Yellow (YELLQ) 10-Q 2004 Q3 Quarterly report

Exhibit 99.3

CONSOLIDATED  FINANCIAL  STATEMENTS

Roadway Next Day Corporation and Subsidiary

A wholly owned subsidiary of Yellow Roadway Corporation

Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003;

Statements of Consolidated Operations for the three and nine months ended September 30, 2004

and twelve and thirty-six weeks ended September 13, 2003;

Statements of Consolidated Cash Flows for the nine months ended September 30, 2004

and thirty-six weeks ended September 13, 2003.

CONSOLIDATED BALANCE SHEETS

Roadway Next Day Corporation and Subsidiary

A wholly owned subsidiary of Yellow Roadway Corporation

(Amounts in thousands)

(Unaudited)

	September 30, 2004		December 31, 2003
Assets
Current Assets:
Cash and cash equivalents	$	1,650	$	25,328
Accounts receivable, net		30,616		19,877
Advances receivable from parent and affiliates		22,576		—
Prepaid expenses and other		7,049		6,830
Total current assets		61,891		52,035
Property and Equipment:
Cost		88,669		74,482
Less – accumulated depreciation		6,134		521
Net property and equipment		82,535		73,961
Goodwill		58,956		122,332
Intangibles, net		64,839		89,291
Other assets		2,174		3,094
Total assets	$	270,395	$	340,713
Liabilities and Parent Company Investment
Current Liabilities:
Accounts payable	$	4,907	$	8,905
Advances payable to parent and affiliates		—		4,568
Wages, vacations and employees’ benefits		14,718		12,102
Other current and accrued liabilities		15,174		9,550
Total current liabilities		34,799		35,125
Other Liabilities:
Note payable to affiliate		153,368		150,000
Deferred income taxes, net		31,113		38,999
Accrued pension and postretirement		1,838		1,811
Claims and other liabilities		14,276		12,057
Total other liabilities		200,595		202,867
Parent Company Investment:
Capital surplus		26,199		103,259
Retained earnings		8,802		(538	)
Total parent company investment		35,001		102,721
Total liabilities and parent company investment	$	270,395	$	340,713

The accompanying notes are an integral part of these statements.

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STATEMENTS OF CONSOLIDATED OPERATIONS

Roadway Next Day Corporation and Subsidiary

A wholly owned subsidiary of Yellow Roadway Corporation

(Amounts in thousands)

(Unaudited)

	Three Months Ended September 30, 2004		Twelve Weeks Ended September 13, 2003
Operating Revenue	$	70,680	$	50,926
Operating Expenses:
Salaries, wages and employees’ benefits		45,038		33,412
Operating expenses and supplies		9,094		7,247
Operating taxes and licenses		1,760		1,390
Claims and insurance		728		527
Depreciation and amortization		2,836		2,239
Purchased transportation		901		517
Losses (gains) on property disposals, net		39		1
Acquisition expenses		—		963
Total operating expenses		60,396		46,296
Operating Income		10,284		4,630
Nonoperating (Income) Expenses:
Interest expense		3,120		4,490
Other		559		1,142
Nonoperating expenses, net		3,679		5,632
Income (Loss) From Continuing Operations Before Income Taxes		6,605		(1,002	)
Income tax provision (benefit)		2,472		(469	)
Net Income (Loss) from Continuing Operations		4,133		(533	)
Loss from discontinued operations		—		—
Net Income (Loss)	$	4,133	$	(533	)

The accompanying notes are an integral part of these statements.

Refer to Note 2 for the difference in accounting policies between the periods presented.

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STATEMENTS OF CONSOLIDATED OPERATIONS

Roadway Next Day Corporation and Subsidiary

A wholly owned subsidiary of Yellow Roadway Corporation

(Amounts in thousands)

(Unaudited)

	Nine Months Ended September 30, 2004			Thirty-six Weeks Ended September 13, 2003
Operating Revenue	$	191,102		$	150,124
Operating Expenses:
Salaries, wages and employees’ benefits		123,739			99,512
Operating expenses and supplies		24,204			22,158
Operating taxes and licenses		5,020			4,206
Claims and insurance		2,353			2,165
Depreciation and amortization		8,467			6,680
Purchased transportation		2,098			1,508
Losses (gains) on property disposals, net		(8	)		61
Acquisition expense		—			963
Total operating expenses		165,873			137,253
Operating Income		25,229			12,871
Nonoperating (Income) Expenses:
Interest expense		9,358			14,087
Other		940			3,598
Nonoperating expenses, net		10,298			17,685
Income (Loss) From Continuing Operations Before Income Taxes		14,931			(4,814	)
Income tax provision (benefit)		5,591			(1,796	)
Net Income (Loss) from Continuing Operations		9,340			(3,018	)
Loss from discontinued operations		—			(155	)
Net Income	$	9,340		$	(3,173	)

The accompanying notes are an integral part of these statements.

