EXHIBIT 99.3
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Roadway Express, Inc. and Subsidiaries
The Period January 1, 2003 to December 11, 2003 and the
Years ended December 31, 2002 and 2001
With Report of Independent Auditors
Report of Independent Auditors
To the Board of Directors and Shareholder of Roadway Express, Inc. and
Subsidiaries
We have audited the accompanying consolidated balance sheets of Roadway Express,
Inc. and subsidiaries as of December 11, 2003 and December 31, 2002, and the
related statements of consolidated operations, parent company investment, and
cash flows for the period January 1, 2003 to December 11, 2003 and each of the
two years in the period ended December 31, 2002. These financial statements are
the responsibility of the Company's 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
Express, Inc. and subsidiaries at December 11, 2003 and December 31, 2002, and
the consolidated results of their operations and their cash flows for the period
January 1, 2003 to December 11, 2003, and each of the two years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
- ---------------------
Akron, Ohio
January 22, 2004
1
Roadway Express, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 11, DECEMBER 31
2003 2002
------------- -------------
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents $ 60,276 $ 82,016
Accounts receivable, (including retained interest in
securitized receivables in 2002), net 326,845 212,834
Prepaid expenses and supplies 16,922 13,936
Deferred income taxes 16,322 17,726
------------- -------------
Total current assets 420,365 326,512
Carrier operating property, at cost 1,383,218 1,414,794
Less allowance for depreciation 975,550 996,224
------------- -------------
Net carrier operating property 407,668 418,570
Goodwill, net 17,599 14,816
Deferred income taxes 37,320 36,525
Other assets 8,440 7,141
------------- -------------
Total assets $ 891,392 $ 803,564
============= =============
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable $ 317,142 $ 190,457
Salaries and wages 130,084 141,242
Freight and casualty claims payable 54,570 45,606
------------- -------------
Total current liabilities 501,796 377,305
Long-term liabilities:
Casualty claims and other 53,011 55,953
Long-term debt 500,000 -
Accrued pension and postretirement
health care 147,745 133,072
------------- -------------
Total long-term liabilities 700,756 189,025
------------- -------------
Parent company investment (311,160) 237,234
------------- -------------
Total liabilities and parent company investment $ 891,392 $ 803,564
============= =============
See accompanying notes.
2
Roadway Express, Inc. and Subsidiaries
Statements of Consolidated Operations
JANUARY 1 TO
DECEMBER 11, YEAR ENDED DECEMBER 31
2003 2002 2001
--------------- --------------- ---------------
(IN THOUSANDS)
Revenue $ 2,845,457 $ 2,797,582 $ 2,764,766
Operating expenses:
Salaries, wages and benefits 1,801,170 1,783,872 1,768,744
Operating supplies and expenses 494,459 462,838 475,313
Purchased transportation 312,340 287,614 271,847
Operating taxes and licenses 70,786 70,451 70,955
Insurance and claims 57,032 59,286 46,804
Depreciation and amortization 59,993 66,510 69,178
Net (gain) loss on sale of carrier operating
property (2,533) (654) 460
Compensation and other expense related to the
Yellow transaction 50,392 - -
--------------- --------------- ---------------
Total operating expenses 2,843,639 2,729,917 2,703,301
--------------- --------------- ---------------
Operating income 1,818 67,665 61,465
Other expense:
Interest expense (634) (942) (732)
Other, net (1,652) (2,957) (3,267)
--------------- --------------- ---------------
(2,286) (3,899) (3,999)
--------------- --------------- ---------------
(Loss) income before income taxes (468) 63,766 57,466
Provision for income taxes 17,275 26,927 24,231
--------------- --------------- ---------------
Net (loss) income $ (17,743) $ 36,839 $ 33,235
=============== =============== ===============
See accompanying notes.
