UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 21, 2003
Yellow Corporation
(Exact name of registrant as specified in its charter)
Delaware | 000-12255 | 48-0948788 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
10990 Roe Avenue Overland Park, Kansas |
66211 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (913) 696-6100
Item 5. Other Events
Condensed Consolidating Financial Statements
As previously reported, in August 2003, Yellow Corporation (Yellow or the company) announced the completion of its private offering of contingent convertible senior notes (the notes) due 2023. Yellow closed the sale of $200 million of the notes on August 8, 2003 and an additional $50 million of the notes on August 15, 2003. The notes are guaranteed by the companys domestic subsidiaries as of the time of the issuance and will be guaranteed by certain of the companys future domestic subsidiaries. Yellow Receivables Corporation, the special-purpose entity that manages the companys asset backed securitization agreement, and Yellows foreign subsidiaries have not provided guarantees of the notes.
Yellow is required to file a Registration Statement on Form S-3 registering the resale of the notes, the related guarantees and the common stock into which the notes are convertible. Because the notes are guaranteed by certain of the companys subsidiaries, Yellow is required to include or incorporate in the Form S-3 certain information relating to guarantor and non-guarantor subsidiaries. Yellow is filing this Current Report on Form 8-K, which will be incorporated by reference in the Form S-3, to set forth the condensed consolidating financial statements for Yellow, its guarantor subsidiaries and its non-guarantor subsidiaries in accordance with Financial Reporting Release No. 55, Financial Statement Requirements in Filings Involving the Guarantee of Securities by a Parent or Subsidiary, and Rule 3-10 of Regulation S-X. The foregoing is qualified by reference to the financial statements, including a note containing guarantor and non-guarantor financial information, filed as Exhibits 99.1 and 99.2 to this Current Report on Form 8-K, which are incorporated herein by reference. Except for the new financial information within the Condensed Consolidating Financial Statements note of Exhibit 99.1 and note 9 of Exhibit 99.2 and minor reclassifications, no other information within the attached exhibits has been changed from the versions previously filed with Yellow Corporations Annual Report on Form 10-K on March 6, 2003 and Quarterly Report on Form 10-Q on July 29, 2003.
Roadway Corporation Acquisition Information
On July 8, 2003, Yellow and Roadway Corporation agreed to the acquisition of Roadway Corporation by Yankee LLC, a newly formed Delaware limited liability company and a wholly owned subsidiary of Yellow, under the terms of the Agreement and Plan of Merger filed as Exhibit 2.1 to the Current Report on Form 8-K filed on July 8, 2003, as amended. Certain historical and pro forma financial information related to Roadway Corporation and the proposed transaction is included in Items 7(a) and 7(b) of this Current Report on Form 8-K and incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) | Financial statements of businesses acquired. |
The following financial statements of Roadway Corporation are included in Exhibit 99.3 hereto and incorporated herein by reference:
Report of independent auditors dated January 22, 2003
Consolidated balance sheets at December 31, 2002 and 2001
Statements of consolidated income for the years ended December 31, 2002, 2001 and 2000
Statements of consolidated shareholders equity for the years ended December 31, 2002, 2001 and 2000
Statements of consolidated cash flows for the years ended December 31, 2002, 2001 and 2000
Notes to consolidated financial statements
Consolidated balance sheets at March 29, 2003 (unaudited) and December 31, 2002
Statements of consolidated income (unaudited) for the twelve weeks ended March 29, 2003 and March 23, 2002
Statements of consolidated cash flows (unaudited) for the twelve weeks ended March 29, 2003 and March 23, 2002
Notes to condensed consolidated financial statements
Consolidated balance sheets at June 21, 2003 (unaudited) and December 31, 2002
Statements of consolidated income (unaudited) for the twelve weeks ended June 21, 2003 and June 15, 2002 and the twenty-four weeks ended June 21, 2003 and June 15, 2002
Statements of consolidated cash flows (unaudited) for the twelve weeks ended June 21, 2003 and June 15, 2002 and the twenty-four weeks ended June 21, 2003 and June 15, 2002
Notes to condensed consolidated financial statements
(b) | Pro forma financial information. |
The following pro forma financial information is included in Exhibit 99.4 hereto and incorporated herein by reference:
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL DATA
Unaudited Condensed Combined Pro Forma Balance Sheet at June 30, 2003
Unaudited Condensed Combined Pro Forma Statement of Operations for the Year Ended December 31, 2002
Unaudited Condensed Combined Pro Forma Statement of Operations for the Six Months Ended June 30, 2003
Notes to Unaudited Condensed Combined Pro Forma Financial Statements
(c) | Exhibits. |
23.1 | Consent of Ernst & Young LLP | |
23.2 | Consent of KPMG LLP | |
99.1 | Consolidated Financial Statements of Yellow Corporation and its Subsidiaries for the Years ended December 31, 2002, 2001 and 2000 | |
99.2 | Consolidated Financial Statements (unaudited) of Yellow Corporation and its Subsidiaries for the Three Months and Six Months ended June 30, 2003 and 2002 | |
99.3 | Certain financial statements of Roadway Corporation (see Item 7(a) above) |
99.4 | Certain pro forma financial statements (see Item 7(b) above) | |
99.5 | Certain Risk Factors provided pursuant to Regulation FD |
Item 9. Regulation FD Disclosure
Certain information related to the proposed Roadway merger, currently contemplated related financings and other matters related to Yellow is included in Exhibit 99.5 to this Current Report on Form 8-K and incorporated herein by reference.
The information presented in this Current Report on Form 8-K may contain forward-looking statements and certain assumptions upon which such forward-looking statements are in part based. Numerous important factors, including those factors identified in Yellow Corporations Annual Report on Form 10-K and other of the companys filings with the Securities and Exchange Commission, and the fact that the assumptions set forth in this Current Report on Form 8-K could prove incorrect, could cause actual results to differ materially from those contained in such forward-looking statements.
Information in this Current Report that is being furnished pursuant to Item 9 shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The information furnished pursuant to Item 9 in this Current Report shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended. The furnishing of the information in Item 9 of this Current Report is not intended to, and does not, constitute a representation that such furnishing is required by Regulation FD or that the information Item 9 of this Current Report contains is material investor information that is not otherwise publicly available.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: October 21, 2003
YELLOW CORPORATION | ||
By: |
/s/ Daniel J. Churay | |
Daniel J. Churay | ||
Senior Vice President, General Counsel and Secretary |
Index to Exhibits
Exhibit Number |
Description | |
23.1 | Consent of Ernst & Young LLP | |
23.2 | Consent of KPMG LLP | |
99.1 | Consolidated Financial Statements of Yellow Corporation and its Subsidiaries for the Years ended December 31, 2002, 2001 and 2000 | |
99.2 | Consolidated Financial Statements (unaudited) of Yellow Corporation and its Subsidiaries for the Three Months and Six Months ended June 30, 2003 and 2002 | |
99.3 | Certain financial statements of Roadway Corporation | |
99.4 | Certain pro forma financial statements | |
99.5 | Certain Risk Factors provided pursuant to Regulation FD |
Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated January 22, 2003 with respect to the consolidated financial statements and schedule of Roadway Corporation included in Yellow Corporation's Current Report on Form 8-K dated October , 2003, filed with the Securities and Exchange Commission in the following Registration Statements on Form S-8 (Nos. 33-47946, 333-02977, 333-16697, 333-59255 333-49618, 333-49620 and 333-88268) and the Registration Statement (No. 333-108081) on Form S-4 of Yellow Corporation. Ernst & Young LLP Akron, Ohio October , 2003
Exhibit 23.2
Independent Auditors Consent
We consent to the incorporation by reference in the registration statements (Nos. 33-47946, 333-02977, 333-16697, 333-59255, 333-49618, 333-49620 and 333-88268) on Form S-8 and the registration statement (No. 333-108081) on Form S-4 of Yellow Corporation of our report dated January 23, 2003, except for the Condensed Consolidating Financial Statements note as to which the date is October 7, 2003, with respect to the consolidated balance sheets of Yellow Corporation as of December 31, 2002 and 2001, and the related consolidated statements of operations, cash flows, shareholders equity, and comprehensive income for each of the years in the three-year period ended December 31, 2002, which report appears in the Yellow Corporation Form 8-K dated October 21, 2003; and to the inclusion of our report dated January 23, 2002 with respect to the related financial statement schedule, which report appears in the December 31, 2002, Form 10-K of Yellow Corporation.
Our report on the financial statements contains an explanatory paragraph that states that effective January 1, 2002, the Company ceased amortization of goodwill and changed its method of determining impairment of goodwill as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
KPMG LLP
Kansas City, Missouri
October 21, 2003
Exhibit 99.1
Consolidated Balance Sheets
Yellow Corporation and Subsidiaries December 31, 2002 and 2001
(in thousands except per share data) | 2002 |
2001 |
||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 28,714 | $ | 19,214 | ||||
Accounts receivable, less allowances of $15,731 and $7,695 |
327,913 | 124,880 | ||||||
Prepaid expenses and other |
68,726 | 75,858 | ||||||
Current assets of discontinued operations |
| 92,458 | ||||||
Total current assets |
425,353 | 312,410 | ||||||
Property and equipment, net of accumulated depreciation of $1,114,120 and $1,096,766 |
564,976 | 559,532 | ||||||
Goodwill and other assets |
52,656 | 15,345 | ||||||
Noncurrent assets of discontinued operations |
| 398,490 | ||||||
Total assets |
$ | 1,042,985 | $ | 1,285,777 | ||||
Liabilities and Shareholders Equity |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 114,989 | $ | 97,528 | ||||
Wages, vacations, and employees benefits |
159,998 | 103,990 | ||||||
Other current and accrued liabilities |
101,111 | 96,740 | ||||||
ABS borrowings |
50,000 | | ||||||
Current maturities of long-term debt |
24,261 | 6,281 | ||||||
Current liabilities of discontinued operations |
| 64,669 | ||||||
Total current liabilities |
450,359 | 369,208 | ||||||
Long-term debt, less current portion |
50,024 | 213,745 | ||||||
Claims and other liabilities |
182,644 | 144,194 | ||||||
Noncurrent liabilities of discontinued operations |
| 67,641 | ||||||
Commitments and contingencies |
||||||||
Shareholders Equity: |
||||||||
Common stock, $1 par value per share-authorized 120,000 shares, issued 31,825 and 31,028 shares |
31,825 | 31,028 | ||||||
Capital surplus |
80,610 | 41,689 | ||||||
Retained earnings |
325,474 | 537,496 | ||||||
Accumulated other comprehensive loss |
(35,596 | ) | (6,252 | ) | ||||
Unamortized restricted stock awards |
(1,053 | ) | | |||||
Treasury stock, at cost (2,244 and 6,163 shares) |
(41,302 | ) | (112,972 | ) | ||||
Total shareholders equity |
359,958 | 490,989 | ||||||
Total liabilities and shareholders equity |
$ | 1,042,985 | $ | 1,285,777 | ||||
The notes to consolidated financial statements are an integral part of these statements.
Statements of Consolidated Operations
Yellow Corporation and Subsidiaries for the years ended December 31
(in thousands except per share data) | 2002 |
2001 |
2000 |
|||||||||
Operating Revenue |
$ | 2,624,148 | $ | 2,505,070 | $ | 2,799,131 | ||||||
Operating Expenses: |
||||||||||||
Salaries, wages and employees benefits |
1,717,382 | 1,638,662 | 1,767,926 | |||||||||
Operating expenses and supplies |
385,522 | 398,054 | 431,336 | |||||||||
Operating taxes and licenses |
75,737 | 75,637 | 81,259 | |||||||||
Claims and insurance |
57,197 | 56,999 | 61,535 | |||||||||
Depreciation and amortization |
79,334 | 76,977 | 78,587 | |||||||||
Purchased transportation |
253,677 | 215,131 | 266,113 | |||||||||
(Gains) losses on property disposals, net |
425 | (186 | ) | (14,372 | ) | |||||||
Spin-off and reorganization charges |
8,010 | 5,601 | | |||||||||
Total operating expenses |
2,577,284 | 2,466,875 | 2,672,384 | |||||||||
Operating Income |
46,864 | 38,195 | 126,747 | |||||||||
Nonoperating (Income) Expenses: |
||||||||||||
Interest expense |
7,211 | 8,437 | 10,131 | |||||||||
ABS facility charges |
2,576 | 7,996 | 10,052 | |||||||||
Interest income |
(843 | ) | (1,198 | ) | (1,003 | ) | ||||||
Loss on equity method investment |
| 5,741 | 3,329 | |||||||||
Other, net |
334 | (140 | ) | (889 | ) | |||||||
Nonoperating expenses, net |
9,278 | 20,836 | 21,620 | |||||||||
Income From Continuing Operations Before Income Taxes |
37,586 | 17,359 | 105,127 | |||||||||
Income Tax Provision |
13,613 | 6,770 | 43,522 | |||||||||
Income From Continuing Operations |
23,973 | 10,589 | 61,605 | |||||||||
Income (loss) from discontinued operations, net |
(117,875 | ) | 4,712 | 6,413 | ||||||||
Net Income (Loss) |
$ | (93,902 | ) | $ | 15,301 | $ | 68,018 | |||||
Average Common Shares OutstandingBasic |
28,004 | 24,376 | 24,649 | |||||||||
Average Common Shares OutstandingDiluted |
28,371 | 24,679 | 24,787 | |||||||||
Basic Earnings (Loss) Per Share: |
||||||||||||
Income from continuing operations |
$ | 0.86 | $ | 0.44 | $ | 2.50 | ||||||
Income (loss) from discontinued operations |
(4.21 | ) | 0.19 | 0.26 | ||||||||
Net income (loss) |
$ | (3.35 | ) | $ | 0.63 | $ | 2.76 | |||||
Diluted Earnings (Loss) Per Share: |
||||||||||||
Income from continuing operations |
$ | 0.84 | $ | 0.43 | $ | 2.49 | ||||||
Income (loss) from discontinued operations |
(4.15 | ) | 0.19 | 0.25 | ||||||||
Net income (loss) |
$ | (3.31 | ) | $ | 0.62 | $ | 2.74 | |||||
The notes to consolidated financial statements are an integral part of these statements.
Statements of Consolidated Cash Flows
Yellow Corporation and Subsidiaries for the years ended December 31
(in thousands) | 2002 |
2001 |
2000 |
|||||||||
Operating Activities: |
||||||||||||
Net income (loss) |
$ | (93,902 | ) | $ | 15,301 | $ | 68,018 | |||||
Noncash items included in net income (loss): |
||||||||||||
Depreciation and amortization |
79,334 | 76,977 | 78,587 | |||||||||
Loss (income) from discontinued operations |
117,875 | (4,712 | ) | (6,413 | ) | |||||||
Loss on equity method investment |
| 5,741 | 3,329 | |||||||||
Deferred income tax provision |
1,449 | 16,746 | 9,606 | |||||||||
(Gains) losses from property disposals, net |
425 | (186 | ) | (14,372 | ) | |||||||
Changes in assets and liabilities, net: |
||||||||||||
Accounts receivable |
(49,633 | ) | 44,041 | (7,885 | ) | |||||||
Accounts receivable securitizations |
(91,500 | ) | (35,500 | ) | 42,000 | |||||||
Accounts payable |
5,928 | (13,704 | ) | 7,116 | ||||||||
Other working capital items |
38,468 | (97,532 | ) | (14,257 | ) | |||||||
Claims and other |
14,386 | (3,742 | ) | (11,107 | ) | |||||||
Other |
2,978 | 8,759 | (3,030 | ) | ||||||||
Net change in operating activities of discontinued operations |
17,250 | 76,106 | 74,157 | |||||||||
Net cash from operating activities |
43,058 | 88,295 | 225,749 | |||||||||
Investing Activities: |
||||||||||||
Acquisition of property and equipment |
(86,337 | ) | (88,022 | ) | (100,577 | ) | ||||||
Proceeds from disposal of property and equipment |
3,507 | 6,587 | 29,888 | |||||||||
Acquisition of companies |
(18,042 | ) | (14,300 | ) | | |||||||
Other |
| (5,830 | ) | (5,114 | ) | |||||||
Net capital expenditures of discontinued operations |
(24,372 | ) | (19,619 | ) | (59,034 | ) | ||||||
Net cash used in investing activities |
(125,244 | ) | (121,184 | ) | (134,837 | ) | ||||||
Financing Activities: |
||||||||||||
Unsecured bank credit lines, net |
(85,000 | ) | 25,000 | (40,000 | ) | |||||||
Repayment of long-term debt |
(44,600 | ) | (10,412 | ) | (31,045 | ) | ||||||
Dividend from subsidiary upon spin-off |
113,790 | | | |||||||||
Proceeds from exercise of stock options |
13,704 | 16,638 | 6,984 | |||||||||
Treasury stock purchases |
| | (24,997 | ) | ||||||||
Proceeds from issuance of common stock |
93,792 | | | |||||||||
Net cash provided by (used in) financing activities |
91,686 | 31,226 | (89,058 | ) | ||||||||
Net Increase (Decrease) In Cash and Cash Equivalents |
9,500 | (1,663 | ) | 1,854 | ||||||||
Cash and Cash Equivalents, Beginning Of Year |
19,214 | 20,877 | 19,023 | |||||||||
Cash and Cash Equivalents, End Of Year |
$ | 28,714 | $ | 19,214 | $ | 20,877 | ||||||
The notes to consolidated financial statements are an integral part of these statements.
Statements of Consolidated Shareholders Equity
Yellow Corporation and Subsidiaries for the years ended December 31
(in thousands) | 2002 |
2001 |
2000 |
|||||||||
Common Stock |
||||||||||||
Beginning balance |
$ | 31,028 | $ | 29,959 | $ | 29,437 | ||||||
Exercise of stock options |
737 | 1,063 | 516 | |||||||||
Other |
60 | 6 | 6 | |||||||||
Ending Balance |
31,825 | 31,028 | 29,959 | |||||||||
Capital Surplus |
||||||||||||
Beginning balance |
41,689 | 23,304 | 16,063 | |||||||||
Exercise of stock options, including tax benefits |
15,296 | 18,286 | 7,130 | |||||||||
Equity offering and other |
23,625 | 99 | 111 | |||||||||
Ending balance |
80,610 | 41,689 | 23,304 | |||||||||
Retained Earnings |
||||||||||||
Beginning balance |
537,496 | 522,195 | 454,177 | |||||||||
Stock dividend to SCST shareholders |
(118,120 | ) | | | ||||||||
Net income (loss) |
(93,902 | ) | 15,301 | 68,018 | ||||||||
Ending balance |
325,474 | 537,496 | 522,195 | |||||||||
Accumulated Other Comprehensive Loss |
||||||||||||
Beginning balance |
(6,252 | ) | (2,710 | ) | (2,322 | ) | ||||||
Change in minimum pension liability adjustment |
(30,848 | ) | | | ||||||||
Changes in foreign currency translation adjustments |
73 | (616 | ) | (388 | ) | |||||||
Changes in the fair value of interest rate swaps |
1,431 | (2,926 | ) | | ||||||||
Ending balance |
(35,596 | ) | (6,252 | ) | (2,710 | ) | ||||||
Unamortized Restricted Stock Awards |
||||||||||||
Beginning balance |
| | | |||||||||
Issuance of restricted stock awards |
(1,458 | ) | | | ||||||||
Amortization of restricted stock awards |
405 | | | |||||||||
Ending balance |
(1,053 | ) | | | ||||||||
Treasury Stock, At Cost |
||||||||||||
Beginning balance |
(112,972 | ) | (112,972 | ) | (87,975 | ) | ||||||
Treasury stock purchases |
| | (24,997 | ) | ||||||||
Equity offeringreissuance of treasury stock |
71,670 | | | |||||||||
Ending balance |
(41,302 | ) | (112,972 | ) | (112,972 | ) | ||||||
Total Shareholders Equity |
$ | 359,958 | $ | 490,989 | $ | 459,776 | ||||||
The notes to consolidated financial statements are an integral part of these statements.
Statements of Comprehensive Income
Yellow Corporation and Subsidiaries for the years ended December 31
(in thousands) | 2002 |
2001 |
2000 |
|||||||||
Net income (loss) |
$ | (93,902 | ) | $ | 15,301 | $ | 68,018 | |||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Change in minimum pension liability adjustment |
(30,848 | ) | | | ||||||||
Changes in foreign currency translation adjustments |
73 | (616 | ) | (388 | ) | |||||||
Changes in the fair value of interest rate swaps |
1,431 | (2,926 | ) | | ||||||||
Comprehensive income (loss) |
$ | (123,246 | ) | $ | 11,759 | $ | 67,630 | |||||
The notes to consolidated financial statements are an integral part of these statements.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Description of Business
Yellow Corporation (also referred to as Yellow or the company) is a holding company that through wholly owned operating subsidiaries offers its customers a wide range of asset and non-asset-based transportation services integrated by technology. Yellow Transportation, Inc. (Yellow Transportation) offers a full range of regional, national, and international services for the movement of industrial, commercial and retail goods. Meridian IQ, LLC (Meridian IQ) is a non-asset global transportation management company that plans and coordinates the movement of goods worldwide to provide customers a single source for transportation management solutions. Yellow Technologies, Inc. provides innovative technology solutions and services exclusively for Yellow Corporation companies.
On September 30, 2002, the company completed the 100 percent distribution (the spin-off) of all of its shares of SCS Transportation, Inc. (SCST) to Yellow shareholders of record on September 3, 2002. SCST provides regional overnight and second-day less-than-truckload (LTL) and selected truckload (TL) transportation services through two subsidiaries, Saia Motor Freight Line, Inc. (Saia) and Jevic Transportation, Inc. (Jevic). Shares were distributed on the basis of one share of SCST common stock for every two shares of Yellow common stock. As a result of the spin-off, the companys financial statements have been reclassified to reflect SCST as discontinued operations for all periods presented.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Principles of Consolidation and Summary of Accounting Policies
The accompanying consolidated financial statements include the accounts of Yellow Corporation and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Management makes estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Actual results could differ from those estimates.
Accounting policies refer to specific accounting principles and the methods of applying those principles to fairly present the companys financial position and results of operations in accordance with generally accepted accounting principles. The policies discussed below include those that management has determined to be the most appropriate in preparing the companys financial statements and are not discussed in a separate footnote.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and highly liquid investments purchased with maturities of three months or less.
Concentration of Credit Risks
The company sells services and extends credit based on an evaluation of the customers financial condition, without requiring collateral. Exposure to losses on receivables is principally dependent on each customers financial condition. The company monitors its exposure for credit losses and maintains allowances for anticipated losses.
Revenue Recognition
For shipments in transit, Yellow Transportation records revenue based on the percentage of service completed as of the period end and accrues delivery costs as incurred. Meridian IQ recognizes revenue upon the completion of services. In certain logistics transactions where Meridian IQ acts as an agent, revenue is recorded on a net basis. Net revenue represents revenue charged to customers less third party transportation costs. Where Meridian IQ acts as principal, it records revenue from these transactions on a gross basis, without deducting transportation costs. Management believes these policies most accurately reflect revenue as earned.
Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximates their fair value due to the short-term nature of these instruments.
Effective January 1, 2001, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (Statement No. 133). As a result of the adoption of Statement No. 133, the company recognizes all derivative financial instruments as either assets or liabilities at their fair value.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
In December 2000, the company entered into a three-year interest rate swap agreement (the swap) to hedge a portion of its variable rate debt. Pursuant to the agreement, the company pays a fixed rate of 6.06 percent and receives a variable three-month London interbank offer rate (LIBOR) on a notional amount of $50 million. The company has designated this interest rate contract as a hedge of the companys exposure to a portion of its variable-rate, asset backed securitization (ABS) financing. At December 31, 2002, approximately 40 percent of the companys debt was variable rate with the swap hedged against the entire variable amount. The company recorded a $22 thousand gain in 2002 and a $34 thousand loss in 2001 in other net nonoperating expense representing the ineffectiveness of the correlation between the hedge and the ABS financing rate. At December 31, 2002 and 2001, accumulated other comprehensive loss included a $1.5 million and $2.9 million, respectively, unrealized loss on the interest rate contract. The company recognizes the differential paid under the contract designated as a hedge as adjustments to interest expense. These adjustments approximated $2.1 million in 2002 and $0.8 million in 2001 in additional interest expense.
Property (Gains)/Losses and Spin-off and Reorganization Charges
The following were included in income from continuing operations for the years ended December 31:
(in thousands) | 2002 |
2001 |
2000 |
||||||||
Property (gains) / losses |
$ | 425 | $ | (186 | ) | $ | (14,372 | ) | |||
Spin-off charges |
6,940 | | | ||||||||
Reorganization costs |
1,026 | 4,901 | | ||||||||
Other |
44 | 700 | | ||||||||
Total |
$ | 8,435 | $ | 5,415 | $ | (14,372 | ) | ||||
Spin-off charges included bank fees and external legal and accounting services. Reorganization costs were primarily associated with the reorganization of Yellow Transportation and Transportation.com. These charges included employee separation costs and lease termination and rent costs. The net property gains in 2000 primarily consisted of a $20.7 million pretax gain on the sale of real estate property in New York and a $6.5 million pretax loss on obsolete computer aided dispatch technology, both at Yellow Transportation.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Claims and Insurance Accruals
Claims and insurance accruals, both current and long-term, reflect the estimated cost of claims for workers compensation, cargo loss and damage, and bodily injury and property damage that insurance does not cover. The company includes these costs in claims and insurance expense except for workers compensation, which the company includes in salaries, wages, and employees benefits.
The company bases reserves for workers compensation primarily upon actuarial analyses prepared by independent actuaries. These reserves are discounted to present value using a risk-free rate at the date of occurrence. The risk-free rate is the U.S. Treasury rate for maturities that match the expected payout of workers compensation liabilities. The process of determining reserve requirements utilizes historical trends and involves an evaluation of accident frequency and severity, claims management, and changes in health care costs, but not certain future administrative costs. The effect of future inflation for costs is implicitly considered in the actuarial analyses. Adjustments to previously established reserves are included in operating results. At December 31, 2002 and 2001, estimated future payments for workers compensation claims aggregated $98.6 million and $93.9 million, respectively. The present value of these estimated future payments was $80.5 million at December 31, 2002 and $75.4 million at December 31, 2001.
Stock-Based Compensation
The company has various stock-based employee compensation plans, which are described more fully in the Stock Compensation Plans note. The company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The company does not reflect compensation cost in net income, as all options that the company granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
Option Value Information
The pro forma calculations in the table below were estimated using the Black-Scholes option pricing model with the following weighted average assumptions.
Dividend yield |
| % | | % | | % | ||||||
Expected volatility |
39.0 | % | 36.8 | % | 36.2 | % | ||||||
Risk-free interest rate |
2.6 | % | 4.2 | % | 5.9 | % | ||||||
Expected option life (years) |
3 | 3 | 3 | |||||||||
Fair value per option |
$ | 7.81 | $ | 6.04 | $ | 4.85 | ||||||
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Pro Forma Information
The following table illustrates the effect on income from continuing operations, net income and earnings per share if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement No. 123).
(in thousands except per share data) | 2002 |
2001 |
2000 |
|||||||||
Net income (loss) as reported |
$ | (93,902 | ) | $ | 15,301 | $ | 68,018 | |||||
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
(1,364 | ) | (2,141 | ) | (1,741 | ) | ||||||
Pro forma net income (loss) |
$ | (95,266 | ) | $ | 13,160 | $ | 66,277 | |||||
Basic earnings (loss) per share: |
||||||||||||
Income from continuing operations as reported |
$ | 0.86 | $ | 0.44 | $ | 2.50 | ||||||
Income from continuing operations pro forma |
0.81 | 0.35 | 2.43 | |||||||||
Net income (loss) as reported |
(3.35 | ) | 0.63 | 2.76 | ||||||||
Net income (loss) pro forma |
(3.40 | ) | 0.54 | 2.69 | ||||||||
Diluted earnings (loss) per share: |
||||||||||||
Income from continuing operations as reported |
$ | 0.84 | $ | 0.43 | $ | 2.49 | ||||||
Income from continuing operations pro forma |
0.79 | 0.34 | 2.42 | |||||||||
Net income (loss) as reported |
(3.31 | ) | 0.62 | 2.74 | ||||||||
Net income (loss) pro forma |
(3.36 | ) | 0.53 | 2.67 | ||||||||
Impairment of Long-Lived Assets
If facts and circumstances indicate that the carrying value of identifiable intangibles and long-lived assets may be impaired, the company would perform an evaluation of recoverability. If an evaluation were required, the company would compare the estimated future undiscounted cash flows associated with the asset to the assets carrying amount to determine if a write-down is required.
Reclassifications
The company has made certain reclassifications to the prior year consolidated financial statements to conform to the current presentation.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Preferred Stock
The Certificate of Incorporation authorizes the Board of Directors, at its discretion, to issue up to 750,000 shares of Series A $10 preferred stock with a $1 par value per share, and 4,250,000 shares of preferred stock with a $1 par value per share. As of December 31, 2002, none of these shares have been issued.
Supplemental Cash Flow Information
The company provides the following supplemental cash flow information for the years ended December 31:
(in thousands) | 2002 |
2001 |
2000 | ||||||
Income taxes paid, net |
$ | 8,272 | $ | 5,268 | $ | 47,813 | |||
Interest paid |
$ | 11,518 | $ | 16,628 | $ | 19,761 | |||
Supplemental cash flow information includes cash paid on behalf of SCST until the spin-off date.
Discontinued Operations
As required under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the company evaluated the carrying value of SCST against the fair value, as determined by the market capitalization of SCST at the spin-off date. The following table presents the net assets (carrying value) of SCST at the spin-off date compared to the fair value as determined by the market capitalization:
(in thousands) | September 30, 2002 |
|||
Cash |
$ | 2,383 | ||
Accounts receivable |
99,233 | |||
Other current assets |
18,158 | |||
Net property, plant and equipment and other assets |
314,610 | |||
Accounts payable and accrued expenses |
(64,275 | ) | ||
Long-term debt |
(130,000 | ) | ||
Other liabilities |
(69,342 | ) | ||
Total net assets (carrying value) |
$ | 170,767 | ||
Fair value at spin-off |
(118,120 | ) | ||
Non-cash loss on disposal of SCST |
$ | (52,647 | ) | |
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Summarized results of operations related to SCST (as reported in discontinued operations) are as follows for the nine months ended September 30, 2002 and the years ended December 31, 2001 and 2000:
(in thousands except per share data) | 2002 |
2001 |
2000 | |||||||
Operating revenue |
$ | 581,181 | $ | 771,581 | $ | 789,009 | ||||
Operating expenses |
559,751 | 752,423 | 763,227 | |||||||
Operating income |
21,430 | 19,158 | 25,782 | |||||||
Nonoperating expenses, net |
4,735 | 7,992 | 9,221 | |||||||
Income before income taxes |
16,695 | 11,166 | 16,561 | |||||||
Provision for income taxes |
6,748 | 6,454 | 8,864 | |||||||
Income from continuing operations |
9,947 | 4,712 | 7,697 | |||||||
Loss on disposal of SCST |
(52,647 | ) | | | ||||||
Cumulative effect of change in accounting for goodwill |
(75,175 | ) | | | ||||||
Income (loss) from discontinued operations |
$ | (117,875 | ) | $ | 4,712 | $ | 7,697 | |||
Discontinued operations basic earnings (loss) per share: |
||||||||||
Income from continuing operations |
$ | 0.35 | $ | 0.19 | $ | 0.31 | ||||
Loss on disposal of SCST |
(1.88 | ) | | | ||||||
Cumulative effect of change in accounting for goodwill |
(2.68 | ) | | | ||||||
Income (loss) from discontinued operations |
$ | (4.21 | ) | $ | 0.19 | $ | 0.31 | |||
Discontinued operations diluted earnings (loss) per share: |
||||||||||
Income from continuing operations |
$ | 0.35 | $ | 0.19 | $ | 0.31 | ||||
Loss on disposal of SCST |
(1.85 | ) | | | ||||||
Cumulative effect of change in accounting for goodwill |
(2.65 | ) | | | ||||||
Income (loss) from discontinued operations |
$ | (4.15 | ) | $ | 0.19 | $ | 0.31 | |||
The company did not charge to discontinued operations the management fees and other corporate services that it previously allocated to SCST, as the company continues to incur a majority of the expense. The company allocated interest expense to discontinued operations based on the overall
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
effective borrowing rate of Yellow applied to the debt reduction realized by Yellow from the spin-off. Interest expense included in discontinued operations was $4.6 million for the nine months ended September 30, 2002, and $8.0 million and $9.4 million for the years ended December 31, 2001 and 2000, respectively. Goodwill amortization expense included in discontinued operations was zero for 2002, and $3.0 million and $2.6 million for 2001 and 2000, respectively.
In July 1999, Preston Trucking Company (a former segment of the company sold in 1998) ceased operations and commenced a liquidation of its assets under federal bankruptcy regulations. The company recorded a charge to discontinued operations of $1.3 million net of tax benefit of $0.7 million in 2000 to settle pending liabilities associated with the bankruptcy. Income from discontinued operations, as shown on the Statements of Consolidated Operations, in 2000 consists of $7.7 million in income related to SCST and $1.3 million in losses related to Preston Trucking Company. Yellow does not anticipate any material change in the loss from disposition of the discontinued operations.
Prepaid Expenses and Other
Items classified as prepaid expenses and other consisted of the following at December 31:
(in thousands) | 2002 |
2001 | ||||
Fuel and operating supplies |
$ | 11,039 | $ | 12,341 | ||
Prefunded benefit contribution |
40,005 | 40,015 | ||||
Other prepaid expenses |
17,682 | 23,502 | ||||
Prepaid expenses and other |
$ | 68,726 | $ | 75,858 | ||
Goodwill and Other Assets
Items classified as goodwill and other assets consisted of the following at December 31:
(in thousands) | 2002 |
2001 | ||||
Goodwill |
$ | 20,491 | $ | 10,600 | ||
Intangibles |
7,696 | 495 | ||||
Other assets |
24,469 | 4,250 | ||||
Goodwill and other assets |
$ | 52,656 | $ | 15,345 | ||
Additional information on goodwill can be found in the Goodwill and Intangibles footnote.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Property and Equipment
Property and equipment consisted of the following at December 31:
(in thousands) | 2002 |
2001 |
||||||
Land |
$ | 93,783 | $ | 92,878 | ||||
Structures |
516,006 | 516,070 | ||||||
Revenue equipment |
825,606 | 801,652 | ||||||
Technology equipment and software |
141,723 | 138,765 | ||||||
Other |
101,978 | 106,933 | ||||||
$ | 1,679,096 | $ | 1,656,298 | |||||
Less - Accumulated depreciation |
(1,114,120 | ) | (1,096,766 | ) | ||||
Net property and equipment |
$ | 564,976 | $ | 559,532 | ||||
For the years ended December 31, 2002, 2001, and 2000, depreciation expense was $78.9 million, $76.9 million, and $78.6 million, respectively.