Refer to Note 2 for the difference in accounting policies between the periods presented.

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STATEMENTS OF CONSOLIDATED CASH FLOWS

Roadway Next Day Corporation and Subsidiary

A wholly owned subsidiary of Yellow Roadway Corporation

(Amounts in thousands)

(Unaudited)

	Nine Months Ended September 30, 2004			Thirty-six Weeks Ended September 13, 2003
Operating Activities:
Net income (loss) from continuing operations	$	9,340		$	(3,018	)
Noncash items included in net income (loss):
Depreciation and amortization		8,467			9,580
Losses (gains) on property disposals, net		(8	)		61
Deferred income tax		(699	)		(431	)
Changes in assets and liabilities, net:
Accounts receivable		(10,739	)		(2,568	)
Accounts payable		(3,998	)		(2,309	)
Other working capital items		4,140			8,929
Claims and other		2,246			1,416
Other, net		920			—
Net cash from operating activities		9,669			11,660
Investing Activities:
Acquisition of property and equipment		(10,700	)		(1,578	)
Proceeds from disposal of property and equipment		1,130			518
Net cash used in investing activities		(9,570	)		(1,060	)
Financing Activities:
Advances to parent and affiliates, net		(23,777	)		(10,300	)
Net cash used in financing activities		(23,777	)		(10,300	)
Net Increase (Decrease) In Cash and Cash Equivalents From Continuing Operations		(23,678	)		300
Net Decrease In Cash and Cash Equivalents From Discontinued Operations		—			(38	)
Cash and Cash Equivalents, Beginning of Period		25,328			12,992
Cash and Cash Equivalents, End of Period	$	1,650		$	13,254

The accompanying notes are an integral part of these statements.

Refer to Note 2 for the difference in accounting policies between the periods presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Roadway Next Day Corporation and Subsidiary

A wholly owned subsidiary of Yellow Roadway Corporation

(Unaudited)

1. Description of Business

Roadway Next Day Corporation (also referred to as “Roadway Next Day,” the “Company,” “we” or “our”) is a non-operating holding company focused on business opportunities in regional and next-day lanes. Roadway Next Day Corporation owns 100 percent of New Penn Motor Express, Inc. (“New Penn”), which provides regional, next-day ground services through a network of facilities located in the Northeastern United States, Quebec, Canada and Puerto Rico.

In accordance with Rule 3-16 of Regulation S-X and due to Roadway Next Day and New Penn pledging their stock for debt purposes, we are presenting these consolidated financial statements of Roadway Next Day Corporation. We are not presenting the separate financial statements of New Penn because:

• The separate financial statements of New Penn are substantially identical to those of Roadway Next Day Consolidated financial statements;

• The separate financial statements of the parent Roadway Next Day, when excluding New Penn, are not material to an investor, and;

• The Company would provide separate financial statements of New Penn should Roadway Next Day commence its own operations or acquire additional subsidiaries.

On December 11, 2003, Yellow Corporation completed the acquisition of Roadway Corporation. The combined company was renamed Yellow Roadway Corporation (“Yellow Roadway”). Roadway Corporation was merged with and into Roadway LLC, a newly formed limited liability company and a wholly owned subsidiary of Yellow Roadway. Consideration for the acquisition included $494.0 million in cash and 18.0 million shares of Yellow Roadway common stock for a total purchase price of approximately $1.1 billion. Roadway LLC principal segments include Roadway Express, Inc. and Roadway Next Day Corporation.

2. Principles of Consolidation and Summary of Accounting Policies

The accompanying consolidated financial statements include the accounts of Roadway Next Day and its wholly owned subsidiaries. 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 management’s 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 our consolidated financial statements included as Exhibit 99.6 to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003.

Prior to the acquisition of Roadway Corporation by Yellow Corporation on December 11, 2003, Roadway Corporation and all of its wholly owned subsidiaries, including Roadway Next Day, operated on thirteen four-week accounting periods with twelve weeks in each of the first three quarters and sixteen weeks in the fourth quarter. As part of the acquisition, Roadway Next Day adopted a calendar-quarter reporting basis as well as the significant accounting policies of Yellow Roadway Corporation. In addition, we utilized independent third party appraisers to revalue significant assets and liabilities to fair market value, therefore these financial statements are not comparable to prior periods. For accounting policies related to the Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003, and for the Statements of Consolidated Operations for the three and nine months ended September 30, 2004 and for the Statement of Consolidated Cash Flows for the nine months ended September 30, 2004 and the related notes to financial statements, please refer to the Yellow Roadway Corporation Annual Report

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on Form 10-K for the year ended December 31, 2003. For accounting policies related to the Statements of Consolidated Operations for the twelve and thirty-six weeks ended September 13, 2003 and the Statement of Consolidated Cash Flows for the thirty-six weeks ended September 13, 2003 and related notes to financial statements, please refer to our financial statements and related notes at December 11, 2003, filed as Exhibit 99.5 to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003.