3
Roadway Express, Inc. and Subsidiaries
Statements of Consolidated Parent Company Investment
PARENT
COMPANY
INVESTMENT
--------------
(IN THOUSANDS)
Balance at January 1, 2001 $ 339,871
Net income 33,235
Foreign currency translation adjustments (2,424)
Derivative fair value adjustments (592)
--------------
Total comprehensive income 30,219
Dividends declared (1,937)
Net transfers to Parent (167,235)
--------------
Balance at December 31, 2001 200,918
Net income 36,839
Foreign currency translation adjustments (615)
Derivative fair value adjustments 266
--------------
Total comprehensive income 36,490
Non-cash transfers to parent 17,326
Cash transfers to Parent (17,500)
--------------
Balance at December 31, 2002 237,234
Net loss (17,743)
Foreign currency translation adjustments 7,047
Derivative fair value adjustments 262
--------------
Total comprehensive loss (10,434)
Non-cash transfers to parent (492,210)
Cash transfers to Parent (45,750)
--------------
Balance at December 11, 2003 $ (311,160)
==============
See accompanying notes.
4
Roadway Express, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
JANUARY 1 TO
DECEMBER 11, YEAR ENDED DECEMBER 31
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (17,743) $ 36,839 $ 33,235
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 59,993 66,510 70,543
Loss (gain) on sale of carrier operating
property (2,533) (654) 460
Changes in assets and liabilities:
Accounts receivable (114,011) (28,406) 30,668
Other assets 7,760 (16,628) 4,058
Payables and accrued items 123,750 49,426 (28,328)
Long-term liabilities 11,730 6,343 5,193
------------ ------------ ------------
Net cash provided by operating activities 68,946 113,430 115,829
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of carrier operating property (54,916) (66,132) (69,116)
Proceeds from sale of carrier operating property 9,622 6,358 3,553
------------ ------------ ------------
Net cash (used) in investing activities (45,294) (59,774) (65,563)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of accounts receivable - - 100,000
Dividends paid - - (1,937)
Long-term borrowings 500,000 - -
Transfer to Parent (545,750) (17,500) (167,235)
------------ ------------ ------------
Net cash (used) in financing activities (45,750) (17,500) (69,172)
Effect of exchange rate changes on cash 358 (227) 54
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (21,740) 35,929 (18,852)
Cash and cash equivalents at beginning of year 82,016 46,087 64,939
------------ ------------ ------------
Cash and cash equivalents at end of year $ 60,276 $ 82,016 $ 46,087
============ ============ ============
See accompanying notes.
5
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 11, 2003
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Roadway Express, Inc. and subsidiaries (the Company) 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. Approximately
75% of the Company's employees are represented by various labor unions,
primarily the International Brotherhood of Teamsters (IBT). The current
agreement with the IBT expires on March 31, 2008.
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 direct 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
(the Parent or Roadway) and its subsidiaries were the same on a consolidated
basis after the merger as the assets and liabilities of Roadway Express, Inc.
immediately before the merger.
The accompanying consolidated financial statements are presented as if the
Company had existed as an entity separate from the Parent during all periods
presented and include the assets, liabilities, revenues and expenses that are
directly related to the Company's operations.
On July 8, 2003, Roadway Corporation announced that a definitive agreement had
been signed under which Yellow Corporation would acquire Roadway Corporation. On
December 11, 2003, the transaction was completed for approximately $1.1 billion,
based on a fixed exchange ratio of 1.752 Yellow shares per Roadway share, in a
half-cash, half-stock transaction.
PARENT COMPANY INVESTMENT AND ALLOCATIONS
Parent company investment represents the Parent's equity investment in Roadway
Express Inc. and subsidiaries. The Company receives support for its operations
from the Parent as deemed necessary. All transfers and allocations to and from
the Parent have been reported in the parent company investment account.
6
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
DEPRECIATION
Depreciation 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 INSTRUMENTS
The 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 Company recognizes all derivative financial instruments as either assets or
liabilities at fair value in the balance sheet. The Company's 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. The fair value of these financial instruments is a
liability of $64,000 net of tax at December 11, 2003.