Yellow carries property and equipment at cost less accumulated depreciation. Yellow computes depreciation using the straight-line method based on the following service lives:
Years | ||
Structures |
10 40 | |
Revenue equipment |
3 14 | |
Technology equipment and software |
3 5 | |
Other |
3 15 | |
The company charges maintenance and repairs to expense as incurred. The company capitalizes replacements and improvements when these costs extend the useful life of the asset.
The companys investment in technology equipment and software consists primarily of advanced customer service and freight management equipment and related software. Yellow capitalizes certain costs associated with developing or obtaining internal-use software. Capitalizable costs include external direct costs of materials and services utilized in developing or obtaining the software, payroll, and payroll-related costs for employees directly associated with the project. For the years ended December 31, 2002, 2001, and 2000, the company capitalized $1.3 million, $2.2 million, and $3.2 million, respectively, which were primarily payroll and payroll-related costs.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Accounts Payable
Items classified as accounts payable consisted of the following at December 31:
(in thousands) | 2002 |
2001 | ||||
Checks outstanding in excess of bank balances |
$ | 63,685 | $ | 51,104 | ||
Accounts payable |
51,304 | 46,424 | ||||
Accounts payable |
$ | 114,989 | $ | 97,528 | ||
Other Current and Accrued Liabilities
Items classified as other current and accrued liabilities consisted of the following at December 31:
(in thousands) | 2002 |
2001 | ||||
Accrued income taxes |
$ | 8,179 | $ | | ||
Deferred income taxes, net |
16,751 | 23,346 | ||||
Claims and insurance accruals |
44,045 | 46,347 | ||||
Other current and accrued liabilities |
32,136 | 27,047 | ||||
Other current and accrued liabilities |
$ | 101,111 | $ | 96,740 | ||
Claims and Other Liabilities
Items classified as claims and other liabilities consisted of the following at December 31:
(in thousands) | 2002 |
2001 | ||||
Deferred income taxes, net |
$ | 25,657 | $ | 33,868 | ||
Pension liability |
71,151 | 34,237 | ||||
Claims and other liabilities |
85,836 | 76,089 | ||||
Claims and other liabilities |
$ | 182,644 | $ | 144,194 | ||
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Debt and Financing
At December 31, debt consisted of the following:
(in thousands) | 2002 |
2001 |
|||||
Unsecured credit agreement |
$ | | $ | 85,000 | |||
ABS borrowings |
50,000 | | (1) | ||||
Unsecured medium-term notes |
55,250 | 77,250 | |||||
Industrial development bonds |
18,900 | 18,900 | |||||
SCST debt |
| 38,834 | |||||
Capital leases and other |
135 | 42 | |||||
Total debt |
$ | 124,285 | $ | 220,026 | |||
ABS borrowings |
50,000 | | (1) | ||||
Current maturities |
24,261 | 6,281 | |||||
Long-term debt |
$ | 50,024 | $ | 213,745 | |||
(1) | Prior to the December 31, 2002 amendment of the ABS agreement, ABS borrowings were not reflected on the balance sheets of the company. At December 31, 2001, $141.5 million was outstanding under the ABS facility. |
Variable-Rate Debt
The company has a $300 million unsecured credit agreement with a group of banks, which expires April 2004. Yellow may use the agreement for additional short-term borrowings and for the issuance of standby letters of credit. Interest on borrowings is based on LIBOR, which was 1.38 percent and 2.44 percent at December 31, 2002 and 2001, respectively. The company pays a fixed increment over these rates. Under the terms of the agreement, among other restrictions, the company must maintain a minimum consolidated net worth and total debt must be no greater than a specified ratio of earnings before interest, income taxes, depreciation and amortization, and rents, as defined. At December 31, 2002 and 2001, the company was in compliance with all terms of this credit agreement. The following table provides the components of the available unused capacity under the bank credit agreement at December 31:
(in thousands) | 2002 |
2001 |
||||||
Total capacity |
$ | 300,000 | $ | 300,000 | ||||
Outstanding borrowings |
| (85,000 | ) | |||||
Letters of credit |
(146,200 | ) | (89,900 | ) | ||||
Available unused capacity |
$ | 153,800 | $ | 125,100 | ||||
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
The company also maintains an ABS agreement that allows it to transfer an ongoing pool of receivables to a conduit administered by an independent financial institution (the conduit). Under the terms of the agreement, the company may transfer Yellow Transportation trade receivables to a special purpose entity, Yellow Receivables Corporation (YRC). YRC is a wholly owned consolidated subsidiary of Yellow Transportation designed to isolate the receivables for bankruptcy purposes. The conduit must purchase from YRC an undivided ownership interest in those receivables. The percentage ownership interest in receivables purchased by the conduit may increase or decrease over time, depending on the characteristics of the receivables, including delinquency rates and debtor concentrations.
The company services the receivables transferred to YRC and receives a servicing fee, which company management has determined approximates market compensation for these services. The conduit pays YRC the face amount of the undivided interest at the time of purchase. On a periodic basis, this sales price is adjusted, resulting in payments by YRC to the conduit of an amount that varies based on the interest rate on certain of the conduits liabilities and the length of time the sold receivables remain outstanding.
Prior to December 31, 2002, financing obtained under the ABS facility was treated as a sale of assets and the sold receivables and related obligations were not reflected on the Consolidated Balance Sheets. The right to repurchase receivable interests was limited to instances when ABS obligations were below $10 million. As of December 31, 2002, the ABS agreement was amended to provide YRC the right to repurchase, at any time, 100 percent of the receivable interests held by the conduit. Due to the amendment, the receivables transferred and the related borrowings are reflected on the Consolidated Balance Sheet as of December 31, 2002. The amendment does not alter the costs associated with operating the ABS facility.
The ABS facility provides additional liquidity and lower borrowing costs through access to the asset backed commercial paper market. By using the ABS facility, the company obtains a variable rate based on the A1 commercial paper rate plus a fixed increment for utilization and administration fees. A1 rated commercial paper comprises more than 90 percent of the commercial paper market, significantly increasing the liquidity. Yellow averaged a rate of 2.3 percent on the ABS facility in 2002.
The ABS facility involves receivables of Yellow Transportation only and has a limit of $200 million. Under the terms of the agreement, Yellow Transportation retains the associated collection risks. Although the facility has no stated maturity, the company has an underlying letter of credit with the administering financial institution that has a 364-day maturity.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
The table below provides the borrowing and repayment activity, as well as the resulting balances, for the years ending December 31 of each period presented:
(in thousands) | 2002 |
2001 |
||||||
ABS obligations outstanding at January 1 |
$ | 141,500 | $ | 177,000 | ||||
Transfer of receivables to conduit (borrowings) |
421,500 | 152,000 | ||||||
Redemptions from conduit (repayments) |
(513,000 | ) | (187,500 | ) | ||||
ABS obligations outstanding at December 31 |
$ | 50,000 | $ | 141,500 | ||||
The companys loss on the sale of receivables under the ABS facility to the conduit was $2.6 million in 2002, $8.0 million in 2001, and $10.1 million in 2000. These charges are reflected as ABS facility charges on the Statements of Consolidated Operations.
Fixed-Rate Debt
Medium-term notes have scheduled maturities through 2008 with fixed interest rates ranging from 6.0 percent to 7.8 percent.
The company has loan guarantees, mortgages, and lease contracts in connection with the issuance of industrial development bonds (IDBs) used to acquire, construct or expand terminal facilities. Rates on these bonds range from 5.0 percent to 6.1 percent, with principal payments due through 2010.
The principal maturities of long-term debt, including current maturities, for the next five years and thereafter are as follows:
(in thousands) | Medium-Term Notes |
IDBs |
Other |
Total | ||||||||
2003 |
$ | 19,250 | $ | 5,000 | $ | 11 | $ | 24,261 | ||||
2004 |
16,000 | | 124 | 16,124 | ||||||||
2005 |
12,000 | 4,400 | | 16,400 | ||||||||
2006 |
7,000 | | | 7,000 | ||||||||
2007 |
| | | | ||||||||
Thereafter |
1,000 | 9,500 | | 10,500 | ||||||||
Total |
$ | 55,250 | $ | 18,900 | $ | 135 | $ | 74,285 | ||||
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Based on the borrowing rates currently available to the company for debt with similar terms and remaining maturities, the fair value of fixed-rate debt at December 31, 2002 and 2001, was approximately $81.5 million and $114.2 million, respectively. The carrying amount of such fixed-rate debt at December 31, 2002 and 2001 was $74.3 million and $108.8 million, respectively.
Other Debt
SCST debt at December 31, 2001 consisted of subordinated debentures of $16.3 million, fixed and variable-rate mortgages of $11.6 million and $5.0 million, respectively, and variable-rate term notes of $5.9 million. SCST assumed the subordinated debentures of $16.3 million and the remaining debt was paid off as part of the spin-off.
Employee Benefits
Retirement Plans
Yellow Corporation and Yellow Transportation provide defined benefit pension plans for employees not covered by collective bargaining agreements (approximately 4,000 employees). Meridian IQ does not offer a defined benefit pension plan and instead offers retirement benefits through a contributory 401(k) savings plan, as discussed later in this section. Pension plan benefits are based on years of service and the employees final average earnings. The companys funding policy is to contribute the minimum required tax-deductible contribution for the year while taking into consideration any variable Pension Benefit Guarantee Corporation premium. In 2000, the pension plan was amended to provide for the payment of unreduced benefits, at early retirement, for a participant whose combination of age and vested service equals 85 years or greater. Approximately 35 percent of the plans assets are invested in fixed income securities, 50 percent in U.S. equities, and 15 percent in international equities. Neither the company nor its subsidiaries sponsor a postretirement health care benefit plan.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
The following table sets forth the plans funded status:
(in thousands) | 2002 |
2001 |
||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of year |
$ | 356,035 | $ | 309,029 | ||||
Service cost |
15,772 | 14,496 | ||||||
Interest cost |
25,595 | 23,427 | ||||||
Plan amendment |
907 | 1,660 | ||||||
Actuarial loss |
30,906 | 19,167 | ||||||
Benefits paid |
(11,512 | ) | (11,744 | ) | ||||
Benefit obligation at end of year |
$ | 417,703 | $ | 356,035 | ||||
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | 274,602 | $ | 269,765 | ||||
Actual return on plan assets |
(26,381 | ) | (12,864 | ) | ||||
Employer contributions |
12,012 | 29,445 | ||||||
Benefits paid |
(11,512 | ) | (11,744 | ) | ||||
Fair value of plan assets at end of year |
$ | 248,721 | $ | 274,602 | ||||
Funded status |
$ | (168,982 | ) | $ | (81,433 | ) | ||
Unrecognized transition asset |
(1,344 | ) | (2,235 | ) | ||||
Unrecognized prior service cost |
13,579 | 13,985 | ||||||
Unrecognized net actuarial loss |
121,850 | 38,444 | ||||||
Accrued benefit cost |
$ | (34,897 | ) | $ | (31,239 | ) | ||
Amounts recognized in the Consolidated Balance Sheets at December 31 are as follows:
(in thousands) | 2002 |
2001 |
||||||
Accrued pension liability, net |
$ | (34,897 | ) | $ | (31,239 | ) | ||
Minimum pension liability |
(61,629 | ) | | |||||
Intangible asset |
13,579 | | ||||||
Accumulated other comprehensive loss (pretax) |
48,050 | | ||||||
Accrued benefit cost |
$ | (34,897 | ) | $ | (31,239 | ) | ||
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
The following table provides the components of net pension cost:
(in thousands) | 2002 |
2001 |
2000 |
|||||||||
Net pension cost: |
||||||||||||
Service cost |
$ | 15,772 | $ | 14,496 | $ | 11,326 | ||||||
Interest cost |
25,595 | 23,427 | 21,733 | |||||||||
Expected return on plan assets |
(25,139 | ) | (21,010 | ) | (20,742 | ) | ||||||
Amortization of unrecognized net transition assets |
(2,380 | ) | (2,384 | ) | (2,388 | ) | ||||||
Amortization of prior service costs |
1,438 | 1,304 | 1,113 | |||||||||
Net pension cost |
$ | 15,286 | $ | 15,833 | $ | 11,042 | ||||||
Weighted average assumptions at December 31: |
||||||||||||
Discount rate |
6.75 | % | 7.25 | % | 7.50 | % | ||||||
Rate of increase in compensation levels |
4.50 | % | 4.50 | % | 4.50 | % | ||||||
Expected rate of return on assets |
9.00 | % | 9.00 | % | 9.00 | % | ||||||
Increases in the companys pension benefit obligations combined with market losses in 2002 and 2001 have negatively impacted the funded status of the pension plans, resulting in additional funding and expense over the next several years. Due to these same factors, the company recorded an adjustment in 2002 to shareholders equity of $30.8 million, net of tax of $17.2 million, to reflect the minimum liability associated with the plans.
Multi-Employer Plans
Yellow Transportation contributes to multi-employer health, welfare and pension plans for employees covered by collective bargaining agreements (approximately 80 percent of total employees). The amounts of these contributions are determined by contract and established in the agreements. The health and welfare plans provide health care and disability benefits to active employees and retirees. The pension plans provide defined benefits to retired participants. The company contributed and charged to expense the following amounts to these plans:
(in thousands) | 2002 |
2001 |
2000 | ||||||
Health and welfare |
$ | 156,081 | $ | 150,012 | $ | 154,730 | |||
Pension |
159,018 | 157,148 | 167,772 | ||||||
Total |
$ | 315,099 | $ | 307,160 | $ | 322,502 | |||
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Under current legislation regarding multi-employer pension plans, a termination, withdrawal or partial withdrawal from any multi-employer plan that is in an under-funded status would render the company liable for a proportionate share of such multi-employer plans unfunded vested liabilities. This potential unfunded pension liability also applies to the companys unionized competitors who contribute to multi-employer plans. Based on the limited information available from plan administrators, which the company cannot independently validate, the company believes that its portion of the contingent liability in the case of a full withdrawal or termination would be material to its financial position and results of operations. Yellow Transportation has no current intention of taking any action that would subject the company to obligations under the legislation.
Yellow Transportation has collective bargaining agreements with its unions that stipulate the amount of contributions Yellow Transportation makes to multi-employer pension plans. The Internal Revenue Code and Internal Revenue Service regulations also establish minimum funding requirements for multi-employer pension plans and a process to address the plans funding if it fails to meet those requirements.
401(k) Savings Plans
The company and its operating subsidiaries each sponsor defined contribution plans, primarily for employees not covered by collective bargaining agreements. The plans principally consist of contributory 401(k) savings plans and noncontributory profit sharing plans. Plans provided by Yellow Corporation and Yellow Transportation consist of both a fixed matching percentage and a discretionary amount. The nondiscretionary company match for these plans equals 25 percent of the first six percent of an eligible employees contributions. Discretionary contributions for both the 401(k) savings plan and profit sharing plans are determined annually by the Board of Directors. The 401(k) savings plan offered by Meridian IQ provides a fixed matching percentage of 75 percent of the first six percent of an eligible employees contributions with no option for discretionary contributions. Contributions for each of the three years in the period ended December 31, 2002, were not material to the operations of the company.
The companys employees covered under collective bargaining agreements can also participate in a contributory 401(k) plan. There are no employer contributions to the plan.
Performance Incentive Awards
The company and its operating subsidiaries each provide annual performance incentive awards to nonunion employees, which are based primarily on actual operating results achieved compared to targeted operating results. Income from continuing operations in 2002, 2001, and 2000 includes performance incentive expense for nonunion employees of $15.6 million, $2.9 million, and $38.7 million, respectively. Yellow pays performance incentive awards for a year primarily in the first quarter of the following year.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Executive Performance Plan
The company implemented a long-term incentive plan in 2002. This plan replaced the use of stock options as the exclusive vehicle for delivering long-term incentive compensation potential to the companys executive officers. Awards under the plan can be made in cash and performance share units at the discretion of the Board of Directors and are expected to vest over three years from the date of grant. The plan utilizes a phased implementation schedule that allows for one-third of the typical award in the first year of implementation, two-thirds in the second year, and the full award in the third year. In 2002, award amounts were based primarily on the companys return on committed capital compared to the Standard and Poors Small Cap 600. Income from continuing operations in 2002 includes performance incentive accruals for executives of $2.0 million.
Stock Compensation Plans
The company has reserved 4.8 million shares of its common stock for issuance to key management personnel of the company and its operating subsidiaries under five stock option plans. The plans generally permit grants of nonqualified stock options and grants of stock options coupled with a grant of stock appreciation rights (SARs). In addition, the company has reserved 200,000 shares of its common stock for issuance to its Board of Directors. Under the plans, the exercise price of each option equals the closing market price of the companys common stock on the date of grant. The options vest ratably, generally over a period of four years, and expire ten years from the date of the grant. The 1992 plan also permits the issuance of restricted stock. In 2002, Yellow issued 56,300 shares of restricted stock from the 1992 plan at $25.90 per share that clif vest over three years.
The company implemented a new stock option plan in 2002 which reserves 1.0 million of the 4.8 million shares discussed above. This plan permits the issuance of restricted stock and restricted stock units, as well as options, SARs, and performance stock and performance stock unit awards. The maximum cumulative number of shares that can be awarded in any form other than options or SARs is 200,000 shares. Yellow did not issue any restricted stock or SARs from this plan during 2002.
The outstanding stock options of Yellow were adjusted to reflect the impact of the spin-off. For employees who continued employment with Yellow, the option remained an option for Yellow common stock with the number of shares covered by the option and related exercise price adjusted to preserve the intrinsic value. For employees who worked for SCST after the spin-off, the Yellow options were cancelled and SCST issued options to purchase SCST common stock with the number of shares of SCST common stock and exercise price set to preserve the intrinsic value.
As of December 31, 2002, 2001, and 2000, options on approximately 736,000 shares, 1,054,000 shares, and 1,421,000 shares, respectively, were exercisable at weighted average exercise prices of $17.77 per share, $20.62 per share, and $18.12 per share, respectively. The weighted average
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
remaining contract life on outstanding options at December 31, 2002, 2001, and 2000 was 7.4 years, 7.3 years, and 7.9 years, respectively. A summary of activity in the companys stock option plans is presented in the following table.
Shares (in thousands) |
Exercise Price | ||||||||
Weighted Average |
Range | ||||||||
Outstanding at December 31, 1999 |
3,134 | $ | 17.44 | $ | 11.50 - 27.00 | ||||
Granted |
1,170 | 16.63 | 14.56 - 18.75 | ||||||
Exercised |
(517 | ) | 13.54 | 11.50 - 18.13 | |||||
Forfeited / expired |
(412 | ) | 19.13 | 11.50 - 27.00 | |||||
Outstanding at December 31, 2000 |
3,375 | $ | 17.55 | $ | 11.50 - 27.00 | ||||
Granted |
42 | 20.30 | 18.25 - 21.87 | ||||||
Exercised |
(1,063 | ) | 15.64 | 11.50 - 24.05 | |||||
Forfeited / expired |
(83 | ) | 18.57 | 12.25 - 24.05 | |||||
Outstanding at December 31, 2001 |
2,271 | $ | 18.46 | $ | 11.50 - 27.00 | ||||
Granted |
900 | 26.81 | 22.42 - 29.67 | ||||||
Exercised |
(737 | ) | 17.76 | 10.56 - 24.79 | |||||
SCST spin-off adjustment |
(352 | ) | | | |||||
Forfeited / expired |
(86 | ) | 17.83 | 10.56 - 24.05 | |||||
Outstanding at December 31, 2002 |
1,996 | $ | 21.27 | $ | 10.56 - 29.67 | ||||
The following table summarizes information about stock options outstanding as of December 31, 2002:
Options Outstanding |
Options Exercisable | |||||||||||
Range of exercise prices |
Shares (in thousands) |
Weighted-Average Contractual Years |
Weighted-Average Exercise Price |
Shares (in thousands) |
Weighted-Average Exercise Price | |||||||
$10.56 - 15.61 |
558 | 7.1 | $ | 14.36 | 246 | $ | 14.30 | |||||
$15.62 - 22.80 |
785 | 5.7 | $ | 19.26 | 480 | $ | 19.41 | |||||
$22.81 - 29.67 |
653 | 9.7 | $ | 29.58 | 10 | $ | 23.93 |
As discussed in the Summary of Accounting Policies note, the company applies APB 25 in accounting for stock options. Please refer to that note for pro forma effects had the company applied Statement No. 123.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Goodwill and Intangibles
Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. Prior to the adoption on January 1, 2002 of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement No. 142), the company amortized goodwill over the estimated period of benefit on a straight-line basis over periods generally ranging from 20 to 40 years, and the company reviewed goodwill for impairment under the policy for other long-lived assets. Since the adoption of Statement No. 142, the company discontinued amortization of goodwill, and reviews goodwill at least annually for impairment based on a fair value approach.
As a result of the spin-off, the company reports results of operations for SCST, including prior year goodwill amortization, under discontinued operations. Meridian IQ has not amortized goodwill in accordance with provisions of Statement No. 142. Therefore, income from continuing operations does not include goodwill amortization for any period presented.
The net carrying amount of goodwill attributable to each subsidiary with goodwill balances and changes therein follows:
(in thousands) | December 31, 2001 |
Impairment Adjustment |
(Spin-off) / Acquisitions |
December 31, 2002 | ||||||||||
SCST |
$ | 89,971 | $ | (75,175 | ) | $ | (14,796 | ) | $ | | ||||
Meridian IQ |
10,600 | | 9,891 | 20,491 | ||||||||||
Goodwill |
$ | 100,571 | $ | (75,175 | ) | $ | (4,905 | ) | $ | 20,491 | ||||
At December 31, 2001, the company had $100.6 million of goodwill, consisting primarily of $75.2 million remaining from the acquisition of Jevic included in the non-current assets of discontinued operations. Based on an estimate of Jevics discounted cash flows, the company determined that 100 percent of the Jevic goodwill was impaired due to lower business volumes, compounded by a weak economy and an increasingly competitive business environment. As a result, the company recorded a non-cash charge of $75.2 million in the first quarter 2002, which was reflected as a cumulative effect of a change in accounting principle. Due to the spin-off, the company reclassified the non-cash charge to discontinued operations on the Statement of Consolidated Operations.
In connection with adopting Statement No. 142, the company also reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
The components of amortized intangible assets follow:
December 31, 2002 |
December 31, 2001 | |||||||||||||
(in thousands) | Average (years) |
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization | |||||||||
Customer related |
11 | $ | 5,622 | $ | 355 | $ | 317 | $ | 34 | |||||
Marketing related |
6 | 1,550 | 42 | 1,963 | 812 | |||||||||
Technology based |
5 | 1,061 | 140 | 231 | 19 | |||||||||
Intangible assets |
$ | 8,233 | $ | 537 | $ | 2,511 | $ | 865 | ||||||
The gross carrying amount of intangibles at December 31, 2001 included approximately $2 million of SCST assets and the related accumulated amortization of $.8 million. SCST intangibles and accumulated amortization are not reflected in the December 31, 2002 balances. Identifiable intangibles of approximately $7.7 million are reflected in the December 31, 2002 balances as a result of Meridian IQ acquisitions during 2002.
Amortization expense for intangible assets, as reflected in income from continuing operations, was $482 thousand for the year ending December 31, 2002. Estimated amortization expense for the next five years is as follows:
(in thousands) | 2003 |
2004 |
2005 |
2006 |
2007 | ||||||||||
Estimated amortization expense |
$ | 972 | $ | 942 | $ | 859 | $ | 750 | $ | 606 | |||||
Acquisitions
In July 2002, Meridian IQ acquired selected assets, consisting primarily of customer contracts, of Clicklogistics, Inc. (Clicklogistics) for nominal cash consideration. Clicklogistics provides non-asset transportation and logistics management services.
In August 2002, Meridian IQ completed the acquisition of MegaSys, Inc. (MegaSys), a Greenwood, Indiana based provider of non-asset transportation and logistics management services, for approximately $17 million. The acquisition price primarily related to $9.3 million of goodwill and $7.1 million of identifiable intangible assets. As part of the acquisition, Meridian IQ negotiated an earnout arrangement, which provides for Meridian IQ to pay contingent consideration upon MegaSys generating cash flow levels in excess of an established rate of return through December 31, 2005. If reached, the earnout amount could increase the purchase price up to an additional $18 million. The company believes the acquisition supports its plans to grow its non-asset-based business and be a single-source transportation provider.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
In September 2001, the company completed its acquisition of the remaining ownership in Transportation.com from its venture capital partners. The cash purchase price of approximately $14.3 million was allocated to goodwill of $10.6 million, tax benefit receivable of $4.0 million and miscellaneous assets and liabilities of $(0.3) million. As of the acquisition date, Transportation.com, as well as the companys other non-asset-based services, have been consolidated under Meridian IQ. The purchase agreements provide for material contingent payments to be paid to the sellers in the event of a public offering of Meridian IQ on or before August 2006. The company has no current plans for a public offering of Meridian IQ. Prior to the acquisition date, the company accounted for its ownership interest under the equity method of accounting due to substantive participating rights of the minority investors. Losses on the companys investment of $5.7 million in 2001 and $3.3 million in 2000 were recorded in nonoperating expenses.
Income Taxes
Deferred income taxes are determined based upon the difference between the book and the tax basis of the companys assets and liabilities. Deferred taxes are recorded at the enacted tax rates expected to be in effect when these differences reverse. Deferred tax liabilities (assets) are comprised of the following at December 31:
(in thousands) | 2002 |
2001 |
||||||
Depreciation |
$ | 90,004 | $ | 81,521 | ||||
Prepaids |
8,193 | 9,427 | ||||||
Employee benefits |
52,330 | 48,519 | ||||||
Revenue |
22,925 | 20,241 | ||||||
Other |
6,354 | 9,467 | ||||||
Gross tax liabilities before discontinued operations |
$ | 179,806 | $ | 169,175 | ||||
Gross tax liabilities of discontinued operations |
| 62,530 | ||||||
Gross tax liabilities |
$ | 179,806 | $ | 231,705 | ||||
Claims and insurance |
$ | (54,684 | ) | $ | (53,341 | ) | ||
Bad debts |
(5,514 | ) | (2,812 | ) | ||||
Employee benefits |
(45,076 | ) | (18,712 | ) | ||||
Revenue |
(10,882 | ) | (15,398 | ) | ||||
Other |
(21,242 | ) | (21,698 | ) | ||||
Gross tax assets before discontinued operations |
$ | (137,398 | ) | $ | (111,961 | ) | ||
Gross tax assets of discontinued operations |
| (20,416 | ) | |||||
Gross tax assets |
$ | (137,398 | ) | $ | (132,377 | ) | ||
Net tax liability |
$ | 42,408 | $ | 99,328 | ||||
A valuation allowance for deferred tax assets was not required at December 31, 2002 or 2001.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
A reconciliation between income taxes at the federal statutory rate and the consolidated effective tax rate from continuing operations follows:
(in thousands) | 2002 |
2001 |
2000 |
||||||
Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | |||
State income taxes, net |
(0.8 | ) | (2.0 | ) | 4.0 | ||||
Nondeductible business expenses |
4.5 | 11.3 | 2.7 | ||||||
Foreign tax credit and rate differential |
(2.2 | ) | (2.5 | ) | 0.6 | ||||
Other, net |
(0.3 | ) | (2.8 | ) | (0.9 | ) | |||
Effective tax rate |
36.2 | % | 39.0 | % | 41.4 | % | |||
The income tax provision from continuing operations consisted of the following:
(in thousands) | 2002 |
2001 |
2000 |
|||||||||
Current: |
||||||||||||
U.S. federal |
$ | 12,697 | $ | (6,853 | ) | $ | 28,511 | |||||
State |
(353 | ) | (3,628 | ) | 5,556 | |||||||
Foreign |
(180 | ) | 505 | (151 | ) | |||||||
Current income tax provision |
$ | 12,164 | $ | (9,976 | ) | $ | 33,916 | |||||
Deferred: |
||||||||||||
U.S. federal |
$ | 584 | $ | 14,220 | $ | 7,739 | ||||||
State |
748 | 2,937 | 1,191 | |||||||||
Foreign |
117 | (411 | ) | 676 | ||||||||
Deferred income tax provision |
$ | 1,449 | $ | 16,746 | $ | 9,606 | ||||||
Income tax provision |
$ | 13,613 | $ | 6,770 | $ | 43,522 | ||||||
Based on the income from continuing operations before income taxes: |
||||||||||||
Domestic |
$ | 37,892 | $ | 16,119 | $ | 105,472 | ||||||
Foreign |
(306 | ) | 1,240 | (345 | ) | |||||||
Income from continuing operations before income taxes |
$ | 37,586 | $ | 17,359 | $ | 105,127 | ||||||
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Commitments, Contingencies, and Uncertainties
The company incurs rental expenses under noncancelable lease agreements for certain buildings and operating equipment. Rental expense is charged to operating expense and supplies on the Statements of Consolidated Operations. Actual rental expense, as reflected in income from continuing operations, was $34.8 million, $37.0 million, and $35.7 million for the years ended December 31, 2002, 2001, and 2000, respectively.
The company utilizes certain terminals and equipment under operating leases. At December 31, 2002, the company was committed under noncancelable lease agreements requiring minimum annual rentals payable as follows:
(in thousands) | 2003 |
2004 |
2005 |
2006 |
2007 |
Thereafter | ||||||||||||
Minimum annual rentals |
$ | 26,203 | $ | 18,182 | $ | 13,373 | $ | 4,076 | $ | 3,039 | $ | 5,624 | ||||||
The company expects in the ordinary course of business that leases will be renewed or replaced as they expire. Projected 2003 net capital expenditures are expected to be $100 to $110 million, of which $32 million was committed at December 31, 2002.
The companys outstanding letters of credit at December 31, 2002 included $10.6 million for property damage and workers compensation claims against SCST. Yellow agreed to maintain the letters of credit outstanding at the spin-off date until SCST obtained replacement letters of credit or third party guarantees. SCST agreed to use its reasonable best efforts to obtain these letters of credit or guarantees, which in many cases would allow Yellow to obtain a release of its letters of credit. SCST agreed to indemnify Yellow for any claims against the letters of credit provided by Yellow. SCST reimburses Yellow for all fees incurred related to the remaining outstanding letters of credit. The company also provides a guarantee of $6.6 million regarding certain lease obligations of SCST.
The company is involved in litigation or proceedings that have arisen in the companys ordinary business activities. The company insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will be sufficient to fully indemnify the company against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain self-insured retentions in amounts the company deems prudent. Based on its current assessment of information available to the company as of the date of these financial statements, the company believes that its financial statements include adequate provision for estimated costs and losses that may ultimately be incurred with regard to the litigation and proceedings to which the company is a party.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Labor Negotiations
The National Master Freight Agreement covering Yellow Transportation collective-bargaining employees expires on March 31, 2003. Yellow Transportation began formal labor negotiations with the International Brotherhood of Teamsters in October 2002, with a goal to renegotiate the agreement prior to its expiration. Failure to reach an agreement prior to the expiration of the contract could have a significant impact on our financial condition and results of operations. The agreement covers approximately 80 percent of Yellow Transportation employees.
Business Segments
The company reports financial and descriptive information about its reportable operating segments on a basis consistent with that used internally for evaluating segment performance and allocating resources to segments. The segments are managed separately because each requires different operating and technology strategies. The company evaluates performance primarily on operating income and return on capital.
Yellow has two reportable segments, which are strategic business units that offer complementary transportation services to its customers. Yellow Transportation is a unionized carrier that provides comprehensive regional, national and international transportation services. Meridian IQ provides domestic and international freight forwarding, multi-modal brokerage and transportation management services.
The accounting policies of the segments are the same as those described in the Summary of Accounting Policies note. Management fees and other corporate services are charged to segments based on direct benefit received or allocated based on revenue. Corporate revenue in 2001 and 2000 represented certain non-asset-based services prior to the formation of Meridian IQ. Corporate operating losses represent operating expenses of the holding company, including salaries, wages and benefits, along with incentive compensation and professional services for all periods presented. In 2002, Corporate operating losses also included approximately $6.9 million of spin-off charges. Corporate identifiable assets primarily referred to cash and cash equivalents, in addition to pension intangible assets. In 2002, intersegment revenue related to transportation services provided by Yellow Transportation to Meridian IQ and charges to Yellow Transportation for use of various Meridian IQ service names.
Meridian IQ includes the former operations of Transportation.com as well as other non-asset-based services. The 2001 and 2000 segment data for Meridian IQ included the partial year results of operations of Transportation.com and other non-asset-based services for the periods they were part
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
of the companys consolidated financial results. Full year revenue for Meridian IQ was $31.1 million and $23.4 million in 2001 and 2000, respectively. Full year operating losses for Meridian IQ were $(16.8) million and $(13.7) million in 2001 and 2000, respectively.
Revenue from foreign sources totaled $24.8 million, $26.0 million, and $24.5 million, in 2002, 2001, and 2000 respectively, and is largely derived from Canada and Mexico.
