-----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, CxCvVUGBonrIu0IbhkWUHZ8NpFXCESeQZ9OsFOuXrtJv8KgrrfTwcKkiijbiQ1WY bEt2b7fZYdUIqSBgPROE7Q== 0000023675-07-000065.txt : 20071108 0000023675-07-000065.hdr.sgml : 20071108 20071107181019 ACCESSION NUMBER: 0000023675-07-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071108 DATE AS OF CHANGE: 20071107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Con-way 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: 071222823 BUSINESS ADDRESS: STREET 1: 2855 CAMPUS DRIVE CITY: SAN MATEO STATE: CA ZIP: 94403 BUSINESS PHONE: 6504942900 MAIL ADDRESS: STREET 1: 1717 NW 21ST AVE CITY: PORTLAND STATE: OR ZIP: 97209 FORMER COMPANY: FORMER CONFORMED NAME: CNF INC DATE OF NAME CHANGE: 20010510 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 oct0710q.txt FORM 10-Q 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 September 30, 2007 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 Con-way Inc. Incorporated in the State of Delaware I.R.S. Employer Identification No. 94-1444798 2855 Campus Drive, Suite 300, San Mateo, California 94403 Telephone Number (650) 378-5200 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer X Accelerated filer Non-accelerated filer --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Number of shares of Common Stock, $.625 par value, outstanding as of October 31, 2007: 45,150,065 CON-WAY INC. FORM 10-Q Quarter Ended September 30, 2007 _______________________________________________________________________________ _______________________________________________________________________________ INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2007 and December 31, 2006 3 Statements of Consolidated Income - Three and Nine Months Ended September 30, 2007 and 2006 5 Statements of Consolidated Cash Flows - Nine Months Ended September 30, 2007 and 2006 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk 37 Item 4. Controls and Procedures 38 PART II. OTHER INFORMATION Item 1. Legal Proceedings 39 Item 1A. Risk Factors 39 Item 6. Exhibits 41 Signatures 42 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CON-WAY INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) September 30, December 31, ASSETS 2007 2006 ------------ ------------ Current Assets Cash and cash equivalents $ 181,449 $ 260,039 Marketable securities 95,041 184,525 Trade accounts receivable, net 506,400 439,727 Other accounts receivable 30,498 107,520 Operating supplies, at lower of average cost or market 23,458 19,223 Prepaid expenses 35,537 34,445 Deferred income taxes 42,962 43,107 Assets of discontinued operations 2,271 1,898 ------------ ------------ Total Current Assets 917,616 1,090,484 ------------ ------------ Property, Plant and Equipment, at cost Land 188,156 159,506 Buildings and leasehold improvements 779,180 688,644 Revenue equipment 1,248,888 970,290 Other equipment 253,734 239,244 ------------ ------------ 2,469,958 2,057,684 Accumulated depreciation and amortization (993,689) (939,709) ------------ ------------ 1,476,269 1,117,975 ------------ ------------ Other Assets Deferred charges and other assets 46,810 25,894 Capitalized software, net 34,267 34,831 Goodwill 475,939 727 Deferred income taxes -- 31,978 ------------ ------------ 557,016 93,430 ------------ ------------ Total Assets $ 2,950,901 $ 2,301,889 ============ ============ The accompanying notes are an integral part of these statements. CON-WAY INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts) September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2007 2006 ------------ ------------ Current Liabilities Accounts payable $ 274,243 $ 240,870 Accrued liabilities 302,598 202,923 Income taxes payable 10,702 -- Self-insurance accruals 106,393 92,372 Short-term borrowings 4,535 -- Bridge-loan facility 425,000 -- Current maturities of long-term debt 22,713 18,635 Liabilities of discontinued operations 3,465 5,002 ------------ ------------ Total Current Liabilities 1,149,649 559,802 Long-Term Liabilities Long-term debt and guarantees 532,099 557,723 Self-insurance accruals 128,936 114,431 Employee benefits 256,726 314,559 Other liabilities and deferred credits 27,341 14,595 Deferred income taxes 71,036 -- ------------ ------------ Total Liabilities 2,165,787 1,561,110 ------------ ------------ Commitments and Contingencies (Notes 4, 7, and 13) 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 570,455 and 603,816 shares, respectively 6 6 Additional paid-in capital, preferred stock 86,760 91,834 Deferred compensation, defined contribution plan (23,605) (31,491) ------------ ------------ Total Preferred Shareholders' Equity 63,161 60,349 ------------ ------------ Common stock, $.625 par value; authorized 100,000,000 shares; issued 61,871,878 and 61,616,649 shares, respectively 38,589 38,434 Additional paid-in capital, common stock 563,924 549,267 Retained earnings 941,865 847,068 Cost of repurchased common stock (16,743,371 and 15,168,447 shares, respectively) (722,495) (638,929) ------------ ------------ Total Common Shareholders' Equity 821,883 795,840 ------------ ------------ Accumulated Other Comprehensive Loss (99,930) (115,410) ------------ ------------ Total Shareholders' Equity 785,114 740,779 ------------ ------------ Total Liabilities and Shareholders' Equity $ 2,950,901 $ 2,301,889 ============ ============ The accompanying notes are an integral part of these statements. CON-WAY INC. STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (Dollars in thousands except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenues $1,111,293 $1,076,807 $3,187,201 $3,222,851 Costs and Expenses Salaries, wages and other employee benefits 486,135 432,196 1,387,339 1,302,990 Purchased transportation 253,282 296,296 779,672 901,279 Fuel and fuel-related taxes 91,226 74,646 236,816 218,032 Depreciation and amortization 42,947 36,346 117,077 106,973 Maintenance 31,762 26,698 85,567 79,827 Rents and leases 22,919 18,357 59,852 57,599 Purchased labor 16,095 17,431 45,906 49,000 Other operating expenses 99,245 80,752 271,297 232,184 Loss (Income) from equity investment -- (1,999) 2,699 (10,858) Gain from sale of Con-way Expedite -- (6,231) -- (6,231) ----------- ----------- ----------- ----------- 1,043,611 974,492 2,986,225 2,930,795 ----------- ----------- ----------- ----------- Operating Income 67,682 102,315 200,976 292,056 ----------- ----------- ----------- ----------- Other Income (Expense) Investment income 5,118 5,399 16,420 19,021 Interest expense (10,603) (8,761) (27,927) (25,226) Miscellaneous, net (271) (511) (78) 145 ----------- ----------- ----------- ----------- (5,756) (3,873) (11,585) (6,060) ----------- ----------- ----------- ----------- Income from Continuing Operations before Income Tax Provision 61,926 98,442 189,391 285,996 Income Tax Provision 22,961 33,664 70,257 97,273 ----------- ----------- ----------- ----------- Income from Continuing Operations 38,965 64,778 119,134 188,723 ----------- ----------- ----------- ----------- Discontinued Operations, net of tax Loss from Discontinued Operations -- -- -- (1,929) Gain (Loss) from Disposal -- -- 1,609 (4,850) ----------- ----------- ----------- ----------- -- -- 1,609 (6,779) Net Income 38,965 64,778 120,743 181,944 Preferred Stock Dividends 1,693 1,748 5,172 5,319 ----------- ----------- ----------- ----------- Net Income Available to Common Shareholders $ 37,272 $ 63,030 $ 115,571 $ 176,625 =========== =========== =========== =========== Net Income from Continuing Operations Available to Common Shareholders $ 37,272 $ 63,030 $ 113,962 $ 183,404 =========== =========== =========== =========== Weighted-Average Common Shares Outstanding Basic 44,976,482 47,601,175 45,414,155 49,717,418 Diluted 48,007,691 50,857,496 48,492,037 53,092,636 Earnings (Loss) per Common Share Basic Net Income from Continuing Operations $ 0.83 $ 1.32 $ 2.51 $ 3.69 Loss from Discontinued Operations -- -- -- (0.04) Gain (Loss) from Disposal -- -- 0.03 (0.10) ----------- ----------- ----------- ----------- Net Income Available to Common Shareholders $ 0.83 $ 1.32 $ 2.54 $ 3.55 =========== =========== =========== =========== Diluted Net Income from Continuing Operations $ 0.78 $ 1.24 $ 2.37 $ 3.47 Loss from Discontinued Operations -- -- -- (0.04) Gain (Loss) from Disposal -- -- 0.03 (0.09) ----------- ----------- ----------- ----------- Net Income Available to Common Shareholders $ 0.78 $ 1.24 $ 2.40 $ 3.34 =========== =========== =========== =========== The accompanying notes are an integral part of these statements. CON-WAY INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (Dollars in thousands) Nine Months Ended September 30, ----------------------- 2007 2006 ----------- ----------- Cash and Cash Equivalents, Beginning of Period $ 260,039 $ 514,275 ----------- ----------- Operating Activities Net income 120,743 181,944 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operations, net of tax (1,609) 6,779 Depreciation and amortization, net of accretion 113,465 103,615 Increase in deferred income taxes 5,976 17,667 Amortization of deferred compensation 7,886 6,853 Share-based compensation 8,029 5,555 Provision for uncollectible accounts 2,625 2,152 Loss (Income) from equity investment 2,699 (10,858) Gain from sale of business -- (6,231) Loss from restructuring activities 7,000 -- Gain from sales of property and equipment, net (2,079) (1,052) Changes in assets and liabilities, net of acquisitions: Receivables (27,644) 25,915 Prepaid expenses 6,743 2,081 Accounts payable 6,296 (5,792) Accrued incentive compensation 19,181 13,200 Accrued liabilities, excluding accrued incentive compensation and employee benefits 24,497 27,545 Self-insurance accruals 8,492 4,382 Income taxes 41,013 8,929 Employee benefits (9,306) (40,167) Deferred charges and credits 1,925 13,699 Other (8,127) (5,970) ----------- ----------- Net Cash Provided by Operating Activities 327,805 350,246 ----------- ----------- Investing Activities Capital expenditures (93,602) (243,297) Software expenditures (8,242) (7,500) Proceeds from sales of property and equipment, net 15,993 4,630 Proceeds from sale of equity investment 51,900 8,000 Acquisition of CFI, net of cash acquired (739,455) -- Acquisition of Cougar Logistics, net of cash acquired (28,218) -- Net decrease in marketable securities 89,500 20,400 ----------- ----------- Net Cash Used in Investing Activities (712,124) (217,767) ----------- ----------- Financing Activities Net proceeds from issuance of bridge-loan facility 425,000 -- Repayment of long-term debt and guarantees (18,626) (15,024) Proceeds from exercise of stock options 6,907 11,771 Excess tax benefit from stock option exercises 577 2,518 Payments of common dividends (13,675) (15,004) Payments of preferred dividends (7,931) (8,457) Repurchases of common stock (89,865) (305,925) ----------- ----------- Net Cash Provided by (Used in) Financing Activities 302,387 (330,121) ----------- ----------- Net Cash Used in Continuing Operations (81,932) (197,642) ----------- ----------- Discontinued Operations Net Cash Provided by (Used in) Operating Activities 3,342 (23,220) Net Cash Used in Investing Activities -- (178) ----------- ----------- Net Cash Provided by (Used in) Discontinued Operations 3,342 (23,398) ----------- ----------- Decrease in Cash and Cash Equivalents (78,590) (221,040) ----------- ----------- Cash and Cash Equivalents, End of Period $ 181,449 $ 293,235 =========== =========== Supplemental Disclosure Cash paid for income taxes, net of refunds $ 21,458 $ 65,044 =========== =========== Cash paid for interest, net of amounts capitalized $ 22,161 $ 21,295 =========== =========== The accompanying notes are an integral part of these statements. CON-WAY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Principal Accounting Policies Organization Con-way Inc. and its consolidated subsidiaries ("Con-way" or the "Company") provide transportation and logistics services for a wide range of manufacturing, industrial and retail customers. Con-way's principal business units operate in regional and transcontinental less-than-truckload and full- truckload freight transportation, truckload brokerage, global logistics management, and trailer manufacturing. As more fully discussed in Note 6, "Segment Reporting," for financial reporting purposes, Con-way is divided into five reporting segments: Freight, Truckload, Logistics, Vector and Other. Basis of Presentation These interim financial statements of Con-way have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Rule 10-01 of Regulation S-X, and should be read in conjunction with Con-way's 2006 Annual Report on Form 10-K. Accordingly, significant accounting policies and other disclosures normally provided have been omitted. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary to present fairly Con-way's financial position, results of operations and cash flows for the interim dates and periods presented. Results for the interim periods presented are not necessarily indicative of annual results. New Accounting Standards In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair-value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair-value measurements and does not require any new fair-value measurements. The effective date of SFAS 157 is the first fiscal year beginning after November 15, 2007, and interim periods within those years, which for Con-way is the first quarter of 2008. Con-way does not expect the adoption of SFAS 157 to have a material effect on its financial statements. In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair-value option has been elected will be reported in earnings. The effective date for SFAS 159 is the first fiscal year beginning after November 15, 2007, which for Con-way is the first quarter of 2008. Con-way is currently evaluating the elective option under SFAS 159, but does not expect that adoption will have a material effect on its financial statements. Reclassification Certain amounts in the prior-period financial statements have been reclassified to conform to the current-period presentation. 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 Three Months Ended Nine Months Ended per share data) September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Numerator: Continuing operations (after preferred stock dividends), as reported $ 37,272 $ 63,030 $ 113,962 $ 183,404 Add-backs: Dividends on Series B preferred stock, net of replacement funding 262 262 795 807 ----------- ----------- ----------- ----------- Continuing operations 37,534 63,292 114,757 184,211 ----------- ----------- ----------- ----------- Discontinued operations -- -- 1,609 (6,779) ----------- ----------- ----------- ----------- Available to common shareholders $ 37,534 $ 63,292 $ 116,366 $ 177,432 =========== =========== =========== =========== Denominator: Weighted-average common shares outstanding 44,976,482 47,601,175 45,414,155 49,717,418 Stock options and nonvested stock 345,512 363,420 392,185 482,317 Series B preferred stock 2,685,697 2,892,901 2,685,697 2,892,901 ----------- ----------- ----------- ----------- 48,007,691 50,857,496 48,492,037 53,092,636 =========== =========== =========== =========== Anti-dilutive stock options not included in denominator 894,298 400,900 831,798 324,500 =========== =========== =========== =========== Earnings (Loss) per Diluted Share: Continuing operations $ 0.78 $ 1.24 $ 2.37 $ 3.47 Discontinued operations -- -- 0.03 (0.13) ----------- ----------- ----------- ----------- Available to common shareholders $ 0.78 $ 1.24 $ 2.40 $ 3.34 =========== =========== =========== =========== 2. Acquisitions Contract Freighters, Inc. On August 23, 2007, Con-way acquired the outstanding common shares of Transportation Resources, Inc. ("TRI"). TRI is the holding company for Contract Freighters, Inc. and other affiliated companies (collectively, "CFI"). CFI is a truckload carrier headquartered in Joplin, Missouri, and provides asset-based full-truckload freight services throughout North America, including services into and out of Mexico. At the acquisition date, CFI operated over 2,300 tractors and more than 7,000 trailers, with more than 3,000 employees, including approximately 2,500 drivers. Following the acquisition, the operating results of CFI are reported with the operating results of the Con-way Truckload business unit in the Truckload reporting segment. Accordingly, the Truckload reporting segment for the third quarter and first nine months of 2007 and 2006 includes the results of the Con-way Truckload business unit for all of those periods, but only includes the operating results of CFI from August 23, 2007 through September 30, 2007. As more fully discussed in Note 3, "Restructuring Activities," Con-way in September 2007 integrated the Con-way Truckload business unit with the CFI business unit. Strategic Benefits The acquisition of CFI establishes Con-way as an enterprise that offers domestic and international shippers with a diverse suite of solutions, including less-than-truckload ("LTL"), full-truckload, and logistics services. Con-way expects to realize a number of strategic benefits from the acquisition of CFI, including the diversification of its revenue mix, a more efficient and integrated truckload operation, and opportunities to leverage sales efforts, infrastructure and freight flows among Con-way's LTL, truckload and logistics business units. Purchase Price and Allocation to Net Assets Acquired In the presentation below, the preliminary allocation of the purchase price is based on the purchase price calculated as of the August 23, 2007 acquisition closing date and the estimated fair value or carrying amount (which approximates fair value) of assets acquired and liabilities assumed as of the same date. The purchase-price accounting is based on current estimates of the assets acquired and liabilities assumed and a preliminary evaluation of the effect of conforming CFI's accounting policies to those of Con-way. Accordingly, revisions to the preliminary estimates and evaluations may be necessary as these items are finalized. Calculation of purchase price (dollars in millions): Cash consideration paid Purchase price $ 750.0 Adjustments for working capital, and for cash and debt acquired 12.0 Direct transaction costs 5.1 ---------- Gross purchase price $ 767.1 Cash acquired (15.4) ---------- Net purchase price $ 751.7 =========== Allocation of purchase price (dollars in millions): Current assets, excluding cash acquired $ 56.2 Non-current assets Property and equipment 362.6 Intangible assets Customer relationships $ 14.0 Trademarks 1.7 Goodwill 463.3 --------- 479.0 Other assets Internal-use software 3.0 Restricted cash 4.0 --------- 7.0 Current liabilities (43.2) Non-current liabilities Deferred taxes (96.5) Other (13.4) ---------- $ 751.7 =========== As required by SFAS 142, "Goodwill and Intangible Assets," intangible assets with an indefinite life are not amortized while intangible assets with lives of definite duration are amortized over their estimated useful lives. Accordingly, goodwill will not be amortized and is not deductible for income- tax purposes, but will be subject to an annual impairment test. Identifiable intangible assets will be amortized on a straight-line basis over the estimated useful lives of the assets, which are 10 years for customer relationships and 2 years for trademarks. In connection with the acquisition, former shareholders of TRI paid $4.0 million into an escrow account for the purpose of retaining certain key executive officers of CFI. Under the escrow agreement, the key executive officers will receive pro rata payments if they remain employees of CFI over a two-year period ending August 23, 2009. Accordingly, $4.0 million has been allocated to the purchase price as the value of the retention-related restricted cash and an equal liability to the key executive officers will be accrued ratably over the two-year service period. If the key executive officers terminate employment prior to August 23, 2009, any unearned portion of the restricted cash in escrow would be remitted to Con-way. Pro Forma Financial Information The following unaudited pro forma condensed financial information presents the combined results of operations of Con-way as if the CFI acquisition had occurred as of the beginning of the periods presented, and based on Con-way's assessment of materiality, does not reflect the acquisition of Cougar Logistics. The unaudited pro forma condensed consolidated financial information is for illustrative purposes only, is hypothetical in nature and does not purport to represent what Con-way's financial information would have been if the acquisition had occurred as of the dates indicated or what such results will be for any future periods. The unaudited financial information reflects pro forma adjustments that are based upon available information and certain assumptions that Con-way believes are reasonable, including estimates related to purchase-method fair- value accounting adjustments, the effect of financing transactions and conforming changes in accounting policies. However, the pro forma condensed consolidated statements of income from continuing operations reflect only pro forma adjustments expected to have a continuing effect on the consolidated results beyond 12 months from the consummation of the acquisition and do not reflect any changes in operations that may occur, including synergistic benefits that may be realized through the acquisition or the costs that may be incurred in integrating operations. These estimates are preliminary and are based on information currently available and could change. (Dollars in thousands Three Months Ended Nine Months Ended except per share amounts) September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenue $1,180,471 $1,203,699 $3,497,426 $3,585,068 Income from continuing operations 38,604 65,760 117,509 192,650 Net income 38,604 65,760 119,118 185,871 Net income available to shareholders 36,911 64,012 113,946 180,552 Earnings per share Basic $ 0.82 $ 1.34 $ 2.51 $ 3.63 Diluted $ 0.77 $ 1.26 $ 2.37 $ 3.42 Cougar Logistics On September 5, 2007, Menlo Worldwide, LLC ("MW") acquired the outstanding common shares of Cougar Holdings Pte Ltd., and its primary subsidiary, Cougar Express Logistics (collectively, "Cougar Logistics"). Cougar Logistics is a warehousing, logistics, distribution-management and freight-forwarding company headquartered in Singapore. Cougar provides its services to a client base in Asia of nearly 200 global businesses with personnel, facilities and operations in 12 locations in Singapore, Malaysia and Thailand. Following the acquisition, the operating results of Cougar are reported with the operating results of the Menlo Logistics business unit in the Logistics reporting segment. The Logistics reporting segment for the third quarter and first nine months of 2007 and 2006 includes the operating results of Cougar Logistics from September 5, 2007 through September 30, 2007. Strategic Benefits The acquisition of Cougar Logistics expands Menlo Logistics' operations in the important Asia-Pacific region. Menlo Logistics expects to realize a number of strategic benefits from the acquisition, including the entry into new service offerings and markets, an expansion of capabilities within its existing service portfolio and industry verticals. Purchase Price and Allocation to Net Assets Acquired MW acquired the outstanding common shares of Cougar Logistics for a cash purchase price of $28.2 million, subject to adjustment, and the assumption of $4.5 million in debt. The preliminary allocation of the purchase price is based on the purchase price calculated as of the September 5, 2007 acquisition closing date and the estimated fair value or carrying amount (which approximates fair value) of assets acquired and liabilities assumed as of the same date. Based on preliminary estimates, the $28.2 million purchase price (net of $0.9 million of cash acquired) was allocated to $21.5 million of acquired property and equipment, $11.9 million of goodwill, $4.5 million of assumed short-term borrowings and $0.7 million of other assumed liabilities (net of other acquired assets). Goodwill will not be amortized but will be subject to an annual impairment test. Con-way is currently evaluating the tax effect of goodwill and other assets acquired and liabilities assumed. The purchase-price accounting is based on a preliminary calculation of the purchase price and current estimates of the assets acquired and liabilities assumed. Accordingly, revisions to the preliminary calculations and estimates may be necessary as these items are finalized. Chic Logistics Subsequent to the end of the period, MW on October 18, 2007 acquired the outstanding common shares of Chic Holdings, Ltd. and its wholly owned subsidiaries, Shanghai Chic Logistics Co. Ltd. and Shanghai Chic Supply Chain Management Co. Ltd. (collectively, "Chic Logistics") for a purchase price of $60 million, subject to earn-out provisions based on performance. Chic Logistics is a well-established provider of third-party logistics and transportation-management services in China and maintains a network with 130 operating sites in 78 cities. The acquisition of Chic Logistics expands Menlo Logistics' operations in China and is expected to bring many of the same international strategic benefits as the acquisition of Cougar Logistics. 3. Restructuring Activities Freight In August 2007, Con-way Freight began an operational restructuring to combine its three regional operating companies into one centralized operation to improve the customer experience and streamline its processes. The reorganization into a centralized entity is intended to improve customer service and efficiency through the development of uniform new pricing and operational processes, implementation of best practices, and fostering of innovation. In connection with the reorganization, Con-way Freight recognized a third-quarter restructuring charge of $5.5 million. Con-way expects the reorganization to be substantially complete by the end of the first quarter of 2008 and, during the period of reorganization, estimates that it will recognize total restructuring charges of approximately $18 million. Estimated restructuring charges consist primarily of employee- separation costs, lease-termination costs, and asset-impairment charges. Employee-separation costs primarily include severance payments and retention bonuses for employees who have been notified of their immediate or future separation, and accordingly, the related expenses are recognized over the employees' remaining service period. The following table summarizes the effect of restructuring activities for the nine months ended September 30, 2007: Cash Liability at (Dollars in Charges Payments or September 30, thousands) Incurred Write-offs 2007 -------------- -------------- -------------- Employee-separation costs $ 3,536 $ (744) $ 2,792 Asset-impairment charges 1,997 (1,997) -- -------------- -------------- -------------- Total $ 5,533 $ (2,741) $ 2,792 ============== ============== ============== Truckload In connection with the acquisition of CFI, as more fully discussed in Note 2, "Acquisitions," Con-way in September 2007 integrated the Con-way Truckload business unit with the CFI business unit. In connection with the integration, Con-way closed the general office of Con-way Truckload and incurred a $1.5 million third-quarter restructuring charge, primarily for costs related to employee separation, lease termination and asset impairment. Con-way estimates that it will recognize an additional $0.3 million restructuring charge in the fourth quarter of 2007 and expects that the Truckload reorganization will be substantially complete by the end of 2007. 4. Discontinued Operations Discontinued operations in the periods presented relate to (1) the closure of Con-way Forwarding in June 2006, (2) the sale of Menlo Worldwide Forwarding, Inc. and its subsidiaries and Menlo Worldwide Expedite!, Inc. (collectively "MWF") in December 2004, (3) the shut-down of Emery Worldwide Airlines, Inc. ("EWA") in December 2001, and (4) the spin-off of Consolidated Freightways Corporation ("CFC") in December 1996. The results of operations, net liabilities, and cash flows of discontinued operations have been segregated from continuing operations, except where otherwise noted. Results of discontinued operations for the nine-month periods of 2007 and 2006 are presented below. There were no results associated with discontinued operations for the third quarters of 2007 and 2006. Nine Months Ended September 30, -------------------------------------- (Dollars in thousands) 2007 2006 ------------------ ------------------ Revenues Con-way Forwarding $ -- $ 21,699 Loss from Discontinued Operations Con-way Forwarding Loss before income tax benefit -- (2,963) Income tax benefit -- 1,034 ------------------ ------------------ $ -- $ (1,929) ================== ================== Gain (Loss) from Disposal, net of tax Con-way Forwarding $ 156 $ (5,128) MWF (33) 644 EWA 2,706 (200) CFC (1,220) (166) ------------------ ------------------ $ 1,609 $ (4,850) ================== ================== The assets and liabilities of discontinued operations are presented in the consolidated balance sheets under the assets (or liabilities) of discontinued operations. At September 30, 2007 and December 31, 2006, assets of discontinued operations were $2.3 million and $1.9 million, respectively, and liabilities of discontinued operations were $3.5 million and $5.0 million, respectively. Con-way Forwarding In June 2006, Con-way closed the operations of its domestic air freight forwarding business known as Con-way Forwarding. The decision to close the operating unit was made following management's review of the unit's competitive position and its prospects in relation to Con-way's long-term strategies. As a result of the closure, Con-way recognized a $5.1 million second-quarter loss from disposal (net of a $2.8 million tax benefit) for the write-off of non-transferable capitalized software and other assets, a loss related to non-cancelable operating leases, and other costs. MWF In October 2004, Con-way and MW entered into a stock purchase agreement with United Parcel Service, Inc. ("UPS") to sell all of the issued and outstanding capital stock of MWF. Con-way completed the sale in December 2004. The stock purchase agreement excludes the assets and liabilities related to EWA, and the obligation related to former MWF employees covered under Con-way's domestic pension, postretirement medical and long-term disability plans. Under the stock purchase agreement, Con-way agreed to a three-year non- compete covenant that, subject to certain exceptions, limits Con-way's annual air freight and ocean- forwarding and/or customs brokerage revenues to $175 million through December 19, 2007. Con-way 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 will be recognized in future periods as an additional loss from disposal when and if incurred. See Note 2, "Discontinued Operations," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K for a complete description of the disposition of MWF, including a discussion of losses from impairment and disposal of MWF and of cash payments received from UPS in connection with the sale of MWF. As more fully discussed in Note 12, "Income Taxes," Con-way's disposal of MWF generated a capital loss for tax purposes. EWA The results of EWA relate to the cessation of its air-carrier operations in 2001. In the periods presented, results from EWA relate to adjustments of loss estimates, except for a first-quarter net gain in 2007 of $2.9 million (net of tax of $1.7 million) that relates to a recovery of prior losses. EWA's estimated loss reserves declined to $2.6 million at September 30, 2007, from $4.0 million at December 31, 2006, due primarily to the cash payment of liabilities. EWA's remaining loss reserves at September 30, 2007 were reported in liabilities of discontinued operations and consisted of Con-way's estimated remaining exposure related to the labor matters described below. In connection with the cessation of its air-carrier operations in 2001, EWA terminated the employment of all of its pilots and flight crewmembers. Those pilots and crewmembers were represented by the Air Line Pilots Association ("ALPA") under a collective bargaining agreement. Subsequently, ALPA filed grievances on behalf of the pilots and flight crewmembers protesting the cessation of EWA's air-carrier operations and MWF's use of other air carriers. These matters have been the subject of litigation in U.S. District Court and state court in California, including litigation brought by ALPA and by former EWA pilots and crewmembers no longer represented by ALPA. On June 30, 2006, EWA, for itself and for Con-way Inc. and Menlo Worldwide Forwarding, Inc. ("MWF, Inc."), concluded a final settlement of the California state court litigation. Under the terms of the settlement, plaintiffs received a cash payment of $9.2 million from EWA, and the lawsuit was dismissed with prejudice. The cash settlement reduced by an equal amount EWA's estimated loss reserve applicable to the grievances filed by ALPA. On August 8, 2006, EWA paid $10.9 million to settle the litigation brought by ALPA that finally concluded litigation with former EWA pilots and flight crewmembers still represented by ALPA as of that date. The remaining matters are also the subject of a claim by former EWA pilots and flight crewmembers no longer represented by ALPA that has been ordered by the court to binding arbitration. Other former pilots have also initiated litigation in federal court. Based on management's current evaluation, Con-way believes that it has provided for its estimated remaining exposure related to these matters. However, there can be no assurance in this regard as Con-way cannot predict with certainty the ultimate outcome of these matters. CFC The results of CFC relate to Con-way's spin-off of CFC to Con-way's shareholders on December 2, 1996. In connection with the spin-off of CFC, Con-way agreed to indemnify certain states, insurance companies and sureties against the failure of CFC to pay certain workers' compensation, tax and public liability claims that were pending as of September 30, 1996. In the periods presented, Con-way's losses related to CFC were due to revisions of estimated losses related to indemnified workers' compensation liabilities. 5. Sale of Unconsolidated Joint Venture Vector SCM, LLC ("Vector") was a joint venture formed with General Motors ("GM") in December 2000 for the purpose of providing logistics management services on a global basis for GM, and for customers in addition to GM. GM Exercise of Call Right On June 23, 2006, GM exercised its right to purchase Con-way's membership interest in Vector. On December 11, 2006, an independent financial advisor established a fair value for Vector that was agreed upon by Con-way and GM. The advisor established a fair value of $96.4 million for the membership interests of both joint-venture partners, including a fair value of $84.8 million that was attributable to Con-way's membership interest in Vector. As a result of the agreed-upon valuation, Con-way in December 2006 recognized a receivable from GM of $51.9 million (an amount equal to the $84.8 million fair value of Con-way's membership interest reduced by Con-way's $32.9 million payable to Vector) and also recognized a $41.0 million gain (an amount equal to the $51.9 million receivable reduced by Con-way's $9.0 million net investment in Vector and $1.9 million of sale-related costs). In January 2007, Con-way received a $51.9 million payment from GM. Operating Results from Vector Although Con-way owned a majority interest in Vector, Con-way's portion of Vector's operating results were reported as an equity-method investment based on GM's ability to control certain operating decisions. Prior to the sale of Vector, Con-way's proportionate share of the net income from Vector is reported in Con-way's statements of consolidated income as a reduction of operating expenses. Except for the sale-related gain described above, Vector's segment results subsequent to June 30, 2006 included only profit or loss associated with the settlement of business-case activity related to the periods prior to June 30, 2006. In connection with these business cases, Con-way at December 31, 2006 reported a $2.7 million receivable from GM. Following negotiation with GM in the first quarter of 2007, the business-case receivable due from GM could not be collected, and accordingly, a $2.7 million charge was recognized in the Vector reporting segment to write off the outstanding receivable from GM. Transition and Related Services Pursuant to a closing agreement, GM and Con-way specified the transition services, primarily accounting assistance, and the compensation amounts for such services, to be provided to GM through September 30, 2007. In addition, GM and Con-way entered into an agreement for Con-way to provide certain information-technology support services at an agreed-upon compensation through at least March 31, 2008. Under these agreements, Menlo Logistics reported revenue of $2.8 million in the third quarter and $8.4 million in the first nine months of 2007, primarily for information-technology services provided to GM. See Note 3, "Investment in Unconsolidated Joint Venture," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K for a complete description of Vector, including a discussion of Con-way's net investment in Vector and other sale-related amounts. 6. Segment Reporting Con-way discloses segment information in the manner in which the business units are organized for making operating decisions, assessing performance and allocating resources. Management evaluates segment performance primarily based on revenue and operating income (loss). 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. For financial-reporting purposes, Con-way is divided into the following five operating segments: * Freight. The Freight segment consists of the operating results of the Con-way Freight business unit, which provides regional, inter- regional, and transcontinental less-than-truckload freight services throughout North America and Mexico. In 2006, the Freight segment also included the operating results of Con-way Expedite, which was sold in July 2006, and Con-way Brokerage, which was integrated into Menlo Logistics in January 2007. * Truckload. The Truckload segment includes the combined operating results of the Con-way Truckload business unit and the recently acquired CFI business unit. The combined businesses provide asset- based full-truckload freight services throughout North America, including services into and out of Mexico. * Logistics. The Logistics segment consists of the operating results of the Menlo Logistics business unit, which develops contract- logistics solutions, including the management of complex distribution networks and supply-chain engineering and consulting, and also provides domestic truckload-brokerage services. * Vector. Prior to its sale, the Vector reporting segment consisted of Con-way's proportionate share of the net income from Vector, a joint venture with GM. GM purchased Con-way's membership interest in Vector in December 2006. * Other. The Other reporting segment consists of the operating results of Road Systems, a trailer manufacturer, and certain corporate activities for which the related income or expense has not been allocated to other reporting segments, including results related to corporate re-insurance activities and corporate properties. Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenues from External Customers Freight $ 740,769 $ 730,960 $2,165,381 $2,175,349 Truckload 51,991 2,622 54,228 5,274 Logistics 312,572 340,869 956,962 1,036,430 Other 5,961 2,356 10,630 5,798 ----------- ----------- ----------- ----------- $1,111,293 $1,076,807 $3,187,201 $3,222,851 =========== =========== =========== =========== Inter-segment Revenues Freight $ 13,032 $ 11,303 $ 38,367 $ 56,984 Truckload 21,055 19,486 56,222 53,539 Logistics 64 -- 304 226 Other 4,234 24,417 21,071 71,582 ----------- ----------- ----------- ----------- $ 38,385 $ 55,206 $ 115,964 $ 182,331 =========== =========== =========== =========== Revenues before Inter-segment Eliminations Freight $ 753,801 $ 742,263 $2,203,748 $2,232,333 Truckload 73,046 22,108 110,450 58,813 Logistics 312,636 340,869 957,266 1,036,656 Other 10,195 26,773 31,701 77,380 Inter-segment Revenue Eliminations (38,385) (55,206) (115,964) (182,331) ----------- ----------- ----------- ----------- $1,111,293 $1,076,807 $3,187,201 $3,222,851 =========== =========== =========== =========== Operating Income (Loss) Freight $ 60,029 $ 93,740 $ 186,412 $ 259,841 Truckload 2,975 1,398 6 3,704 Logistics 6,188 5,462 19,659 17,740 Vector -- 1,999 (2,699) 10,858 Other (1,510) (284) (2,402) (87) ----------- ----------- ----------- ----------- $ 67,682 $ 102,315 $ 200,976 $ 292,056 =========== =========== =========== =========== 7. Debt and Other Financing Arrangements On August 23, 2007, Con-way acquired the outstanding common shares of CFI, and on September 5, 2007, MW acquired the outstanding common shares of Cougar Logistics, as more fully discussed in Note 2, "Acquisitions." In connection with the acquisition of CFI, Con-way entered into a bridge-loan facility to fund a portion of the purchase price and also assumed an additional $1.1 million of secured long-term debt. In connection with the acquisition of Cougar Logistics, MW assumed $4.5 million of short-term borrowings, as more fully discussed below. Bridge-Loan Facility On August 23, 2007, Con-way entered an agreement that established a $500.0 million bridge-loan facility. On that date, Con-way borrowed $425.0 million under the bridge-loan facility to fund a portion of the purchase price of CFI. Under the borrowing, the outstanding principal amount of $425.0 million at September 30, 2007 is due in full on August 21, 2008. No further borrowings are permitted under the terms of the agreement. Borrowings under the bridge-loan facility bear interest at a rate based upon the lead bank's base rate or Eurodollar rate plus a margin dependent on either Con-way's senior debt credit ratings or a leverage ratio. The interest rate as of September 30, 2007 was 5.54%. The credit facility is guaranteed by certain of Con-way's material domestic subsidiaries and contains two financial covenants: (i) a leverage ratio and (ii) a fixed charge coverage ratio. There are also various restrictive covenants, including limitations on (i) the incurrence of liens, (ii) consolidations, mergers and asset sales, and (iii) the incurrence of additional subsidiary indebtedness. Assumed Subsidiary Debt In connection with Con-way's acquisition of CFI on August 23, 2007, Con-way assumed a $1.1 million promissory note that bears interest of 6.0% and is due in full on December 31, 2009. At September 30, 2007, the full amount of $1.1 million remained outstanding under the note. In connection with MW's acquisition of Cougar Logistics on September 5, 2007, MW assumed short-term borrowings of $4.5 million, which were outstanding under $23.5 million of unsecured credit facilities that are available for cash borrowings, letters of credit and bank guarantees. On September 30, 2007, $4.5 million of short-term borrowings remained outstanding under these foreign-currency facilities and, at that same date, $6.5 million of bank guarantees and letters of credit were outstanding, leaving $12.5 million of available capacity for additional bank guarantees, letters of credit or cash borrowings, subject to compliance with certain restrictive covenants, including limitations on the incurrence of liens. Borrowings under the credit facilities are denominated in foreign currencies and bear variable interest rates currently ranging from 2.99% to 3.40%. The credit facility fees range from 0.5% to 1.25% on the amount of outstanding bank guarantees and letters of credit. 8. Employee Benefit Plans In the periods presented, employees of Con-way and its subsidiaries in the U.S. were covered under several retirement benefit plans, including defined benefit pension plans, defined contribution retirement plans, and a postretirement medical plan. Con-way's defined benefit pension plans include "qualified" plans that are eligible for certain beneficial treatment under the Internal Revenue Code ("IRC"), as well as "non-qualified" plans that do not meet IRC criteria. In October 2006, Con-way's Board of Directors approved changes to Con-way's retirement benefit plans that are intended to preserve the retirement benefits earned by existing employees under Con-way's primary qualified defined benefit pension plan (the "Primary DB Plan") and its primary non- qualified supplemental defined benefit pension plan (the "Supplemental DB Plan") while expanding benefits earned under its defined contribution plan (the "Primary DC Plan") and its new supplemental defined contribution plan (the "Supplemental DC Plan"). The major provisions were effective January 1, 2007, and are more fully discussed in Note 9, "Employee Benefit Plans," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K. Defined Benefit Pension Plans Con-way's qualified defined benefit pension plans (collectively, the "Qualified Pension Plans") consist mostly of the Primary DB Plan, which covers the non-contractual employees and former employees of Con-way's continuing operations as well as former employees of its discontinued operations. Con-way's other qualified defined benefit pension plans cover only the former employees of discontinued operations. Con-way also sponsors the Supplemental DB Plan and several other unfunded non-qualified defined benefit plans (collectively, the "Non-Qualified Pension Plans"). The Supplemental DB Plan provides additional benefits for certain employees who are affected by IRC limitations on compensation eligible for benefits available under the qualified Primary DB Plan. Adoption of SFAS 158 - Measurement-Date Provision Effective January 1, 2007, Con-way adopted the measurement-date provisions of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of SFAS 87, 88, 106, and 132R," which require employers to measure plan assets and obligations as of the end of the fiscal year. Accordingly, Con-way changed its measurement date to December 31 from November 30 for all of its defined benefit pension plans. Under the transition provisions of SFAS 158, Con-way recognized a $21.3 million decrease in plan-related employee benefit liabilities, an $8.3 million decline in related deferred tax assets, and a $13.0 million increase in shareholders' equity. The beginning-of-period increase to shareholders' equity consisted of a $2.6 million decline in retained earnings to recognize pension cost for December 2006 and a $15.6 million decline in accumulated other comprehensive loss primarily to recognize the effect of an increase in the plan-related discount rate to 5.95% at December 31, 2006 from 5.85% at November 30, 2006. Net Periodic Pension Expense (Income) The following tables summarize the components of net periodic benefit expense (income) for Con-way's defined benefit pension plans: Qualified Pension Plans ------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- (Dollars in thousands) 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Service cost - benefits earned during the period $ 27 $ 14,678 $ 82 $ 41,773 Interest cost on benefit obligation 16,411 15,501 50,603 44,115 Expected return on plan assets (23,265) (18,978) (71,737) (54,011) Net amortization and deferral (775) 2,165 (2,389) 6,162 ----------- ----------- ----------- ----------- Net periodic benefit expense (income) $ (7,602) $ 13,366 $ (23,441) $ 38,039 =========== =========== =========== =========== Non-Qualified Pension Plans ------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ---------------------- (Dollars in thousands) 2007 2006 2007 2006 ----------- ----------- ----------- ---------- Service cost - benefits earned during the period $ -- $ 215 $ -- $ 626 Interest cost on benefit obligation 1,006 1,142 3,316 3,330 Net amortization and deferral 476 604 1,571 1,763 ----------- ----------- ----------- ---------- Net periodic benefit expense $ 1,482 $ 1,961 $ 4,887 $ 5,719 =========== =========== =========== ========== In April 2007, Con-way contributed $12.7 million to the Qualified Pension Plans. Con-way does not currently anticipate making any further contributions to the plans in 2007. In 2006, Con-way contributed $75.0 million to the Qualified Pension Plans, all of which was paid in the first nine months. Defined Contribution Retirement Plan Effective January 1, 2007, amendments to Con-way's Primary DC Plan increased the contributions made by Con-way to its employees' 401(k) accounts. Con-way increased its discretionary matching contributions under the Primary DC Plan to 50% of the first 6 percent of employees' eligible compensation (from 50% of the first 3 percent of eligible compensation) and now makes additional contributions to employees' 401(k) accounts based on years of service. As a result, Con-way's expense related to its contributions under the Primary DC Plan was $23.5 million and $67.6 million in the third quarter and first nine months of 2007, respectively, compared to $4.4 million and $11.8 million in the same periods of 2006. At September 30, 2007 and December 31, 2006, Con- way had recognized accrued liabilities of $23.4 million and $1.4 million, respectively, for its contributions related to the Primary DC Plan. Postretirement Medical Plan The following table summarizes the components of net periodic benefit expense for the postretirement medical plan: Three Months Nine Months Ended Ended September 30, September 30, ----------------- ----------------- (Dollars in thousands) 2007 2006 2007 2006 -------- -------- -------- -------- Service cost - benefits earned during the period $ 690 $ 582 $ 2,100 $ 1,650 Interest cost on benefit obligation 1,733 1,800 5,271 5,101 Net amortization and deferral 610 618 1,851 1,754 -------- -------- -------- -------- Net periodic benefit expense $ 3,033 $ 3,000 $ 9,222 $ 8,505 ======== ======== ======== ======== 9. Comprehensive Income Comprehensive income, which is a measure of all changes in equity except those resulting from investments by owners and distributions to owners, was as follows: Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Net income $ 38,965 $ 64,778 $ 120,743 $ 181,944 Other comprehensive income (loss): Foreign currency translation adjustment 112 (182) (123) 319 ----------- ----------- ----------- ----------- Comprehensive income $ 39,077 $ 64,596 $ 120,620 $ 182,263 =========== =========== =========== =========== 10. Common Stock Repurchase Program In April 2006, the Board of Directors authorized the repurchase of up to $400 million in Con-way's common stock through open-market transactions and privately negotiated transactions from time to time in such amounts as management deemed appropriate through June 30, 2007. Under the program, which concluded on June 29, 2007, Con-way repurchased common stock of $399.5 million. 11. Share-Based Compensation Under terms of the share-based compensation plans, Con-way grants various types of share-based compensation awards to employees and directors. The plan provides for awards in the form of stock options, nonvested stock (also known as restricted stock), and performance-share plan units. Stock options are granted at prices equal to the market value of the common stock on the date of grant and expire 10 years from the date of grant. Generally, stock options are granted with three- or four-year graded-vesting terms, under which one-third or one-fourth of the award vests each year, respectively. Stock options granted in and after December 2004 generally have three-year graded-vesting terms, while stock options issued before that date generally have four-year graded-vesting terms. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the stock option plans). Effective September 26, 2006, Con-way established vesting provisions for new option awards that generally provide for immediate vesting of unvested shares upon retirement. Stock options issued before that date generally provide for continued vesting subsequent to the employee's retirement. Shares of nonvested stock are valued at the market price of Con-way's common stock at the date of award and are generally granted with three-year graded- vesting terms. In the first quarter of 2007, Con-way awarded performance-share plan units ("PSPUs") to its officer-level employees. These shares are valued at the market price of Con-way's common stock at the date of award and vest three years from the grant date if certain performance criteria are achieved. PSPUs are subject to forfeiture if an award recipient leaves Con-way during the three-year period. If the maximum performance criteria are attained, award recipients may collectively earn up to 289,192 shares. The PSPUs were awarded with a weighted-average grant-date value of $47. The amount of expense recorded each period is based on Con-way's current estimate of the number of shares that will ultimately vest. The following expense was recognized for share-based compensation: (Dollars in Three Months Ended Three Months Ended thousands) September 30, 2007 September 30, 2006 ----------------------------- ----------------------------- Stock Nonvested Stock Nonvested Options Stock and Total Options Stock and Total PSPUs PSPUs --------- --------- --------- --------- --------- --------- Salaries, wages and other employee benefits $ 1,599 $ 1,080 $ 2,679 $ 1,566 $ 504 $ 2,070 Deferred income tax benefit (607) (421) (1,028) (611) (196) (807) --------- --------- --------- --------- --------- --------- Net share-based compensation expense $ 992 $ 659 $ 1,651 $ 955 $ 308 $ 1,263 ========= ========= ========= ========= ========= ========= (Dollars in Nine Months Ended Nine Months Ended thousands) September 30, 2007 September 30, 2006 ----------------------------- ----------------------------- Stock Nonvested Stock Nonvested Options Stock and Total Options Stock and Total PSPUs PSPUs --------- --------- --------- --------- --------- --------- Salaries, wages and other employee benefits $ 4,955 $ 3,074 $ 8,029 $ 4,408 $ 1,147 $ 5,555 Deferred income tax benefit (1,890) (1,199) (3,089) (1,719) (447) (2,166) --------- --------- --------- --------- --------- --------- Net share-based compensation expense $ 3,065 $ 1,875 $ 4,940 $ 2,689 $ 700 $ 3,389 ========= ========= ========= ========= ========= ========= 12. Income Taxes Con-way's effective tax rate was 37.1% in the third quarter and first nine months of 2007, respectively, and was 34.2% and 34.0% in the same respective periods of last year. Excluding the effect of various discrete tax adjustments, Con-way's third-quarter and year-to-date effective tax rate in 2007 was 37.3% and 37.5%, respectively, and in 2006, was 37.5% and 37.7%, respectively. The discrete tax adjustments, which primarily affected the prior-year periods, largely reflect the settlement of issues following completion of an Internal Revenue Service ("IRS") audit. Con-way reported an income tax liability of $10.7 million at September 30, 2007, and reported an income tax receivable of $31.5 million at December 31, 2006, due primarily to taxable income in the first nine months of 2007 and to a $34.5 million federal income tax refund received in the first quarter of 2007, partially offset by periodic payments for estimated tax in the first nine months of 2007. Disposal-Related Capital Loss Con-way's disposal of MWF in December 2004, as more fully discussed in Note 4, "Discontinued Operations," generated a capital loss for tax purposes. Under current tax law, capital losses can only be used to offset capital gains. Since Con-way did not forecast any significant taxable capital gains in the five-year tax carry-forward period, the cumulative disposal-related tax benefit was fully offset by a valuation allowance of an equal amount. The remaining disposal-related tax benefit and the associated valuation allowance increased to $29.9 million at September 30, 2007 from $11.8 million at December 31, 2006, due primarily to a second-quarter revision to MWF's tax basis, which Con-way initially estimated at the time of MWF's disposal. Uncertain Tax Positions In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of SFAS 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. FIN 48 is a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Tax positions shall be recognized in the financial statements only when it is more likely than not that the position will be sustained upon examination by a taxing authority. If the position meets the more-likely-than-not criteria, it should be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. It requires previously recognized tax positions that no longer meet the more- likely-than-not recognition threshold to be derecognized in the first subsequent financial reporting period in which the threshold is no longer met. Con-way adopted the provisions of FIN 48 on January 1, 2007. As of the adoption date, Con-way reported gross tax-affected unrecognized tax benefits of $7.6 million, including $1.2 million of accrued interest and penalties related to the unrecognized tax benefits. Con-way classifies interest and penalties expense related to income taxes as a component of income tax expense. As of the adoption date, Con-way estimated that $5.4 million of the unrecognized tax benefits, if recognized, would change the effective tax rate. At September 30, 2007, Con-way's estimate of gross tax-affected unrecognized tax benefits increased to $13.0 million (including $3.1 million of accrued interest and penalties), due primarily to liabilities assumed in connection with Con-way's acquisition of CFI, partially offset by the effect of settlements following completion of an IRS audit. At September 30, 2007, Con-way estimated that $8.5 million of the unrecognized tax benefits, if recognized, would change the effective tax rate. In the next 12 months, Con- way does not expect a significant increase or decrease to its estimates of unrecognized tax benefits. In the normal course of business, Con-way is subject to examination by taxing authorities throughout the world. With few exceptions, Con-way is no longer subject to U.S. federal examinations for years before 2003, and is no longer subject to state, local, and foreign income-tax examinations for years before 1999. However, certain years remain subject to examination in the relevant jurisdictions, including the years from 2003 to 2006 for U.S. federal income taxes and the years from 1999 to 2006 for state, local and foreign income taxes. Where no tax return has been filed, no statute of limitations applies. Accordingly, if a tax jurisdiction reaches a conclusion that a filing requirement does exist, then additional years may be reviewed by the tax authority. 13. Commitments and Contingencies Purchase Commitments At September 30, 2007, Con-way had entered into purchase commitments to acquire $19.2 million of revenue equipment and other equipment for delivery in 2007. Con-way has entered into fuel purchase commitments with certain diesel fuel vendors. Under these commitments, Con-way has agreed to purchase, at market prices, a specified volume of fuel to be delivered ratably over the contract period, which expires in July 2008. At September 30, 2007, Con-way estimates that it will purchase approximately $110 million of diesel fuel under these commitments, which represent only a portion of Con-way's fuel needs during the contract period. Spin-Off of CFC On December 2, 1996, Con-way completed the spin-off of Consolidated Freightways Corporation ("CFC") to Con-way'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 Con-way 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. Con-way 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, Con-way has responded to those requests. Con-way believes that it would ultimately prevail if any such claims were made, although there can be no assurance in this regard due to various unknowns, including possible adverse judicial decisions in other cases. Con- way believes that the amount of those claims, if asserted, could be material, and a judgment against Con-way for all or a significant part of these claims could have a material adverse effect on Con-way's financial condition, results of operations and cash flows. Prior to the enactment in April 2004 of the Pension Funding Equity Act of 2004, if the multiemployer funds had asserted such claims against Con-way, Con-way 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, Con-way 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, Con-way can provide no assurance that matters relating to the spin-off of CFC will not have a material adverse effect on Con-way's financial condition, results of operations or cash flows. 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 $9 million, including interest. Con-way intends to continue to vigorously defend the lawsuit. Con-way 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 effect on Con-way's financial condition, results of operations or cash flows. 