7
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
RECEIVABLES SALES
Prior to December 11, 2003, the Company sold receivables in securitization
transactions, and retained an equity interest in the receivables pool, servicing
rights, and a cash reserve account. These constituted the retained interests in
the securitized receivables. The estimated fair value was based on the present
value of the expected cash flows, which approximated face value adjusted for
allowances for anticipated losses. The Company terminated the agreement on
December 11, 2003 (see Note 8).
CONCENTRATION OF CREDIT RISKS
The Company sells services and extends credit based on an evaluation of the
customer's financial condition, without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
GOODWILL
Goodwill 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 11, 2003, the Company had net unamortized goodwill of $17,599,000
related to its Canadian subsidiaries. Goodwill amortization was zero in 2003 and
2002, and $967,000 in 2001. The Company completed the required annual goodwill
impairment test under SFAS No. 142 for all reporting units effective June 21,
2003 which did not indicate any impairment.
8
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
CASUALTY CLAIMS PAYABLE
Casualty claims payable represent management's 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 TPAs using actual 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.
REVENUE RECOGNITION
Roadway recognizes revenue on the date that freight is delivered to the
consignee at which time all services have been rendered. In addition, all
related expenses are recognized as incurred. Roadway recognizes revenue on a
gross basis since the Company is the primary obligor in the arrangement, even if
the Company uses other transportation service providers who act on their behalf,
because the Company is responsible to the customer for complete and proper
shipment, including the risk of physical loss or damage of the goods and cargo
claims issues. In addition, Roadway retains all credit risk.
FOREIGN CURRENCY TRANSLATION
Income 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 component of parent company investment.
9
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The 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 ASSETS
In 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 flows associated with the asset would be
compared to the asset's carrying amount to determine if further impairment
testing is required.
INCOME TAXES
The Company is included in a consolidated income tax filing group with Roadway
for federal income tax purposes. The federal and state income tax provision and
related obligation and deferred taxes included in the statements of consolidated
income and consolidated balance sheets of the Company is calculated on a
separate return basis as if the Company were a separate tax payer. The Company
and its subsidiaries file tax returns and pay taxes due on a stand-alone basis
in state and foreign jurisdictions where such filings are required.
10
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CARRIER OPERATING PROPERTY
Carrier operating properties consist of the following:
DEC. 11, 2003 DEC. 31, 2002
-------------- --------------
(IN THOUSANDS)
Land $ 96,739 $ 92,734
Structures 426,676 420,245
Revenue equipment 600,744 654,320
Other operating property 259,059 247,495
-------------- --------------
Carrier operating property, at cost 1,383,218 1,414,794
Less allowance for depreciation 975,550 996,224
-------------- --------------
Net carrier operating property $ 407,668 $ 418,570
============== ==============
4. ACCOUNTS PAYABLE
Items classified as accounts payables consist of the following:
DEC. 11, 2003 DEC. 31, 2002
-------------- --------------
(IN THOUSANDS)
Trade and other payables $ 191,601 $ 68,543
Drafts outstanding 41,378 18,456
Income taxes payable 19,285 45,962
Taxes, other than income 28,738 28,942
Multi-employer health, welfare, and pension plans 36,140 28,554
-------------- --------------
Payables $ 317,142 $ 190,457
============== ==============
11
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
JANUARY 1 TO
DECEMBER 11 YEARS ENDED DECEMBER 31
------------- ------------------------------
2003 2002 2001
------------- ------------- -------------
(IN THOUSANDS)
Current taxes:
Federal $ 12,664 $ 27,290 $ 21,438
State 1,709 4,420 3,495
Foreign 4,666 4,776 (766)
------------- ------------- -------------
19,039 36,486 24,167
Deferred taxes:
Federal (1,526) (8,504) (1,221)
State (322) (990) (79)
Foreign 84 (65) 1,364
------------- ------------- -------------
(1,764) (9,559) 64
------------- ------------- -------------
Provision for income taxes $ 17,275 $ 26,927 $ 24,231
============= ============= =============
In addition to the 2003 provision for income taxes of $17,275,000, income tax
benefits of $6,002,000 were allocated directly to parent company investment
related to the restricted stock awards from the Company's parent. Income tax
payments amounted to $21,678,000 for the period January 1 to December 11, 2003,
$5,443,000 in 2002, and $24,039,000 in 2001.