The following table summarizes the companys operations by business segment:
(in thousands) | Yellow Transportation |
Meridian IQ |
Corporate/ Eliminations |
Consolidated |
|||||||||||
2002 |
|||||||||||||||
External revenue |
$ | 2,544,573 | $ | 79,575 | $ | | $ | 2,624,148 | |||||||
Intersegment revenue |
2,479 | 2,196 | (4,675 | ) | | ||||||||||
Operating income (loss) |
70,594 | (2,697 | ) | (21,033 | )(2) | 46,864 | |||||||||
Identifiable assets |
940,252 | 64,617 | 38,116 | 1,042,985 | |||||||||||
Capital expenditures, net |
81,232 | 1,537 | 61 | 82,830 | |||||||||||
Depreciation and amortization |
76,972 | 2,321 | 41 | 79,334 | |||||||||||
2001 |
|||||||||||||||
External revenue |
$ | 2,485,972 | $ | 11,292 | $ | 7,806 | $ | 2,505,070 | |||||||
Intersegment revenue |
6,360 | | (6,360 | ) | | ||||||||||
Operating income (loss) |
55,884 | (5,738 | ) | (11,951 | ) | 38,195 | |||||||||
Identifiable assets |
757,484 | 17,641 | 19,704 | 794,829 | (1) | ||||||||||
Capital expenditures, net |
80,463 | 822 | 150 | 81,435 | |||||||||||
Depreciation and amortization |
76,227 | 698 | 52 | 76,977 | |||||||||||
2000 |
|||||||||||||||
External revenue |
$ | 2,763,426 | $ | 16,788 | $ | 18,917 | $ | 2,799,131 | |||||||
Intersegment revenue |
14,346 | | (14,346 | ) | | ||||||||||
Operating income (loss) |
141,829 | (4,507 | ) | (10,575 | ) | 126,747 | |||||||||
Identifiable assets |
722,808 | | 45,793 | 768,601 | (1) | ||||||||||
Capital expenditures, net |
61,791 | 256 | 8,642 | 70,689 | |||||||||||
Depreciation and amortization |
68,780 | 120 | 9,687 | 78,587 | |||||||||||
(1) | The December 31, 2001 and 2000, total assets per the Consolidated Balance Sheets includes $490,948 and $539,876, respectively, of assets related to discontinued operations not included above. |
(2) | Includes $6.9 million of spin-off charges, as discussed on the previous page. |
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Earnings Per Common Share
(in thousands except per share data) | 2002 |
2001 |
2000 |
|||||||||
Income from continuing operations |
$ | 23,973 | $ | 10,589 | $ | 61,605 | ||||||
Income (loss) from discontinued operations |
(117,875 | ) | 4,712 | 6,413 | ||||||||
Net income (loss) |
$ | (93,902 | ) | $ | 15,301 | $ | 68,018 | |||||
Average common shares outstanding - basic |
28,004 | 24,376 | 24,649 | |||||||||
Effect of dilutive options and restricted stock |
367 | 303 | 138 | |||||||||
Average common shares outstanding - diluted |
28,371 | 24,679 | 24,787 | |||||||||
Basic earnings per share: |
||||||||||||
Income from continuing operations |
$ | 0.86 | $ | 0.44 | $ | 2.50 | ||||||
Income (loss) from discontinued operations |
(4.21 | ) | 0.19 | 0.26 | ||||||||
Net income (loss) |
$ | (3.35 | ) | $ | 0.63 | $ | 2.76 | |||||
Effect of dilutive options on earnings per share: |
||||||||||||
Income from continuing operations |
$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.01 | ) | |||
Income (loss) from discontinued operations |
0.06 | | (0.01 | ) | ||||||||
Net income (loss) |
$ | 0.04 | $ | (0.01 | ) | $ | (0.02 | ) | ||||
Diluted earnings per share: |
||||||||||||
Income from continuing operations |
$ | 0.84 | $ | 0.43 | $ | 2.49 | ||||||
Income (loss) from discontinued operations |
(4.15 | ) | 0.19 | 0.25 | ||||||||
Net income (loss) |
$ | (3.31 | ) | $ | 0.62 | $ | 2.74 | |||||
The impacts of certain options were excluded from the calculation of diluted earnings per share because average exercise prices were greater than the average market price of common shares. Data regarding those options is summarized below:
(in thousands except per share data) | 2002 |
2001 |
2000 | ||||||
Weighted average option shares outstanding |
129 | 611 | 1,500 | ||||||
Weighted average exercise price |
$ | 29.67 | $ | 24.18 | $ | 20.79 | |||
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Condensed Consolidating Financial Statements
In August 2003, Yellow Corporation issued 5.0 percent Contingent Convertible Senior Notes (the notes) due 2023 pursuant to Rule 144A under the Securities Act of 1933, as amended. In connection with the notes, the following 100 percent owned subsidiaries of Yellow Corporation issued guarantees in favor of the holders of the notes: Yellow Transportation, Inc., Mission Supply Company, Yellow Redevelopment Corporation, Yellow Relocation Services, Yellow Technologies, Inc., Yellow Dot Com Subsidiary, Inc., MegaSys, Inc., Meridian IQ, LLC, Yellow GPS, LLC, and Globe.com Lines, Inc. Each of the guarantees is full and unconditional and joint and several.
The summarized consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Yellow Corporation or any guarantor to obtain funds from its subsidiaries by dividend or loan.
The following represents summarized condensed consolidating financial information as of December 31, 2002 and 2001 with respect to the financial position, and for the three years ended December 31, 2002 for results of operations and for cash flows of Yellow Corporation and its subsidiaries. The Parent column presents the financial information of Yellow Corporation that is the primary obligor on the notes. The Guarantor Subsidiaries column presents the financial information of all guarantors excluding that of Yellow Corporation which is separately presented. The Non-guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those that are governed by foreign laws.
Condensed Consolidating Balance Sheets
December 31, 2002
(in thousands)
Parent |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Elimination |
Consolidated | ||||||||||||||
Cash and cash equivalents |
$ | 21,898 | $ | 2,470 | $ | 4,346 | $ | | $ | 28,714 | ||||||||
Intercompany advances receivable |
141,057 | 46,291 | | (187,348 | ) | | ||||||||||||
Accounts receivable, net |
3,211 | 29,017 | 295,685 | | 327,913 | |||||||||||||
Prepaid expenses and other |
3,518 | 65,148 | 60 | | 68,726 | |||||||||||||
Total current assets |
169,684 | 142,926 | 300,091 | (187,348 | ) | 425,353 | ||||||||||||
Property and equipment |
289 | 1,671,327 | 7,480 | | 1,679,096 | |||||||||||||
Less - accumulated depreciation |
213 | 1,109,710 | 4,197 | | 1,114,120 | |||||||||||||
Net property and equipment |
76 | 561,617 | 3,283 | | 564,976 | |||||||||||||
Investment in subsidiary |
263,577 | | | (263,577 | ) | | ||||||||||||
Goodwill and other assets |
3,729 | 44,756 | 4,171 | | 52,656 | |||||||||||||
Total assets |
$ | 437,066 | $ | 749,299 | $ | 307,545 | $ | (450,925 | ) | $ | 1,042,985 | |||||||
Intercompany advances payable |
$ | | $ | | $ | 187,348 | $ | (187,348 | ) | $ | | |||||||
Accounts payable |
1,412 | 113,251 | 326 | | 114,989 | |||||||||||||
Wages, vacations, and employees benefits |
2,389 | 157,230 | 379 | | 159,998 | |||||||||||||
Other current and accrued liabilities |
(1,098 | ) | 101,287 | 922 | | 101,111 | ||||||||||||
ABS borrowings |
| | 50,000 | | 50,000 | |||||||||||||
Current maturities of long-term debt |
19,250 | 5,011 | | | 24,261 | |||||||||||||
Total current liabilities |
21,953 | 376,779 | 238,975 | (187,348 | ) | 450,359 | ||||||||||||
Intercompany debt |
(20,658 | ) | 20,658 | | | | ||||||||||||
Long-term debt, less current portion |
36,000 | 14,024 | | | 50,024 | |||||||||||||
Deferred income taxes, net |
(17,319 | ) | 43,381 | (405 | ) | | 25,657 | |||||||||||
Claims and other liabilities |
15,782 | 141,495 | (290 | ) | | 156,987 | ||||||||||||
Commitments and contingencies |
||||||||||||||||||
Shareholders equity |
401,308 | 152,962 | 69,265 | (263,577 | ) | 359,958 | ||||||||||||
Total liabilities and shareholders equity |
$ | 437,066 | $ | 749,299 | $ | 307,545 | $ | (450,925 | ) | $ | 1,042,985 | |||||||
Condensed Consolidating Balance Sheets
December 31, 2001
(in thousands)
Parent |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Elimination |
Consolidated | |||||||||||||||
Cash and cash equivalents |
$ | 11,154 | $ | 1,944 | $ | 6,116 | $ | | $ | 19,214 | |||||||||
Intercompany advances receivable |
88,768 | 32,348 | | (121,116 | ) | | |||||||||||||
Accounts receivable, net |
716 | 15,695 | 108,469 | | 124,880 | ||||||||||||||
Prepaid expenses and other |
(1,011 | ) | 61,494 | 15,375 | | 75,858 | |||||||||||||
Current assets of discontinued operations |
| | 92,458 | | 92,458 | ||||||||||||||
Total current assets |
99,627 | 111,481 | 222,418 | (121,116 | ) | 312,410 | |||||||||||||
Property and equipment |
240 | 1,647,947 | 8,111 | | 1,656,298 | ||||||||||||||
Less - accumulated depreciation |
182 | 1,091,899 | 4,685 | | 1,096,766 | ||||||||||||||
Net property and equipment |
58 | 556,048 | 3,426 | | 559,532 | ||||||||||||||
Investment in subsidiary |
474,283 | | | (474,283 | ) | | |||||||||||||
Goodwill and other assets |
4,044 | 11,169 | 132 | | 15,345 | ||||||||||||||
Noncurrent assets of discontinued operations |
| | 398,490 | | 398,490 | ||||||||||||||
Total assets |
$ | 578,012 | $ | 678,698 | $ | 624,466 | $ | (595,399 | ) | $ | 1,285,777 | ||||||||
Intercompany advances payable |
$ | | $ | 44,704 | $ | 76,412 | $ | (121,116 | ) | $ | | ||||||||
Accounts payable |
546 | 96,691 | 291 | | 97,528 | ||||||||||||||
Wages, vacations, and employees benefits |
783 | 103,004 | 203 | | 103,990 | ||||||||||||||
Other current and accrued liabilities |
4,231 | 87,634 | 4,875 | | 96,740 | ||||||||||||||
Current maturities of long-term debt |
| 41 | 6,240 | | 6,281 | ||||||||||||||
Current liabilities of discontinued operations |
| | 64,669 | | 64,669 | ||||||||||||||
Total current liabilities |
5,560 | 332,074 | 152,690 | (121,116 | ) | 369,208 | |||||||||||||
Intercompany debt |
(89,109 | ) | (1,048 | ) | 90,157 | | | ||||||||||||
Long-term debt, less current portion |
162,250 | 18,900 | 32,595 | | 213,745 | ||||||||||||||
Deferred income taxes, net |
(15,402 | ) | 49,847 | (577 | ) | | 33,868 | ||||||||||||
Claims and other liabilities |
12,532 | 102,167 | (4,373 | ) | | 110,326 | |||||||||||||
Noncurrent liabilities of discontinued operations |
| | 67,641 | | 67,641 | ||||||||||||||
Commitments and contingencies |
|||||||||||||||||||
Shareholders equity |
502,181 | 176,758 | 286,333 | (474,283 | ) | 490,989 | |||||||||||||
Total liabilities and shareholders equity |
$ | 578,012 | $ | 678,698 | $ | 624,466 | $ | (595,399 | ) | $ | 1,285,777 | ||||||||
Condensed Consolidating Statements of Operations
For the year ended December 31, 2002
(in thousands)
Parent |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Elimination |
Consolidated |
|||||||||||||||
Operating revenue |
$ | 43,938 | $ | 2,599,394 | $ | 24,754 | $ | (43,938 | ) | $ | 2,624,148 | ||||||||
Operating expenses: |
|||||||||||||||||||
Salaries, wages and employees benefits |
12,056 | 1,697,567 | 7,759 | | 1,717,382 | ||||||||||||||
Operating expenses and supplies |
14,774 | 355,476 | 31,360 | (16,088 | ) | 385,522 | |||||||||||||
Operating taxes and licenses |
206 | 74,999 | 532 | | 75,737 | ||||||||||||||
Claims and insurance |
1,233 | 55,944 | 20 | | 57,197 | ||||||||||||||
Depreciation and amortization |
41 | 79,028 | 265 | | 79,334 | ||||||||||||||
Purchased transportation |
| 244,087 | 9,590 | | 253,677 | ||||||||||||||
(Gains) losses on property disposals, net |
| 559 | (134 | ) | | 425 | |||||||||||||
Spin-off and reorganization charges |
6,613 | 1,397 | | | 8,010 | ||||||||||||||
Total operating expenses |
34,923 | 2,509,057 | 49,392 | (16,088 | ) | 2,577,284 | |||||||||||||
Operating income (loss) |
9,015 | 90,337 | (24,638 | ) | (27,850 | ) | 46,864 | ||||||||||||
Nonoperating (income) expenses: |
|||||||||||||||||||
Interest expense |
8,087 | 3,932 | 3,394 | (8,202 | ) | 7,211 | |||||||||||||
ABS facility charges |
| | 2,576 | | 2,576 | ||||||||||||||
Other, net |
(24,296 | ) | 74,855 | (50,669 | ) | (399 | ) | (509 | ) | ||||||||||
Nonoperating (income) expenses, net |
(16,209 | ) | 78,787 | (44,699 | ) | (8,601 | ) | 9,278 | |||||||||||
Income (loss) from continuing operations before income taxes |
25,224 | 11,550 | 20,061 | (19,249 | ) | 37,586 | |||||||||||||
Income tax provision |
1,249 | 5,143 | 7,221 | | 13,613 | ||||||||||||||
Income (loss) from continuing operations |
23,975 | 6,407 | 12,840 | (19,249 | ) | 23,973 | |||||||||||||
Loss from discontinued operations, net |
| | (117,875 | ) | | (117,875 | ) | ||||||||||||
Net income (loss) |
$ | 23,975 | $ | 6,407 | $ | (105,035 | ) | $ | (19,249 | ) | $ | (93,902 | ) | ||||||
Condensed Consolidating Statements of Operations
For the year ended December 31, 2001
(in thousands)
Parent |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Elimination |
Consolidated |
||||||||||||||||
Operating revenue |
$ | 54,264 | $ | 2,480,119 | $ | 25,987 | $ | (55,300 | ) | $ | 2,505,070 | |||||||||
Operating expenses: |
||||||||||||||||||||
Salaries, wages and employees benefits |
8,390 | 1,622,638 | 7,634 | | 1,638,662 | |||||||||||||||
Operating expenses and supplies |
13,848 | 378,599 | 23,516 | (17,909 | ) | 398,054 | ||||||||||||||
Operating taxes and licenses |
174 | 74,920 | 543 | | 75,637 | |||||||||||||||
Claims and insurance |
1,983 | 56,372 | (1,356 | ) | | 56,999 | ||||||||||||||
Depreciation and amortization |
38 | 76,668 | 271 | | 76,977 | |||||||||||||||
Purchased transportation |
| 205,424 | 9,707 | | 215,131 | |||||||||||||||
(Gains) losses on property disposals, net |
(1 | ) | (202 | ) | 17 | | (186 | ) | ||||||||||||
Spin-off and reorganization charges |
633 | 5,089 | (121 | ) | | 5,601 | ||||||||||||||
Total operating expenses |
25,065 | 2,419,508 | 40,211 | (17,909 | ) | 2,466,875 | ||||||||||||||
Operating income (loss) |
29,199 | 60,611 | (14,224 | ) | (37,391 | ) | 38,195 | |||||||||||||
Nonoperating (income) expenses: |
||||||||||||||||||||
Interest expense |
18,513 | 2,356 | 5,017 | (17,449 | ) | 8,437 | ||||||||||||||
ABS facility charges |
| | 7,996 | | 7,996 | |||||||||||||||
Other, net |
(14,294 | ) | 90,096 | (49,645 | ) | (21,754 | ) | 4,403 | ||||||||||||
Nonoperating (income) expenses, net |
4,219 | 92,452 | (36,632 | ) | (39,203 | ) | 20,836 | |||||||||||||
Income (loss) from continuing operations before income taxes |
24,980 | (31,841 | ) | 22,408 | 1,812 | 17,359 | ||||||||||||||
Income tax provision (benefit) |
9,679 | (10,399 | ) | 7,490 | | 6,770 | ||||||||||||||
Income (loss) from continuing operations |
15,301 | (21,442 | ) | 14,918 | 1,812 | 10,589 | ||||||||||||||
Income from discontinued operations, net |
| | 4,712 | | 4,712 | |||||||||||||||
Net income (loss) |
$ | 15,301 | $ | (21,442 | ) | $ | 19,630 | $ | 1,812 | $ | 15,301 | |||||||||
Condensed Consolidating Statements of Operations
For the year ended December 31, 2000
(in thousands)
Parent |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Elimination |
Consolidated |
||||||||||||||||
Operating revenue |
$ | 44,117 | $ | 2,781,499 | $ | 24,521 | $ | (51,006 | ) | $ | 2,799,131 | |||||||||
Operating expenses: |
||||||||||||||||||||
Salaries, wages and employees benefits |
6,653 | 1,752,506 | 8,767 | | 1,767,926 | |||||||||||||||
Operating expenses and supplies |
16,494 | 428,992 | 8,904 | (23,054 | ) | 431,336 | ||||||||||||||
Operating taxes and licenses |
190 | 80,510 | 559 | | 81,259 | |||||||||||||||
Claims and insurance |
1,232 | 61,067 | (764 | ) | | 61,535 | ||||||||||||||
Depreciation and amortization |
54 | 78,226 | 307 | | 78,587 | |||||||||||||||
Purchased transportation |
| 257,127 | 8,986 | | 266,113 | |||||||||||||||
(Gains) losses on property disposals, net |
2,234 | (13,518 | ) | (3,088 | ) | | (14,372 | ) | ||||||||||||
Spin-off and reorganization charges |
| | | | | |||||||||||||||
Total operating expenses |
26,857 | 2,644,910 | 23,671 | (23,054 | ) | 2,672,384 | ||||||||||||||
Operating income (loss) |
17,260 | 136,589 | 850 | (27,952 | ) | 126,747 | ||||||||||||||
Nonoperating (income) expenses: |
||||||||||||||||||||
Interest expense |
16,546 | 2,401 | 16,909 | (25,725 | ) | 10,131 | ||||||||||||||
ABS facility charges |
| | 10,052 | | 10,052 | |||||||||||||||
Other, net |
(77,074 | ) | 39,013 | (27,059 | ) | 66,557 | 1,437 | |||||||||||||
Nonoperating (income) expenses, net |
(60,528 | ) | 41,414 | (98 | ) | 40,832 | 21,620 | |||||||||||||
Income (loss) from continuing operations before income taxes |
77,788 | 95,175 | 948 | (68,784 | ) | 105,127 | ||||||||||||||
Income tax provision (benefit) |
5,431 | 39,747 | (1,656 | ) | | 43,522 | ||||||||||||||
Income (loss) from continuing operations |
72,357 | 55,428 | 2,604 | (68,784 | ) | 61,605 | ||||||||||||||
Income (loss) from discontinued operations, net |
(1,284 | ) | | 7,697 | | 6,413 | ||||||||||||||
Net income (loss) |
$ | 71,073 | $ | 55,428 | $ | 10,301 | $ | (68,784 | ) | $ | 68,018 | |||||||||
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2002
(in thousands)
Parent |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Elimination |
Consolidated |
||||||||||||||||
Operating Activities: |
||||||||||||||||||||
Net cash from (used in) operating activities |
$ | 19,435 | $ | 142,608 | $ | (95,311 | ) | $ | (23,674 | ) | $ | 43,058 | ||||||||
Investing activities: |
||||||||||||||||||||
Acquisition of property and equipment |
(59 | ) | (86,120 | ) | (158 | ) | | (86,337 | ) | |||||||||||
Proceeds from disposal of property and equipment |
| 3,306 | 201 | | 3,507 | |||||||||||||||
Acquisition of companies |
(17,105 | ) | (937 | ) | | | (18,042 | ) | ||||||||||||
Net capital expenditures of discontinued operations |
| | (24,372 | ) | | (24,372 | ) | |||||||||||||
Net cash used in investing activities |
(17,164 | ) | (83,751 | ) | (24,329 | ) | | (125,244 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Unsecured bank credit lines, net |
(85,000 | ) | | | | (85,000 | ) | |||||||||||||
Repayment of long-term debt |
(22,000 | ) | (75 | ) | (22,525 | ) | | (44,600 | ) | |||||||||||
Dividend from subsidiary upon spin-off |
| | 113,790 | | 113,790 | |||||||||||||||
Proceeds from exercise of stock options |
13,704 | | | | 13,704 | |||||||||||||||
Proceeds from issuance of common stock |
93,792 | | | | 93,792 | |||||||||||||||
Intercompany advances/repayments |
7,977 | (58,256 | ) | 26,605 | 23,674 | | ||||||||||||||
Net cash provided by (used in) financing activities |
8,473 | (58,331 | ) | 117,870 | 23,674 | 91,686 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
10,744 | 526 | (1,770 | ) | | 9,500 | ||||||||||||||
Cash and cash equivalents, beginning of year |
11,154 | 1,944 | 6,116 | | 19,214 | |||||||||||||||
Cash and cash equivalents, end of year |
$ | 21,898 | $ | 2,470 | $ | 4,346 | $ | | $ | 28,714 | ||||||||||
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2001
(in thousands)
Parent |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Elimination |
Consolidated |
||||||||||||||||
Operating Activities: |
||||||||||||||||||||
Net cash from (used in) operating activities |
$ | 13,282 | $ | (4,042 | ) | $ | 72,818 | $ | 6,237 | $ | 88,295 | |||||||||
Investing activities: |
||||||||||||||||||||
Acquisition of property and equipment |
(33 | ) | (87,814 | ) | (175 | ) | | (88,022 | ) | |||||||||||
Proceeds from disposal of property and equipment |
| 6,587 | | | 6,587 | |||||||||||||||
Acquisition of company |
| (14,300 | ) | | | (14,300 | ) | |||||||||||||
Other |
| (5,830 | ) | | | (5,830 | ) | |||||||||||||
Net capital expenditures of discontinued operations |
| | (19,619 | ) | | (19,619 | ) | |||||||||||||
Net cash used in investing activities |
(33 | ) | (101,357 | ) | (19,794 | ) | | (121,184 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Unsecured bank credit lines, net |
25,000 | | | | 25,000 | |||||||||||||||
Repayment of long-term debt |
(1,000 | ) | (7,694 | ) | (1,718 | ) | | (10,412 | ) | |||||||||||
Proceeds from exercise of stock options |
16,638 | | | | 16,638 | |||||||||||||||
Intercompany advances/repayments |
(48,811 | ) | 105,994 | (50,946 | ) | (6,237 | ) | | ||||||||||||
Net cash provided by (used in) financing activities |
(8,173 | ) | 98,300 | (52,664 | ) | (6,237 | ) | 31,226 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
5,076 | (7,099 | ) | 360 | | (1,663 | ) | |||||||||||||
Cash and cash equivalents, beginning of year |
6,078 | 9,043 | 5,756 | | 20,877 | |||||||||||||||
Cash and cash equivalents, end of year |
$ | 11,154 | $ | 1,944 | $ | 6,116 | $ | | $ | 19,214 | ||||||||||
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2000
(in thousands)
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Elimination |
Consolidated |
||||||||||||||||
Operating Activities: |
||||||||||||||||||||
Net cash from (used in) operating activities |
$ | 58,756 | $ | 115,749 | $ | 120,028 | $ | (68,784 | ) | $ | 225,749 | |||||||||
Investing activities: |
||||||||||||||||||||
Acquisition of property and equipment |
(25 | ) | (100,174 | ) | (378 | ) | | (100,577 | ) | |||||||||||
Proceeds from disposal of property and equipment |
| 26,578 | 3,310 | | 29,888 | |||||||||||||||
Other |
| (5,114 | ) | | | (5,114 | ) | |||||||||||||
Net capital expenditures of discontinued operations |
| | (59,034 | ) | | (59,034 | ) | |||||||||||||
Net cash used in investing activities |
(25 | ) | (78,710 | ) | (56,102 | ) | | (134,837 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Unsecured bank credit lines, net |
(40,000 | ) | | | | (40,000 | ) | |||||||||||||
Repayment of long-term debt |
(28,750 | ) | (728 | ) | (1,567 | ) | | (31,045 | ) | |||||||||||
Proceeds from exercise of stock options |
6,984 | | | | 6,984 | |||||||||||||||
Treasury stock purchases |
(24,997 | ) | | | | (24,997 | ) | |||||||||||||
Intercompany advances/repayments |
27,049 | (32,972 | ) | (62,861 | ) | 68,784 | | |||||||||||||
Net cash provided by (used in) financing activities |
(59,714 | ) | (33,700 | ) | (64,428 | ) | 68,784 | (89,058 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents |
(983 | ) | 3,339 | (502 | ) | | 1,854 | |||||||||||||
Cash and cash equivalents, beginning of year |
7,061 | 5,704 | 6,258 | | 19,023 | |||||||||||||||
Cash and cash equivalents, end of year |
$ | 6,078 | $ | 9,043 | $ | 5,756 | $ | | $ | 20,877 | ||||||||||
Independent Auditors Report
To the Shareholders of Yellow Corporation:
We have audited the accompanying consolidated balance sheets of Yellow Corporation (a Delaware corporation) and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, cash flows, shareholders equity, and comprehensive income for each of the years in the three year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yellow Corporation and Subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in the Goodwill and Intangibles note to the financial statements, effective January 1, 2002, the Company ceased amortization of goodwill and changed its method of determining impairment of goodwill as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
KPMG LLP
Kansas City, Missouri
January 23, 2003,
except for the Condensed
Consolidating Financial
Statements note as to which the
date is October 7, 2003
Exhibit 99.2
CONSOLIDATED BALANCE SHEETS
Yellow Corporation and Subsidiaries
(Amounts in thousands except per share data)
(Unaudited)
June 30, 2003 |
December 31, 2002 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 49,811 | $ | 28,714 | ||||
Accounts receivable, net |
334,360 | 327,913 | ||||||
Prepaid expenses and other |
31,765 | 68,726 | ||||||
Total current assets |
415,936 | 425,353 | ||||||
PROPERTY AND EQUIPMENT: |
||||||||
Cost |
1,698,586 | 1,679,096 | ||||||
Less - Accumulated depreciation |
1,127,405 | 1,114,120 | ||||||
Net property and equipment |
571,181 | 564,976 | ||||||
Goodwill and other assets |
53,564 | 52,656 | ||||||
Total assets |
$ | 1,040,681 | $ | 1,042,985 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 71,283 | $ | 114,989 | ||||
Wages, vacations, and employees benefits |
166,369 | 159,998 | ||||||
Other current and accrued liabilities |
113,572 | 101,111 | ||||||
Asset backed securitization (ABS) borrowings |
50,000 | 50,000 | ||||||
Current maturities of long-term debt |
40,259 | 24,261 | ||||||
Total current liabilities |
441,483 | 450,359 | ||||||
OTHER LIABILITIES: |
||||||||
Long-term debt, less current portion |
33,983 | 50,024 | ||||||
Deferred income taxes, net |
27,089 | 25,657 | ||||||
Claims and other liabilities |
153,260 | 156,987 | ||||||
Total other liabilities |
214,332 | 232,668 | ||||||
SHAREHOLDERS EQUITY: |
||||||||
Common stock, $1 par value per share |
31,910 | 31,825 | ||||||
Capital surplus |
82,104 | 80,610 | ||||||
Retained earnings |
349,460 | 325,474 | ||||||
Accumulated other comprehensive loss |
(33,575 | ) | (35,596 | ) | ||||
Unamortized restricted stock awards |
(810 | ) | (1,053 | ) | ||||
Treasury stock, at cost (2,359 and 2,244 shares) |
(44,223 | ) | (41,302 | ) | ||||
Total shareholders equity |
384,866 | 359,958 | ||||||
Total liabilities and shareholders equity |
$ | 1,040,681 | $ | 1,042,985 | ||||
The accompanying notes are an integral part of these statements.
STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Corporation and Subsidiaries
For the Three and Six Months Ended June 30
(Amounts in thousands except per share data)
(Unaudited)
Three Months |
Six Months |
|||||||||||||||
2003 |
2002 |
2003 |
2002 |
|||||||||||||
OPERATING REVENUE |
$ | 713,453 | $ | 646,061 | $ | 1,394,546 | $ | 1,224,863 | ||||||||
OPERATING EXPENSES: |
||||||||||||||||
Salaries, wages and benefits |
458,036 | 429,782 | 896,784 | 820,021 | ||||||||||||
Operating expenses and supplies |
103,908 | 92,753 | 213,851 | 173,821 | ||||||||||||
Operating taxes and licenses |
19,492 | 18,722 | 39,259 | 37,101 | ||||||||||||
Claims and insurance |
10,730 | 16,642 | 23,454 | 30,222 | ||||||||||||
Depreciation and amortization |
20,818 | 19,482 | 41,086 | 38,411 | ||||||||||||
Purchased transportation |
68,106 | 61,471 | 135,979 | 114,717 | ||||||||||||
Losses on property disposals, net |
30 | 438 | 41 | 906 | ||||||||||||
Spin-off and reorganization charges |
| 561 | | 797 | ||||||||||||
Total operating expenses |
681,120 | 639,851 | 1,350,454 | 1,215,996 | ||||||||||||
OPERATING INCOME |
32,333 | 6,210 | 44,092 | 8,867 | ||||||||||||
NONOPERATING (INCOME) EXPENSES: |
||||||||||||||||
Interest expense |
2,625 | 1,437 | 5,271 | 3,747 | ||||||||||||
ABS facility charges |
| 715 | | 1,469 | ||||||||||||
Other |
(343 | ) | (44 | ) | (436 | ) | (202 | ) | ||||||||
Nonoperating expenses, net |
2,282 | 2,108 | 4,835 | 5,014 | ||||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
30,051 | 4,102 | 39,257 | 3,853 | ||||||||||||
INCOME TAX PROVISION |
11,691 | 1,474 | 15,271 | 1,372 | ||||||||||||
INCOME FROM CONTINUING OPERATIONS |
18,360 | 2,628 | 23,986 | 2,481 | ||||||||||||
Income (loss) from discontinued operations, net |
| 3,592 | | (69,297 | ) | |||||||||||
NET INCOME (LOSS) |
$ | 18,360 | $ | 6,220 | $ | 23,986 | $ | (66,816 | ) | |||||||
AVERAGE SHARES OUTSTANDING-BASIC |
29,586 | 28,404 | 29,585 | 26,687 | ||||||||||||
AVERAGE SHARES OUTSTANDING-DILUTED |
29,834 | 28,810 | 29,826 | 27,053 | ||||||||||||
BASIC EARNINGS (LOSS) PER SHARE: |
||||||||||||||||
Income from continuing operations |
$ | 0.62 | $ | 0.09 | $ | 0.81 | $ | 0.09 | ||||||||
Income (loss) from discontinued operations |
| 0.13 | | (2.59 | ) | |||||||||||
Net income (loss) |
$ | 0.62 | $ | 0.22 | $ | 0.81 | $ | (2.50 | ) | |||||||
DILUTED EARNINGS (LOSS) PER SHARE: |
||||||||||||||||
Income from continuing operations |
$ | 0.62 | $ | 0.09 | $ | 0.80 | $ | 0.09 | ||||||||
Income (loss) from discontinued operations |
| 0.13 | | (2.56 | ) | |||||||||||
Net income (loss) |
$ | 0.62 | $ | 0.22 | $ | 0.80 | $ | (2.47 | ) | |||||||
The accompanying notes are an integral part of these statements.
2
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Corporation and Subsidiaries
For the Six Months Ended June 30
(Amounts in thousands)
(Unaudited)
2003 |
2002 |
|||||||
OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 23,986 | $ | (66,816 | ) | |||
Noncash items included in net income (loss): |
||||||||
Depreciation and amortization |
41,086 | 38,411 | ||||||
Loss from discontinued operations |
| 69,297 | ||||||
Losses on property disposals, net |
41 | 906 | ||||||
Changes in assets and liabilities, net: |
||||||||
Accounts receivable |
(6,447 | ) | (49,858 | ) | ||||
Accounts receivable securitizations |
| (22,000 | ) | |||||
Accounts payable |
(43,706 | ) | (21,641 | ) | ||||
Other working capital items |
55,861 | 67,522 | ||||||
Claims and other |
(2,653 | ) | 20,056 | |||||
Other |
1,603 | 2,760 | ||||||
Net change in operating activities of discontinued operations |
| 19,081 | ||||||
Net cash from operating activities |
69,771 | 57,718 | ||||||
INVESTING ACTIVITIES: |
||||||||
Acquisition of property and equipment |
(48,038 | ) | (39,398 | ) | ||||
Proceeds from disposal of property and equipment |
1,204 | 1,528 | ||||||
Net capital expenditures of discontinued operations |
| (9,229 | ) | |||||
Net cash used in investing activities |
(46,834 | ) | (47,099 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Decrease in long-term debt |
(43 | ) | (113,011 | ) | ||||
ABS borrowings, net |
| | ||||||
Proceeds from issuance of common stock |
| 93,792 | ||||||
Treasury stock purchases |
(2,921 | ) | | |||||
Proceeds from stock options |
1,124 | 6,189 | ||||||
Net cash used in financing activities |
(1,840 | ) | (13,030 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
21,097 | (2,411 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
28,714 | 19,214 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 49,811 | $ | 16,803 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
Income taxes paid (refunds), net |
$ | 4,170 | $ | (5,055 | ) | |||
Interest paid |
$ | 4,491 | $ | 7,499 | ||||
The accompanying notes are an integral part of these statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Yellow Corporation and Subsidiaries
(unaudited)
1. | The accompanying consolidated financial statements include the accounts of Yellow Corporation and its wholly owned subsidiaries (also referred to as Yellow, we or our). We have prepared the consolidated financial statements, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In managements opinion, all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods included herein have been made. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to SEC rules and regulations. Accordingly, the accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. |
2. | Yellow Corporation is a holding company that through wholly owned operating subsidiaries offers its customers a wide range of asset and non-asset-based transportation services integrated by technology. Yellow Transportation, Inc. (Yellow Transportation) offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods. Meridian IQ, LLC (Meridian IQ) is a non-asset global transportation management company that plans, coordinates and manages the movement of goods worldwide to provide customers a single source for transportation management solutions. Yellow Technologies, Inc. provides innovative technology solutions and services exclusively for Yellow Corporation companies. |
On July 8, 2003, Yellow and Roadway Corporation (Roadway) announced a definitive agreement under which we will acquire Roadway for approximately $966 million in cash and Yellow common stock on approximately a 50/50 basis. We will also assume an expected $140 million in net Roadway indebtedness, bringing the enterprise value of the acquisition to approximately $1.1 billion. Upon completion of the transaction, Roadway will be an operating subsidiary under the holding company, which will be renamed Yellow-Roadway Corporation. Please refer to our Current Report on Form 8-K/A dated July 8, 2003 for a more detailed description of the transaction.
On September 30, 2002, Yellow completed the 100 percent distribution (the spin-off) of all of its shares of SCS Transportation, Inc. (SCST) to Yellow shareholders. Shares were distributed on the basis of one share of SCST common stock for every two shares of Yellow common stock. As a result of the spin-off, our financial statements were reclassified to reflect SCST as discontinued operations for the periods prior to the spin-off.