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 Con-way's financial condition, results of operations, and cash flows, including a discussion and analysis of the following: * Overview of Business * Results of Operations * Liquidity and Capital Resources * Critical Accounting Policies and Estimates * Forward-Looking Statements Overview of Business -------------------- Con-way provides transportation, logistics and supply-chain management services for a wide range of manufacturing, industrial and retail customers. Con-way's principal business units operate in regional and transcontinental less-than-truckload and full-truckload freight transportation, truckload brokerage, global logistics management, and trailer manufacturing. For financial reporting purposes, Con-way is divided into five reporting segments: * Freight. The Freight segment consists of the operating results of the Con-way Freight business unit, which provides regional, inter- regional, and transcontinental less-than-truckload freight services throughout North America and Mexico. In 2006, the Freight segment also included the operating results of Con-way Expedite, which was sold in July 2006, and Con-way Brokerage, which was integrated into Menlo Logistics in January 2007. * Truckload. The Truckload segment includes the combined operating results of the Con-way Truckload business unit and the recently acquired CFI business unit. The combined businesses provide asset- based full-truckload freight services throughout North America, including services into and out of Mexico. * Logistics. The Logistics segment consists of the operating results of the Menlo Logistics business unit, which develops contract- logistics solutions, including the management of complex distribution networks and supply-chain engineering and consulting, and also provides domestic truckload-brokerage services. * Vector. Prior to its sale, the Vector reporting segment consisted of Con-way's proportionate share of the net income from Vector, a joint venture with GM. GM purchased Con-way's membership interest in Vector in December 2006. * Other. The Other reporting segment consists of the operating results of Road Systems, a trailer manufacturer, and certain corporate activities for which the related income or expense has not been allocated to other reporting segments, including results related to corporate re-insurance activities and corporate properties. Con-way's primary business-unit results generally depend on the number, weight and distance of shipments transported, the prices received on those shipments or services, and the mix of services provided to customers, as well as the fixed and variable costs incurred by Con-way in providing the services and the ability to manage those costs under changing circumstances. Con-way Freight transports shipments utilizing a network of freight service centers combined with a fleet of company-operated line-haul and pickup-and- delivery tractors and trailers. CFI and Con-way Truckload transport shipments using a fleet of company-operated and contractor-operated long-haul tractors and trailers. Menlo Logistics manages the logistics functions of its customers and primarily utilizes third-party transportation providers for the movement of customer shipments. Results of Operations --------------------- The overview below provides a high-level summary of Con-way's results from continuing operations for the periods presented and is intended to provide context for the remainder of the discussion on reporting segments. Refer to "Reporting Segment Review" below for more complete and detailed discussion and analysis. Continuing Operations (Dollars in thousands except Three Months Ended Nine Months Ended per share amounts) September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenues $1,111,293 $1,076,807 $3,187,201 $3,222,851 =========== =========== =========== =========== Operating income $ 67,682 $ 102,315 $ 200,976 $ 292,056 Other expense 5,756 3,873 11,585 6,060 ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 61,926 98,442 189,391 285,996 Income tax provision 22,961 33,664 70,257 97,273 ----------- ----------- ----------- ----------- Income from continuing operations 38,965 64,778 119,134 188,723 Preferred stock dividends 1,693 1,748 5,172 5,319 ----------- ----------- ----------- ----------- Net income from continuing operations available to common shareholders $ 37,272 $ 63,030 $ 113,962 $ 183,404 =========== =========== =========== =========== Diluted earnings per share $ 0.78 $ 1.24 $ 2.37 $ 3.47 Operating margin 6.1% 9.5% 6.3% 9.1% Effective tax rate 37.1% 34.2% 37.1% 34.0% Con-way's consolidated revenue for the third quarter increased 3.2% from the same period last year due primarily to the acquisition of CFI on August 23, 2007 and to a 1.3% increase at Freight, partially offset by an 8.3% decline at Logistics. Excluding the acquisition of CFI, Con-way's third-quarter revenue decreased by 1.6%. Con-way's consolidated revenue for the first nine months of 2007 decreased 1.1% due to a 7.7% decline at Logistics and a 0.5% decline at Freight, partially offset by the acquisition-related increase in revenue at Truckload. Although revenues at Logistics declined, net revenue (revenue less purchased transportation costs) increased. Despite decreases in carrier-management revenue in the third quarter and first nine months of 2007, Logistics achieved growth in net revenue from carrier-management services as declines in purchased transportation costs more than offset the declines in carrier-management revenue. Revenues at the Freight segment in 2007 for the three- and nine-month period reflect increased revenue from the Con-way Freight business unit, which in the three-month period was partially offset by lower revenue from the former Con-way Expedite and Brokerage business unit, and in the nine-month period, was more than offset by the revenue decline from Con-way Expedite and Brokerage. In the third quarter and first nine months of 2007, consolidated operating income decreased 33.8% and 31.2%, respectively, from the same periods last year due largely to lower operating income from the Freight reporting segment and from Vector. In the third quarter and first nine months of 2007, operating income at Freight decreased 36.0% and 28.3%, respectively, due primarily to a higher-volume, lower-yield mix of revenue and to higher employee costs. Lower operating income from Vector reflects its sale, which was recognized in December 2006, as more fully discussed in Note 5, "Sale of Unconsolidated Joint Venture," of Item 1, "Financial Statements." In the first nine months of 2007, operating income included a $2.7 million first- quarter loss for the write-off of a receivable related to the Vector sale, while the third quarter and first nine months of 2006 included pre-sale operating income from Vector of $2.0 million and $10.9 million, respectively. Under Con-way's re-branding initiative announced in April 2006, Con-way has recognized expense of $10.5 million, including $3.2 million and $8.8 million in the third quarter and first nine months of 2007, respectively, primarily for the conversion of Con-way Freight trailers to the new Con-way graphic identity and for new uniforms. Under current estimates, Con-way expects to recognize $3.5 million of additional re-branding expenses in the remainder of 2007 and an estimated $10 million of re-branding expenses in 2008. Total estimated expenses of $24 million for the re-branding initiative consist primarily of the costs to re-brand Con-way Freight's tractors and trailers. As more fully discussed in Note 3, "Restructuring Activities," of Item 1, "Financial Statements," Con-way incurred $7.0 million in third-quarter expense related to its reorganization initiative at Con-way Freight and to the closure of the Con-way Truckload general office. Non-operating expenses increased $1.9 million in the third quarter of 2007 and $5.5 million in the first nine months of 2007 due primarily to an increase in interest expense, which increased $1.8 million and $2.7 million in the third quarter and first nine months of 2007, respectively. Other non- operating expense was also affected by a decrease in investment income of $0.3 million in the third quarter and $2.6 million in the first nine months of 2007. Variations in interest expense and interest income were due in part to the acquisition of CFI on August 23, 2007, which was financed with existing cash resources and proceeds from new debt financing. Con-way's third-quarter and year-to-date effective tax rates in 2007 were 37.1%, compared to 34.2% and 34.0%, respectively, in 2006. Excluding the effect of various discrete tax adjustments, Con-way's third-quarter and year- to-date effective tax rates in 2007 were 37.3% and 37.5%, respectively, and in 2006, were 37.5% and 37.7%, respectively. The discrete tax adjustments, which primarily affected the prior-year periods, largely reflect the settlement of issues following completion of an Internal Revenue Service audit. Con-way's net income from continuing operations available to common shareholders in the third quarter and first nine months of 2007 decreased 40.9% and 37.9%, respectively, reflecting lower operating income, higher non- operating expenses, and an increase in the effective tax rate. Con-way's diluted earnings per share from continuing operations in the same periods of 2007 decreased 37.1% and 31.7%, respectively, as lower net income was partially offset by the accretive effect of Con-way's share repurchase program, which concluded on June 29, 2007. Primarily as the result of share repurchases, Con-way's average diluted shares outstanding declined to 48.0 million shares in the third quarter of 2007 from 50.9 million shares in the same period of 2006, and in the first nine months, declined to 48.5 million shares in 2007 from 53.1 million shares in 2006. Reporting Segment Review Freight The following table compares operating results, operating margins, and the percentage change in selected operating statistics of the Freight reporting segment: (Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Summary of Segment Operating Results Revenues $ 740,769 $ 730,960 $2,165,381 $2,175,349 Operating Income 60,029 93,740 186,412 259,841 Operating Margin 8.1% 12.8% 8.6% 11.9% 2007 vs. 2006 2007 vs. 2006 ------------- ------------- Selected Con-way Freight Operating Statistics Revenue per day +2.2% +0.7% Weight per day +5.1 +2.4 Revenue per hundredweight ("yield") -2.8 -1.7 Shipments per day ("volume") +6.7 +3.5 Weight per shipment -1.5 -1.1 The Freight segment's revenues in the third quarter of 2007 increased 1.3% over the same period of 2006 and, in the first nine months, decreased 0.5% from the same prior-year period. Revenues in 2007 include increases at Con- way Freight and declines due to the sale of the expedited-shipping portion of its former Con-way Expedite and Brokerage business in July 2006 and to the integration of the remaining truckload-brokerage operation into Menlo Logistics in January 2007. Revenue per day for Con-way Freight increased 2.2% in the third quarter on a 5.1% increase in weight per day partially offset by a 2.8% decline in yield. In the first nine months of 2007, revenue per day at Con-way Freight rose 0.7% on a 2.4% increase in weight per day partially offset by a 1.7% decline in yield. In the third quarter, the 5.1% increase in weight per day was achieved through a 6.7% increase in shipments per day, partially offset by a 1.5% decline in weight per shipment. Weight per day in the first nine months of 2007 increased 2.4% on a 3.5% increase in shipments per day, partially offset by a 1.1% decrease in weight per shipment. The increase in the weight per day and volume of freight transported was achieved despite an increasingly price-sensitive and competitive freight market, due in part to targeted sales initiatives. Yields declined in 2007 due primarily to lower pricing associated with new business generated under Con-way's sales initiatives and to an increasingly price-sensitive and competitive freight market that required defensive pricing for certain customer relationships. In the third quarter and first nine months of 2007, Con-way's recent sales initiatives contributed to increased business levels from large customers who typically command lower rates on a higher quantity of freight. Like other LTL carriers, Con-way Freight assesses many of its customers with a fuel surcharge. The fuel surcharge is intended to compensate Con-way Freight for the adverse effects of higher fuel costs and fuel-related increases in purchased transportation. Fuel surcharges are only one part of Con-way Freight's overall rate structure, and the total price that Con-way Freight receives from customers for its services is governed by market forces, as more fully discussed below in Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Fuel." In the third quarter, Con-way Freight's fuel-surcharge revenue in 2007 decreased 2.6% from 2006, and in the nine-month period, fuel-surcharge revenue in 2007 decreased 1.1% from 2006. Excluding fuel surcharges, yields decreased 1.9% and 1.4% in the third quarter and first nine months of 2007, respectively. Freight's operating income in the third quarter and first nine months of 2007 decreased 36.0% and 28.3%, respectively, due primarily to a higher-volume, lower-yield mix of revenue, which required increased freight handling. Due largely to the change in the mix of revenue, employee costs in the third quarter and first nine months of 2007 increased 8.1% and 4.6%, respectively, from the same periods in 2006. Base compensation in the third quarter and first nine months of 2007 rose 8.6% and 5.5%, respectively, reflecting additional freight-handling requirements, wage and salary rate increases, and an increase in driver count during the period in response to increases in actual and anticipated freight volumes. Employee benefits expense increased 6.5% in the third quarter of 2007 due primarily to higher payroll taxes and increases in the costs for paid time off, partially offset by a decline in sick-pay expense. Variations in expenses for paid time off and sick pay were due in part to a conversion from a sick-pay benefit to a paid-time-off benefit. In the first nine months of 2007, employee benefits expense increased 4.3% due largely to higher self-insurance expense for health-care benefits, higher payroll taxes, and to increases in the costs for paid time off, partially offset by lower costs associated with workers' compensation claims and sick pay. In the third quarter of 2007, incentive compensation increased $3.6 million or 40.8% and, in the first nine months of 2007, increased $1.3 million or 4.2% based on variations in performance measures relative to incentive-plan targets. Expenses for fuel, oil and fuel taxes in the third quarter of 2007 increased 6.4% from 2006 and, in the nine-month period of 2007, increased 3.1% from 2006. During the same comparative periods, purchased transportation expense decreased 2.7% and 11.5%, respectively, as fuel-related increases were more than offset by the effect of lower transportation requirements following the sale of the expedited-shipping portion of the former Con-way Expedite and Brokerage business in July 2006. Depreciation expense in the third quarter and first nine months of 2007 increased 4.4% and 4.9% from the third quarter and first nine months of 2006, due primarily to volume-related increases in revenue equipment. Operating income was also negatively affected by increases in vehicular self-insurance expense and costs incurred under Con-way's re-branding initiative and its operational restructuring, which combines its three regional operating companies into one centralized operation. Vehicular self-insurance expense increased 22.4% and 52.4% in the third quarter and first nine months of 2007 due to increased claims experience, including an $8.0 million loss related to a significant claim in the second quarter of 2007. Under Con-way's re- branding initiative announced in April 2006, Con-way Freight incurred $3.2 million and $8.8 million of costs in the third quarter and first nine months of 2007, respectively, compared to $0.1 million and $0.4 million in the third quarter and first nine months of 2006, respectively. The re-branding costs were for expenses related primarily to the conversion of trailers to the new Con-way graphic identity and to new uniforms. As more fully discussed in Note 3, "Restructuring Activities," of Item 1, "Financial Statements," Con- way Freight incurred $5.5 million in third-quarter expense related to its operational restructuring announced in August 2007. Comparative operating results for the Freight segment reflect the sale of the expedited-shipping portion of its former Con-way Expedite and Brokerage business in July 2006. In connection with the sale, Con-way recognized a $6.2 million third-quarter gain in 2006. Truckload Following the acquisition of CFI, the operating results of CFI are reported with the operating results of the Con-way Truckload business unit in the Truckload reporting segment. Accordingly, the Truckload reporting segment for the third quarter and first nine months of 2007 and 2006 includes the results of the Con-way Truckload business unit for all of those periods, but only includes the operating results of CFI from August 23, 2007 through September 30, 2007. (Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Summary of Segment Operating Results Revenues CFI $ 51,280 $ -- $ 51,280 $ -- Con-way Truckload 711 2,622 2,948 5,274 ----------- ----------- ----------- ----------- Total $ 51,991 $ 2,622 $ 54,228 $ 5,274 =========== =========== =========== =========== Operating Income (Loss) CFI $ 7,693 $ -- $ 7,693 $ -- Con-way Truckload (4,718) 1,398 (7,687) 3,704 ----------- ----------- ----------- ----------- Total $ 2,975 $ 1,398 $ 6 $ 3,704 =========== =========== =========== =========== Increased revenue at the Truckload reporting segment was substantially due to the acquisition of CFI. As a result of the acquisition, the third quarter of 2007 included CFI revenue in 26 of 63 working days and the first nine months of 2007 included CFI revenue in 26 of 191 working days. In all periods presented, segment revenue is reported after the elimination of revenue recognized for truckload services provided by CFI and Con-way Truckload to Con-way Freight and Menlo Logistics. Accordingly, CFI revenue in the third quarter and first nine months of 2007 is reported net of $9.5 million of inter-segment revenue. In the same periods of 2007 and 2006, Con-way Truckload revenue is reported net of inter-segment revenue of $11.5 million and $46.7 million, respectively, and $19.5 million and $53.5 million, respectively. Operating results for the Truckload segment also reflect the acquisition of CFI. Subsequent to its acquisition on August 23, 2007, CFI reported operating income of $7.7 million while Con-way Truckload in the third quarter and first nine months of 2007 reported operating losses of $4.7 million and $7.7 million, respectively, which were due in part to productivity declines following Con-way's announcement of the CFI acquisition on July 13, 2007 and to $1.5 million of third-quarter costs incurred in the integration of the Con-way Truckload business unit with the CFI business unit, as more fully discussed in Note 3, "Restructuring Activities," of Item 1, "Financial Statements." Logistics The table below compares operating results and operating margins of the Logistics reporting segment. The table summarizes Menlo Logistics' gross revenues as well as net revenues (revenues less purchased transportation expenses). Carrier-management revenue is attributable to contracts for which Menlo Logistics manages the transportation of freight but subcontracts the actual transportation and delivery of products to third parties, which Menlo Logistics refers to as purchased transportation. Menlo Logistics' management places emphasis on net revenues as a meaningful measure of the relative importance of its principal services since gross revenues earned on most carrier-management services include the third-party carriers' charges to Menlo Logistics for transporting the shipments. (Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Summary of Segment Operating Results Revenues $ 312,572 $ 340,869 $ 956,962 $1,036,430 Purchased Transportation (203,015) (241,097) (637,371) (745,687) ----------- ----------- ----------- ----------- Net Revenues 109,557 99,772 319,591 290,743 Operating Income 6,188 5,462 19,659 17,740 Operating Margin on Revenue 2.0% 1.6% 2.1% 1.7% Operating Margin on Net Revenue 5.6% 5.5% 6.2% 6.1% Logistics' revenue in the third quarter and first nine months of 2007 decreased 8.3% and 7.7%, respectively, due principally to decreases in carrier-management services, partially offset by increases in warehouse- management services. In 2007, revenue from carrier-management services in the third quarter and first nine months decreased 12.8% and 12.5%, respectively, while revenue from warehouse-management services rose 3.7% and 6.4%, respectively. Logistics' net revenue in the third quarter and first nine months of 2007 increased 9.8% and 9.9%, respectively, due primarily to increases in net revenue from both carrier-management and warehouse-management services. Despite decreases in carrier-management revenue in the third quarter and first nine months of 2007, Logistics achieved growth in net revenue from carrier-management services as declines in purchased transportation costs more than offset the declines in carrier-management revenue. In the third quarter and first nine months of 2007, purchased transportation costs decreased 15.8% and 14.5%, respectively, due primarily to decreases in carrier-management volumes and lower carrier rates. Logistics' operating income in the third quarter and first nine months of 2007 increased 13.3% and 10.8%, respectively, over the same periods of last year. Operating margins were positively impacted by income from information- technology services provided to GM, as more fully discussed in Note 5, "Sale of Unconsolidated Joint Venture," of Item 1, "Financial Statements." Higher operating income in 2007 also reflects a decline in costs incurred during a contract-bid process. In connection with this contract, as more fully discussed below, Logistics incurred $1.0 million of costs in the third quarter of last year. Excluding the items discussed above, operating margins in the third quarter and first nine months of 2007 declined, as higher net revenue from carrier-management and warehouse-management services was more than offset by increases in employee costs and allocated corporate costs, and from higher expenses for rent and supplies. Employee costs in the third quarter and first nine months of 2007 increased 15.5% and 11.9% respectively, which reflect increases in headcount, employee benefits, and wage and salary rate increases. Headcount increases were due in part to growth in warehouse-management services. Employee benefits expense increased 22.9% and 19.4% in the third quarter and first nine months of 2007, respectively, due principally from higher self-insurance expense for health-care benefits, increased costs for post-employment benefits, and increased costs for paid time off. The cost of health-care benefits in the first nine months of 2007 was significantly affected by a single large first- quarter claim. Excluding the unusually large first-quarter claim, health- care expenses in both the third quarter and first nine months of 2007 were adversely affected by higher overall claims activity, due to an increase in the cost per claim and in the number of claims. Corporate administrative costs allocated to the Logistics segment in the third quarter and first nine months of 2007 increased by $2.6 million and $8.8 million, respectively, due primarily to the allocation of costs associated with corporate information-technology personnel who were retained by Con-way following the sale of Vector to GM in December 2006. The associated costs of these employees are allocated to Vector prior to its sale, but were allocated to Logistics subsequent to the sale. The retained employees were utilized in providing information-technology services to GM, as described above, and also to provide services on other Menlo Logistics' information-technology initiatives. Rent expense increased 16.1% and 13.5% in the third quarter and first nine months of 2007, respectively, as a result of new warehouse customer space requirements as well as facilities expansion with existing customers. Supplies expense increased 2.3% and 13.8% in the third quarter and first nine months of 2007, respectively, due to existing and new warehouse customer service requirements. At the conclusion in August 2007 of a lengthy preparation and selection process, the Department of Defense U.S. Transportation Command ("DODTC") selected Menlo Logistics as the primary contractor for the Defense Transportation Coordination Initiative ("DTCI"), a logistics program directed by the DODTC to streamline and improve domestic transportation and distribution operations. Under the contract, Menlo Logistics will be responsible for deploying and operating an integrated logistics solution for shipment planning and optimization, shipment execution and overall transportation management for Department of Defense ("DOD") shipments moving into and among DOD facilities in the contiguous United States. The contract, which has a potential seven-year life cycle, has a three-year base period with an estimated $525 million in transportation spend. Implementation of the initiative, which is expected to be rolled out in three phases over a 25- month period, was delayed briefly by a protest filed by a competitor; however, the protest was subsequently withdrawn in October 2007. As more fully discussed in Note 2, "Acquisitions," of Item 1, "Financial Statements," Menlo Worldwide, LLC acquired Cougar Logistics on September 5, 2007, and on October 18, 2007, acquired Chic Logistics. The acquisitions did not have a material effect on Logistics' revenues or operating income in the periods presented. Vector In December 2006, Con-way recognized the sale to GM of Con-way's membership interest in Vector. The sale of Vector did not qualify as a discontinued operation due to its classification as an equity-method investment, and accordingly, Vector's income or losses are reported in net income from continuing operations. In 2007, segment results reported from Con-way's equity investment in Vector included a $2.7 million first-quarter loss compared to income of $2.0 million and $10.9 million in the third quarter and first nine months of 2006, respectively. The first-quarter loss in 2007 was due to the write-off of a business-case receivable from GM, as more fully discussed in Note 5, "Sale of Unconsolidated Joint Venture," of Item 1, "Financial Statements." Other The Other reporting segment consists of the operating results of Road Systems, a trailer manufacturer, and certain corporate activities for which the related income or expense has not been allocated to other reporting segments, including results related to corporate re-insurance activities and corporate properties. Operating losses from corporate properties in 2007 reflect a $0.6 million third-quarter loss for environmental remediation of an unused corporate property. The table below summarizes the operating results for the Other reporting segment: (Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Revenues Road Systems $ 5,961 $ 2,356 $ 10,630 $ 5,798 Operating Income (Loss) Road Systems $ (171) $ 386 $ 618 $ 1,058 Con-way re-insurance activities (354) (238) (1,601) (860) Con-way corporate properties (1,015) (426) (1,740) (1,314) Sales of non-operating assets -- -- -- 1,260 Other 30 (6) 321 (231) ----------- ----------- ----------- ----------- $ (1,510) $ (284) $ (2,402) $ (87) =========== =========== =========== =========== Discontinued Operations Net income available to common shareholders in the periods presented includes the results of discontinued operations, which relate to the closure of Con- way Forwarding, the sale of MWF, the shut-down of EWA, and the spin-off of CFC, as more fully discussed in Note 4, "Discontinued Operations," of Item 1, "Financial Statements." Results of discontinued operations for the nine- month periods of 2007 and 2006 are presented below. There were no results associated with discontinued operations for the third quarter of 2007 and 2006. (Dollars in thousands except per share Nine Months Ended amounts) September 30, ------------------------------- 2007 2006 --------------- -------------- Discontinued Operations, net of tax Loss from Discontinued Operations $ -- $ (1,929) Gain (Loss) from Disposal 1,609 (4,850) --------------- -------------- $ 1,609 $ (6,779) Earnings (Loss) per share - Diluted Loss from Discontinued Operations $ -- $ (0.04) Gain (Loss) from Disposal 0.03 (0.09) --------------- -------------- $ 0.03 $ (0.13) Liquidity and Capital Resources ------------------------------- Cash and cash equivalents declined to $181.4 million at September 30, 2007 from $260.0 million at December 31, 2006, as $712.1 million used in investing activities exceeded $327.8 million provided by operating activities and $302.4 million provided by financing activities. Cash used by investing activities primarily reflects the acquisitions of CFI and Cougar Logistics in the third quarter of 2007. In the first nine months of 2007, cash provided by financing activities primarily reflects $425.0 million borrowed under a bridge-loan facility in August 2007 to fund a portion of the purchase price of CFI. Con-way's cash flows are summarized in the table below. Discontinued operations in the periods presented relate to the closure of Con-way Forwarding, the sale of MWF, the shut-down of EWA, and the spin-off of CFC, as more fully discussed in Note 4, "Discontinued Operations," of Item 1, "Financial Statements." Nine Months Ended (Dollars in thousands) September 30, -------------------------- 2007 2006 ------------ ------------ Operating Activities Net income $ 120,743 $ 181,944 Discontinued operations (1,609) 6,779 Non-cash adjustments (1) 145,601 117,701 ------------ ------------ Net income before non-cash items 264,735 306,424 Changes in assets and liabilities 63,070 43,822 Net Cash Provided by Operating Activities 327,805 350,246 ------------ ------------ Net Cash Used in Investing Activities (712,124) (217,767) ------------ ------------ Net Cash Provided by (Used in) Financing Activities 302,387 (330,121) ------------ ------------ Net Cash Used in Continuing Operations (81,932) (197,642) Net Cash Provided by (Used in) Discontinued Operations 3,342 (23,398) ------------ ------------ Decrease in Cash and Cash Equivalents $ (78,590) $ (221,040) ============ ============ (1) "Non-cash adjustments" refer to depreciation, amortization, deferred income taxes, provision for uncollectible accounts, equity-method income or loss, and other non-cash income and expenses. Operating Activities Cash flow from operating activities in the first nine months of 2007 was $327.8 million, a $22.4 million decrease from the first nine months of 2006, due to a decrease in net income before non-cash items, partially offset by an increase in cash provided by changes in assets and liabilities. In the first nine months of 2007, receivables used $27.6 million, compared to $25.9 million provided in the same prior-year period. Cash provided by changes in accrued income taxes increased to $41.0 million in the first nine months of 2007 from $8.9 million in the same prior-year period, due primarily to tax refunds received in March 2007. Employee benefits used $9.3 million in the first nine months of 2007 compared to $40.2 million used in the same period of 2006. As a result of benefit plan amendments that were effective on January 1, 2007, an increase in the obligation for Con-way's defined contribution pension plan was largely offset by a decline in the obligation related to Con-way's defined benefit pension plans, as more fully discussed in Note 8, "Employee Benefit Plans," of Item 1, "Financial Statements." Cash provided by deferred charges and credits decreased to $1.9 million in the first nine months of 2007 from $13.7 million provided in the same period of 2006, primarily due to the sale of Con-way's membership interest in Vector. In the first nine months of 2006, cash provided by deferred charges and credits reflects variations in Con-way's affiliate payable to Vector. Investing Activities Cash used in investing activities increased to $712.1 million in the first nine months of 2007 from $217.8 million used in the first nine months of 2006 due primarily to $739.5 million used to purchase CFI and $28.2 million used to purchase Cougar Logistics in the third quarter of 2007. As more fully discussed in Note 2, "Acquisitions," of Item 1, "Financial Statements," Con- way completed the acquisitions of CFI and Cougar Logistics in August 2007 and September 2007, respectively. The increase in cash used for acquisitions was partially offset by a decline in capital expenditures, an increase in cash provided from the conversion of marketable securities, proceeds received from the sale of Con-way's membership interest in Vector, and an increase in proceeds from the sale of properties and equipment. Capital expenditures in the first nine months of 2007 decreased $149.7 million from the same prior-year period due primarily to fewer tractor and trailer expenditures at the Freight and Truckload segments. The prior year included an above-average number of tractors acquired in advance of new governmental emission standards. Cash provided by declines in marketable securities increased $69.1 million due primarily to the conversion in August 2007 of marketable securities into cash to fund a portion of the purchase price of CFI. The first nine months of 2007 include $51.9 million of proceeds received in January 2007 from the sale of Con-way's membership interest in Vector, while the same period of 2006 includes $8.0 million of proceeds received from the sale of the expedited-shipping portion of the former Con-way Expedite and Brokerage business in the third quarter of 2006. Proceeds from the sale of properties and equipment increased $11.4 million in the first nine months of 2007 compared to the same period of 2006 due primarily to the sale of Con-way Truckload tractors. Financing Activities Financing activities provided cash of $302.4 million in the first nine months of 2007 compared to $330.1 million used in the same period of 2006. In August 2007, Con-way borrowed $425.0 million under a bridge-loan facility to fund a portion of the purchase price of CFI. Financing activities also reflect a decline in common stock repurchases made under Con-way's repurchase program. Under the program, common stock repurchases fell to $89.9 million in the first nine months of 2007 from $305.9 million in the first nine months of 2006. The repurchase program concluded on June 29, 2007 and no additional authorizations have been made under the program. In both periods presented, financing activities also reflect proceeds from the exercise of stock options, dividend payments and scheduled principal payments for notes related to Con-way's defined contribution retirement plan. Con-way has a $400 million revolving credit facility that matures on September 30, 2011. The revolving credit facility is available for cash borrowings and for the issuance of letters of credit up to $400 million. At September 30, 2007, no borrowings were outstanding under Con-way's revolving credit facility and $216.5 million of letters of credit were outstanding, leaving $183.5 million of available capacity for additional letters of credit or cash borrowings, subject to compliance with financial covenants and other customary conditions to borrowing. Including credit facilities assumed in connection with MW's acquisition of Cougar Logistics, Con-way had other uncommitted unsecured credit facilities totaling $63.5 million. Under these facilities, $4.5 million of short-term borrowings remained outstanding, and a total of $21.6 million of letters of credit, bank guarantees, and overdraft facilities were outstanding at September 30, 2007. See "- Forward-Looking Statements" below; Item 1A, "Risk Factors" of Part II, "Other Information;" and Note 5, "Debt and Other Financing Arrangements," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K for additional information concerning Con-way's $400 million credit facility and its other debt instruments. Contractual Cash Obligations Con-way's contractual cash obligations as of December 31, 2006 are summarized in Con-way's 2006 Annual Report on Form 10-K under Item 7, "Management's Discussion and Analysis - Liquidity and Capital Resources - Contractual Cash Obligations." In the first nine months of 2007, there have been no material changes in Con-way's contractual obligations outside the ordinary course of business, except for Con-way's borrowings under the bridge-loan facility and entry into purchase commitments, as more fully discussed in Note 7, "Debt," and Note 13, "Commitments and Contingencies," respectively, of Item 1, "Financial Statements." As discussed in Item 1A, "Risk Factors" of Part II, "Other Information" in Con-way's 2006 Annual Report on Form 10-K, Con-way's primary business unit is capital intensive and makes significant investments in revenue equipment and service centers. Like Con-way Freight, the newly acquired CFI business unit requires investments in revenue equipment, which depend on the ability to generate cash flow from operations and access to debt and equity markets. In 2007, Con-way anticipates capital and software expenditures of approximately $150.0 million or approximately $48.0 million of additional expenditures in the fourth quarter of 2007. Con-way's estimate for capital expenditures primarily includes acquisitions of additional tractor and trailer equipment, land, and development of new and existing facilities. Con-way's actual 2007 capital expenditures may differ from the estimated amount, depending on factors such as availability and timing of delivery of equipment, the availability of land in desired locations for new facilities, and the timing of obtaining permits, environmental studies and other approvals necessary for the development of new and existing facilities. The planned expenditures do not represent contractual obligations. Other On October 18, 2007, MW completed the acquisition of Chic Logistics, as more fully discussed in Note 2, "Acquisitions," of Item 1, "Financial Statements." The $60.0 million purchase price was funded with existing cash resources. Con-way believes that its working capital requirements and capital expenditure plans in the foreseeable future will be adequately met with various sources of liquidity and capital, including Con-way's cash and cash equivalents, marketable securities, cash flow from operations, credit facilities and access to capital markets. At September 30, 2007, Con-way's senior unsecured debt was rated as investment grade by Standard and Poor's (BBB), Fitch Ratings (BBB), and Moody's (Baa3). Critical Accounting Policies and Estimates ------------------------------------------ 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. Con-way 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 registered public accounting firm. Accounting policies and estimates may require adjustment based on changing facts and circumstances and actual results could differ from estimates. Information concerning Con-way's "Critical Accounting Policies and Estimates" are included in Item 7, "Management's Discussion and Analysis," in Con-way's 2006 Annual Report on Form 10-K. Con-way believes that the accounting policies that are most judgmental and material to the financial statements are those related to the following: * Employee Retirement Benefit Plans * Self-Insurance Accruals * Income Taxes * Acquisitions * Disposition and Restructuring Activities * Revenue Recognition * Property, Plant and Equipment and Other Long-Lived Assets Con-way's acquisition of CFI and Cougar Logistics in the third quarter of 2007 requires management to make significant judgments and estimates, as more fully discussed below. Also, the current-year adoption of new accounting pronouncements resulted in changes to the accounting policies and estimation techniques, as more fully discussed below. Except for the effect of recent acquisitions and the current-year adoption of recent accounting pronouncements, there have been no significant changes to the critical accounting policies and estimates disclosed in Con-way's 2006 Annual Report on Form 10-K. Acquisitions Con-way's accounting for the acquisition of CFI and Cougar Logistics requires various judgments and estimates, including but not limited to, purchase- method accounting estimates related to the fair value of assets acquired and liabilities assumed and the estimated useful lives of acquired property and equipment, internal-use software, and identifiable intangible assets. Estimates of the fair value of assets acquired are based on various valuation techniques, with a market-based approach applied to acquired property and equipment, an income-based approach applied to identifiable intangible assets and a cost-based approach applied to internal-use software. In the case of CFI, the current and deferred income-tax effects associated with assets acquired and liabilities assumed have been estimated based on Con-way's status as a "C" corporation rather than CFI's previous status as a "Subchapter S" corporation. Generally, all other assets acquired and liabilities assumed have been recorded at carrying value, which approximates fair value. The excess of the acquired entity's purchase price over the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The assessment requires the comparison of the fair value of a reporting unit to the carrying value of its net assets, including allocated goodwill. If the carrying value of the reporting unit exceeds its fair value, Con-way must then compare the implied fair value of reporting-unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting-unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The amounts that Con-way has recorded for goodwill and other identifiable intangible assets represent fair values, which were primarily determined by an income-based valuation approach. The estimates and assumptions used in the initial valuation of goodwill and identifiable intangible assets include, but are not limited to: the future expected cash flows from sales, customer contracts, and trademarks; growth opportunities; the retention of key employees; and integration costs. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and identifiable intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets, as discussed above, may result in an impairment loss in the period in which Con-way identifies the impairment. Changes in assumptions and estimates related to acquisitions could have a material effect on Con-way's financial condition or results of operations. Employee Retirement Benefit Plans In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of SFAS 87, 88, 106, and 132R." Effective on December 31, 2006, Con-way adopted the recognition and related disclosure provisions of SFAS 158, as more fully discussed in Note 9, "Employee Benefit Plans," of Item 8, "Financial Statements and Supplementary Data," in Con-way's 2006 Annual Report on Form 10-K. Effective January 1, 2007, Con-way adopted the measurement-date provisions of SFAS 158, which require employers to measure plan assets and obligations as of the end of the fiscal year. Accordingly, Con-way changed its measurement date to December 31 from November 30 for all of its defined benefit pension plans. Under the transition provisions of SFAS 158, Con-way recognized a $21.3 million decrease in plan-related liabilities, an $8.3 million decline in related deferred tax assets, and a $13.0 million increase in shareholders' equity. The beginning-of-period increase to shareholders' equity consisted of a $2.6 million decline in retained earnings to recognize service cost for December 2006 and a $15.6 million decline in accumulated other comprehensive loss to recognize the effect of an increase in the plan- related discount rate. The effect of adoption of SFAS 158's measurement-date provisions to Con-way's financial statements as of and for the nine months ended September 30, 2007 was primarily the result of an increase in the discount rate (used to measure plan-related obligations) to 5.95% at December 31, 2006 from 5.85% at November 30, 2006. This increase in the discount rate reduced Con-way's estimated plan obligation, as described above, and will also increase estimated annual pension income in 2007 by $7.7 million. Following completion of final actuarial calculations, Con-way estimates that the defined benefit pension plans in 2007 will result in annual pension income of $25 million, based primarily on an expected return on plan assets that exceeds the interest cost on plan benefit obligations. Income Taxes Effective on January 1, 2007, Con-way adopted the provisions of FIN 48, "Accounting for Uncertainty in Income Taxes," as more fully discussed in Note 12, "Income Taxes," of Item 1, "Financial Statements." Con-way assesses its income tax positions and records tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those positions where it is more likely than not that a tax benefit will be sustained, Con-way has recorded the largest amount of tax benefit with a greater-than-50-percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Forward-Looking Statements -------------------------- Certain statements included herein constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties, and should not be relied upon as predictions of future events. All statements other than statements of historical fact are forward-looking statements, including: * any projections of earnings, revenues, weight, yield, volumes, income or other financial or operating items; * any statements of the plans, strategies, expectations or objectives of Con-way's management for future operations or other future items; * any statements concerning proposed new products or services; * any statements regarding Con-way'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 Con-way by CFC's multi-employer pension plans; * any statements regarding future economic conditions or performance; * any statements regarding the outcome of legal and other claims and proceedings against Con-way; * any statements regarding the acquisition of CFI and related financing; and * 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 Con-way 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 Con-way's customers and their ability to pay for services rendered; * increasing competition and pricing pressure; * availability of fuel, changes in fuel prices or fuel surcharges, and the effect of recently-filed litigation alleging that Con-way engaged in price-fixing of fuel surcharges in violation of Federal antitrust laws; * the effects of the cessation of EWA's air-carrier operations; * the possibility that Con-way may, from time to time, be required to record impairment charges for goodwill, intangible assets, and other long-lived assets; * the possibility of defaults under Con-way's $400 million credit agreement, $500 million bridge credit agreement, other debt instruments, and the possibility that Con-way may be unable to refinance its borrowings under the bridge credit agreement with long-term debt; * the possibility that Con-way may be required to repay certain indebtedness in the event that the ratings assigned to its long-term senior debt by credit rating agencies are reduced; * labor matters, including the grievances by furloughed EWA 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 Con-way's 1996 spin-off of CFC, including the possibility that CFC's multi-employer pension plans may assert claims against Con-way, that Con-way may not prevail in those proceedings and that Con-way may not have the financial resources necessary to satisfy amounts payable to those plans; * matters relating to the sale of MWF, including Con-way's obligation to indemnify UPS for certain losses in connection with the sale; * matters relating to the acquisitions of CFI and Cougar Logistics (including, without limitation risks relating to the financing, integration risks and risks that acquisition synergies are not realized); and * matters relating to Con-way's defined benefit and defined contribution pension plans. As a result of the foregoing, no assurance can be given as to future financial condition, results of operations, or cash flows. See Note 13, "Commitments and Contingencies," of Item 1, "Financial Statements." ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Con-way is exposed to a variety of market risks, including the effects of interest rates, fuel prices, and foreign currency exchange rates. Con-way 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. Derivative financial instruments held by Con-way at September 30, 2007 did not have a material effect on Con-way's financial statements. Interest Rates Con-way is subject to the effect of interest-rate fluctuations on the fair value of its long-term debt and on the amount of interest income earned on cash-equivalent investments and short-term marketable securities, as more fully discussed in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of Con-way's 2006 Annual Report on Form 10-K. Fuel Con-way's business units are exposed to the effects of changes in the availability and price of diesel fuel. Generally, fuel can be obtained from various sources and in the desired quantities. However, an inability to obtain fuel could have a material adverse effect on Con-way. Con-way's business units in the Freight and Truckload reporting segments are subject to the risk of price fluctuations. Like other carriers, Con-way Freight assesses many of its customers with a fuel surcharge. The fuel surcharge is a part of Con-way Freight's overall rate structure for customers and is intended to compensate Con-way Freight for the adverse effects of higher fuel costs. In periods of rising fuel prices, the fuel surcharge typically increases Con-way Freight's yields and revenue, and Con-way Freight generally recovers more than the cost of higher fuel and fuel-related increases in purchased transportation. Con-way cannot predict the future movement of fuel prices, Con-way Freight's ability to recover higher fuel costs through fuel surcharges, or the effect that changes in fuel surcharges may have on Con-way Freight's overall rate structure. Con-way Freight's operating income may be adversely affected by a decline in fuel prices as lower fuel surcharges would reduce its yield and revenue. Whether fuel prices increase, decrease, or remain constant, Con-way Freight's operating income may be adversely affected if market pressures limited Con-way Freight's ability to assess its fuel surcharges. Foreign Currency The assets and liabilities of Con-way'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 Con-way's financial condition, results of operations, or cash flows. ITEM 4. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. Con-way's management, with the participation of Con-way's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Con- way'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, Con-way's Chief Executive Officer and Chief Financial Officer have concluded that Con-way's disclosure controls and procedures are effective as of the end of such period. (b) Internal Control Over Financial Reporting. Other than as described below, there have not been any changes in Con-way'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, Con-way's internal control over financial reporting. Con-way acquired CFI on August 23, 2007. CFI was not previously required to maintain disclosure controls and procedures, or maintain, document and assess internal control over financial reporting, as required under the rules and regulation of the Securities and Exchange Commission. Con-way will review CFI's procedures and controls and may make additional changes in those controls in the future. Con-way excluded CFI from it assessment of the effectiveness of internal control over financial reporting as of September 30, 2007. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Certain legal proceedings of Con-way are also discussed in Note 4, "Discontinued Operations," and Note 13, "Commitments and Contingencies," of Part 1 Item 1, "Financial Statements." Con-way, along with 11 other companies engaged in the LTL trucking business, has been named as a defendant in a purported class-action lawsuit filed on July 30, 2007 in the United States District Court for the Southern District of California. The named plaintiffs, Farm Water Technological Services Inc. d/b/a Water Tech. and C.B.J.T. d/b/a Agricultural Supply, allege that the defendants have conspired to fix fuel surcharges for LTL shipments in violation of Federal antitrust laws and are seeking treble damages, injunctive relief, attorneys' fees and costs. Since this lawsuit was filed, over 40 similar lawsuits have been filed by other plaintiffs in various federal district courts, naming as defendants Con-way or Con-way Freight (or both), as well as other companies engaged in the LTL trucking business. Con- way expects that these lawsuits will be consolidated in a single jurisdiction for litigation. In 2003, prior to the sale of MWF to UPS, Con-way 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. Con-way 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. Con-way was subsequently advised by the Department of Justice that it is not pursuing an investigation of this matter. Con-way 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, Con-way 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, Con-way agreed to indemnify UPS for certain losses resulting from violations of the Foreign Corrupt Practices Act. Con-way is currently unable to predict whether it will be required to make payments under the indemnity or whether the SEC will impose fines or other penalties directly on Con-way as a result of the actions of Emery Transnational. ITEM 1A. RISK FACTORS There are no material changes to the risk factors previously disclosed in Item 1A, "Risk Factors," of Con-way's 2006 Annual Report on Form 10-K, except for risks related to the acquisitions of CFI and Cougar Logistics, as more fully discussed herein below and in Note 2, "Acquisitions," of Part 1 Item 1, "Financial Statements." The degree of success of the acquisition will depend, in part, on Con-way's ability to realize the anticipated synergies, cost savings and growth opportunities from integrating acquired businesses with Con-way's existing businesses. Con-way's success in realizing these benefits and the timing of this realization depends upon the successful integration of operations. The integration process may be complex, costly and time-consuming. The difficulties of integrating the operations of acquired businesses include, among others: * unanticipated issues in integrating information, communications and other systems; * retaining key employees; * consolidating corporate and administrative infrastructures; * the diversion of management's attention from ongoing business concerns; * the impact on internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002; and * unanticipated issues, expenses and liabilities. Con-way may not accomplish this integration smoothly or successfully. The diversion of the attention of management from its current operations to the integration effort and any difficulties encountered in combining operations could prevent Con-way from realizing the full benefits anticipated to result from the acquisitions and could adversely affect Con-way's business. ITEM 6. EXHIBITS Exhibit No. - ----------- (2) Plan of acquisition, reorganization, arrangement, liquidation, or succession: 2.1 Con-way Plan for reorganization of Con-way Freight, Inc. (Item 7.01 to Con-way's Report on Form 8-K filed on August 22, 2007*). (4) Instruments defining the rights of holders: 4.1 $500 million Bridge Credit Agreement dated August 23, 2007 between Con-way Inc. and Goldman Sachs Credit Partners L.P. 4.2 Subsidiary Guaranty Agreement dated August 23, 2007 made by Con- way Freight Inc., Menlo Worldwide, LLC, Menlo Logistics, Inc., Transportation Resources, Inc., and Contract Freighters, Inc. in favor of the banks referred to in 4.1. (10) Material contracts 10.1 Con-way Inc. 2005 Deferred Compensation Plan for Executives and Key Employees, Amended and Restated Effective January 1, 2008 (Exhibit 99.1 to Con-way's Report on Form 8-K filed on September 27, 2007*#). 10.2 Con-way Inc. 1993 Deferred Compensation Plan for Executives and Key Employees (Exhibit 99.2 to Con-way's Report on Form 8-K filed on September 27, 2007*#). 10.3 Con-way Inc. 2005 Supplemental Excess Retirement Plan, Amended and Restated Effective January 1, 2008 (Exhibit 99.3 to Con-way's Report on Form 8-K filed on September 27, 2007*#). 10.4 Con-way Inc. Supplemental Retirement Savings Plan, Amended and Restated Effective January 1, 2008 (Exhibit 99.4 to Con-way's Report on Form 8-K filed on September 27, 2007*#). 10.5 Separation Agreement and General Release between Con-way Freight Inc. and David S. McClimon effective September 28, 2007 (Exhibit 99 to Con-way's Report on Form 8-K filed on October 1, 2007*#). 10.6 Amendment No. 1 dated December 4, 2006 to the Amended and Restated 2003 Equity and Incentive Plan for Non-Employee Directors.# 10.7 Severance Agreement dated August 23, 2007 between Herbert J. Schmidt and Contract Freighters, Inc. # 10.8 Stock Purchase Agreement to purchase Chic Holdings Limited between Menlo Worldwide, LLC and various sellers dated September 7, 2007. (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 and Directors. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Con-way Inc. (Registrant) November 7, 2007 /s/ Kevin C. Schick ------------------------ Kevin C. Schick Senior Vice President and Chief Financial Officer EX-31 2 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 Con-way 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 officer 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 officer 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. November 7, 2007 /s/ Douglas W. Stotlar ------------------------- Douglas W. Stotlar Chief Executive Officer Exhibit 31(b) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kevin C. Schick, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Con-way 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 officer 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 officer 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. November 7, 2007 /s/ Kevin C. Schick ------------------------ Kevin C. Schick Chief Financial Officer EX-32 3 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 Con-way Inc. (the "Company") for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas W. Stotlar, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 7, 2007 /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 Con-way Inc. (the "Company") for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin C. Schick, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 7, 2007 /s/ Kevin C. Schick - ----------------------- Name: Kevin C. Schick Title: Chief Financial Officer EX-4 4 ex41.txt EXHIBIT 4.1 Exhibit 4.1 $500,000,000 BRIDGE CREDIT AGREEMENT dated as of August 23, 2007 among CON-WAY INC., as Borrower The Banks Party Hereto GOLDMAN SACHS CREDIT PARTNERS L.P., as Syndication Agent and GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agent ______________________________ GOLDMAN SACHS CREDIT PARTNERS L.P., as Sole Lead Arranger and Sole Book Runner TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS Section 1.01 Definitions....................................... Section 1.02 Accounting Terms and Determinations............... Section 1.03 Types of Borrowings............................... ARTICLE 2 THE CREDITS Section 2.01 Commitments to Lend............................... Section 2.02 Notice of Borrowing............................... Section 2.03 [Reserved]........................................ Section 2.04 Notice to Banks; Funding of Loans................. Section 2.05 Notes; Loan Accounts; Records..................... Section 2.06 Maturity of Loans................................. Section 2.07 Interest Rates.................................... Section 2.08 Agent's Fees...................................... Section 2.09 Optional Termination or Reduction of Commitments.. Section 2.10 Method of Electing Interest Rates................. Section 2.11 Mandatory Termination of Commitments.............. Section 2.12 Payments.......................................... Section 2.13 General Provisions as to Payment.................. Section 2.14 Funding Losses.................................... Section 2.15 Computation of Interest........................... Section 2.16 Maximum Interest Rate............................. ARTICLE 3 CONDITIONS Section 3.01 Conditions to Effectiveness....................... Section 3.02 Loans............................................. ARTICLE 4 REPRESENTATIONS AND WARRANTIES Section 4.01 Corporate Existence and Power..................... Section 4.02 Corporate and Governmental Authorization; No Contravention. Section 4.03 Binding Effect.................................... Section 4.04 Financial Information............................. Section 4.05 Litigation........................................ Section 4.06 Compliance with ERISA............................. Section 4.07 Environmental Matters............................. Section 4.08 Taxes............................................. Section 4.09 Subsidiaries...................................... Section 4.10 Not an Investment Company; Federal Reserve Regulations. Section 4.11 Full Disclosure................................... ARTICLE 5 COVENANTS Section 5.01 Information....................................... Section 5.02 Payment of Obligations............................ Section 5.03 Maintenance of Property; Insurance................ Section 5.04 Conduct of Business and Maintenance of Existence.. Section 5.05 Compliance with Laws.............................. Section 5.06 Inspection of Property, Books and Records......... Section 5.07 Debt.............................................. Section 5.08 Leverage Ratio.................................... Section 5.09 Negative Pledge................................... Section 5.10 Consolidations, Mergers and Sales of Assets....... Section 5.11 Use of Proceeds................................... Section 5.12 Fixed Charge Coverage............................. Section 5.13 Transactions with Third Party Affiliates.......... ARTICLE 6 DEFAULTS Section 6.01 Events of Default................................. Section 6.02 Notice of Default................................. ARTICLE 7 THE AGENT AND THE CO-AGENTS Section 7.01 Appointment and Authorization..................... Section 7.02 Agent and Affiliates.............................. Section 7.03 Action by Agent................................... Section 7.04 Consultation with Experts; Delegation of Duties... Section 7.05 Liability of Agent................................ Section 7.06 Reliance by Agent................................. Section 7.07 Notice of Default................................. Section 7.08 Indemnification................................... Section 7.09 Credit Decision................................... Section 7.10 Successor Agent................................... Section 7.11 Additional Agents................................. ARTICLE 8 CHANGE IN CIRCUMSTANCES Section 8.01 Basis for Determining Interest Rate Inadequate or Unfair. Section 8.02 Illegality........................................ Section 8.03 Increased Cost and Reduced Return................. Section 8.04 Taxes............................................. Section 8.05 Base Rate Loans Substituted for Affected Euro-Dollar Loans. Section 8.06 Substitution of Banks............................. ARTICLE 9 MISCELLANEOUS Section 9.01 Notices........................................... Section 9.02 No Waivers........................................ Section 9.03 Expenses; Indemnification......................... Section 9.04 Set-Off; Sharing of Set-offs...................... Section 9.05 Amendments and Waivers............................ Section 9.06 Successors and Assigns............................ Section 9.07 Collateral........................................ Section 9.08 Governing Law; Submission to Jurisdiction......... Section 9.09 Counterparts; Integration......................... Section 9.10 Waiver of Jury Trial.............................. Section 9.11 Confidentiality................................... Section 9.12 Survival.......................................... Section 9.13 Patriot Act Notice................................ Section 9.14 Absence of Fiduciary Relationship; Affiliate Activities. SCHEDULE 1 Commitment Schedule SCHEDULE 2 Pricing Schedule SCHEDULE 5.07 List of Subsidiary Debt SCHEDULE 5.09 List of Existing Liens EXHIBIT A Form of Note EXHIBIT B Assignment and Assumption Agreement EXHIBIT C Subsidiary Guaranty Agreement EXHIBIT D Calculation of Funding Losses BRIDGE CREDIT AGREEMENT THIS BRIDGE CREDIT AGREEMENT dated as of August 23, 2007 is by and among CON-WAY INC., a Delaware corporation, the BANKS party hereto, GOLDMAN SACHS CREDIT PARTNERS L.P., as Syndication Agent, Administrative Agent, Sole Lead Arranger and Sole Book Runner. WITNESSETH WHEREAS, the Borrower has requested that the Banks provide $500 million in term loans for the purposes hereinafter set forth; and WHEREAS, the Banks have agreed to make the requested term loans available to the Borrower on the terms and conditions hereinafter set forth. NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Section 1.01 Definitions. The following terms, as used herein, have the following meanings: "Acquired Business" means Transportation Resources, Inc. and its subsidiaries. "Acquisition" means the acquisition contemplated by the Merger Agreement. "Adjusted London Interbank Offered Rate" has the meaning set forth in Section 2.07(b). "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Agent" means GSCP, as administrative agent for the Banks, and its successors in such capacity. "Aggregate Usage" means, at any time, the aggregate outstanding principal amount of the Loans at such time. "Agreement" means this Bridge Credit Agreement, as it may be amended, modified, supplemented and extended from time to time. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "Approved Fund" means any Fund that is administered or managed by (a) a Bank, (b) an Affiliate of a Bank or (c) an entity or an affiliate of an entity that administers or manages a Bank. "Assignee" has the meaning set forth in Section 9.06(c). "Bank" means each bank or other financial institution listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Loan which bears interest at the Base Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or pursuant to Article 8. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means Con-way Inc., a Delaware corporation, and its successors. "Borrowing" has the meaning set forth in Section 1.03. "Closing Date" has the meaning set forth in Section 3.01. "Commitment" means, as the context requires, either (a) the commitment of a Bank to extend credit to the Borrower hereunder or (b) the amount of such commitment, which is (i) with respect to any Bank listed on the Commitment Schedule, the amount set forth opposite the name of such Bank on the Commitment Schedule or (ii) with respect to any Assignee, the amount of the transferor Bank's Commitment assigned to such Assignee pursuant to Section 9.06(c), in each case as such amount may be reduced from time to time pursuant to Section 2.09 or 2.11 or changed as a result of an assignment pursuant to Section 9.06(c). "Commitment Schedule" means the Commitment Schedule attached hereto as Schedule 1. "Consolidated Debt" means, at any date, the Debt of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date, less, to the extent included in the determination of Debt of the Borrower and its Consolidated Subsidiaries, all obligations of the Borrower and its Consolidated Subsidiaries in respect of interest rate protection agreements, foreign currency exchange agreements, commodity purchase or option agreements or other interest or exchange rate or commodity price hedging agreements. "Consolidated EBITDA" means, for any period, the sum of, without duplication, (i) the consolidated net income before income taxes of the Borrower and its Consolidated Subsidiaries for such period plus (ii) to the extent deducted in determining such consolidated income before income taxes, the sum of (A) interest expense, (B) depreciation and amortization, (C) other non-cash items (including charges associated with the Borrower's existing claims against the United States Postal Service, charges associated with any write-down of goodwill pursuant to FAS 142, and charges associated with the grant of stock options and excluding (a) any non-cash item to the extent representing an accrual or reserve for potential cash items in any future period or amortization of a prepaid cash item that was paid in a prior period and (b) ordinary accruals), (D) losses from discontinuances, and (E) losses from any extraordinary and non-recurring items, minus (iii) to the extent increasing net income for such period, gains from discontinuances and any extraordinary, non-recurring or non-cash items, excluding (a) any non-cash item to the extent it represents the reversal of an accrual or reserve for potential cash item in any prior period and (b) ordinary accruals. If an acquisition or series of related acquisitions, or disposition or series of related dispositions, of property that constitutes assets comprising all or substantially all of an operating unit of a business or constitutes all or substantially all of the common equity of a Person (each, a "Subject Transaction") shall, (x) for purposes of Section 5.12, occur during such period and (y) for purposes of Section 5.08 and the Pricing Schedule, occur during or subsequent to such period and on or prior to the date of any relevant calculation, in each such case, Consolidated EBITDA shall be calculated with respect to such period on a pro forma basis (including pro forma adjustments arising out of events which are directly attributable to a specific transaction, are factually supportable and are expected to have a continuing impact, in each case determined on a basis consistent with Article 11 of Regulation SX promulgated under the Securities Act of 1933, as amended from time to time, and any successor statute, and as interpreted by the staff of the Securities and Exchange Commission, which would include cost savings resulting from head count reduction, closure of facilities and similar restructuring charges, which pro forma adjustments shall be certified by the chief financial officer or chief accounting officer of the Borrower) using the historical financial statements of any business so acquired or disposed of pursuant to such Subject Transaction and the consolidated financial statements of the Borrower which shall be reformulated as if such Subject Transaction had been consummated at the beginning of such period. "Consolidated EBITDAR" means, for any period, the sum of (i) Consolidated EBITDA for such period plus (ii) to the extent deducted in determining such Consolidated EBITDA, Consolidated Rental Expense for such period. "Consolidated Fixed Charges" means, for any period, the sum of Consolidated Interest Expense and Consolidated Rental Expense for such period. "Consolidated Interest Expense" means, for any period, the interest expense of the Borrower and its Consolidated Subsidiaries (but excluding any interest expense relating to any Debt that is the subject of a legal or a covenant defeasance) determined on a consolidated basis for such period, and adjusted to give pro forma effect to any Subject Transaction (as defined in "Consolidated EBITDA") that has occurred during such period as if it had occurred on the first day of such period. "Consolidated Net Tangible Assets" means at any date the consolidated assets of the Borrower and its Consolidated Subsidiaries (as shown on the most recent consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of a fiscal quarter) after deducting therefrom (i) all current liabilities (excluding current liabilities which are by their terms extendible or renewable at the option of the obligor to a time more than 365 days after the time of determination and excluding current maturities of long-term debt and current maturities of capitalized lease obligations), and (ii) all goodwill, tradenames, trademarks, patents, debt discounts and expense and other intangibles, in each case in this clause (ii), net of applicable amortization (all as shown on the most recent consolidated financial statements of the Borrower and its Consolidated Subsidiaries as of the end of a fiscal quarter). "Consolidated Rental Expense" means, for any period, the sum of (without duplication) (a) rental expense for operating leases of the Borrower and its Consolidated Subsidiaries determined on a consolidated basis for such period plus (b) rental expense for operating leases of the Borrower or any of its Consolidated Subsidiaries assigned to a third party and guaranteed by the Borrower or any of its Consolidated Subsidiaries determined on a consolidated basis for such period, and adjusted to give pro forma effect to any Subject Transaction (as defined in "Consolidated EBITDA") that has occurred during such period as if it had occurred on the first day of such period. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "Continuing Director" means (i) any individual who is a director of the Borrower on the Closing Date and (ii) any individual who becomes a director of the Borrower after the Closing Date and is elected or nominated for election as a director of the Borrower by a majority of the individuals who were Continuing Directors immediately before such election or nomination. "Credit Party" means the Agent or any Bank, as the case may be. "Debt" of any Person means at any date, without duplication: (i) all obligations of such Person for borrowed money (other than overdrafts or other similar obligations not outstanding for more than three Domestic Business Days (or in the case of a Foreign Subsidiary, ten Domestic Business Days) arising in the ordinary course of business), (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except overdrafts or other similar obligations not outstanding for more than three Domestic Business Days (or in the case of a Foreign Subsidiary, ten Domestic Business Days) or trade accounts payable, in each case, arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all obligations of such Person to reimburse banks for drawings under letters of credit or payments with respect to bankers' acceptances, which obligations remain unpaid for more than three Domestic Business Days (or in the case of a Foreign Subsidiary, ten Domestic Business Days) after they become due, or, if later, after such Person is notified of the due date thereof, (vi) all obligations of the types referred to in clauses (i) to (v), inclusive, of this definition which are secured by a Lien on any asset of such Person, whether or not such obligations are otherwise obligations of such Person; provided that the amount of Debt attributed, for purposes of this Agreement, to any such obligation that is not otherwise an obligation of such Person shall be limited to the lesser of (x) the net book value of the assets of such Person by which such obligation is secured or (y) the amount of such obligation secured thereby (excluding accrued interest for the current period); and (vii) all Guarantees by such Person of obligations of others of the types referred to in clauses (i) to (v), inclusive, of this definition (which Guarantees shall be deemed to constitute Debt in an amount equal to the lesser of (x) the maximum amount of such Guarantee and (y) the amount of such obligation of others Guaranteed thereby). Debt of any Person shall not include any obligation of such Person that is the subject of a legal or covenant defeasance and is fully secured by cash or cash equivalents (which cash or cash equivalents shall not be included as an asset of the Borrower and its Subsidiaries for purposes of this Agreement, including, without limitation, for purposes of Section 5.08 and Schedule 2). "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Defaulting Bank" means a Bank that defaults in its obligation to fund a Loan. "Dollars" and "$" means the lawful currency of the United States. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower and all other corporations, trades or businesses (whether or not incorporated) to the extent collectively treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means a Loan which bears interest based upon a Euro-Dollar Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.07(b) on the basis of a London Interbank Offered Rate. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.07(b). "Event of Default" has the meaning set forth in Section 6.01. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to GSCP on such day on such transactions as determined by the Agent. "Financing Documents" means this Agreement, the Subsidiary Guaranty Agreement and the Notes, if any. "Fitch" means Fitch Ratings, a majority-owned subsidiary of Fimalac, S.A., and its successors or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, "Fitch" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Required Banks, with the approval of the Borrower, by notice to the Agent and the Borrower. "Foreign Bank" has the meaning set forth in Section 8.04(d). "Foreign Subsidiary" means any Subsidiary which is a "controlled foreign corporation" within the meaning of Section 957 of the Internal Revenue Code. "Fund" means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "Group" or "Group of Loans" means at any time a group of Loans consisting of (i) all Loans which are Base Rate Loans at such time or (ii) all Loans which are Euro-Dollar Loans of the same type having the same Interest Period at such time; provided that, if a Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "GSCP" means Goldman Sachs Credit Partners L.P., and its successors. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term Guarantee used as a verb has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnified Liabilities" has the meaning set forth in Section 9.03(b). "Indemnitee" has the meaning set forth in Section 9.03(b). "Interest Period" means: (a) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing therefor specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three, six or nine months thereafter, as the Borrower may elect in the applicable notice; provided that: (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day, and (ii) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Euro-Dollar Business Day of a calendar month, and (iii) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Lien" means with respect to any asset (including without limitation any account receivable), any mortgage, lien, pledge, charge or security interest of any kind, or any encumbrance constituting a security interest, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed (x) to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset and (y) not to own subject to a Lien any asset which it leases under a lease that is classified as an operating lease under generally accepted accounting principles. "Loan" means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. The term "Loan" also refers a Base Rate Loan or a Euro-Dollar Loan and "Loans" means Base Rate Loans or Euro-Dollar Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.07(b). "Material Debt" means Debt (other than the Loans) of the Borrower and/or one or more of its Subsidiaries in an aggregate outstanding principal amount exceeding $75,000,000. For purposes of this definition, if the Debt arising from any single transaction has an outstanding principal amount less than $1,000,000, it shall be excluded, but Debts arising from one or more related or unrelated transactions shall be aggregated if the Debt arising from each such transaction has an outstanding principal amount of $1,000,000 or more. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $75,000,000. "Maturity Date" means August 21, 2008. "Merger Agreement" means the Agreement and Plan of Merger among the Borrower, Transportation Resources, Inc. and the other parties thereto dated as of July 13, 2007. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 400l(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Nonpublic Information" means information which has not been disseminated in a manner making it available to investors generally, within the meaning of Regulation FD. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" has the meaning set forth in Section 2.02. "Notice of Interest Rate Election" has the meaning set forth in Section 2.10(ii). "Obligor" means each of the Borrower and the Subsidiary Guarantors, and "Obligors" means all of the foregoing. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b). "Patriot Act" has the meaning set forth in Section 9.13. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Percentage" means, with respect to each Bank, the percentage that such Bank's Commitment constitutes of the aggregate amount of the Commitments of all Banks. "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Platform" has the meaning set forth in Section 5.01(k). "Pricing Schedule" means the Pricing Schedule attached hereto as Schedule 2. "Prime Rate" means the rate of interest quoted in The Wall Street Journal, Money Rates Section as the Prime Rate (currently defined as the base rate on corporate loans posted by at least 75% of the nation's thirty (30) largest banks), as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Agent or any other Bank may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "Qualified Variable Rate Demand Note" means, at any time, a variable rate demand note having, at the time of acquisition, (a) in the case of long term notes, a long term rating of A or higher by S&P or Fitch, or (b) in the case of short term notes, a short term rating of A-1 or higher by S&P or F-1 or higher by Fitch. "Quarterly Dates" means each March 31, June 30, September 30 and December 31. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks having more than 50% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, having more than 50% of the Aggregate Usage. "S&P" means Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, Inc., or if Standard & Poor's Ratings Group shall no longer perform the functions of a securities rating agency, "S&P" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Required Banks, with the approval of the Borrower, by notice to the Agent and the Borrower. "Significant Subsidiary" means any Subsidiary (other than Emery Insurance Company Limited) of the Borrower which has total assets or revenues in excess of 10% of the consolidated total assets or consolidated revenues of the Borrower and its Consolidated Subsidiaries, all calculated at the date of the most recent financial statements delivered to the Agent pursuant to Section 5.01 or, in the case of revenues, for the twelve calendar months then ended. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect or appoint a majority of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies of such corporation or other entity is at the time owned or controlled, directly or indirectly, by the Borrower or one or more of the Borrower's other Subsidiaries or a combination thereof (it being understood that Vector SCM, LLC is not, as of the Closing Date, a Subsidiary). "Subsidiary Guarantors" means, at any date, (i) Con-way Freight Inc., (ii) Menlo Worldwide, LLC, (iii) Menlo Logistics, Inc., (iv) Transportation Resources, Inc., (v) Contract Freighters, Inc. and (vi) each other Subsidiary of the Borrower which is a party to the Subsidiary Guaranty Agreement as of such date. "Subsidiary Guaranty Agreement" means a Subsidiary Guaranty Agreement among the Borrower, the Subsidiary Guarantors and the Agent, as executed and delivered pursuant to Section 3.01(c) and as the same may be amended from time to time in accordance with the terms thereof. "Taxes" has the meaning set forth in Section 8.04(a). "Third Party Affiliate" means (i) any Person or any group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Wholly-Owned Subsidiary" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly (through Subsidiaries) owned by the Borrower. Section 1.02 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes agreed to by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Agent; provided that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. Section 1.03 Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Section 2.01 on the same date, all of which Loans are of the same type (subject to Article 8) and, except in the case of Base Rate Loans, have the same Interest Period or initial Interest Period. Borrowings are classified for purposes of this Agreement by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans). ARTICLE 2 THE CREDITS Section 2.01 Commitments to Lend. Each Bank (severally and not jointly) agrees, on the terms and conditions set forth in this Agreement, to make a loan in Dollars to the Borrower pursuant to this Section on the Closing Date in an amount that does not exceed Commitment of such Bank. The Borrowing pursuant to this Section 2.01 shall be in an aggregate principal amount equal to $10,000,000 or any larger integral multiple of $1,000,000, and shall be made from the several Banks ratably in accordance with their respective Percentages. Any amount borrowed under this Section 2.01 and subsequently repaid or prepaid may not be reborrowed. Notwithstanding the foregoing, the sole Bank on the Closing Date shall be Goldman Sachs Credit Partners L.P. Section 2.02 Notice of Borrowing. The Borrower shall give the Agent notice (a "Notice of Borrowing") not later than (a) 12:00 Noon (New York City time) on the Domestic Business Day before each Base Rate Borrowing (or the same Domestic Business Day, as the Agent may agree, provided that if any Bank is a Foreign Bank that does not have a lending office in the United States, the consent of such Bank shall be required for such shorter notice) and (b) 1:00 P.M. (New York City time) on the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (i) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (ii) the aggregate amount of such Borrowing, (iii) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate or based upon a Euro-Dollar Rate, and (iv) in the case of a Euro-Dollar Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period; provided that the Borrower may not deliver a Notice of Borrowing if after giving effect to the requested Borrowing there would be more than ten Euro- Dollar Borrowings outstanding. Section 2.03 [Reserved]. Section 2.04 Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than (x) 12:00 Noon (New York City time) on the date of each Borrowing other than a Base Rate Borrowing and (y) 1:00 P.M. (New York City time) on the date of each Base Rate Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. Unless the Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Agent will, promptly after receipt thereof, make the funds so received from the Banks available to the Borrower as the Borrower may direct in the applicable Notice of Borrowing. (c) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank agrees to repay to the Agent, within one Domestic Business Day after demand, such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. (d) No Bank shall be responsible for the failure or delay by any other Bank in its obligation to make its ratable share of a Borrowing hereunder; provided, however, that the failure of any Bank to fulfill its obligations hereunder shall not relieve any other Bank of its obligations hereunder. (e) Except as otherwise expressly provided in this Agreement, if any Credit Party shall fail to remit to any other Credit Party an amount payable by such first Credit Party to such other Credit Party pursuant to this Agreement on the date when such amount is due, such payments shall be made by such first Credit Party together with interest thereon for each date from the date such amount is due until the date such amount is paid to such other Credit Party at a rate per annum equal to the Federal Funds Rate. Section 2.05 Notes; Loan Accounts; Records. (a) The Loans of each Bank shall be evidenced by one or more accounts maintained by such Bank on behalf of its Applicable Lending Office in accordance with paragraph (d) below. (b) The Borrower hereby agrees that if any Bank requests a promissory note to evidence the Loans of such Bank, the Borrower shall promptly execute and deliver to such Bank a promissory note substantially in the form of Exhibit A attached hereto, payable to the order of such Bank. In addition, each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Promptly after receipt of any Bank's Note pursuant to Section 3.01(b), the Agent shall forward such Note to such Bank. (d) (i) Each Bank shall maintain an account or accounts evidencing each Loan made by such Bank to the Borrower from time to time, including the amounts of principal and interest payable and paid to such Bank from time to time under this Agreement. Each Bank will make reasonable efforts to maintain the accuracy of its account or accounts and to promptly update its account or accounts from time to time, as necessary. (ii) The Agent shall maintain the Register pursuant to Section 9.06 and a subaccount for each Bank, in which Register and subaccounts (taken together) shall be recorded (A) the amount, type and Interest Period, if any, of each such Loan hereunder, (B) the amount of any principal or interest due and payable or to become due and payable to each Bank hereunder and (C) the amount of any sum received by the Agent hereunder from or for the account of the Borrower and each Bank's share thereof. The Agent will make reasonable efforts to maintain the accuracy of the subaccounts referred to in the preceding sentence and to promptly update such subaccounts from time to time, as necessary. (iii) The entries made in the accounts, Register and subaccounts maintained pursuant to subsection (ii) above (and, if consistent with the entries of the Agent, subsection (i) above) shall be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Bank or the Agent to maintain any such account, such Register or such subaccount, as applicable, or any error therein, shall not in any manner affect the obligation of the Borrower to repay the Loans and other amounts owing hereunder to such Bank. Section 2.06 Maturity of Loans. Each Loan shall mature, and the principal amount thereof shall be due and payable (together with accrued and unpaid interest thereon), on the Maturity Date. Section 2.07 Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Date and, with respect to the principal amount of any Base Rate Loan converted to a Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at the end of each three month interval after the first day thereof. The "Adjusted London Interbank Offered Rate" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "London Interbank Offered Rate" applicable to any Interest Period means the rate per annum (rounded upward, if necessary, to the next higher 1/100th of 1%) in each case determined by the Agent to be equal to: (i) the offered rate that appears on the Reuters Screen LIBOR01 Page (or any successor page) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of the applicable Interest Period) for a term (and having a maturity) equivalent to the applicable Interest Period at approximately 11:00 a.m. (London time) two Euro-Dollar Business Days prior to the first day of the applicable Interest Period; or (ii) if for any reason the foregoing rate in clause (i) is unavailable or undeterminable, the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of the applicable Interest Period) for a term (and having a maturity) equivalent to the applicable Interest Period at approximately 11:00 a.m. (London time) two Euro-Dollar Business Days prior to the first day of the applicable Interest Period; or (iii) if for any reason the foregoing rates in clauses (i) and (ii) are unavailable or undeterminable, the rate of interest at which deposits in Dollars for delivery on the first day of the applicable Interest Period in same day funds in the approximate amount of GSCP's pro rata share of the applicable Euro-Dollar Loan (but in no event less than $1,000,000) for a term (and having a maturity) equivalent to the applicable Interest Period would be offered by the London branch of GSCP to leading banks in the London interbank market at approximately 11:00 a.m. (London time) two Euro-Dollar Business Days prior to the first day of the applicable Interest Period. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including any marginal, special, emergency or supplemental reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities". The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. (c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Loan on the day before such payment was due and (ii) the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the rate per annum (rounded upward, if necessary, to the next higher 1/100 of 1%) at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment is offered by the London branch of GSCP to leading banks London interbank market for the applicable period by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the Base Rate for such day). (d) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. Section 2.08 Agent's Fees. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. Section 2.09 Optional Termination or Reduction of Commitments. The Borrower may, upon at least three Domestic Business Days' notice to the Agent (or such shorter period as the Agent may agree), (i) terminate the Commitments at any time, if no Loans are outstanding at such time, or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000 or any larger integral multiple of $1,000,000, the aggregate amount of the Commitments in excess of the Aggregate Usage. Section 2.10 Method of Electing Interest Rates. (i) The Loans included in each Borrowing shall bear interest initially at the Euro-Dollar Rate or the Base Rate, as specified by the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (A) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day, and (B) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans; provided that (i) no Loan may be converted into a Euro-Dollar Loan when any Event of Default has occurred and is continuing and the Agent has or the Required Banks have determined that such a conversion is not appropriate and (ii) no Loan may be converted into a Euro-Dollar Loan after the date that is one month prior to the Maturity Date. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Agent at least three Euro-Dollar Business Days before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply are each $10,000,000 or any larger multiple of $1,000,000. (ii) Each Notice of Interest Rate Election shall specify: (A) the Group of Loans (or portion thereof) to which such notice applies; (B) the date on which the conversion or continuation selection in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (C) if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Euro-Dollar Loans, the duration of the additional Interest Period applicable thereto; and (D) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (iii) Upon receipt of Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Group of Euro-Dollar Rate Loans, such Loans shall be converted to Base Rate Loans on the last day of the then current Interest Period applicable thereto. Section 2.11 Mandatory Termination of Commitments. The Commitments shall terminate on the date of the initial Borrowing, after giving effect to any Loans made on such date. Section 2.12 Payments. (a) Optional. The Borrower may (i) upon the same Domestic Business Day's notice to the Agent, prepay any Base Rate Loans in whole at any time, or from time to time in part, in amounts aggregating $500,000 or any larger integral multiple of $100,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment or (ii) upon at least three Euro-Dollar Business Days' notice to the Agent, prepay any Group of Euro-Dollar Loans, in whole at any time, or from time to time in part, in amounts aggregating $5,000,000 or any larger integral multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group or Borrowing. In connection with any such prepayment of any Euro-Dollar Loan, the Borrower shall comply with the provisions of Section 2.14. Upon receipt of a notice of prepayment of Loans pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. (b) Mandatory. (i) Issuance of Equity Securities. Within one Business Day of the date of receipt by the Borrower of any cash proceeds from the issuance of any equity interests of the Borrower or any of its Subsidiaries (other than (x) pursuant to any employee stock or stock option compensation plan, (y) pursuant to any such issuance which results in less than $75,000,000 of net cash proceeds to the Borrower or any of its Subsidiaries, or (z) issuances of equity interests of Subsidiaries of the Borrower to the Borrower or other Subsidiaries of the Borrower or to holders of equity interests in joint ventures which are Subsidiaries of the Borrower), the Borrower shall prepay the Loans in an aggregate amount equal to 100% of such proceeds, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including reasonable legal fees and expenses. (ii) Issuance of Debt. Within one Business Day of the date of receipt by the Borrower or any of its Subsidiaries of any cash proceeds from the incurrence of any debt security of the Borrower or any of its Subsidiaries resulting in the receipt by the Borrower or any of its Subsidiaries of net cash proceeds of $75,000,000 or more, the Borrower shall prepay the Loans in an aggregate amount equal to 100% of such proceeds, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including reasonable legal fees and expenses. (c) Prepayment Certificate. Concurrently with any prepayment of the Loans pursuant to this Section 2.12(b), the Borrower shall deliver to the Agent a certificate of an authorized officer demonstrating the calculation of the amount of the applicable net proceeds. In the event that the Borrower shall subsequently determine that the actual amount received exceeded the amount set forth in such certificate, the Borrower shall promptly make an additional prepayment of the Loans in an amount equal to such excess, and the Borrower shall concurrently therewith deliver to the Agent a certificate of an authorized officer demonstrating the derivation of such excess. Upon receipt of a notice of prepayment of Loans pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment. Section 2.13 General Provisions as to Payment. (a) The Borrower shall make each payment of principal of, and interest on, the Loans hereunder not later than 1:00 P.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City, without condition or deduction for any counterclaim, defense, recoupment or setoff, to the Agent at its address referred to in Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended in accordance with this Section 2.13, by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. Section 2.14 Funding Losses. If the Borrower makes any payment of principal with respect to any Euro- Dollar Loan, or any Euro-Dollar Loan is converted to a Base Rate Loan (whether such payment or conversion is pursuant to Articles 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(c), or if the Borrower fails to borrow any Euro-Dollar Loan, or to prepay, convert or continue any Euro-Dollar Loan, after notice has been given to any Bank in accordance with Sections 2.04(a) or 2.10, the Borrower shall pay to each Bank within 15 days after demand an amount calculated as provided in Exhibit D hereto to indemnify such Bank for any loss incurred by it (or by an existing or scheduled Participant in the related Loan) in obtaining, liquidating or employing deposits from third parties, provided that such Bank shall have delivered to the Borrower a certificate setting forth such amount and the calculation thereof in reasonable detail. Section 2.15 Computation of Interest. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.16 Maximum Interest Rate. (a) Nothing contained in this Agreement or the Notes shall require the Borrower to pay interest for the account of any Bank at a rate exceeding the maximum rate permitted by applicable law. (b) If the amount of interest payable for the account of any Bank on any interest payment date in respect of the immediately preceding interest computation period, computed pursuant to Sections 2.07 and 2.15, would exceed the maximum amount permitted by applicable law to be charged by such Bank, the amount of interest payable for its account on such interest payment date shall be automatically reduced to such maximum permissible amount. (c) If the amount of interest payable for the account of any Bank in respect of any interest computation period is reduced pursuant to subsection (b) of this Section and the amount of interest payable for its account in respect of any subsequent interest computation period, computed pursuant to Sections 2.07 and 2.15, would be less than the maximum amount permitted by applicable law to be charged by such Bank, then the amount of interest payable for its account in respect of such subsequent interest computation period shall be automatically increased to such maximum permissible amount; provided that at no time shall the aggregate amount by which interest paid for the account of any Bank has been increased pursuant to this subsection (c) exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to subsection (b) of this Section. ARTICLE 3 CONDITIONS Section 3.01 Conditions to Effectiveness. This Agreement shall become effective as of the date (the "Closing Date") when all of the following conditions to effectiveness shall be satisfied: (a) the Agent shall have received counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received in form satisfactory to it facsimile or other written confirmation from such party that it has executed a counterpart hereof); (b) the Agent shall have received a duly executed Note for the account of each Bank requesting the same dated as of the Closing Date complying with the provisions of Section 2.05; (c) the Agent shall have received counterparts of a Subsidiary Guaranty Agreement, substantially in the form of Exhibit C hereto, duly executed by each of the Obligors listed on the signature pages thereof; (d) the Agent shall have received an opinion of legal counsel for the Borrower relating to the transactions contemplated hereby, in form and substance reasonably satisfactory to the Agent; (e) the Agent shall have received all documents the Agent may reasonably request relating to the existence of the Obligors, the corporate authority for and the validity of the Financing Documents and any other matters relevant hereto, all in form and substance satisfactory to the Agent; (f) the Agent shall have received certification by the Borrower that the Borrower has paid all fees and expenses owing on the Closing Date by the Borrower to the Credit Parties; (g) the Agent shall have received at least 5 days prior to the Closing Date all documentation and other information required by bank regulatory authorities under applicable "know-your-customer" and anti-money laundering rules and regulations, including the Patriot Act; (h) the Borrower shall have cash on hand which, together with the proceeds from borrowings made hereunder, shall be sufficient to consummate the Acquisition and pay all related fees, commissions and expenses; (i) the Acquisition shall have been consummated in accordance with the Merger Agreement, without giving effect to any amendments or waivers thereto that are materially adverse to the Banks without the consent of the Agent, such consent not to be unreasonably withheld; and (j) the Agent shall have received (i) at least 10 days prior to the Closing Date, audited financial statements of the Borrower and the Acquired Business for each of the three fiscal years immediately preceding the Acquisition; (ii) with respect to the Borrower, as soon as available, unaudited financial statements for any interim period or periods of the Borrower ended after the date of the most recent audited financial statements and at least 45 days prior to the Closing Date; and (iii) with respect to the Acquired Business, as soon as available to the Borrower, such interim financial statements, if any, as have been delivered to the Borrower by the Acquired Business. The Agent shall promptly notify each of the other Credit Parties and the Borrower of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. Section 3.02 Loans. In addition to the requirements set forth in Section 3.01, the obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02; (b) the fact that, immediately before and after such Loan, no Default shall have occurred and be continuing; and (c) the fact that the representations and warranties of the Borrower contained in Sections 4.01, 4.02, 4.03 and 4.10 of this Agreement shall be true in all material respects on and as of the date of such Loan. Each Notice of Borrowing shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b) and (c) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Agent and the Banks that: Section 4.01 Corporate Existence and Power. The Borrower (a) is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and (b) has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except, with respect to clause (b), where failure to do so could not reasonably be expected to have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.02 Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each Obligor of the Financing Documents to which it is a party are within its corporate or limited liability company powers, as the case may be, have been duly authorized by all necessary corporate or limited liability company action, as the case may be, require no material action by or in respect of, or material filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any material provision of any applicable law or regulation or of the certificate of incorporation or by-laws or certificate of formation or operating agreement, as the case may be, of such Obligor or of any material agreement, judgment, injunction, order, decree or other instrument binding upon such Obligor or any Subsidiary or result in the creation or imposition of any Lien on any material asset of such Obligor or any Subsidiary. Section 4.03 Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower, in each case enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity (regardless of whether considered in a proceeding at law or in equity). The Subsidiary Guaranty Agreement, when executed and delivered by each Obligor, will constitute a valid and binding agreement of such Obligor, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and general principles of equity (regardless of whether considered in a proceeding at law or in equity). Section 4.04 Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 2006 and the related statements of consolidated income, consolidated cash flows and consolidated shareholders' equity for the fiscal year then ended, reported on by KPMG LLP and set forth in the Borrower's 2006 Annual Report to Shareholders, a copy of which has been delivered to the Agent (for posting on Intralinks for the Banks or otherwise), fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited condensed consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 2007 and the related unaudited condensed statements of consolidated income and consolidated cash flows for the three months then ended, set forth in the Borrower's quarterly report for the fiscal quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on Form 10-Q, a copy of which has been delivered to the Agent, fairly present, on a basis consistent with the financial statements referred to in subsection (a) of this Section (except as otherwise disclosed therein), the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such six-month period (subject to normal year-end adjustments and the absence of footnotes). (c) As of the Closing Date, there has been no material adverse change since December 31, 2006 in the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.05 Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official (a) as of the Closing Date, which could reasonably be expected to have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (b) which in any manner draws into question the validity of any Financing Document. Section 4.06 Compliance with ERISA. As of the Closing Date, each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan, except to the extent that noncompliance could not reasonably be expected to result, individually or in the aggregate, in a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. As of the Closing Date, no member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code, except to the extent such Lien, bond or other security could not reasonably be expected to result, individually or in the aggregate, in a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA, except to the extent such liability could not reasonably be expected to result, individually or in the aggregate, in a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.07 Environmental Matters. As of the Closing Date, to the knowledge of the Borrower, liabilities and costs of the Borrower and its Subsidiaries associated with compliance with Environmental Laws are unlikely (after taking into account the Borrower's reserves for such liabilities and costs) to result in a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.08 Taxes. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary, except for (i) any taxes or assessments, the amount of which is not individually or in the aggregate material or (ii) any taxes or assessments being contested in good faith. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. Section 4.09 Subsidiaries. As of the Closing Date, each of the Borrower's Subsidiaries is a corporation, limited liability company or other legal Person duly incorporated or formed, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation, and has all corporate, limited liability company or organizational, as the case may be, powers and all governmental licenses, authorizations, consents and approvals required to carry, on its business as now conducted, except where failure to do so could not reasonably be expected to have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. As of the Closing Date, each Subsidiary Guarantor is a Wholly-Owned Subsidiary of the Borrower. Section 4.10 Not an Investment Company; Federal Reserve Regulations. (a) Neither the Borrower nor any Subsidiary Guarantor is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (b) Immediately before and after giving effect to each Borrowing, Margin Stock (within the meaning of Regulation U) will constitute less than 25% of the Borrower's assets as determined in accordance with Regulation U. Section 4.11 Full Disclosure. (a) All information heretofore furnished by the Borrower to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, taken as a whole, and all such information hereafter furnished by the Borrower to the Agent or any Bank will be, taken as a whole, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts (which shall be deemed to include facts contained in the Borrower's publicly available filings with the Securities Exchange Commission) which materially and adversely affect or could reasonably be expected to materially and adversely affect the ability of the Borrower to perform its obligations under this Agreement. (b) As of the Closing Date, the Borrower has disclosed to the Agent in writing any and all facts (which shall be deemed to include facts contained in the Borrower's publicly available filings with the Securities Exchange Commission) which materially and adversely affect or could reasonably be expected to materially and adversely affect the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment or any Loan remains outstanding: Section 5.01 Information. The Borrower will deliver to the Agent: (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the audited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related audited statements of consolidated income, consolidated cash flows and consolidated shareholders' equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by KPMG LLP or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, the condensed consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter, the related condensed statement of income for such quarter and the related condensed statements of income and consolidated cash flows for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such statements of consolidated income and consolidated cash flows in comparative form the figures for the corresponding periods of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments and the absence of footnotes) as to fairness of presentation in all material respects by the chief financial officer or the chief accounting officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.07, 5.08, 5.09 and 5.12 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants (to the extent available from such firm) which reported on such statements as to whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements; (e) within five Domestic Business Days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (h) promptly if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, which could, when aggregated with any liability incurred by any member of the ERISA Group as a result of any other such withdrawal liability, reorganization, insolvency or termination, give rise to aggregate liabilities of the ERISA Group in excess of $75,000,000, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 or ERISA, which could, when aggregated with any liability incurred by any member of the ERISA Group as a result of any other such withdrawal, give rise to aggregate liabilities of the ERISA Group in excess of $75,000,000, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted in the imposition of a Lien or the posting of a bond or other security valued in an amount when aggregated with the value of any other such Lien, bond or security imposed on any member of the ERISA Group in excess of $75,000,000, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Agent, at the request of any Bank, may reasonably request; (j) promptly such other information with documentation required by bank regulatory authorities under applicable "know your customer" and anti-money laundering rules and regulations (including, without limitation, the Patriot Act), as from time to time may be reasonably requested by the Agent or any Bank; and (k) concurrently with the delivery of any document or notice required to be delivered pursuant to this Section 5.01, the Borrower shall indicate in writing whether such document or notice contains Nonpublic Information. The Borrower and each Bank acknowledge that certain of the Banks may be "public-side" Banks (Banks that do not wish to receive material non-public information with respect to the Borrower, its Subsidiaries or their securities) and, if documents or notices required to be delivered pursuant to this Section 5.01 or otherwise are being distributed through IntraLinks/IntraAgency, SyndTrak or another relevant website or other information platform (the "Platform"), any document or notice that the Borrower has indicated contains Nonpublic Information shall not be posted on that portion of the Platform designated for such public-side Banks. If the Borrower has not indicated whether a document or notice delivered pursuant to this Section 5.01 contains Nonpublic Information, the Agent reserves the right to post such document or notice solely on that portion of the Platform designated for Banks who wish to receive material nonpublic information with respect to the Borrower, its Subsidiaries and their securities. Section 5.02 Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective obligations and liabilities, including, without limitation, tax liabilities, except where (i) the same are contested in good faith by appropriate proceedings or (ii) such non-payment could not reasonably be expected to have a material adverse affect on the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. Section 5.03 Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition (ordinary, wear and tear and unexpected accidents or catastrophes excepted), except to the extent the non-maintenance of which could not reasonably be expected to have a material adverse affect on the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole. (b) The Borrower will maintain, and will cause each Subsidiary to maintain, with financially sound and reputable insurers, insurance against liabilities to third parties, casualties affecting property used in its business and other risks of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations; provided that, in lieu of any such insurance, the Borrower or any such Subsidiary may maintain a system or systems of self-insurance and reinsurance which will accord with sound practices of similarly situated corporations maintaining such systems and with respect to which the Borrower or such Subsidiary will maintain adequate insurance reserves, all in accordance with generally accepted accounting principles and in accordance with sound insurance principles or practice. Section 5.04 Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries or reasonable extensions thereof, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate or limited liability company existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) any merger or consolidation permitted by Section 5.10 or (ii) the termination (whether by dissolution, liquidation or wind-up) of the corporate or limited liability company existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. Section 5.05 Compliance with Laws. The Borrower will comply, and will cause each Subsidiary to comply, in all respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder), except where (i) the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) failures to comply therewith could not, in the aggregate, reasonably be expected to have a material adverse effect on the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, taken as a whole. Section 5.06 Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities. The Borrower will permit, and will cause any Significant Subsidiary to permit representatives of any Bank, at such Bank's expense, to visit and inspect any of their respective properties to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent accountants, in each case to the extent reasonably requested by such Bank to enable it to evaluate the credit of the Borrower and such Significant Subsidiary, confirm the Borrower's compliance with the provisions of the Financing Documents, exercise and enforce such Bank's rights under the Financing Documents or otherwise make decisions relating thereto, but subject to any limitations imposed by law or by confidentiality agreements binding on the Borrower or the relevant Significant Subsidiary and excluding materials subject to attorney-client privilege or attorney work product. Such visits, inspections, examinations and discussions shall be conducted at such reasonable times and as often as the relevant Bank or Banks may reasonably request and the Borrower shall be entitled to participate in or observe all such visits, inspections, examinations and discussions. Section 5.07 Debt. Total Debt of all Subsidiaries then outstanding will at no time exceed $75,000,000; provided that such total Debt shall not include: (i) Debt of a Subsidiary owing to the Borrower; (ii) Debt of a Subsidiary owing to another Subsidiary (except, in the case of Debt held by a Subsidiary that is not wholly owned, directly or indirectly, by the Borrower, the portion of such Debt allocable, on a pro rata basis, to the minority interest); (iii) Guarantees by a Subsidiary of Debt of the Borrower or Debt of another Subsidiary; (iv) Debt of a Subsidiary outstanding on June 30, 2007 and listed on Schedule 5.07 or any refinancing of such Debt, provided that the principal amount of refinancing Debt excluded from total Debt pursuant to this clause (iv) shall not exceed the principal amount of the Debt refinanced thereby (plus accrued interest owing thereon and the amount of fees, premiums and expenses charged or otherwise paid in connection with any such refinancing); (v) Debt of a Subsidiary secured by a purchase money Lien or in respect of capitalized lease obligations permitted by Section 5.09(b) (or any refinancing thereof); provided that the aggregate outstanding principal amount of all Debt of all Subsidiaries excluded from total Debt pursuant to this clause (v) shall not at any time exceed $150,000,000 (plus accrued interest owing thereon and the amount of fees, premiums and expenses charged or otherwise paid in connection with any such refinancing); (vi) Debt of a Subsidiary existing at the time of acquisition of such Subsidiary by the Borrower or another Subsidiary and not created in contemplation thereof (and any refinancing thereof); provided that the principal amount of refinancing Debt excluded from total Debt pursuant to this clause (vi) shall not exceed the principal amount of the Debt refinanced thereby (plus accrued interest owing thereon and the amount of fees, premiums and expenses charged or otherwise paid in connection with any such refinancing); (vii)Debt of a Subsidiary secured by Liens permitted by Section 5.09(c) or 5.09(d) (and any refinancing thereof); provided that the principal amount of refinancing Debt excluded from total Debt pursuant to this clause (vii) shall not exceed the principal amount of the Debt refinanced thereby (plus accrued interest owing thereon and the amount of fees, premiums and expenses charged or otherwise paid in connection with any such refinancing); and (viii) Guarantees by a Subsidiary of Debt of an ESOP Trust. As used herein, the term "ESOP Trust" means a trust created under an employee stock ownership plan as defined in Section 407(d)(6) of ERISA which benefits employees of a member of the ERISA Group. Section 5.08 Leverage Ratio. The ratio of (i) Consolidated Debt (minus unrestricted cash and cash equivalents, marketable securities with a maturity date of 90 days or less (provided that such marketable securities, if short-term, have an A-1 rating by S&P or P-1 rating by Fitch or, if long-term, an A rating or better by S&P or the Fitch equivalent), Qualified Variable Rate Demand Notes and auction rate securities subject to a "dutch auction" process within 90 days or less (provided that such auction rate securities have a AAA rating or the Fitch equivalent), in each case, at the time of acquisition, of the Borrower and its Subsidiaries, taken as a whole, in excess of $100,000,000) to (ii) Consolidated EBITDA for the immediately preceding four fiscal quarter period in respect of which financial statements were delivered to the Agent pursuant to Section 5.01, shall at all times be less than or equal to 3.50 to 1. Section 5.09 Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) any Lien existing on any asset of any Person at the time such Person becomes a Subsidiary, and not created in contemplation of such event at the request of the Borrower or any of its Subsidiaries or for the benefit of any of their respective creditors (other than creditors of such Person); (b) (i) any purchase money Lien on any property (including accessions thereto and proceeds thereof) acquired by the Borrower or any Subsidiary or hereafter constructed or improved by the Borrower or any Subsidiary, to secure or provide for the payment of all or a part of the purchase price thereof, or any Debt incurred to finance the purchase thereof or cost of construction or cost of improvement of such property and for which a bona fide firm commitment in writing was executed prior to, contemporaneously with or within l80 days after acquisition of such property, or the completion of construction or improvement thereof, as the case may be, provided that no such Lien shall extend to any other property (other than proceeds, replacements, accessions and improvements thereof or thereto) of the Borrower or any Subsidiary and (ii) any Lien relating to capitalized lease obligations of the Borrower or any Subsidiary; (c) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Borrower or a Subsidiary and not created in contemplation of such event at the request of the Borrower or any of its Subsidiaries or for the benefit of any of their respective creditors (other than creditors of such Person); (d) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary and not created in contemplation of such acquisition at the request of the Borrower or any of its Subsidiaries or for the benefit of any of their respective creditors; (e) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased (except accrued interest owing thereon and in the amount of fees, premiums and expenses charged or otherwise paid in connection with such transaction) and is not secured by any additional assets; (f) any Lien on (i) the common stock or other ownership interest of any Subsidiary Guarantor, but only if after giving effect to such Lien or other ownership interest the Borrower would own, directly or indirectly, at least 80% of the common stock of such Subsidiary Guarantor free and clear of Liens or (ii) the common stock or other ownership interest of any other Subsidiary; (g) Liens for taxes, assessments or other governmental charges which are not yet due and payable or that are being contested in good faith; (h) (i) Liens incidental to the conduct of business or the ownership of properties and assets (including landlords', carriers', warehousemen's, mechanics', materialmen's and other similar Liens), (ii) Liens directly or indirectly securing (1) any obligation under an indemnity, performance guarantee or similar undertaking or guarantee thereof issued by or on behalf of the Borrower or its Subsidiaries, (2) any obligation to reimburse or indemnify any other Person in connection with a performance guaranty or similar undertaking or guarantee thereof issued by or on behalf of the Borrower or its Subsidiaries, which indemnity, guarantee or undertaking in either case (1) or (2) above is issued to secure or support any contract or other obligation (other than a contract or other obligation evidencing Debt of the Borrower and its Subsidiaries) entered into by or otherwise binding upon the Borrower or any of its Subsidiaries in the ordinary course of business, (iii) Liens directly or indirectly created to secure the performance of bids, tenders, leases, or trade contracts, or to secure statutory obligations (including obligations under workers compensation, unemployment insurance and other social security legislation), surety or appeal bonds or nonqualified benefit plans, (iv) Liens of customs or revenue authorities in the ordinary course of business, or (v) Liens with respect to cash or cash equivalents securing defeased (legal or covenant) liabilities; (i) Liens resulting from judgments not constituting an Event of Default; (j) Liens securing debt of a Subsidiary owed to the Borrower or to a Subsidiary Guarantor; (k) Liens in existence as of the Closing Date and listed on Schedule 5.09; (m) leases, subleases, survey exceptions, easements, rights-of- way, restrictions and other similar charges or encumbrances incidental to the ownership of property or assets or the ordinary conduct of the Borrower or any Subsidiary's business; (n) Liens on property of the Borrower or any Subsidiary (except Liens on the capital stock or debt of the Borrower or any Subsidiary Guarantor) in favor of the United States of America or any state thereof, or any agency or political subdivision of either, or in favor of any other country or agency or political subdivision thereof, in each case (i) to secure payments (other than Debt) pursuant to contract or statute in the ordinary course of business or (ii) to secure Debt created, incurred or guaranteed for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of the property subject to such Liens, including Liens incurred in connection with pollution control, industrial revenue bond or other similar financings; (o) other Liens arising in the ordinary course of its business which (i) do not secure Debt, (ii) do not secure any obligation in an amount exceeding $50,000,000 and (iii) do not in the aggregate materially detract from the value of the assets of the Borrower and its Subsidiaries or materially impair the use thereof in the operation of their business, taken as a whole; (p) any Lien on accounts receivable if, immediately after such Lien arises, the aggregate uncollected balance of all accounts receivable sold or subjected to Liens by the Borrower and its Subsidiaries would not exceed 15% of the consolidated accounts receivable of the Borrower and its Subsidiaries as of the end of its then most recently ended fiscal quarter (excluding, for purposes of this clause (p) accounts receivable charged off in accordance with the charge-off policies applicable to the unsold accounts receivable of the Borrower and its Subsidiaries) for which financial statements were delivered to the Agent pursuant to Section 5.01; and (q) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt or other obligations if, immediately after giving effect to the incurrence thereof, the Debt or other obligations secured by such Liens would not exceed 15% of Consolidated Net Tangible Assets as of the end of the immediately preceding fiscal quarter of the Borrower for which financial statements were delivered to the Agent pursuant to Section 5.01. Section 5.10 Consolidations, Mergers and Sales of Assets. The Borrower will not, and will not permit any Subsidiary to, consolidate or merge with, or sell, lease or otherwise transfer any of its assets to, any Person or dissolve, liquidate or wind up its affairs (other than in accordance with Section 5.04(ii)), except that nothing in this Section 5.10 shall prohibit: (a) the merger or consolidation of the Borrower with or into another Person if the entity surviving such consolidation or merger is the Borrower, (b) the merger or consolidation of a Subsidiary Guarantor with or into another Person if the entity surviving such consolidation or merger is or becomes a Subsidiary Guarantor in accordance with Article 3 of the Subsidiary Guaranty Agreement, (c) the merger or consolidation of a Subsidiary (other than a Subsidiary Guarantor) with or into another Person if the entity surviving such consolidation or merger is the Borrower or a Subsidiary, provided that if such other Person is the Borrower or a Subsidiary Guarantor, the Borrower or such Subsidiary Guarantor is the surviving entity, (d) any sale, lease or other transfer of any asset (including, in the case of clause (ii) pursuant to a merger or consolidation) either (i) in the ordinary course of business or (ii) for fair value if after giving effect thereto, the aggregate consideration received for all of their assets sold, leased or otherwise transferred under this clause (ii) during any fiscal year of the Borrower does not exceed $100,000,000, or (e) the Acquisition and the merger contemplated by the Merger Agreement; provided that, in the case of (x) any such merger or consolidation or (y) any such sale, lease or other transfer of any asset not in the ordinary course of business, no Default shall have occurred and be continuing after giving effect thereto. Section 5.11 Use of Proceeds. The Loans will be used by the Borrower and its Subsidiaries to fund, in part, the Acquisition (including refinancing or retiring all existing debt and redeeming all preferred stock of the Acquired Business and paying fees, commissions and expenses in connection with the acquisition). No Loan will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. Section 5.12 Fixed Charge Coverage. The ratio of Consolidated EBITDAR to Consolidated Fixed Charges shall be, as of the last day of each fiscal quarter (beginning with the fiscal quarter ended September 30, 2007), greater than or equal to 1.875 to 1 for the most recently ended four fiscal quarters for which financial statements were delivered to the Agent pursuant to Section 5.01. Section 5.13 Transactions with Third Party Affiliates. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Third Party Affiliate; provided that nothing in this Section 5.13 shall prohibit: (a) the Borrower from declaring or paying any lawful dividend so long as, immediately after giving effect thereto, no Default would occur or be continuing; (b) the Borrower or any Subsidiary from making sales to or purchases from any Third Party Affiliate and, in connection therewith, extending credit or making payments, or from making payments for services rendered by any Third Party Affiliate, if such sales or purchases are made or such services are rendered in the ordinary course of business and on a basis no less advantageous to the Borrower or such Subsidiary than would be the case in an arm's-length transaction; (c) the Borrower or any Subsidiary from making payments of principal, interest and premium on any Debt of the Borrower or such Subsidiary held by a Third Party Affiliate if the terms of such Debt are established on a basis no less advantageous to the Borrower or such Subsidiary than would be the case in an arm's-length transaction; or (d) the Borrower or any Subsidiary from participating in or effecting any transaction in connection with any joint enterprise or other joint arrangement with any Third Party Affiliate if the Borrower or such Subsidiary participates in the ordinary course of its business and on a basis no less advantageous than the basis on which such Third Party Affiliate participates. ARTICLE 6 DEFAULTS Section 6.01 Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay any principal of any Loan when due, or shall fail to pay within three Domestic Business Days of the due date thereof any interest, fees or other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.07 to 5.12, inclusive, or in Section 3.01 of the Subsidiary Guaranty Agreement; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in any (i) Financing Document (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Borrower by the Agent at the request of any Bank, or (ii) Section 5.01(e) for 30 days; (d) any representation, warranty, certification or statement made by the Borrower or any Subsidiary Guarantor in any Financing Document or any amendment thereof or in any certificate, financial statement or other document delivered pursuant to any Financing Document shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Debt within three Domestic Business Days after such payment is due or, if longer, within any grace period otherwise applicable to such payment; (f) any event or condition shall occur which results in the acceleration of the maturity of Material Debt or enables the holders of Material Debt or any Person acting on their behalf to accelerate the maturity thereof; (g) the Borrower, any Significant Subsidiary, or group of Subsidiaries of the Borrower that, taken together, would constitute a Significant Subsidiary, shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower, any Significant Subsidiary, or group of Subsidiaries of the Borrower that, taken together, would constitute a Significant Subsidiary, seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower, any Significant Subsidiary, or group of Subsidiaries of the Borrower that, taken together, would constitute a Significant Subsidiary, under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $75,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudication that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $75,000,000; (j) a final judgment or order for the payment of money in excess of $75,000,000 (to the extent not covered by insurance, net of any applicable deductible) shall be entered or filed against the Borrower or any Subsidiary and such judgment or order shall continue unsatisfied, unvacated and unstayed for a period of 60 days; (k) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of the Borrower or Continuing Directors shall cease to constitute a majority of the Borrower's board of directors; or (l) the Borrower or any Subsidiary Guarantor shall take any action that causes the guarantee by any Subsidiary Guarantor set forth in the Subsidiary Guaranty Agreement to be revoked or invalidated, or to cease to be in full force and effect (other than pursuant to Section 4.03 of the Subsidiary Guaranty Agreement), or the Borrower or any Subsidiary Guarantor (or any Person acting on behalf of the Borrower or any Subsidiary Guarantor) shall deny or disaffirm any of the obligations of any Subsidiary Guarantor set forth in the Subsidiary Guaranty Agreement (except to the extent such obligations have ceased to be in effect pursuant to Section 4.03 of the Subsidiary Guaranty Agreement); then, and in every such event, the Agent shall (i) if requested by the Required Banks, by notice to the Borrower terminate the Commitments and they shall thereupon terminate and (ii) if requested by the Required Banks by notice to the Borrower declare the unpaid principal amount of the Loans (together with accrued interest thereon) to be, and the unpaid principal amount of the Loans shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to any Obligor or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the unpaid principal amount of the Loans (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. Section 6.02 Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 THE AGENT AND THE CO-AGENTS Section 7.01 Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and perform such duties under the Financing Documents as are expressly delegated to the Agent by the terms thereof, together with all such powers as are reasonably incidental thereto. Section 7.02 Agent and Affiliates. GSCP shall have the same rights and powers under the Financing Documents as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent. GSCP and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary, or affiliate of the Borrower, as if it were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, the Agent or its affiliates may receive information regarding any Obligor or its affiliates (including information that may be subject to confidentiality obligations in favor of such Obligor or such affiliate) and acknowledge that the Agent and its affiliates shall be under no obligation to provide such information to them. Section 7.03 Action by Agent. The obligations of the Agent under the Financing Documents are only those expressly set forth therein. Notwithstanding any provision to the contrary contained elsewhere herein or in any other Financing Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Financing Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" herein and in the other Financing Documents with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. Section 7.04 Consultation with Experts; Delegation of Duties. The Agent may consult with legal counsel (who may be counsel for an Obligor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. The Agent may execute any of its duties under this Agreement or any other Financing Document by or through agents, sub-agents, employees or attorneys- in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent, sub-agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct by the Agent, as determined by a court of competent jurisdiction in a final judgment. The Agent and any agent, sub-agent or attorney-in-law may perform any and all of its duties and exercise its rights and powers by or through their respective affiliates. The exculpatory, indemnification and other provisions of this Agreement and shall apply to any the affiliates of the Agent. All of the rights, benefits, and privileges (including the exculpatory and indemnification provisions) of this Agreement shall apply to any such sub-agent and to the affiliates of any such sub- agent, and shall apply to their respective activities as sub-agent as if such sub-agent and affiliates were named herein. Notwithstanding anything herein to the contrary, with respect to each sub-agent appointed by the Agent, (i) such sub-agent shall be a third party beneficiary under this Agreement with respect to all such rights, benefits and privileges (including exculpatory rights and rights to indemnification) and shall have all of the rights and benefits of a third party beneficiary, including an independent right of action to enforce such rights, benefits and privileges (including exculpatory rights and rights to indemnification) directly, without the consent or joinder of any other person, against any or all of the Borrower, Subsidiary Guarantors and the Banks, and (ii) such sub-agent shall only have obligations to the Agent and not to the Borrower or the Subsidiary Guarantors, Banks or any other person, and the Borrower, Subsidiary Guarantors, Banks or any other person shall not have any rights, directly or indirectly, as a third party beneficiary or otherwise, against such sub-agent. Section 7.05 Liability of Agent. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final judgment. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of the Financing Documents or any other instrument or writing furnished in connection therewith. Section 7.06 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall not incur any liability by acting in reliance, upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. The Agent shall be fully justified in failing or refusing to take any action under any Financing Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. (b) For purposes of determining compliance with the conditions specified in Section 3.01, each Bank that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to a Bank. Section 7.07 Notice of Default. The Agent shall be deemed not to have knowledge or notice of the occurrence of any Default, except with respect to defaults in the payment of principal and interest, unless the Agent shall have received written notice from a Bank or the Borrower referring to this Agreement, describing such Default and stating that such notice is a "notice of default." The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default as may be directed by the Required Banks in accordance with Article 6; provided, however, that unless and until the Agent has received any such direction, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable or in the best interest of the Banks. Section 7.08 Indemnification. Each Bank shall indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower), against any Indemnified Liabilities (except for any such Indemnified Liabilities that result from such indemnitees' gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final judgment, provided that no action taken in accordance with the direction of the Required Banks shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section), in each case ratably in accordance with its Percentage (or in the event that the aggregate Commitments have expired or otherwise terminated, in accordance with its pro rata share of the aggregate outstanding Loans of all Banks). Section 7.09 Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent, its affiliates or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank acknowledges that neither the Agent, its affiliates nor any other Bank has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of any Obligor or any affiliate thereof, shall be deemed to constitute any representation or warranty by the Agent or its affiliates to any Bank as to any matter, including whether the Agent or its affiliates have disclosed material information in their possession. Each Bank also acknowledges that it will, independently and without reliance upon the Agent, its affiliates or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under the Financing Documents. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent herein, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of any of the Obligors or any of their respective affiliates which may come into the possession of the Agent or its affiliates. Section 7.10 Successor Agent. The Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right, with the prior consent (such consent not to be unreasonably withheld) of the Borrower provided that no Default has occurred and is continuing, to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks (with the Borrower's consent, to the extent required), and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a financial institution to act as a successor Agent hereunder and in any case, the Agent's resignation shall become effective on the thirtieth day after such notice of resignation. If neither the Required Banks nor the Agent have appointed a successor Agent, the Required Banks shall be deemed to have succeeded to and become vested with all the rights, powers, privileges and duties of the retiring Agent. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. Section 7.11 Additional Agents. No Bank identified as a "syndication agent" on the facing page hereof, on the signature pages hereto or otherwise herein shall have any right, power, obligation, liability, responsibility or duty of any kind under the Financing Documents (except those applicable to it in its capacity as a Bank) or any fiduciary relationship with any other Bank. ARTICLE 8 CHANGE IN CIRCUMSTANCES Section 8.01 Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Euro-Dollar Borrowing: (a) the Agent determines that deposits in Dollars (in the applicable amounts) are not being offered in the relevant market for such Interest Period, or (b) Banks having 50% or more of either the aggregate Commitments or the aggregate principal amount of the affected Loans advise the Agent that the Adjusted London Interbank Offered Rate, as determined by the Agent, will not adequately and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make Euro-Dollar Loans or to continue or convert outstanding Loans as or into Euro-Dollar Loans shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Euro-Dollar Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. Section 8.02 Illegality. If after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Applicable Lending Office) to make or fund any Euro-Dollar Loan, or maintain its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make or fund Euro-Dollar Loans, to continue or convert outstanding Loans as or into Euro- Dollar Loans, shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Applicable Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan as a Euro- Dollar Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day. Section 8.03 Increased Cost and Reduced Return. (a) If after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency, charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Euro-Dollar Loans, its Note or its obligation to make Euro-Dollar Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note, if any, with respect thereto, by an amount deemed by such Bank to be material, then, within 30 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 30 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will use its best efforts promptly to notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing, the Borrower shall not be obligated to pay any amounts contemplated by this Section 8.03 which were incurred by such Bank more than 180 days prior to the date of such demand, such 180 day period to be extended to the extent that the event entitling such Bank to compensation pursuant to this Section is retroactive. Section 8.04 Taxes. (a) Any and all payments by the Borrower to or for the account of any Bank or the Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise or similar taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Bank or the Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority, or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, or charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Bank or the Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States (a "Foreign Bank"), on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with (i) Internal Revenue Service Form W-8 BEN or W-8 ECI, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) Internal Revenue Service Form W-8 or W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, and/or (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code, including, without limitation, in the case of Section 881(c) of the Internal Revenue Code, a certificate that such Bank (i) is not a "bank" under Section 881(c)(3)(A) of the Internal Revenue Code, (ii) is not a 10- percent shareholder within the meaning of Section 881(c)(3)(B) of the Internal Revenue Code and (iii) is not a controlled foreign corporation receiving interest from a related person within the meaning of Section 881(c)(3)(C) of the Internal Revenue Code), certifying that such Bank is entitled to an exemption from tax on payments pursuant to this Agreement or any of the other Financing Documents. If the form provided by a Bank at the time such Bank first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 8.04(a). (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(a) with respect to Taxes imposed by the United States; provided that should a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.04, then such Bank will change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Bank, is not otherwise disadvantageous to such Bank. Section 8.05 Base Rate Loans Substituted for Affected Euro-Dollar Loans. (a) If (i) the obligation of any Bank to make, or continue or convert outstanding Loans as or into, Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section 8.05(a) shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, all Loans which would otherwise be made by such Bank as (or continued as or converted into) Euro-Dollar Loans shall be made or continued instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks). If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer exist, the principal amount of each such Base Rate Loan that was a Euro-Dollar Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. (b) If (i) any Bank has demanded compensation under Section 8.03 with respect to its Euro-Dollar Loans or (ii) the Borrower has become obligated to pay any Taxes or other amounts to or for the account of any Bank pursuant to Section 8.04, and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to the Banks through the Agent, have elected that the provisions of this Section 8.05(b) shall apply to all of the Banks, then the Borrower shall, on the fifth Euro-Dollar Business Day following such notice, prepay in full the then outstanding principal amount of each outstanding Euro-Dollar Loan of each Bank, together with accrued interest thereon. Section 8.06 Substitution of Banks. If (i) any Bank has demanded compensation under Section 8.03, (ii) the Borrower has become obligated to pay any Taxes or other amounts to or for the account of any Bank pursuant to Section 8.04 (such Bank, in either clause (i) or (ii), an "Increased Cost Bank"), (iii) any Bank has become a Defaulting Bank and has failed to cure its default within five days after the Borrower's request that it cure such default or (iv) in connection with any proposed amendment, modification, termination, waiver or consent contemplated by Sections 9.05(ii) to 9.05(vi), inclusive, the consent of Required Banks shall have been obtained but the consent of one or more of such other Banks (each a "Non-Consenting Bank") whose consent is required has not been obtained, in each case, then, with respect to each such Increased Cost Bank, Defaulting Bank or Non-Consenting Bank (each a "Selling Bank"), the Borrower shall have the right, with the assistance of the Agent, to seek one or more banks or other institutions satisfactory to the Borrower and the Agent (collectively, the "Purchasing Banks") willing to purchase the Selling Bank's Loans and assume the Commitment of the Selling Bank, all on the terms specified in this Section 8.06. The Selling Bank shall be obligated (and hereby irrevocably agrees) to sell its Loans to such Purchasing Bank or Banks (which may include one or more of the Banks) in accordance with the provisions of Section 9.06(c) within 5 days after receiving notice from the Borrower requiring it to do so, at an aggregate price equal to the outstanding principal amount thereof, plus unpaid interest accrued thereon to but excluding the date of sale. In connection with any such sale, and as a condition thereof, the Borrower shall pay to the Selling Bank, if demanded by the Selling Bank at least two Domestic Business Days prior to such sale, (i) the amount of any indemnity which would be due to the Selling Bank under Section 2.14 if the Borrower had prepaid the outstanding Euro-Dollar Loans of the Selling Bank on the date of such sale and (ii) any additional compensation, Taxes or other amounts accrued for its account under Section 8.03 or 8.04, as applicable, to but excluding, said date (it being understood that the Selling Bank shall retain its right to be compensated after the date of such sale for any such accrued amounts remaining unpaid) and shall pay to the Agent the administrative fee referred to in Section 9.06(c). Upon such sale, the Purchasing Bank or Banks shall assume the Commitment of the Selling Bank and acquire the Loans of the Selling Bank, and the Selling Bank shall be released from its obligations hereunder to a corresponding extent, and, such Purchasing Bank shall be a Bank party to this Agreement, shall be deemed to be an Assignee hereunder and shall have all the rights and obligations of a Bank with a Commitment equal to its ratable share of the Commitment of the Selling Bank and Loans equal to the amount of Loans acquired from the Selling Bank. Upon the consummation of any sale pursuant to this Section 8.06, the Selling Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, each Purchasing Bank receives a new Note. In the event such Selling Bank is a Non-Consenting Bank, each Purchasing Bank shall consent, at the time of such assignment, to each matter in respect of which such Selling Bank was a Non-Consenting Bank. Upon the payment of all amounts owing to any Selling Bank and the termination of such Selling Bank's Commitments, if any, such Selling Bank shall no longer constitute a "Bank" for purposes hereof; provided, any rights of such Selling Bank to indemnification hereunder shall survive as to such Selling Bank. ARTICLE 9 MISCELLANEOUS Section 9.01 Notices. All notices, requests and other communications ("notices") to any party hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given to such party (a) in the case of the Borrower, at its address or facsimile number set forth on the signature pages hereof, (b) in the case of the Agent and the Banks, at its address or facsimile number set forth on the signature pages hereof or (c) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice shall be effective (i) if given by facsimile transmission, when such facsimile is transmitted to the facsimile transmission number specified in or pursuant to this Section 9.01 and telephonic confirmation of receipt thereof is received, or (ii) if given by mail or by any other means, when delivered at the address specified in this Section; provided that notices to one or more Credit Parties under Article 2 or Article 8 shall not be effective until received. Notwithstanding the foregoing, notices to the Banks hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites, including the Platform) pursuant to procedures approved by the Agent, provided that the foregoing shall not apply to notices to any Bank pursuant to Article 2 if such Bank has notified the Agent that it is incapable of receiving, or that it is contrary to such bank's policies to receive, notices under such Article by electronic communication. The Agent or any Credit Party may, in its discretion, agree to accept notices to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices. Unless the Agent otherwise prescribes, (i) notices sent to an e- mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement); provided, however, that if such notice is not sent during the normal business hours of the recipient, such notice shall be deemed to have been sent at the opening of business on the next business day of the recipient, and (ii) notices posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice is available and identifying the website address therefor. The Borrower understands that the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution and agrees and assumes the risks associated with such electronic distribution, except to the extent caused by the willful misconduct or gross negligence of Agent as determined by a court of competent jurisdiction in a final judgment. The Platform is provided "as is" and "as available". None of the Agent or any of its officers, directors, employees, agents, advisors or representatives (the "Agent Affiliates") warrant the accuracy, adequacy, or completeness of the Platform and each expressly disclaims liability for errors or omissions in the Platform. No warranty of any kind, express, implied or statutory, including any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects is made by the Agent Affiliates in connection with the Platform. Section 9.02 No Waivers. No failure or delay by any Credit Party in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.03 Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent and its affiliates, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation and administration of the Financing Documents, any waiver or consent thereunder or any amendment thereof or any Default thereunder or any event or condition reasonably alleged by any Credit Party to be a possible Default thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent and its affiliates and each Bank, including reasonable fees and disbursements of counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees, in addition to but not in duplication of any other indemnity otherwise provided herein, to indemnify each Credit Party, Sole Lead Arranger and Sole Book Runner and their respective affiliates and the respective directors, partners, members, officers, agents, sub-agents and employees thereof (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by or asserted against such Indemnitee arising out of, in connection with, or as a result of (a) the execution or delivery of this Agreement or the Financing Documents or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the transactions contemplated hereby, (b) any Loan or the actual or proposed use of the proceeds therefrom, (c) any actual or prospective claim, investigative, administrative or judicial proceeding (whether based on contract, tort or any other theory and regardless of whether or not such Indemnitee shall be designated a party thereto) relating to any of the foregoing (all of the foregoing in subsections (a), (b) and (c) above, collectively, the "Indemnified Liabilities"); provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final judgment. (c) To the extent permitted by applicable law, the Borrower shall not assert, and the Borrower hereby waives, any claim against each Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) (whether or not the claim therefor is based on contract, tort or duty imposed by any applicable legal requirement) arising out of, in connection with, arising out of, as a result of, or in any way related to, this Agreement or the Financing Documents or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the transactions contemplated hereby, or any Loan or the actual or proposed use of the proceeds therefrom, and the Borrower hereby waives, releases and agrees not to sue upon any such claim or any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section 9.04 Set-Off; Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Loan held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Loan held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Loans held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Loans held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Credit Party to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Loans. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Loan, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. Section 9.05 Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (or the Agent with the consent of the Required Banks) (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed or consented to by all the Banks directly affected thereby, (i) increase the Commitment of any Bank over the amount then in effect (it being understood and agreed that a waiver of any Default shall not constitute an increase in any Commitment of any Bank), (ii) reduce the principal of, or rate of interest on, any Loan (other than as a result of waiving the applicability of any post-Default increase in interest rates) (provided that amendments to the definitions of Consolidated Debt and Consolidated EBITDA shall only require the consent of Required Banks), (iii) postpone the date fixed for any payment of principal of or interest on any Loan or for any termination of any Commitment, (iv) amend this Section or modify the definition of Required Banks, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans, in each case, which shall be required for the Banks or any of them to take any action under this Section or any other provision of the Financing Documents, (vi) change the manner of application of any payments made under this Agreement or the Notes or (vii) amend, modify or waive any provision of Sections 2.06 or 2.11. Section 9.06 Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement or the Notes, if any, without the prior written consent of all Banks. (b) Any Bank may at any time, grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the other Credit Parties shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clauses (i), (ii) or (iii) of Section 9.05 or the immediately succeeding sentence without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement and subject to subsection (e) of this Section 9.06, be entitled to the benefits of Article 8 with respect to its participating interest to the same extent as if it were a Bank hereunder. (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or, subject to the next sentence, a part, of its rights and obligations under this Agreement and the Notes, if any, held by such Bank and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit B hereto (an "Assignment and Assumption Agreement") executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent (which shall not be unreasonably withheld) of the Borrower and the Agent; provided that (i) if an Assignee is another Bank, an affiliate of a Bank, or an Approved Fund, the consent of the Borrower and the Agent shall not be required unless all or any portion of such transferor Bank's Commitment is being assigned and (ii) if an Event of Default has occurred and is continuing, the consent of the Borrower shall not be required. No assignment of only a part of the rights and obligations of a Bank under this Agreement and the Notes, if any, held by such Bank may be made unless each of (i) the part assigned (i.e., the "Assigned Amount" set forth in the related Assignment and Assumption Agreement) and (ii) the part retained by the transferor Bank and any of its affiliates equals $5,000,000 or any larger integral multiple of $1,000,000. Upon (x) execution and delivery to the Agent of an Assignment and Assumption Agreement, (y) payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, and (z) receipt by the Agent of an administrative fee in the amount of $3,500 from such transferor Bank or such Assignee for processing such assignment (if such Assignee is not another Bank, an affiliate of a Bank or an Approved Fund), such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment or Loans as set forth in such Assignment and Assumption Agreement, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States Federal income taxes in accordance with Section 8.04. (d) Any Bank may at any time pledge or assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (f) The Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at its office in New York, New York a copy of each Assignment and Assumption Agreement delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitments of, and principal amount of the Loans owing to, each Banks pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrower, the Agent and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Agent, at any reasonable time and from time to time upon reasonable prior notice. Section 9.07 Collateral. Each Credit Party represents to each other Credit Party that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 9.08 Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to the Financing Documents or the transactions contemplated thereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 9.09 Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. Section 9.10 Waiver of Jury Trial. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY FINANCING DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY FINANCING DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. Section 9.11 Confidentiality. Each Credit Party agrees to keep confidential this Agreement and any proprietary or financial information obtained by such Credit Party based on a review of the books and records of the Borrower or any Subsidiary pursuant to Section 5.06 and any other information to the extent such information has been stated by the Borrower to be confidential; provided that nothing herein shall prevent any Credit Party from disclosing this Agreement or such information (i) to any other Credit Party in connection with the transactions contemplated by the Financing Documents, (ii) to the officers, directors, employees, agents, attorneys and accountants of such party and its affiliates who have a need to know such information in accordance with customary banking practices and who receive such information having been made aware of the confidential nature of such information, (iii) upon the order of any court or administrative agency or pursuant to legal or judicial process, (iv) upon the requests or demand of any governmental, regulatory or self-regulatory agency or authority having or purporting to have jurisdiction over such party or its affiliates, (v) which has been publicly disclosed, (vi) which has been obtained from any Person other than the Borrower and its Subsidiaries, provided that such Person is not known to it to be bound by a confidentiality agreement with the Borrower or its Subsidiaries or known to it to be otherwise prohibited from transmitting the information to it by a contractual, legal or fiduciary obligation, (vii) in connection with the exercise of any remedy under the Financing Documents, (viii) to any actual or proposed participant, assignee or swap counterparty of all or any of its rights under the Financing Documents, provided that such proposed participant or assignee shall have agreed in writing to be bound by the provisions of this Section or confidentiality provisions no less restrictive than those of this Section, or (ix) disclosure to any rating agency when required by it, provided that, prior to any disclosure, such rating agency shall undertake in writing to preserve the confidentiality of any confidential information relating to the Borrower or its Subsidiaries received by it from any of the Credit Parties. In addition, the Agent and each Bank may disclose the existence of this Agreement and the information contained in this Agreement to market data collectors, similar service providers to the lending industry, and service providers to the Agent and the Banks in connection with the administration and management of this Agreement. Section 9.12 Survival. All indemnities set forth herein, including, without limitation, in Sections 2.14, 7.08, 8.03, 8.04 and 9.03, shall survive the execution and delivery of this Agreement, the making of the Loans, the repayment of the Loans and other obligations under the Financing Documents and the expiration or other termination of the Commitments hereunder. Section 9.13 Patriot Act Notice. Each Bank and the Agent (for itself and not on behalf of any Bank) hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Patriot Act"), it is required to obtain, verify and record information that identifies the Borrower and each Subsidiary Guarantor, which information includes the name and address of the Borrower and each Subsidiary Guarantor and other information that will allow such Bank or the Agent, as applicable, to identify the Borrower and each Subsidiary Guarantor in accordance with the Patriot Act. Section 9.14 Absence of Fiduciary Relationship; Affiliate Activities. The Borrower acknowledges that GSCP and its affiliates, including Goldman Sachs (collectively "GS") may have economic interests that conflict with those of the Borrower. Each of the parties hereto agrees that GS will act under this Agreement as an independent contractor and that nothing in this Agreement or otherwise will be deemed to create an advisory, fiduciary or agency relationship or fiduciary or other implied duty between GS and the Borrower, its stockholders or its affiliates except, solely with respect to an advisory relationship, for the advisory relationship between Goldman Sachs & Co. and the Borrower pursuant to the letter dated July 13, 2007 between the Borrower and Goldman Sachs & Co. (the "M&A Engagement Letter"). Each of the parties hereto acknowledges and agrees that (i) the transactions contemplated by this Agreement are arm's-length commercial transactions between GS, on the one hand, and the Borrower, on the other, (ii) in connection therewith and with the process leading to such transaction GS is acting solely as a principal and not the agent or fiduciary of the Borrower, its management, stockholders, creditors or any other person, (iii) except, solely with respect to an advisory relationship, for the advisory relationship between Goldman Sachs & Co. and the Borrower pursuant to the M&A Engagement Letter, GS has not assumed an advisory or fiduciary responsibility in favor of the Borrower with respect to the transactions contemplated hereby or the process leading thereto (irrespective of whether GS or any of its affiliates has advised or is currently advising the Borrower on other matters) and (iv) the Borrower has consulted its own legal and financial advisors to the extent it deemed appropriate. The Borrower further acknowledges and agrees that it is responsible for making its own independent judgment with respect to such transactions and the process leading thereto. The Borrower agrees that it will not claim that GS has rendered advisory services of any nature or respect, except provided by the M&A Engagement Letter, or owes a fiduciary or similar duty to the Borrower, in connection with such transaction or the process leading thereto. In addition, GSCP may employ the services of its affiliates in providing certain services hereunder and may exchange with such affiliates information concerning the Borrower and other companies that may be the subject of this arrangement, and such affiliates shall be entitled to the benefits afforded to (and subject to the obligations of) GSCP hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written CON-WAY INC., a Delaware corporation By: /s/ Mark C. Thickpenny --------------------------- Name: Mark C. Thickpenny Title: Vice President - Treasurer 2855 Campus Drive, Suite 300 San Mateo, CA 94403 Facsimile number: (650) 378-5200 Telephone number: (650) 357-9160 GOLDMAN SACHS CREDIT PARTNERS L.P., in its capacity as a Bank, the Syndication Agent and as the Agent By: Walter A. Jackson ---------------------- Name: Walter A. Jackson Title: Authorized Signatory Goldman Sachs Credit Partners L.P. c/o Goldman, Sachs & Co. 30 Hudson Street, 17th Floor Jersey City, NJ 07302 Attention: SBD Operations Attention: Pedro Ramirez Telecopier: (212) 357-4597 Email [and for delivery of final financial statements for posting]: gsd.link@gs.com with a copy to: Goldman Sachs Credit Partners L.P. 1 New York Plaza New York, New York 10004 Attention: [Elizabeth Fischer] [Rob Schatzman]* Telecopier: (212) 902-3000 EX-4 5 ex42.txt EXHIBIT 4.2 Exhibit 4.2 SUBSIDIARY GUARANTY AGREEMENT THIS AGREEMENT dated as of August 23, 2007 among Con-way Inc., a Delaware corporation (the "Borrower"), each of the Subsidiary Guarantors party hereto from time to time (collectively, the "Subsidiary Guarantors") and Goldman Sachs Credit Partners L.P., as Agent. WHEREAS, the Borrower has entered into that Bridge Credit Agreement (as the same may be amended, modified, supplemented and extended from time to time, the "Credit Agreement") dated as of August 23, 2007 among the Borrower, the Banks party thereto and Goldman Sachs Credit Partners L.P., as Agent (the "Agent"), pursuant to which the Borrower may be entitled, subject to certain conditions, to borrow up to $500,000,000; WHEREAS, the Credit Agreement provides, among other things, that one condition to its effectiveness is the execution and delivery of a guaranty substantially in the form of this Agreement by the Borrower and the Subsidiary Guarantors listed on the signature pages hereof; and WHEREAS, in conjunction with the transactions contemplated by the Credit Agreement and in consideration of the financial and other support that the Borrower has provided, and such financial and other support as the Borrower may in the future provide, to the Subsidiary Guarantors, and in order to induce the Banks and the Agent to enter into the Credit Agreement, the Subsidiary Guarantors listed on the signature pages hereof are willing to guaranty the obligations of the Borrower under the Credit Agreement and the Notes issued pursuant thereto; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS Section 1.01 Definitions. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as therein defined. In addition, the following term, as used herein, has the following meaning: "Guarantied Obligations" means (i) all obligations of the Borrower in respect of principal of and interest on the Loans and the Notes, (ii) all other amounts payable by the Borrower under the Credit Agreement or the Notes, if any, and (iii) all renewals or extensions of the foregoing, in each case whether now outstanding or hereafter arising. The Guarantied Obligations shall include, without limitation, any interest, costs, fees and expenses which accrue on or with respect to any of the foregoing, whether before or after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of any one or more of the Borrower and the Subsidiary Guarantors, and any such interest, costs, fees and expenses that would have accrued thereon or with respect thereto but for the commencement of such case, proceeding or other action. ARTICLE 2 GUARANTIES Section 2.01 The Guaranties. Subject to Section 2.03, the Subsidiary Guarantors hereby, jointly and severally, unconditionally and irrevocably guaranty to the Banks and the Agent and to each of them, the due and punctual payment of all Guarantied Obligations as and when the same shall become due and payable, whether at maturity, by declaration or otherwise, according to the terms thereof. In case of failure by the Borrower punctually to pay any indebtedness guarantied hereby, the Subsidiary Guarantors, subject to Section 2.03, hereby jointly, severally and, to the extent permitted by law, unconditionally agree to make such payment punctually as and when the same shall become due and payable, whether at maturity, or by demand, declaration, acceleration or otherwise. Section 2.02 Guaranties Unconditional; Waiver. To the extent permitted by applicable law, the obligations of each Subsidiary Guarantor under this Article 2 shall be unconditional and absolute and without limiting the generality of the foregoing, shall, to the extent permitted by law, not be released, discharged or otherwise affected by: (a) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any other Obligor under any Financing Document, by operation of law or otherwise; (b) any modification or amendment (including any increase in the aggregate Commitments and any increase in the obligations of the Borrower under the Financing Documents) of or supplement to any other Financing Document; (c) any modification, amendment, waiver, release, non-perfection or invalidity of any direct or indirect security, or of any guaranty or other liability of any third party, for any obligation of any other Obligor under any Financing Document; (d) any change in the corporate existence, structure or ownership of any other Obligor or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any other Obligor or its assets or any resulting release or discharge of any obligation of any other Obligor contained in any Financing Document; (e) the existence of any claim, set-off or other rights which any Subsidiary Guarantor may have at any time against any other Obligor, the Agent, any Bank or any other Person, whether or not arising in connection with the Financing Documents; provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (f) any invalidity or unenforceability relating to or against any other Obligor for any reason of any Financing Document, or any provision of applicable law or regulation purporting to prohibit the payment by any other Obligor of the principal of or interest on any Note or any other amount payable by any other Obligor under any Financing Document; or (g) any other act or omission to act or delay of any kind by any other Obligor, the Agent, any Bank or any other Person or any other circumstance whatsoever (other than payment in full of all Guarantied Obligations) that might, but for the provisions of this paragraph, constitute a legal or equitable discharge of the obligations of any Subsidiary Guarantor under this Article 2. With respect to its obligations hereunder, to the extent permitted by applicable law, each Subsidiary Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Agent or any Bank exhaust any right, power or remedy or proceed against any Person under any of the Financing Documents or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. In accordance with Section 2856 of the California Civil Code, each Subsidiary Guarantor unconditionally and irrevocably waives any and all rights and defenses available to it by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code. No other provision of this Agreement shall be construed as limiting the generality of any of the covenants and waivers set forth in this paragraph. As provided below, this Agreement shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of New York. This paragraph is included solely out of an abundance of caution, and shall not be construed to mean that any of the above-referenced provisions of California law are in any way applicable to this Agreement or to any of the Guarantied Obligations. Section 2.03 Fraudulent Transfer. Anything in this Guaranty Agreement to the contrary notwithstanding, the obligations of each Subsidiary Guarantor hereunder shall be limited to a maximum aggregate amount equal to the greatest amount that would not render such Subsidiary Guarantor's obligations hereunder subject to avoidance as a fraudulent transfer, obligation or conveyance under Section 548 of Title 11 of the United States Code or any provisions of applicable state law (collectively, the "Fraudulent Transfer Laws"), in each case after giving effect to all other liabilities of such Subsidiary Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Subsidiary Guarantor (A) in respect of intercompany debt owed or owing to the Borrower or affiliates of the Borrower to the extent that such debt would be discharged in an amount equal to the amount paid by such Subsidiary Guarantor hereunder and (B) under any Guarantee of senior unsecured debt or indebtedness subordinated in right of payment to the Guaranteed Obligations, which Guarantee contains a limitation as to maximum amount similar to that set forth in this Section 2.03, pursuant to which the liability of such Subsidiary Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, contribution, reimbursement, indemnity or similar rights of such Subsidiary Guarantor pursuant to (I) applicable law or (II) any agreement providing for an equitable allocation among such Subsidiary Guarantor and other affiliates of the Borrower of obligations arising under guarantees by such parties (including the agreements described in Section 2.08). Section 2.04 Discharge; Reinstatement in Certain Circumstances. Except as otherwise provided in Sections 3.01(c) and 4.03 hereof, each Subsidiary Guarantor's obligations under this Article 2 shall remain in full force and effect until the Commitments are terminated and the principal of and interest on the Loans and all other amounts payable by the Borrower under the Financing Documents shall have been paid in full. If at any time any payment of the principal of or interest on any Loan or any other amount payable by the Borrower under any Financing Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of any Obligor or otherwise, each Subsidiary Guarantor's obligations under this Article 2 with respect to such payment shall be reinstated at such time as though such payment had become due but had not been made at such time. Section 2.05 Subrogation. Each Subsidiary Guarantor that makes a payment hereunder with respect to a Guarantied Obligation shall be subrogated to the rights of the payee against the Borrower with respect to such payment, provided, that until the Commitments have terminated, and all Guarantied Obligations have been paid in full and no Person or court or governmental authority shall have made any request for the return or reimbursement of any funds from the Agent or any Bank in connection with monies received under the Financing Documents (i) such Subsidiary Guarantor shall not enforce any such right against the Borrower (or enforce any right of reimbursement or contribution relating to such payment against the Borrower or any other Subsidiary Guarantor) and (ii) the rights against the Borrower to which such Subsidiary Guarantor is subrogated and any rights of reimbursement or contribution that such Subsidiary Guarantor may have against the Borrower or any other Subsidiary Guarantor shall be subordinate and junior in right of payment to all other obligations of the Borrower or such other Subsidiary Guarantor, as the case may be, under the Financing Documents. Section 2.06 Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Borrower under the Financing Documents is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of the Financing Documents shall, to the extent permitted by law, nonetheless be payable by each Subsidiary Guarantor hereunder forthwith on demand by the Agent made at the request of the Required Banks. Section 2.07 Taxes. Without limiting the generality of any other provision hereof each Subsidiary Guarantor agrees that, if it makes a payment hereunder with respect to a Guaranteed Obligation, it will have the same obligations with respect to such payment and any related Taxes or Other Taxes as the Borrower would have had under Section 8.04 of the Credit Agreement if such payment had been made by the Borrower. Section 2.08 Right of Contribution. The Subsidiary Guarantors hereby agree, as among themselves, that if any Subsidiary Guarantor shall become an Excess Funding Guarantor (as defined below), each other Subsidiary Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the succeeding provisions of this Section 2.08), pay to such Excess Funding Guarantor an amount equal to such Subsidiary Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, assets, liabilities and debts of such Excess Funding Guarantor) of such Excess Payment (as defined below). The payment obligation of any Subsidiary Guarantor to any Excess Funding Guarantor under this Section 2.08 shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Subsidiary Guarantor under the other provisions of this Article 2, and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes hereof, (a) "Excess Funding Guarantor" shall mean, in respect of any obligations arising under the other provisions of this Article 2 (hereafter, the "Obligations"), a Subsidiary Guarantor that has paid an amount in excess of its Pro Rata Share of the Obligations; (b) "Excess Payment" shall mean, in respect of any Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Obligations; and (c) "Pro Rata Share", for the purposes of this Section 2.08, shall mean, for any Subsidiary Guarantor, the ratio (expressed as a percentage) of (i) the amount by which the aggregate present fair saleable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Subsidiary Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Subsidiary Guarantor hereunder) to (ii) the amount by which the aggregate present fair saleable value of all assets and other properties of the Borrower and all of the Subsidiary Guarantors exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Borrower under the Financing Documents and the Subsidiary Guarantors hereunder) of the Borrower and all of the Subsidiary Guarantors, all as of the Closing Date (if any Subsidiary Guarantor becomes a party hereto subsequent to the Closing Date, then for the purposes of this Section 2.08 such subsequent Subsidiary Guarantor shall be deemed to have been a Subsidiary Guarantor as of the Closing Date and the information pertaining to, and only pertaining to, such Subsidiary Guarantor as of the date such Subsidiary Guarantor became a Subsidiary Guarantor shall be deemed true as of the Closing Date). ARTICLE 3 ADDITIONAL SUBSIDIARY GUARANTORS Section 3.01 Additional Subsidiary Guarantors; release of Subsidiary Guarantors. (a) On the Closing Date and on each Reporting Date thereafter, the Borrower shall cause one or more Subsidiaries that are not then Subsidiary Guarantors to execute and deliver to the Agent a letter substantially in the form of Exhibit C-1 hereto, whereupon such Subsidiary shall become a party hereto and both a Subsidiary Guarantor and an Obligor for all purposes of the Financing Documents, to the extent necessary such that after giving effect thereto, as of the most recently ended fiscal quarter for which financial statements have been delivered, only non-Significant Subsidiaries and Foreign Subsidiaries will be Non-Guarantor Subsidiaries. On or promptly following the date on which the Borrower shall directly or indirectly acquire (through an acquisition of assets, a merger or otherwise) a Significant Subsidiary that is not a Subsidiary Guarantor or a Foreign Subsidiary, the Borrower shall cause such Significant Subsidiary to execute and deliver to the Agent a letter substantially in the form of Exhibit C-1 hereto, whereupon such Significant Subsidiary shall become a party hereto and both a Subsidiary Guarantor and an Obligor for all purposes of the Financing Documents. Upon each such execution and delivery, the Borrower shall be deemed to make a representation and warranty as to the facts set forth in Sections 4.02, 4.03, and 4.09 of the Credit Agreement. "Non-Guarantor Subsidiary" means, at any time, any Subsidiary that is not a Subsidiary Guarantor at such time. "Reporting Date" means the date that is 30 days after delivery of the Borrower's annual or quarterly financial statements to the Agent pursuant to Section 5.01 of the Credit Agreement. (b) On each Reporting Date, the Borrower shall deliver to the Agent a list of the Subsidiary Guarantors, a list of the Non-Guarantor Subsidiaries, and calculations in reasonable detail demonstrating compliance with Section 3.01(a). (c) At any time or from time to time upon receipt by the Agent of a certificate, signed on behalf of the Borrower by the chief financial officer or chief accounting officer of the Borrower, requesting the release of a Subsidiary Guarantor from its obligations under this Agreement in connection with the direct or indirect sale, transfer, disposition or conveyance of a majority of the equity interests in such Subsidiary Guarantor permitted under Section 5.10 of the Credit Agreement, representing and warranting that such sale, transfer, disposition or conveyance is permitted under Section 5.10 of the Credit Agreement, such Subsidiary Guarantor shall be automatically be released from its obligations hereunder upon the consummation of such sale, transfer, disposition or conveyance. The Agent shall, at the sole cost and expense of the Borrower, execute and deliver to the Borrower such instrument or other document as may be reasonably requested by the Borrower evidencing the release of such Subsidiary Guarantor hereunder. ARTICLE 4 MISCELLANEOUS Section 4.01 Notices. Unless otherwise specified herein, all notices, requests and other communications ("notices") to any party hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given to such party at its address or facsimile number set forth on the signature pages hereof or on its letter substantially in the form of Exhibit C-1 hereto, as applicable (or, in the case of any Subsidiary Guarantor as to which no such address or facsimile number is so set forth, to it at the address or facsimile number of the Borrower set forth on the signature pages hereof) or such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent. Each such notice shall be effective (i) if given by facsimile transmission, when such facsimile is transmitted to the facsimile transmission number specified in or pursuant to this Section 4.01 and telephonic confirmation of receipt thereof is received or (ii) if given by mail or by any other means, when delivered at the address specified in this Section 4.01. Section 4.02 No Waiver. No failure or delay by the Agent or any Bank in exercising any right, power or privilege under this Agreement or any other Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein and therein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 4.03 Amendments and Waivers; Termination. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and is signed by the Borrower, each Subsidiary Guarantor and the Agent with the prior written consent of the Required Banks; provided that except as otherwise provided in Section 3.01(c), the consent of each Bank shall be required to release all or substantially all of the Subsidiary Guarantors from their obligations hereunder; and provided further that (x) Subsidiary Guarantors may become parties to this Agreement in accordance with Section 3.01(a) and (y) Subsidiary Guarantors may be released from this Agreement in accordance with Section 3.01(c), in each case, without the consent of Required Banks. Section 4.04 Governing Law; Submission to Jurisdiction; Waiver of a Jury Trial. This Agreement shall be construed in accordance with and governed by the law of the State of New York. Each of the Subsidiary Guarantors hereby agrees to be bound by each provision of the Credit Agreement which purports to bind all Obligors to the same extent as if it were a party thereto. Section 4.05 Successors and Assigns. This Agreement is for the benefit of the Banks and the Agent and their respective successors and assigns and in the event of an assignment of the Loans, the Notes or other amounts payable under the Financing Documents, the rights hereunder, to the extent applicable to the indebtedness so assigned, shall be transferred with such indebtedness. All the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Section 4.06 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, and all of which taken together shall constitute a single instrument, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when the Agent shall have received a counterpart hereof signed by the Borrower and one or more of the Subsidiary Guarantors and when the Credit Agreement shall become effective in accordance with its terms. Thereafter, upon execution and delivery of a letter substantially in the form of Exhibit C-1 hereto on behalf of any other Subsidiary Guarantor, this Agreement shall become effective with respect to such Subsidiary Guarantor as of the date of such delivery. Section 4.07 Submission to Jurisdiction. The Borrower and each Subsidiary Guarantor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Subsidiary Guaranty or the transactions contemplated thereby. The Borrower and each Subsidiary Guarantor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 4.08 Waiver of a Jury Trial. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written. BORROWER: CON-WAY INC., a Delaware corporation By: /s/ Mark C. Thickpenny ------------------------- Name: Mark C. Thickpenny Title: Vice President - Treasurer c/o CON-WAY INC. 2855 Campus Drive, Suite 300 San Mateo, CA 94403 Facsimile number: (650) 378-5200 Telephone number: (650) 357-9160 SUBSIDIARY GUARANTORS: CON-WAY FREIGHT INC., a Delaware corporation By: /s/ Mark C. Thickpenny ------------------------- Name: Mark C. Thickpenny Title: Assistant Treasurer c/o CON-WAY INC. 2855 Campus Drive, Suite 300 San Mateo, CA 94403 Facsimile number: (650) 378-5200 Telephone number: (650) 357-9160 MENLO WORLDWIDE, LLC, a Delaware limited liability company By: /s/ Mark C. Thickpenny ------------------------- Name: Mark C. Thickpenny Title: Assistant Treasurer c/o CON-WAY INC. 2855 Campus Drive, Suite 300 San Mateo, CA 94403 Facsimile number: (650) 378-5200 Telephone number: (650) 357-9160 MENLO LOGISTICS, INC., a Delaware corporation By: /s/ Mark C. Thickpenny ------------------------ Name: Mark C. Thickpenny Title: Assistant Treasurer c/o CON-WAY INC. 2855 Campus Drive, Suite 300 San Mateo, CA 94403 Facsimile number: (650) 378-5200 Telephone number: (650) 357-9160 TRANSPORTATION RESOURCES, INC., a Missouri corporation By: /s/ Mark C. Thickpenny ------------------------ Name: Mark C. Thickpenny Title: Mark C. Thickpenny c/o CON-WAY INC. 2855 Campus Drive, Suite 300 San Mateo, CA 94403 Facsimile number: (650) 378-5200 Telephone number: (650) 357-9160 CONTRACT FREIGHTERS, INC., a Missouri corporation By: /s/ Mark C. Thickpenny ------------------------ Name: Mark C. Thickpenny Title: Assistant Treasurer c/o CON-WAY INC. 2855 Campus Drive, Suite 300 San Mateo, CA 94403 Facsimile number: (650) 378-5200 Telephone number: (650) 357-9160 GOLDMAN SACHS CREDIT PARTNERS L.P., as Agent By: Walter A. Jackson ------------------- Name: Walter A. Jackson Title: Authorized Signatory EX-10 6 ex106.txt EXHIBIT 10.6 Exhibit 10.6 AMENDMENT NO. 1 TO AMENDED AND RESTATED 2003 EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS The Amended and Restated 2003 Equity Incentive Plan for Non-Employee Directors, dated April 22, 2003 (the "2003 Equity Incentive Plan"), is amended as follows: 1. Grant of Restricted Stock The Board of Directors of the Company has determined to amend the Amended and Restated 2003 Equity Incentive Plan (i) to provide for annual grants of restricted stock having a value of $255,000 to the members of the Board of Directors at the time of their election or re-election to the Board, (ii) to provide for transition grants of $20,000 and $40,000 for directors who, as of April 2007, have one (1) or two (2) years until their election or re-election to the Board, respectively, and (iii) to provide for pro rata transition grants of restricted stock to newly appointed members of the Board of Directors, in each case effective for grants made in 2007 and thereafter. In order to provide for granting of the restricted shares as described above, Section 2(n) is amended to read as follows: (n)"Restricted Stock Award Amount" means: for calendar year 2007 and subsequent calendar years, (i) for each director receiving a Restricted Stock Award pursuant to Section 6(a)(i), an amount equal to $85,000 for each full year during the director's term (for a total of $255,000 for a three-year term), (ii) for each Class II and Class III director receiving a Restricted Stock Award pursuant to Section 6(a)(ii), an amount equal to $85,000 for each full year remaining until such director is next scheduled for election or re-election to the Board (for a total of $85,000 for Class II directors and $170,000 for Class III directors) and (iii) for each newly-appointed director receiving a Restricted Stock Award pursuant to Section 6(a)(iii), an amount equal to $85,000 for each full year remaining until such director is next scheduled for election, plus a pro rata portion of $85,000 for each partial year remaining until such director is next scheduled for election. For purposes of this definition, a period of greater than 11 but less than 12 months shall be considered a full year. Additionally, Section 6(a) is amended and restated in its entirety so as to read as follows: (a) Restricted Stock Awards. Subject to Section 10 hereof, so long as there are sufficient shares of Stock available for issuance or transfer pursuant to Restricted Stock Awards under the Plan: (i) on the Restricted Stock Award Date in each year during the term of the Plan, commencing with the Restricted Stock Award Date in 2007, each Director who is elected or re-elected to the Board at the annual meeting of shareholders during such year shall automatically be granted an Award consisting of a number of shares of Restricted Stock determined based on the applicable Restricted Stock Award Amount; (ii) in addition to the grants described in subsection (i) above, on the Restricted Stock Award Date in 2007, each Class II Director and each Class III Director then serving on the Board shall automatically be granted an Award consisting of a number of shares of Restricted Stock determined based on the applicable Restricted Stock Award Amount; and (iii) at any time in 2007 and thereafter, upon a director's appointment to the Board, such director shall automatically be granted an Award consisting of a number of shares of Restricted Stock determined based on the applicable Restricted Stock Award Amount. 2. No Effect on Validity of Prior Grants Nothing in this Amendment shall impair or otherwise affect the validity of grants made under the terms of the 2003 Equity Incentive Plan as in effect prior to the adoption of this Amendment. 