Income (loss) before income taxes consists of the following:
JANUARY 1 TO
DECEMBER 11 YEARS ENDED DECEMBER 31
------------ -----------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Domestic $ (13,314) $ 52,008 $ 55,034
Foreign 12,846 11,758 2,432
------------ ------------ ------------
$ (468) $ 63,766 $ 57,466
============ ============ ============
12
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred taxes are as follows:
DEC. 11, 2003 DEC. 31, 2002
------------- -------------
(IN THOUSANDS)
Deferred tax assets:
Freight and casualty claims $ 36,456 $ 36,618
Retirement benefit liabilities 51,966 51,897
Accrued employee benefits 24,495 32,055
Other 8,274 10,058
Valuation allowance (1,930) (2,229)
------------- -------------
Total deferred tax assets 119,261 128,399
Deferred tax liabilities:
Depreciation 37,057 40,729
Multi-employer pension plans 28,654 33,420
Other (92) -
------------- -------------
Total deferred tax liabilities 65,619 74,149
------------- -------------
Net deferred tax assets $ 53,642 $ 54,250
============= =============
At December 11, 2003, the Company had approximately $5,563,000 of foreign
operating loss carryforwards, which have expiration dates ranging from 2009 to
2011. For financial reporting purposes, a valuation allowance of $1,930,000 has
been recognized to offset the deferred tax asset relating to certain foreign
operating loss carry forwards.
13
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The income tax resulting from the effective tax rate differs from the income tax
calculated using the federal statutory rate as set forth in the following
reconciliation:
JANUARY 1 TO
DECEMBER 11 YEARS ENDED DEC. 31
------------ ----------------------------
2003 2002 2001
------------ ----------- -----------
Federal statutory tax $ (164) $ 22,318 $ 20,113
State income taxes, net of federal
tax benefit 902 2,229 2,220
Non-deductible operating costs 2,191 2,030 1,745
Excise taxes 2,997 - -
Yellow transaction costs 4,269 - -
Section 280G Limitations 5,123 - -
Impact of foreign operations (7) 325 193
Other, net 1,964 25 (40)
------------ ----------- -----------
Effective tax $ 17,275 $ 26,927 $ 24,231
============ =========== ===========
6. EMPLOYEE BENEFIT PLANS
MULTI-EMPLOYER PLANS
The Company charged to operations $163,148,000 in 2003, $161,696,000 in 2002,
and $164,358,000 in 2001 for contributions to multi-employer pension plans for
employees subject to labor contracts. The Company also charged to operations
$186,704,000 in 2003, $167,032,000 in 2002, and $162,917,000 in 2001 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 Act of 1980,
total or partial withdrawal from a plan would result in an obligation to fund a
portion of the plan's unfunded vested liability. Management has no intention of
changing operations so as to subject the Company to any material obligation.
14
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. 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
of the defined benefit pension and postretirement health care benefit plans as
of December 11, 2003 and December 31, 2002:
PENSION BENEFITS HEALTH CARE BENEFITS
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 384,546 $ 328,915 $ 49,160 $ 41,721
Service cost 17,581 17,467 1,752 1,741
Interest cost 23,572 24,056 2,983 3,156
Actuarial losses 56,995 32,262 1,351 5,024
Benefits paid (27,405) (18,154) (2,312) (2,482)
---------- ---------- ---------- ----------
Benefit obligation at end of year 455,289 384,546 52,934 49,160
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 241,324 308,229 - -
Actual return on plan assets 53,990 (48,751) - -
Benefits paid (14,713) (18,154) - -
---------- ---------- ---------- ----------
Fair value of plan assets at end of year 280,601 241,324 - -
FUNDED STATUS
Plan assets less than
projected benefit obligation 174,688 143,222 52,934 49,160
Unamortized:
Net actuarial (loss) gain (45,384) (26,917) (15,042) (10,281)
Net asset at transition 7,053 8,372 - -
Prior service (cost) benefit (41,926) (43,739) 15,422 13,255
---------- ---------- ---------- ----------
Accrued benefit cost $ 94,431 $ 80,938 $ 53,314 $ 52,134
========== ========== ========== ==========
Plan assets are primarily invested in listed stocks, bonds, and cash
equivalents.