Summarized results of operations relating to SCST (as reported in discontinued operations) for the three and six months ended June 30, 2002 were as follows (amounts in thousands, except per share data):
Three Months |
Six Months |
||||||
Operating revenue |
$ | 196,488 | $ | 380,026 | |||
Operating expenses |
189,162 | 367,253 | |||||
Operating income |
7,326 | 12,773 | |||||
Nonoperating expenses, net |
1,522 | 3,100 | |||||
Income before income taxes |
5,804 | 9,673 | |||||
Income tax provision |
2,212 | 3,795 | |||||
Income from continuing operations |
3,592 | 5,878 | |||||
Cumulative effect of change in accounting for goodwill |
| (75,175 | ) | ||||
Income (loss) from discontinued operations, net |
$ | 3,592 | $ | (69,297 | ) | ||
Discontinued operations basic earnings (loss) per share: |
|||||||
Income from continuing operations |
$ | 0.13 | $ | 0.22 | |||
Cumulative effect of change in accounting for goodwill |
| (2.81 | ) | ||||
Income (loss) from discontinued operations |
$ | 0.13 | $ | (2.59 | ) | ||
Discontinued operations diluted earnings (loss) per share: |
|||||||
Income from continuing operations |
$ | 0.13 | $ | 0.22 | |||
Cumulative effect of change in accounting for goodwill |
| (2.78 | ) | ||||
Income (loss) from discontinued operations |
$ | 0.13 | $ | (2.56 | ) | ||
4
Management fees and other corporate services previously allocated to SCST were not charged to discontinued operations, as we continue to incur the expenses. We allocated interest expense to discontinued operations based on the overall effective borrowing rate of Yellow applied to the debt reduction that we realized from the spin-off. Interest expense included in discontinued operations was $1.4 million and $3.0 million for the three months and six months ended June 30, 2002, respectively.
3. | Yellow reports financial and descriptive information about its reportable operating segments on a basis consistent with that used internally for evaluating segment operating performance and allocating resources to segments. We manage the segments separately because each requires different operating strategies. We evaluate performance primarily on operating income and return on capital. |
Yellow has two reportable segments, which are strategic business units that offer complementary transportation services to its customers. Yellow Transportation is a unionized carrier that provides comprehensive regional, national and international transportation services. Meridian IQ provides domestic and international freight forwarding, multi-modal brokerage and transportation management services.
The accounting policies of the segments are the same as those described in the Summary of Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2002. We charge management fees and other corporate services to segments primarily based on direct benefit received or allocated based on revenue. Corporate operating losses represent operating expenses of the holding company, including salaries, wages and benefits, along with incentive compensation and professional services. In 2003, Corporate operating losses also included $4.0 million for an industry conference Yellow hosted. Corporate identifiable assets primarily include cash and cash equivalents, in addition to pension intangible assets. Intersegment revenue consists of transportation services provided by Yellow Transportation to Meridian IQ and charges to Yellow Transportation for use of various Meridian IQ service names.
The following table summarizes our operations by business segment (in thousands):
Yellow Transportation |
Meridian IQ |
Corporate/ Eliminations |
Consolidated | |||||||||||
As of June 30, 2003 |
$ | 918,602 | $ | 64,874 | $ | 57,205 | $ | 1,040,681 | ||||||
As of December 31, 2002 |
940,252 | 64,617 | 38,116 | 1,042,985 | ||||||||||
Three months ended |
||||||||||||||
External revenue |
690,817 | 22,636 | | 713,453 | ||||||||||
Intersegment revenue |
632 | 549 | (1,181 | ) | | |||||||||
Operating income (loss) |
36,361 | 64 | (4,092 | ) | 32,333 | |||||||||
Three months ended |
||||||||||||||
External revenue |
627,668 | 18,393 | | 646,061 | ||||||||||
Intersegment revenue |
547 | 549 | (1,096 | ) | | |||||||||
Operating income (loss) |
10,525 | (454 | ) | (3,861 | ) | 6,210 | ||||||||
Six months ended |
||||||||||||||
External revenue |
1,350,376 | 44,170 | | 1,394,546 | ||||||||||
Intersegment revenue |
1,198 | 1,098 | (2,296 | ) | | |||||||||
Operating income (loss) |
55,861 | (829 | ) | (10,940 | ) | 44,092 | ||||||||
Six months ended |
||||||||||||||
External revenue |
1,191,617 | 33,246 | | 1,224,863 | ||||||||||
Intersegment revenue |
1,241 | 1,098 | (2,339 | ) | | |||||||||
Operating income (loss) |
17,187 | (1,969 | ) | (6,351 | ) | 8,867 |
5
4. | Yellow has various stock-based employee compensation plans, which are described more fully in our Annual Report on Form 10-K for the year ended December 31, 2002. Yellow accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. We do not reflect compensation cost in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. |
We estimated the pro forma calculations in the table below using the Black-Scholes option pricing model with the following weighted average assumptions for the three and six months ended June 30:
Three Months |
Six Months |
|||||||||||||
2003 |
2002 |
2003 |
2002 |
|||||||||||
Dividend yield |
| % | n/a | | % | | % | |||||||
Expected volatility |
46.8 | % | n/a | 46.9 | % | 35.7 | % | |||||||
Risk-free interest rate |
2.2 | % | n/a | 2.1 | % | 3.8 | % | |||||||
Expected option life (years) |
3 | n/a | 3 | 3 | ||||||||||
Fair value per option |
$ | 8.91 | n/a | $ | 8.90 | $ | 5.59 | |||||||
Actual options granted |
40,700 | 0 | 54,700 | 14,000 |
The following table illustrates the effect on income from continuing operations, net income and earnings per share if Yellow had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, for the three and six months ended June 30:
Three Months |
Six Months |
||||||||||||
(In thousands except per share data) | 2003 |
2002 |
2003 |
2002 |
|||||||||
Net income (loss), as reported |
$ | 18,360 | $ | 6,220 | $ | 23,986 | $ | (66,816 | ) | ||||
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
552 | 345 | 1,101 | 705 | |||||||||
Pro forma net income (loss) |
$ | 17,808 | $ | 5,875 | $ | 22,885 | $ | (67,521 | ) | ||||
Basic earnings (loss) per share: |
|||||||||||||
Income from continuing operations as reported |
$ | 0.62 | $ | 0.09 | $ | 0.81 | $ | 0.09 | |||||
Income from continuing operations pro forma |
0.60 | 0.08 | 0.77 | 0.06 | |||||||||
Net income (loss) as reported |
0.62 | 0.22 | 0.81 | (2.50 | ) | ||||||||
Net income (loss) pro forma |
0.60 | 0.21 | 0.77 | (2.53 | ) | ||||||||
Diluted earnings (loss) per share: |
|||||||||||||
Income from continuing operations as reported |
$ | 0.62 | $ | 0.09 | $ | 0.80 | $ | 0.09 | |||||
Income from continuing operations pro forma |
0.60 | 0.08 | 0.76 | 0.06 | |||||||||
Net income (loss) as reported |
0.62 | 0.22 | 0.80 | (2.47 | ) | ||||||||
Net income (loss) pro forma |
0.60 | 0.21 | 0.76 | (2.50 | ) |
5. | Our comprehensive income includes net income, changes in the fair value of an interest rate swap and foreign currency translation adjustments. Comprehensive income for the three months ended June 30, 2003 and 2002 was $19.5 million and $6.4 million, respectively, while comprehensive income (loss) for the six months ended June 30, 2003 and 2002 was $26.0 million and $(65.2) million, respectively. |
6. | As of June 30, 2003, the carrying amount of goodwill was $20.5 million and the gross amount of identifiable intangible assets was $8.3 million. Accumulated amortization of intangibles totaled $1.0 million. Refer to our Annual Report on Form 10-K for the year ended December 31, 2002 for a description of our goodwill and intangibles policies. |
7. | Yellow incurs rental expenses under noncancelable lease agreements for certain buildings and operating equipment. Rental expense is charged to operating expenses and supplies on the Statements of Consolidated Operations. The following table represents the actual rental expense, as reflected in operating income, incurred for the three and six months ended June 30 (in thousands): |
6
Three Months |
Six Months | |||||||||||
2003 |
2002 |
2003 |
2002 | |||||||||
Rental expense |
$ | 9,578 | $ | 8,472 | $ | 19,173 | $ | 16,956 |
8. | Under current legislation regarding multi-employer pension plans, a termination, withdrawal or partial withdrawal from any multi-employer plan that is in an under-funded status would render Yellow liable for a proportionate share of such multi-employer plans unfunded vested liabilities. This potential unfunded pension liability also applies to our unionized competitors who contribute to multi-employer plans. Based on the limited information available from plan administrators, which we cannot independently validate, we believe that our portion of the contingent liability in the case of a full withdrawal or termination would be material to our financial position and results of operations. Yellow Transportation has no current intention of taking any action that would subject Yellow to obligations under the legislation. |
Yellow Transportation has collective bargaining agreements with its unions that stipulate the amount of contributions it makes to multi-employer pension plans. The Internal Revenue Code and Internal Revenue Service regulations also establish minimum funding requirements for multi-employer pension plans and provide provisions to address the plans funding if it fails to meet those requirements.
9. | In August 2003, Yellow Corporation issued 5.0 percent Contingent Convertible Senior Notes (the notes) due 2023 pursuant to Rule 144A under the Securities Act of 1933, as amended. In connection with the notes, the following 100 percent owned subsidiaries of Yellow Corporation issued guarantees in favor of the holders of the notes: Yellow Transportation, Inc., Mission Supply Company, Yellow Redevelopment Corporation, Yellow Relocation Services, Yellow Technologies, Inc., Yellow Dot Com Subsidiary, Inc., MegaSys, Inc., Meridian IQ, LLC, Yellow GPS, LLC, and Globe.com Lines, Inc. Each of the guarantees is full and unconditional and joint and several. |
The summarized consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Yellow Corporation or any guarantor to obtain funds from its subsidiaries by dividend or loan.
The following represents summarized condensed consolidating financial information as of June 30, 2003 and December 31, 2002 with respect to the financial position, and for the six months ended June 30, 2003 and 2002 for results of operations and for cash flows of Yellow Corporation and its subsidiaries. The Parent column presents the financial information of Yellow Corporation that is the primary obligor of the notes. The Guarantor Subsidiaries column presents the financial information of all guarantors excluding that of Yellow Corporation which is separately presented. The Non-guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those that are governed by foreign laws.
7
Condensed Consolidating Balance Sheets
June 30, 2003
(in thousands)
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Elimination |
Consolidated | |||||||||||||
Cash and cash equivalents |
$ | 44,539 | $ | 1,464 | $ | 3,808 | $ | | $ | 49,811 | |||||||
Intercompany advances receivable |
146,016 | 34,020 | | (180,036 | ) | | |||||||||||
Accounts receivable, net |
2,764 | 31,950 | 299,646 | | 334,360 | ||||||||||||
Prepaid expenses and other |
514 | 31,162 | 89 | | 31,765 | ||||||||||||
Total current assets |
193,833 | 98,596 | 303,543 | (180,036 | ) | 415,936 | |||||||||||
Property and equipment at cost |
296 | 1,689,861 | 8,429 | | 1,698,586 | ||||||||||||
Less - accumulated depreciation |
218 | 1,122,505 | 4,682 | | 1,127,405 | ||||||||||||
Net property and equipment |
78 | 567,356 | 3,747 | | 571,181 | ||||||||||||
Investment in subsidiary |
231,326 | | | (231,326 | ) | | |||||||||||
Goodwill and other assets |
3,612 | 45,199 | 4,753 | | 53,564 | ||||||||||||
Total assets |
$ | 428,849 | $ | 711,151 | $ | 312,043 | $ | (411,362 | ) | $ | 1,040,681 | ||||||
Intercompany advances payable |
$ | | $ | | $ | 180,036 | $ | (180,036 | ) | $ | | ||||||
Accounts payable |
943 | 70,034 | 306 | | 71,283 | ||||||||||||
Wages, vacations, and employees benefits |
2,600 | 163,598 | 171 | | 166,369 | ||||||||||||
Other current and accrued liabilities |
1,724 | 111,643 | 330 | (125 | ) | 113,572 | |||||||||||
ABS borrowings |
| | 50,000 | | 50,000 | ||||||||||||
Current maturities of long-term debt |
35,250 | 5,009 | | | 40,259 | ||||||||||||
Total current liabilities |
40,517 | 350,284 | 230,843 | (180,161 | ) | 441,483 | |||||||||||
Intercompany debt |
(20,293 | ) | 20,293 | | | | |||||||||||
Long-term debt, less current portion |
20,000 | 13,983 | | | 33,983 | ||||||||||||
Deferred income taxes, net |
(16,939 | ) | 43,663 | 365 | | 27,089 | |||||||||||
Claims and other liabilities |
12,620 | 140,585 | 55 | | 153,260 | ||||||||||||
Shareholders equity |
392,944 | 142,343 | 80,780 | (231,201 | ) | 384,866 | |||||||||||
Total liabilities and shareholders equity |
$ | 428,849 | $ | 711,151 | $ | 312,043 | $ | (411,362 | ) | $ | 1,040,681 | ||||||
8
Condensed Consolidating Balance Sheets
December 31, 2002
(in thousands)
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Elimination |
Consolidated | ||||||||||||||
Cash and cash equivalents |
$ | 21,898 | $ | 2,470 | $ | 4,346 | $ | | $ | 28,714 | ||||||||
Intercompany advances receivable |
141,057 | 46,291 | | (187,348 | ) | | ||||||||||||
Accounts receivable, net |
3,211 | 29,017 | 295,685 | | 327,913 | |||||||||||||
Prepaid expenses and other |
3,518 | 65,148 | 60 | | 68,726 | |||||||||||||
Total current assets |
169,684 | 142,926 | 300,091 | (187,348 | ) | 425,353 | ||||||||||||
Property and equipment at cost |
289 | 1,671,327 | 7,480 | | 1,679,096 | |||||||||||||
Less - accumulated depreciation |
213 | 1,109,710 | 4,197 | | 1,114,120 | |||||||||||||
Net property and equipment at cost |
76 | 561,617 | 3,283 | | 564,976 | |||||||||||||
Investment in subsidiary |
263,577 | | | (263,577 | ) | | ||||||||||||
Goodwill and other assets |
3,729 | 44,756 | 4,171 | | 52,656 | |||||||||||||
Total assets |
$ | 437,066 | $ | 749,299 | $ | 307,545 | $ | (450,925 | ) | $ | 1,042,985 | |||||||
Intercompany advances payable |
$ | | $ | | $ | 187,348 | $ | (187,348 | ) | $ | | |||||||
Accounts payable |
1,412 | 113,251 | 326 | | 114,989 | |||||||||||||
Wages, vacations, and employees benefits |
2,389 | 157,230 | 379 | | 159,998 | |||||||||||||
Other current and accrued liabilities |
(1,098 | ) | 101,287 | 922 | | 101,111 | ||||||||||||
ABS borrowings |
| | 50,000 | | 50,000 | |||||||||||||
Current maturities of long-term debt |
19,250 | 5,011 | | | 24,261 | |||||||||||||
Total current liabilities |
21,953 | 376,779 | 238,975 | (187,348 | ) | 450,359 | ||||||||||||
Intercompany debt |
(20,658 | ) | 20,658 | | | | ||||||||||||
Long-term debt, less current portion |
36,000 | 14,024 | | | 50,024 | |||||||||||||
Deferred income taxes, net |
(17,319 | ) | 43,381 | (405 | ) | | 25,657 | |||||||||||
Claims and other liabilities |
15,782 | 141,495 | (290 | ) | | 156,987 | ||||||||||||
Shareholders equity |
401,308 | 152,962 | 69,265 | (263,577 | ) | 359,958 | ||||||||||||
Total liabilities and shareholders equity |
$ | 437,066 | $ | 749,299 | $ | 307,545 | $ | (450,925 | ) | $ | 1,042,985 | |||||||
9
Condensed Consolidating Statements of Operations
For the six months ended June 30, 2003
(in thousands)
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Elimination |
Consolidated |
|||||||||||||||
Operating revenue |
$ | 6,927 | $ | 1,381,475 | $ | 13,071 | $ | (6,927 | ) | $ | 1,394,546 | ||||||||
Operating expenses: |
|||||||||||||||||||
Salaries, wages and benefits |
6,183 | 886,287 | 4,314 | | 896,784 | ||||||||||||||
Operating expenses and supplies |
10,212 | 196,603 | 13,938 | (6,902 | ) | 213,851 | |||||||||||||
Operating taxes and licenses |
93 | 38,873 | 293 | | 39,259 | ||||||||||||||
Claims and insurance |
211 | 23,107 | 136 | | 23,454 | ||||||||||||||
Depreciation and amortization |
19 | 40,924 | 143 | | 41,086 | ||||||||||||||
Purchased transportation |
| 131,066 | 4,913 | | 135,979 | ||||||||||||||
Losses on property disposals, net |
27 | 13 | 1 | | 41 | ||||||||||||||
Spin-off and reorganization charges |
| | | | | ||||||||||||||
Total operating expenses |
16,745 | 1,316,873 | 23,738 | (6,902 | ) | 1,350,454 | |||||||||||||
Operating income (loss) |
(9,818 | ) | 64,602 | (10,667 | ) | (25 | ) | 44,092 | |||||||||||
Nonoperating (income) expenses: |
|||||||||||||||||||
Interest expense |
4,071 | 1,965 | 2,852 | (3,617 | ) | 5,271 | |||||||||||||
ABS facility charges |
| | | | | ||||||||||||||
Other, net |
(1,680 | ) | 27,024 | (29,372 | ) | 3,592 | (436 | ) | |||||||||||
Nonoperating (income) expenses, net |
2,391 | 28,989 | (26,520 | ) | (25 | ) | 4,835 | ||||||||||||
Income (loss) before income taxes |
(12,209 | ) | 35,613 | 15,853 | | 39,257 | |||||||||||||
Income tax provision (benefit) |
(4,251 | ) | 13,957 | 5,690 | (125 | ) | 15,271 | ||||||||||||
Net income (loss) |
$ | (7,958 | ) | $ | 21,656 | $ | 10,163 | $ | 125 | $ | 23,986 | ||||||||
10
Condensed Consolidating Statements of Operations
For the six months ended June 30, 2002
(in thousands)
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Elimination |
Consolidated |
||||||||||||||||
Operating revenue |
$ | 26,200 | $ | 1,212,303 | $ | 12,560 | $ | (26,200 | ) | $ | 1,224,863 | |||||||||
Operating expenses: |
||||||||||||||||||||
Salaries, wages and benefits |
5,280 | 811,102 | 3,639 | | 820,021 | |||||||||||||||
Operating expenses and supplies |
5,380 | 162,448 | 14,318 | (8,325 | ) | 173,821 | ||||||||||||||
Operating taxes and licenses |
148 | 36,672 | 281 | | 37,101 | |||||||||||||||
Claims and insurance |
1,044 | 29,168 | 10 | | 30,222 | |||||||||||||||
Depreciation and amortization |
20 | 38,261 | 130 | | 38,411 | |||||||||||||||
Purchased transportation |
| 110,204 | 4,513 | | 114,717 | |||||||||||||||
(Gains) losses on property disposals, net |
| 1,053 | (147 | ) | | 906 | ||||||||||||||
Spin-off and reorganization charges |
578 | 219 | | | 797 | |||||||||||||||
Total operating expenses |
12,450 | 1,189,127 | 22,744 | (8,325 | ) | 1,215,996 | ||||||||||||||
Operating income (loss) |
13,750 | 23,176 | (10,184 | ) | (17,875 | ) | 8,867 | |||||||||||||
Nonoperating (income) expenses: |
||||||||||||||||||||
Interest expense |
4,815 | 2,033 | 543 | (3,644 | ) | 3,747 | ||||||||||||||
ABS facility charges |
| | 1,469 | | 1,469 | |||||||||||||||
Other, net |
(2,922 | ) | 40,547 | (23,596 | ) | (14,231 | ) | (202 | ) | |||||||||||
Nonoperating (income) expenses, net |
1,893 | 42,580 | (21,584 | ) | (17,875 | ) | 5,014 | |||||||||||||
Income (loss) from continuing operations before income taxes |
11,857 | (19,404 | ) | 11,400 | | 3,853 | ||||||||||||||
Income tax provision (benefit) |
4,260 | (6,592 | ) | 4,587 | (883 | ) | 1,372 | |||||||||||||
Income (loss) from continuing operations |
7,597 | (12,812 | ) | 6,813 | 883 | 2,481 | ||||||||||||||
Loss from discontinued operations, net |
| | (69,297 | ) | | (69,297 | ) | |||||||||||||
Net income (loss) |
$ | 7,597 | $ | (12,812 | ) | $ | (62,484 | ) | $ | 883 | $ | (66,816 | ) | |||||||
11
Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2003
(in thousands)
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Elimination |
Consolidated |
|||||||||||||||
Operating Activities: |
|||||||||||||||||||
Net cash from (used in) operating activities |
$ | (3,198 | ) | $ | 66,113 | $ | 6,856 | $ | | $ | 69,771 | ||||||||
Investing activities: |
|||||||||||||||||||
Acquisition of property and equipment |
(22 | ) | (47,909 | ) | (107 | ) | | (48,038 | ) | ||||||||||
Proceeds from disposal of property and equipment |
1 | 1,203 | | | 1,204 | ||||||||||||||
Net cash used in investing activities |
(21 | ) | (46,706 | ) | (107 | ) | | (46,834 | ) | ||||||||||
Financing activities: |
|||||||||||||||||||
Decrease in long-term debt |
| (43 | ) | | | (43 | ) | ||||||||||||
ABS borrowings, net |
| | | | | ||||||||||||||
Proceeds from stock options |
1,124 | | | | 1,124 | ||||||||||||||
Treasury stock purchases |
(2,921 | ) | | | | (2,921 | ) | ||||||||||||
Intercompany advances/repayments |
27,657 | (20,370 | ) | (7,287 | ) | | | ||||||||||||
Net cash provided by (used in) financing activities |
25,860 | (20,413 | ) | (7,287 | ) | | (1,840 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents |
22,641 | (1,006 | ) | (538 | ) | | 21,097 | ||||||||||||
Cash and cash equivalents, beginning of period |
21,898 | 2,470 | 4,346 | | 28,714 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 44,539 | $ | 1,464 | $ | 3,808 | $ | | $ | 49,811 | |||||||||
12
Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2002
(in thousands)
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Elimination |
Consolidated |
||||||||||||||||
Operating Activities: |
||||||||||||||||||||
Net cash from (used in) operating activities |
$ | 3,939 | $ | 73,216 | $ | (14,987 | ) | $ | (4,450 | ) | $ | 57,718 | ||||||||
Investing activities: |
||||||||||||||||||||
Acquisition of property and equipment |
(55 | ) | (39,258 | ) | (85 | ) | | (39,398 | ) | |||||||||||
Proceeds from disposal of property and equipment |
| 1,308 | 220 | | 1,528 | |||||||||||||||
Net capital expenditures of discontinued operations |
| | (9,229 | ) | | (9,229 | ) | |||||||||||||
Net cash used in investing activities |
(55 | ) | (37,950 | ) | (9,094 | ) | | (47,099 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Decrease in long-term debt |
(107,000 | ) | | (6,011 | ) | | (113,011 | ) | ||||||||||||
ABS borrowings, net |
| | | | | |||||||||||||||
Proceeds from stock options |
6,189 | | | | 6,189 | |||||||||||||||
Proceeds from issuance of common stock |
93,792 | | | | 93,792 | |||||||||||||||
Intercompany advances/repayments |
1,103 | (34,214 | ) | 28,661 | 4,450 | | ||||||||||||||
Net cash provided by (used in) financing activities |
(5,916 | ) | (34,214 | ) | 22,650 | 4,450 | (13,030 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
(2,032 | ) | 1,052 | (1,431 | ) | | (2,411 | ) | ||||||||||||
Cash and cash equivalents, beginning of period |
11,154 | 1,944 | 6,116 | | 19,214 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 9,122 | $ | 2,996 | $ | 4,685 | $ | | $ | 16,803 | ||||||||||
13
Exhibit 99.3
Report of Ernst & Young LLP
Independent Auditors
To the Board of Directors and Shareholders of
Roadway Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Roadway Corporation and subsidiaries as of December 31, 2002 and 2001, and the related statements of consolidated income, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Roadway Corporation and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Akron, Ohio
January 22, 2003
Roadway Corporation and Subsidiaries
Consolidated Balance Sheets
December 31 |
||||||||
2002 |
2001 |
|||||||
(in thousands, except share data) |
||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 106,929 | $ | 110,432 | ||||
Accounts receivable, including retained interest in securitized receivables, net |
230,216 | 182,463 | ||||||
Prepaid expenses and supplies |
16,683 | 13,802 | ||||||
Deferred income taxes |
21,813 | 16,134 | ||||||
Assets of discontinued operations |
87,431 | 134,936 | ||||||
Total current assets |
463,072 | 457,767 | ||||||
Carrier operating property, at cost |
1,515,648 | 1,535,086 | ||||||
Less allowance for depreciation |
1,006,465 | 1,012,279 | ||||||
Net carrier operating property |
509,183 | 522,807 | ||||||
Goodwill, net |
283,910 | 256,901 | ||||||
Deferred income taxes |
39,941 | 31,054 | ||||||
Other assets |
39,767 | 34,320 | ||||||
Total assets |
$ | 1,335,873 | $ | 1,302,849 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 193,501 | $ | 179,829 | ||||
Salaries and wages |
151,464 | 120,198 | ||||||
Current portion of long-term debt |
33,703 | 18,000 | ||||||
Freight and casualty claims payable |
49,815 | 52,669 | ||||||
Liabilities of discontinued operations |
32,407 | 67,353 | ||||||
Total current liabilities |
460,890 | 438,049 | ||||||
Long-term liabilities: |
||||||||
Casualty claims and other |
67,882 | 65,997 | ||||||
Deferred income taxes |
10,666 | 10,887 | ||||||
Accrued pension and postretirement health care |
135,053 | 121,021 | ||||||
Long-term debt |
273,513 | 307,000 | ||||||
Total long-term liabilities |
487,114 | 504,905 | ||||||
Shareholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock$.01 par value; |
206 | 206 | ||||||
Additional paid-in capital |
35,559 | 38,555 | ||||||
Retained earnings |
397,173 | 362,123 | ||||||
Accumulated other comprehensive loss |
(10,090 | ) | (9,741 | ) | ||||
Unearned portion of restricted stock awards |
(12,896 | ) | (10,417 | ) | ||||
Treasury shares (1,188,124 shares in 2002 and 1,179,900 shares in 2001) |
(22,083 | ) | (20,831 | ) | ||||
Total shareholders equity |
387,869 | 359,895 | ||||||
Total liabilities and shareholders equity |
$ | 1,335,873 | $ | 1,302,849 | ||||
See accompanying notes.
1
Roadway Corporation and Subsidiaries
Statements of Consolidated Income
Year ended December 31 |
||||||||||||
2002 |
2001 |
2000 |
||||||||||
(in thousands, except per share data) | ||||||||||||
Revenue |
$ | 3,010,776 | $ | 2,778,891 | $ | 3,039,560 | ||||||
Operating expenses: |
||||||||||||
Salaries, wages and benefits |
1,934,482 | 1,781,243 | 1,889,928 | |||||||||
Operating supplies and expenses |
479,415 | 477,981 | 544,774 | |||||||||
Purchased transportation |
289,612 | 271,964 | 308,089 | |||||||||
Operating taxes and licenses |
76,662 | 71,360 | 78,271 | |||||||||
Insurance and claims |
63,621 | 47,028 | 64,442 | |||||||||
Provision for depreciation |
75,786 | 70,186 | 55,675 | |||||||||
Net (gain) loss on sale of carrier operating property |
(650 | ) | 434 | 1,969 | ||||||||
Total operating expenses |
2,918,928 | 2,720,196 | 2,943,148 | |||||||||
Operating income from continuing operations |
91,848 | 58,695 | 96,412 | |||||||||
Other (expense) income: |
||||||||||||
Interest expense |
(23,268 | ) | (2,751 | ) | (341 | ) | ||||||
Other, net |
(6,543 | ) | (3,067 | ) | 2,213 | |||||||
(29,811 | ) | (5,818 | ) | 1,872 | ||||||||
Income from continuing operations before income taxes |
62,037 | 52,877 | 98,284 | |||||||||
Provision for income taxes |
26,895 | 22,214 | 41,742 | |||||||||
Income from continuing operations |
35,142 | 30,663 | 56,542 | |||||||||
Income from discontinued operations |
3,782 | 174 | | |||||||||
Net Income |
$ | 38,924 | $ | 30,837 | $ | 56,542 | ||||||
Basic earnings per share from: |
||||||||||||
Continuing operations |
$ | 1.90 | $ | 1.66 | $ | 3.03 | ||||||
Discontinued operations |
0.20 | 0.01 | | |||||||||
Basic earnings per share |
$ | 2.10 | $ | 1.67 | $ | 3.03 | ||||||
Diluted earnings per share from: |
||||||||||||
Continuing operations |
$ | 1.85 | $ | 1.63 | $ | 2.98 | ||||||
Discontinued operations |
0.20 | 0.01 | | |||||||||
Diluted earnings per share |
$ | 2.05 | $ | 1.64 | $ | 2.98 | ||||||
Dividends declared per share |
$ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||
See accompanying notes.
2
Roadway Corporation and Subsidiaries
Statements of Consolidated Shareholders Equity
Total |
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive (Loss) Income |
Unearned Portion of Restricted Stock Awards |
Treasury Shares |
|||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||
Year ended December 31, 2000 |
|||||||||||||||||||||||||||
Balance at January 1, 2000 |
$ | 290,955 | $ | 206 | $ | 41,586 | $ | 282,490 | $ | (5,591 | ) | $ | (7,509 | ) | $ | (20,227 | ) | ||||||||||
Net income |
56,542 | 56,542 | |||||||||||||||||||||||||
Foreign currency translation Adjustments |
(1,134 | ) | (1,134 | ) | |||||||||||||||||||||||
Total comprehensive income |
55,408 | ||||||||||||||||||||||||||
Dividends declared |
(3,875 | ) | (3,875 | ) | |||||||||||||||||||||||
Treasury stock activitynet |
20 | 20 | |||||||||||||||||||||||||
Restricted stock award activity |
(2,637 | ) | (1,156 | ) | (1,481 | ) | |||||||||||||||||||||
Balance at December 31, 2000 |
339,871 | 206 | 40,430 | 335,157 | (6,725 | ) | (8,990 | ) | (20,207 | ) | |||||||||||||||||
Year ended December 31, 2001 |
|||||||||||||||||||||||||||
Net income |
30,837 | 30,837 | |||||||||||||||||||||||||
Foreign currency translation adjustments |
(2,424 | ) | (2,424 | ) | |||||||||||||||||||||||
Derivative fair value adjustments |
(592 | ) | (592 | ) | |||||||||||||||||||||||
Total comprehensive income |
27,821 | ||||||||||||||||||||||||||
Dividends declared |
(3,871 | ) | (3,871 | ) | |||||||||||||||||||||||
Treasury stock activitynet |
(624 | ) | (624 | ) | |||||||||||||||||||||||
Restricted stock award activity |
(3,302 | ) | (1,875 | ) | (1,427 | ) | |||||||||||||||||||||
Balance at December 31, 2001 |
$ | 359,895 | $ | 206 | $ | 38,555 | $ | 362,123 | $ | (9,741 | ) | $ | (10,417 | ) | $ | (20,831 | ) | ||||||||||
Year ended December 31, 2002 |
|||||||||||||||||||||||||||
Net income |
38,924 | 38,924 | |||||||||||||||||||||||||
Foreign currency translation adjustments |
(615 | ) | (615 | ) | |||||||||||||||||||||||
Derivative fair value adjustments |
266 | 266 | |||||||||||||||||||||||||
Total comprehensive income |
38,575 | ||||||||||||||||||||||||||
Dividends declared |
(3,874 | ) | (3,874 | ) | |||||||||||||||||||||||
Treasury stock activitynet |
(1,252 | ) | (1,252 | ) | |||||||||||||||||||||||
Restricted stock award activity |
(5,475 | ) | (2,996 | ) | (2,479 | ) | |||||||||||||||||||||
Balance at December 31, 2002 |
$ | 387,869 | $ | 206 | $ | 35,559 | $ | 397,173 | $ | (10,090 | ) | $ | (12,896 | ) | $ | (22,083 | ) | ||||||||||
See accompanying notes.
3
Roadway Corporation and Subsidiaries
Statements of Consolidated Cash Flows
Year ended December 31 |
||||||||||||
2002 |
2001 |
2000 |
||||||||||
(in thousands) | ||||||||||||
Cash flows from operating activities |
||||||||||||
Net Income |
$ | 38,924 | $ | 30,837 | $ | 56,542 | ||||||
Less: income from discontinued operations |
3,782 | 174 | | |||||||||
Income from continuing operations |
35,142 | 30,663 | 56,542 | |||||||||
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
80,090 | 71,498 | 56,878 | |||||||||
(Gain) loss on sale of carrier operating property |
(650 | ) | 434 | 1,969 | ||||||||
Changes in assets and liabilities from continuing operations: |
||||||||||||
Accounts receivable |
(46,766 | ) | 42,872 | 420 | ||||||||
Other assets |
(12,652 | ) | (11,253 | ) | (8,829 | ) | ||||||
Accounts payable and accrued items |
38,155 | (23,974 | ) | (7,184 | ) | |||||||
Long-term liabilities |
9,930 | 2,515 | (2,812 | ) | ||||||||
Net cash provided by continuing operations |
103,249 | 112,755 | 96,984 | |||||||||
Cash flows from investing activities |
||||||||||||
Business acquisitions, net of cash acquired |
(24,092 | ) | (413,222 | ) | (2,885 | ) | ||||||
Purchases of carrier operating property |
(73,427 | ) | (70,540 | ) | (109,617 | ) | ||||||
Sales of carrier operating property |
6,765 | 4,481 | 3,617 | |||||||||
Net cash (used) by investing activities |
(90,754 | ) | (479,281 | ) | (108,885 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Sale of accounts receivable |
| 100,000 | | |||||||||
Long-term debt (payments) proceeds |
(17,784 | ) | 325,000 | | ||||||||
Debt issuance costs |
| (10,826 | ) | | ||||||||
Net dividends paid |
(3,863 | ) | (3,871 | ) | (3,874 | ) | ||||||
Transfers from discontinued operation |
18,000 | | | |||||||||
Treasury stock activitynet |
(1,252 | ) | (624 | ) | 20 | |||||||
Net cash (used) provided by financing activities |
(4,899 | ) | 409,679 | (3,854 | ) | |||||||
Effect of exchange rate changes on cash |
(227 | ) | 54 | (103 | ) | |||||||
Net increase (decrease) in cash and cash equivalents from continuing operations |
7,369 | 43,207 | (15,858 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents from discontinued operations |
(10,872 | ) | 2,286 | | ||||||||
Cash and cash equivalents at beginning of year |
110,432 | 64,939 | 80,797 | |||||||||
Cash and cash equivalents at end of year |
$ | 106,929 | $ | 110,432 | $ | 64,939 | ||||||
See accompanying notes.