3. Effective Date; No Further Amendment This Amendment shall be effective as of December 4, 2006. Except as expressly amended hereby, the 2003 Equity Incentive Plan remains unchanged and in full force and effect. CON-WAY INC. By: /s/ Jennifer W. Pileggi ------------------------- Name: Jennifer W. Pileggi Title: Senior Vice President General Counsel and Secretary EX-10 7 ex107.txt EXHIBIT 10.7 Exhibit 10.7 SEVERANCE AGREEMENT THIS AGREEMENT, dated as of and effective as of August 23, 2007, is by and between Contract Freighters, Inc. (the "Employer"), and Herbert J. Schmidt (the "Executive") and supersedes all prior severance agreements between the Executive and the Employer or any Affiliate. WHEREAS, the Employer (a) considers it essential to foster the continued employment of key management personnel, (b) recognizes that 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 Employer, and (c) has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Employer'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 Employer and the Executive hereby agree as follows: * The Term of this Agreement shall commence on August 23, 2007 and expire as provided in the definition of "Term" in Section 1 of the attached Terms and Conditions, all of which (including definitions) are hereby incorporated by reference. * The Executive agrees that, subject to the Terms and Conditions, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Employer until the earliest of (a) a date which is six (6) months from the date of such Potential Change in Control, (b) the date of a Change in Control, (c) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, disability or retirement in accordance with the Con-way Inc. Retirement Plan, including early retirement, or (d) the termination by the Employer of the Executive's employment for any reason. * If the Executive incurs a Severance following a Change in Control or Potential Change in Control and during the Term, the Executive shall be entitled to receive (a) a Severance Payment equal to three (3) times the sum of the Executive's annual base salary and Annual Bonus in a lump sum and (b) Severance Benefits for a period of 36 months following the Severance Date, as provided in the attached Terms and Conditions. * If the Executive transfers to and becomes an employee of an Affiliate, the Employer shall assign this Agreement to the Affiliate and the Affiliate shall become the Employer and shall assume the obligations of the Employer. - ----------------------------------------------------------------------------- |THE EMPLOYER | | | | | |By: Contract Freighters, Inc. | Con-way Inc. hereby assumes the | |/s/ Jennifer W. Pileggi | obligations imposed by the | |------------------------ | second sentence of Section 3.1 | |Name: Jennifer W. Pileggi | of the attached Terms | |Title: Secretary | and Conditions. | | | | - ----------------------------------------------------------------------------- | | | |EXECUTIVE |CON-WAY INC. | |/s/ Herbert J. Schmidt | | |------------------------- |By: /s/ Douglas W. Stotlar | |Name: Herbert J. Schmidt | ------------------------- | |Address: 4527 Goldfinch Road |Name: Douglas W. Stotlar | | Joplin, MO 64804 |Title: President - CEO | | | | - ----------------------------------------------------------------------------- TERMS AND CONDITIONS OF SEVERANCE AGREEMENT Table of Contents 1. Definitions................................ 2. Compensation other than Severance Payments and Benefits.............................. 3. Severance Payments and Benefits............ 4. Excise Tax Gross-Up........................ 5. Notice of Termination...................... 6. General Provisions......................... Exhibit A - Waiver and Release of Claims....... Exhibit B - Assignment and Assumption of Agreement 1. DEFINITIONS. As hereinafter used: "Affiliate" means an affiliate of the Company, as defined in Rule 12b-2 promulgated under Section 12 of the Exchange Act, including any Business Unit. "Agreement" means the Severance Agreement to which these Terms and Conditions are attached, including the Terms and Conditions, which are incorporated by reference in the Agreement. If there is any inconsistency between the Severance Agreement and these Terms and Conditions, the Terms and Conditions shall govern. "Annual Bonus" means the annual bonus payable with respect to a calendar year under the ICP (Incentive Compensation Plan) applicable to an Executive or other applicable annual bonus or arrangement determined as if such Annual Bonus had been earned to the extent of 100% of the Executive's target bonus opportunity, as opposed to the maximum 200%. The Annual Bonus does not include any amount payable under the Con-way Inc. Value Management Plan or any other long-term incentive plan. "Auditor" shall have the meaning set forth in Section 4.2 hereof. "Base Amount" shall have the meaning set forth in Section 280G(b)(3) of the Code. "Board" means the Board of Directors of the Company. "Business Unit" is defined in Section 2 of the EIP. "Cause" for termination by the Employer of the Executive's employment means (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Employer (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 by the Executive of a notice of intent to terminate employment for Good Reason, as provided in the definition of Good Reason) after a written demand for substantial performance is delivered to the Executive by or on behalf of the Employer Board, which demand specifically identifies the manner in which the Employer 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 Employer, the Company or an Affiliate, 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 Employer, the Company or an Affiliate. In the event of a dispute concerning the application of this provision, no claim by the Employer that Cause exists shall be given effect unless the Employer establishes (iii) to the Employer Board and (iv) in the event of an arbitration to resolve the dispute, to the arbitrator, by clear and convincing evidence that Cause exists. "Change in Control" means the occurrence of any one of the events described in clauses (a) through (d) of the definition of "Change in Control" in Section 2 of the EIP or the occurrence of the event described in the following clause (e), which shall apply for purposes of the Agreement instead of clause (e) of the definition of "Change in Control" in Section 2 of the EIP: (e) Disposition of a Business Unit. There is consummated the Disposition of a Business Unit; provided, however, that this clause (e) shall apply only to an Executive who immediately prior to the Disposition of a Business Unit was employed by (and on the payroll of) the Business Unit that was the subject of the Disposition of a Business Unit. The following Examples illustrate clause (e): Example 1. The ownership interests of Business Unit X are sold to an unrelated purchaser. Executive A was employed by (and on the payroll of) Business Unit X immediately prior to the sale. A Change in Control has taken place with respect to Executive A. Example 2. The assets of Business Unit Y are sold to an unrelated purchaser. Executive B was employed by (and on the payroll of) Business Unit Y immediately prior to the sale. A Change in Control has taken place with respect to Executive B. Example 3. Executive C is employed by (and on the payroll of) a Business Unit as described in either Example 1 or 2, except that Executive C remains employed by (and on the payroll of) a Business Unit that continues to be a Business Unit of the Company following the sale. A Change in Control has taken place with respect to Executive C. Because the EIP is not intended to serve the same purpose as the Agreement, whether a "Change in Control" has taken place under the EIP is not relevant in determining whether benefits are payable under the Agreement. For example, in Example 3, a Change in Control took place for Executive C under the Agreement, but no Change in Control took place for Executive C under the EIP. If Executive C terminates employment six months after the Change in Control occurred under the Agreement, Executive C may or may not be entitled to benefits under the Agreement, depending on the facts surrounding the termination of employment. However, no Change in Control would take place under the EIP with respect to Executive C under the facts of Example 3, whether or not benefits are due under the Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Company" means Con-way Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation. "Disposition of a Business Unit" is defined in Section 2 of the EIP. "EIP" means the Con-way Inc. 1997 Equity and Incentive Plan, as amended from time to time, or any successor plan. "Employer" means the person specified in the first paragraph of the Agreement or any assignee or successor (including a successor who assumes the Agreement following a Change in Control). The fourth bullet of the Agreement provides that, if the Executive transfers to the Company or an Affiliate, the Agreement will be assigned, resulting in a change in the Employer. A draft form of assignment and assumption is attached as Exhibit B. Notwithstanding the preceding provisions of this definition, if (and for as long as) the Executive is an employee of Vector SCM, LLC, (i) the Employer means Vector SCM, LLC or any successor, (ii) the Company shall fulfill the obligations of the Employer under the Agreement, and (iii) clause (e) of the definition of Change in Control shall not apply to the Executive. "Employer Board" means the Board of Directors of the Employer. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases. "Excise Tax" means any excise tax imposed under Section 4999 of the Code. "Executive" means the person specified in the first paragraph of the Agreement. "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 any one of the following acts by the Employer, or failures by the Employer to act, unless such act or failure to act is corrected within 30 days of receipt by the Employer of notice of the Executive's intent to terminate for Good Reason hereunder: (1) the failure of the successor company, following the Change in Control, to assume the Agreement and all obligations thereunder, as of the date of such Change in Control; (2) the assignment to the Executive of duties inconsistent with the Executive's status as an executive of the Employer 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; (3) a reduction by the Employer in the Executive's base salary, cash bonus opportunity, or long term incentive opportunity, each as in effect immediately prior to the Change in Control or as the same may thereafter be increased from time to time; (4) 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, (5) a substantial increase in the Executive's business travel obligations from the Executive's business travel obligations immediately prior to the Change in Control; (6) the failure by the Employer to pay to the Executive when due any portion of the Executive's current compensation; (7) the failure by the Employer to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Employer'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 Employer and any entity in control of the Employer), the taking of any other action by the Employer 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 Employer to provide the Executive with the number of paid vacation days or PTO days (days of paid time off) to which the Executive was entitled. If a Change in Control takes place with respect to the Executive solely because of the Disposition of a Business Unit as described in clause (e) of the definition of Change in Control and the Executive continues to be employed by the Company or an Affiliate, but the position the Executive previously held is no longer needed, then, for purposes of determining whether there is a substantial adverse alteration in the nature or status of the Executive's responsibilities under clause (2) above, all the facts and circumstances shall be taken into account, and no single or selected set of facts shall be determinative. In particular, if the Executive receives a bona fide offer of a new or different position with the Company or an Affiliate, the fact or set of facts that, under the Executive's new position, fewer employees may be supervised and/or fewer functional areas may be within the Exective's span of control shall not be determinative. 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, except as provided in the penultimate paragraph of the definition of Severance. If Good Reason first occurs during the last 30 days of the Term and the Executive gives notice of the Executive's intent to terminate for Good Reason before the end of the Term, the correction period referred to in the first sentence of this definition of Good Reason shall end on the date of termination specified in Section 5.3. The Executive's continued employment after Good Reason occurs shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. "Gross Up Payment" shall have the meaning set forth in Section 4.1 hereof. "Person" means any person, as such term is used in Sections 13(d) and 14(d) of the Exchange Act other than (i) the Company or its Affiliates, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or its Affiliates, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Common Stock. "Potential Change in Control" shall be deemed to have occurred if: (1) the Company or any Affiliate enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (2) the Company or any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act publicly announces an intention to take or to consider actions, including but not limited to proxy contests or consent solicitations, which, if consummated, would constitute a Change in Control; (3) any Person becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of the common stock, par value $0.625 per share, 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 (4) the Board or the Employer Board if the Employer is other than the Company adopts a resolution to the effect that, for purposes of the Agreement, a Potential Change in Control has occurred. If the Potential Change in Control referred to in clause (1) or (2) would arise because of an event described in clause (e) in the definition of Change in Control, the Potential Change in Control shall apply only if the Executive is employed by (and on the payroll of) the Business Unit that would be the subject of the Disposition of a Business Unit. "Severance" means the termination of an Executive's employment with the Employer following a Change in Control and during the Term of the Agreement, (i) by the Employer other than for Cause, or (ii) by the Executive for Good Reason. For purposes of the Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Employer without Cause or by the Executive with Good Reason if (i) the Executive's employment is terminated by the Employer 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 or Affiliate the consummation of which would constitute a Change in Control, (ii) the Executive terminates 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) the Executive's employment is terminated by the Employer 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). For purposes of this paragraph, a Change in Control shall be deemed to have occurred for purposes of the definition of Good Reason if a Potential Change in Control has occurred or if the termination or the circumstance or event which would constitute Good Reason if a Change in Control had occurred is 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 incurred a Severance (i) if the Executive's employment is discontinued by reason of the Executive's death or disability, including a physical or mental condition causing such Executive's inability to substantially perform the Executive's duties with the Employer for a period of six consecutive months or (ii) by reason of the divestiture of a facility, sale 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 constitutes, or takes place following a Change in Control and during the Term of the Agreement, if the Executive is offered a position with the successor company that, if accepted, would not give rise to Good Reason, and such successor company agrees to assume the obligations of the Agreement with respect to such Executive. If any benefits provided to the Executive under the Agreement are treated as deferred compensation subject to Code section 409A, the Executive will not be considered to have incurred a Severance until the Executive incurs a "separation from service," becomes "disabled," or dies; provided, however, that if an "unforseeable emergency" occurs, the Severance Payment may be made to the extent permitted by Code section 409A(a)(2)(B)(ii)(II). (The terms quoted in the immediately-preceding sentence have the meanings set forth in Code section 409A(a)(2)(A).) "Severance Benefits" means: (1) life, disability and accident benefits substantially similar to those provided to the Executive and the Executive's dependents immediately prior to the Severance or, if more favorable to the Executive, immediately prior to the Change in Control, at no greater cost to the Executive than the cost to the Executive immediately prior to the Severance or the Change in Control in this Agreement; provided, however, that, unless the Change in Control took place because of the event described in clause (e) of the definition of Change in Control, the Employer may apply to such benefits any across the board changes similarly affecting all or substantially all employees participating in such benefits; (2) health and dental benefits provided to the Executive and the Executive's dependents under the Company's health and dental plan as in effect immediately prior to the Severance or, if more favorable to the Executive, those provided to the Executive and the Executive's dependents immediately prior to the Change in Control, at no cost to the Executive; and (3) outplacement services determined by the Company to be suitable to the Executive's position, at no cost to the Executive; in each case for the number of months specified in the Agreement following such Executive's Severance Date; provided, however, that (4) benefits otherwise receivable pursuant to (1) and (2) shall be reduced to the extent benefits of the same type are received by or made available to the Executive or the Executive's dependents following the Executive's termination of employment (and any such benefits shall be reported to the Employer by the Executive); (5) the Employer shall reimburse the Executive for the excess, if any, of the cost to the Executive of benefits received or made available pursuant to (1) and (2) over such cost immediately prior to the Severance or, if more favorable to the Executive, immediately prior to the Change in Control; (6) if the Executive dies, the Employer shall continue to provide the Executive's dependents with the benefits otherwise receivable pursuant to (1) and (2) on the same basis as if the Executive had survived, and (7) if any such benefits are treated as deferred compensation subject to Code section 409A and the Executive is a "specified employee" as defined in Code section 409A(a)(2)(B)(i), the Executive shall pay the full cost of such benefits for the first six months after the Severance Date and the Employer shall reimburse the Executive for such payments as soon as practicable thereafter. "Severance Date" means the date on which an Executive incurs a Severance, which should be the date of termination as determined under Section 5.3. "Severance Payment" means a payment, in lieu of any other severance payment or benefit pursuant to any other plan or agreement of the Employer, the Company or any Affiliate to which the Executive is otherwise entitled, of an amount equal to the number of years specified in the Agreement times the sum of (i) the Executive's annual base salary immediately prior to the time of Severance or, if higher, in effect immediately prior to the Change in Control and (ii) the Executive's Annual Bonus for the calendar year in which the Change in Control occurred. "Tax Counsel" shall have the meaning set forth in Section 4.2 hereof. "Term" means the period of time commencing on the date specified in the Agreement and continuing through December 31 of the following year; provided, however, that commencing on January 1 of such following year, 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 Employer or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall occur during the Term, the Term shall expire no earlier than 24 months beyond the month in which such Change in Control occurred. "Terms and Conditions" means these terms and conditions. "Total Payments" means those payments so described in Section 4.1 hereof. 2. COMPENSATION OTHER THAN SEVERANCE PAYMENTS AND BENEFITS. 2.1 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 Employer as a result of incapacity due to disability, including physical or mental illness, the Employer 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 Employer during such period (other than any disability plan), until the Executive's employment is terminated by the Employer for disability. 2.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Employer shall pay the Executive's full salary to the Executive through the Severance Date at the rate in effect immediately prior to the Severance Date 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 Severance Date under the terms of the Employer's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Severance Date or, if more favorable to the Executive, as in effect immediately prior to the Change in Control. 2.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Employer 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 Severance). 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 Severance or, if more favorable to the Executive, as in effect immediately prior to the Change in Control. 3. SEVERANCE PAYMENTS AND BENEFITS. 3.1 If the Executive incurs a Severance, the Executive shall be entitled to receive from the Employer (i) the Severance Payment and (ii) Severance Benefits. If the Employer is not the Company, the Employer does not provide the Severance Payment and the Severance Benefits and the Severance is related to a Change in Control or a Potential Change in Control that occurred other than because of the Disposition of a Business Unit as provided in clause (e) of the definition of Change in Control, the Company shall fulfill the obligations of the Employer under the Agreement, and the Executive need not exhaust the remedies provided in Section 3.4 and 3.5 against the Employer before being entitled to receive the Severance Payment and the Severance Benefits from the Company. 3.2 The Employer shall pay the Severance Payment to the Executive in a cash lump sum, on the date that is 6 months after the Severance Date or as soon as practicable thereafter, but in no event later than 10 business days immediately following such date. 3.3 The Executive shall not be eligible to receive a Severance Payment or Severance Benefits under the Agreement unless the Executive (or, in the event of the death of the Executive, the executor, personal representative or administrator of the Executive's estate) first executes a written release substantially in the form attached as Exhibit A hereto and the Executive executes the release within 6 months after the Severance Date. 3.4 In the event that the Executive or a dependent of the Executive believes that he or she is not receiving the full benefits to which he or she is entitled under the Agreement, such person may make a claim to the Employer Board (or the Board if the second sentence of Section 3.1 applies), and the claims procedure set forth in Section 8 of the EIP shall apply with the Employer Board (or the Board if the second sentence of Section 3.1 applies) treated as the Committee. 3.5 Any further dispute or controversy arising under or in connection with the Agreement which remains after the final decision of the Board as contemplated by Section 3.4 shall be finally settled exclusively by arbitration in San Francisco, California, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the clear and convincing evidentiary standard set forth in the definition of Cause in this Agreement shall apply; and provided further, that the arbitrator shall apply the applicable provisions of ERISA, and applicable regulations adopted thereunder, in such arbitration proceeding. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 3.6 The Employer 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 the Agreement. 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 Employer reasonably may require. The Employer shall not be obligated to pay legal fees and expenses incurred by any person other than the Executive. However, the Employer shall be obligated to pay legal fees and expenses incurred by the Executive on behalf of the Executive's dependents and legal fees and expenses incurred by the estate of the Executive on behalf of the Executive or the Executive's dependents. 3.7 The Employer shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold. 3.8 The Employer agrees that, if the Executive's employment with the Employer terminates following a Change in Control that is applicable to the Executive and during the Term of the Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive hereunder. Further, the amount of any payment or benefit provided for in the Agreement shall not be reduced (except as provided in clause (4) of the definition of Severance Benefits) 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 Employer, or otherwise. 4. EXCISE TAX GROSS-UP. 4.1 Whether or not the Executive becomes entitled to the Severance Payment and Severance Benefits, 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 the Agreement or any other agreement, plan, or arrangement with the Employer, any Person whose actions result in a Change in Control or any Person affiliated with the Employer 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 Employer 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 (but without deducting federal, state and local income and employment taxes on the Total Payments), shall be equal to the Total Payments. 4.2 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 at the time of the Severance (or if there is no Severance, then the date on which the Gross-Up Payment is calculated for purposes of this Section 4.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. 4.3 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. 4.4 The payments provided in Section 4.1 shall be made on the date that is 6 months after the Severance Date or as soon as practicable thereafter; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Employer shall pay to the Executive on such day an estimate, as determined in good faith by the Employer or, in the case of payments under Section 4.1 or 4.3, in accordance with Section 4.2, 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. 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 Employer not later than the fifth (5th) business day after demand by the Employer. At the time that payments are made under the Agreement, the Employer 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 Employer 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). 4.5 The Employer 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 the 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 Employer reasonably may require. 5. NOTICE OF TERMINATION. 5.1 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 the Employer to the Executive or the Executive to the Employer in accordance with Section 6.9. 5.2 The notice of termination shall indicate the specific termination provision in the 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. A notice of termination for Cause shall 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 Employer Board at a meeting of the Employer 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 Employer Board) finding that, in the good faith opinion of the Employer 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. 5.3 The notice of termination shall specify the date of termination which, in the case of a termination by the Employer, 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 thirty (30) days nor more than sixty (60) days, respectively, from the date such notice of termination is given. (1) Once the Employer or the Executive has specified a date of termination in a notice of termination, the date of termination cannot be changed by the Employer or the Executive except by mutual consent. (2) The date of termination must be at least 30 days after the notice of termination unless the termination is for Good Reason and Good Reason first occurs during the last 30 days of the Term (determined without regard to this Section 5.3(2)), in which event the date of termination shall be (i) the end of the Term (determined without regard to this Section 5.3(2)) if the Employer receives notice of the Executive's intent to terminate for Good Reason ten days or more before the end of the Term (determined without regard to this Section 5.3(2)) or (ii) the later of ten days after receipt by the Employer of notice of the Executive's intent to terminate for Good Reason or five days after the end of the Term (determined without regard to this Section 5.3(2)) if the Employer does not receive notice of the Executive's intent to terminate for Good Reason ten days or more before the end of the Term (determined without regard to this Section 5.3(2)). 6. GENERAL PROVISIONS. 6.1 Except as otherwise provided herein or by law, no right or interest of the Executive under the Agreement shall be assignable or transferable, in whole or in part, either directly or by operation of law or otherwise, including without limitation by execution, levy, garnishment, attachment, pledge or in any manner; no attempted assignment or transfer thereof shall be effective; and no right or interest of the Executive under the Agreement shall be liable for, or subject to, any obligation or liability of such Executive. When a payment is due under the Agreement to an Executive who is unable to care for his or her affairs, payment may be made directly to the Executive's legal guardian or personal representative. 6.2 If the Employer, the Company or any Affiliate is obligated pursuant to applicable law or by virtue of being a party to a contract (other than this Agreement) to pay severance pay, a termination indemnity, notice pay or the like or if the Employer, the Company or any Affiliate is obligated by law to provide advance notice of separation ("Notice Period"), then any Severance Payment hereunder shall be reduced by the amount of any such severance pay, termination indemnity, notice pay or the like, as applicable, and by the amount of any compensation received during any Notice Period. 6.3 Neither the Agreement, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Executive, or any person whomsoever, the right to be retained in the service of the Employer, and the Executive shall remain subject to discharge to the same extent as if the Agreement had never been executed. 6.4 If any provision of the Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Agreement shall be construed and enforced as if such provisions had not been included. 6.5 If any provision of the Agreement would cause compensation to be includible in the Executive's income pursuant to Code section 409A(a)(1)(A), such provision shall be void, and the Employer shall amend the Agreement retroactively in such a way as to achieve substantially similar economic results without causing such inclusion. Any such amendment shall be binding on the Executive unless the Executive objects within 30 days after a copy of such amendment is delivered to the Executive. In any event, the Executive will be solely responsible for any adverse tax consequences to the Executive. 6.6 The Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the Employer and its successors and assigns, and by each Executive and by the personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees of each Executive. If any Executive shall die while any amount would still be payable to such Executive (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 the Agreement to the executors, personal representatives or administrators of the Executive's estate. 6.7 The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Agreement, and shall not be employed in the construction of the Agreement. 6.8 The Agreement shall not be funded. The Executive shall not have any right to, or interest in, any assets of the Employer which may be applied by the Employer to the payment of benefits or other rights under the Agreement. 6.9 All notices and all other communications provided for in the 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 Employer, to the principal office of the Employer, attention President, and in the case of the Company, to 2855 Campus Drive, San Mateo, California 94403, attention General Counsel, and in the case of the Executive, to the last known address of the Executive, and (iii) shall be effective only upon actual receipt. 6.10 The Agreement shall be construed and enforced according to the laws of the State of Delaware (without giving effect to the conflict of laws principles thereof) to the extent not preempted by federal law, which shall otherwise control. EXHIBIT A --------- WAIVER AND RELEASE OF CLAIMS ---------------------------- In consideration of, and subject to, the payment to be made to me by ____________ (the "Employer") of the "Severance Payment" (as defined in the Severance Agreement, dated as of _________, entered into between me and the Company (the "Agreement")), I hereby waive any claims I may have for employment or re-employment by the Employer or any parent or subsidiary of the Employer after the date hereof, and I further agree to and do release and forever discharge the Employer and any parent or subsidiary of the Employer, 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 Employer or any parent or subsidiary of the Employer, 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 to Severance Benefits under the Agreement; (ii) my rights to benefits other than severance payments or benefits under plans, programs and arrangements of the Employer or any parent or subsidiary of the Employer; or (iii) my rights to indemnification under any indemnification agreement, applicable law or the certificates of incorporation or bylaws of the Employer or any parent or subsidiary of the Employer, (iv) my rights under any director's and officers' liability insurance policy covering me, (v) my workers compensation rights, or (vi) my unemployment insurance rights. 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 Employer'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 Employer. I acknowledge that it is my intention and the intention of the Employer 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 THE 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 EXHIBIT B --------- Assignment and Assumption of Severance Agreement Between ____________ and ______________, As of ___________ ____________ (the "Old Employer") and ______________ (the "Executive") have entered into a Severance Agreement dated ______________ (the "Agreement"). The Executive is transferring employment from the Old Employer to ____________ (the "New Employer"), effective ________. The fourth bullet of the Agreement provides that, if the Executive transfers to the Company or an Affiliate, the Old Employer shall assign the Agreement to the Company or Affiliate. To order to carry out the provisions of the fourth bullet of the Agreement - 1. The Old Employer hereby assigns the Agreement to the New Employer. 2. The New Employer hereby assumes the obligations of the Old Employer under the Agreement. 3. The assignment and assumption are effective as of the date employment is transferred. 4. The Executive hereby acknowledges receipt of notice of the assignment and assumption. - ----------------------------------------------------------------- |THE OLD EMPLOYER |THE NEW EMPLOYER | | | | | | | |By: ___________________________|By: ___________________________| |Name: |Name: | |Title: |Title: | - ----------------------------------------------------------------- | | | |EXECUTIVE | | | | | | | | |______________________________ | | |Name: Herbert J. Schmidt | | - ----------------------------------------------------------------- EX-10 8 ex108.txt EXHIBIT 10.8 Exhibit 10.8 Dated Seventh day of September 2007 CV DISTRIBUTION SERVICES LTD. and SWINGSIDE LIMITED and SEAVI ADVENT CHL INVESTMENTS LTD. and FORTIS PRIVATE EQUITY ASIA FUND N.V. and PROSPER FIELD HOLDINGS LIMITED (as Sellers) MR. JOHNSON SHEN QIWEI and MR. JIMMY KANG JIMIN (as Warrantors) and MENLO WORLDWIDE, LLC (as Buyer) ----------------------------------- AGREEMENT FOR THE SALE AND PURCHASE OF THE ENTIRE ISSUED AND OUTSTANDING SHARE CAPITAL OF CHIC HOLDINGS LIMITED ----------------------------------- CONTENTS Clause Page 1. Interpretation........................................................... 4 2. Sale And Purchase........................................................12 3. Conditions...............................................................13 4. Completion...............................................................19 5. Warranties And Pre-Completion Conduct....................................20 6. The Buyer's Remedies And The Seller'S Remedies...........................21 7. Further Undertakings By The Sellers......................................25 8. Undertakings By The Buyer................................................27 9. Joint Transitional Management Committee..................................28 10. Confidential Information.................................................30 11. Announcements............................................................31 12. Costs....................................................................31 13. Escrow Account...........................................................32 14. General..................................................................34 15. Entire Agreement.........................................................35 16. Assignment...............................................................35 17. Notices..................................................................35 18. Force Majeure............................................................37 19. Governing Law And Jurisdiction...........................................37 20. Governing Language.......................................................38 21. Further Assurances.......................................................38 22. Counterparts.............................................................39 Schedule 1 Information About The Sellers, Company And The Subsidiaries..40 Schedule 2 Completion Requirements......................................44 Schedule 3 Accounting Principles........................................48 Schedule 4 Warranties...................................................49 Schedule 5 Action Pending Completion....................................63 Schedule 6 Real Property................................................67 Schedule 7 Intellectual Property Rights.................................76 Schedule 8 Tax Deed.....................................................77 Schedule 9 Key Personnel................................................78 Schedule 10 Form Employment, Confidentiality And Non-Compete Agreement...79 Schedule 11 Non-Disclosure And Non-Compete Agreement.....................80 Schedule 12 Disclosure Letter............................................81 THIS AGREEMENT is made on 7th day of September 2007 in Hong Kong BY AND BETWEEN: (1) Prosper Field Holdings Limited, a company incorporated in the British Virgin Islands, whose registered office is at Kingston Chambers, P. O. Box 173, Road Town, Tortola, British Virgin Islands ("Prosper Field"); (2) Swingside Limited, a company incorporated in Hong Kong, whose registered office is at 5705 57th Floor, The Centre, 99 Queen's Road Central, Hong Kong ("Swingside"); each party set out in paragraphs (1) to (2) is referred to as an "Ordinary Share Seller" and together, the "Ordinary Share Sellers"; (3) CV Distribution Services Ltd., a company incorporated in the Cayman Islands, whose registered office is at Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands ("CVDS"); (4) SEAVI Advent CHL Investments Ltd., a company incorporated British Virgin Islands, whose registered office is at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands ("SEAVI"); (5) Fortis Private Equity Asia Fund N.V., a company incorporated in Belgium, whose registered office is at Warandeberg 3, 1000, Brussels, Belgium ("Fortis"); each party set out in paragraphs (3) to (5) is referred to as a "Preferred Share Seller" and together, the "Preferred Share Sellers"; each Ordinary Share Seller or Preferred Share Seller is referred to as a "Seller" and together, the "Sellers"; (6) Mr. Johnson Shen Qiwei, a PRC citizen (holder of PRC ID Number: 310104196411064078), whose address is at No.190, Lane 3588 Dushi Road, Minghang District, Shanghai PRC, 201108 ("Johnson"); (7) Mr. Jimmy Kang Jimin, a PRC citizen (holder of PRC ID Number: 310107671123281), whose address is at Room101, 139 Lijiang Shanshui, 999 Huajing Road, Xuhui District, Shanghai PRC, 200231 ("Jimmy"); and each party set out in paragraphs (6) to (7) is referred to as a "Warrantor" and together, the "Warrantors"; (8) Menlo Worldwide, LLC, a company incorporated in the state of Delaware of the United States of America and having its primary business office at 2855 Campus Drive, Suite 300 San Mateo, CA 94403-2512, United States of America (the "Buyer"). WHEREAS:- (A) (1) Chic Holdings Limited (the "Company") is a company incorporated under the laws of the Cayman Islands whose registered office is situated at c/o Maples & Calder, Ugland House, P.O. Box 309, George Town, Grand Cayman, Cayman Islands and is validly existing and in good standing. The amount and particulars of the issued share capital and certain other particulars of the Company are as set out in Part B of Schedule 1. (2) The Company is the registered holder and beneficial owner of 100% ownership interest in Shanghai Chic Logistics Co., Ltd., a wholly foreign owned enterprise organized and existing under the laws of the PRC ("Chic Logistics"). Chic Logistics is the registered holder and beneficial owner of 100% equity interest in each of Shanghai Chic Supply Chain Management Co., Ltd., a company organized and existing under the laws of the PRC ( "Chic SCM") and Shanghai Chic Storage and Transportation Co., Ltd.( "Chic S&T") and will become the registered holder and beneficial owner of 100% equity interest in Shanghai New Chic Logistics Co., Ltd. a company organized and existing under the laws of the PRC ( "New Chic")before the Completion. The amount and particulars of the share capital and certain other particulars of Chic Logistics, Chic SCM, Chic S&T and New Chic are as set out in Part C of Schedule 1. (B) Each of the Sellers is the legal and record owner of the relevant Sale Shares (as hereinafter defined) as set out against its name in column (2), Part A of Schedule 1. (C) Each Warrantor was a founder of the Company. Johnson and Jimmy respectively own 90% and 10% of the issued and outstanding shares in the share capital of Swingside. Each Warrantor agrees to provide certain warranties under this Agreement. (D) On the terms and subject to the conditions hereinafter set forth, the Sellers have agreed to sell and the Buyer has agreed to purchase the Sale Shares. THE PARTIES AGREE as follows: 1. INTERPRETATION 1.1 In this Agreement: "Accounts" means the individual audited accounts of each Group Company and the Group's consolidated audited accounts, the auditors' reports on those accounts, the relevant directors' reports for that year on those accounts and the notes to those accounts (if and as applicable and available). "Actual EBITDA Valuation" means the product of (i) FY2007 Actual EBITDA, and (ii) 10.5. "Affiliate" means a person that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified person, where "control" means the power and ability to direct the management and policies of the controlled person through ownership of voting shares of the controlled person or by contract or otherwise. "AIC" means the State Administration for Industry and Commerce of the PRC and its local branches. "Ancillary Documentation" means any and all agreements and documents contemplated under this Agreement to be executed on or before Completion. "Business Day" means a day (other than a Saturday or Sunday or public holiday) on which banks are open for business in Hong Kong and the PRC. "Buyer's Accountant" means KPMG. "Buyer's Legal Counsel" means Jun He Law Offices at 32nd Floor, Shanghai Kerry Centre, 1515 West Nanjing Road, Shanghai, 200040, PRC. "Buyer's Warranty" means a statement contained in Part C of Schedule 4 and "Buyer's Warranties" means all of those statements. "Companies Ordinance" means Companies Ordinance (Chapter 32 of the Laws of Hong Kong) as amended from time to time. "Company" means Chic Holdings Limited. "Company's Accountant" means Deloitte Touche Tohmatsu Huayong Public Accountants Co., Ltd. "Completion" means completion of the sale and purchase of the Sale Shares in accordance with this Agreement. "Completion Date" means the third (3rd) Business Day after the date (not being later than 17 October 2007) on which the last of the Conditions to be satisfied or waived is satisfied or waived or such other date as the Buyer and the Sellers may agree in writing. "Completion Payment" has the meaning given to it in Clause 2.4.2. "Condition" means a condition set out in Clause and Clause 3.2 and "Conditions" means all those conditions. "Confidential Information" means all information which is used in or otherwise relates to any Group Company's business, customers or financial or other affairs including, without limitation, information relating to: (1) the marketing of services including, without limitation, customer names and lists and other details of customers, sales targets, sales statistics, market share statistics, prices, market research reports and surveys, and advertising or other promotional materials; or (2) pending projects, business development or planning, commercial relationships and negotiations, but does not include information which is in or comes into the public domain otherwise than by disclosure in breach of this Agreement. "Disclosure Letter" means (i) the letter set forth in Schedule 12 of this Agreement which is given by the Sellers to the Buyer, dated the date of this Agreement and set forth exceptions to the Warranties as of the date of this Agreement and (ii) (if the Sellers deem necessary) an amendment or supplement to the letter referenced to in subparagraph (i) above which is given by the Sellers to the Buyer, dated the Completion Date and set forth amended exceptions (occurring during the period from the date of this Agreement to Completion) to the Warranties as of the Completion Date. "Earn-out Payment" has the meaning given to it in Clause 2.3.2. "EBITDA" means earnings before interest, taxes, depreciation and amortization as defined by the International Accounting Standard Board. "Employee Benefit Plan" means any bonus, incentive or deferred compensation, employee loans, pension, profit sharing, severance, retention, change of control, stock option, employee, stock purchase, various statutory social welfare funds and housing funds, other equity- based performance or other employee or retiree benefit or compensation plan, scheme, agreement or arrangement that provides benefits or compensation in respect of any Employee which is or has been maintained by any Group Company, Ordinary Share Seller or Warrantor or to which any Group Company, Ordinary Share Seller or Warrantor contributes or is or has been obligated or required to contribute or is legally bound under applicable laws or regulations. "Employee" means a current employee of the Group and "Employees" means all current employees of the Group. "Encumbrance" means a mortgage, charge, pledge, lien, option, restriction, right of first refusal, right of pre-emption, third-party right or interest, other encumbrance or security interest of any kind, or another type of preferential arrangement (including, without limitation, a title transfer or retention arrangement) having similar effect. "Environmental Laws" means any laws and regulations of the People's Republic of China that relate to or otherwise impose liability or standards of conduct concerning industrial hygiene, occupational and other safety conditions, health conditions and environmental conditions on any Group Company, including, without limitation, laws and regulations relating to discharges, emission, release or threatened release of any noise, odors, pollutants, contaminants or Hazardous Substance into the ambient air, water or land or otherwise relating to manufacture, processing, generation, distribution, use, treatment, storage, disposal, cleanup, transport, handling of pollutants, contaminants or Hazardous Substance or otherwise relating to registration or approval of the services provided by the Group. "Escrow Account" means a separately designated interest-bearing account set up by the parties and managed by the Escrow Agent according to Clause 13 and the Escrow Agreement. "Escrow Agent" means the escrow agent appointed under the Escrow Agreement. "Escrow Agreement" means the escrow agreement among the Sellers, the Buyer and the Escrow Agent. "Financial Projections" means the financial projections of the Group Companies and their associated documents prepared by the Company, reviewed by the Sellers and Warrantors and presented by the Company to the Buyer in November 2006 and March 2007 with respect to the time periods projected therein. "FY2007 Actual EBITDA" means the unqualified, audited and consolidated EBITDA of the Group for the fiscal year ending 31 December 2007 prepared by the Company's Accountant, reviewed by Buyer's Accountant according to the principles set forth in Schedule 3 of this Agreement and confirmed jointly by the Buyer and Sellers in writing. "Group Company" means the Company or a Subsidiary. "Group" means the Company and each Subsidiary. "Hazardous Substance" means any material, substance or waste that poses or causes, or is alleged to pose or cause, any damage to property or personal injury, including death, or threat to the environment, including without limitation, those substances defined, listed, designated or classified as hazardous, toxic, radioactive, or dangerous or otherwise regulated or governed under any applicable environmental requirements of the People's Republic of China, including without limitation, any petroleum product or by-product, crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, synthetic gas usable as fuel, polychlorinated biphenyls, caustic, chlorine or chlorine-based compounds. "Hong Kong" means the Hong Kong Special Administrative Region of the PRC. "IFRS" means the International Financial Reporting Standards issued from time to time by the International Accounting Standards Board. "Indebtedness" of a person means (i) any and all financial liabilities and obligations of such person (whether interest accruing or not) and (ii) any and all costs to be incurred in connection with early repayment of any such indebtedness, including without limitation, any costs to be incurred for break funding and swap unwinding. "Intellectual Property Rights" means any of the following rights owned, used or required to be used by any Group Company: (a) patents, trade marks, service marks, registered designs, applications and rights to apply for any of those rights, trade, business and company names, internet domain names and e-mail addresses, unregistered trade marks and service marks, copyrights, database rights, rights in software, know-how, rights in designs and inventions; (b) rights under licences, consents, orders, statutes or otherwise in relation to a right in paragraph ; (c) rights of the same or similar effect or nature as or to those in paragraphs and which now or in the future may subsist; and (d) the right to sue for past infringements of any of the foregoing rights. "Joint Management Committee" has the meaning given to it in Clause 9.1. "Key Personnel" means each person as set forth in Schedule 9 of this Agreement; "Last Accounting Date" means 30 June 2007. "Material Adverse Change" means (i) any change in, or effect on any Group Company or its businesses which is, or which could reasonably be expected to be, materially adverse to the business, operations, assets, liabilities, financial condition, or results of operation of any Group Company, or (ii) any change, event, condition or development which will, or which could reasonably be expected to, prevent or materially hinder or delay the transaction contemplated by this Agreement, including without limitation any change in relevant laws or regulations. "Ordinary Sale Shares" means 594,221 Ordinary Shares of US$0.0001 per share in the share capital of the Company, representing all the issued and outstanding Ordinary Shares of the Company. "Permit" means: (a) a permit, licence, consent, approval, certificate, qualification, order, clearance, governmental franchise, concession, specification, registration or other authorisation; or (b) a filing of a notification, report or assessment, in each case from or with a Chinese or Cayman government agency and necessary for the effective operation of any Group Company's business, its ownership, possession, occupation or use of an asset as it currently engages in or owns, possesses, occupies or uses, or the execution or performance of this Agreement. "PRC" means the People's Republic of China which for the sole purpose of this Agreement shall exclude Hong Kong, Macau Special Administrative Region and Taiwan. "Preferred Sale Shares" means 446,119 Series A Preference Shares of US$0.0001 per share and 387,438 Series B Preference Shares of US$0.0001 per share in the issued share capital of the Company, representing all the issued preference shares of the Company. "Property" means the property or properties details of which are set out in Schedule 6. "Purchase Price" has the meaning given to it in Clause 2.2. "Relevant Claim" means a Warranty Claim, a claim for breach of any covenants and/or other provisions or for indemnifications by the Sellers or Warrantors under this Agreement or any Ancillary Documentation, a claim for any contingent or hidden liability, or a claim under the Tax Deed. "Retained Payment" has the meaning given to it in Clause 2.4.1. "SAFE" means the State Administration of Foreign Exchange of the PRC or its local branches. "Sale Shares" means each and all Ordinary Sale Shares and Preferred Sale Shares. "Sellers' Representative" means each of David Li and Henry Yao. "Subsidiaries" means each of the companies set out in Part C of Schedule 1. "Tax Authority" means any national, local, municipal, or other fiscal, revenue, customs or excise authority, body or official. "Tax Deed" means the tax deed in the form as set forth in Schedule 8 of this Agreement. "Taxes" mean (a) all taxes and social charges of that nature whether of Cayman Islands, Hong Kong or the PRC, however denominated, including any interest, penalties or other additions that may become payable in respect thereof, which will include, without limiting the generality of the foregoing, all customs duties, corporate and individual income taxes, employee withholding taxes, withholding tax on other service providers, withholding tax on capital gains, unemployment insurance, social security taxes, national pension, national health insurance, statutory housing funds, sales and use taxes, value added taxes, real and personal property taxes, stamp taxes, transfer taxes, workers' compensation, other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which are required to be paid, withheld or collected, or (b) any liability for amounts referred to in (a) as a result of any obligations to indemnify another person. "Upfront Payment" has the meaning given to it in Clause 2.3.1. "Warranty Claim" means a claim for breach of any Warranty. "Warranty" means a statement contained in Parts A and B of Schedule 4 and any other representations and warranties given by the Seller(s) or Warrantor(s) under this Agreement and "Warranties" means all those statements. For purposes of clarification, Warranties as defined here do not include "Buyer's Warranties". 1.2 In this Agreement, a reference to: 1.2.1 a "subsidiary" is to be construed in accordance with section 2 of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) as amended from time to time; 1.2.2 liability under, pursuant to or arising out of (or any analogous expression) any agreement, contract, deed or other instrument includes a reference to contingent liability under, pursuant to or arising out of (or any analogous expression) that agreement, contract, deed or other instrument; 1.2.3 liability includes, but is not limited to, any liability in equity, contract or tort (including negligence); 1.2.4 a document in the "agreed form" is a reference to a document in a form and substance approved by or on behalf of each party; 1.2.5 a statutory provision includes a reference to the statutory provision as modified or re-enacted or both from time to time before the date of this Agreement and any subordinate legislation made under the statutory provision (as so modified or re-enacted) before the date of this Agreement; 1.2.6 a "person" includes a reference to any individual, firm, company, corporation or other body corporate, government, state or agency of a state or any joint venture, association or partnership, works council or employee representative body (whether or not having separate legal personality); 1.2.7 a person includes a reference to that person's legal personal representatives, successors and permitted assigns; 1.2.8 a "party" includes a reference to that party's successors and permitted assigns; 1.2.9 a clause, paragraph or schedule, unless the context otherwise requires, is a reference to a clause or paragraph of, or schedule to, this Agreement and constitutes an integral part of this Agreement; 1.2.10 any Hong Kong legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official or any legal concept or thing shall in respect of any jurisdiction other than Hong Kong be deemed to include what most nearly approximates in that jurisdiction to the Hong Kong legal term and to any Hong Kong ordinance shall be construed so as to include equivalent or analogous laws of any other jurisdiction; 1.2.11 times of the day is to Hong Kong time; 1.2.12 "US$" or "United States dollars" shall mean the lawful currency of the United States of America; and 1.2.13 "RMB" or "Renminbi" shall mean the lawful currency of the PRC. 1.3 The headings in this Agreement do not affect its interpretation. 1.4 Any monetary sum to be taken into account for the purposes of calculating the Earn-out Payment where that sum is expressed in RMB shall be translated into US$ at the closing mid-point dollar spot rate applicable to the balance of all such amounts as are expressed in RMB at close of business in PRC on December 31, 2007 published by the PRC Foreign Exchange Center under the authorization of the People's Bank of China. 1.5 Any monetary sum to be taken into account for the purposes of any Relevant Claim where that sum is expressed in a currency other than US$ shall be translated into US$ at the closing mid-point dollar spot rate applicable to the balance of all such amounts as are expressed in that non-US$ currency at close of business in PRC on the Business Day preceding the date of the written notification of the Relevant Claim (or, if such day is not a Business Day, on the Business Day immediately preceding such day) published by the PRC Foreign Exchange Center under the authorization of the People's Bank of China. 1.6 All payments to be made pursuant to this Agreement shall be made in immediately available funds by transfer of funds for the same day value to such accounts as shall be notified by the Sellers in writing to the Buyer at least three Business Days before the date on which the payment is due or, as the case may be, by the Buyer in writing to the Sellers at least three Business Days before the date on which the payment is due. 1.7 A reference to a party's knowledge, information or belief is deemed to include knowledge, information and belief which such party would have if it had made all due, diligent, careful and good faith queries and investigations and, without limitation, includes the knowledge, information and belief of its officers and affiliates, provided however that a reference to the Preferred Share Sellers' knowledge shall mean their actual knowledge and awareness and the knowledge and awareness such Preferred Share Sellers have obtained with respect to matters noted in the minutes of the meetings of, or otherwise presented in any form to, the directors and shareholders of the Company. 1.8 Each representation, warranty, covenant, and/or liability of the Sellers under this Agreement is warranted by the Warrantors regardless if the Warrantors are specifically identified in any particular clauses. 1.9 Subject to other terms and conditions of this Agreement, the obligations and liabilities of each of the Sellers and the Warrantors contained in this Agreement shall be joint and several. 2. SALE AND PURCHASE 2.1 On the terms and subject to the conditions set forth herein, each Seller agrees to sell to the Buyer, and the Buyer agrees to buy from such Seller, the Sale Shares legally and owned of record by such Seller and each right attaching to the Sale Shares at or after Completion, free of any Encumbrance. 2.2 The Purchase Price of the Sale Shares shall be calculated as follows: "Purchase Price" is equivalent to: (a) US$60,000,000, if the Actual EBITDA Valuation is less than or equivalent to US$60,000,000; or (b) the Actual EBITDA Valuation, if Actual EBITDA Valuation is greater than US$60,000,000 but less than US$89,000,000; or (c) US$89,000,000, if Actual EBITDA Valuation is equivalent to or greater than US$89,000,000. For purposes of clarification and to avoid any ambiguity, the Purchase Price shall in no event and under no circumstances be lower than US$60,000,000. 2.3 The Purchase Price shall be divided into Upfront Payment and Earn-Out Payment and be paid to the Sellers according to Clause 2.4 below. The Upfront Payment and Earn-Out Payment shall be calculated and paid as follows: 2.3.1 "Upfront Payment" is equivalent to US$60,000,000 and shall be paid by the Buyer to the Sellers according to Clause 2.4.1 and Clause 2.4.2 below. 2.3.2 "Earn-out Payment" is equivalent to: (a) the positive difference between the Purchase Price and the Upfront Payment (that is, Purchase Price minus Upfront Payment), if the Purchase Price is greater than the Upfront Payment; or (b) 0, if the Purchase Price is equivalent to the Upfront Payment, and shall be paid to the Sellers according to Clause 2.4.3 below. 2.4 In consideration for the sale and transfer by the Sellers of the Sale Shares, the Buyer agrees to pay to the Sellers the Purchase Price in the following manner, subject to the satisfaction or written waiver by the Buyer of each of the Conditions set forth in Clause 3 below: 2.4.1 15% of the Upfront Payment (the "Retained Payment") shall be jointly deposited by the Buyer and the Sellers into the Escrow Account on Completion and shall be released to the Sellers or Buyer in accordance with Clause 13 and the Escrow Agreement; 2.4.2 85% of the Upfront Payment (the "Completion Payment") shall be paid out to an account designated jointly by the Sellers on Completion; and 2.4.3 The Earn-out Payment shall be paid to the Sellers in the following manner: (a) if the situation under Clause 2.3.2(a) occurs, the Buyer shall, within thirty (30) days of the determination of the FY2007 Actual EBITDA, pay such Earn-out Payment to the Sellers by wire transfer into an account designated jointly by the Sellers; and (b) if the situation under Clause 2.3.2(b) occurs, the Buyer shall not be obligated to pay any Earn-out Payment. 2.5 For the avoidance of doubt, the Buyer shall be deemed to have fully discharged its obligations to each Seller under this Clause 2 if it has made payments to the Escrow Account and to the account(s) designated jointly by the Sellers according to this Clause 2. 3. CONDITIONS 3.1 Buyer's obligation to proceed with Completion is conditional on the following Conditions being satisfied to the satisfaction of or waived (in whole or in part) by the Buyer, on or before 12:00PM on the Completion Date: 3.1.1 The Warranties made by each Seller and each Warrantor and qualified by the Disclosure Letter shall have been true, correct and not misleading in all respects when made, and shall remain true, correct and not misleading in all material respects as of the Completion Date with the same force and effect as if they had been made on and as of such date, subject to changes contemplated by this Agreement and the Ancillary Documentation and disclosed in the updated Disclosure Letter (or if any such representation or warranty is expressly stated to have been made on a specific date, on and as of such specific date). 3.1.2 Each Seller and Warrantor shall have performed and complied with in all material respects and to the reasonable satisfaction of the Buyer, all agreements, obligations, covenants and conditions contained in this Agreement and the Ancillary Documentation which are required to be performed or complied with by it on or before the Completion Date. 3.1.3 All corporate and other proceedings of the Sellers, Warrantors and/or any Group Company in connection with the transactions contemplated hereby and all documents and instruments incidental to such transactions shall have been taken and be reasonably satisfactory in substance and form to the Buyer, and the Buyer shall have received certified copies of all such documents as it may reasonably request. 3.1.4 Each Seller shall have obtained all requisite approvals, consents and waivers necessary for consummation of the transactions contemplated by this Agreement and all such approvals, consents and waivers shall remain in full force and effect. 