and provisions, including as well those related to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified. SECTION 1542 provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR." I acknowledge that I may hereafter discover claims or facts in addition to or different from those which I now know or believe to exist with respect to the subject matter of this Waiver and Release of Claims and which, if known or suspected at the time of executing this Waiver and Release of Claims, may have materially affected this settlement. Finally, I acknowledge that I have read this Waiver and Release of Claims and understand all of its terms. _________________________ Signature of Executive _________________________ Print Name _________________________ Date Signed EX-10 4 ex105.txt EXHIBIT 10.5 Exhibit 10.5 SEVERANCE AGREEMENT THIS AGREEMENT is made as of June 3, 2005 by and between CNF Inc., a Delaware corporation (the "Company"), and Bryan M. Millican (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on June 3, 2005 (the "Effective Date") and shall continue in effect through December 31, 2006; provided, however, that commencing on January 1, 2006, and each January 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second paragraph of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive (i) shall not have any right to be retained in the employ of the Company, and (ii) shall remain subject to discharge to the same extent as if this Agreement had not been entered into by the Company and the Executive. 4. Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full- time duties with the Company as a result of incapacity due to disability, including physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the Change in Control, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the Change in Control. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post termination compensation and benefits as such payments become due (other than severance payments under any severance plan as in effect immediately prior to the Date of Termination). Such post termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the Change in Control. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof; provided, however, that the Executive shall not be entitled to the Severance Payments unless and until the Executive (or, in the event of the Executive's death, the executor, personal representative or administrator of the Executive's estate) has signed a written waiver and release substantially in the form set forth on Exhibit A hereto. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) during the Term the Executive's employment is terminated by the Company without Cause following a Potential Change in Control but prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) during the Term the Executive terminates his employment for Good Reason following a Potential Change in Control but prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person or (iii) during the Term the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). An Executive will not be considered to have been terminated by reason of the divestiture of a facility, sale or other disposition of a business or business unit, or the outsourcing of a business activity with which the Executive is affiliated, notwithstanding the fact that such divestiture, sale or outsourcing takes place within two years following a Change in Control, if the Executive is offered comparable employment by the successor company and such successor company agrees to assume the Company's obligations to the Executive under this Agreement. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the Executive's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the Change in Control and (ii) the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs the Change in Control. (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability and accident benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the Change in Control, at no greater cost to the Executive than the cost to the Executive immediately prior to such Date of Termination or Change in Control; provided, however, that any across the board changes to life, disability or accident benefits similarly affecting all or substantially all employees of the Company and any entity in control of the Company shall not be deemed a breach of this Section 6.1(B). Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. If the Executive dies during the thirty-six (36) month period following the Date of Termination, life, disability and accident benefit coverage of the Executive's dependents shall continue for the remainder of the thirty-six (36) month period. (C) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall provide health and dental benefits to the Executive and his dependents under the terms of the Company's health and dental plan as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(C) shall be reduced to the extent benefits of the same type are received by or made available to the Executive following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. If the Executive dies at a time when health and dental benefits are being provided under this Section 6.1(C) to the Executive's dependents, the Company shall continue to provide the dependents with health and dental benefits for the remainder of the thirty-six (36) month period on the same basis as if the Executive had survived throughout that period. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) should not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or should otherwise not be subject to the Excise Tax and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross Up Payment attributable to such reduction (plus that portion of the Gross Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes). In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross Up Payment), the Company shall make an additional Gross Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 The payments provided in subsection (A) of Section 6.1 hereof and in subsections (A) and (B) of Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall be paid by the Executive to the Company not later than the fifth (5th) business day after demand by the Company. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarter (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than to the extent provided in Section 6.1(B) and 6.1(C) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. All notices and other communications provided for in this Agreement (i) shall be in writing, (ii) shall be hand delivered, sent by overnight courier or by United States registered mail, return receipt requested and postage prepaid, addressed, in the case of the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, and (iii) shall be effective only upon actual receipt. To the Company: CNF Inc. 3240 Hillview Avenue Palo Alto, CA 94304 Attention: General Counsel 11. Miscellaneous. Except as otherwise expressly provided herein, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any written agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. 14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be finally settled exclusively by arbitration in Palo Alto, California, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in Section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to disability, including physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. In the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board and, in the event of an arbitration as contemplated by Section 14.2, to the arbitrator, by clear and convincing evidence that Cause exists. (G) "Change in Control" means the occurrence of an event described in any one of the following clauses (1) through (5): (1) 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), 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; (2) 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; (3) 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 hereinabove defined), 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 (4) 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; provided, however, that a Change in Control shall be deemed not to have occurred under this clause (4) if, immediately prior to the consummation of any sale or disposition of a business unit that is taken into account in determining whether a Change in Control has occurred, the Executive is employed by, and is party to a severance agreement with, such business unit. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean CNF Inc. and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. In addition, when used in the context of the Executive's employment, "Company" shall mean the Company or any of its subsidiaries. (J) "Common Stock" shall mean the common stock, par value $0.625 per share, of the Company. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to disability, including physical or mental illness, the Executive shall have been absent from the full- time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under Section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control and during the Term of any one of the following acts by the Company, or failures by the Company to act, unless such act or failure to act is corrected within 30 days of receipt by the Company of notice of the Executive's intent to terminate for Good Reason hereunder: (I) the failure of the successor company, following the Change in Control, to assume this Agreement and all obligations hereunder, as of the date of such Change in Control; (II) the assignment to the Executive of any duties inconsistent with the Executive's status as an executive of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (III)a reduction by the Company in the Executive's annual base salary (except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company) or incentive compensation opportunity (both short-term and long- term, valued in a manner consistent with the valuation methodology used by the Company prior to the Change in Control), each as in effect immediately prior to the Change in Control or as the same may thereafter be increased from time to time; (IV) the relocation of the Executive's principal place of employment to a location that results in an increase in the Executive's one way commute of at least 50 miles more than the Executive's one way commute immediately prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control; (V) the failure by the Company to pay to the Executive when due any portion of the Executive's current compensation; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all or substantially all employees of the Company and any entity in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to disability, including physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (Q) "Gross Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (T) "Person" shall mean 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) (U) "Potential Change in Control" shall be deemed to have occurred if: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a 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 Change in Control; (III)any Person becomes the Beneficial Owner, 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 adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. CNF INC. By: _________________________ Name: Kevin C. Schick Title: Senior Vice President and Chief Financial Officer EXECUTIVE ______________________________________________ Name: Bryan M. Millican Address: Severance Agreement Millican CNF 2005 EXHIBIT A WAIVER AND RELEASE OF CLAIMS In consideration of, and subject to, the payment to be made to me by CNF Inc. (the "Company") of the "Severance Payments" (as defined in the Severance Agreement, dated as of June 3, 2005, entered into between me and the Company (the "Agreement")), I hereby waive any claims I may have for employment or re-employment by the Company or any subsidiary of the Company after the date hereof, and I further agree to and do release and forever discharge the Company or any subsidiary of the Company, and their respective past and present officers, directors, shareholders, insurers, employees and agents from any and all claims and causes of action, known or unknown, arising out of or relating to my employment with the Company or any subsidiary of the Company, or the termination thereof, including, but not limited to, wrongful discharge, breach of contract, tort, fraud, the Civil Rights Acts, Age Discrimination in Employment Act, Employee Retirement Income Security Act of 1974, Americans with Disabilities Act, or any other federal, state or local legislation or common law relating to employment or discrimination in employment or otherwise. Notwithstanding the foregoing or any other provision hereof, nothing in this Waiver and Release of Claims shall adversely affect (i) my rights under the Agreement; (ii) my rights to benefits other than severance benefits under plans, programs and arrangements of the Company or any subsidiary or parent of the Company which are accrued but unpaid as of the date of my termination; or (iii) my rights to indemnification under any indemnification agreement, applicable law and the certificates of incorporation and bylaws of the Company and any subsidiary or parent of the Company, and my rights under any director's and officers' liability insurance policy covering me. I acknowledge that I have signed this Waiver and Release of Claims voluntarily, knowingly, of my own free will and without reservation or duress, and that no promises or representations have been made to me by any person to induce me to do so other than the promise of payment set forth in the first paragraph above and the Company's acknowledgment of my rights reserved under the second paragraph above. I understand that this release will be deemed to be an application for benefits under the Agreement and that my entitlement thereto shall be governed by the terms and conditions of the Agreement and any applicable plan. I expressly hereby consent to such terms and conditions. I acknowledge that I have been given not less than forty-five (45) days to review and consider this Waiver and Release of Claims (unless I have signed a written waiver of such review and consideration period), and that I have had the opportunity to consult with an attorney or other advisor of my choice and have been advised by the Company to do so if I choose. I may revoke this Waiver and Release of Claims seven days or less after its execution by providing written notice to the Company. I acknowledge that it is my intention and the intention of the Company in executing this Waiver and Release of Claims that the same shall be effective as a bar to each and every claim, demand and cause of action hereinabove specified. In furtherance of this intention, I hereby expressly waive any and all rights and benefits conferred upon me by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE, to the extent applicable to me, and expressly I consent that this Waiver and Release of Claims shall be given full force and effect according to each and all of its express terms and provisions, including as well those related to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified. SECTION 1542 provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR." I acknowledge that I may hereafter discover claims or facts in addition to or different from those which I now know or believe to exist with respect to the subject matter of this Waiver and Release of Claims and which, if known or suspected at the time of executing this Waiver and Release of Claims, may have materially affected this settlement. Finally, I acknowledge that I have read this Waiver and Release of Claims and understand all of its terms. ____________________________ Signature of Executive ____________________________ Print Name ____________________________ Date Signed EX-10 5 ex106.txt EXHIBIT 10.6 Exhibit 10.6 CTS June 2, 2005 Douglas W. Stotlar President and Chief Executive Officer CNF Inc. 3240 Hillview Avenue Palo Alto, CA 94304 Re: Severance Agreement dated as of March 1, 2005 Dear Doug: Reference is made to the Severance Agreement ("Severance Agreement") dated as of March 1, 2005 between you and Con-Way Transportation Services, Inc. ("CTS"). The purpose of this letter is to formally terminate the Severance Agreement, since you are no longer employed by CTS. Please acknowledge the termination of the Severance Agreement by signing on the line set forth below. Sincerely, /s/ Scott Engers Scott Engers Acknowledged and agreed this 2nd day of June, 2005. /s/ Douglas W. Stotlar _____________________________________ Douglas W. Stotlar 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. /s/ Douglas W. Stotlar August 5, 2005 ------------------------- 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. August 5, 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 June 30, 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. *1350, as adopted pursuant to *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: August 5, 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 June 30, 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. *1350, as adopted pursuant to *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: August 5, 2005 /s/ Kevin Schick - --------------------------- Name: Kevin Schick Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----