4
Notes to Consolidated Financial Statements
Roadway Corporation and Subsidiaries
December 31, 2002
1. Nature of Operations and Basis of Presentation
Roadway Corporation (the Company) is a holding company with two primary operating entities, Roadway Express, Inc. and Roadway Next Day Corporation. Approximately 75% of the Companys employees are represented by various labor unions, primarily the International Brotherhood of Teamsters (IBT). The current agreement with the IBT expires on March 31, 2003.
Effective May 30, 2001, holders of common stock of Roadway Express, Inc. became holders of an identical number of shares of common stock of Roadway Corporation, and Roadway Express, Inc. became a wholly owned subsidiary of Roadway Corporation (the Reorganization). The Reorganization was effected by a merger pursuant to Section 251(g) of the Delaware General Corporation Law, which provides for the formation of a holding company structure without a vote of the shareholders of the Company. The assets and liabilities of Roadway Corporation and its subsidiaries were the same on a consolidated basis after the merger as the assets and the liabilities of Roadway Express, Inc. immediately before the merger.
Roadway Express, Inc. and subsidiaries (Roadway Express) provides long-haul, less-than-truckload (LTL) freight services in North America and offers services to more than 100 countries worldwide in a single business segment.
Roadway Next Day Corporation (Roadway Next Day), formerly known as Arnold Industries, Inc. (Arnold), was acquired on November 30, 2001 and provides regional next-day LTL, and truckload (TL) freight services in two business segments, New Penn Motor Express, Inc. (New Penn) and Arnold Transportation Services (ATS), respectively. On December 26, 2002, the Company entered into an agreement to sell ATS, the TL subsidiary of Roadway Next Day. The transaction was completed on January 23, 2003. No significant gain or loss occurred as a result of this transaction. The Company has reported ATS as a discontinued operation for all periods presented and Roadway Next Day now operates in one business segment, regional next-day LTL (see Notes 3 and 4).
2. Accounting Policies
Principles of ConsolidationThe consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash EquivalentsThe Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
5
2. Accounting Policies (continued)
DepreciationDepreciation of carrier operating property is computed by the straight-line method based on the useful lives of the assets. The useful life of structures ranges from 15 to 33 years, and equipment from 3 to 10 years. Major maintenance expenditures that extend the useful life of carrier operating equipment are capitalized and depreciated over 2 to 5 years.
Financial InstrumentsThe carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximate their fair value due to the short-term nature of these instruments.
The carrying value of the Companys senior term loan approximates fair value as these financial instruments bear interest at variable rates based on LIBOR or the prime rate. The $225,000,000 in senior notes had an approximate fair value of $254,421,000 at December 31, 2002, based on quoted market prices.
The Company recognizes all derivative financial instruments as either assets or liabilities at fair value in the balance sheet. The Companys use of derivative financial instruments is limited principally to interest rate swaps on certain trailer leases as part of its overall risk management policy. The interest rate swaps have been designated as cash flow hedges under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. Under the provisions of SFAS No. 133, changes in the fair value of interest rate swaps are recognized in other comprehensive income in the statement of shareholders equity until such time as the hedged items are recognized in net income. Due to the Companys limited use of derivatives, the fair value of these financial instruments, a liability of $326,000 net of tax, has not been separately disclosed on the balance sheet (see Note 12).
Receivable SalesThe Company sells receivables in securitization transactions, and retains an equity interest in the receivables pool, servicing rights, and a cash reserve account. These constitute the retained interests in the securitized receivables. The estimated fair value is based on the present value of the expected cash flows, which approximates face value adjusted for allowances for anticipated losses (see Note 13).
Concentration of Credit RisksThe Company sells services and extends credit based on an evaluation of the customers financial condition, without requiring collateral. Exposure to losses on receivables is principally dependent on each customers financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
6
2. Accounting Policies (continued)
GoodwillGoodwill represents costs in excess of net assets of acquired businesses, which prior to January 1, 2002, was amortized using the straight-line method primarily over a period of 20 years.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the purchase method for all business combinations initiated after June 30, 2001. SFAS No. 141 also clarifies the criteria for recognition of intangible assets separately from goodwill. Under SFAS No. 142, separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. SFAS No. 142 also eliminates the amortization of goodwill and indefinite-lived intangible assets for assets acquired after June 30, 2001, and all other goodwill on January 1, 2002.
As of December 31, 2002, the Company had net unamortized goodwill of $283,910,000, including $269,093,000 of goodwill recorded in connection with the Companys acquisition of Roadway Next Day on November 30, 2001 (see Note 3). Amortization of previously existing goodwill resulting from the Companys earlier acquisitions was ended effective January 1, 2002. Goodwill amortization was zero in 2002, $967,000 in 2001, and $826,000 in 2000. As a result of adopting SFAS No. 142, the elimination of goodwill amortization would have resulted in an increase to net income of $560,000 ($0.03 per sharediluted) in 2001 and $475,000 ($0.03 per sharediluted) in 2000.
The Company completed the required transitional goodwill impairment test under SFAS No. 142 for all reporting units effective June 15, 2002 which did not indicate any impairment. As a result of finalizing the Roadway Next Day purchase price allocation during the fourth quarter, goodwill reflected in the ATS segment preliminary purchase price allocation was reallocated to the New Penn segment. Accordingly, all goodwill resulting from the Roadway Next Day acquisition has been recorded in the New Penn business segment at December 31, 2002. The Company updated its goodwill impairment test at December 31, 2002 due to the reallocation of goodwill previously recorded in the ATS business segment. The performance of the updated impairment test did not indicate any impairment of goodwill. The Company expects to perform the required annual goodwill impairment assessment on a recurring basis at the end of the second quarter each year, or more frequently should any indicators of possible impairment be identified.
Casualty Claims PayableCasualty claims payable represent managements estimates of claims for property damage and public liability and workers compensation. The Company manages casualty claims with assistance of a third party administrator (TPA) along with oversight by a major risk management provider. The Company is self-insured for these claims with retention generally limited to $3,000,000. The liability balances are closely monitored by the Company and its TPA using adjuster evaluations of each claim and a statistical benchmarking database for analysis of reserve accuracy. Expenses resulting from workers compensation claims are included in salaries, wages, and benefits in the accompanying statements of consolidated income.
7
2. Accounting Policies (continued)
Revenue RecognitionThe Company recognizes revenue as earned on the date of freight delivery to the consignee. Related expenses are recognized as incurred.
Stock-Based Compensation In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. The Company has adopted the disclosure provision of SFAS No. 148 as of December 31, 2002.
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, the Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company has granted stock awards that have reduced net income as follows: 2002$3,900,000; 2001$2,115,000; and 2000$1,495,000.
In addition, the Company has issued stock options for which compensation expense is not recognized in the Companys financial statements because the exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant (see Note 11).
8
2. Accounting Policies (continued)
Under SFAS No. 123, compensation expense is measured at the grant date based on the value of the award and is recognized over the vesting period. Had compensation expense been determined under SFAS No. 123 for the Companys stock options, based on the Black-Scholes value at the grant date, the Companys actual net income would have been reduced by $1,059,000, $947,000 and $931,000 in 2002, 2001, and 2000 respectively. Pro forma net income and earnings per share would have been as follows:
2002 |
2001 |
2000 | |||||||
(in thousands, except per share data) | |||||||||
Incomeas reported from: |
|||||||||
Continuing operations |
$ | 35,142 | $ | 30,663 | $ | 56,542 | |||
Discontinued operations |
3,782 | 174 | | ||||||
Net incomeas reported |
$ | 38,924 | $ | 30,837 | $ | 56,542 | |||
Incomepro forma from: |
|||||||||
Continuing operations |
$ | 34,083 | $ | 29,716 | $ | 55,611 | |||
Discontinued operations |
3,782 | 174 | | ||||||
Net incomepro forma |
$ | 37,865 | $ | 29,890 | $ | 55,611 | |||
Basic earnings per share |
|||||||||
As reported from: |
|||||||||
Continuing operations |
$ | 1.90 | $ | 1.66 | $ | 3.03 | |||
Discontinued operations |
0.20 | 0.01 | | ||||||
As reported |
$ | 2.10 | $ | 1.67 | $ | 3.03 | |||
Pro forma from: |
|||||||||
Continuing operations |
$ | 1.84 | $ | 1.61 | $ | 2.98 | |||
Discontinued operations |
0.20 | 0.01 | | ||||||
Pro forma |
$ | 2.04 | $ | 1.62 | $ | 2.98 | |||
Diluted earnings per share |
|||||||||
As reported from: |
|||||||||
Continuing operations |
$ | 1.85 | $ | 1.63 | $ | 2.98 | |||
Discontinued operations |
0.20 | 0.01 | | ||||||
As reported |
$ | 2.05 | $ | 1.64 | $ | 2.98 | |||
Pro forma from: |
|||||||||
Continuing operations |
$ | 1.79 | $ | 1.58 | $ | 2.93 | |||
Discontinued operations |
0.20 | 0.01 | | ||||||
Pro forma |
$ | 1.99 | $ | 1.59 | $ | 2.93 | |||
9
2. Accounting Policies (continued)
Foreign Currency TranslationIncome statement items are translated at average currency exchange rates. Transaction gains and losses are included in determining net income. All balance sheet accounts of foreign operations are translated at the current exchange rate as of the end of the period. The resulting translation adjustment is recorded as a separate component of shareholders equity.
Use of Estimates in the Financial StatementsThe preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from these estimates.
Impairment of Long-Lived AssetsIn the event that facts and circumstances indicate that the carrying value of intangibles and long-lived assets or other assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flow associated with the asset would be compared to the assets carrying amount to determine if a write-down is required. No impairment charge was required for any period presented.
ReclassificationsCertain items in the 2001 financial statements have been reclassified to conform to the 2002 presentation.
Discontinued Operations In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes a single accounting model to be used for the impairment or disposal of long-lived assets.
Effective January 1, 2002, the Company adopted SFAS No. 144. The Company has reported the operations of ATS as a discontinued operation in the accompanying financial statements and, unless otherwise stated, the notes to the financial statements for all years presented exclude the amounts related to this discontinued operation.
10
2. Accounting Policies (continued)
Recently Issued Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 is effective for the Companys financial statements beginning January 1, 2003. The adoption of SFAS No. 145 is not expected to have a material effect on the Companys financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 will be effective for the Company for disposal activities initiated after December 31, 2002. The adoption of this standard is not expected to have a material effect on the Companys financial position, results of operations or cash flows.
3. Business Acquisition
On November 30, 2001, the Company acquired Arnold Industries, Inc. (Arnold), subsequently named Roadway Next Day Corporation, for cash consideration of $559,839,000, including direct acquisition costs. Included in the acquired assets of Arnold was $50,763,000 in cash, which was used to partially finance the acquisition. Also on November 30, 2001, concurrent with the acquisition of Arnold, the Company sold Arnolds logistics business (ARLO) to members of the ARLO management team for $105,010,000 in cash. The net acquisition consideration of $427,160,000, which included $23,094,000 in income taxes paid by the Company primarily as a result of the sale of ARLO, was financed with borrowings under a new credit facility, proceeds from an accounts receivable securitization, the issuance of $225,000,000 in senior notes, and available cash.
Roadway Next Day operates in the motor carrier industry, principally in the eastern United States, and provides next-day LTL and TL services. Roadway Next Days trucking activities are conducted by its subsidiaries, New Penn and ATS. New Penn is a leading regional next-day ground LTL carrier operating primarily in New England and the Middle Atlantic states. ATS operates as an inter-regional irregular route and dedicated TL carrier, conducting operations east of the Mississippi and in the southwestern United States.
The acquisition of Roadway Next Day was accounted for as a purchase business combination and accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date. The excess of the purchase price paid over the fair value of the net assets acquired, totaling approximately $269,093,000, has been recorded as goodwill. The purchase price allocation reflected in these financial statements for the acquisition has been finalized and is based in part on the results of an independent appraisal of the assets acquired and liabilities assumed. Upon the finalization of the valuation process, $5,630,000 of the amount initially classified as goodwill in the financial statements was reclassified to other tangible and identifiable intangible assets acquired, based on their estimated fair values at the date of the acquisition.
11
3. Business Acquisition (continued)
The following condensed balance sheet represents the adjusted amounts assigned to each major asset and liability caption of Roadway Next Day at November 30, 2001, including ATS and after the sale of ARLO:
(in thousands) | |||
Current assets |
$ | 111,767 | |
Carrier operating property |
162,754 | ||
Goodwill |
269,093 | ||
Other assets |
15,104 | ||
Total assets |
$ | 558,718 | |
Current liabilities |
$ | 37,161 | |
Long-term liabilities |
43,634 | ||
Shareholders equity |
477,923 | ||
Total liabilities and shareholders equity |
$ | 558,718 | |
4. Discontinued Operations
On December 26, 2002, the Company entered into an agreement to sell ATS to a management group led by the units president and a private equity firm, for approximately $55,000,000 in cash. The ATS business segment was acquired as part of the Companys purchase of Roadway Next Day in November 2001, but did not fit the Companys strategic focus of being a LTL carrier. The transaction was completed on January 23, 2003. The Company did not recognize a significant gain or loss as a result of this transaction.
The Company has reported the operations of ATS as a discontinued operation in the accompanying financial statements and, unless otherwise stated, the notes to the financial statements for all years presented exclude the amounts related to this discontinued operation.
The following table presents revenue and income from the discontinued operation for the years ended December 31, 2002 and 2001. The year ended December 31, 2001 includes only one month of operations since ATS was acquired on November 30, 2001.
2002 |
2001 | |||||
(in thousands) | ||||||
Revenue |
$ | 171,133 | $ | 12,857 | ||
Pre-tax income from discontinued operations |
6,251 | 290 | ||||
Income tax expense |
2,469 | 116 | ||||
Income from discontinued operations |
$ | 3,782 | $ | 174 | ||
12
4. Discontinued Operations (continued)
Assets and liabilities of the discontinued operation were as follows:
2002 |
2001 | |||||
(in thousands) | ||||||
Assets |
||||||
Current assets |
$ | 22,025 | $ | 37,623 | ||
Net carrier operating property |
64,065 | 85,118 | ||||
Other assets |
1,341 | 12,195 | ||||
Total assets |
$ | 87,431 | $ | 134,936 | ||
Liabilities |
||||||
Current liabilities |
$ | 8,104 | $ | 42,397 | ||
Long-term liabilities |
24,303 | 24,956 | ||||
Total liabilities |
$ | 32,407 | $ | 67,353 | ||
Net assets of discontinued operations |
$ | 55,024 | $ | 67,583 | ||
5. Segment Information
The Company provides freight services primarily in two business segments: Roadway Express and New Penn. Prior to the acquisition of Roadway Next Day in November 2001, the Company operated only in the Roadway Express segment. The Roadway Express segment provides long-haul LTL freight services in North America and offers services to more than 100 countries worldwide. The New Penn segment provides regional, next-day ground LTL freight service operating primarily in New England and the Middle Atlantic states.
The Companys reportable segments are identified based on differences in products, services, and management structure. The measurement basis of segment profit or loss is operating income. Business segment assets consist primarily of customer receivables, net carrier operating property, and goodwill.
13
5. Segment Information (continued)
The following tables present information about reported segments for the years ended December 31, 2002 and 2001. The year ended December 31, 2001 includes only one month of operations for New Penn, since New Penn was acquired on November 30, 2001.
For the year ended December 31, 2002 |
||||||||||||
Roadway Express |
New Penn |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 2,797,582 | $ | 213,194 | $ | 3,010,776 | ||||||
Operating expenses: |
||||||||||||
Salaries, wages & benefits |
1,783,872 | 140,248 | 1,924,120 | |||||||||
Operating supplies |
462,838 | 28,415 | 491,253 | |||||||||
Purchased transportation |
287,614 | 1,998 | 289,612 | |||||||||
Operating taxes and licenses |
70,451 | 6,061 | 76,512 | |||||||||
Insurance and claims |
59,286 | 3,470 | 62,756 | |||||||||
Depreciation |
66,510 | 8,815 | 75,325 | |||||||||
Net (gain) loss on sale of operating property |
(654 | ) | 4 | (650 | ) | |||||||
Total operating expenses |
2,729,917 | 189,011 | 2,918,928 | |||||||||
Operating income |
$ | 67,665 | $ | 24,183 | $ | 91,848 | ||||||
Total assets |
$ | 803,563 | $ | 408,021 | $ | 1,211,584 | ||||||
Goodwill |
$ | 14,817 | $ | 269,093 | $ | 283,910 | ||||||
For the year ended December 31, 2001 |
||||||||||||
Roadway Express |
New Penn |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 2,764,767 | $ | 14,124 | $ | 2,778,891 | ||||||
Operating expenses: |
||||||||||||
Salaries, wages & benefits |
1,768,744 | 9,654 | 1,778,398 | |||||||||
Operating supplies |
475,313 | 1,870 | 477,183 | |||||||||
Purchased transportation |
271,847 | 117 | 271,964 | |||||||||
Operating taxes and licenses |
70,955 | 207 | 71,162 | |||||||||
Insurance and claims |
46,805 | 967 | 47,772 | |||||||||
Depreciation |
69,178 | 399 | 69,577 | |||||||||
Net loss (gain) on sale of operating property |
460 | (26 | ) | 434 | ||||||||
Total operating expenses |
2,703,302 | 13,188 | 2,716,490 | |||||||||
Operating income |
$ | 61,465 | $ | 936 | $ | 62,401 | ||||||
Total assets |
$ | 711,387 | $ | 398,820 | $ | 1,110,207 | ||||||
Goodwill |
$ | 14,721 | $ | 242,180 | $ | 256,901 |
14
5. Segment Information (continued)
Reconciliation of segment operating income from continuing operations to consolidated income from continuing operations before taxes:
2002 |
2001 |
|||||||
(in thousands) | ||||||||
Segment operating income from continuing operations |
$ | 91,848 | $ | 62,401 | ||||
Unallocated corporate (expense) |
| (3,706 | ) | |||||
Interest (expense) |
(23,268 | ) | (2,751 | ) | ||||
Other (expense), net |
(6,543 | ) | (3,067 | ) | ||||
Consolidated income from continuing operations before income taxes |
$ | 62,037 | $ | 52,877 | ||||
Reconciliation of total segment assets to total consolidated assets:
2002 |
2001 |
|||||||
(in thousands) | ||||||||
Total segment assets |
$ | 1,211,584 | $ | 1,110,207 | ||||
Assets of discontinued operations |
87,431 | 134,936 | ||||||
Unallocated corporate assets |
41,351 | 78,167 | ||||||
Elimination of intercompany balances |
(4,493 | ) | (20,461 | ) | ||||
Consolidated assets |
$ | 1,335,873 | $ | 1,302,849 | ||||
15
6. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
2002 |
2001 |
2000 | |||||||
(in thousands, except per share data) | |||||||||
Income from: |
|||||||||
Continuing operations |
$ | 35,142 | $ | 30,663 | $ | 56,542 | |||
Discontinued operations |
3,782 | 174 | | ||||||
Net income |
$ | 38,924 | $ | 30,837 | $ | 56,542 | |||
Weighted-average shares for basic earnings per share |
18,507 | 18,490 | 18,662 | ||||||
Incentive stock plans |
492 | 318 | 330 | ||||||
Weighted-average shares for diluted earnings per share |
18,999 | 18,808 | 18,992 | ||||||
Basic earnings per share from: |
|||||||||
Continuing operations |
$ | 1.90 | $ | 1.66 | $ | 3.03 | |||
Discontinued operations |
0.20 | 0.01 | | ||||||
Basic earnings per share |
$ | 2.10 | $ | 1.67 | $ | 3.03 | |||
Diluted earnings per share from: |
|||||||||
Continuing operations |
$ | 1.85 | $ | 1.63 | $ | 2.98 | |||
Discontinued operations |
0.20 | 0.01 | | ||||||
Diluted earnings per share |
$ | 2.05 | $ | 1.64 | $ | 2.98 | |||
16
7. Carrier Operating Property
Carrier operating properties consist of the following:
2002 |
2001 | |||||
(in thousands) | ||||||
Land |
$ | 109,564 | $ | 111,173 | ||
Structures |
459,594 | 442,896 | ||||
Revenue equipment |
687,467 | 735,474 | ||||
Other operating property |
259,023 | 245,543 | ||||
Carrier operating property, at cost |
1,515,648 | 1,535,086 | ||||
Less allowance for depreciation |
1,006,465 | 1,012,279 | ||||
Net carrier operating property |
$ | 509,183 | $ | 522,807 | ||
8. Accounts Payable
Items classified as accounts payable consist of the following:
2002 |
2001 | |||||
(in thousands) | ||||||
Trade and other payables |
$ | 76,063 | $ | 66,899 | ||
Drafts outstanding |
18,456 | 25,785 | ||||
Income taxes payable |
36,925 | 30,525 | ||||
Taxes, other than income |
29,688 | 27,502 | ||||
Multi-employer health, welfare, and pension plans |
32,369 | 29,118 | ||||
Accounts payable |
$ | 193,501 | $ | 179,829 | ||
17
9. Income Taxes
The provision (benefit) for income taxes consists of the following:
2002 |
2001 |
2000 |
||||||||||
(in thousands) | ||||||||||||
Current taxes: |
||||||||||||
Federal |
$ | 29,557 | $ | 19,655 | $ | 41,014 | ||||||
State |
7,349 | 3,029 | 6,674 | |||||||||
Foreign |
4,776 | (766 | ) | 1,426 | ||||||||
41,682 | 21,918 | 49,114 | ||||||||||
Deferred taxes: |
||||||||||||
Federal |
(13,205 | ) | (1,012 | ) | (6,009 | ) | ||||||
State |
(1,517 | ) | (56 | ) | (580 | ) | ||||||
Foreign |
(65 | ) | 1,364 | (783 | ) | |||||||
(14,787 | ) | 296 | (7,372 | ) | ||||||||
Provision for income taxes |
$ | 26,895 | $ | 22,214 | $ | 41,742 | ||||||
In addition to the 2002 provision for income taxes of $26,895,000, income tax benefits of $451,000 were allocated directly to shareholders equity related to the Companys restricted stock awards. Income tax payments were $38,631,000 in 2002, $25,341,000 in 2001, and $54,245,000 in 2000.
Income (loss) before income taxes consists of the following:
2002 |
2001 |
2000 |
||||||||
(in thousands) | ||||||||||
Domestic |
$ | 50,279 | $ | 50,445 | $ | 104,097 | ||||
Foreign |
11,758 | 2,432 | (5,813 | ) | ||||||
Income before income taxes |
$ | 62,037 | $ | 52,877 | 98,284 | |||||
18
9. Income Taxes (continued)
Significant components of the Companys deferred taxes are as follows:
2002 |
2001 |
|||||||
(in thousands) | ||||||||
Deferred tax assets: |
||||||||
Freight and casualty claims |
$ | 40,934 | $ | 41,028 | ||||
Retirement benefit liabilities |
51,897 | 46,466 | ||||||
Accrued employee benefits |
38,813 | 32,453 | ||||||
Other |
10,274 | 8,321 | ||||||
Valuation allowance |
(2,229 | ) | (2,387 | ) | ||||
Total deferred tax assets |
139,689 | 125,881 | ||||||
Deferred tax liabilities: |
||||||||
Depreciation |
53,029 | 52,165 | ||||||
Multi-employer pension plans |
33,420 | 35,313 | ||||||
Other |
2,152 | 2,102 | ||||||
Total deferred tax liabilities |
88,601 | 89,580 | ||||||
Net deferred tax assets |
$ | 51,088 | $ | 36,301 | ||||
At December 31, 2002, the Company had approximately $6,418,000 of foreign operating loss carry forwards, which have expiration dates ranging from 2008 to 2011. For financial reporting purposes, a valuation allowance of $2,229,000 has been recognized to offset the deferred tax asset relating to certain foreign operating loss carry forwards.
19
9. Income Taxes (continued)
The effective tax rate differs from the federal statutory rate as set forth in the following reconciliation:
2002 |
2001 |
2000 |
|||||||
Federal statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | |||
State income taxes, net of federal tax benefit |
6.1 | 3.7 | 4.0 | ||||||
Non-deductible operating costs |
3.5 | 3.3 | 2.1 | ||||||
Impact of foreign operations |
0.5 | 0.3 | 1.6 | ||||||
Other, net |
(1.7 | ) | (0.3 | ) | (0.2 | ) | |||
Effective tax rate |
43.4 | % | 42.0 | % | 42.5 | % | |||
10. Employee Benefit Plans
Multi-employer Plans
The Company charged to operations $174,007,000 in 2002, $165,331,000 in 2001, and $174,253,000 in 2000 for contributions to multi-employer pension plans for employees subject to labor contracts. The Company also charged to operations $178,955,000 in 2002, $163,775,000 in 2001, and $165,018,000 in 2000 for contributions to multi-employer plans that provide health and welfare benefits to employees and certain retirees who are or were subject to labor contracts. These amounts were determined in accordance with provisions of industry labor contracts. Under provisions of the Multi-employer Pension Plan Amendment Act of 1980, total or partial withdrawal from a plan would result in an obligation to fund a portion of the plans unfunded vested liability. Management has no intention of changing operations so as to subject the Company to any material obligation.
20
10. Employee Benefit Plans (continued)
Retirement Plans
The following tables set forth the change in benefit obligation, change in plan assets, funded status, and amounts recognized in the consolidated balance sheets for the defined benefit pension and postretirement health care benefit plans as of December 31, 2002 and 2001:
Pension Benefits |
Health Care Benefits |
|||||||||||||||
2002 |
2001 |
2002 |
2001 |
|||||||||||||
(in thousands) | ||||||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation at beginning of year |
$ | 330,790 | $ | 293,100 | $ | 41,721 | $ | 42,713 | ||||||||
Service cost |
17,520 | 17,496 | 1,741 | 1,665 | ||||||||||||
Interest cost |
24,183 | 22,568 | 3,156 | 2,881 | ||||||||||||
Actuarial losses (gains) |
32,295 | 15,042 | 5,024 | (2,911 | ) | |||||||||||
Benefits paid |
(18,224 | ) | (17,416 | ) | (2,482 | ) | (2,627 | ) | ||||||||
Benefit obligation at end of year |
386,564 | 330,790 | 49,160 | 41,721 | ||||||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets at beginning of year |
308,229 | 362,781 | | | ||||||||||||
Actual return on plan assets |
(48,681 | ) | (37,136 | ) | | | ||||||||||
Benefits paid |
(18,224 | ) | (17,416 | ) | | | ||||||||||
Fair value of plan assets at end of year |
241,324 | 308,229 | | | ||||||||||||
Funded status |
||||||||||||||||
Plan assets less than projected benefit obligation |
145,240 | 22,561 | 49,160 | 41,721 | ||||||||||||
Unamortized: |
||||||||||||||||
Net actuarial (loss) gain |
(26,968 | ) | 85,816 | (10,281 | ) | 6,492 | ||||||||||
Net asset at transition |
8,372 | 9,767 | | | ||||||||||||
Prior service (cost) benefit |
(43,725 | ) | (48,136 | ) | 13,255 | 2,799 | ||||||||||
Accrued benefit cost |
$ | 82,919 | $ | 70,008 | $ | 52,134 | $ | 51,012 | ||||||||
Plan assets are primarily invested in listed stocks, bonds, and cash equivalents.
21
10. Employee Benefit Plans (continued)
The following table summarizes the assumptions used by the consulting actuary, and the related benefit cost information:
Pension Benefits |
Health Care Benefits |
|||||||||||||||||||||||
2002 |
2001 |
2000 |
2002 |
2001 |
2000 |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Weighted-average assumptions |
||||||||||||||||||||||||
Discount rate |
6.75 | % | 7.50 | % | 7.50 | % | 6.75 | % | 7.50 | % | 7.50 | % | ||||||||||||
Future compensation |
3.25 | % | 3.25 | % | 3.25 | % | | | | |||||||||||||||
Expected long-term return on plan assets |
9.50 | % | 9.50 | % | 9.50 | % | | | | |||||||||||||||
Components of net periodic benefit cost |
||||||||||||||||||||||||
Service cost |
$ | 17,520 | $ | 17,496 | $ | 15,458 | $ | 1,741 | $ | 1,665 | $ | 1,755 | ||||||||||||
Interest cost |
24,183 | 22,568 | 19,893 | 3,156 | 2,881 | 2,951 | ||||||||||||||||||
Expected return on plan assets |
(28,574 | ) | (33,841 | ) | (32,404 | ) | | | | |||||||||||||||
Amortization of: |
||||||||||||||||||||||||
Prior service cost (benefit) |
5,245 | 5,230 | 5,229 | (1,477 | ) | (305 | ) | (169 | ) | |||||||||||||||
Net asset gain at transition |
(1,395 | ) | (1,396 | ) | (1,395 | ) | | | | |||||||||||||||
Unrecognized gain |
(3,940 | ) | (8,893 | ) | (10,584 | ) | 184 | (177 | ) | (46 | ) | |||||||||||||
Net periodic benefit cost (income) |
$ | 13,039 | $ | 1,164 | $ | (3,803 | ) | $ | 3,604 | $ | 4,064 | $ | 4,491 | |||||||||||
The Company has adjusted the expected long-term return on plan assets from 9.50% to 8.50% effective January 1, 2003.
For measurement purposes, the Company assumed a weighted-average annual rate of increase in the per capita cost of health care benefits (health care cost trend rate) of 11.5% for 2002 declining gradually to 5.0% in 2010 and thereafter.
A decrease in the assumed health care cost trend rate has a significant effect on the amounts reported. For example, a one percentage point decrease in the assumed health care cost trend rate would decrease the accumulated postretirement benefit obligation by $5,392,000 and the service and interest cost components by $582,000 as of December 31, 2002. A one percentage point increase in the assumed health care cost trend rate would have no effect on the accumulated postretirement benefit obligation or the service and interest cost components. The Companys policy regarding the management of health care costs passes the increases beyond a fixed threshold to the plan participants.
The Company charged to operations $10,321,000 in 2002, $10,964,000 in 2001, and $10,395,000 in 2000 relating to its defined contribution 401(k) plans. These plans cover employees not subject to labor contracts. Annual contributions are related to the level of voluntary employee participation.
22
11. Stock Plans
Stock Granted Under the Management Incentive Stock Plan and Equity Ownership Plan
The Companys Management Incentive Stock Plan and Equity Ownership Plan (the Stock Plans) authorize the granting of common stock at the discretion of the Board of Directors to officers and certain key employees of the Company. The Board approved grants of 248,000 shares in 2002, 263,000 shares in 2001, and 189,000 shares in 2000. These grants are recorded as the unearned portion of restricted stock awards. The grants, originally recorded at market price, are amortized to compensation expense over the period for which the stock is restricted.
Compensation expense relating to the Stock Plans amounted to $6,890,000 in 2002, $3,647,000 in 2001, and $2,600,000 in 2000.
Employee Stock Purchase Plan
Under the Companys Employees Stock Purchase Plan, all full-time eligible employees may purchase shares of the Companys common stock with up to 10% of their respective compensation through payroll deductions. The purchase price under the plan is 85% of the fair market value of the Companys common stock. Under this plan, employees purchased 149,000 shares in 2002, 171,000 shares in 2001, and 198,000 shares in 2000.
Union Stock Plan
The Companys Union Stock Plan provides stock awards to employees subject to labor contracts who meet the eligibility and performance requirements of providing a safe, reliably staffed, and injury-free work environment. The Company allocated 50,000 shares in 2002, 20,000 shares in 2001, and 100,000 shares in 2000 for grants under this plan.
23
11. Stock Plans (continued)
Options Granted Under the Equity Ownership Plan, Non employee Directors Equity Ownership Plan and Nonemployee Directors Stock Option Plan
Under the Equity Ownership Plan, the Board is authorized to award officers and key employees with various types of stock-based compensation, including stock options. Stock options vest over a period of four years from the date of grant, are exercisable at the rate of 25% each year, and expire at the end of ten years. The number of shares of common stock that may be issued or transferred under the plan may not exceed 2,000,000. No options were granted under this plan in 2002, 2001 or 2000.
Under the Nonemployee Directors Equity Ownership Plan, the Compensation Committee is authorized to make awards of stock options and restricted shares. Stock options vest one year from date of grant. The number of shares of common stock that may be issued under the plan may not exceed 100,000.
Under the Nonemployee Directors Stock Option Plan, directors can elect to invest all or a portion of their retainers in stock options. These stock options vest one year from the date of grant and expire at the end of ten years. The number of options issued under this plan may not exceed 100,000.