3.1.5 Each Seller and Warrantor shall cause the Company to possess and continue to possess all material Permits and waivers required from PRC, Cayman Islands and all other relevant governmental or regulatory authorities for the operation of the Company as a going concern. 3.1.6 The Buyer shall have received a certificate of good standing issued by the Registrar of Companies of the Cayman Islands dated no earlier than fifteen (15) days prior to the Completion Date in respect of the Company, certifying that the Company was duly incorporated, has paid all required fees and is validly existing and in good standing under the laws of the Cayman Islands. 3.1.7 The Sellers shall have procured, to the reasonable satisfaction of Buyer, that (i) all instruments for the replacement of all directors and secretary of the Company have been duly executed by the appropriate parties for filing and registration with Registrar of Companies of the Cayman Islands with effectiveness upon the Completion; (ii) all instruments for the replacement of all directors and supervisors of each Group Company incorporated in the PRC have been duly executed by the appropriate parties for filing and registration with the competent governing PRC authorities with effectiveness upon the Completion. Each director and supervisor resigning from a Group Company shall have executed a written statement with the Group Company confirming such resigning director or supervisor has no claim against such company for compensation or loss or otherwise. 3.1.8 The Shareholders' Agreement between the Sellers, Warrantors and the Company dated 15 August 2005 and the Supplementary Shareholders' Agreement dated 2nd September 2005 shall both be terminated and have no further effect and evidence thereof shall been provided to Buyer in form and substance reasonably satisfactory to the Buyer. 3.1.9 Each action pending Completion set forth in Schedule 5 shall have been performed in all material aspect and to the reasonable satisfaction of the Buyer. 3.1.10 The Sellers shall have provided consolidated financial statements (including profit and loss statement, cash flow statement, balance sheet and relevant schedules) prepared, reviewed and confirmed by the Company's Accountant in accordance with the then applicable IFRS for the period from 1 January 2007 up to and as of the Last Accounting Date and as of the last day of the month immediately preceding the Completion Date in respect of each Group Company and the Group in form and substance to the reasonable satisfaction of the Buyer. 3.1.11 The Buyer shall have received from Cayman Islands, Hong Kong and PRC counsels to the Group legal opinions in relation to due incorporation, authorization, valid existence, good standing, incumbency, enforceability corporate power, no conflict or violation, approvals and filings, no litigation and such other matters as to each Group Company as the Buyer may reasonably request, addressed to the Buyer, dated the Completion Date, and in form and substance reasonably satisfactory to the Buyer. 3.1.12 Each Key Personnel shall have executed an employment, confidentiality and non-compete agreement with a Group Company designated by the Buyer for a term no less than 3 years and in form and substance as set forth in Schedule 10 of this Agreement. 3.1.13 The Sellers and the Warrantors shall have executed a Tax Deed in form and substance as set forth in Schedule 8 of this Agreement; and the Sellers shall have executed the Escrow Agreement. 3.1.14 The Sellers shall have obtained a letter of understanding to the reasonable satisfaction of the Buyer from Procter & Gamble Guangzhou Co., Ltd. under which Procter & Gamble Guangzhou Co., Ltd. (i) waives its rights of 90 days advance notice with respect to the proposed transaction which may result in the change of control of Chic SCM; (ii) waives its rights of "pre-emptive purchase rights" of the proposed transaction; and (iii) waives its rights to terminate its contracts with Chic SCM during the 180 days following the receipt of notice regarding the proposed transaction. 3.1.15 The relevant Group Company(ies) shall have renewed the existing service contracts with each of ICI and Butler on substantially same terms and conditions. 3.1.16 A new business license of Chic S&T reflecting that the Warrantors have transferred all their equity interests in Chic S&T to Chic Logistics at nominal price shall have been issued by the competent Chinese government authorities and delivered to Buyer with all transfer documentation in form and substance to its reasonable satisfaction. 3.1.17 Each of Jimmy and Chic S&T shall have duly executed appropriate legal documentation for the transfer of all their equity interests in New Chic to Chic Logistics at nominal price, duly completed such transfer and shall have caused such documentation and the necessary applications in connection therewith been duly filed with the competent Chinese government authorities. A new business license of New Chic reflecting such equity transfer shall have been issued by the competent Chinese government authorities and delivered to Buyer with all transfer documentation in form and substance to its reasonable satisfaction. 3.1.18 Chic S&T and Chic SCM shall have terminated the Service and Undertakings Agreement signed between them in December 2006. 3.1.19 Chic's Mart Trading Co., Ltd. shall have entered into a non- disclosure and non-compete agreement with the Company in form and substance as set forth in Schedule 11 of this Agreement. 3.1.20 The receipt by the Buyer of evidence reasonably satisfactory to the Buyer that: upon Completion, (i) any and all agreements and arrangements by either of the Sellers, Warrantors or Group Companies to grant share options or warrants (or to give similar rights) to any Employees of any Group Companies; and (ii) any and all share options or warrants granted (or similar rights given) to any Employees of any Group Companies have been released, cancelled, waived and surrendered by each relevant Employee of all Group Companies in favour of the Group Companies. Without limiting the generality of the forgoing, the Sellers and the Warrantors shall have procured that (i) all existing warrants issued by Prosper Field to Employees other than Anny Wang, Waley Jiang, Lu Wei and Miao Qian have not been exercised and have been cancelled and invalidated in return for the arrangement that the proceeds from the sale of shares which would otherwise be granted under such warrants are paid to the warrant holders according to the following schedule: 40% proceeds to be paid on Completion, 30% proceeds to be paid one (1) year after Completion and 30% proceeds to be paid two (2) years after Completion; (ii) all existing warrants issued by Prosper Field to each of Anny Wang, Waley Jiang, Lu Wei and Miao Qian have not been exercised and have been cancelled and invalidated in return for the arrangement that the proceeds from the sale of shares which would otherwise be granted under such warrants are paid to each of these four (4) employees according to the same schedules and proportions pursuant to which Prosper Field is entitled to receive its portion of Purchase Price under this Agreement; and (iii) all warrants (if any) issued by Swingside have been cancelled and invalidated. 3.1.21 Chic S&T and Shanghai Venus Software Co., Ltd. shall have executed an amendment to the Technology Development Contract dated July 9, 2002 to the reasonable satisfaction of the Buyer whereby all affiliates companies of Chic S&T, including without limitation Chic Logistics, Chic SCM and New Chic will be allowed to use the logistics management program (including its upgrades and add-ons) jointly owned by Chic S&T and Shanghai Venus Software Co., Ltd. without any additional consideration and without time limits or other restrictions. 3.1.22 The Sellers shall have procured that each of the relevant Subsidiary(ies) maintains with a well-established and reputable insurer adequate insurance against all risks usually and customarily insured against by comparable companies carrying on the same or a similar business for all assets of an insurable nature leased, owned or controlled by such Subsidiary(ies). 3.1.23 The Sellers and Warrantors shall deliver to the Buyer a joint closing certificate, dated the Completion Date, certifying that (i) each condition specified in Clause 3.1 of this Agreement have been fulfilled; (ii) each Warranty is true, accurate and not misleading in all material respects, without giving effect to any amendment or supplement to the Disclosure Letter after the date of this Agreement; (iii) each covenant of the Sellers to be performed prior to Completion under this Agreement has been duly fulfilled; and (iv) there has been no Material Adverse Change since the date of this Agreement. 3.1.24 No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the Completion or any of the transactions contemplated by this Agreement or the Ancillary Documentation shall be in effect and on proceeding initiated by any governmental entity seeking an injunction shall be pending. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any governmental entity which prohibits, restricts or makes illegal the Completion or any of the transactions contemplated by this Agreement or the Ancillary Documentation. 3.1.25 All Sellers shall have issued a consent and waiver to the Buyer in form and substance reasonably satisfactory to the Buyer certifying that it irrevocably waives any and all rights of pre- emption, first refusal and other rights or restrictions on the transfer of the Sale Shares to the Buyer according to any applicable law, corporate documents or charter documents of the Company, or any contracts, agreements, covenants or other documents governing the sale and purchase of Sale Shares and shall procure that all such rights conferred on any other person are waived no later than Completion so as to permit the sale and purchase of the Sale Shares. 3.2 Sellers' obligation to proceed with Completion is conditional on the following Conditions being satisfied to the reasonable satisfaction of or waived by the Sellers, on or before the Completion Date: 3.2.1 Each Buyer's Warranty contained in Part C of Schedule 4 hereof shall remain true, correct and not misleading in all material respects when made and as of the Completion Date with the same force and effect as if it had been made on and as of such date, subject to changes contemplated by this Agreement or otherwise disclosed by the Buyer in writing. 3.2.2 The Buyer's purchase of the Sale Shares pursuant to this Agreement shall remain exempt from the registration and/or qualification requirements under all applicable securities laws, including, without limitation, the US federal securities laws and any state blue sky laws. 3.2.3 The Buyer shall have obtained from its board of directors the necessary approval of the transactions contemplated under this Agreement. 3.2.4 No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the Completion or any of the transactions contemplated by this Agreement or the Ancillary Documentation shall be in effect and on proceeding initiated by any governmental entity seeking an injunction shall be pending. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any governmental entity which prohibits, restricts or makes illegal the Completion or any of the transactions contemplated by this Agreement or the Ancillary Documentation. 3.3 Each Seller and Warrantor shall make all reasonable efforts to achieve satisfaction of the Conditions set out in Clause 3.1 as soon as possible after the date of this Agreement and in any event not later than 12:00 p.m. on the Completion Date. 3.4 The Buyer shall make all reasonable efforts to achieve satisfaction of the Condition set out in Clause 3.2 as soon as possible after the date of this Agreement and in any event not later than 12:00 p.m. on the Completion Date. 3.5 If, at any time, any Party becomes aware of a fact or circumstance that might prevent a Condition being satisfied, it shall immediately notify the other parties in writing. 3.6 At any time on or before 12:00 p.m. on the Completion Date the Buyer may waive any Condition set out in Clause 3.1 by written notice to the Sellers on any terms it may decide in its sole discretion. At any time on or before 12:00 p.m. on the Completion Date the Sellers may waive any Condition set out in Clause 3.2 by written notice to the Buyer on any terms they may decide in their sole discretion. 3.7 If a Condition set out in Clause 3.1 has not been waived by the Buyer pursuant to Clause or has not been satisfied by 12:00 p.m. on 17 October 2007 or such other date as the parties hereto may agree, or if a Condition set out in Clause 3.2 has not been waived by the Sellers pursuant to Clause or has not been satisfied by 12:00 p.m. on 17 October 2007 or such other date as the parties hereto may agree, this Agreement shall automatically terminate with immediate effect, and shall become null and void and be of no further force and effect whatsoever and all the obligations and liabilities of the parties hereunder shall cease and terminate (save for any antecedent breaches of this Agreement and the confidentiality obligations of the Parties under Clause 10). 4. COMPLETION 4.1 Subject to the Conditions having been fulfilled (or waived as provided Clause 3.6) Completion shall take place at the offices of the Buyer's Legal Counsel at Suite 2208, 22nd Floor, Jardine House, 1 Connaught Place, Central, Hong Kong on the Completion Date (or such other place and/or time as the Sellers and the Buyer may agree). 4.2 At Completion each Seller shall do all those things respectively required of it in Schedule 2. 4.3 The Buyer will not be obliged to complete its obligations or the purchase of any Sale Shares under this Agreement unless: 4.3.1 each of the Sellers and Warrantors complies with all its obligations required to be performed before Completion under this Agreement; and 4.3.2 the sale and purchase of all the Sale Shares is completed simultaneously. 4.4 If Completion does not take place on the Completion Date because any of the Sellers fails to comply with any of its obligations under this Agreement (whether such failure by such Seller amounts to a repudiatory breach or not), the Buyer may by notice to the Sellers: 4.4.1 proceed to Completion to the extent reasonably practicable (but if the Buyer exercises its right pursuant to this Clause , Completion of the purchase of some of the Sale Shares will not affect the Buyer's rights with respect to the other Sale Shares); 4.4.2 postpone Completion to a date not more than 30 Business Days after the Completion Date and not later than 17 October 2007 or such other date agreed by all Parties in writing; or 4.4.3 terminate this Agreement. 4.5 If the Buyer postpones Completion to another date in accordance with Clause , the provisions of this Agreement shall apply as if that other date is the Completion Date. 4.6 If the Buyer terminates this Agreement pursuant to Clause , each party's further rights and obligations cease immediately on termination, but termination does not affect a party's accrued rights and obligations at the date of termination. 5. WARRANTIES AND PRE-COMPLETION CONDUCT 5.1 The Sellers and Warrantors jointly and severally represent and warrant to the Buyer that, subject to the matters disclosed in the Disclosure Letter (in the form delivered as of the date of this Agreement), each Warranty is true, accurate and not misleading in all material aspects at the date of this Agreement. Immediately before Completion, the Sellers and Warrantors are deemed to jointly and severally to represent and warrant to the Buyer that, subject to the matters disclosed in the Disclosure Letter, each Warranty is true, accurate and not misleading in all material respects by reference to the facts and circumstances as at Completion. For this purpose only, where there is an express or implied reference in a Warranty to the "date of this Agreement", that reference is to be construed as a reference to Completion. 5.2 Each Seller and Warrantor acknowledges that the Buyer is entering into this Agreement in reliance on each Warranty (each of which has also been given as a representation) and with the intention of inducing the Buyer to enter into and perform its obligations under this Agreement. 5.3 The Warranties are qualified by the facts and circumstances disclosed in the Disclosure Letter. No other knowledge relating to any Group Company (actual, constructive or imputed) prevents or limits a claim made by the Buyer for breach of Clause . None of the Sellers shall invoke the Buyer's knowledge (actual, constructive or imputed) of a fact or circumstance which might make a Warranty untrue, inaccurate or misleading as a defense to a claim for breach of Clause . 5.4 Reference to any facts and circumstances being disclosed as exceptions to the Warranties shall be deemed to be a reference to them being fully, fairly, specifically and accurately disclosed in the Disclosure Letter in such a manner that: 5.4.1 in the context of the disclosures contained in the Disclosure Letter: (a) the significance of the information disclosed and its relevance to a particular Warranty ought reasonably to be appreciated by a similarly situated buyer, taking into account the paragraphs or subject matters in relation to which the information was disclosed; (b) there is not omitted from the information disclosed any information which would have the effect of rendering the information so disclosed misleading in any respect; and 5.4.2 in the context of any document treated as disclosed by the Disclosure Letter, the matter disclosed is reasonably apparent from the terms of the document, and nothing disclosed by the Sellers to the Buyer other than in the Disclosure Letter and in accordance with the provisions of this Clause shall constitute disclosure as exceptions to the Warranties for the purposes of this Agreement. 5.5 Conditional upon and subject to the Completion, each Seller and Warrantor undertakes not to make any claim against any Group Company or any director, officer or employee of any Group Company other than the Warrantors which it may have in respect of a misrepresentation, inaccuracy or omission in or from information or advice provided by such Group Company or a director, officer or employee of such Group Company other than the Warrantors for the purpose of assisting the Seller to make a representation, give a Warranty or prepare the Disclosure Letter. 5.6 Each Warranty is to be construed independently and (except where this Agreement provides otherwise) is not limited by a provision of this Agreement or another Warranty. 5.7 Between the execution of this Agreement and Completion the Sellers and Warrantors shall: 5.7.1 ensure that each Group Company complies with Schedule 5; 5.7.2 notify the Buyer immediately if it becomes aware of a fact or circumstance which constitutes or which would or might constitute a breach (whether repudiatory in nature or not) of Clause or or which would or might cause a Warranty to be untrue, inaccurate or misleading if given in respect of the facts or circumstances as at Completion. 5.8 The Buyer warrants to the Sellers that each Buyer's Warranty is true, accurate and not misleading at the date of this Agreement. Immediately before Completion, the Buyer is deemed to warrant to the Sellers that each Buyer's Warranty is true, accurate and not misleading by reference to the facts and circumstances as at Completion, subject to changes contemplated by this Agreement or otherwise disclosed by the Buyer in writing. For this purpose only, where there is an express or implied reference in a Warranty to the "date of this Agreement", that reference is to be construed as a reference to Completion. 6. THE BUYER'S REMEDIES AND THE SELLER'S REMEDIES 6.1 The Sellers and the Warrantors hereby jointly and severally agree with the Buyer to indemnify the Buyer as provided in this Clause 6. As used in this Clause 6: 6.1.1 the term "Damages" shall mean all losses, claims, damages, costs and expenses (including reasonable legal expenses), liabilities and reduction in value which a Buyer Indemnitee (as defined in Clause 6.5) may sustain, suffer or incur which arises out of or in connection with this Agreement including, without limitation, each loss, claim, damage, liability, cost and expense (including legal fees) incurred as a result of defending or settling a Relevant Claim; and 6.1.2 the term "Third Party Claim" shall mean any claim, action, suit or like matter which is asserted by a party other than the parties hereto against the Buyer or any Group Company with respect to such Group Company's business and operations or the transactions contemplated under this Agreement, provided however, that a claim from a Tax Authority under the Tax Deed shall not be regarded as a Third Party Claim and shall be governed under the Tax Deed. 6.2 If, at any time before Completion, the Buyer reasonably considers that any Seller or Warrantor is in breach of any provision of this Agreement (whether such breach amounts to a repudiatory breach or not) or if any of the Sellers gives a notice under Clause , the Buyer may, by notice in writing to Sellers, elect to proceed to Completion or terminate this Agreement. 6.3 If the Buyer terminates this Agreement pursuant to Clause 6.2, each party's further rights and obligations shall cease immediately on termination, but termination will not affect a party's accrued rights and obligations at the date of termination. 6.4 If the Buyer elects to proceed to Completion pursuant to Clause 6.2, then the parties should discuss in good faith and seek acceptable terms and conditions in writing. 6.5 Subject to the limitations and conditions set forth in this Clause 6, the Sellers and Warrantors shall jointly and severally indemnify, save and keep the Buyer, its officers, directors, shareholders and agents and each and all the Group Companies (each a "Buyer Indemnitee" and collectively the "Buyer Indemnitees") harmless against and from all Damages sustained or incurred by any Buyer Indemnitee arising from or in connection with: 6.5.1 any breach of any Warranty of the Sellers or Warrantors; 6.5.2 any breach or default of, or failure to comply with, any of the covenants, obligations or agreements of the Sellers or Warrantors under this Agreement, the Tax Deed, any other Ancillary Documentation and/or in any document or certificate delivered pursuant thereto; and 6.5.3 any claims in connection with or arising from the use of warehouses without appropriate title certificates prior to December 31, 2007. 6.6 Subject to Clause 6.9 below, the indemnification obligations of the Sellers and Warrantors pursuant to the provisions of Clause 6 are subject to the following limitations: 6.6.1 The Buyer Indemnitee(s) shall not be entitled to recover under Clause 6: (a) unless a claim has been asserted by written notice, specifying the grounds for indemnification and delivered to the Sellers' Representatives; (b) until the aggregate amount of all asserted Damages exceed US$350,000, but at such point the Sellers and Warrantors shall be liable for the whole of such amount and not just the excess; provided also that in calculating the US$350,000, all Damages shall be aggregated, and not just the Damages that exceed US$350,000; (c) to the extent the Buyer Indemnitees received the proceeds of any insurance held by the Group Company covering the subject matter; and (d) any additional amount of the Damages from any Sellers or Warrantors, if Damages recovered under this Agreement have exceeded the Purchase Price. 6.6.2 Preferred Share Seller will not be liable for any Relevant Claim unless the Sellers' Representatives have received written notices regarding the Relevant Claim from the Buyer prior to the second anniversary of the Completion. For the avoidance of doubt, the Preferred Share Seller will be liable for a Relevant Claim if the Buyer Indemnitee(s) has given written notices to the Sellers' Representatives regarding a Relevant Claim prior to the second anniversary of the Completion but final resolution regarding such Relevant Claim occurs only after the second anniversary of the Completion. 6.6.3 Notwithstanding anything to the contrary in this Agreement but subject to Clause 6.9, CVDS' liability under this Agreement shall in no event and under no circumstances exceed the US$3,005,100 it contributes to the Retained Amount and deposits into the Escrow Account pursuant to the Escrow Agreement, SEAVI's liability under this Agreement shall in no event exceed the US$1,730,700 it contributes to the Retained Amount and deposits into the Escrow Account pursuant to the Escrow Agreement, and Fortis' liability under this Agreement shall in no event exceed the US $519,300 it contributes to the Retained Amount and deposits into the Escrow Account pursuant to the Escrow Agreement, provided however that such limitation shall not in any way prejudice the rights of the Buyer Indemnitee(s) to recover from the Ordinary Share Sellers and Warrantors under this Agreement. 6.7 Promptly after receipt by a Buyer Indemnitee under this Clause 6 of notice of any Third Party Claim, and in any event within the time period necessary to respond to such pleading, the Buyer shall deliver to Sellers' Representatives a written notice setting forth with reasonable specificity the facts and circumstances of which such Buyer Indemnitee has received such Third Party Claim and the basis upon which the Buyer Indemnitee's claim for indemnification is asserted. Upon receipt of such notice, each of the Sellers and Warrantors shall have the right to participate in, and, to the extent any Sellers and Warrantors so desires, jointly with any other Sellers and Warrantors similarly noticed (if any), to assume control of the defense thereof at its own expense and with counsel of its own choice; provided, however, that the Sellers and Warrantors shall diligently pursue such defense. If in the reasonable opinion of the Buyer, the Sellers and Warrantors cannot diligently pursue such defense or cannot reach internal consensus on ways to pursue such defense, the Buyer may, after giving written notice to the Sellers' Representatives, assume control of the defense. For the avoidance of doubt no Buyer Indemnitee shall settle any Third Party Claim without consent of any of the Sellers and Warrantors. The Sellers and Warrantors or the Buyer Indemnitee, as the case may be, shall in good faith cooperate with and assist the defending party in the defense of such Third Party Claim. 6.8 Except in respect of claims based upon fraud and subject to other terms and conditions of this Agreement, the indemnification accorded by this Clause 6 shall be the sole and exclusive remedy of the Buyer under this Agreement in respect of any misrepresentation or inaccuracy in, or breach of, any representation or warranty or any breach or failure in performance of any covenant or agreement made in this Agreement, the Ancillary Documentation, and/or in any document or certificate delivered pursuant thereto. Notwithstanding the foregoing, in the event of any breach or failure in performance after the Completion of any covenant or agreement, the Buyer shall also be entitled to seek specific performance, injunctive or other equitable relief. 6.9 Notwithstanding any other provision hereof, nothing in this Clause 6 shall limit, in any manner, any remedy at law or equity, to which the Buyer may be entitled as a result of (i) fraud by any Seller or Warrantor committed to the Buyer; or (ii) any misrepresentations relating to the title to the Sale Shares. 6.10 Subject to each limitation and condition set forth in Clause 6.11 below, the Buyer agrees to indemnify and hold harmless the Sellers against all damages sustained or incurred by the Sellers arising from or in connection with any breach or default of, or failure to comply with any of Buyer's Warranties and any covenants, obligations or agreements of the Buyer under this Agreement: 6.11 The Sellers shall not be entitled to recover from the Buyer and the Buyer shall not be obligated to indemnify the Sellers under Clause 6.10: (a) unless a claim has been asserted by written notice, specifying the grounds for indemnification and delivered to the Buyer prior to the second anniversary of the Completion; (b) until the aggregate amount of all asserted damages exceed US$350,000, but at such point the Buyer shall be liable for the whole of such amount and not just the excess; provided also that in calculating the US$350,000, all damages shall be aggregated, and not just the damages that exceed US$350,000; (c) to the extent the Seller received the proceeds of any insurance maintained by it; and (d) in respect of any additional amount of the damages from the Buyer, if damages recovered under this Agreement from the Buyer have exceeded the Retained Payment. 7. FURTHER UNDERTAKINGS BY THE SELLERS 7.1 Subject to Clause 7.2, each of the Sellers and Warrantors undertakes to the Buyer that it will not do any of the following things: 7.1.1 for a period of 3 years starting on the Completion Date, either alone or jointly with, through or as adviser to, or agent of, or manager for, any person directly or indirectly carry on or be engaged, concerned or interested in or assist a business in the PRC which competes, directly or indirectly, with a business of a Group Company as carried on at the date of this Agreement or at any time in the twelve months prior to that date; 7.1.2 for a period of 3 years starting on the Completion Date, on its own account or in conjunction with or on behalf of any other person in respect of the services of a business of a Group Company either seek to obtain orders from, or do business with, or encourage directly or indirectly another person to obtain orders from or do business with, a person who has been a customer of that business at any time during the twelve months prior to the date of this Agreement for the products or services of that business in its territory of operation; or 7.1.3 for a period of 3 years starting on the Completion Date directly or indirectly solicit or initiate contact with, with a view to his engagement or employment by another person, a director, officer, employee or manager of a Group Company or a person who was a director, officer, employee or manager of a Group Company at any time during the twelve months prior to the date of this Agreement, in either case where the person in question either has Confidential Information or would be in a position to exploit a Group Company's trade connections. 7.2 Notwithstanding anything to the contrary in Clause 7.1 and for purposes of clarification, but subject to such Sellers' confidentiality obligations hereunder, the provisions of Clause 7.1 shall not apply to equity investment conducted or to be conducted by any Preferred Share Seller, in each case, in its capacity as an institutional private equity investor; nor shall any competitive conduct by any of its portfolio companies set forth in Clause 7.1 above be attributed to such institutional private equity investor. 7.3 In addition to the actions pending Completion set forth in Schedule 5, from the date of this Agreement to Completion, each Seller and Warrantor shall not, directly or indirectly: 7.3.1 enter into or engage in any discussion or negotiation with any person except the Buyer in connection with the sale of any Group Company or the business or any part of the business of or (except in the usual course of business or as contemplated under this Agreement and the Ancillary Documentation) any of the assets of the business of any Group Company; 7.3.2 enter into an agreement or arrangement with any person except the Buyer or any person designated by the Buyer in connection with the sale of any Group Company or the business or any part of the business of or (except in the ordinary course of business or as contemplated under this Agreement and the Ancillary Documentation) any of the assets of any Group Company; or 7.3.3 make available to any person except the Buyer, its directors, officers, duly authorised representatives, advisers or agents any information relating to the sale of any Group Company or the business or any part of the business of or (except in the usual course of business or as contemplated under this Agreement and the Ancillary Documentation) any of the assets of any Group Company. 7.4 On and immediately after Completion, each Warrantor and Seller shall use their reasonable best efforts to assist the Buyer to procure: (a) that all filings and registrations for the replacement of all directors and secretary of the Company, and for the replacement of all directors and supervisors of each Group Company incorporated in the PRC be completed within one month after Completion; (b) that each Group Company has filed the change of bank signatories and other mandates to the satisfaction of the Buyer for all of its RMB and foreign exchange bank accounts within 15 days after Completion; (c) that Chic's Mart Trading Co., Ltd. shall have repaid all its outstanding loans owed to the Subsidiaries within 15 Business Days after Completion; (d) that no new Employee Benefit Plan of the Group be introduced, amended or discontinued during the period from Completion to 31 December 2007; and (e) during the period from Completion to 31 December 2007, (i) that the business of each Group Company is operated in the usual way and according to its existing 2007 budgetary and business plan of the Group so as to maintain that business as a going concern, (ii) that sufficient working capital is maintained for the purposes of continuing to carry on the business of each Group Company in its present form and at its present level of turnover, and (iii) that the turnovers of any Group Company be managed in a way consistent with its good faith practice in the past two years prior to the Completion. 7.5 Prosper Field agrees to release proceeds to each warrant holder pursuant to Clause 3.1.20 of this Agreement. 7.6 Each Warrantor agrees to remain employed by a Subsidiary and shall procure that each Key Personnel remains employed by a Subsidiary for a term of no less than three (3) years after Completion and to devote sufficient business efforts and time to the Group Companies. 7.7 Each Warrantor agrees to duly file all requisite changes and discharge all requisite obligations in connection with the transaction contemplated in this Agreement under the Circular on Issues Relevant to Foreign Exchange Administration with Respect to Fund Raising and Round- trip Investment by Domestic Residents Through Offshore Special Purpose Vehicles and its interpreting rules. 7.8 Each undertaking in this Clause 7 constitutes an entirely independent undertaking and shall bind the applicable Sellers and Warrantors. 7.9 On receiving the Buyer's reasonable request each Seller and Warrantor shall (at its cost): 7.9.1 do and execute, or arrange to be done and executed, each act, document and thing necessary to implement this Agreement and the Ancillary Documentation; 7.9.2 give to the Buyer all information it possesses or to which it has access relating to a Group Company's business and allow the Buyer to copy any document containing that information; and 7.9.3 procure each Group Company to do the same. 8. UNDERTAKINGS BY THE BUYER 8.1 From the Completion Date to December 31, 2007: 8.1.1 subject to matters reserved for the approval of the Joint Management Committee, Buyer shall minimize its participation and involvement in the daily management of the Group and its operations unless necessary for maintaining the Group Companies' normal course of businesses; Buyer shall not modify the existing 2007 budgetary and business plan of the Group Companies without the consent of all members of the Joint Management Committee; 8.1.2 in the event Buyer proposes any significant expenditure or investment (capital or operational) to be made by the Group, such proposal shall be subject to the consent of all members of the Joint Management Committee unless such expenditure or investment is required for the implementation of new or existing customer contracts; 8.1.3 Buyer shall not incur costs or expenses for or on half of the Group and may not otherwise divert revenues or profits of the Group to its other affiliates through transfer pricing or otherwise; 8.1.4 in the event the integration of existing logistics business of Buyer or its affiliates in the PRC is carried out prior to December 31, 2007, such business integration shall not adversely affect the operations of the Group without the consent of all members of the Joint Management Committee; and 8.1.5 Buyer shall not replace the current management team or otherwise make significant personnel changes without the consent of all members of the Joint Management Committee unless the related management team member is in serious breach of labour contract or violation of law. 8.2 For the avoidance of doubt, nothing contained in Clause 8.1 shall restrict Buyer's right as the shareholder of the Company to exercise ultimate control over the Company and its Subsidiaries in any respect, including, without limitation, the hiring or termination of employees, the incurrence of expenses and requiring compliance with Buyer's and its Affiliates' internal controls, corporate governance policies and procedures, legal and regulatory compliance standards and consumer data guidelines and privacy rules and regulations. 8.3 If so requested by the Sellers, Buyer shall procure that the Company provide to the Sellers, promptly when available, (i) the unconsolidated balance sheet of the Company as of Completion and December 31, 2007; and (ii) the unconsolidated profit and loss of the Company for the period from January 1, 2007 to Completion and to December 31, 2007. 8.4 From the date of this Agreement to Completion, on receiving the Sellers' reasonable request Buyer shall (at its cost) do and execute, or arrange to be done and executed, each act, document and thing necessary to implement this Agreement and the Ancillary Documentation. 9. JOINT TRANSITIONAL MANAGEMENT COMMITTEE 9.1 The parties agree to establish a joint transitional management committee with due authorization from all shareholders of each Group Company to approve the matters set forth in Clause 9.2 of this Agreement during the period from Completion to 31 December 2007 (the "Joint Management Committee"). The Joint Management Committee shall have three (3) members being Johnson Shen and two (2) members appointed by the Buyer. The Preferred Share Sellers may jointly appoint one (1) observer to attend all meetings of the Joint Management Committee in a non-voting observer capacity and subject to appropriate confidentiality undertakings. 9.2 The parties agree that during the period referred to in Clause 9.1 the following matters with regards to or in connection with any Group Company shall require the prior written approval of the simple majority of all members of the Joint Management Committee: 9.2.1 creating, altering or changing the rights, preferences, privileges, classification of the shares or equity interest; 9.2.2 increase or decrease of the authorized or outstanding number of the shares or registered capital; 9.2.3 amendment or waiver of any provisions of the memorandum of association and articles of association; 9.2.4 changing the authorized size of the board of directors or board of shareholders; 9.2.5 any share or equity transfer, merger or consolidation of such Group Company; 9.2.6 the formation, reorganization or dissolution of any subsidiary or joint venture; 9.2.7 any transaction between any Group Company and/or its shareholder, employees, officers, directors or their respective affiliates; and 9.2.8 the appointment and removal of auditors of any Group Company or any material change in, or deviation to, the 2007 budgetary or business plan, or the accounting and financial policies of any Group Company. 9.3 The parties agree that during the period referred to in Clause 9.1 the following matters with regards to or in connection with any Group Company shall require the prior written approval of all members of the Joint Management Committee: 9.3.1 capital expenditures other than those (i) contemplated in the existing 2007 budgetary and business plan of the Group or (ii) required for the implementation of new or existing customer contracts; 9.3.2 changing the existing 2007 budgetary and business plan of the Group; 9.3.3 the hiring and removal of the senior management of any Group Company or changes to their salaries; 9.3.4 changing any Employee Benefit Plan or making any awards under any Employee Benefit Plan; 9.3.5 declaration or payment of any dividends; 9.3.6 borrowing any loans or incurring any debt, contingent or other liability in a single transaction in excess of US$150,000; 9.3.7 commencing or settling any material litigation; 9.3.8 any transfer of any assets of any Group Company or any transfer or licensing of any Intellectual Property Rights with a value in excess of US$150,000 or outside the ordinary course of business; 9.3.9 steps towards the winding up, dissolution or liquidation; 9.3.10 integrating any existing logistics business of Buyer or its affiliates in the PRC with that of any Group Companies; 9.3.11 any material departure from business in the ordinary course; and 9.3.12 any other action that may have a Material Adverse Change on any Group Company. 9.4 The Warrantors shall procure that the management team of the Group submit the matters set forth in Clauses 9.2 and 9.3 for the approval of the Joint Management Committee. 10. CONFIDENTIAL INFORMATION 10.1 Each Seller and Warrantor undertakes to the Buyer that after Completion each of the Sellers and Warrantors shall: 10.1.1 not use or disclose to any person Confidential Information it has or acquires; and 10.1.2 use its reasonable best efforts to prevent the unlawful or prohibited use or disclosure of Confidential Information. Each Warrantor undertakes to the Buyer that after Completion that it shall use best efforts to ensure that each Group Company complies with Clauses 10.1.1 and 10.1.2. 10.2 Clause 10.1 does not apply to disclosure of Confidential Information: 10.2.1 to a director, officer or employee of the Buyer or of a Group Company whose function requires him to have the Confidential Information provided that such disclosure is essential for his function and is on the basis that Clause 10.1 applies to the disclosure by such director, officer or employee; 10.2.2 required to be disclosed by law, by a rule of a listing authority by which a Seller's shares are listed, a stock exchange on which a Seller's shares are listed or traded or by a governmental authority or other authority with relevant powers to which the Seller is subject or submits, whether or not the requirement has the force of law provided that the disclosure shall so far as is practicable be made after consultation with the Buyer and after taking into account the Buyer's reasonable requirements as to its timing, content and manner of making or despatch; or 10.2.3 to an adviser for the purpose of advising the Seller in connection with the transactions contemplated by this Agreement provided that such disclosure is essential for these purposes and is on the basis that Clause 10.1 applies to the disclosure by the adviser. 11. ANNOUNCEMENTS 11.1 Subject to Clause 11.2, neither party may, before or after Completion, make or send a public announcement, communication or circular concerning the transactions referred to in this Agreement unless it has first obtained the other parties' written consent, which may not be unreasonably withheld or delayed. 11.2 Clause 11.1 does not apply to a public announcement, communication or circular: 11.2.1 made or sent by the Buyer after Completion to a customer, client or supplier of a Group Company informing it of the Buyer's purchase of the Sale Shares; or 11.2.2 required by law, by a rule of a listing authority by which a party's shares are listed, a stock exchange on which a parties' shares are listed or traded or by a governmental authority or other authority with relevant powers to which either party is subject or submits, whether or not the requirement has the force of law, provided that the public announcement, communication or circular shall, so far as is practicable, be made after consultation with the other parties and after taking into account the reasonable requirements of the other parties as to its timing, content and manner of making or despatch. 12. COSTS Except where this Agreement or the relevant document provides otherwise, each party shall pay its own costs relating to the negotiation, preparation, execution and performance by it of this Agreement and of each document referred to in it. 13. ESCROW ACCOUNT 13.1 If the Buyer desires to use any of the Retained Payment in the Escrow Account in settling any Relevant Claim: 13.1.1 the Buyer shall notify the Sellers' Representatives in writing of the Relevant Claim ("Notice of Claim"), stating in reasonable details the nature of the Relevant Claim and the amount claimed in respect of the Relevant Claim (the "Amount Claimed"); 13.1.2 within five days of receipt of Notice of Claim, the Sellers shall notify the Buyer in writing indicating: (a) whether or not the Sellers accept responsibility for the Relevant Claim; and (b) whether or not the Sellers agree to assume responsibility for the Amount Claimed and if they do not, the part of the Amount Claimed they are willing to assume responsibility; 13.1.3 if the Sellers fail to notify the Buyer in accordance with Clause , the Amount Claimed shall be paid to the Buyer out of the Retained Payment standing to the credit of the Escrow Account; 13.1.4 without prejudice to Clause , if the Sellers accept liability in respect of a Relevant Claim but accept part only of the Amount Claimed, that part of the Amount Claimed which is accepted shall be paid to the Buyer out of the Retained Payment standing to the credit of the Escrow Account; and 13.1.5 if the Sellers accept the Amount Claimed or, in the event the Sellers do not accept liability, do not accept the Amount Claim or do not accept part of the Amount Claimed, there is a determination of the amount payable in respect of the Relevant Claim by a court or arbitration tribunal of competent jurisdiction against which no appeal has been lodged or is incapable of being lodged within the statutory time limit or all appeals have been exhausted, the amount so accepted or determined (in the latter case less any money previously paid under Clause in respect of the Relevant Claim) shall be paid to the Buyer out of the Retained Payment standing to the credit of the Escrow Account. 13.2 To the extent that a payment to the Buyer out of the Escrow Account is made in partial satisfaction of an Amount Claimed, such payment is deemed to be a payment on account of the amount finally agreed or determined to be payable in respect of the Amount Claimed. 13.3 Subject to the limitation of liabilities as set forth in Clause 6 of this Agreement, the Sellers' liability in respect of Relevant Claims shall not be limited by the amount of the Retained Payment standing to the credit of the Escrow Account from time to time. 13.4 The balance in the Escrow Account shall be released according to the following schedule: 13.4.1 On the date which is one week after the Group's consolidated Accounts for the financial year ending on 31 December 2008 are made available, two thirds of the Retained Payment after deducting the total of the then outstanding Amounts Claimed in respect of which payment has not been made under Clause , plus all interest accrued as of the date thereof, shall be paid to the Sellers by wire transfer of such amount to an account jointly designated by the Sellers. 13.4.2 On the second anniversary of the Completion Date, all the remaining amounts after deducting the total of the then outstanding Amounts Claimed in respect of which payment has not been made under Clause from the balance of the Escrow Account; plus interest accrued as of the date thereof, shall be automatically released from the Escrow Account and paid to the Sellers by wire transfer of such amount to an account jointly designated by the Sellers. 13.4.3 After the second anniversary of the Completion Date (but without prejudice to Clause ), to the extent that the balance of the Escrow Account from time to time exceeds the total of the then outstanding Amounts Claimed in respect of which payment has not been made under Clause , that remaining part of the balance shall be paid to the Sellers on a pro-rata basis to their shareholdings in the Company immediately prior to Completion. 13.5 On the second anniversary of the Completion Date and simultaneously with the release of amounts according to Clause 13.4.2 above, the Buyer shall pay to the Sellers on a pro-rata basis to their shareholdings in the Company immediately prior to Completion an amount equivalent to the product of (i) the balance remaining in the escrow account immediately prior to the second anniversary of the Completion Date; and (ii) the percentage increase in EBITDA for the financial year ending on 31 December 2008 over the financial year ending on 31 December 2007 as indicated in the Accounts, provided however, if the EBITDA for the financial year ending on 31 December 2008 is equivalent to or less than the EBITDA for the financial year ending on 31 December 2007, the Buyer will not need to make any such payment to the Sellers. 13.6 If the Sellers or the Buyer are entitled to money from the Escrow Account, the Buyer and the Sellers shall jointly, or under Clause 13.1.3 or Clause 13.1.5, the Buyer shall individually, within seven days of the date on which the entitlement arises (the "Due Date") instruct the Escrow Agent in writing to release the money to the Sellers or the Buyer, as the case may be. 13.7 Interest accruing from time to time on the balance of the Retained Payment standing to the credit of the Escrow Account shall be added to the Retained Payment standing to the credit of the Escrow Account and shall form part of it for the purposes of this Clause . 13.8 The Sellers and the Buyer shall each pay one half of the Escrow Agent's costs in respect of any work done pursuant to this Clause . 13.9 The Buyer and the Sellers acknowledge that the Escrow Agent may withdraw from the Escrow Account an amount of tax on the interest earned in respect of money held in the Escrow Account for which it is or may become liable. 13.10All payments of an Amount Claimed made to the Buyer by the Escrow Agent under this Clause shall be made gross and without deduction or withholding of any kind other than any deduction or withholding required by law. 13.11If a payment to the Buyer under this Clause will be or has been subject to Tax, the Escrow Agent shall on demand from the Buyer pay to the Buyer from the Escrow Account the amount (after taking into account Tax payable in respect of the amount) that will ensure that the Buyer receives and retains a net sum equal to the sum it would have received had the payment not been subject to Tax. 13.12This Clause 13 shall be in addition to and without prejudice to all other rights and remedies available to the Buyer pursuant to the terms and provisions of this Agreement. 13.13Notwithstanding anything to the contrary in this Clause 13, if there is any discrepancy between this Clause 13 and the Escrow Agreement, the Escrow Agreement shall control and prevail to the extent of discrepancy. 14. GENERAL 14.1 A variation of this Agreement is valid only if it is in writing and signed by or on behalf of each party. 14.2 The failure to exercise or delay in exercising a right or remedy provided by this Agreement or by law does not impair or constitute a waiver of the right or remedy or an impairment of or a waiver of other rights or remedies. No single or partial exercise of a right or remedy provided by this Agreement or by law prevents further exercise of the right or remedy or the exercise of another right or remedy. 14.3 The parties' rights and remedies contained in this Agreement are cumulative and not exclusive of rights or remedies provided by law. 14.4 Except to the extent that they have been performed and except where this Agreement provides otherwise, the obligations contained in this Agreement remain in force after Completion. 14.5 All payments made by the Sellers under Clauses 6 and 13 shall be made gross, free of right of counterclaim or set off and without deduction or withholding of any kind other than any deductions or withholding required by law. 14.6 Any date or period mentioned in this Agreement may be varied or extended by written agreement of all the parties hereto, but, as regards any date or period so varied or extended as aforesaid, or not having been so varied or extended, time shall be of the essence of this Agreement. 14.7 Any provision of this Agreement being prohibited by or unlawful or unenforceable under any applicable law actually applied by any court of competent jurisdiction shall, to the extent required by such law, be severed from this Agreement and rendered ineffective so far as is possible without modifying the remaining provisions of this Agreement. 14.8 The parties agree that this Agreement is jointly drafted by all the parties. Accordingly, the parties further agree that any and all rules of construction that ambiguity is construed against the drafting party is not applicable in any disputes concerning the terms, meaning and interpretation of this Agreement. 15. ENTIRE AGREEMENT This Agreement and each document referred to in it/describe related agreements constitute the entire agreement and supersede any previous agreement between the parties relating to the subject matter of this Agreement. 16. ASSIGNMENT This Agreement is personal to each Seller. Accordingly, each Seller shall not assign, transfer, declare a trust of the benefit of or in any other way alienate any of its rights under this Agreement whether in whole or in part. 17. NOTICES 17.1 A notice or other communication under or in connection with this Agreement (a "Notice") shall be: 17.1.1 in writing; 17.1.2 in the English language; and 17.1.3 delivered personally or sent by courier or by fax to the party due to receive the Notice to the address set out in Clause or to an alternative address, person or fax number specified by that party by not less than 7 days' written notice to the other party received before the Notice was despatched. 17.2 Unless there is evidence that it was received earlier, a Notice is deemed given if: 17.2.1 delivered personally, when left at the address referred to in Clause 17.1.3; 17.2.2 sent by courier, four Business Days after posting it; and 17.2.3 sent by fax, when confirmation of its transmission has been recorded by the sender's fax machine. 17.3 The address referred to in Clause is: - ----------------------------------------------------------------------------- |Name of party|Address |Facsimile | | | |No. | - ----------------------------------------------------------------------------- |CV |0/0 ChinaVest Services Limited, P.O.Box 9955 GPO, |+852-2845-| |Distribution |Hong Kong |2949 | |Services Ltd.| | | - ----------------------------------------------------------------------------- |Swingside |5705 57th Floor, The Centre, 99 Queen's Road |+86-21- | |Limited |Central, Hong Kong |6160-1198 | - ----------------------------------------------------------------------------- |SEAVI Advent |Attention: Mr Derrick Lee Meow Chan / Mr Hoe Boon |+ 65-6339-| |CHL |Kwee |8247 | |Investments |c/o 331 North Bridge Road, #05-04 Odeon Towers, | | |Ltd. |Singapore, 188720 | | - ----------------------------------------------------------------------------- |Fortis |Attention: Mr Derrick Lee Meow Chan / Mr Hoe Boon |+ 65 6339 | |Private |Kwee |8247 | |Equity Asia |c/o 331 North Bridge Road, #05-04 Odeon Towers, | | |Fund N.V. |Singapore, 188720 | | - ----------------------------------------------------------------------------- |Prosper Field|Kingston Chambers, P. O. Box 173, Road Town, |+86-21- | |Holdings |Tortola, British Virgin Islands |6160-1198 | |Limited | | | - ----------------------------------------------------------------------------- |Johnson Shen |No.190, Lane 3588 Dushi Road, Minghang District, |+86-21- | |Qiwei |Shanghai PRC, 201108 |6160-1198 | - ----------------------------------------------------------------------------- |Jimmy Kang |Room101, 139 Lijiang Shanshui, 999 Huajing Road, |+86-21- | |Jimin |Xuhui District, Shanghai PRC, 200231 |6160-1198 | - ----------------------------------------------------------------------------- |Menlo |To each of: |To each | |Worldwide, |(i) Ms. Jennifer W. Pileggi, Senior Vice |of: | |LLC |President, General Counsel and Secretary, Con-Way |(i) +1- | | |Inc. |650-378- | | |2855 Campus Drive, Suite 300 |5464 | | |San Mateo, CA 94403 |(ii) +852-| | |USA |2737-2611 | | | | | | |(ii) Mr. Frank W. Lange, Director, Strategic | | | |Acquisitions, Con-Way, Inc. | | | |2855 Campus Drive, Suite 300 | | | |San Mateo, CA 94403 | | | |USA | | - ----------------------------------------------------------------------------- 18. FORCE MAJEURE. Neither party shall be liable to the other for any default or delay in performing any of its obligations if caused, directly or indirectly, by fire, flood, earthquake, acts of God, strikes, riots or civil disorders, unavoidable casualty, governmental order or state of war, accidents, interruptions of transportation facilities or delays in transit, supply shortages, failure of computers or equipment to properly process dates, or any cause beyond the reasonable control of a party. Should a force majeure event occur and affect a party's ability to perform its obligations hereunder, the party so affected shall notify its counterparty of the happening of any such event within a reasonable period of time. If due to such cause performance by the party is delayed, the period for performance shall be extended for a reasonable period of time to allow for completion of performance. 19. GOVERNING LAW AND JURISDICTION 19.1 This Agreement is governed by Hong Kong law, without regard to its conflict of laws rules. 19.2 Any dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity thereof ("Dispute"), shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force and as may be amended by the rest of this Clause. The appointing authority shall be the Hong Kong International Arbitration Centre. There shall be three (3) arbitrators. The Buyer shall be entitled to appoint one (1) arbitrator. The Warrantors and Sellers shall be entitled to jointly appoint one (1) arbitrator. The third arbitrator who shall be of a different nationality from any of the parties shall be agreed upon by the two party appointed arbitrators within thirty (30) days of the appointment of the second arbitrator or, in default thereof, be appointed by the Chairman of the Hong Kong International Arbitration Centre. The place of arbitration shall be Hong Kong. The language in the arbitration proceedings shall be English. The arbitral tribunal may not award exemplary, punitive, multiple or any form of non-compensatory damages. The decision and award of the arbitral tribunal shall be final and binding on the Parties and may be entered and enforced in any court having jurisdiction, and the Parties irrevocably and unconditionally waive any and all rights to any form of appeal, review or recourse to any state or other judicial authority, insofar as such waiver may be validly made. Notwithstanding the foregoing, the Parties shall have the right to seek interim injunctive relief or other interim relief from a court of competent jurisdiction, before the arbitral tribunal has been appointed. Without prejudice to such provisional remedies as maybe available under the jurisdiction of a national court, the arbitral tribunal shall have full authority to grant provisional remedies or order the parties to request that a court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect. 19.3 The parties agree that the documents which start any proceedings relating to a Dispute and any other documents required to be served in relation to such proceedings may be served on the Seller in accordance with Clause . These documents may, however, be served in any other manner allowed by law. This Clause applies to all proceedings wherever started. 20. GOVERNING LANGUAGE 20.1 Each notice, demand, request, statement, instrument, certificate or other communication given, delivered or made by a party to any other party under or in connection with this Agreement shall be: 20.1.1 in English; or 20.1.2 if not in English, accompanied by an English translation made by a translator, and certified by such translator to be accurate. 20.2 The receiving party shall be entitled to assume the accuracy of and rely upon any English translation of any document provided pursuant to Clause 20.1.2. 21. FURTHER ASSURANCES 21.1 Subject to Completion, each of the Sellers agrees with and undertakes to the Buyer that at any time and from time to time upon the written request of the Buyer, it shall do, execute and perform such further acts, deeds, documents and things as the Buyer may reasonably require: 21.1.1 to effectively vest beneficial ownership of the Sale Shares in the Buyer or as it may direct free from all encumbrances; 21.1.2 to give the full effect of this Agreement and confer the full benefit of this Agreement on the Buyer (or such other person as it may direct); and 21.1.3 for the purpose of enforcing the Buyer's rights under this Agreement against any third party. 21.2 Subject to Completion, the Buyer agrees with and undertakes to the Sellers that at any time and from time to time upon the written request of the Sellers' Representatives, it shall do, execute and perform such further acts, deeds, documents and things as the Sellers may reasonably require: 21.2.1 to give the full effect of this Agreement and confer the full benefit of this Agreement on the Sellers (or such other person as it may direct); and 21.2.2 for the purpose of enforcing the Sellers' rights under this Agreement against any third party. 22. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties. SCHEDULE 1 INFORMATION ABOUT THE SELLERS, COMPANY AND THE SUBSIDIARIES PART A: THE SELLERS - ----------------------------------------------------------------------------- |(1) Seller |(2) Sale Shares |(3) Percentage of Total Outstanding | | | |Shares of the Company | | |--------------------| | | |Preferred |Ordinary | | | |Sale |Sale | | | |Shares |Shares | | - ----------------------------------------------------------------------------- |CV Distribution |446,119 |N/A |33.39% | |Services Ltd. |Preferred | | | | |A Shares | | | | | | | | | |30,556 | | | | |Preferred | | | | |B Shares | | | - ----------------------------------------------------------------------------- |SEAVI Advent CHL|274,525 |N/A |19.23% | |Investments Ltd.