3. 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. The following table shows the amount of goodwill attributable to Roadway Next Day with balances and changes therein:

(in thousands)	December 31, 2003		Purchase Accounting Reclasses/Other			September 30, 2004
Goodwill	$	122,332	$	(63,376	)	$	58,956

As the acquisition of Roadway Corporation by Yellow Corporation occurred in December 2003, the allocation of the purchase price included in the December 31, 2003 Consolidated Balance Sheets was preliminary and subject to refinement. During the nine months ended September 30, 2004, an independent asset valuation was received and certain reallocations were made related to tangible and intangible assets. The purchase price allocation has been modified to reflect the results of this valuation. These changes did not have an impact on our consolidated results of operations.

As of September 30, 2004, refinements to the purchase price allocation are substantially complete. Additional changes during the fourth quarter of 2004, if any, are not expected to have an impact on our consolidated results of operations.

The components of amortizable intangible assets are as follows:

	Weighted Average Life (years)	September 30, 2004				December 31, 2003
(in thousands)		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer related	15	$	46,200	$	2,855	$	62,900	$	192
Technology based	3		1,000		206		1,000		17
Intangible assets		$	47,200	$	3,061	$	63,900	$	209

Total marketing related intangible assets with indefinite lives were $20.7 million at September 30, 2004 and $25.6 million at December 31, 2003. These intangible assets are not subject to amortization. The change between periods related to a reclassification arising from modifications to the purchase price allocation, as discussed above, and foreign currency translation adjustments.

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4. Employee Benefits

Components of Net Periodic Pension Cost

In December 2003, the Financial Accounting Standards Board revised Statement of Financial Accounting Standards (“SFAS”) No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits (“SFAS No. 132R”). SFAS No. 132R requires the disclosure of the components of the net periodic pension cost recognized during interim periods. The following table sets forth the components of our net periodic pension cost for the three and nine months ended September 30, 2004 and the twelve and thirty-six weeks ended September 13, 2003:

(in thousands)	Three Months ended September 30, 2004		Twelve Weeks ended September 13, 2003		Nine Months ended September 30, 2004		Thirty-six Weeks ended September 13, 2003
Service cost	$	11	$	10	$	33	$	31
Interest cost		29		28		87		83
Net periodic pension cost	$	40	$	38	$	120	$	114

5. Rental Expenses

Roadway Next Day 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 nine months ended September 30, 2004 and the twelve and thirty-six weeks ended September 13, 2003:

(in thousands)	Three Months ended September 30, 2004		Twelve Weeks ended September 13, 2003		Nine Months ended September 30, 2004		Thirty-six Weeks ended September 13, 2003
Rental expense	$	265	$	94	$	439	$	242

6. Multi-Employer Pension Plans

Roadway Next Day contributes to various multi-employer health, welfare and pension plans for employees covered by collective bargaining agreements (approximately 73 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. We recognize as net pension cost the required contribution for the period and recognize as a liability any contributions due and unpaid.

Under current legislation regarding multi-employer pension plans, a termination, withdrawal or partial withdrawal from any multi-employer plan in an under-funded status would render us liable for a proportionate share of the 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. Roadway Next Day has no current intention of taking any action that would subject it to obligations under the legislation.

Roadway Next Day has collective bargaining agreements with its unions that stipulate the amount of contributions 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. Under recent legislation, qualified multi-employer plans are permitted to exclude certain recent investment losses from the minimum funding formula through 2005. If any of these plans fail to meet minimum funding requirements and the trustees of such a plan are unable to obtain a waiver of the requirements or certain changes in how the applicable plan calculates its funding

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level from the Internal Revenue Service (“IRS”) or reduce pension benefits to a level where the requirements are met, the IRS could impose an excise tax on all employers participating in these plans and contributions in excess of our contractually agreed upon rates could be required to correct the funding deficiency. If an excise tax were imposed on the participating employers and additional contributions required, it could have a material adverse impact on the financial results of Roadway Next Day.

7. Related Party Transactions

On December 10, 2003, Roadway Next Day executed a $150 million ten-year Promissory Note to Roadway Corporation (subsequently renamed Roadway LLC), accruing interest at the rate of 8.25 percent. Interest is due and payable quarterly, and the principal is due at maturity. All amounts were outstanding at September 30, 2004 and at December 31, 2003.

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