The following table summarizes all stock option activity:
2002 |
2001 |
2000 | |||||||||||||||||||
Number of Stock |
Weighted- Average Exercise Price |
Number of Stock |
Weighted- Average Exercise Price |
Number of Stock |
Weighted- Average Exercise Price | ||||||||||||||||
Outstanding January 1 |
566,518 | $ | 20.47 | 722,539 | $ | 20.47 | 725,049 | $ | 20.46 | ||||||||||||
Exercised |
(109,063 | ) | 20.50 | (146,226 | ) | 20.50 | | | |||||||||||||
Granted |
37,555 | 30.98 | 5,955 | 21.19 | 3,490 | 21.75 | |||||||||||||||
Forfeited or expired |
(6,000 | ) | 20.50 | (15,750 | ) | 20.50 | (6,000 | ) | 20.50 | ||||||||||||
Outstanding December 31 |
489,010 | $ | 21.27 | 566,518 | $ | 20.47 | 722,539 | $ | 20.47 | ||||||||||||
Exercisable at year-end |
287,447 | $ | 20.44 | 194,538 | $ | 20.38 | 185,016 | $ | 20.35 | ||||||||||||
Weighted-average fair value of options granted during the year |
$ | 12.89 | $ | 8.76 | $ | 11.09 |
24
11. Stock Plans (continued)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table shows the weighted-average valuation assumptions used:
2002 |
2001 |
2000 |
|||||||
Expected life |
5.0 years | 5.0 years | 7.0 years | ||||||
Risk-free interest rate |
4.4 | % | 5.0 | % | 6.4 | % | |||
Volatility |
43.4 | % | 43.0 | % | 45.8 | % | |||
Dividend yield |
0.7 | % | 0.9 | % | 1.1 | % |
The following table summarizes information about stock options outstanding as of December 31, 2002:
Range of Exercise Prices |
Options Outstanding |
Options Exercisable | ||||||||||
Number Outstanding |
Weighted- Average Remaining Contractual Life |
Weighted- Average Exercise Price |
Number Exercisable |
Weighted- Average Exercise Price | ||||||||
$ 1015 |
7,896 | | $ | 14.44 | 7,896 | $ | 14.44 | |||||
2025 |
443,559 | 0.83 years | 20.57 | 279,551 | 20.60 | |||||||
3040 |
37,555 | 0.41 years | 30.98 | | | |||||||
489,010 | 0.79 years | $ | 21.27 | 287,447 | $ | 20.44 | ||||||
12. Leases
The Company leases certain terminals and revenue equipment under noncancellable operating leases requiring minimum future rentals aggregating $139,520,000 payable as follows: 2003$48,639,000; 2004$32,633,000; 2005$22,541,000; 2006$13,211,000; 2007$9,262,000 and thereafter $13,234,000. Rental expense for operating leases was $55,199,000, $50,761,000, and $45,445,000, for 2002, 2001, and 2000, respectively.
The Company has interest rate swap agreements with major commercial banks to fix the interest rate of its trailer leases from variable interest rates principally based on LIBOR. The value of the leases upon which the payments are based was not changed. The agreements, which expire in 2003 and 2004, fix the Companys interest costs at rates varying from 5.62% to 6.39% on leases with a notional amount of $14,400,000.
The fair value of the Companys interest rate swaps at December 31, 2002 is a liability of approximately $326,000, net of income taxes, and has been determined using proprietary financial models developed by the lending institutions which are counterparties to the swap arrangements. As a result of declining interest rates throughout 2002, the Company recognized incremental interest expense of approximately $734,000, which is included in interest expense in the accompanying financial statements. The ineffective portions of the Companys interest rate swap agreements were not material.
25
13. Sale of Accounts Receivable
Accounts receivable consist of the following:
2002 |
2001 |
|||||||
(in thousands) | ||||||||
Accounts receivable |
$ | 21,031 | $ | 25,241 | ||||
Retained interest in securitized accounts receivable |
217,617 | 165,396 | ||||||
Allowance for doubtful accounts |
(8,432 | ) | (8,174 | ) | ||||
$ | 230,216 | $ | 182,463 | |||||
On November 21, 2001, Roadway Express entered into an accounts receivable securitization agreement which matures in 2004, to finance up to $200,000,000 (total commitment) of its domestic accounts receivable. Under this arrangement, undivided interests in Roadway Express domestic accounts receivable are sold through a special purpose entity (SPE), a wholly owned subsidiary of the Company, without recourse, to a financial conduit. Undivided interests in the accounts receivable pool aggregating zero in 2002 and $100,000,000 in 2001 were sold under this arrangement. The proceeds were used to partially fund the acquisition of Roadway Next Day and are reported as financing cash flows in the Statement of Consolidated Cash Flows.
The accounts receivable are sold at a discount from the face amount to pay investor yield (LIBOR) on the undivided interests sold to the conduit, for utilization fees (0.25% of the undivided interest sold), and for program fees (0.50% of the total commitment). The discount from the face amount for accounts receivable sold by Roadway Express in 2002 and 2001 aggregated $6,384,000 and $585,000 respectively and was directly offset by a gain on allowance for accounts receivable discounts upon the consolidation of the SPE. The interest expense recognized in conjunction with the sale of accounts receivable was $3,088,000 in 2002 and $317,000 in 2001.
The arrangement provides that new Roadway Express accounts receivable are immediately sold to the SPE. The Company, through its SPE, retains the risk of credit loss on the receivables and, accordingly the full amount of the allowance for doubtful accounts has been retained on the Consolidated Balance Sheet. The conduit has collection rights to recover payments from the receivables in the designated pool and Roadway Express retains collection and administrative responsibilities for the undivided interests in the pool.
The following transactions occurred between Roadway Express and the SPE in the years 2002 and 2001, respectively: proceeds from the accounts receivable sales, $2,650,810,000, and $493,673,000; servicing fees received, $1,529,000, and $150,000; payments received on investment in accounts receivable, $2,598,576,000, and $328,696,000.
26
14. Financing Arrangements
The Companys consolidated debt consists of the following:
2002 |
2001 |
|||||||
(in thousands) | ||||||||
Revolving credit facilities |
$ | | $ | | ||||
Senior term loan |
82,216 | 100,000 | ||||||
8.25% senior notes due 2008 |
225,000 | 225,000 | ||||||
Sub-total |
307,216 | 325,000 | ||||||
Less current portion |
(33,703 | ) | (18,000 | ) | ||||
Long-term debt |
$ | 273,513 | $ | 307,000 | ||||
At December 31, 2002, the Company has in place a senior revolving credit facility with a sublimit for letters of credit that expires November 30, 2006. The original amount of the senior revolving credit facility was $150,000,000 with a $100,000,000 sublimit for letters of credit, which was amended on August 6, 2002. The result of the amendment increased the senior revolving credit facility to $215,000,000 and increased the sublimit for letters of credit to $165,000,000. Pricing under the revolving credit facility is at a fluctuating rate based on the alternate base rate as determined by Credit Suisse First Boston (CSFB) or LIBOR, plus an additional margin of 0.50% and 1.50%, respectively. In addition, there is a commitment fee of 0.40% on undrawn amounts. As of December 31, 2002, there were no amounts outstanding under the revolving credit facility, but availability had been reduced by $112,162,000 as a result of the issuance of letters of credit, primarily related to casualty claims.
The credit facility also includes a $175,000,000 senior term loan, which was drawn in full to partially fund the acquisition of Arnold. After-tax proceeds of $75,000,000 from the sale of ARLO were used to pay down borrowings on this facility in 2001. Pricing under the term loan is at a fluctuating rate based on the alternate base rate as determined by CSFB or LIBOR, plus an additional margin of 0.50% and 1.50%, respectively. As of December 31, 2002, $82,216,000 was outstanding under the term loan facility accruing interest at a rate of LIBOR plus 1.50% (2.91% effective rate) with future quarterly installments ranging from $2,426,000 in 2003 to $4,851,000 in 2006.
Also in connection with the acquisition of Roadway Next Day on November 30, 2001, the Company issued $225,000,000 of 8.25% senior notes due December 1, 2008. Interest is due semi-annually on June 1st and December 1st.
Under certain conditions, mandatory prepayments may be required under the credit facility and the senior notes. A mandatory prepayment of $8,000,000 was made on the senior term loan in 2002, related to the sale of ARLO. Additionally, a mandatory prepayment of $24,000,000 was made on the senior term loan in January 2003 upon the completion of the sale of ATS, and has been included in the current portion of long-term debt. Aggregate maturities of long-term debt for the next four years are: 2003 - $33,703,000; 2004 - $12,937,000; 2005 - $16,171,000; and 2006 - $19,405,000, at such time the senior term loan balance will be zero.
27
14. Financing Arrangements (continued)
The credit facility borrowings and the senior notes rank equally and are secured by a first-priority perfected lien on all of the capital stock of the Companys direct subsidiaries and are also supported by guarantees provided by all of the Companys current material subsidiaries and all future material subsidiaries.
In addition, the Companys Canadian subsidiary has $10,000,000 available for borrowing under a secured revolving line of credit and bankers acceptances. Borrowings are payable upon demand and bear interest at either the banks prime lending rate, U.S. dollar base rate in Canada, or LIBOR plus 1.50% for periods up to 180 days. At December 31, 2002, no amounts were outstanding on this facility.
The financing arrangements include covenants that require the Company to comply with certain financial ratios, including leverage and fixed-charge coverage ratios, and maintenance of a minimum level of tangible net worth. Interest expense, which approximates interest paid, amounted to $23,268,000 in 2002, $2,751,000 in 2001, and $341,000 in 2000.
15. Contingencies
The Company has received notices from the Environmental Protection Agency (EPA) that it has been identified as a potentially responsible party (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (Superfund) at certain hazardous waste sites. Such designations are made regardless of the Companys limited involvement at each site. The claims for remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share. The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Based on its investigations, the Company believes that its obligation with regard to these sites is not significant, although there can be no assurances in this regard.
The Companys former parent is currently under examination by the Internal Revenue Service for tax years 1994 and 1995, years prior to the spin-off of the Company. The IRS has proposed substantial adjustments for these tax years for multi-employer pension plan deductions. The IRS is challenging the timing, not the validity of these deductions. The Company is unable to predict the ultimate outcome of this matter; however, its former parent intends to vigorously contest these proposed adjustments.
Under a tax sharing agreement entered into by the Company and its former parent at the time of the spin-off, the Company is obligated to reimburse the former parent for any additional taxes and interest that relate to the Companys business prior to the spin-off. The amount and timing of such payments is dependent on the ultimate resolution of the former parents disputes with the IRS and the determination of the nature and extent of the obligations under the tax sharing agreement. On January 16, 2003, the Company made a $14,000,000 payment to its former parent under the tax sharing agreement for taxes and interest related to certain of the proposed adjustments for tax years 1994 and 1995.
28
15. Contingencies (continued)
We estimate the possible range of the remaining payments that may be due to the former parent to be approximately $0 to $16,000,000 in additional taxes and $0 to $9,000,000 in related interest, net of tax benefit. The Company has established certain reserves with respect to these proposed adjustments. There can be no assurance, however, that the amount or timing of any liability of the Company to the former parent will not have a material adverse effect on the Companys results of operations and financial position.
Various legal proceedings arising from the normal conduct of business are pending but, in the opinion of management, the ultimate disposition of these matters will have no material adverse effect on the financial position or results of operations of the Company.
16. Guarantor and Non-Guarantor Subsidiaries
The following condensed consolidating financial statements set forth the Companys balance sheets as of December 31, 2002 and 2001 and the statements of income and statements of cash flows for the years ended December 31, 2002, 2001, and 2000. In the following schedules Parent Company refers to Roadway Corporation, Guarantor Subsidiaries refers to non-minor domestic subsidiaries, and Non-guarantor subsidiaries refers to foreign and minor domestic subsidiaries and Eliminations represent the adjustments necessary to (a) eliminate intercompany transactions and (b) eliminate the investments in the Companys subsidiaries.
29
16. Guarantor and Non-Guarantor Subsidiaries (continued)
Condensed Consolidating Balance Sheets
December 31, 2002
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated | |||||||||||||
(in millions) | |||||||||||||||||
Cash and cash equivalents |
$ | 12 | $ | 88 | $ | 7 | $ | | $ | 107 | |||||||
Accounts receivable, including retained interest in securitized receivables, net |
| 216 | 14 | | 230 | ||||||||||||
Due from affiliates |
11 | 330 | 2 | (343 | ) | | |||||||||||
Prepaid expenses and supplies |
| 17 | | | 17 | ||||||||||||
Deferred income taxes |
| 22 | | | 22 | ||||||||||||
Assets of discontinued operations |
| 87 | | | 87 | ||||||||||||
Total current assets |
23 | 760 | 23 | (343 | ) | 463 | |||||||||||
Carrier operating property, at cost |
| 1,488 | 28 | | 1,516 | ||||||||||||
Less allowance for depreciation |
| 992 | 15 | | 1,007 | ||||||||||||
Net carrier operating property |
| 496 | 13 | | 509 | ||||||||||||
Goodwill, net |
| 269 | 15 | | 284 | ||||||||||||
Investment in subsidiaries |
656 | 4 | | (660 | ) | | |||||||||||
Deferred income taxes |
4 | 36 | | | 40 | ||||||||||||
Long-term assets |
10 | 30 | | | 40 | ||||||||||||
Total assets |
$ | 693 | $ | 1,595 | $ | 51 | $ | (1,003 | ) | $ | 1,336 | ||||||
Accounts payable |
$ | (12 | ) | $ | 195 | $ | 11 | $ | | $ | 194 | ||||||
Due to affiliates |
310 | 2 | 31 | (343 | ) | | |||||||||||
Salaries and wages |
2 | 145 | 4 | | 151 | ||||||||||||
Current portion of long-term debt |
| 34 | | | 34 | ||||||||||||
Freight and casualty claims payable |
| 49 | 1 | | 50 | ||||||||||||
Liabilities of discontinued operations |
| 32 | | | 32 | ||||||||||||
Total current liabilities |
300 | 457 | 47 | (343 | ) | 461 | |||||||||||
Casualty claims and other |
5 | 62 | | | 67 | ||||||||||||
Deferred income taxes |
| 11 | | | 11 | ||||||||||||
Long-term debt |
| 274 | | | 274 | ||||||||||||
Accrued pension and retiree medical |
| 135 | | | 135 | ||||||||||||
Total shareholders equity |
388 | 656 | 4 | (660 | ) | 388 | |||||||||||
Total liabilities and shareholders equity |
$ | 693 | $ | 1,595 | $ | 51 | $ | (1,003 | ) | $ | 1,336 | ||||||
30
16. Guarantor and Non-Guarantor Subsidiaries (continued)
Condensed Consolidating Balance Sheets
December 31, 2001
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated | ||||||||||||||
(in millions) | ||||||||||||||||||
Cash and cash equivalents |
$ | 35 | $ | 74 | $ | 1 | $ | | $ | 110 | ||||||||
Accounts receivable, including retained interest in securitized receivables, net |
1 | 167 | 15 | | 183 | |||||||||||||
Due from affiliates |
11 | 371 | 1 | (383 | ) | | ||||||||||||
Prepaid expenses and supplies |
| 14 | | | 14 | |||||||||||||
Deferred income taxes |
| 16 | | | 16 | |||||||||||||
Assets of discontinued operations |
135 | | 135 | |||||||||||||||
Total current assets |
47 | 777 | 17 | (383 | ) | 458 | ||||||||||||
Carrier operating property, at cost |
| 1,431 | 26 | 78 | 1,535 | |||||||||||||
Less allowance for depreciation |
| 921 | 13 | 78 | 1,012 | |||||||||||||
Net carrier operating property |
| 510 | 13 | | 523 | |||||||||||||
Goodwill, net |
| 242 | 15 | | 257 | |||||||||||||
Investment in subsidiaries |
662 | (4 | ) | | (658 | ) | | |||||||||||
Deferred income taxes |
| 31 | | | 31 | |||||||||||||
Long-term assets |
10 | 24 | | | 34 | |||||||||||||
Total assets |
$ | 719 | $ | 1,580 | $ | 45 | $ | (1,041 | ) | $ | 1,303 | |||||||
Accounts payable |
$ | 13 | $ | 158 | $ | 9 | $ | | $ | 180 | ||||||||
Due to affiliates |
346 | 1 | 36 | (383 | ) | | ||||||||||||
Salaries and wages |
| 117 | 3 | | 120 | |||||||||||||
Current portion of long-term debt |
| 18 | | | 18 | |||||||||||||
Freight and casualty claims payable |
| 52 | 1 | | 53 | |||||||||||||
Liabilities of discontinued operations |
| 67 | | | 67 | |||||||||||||
Total current liabilities |
359 | 413 | 49 | (383 | ) | 438 | ||||||||||||
Casualty claims and other |
| 66 | | | 66 | |||||||||||||
Deferred income taxes |
| 11 | | | 11 | |||||||||||||
Long-term debt |
| 307 | | | 307 | |||||||||||||
Accrued pension and retiree medical |
| 121 | | | 121 | |||||||||||||
Total shareholders equity |
360 | 662 | (4 | ) | (658 | ) | 360 | |||||||||||
Total liabilities and shareholders equity |
$ | 719 | $ | 1,580 | $ | 45 | $ | (1,041 | ) | $ | 1,303 | |||||||
31
16. Guarantor and Non-Guarantor Subsidiaries (continued)
Condensed Consolidating Statements of Income
Year ended December 31, 2002
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
|||||||||||||||
(in millions) | |||||||||||||||||||
Revenue |
$ | | $ | 2,886 | $ | 126 | $ | (1 | ) | $ | 3,011 | ||||||||
Operating expenses: |
|||||||||||||||||||
Salaries, wages and benefits |
8 | 1,888 | 39 | | 1,935 | ||||||||||||||
Operating supplies and expenses |
(8 | ) | 460 | 28 | (1 | ) | 479 | ||||||||||||
Purchased transportation |
| 250 | 40 | | 290 | ||||||||||||||
Operating taxes and licenses |
| 74 | 2 | | 76 | ||||||||||||||
Insurance and claims expenses |
| 62 | 1 | | 63 | ||||||||||||||
Provision for depreciation |
| 73 | 4 | | 77 | ||||||||||||||
Net loss (gain) on disposal of operating property |
| (1 | ) | | | (1 | ) | ||||||||||||
Results of affiliates |
(40 | ) | (8 | ) | | 48 | | ||||||||||||
Total operating expenses |
(40 | ) | 2,798 | 114 | 47 | 2,919 | |||||||||||||
Operating income from continuing operations |
40 | 88 | 12 | (48 | ) | 92 | |||||||||||||
Other (expenses), net |
(2 | ) | (29 | ) | 1 | | (30 | ) | |||||||||||
Income from continuing operations before income taxes |
38 | 59 | 13 | (48 | ) | 62 | |||||||||||||
Provision for income taxes |
(1 | ) | 23 | 5 | | 27 | |||||||||||||
Income from continuing operations |
39 | 36 | 8 | (48 | ) | 35 | |||||||||||||
Income from discontinued operations |
| 4 | | | 4 | ||||||||||||||
Net income |
$ | 39 | $ | 40 | $ | 8 | $ | (48 | ) | $ | 39 | ||||||||
Year ended December 31, 2001
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Revenue |
$ | | $ | 2,658 | $ | 122 | $ | (1 | ) | $ | 2,779 | |||||||||
Operating expenses: |
||||||||||||||||||||
Salaries, wages and benefits |
3 | 1,738 | 40 | | 1,781 | |||||||||||||||
Operating supplies and expenses |
1 | 449 | 29 | (1 | ) | 478 | ||||||||||||||
Purchased transportation |
| 231 | 41 | | 272 | |||||||||||||||
Operating taxes and licenses |
| 69 | 2 | | 71 | |||||||||||||||
Insurance and claims expenses |
| 46 | 1 | | 47 | |||||||||||||||
Provision for depreciation |
| 66 | 4 | | 70 | |||||||||||||||
Net loss (gain) on disposal of operating property |
| 1 | | | 1 | |||||||||||||||
Results of affiliates |
(32 | ) | (2 | ) | | 34 | | |||||||||||||
Total operating expenses |
(28 | ) | 2,598 | 117 | 33 | 2,720 | ||||||||||||||
Operating income from continuing operations |
28 | 60 | 5 | (34 | ) | 59 | ||||||||||||||
Other (expenses), net |
| (4 | ) | (2 | ) | | (6 | ) | ||||||||||||
Income from continuing operations before income taxes |
28 | 56 | 3 | (34 | ) | 53 | ||||||||||||||
Provision for income taxes |
(3 | ) | 24 | 1 | | 22 | ||||||||||||||
Income from continuing operations |
31 | 32 | 2 | (34 | ) | 31 | ||||||||||||||
Income from discontinued operations |
| | | | | |||||||||||||||
Net income |
$ | 31 | $ | 32 | $ | 2 | $ | (34 | ) | $ | 31 | |||||||||
32
16. Guarantor and Non-Guarantor Subsidiaries (continued)
Year ended December 31, 2000
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated | |||||||||||||
(in millions) | |||||||||||||||||
Revenue |
$ | | $ | 2,922 | $ | 120 | $ | (2 | ) | $ | 3,040 | ||||||
Operating expenses: |
|||||||||||||||||
Salaries, wages and benefits |
| 1,848 | 42 | | 1,890 | ||||||||||||
Operating supplies and expenses |
| 513 | 33 | (1 | ) | 545 | |||||||||||
Purchased transportation |
| 272 | 37 | (1 | ) | 308 | |||||||||||
Operating taxes and licenses |
| 76 | 1 | | 77 | ||||||||||||
Insurance and claims expenses |
| 63 | 2 | | 65 | ||||||||||||
Provision for depreciation |
| 52 | 4 | | 56 | ||||||||||||
Net loss on disposal of operating property |
| 2 | | | 2 | ||||||||||||
Results of affiliates |
| 6 | | (6 | ) | | |||||||||||
Total operating expenses |
| 2,832 | 119 | (8 | ) | 2,943 | |||||||||||
Operating income from continuing operations |
| 90 | 1 | 6 | 97 | ||||||||||||
Other income (expenses), net |
| 8 | (7 | ) | | 1 | |||||||||||
Income (loss) from continuing operations before income taxes |
| 98 | (6 | ) | 6 | 98 | |||||||||||
Provision for income taxes |
| 41 | | | 41 | ||||||||||||
Income (loss) from continuing operations |
| 57 | (6 | ) | 6 | 57 | |||||||||||
Income from discontinued operations |
| | | | | ||||||||||||
Net income (loss) |
$ | | $ | 57 | $ | (6 | ) | $ | 6 | $ | 57 | ||||||
33
16. Guarantor and Non-Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2002
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
|||||||||||||||
(in millions) | |||||||||||||||||||
Net cash (used) provided by continuing operating activities |
$ | (61 | ) | $ | 155 | $ | 9 | $ | | $ | 103 | ||||||||
Cash flows from investing activities |
|||||||||||||||||||
Purchases of carrier operating property, net |
| (63 | ) | (3 | ) | | (66 | ) | |||||||||||
Business acquisitions |
(24 | ) | | | | (24 | ) | ||||||||||||
Net cash (used) by investing activities |
(24 | ) | (63 | ) | (3 | ) | | (90 | ) | ||||||||||
Cash flows from financing activities |
|||||||||||||||||||
Dividends paid |
(4 | ) | | | | (4 | ) | ||||||||||||
Transfers to (from) parent |
85 | (67 | ) | | | 18 | |||||||||||||
Accounts receivable securitization |
| | | | | ||||||||||||||
Treasury stock activitynet |
(1 | ) | | | | (1 | ) | ||||||||||||
Debt issuance costs |
| | | | | ||||||||||||||
Long-term debt |
(18 | ) | | | | (18 | ) | ||||||||||||
Net cash provided (used) by financing activities |
62 | (67 | ) | | | (5 | ) | ||||||||||||
Effect of exchange rates on cash |
| | | | | ||||||||||||||
Net (decrease) increase in cash and cash equivalents from continuing operations |
(23 | ) | 25 | 6 | | 8 | |||||||||||||
Net (decrease) in cash and cash equivalents from discontinued operations |
| (11 | ) | | | (11 | ) | ||||||||||||
Cash and cash equivalents at beginning of year |
35 | 74 | 1 | | 110 | ||||||||||||||
Cash and cash equivalents at end of year |
$ | 12 | $ | 88 | $ | 7 | $ | | $ | 107 | |||||||||
34
16. Guarantor and Non-Guarantor Subsidiaries (continued)
Year ended December 31, 2001
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
|||||||||||||||
(in millions) | |||||||||||||||||||
Net cash provided by continuing operating activities |
$ | 14 | $ | 99 | $ | | $ | | $ | 113 | |||||||||
Cash flows from investing activities |
|||||||||||||||||||
Purchases of carrier operating property, net |
| (64 | ) | (3 | ) | | (67 | ) | |||||||||||
Business acquisitions |
(453 | ) | 40 | | | (413 | ) | ||||||||||||
Net cash (used) by investing activities |
(453 | ) | (24 | ) | (3 | ) | | (480 | ) | ||||||||||
Cash flows from financing activities |
|||||||||||||||||||
Dividends paid |
161 | (164 | ) | | | (3 | ) | ||||||||||||
Accounts receivable securitization |
| 100 | | | 100 | ||||||||||||||
Treasury stock activitynet |
(1 | ) | | | | (1 | ) | ||||||||||||
Debt issuance costs |
(11 | ) | | | | (11 | ) | ||||||||||||
Long-term debt |
325 | | | | 325 | ||||||||||||||
Net cash provided (used) by financing activities |
474 | (64 | ) | | | 410 | |||||||||||||
Effect of exchange rates on cash |
| | | | | ||||||||||||||
Net increase (decrease) in cash and cash equivalents from continuing operations |
35 | 11 | (3 | ) | | 43 | |||||||||||||
Net increase in cash and cash equivalents from discontinued operations |
| 2 | | | 2 | ||||||||||||||
Cash and cash equivalents at beginning of year |
| 61 | 4 | | 65 | ||||||||||||||
Cash and cash equivalents at end of year |
$ | 35 | $ | 74 | $ | 1 | $ | | $ | 110 | |||||||||
Year ended December 31, 2000
Parent |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||
(in millions) | ||||||||||||||||||
Net cash provided (used) by continuing operating activities |
$ | | $ | 100 | $ | (3 | ) | $ | | $ | 97 | |||||||
Cash flows from investing activities |
||||||||||||||||||
Purchases of carrier operating property, net |
| (103 | ) | (3 | ) | | (106 | ) | ||||||||||
Business acquisitions |
| (3 | ) | | | (3 | ) | |||||||||||
Net cash (used) by investing activities |
| (106 | ) | (3 | ) | | (109 | ) | ||||||||||
Cash flows from financing activities |
||||||||||||||||||
Dividends paid |
| (4 | ) | | | (4 | ) | |||||||||||
Treasury stock activitynet |
| | | | | |||||||||||||
Net cash (used) by financing activities |
| (4 | ) | | | (4 | ) | |||||||||||
Effect of exchange rates on cash |
| | | | | |||||||||||||
Net (decrease) in cash and cash equivalents from continuing operations |
| (10 | ) | (6 | ) | | (16 | ) | ||||||||||
Net (decrease) in cash and cash equivalents from discontinued operations |
| | | | | |||||||||||||
Cash and cash equivalents at beginning of year |
| 71 | 10 | | 81 | |||||||||||||
Cash and cash equivalents at end of year |
$ | | $ | 61 | $ | 4 | $ | | $ | 65 | ||||||||
35
Roadway Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
March 29, 2003 |
December 31, 2002 | |||||
(in thousands, except share data) | ||||||
Assets |
||||||
Current assets: |
||||||
Cash and cash equivalents |
$ | 117,151 | $ | 106,929 | ||
Accounts receivable, including retained interest in securitized receivables, net |
217,610 | 230,216 | ||||
Assets of discontinued operations |
| 87,431 | ||||
Other current assets |
55,018 | 38,496 | ||||
Total current assets |
389,779 | 463,072 | ||||
Carrier operating property, at cost |
1,512,028 | 1,515,648 | ||||
Less allowance for depreciation |
1,007,788 | 1,006,465 | ||||
Net carrier operating property |
504,240 | 509,183 | ||||
Goodwill, net |
284,598 | 283,910 | ||||
Other assets |
90,157 | 79,708 | ||||
Total assets |
$ | 1,268,774 | $ | 1,335,873 | ||
Liabilities and shareholders equity |
||||||
Current liabilities: |
||||||
Accounts payable |
$ | 187,457 | $ | 193,501 | ||
Salaries and wages |
126,680 | 151,464 | ||||
Liabilities of discontinued operations |
| 32,407 | ||||
Other current liabilities |
60,743 | 83,518 | ||||
Total current liabilities |
374,880 | 460,890 | ||||
Long-term liabilities: |
||||||
Casualty claims and other |
77,467 | 78,548 | ||||
Accrued pension and retiree medical |
140,960 | 135,053 | ||||
Long-term debt |
273,513 | 273,513 | ||||
Total long-term liabilities |
491,940 | 487,114 | ||||
Shareholders equity: |
||||||
Common Stock - $.01 par value Authorized - 100,000,000 shares Issued - 20,556,714 shares |
206 | 206 | ||||
Other shareholders equity |
401,748 | 387,663 | ||||
Total shareholders equity |
401,954 | 387,869 | ||||
Total liabilities and shareholders equity |
$ | 1,268,774 | $ | 1,335,873 | ||
The number of shares of common stock outstanding at March 29, 2003 and December 31, 2002 were 19,653,213 and 19,368,590, respectively.
Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements.
1
Roadway Corporation and Subsidiaries
Condensed Statements of Consolidated Income (Unaudited)
Twelve Weeks Ended | ||||||||
(First Quarter) |
||||||||
March 29, 2003 |
March 23, 2002 |
|||||||
(in thousands, except per share data) | ||||||||
Revenue |
$ | 754,070 | $ | 598,967 | ||||
Operating expenses: |
||||||||
Salaries, wages and benefits |
475,435 | 399,164 | ||||||
Operating supplies and expenses |
130,412 | 99,209 | ||||||
Purchased transportation |
74,784 | 51,509 | ||||||
Operating taxes and licenses |
19,866 | 15,564 | ||||||
Insurance and claims expense |
15,112 | 11,431 | ||||||
Provision for depreciation |
17,299 | 18,088 | ||||||
Net loss on disposal of operating property |
811 | 295 | ||||||
Total operating expenses |
733,719 | 595,260 | ||||||
Operating income from continuing operations |
20,351 | 3,707 | ||||||
Other (expense), net |
(6,794 | ) | (6,824 | ) | ||||
Income (loss) from continuing operations before income taxes |
13,557 | (3,117 | ) | |||||
Provision (benefit) for income taxes |
5,694 | (1,244 | ) | |||||
Income (loss) from continuing operations |
7,863 | (1,873 | ) | |||||
Income from discontinued operations |
147 | 124 | ||||||
Net income (loss) |
$ | 8,010 | $ | (1,749 | ) | |||
Earnings (loss) per share basic: |
||||||||
Continuing operations |
$ | 0.42 | $ | (0.10 | ) | |||
Discontinued operations |
$ | 0.01 | $ | 0.01 | ||||
Total earnings (loss) per share basic |
$ | 0.43 | $ | (0.09 | ) | |||
Earnings (loss) per share diluted: |
||||||||
Continuing operations |
$ | 0.41 | $ | (0.10 | ) | |||
Discontinued operations |
$ | 0.01 | $ | 0.01 | ||||
Total earnings (loss) per share diluted |
$ | 0.42 | $ | (0.09 | ) | |||
Average shares outstanding basic |
18,655 | 18,555 | ||||||
Average shares outstanding diluted |
19,086 | 18,555 | ||||||
Dividends declared per share |
$ | 0.05 | $ | 0.05 |
See notes to condensed consolidated financial statements.
2
Roadway Corporation and Subsidiaries
Condensed Statements of Consolidated Cash Flows (Unaudited)
Twelve Weeks Ended | ||||||||
(First Quarter) |
||||||||
March 29, 2003 |
March 23, 2002 |
|||||||
(in thousands) | ||||||||
Cash flows from operating activities |
||||||||
Income (loss) from continuing operations |
$ | 7,863 | $ | (1,873 | ) | |||
Depreciation and amortization |
18,260 | 18,555 | ||||||
Other operating adjustments |
(24,201 | ) | (52,778 | ) | ||||
Net cash provided (used) by operating activities |
1,922 | (36,096 | ) | |||||
Cash flows from investing activities |
||||||||
Purchases of carrier operating property |
(13,786 | ) | (11,043 | ) | ||||
Sales of carrier operating property |
762 | 1,381 | ||||||
Business disposal |
47,221 | | ||||||
Net cash provided (used) by investing activities |
34,197 | (9,662 | ) | |||||
Cash flows from financing activities |
||||||||
Dividends paid |
(960 | ) | (957 | ) | ||||
Treasury stock activity, net |
(950 | ) | 24 | |||||
Long-term (repayments) borrowings |
(24,000 | ) | | |||||
Net cash (used) by financing activities |
(25,910 | ) | (933 | ) | ||||
Effect of exchange rate changes on cash |
51 | (11 | ) | |||||
Net increase (decrease) in cash and cash equivalents from continuing operations |
10,260 | (46,702 | ) | |||||
Net (decrease) in cash and cash equivalents from discontinued operations |
(38 | ) | (4,339 | ) | ||||
Cash and cash equivalents at beginning of period |
106,929 | 110,433 | ||||||
Cash and cash equivalents at end of period |
$ | 117,151 | $ | 59,392 | ||||
See notes to condensed consolidated financial statements.
3
Roadway Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the twelve weeks ended March 29, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2002.
Note 2Accounting Period
Roadway Corporation (the registrant or Company) operates on 13 four-week accounting periods with 12 weeks in each of the first three quarters and 16 weeks in the fourth quarter.
Note 3Discontinued operations
On December 26, 2002, the Company entered into an agreement to sell Arnold Transportation Services (ATS) to a management group led by the units president and a private equity firm, for approximately $55,000,000. The ATS business segment was acquired as part of the Companys purchase of Roadway Next Day in November 2001, but did not fit the Companys strategic focus of being a LTL carrier. The transaction was completed on January 23, 2003. The Company did not recognize a significant gain or loss as a result of this transaction.
The Company has reported the ATS results as a discontinued operation in the accompanying financial statements and, unless otherwise stated, the notes to the financial statements for all periods presented exclude the amounts related to this discontinued operation.
The following table presents revenue and income from the discontinued operations for the quarters ended March 29, 2003 and March 23, 2002. The quarter ended March 29, 2003 includes results of operations only through the disposal date, January 23, 2003.
Twelve Weeks Ended | ||||||
(First Quarter) | ||||||
March 29, 2003 |
March 23, 2002 | |||||
(in thousands) | ||||||
Revenue |
$ | 9,267 | $ | 38,201 | ||
Pre-tax income from discontinued operations |
198 | 212 | ||||
Income tax expense |
51 | 88 | ||||
Income from discontinued operations |
$ | 147 | $ | 124 | ||
4
Note 4Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
Twelve Weeks Ended | |||||||
(First Quarter) |
|||||||
March 29, 2003 |
March 23, 2002 |
||||||
(in thousands, except per share data) | |||||||
Income (loss) from: |
|||||||
Continuing operations |
$ | 7,863 | $ | (1,873 | ) | ||
Discontinued operations |
147 | 124 | |||||
Net income (loss) |
$ | 8,010 | $ | (1,749 | ) | ||
Weighted-average shares for basic earnings per share |
18,655 | 18,555 | |||||
Management incentive stock plans |
431 | | |||||
Weighted-average shares for diluted earnings per share |
19,086 | 18,555 | |||||
Basic earnings (loss) per share from: |
|||||||
Continuing operations |
$ | 0.42 | $ | (0.10 | ) | ||
Discontinued operations |
0.01 | $ | 0.01 | ||||
Basic earnings (loss) per share |
$ | 0.43 | $ | (0.09 | ) | ||
Diluted earnings (loss) per share from: |
|||||||
Continuing operations |
$ | 0.41 | $ | (0.10 | ) | ||
Discontinued operations |
0.01 | $ | 0.01 | ||||
Diluted earnings (loss) per share |
$ | 0.42 | $ | (0.09 | ) | ||
5
Note 5Segment information
The Company provides freight services in two business segments: Roadway Express (Roadway) and New Penn Motor Express (New Penn). The Roadway segment provides long haul LTL freight services in North America and offers services to over 100 countries worldwide. The New Penn segment provides regional, next-day LTL freight service primarily in the northeast region of the United States.