|Preferred | | | | |B Shares | | | - ----------------------------------------------------------------------------- |Fortis Private |82,357 |N/A |5.77% | |Equity Asia Fund|Preferred | | | |N.V. |B Shares | | | - ----------------------------------------------------------------------------- |Swingside |N/A |449,222 |31.46% | |Limited | |Ordinary | | | | |Shares | | - ----------------------------------------------------------------------------- |Prosper Field |N/A |144,999 |10.15% | |Holdings Limited| |Ordinary | | | | |Shares | | - ----------------------------------------------------------------------------- PART B: THE COMPANY Chic Holdings Limited 1. Registered number: MC-89785 2. Place of incorporation: Cayman Islands 3. Address of registered office: the offices of Maples and Calder, Attorneys-at-Law, Ugland House, P.O. Box 309, George Town, Grand Cayman, Cayman Islands, British West Indies 4. Authorised share capital: US$50,000 5. Issued share capital: 446,119 Series A Preference Shares, 387,438 Series B Preference Shares, 594,221 Ordinary Shares 6. Directors: Edward Collins, Derrick Lee and Johnson Shen 7. Secretary: N/A 8. Accounting reference date: December 31 9. Auditors: Deloitte Touche Tohmatsu Huayong Public Accountants Co., Ltd. PART C: THE SUBSIDIARIES (a) Shanghai Chic Logistics Co., Ltd. 1. Registered number: Qiduhuzongzi No. 032505 (Putuo) 2. Place of incorporation: Shanghai, China 3. Address of registered office: No. 55, Lane 356, Gu Lang Road, Putuo District 4. Total investment US$ 15,000,000 5. Registered capital: US$ 8,500,000 6. Paid-in capital: US$ 8,500,000 7. Directors: Johnson Shen, Ping Li, and Chan Lau Yui Kevin (b) Shanghai Chic Supply Chain Management Co., Ltd. 1. Registered number: No. 3101152025477 2. Place of incorporation: Shanghai 3. Address of registered office: Section L, the 6th Floor, No.12 Building,Xiya Road, Shanghai Waigaoqiao Free Trade Zone 4. Registered capital: RMB 10,000,000 5. Paid-in capital: RMB 10,000,000 6. Directors: Johnson Shen, Ping Li, and Chan Lau Yui Kevin (c) Shanghai Chic Storage and Transportation Co., Ltd. 1. Registered number: No.310227000543077 2. Place of incorporation: Shanghai 3. Address of registered office: Xinmin Development Zone, Songjiang District 4. Registered capital: RMB 8,000,000 5. Paid-in capital: RMB 8,000,000 6. Executive Director: Johnson Shen (d) Shanghai New Chic Logistics Co., Ltd. 1. Registered number: No. 3102292103686 2. Place of incorporation: Shanghai 3. Address of registered office: No. 1-364, Hexiang Road, Baihe Town, Qingpu District, Shanghai 4. Registered capital: RMB500,000 5. Paid-in capital: RMB500,000 6. Executive Director: Johnson Shen SCHEDULE 2 COMPLETION REQUIREMENTS 1. Sellers' obligations 1.1 At Completion the Sellers and Warrantors shall deliver to the Buyer's Legal Counsel: 1.1.1.a closing certificate, dated the Completion Date, certifying that (i) each condition specified in Clause 3.1 of this Agreement has been fulfilled; (ii) each Warranty is true, accurate and not misleading; (iii) each covenant of the Sellers to be performed prior to Completion under this Agreement has been duly fulfilled; and (iv) there has been no Material Adverse Change since the date of this Agreement; 1.1.2.written resolutions of the board of directors of the Company as referenced to in Clause 1.2 of this Schedule; 1.1.3.duly executed transfer(s) in respect of the Sale Shares to the Buyer and the share certificate(s) for the Sale Shares issued to the Buyer; 1.1.4.updated Register of Members and Register of Directors certified by the Company; 1.1.5.as evidence of the authority of each person executing a document referred to in this Schedule 2 on a Seller's behalf: (a) a copy of the minutes of a duly held meeting of the directors of the Seller (or a duly constituted committee thereof) authorising the execution by the Seller of the document and, where such execution is authorised by a committee of the board of directors of the Seller, a copy of the minutes of a duly held meeting of the directors constituting such committee or the relevant extract thereof; or (b) a copy of the power of attorney conferring the authority, in each case certified to be a true copy by a director or the secretary of the Seller; 1.1.6.the common seal, company seal and finance seal (if any) of each Group Company; each register, minute book and other book required to be kept by each Group Company under relevant laws or regulations made up to the Completion Date; and each certificate of incorporation, certificate of approval and road transportation license for each Group Company; 1.1.7.share certificates for all issued shares or investment certificates (or certificate of verification of capital contribution issued by such firm of certified public accounts qualified to issue the same) for all equity interests in the registered capital of each Subsidiary and executed but uncompleted transfers and declarations of trust by the registered owner in respect of all those shares or equity interests that are beneficially owned by but not registered in the name of a Group Company; 1.1.8.the Ancillary Documentation duly executed by all parties to such Ancillary Documentation; 1.1.9.letter of resignations in the agreed form from each director, supervisor (if applicable) and secretary (as the case may be) of each Group Company expressed to take effect from the end of the meeting held at Completion pursuant to paragraph 1.2 with a statement confirming that the director, secretary or supervisor (as the case may be) has no claim against such company for compensation or loss of office or otherwise; 1.1.10.all documentation relating to the Intellectual Property Rights including (without limitation) the original registration and renewal certificate for each of the Intellectual Property Rights which are registered or pending as at Completion; 1.1.11.the certificate of good standing as referenced to in Clause 3.1.6 of the Agreement; 1.1.12.copy of all executed instruments for replacement of the directors and supervisors as required under Clause 3.1.7 of the Agreement; 1.1.13.copy of all executed written statement confirming such resigning director or supervisor has no claim against such company for compensation or loss of office or otherwise; 1.1.14.copy of the termination agreement as required under Clause 3.1.8 of the Agreement; 1.1.15.the financial statement as referenced to in Clause 3.1.10 of the Agreement; 1.1.16.the legal opinions as referenced to in Clause 3.1.11 of the Agreement; 1.1.17.copies of the agreements as referenced to in Clause 3.1.12 of the Agreement; 1.1.18.the Tax Deed and the Escrow Agreement as referenced to in Clause 3.1.13 of the Agreement; 1.1.19.copy of the letter of understanding as referenced to in Clause 3.1.14 of the Agreement; 1.1.20.copy of the renewed service contracts with each of ICI and Butler as referenced to in Clauses 3.1.15 of the Agreement; 1.1.21.evidence of effective completion of the transactions as referenced to in Clauses 3.1.16 and 3.1.17 of the Agreement; 1.1.22.copy of the termination agreement as referenced to in Clause 3.1.18 of the Agreement; 1.1.23.copy of the non-disclosure and non-compete agreement as referenced to in Clause 3.1.19 of the Agreement; 1.1.24.copy of the cancellation and arrangement documents as referenced to in Clause 3.1.20 of the Agreement; 1.1.25.copy of the amendment agreement as referenced in clause 3.1.21 of the Agreement; 1.1.26.copy of the insurance policies as referenced to in Clause 3.1.22 of the Agreement; 1.1.27.original of the joint closing certificate as referenced to in Clause 3.1.23 of the Agreement; and 1.1.28.original of the consent and waiver as referenced in clause 3.1.25 of the Agreement. 1.2 The Sellers shall ensure that at Completion a meeting of the board of directors of the Company is held at which the directors resolve to: 1.2.1.approve the transactions contemplated under this Agreement; 1.2.2.approve this Agreement for each Seller transferring shares to the purchaser, 1.2.3.approve the entry in the register of members and the issue of a certificate or certificates under the name of the Buyer, 1.2.4.authorise the appointment of the new directors as nominated by the purchaser, 1.2.5.confirm their resignation as directors following the closing of the board meeting, and 1.2.6.confirm the change of registered office to a place nominated by the Buyer along with change of company secretary. 1.3 If required by the Buyer, the Sellers shall ensure that immediately after the board meeting referred to in paragraph , a meeting of the board of directors of each Subsidiary is held to deal with any matter referred to in paragraph 1.2. SCHEDULE 3 ACCOUNTING PRINCIPLES The FY2007 Actual EBITDA to be used in the Earn-Out Payment calculation shall be prepared in accordance with the IFRS in force on 31 December 2007, subject to the following adjustments: (a) inclusion in revenue of subsidy income which is currently included in the financial statements as "Other Operating Income" and is related to any recurrent Tax refunds (including but not limited to any enterprise income tax business tax subsidies) granted by the local government for transportation and storage enterprises or for foreign invested companies but such subsidy income shall not exceed RMB2,600,000 for the calculation of the FY2007 Actual EBITDA; (b) inclusion of all revenues and expenses related to the Group's business incurred by Chic S&T and New Chic during FY2007, including the period prior to Completion; (c) exclusion from the Company's expenses of verifiable expenses incurred by the Sellers or the Group related to the proposed transactions contemplated in this Agreement up to US$200,000; (d) inclusion in the Company's costs and expenses of all costs and expenses incurred or to be incurred by the Group in relation to the termination of the Service and Undertakings Agreement signed between Chic SCM and Chic S&T in December 2006; and (e) inclusion in the Company's costs and expenses of expenses related to execution of the Group Companies' Employee Benefit Plan. Should any disagreement arise between the Buyer and the Sellers relating to this Schedule 3, such matter will be resolved pursuant to the dispute resolution process set forth in Clause 19.2 of this Agreement. SCHEDULE 4 WARRANTIES All Warranties contained herein are made subject to the exceptions with respect thereto which are noted in the schedules delivered by the Sellers and Warrantors to the Buyer concurrently herewith and identified as the "Disclosure Letter" and further, with respect to Warranties contained in clauses 8, 10, 11, 13, 14, 16, 20, 21 22, 23, 24, 25 and 26, when made by the Preferred Share Sellers, each in its capacity as a Seller, such Warranties are qualified by the knowledge of such Seller. PART A - WARRANTIES IN RESPECT OF THE GROUP COMPANIES 1.Corporate Organisation. Each Group Company is a company duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was incorporated. Each Group Company and their respective branch companies so registered have received all Permits necessary for their establishment and the conduct of their business as such, including but not limited to appropriate Business Licenses and Road Transport Operation Permits (if applicable). The Warranties in this item 1 with respect to branch companies made by the Preferred Share Sellers are subject to their knowledge. 2.Corporate Actions. The transactions contemplated herein have been duly authorized by the applicable Group Company. 3.Capitalization. The Sale Shares comprise the whole of the Company's allotted and issued share capital and have been properly allotted and issued and are fully paid; the registered capital of the Subsidiaries has been fully paid up by its immediate investors and duly verified by PRC certified accountants. Each Group Company has taken no action to issue any of the authorised but unissued share capital of the Group Company and except as disclosed in the Disclosure Letter, there are no outstanding: (i) options, warrants or other rights to purchase or subscribe to investment interests in the Group Company; or (ii) agreements or arrangements in force which provide for the present or future issue, allotment or transfer of or grant to any person the right (whether conditional or otherwise) to call for the issue, allotment or transfer of any share or interest of the Group Companies (including any option or right of pre-emption or conversion). 4.Ownership of the Group Company. The Sellers are the legal, recorded and beneficial owners of the Sale Shares, free and clear of all Encumbrances. The Company is the legal, recorded and beneficial owner of 100% of the equity interest of Chic Logistics, free and clear of all Encumbrances. Chic Logistics is the legal, recorded and beneficial owner of 100% of the equity interest of each of Chic SCM and Chic S&T, free and clear of all Encumbrances. After the consummation of the transfer contemplated under Clause 3.1.17, Chic Logistics is the legal, recorded and beneficial owner of 100% of the equity interest of New Chic, free and clear of all Encumbrances. Other than the Sale Shares, the Sellers, the Warrantors or any third parties do not legally or beneficially own or control any other shares/equity interest or convertible debentures, options, warrants, rights, calls, commitments, conversion rights or other instruments or agreements providing for the purchase, issuance or sale of any shares of any Group Company. 5.Subsidiaries and Affiliates. Each Group Company has no subsidiaries and branch companies other than the subsidiaries and branch companies disclosed in this Agreement and the Disclosure Letter and does not own, directly or indirectly, any capital stock or other equity or ownership or proprietary interest in any corporation, partnership, association, trust, joint venture or other entity other than the subsidiaries and branch companies disclosed in this Agreement and the Disclosure Letter. Each Group Company has received all Permits necessary for its investments in and for the conduct of business of the subsidiaries and branch companies disclosed in this Agreement and the Disclosure Letter Each Subsidiaries and each of their branch companies disclosed in this Agreement and the Disclosure Letter is validly existing and in good standing. The Warranties in this item 5 with respect to branch companies made by the Preferred Share Sellers are subject to their knowledge. 6.No Violation. Neither the execution and delivery of this Agreement, any Ancillary Documentation nor the consummation of the sale and purchase of the Sale Shares contemplated hereby will violate any provision of the constitutive documents of the Company or will violate, or be in conflict with, or constitute a default (or an event, which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of or give any other person the right to terminate, any contract, indenture, mortgage, deed of trust, loan agreement or any other agreement, contract or instrument, which violation, conflict, default or termination would reasonably be expected to have a material adverse effect on any Group Company, or violate any applicable law or any final judgment of any court with competent jurisdiction over any Group Company and the subject matter, which violation would reasonably be expected to have a material adverse effect on any Group Company. 7.Accounts. The Accounts and the Group's consolidated accounts, each for the financial year ended 31 December 2006, 31 December 2005 and 31 December 2004 , have been prepared and audited on a proper and consistent basis in accordance with IFRS and based on the opinion of the Company's auditors of international professional reputation (which opinion is issued on the basis of the true and complete books, records and other materials provided by each Group Company), show a true and complete view of the assets and liabilities (whether actual or contingent) and trading position of each Group Company and the Group at the specific time stated therein, and of the profits and losses and cash flows for time period stated therein. The management accounts for the period from January 1 2007 to the relevant management account dates have been prepared by the Company's Accountants on a proper and consistent basis in accordance with IFRS and show a true and complete view of the assets and liabilities (whether actual or contingent) and trading position of the Company on the relevant management account dates and of the profits and losses and cash flows for the the relevant management account periods. Notwithstanding the foregoing, neither SEAVI nor Fortis makes any representations or warranties with respect to the Accounts and the Group's consolidated accounts for the financial year ended 31 December 2004 and the Warranties in this item 7 with respect to the management accounts for the period from January 1 2007 to the relevant management account dates are subject to best knowledge of the Preferred Share Sellers. 8.Sales Growth and Financial Projections. There are no existing or imminent matters in any Group Company that will impede the sustainability of any Group Company's sales growth and profitability and the Financial Projections were prepared by the management of the Company with due care and diligence based on proper and reasonable assumptions and were properly reviewed by the board of directors of the Company. 9.Absence of Changes. Since the Last Accounting Date, other than for purposes of effectuating transactions contemplated under this Agreement and the Ancillary Documentation: (i) Each Group Company's business has been operated in the usual way so as to maintain it as a going concern; (ii) there has been no Material Adverse Change in the financial or trading position of any Group Company or the Group; and (iii) no material change has occurred in the assets and liabilities shown in the Accounts and there has been no material reduction in the value of the net tangible assets of any Group Company on the basis of the valuations used in the Accounts. Without limiting the foregoing, since the Last Accounting Date, other than the transactions contemplated under this Agreement and the Ancillary Documentation, there has not occurred: (i) any material change in: (a) any accounting, financial reporting or tax practice or policy of any Group Company; or (b) any method of calculating any bad debt, contingency or other reserve of any Group Company for accounting, financial reporting or tax purposes, or any change in the fiscal year of any Group Company; (ii) any change in the general pricing practices or policies of any Group Company except in the ordinary course of business; (iii) except in the ordinary course of business, any acquisition or disposition of any assets or properties of any Group Company; (iv) any declaration or payment of any dividend or distribution save as provided in the Accounts; (v) no substantial supplier or customer of the business of any Group Company has (a) stopped or indicated an intention to stop, trading with the business, (b) reduced or indicated an intention to reduce, substantially its trading with any Group Company, or (c) changed or indicated an intention to change, substantially the terms on which it is prepared to trade with any Group Company. 10.Assets, Equipment and Stock. Each Group Company owns or has the right to use each asset essential for the effective operation of its business without any disturbance and subject to exceptions disclosed in the Disclosure Letter, self-owned assets are assets of such Group Company free of any Encumbrance. All material warehouses, plant, vehicles and equipment owned or used by each Group Company is in reasonably good condition and has been properly maintained. No Group Company has provided any service which is or was in any material respect below industry standard. All trucks and other vehicles owned, leased or controlled by each Group Company have the appropriate vehicle licenses and road transport licenses suitable for the activities they are engaged in. The drivers contracted with each Group Company have the appropriate drivers' licenses, business qualifications and operation license for handling of dangerous goods (if applicable) necessary for the activities they are engaged in. 11.Intellectual Property. The Intellectual Property Rights are legally, beneficially and exclusively owned by a Group Company, without any Encumbrance, restriction on use, and is not subject to a claim or opposition from any other party as to title, validity, enforceability, entitlement, assignment or otherwise, or validly granted to such Group Company subject a licensing agreement. Any and all fees required of such Group Company for the maintenance of the Intellectual Property Rights have been paid by such Group Company, and all actions required of such Group Company to maintain and protect the registered Intellectual Property Rights have been taken by such Group Company. There is no pending or threatened proceeding or dispute by or against such Group Company in respect of the Intellectual Property Rights. Each Group Company has not granted and is not obliged to grant a license or assignment or other right in respect of any of the Intellectual Property Rights. The Intellectual Property Rights constitute all of the material intellectual property required and essentially used in the business of each Group Company as it was carried on before the date of this Agreement. 12.Taxes. Except as otherwise disclosed in the Disclosure Letter, each Group Company has properly, appropriately and duly completed and filed all tax reports, returns, information, notices and statement that are required to be filed by it under the applicable law and has properly and duly paid, deducted or withheld all Taxes and other charges required to be paid, deducted or withheld (including but not limited to any related party transactions) in respect of all periods covered by such returns, report or statements by any competent Tax Authority. Each Group Company does not have any tax obligations or penalties outstanding, pending or threatened. Each Group Company has not engaged in, or been a party to, any transaction or series of transactions or scheme or arrangement of which the main purpose, or one of the main purposes, was or could be construed to be the illegal evasion of Taxes. Each Group Company has not been the subject of an investigation, discovery or order by or involving any Tax Authority and there are no circumstances existing which make it likely that an investigation, discovery or order will be made. There are no known pending or threatened disputes, audits or investigations relating to any Taxes for which any Group Company may be held liable. 13.Contracts. Each material contract agreement, arrangement or obligation to which any Group Company is a party ("Material Agreement") is in full force and effect, and there exists no default or event of default or event, occurrence, condition or act which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default thereunder, which default or event of default would be reasonably expected to have a Material Adverse Effect on the Group Companies. No approval or consent of any party is needed for all of the Material Agreements to continue to be in full force and effect within and in accordance with the terms contained therein. There are no agreements, understandings or proposed transactions between a Group Company and any of its Affiliates or the Sellers' Affiliates. 14.Insurance. Each Group Company has in place all material policies of insurance customary and sufficient for the conduct of its business as currently operated, for the material warehouses, offices and other essential properties owned or leased by it, and for compliance with all relevant requirements of law or regulations; such policies are in full force and effect; and all premiums due and payable with respect thereto have been paid, and no notice of cancellation or termination has been received with respect to any such policies, and each Group Company has complied in all material respects with the terms and conditions of such policies. 15.Legal Compliance. Each Group Company is in compliance in all material respects with all legal requirements (including, but not limited to, all applicable Environmental Laws) applicable to or affecting its business as undertaken up until the date of this Agreement, the non-compliance of which would be reasonably expected to have a Material Adverse Effect on the Group Companies, and each Group Company has not received any notice from any government authority of non-compliance with any legal requirement, nor is the Company subject to any proceeding currently pending, or threatened with respect to any alleged violation thereof. No act or transaction has been effected by or on behalf of any Group Company, nor any of their directors, officers or senior management staff, involving the illegal making or authorising of any payment, or the giving of anything of value, to any government official, party official, or any potential or existing client for the purpose of influencing the recipient in his official capacity in order to obtain business, retain business or direct business to any Group Company or other person. 16.Litigation. There is no employee, director or officer claim, legal action, suit, inquiry, proceeding or investigation by or before any court, governmental or regulatory body pending by or against any Group Company. There are no facts or circumstances in existence that would reasonably be expected to give rise to such employee, director or officer claim, legal action, suit, inquiry, proceeding or investigation. No injunction, writ, temporary restraining order, decree or any order of any nature has been issued by any court or other governmental authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or the Ancillary Documentation. Each of Ordinary Share Sellers and CVDS represents that each Group Company is not subject to, nor has it, during the five (5) years prior to the date of this Agreement, been subject to, any judgment, order or decree entered in any lawsuit or proceeding. Each of SEAVI and Fortis represents that each Group Company is not subject to, nor has it, during the two (2) years prior to the date of this Agreement, been subject to, any judgment, order or decree entered in any lawsuit or proceeding. (a)None of the Sellers and the Group Companies is a plaintiff or defendant in or otherwise a party to any litigation, arbitration or administrative proceedings which are in progress or threatened or pending by or against or concerning any of the Group Companies or any of its assets. (b) So far as any of the Sellers is aware, no governmental or official investigation or inquiry concerning any of the Group Companies is in progress or pending. (c) None of the Sellers is aware of any circumstances which are likely to give rise to any such proceeding, investigation or inquiry as is referred to in paragraph (a) or paragraph (b). (d) There is no action, suit, proceeding, claim, arbitration or investigation ("Action") pending (or, to the best knowledge of each of the Group Companies and each of the Sellers, currently threatened) against any of any of the Group Companies, any Group Companies activities, properties or assets or, to the best of knowledge of any of the Group Companies and the Sellers, against any officer, director or employee of any of the Group Companies in connection with such officer's, director's or employee's relationship with, or actions taken on behalf of any of the Group Companies. To the best knowledge of any of the Group Companies and any of the Sellers, there is no factual or legal basis for any such Action that might result, individually or in the aggregate, in any material adverse change in the business, properties, assets, financial condition, affairs or prospects of the Companies. There are no Actions pending or, to the best knowledge of any of the Group Companies and any of the Sellers, threatened (or any basis therefor), relating to the prior employment of any of the Group Companies employees or consultants, their use in connection with any of the Group Companies business of any information, technology or techniques allegedly proprietary to any of their former employers, clients or other parties, or their obligations under any agreements with prior employers, clients or other parties. None of the Group Companies is a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality and there is no Action by any of the Group Companies currently pending or which it intends to initiate. (e) There is no dispute in Cayman Islands, the PRC or elsewhere, in relation to the affairs of any of the Group Companies, the outcome of which would be reasonably expected to have a material adverse effect on the Group Companies, and to the best information and belief of each of the Sellers and the Group Companies there are no facts which may give rise to any dispute. (f) There is no unsatisfied judgment order or decree of any court tribunal or any governmental agency outstanding against any of the Group Companies, which may have a material adverse effect upon any of the Group Companies or its business, operations, assets or liabilities or any part of the same. (g) No event has occurred causing, or which upon intervention or notice by any third party may cause, any floating charge created by any of the Group Companies, to crystallise or any charge created by it to become enforceable, nor has any such crystallisation occurred nor is such enforcement in process. 17.Insolvency/Winding Up. Other than for purposes of effectuating transactions contemplated under this Agreement and the Ancillary Documentation, (i) no government order has been made, legal petition presented or board/shareholder resolution passed for the winding up, dissolution or liquidation of any Group Company or for the appointment of a provisional or other liquidator or for the appointment of a custodian or trustee for all or substantially all of the property or assets of any Group Company, (ii) no Group Company has commenced any other proceeding for itself under any bankruptcy, reorganisation, composition, insolvency, liquidation, or similar law of any jurisdiction, and there has not been commenced against any Group Company any such proceeding, (iii) no receiver or manager has been appointed for whole or in part of the business, and (iv) no distress, execution or other process has been levied on any Group Company's assets. 18.Approvals and Permits. Each Group Company has obtained and is in compliance with the terms and conditions of all material Permits (including, any Permits required under Environmental Laws), which are essential to the lawful operation of the business of the Group Company as currently being conducted and the failure to obtain which or the incompliance with which would be reasonably expected to have a Material Adverse Effect on the Group Company. 19.Brokers. Neither the Seller, the Warrantor nor any of their Affiliates has entered into any agreement or had any discussion with any third party regarding any proposed sale of any of the Sale Shares which could result in Buyer or the Company having any liability to such third party. 20.Books and Records. All accounts, books, ledgers and other records of a significant nature related to each Group Company's business have been properly and accurately kept and completed in all material respects, and there are no material inaccuracies or discrepancies of any kind contained or reflected therein. 21.Real Property. Schedule 6 set forth an accurate and complete list of all material real properties leased in whole or in part by the Group Companies for their operations and includes the name of the record title holder thereof. Each Group Company has no owned real properties. The landlord of the Property has good and marketable title to all the real property leased to the Group Company, free and clear of all Encumbrances, charges or other restrictions of any kind or character, and such lease has been duly approved and registered with competent land/building authorities. None of such buildings or structures (or any equipment therein), nor the operation or maintenance thereof, violates any restrictive covenant or any provision of any law, ordinance, rule or regulation, or encroaches on any property owned by others. No condemnation proceeding is pending or threatened, which would preclude or impair the use of any such property by the Group Company for which it is currently used. All leases of each Group Company are in full force and effect not subject to any pre-emptive right, and no person has a right to terminate that lease before it is due to expire; and all rents and material additional payments due to date on each such lease have been paid. Each Group Company has not violated any of the terms or conditions under any such lease in any material respect. The office, warehouses and other real properties leased by each Group Company is in a state of good operating condition, good maintenance and repair and is adequate and suitable for the purposes for which it is presently being used, except for ordinary wear and tear. 22.Employment Relations and Employee Benefit Plans. Except as otherwise disclosed in the Disclosure Letter, each Group Company has complied in all aspects with all applicable laws relating to the employment of labor, including without limitation, those relating to wages, social welfare, hours, no-competition arrangement and Employee Benefit Plan. Each Group Company has not experienced any material work stoppage or any other labor difficulty during the past three (3) years. The Accounts adequately reflect amounts paid, or have adequate provisions, for all Employee claims (if any). Each Group Company has paid all amounts required or has made adequate provision in the Accounts for all Employee Benefit Plans. No Employee has exercised any warrants or options granted by any Sellers or any Group Company under any Employment Benefit Plans. Each Group Company has not been delinquent in making any payment to or for the benefit of any current or former employee, officer, consultant, independent contractor or agent with respect to statutory social welfare funds and housing funds operated under PRC laws. All contributions and payments required to be made by any employees of each Group Company in connection with such statutory social welfare funds and housing funds have been fully deducted and paid to the relevant governmental authority, and no such deductions have been challenged or disallowed by any governmental authority or any employee of any Group Company. 23.Information. All information provided by the Sellers with respect to the Group Companies or set out in this Agreement and the Ancillary Documentation are true, accurate and not misleading in all material aspects. The Disclosure Letter and its updates (if any) has fully, fairly, specifically and accurately disclosed the information that constitutes qualification to the Warranties. 24.Environmental Compliance. Each Group Company has complied in all material aspects with all Environmental Laws in force, relevant or applicable to it in any relevant jurisdiction and there is nothing in, on, over or under the Property the presence, existence or condition of which constitutes a material breach of such Environmental Laws nor is there or has there been any manufacturing, storage, generation, servicing, treatment, disposal or other process carried on at the Property in such a way as to amount to a material breach of the same. No toxic industrial waste or toxic substance (as defined in any Environmental Law) or any other Hazardous Substance, including without limitation, polychlorinated biphenyls, radioactive material, lead, asbestos-containing material, incinerator, landfill, septic, wastewater treatment or other disposal system or underground or above-ground storage tank (active or inactive) is or has been present at, on or under, or has been spilt, leaked, released, deposited, discharged or disposed in the soil or water in, under, around or upon the Property or any property previously owned, leased or operated by any Group Company. Each Group Company is not subject to any environmental investigation or proceedings. There are no liabilities of or relating to the business of any Group Company of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any Environmental Laws (including any liability to make good, repair, re-instate or clean up land or another asset owned, occupied, possessed or used by any Group Company on or before the date of this Agreement) and there are no facts, conditions, situations or set of circumstances which could reasonably be expected to result in or be the basis for any such liability. (a)Each of the Group Companies is in compliance in all material aspects with the Environmental Laws, which compliance includes, but is not limited to, the possession by each of the Group Companies of all permits and other government authorizations required under applicable Environmental Laws and compliance with the terms and conditions thereof. No Group Companies has received any communication (written or oral), from a governmental authority that alleges that it is not in such full compliance and, to the best knowledge of each the Group Companies and each of the Sellers, there are no circumstances that may prevent or interfere with such compliance in the future. (b)There is no Environmental Claim (as defined below) pending or threatened against any Group Companies (c)There are no past or present actions, activities, circumstances, conditions, events, or incidents, including, without limitation, the release, emission, discharge, presence, or disposal of any Material of Environmental Concern (as defined below), that could form the basis of any Environmental Claim against any Group Companies In this Agreement, "Environmental Claim" means any claim, action, cause of action, investigation, or notice (written or oral) by any person or entity alleging potential liability (including, without limitation, potential liability for investigation costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on, or resulting from: (i) the presence, or release into the environment, of any Material of Environmental Concern at any location, whether or not owned or operated by any party; or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. "Materials of Environmental Concern" means chemicals, pollutants, contaminants, wastes, toxic substances, Hazardous Substances, petroleum, and petroleum products. 25.Loans. Each Group Company has not, nor has it agreed to, create or incur loan capital, borrowings or indebtedness in the nature of borrowings with any third party which are not reflected in the Accounts. 26.Guarantees and Indemnities. Each Group Company is not a party to and does not have any liability (including without limitation, any contingent liability) under any guarantee, indemnity or other agreement to secure, or otherwise incur financial or other obligations with respect to, an obligation of a third party, which is not reflected in the Accounts. PART B - WARRANTIES IN RESPECT OF THE SELLERS 1. Corporate Authority and Existence. Each Seller is an entity duly organised and validly existing under the laws in which it was organized, and has all requisite power and authority to enter into this Agreement and Ancillary Documentation to which such Seller is a party and to carry out the transactions contemplated by this Agreement and Ancillary Documentation to which such Seller is a party. The Seller's investment in the Company and holding of Sale Shares does not violate any applicable law. 2. Authorisation of this Agreement and Related Transaction Documents. All actions, approvals and other proceedings, corporate or otherwise, including the board of directors' approval (if applicable), taken by each Seller necessary for, or in connection with: (i) the execution, delivery and performance of this Agreement and Ancillary Documentation to which the Seller is a party, (ii) the legality, validity, binding effect or enforceability of this Agreement and Ancillary Documentation to which the Seller is a party, and (iii) the consummation of any transactions contemplated under this Agreement and Ancillary Documentation to which the Seller is a party have been duly completed or obtained, except as may be limited by bankruptcy and other similar laws affecting creditors' rights generally and limitations on the availability of equitable remedies. This Agreement shall constitute its legal, valid and binding obligations on such Seller. 3. No Conflict or Violation. Neither the execution, delivery or performance by any Seller of this Agreement and Ancillary Documentation to which it is a party, nor compliance by the Seller with the terms, provisions and conditions thereof, (i) will contravene any provision of any law, statute, rule or regulation or any order, injunction or decree of any court or governmental instrumentality to which the Seller is subject, (ii) will violate or conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default (or give rise to any right or termination, cancellation to create or impose) of any Encumbrance upon the property or assets may be subject, (iii) will violate any provisions of the constitutional or other governing documents of the Seller and (iv) will be subject to any statutory, contractual or other limitations or require consents or approvals of any persons. 4. No Government Approvals. No governmental regulatory approvals or third party approvals or consents are required to be obtained by any Seller in connection with: (i) the execution, delivery and performance of this Agreement or Ancillary Documentation to which the Seller is a party, (ii) the legality, validity, binding effect or enforceability of this Agreement or Ancillary Documentation to which the Seller is a party or (iii) the consummation of any transactions contemplated under this Agreement or Ancillary Documentation to which the Seller is a party. 5. Each Seller is the legal and record owner of the relevant Sale Shares as set out against its name in column (2), Part A of Schedule 1 and has full and unrestricted rights to sell the relevant Sales Shares to the Buyer under this Agreement. PART C - WARRANTIES IN RESPECT OF THE BUYER 1.Corporate Authority and Existence. The Buyer is a company duly organized and validly existing under the laws of Delaware, and has all requisite corporate power and authority to enter into this Agreement and Ancillary Documentation to which the Buyer is a party and to carry out the transactions contemplated by this Agreement and Ancillary Documentation to which the Buyer is a party. 2.Authorisation of this Agreement and Ancillary Documentation. All actions, approvals and other proceedings, corporate or otherwise, including the board of directors' approval, taken by the Buyer necessary for, or in connection with: (i) the execution, delivery and performance of this Agreement and Ancillary Documentation to which the Buyer is a party; (ii) the legality, validity, binding effect or enforceability of this Agreement and Ancillary Documentation to which the Buyer is a party; or (iii) the consummation of any transactions contemplated under this Agreement and Ancillary Documentation to which the Buyer is a party, have been duly completed or obtained, except as may be limited by bankruptcy and other similar laws affecting creditors' rights generally and limitations on the availability of equitable remedies. This Agreement shall constitute legal, valid and binding obligations on the Buyer. 3.No Conflict or Violation. Neither the execution, delivery or performance by the Buyer of this Agreement and Ancillary Documentation to which it is a party, nor compliance by the Buyer with the terms, provisions and conditions thereof, (i) will contravene any provision of any law, statute, rule or regulation or any order, injunction or decree of any court or governmental instrumentality to which the Buyer is subject, (ii) will violate or conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default (or give rise to any right or termination, cancellation to create or impose) of any Encumbrance upon the property or assets may be subject, (iii) will violate any provisions of the constitutional or other governing documents of the Buyer and (iv) will be subject to any statutory, contractual or other limitations or require consents or approvals of any persons. 4.No Government Approvals. No governmental, regulatory approvals or third party approvals or consents are required to be obtained by the Buyer in connection with: (i) the execution, delivery and performance of this Agreement or Ancillary Documentation to which the Buyer is a party; (ii) the legality, validity, binding effect or enforceability of this Agreement or Ancillary Documentation to which the Buyer is a party; or (iii) the consummation of any transactions contemplated under this Agreement or Ancillary Documentation to which the Buyer is a party. 5.Brokers. Buyer has not entered into any agreement or had any discussion with any broker (except for Latitude Capital Group) regarding any proposed purchase of any of the Sale Shares which could result in Sellers or the Company having any liability to such third party. 6.Accounts. Buyer has received the Group Companies' Accounts for fiscal year 2006 along with a draft auditors' report. SCHEDULE 5 ACTION PENDING COMPLETION Each Seller shall ensure that each Group Company will: except for the purpose of effectuating the sale and purchase of the Sale Shares pursuant to this Agreement or otherwise contemplated under this Agreement or the Ancillary Documentation, 1.operate its business in the usual way so as to maintain that business as a going concern; having regard to existing bank and other facilities, maintain sufficient working capital for the purposes of continuing to carry on its business in its present form and at its present level of turnover for the foreseeable future and for the purposes of performing in accordance with their respective terms all orders, projects and contractual obligations which have been placed with, or undertaken by, such Group Company, in a manner consistent with its past practice in the two years prior to the Completion; 2.not amend its organizational documents; not issue, sell, transfer, pledge, dispose of or encumber any shares or equity interests (including the Sale Shares being purchased by the Buyer), or securities convertible into or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares or equity interests; 3.not create, allot, issue, acquire, repay or redeem any share capital or agree, arrange or undertake to do any of those things or acquire or agree to acquire, an interest in a corporate body or merge or consolidate with a corporate body or any other person, enter into any demerger transaction or participate in any other type of corporate reconstruction; 4.not acquire or dispose of, or agree to acquire or dispose of, any revenues, assets, business or undertakings except in the ordinary course of its business or assume or incur, or agree to assume or incur, a liability, obligation or expense (actual or contingent) except in the ordinary course of its business; 5.not make, or agree to make, capital expenditure exceeding in total US$100,000 (or its equivalent at the time) or incur, or agree to incur, a commitment or commitments involving capital expenditure exceeding in total US$100,000 (or its equivalent at the time) other than pursuant to its business plan and budget previously approved by the board of directors; 6.not declare, pay or make a dividend or distribution; 7.not pass a shareholders' resolution except in the ordinary course of its business; 8.not create, or agree to create or amend, an Encumbrance over the Property or another asset or redeem, or agree to redeem, an existing Encumbrance over the Property or another asset other than pursuant to its business plan and budget previously approved by the board of directors; 9.in relation to the Property: (i) not change its existing use; (ii) not terminate, or give a notice to terminate, a lease, tenancy or licence; (iii) not apply for consent to do something requiring consent under a lease, tenancy or licence; or (iv) not agree a new rent or fee payable under a lease, tenancy or licence, other than in the ordinary course of its business or otherwise pursuant to its business plan or budget approved previously by the board of directors; 10.not enter into a long-term, onerous, unusual or material agreement, arrangement or obligation in each case, involving consideration, expenditure or liabilities in excess of US$100,000 other than in the ordinary course of business or pursuant to its business plan or budget approved previously by the board of directors; 11.not amend or terminate a material agreement, arrangement or obligation to which it is a party other than in the ordinary course of business or pursuant to its business plan or budget approved previously by the board of directors; 12.not amend the terms and conditions of employment or engagement of a director, other officer or employee (except in the usual course of its business) or provide, or agree to provide, a gratuitous payment or benefit to a director, officer or employee (or any of their dependants) or employ, engage or terminate the employment or engagement of, a person with aggregate annual compensation package in excess of US$ 50,000; 13.not amend, or agree to amend, the terms of its borrowing or indebtedness in the nature of borrowing or create, incur, or agree to create or incur, borrowing or indebtedness in the nature of borrowing; 14.not give, or agree to give, a guarantee, indemnity or other agreement to secure, or incur financial or other obligations with respect to, another person's obligation; 15.not establish, modify or discontinue (wholly or partly) an Employee Benefit Plan or discontinue (wholly or partly) an Employee Benefit Plan; not issue any new shares, options, warrants or other securities under the Employee Benefit Plan, in each case, other than as contemplated under this Agreement and the Ancillary Documents; 16.not pay any benefits under an Employee Benefit Plan other than in accordance with the terms of the documents governing an Employee Benefit Plan and not under any discretionary power; 17.not commence litigation or arbitration proceedings without notification to the Buyer in writing; 18.conduct its business in all material respects in accordance with all applicable legal, regulatory and administrative requirements in any applicable jurisdiction; 19.not enter into an agreement, arrangement or obligation (whether legally enforceable or not) in which a director or former director of a Group Company or a person connected with any of them is interested; 20.protect, defend, enforce, maintain and renew each of the Intellectual Property Rights and continue any pending application for the Intellectual Property Rights; 21.pay and discharge in accordance with the present practice of such Group Company as at the date of this Agreement (i) all Taxes, assessments, levies, fees and charges imposed upon it or upon or in relation or in connection with the Properties and other assets and (ii) all lawful and valid claims which, if unpaid, might by law become a lien upon the Properties and other assets, and maintain such reserves in respect of Taxes, assessments, levies, fees and charges as are required under generally accepted accounting principles, standards and practices generally accepted in Cayman Islands and PRC (as the case may be) and consistently applied with the consequences that as at the Completion Date, all Taxes payable by any Group Company have been paid and/or discharged in full and/or moneys have been set aside for the same (and all adequate provisions for deferred Taxes have been made in the relevant Accounts); 22.allow the Buyer and its agents access to, and to take copies of, the books and records of each Group Company including, without limitation, the statutory books, minute books, leases, licences, contracts, details of receivables, intellectual property, supplier lists and customer lists in the possession or control of each Group Company subject to their confidentiality obligations; 23.not take, or agree to or commit to take, any action that would or is reasonably likely to result in any of the Conditions not being satisfied, or would make any Warranty of the Sellers or the Company contained herein inaccurate in any respect; 24.complete registration of the 8 permanent sites located at Huhehot, Jiangmen, Lanxi, Xiamen, Wuhan, Kelamayi, Chongqing, Kunming and the 5 permanent sites in Shanghai as branch companies at the local AICs; 25.complete renewal of the following leases for the offices located at: Heilongjiang, Tianjin, Guangzhou, Haikou, Quanzhou, Suzhou, Wenzhou, Lanxi, Xuzhou, Wuhan,Changsha, Zhenzhou, Wulumuqi, Kuerle, Chengdu and provide to the Buyer the renewed business licenses of all branch companies of each Subsidiary which indicate that they have all passed 2006 annual review; 26.amend the business scope of Chic SCM and obtain new business license entitling it to carry on transportation and warehousing business covering all of the regions in the PRC; 27.procure each Key Personnel to execute the employment agreement as referenced to in Clause 3.1.12 of the Agreement; 28.obtain the letter of understanding from Procter & Gamble Guangzhou Co., Ltd. as required under Clause 3.1.14 of the Agreement; 29.procure the relevant Group Companies to renew the contracts as referenced to in Clause 3.1.15 of the Agreement; 30.complete the transactions as referenced to in Clauses 3.1.16 and 3.1.17 of the Agreement; 31.procure Chic S&T and Chic SCM to terminate the Service and Undertakings Agreement as required under Clause 3.1.18 of the Agreement; 32.procure Chic's Mart Trading Co., Ltd to enter into the non-disclosure and non-compete agreement as referenced to in Clause 3.1.19 of the Agreement; 33.procure the Group Companies to make arrangements with respect to the options and/or the warrants as referenced to in Clause 3.1.20 of the Agreement; 34.procure Shanghai Venus Software Co., Ltd. to enter into an amendment to the Technology Development Contract as required under Clause 3.1.21 of the Agreement; and 35.procure the Subsidiaries to maintain such insurance policies as referenced to in Clause 3.1.22 of the Agreement. SCHEDULE 6 REAL PROPERTY
(1) WAREHOUSE LEASE Warehouse Name Warehouse Address Staring Date Ending Date Total Area Rent (monthly) (m2) - ------------------- -------------------- -------------- -------------- ------------- ---------------- ShanghaiBaoshan 455 Miaopu Road, 2006-11-28 2007-11-27 4,814 111,315 Guangming Warehouse Shanghai Shanghai Songjiang 115 Shenglong Road, 2007-4-1 2008-3-30 16,859 210,201 Jiuting Warehouse Jiuting,Songjiang District, Shanghai Road Shanghai Songjiang 295 Shengli Road, 2006-9-1 2010-8-31 23,696 381,995 Xinqiao Warehouse Xinqiao, Songjiang District, Shanghai Wuhan Gongxiao No 2 New Warehouse, 2007-5-1 2008-4-30 8,107 89,177 Agricultural Shazui,Tuoluokou, Production Materials Dongxihu District, Warehouse Wuhan Wuhan Shitong 439 Changfeng Avenue, 2007-4-1 2007-9-30 1,000 13,700 Warehouse Chang Port, Wuhan Wuhang Jieli 49 Gutianyi Road, 2006-9-23 2008-9-22 2,300 30,110 Warehouse Qiaokou District, Wuhan Chengdu Warehouse Xinguanghua Industry 2006-4-1 2011-3-31 16,164 190,631 Park of Yongquan Street, Wenjiang District, Chengdu Kunming Warehouse Shilipu, Liangting, 2006-11-26 2007-11-25 990 15,073 Eastern Suburb, Kunming Xi'an Warehouse No 1 Warehouse, 188 2006-2-15 2008-2-14 7,716 94,797 Jianzhang Road, Xi'an Urumqi 1 Youyi Road 2004-9-15 2007-9-14 2,821 23,721 warehouse Guangzhou Wenjia Road 2006-11-1 2009-10-31 3,900 60,840 QiaohaiWarehouse North, Yitang Village, Fengle Road North, Huangpu District,Guangzhou Guangzhou Shenglai Jianshe Yitang 2006-10-1 2007-9-30 3,280 39,360 Warehouse Warehouse,Fengle Road North,Huangpu District,Guangzhou Shenzhen Huanancheng 2007-1-1 2007-12-31 15,390 277,560 Huanancheng Warehousing Quarter, Warehouse Fuan Avenue South, Pinghu Town, Longgang District, Shenzhen Beijing Xizhihe Xizhihe Village, 2004-8-16 2009-8-15 20,560 281,178 Warehouse Shibalidian Township, Chaoyang District, Beijing Beijing Xizhihe Xizhihe Village, 2005-1-1 2007-12-31 10,668 176,030 Warehouse Shibalidian Township, Chaoyang District, Beijing Beijing Xizhihe Xizhihe Village, 2006-4-15 2009-8-15 800 13,383 Warehouse Shibalidian Township, Chaoyang District, Beijing Tianjin CTX 188 Jingmen Avenue, 2007-1-1 2007-9-30 1,500 22,500 Warehouse Tianjin Free Trade Zone Tianjin Hub Zhendong Group, Xu 2007-3-14 2007-9-13 420 7,161 Village, Dongli District, Tianjin Shenyan PVM No 2 Warehouse, 11 2007-8-1 2008-7-31 3,870 62,020 Warehouse Fuminnan Street, Hunnanxin District, Shenyang, Liaoning Shenyan MK 19 Dongmao Road, 2006-10-15 2007-10-14 2,100 29,400 Warehouse Dadong District (warm seasons) 52,500 (winter)
2) OFFICE LEASE
Branches Address Duration Starting Date Ending Date Annual Rent (year) (RMB Yuan) - ---------- --------------------- ---------- --------------- --------------- ------------- Beijing Room 1703, Building 2 2006-9-26 2008-9-25 96000/year 6, Jianguo Road, Chaoyang District, Beijing Baotou 1/Floor, Conference 2 2006-8-16 2008-8-25 23000/year Room, 1 Steel Road, Qingshan District, Baotou Yantai Room 503, Suite A, 3 2006-8-1 2009-7-31 34000/year Eastern Paris Triumph Towern, 1 Qianjin Road, Zhifu District, Yantai, Shangdong Shenyan 2/Floor, Western 1 2006-4-1 2007-9-30 7200/year Office Building, 20 Dongmao Road, Dadong District, Shenyan Jilin 2/F, Transporation 1 2006-11-1 2007-10-31 25000/year Hotel, 6 Zhongkan Road, Jilin City, Jilin Province Zibo Tianlin Tower 1 2006-4-15 2008-4-15 10680/year Taian Taishan Resturant, 1 2006-9-16 2007-9-16 16800/year Taian Erdos Room 215, Section 1 2006-11-20 2007-11-19 12000/year B, Daxing International Shopping Park, Dalate Road, Dongsheng District, Erdos Dongying 270 Jinan Road, 2 2006-5-1 2008-4-30 13000/year Dongying District Weifang Room 421, Dongtai 1 2006-12-25 2007-12-24 21315/year Tower, Weifang Linyi (2/F) Ruyi Jie, 2 2006-12-16 2008-12-15 15000/year Lantian Pedestrian Street, Linyi Baoding 2 Eastern Side, 2 2006-11-15 2008-11-14 35000/year 6/F, Jiapeng Building, 178 Tiane Road, Gaokai District, Baoding Tangshan 211, 2/F, Measuring 2 2006-6-1 2008-5-31 11520/year Building, Tangshan Branch of China Coal Research Institute (21 Xinhuaxi Road) Dalian 1/F North, Lane 2 2006-7-1 2008-6-30 40000/year 102, Waisui Street, Shahekou, Dalian Shijiazhuang Rooms B420-B422, 1 2007-3-15 2008-3-14 52116/year Yinban Shangzhu, 129 Qiaoxinanxiao Street, Shijiazhuang Daqing Conference Room 1 2007-3-24 2008-3-23 24000/year 4/F, Daqin Jungong Guest House, 53 Huizhan Street, Sartu District, Haerbin, Helongjiang Taiyuan 66 Taoyuan Road 1 2007-4-20 2008-4-19 50000/year North, Taiyuan Haerbin 10/F, Suite H, 1 2007-6-20 2008-6-19 27500.04/year Hushi Tower, Haiguan Street, Nangang District, Haerbin Changchun Room 503, Tianting 1 2007-7-14 2008-7-13 50000/year Tower, 169 Puqing Road, Chaoyang District, Changchun Jinan Rooms 601 & 603, 2 2006-4-1 2008-3-31 56160/year Suite A, Dashun Commercial Tower, 95 Lishan Road, Shangdong Qingdao 1002 Room, Dongli 2 2007-6-1 2009-5-31 40000/year Apartment Building, 38 Dongguang Road, Shibei District, Qingdao Handan 133 Yuxinna Street, 2 2007-2-1 2009-1-31 7200/year H&an Tianjin 1-A-610 Shiji 1 2007-7-1 2008-6-30 30000/year Garden, Nanmenwai Street, Nankai District, Tianjin Guangzhou 5606 Room, CITIC 2 2007-1-1 2008-12-31 478571.16/year Plaza Office Building, 233 Tianhe Road North, Guangzhou Guangzhou A264 (Former A 2 Xi 1 2007-5-20 2008-5-19 6000/year 18), 329 Chuangshi Dasha Street, Qingnian Road, the Development Zone, Guangzhou Guangzhou Room 301, 3/F, 1 2007-1-1 2007-12-31 11400/year Building 9, Tearchers' Village, Yunningju, Guangzhou Shantou 16B, Suite A, 1 2006-12-1 2007-11-30 21600/year Jinlong Tower, Jinsha Road East, Longhu District, Shantou Shenzhen 2201 Room, Suite 1 2007-4-8 2008-4-7 20400/year East, Baihuo Plaza Tower, 123 Shennan Road East, Shenzhen Zhongshan Section 1, 3/F, 2 2006-5-15 2008-5-14 32364/year Commercial Plaza, Buffalo, 389 Fuhua Road, West District, Zhongshan Shunde The First Floor, 9 2 2006-3-1 2008-2-28 15600/year Ronggui Fengan Street, Shunde District, Fushan Nanning Room 3018, Tenglong 2 2006-1-7 2008-1-7 32400/year Ge, Jubao Garden, 8 Minsheng Road, Nanning Quanzhou Room 207, Boren 1 2007-6-20 2008-6-20 14400/year Building, Huxin Road, Fengze District, Quanzhou Haikou Room 104, 58 Haifu 1 2007-1-25 2008-1-24 28800/year Road, Haikou Dongguan Room 409, Suite B, 1 2006-8-21 2007-8-20 36192/year Jinao Garden (Fangzhou Tower), 65 Gongguan Gongcheng Avenue, Dongguan Zhuhai Office Building 2 2006-12-15 2008-12-14 36000/year, 1801A, Haicheng 39600/year for Tower, 183 the third year Fenghuang Road, Zhuhai Shaoguan Store 6, First 2 2006-8-16 2008-8-15 19200/year Floor, Suite B, Dongfeng Garden, Xinjian Road, Wujiang District, Shaoguan Guangzhou Room 1705, 7 Qinghe 1 2007-3-1 2008-2-28 48000/year Road, Guangzhou Economic Development Zone Chengdu 24G, Jinyang 0.5 2007-4-1 2007-9-30 20430/year Building, 58 Tidu Street, Jinjiang District, Chengdu Chengdu B6 Section, 5/F, 1year and 2006-8-21 2007-11-20 27360/year Shunji Tower, 252 3 months Shuncheng Street, Chengdu Panzhihua Room 609, 175 1 2006-1-17 2007-12-31 14400/year Linjiang Road, Panzhihua Chongqing Room 5, 10/F, 1 2006-9-22 2007-12-31 45492/year Oupeng Tower, 216 Xinhua Road, Yuzhong District, Chongqing Neijiang 9-2 Tiancheng Dasha 1 2007-1-1 2007-12-31 14400/year Hotel, 118 Park Road, Zhong District, Neijiang Guiyang Rooms 6-8, 8/F, 1 2007-1-1 2007-12-31 27048/year Qiaoliang Tower, 36 Qianling Road West, Yunyan District, Guizhou Kunming Room 1205, 12/F, 4 2007-3-5 2011-12-31 42432/year Jida Plaza, 289 Renmin Road East, Kunming Leshan 12-1 Land 1 2007-1-1 2007-12-31 9000/year Administration Building, 41 Boyan Road, Zhong District, Leshan Wuhan Suite B, 14/F, 1 2007-4-20 2008-4-19 52738.08/year Liangyou Tower, 316 Xinhua Road, Wuhan Wuhan Room 1210, Hubei 1 2006-12-18 2007-12-17 54096/year Commercial Tower, 1 Baofeng Road, Qiaokou District, Wuhan Yichang Suite B, 13/F, 1 2006-10-1 2007-9-30 14800/year Donghuan Tower, 9 Huancheng Road East, Yichang Luoyang Rooms 317 - 319, 1 2006-11-15 2007-12-31 15300/year Jiuzhou Tower, 13 Qiyi Road North, Xigong District, Luoyang Pingxiang Room 5028, 1 2007-1-1 2007-12-31 10800/year Fulichang Tower, 17 Yuejin Road North, Pingxiang Zhenzhou 159 Jiankang Road, 1 2007-3-25 2008-3-24 60225/year Zhenzhou Zhuzhou Room 1205, Tianshun 1 2005-8-25 2006-8-24 26400/year Building, 12 Xinhua Road West, Zhuzhou Nanchang Room 2, Wuzi Tower, 1 2007-6-11 2008-6-10 22200/year 12 Guangchang Road South, Xihu District, Nanchang Changsha Room 806, Lianhe 1 2007-6-8 2008-6-7 49200/year Commercial Building, 549 Wuyi Avenue, Changsha Xi'an Room 305, 13/F, 2 2007-4-20 2009-4-19 37980/year Weilan International, 3 Daqing Road, Lianhu District, Xi'an Xi'an Rooms 1002 & 1004, 2 2007-5-1 2009-4-30 48240/year 10/F, 82 Xiguanzheng Street, Lianhu District, Xi'an Yinchuan Room 4, 10F/F, 1 2006-8-26 2007-8-26 23928/year Suite A, Jintai Tower, 4 Xinhua Street East, Yinchuan Urumqi 6/F, 11 Xinhua Road 2 2005-10-29 2007-11-15 43500/year South, Urumqi Lanzhou 1001 Room, Mianma 2 2006-11-1 2008-10-31 25200/year Tower, 28 Zhongshan Road, Lanzhou Taiyuan 66 Taoyuan Road 1 2007-4-20 2008-4-19 50000/year North, Taiyuan Kelamay 1001 Room, 169 1 2006-12-2 2007-12-1 11218.28/year Youyi Road, Kelamay Baoji Room 1011, 1 2007-3-27 2008-3-26 15276/year Zhonghuan Hotel, 1 Yingda Road, Hi- Tech Development Zone, Baoji Xining Room 1205, 26 1 2007-4-1 2008-3-30 18357.6/year North Street, Chengzhong District, Xining Korla Tongluowan Plaza, 1 2007-7-1 2008-6-30 10560/year Renmin Road, Korla Suzhou 5 Shuitan Lane, 1 2007-3-18 2008-3-17 40000/year Ganjiang Road West, Pingjiang District, Suzhou Jinhua Store, First Floor, 1 2006-11-25 2007-12-31 18000/year 106 Xiuya Street, Jinhua Hefei Room 806, Haiya 1 2006-12-29 2007-12-28 33170.4/year Office Buidling, Hefei Yangzhou Room 817, Yangguan 1 2007-1-1 2007-12-31 10980/year City, 230 Lane, Yunhe Road West, Yangzhou Nantong Stores 4 & 5, 1 2007-1-1 2007-12-31 72576/year Building 10, Zhaohui Garden, Nantong Taizhou Store 41, Haiwan 1 2007-2-17 2007-12-31 13100/year Langqin, Taizhou Economic Development Zone Changzhou Room 807A, 20 2.5 2007-5-8 2009-12-31 24800/year Guanghua Street, Changzhou Nantong Stores 4 & 5, 1 2007-5-1 2008-4-30 5280/year Building 10, Zhaohui Garden, Nantong Zhenjiang Room 209, Jingcheng 1 2007-5-19 2008-5-18 8800/year Tower 1, 22 Jiefang Road, Zhenjiang Lanxi Home of Zhao 1 2007-7-20 2008-7-19 6000/year Xiezhi, Gengtoufan Village, Lingdong Town, Lanxi Xuzhou Rooms 301 & 302, 95 1 2007-7-1 2008-6-30 19200/year Pengcheng Road, Xuzhou Wuxi Room 101, 61 Huaigu 2 2006-2-1 2008-1-31 31000/year Xin Village, Jiefang Road East, Wuxi Nanping Room 101, Guangyu 2 2005-11-29 2007-11-28 18000/year Xincheng, Sanyuan Road, Nanping Fuzhou 3A-2, Suite B, Lida 1 2006-11-1 2007-10-31 33600/year Tower, 8 Dong Street, Fuzhou Wenzhou Room 406, Huasheng 1 2007-6-24 2008-6-23 34800/year Tower, Danan Road, Wenzhou Hangzhou Room 1005, Lianyin 2 2006-10-22 2008-10-21 86544/year Tower, 95 Pengcheng Road, Hangzhou Ningbo Room 4-43, 4/F, 1 2007-8-12 2008-7-31 43200/year Zhongshan Dadi, 26 Lane 416, Zhongshan Road East, Dong District, Ningbo Xiamen Units 08 & 09, 7/F, 2 2007-2-2 2009-2-1 30660/year Xinxin Jindi Tower, 396 Jiahe Road, Huli District, Xiamen