The Companys reportable segments are identified based on differences in products, services, and management structure. The measurement basis of segment profit or loss is operating income. Business segment assets consist primarily of customer receivables, net carrier operating property, and goodwill.
Twelve weeks ended March 29, 2003 | ||||||||||||
(First Quarter) |
||||||||||||
Roadway Express |
New Penn |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 705,244 | $ | 48,826 | $ | 754,070 | ||||||
Operating expense: |
||||||||||||
Salaries, wages & benefits |
439,438 | 33,443 | 472,881 | |||||||||
Operating supplies |
125,826 | 7,667 | 133,493 | |||||||||
Purchased transportation |
74,242 | 542 | 74,784 | |||||||||
Operating license and tax |
18,379 | 1,389 | 19,768 | |||||||||
Insurance and claims |
13,895 | 954 | 14,849 | |||||||||
Depreciation |
14,924 | 2,209 | 17,133 | |||||||||
Net loss (gain) on sale of operating property |
802 | 9 | 811 | |||||||||
Total operating expense |
687,506 | 46,213 | 733,719 | |||||||||
Operating income |
$ | 17,738 | $ | 2,613 | $ | 20,351 | ||||||
Operating ratio |
97.5 | % | 94.6 | % | 97.3 | % | ||||||
Total assets |
$ | 802,557 | $ | 403,315 | $ | 1,205,872 |
6
Note 5Segment information (continued)
Twelve weeks ended March 23, 2002 | ||||||||||||
(First Quarter) |
||||||||||||
Roadway Express |
New Penn |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 553,558 | $ | 45,409 | $ | 598,967 | ||||||
Operating expense: |
||||||||||||
Salaries, wages & benefits |
366,335 | 30,709 | 397,044 | |||||||||
Operating supplies |
95,499 | 6,114 | 101,613 | |||||||||
Purchased transportation |
51,126 | 383 | 51,509 | |||||||||
Operating license and tax |
14,188 | 1,359 | 15,547 | |||||||||
Insurance and claims |
10,388 | 894 | 11,282 | |||||||||
Depreciation |
15,269 | 2,690 | 17,959 | |||||||||
Net loss (gain) on sale of operating property |
346 | (51 | ) | 295 | ||||||||
Total operating expense |
553,151 | 42,098 | 595,249 | |||||||||
Operating income |
$ | 407 | $ | 3,311 | $ | 3,718 | ||||||
Operating ratio |
99.9 | % | 92.7 | % | 99.4 | % | ||||||
Total assets |
$ | 703,834 | $ | 335,218 | $ | 1,039,052 |
Reconciliation of segment operating income to consolidated operating income from continuing operations before taxes:
Twelve Weeks Ended | ||||||||
(First Quarter) |
||||||||
March 29, 2003 |
March 23, 2002 |
|||||||
(in thousands) | ||||||||
Segment operating income from continuing operations |
$ | 20,351 | $ | 3,718 | ||||
Unallocated corporate (expense) |
| (11 | ) | |||||
Interest (expense) |
(5,102 | ) | (5,464 | ) | ||||
Other (expense), net |
(1,692 | ) | (1,360 | ) | ||||
Consolidated income (loss) from continuing operations before taxes |
$ | 13,557 | $ | (3,117 | ) | |||
7
Note 5Segment information (continued)
Reconciliation of total segment assets to total consolidated assets:
March 29,2003 |
December 31, 2002 |
|||||||
(in thousands) | ||||||||
Total segment assets |
$ | 1,205,872 | $ | 1,211,584 | ||||
Unallocated corporate assets |
77,102 | 41,351 | ||||||
Assets of discontinued operations |
| 87,431 | ||||||
Elimination of intercompany balances |
(14,200 | ) | (4,493 | ) | ||||
Consolidated assets |
$ | 1,268,774 | $ | 1,335,873 | ||||
Note 6Comprehensive Income
Comprehensive income differs from net income due to foreign currency translation adjustments and derivative fair value adjustments as shown below:
Twelve Weeks Ended | |||||||
(First Quarter) |
|||||||
March 29, 2003 |
March 23, 2002 |
||||||
(in thousands) | |||||||
Net income (loss) |
$ | 8,010 | $ | (1,749 | ) | ||
Foreign currency translation adjustments |
2,688 | (1,178 | ) | ||||
Derivative fair value adjustment |
76 | | |||||
Comprehensive income (loss) |
$ | 10,774 | $ | (2,927 | ) | ||
Note 7Contingent Matter
The Companys former parent is currently under examination by the Internal Revenue Service for tax years 1994 and 1995, years prior to the spin-off of the Company. The IRS has proposed substantial adjustments for these tax years for multi-employer pension plan deductions. The IRS is challenging the timing, not the validity of these deductions. The Company is unable to predict the ultimate outcome of this matter; however, its former parent intends to vigorously contest these proposed adjustments.
Under a tax sharing agreement entered into by the Company and its former parent at the time of the spin-off, the Company is obligated to reimburse the former parent for any additional taxes and interest that relate to the Companys business prior to the spin-off. The amount and timing of such payments is dependent on the ultimate resolution of the former parents disputes with the IRS and the determination of the nature and extent of the obligations under the tax sharing agreement. On January 16, 2003, the Company made a $14,000,000 payment to its former parent under the tax sharing agreement for taxes and interest related to certain of the proposed adjustments for tax years 1994 and 1995.
We estimate the range of the remaining payments that may be due to the former parent to be $0 to $16,000,000 in additional taxes and $0 to $10,000,000 in related interest, net of tax benefit. The Company has established certain reserves with respect to these proposed adjustments. There can be no assurance, however, that the amount or timing of any liability of the Company to the former parent will not have a material adverse effect on the Companys results of operations and financial position.
8
Roadway Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
June 21, 2003 |
December 31, 2002 | |||||
(in thousands, except share data) | ||||||
Assets |
||||||
Current assets: |
||||||
Cash and cash equivalents |
$ | 125,692 | $ | 106,929 | ||
Accounts receivable, including retained interest in securitized receivables, net |
215,055 | 230,216 | ||||
Assets of discontinued operations |
| 87,431 | ||||
Other current assets |
49,541 | 38,496 | ||||
Total current assets |
390,288 | 463,072 | ||||
Carrier operating property, at cost |
1,511,699 | 1,515,648 | ||||
Less allowance for depreciation |
1,015,682 | 1,006,465 | ||||
Net carrier operating property |
496,017 | 509,183 | ||||
Goodwill, net |
286,181 | 283,910 | ||||
Other assets |
91,093 | 79,708 | ||||
Total assets |
$ | 1,263,579 | $ | 1,335,873 | ||
Liabilities and shareholders equity |
||||||
Current liabilities: |
||||||
Accounts payable |
$ | 164,806 | $ | 193,501 | ||
Salaries and wages |
125,162 | 151,464 | ||||
Liabilities of discontinued operations |
| 32,407 | ||||
Other current liabilities |
61,889 | 83,518 | ||||
Total current liabilities |
351,857 | 460,890 | ||||
Long-term liabilities: |
||||||
Casualty claims and other |
75,505 | 78,548 | ||||
Accrued pension and retiree medical |
147,800 | 135,053 | ||||
Long-term debt |
270,279 | 273,513 | ||||
Total long-term liabilities |
493,584 | 487,114 | ||||
Shareholders equity: |
||||||
Common Stock - $.01 par value |
206 | 206 | ||||
Other shareholders equity |
417,932 | 387,663 | ||||
Total shareholders equity |
418,138 | 387,869 | ||||
Total liabilities and shareholders equity |
$ | 1,263,579 | $ | 1,335,873 | ||
Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements.
1
Roadway Corporation and Subsidiaries
Condensed Statements of Consolidated Income (Unaudited)
Twelve Weeks Ended (Second Quarter) |
||||||||
June 21, 2003 |
June 15, 2002 |
|||||||
(in thousands, except per share data) | ||||||||
Revenue |
$ | 741,528 | $ | 656,003 | ||||
Operating expenses: |
||||||||
Salaries, wages and benefits |
468,223 | 427,273 | ||||||
Operating supplies and expenses |
130,022 | 107,104 | ||||||
Purchased transportation |
75,725 | 57,775 | ||||||
Operating taxes and licenses |
18,688 | 17,481 | ||||||
Insurance and claims expense |
14,529 | 13,129 | ||||||
Provision for depreciation |
16,870 | 18,152 | ||||||
Net loss on disposal of operating property |
30 | 283 | ||||||
Total operating expenses |
724,087 | 641,197 | ||||||
Operating income from continuing operations |
17,441 | 14,806 | ||||||
Other (expense), net |
(6,044 | ) | (6,823 | ) | ||||
Income from continuing operations before income taxes |
11,397 | 7,983 | ||||||
Provision for income taxes |
4,787 | 3,347 | ||||||
Income from continuing operations |
6,610 | 4,636 | ||||||
(Loss) income from discontinued operations |
(302 | ) | 1,038 | |||||
Net income |
$ | 6,308 | $ | 5,674 | ||||
Earnings (loss) per share basic: |
||||||||
Continuing operations |
$ | 0.35 | $ | 0.25 | ||||
Discontinued operations |
(0.02 | ) | 0.05 | |||||
Total earnings per share basic |
$ | 0.33 | $ | 0.30 | ||||
Earnings (loss) per share diluted: |
||||||||
Continuing operations |
$ | 0.35 | $ | 0.25 | ||||
Discontinued operations |
(0.02 | ) | 0.05 | |||||
Total earnings per share diluted |
$ | 0.33 | $ | 0.30 | ||||
Average shares outstanding basic |
18,955 | 18,474 | ||||||
Average shares outstanding diluted |
19,336 | 18,888 | ||||||
Dividends declared per share |
$ | 0.05 | $ | 0.05 |
See notes to condensed consolidated financial statements.
2
Roadway Corporation and Subsidiaries
Condensed Statements of Consolidated Income (Unaudited)
Twenty-four Weeks Ended (Two Quarters) |
||||||||
June 21, 2003 |
June 15, 2002 |
|||||||
(in thousands, except per share data) | ||||||||
Revenue |
$ | 1,495,598 | $ | 1,254,970 | ||||
Operating expenses: |
||||||||
Salaries, wages and benefits |
943,658 | 826,437 | ||||||
Operating supplies and expenses |
260,434 | 206,313 | ||||||
Purchased transportation |
150,509 | 109,284 | ||||||
Operating taxes and licenses |
38,554 | 33,045 | ||||||
Insurance and claims expense |
29,641 | 24,560 | ||||||
Provision for depreciation |
34,169 | 36,240 | ||||||
Net loss on disposal of operating property |
841 | 578 | ||||||
Total operating expenses |
1,457,806 | 1,236,457 | ||||||
Operating income from continuing operations |
37,792 | 18,513 | ||||||
Other (expense), net |
(12,838 | ) | (13,647 | ) | ||||
Income from continuing operations before income taxes |
24,954 | 4,866 | ||||||
Provision for income taxes |
10,481 | 2,103 | ||||||
Income from continuing operations |
14,473 | 2,763 | ||||||
(Loss) income from discontinued operations |
(155 | ) | 1,162 | |||||
Net income |
$ | 14,318 | $ | 3,925 | ||||
Earnings (loss) per share basic: |
||||||||
Continuing operations |
$ | 0.77 | $ | 0.15 | ||||
Discontinued operations |
(0.01 | ) | 0.06 | |||||
Total earnings per share basic |
$ | 0.76 | $ | 0.21 | ||||
Earnings (loss) per share diluted: |
||||||||
Continuing operations |
$ | 0.76 | $ | 0.15 | ||||
Discontinued operations |
(0.01 | ) | 0.06 | |||||
Total earnings per share diluted |
$ | 0.75 | $ | 0.21 | ||||
Average shares outstanding basic |
18,802 | 18,514 | ||||||
Average shares outstanding diluted |
19,177 | 18,968 | ||||||
Dividends declared per share |
$ | 0.10 | $ | 0.10 |
See notes to condensed consolidated financial statements.
3
Roadway Corporation and Subsidiaries
Condensed Statements of Consolidated Cash Flows (Unaudited)
Twenty-four Weeks Ended (Two Quarters) |
||||||||
June 21, 2003 |
June 15, 2002 |
|||||||
(in thousands) | ||||||||
Cash flows from operating activities |
||||||||
Income from continuing operations |
$ | 14,473 | $ | 2,763 | ||||
Depreciation and amortization |
35,849 | 37,175 | ||||||
Other operating adjustments |
(31,928 | ) | (45,756 | ) | ||||
Net cash provided (used) by operating activities |
18,394 | (5,818 | ) | |||||
Cash flows from investing activities |
||||||||
Purchases of carrier operating property |
(22,448 | ) | (24,313 | ) | ||||
Sales of carrier operating property |
1,721 | 1,869 | ||||||
Business disposal |
47,430 | | ||||||
Net cash provided (used) by investing activities |
26,703 | (22,444 | ) | |||||
Cash flows from financing activities |
||||||||
Dividends paid |
(1,931 | ) | (1,940 | ) | ||||
Treasury stock activity, net |
1,713 | (1,383 | ) | |||||
Transfer from discontinued operation |
| 2,500 | ||||||
Long-term (repayments) borrowings |
(26,426 | ) | (2,500 | ) | ||||
Net cash (used) by financing activities |
(26,644 | ) | (3,323 | ) | ||||
Effect of exchange rate changes on cash |
348 | (90 | ) | |||||
Net increase (decrease) in cash and cash equivalents from continuing operations |
18,801 | (31,675 | ) | |||||
Net (decrease) in cash and cash equivalents from discontinued operations |
(38 | ) | (5,163 | ) | ||||
Cash and cash equivalents at beginning of period |
106,929 | 110,432 | ||||||
Cash and cash equivalents at end of period |
$ | 125,692 | $ | 73,594 | ||||
See notes to condensed consolidated financial statements.
4
Roadway Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the twelve and twenty-four weeks ended June 21, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2002.
The Company completed the required goodwill impairment test under SFAS No. 142 for all reporting units effective June 21, 2003 which did not indicate any impairment. The Company expects to perform the required annual goodwill impairment assessment on a recurring basis at the end of the second quarter each year, or more frequently should any indicators of possible impairment be identified.
Note 2Accounting Period
Roadway Corporation (the registrant or Company) operates on 13 four-week accounting periods with 12 weeks in each of the first three quarters and 16 weeks in the fourth quarter.
Note 3Discontinued operations
On December 26, 2002, the Company entered into an agreement to sell Arnold Transportation Services (ATS) to a management group led by the units president and a private equity firm, for approximately $55,000,000. The ATS business segment was acquired as part of the Companys purchase of Arnold Industries, Inc. (subsequently renamed Roadway Next Day Corporation) in November 2001, but did not fit the Companys strategic focus of being a LTL carrier. The transaction was completed on January 23, 2003. The Company did not recognize a significant gain or loss as a result of this transaction.
The Company has reported the ATS results as a discontinued operation in the accompanying financial statements and, unless otherwise stated, the notes to the financial statements for all periods presented exclude the amounts related to this discontinued operation.
5
Note 4Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
Twelve Weeks Ended (Second Quarter) |
Twenty-four Weeks Ended (Two Quarters) | |||||||||||||
June 21, 2003 |
June 15, 2002 |
June 21, 2003 |
June 15, 2002 | |||||||||||
(in thousands, except per share data) | ||||||||||||||
Income (loss) from: |
||||||||||||||
Continuing operations |
$ | 6,610 | $ | 4,636 | $ | 14,473 | $ | 2,763 | ||||||
Discontinued operations |
(302 | ) | 1,038 | (155 | ) | 1,162 | ||||||||
Net income |
$ | 6,308 | $ | 5,674 | $ | 14,318 | $ | 3,925 | ||||||
Weighted-average shares for basic earnings per share |
18,955 | 18,474 | 18,802 | 18,514 | ||||||||||
Management incentive stock plans |
381 | 414 | 375 | 454 | ||||||||||
Weighted-average shares for diluted earnings per share |
19,336 | 18,888 | 19,177 | 18,968 | ||||||||||
Basic earnings (loss) per share from: |
||||||||||||||
Continuing operations |
$ | 0.35 | $ | 0.25 | $ | 0.77 | $ | 0.15 | ||||||
Discontinued operations |
(0.02 | ) | 0.05 | (0.01 | ) | 0.06 | ||||||||
Basic earnings per share |
$ | 0.33 | $ | 0.30 | $ | 0.76 | $ | 0.21 | ||||||
Diluted earnings (loss) per share from: |
||||||||||||||
Continuing operations |
$ | 0.35 | $ | 0.25 | $ | 0.76 | $ | 0.15 | ||||||
Discontinued operations |
(0.02 | ) | 0.05 | (0.01 | ) | 0.06 | ||||||||
Diluted earnings per share |
$ | 0.33 | $ | 0.30 | $ | 0.75 | $ | 0.21 | ||||||
6
Note 5Segment information
The Company provides freight services in two business segments: Roadway Express (Roadway) and New Penn Motor Express (New Penn). The Roadway segment provides long haul, expedited, and regional LTL freight services in North America and offers services to over 100 countries worldwide. The New Penn segment provides regional, next-day LTL freight services primarily in the northeast region of the United States.
The Companys reportable segments are identified based on differences in products, services, and management structure. The measurement basis of segment profit or loss is operating income. Business segment assets consist primarily of customer receivables, net carrier operating property, and goodwill.
Twelve weeks ended June 21, 2003 (Second Quarter) |
||||||||||||
Roadway Express |
New Penn |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 691,156 | $ | 50,372 | $ | 741,528 | ||||||
Operating expense: |
||||||||||||
Salaries, wages & benefits |
433,101 | 32,657 | 465,758 | |||||||||
Operating supplies |
125,734 | 7,244 | 132,978 | |||||||||
Purchased transportation |
75,276 | 449 | 75,725 | |||||||||
Operating license and tax |
17,182 | 1,427 | 18,609 | |||||||||
Insurance and claims |
13,599 | 684 | 14,283 | |||||||||
Depreciation |
14,472 | 2,232 | 16,704 | |||||||||
Net loss (gain) on sale of operating property |
(21 | ) | 51 | 30 | ||||||||
Total operating expense |
679,343 | 44,744 | 724,087 | |||||||||
Operating income |
$ | 11,813 | $ | 5,628 | $ | 17,441 | ||||||
Operating ratio |
98.3 | % | 88.8 | % | 97.6 | % | ||||||
Total assets |
$ | 761,817 | $ | 405,914 | $ | 1,167,731 |
7
Note 5Segment information (continued)
Twelve weeks ended June 15, 2002 (Second Quarter) |
||||||||||||
Roadway Express |
New Penn |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 606,409 | $ | 49,594 | $ | 656,003 | ||||||
Operating expense: |
||||||||||||
Salaries, wages & benefits |
392,635 | 32,722 | 425,357 | |||||||||
Operating supplies |
103,488 | 5,937 | 109,425 | |||||||||
Purchased transportation |
57,317 | 458 | 57,775 | |||||||||
Operating license and tax |
16,043 | 1,383 | 17,426 | |||||||||
Insurance and claims |
11,964 | 947 | 12,911 | |||||||||
Depreciation |
15,416 | 2,615 | 18,031 | |||||||||
Net loss (gain) on sale of operating property |
303 | (20 | ) | 283 | ||||||||
Total operating expense |
597,166 | 44,042 | 641,208 | |||||||||
Operating income |
$ | 9,243 | $ | 5,552 | $ | 14,795 | ||||||
Operating ratio |
98.5 | % | 88.8 | % | 97.7 | % | ||||||
Total assets |
$ | 713,832 | $ | 336,587 | $ | 1,050,419 |
Twenty-four weeks ended June 21, 2003 (Two Quarters) |
||||||||||||
Roadway Express |
New Penn |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 1,396,400 | $ | 99,198 | $ | 1,495,598 | ||||||
Operating expense: |
||||||||||||
Salaries, wages & benefits |
872,539 | 66,100 | 938,639 | |||||||||
Operating supplies |
251,560 | 14,911 | 266,471 | |||||||||
Purchased transportation |
149,518 | 991 | 150,509 | |||||||||
Operating license and tax |
35,561 | 2,816 | 38,377 | |||||||||
Insurance and claims |
27,494 | 1,638 | 29,132 | |||||||||
Depreciation |
29,396 | 4,441 | 33,837 | |||||||||
Net loss (gain) on sale of operating property |
781 | 60 | 841 | |||||||||
Total operating expense |
1,366,849 | 90,957 | 1,457,806 | |||||||||
Operating income |
$ | 29,551 | $ | 8,241 | $ | 37,792 | ||||||
Operating ratio |
97.9 | % | 91.7 | % | 97.5 | % |
8
Note 5Segment information (continued)
Twenty-four weeks ended June 15, 2002 (Two Quarters) |
||||||||||||
Roadway Express |
New Penn |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 1,159,967 | $ | 95,003 | $ | 1,254,970 | ||||||
Operating expense: |
||||||||||||
Salaries, wages & benefits |
758,970 | 63,431 | 822,401 | |||||||||
Operating supplies |
198,987 | 12,051 | 211,038 | |||||||||
Purchased transportation |
108,443 | 841 | 109,284 | |||||||||
Operating license and tax |
30,231 | 2,742 | 32,973 | |||||||||
Insurance and claims |
22,352 | 1,841 | 24,193 | |||||||||
Depreciation |
30,685 | 5,305 | 35,990 | |||||||||
Net loss (gain) on sale of operating property |
649 | (71 | ) | 578 | ||||||||
Total operating expense |
1,150,317 | 86,140 | 1,236,457 | |||||||||
Operating income |
$ | 9,650 | $ | 8,863 | $ | 18,513 | ||||||
Operating ratio |
99.2 | % | 90.7 | % | 98.5 | % |
Reconciliation of segment operating income to consolidated operating income from continuing operations before taxes:
Twelve Weeks Ended (Second Quarter) |
Twenty-four weeks ended (Two quarters) |
|||||||||||||||
June 21, 2003 |
June 15, 2002 |
June 21, 2003 |
June 15, 2002 |
|||||||||||||
(in thousands) | ||||||||||||||||
Segment operating income from continuing operations |
$ | 17,441 | $ | 14,795 | $ | 37,792 | $ | 18,513 | ||||||||
Unallocated corporate income |
| 11 | | | ||||||||||||
Interest (expense) |
(4,779 | ) | (5,473 | ) | (9,881 | ) | (10,937 | ) | ||||||||
Other (expense), net |
(1,265 | ) | (1,350 | ) | (2,957 | ) | (2,710 | ) | ||||||||
Consolidated income from continuing operations before taxes |
$ | 11,397 | $ | 7,983 | $ | 24,954 | $ | 4,866 | ||||||||
9
Note 5Segment information (continued)
Reconciliation of total segment assets to total consolidated assets:
June 21, 2003 |
December 31, 2002 |
|||||||
(in thousands) | ||||||||
Total segment assets |
$ | 1,167,731 | $ | 1,211,584 | ||||
Unallocated corporate assets |
103,142 | 41,351 | ||||||
Assets of discontinued operations |
| 87,431 | ||||||
Elimination of intercompany balances |
(7,294 | ) | (4,493 | ) | ||||
Consolidated assets |
$ | 1,263,579 | $ | 1,335,873 | ||||
Note 6Comprehensive Income
Comprehensive income differs from net income due to foreign currency translation adjustments and derivative fair value adjustments as shown below:
Twelve weeks Ended (Second Quarter) |
Twenty-four weeks ended (Two quarters) |
||||||||||||
June 21, 2003 |
June 15, 2002 |
June 21, 2003 |
June 15, 2002 |
||||||||||
(in thousands) | |||||||||||||
Net income |
$ | 6,308 | $ | 5,674 | $ | 14,318 | $ | 3,925 | |||||
Foreign currency translation adjustments |
3,089 | 1,122 | 5,776 | (56 | ) | ||||||||
Derivative fair value adjustment |
50 | | 126 | | |||||||||
Comprehensive income |
$ | 9,447 | $ | 6,796 | $ | 20,220 | $ | 3,869 | |||||
Note 7Contingent Matter
The Companys former parent is currently under examination by the Internal Revenue Service for tax years 1994 and 1995, years prior to the spin-off of the Company. The IRS has proposed substantial adjustments for these tax years for multi-employer pension plan deductions. The IRS is challenging the timing, not the validity of these deductions. The Company is unable to predict the ultimate outcome of this matter; however, its former parent intends to vigorously contest these proposed adjustments.
Under a tax sharing agreement entered into by the Company and its former parent at the time of the spin-off, the Company is obligated to reimburse the former parent for any additional taxes and interest that relate to the Companys business prior to the spin-off. The amount and timing of such payments is dependent on the ultimate resolution of the former parents disputes with the IRS and the determination of the nature and extent of the obligations under the tax sharing agreement. On January 16, 2003, the Company made a $14,000,000 payment to its former parent under the tax sharing agreement for taxes and interest related to certain of the proposed adjustments for tax years 1994 and 1995.
We estimate the range of the remaining payments that may be due to the former parent to be $0 to $16,000,000 in additional taxes and $0 to $10,000,000 in related interest, net of tax benefit. The Company has established certain reserves with respect to these proposed adjustments. There can be no assurance, however, that the amount or timing of any liability of the Company to the former parent will not have a material adverse effect on the Companys results of operations and financial position.
10
Note 8Subsequent event
On July 8, 2003, the Company announced the signing of a definitive agreement under which Yellow Corporation would acquire Roadway for approximately $966 million, or $48 per share. See the Companys 8-K filed on July 8, 2003 for further information and details.
11
Exhibit 99.4
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL DATA
The following unaudited condensed combined pro forma financial statements and explanatory notes have been prepared to give effect to the proposed merger of Roadway Corporation (Roadway) with and into a subsidiary of Yellow Corporation (Yellow), the proceeds of Yellows recent offering of its 5.0% contingent convertible senior notes due 2023 and the consummation of Yellows other currently contemplated financing transactions related to the proposed merger. At the effective time of the proposed merger, Roadway will be merged with and into a wholly owned acquisition subsidiary of Yellow. The transaction is being accounted for as a purchase business combination.
In general, upon the effectiveness of the proposed merger, each share of Roadway stock (except those shares owned directly or indirectly by Roadway or Yellow and those shares held by dissenting stockholders) will be converted into 1.924 shares of Yellow common stock. However, a Roadway stockholder may elect to receive $48.00 in cash in lieu of Yellow stock for each share of the stockholders Roadway stock. Notwithstanding the individual elections of the Roadway stockholders, no more than 50% of the Roadway shares may be converted into cash and certain adjustments will be made so that the aggregate consideration in the proposed merger will consist of approximately 50% cash and 50% Yellow common stock. See Description of the Merger.
The exchange ratio of 1.924 shares will be subject to further adjustment based upon the 20-trading-day average of the per share closing price of Yellow common stock as of the date five trading days before closing of the merger. If the average price is less than $21.21, the exchange ratio shall be the quotient of $40.81 and the average price, or if the average price is greater than $28.69, then the exchange ratio shall be the quotient of $55.20 and the average price. If the average price of Yellow common stock is less than $16.63, Yellow may elect not to consummate the proposed merger.
In accordance with Article 11 of Regulation S-X under the Securities Act of 1933, an unaudited condensed combined pro forma balance sheet as of June 30, 2003 and unaudited condensed combined pro forma statements of operations for the six months ended June 30, 2003 and the year ended December 31, 2002, have been prepared to reflect the proposed merger (treated as an acquisition of Roadway), the proceeds of Yellows recent offering of its 5.0% contingent convertible senior notes due 2023 and the consummation of Yellows other currently contemplated financing transactions related to the proposed merger. The following unaudited condensed combined pro forma financial statements have been prepared based upon historical financial statements of Yellow and Roadway. Yellow operates on a calendar quarter reporting basis. Roadway operates on 13 four-week accounting periods with 12 weeks in each of the first three quarters and 16 weeks in the fourth quarter. Additionally, the unaudited condensed combined pro forma financial statements reflect certain balance sheet and statement of operations reclassifications made to conform Roadways presentations to those of Yellow. The unaudited condensed combined pro forma financial statements should be read in conjunction with:
| Yellows historical audited consolidated financial statements for the year ended December 31, 2002, and its unaudited condensed consolidated financial statements as of June 30, 2003 and for the six months ended June 30, 2003; and |
| Roadways historical audited consolidated financial statements for the year ended December 31, 2002, and its unaudited condensed consolidated financial statements as of June 21, 2003 and for the twenty-four week period (two quarters) ended June 21, 2003. |
The unaudited condensed combined pro forma balance sheet was prepared by combining Yellows historical unaudited consolidated balance sheet as of June 30, 2003 and Roadways historical unaudited consolidated balance sheet as of June 21, 2003, adjusted to reflect the proposed merger, the proceeds of Yellows recent offering of its 5.0% contingent convertible senior notes due 2023 and the consummation of Yellows other currently contemplated financing transactions related to the proposed merger, as if each had occurred at June 30, 2003.
The unaudited condensed combined pro forma statements of operations were prepared using the historical consolidated statements of operations for both Yellow and Roadway assuming the proposed merger and related
1
transactions had each occurred on January 1, 2002. The unaudited condensed combined pro forma statement of operations for the year ended December 31, 2002 was prepared by combining the historical audited consolidated statement of operations of Yellow and the historical audited consolidated statement of income of Roadway for the year ended December 31, 2002. The unaudited condensed combined pro forma statement of operations for the six months ended June 30, 2003 was prepared by combining the historical unaudited consolidated statement of operations of Yellow for the six month period ended June 30, 2003 and the historical unaudited consolidated statement of income of Roadway for the twenty-four week period (two quarters) ended June 21, 2003. The unaudited condensed combined pro forma statements of operations give effect to the costs associated with financing the proposed merger, including interest expense and amortization of deferred financing costs associated with Yellows recent offering of its 5.0% contingent convertible senior notes due 2023 and other currently contemplated financing transactions related to the proposed merger, and the impact of other purchase accounting adjustments.
The unaudited condensed combined pro forma financial statements are prepared for illustrative purposes only, and are not necessarily indicative of the operating results or financial position that would have occurred if the merger transaction described above had been consummated at the beginning of the periods or the dates indicated, nor are they necessarily indicative of any future operating results or financial position. The unaudited condensed combined pro forma financial statements do not include any adjustments related to any restructuring charges, profit improvements, potential cost savings or one-time charges which may result from the proposed merger or the result of final valuations of tangible and intangible assets and liabilities.
The process of valuing Roadways tangible and intangible assets and liabilities as well as evaluating accounting policies for conformity is still in the preliminary stages. Material revisions to our current estimates could be necessary as the valuation process and accounting policy review are finalized. Following closing of the proposed merger, we will finalize the process of determining the fair value at the date of acquisition of the tangible and intangible assets and liabilities of Roadway. As a result of this process, we anticipate that a portion of the amount classified as goodwill in the unaudited condensed combined pro forma financial statements, which in accordance with Statement of Financial Accounting Standards No. 142 will not be amortized, will be reclassified to the tangible and identified intangible assets and liabilities acquired, based on their estimated fair values at the date of acquisition. These tangible and identified intangible assets will be depreciated and amortized over their estimated useful lives. As a result, the actual amount of depreciation and amortization expense may be materially different from that presented in the unaudited condensed combined pro forma statements of operations and the effects cannot be quantified at this time.
The proposed merger had not been consummated as of the preparation of these unaudited condensed combined pro forma financial statements.
2
Unaudited Condensed Combined Pro Forma Balance Sheet
At June 30, 2003
Historical |
Pro Forma |
|||||||||||||||
Yellow |
Roadway (at June 21, 2003) |
Adjustments |
Combined |
|||||||||||||
(in thousands) | ||||||||||||||||
ASSETS | ||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 49,811 | $ | 125,692 | $ | (490,395 | ) (1) | $ | 8,618 | |||||||
250,000 | (2) | |||||||||||||||
325,000 | (3) | |||||||||||||||
53,000 | (4) | |||||||||||||||
(100,000 | ) (5) | |||||||||||||||
(93,450 | ) (6) | |||||||||||||||
(111,040 | ) (7) | |||||||||||||||
Accounts receivable, net |
334,360 | 215,055 | 25,400 | (8) | 674,815 | |||||||||||
100,000 | (5) | |||||||||||||||
Prepaid expenses and other |
31,765 | 49,541 | (16,795 | ) (9) | 64,511 | |||||||||||
Total current assets |
415,936 | 390,288 | (58,280 | ) | 747,944 | |||||||||||
Property and equipment, at cost |
1,698,586 | 1,511,699 | 225,000 | (10) | 2,419,603 | |||||||||||
(1,015,682 | )(11) | |||||||||||||||
Less: accumulated depreciation |
(1,127,405 | ) | (1,015,682 | ) | 1,015,682 | (11) | (1,127,405 | ) | ||||||||
Net property and equipment |
571,181 | 496,017 | 225,000 | 1,292,198 | ||||||||||||
Goodwill |
20,469 | 286,181 | 812,389 | (1) | 832,858 | |||||||||||
(286,181 | )(12) | |||||||||||||||
Deferred income taxes |
| 44,598 | (44,598 | ) (9) | | |||||||||||
Other assets |
33,095 | 46,495 | 25,400 | (6) | 96,871 | |||||||||||
(8,119 | ) (7) | |||||||||||||||
Total Assets |
$ | 1,040,681 | $ | 1,263,579 | $ | 665,611 | $ | 2,969,871 | ||||||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 71,283 | $ | 164,806 | $ | (57,526 | )(13) | $ | 178,563 | |||||||
Wages, vacations and employees benefits |
166,369 | 125,162 | 291,531 | |||||||||||||
Other current and accrued liabilities |
113,572 | 51,378 | (16,795 | ) (9) | 200,994 | |||||||||||
(4,687 | ) (9) | |||||||||||||||
57,526 | (13) | |||||||||||||||
ABS borrowings |
50,000 | | 53,000 | (4) | 103,000 | |||||||||||
Current maturities of long-term debt |
40,259 | 10,511 | (45,761 | ) (7) | 5,009 | |||||||||||
Total current liabilities |
441,483 | 351,857 | (14,243 | ) | 779,097 | |||||||||||
Long-term liabilities: |
||||||||||||||||
Long-term debt, less current portion |
33,983 | 270,279 | 250,000 | (2) | 840,573 | |||||||||||
325,000 | (3) | |||||||||||||||
(65,279 | ) (7) | |||||||||||||||
26,590 | (14) | |||||||||||||||
Claims and other liabilities |
76,967 | 65,029 | 37,900 | (15) | 173,196 | |||||||||||
(6,700 | )(16) | |||||||||||||||
Accrued pension and postretirement health care |
76,293 | 147,800 | 50,800 | (17) | 274,893 | |||||||||||
Deferred income taxes |
27,089 | 10,476 | 11,328 | (9) | 48,893 | |||||||||||
Total long-term liabilities |
214,332 | 493,584 | 629,639 | 1,337,555 | ||||||||||||
Total shareholders equity |
384,866 | 418,138 | 472,742 | (1) | 853,219 | |||||||||||
(418,138 | )(18) | |||||||||||||||
(4,389 | )(19) | |||||||||||||||
Total Liabilities and Shareholders Equity |
$ | 1,040,681 | $ | 1,263,579 | $ | 665,611 | $ | 2,969,871 | ||||||||
3
Unaudited Condensed Combined Pro Forma Statement of Operations
For the Year Ended December 31, 2002
Historical |
Pro Forma |
|||||||||||||||
Yellow |
Roadway |
Adjustments |
Combined |
|||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Revenue |
$ | 2,624,148 | $ | 3,010,776 | $ | 3,000 | (8) | $ | 5,637,924 | |||||||
Operating expenses: |
||||||||||||||||
Salaries, wages and employees benefits |
1,717,382 | 1,934,482 | 3,651,864 | |||||||||||||
Operating expenses and supplies |
385,522 | 479,415 | (2,154 | )(13) | 862,783 | |||||||||||
Operating taxes and licenses |
75,737 | 76,662 | 152,399 | |||||||||||||
Claims and insurance |
57,197 | 63,621 | 120,818 | |||||||||||||
Depreciation and amortization |
79,334 | 75,786 | 2,154 | (13) | 157,174 | |||||||||||
(100 | )(20) | |||||||||||||||
Purchased transportation |
253,677 | 289,612 | 543,289 | |||||||||||||
(Gains) losses on property disposals, net |
425 | (650 | ) | (225 | ) | |||||||||||
Spin-off and reorganization charges |
8,010 | | 8,010 | |||||||||||||
Total operating expenses |
2,577,284 | 2,918,928 | (100 | ) | 5,496,112 | |||||||||||
Operating income |
46,864 | 91,848 | 3,100 | 141,812 | ||||||||||||
Interest expense |
7,211 | 23,268 | 3,249 | (13) | 59,642 | |||||||||||
25,914 | (21) | |||||||||||||||
ABS facility charges |
2,576 | 3,688 | (6,264 | )(21) | | |||||||||||
Other, net |
(509 | ) | 2,855 | (3,249 | )(13) | (903 | ) | |||||||||
Nonoperating expenses, net |
9,278 | 29,811 | 19,650 | 58,739 | ||||||||||||
Income from continuing operations before income taxes |
37,586 | 62,037 | (16,550 | ) | 83,073 | |||||||||||
Income tax provision |
13,613 | 26,895 | (6,620 | )(22) | 33,888 | |||||||||||
Income from continuing operations |
$ | 23,973 | $ | 35,142 | $ | (9,930 | ) | $ | 49,185 | |||||||
Earnings per share from continuing operations: |
||||||||||||||||
Basic |
$ | 0.86 | $ | 1.90 | $ | 1.03 | ||||||||||
Diluted |
0.84 | 1.85 | 1.02 | |||||||||||||
Average common shares outstanding: |
||||||||||||||||
Basic |
28,004 | 18,507 | 47,661 | |||||||||||||
Diluted |
28,371 | 18,999 | 48,028 |
4
Unaudited Condensed Combined Pro Forma Statement of Operations
For the Six Months Ended June 30, 2003
Historical |
Pro Forma |
||||||||||||||
Yellow |
Roadway (for the two |
Adjustments |
Combined |
||||||||||||
(in thousands, except per share data) | |||||||||||||||
Revenue |
$ | 1,394,546 | $ | 1,495,598 | $ | 7,300 | (8) | $ | 2,897,444 | ||||||
Operating expenses: |
|||||||||||||||
Salaries, wages and employees benefits |
896,784 | 943,658 | 1,840,442 | ||||||||||||
Operating expenses and supplies |
213,851 | 260,434 | (302 | )(13) | 473,983 | ||||||||||
Operating taxes and licenses |
39,259 | 38,554 | 77,813 | ||||||||||||
Claims and insurance |
23,454 | 29,641 | 53,095 | ||||||||||||
Depreciation and amortization |
41,086 | 34,169 | 302 | (13) | 75,507 | ||||||||||
(50 | )(20) | ||||||||||||||
Purchased transportation |
135,979 | 150,509 | 286,488 | ||||||||||||
Losses on property disposals, net |
41 | 841 | 882 | ||||||||||||
Spin-off and reorganization charges |
| | | ||||||||||||
Total operating expenses |
1,350,454 | 1,457,806 | (50 | ) | 2,808,210 | ||||||||||
Operating income |
44,092 | 37,792 | 7,350 | 89,234 | |||||||||||
Interest expense |
5,271 | 9,881 | 2,223 | (13) | 29,345 | ||||||||||
11,970 | (21) | ||||||||||||||
ABS facility charges |
| 1,813 | (1,813 | )(21) | | ||||||||||
Other, net |
(436 | ) | 1,144 | (2,223 | )(13) | (1,515 | ) | ||||||||
Nonoperating expenses, net |
4,835 | 12,838 | 10,157 | 27,830 | |||||||||||
Income from continuing operations before income taxes |
39,257 | 24,954 | (2,807 | ) | 61,404 | ||||||||||
Income tax provision |
15,271 | 10,481 | (1,123 | )(22) | 24,629 | ||||||||||
Income from continuing operations |
$ | 23,986 | $ | 14,473 | $ | (1,684 | ) | $ | 36,775 | ||||||
Earnings per share from continuing operations: |
|||||||||||||||
Basic |
$ | 0.81 | $ | 0.77 | $ | 0.75 | |||||||||
Diluted |
0.80 | 0.76 | 0.74 | ||||||||||||
Average common shares outstanding: |
|||||||||||||||
Basic |
29,585 | 18,802 | 49,242 | ||||||||||||
Diluted |
29,826 | 19,177 | 49,483 |
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NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA
FINANCIAL STATEMENTS
(1) | The process of valuing Roadways tangible and intangible assets and liabilities as well as evaluating accounting policies for conformity is still in the preliminary stages. Material revisions to our current estimates could be necessary as the valuation process and accounting policy review are finalized. These unaudited condensed combined pro forma financial statements are not necessarily indicative of the operating results or financial position that would have occurred had the proposed merger been consummated at the dates indicated, nor necessarily indicative of future operating results. |
The purchase price is estimated as follows (in thousands, except per share data):
Merger consideration of approximately $963.1 million, based on $24.00 cash consideration per Roadway share, a fixed exchange ratio of 1.924 Yellow shares for each Roadway share, and the assumption of a 50% cash, 50% stock election by Roadway shareholders. For purchase accounting purposes, the Yellow common stock component of the merger consideration was valued at $24.05 per share, which represents the simple average of the daily opening and closing trade prices for the period from July 3, 2003 through July 10, 2003, the period immediately surrounding the date of the announcement of the proposed merger.
Cash |
$ | 490,395 | ||
Common stock (19.7 million Yellow shares) |
472,742 | |||
Total merger consideration |
963,137 | |||
Acquisition and change of control costs |
49,150 | |||
Total purchase price |
1,012,287 | |||
Net tangible assets acquired at fair value |
199,898 | * | ||
Costs in excess of net tangible assets of the acquired company (Goodwill) |
$ | 812,389 | ** | |
* | Net tangible assets acquired at fair value is comprised of the following (in thousands): |
Roadway historical net tangible assets at June 21, 2003 |
$ | 131,957 | ||||
Purchase accounting adjustments, as described in the following notes: |
||||||
Merger-related expenses incurred by Roadway |
(11,900 | ) | ||||
Write-off of certain deferred financing costs |
(8,003 | ) | ||||
Conform revenue recognition policy |
25,400 | |||||
Adjust property and equipment to fair value |
225,000 | |||||
Adjust senior notes to fair value |
(26,590 | ) | ||||
Conform workers compensation policy |
(37,900 | ) | ||||
Elimination of accrual for Roadway deferred shares |
6,700 | |||||
Adjustment to pension and postretirement health care liabilities |
(50,800 | ) | ||||
Current and deferred income taxes associated with purchase accounting adjustments |
(53,966 | ) | ||||
Total purchase accounting adjustments |
67,941 | |||||
Net tangible assets acquired at fair value |
$ | 199,898 | ||||
** | Goodwill reflects the preliminary estimated adjustment for the costs in excess of net tangible assets of Roadway at estimated fair value. Subsequent to closing of the merger, we will be completing a study to determine the allocation of the total purchase price to the various tangible and intangible assets acquired and the liabilities assumed in order to allocate the purchase price. Management believes, on a preliminary basis, there may be intangible assets that will be assigned a fair value in the purchase price allocation. The sensitivity of the valuations regarding the above can be significant. Accordingly, as we conclude our evaluation of the assets acquired and liabilities assumed upon closing the merger, allocation of the purchase price among the tangible and intangible assets will be subject to change. Any such change may also impact results of operations. |
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(2) | Reflects gross proceeds of Yellows recent offering of $250.0 million aggregate principal amount of its 5.0% contingent convertible senior notes due 2023. |
(3) | Reflects gross proceeds of Yellows other currently contemplated financing transactions related to the proposed merger, comprised of $175.0 million of secured term loan borrowings and $150.0 million of senior unsecured debt securities. |
(4) | Reflects additional borrowings under Yellows asset backed securitization (ABS) facility. |
(5) | Reflects the elimination of Roadways ABS facility as a component of the currently contemplated financing transactions. As Roadways ABS facility receives sales treatment for financial reporting purposes and is therefore not reflected on its balance sheets, elimination of that facility effectively brings accounts receivable back onto the balance sheet. |
(6) | Represents costs associated with completing the proposed merger and the currently contemplated financing transactions, including Yellows recent offering of its 5.0% contingent convertible senior notes due 2023, as follows (in thousands): |
Direct transaction costs, including investment banking, legal, accounting and other fees: |
||||
Yellow |
$ | 12,650 | ||
Roadway |
11,900 | |||
Deferred debt issuance costs |
25,400 | |||
Bridge financing costs |
4,500 | |||
Debt prepayment penalties |
2,500 | |||
Director, officer and fiduciary insurance premium costs |
6,100 | * | ||
Change of control costs |
30,400 | ** | ||
Total |
$ | 93,450 | ||
* | This item represents the estimated cost to provide director, officer and fiduciary liability insurance coverage for Roadway directors, officers and employees for periods prior to the date of the proposed merger. In accordance with the merger agreement, this coverage will be provided for six years after the effective date of the proposed merger. |
** | The change of control costs represent the estimated maximum cost of various change of control provisions for key Roadway executives. |
(7) | Reflects the payoff of certain existing indebtedness in conjunction with the currently contemplated financing transactions and the write-off of deferred financing costs. |
(8) | Represents the adjustment necessary to conform Roadways revenue recognition policy to the policy used by Yellow. |
(9) | Represents the impact on currently payable and deferred income taxes of the pro forma adjustments presented. |
(10) | Represents the net adjustment to Roadways property and equipment based on initially estimated fair values. |
(11) | Represents the elimination of Roadways historical accumulated depreciation. |
(12) | Represents the elimination of the historical goodwill of Roadway. |
(13) | Reflects certain balance sheet and statement of operations reclassifications made to conform Roadways presentation to the presentation used by Yellow. |
(14) | Represents an increase in the fair value of Roadways senior notes based on current market prices. |
(15) | Represents the estimated adjustment necessary to conform Roadways workers compensation accrual policy to the policy used by Yellow. |
(16) | Represents the elimination of the accrual previously established for shares of Roadway common stock that were deferred by the recipient under one of Roadways compensation plans. These shares of Roadway common stock were distributed to the recipients upon the initial filing of this joint proxy statement/prospectus. |
(17) | Represents the estimated adjustment necessary to eliminate previously unrecognized gains or losses, prior service cost, and transition assets or obligations related to Roadways defined benefit pension and postretirement health care benefit plans for employees not covered by collective bargaining agreements. |
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(18) | Represents the elimination of Roadways historical shareholders equity balances. |
(19) | Represents the after-tax impact of bridge financing costs, debt prepayment penalties, and the write-off of Yellows deferred financing costs associated with completing the currently contemplated financing transactions. |
(20) | Adjustment to record lower depreciation expense on the new basis of Roadways property and equipment. The fair value of longer-lived assets increased while the fair value of shorter-lived assets decreased. |
(21) | Adjustment to record additional interest expense and amortization of deferred financing costs on borrowings related to Yellows recent offering of its 5.0% contingent convertible senior notes due 2023 and other currently contemplated financing transactions related to the proposed merger. The estimated weighted average annual interest rate of the currently contemplated debt structure is 6.1%. A 1/8th% change in the variable interest rates associated with these borrowings would have a $0.3 million effect on annual interest expense. A $10.0 million change in the amount of borrowings necessary to finance the proposed merger would have a $0.6 million effect on annual interest expense. |
(22) | Adjustment to record the income tax impact of the pro forma adjustments at an effective income tax rate of 40.0%. |
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Exhibit 99.5
You should pay particular attention to the following risks related to the proposed merger of Roadway Corporation (Roadway) with and into a subsidiary of Yellow Corporation (Yellow) and the business of the combined company (Yellow Roadway):
Risks of the Merger
The merger is subject to certain conditions to closing that, if not satisfied or waived, will result in the merger not being completed.
The merger is subject to customary conditions to closing, as set forth in the merger agreement. The conditions to the merger include, among others, the receipt of required approvals from Yellows stockholders and Roadways stockholders. If any of the conditions to the merger is not satisfied or, if waiver is permissible, not waived, the merger will not be completed. In addition, under circumstances specified in the merger agreement, Yellow or Roadway may terminate the merger agreement. As a result, we cannot assure you that we will complete the merger. If we do not complete the merger, the price of Yellow common stock or Roadway common stock may decline to the extent that the current market price of both Yellow common stock and Roadway common stock reflect a market assumption that the merger will be completed. Furthermore, our respective businesses may be harmed to the extent that customers, suppliers and others believe that Yellow and Roadway cannot effectively compete in the marketplace without the merger, or otherwise remain uncertain about either of us. Yellow and Roadway will also be obligated to pay certain investment banking, financing, legal and accounting fees in connection with the merger, whether or not the merger is completed. Moreover, under specified circumstances, Yellow and Roadway may be required to pay a termination fee of $25 million to the other in connection with the termination of the merger agreement.
We may face difficulties in achieving the expected benefits of the merger.
Yellow and Roadway currently operate as separate companies. Management has no experience running the combined business, and we may not be able to realize the operating efficiencies, synergies, cost savings or other benefits expected from the merger. In addition, the costs we incur in implementing synergies, including our ability to terminate, amend or renegotiate prior contractual commitments of Yellow and Roadway, may be greater than expected. We also may suffer a loss of employees, customers or suppliers, a loss of revenues, or an increase in operating or other costs or other difficulties relating to the merger.
Certain directors and executive officers of Roadway have interests and arrangements that are different from Roadways stockholders and that may influence or have influenced their decision to support or approve the merger.
When considering the recommendation of Roadways board of directors with respect to the merger, holders of Roadway common stock should be aware that certain of Roadways directors and executive officers have interests in the merger that are different from, or in addition to, their interests as Roadway stockholders and the interests of Roadway stockholders generally. These interests include, among other things, the following:
| the appointment of three of Roadways current directors to Yellows board of directors; |
| under the terms of the change in control severance agreements entered into between Roadway and certain of its officers, if an officers employment with Roadway (or its successor) is terminated during the severance period (as defined in the officers change in control severance agreement), that officer is entitled to severance benefits, including excise tax gross-up payments; |
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| as of the initial filing date of this joint proxy statement/prospectus, acceleration of vesting of stock options and restricted stock for officers under the terms of the Roadway Equity Ownership Plan and the Roadway Management Incentive Stock Plan and the acceleration of vesting of restricted stock for directors under the terms of the Roadway Non-Employee Directors Equity Ownership Plan; |
| as of the initial filing date of this joint proxy statement/prospectus, distribution of deferred shares and cash (including accelerated retirement credits) to officers under the terms of the Roadway Deferred Compensation Plan; |
| receipt of stock, and in some cases, a cash payment in exchange for the cancellation and termination of unexercised options held by officers and directors under the terms of the merger agreement; |
| indemnification of directors and officers of Roadway against certain liabilities arising both before and, in some cases, after the merger; and |
| liability insurance for certain directors and officers of Roadway. |
As a result, these directors and executive officers may be more likely to support and to vote to approve the merger than if they did not have these interests. Holders of Roadway common stock should consider whether these interests may have influenced these directors and officers to support or recommend approval of the merger. These directors and executive officers own and are entitled to vote shares of Roadway common stock .
The market value of shares of Yellow common stock that Roadway stockholders will receive in the merger will vary because the exchange ratio is fixed within a range of Yellows stock price, potentially resulting in Roadway stockholders receiving a lower dollar value of Yellow common stock at the time of completion of the merger.
The exchange ratio is a fixed ratio within a range of $21.21 to $28.69 per share of Yellow common stock and will not be adjusted as a result of an increase or decrease in the price per share of Yellow common stock within that range or for any increase or decrease in the price per share of Roadway common stock. The prices of Yellow common stock and Roadway common stock at the time the merger is completed may be higher or lower than their price on the date of this document or on the date of the special meetings of Yellow stockholders and Roadway stockholders. Changes in the business, operations or prospects of Yellow or Roadway, market assessments of the benefits of the merger and of the likelihood that the merger will be completed, regulatory considerations, general market and economic conditions, or other factors may affect the prices of Yellow common stock or Roadway common stock. Most of these factors are beyond our control.
Because the merger will be completed only after the special meetings of our respective stockholders are held, there is no way to be sure that the price of the Yellow common stock now, or on the date of the special meetings, will be indicative of its price over the period used to determine the average closing price or at the time the merger is completed. We urge you to obtain current market quotations for shares of both Yellow common stock and Roadway common stock. Roadway does not have a right to terminate the merger agreement based solely upon changes in the market price of either Roadway common stock or Yellow common stock.
The pro forma financial data included in this Current Report on Form 8-K is preliminary and our actual financial position and results of operations may differ significantly and adversely from the pro forma amounts included in this Current Report on Form 8-K.
The process of valuing Roadways tangible and intangible assets and liabilities, as well as
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evaluating Roadways accounting policies for conformity is still in the preliminary stages. Material revisions to current estimates could be necessary as the valuation process and accounting policy review are finalized.
The unaudited pro forma operating data contained in this Current Report on Form 8-K is not necessarily indicative of the results that actually would have been achieved had the recent offering of Yellows 5.0% contingent convertible senior notes due 2023, the proposed merger and Yellows other currently contemplated financing transactions related to the merger been consummated on January 1, 2002, or that may be achieved in the future. We can provide no assurances as to how the operations and assets of both companies would have been run if they had been combined, or how they will be run in the future, which, together with other factors, could have a significant effect on the results of operations and financial position of the combined company.
Yellow Roadway will have higher levels of indebtedness than either Yellow or Roadway had before the merger.
You should consider that following the merger Yellow Roadway will have higher levels of debt and interest expense than either company had immediately prior to the merger on a stand-alone basis. As of June 30, 2003, after giving effect to the merger, Yellows recent offering of its 5.0% contingent convertible senior notes due 2023 and other currently contemplated related financings, the combined company and its subsidiaries would have had approximately $948.6 million of indebtedness outstanding. The significant level of combined indebtedness after the merger may have an effect on our future operations, including:
| limiting our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; |
| increasing our vulnerability to general economic downturns, competition and industry conditions, which could place us at a competitive disadvantage compared to our competitors that are less leveraged; |
| increasing our exposure to rising interest rates because a portion of our borrowings will be at variable interest rates; |
| reducing the availability of our cash flow to fund our working capital requirements, capital expenditures, acquisitions, investments and other general corporate requirements because we will be required to use a substantial portion of our cash flow to service debt obligations; and |
| limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate. |
See Recent and Proposed Financings on page 113 of this joint proxy statement/prospectus.
The occurrence of certain events may prevent tax counsel from issuing an opinion that the merger constitutes a reorganization under Section 368(a) of the Internal Revenue Code, which is a condition to closing the merger.
The completion of the merger is conditioned on, among other things, receipt of opinions from tax counsel for each of Yellow and Roadway that the merger will qualify as a reorganization under Section 368(a) of the Internal Revenue Code. These opinions will be delivered only if, among other things, the Roadway stockholders receive in the merger, in the aggregate, Yellow shares with a value equal to at least 45% of the combined value of the total consideration paid for all Roadway shares, taking into account, among other things, the amount of cash paid or deemed paid to Roadway stockholders in connection with the merger (including cash received by Roadway stockholders who perfect their dissenters rights and cash received in lieu of fractional Yellow shares).
In addition to the market value of the Yellow shares on the date of the merger and the other items described above, various factors affect the determination of whether the value of the Yellow shares received by the
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Roadway stockholders in the merger is equal to at least 45% of the combined value of the total consideration paid for all Roadway shares, including:
| the amount, if any, to be paid to Roadway stockholders who perfect their dissenters rights; |
| whether prior to or in connection with the merger Roadway or Yellow (or parties related to either) redeems, repurchases or otherwise acquires Roadway shares or makes distributions to the Roadway stockholders (none of Roadway, Yellow or any corporation related to Roadway or Yellow has redeemed or purchased, or has any plan or intention to redeem or purchase, any Roadway shares in connection with the merger); and |
| whether there will be any repurchases by Yellow (or parties related to Yellow) of the Yellow shares to be issued in the merger (neither Yellow nor any corporation related to Yellow has any plan or intention to repurchase any of the Yellow common stock to be issued in the merger). |
Risks of Yellow Roadway Following the Merger
We are subject to general economic factors that are largely out of our control, any of which could significantly reduce our operating margins and income.
Our business is subject to a number of general economic factors that may significantly reduce our operating margins and income, many of which are largely out of our control. These include recessionary economic cycles and downturns in customers business cycles and changes in their business practices, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers. Economic conditions may adversely affect our customers business levels, the amount of transportation services they need and their ability to pay for our services. Customers encountering adverse economic conditions represent a greater potential for loss, and we may be required to increase our reserve for bad-debt losses.
The transportation industry is affected by business risks that are largely out of our control, any of which could significantly reduce our operating margins and income.
Businesses operating in the transportation industry are affected by risks that are largely out of our control, any of which could significantly reduce our operating margins and income. These factors include weather, excess capacity in the transportation industry, interest rates, fuel prices and taxes, license and registration fees, and insurance premiums and self-insurance levels. Our results of operations may also be affected by seasonal factors.
We operate in a highly competitive industry, and our business will suffer if we are unable to adequately address potential downward pricing pressures and other factors that may adversely affect our operations and significantly reduce our operating margins and income.
Numerous competitive factors could impair our ability to maintain our current profitability. These factors include the following:
| We compete with many other transportation service providers of varying sizes, some of which have more equipment and greater capital resources than we do or have other competitive advantages. |
| Some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which limits our ability to maintain or increase prices or maintain significant growth in our business. |
| Our customers may negotiate rates or contracts that minimize or eliminate our ability to continue passing on fuel price increases to our customers. |
| Many customers reduce the number of carriers they use by selecting so-called core carriers as approved transportation service providers, and in some instances we may not be selected. |
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| Many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress prices or result in the loss of some business to competitors. |
| The trend towards consolidation in the ground transportation industry may create other large carriers with greater financial resources and other competitive advantages relating to their size. |
| Advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments. |
| Competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and prices. |
If our relationship with our employees were to deteriorate, we may be faced with labor shortages, disruptions or stoppages, which could adversely affect our business and reduce our operating margins and income and place us at a disadvantage relative to non-union competitors.
Our operations rely heavily on our employees, and any labor shortage, disruption or stoppage caused by poor relations with our employees or the renegotiation of labor contracts could reduce our operating margins and income. Approximately 80% of Yellows and approximately 78% of Roadways employees are organized by the International Brotherhood of Teamsters and their wages and benefits are governed by a common labor agreement that is renegotiated every three to five years. The current five-year labor agreement will expire on March 31, 2008. It is possible that we could become subject to additional work rules imposed by agreements with labor unions, or that work stoppages or other labor disturbances could occur in the future, any of which could reduce our operating margins and income. Similarly, any failure to negotiate a new labor agreement when required might result in a work stoppage that could reduce our operating margins and income and place us at a disadvantage relative to non-union competitors.
Ongoing insurance and claims expenses could significantly reduce our income.
Our future insurance and claims expenses might exceed historical levels, which could significantly reduce our earnings. Yellow and Roadway currently self-insure for a portion of their claims exposure resulting from cargo loss, personal injury, property damage and workers compensation. If the number or severity of claims for which we are self-insured increases, our earnings could be significantly reduced. Yellow and Roadway also maintain insurance with licensed insurance companies above the amounts for which they self-insure.
We will have significant ongoing capital requirements that could reduce our income if we are unable to generate sufficient cash from operations.
The transportation industry is very capital intensive. If we are unable to generate sufficient cash from operations in the future, we may have to limit our growth, enter into additional financing arrangements, or operate our revenue equipment for longer periods, any of which could reduce our income. Our ability to incur additional indebtedness could be adversely affected by any increase in requirements that we post letters of credit in support of our insurance policies. See Ongoing insurance and claims expenses could significantly reduce our income. Lack of availability of surety bonds in the future could result in our having to post additional letters of credit, which would in turn reduce borrowing availability under our credit agreement. If needed, additional indebtedness may not be available on terms acceptable to us.
We operate in a highly regulated industry, and costs of compliance with, or liability for violation of, existing or future regulations could significantly increase our costs of doing business.
The U.S. Department of Transportation and various state and federal agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations and safety. We may also become subject to new or more restrictive regulations imposed by the Department of Transportation, the Occupational Safety and Health Administration or other authorities relating to engine exhaust
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emissions, security and other matters. Compliance with such regulations could substantially impair equipment productivity and increase our costs.
The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from diesel engines through 2007. These reductions began with diesel engines manufactured late in 2002. The regulations currently include subsequent reductions in the sulfur content of diesel fuel in 2006 and the introduction of emissions after-treatment devices on newly manufactured engines in 2007. These regulations could result in higher prices for tractors and increased fuel and maintenance costs.
We are subject to various environmental laws and regulations, and costs of compliance with, or liabilities for violations of, existing or future regulations could significantly increase our costs of doing business.
Our operations are subject to environmental laws and regulations dealing with, among other things, the handling of hazardous materials, underground fuel storage tanks and discharge and retention of stormwater. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable laws or regulations, it could significantly increase our cost of doing business. Under specific environmental laws, we could be held responsible for all of the costs relating to any contamination at our past or present facilities and at third party waste disposal sites. If we fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.
Following the merger, the combined company could be responsible for certain federal tax obligations of Roadway under a tax sharing agreement with its former parent corporation.
Roadways former parent, Caliber System, Inc. (which subsequently was acquired by FDX Corporation, a wholly owned subsidiary of FedEx Corporation), is currently under examination by the Internal Revenue Service for tax years 1994 and 1995, years prior to the spin-off of Roadway. The Internal Revenue Service has proposed substantial adjustments for these tax years for multi-employer pension plan deductions. The Internal Revenue Service is challenging the timing, but not the validity, of these deductions. Roadway is unable to predict the ultimate outcome of this matter; however, its former parent intends to vigorously contest these proposed adjustments.
Under a tax sharing agreement entered into by Roadway and its former parent at the time of the spin-off, Roadway is obligated to reimburse its former parent for any additional taxes and interest that relate to Roadways business prior to the spin-off. The amount and timing of any payments is dependent on the ultimate resolution of the former parents disputes with the Internal Revenue Service and the determination of the nature and extent of the obligations under the tax sharing agreement. On January 16, 2003, Roadway made a $14 million payment to its former parent under the tax sharing agreement for taxes and interest related to certain of the proposed adjustments for tax years 1994 and 1995.
We estimate the possible range of the remaining payments that may be due to Roadways former parent to be approximately $0 to $16 million in additional taxes and $0 to $10 million in related interest, net of tax benefit. Roadway has established specific reserves with respect to these proposed adjustments. There can be no assurance, however, that the amount or timing of any liability of Roadway to its former parent will not have a material adverse effect on the results of operations and financial position of the combined company.
In addition, Roadway has a similar tax issue in each of its subsequent federal income tax returns, and in the event of an adverse determination in the Federal Express tax case, it is likely that the Internal Revenue Service will make additional claims for taxes for those subsequent tax years.
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We may be obligated to make additional contributions to multiemployer pension plans.
Yellow and Roadway each have collective bargaining agreements with their unions that stipulate the amount of contributions that each company must make to union-sponsored, multi-employer pension plans. The Internal Revenue Code and related regulations establish minimum funding requirements for these plans. If any of these plans fail to meet these requirements and the trustees of these plans are unable to obtain waivers of the requirements from the Internal Revenue Service or reduce pension benefits to a level where the requirements are met, the Internal Revenue Service could impose an excise tax on all employers participating in these plans to correct the funding deficiency. If an excise tax were imposed on the participating employers, it could have a material adverse impact on the financial results of Yellow or Roadway.
Our management team is an important part of our business and loss of key personnel could impair our success.
We benefit from the leadership and experience of our senior management team and depend on their continued services to successfully implement our business strategy. Other than our Chief Executive Officer, William D. Zollars, we have not entered into employment agreements with members of our current management. We also have entered into a five-year employment agreement with James D. Staley, currently President and Chief Executive Officer of Roadway, to become effective upon the closing of the merger. The loss of key personnel could have a material adverse effect on our operating results, business or financial condition.
Our business may be harmed by anti-terrorism measures.
In the aftermath of the terrorist attacks on the United States, federal, state and municipal authorities have implemented and are implementing various security measures, including checkpoints and travel restrictions on large trucks. Although many companies will be adversely affected by any slowdown in the availability of freight transportation, the negative impact could affect our business disproportionately. For example, we offer specialized services that guarantee on-time delivery. If the new security measures disrupt or impede the timing of our deliveries, we may fail to meet the needs of our customers, or may incur increased expenses to do so. We cannot assure you that these measures will not significantly increase our costs and reduce our operating margins and income.
Yellow Roadways stock price may be volatile in the future, which could cause you to lose a significant portion of your investment.
The market price of Yellow Roadway common stock could be subject to significant fluctuations in response to certain factors, such as variations in our anticipated or actual results of operations, the operating results of other companies in the transportation industry, changes in conditions affecting the economy generally, including incidents of terrorism, analyst reports, general trends in the industry, sales of common stock by insiders, as well as other factors unrelated to our operating results. Volatility in the market price of Yellow Roadway common stock may prevent you from being able to sell your shares at or above the price you paid for your shares.
Our 5.0% contingent convertible senior notes due 2023 may result in dilution to our common stockholders.
Dilution in the per share value of our common stock could result from the conversion of most or all of the 5.0% contingent convertible senior notes due 2023 that we sold in a private placement in August 2003. There is currently $250 million aggregate principal amount of such notes outstanding. The notes are convertible upon the occurrence of certain events at a conversion price of $39.24 per share, subject to adjustment. Because approximately 6.4 million shares of our common stock could be issued upon the conversion of the notes, holders of our common stock could experience substantial dilution from the conversion of such notes. Furthermore, the trading price of our common stock could suffer from significant downward pressure as note holders convert these notes and sell the common shares received on conversion, encouraging short sales by the holders of such notes or other stockholders.
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This Current Report on Form 8-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words expect, will, look forward to and similar expressions are intended to identify forward-looking statements.
The expectations set forth in this joint proxy statement/prospectus and the documents incorporated by reference regarding, among other things, accretion, returns on invested capital, achievement of annual savings and synergies, achievement of strong cash flow, sufficiency of cash flow to fund capital expenditures and achievement of debt reduction targets are only the parties expectations regarding these matters. Actual results could differ materially from these expectations depending on factors such as:
| the factors described under Risk Factors; |
| the factors that generally affect Yellows and Roadways businesses as further outlined in Managements Discussion and Analysis of Financial Condition and Results of Operations in the companies Annual Reports on Form 10-K for the year ended December 31, 2002, and this joint proxy statement/prospectus, including inflation, labor relations (i.e., disruptions, strikes or work stoppages), inclement weather, availability of fuel and the price of fuel as it affects the general economy, competitor pricing activity and the general impact of competition, expense volatility, capacity levels in the motor freight industry, changes in and customer acceptance of new technology, changes in equity and debt markets, our ability to control costs and uncertainties concerning the impact terrorist activities may have on the economy and the motor freight industry, the state of international, national and regional economies and the success or failure of our operating plans, including our ability to manage growth; and |
| the fact that, following the merger, the actual results of the combined company could differ materially from the expectations set forth in this joint proxy statement/prospectus and the documents incorporated by reference depending on additional factors such as: |
| the combined companys cost of capital; |
| the ability of the combined company to identify and implement cost savings, synergies and efficiencies in the time frame needed to achieve these expectations; |
| any loss of employees, customers or suppliers that the combined company may suffer as a result of the merger; |
| the combined companys actual capital needs, the absence of any material incident of property damage or other hazard that could affect the need to effect capital expenditures and any currently unforeseen merger or acquisition opportunities that could affect capital needs; and |
| the costs incurred in implementing synergies including, but not limited to, our ability to terminate, amend or renegotiate prior contractual commitments of Yellow and Roadway. |
Yellows plans regarding the maintenance of the separate Yellow and Roadway brands and networks, the continuation of the Roadway headquarters as a major operational center, the focus on administrative and back office synergies and workforce rationalizations are only its current plans and intentions regarding these matters. Actual actions that the combined company may take may differ from time to time as the combined company may deem necessary or advisable in the best interest of the combined company and its stockholders to attempt to achieve the successful integration of the companies, the synergies needed to make the transaction a financial success and to react to the economy and the combined companys market for its transportation services.
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