SCHEDULE 7 INTELLECTUAL PROPERTY RIGHTS (a) The trademark of "Chic" used by the Group Company was registered in the name of Chic S&T in the category of class 39 on 14 March 2001. (b) Software No. Software name Developer Description of Right to Right to development contract use the use the (date, term and material software software terms) by the by Group developer Company - ----------------------------------------------------------------------------- 1 Transportation Shanghai July,2007~Sep., 2005 NO Yes management Venus system software co. 2 MK WMS NOVA Jan.,2004~ NO Yes (CDC & RDC) Software 3 GPS Dichain Jan.,2006~Mar.,2007 Yes Yes DTS 4 SAP Excel-SH Yes Yes SCHEDULE 8 TAX DEED DEED OF TAX INDEMNITY THIS DEED OF TAX INDEMNITY (this "Deed") is dated [*], 2007 BY: (1) CV Distribution Services Ltd., a company incorporated in the Cayman Islands, whose registered office is at Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands; (2) Swingside Ltd., a company incorporated in Hong Kong SAR, whose registered office is at 5705 57th Floor, The Centre, 99 Queen's Road Central, Hong Kong ; (3) Seavi Advent CHL Investments Ltd., a company incorporated British Virgin Islands, whose registered office is at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands ; (4) Fortis Private Equity Asia Fund N.V., a company incorporated in Belgium, whose registered office is at Warandeberg 3, 1000, Brussels, Belgium ; (5) Prosper Field Holdings Limited, a company incorporated in the British Virgin Islands whose registered office is at Kingston Chambers, P. O. Box 173, Road Town, Tortola, British Virgin Islands ; (Each party set out in paragraphs (1) to (5) above is referred to as a "Seller" and together, the "Sellers". Each party set out in paragraphs (3) to (5) above is referred to as a "Preferred Share Seller" and together, "Preferred Share Sellers".) (6) Mr. Johnson Shen Qiwei, a PRC citizen (holder of PRC ID Number: 310104196411064078), whose address is at No.190, Lane 3588 Dushi Road, Minghang District, Shanghai PRC, 201108; and (7) Mr. Jimmy Kang Jimin, a PRC citizen (holder of PRC ID Number: 310107671123281), whose address is at Room101, 139 Lijiang Shanshui, 999 Huajing Road, Xuhui District, Shanghai PRC, 200231; (Each party set out in paragraphs (1) to (7) above is referred to as a "Covenanter" and together, the "Covenanters".) IN FAVOUR OF: (8) Menlo Worldwide, LLC, a company incorporated in the State of Delaware whose primary business office is at 2855 Campus Drive, Suite 300 San Mateo, CA 94403-2512, United States of America ("Buyer "); (9) Chic Holdings Limited, a company incorporated in Cayman Islands, with its registered office at c/o Maples & Calder, Ugland House, P.O. Box 309, George Town, Grand Cayman, Cayman Islands ("Company"); and (10)each Subsidiary as stated and defined in the Agreement (as defined below) (together with the Company, the "Group Companies"). (Each party set out in paragraphs (8) to (10) above is referred to as a "Covenantee" and together, the " Covenantees".) WHEREAS :- (A) This Deed is made pursuant to an agreement dated 7 September 2007 (the "Agreement") between the Covenanters and the Buyer to which this Deed is attached as Schedule 8 providing, inter alia, for the acquisition by the Buyer from the Sellers of the entire issued share capital in the Company. (B) Each Covenanter has agreed to provide each Covenantee with an indemnity in respect of taxation on the terms and conditions of this Deed. EACH COVENANTER HEREBY AGREES as follows : 1. DEFINITIONS 1.01 In this Deed, in addition to the above definitions, the following words and expressions shall have the following meanings:- "Claim" means any assessment, notice, demand or other government paper issued or action taken by or on behalf of any Tax Authority pursuant to which any Group Company is liable or is sought to be made liable for any Taxation or for any payment arising from the retroactive depravation of any form of Relief which Relief has already been granted to and enjoyed by the Group Company(ies) prior to Completion and would, but for the Claim, have not been clawed back from relevant Group Company(ies) ; "PRC" means the People's Republic of China which for the sole purpose of this Deed shall exclude Hong Kong, Macau and Taiwan; "Relief" includes any relief, allowance, set-off or deduction in computing profits or credit or right to repayment of Taxation enjoyed by any Group Company on or prior to Completion pursuant to any legislation concerning or relating to Taxation; "Taxation" means (a) all taxes, or similar governmental levy or imposition imposed on any Group Company arising from its activities on or prior to Completion whether of the PRC or the Cayman Islands, however denominated, which will include, without limiting the generality of the foregoing, all customs duties, corporate and individual income taxes, employee withholding taxes, withholding tax on other service providers, withholding tax on capital gains, social security taxes, sales and use taxes, value added taxes, real and personal property taxes, stamp taxes, transfer taxes, other governmental charges, and other government obligations of the same or of a similar nature to any of the foregoing, which are required by law to be paid, withheld or collected by the Group Companies; (b) any liability for amounts referred to in (a) as a result of any obligations to indemnify another person; (c) any amount or amounts in respect of any Group Company as is referred to in Clause 1.03 and (d) all interest, penalties, fines, costs, charges and expenses incidental or relating to the liability to Taxation or the deprivation of any Relief which is the subject of this Deed to the extent that the same is payable or suffered by any Group Company; "Tax Authority" means any taxing or other legitimate authority in the PRC or Cayman Islands competent to impose any liability of Taxation pursuant to the then effective laws of the relevant jurisdiction. 1.02 In this Deed, references to Clauses and Schedules are to clauses and schedules of this Deed, words importing the singular include the plural and vice versa, words importing a gender include any gender, references to persons include bodies corporate or unincorporate and the headings to the Clauses in this Deed are for convenience only and have no legal effect. 1.03 In the event of any deprivation of any Relief already enjoyed and accounted for by the Group Companies, liability arising from such deprivation shall be treated as an amount of Taxation by applying the relevant rates of Taxation in force in the period or periods in respect of which Relief would have applied or (where the rate has at the relevant time not been fixed) the last known rate and assuming that Relief was capable of full utilization by the relevant company. 1.04 Words and phrases defined in the Agreement shall have the same meaning when used in this Deed unless otherwise defined herein. 2. INDEMNITY 2.01 The Covenanters hereby jointly and severally covenant and agree with each Covenantee that the Covenanters shall unconditionally, fully and effectually indemnify and at all times keep unconditionally, fully and effectually indemnified each Covenantee from and against: (a) the amount of any and all Taxation falling on any Covenantee resulting from or by reference to any income, profits, gains, transactions, events, matters or things of the Group Companies earned, accrued, received, entered into or occurring up to Completion with respect to which Taxation should have been paid but have not been paid pursuant to the requirement of law by such Covenantee on or prior to Completion; (b) without limiting the generality of Section 2.01(a) above, the amount of any and all Taxation falling on any Covenantee resulting from or by reference to the following taxations, claims, penalties, fines or other monetary and non-monetary tax liabilities of any Group Companies occurring up to Completion with respect to which Taxation should have been paid but have not been paid pursuant to the requirement of law by such Covenantee on or prior to Completion: (i) any tax liabilities due to the recognition of sales revenues upon the issuance of invoices rather than on an accrual basis; (ii) any tax liabilities due to any equity transfers of any Group Companies (including without limitation the transfers of equity interests of Shanghai Chic Storage and Transportation Co., Ltd. and Shanghai New Chic Logistics Co., Ltd. to Shanghai Chic Logistics Co., Ltd.), or any business or assets transfers or any service and undertakings agreement entered into between Group Companies; (iii)any tax liabilities due to any claims by any Subsidiary for corporate income tax deduction for expenses incurred by the Company; (iv) any tax liabilities due to any related parties' transactions between any Group Company and its Affiliate(s); (v) any tax liabilities due to not withholding appropriate individual income taxes for the employees of any Group Company and not withholding appropriate corporate and/or individual income tax in transactions with any third parties; (vi) any tax liabilities due to non-compliance with competent local or state tax authorities either by any Group Company or any of its branch company; (vii)any tax liabilities incurred by any Group Company due to issuance of tax deductible invoices used in the transportation industry for transportation services provided by subcontractors; and (viii)any tax liabilities incurred by the Company due to the implementation of the Employee Benefit Plan. (c) any and all costs (including all legal costs), expense or other liabilities which any Covenantee may incur in connection with:- (i) the settlement of any claim under this Deed; (ii) any legal proceedings in which any Covenantee claims under or in respect of this Deed and in which judgment is given for any Covenantee; or (iii)the enforcement of any such settlement or judgment. 2.02 For the avoidance of doubt, the Covenanters shall unconditionally, fully and effectually indemnify and at all times keep unconditionally, fully and effectually indemnified each Covenantee as set forth in Section 2.01 even if the Covenanters have disclosed to the Convenantee(s) the facts in connection with such Taxation or depravation of Relief. 3. CLAIMS 3.01 If any Covenantee receives a Claim which may give rise to a liability on the part of the Covenanters to make a payment under this Deed, the Buyer shall: (i) within twenty (20) business days of becoming aware of such Claim, give to the Covenanters by written notice details of the circumstances of such Claim. The Covenanters and the Buyer shall discuss with each other in good faith in respect of such Claim, and Buyer shall keep the Covenanters informed of all material developments relating to such Claim; (ii) if so reasonably requested by the Covenanters, take all reasonable steps or proceedings as the Covenanters may reasonably consider necessary in order to mitigate, avoid, resist, appeal, dispute, contest, remedy, compromise or defend such Claim and for this purpose take necessary proceedings in the name of the relevant Group Company subject to the Buyer being indemnified by the Covenanters against all reasonable costs and expenses incurred in connection therewith; (iii) at ordinary working hours allow the Covenanters access to and to inspect and take copies of all necessary books and records of the relevant Group Company in respect of matters prior to Completion and associated with the Claim (subject always to keeping the same confidential other than necessary disclosures in connection with any such Claim); (iv) obtain the assistance of the personnel of the relevant Group Company to provide statements and proofs of evidence, and to attend at any hearing to give evidence or otherwise, and to provide other reasonable assistance to enable the Covenanters to reasonably mitigate, avoid, resist, appeal, dispute, contest, remedy, compromise or defend any such Claim on the basis that the Covenanters shall be responsible for all reasonable expenses incurred by the Company and/or the Buyer in providing such assistance; (v) save with the prior written consent of the Covenanters (which consent shall not be unreasonably withheld or delayed), not admit liability in respect of or compromise or settle any such Claim or volunteer any alleged circumstances in the course of disputing any claim likely to affect the amount thereof or the future Taxation liability of any Covenantee. Notwithstanding the foregoing, if the Buyer has given a written notice of a proposed admission, compromise or settlement of Claim, and has not within 21 days thereafter received an instruction in writing from the Covenanters indicating its objection to such proposal, then the Covenanters shall be deemed to have given a prior written consent to such proposed admission, compromise or settlement of Claim. 3.02 Upon receipt of a notice, the Covenanters shall have the right to jointly rather than individually participate in the defense of the Claim at its own expense and with counsel of its own choice; provided, however, that the Covenanters shall diligently pursue such defense. 3.03 Where a deadline to pay the Taxation is provided in a Claim, an order of the Tax Authority or under applicable laws which deadline is not extendable upon filing a dispute, the Covenanters shall pay to the Buyer or a Group Company designated by the Buyer an amount equal to the full amount of the Taxation on or before the third business day prior to such deadline, and the Buyer or the designated Group Company shall pay the Taxation within three business days thereafter to the Tax Authority, provided however that such payments shall not be deemed as admission of liability or a compromise or settlement to the Claim and shall not prejudice the parties' right to seek final adjudication regarding the Claim. If under the final adjudication regarding the Claim, any compensation is adjudicated to be paid to a Group Company, the Group Company should pay to the Covenanter an amount equivalent to such compensation within 3 days upon receipt of such compensation. 3.04 Where there is no deadline to pay the Taxation, the Covenanters shall pay to the Buyer or a Group Company designated by the Buyer according to the final adjudication regarding the Claim (if any) on or before three business days following the issuance of such final adjudication. 4 Exclusions and Limitations 4.01 The Covenanters shall have no obligations under the covenant contained in clause 2.1 in respect of any liability for Taxation: (i) to the extent that provision or reserve for such liability for Taxation has been made in the Accounts; or (ii) to the extent that the Buyer has made recovery in respect of such liability for Taxation under the Warranties or any other provisions of the Agreement; or (iii) to the extent that such liability for Taxation would not have arisen but for or is increased as a consequence of any voluntary act, omission, transaction or arrangement carried out or effected by the Buyer or a Group Company at any time after Completion, other than where such voluntary act, omission, transaction or arrangement takes place pursuant to a legally binding commitment created on or before Completion by the Covenanter or the Group Company, is required by law or takes place in the ordinary course of business of the Group Company; or (iv) to the extent that such liability for Taxation would not have arisen but for or is increased by reason of: (a) a disclaimer, claim or election made or notice or consent given after Completion by the Buyer or a Group Company otherwise than at the direction of the Covenanters under the provisions of this Deed or pursuant to law; or (b) the failure or omission by a Group Company to make any claim, election, surrender or disclaimer or give any notice or consent or do any other thing after Completion the making giving or doing of which was taken into account or assumed in computing the provision for Taxation (including the provision for deferred Taxation) in the Accounts and full details of which are given in the Disclosure Letter; or (v) which arises from any change in accounting policy affecting the Company, introduced or having effect on or after Completion, other than those changes introduced or effected pursuant to and in compliance with law; or (vi) to the extent that any Relief (other than a Buyer's or the Company's Relief) is available to set against or otherwise mitigate such liability for Taxation; or (vii) to the extent that such liability for Taxation arises or is increased as a consequence of the failure by the Buyer or the Company after Completion to comply with its obligations under this Deed. 4.02 Except for any liabilities based on fraud, the liability of the Preferred Share Sellers under this Deed shall not extend to any Claim notice of which was given by the Buyer in writing later than the second anniversary of the Completion, provided however, the Covenanters shall remain liable for the Taxation with respect to which the Buyer has given a written notice regarding the relevant Claim within the second anniversary of the Completion but the final adjudication regarding such Claim occurs only after the second anniversary of the Completion. 4.03 The liability of the Covenanters under this Deed is subject to the limitations set forth in Section 6.6.3 of the Agreement. 4.04 To the extent permitted by law and solely for Covenanters' tax filing purposes, any amount paid by the Covenanters under this Deed shall be treated as a reduction in the consideration paid by the Buyer for the Sale Shares. 5. NOTICES 5.01 The provisions of Clause 17 of the Agreement (mutatis mutandis) shall be incorporated in and be deemed to be part of this Deed. 6. BINDING EFFECT 6.01 This Deed shall enure to the benefit of and be binding on each party and its respective successors and assigns. 7. ENTIRETY OF DEED AND SEVERABILITY 7.01 The terms and conditions contained in the Agreement and this Deed constitute the entire agreement between the parties hereto relating to the subject matter hereof and shall supersede and previous communications, oral or written, between the parties hereto with respect to the subject matter hereof which are inconsistent with the provisions of this Deed. 7.02 Any provision of this Deed prohibited by or unlawful or unenforceable under any applicable law actually applied by any court of competent jurisdiction shall, to the extent required by such law, be severed from this Deed and rendered ineffective so far as is possible without modifying the remaining provisions of this Deed. Where, however, the provisions of any such applicable law may be waived, they are hereby waived by the parties hereto to the full extent permitted by such law to the end that this Deed shall be valid, binding and enforceable in accordance with its terms. 8. AMENDMENT 8.01 This Deed may be varied, amended or modified only by agreement under seal of all parties. 9. RELEASE OF OBLIGATIONS 9.01 Any liability of the Covenanters under this Deed may, in whole or in part, be released, compounded or compromised by the Covenantees jointly, in their sole and absolute discretion, or time or other indulgence may be granted to the Covenanters by the Covenantees jointly, in their sole and absolute discretion, without in any way prejudicing or affecting any of its other rights, powers or remedies against the Covenanters under any other liability hereunder. 10. TIME 10.01Time shall be of the essence of this Deed. 11. LAW AND JURISDICTION 11.01This Deed is governed by Hong Kong law, without regard to its conflict of laws rules. 11.02Any dispute, controversy or claim arising out of or in connection with this Deed, or the breach, termination or invalidity thereof ("Dispute"), shall submitted to the Hong Kong International Arbitration Centre and be settled by arbitration in accordance with UNCITRAL Arbitration Rules as at present in force and as may be amended by the rest of this Clause.. There shall be three (3) arbitrators. The Covenantees shall be entitled to jointly appoint one (1) arbitrator. The Covenanters shall be entitled to jointly appoint one (1) arbitrator. The third arbitrator who shall be of a different nationality from any of the parties shall be agreed upon by the two party appointed arbitrators within thirty (30) days of the appointment of the second arbitrator or, in default thereof, be appointed by the Chairman of the Hong Kong International Arbitration Centre. The place of arbitration shall be Hong Kong. The language in the arbitration proceedings shall be English. The arbitral tribunal may not award exemplary, punitive, multiple or any form of non-compensatory damages. The decision and award of the arbitral tribunal shall be final and binding on the Parties and may be entered and enforced in any court having jurisdiction, and the Parties irrevocably and unconditionally waive any and all rights to any form of appeal, review or recourse to any state or other judicial authority, insofar as such waiver may be validly made. Notwithstanding the foregoing, the Parties shall have the right to seek interim injunctive relief or other interim relief from a court of competent jurisdiction, before the arbitral tribunal has been appointed. Without prejudice to such provisional remedies as maybe available under the jurisdiction of a national court, the arbitral tribunal shall have full authority to grant provisional remedies or order the parties to request that a court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal's orders to that effect. 11.03The parties agree that the documents which start any proceedings relating to a Dispute and any other documents required to be served in relation to such proceedings may be served on the Covenanter in accordance with Clause 17 of the Agreement. These documents may, however, be served in any other manner allowed by law. This Clause 11.03 applies to all proceedings wherever started. IN WITNESS whereof this Deed has been executed under seal the date first above written. Signed by [ ] for and ob behalf of CV DISTRIBUTION SERVICE LTD. in the presence of: Signed by [ ] for and on behalf of SWINGSIDE LTD. in the presence of: Signed by [ ] for and on behalf of SEAVI ADVENT CHL INVESTMENTS LTD. in the presence of: Signed by [ ] for and on behalf of FORTIS PRIVATE EQUITY ASIA FUND N.V. in the presence of: Signed by [ ] for and on behalf of PROSPER FIELD HOLDINGS LIMITED in the presence of: Signed by [ ] JOHNSON SHEN QIWEI Signed by [ ] JIMMY KANG JIMIN SCHEDULE 9 KEY PERSONNEL 1. Johnson Shen 2. Jimmy Kang 3. Lim Sau Hong 4. Edwin Li 5. Anny Wang 6. Waley Jiang SCHEDULE 10 FORM EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETE AGREEMENT Notes: (i) With respect to Johnson Shen, an appropriate employment agreement in form and substance substantially in the form as set forth below, subject to any supplements/amendments satisfactory to the Employer (as defined below), Buyer and Johnson Shen shall be negotiated and entered into prior to Completion, which employment agreement shall reflect the terms set forth in the letter dated August _ 2007 from duly authorized representative of Buyer and shall contain other provisions customary and appropriate for the occasion. (ii) With respect to other Key Personnel, an employment agreement substantially in the form as set forth below shall be negotiated and entered into prior to Completion: This Employment, Confidentiality and Non-competition Agreement (the "Agreement") is entered into on [*] by and between: (1) [INSERT COMPANY'S NAME] (the "Employer"), a corporation organized under the laws of the People's Republic of China (the "PRC") with its registered address of [*] and legal representative of [*]. And (2) [NAME] (the "Employee"), a [*] citizen with ID Card No. [*], whose residence address is [*]. The Employer and the Employee are hereinafter referred to collectively as the "Parties" and individually as a "Party". WHEREAS, (A) the Employer desires to employ the Employee in accordance with the terms and conditions of this Agreement; and (B) the Employee is willing to enter into such employment with the Employer. NOW THEREFORE, the Employer and the Employee agree as follows: ARTICLE 1 EMPLOYMENT 1.1 Agreement to Employment The Employer hereby employs the Employee for the Term (as defined in Section 1.2 hereof) to render exclusive and full-time services in an exclusive capacity to the Employer, and the Employee hereby accepts such employment and agrees to render such services to the Employer, upon the terms and subject to the conditions contained in this Agreement. 1.2 Term of Employment Subject to the terms and conditions of this Agreement, the term of employment of the Employee by the Employer pursuant to this Agreement shall be [*] years (the "Term"), with the initial commencing from [*], 200[*].The first [*] months of the Term, that is, the period Commencing on [*] and ending [*], shall be the probational period. The Term is subject to renewal based on mutual agreement if reached one month prior to the expiration date of the Term. 1.3 Position and Duties (1) Position. The Employer shall employ the Employee as the Employer's [Position] during the Term. The Employer may, depending on necessity to its operation and/or the Employee's performance, change or adjust the Employee's position. (2) Duties. The Employee agrees to perform faithfully the duties as Employee under the Articles of Association, employee handbook and other internal rules of the Employer to be amended from time to time, the powers, authority and responsibilities vested in and the resolutions of the Board of the Employer (the "Board") and any applicable laws and regulations, to the best of the Employee's ability, experience and talent, and to submit to the Board prompt, complete, and accurate reports of the Employee's work and expenses as requested. (3) Prohibited Activities. In carrying out the Employee's duties under the Agreement, the Employee will not pay, offer or promise to pay, or authorize the payment directly or indirectly, of any monies or anything of value to any government official or employee or any political party or candidate for political office for the purpose of influencing any act or decision of such official or of the government to obtain or retain business, or direct business to any person. In no event shall the Employer or its affiliates be obligated under this Agreement to take any action or omit to take any action that the Employer believes, in good faith, would cause it to be in violation of any applicable law, including the laws of the PRC, or of the United States, including without limitation the U.S. Foreign Corrupt Practices Act. 1.4 Place of Employment; Devotion of Time to Business (1) Place of Employment. The Employee hereby agrees to perform his duties as [position] at the Employer's place of business in [Shanghai], but the Employee will travel on temporary trips to such other place or places as may be required from time to time to perform his duties hereunder. (2) Devotion of Time to Business. The Employee agrees to render exclusive and full-time services to the Employer, which shall be eight (8) hours per working day. As determined by the particularity of the nature of the Employee's position and responsibilities, he may extend the work time beyond the normal work schedule of working eight (8) hours a day based on the business requirements of the Employer for purpose of achieving his job objectives. The Employer and the Employee hereby acknowledge that the Employee's efforts so made are due to the Employee's job function which has been fully taken into consideration by the Employer and the Employee when agreeing to the compensation to the Employee hereunder and have been completely compensated under Article 1.5 hereof. The Employee acknowledges that the compensation and income under Article 1.5 hereof include all the reasonable compensation for all extra work as may be required due to the nature of his job, and the Employee expressly acknowledge that he will not otherwise request any overtime payment from the Employer for such extra work. 1.5 Remuneration and Benefits (1) Remuneration. As compensation for all services to be rendered pursuant to this Agreement or at the request of the Employer, the Employer will pay the Employee a salary at the rate of RMB [*] per annum. This salary will be wired, in equal monthly instalments, pay on the [*] day of each month, to the account designated by the Employee. (2) Benefits. The Employer will contribute to accounts of social security of the Employee as required by applicable labor law. The Employee shall be entitled to all statutory PRC holidays, annual paid leave of [*] days per calendar year during the Term (provided that the entitled annual paid leave will be pro-rated for 2007), and other benefits in accordance with the Employer's standard policies as currently in effect and as may be amended from time to time. (3) Labor Protections, Labor Conditions and Protections against Vocational Perils. The Employer shall provide labor protections, labor conditions and protections against vocational perils compatible with the duties performed by the Employee and in accordance with PRC laws. (4) Tax. The Employee shall be fully and ultimately liable for any tax payable to the relevant tax authorities by the Employee on his/her remuneration and benefits received from the Employer. The Employer shall have the right to withhold such individual income tax under the applicable law. (5) Entire Compensation. The Employee hereby expressly agrees that, unless otherwise agreed by both parties in writing, the salary and bonus (if any) as set forth herein constitute the full payment in consideration of all services provided by the Employee hereunder and all compensation entitled to the Employee under this Agreement. ARTICLE 2 CONFIDENTIALITY 2.1 Confidential Information "Confidential Information" means all information which is used in or otherwise relates to the business, customers or financial or other affairs of the Employer, its subsidiaries and its affiliated companies including, without limitation, information relating to: (a)the marketing of goods or services including, without limitation, customer names and lists and other details of customers, sales targets, sales statistics, market share statistics, prices or any other financial data, market research reports and surveys, and advertising or other promotional materials; or (b)future projects, business development or planning, commercial relationships and negotiations, or (c)any transactions in relation to or in connection with the Employer. 2.2 Confidentiality Obligation (1) In view of the fact that the Employee's work as [position] of the Employer will give the Employee contact with or access to the Confidential Information, the Employee hereby agrees that during the Term and at any time after the termination of the employment relationship, the Employee shall abide by the confidentiality rules formulated by the Employer. (a)Without the Employer's prior written consent, the Employee shall not, directly or indirectly: (i) use Confidential Information for any purpose other than performance of his/her duties; (ii) disclose in whatsoever form any Confidential Information to any third parties; (iii) acquire Confidential Information by any improper methods or allow third parties to do the same; (iv) use or allow third parties to use any Confidential Information so acquired. (b)The Employee is obliged to use his/her best efforts to prevent any third party from stealing the Confidential Information. (2) For the purpose of this Article 2, the phrase "acquire by any improper methods" referred to under Article 2.2(1) includes stealing, fraud, threat, bribery, unauthorized reproduction, breach of confidentiality obligations, persuasion of others to breach the confidentiality obligation or similar methods of the same nature. (3) The obligations under Article 2.2(1) shall not apply to the following information which: (a)the Employee can prove has entered into the public domain; (b)has been disclosed other than by the Employee's breach of the provisions of this Article 2.2(1); (c)the Employee can prove is acquired from a third party who does not assume confidentiality obligations; or (d)has been disclosed by the Employee as required by any applicable law or court order, under which circumstance, the Confidential Information shall be disclosed only to the extent as expressly specified by such applicable law or court order. (4) The Employee understands and agrees that the Employer may from time to time receive confidential information of third parties which would require the Employer to maintain such information in confidence. The Employee agrees to maintain such information in confidence for the Employer and such third parties and in no event disclose to any party other than the Employer and such third parties such confidential information. (5) If the Employer suffers any loss from the Employee's breach of Article 2.2 hereof, the Employee must indemnify the Employer for any losses or damages of the Employer arising from the Employee's breach of Article 2.2 hereof in accordance with this Agreement and assume any other legal liabilities under PRC laws. (6) Nothing in this Agreement shall be deemed to exclude, weaken or waive any rights related to the protection of trade secrets that the Employer may have under PRC laws (including but not limited to the PRC Anti- Unfair Competition Law). ARTICLE 3 NON-COMPETITION 3.1 Competitive Position In this Article 3: "Competitive Position" shall mean serving as an employee, consultant, advisor or otherwise, for any other person that engages in the business competitive or similar to the Principal Business. "Principal Business" means the following businesses: warehousing and storage, package, encasement and consignment, stacking and cargo packing up, package and freight forwarding agency, domestic express delivery service, road cargo transportation of ordinary and dangerous goods, multimodal transportation, cargo and technology import and export, commercial simple processing, goods display, and commercial consultation services. 3.2 Non-competition by the Employee (1) The Employee hereby irrevocably covenants and undertakes that during the Term and within 3 years after the Employee leaves his/her employ ("Employee Departure Date"), the Employee shall not, directly or indirectly, and whether or not for compensation, either on his or her own behalf or as an employee, officer, agent, consultant, director, owner, partner, shareholder, investor, or in any other capacity (except in the capacity of an employee of the Employer acting for the benefit of the Employer), (a)serve in a Competitive Position; (b)engage in activities contrary or harmful to the interest of the Employer or any of its subsidiaries and affiliates, including but not limited to: (i)employ or recruit any present, former or future employee of the Employer or any of its subsidiaries and affiliates to serve in a Competitive Position; (ii)own equity (other than as the holder of not more than 1% of total outstanding shares of a publicly-held company) in any other company that engages in Principal Business; or (iii)participate in a hostile takeover attempt of the Employer or any of its subsidiaries and affiliates. (c)assist in any way any person or entity whose activities are competitive with or otherwise similar to the Principal Business; or (2) The Employer may, at any time either before or after the Employee Departure Date, shorten, or waive, the period for its non-competition obligation under Article 3.2 (1) above by giving notice to the Employee thereof. If, at any time either before or after the Employee Departure Date, the Employer does not require the Employee to perform any non- competition obligations hereunder, the period for the Non-competition obligation may be shortened to zero, and the Employer does not need to pay any economic compensation to the Employee. (3) In full consideration of the Employee's performance of the non- competition obligations under Article 3.2(1) above, the Employer agrees, subject to Article 3.2(2) above, from the Employee Departure Date to the expiry of the Employee's non-competition obligations, pay to the Employee an economic compensation at a rate set out in Article 3.2 (4) hereunder, for the enforcement of such obligations of non-competition herein imposed on the Employee. (4) The full economic compensation for the Employee set forth in Article 3.2(3) above shall be [*]% of the aggregate remuneration (excluding any benefits) in the 12 consecutive months prior to the Employee Departure Date divided by 12 and shall be paid at the end of each month after the Employee Departure Date to the bank account of the Employee for receipt of salaries under this Agreement. The Employee shall be fully and ultimately liable for any tax payable to the relevant tax authorities by the Employee on such economic compensation set forth in this Article 3.2(4). The Employer shall have the right to withhold such individual income tax under the applicable law. (5) Upon receipt of each payment of the economic compensation from the Employer, the Employee shall provide the Employer with an executed receipt by the Employee indicating the payment date. (6) If the Employer fails to pay to the Employee the economic compensation in a full and timely manner as set out in Articles 3.2(3) and 3.2(4) (unless otherwise notified pursuant to Article 3.2(2)), and still fails to do so within 30 days of receipt of the Employee's written notice, the Employee will be discharged from his/her obligations under Article 3.2(1). 3.3 Non-Solicitation (1) The Employee hereby agrees that, during the Term and for a period of [3 years] after the Employee Departure Date, the Employee will not, directly or indirectly, and whether or not for compensation, either on his or her own behalf or as an employee, officer, agent, consultant, director, owner, partner, shareholder, investor, or in any other capacity, (a)induce or attempt to induce any employee, consultant, sales agent, supplier, customer or independent contractor of the Employer to end his or her relationship with the Employer; or (b)employ, retain as a consultant or contractor, or cause to be so employed or retained, any employee (or former employee within 12 months after the date such former employee ceases to be employed by the Employer), consultant, sales agent, or independent contractor of the Employer; or (c)accept or solicit investment capital, directly or indirectly, from any individual (other than the general public) or entity, or from an officer, partner, or principal of any entity, from which the Employer has accepted investment capital, or with which, prior to the Employee Departure Date, the Employer has held discussions regarding the possibility of securing investment capital; or (d)enter into or attempt to enter into a business relationship with any individual or entity with which, prior to the Employee Departure Date, the Employer had a business relationship, or with which, prior to the Employee Departure Date, the Employer had held discussions regarding the possibility of entering into such an relationship, if such relationship would be competitive with or otherwise deleterious to the interests of the Employer; or (e)do or say anything which is harmful to the reputation of the Employer, or which may lead any person to cease to deal with the Employer on substantially equivalent terms as before or at all. ARTICLE 4 AMENDMENT, TERMINATION AND RESCISSION OF THIS AGREEMENT 4.1 Amendment to the Agreement (1) This Agreement can be amended under any of the following circumstances: (a) upon agreement of the Parties through consultation; or (b)if there is any change in the laws, regulations and administrative rules on which this Agreement is based at the time of its execution, the relevant content of the Agreement shall be adjusted accordingly. (2) Either Party who wishes to amend the provisions of this Agreement for any reason (including the case where a major change in the objective circumstances under which the Agreement was drawn up has rendered this Agreement impossible to be performed) shall inform the other Party with a thirty (30) days prior written notice. The other Party shall reply within fifteen (15) days upon receipt of the notice. The failure to reply within the said period, the other Party shall be deemed as disapproval of the amendment and the Parties shall continue to perform this Agreement unless otherwise stipulated by applicable laws and regulations. (3) The Agreement may be amended only by a written agreement executed by the Parties hereto. 4.2 Termination upon Consultation The Agreement may be terminated upon mutual agreement by the Parties. 4.3 Early Termination by the Employer (1) Dismissal without Notice. The Employer may dismiss the Employee at any time without notice if the Employee: (a)the Employee has been proven unable to meet the employment criteria of the Employer during the probation period; (b)the Employee has seriously or persistently breached the rules of employment or work disciplines of the Employer as promulgated by the Employer; (c)the Employee has been seriously derelict in duties or engaged in misconduct for selfish ends or personal gain, against the best interests of the Employer; (d)the Employee maintains labor relationship with other employer(s), which leads to adverse impact on his/her performance of duties assigned by the Employer, or which he/she refuses to rectify when notified by the Employer; (e)the Employee has been charged and found guilty of a criminal offense, or punished with detention or rehabilitation through labor for his/her violation of laws and regulations; (f)the Employee enters into or amends this Agreement against the Employer's autonomy of will or by means of fraud, intimidation or taking advantage of the Employer's precarious position; or (g)the Employee has provided untrue, false information to the Employer or has willfully withheld or concealed information which would otherwise have impacted the Employer's decision. (2) Dismissal with Notice. The Employer may dismiss the Employee with 30 days prior written notice or payment of one month's salary of the Employee in lieu of the notice if: (a)the Employee suffers from a non-occupational disease or has sustained an injury that is not work-related, and is unable to resume his/her original work or other work assigned by the Employer upon the conclusion of medical treatment; (b)the Employee is incapable of performing the duties of his/her position and continues to be incapable of achieving an adequate level of performance after training or transfer to a different position; (c)a major change in the objective circumstances pursuant to which this Agreement was entered into has rendered the Agreement incapable of being performed and the Parties have failed to reach agreement on the amendment of the Agreement; or (d)the Employer needs to reduce the number of its personnel in response to any of the following situations: (i) carrying out restructuring according to the PRC Enterprise Bankruptcy Law; (ii) encountering serious difficulty in its production or operation, (iii) changing way of production, material technical innovation or adjustment of business mode which, after amending relevant labor contracts, still give rise to the need of reducing personnel, or (iv) encountering a major change in the objective economic circumstances pursuant to which this Agreement was entered into which change has rendered the Agreement incapable of being performed, and has consulted with the Employer's trade union or employees and complied with relevant legal requirements. The Parties hereby agrees that if the Employer fails to serve a prior written notice to the Employee pursuant to this Article 4.3(2), the Employer can terminate this Agreement by way of paying one-month salary to the Employee in lieu of notice in accordance with applicable law. (3) No Dismissal. The Employee shall not be dismissed pursuant to Article 4.3(2) (except for the circumstance where the termination is agreed by the Parties through consultation) if: (a)the Employee suffers from an occupational disease or has sustained work-related injuries, and has been confirmed to have lost or has partially lost the capacity to work; (b)the Employee is on prescribed medical leave due to a disease or an injury; (c)the Employee is a woman who is pregnant, on maternity leave, or nursing a baby; or (d)an applicable law or regulation otherwise prohibits the termination of the Agreement. 4.4 Early Termination by the Employee (1) Resignation with Notice. The Employee may, at any time during the Term, with or without cause, upon not less than 30 days' prior written notice, terminate the employment with the Employer. In such event, the Employer shall have no obligation to pay any compensation to the Employee for termination of this Agreement. If the Employee fails to serve the Employer a 30 days prior written notice pursuant to this Article 4.4(1), the Employee shall compensate the Employer for the shortfall calculated based on his/her daily salary rate. , Notwithstanding anything herein to the contrary, however, this Agreement should not be terminated by the Employee with 30 days prior written notice in the event the Employer suffers any economic losses caused by the Employee and such losses have not been fully compensated (including any outstanding training fees) by the Employee, or the Employee fails to assume his/her liabilities for breach of agreement under this Agreement. (2) Resignation without Notice. Notwithstanding the provisions of Article 4.4(1) above, the Employee may resign at any time without notice: (a)if the Employer has coerced him into entering into this Agreement; or (b)if the Employer fails to pay remuneration in accordance with the terms of this Agreement or to provide working conditions pursuant to labour laws. 4.5 Mandatory Rescission The Agreement shall be immediately rescinded under any of the following circumstances: (a)the Agreement expires upon the expiry of its term (unless the Parties have renewed the Agreement in accordance with Article 1.2). Prior to the expiry of the Agreement, the Employer shall inform the Employee with thirty (30) days prior written notice and proceed with procedures for the termination of this Agreement; (b)the Employee has been entitled to basic pension insurance treatments as stipulated by PRC laws; (c)the Employee dies or has been declared to be missing or dead by a court; (d)the Employer has been shut down, dissolved, wound up, terminated by agreement, or declared bankrupt; (e)either Party has de facto ceased to perform this Agreement for thirty (30) days in succession; or (f)the Employee has suffered from an occupational disease or work- related injury and has been confirmed to have lost part of his/her working ability, and the Employer has paid the Employee a lump sum disability compensation in accordance with laws and regulations upon mutual agreement by the Parties; 4.6 Events of Termination Unless otherwise agreed in writing by the Employer, when the Agreement is early terminated or expired, the Employee must: (a) immediately cease to undertake all the activities in the name of the Employer, or complete any unfulfilled matters as per the Employer's request; (b)transfer all works conducted by him/her in the name of the Employer during his/her employment with the Employer in their entirety and without any omission; (c)immediately return to the Employer, in an intact and good status, everything, such as archives, records and other Confidential Information, phones, computers and other office devices, books and all other properties of the Employer that are under the Employee's possession or custody or under the Employee's control. Unless otherwise agreed by the Employer in writing, the Employee may not take anything of the Employer (including but not limited to the above items) away from the Employer's office; and (d)If the Employer suffers any losses from the Employee's failure to deliver any of the above documents (including copies) or items to the Employer, the Employee shall assume the relevant liabilities and compensate the Employer for such losses, under which circumstance the Employer may deduct an appropriate amount from the last payment of salary payable to the Employee, and shall have the right to take any other measures to protect its own legitimate rights and interests. ARTICLE 5 LIABILITIES FOR COMPENSATION 5.1 Employer's Compensation The Employer shall provide economic compensations to the Employee according to applicable PRC laws and regulations at the time of economic compensations. 5.2 The Employee's Compensation (1) In the event of the Employee's violation of PRC laws or breach of this Agreement, the Employer is entitled to impose disciplinary and/or economic punishment on the Employee, and/or claim economic compensation (if any) against the Employee and pursue any other remedies available for such violation or breach pursuant to PRC laws and this Agreement, (2) In case the Employee terminates this Agreement in violation of PRC laws or provisions hereof and causes losses to the Employer, he/she shall fully compensate the Employer for: (a) expenses incurred by the Employer for recruiting the Employee; (b) training fees paid by the Employer for the Employee; (c) direct economic losses caused to the Employer's business and operation. (3) If the Employee breaches his/her confidentiality and non- competition obligations as set forth in Article 2 and 3, and causes losses to the Employer, the Employee shall pay to the Employer an amount of RMB[*] as liquidated damages in addition to any other remedies available to the Employer under PRC law and this Agreement. In addition, the Employee shall return all economic compensations already paid by the Employer in accordance with Article 3 above. ARTICLE 6 GENERAL PROVISIONS 6.1 Labour Discipline The Employee shall comply with all aspects of the Employer's rules relating to labour discipline and other work rules and procedures of the Employer contained in the employee handbook or otherwise issued by the Employer. The employee handbook of the Employer, as amended from time to time, and other rules and materials issued by the Employer from time to time shall form part of the terms and conditions of the Agreement. 6.2 Waiver of Breach The waiver by the Employer of a breach of any term of this Agreement is not a waiver of any subsequent breach. 6.3 Severability If any provision of this Agreement, or any part of any provision, is held to be invalid or unenforceable, that provision is deemed to be amended to apply to the extent enforceable and the balance of the Agreement shall be valid and binding. 6.4 Effective Day This Agreement shall come into effect when it is signed by the Parties. 6.5 Entire Agreement The terms and conditions of this Agreement constitute the entire agreement between the Employee and the Employer and supersede any previous agreements as to the subjects covered by the Agreement. In particular, the Employer and Employee agree that the employment agreement between them dated [*] shall immediately expire and have no further effect upon the effectiveness of this Agreement. 6.6 Governing Law and Dispute Resolution This Agreement shall be governed and construed in accordance with PRC laws and any dispute under this Agreement shall be resolved according to PRC laws. Any dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity thereof ("Dispute"), shall be submitted to the competent labour dispute tribunal or people's court for resolution. 6.7 The Employee Representation The Employee represents that the Employee is not party to or bound by any agreement, or other legal limitation, that prohibits the Employee from entering into this Agreement or fulfilling its obligations. 6.8 Full Acknowledgement At the time of the execution hereof, the Employee has carefully read this Agreement, various rules and regulations of the Employer and the employee handbook and fully understands their contents. The Employee hereby agrees to accept and comply with this Agreement. 6.9 Notices Notices under this Agreement shall be given in writing to the relevant Party at the address stated herein (or to such other address as it shall have notified the other Party previously in writing). If to the Employer: [Name] [Address] If to the Employee: [Name] [Address] 6.10 Survival of Agreement Article 2, Article 3, Article 5.2(3) and Article 6.6 shall survive the termination of this Agreement. IN WITNESS WHEREOF, the undersigned have hereunto caused this Agreement to be executed as of the day and year first above written. [Employer] _______________________________ By: Title: [Employee] _______________________________ SCHEDULE 11 NON-DISCLOSURE AND NON-COMPETE AGREEMENT CONFIDENTIALITY AND NON-COMPETITION AGREEMENT THIS CONFIDENTIALITY AND NON-COMPETITION AGREEMENT (the "Agreement") is made on [*] by and between: (i) Chic Holding Limited, a limited liability company incorporated [*], whose registered office is at [*] (the "Chic Holdings"); (ii) Shanghai Chic Logistics Co., Ltd., a limited liability company incorporated in the People's Republic of China ("PRC"), whose registered office is at [*] (the "Chic Logistics") (iii)Shanghai Chic Supply Chain Management Co., Ltd., a company incorporated in the PRC, whose registered office is at [*] (the "Chic SCM"); (iv) Shanghai Chic Storage and Transportation Co., Ltd., a company incorporated in the PRC, whose registered office is at [*] (the "Chic S&T"); (v) Shanghai New Chic Logistics Co., Ltd., a company incorporated in the PRC, whose registered office is at [*] (the "New Chic") ; and (vi) Chic's Mart Trading Co., Ltd., a company incorporated in the PRC, whose registered office is at [*] ("Chic's Mart"). Chic Holdings, Chic Logistics, Chic SCM, Chic S&T and New Chic are hereinafter referred to collectively as the "Group Companies" and individually as a "Group Company". Chic's Mart and each Group Company are hereinafter referred to collectively as the "Parties" and individually as a "Party". Whereas, (a)Mr. Johnson Shen Qiwei (holder of PRC ID Number: 310104196411064078) and Mr. Jimmy Kang (holder of PRC ID Number: 310107671123281) (the "Founders") are shareholders of both the Group Companies and Chic's Mart at the date of this Agreement. (b)The Founders, together with all other shareholders of Chic Holdings, entered into an Agreement for the Sale and Purchase of the Entire Issued and Outstanding Share Capital of Chic Holdings Limited on [*] (the "SPA"), to which the form of this Agreement is attached as Schedule 11. Pursuant the SPA, the Group Companies will be directly or indirectly sold to certain buyer subject to the satisfaction of certain condition precedents. (c)The buyer makes it a condition precedent to the completion of the transaction contemplated under the SPA that Chic's Mart and the Group Companies should enter into this Agreement to define their rights and obligations regarding the protection of Confidential Information (as defined below) and the avoidance of competitive activities after the completion of the transaction contemplated under the SPA. NOW THEREFORE, upon mutual consultation and adhering to the principle of good faith, each Group Company and Chic's Mart hereby agree to perform the terms of this Agreement set out as follows: ARTICLE 1 DEFINITION In this Agreement: "Affiliate" means a person that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified person, where "control" means the power and ability to direct the management and policies of the controlled person through ownership of voting shares of the controlled person or by contract or otherwise; "Principal Business" means the warehousing and storage, package, encasement and consignment, stacking and cargo packing up, package and freight forwarding agency, domestic express delivery service, road cargo transportation of ordinary and dangerous goods, multimodal transportation, cargo and technology import and export, commercial simple processing, goods display, commercial consultation services. "Confidential Information" means all information which is used in or otherwise relates to any Group Company's business, customers or financial or other affairs including, without limitation, information relating to: (a) the marketing of goods or services including, without limitation, customer names and lists and other details of customers, sales targets, sales statistics, market share statistics, prices, market research reports and surveys, and advertising or other promotional materials; or (b) pending projects, business development or planning, commercial relationships and negotiations, or (c) any transactions under the SPA or the Ancillary Documentation. Other capitalized words used in this Agreement, unless otherwise defined herein, have the same meanings as those defined in the SPA. ARTICLE 2 NON-COMPETITION 2.1 Non-competition During a period of 3 years from the Completion Date, Chic's Mart agrees that, it will not, either alone or in conjunction with, through or as shareholder or adviser to, or agent of, or manager for, any company or individual directly or indirectly carry on or be engaged, concerned or interested in or assist a business which competes, directly or indirectly, with the Principal Business. 2.2 Solicitation of Business During a period of 3 years from the Completion Date, Chic's Mart will not on its own account or in conjunction with or on behalf of any other person, either seek to obtain orders from or do business with (which orders or business are similar to those conducted by any Group Company), or encourage directly or indirectly another person to do the same, a person who has been a customer of the Principal Business at any time during the twelve months prior to the Completion Date for the products or services of that business in its territory of operation. 2.3 Solicitation of Employee During a period of 3 years from the Completion Date, Chic's Mart will not directly or indirectly solicit or contact with a view to his engagement or employment by another person, a director, officer, employee or manager of a Group Company or a person who was a director, officer, employee or manager of a Group Company at any time during the twelve months prior to the Completion Date, in either case where the person in question either has Confidential Information or would be in a position to exploit a Group Company's trade connections. 2.4 Solicitation of Professionals During a period of 3 years from the Completion Date, Chic's Mart will not directly or indirectly solicit or encourage any consultant, sales agent, accountant, auditor, agent, supplier, customer, or independent contractor then under contract with the any of the Group Companies to cease work for any of the Group Companies. ARTICLE 3 CONFIDENTIALITY 3.1 Confidentiality Obligation (1) Chic's Mart agrees that it should respect and keep confidential all Confidential Information. At any time after the date of the SPA, without any Group Company's prior written consent, Chic's Mart shall, (a) not, directly or indirectly, use or disclose to any third party Confidential Information it has or acquires; (b) use its best efforts to prevent the use or disclosure of Confidential Information; (c) not acquire Confidential Information by any improper methods or allow third parties to do the same; and (d) use or allow third parties to use any Confidential Information so acquired. (2) For the purpose of this Agreement, "acquire by any improper methods" referred to under above section 3.1(1) above includes stealing, fraud, threat, bribery, unauthorized reproduction, breach of confidentiality obligations, persuasion of others to breach the confidentiality obligation or similar methods of the same nature. (3) If any of the Group Companies suffers loss from Chic's Mart's breach of Section 3.1 (1) hereof, Chic's Mart must compensate such Group Company or Companies for the loss according to the relevant provisions of this Agreement and assume any other legal liabilities under PRC laws. 3.2 Exception to Confidentiality Obligation The obligations under Section 3.1 shall not apply to the following information which: (1) has entered into the public domain; (2) has been disclosed other than by Chic's Mart's breach of the provisions of this Agreement; (3) is acquired from a third party who does not assume confidentiality obligations; or (4) has been disclosed by Chic's Mart as required by any applicable law or court order, under which circumstance, the Confidential Information shall be disclosed only to the extent as expressly specified by such applicable law or court order. ARTICLE 4 LIABILITY FOR BREACH If Chic's Mart breaches, or threatens to commit a breach of, any of the provisions of this Agreement (the "Restrictive Covenants"'), the relevant Group Company will have the following rights and remedies, each of which will be in addition to, and not in lieu of, any other rights and remedies available to the Group Company under applicable law or in equity: (1) Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced or to have any actual or threatened breach enjoined by any court having equity jurisdiction, all without the need to post a bond or any other security, or to prove any amount of actual damage, or that money damages would not provide an adequate remedy, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Group Company and that monetary damages will not provide an adequate remedy to the Group Company; and (2) Accounting and Indemnification. The right and remedy to require Chic's Mart: (i) to account for and pay over to the Group Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Chic's Mart or any associated party deriving such benefits as a result of any such breach of the Restrictive Covenants; and (ii) to indemnify the Group Company against any other losses, damages (including special and consequential damages), costs and expenses, including actual attorney's fees and court costs, which may be incurred by them and which result from or arise out of any such breach or threatened breach of the Restrictive Covenants. ARTICLE 5 MISCELLANEOUS 5.1 Scope of Restrictions Chic's Mart's restrictions of non-competition and confidentiality as contained in Articles 2 and 3 hereof shall extend to and for the benefit of each Group Company and its Affiliate and to the nature and extent of their respective businesses. Where reference is made to the business of a particular Group Company, such term shall include any business of the Group Company and its Affiliate. 5.2 Effective Day. This Agreement shall come into effect on the Completion Date. 5.3 Governing Law This Agreement, and all matters relating hereto, including any matter or dispute arising out of the Agreement, shall be interpreted, governed, and enforced according to the laws of the PRC, without regard to its conflict of laws rules. 5.4 Dispute Resolution Any dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity thereof ("Dispute"), shall submitted to the Hong Kong International Arbitration Centre and be settled by arbitration in accordance with the Arbitration Ordinance in force on the date of referral to arbitration. There shall only be one (1) arbitrator, who shall be appointed by the Hong Kong International Arbitration Centre. The place of arbitration shall be Hong Kong. The language in the arbitration proceedings shall be English. The decision of the arbitral tribunal shall be final and binding on the Parties and the Parties irrevocably and unconditionally waive any and all rights to any form of appeal, review or recourse to any state or other judicial authority, insofar as such waiver may be validly made. Notwithstanding the foregoing, the Parties shall have the right to seek interim injunctive relief or other interim relief from a court of competent jurisdiction, both before and after the arbitral tribunal has been appointed, at any time up until the artbitral tribunal has made its final award. 5.5 Governing Language Each notice, demand, request, statement, instrument, certificate or other communication given, delivered or made by a party to any other party under or in connection with this Agreement shall be: (1) in Chinese; or (2) if not in Chinese, accompanied by an Chinese translation made by a translator, and certified by such translator to be accurate. The receiving party shall be entitled to assume the accuracy of and rely upon any English translation of any document provided pursuant to this Section 5.5(2). 5.6 Variation A variation of this Agreement is valid only if it is in writing and signed by or on behalf of each party. 5.7 Waiver The failure to exercise or delay in exercising a right or remedy provided by this Agreement or by law does not impair or constitute a waiver of the right or remedy or an impairment of or a waiver of other rights or remedies. No single or partial exercise of a right or remedy provided by this Agreement or by law prevents further exercise of the right or remedy or the exercise of another right or remedy. 5.8 Survival Any provision of this Agreement being prohibited by or unlawful or unenforceable under any applicable law actually applied by any court of competent jurisdiction shall, to the extent required by such law, be severed from this Agreement and rendered ineffective so far as is possible without modifying the remaining provisions of this Agreement. 5.9 Entire Agreement This Agreement and each document referred to in it/describe related agreements constitute the entire agreement and supersede any previous agreement between the parties relating to the subject matter of this Agreement. 5.10 Assignment Each Party shall not assign, transfer, declare a trust of the benefit of or in any other way alienate any of its rights under this Agreement whether in whole or in part without the consent of the other Parties. 5.11 Notices Notices under this Agreement shall be given in writing to the relevant Party at the address stated herein (or to such other address as it shall have notified the other Party previously in writing). If to any Group Company: If to Chic's Mart: IN WITNESS whereof this Agreement has been duly executed on the date first above written. Signed by [___________] for and on behalf of CHIC HOLDING LIMITED Signed by [___________] for and on behalf of SHANGHAI CHIC LOGISTICS CO., LTD. Signed by [___________] for and on behalf of SHANGHAI CHIC SUPPLY CHAIN MANAGEMENT CO., LTD. Signed by [___________] for and on behalf of SHANGHAI CHIC STORAGE AND TRANSPORTATION CO., LTD. Signed by [___________] for and on behalf of SHANGHAI NEW CHIC LOGISTICS CO., LTD. Signed by [___________] for and on behalf of CHIC'S MART TRADING CO., LTD. SCHEDULE 12 DISCLOSURE LETTER IN WITNESS whereof this Agreement has been duly executed on the date first above written. Signed by _____________ ) for and ob behalf of ) CV DISTRIBUTION SERVICES LTD. ) in the presence of _____________ ) Signed by _____________ ) for and on behalf of ) SWINGSIDE LTD. ) in the presence of _____________ ) Signed by _____________ ) for and on behalf of ) SEAVI ADVENT CHL INVESTMENTS LTD. ) in the presence of _____________ ) Signed by _____________ ) for and on behalf of ) FORTIS PRIVATE EQUITY ASIA FUND N.V. ) in the presence of _____________ ) Signed by _____________ ) for and on behalf of ) PROSPER FIELD HOLDINGS LIMITED ) in the presence of _____________ ) Signed by _____________ ) JOHNSON SHEN QIWEI ) in the presence of _____________ ) Signed by _____________ ) JIMMY KANG JIMIN ) in the presence of _____________ ) Signed by _____________ ) for and on behalf of ) MENLO WORLDWIDE, LLC ) in the presence of _____________ ) -----END PRIVACY-ENHANCED MESSAGE-----