15
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the assumptions used and the related benefit cost
information:
PENSION BENEFITS HEALTH CARE BENEFITS
------------------------------------ ----------------------------------
2003 2002 2001 2003 2002 2001
---------- ---------- ---------- -------- -------- --------
(IN THOUSANDS)
WEIGHTED-AVERAGE
ASSUMPTIONS
Discount rate 6.25% 6.75% 7.50% 6.25% 6.75% 7.50%
Future compensation 3.25% 3.25% 3.25% - - -
Expected long-term
return on plan assets 8.50% 9.50% 9.50% - - -
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service cost $ 17,582 $ 17,467 $ 17,492 $ 1,752 $ 1,741 $ 1,665
Interest cost 23,572 24,056 22,558 2,983 3,156 2,881
Expected return on plan
assets (18,968) (28,574) (33,841) - - -
Amortization of:
Prior service cost
(benefit) 5,191 5,249 5,230 (1,779) (1,477) (305)
Net asset gain at
transition (1,319) (1,395) (1,396) - - -
Unrecognized gain 128 (3,940) (8,893) 537 184 (177)
---------- ---------- ---------- -------- -------- --------
Net periodic benefit
cost (income) $ 26,186 $ 12,863 $ 1,150 $ 3,493 $ 3,604 $ 4,064
========== ========== ========== ======== ======== ========
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 10.5% for 2004 declining gradually to 5.0% in 2010 and thereafter.
16
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
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 $5,938,000 and the service and interest
cost components by $618,000 as of December 11, 2003. 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 Company's policy regarding the management of health care costs
passes increases beyond a fixed threshold to the plan participants.
The Company charged to operations $10,725,000 in 2003, $10,250,000 in 2002 and
$10,788,000 in 2001 relating to its defined contribution 401(k) plan. This plan
covers employees not subject to labor contracts. Annual contributions are
related to the level of voluntary employee participation.
7. LEASES
The Company leases certain terminals and revenue equipment under noncancellable
operating leases requiring minimum future rentals aggregating $103,149,000
payable as follows: 2004 -- $37,411,000; 2005 -- $24,949,000; 2006 --
$15,544,000; 2007 -- $10,540,000; 2008 -- $6,787,000; and thereafter $7,918,000.
Rental expense for operating leases was $51,444,000, $50,718,000, and
$45,445,000 in 2003, 2002, and 2001, respectively.
The Company has an interest rate swap agreement a with major commercial bank to
fix the interest rate of its trailer leases from previous variable interest
rates principally based on LIBOR. The value of the leases upon which the
payments are based was not changed. The agreement, which expires in 2004, fixes
the Company's interest costs at 5.62% on leases with a notional amount of
$5,912,000.
The fair value of the Company's interest rate swap at December 31, 2003 is a
liability of approximately $64,000, 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 2003, the Company recognized incremental interest expense of
approximately $425,000, which is included in interest expense in the
accompanying financial statements. The ineffective portions of the Company's
interest rate swap agreements was not material.
17
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. SALE OF ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
DECEMBER 11 DECEMBER 31
------------ ------------
2003 2002
------------ ------------
(IN THOUSANDS)
Accounts receivable $ 332,041 $ 3,259
Retained interest in securitized accounts
receivable - 217,617
Allowance for doubtful accounts (5,196) (8,042)
------------ ------------
$ 326,845 $ 212,834
============ ============
On November 21, 2001, the Company 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 the Company's domestic accounts receivable are sold
through a special purpose entity (SPE), a wholly owned subsidiary of the
Company, without recourse, to a financial conduit. The proceeds constituted a
portion of the funds used by the Parent for acquisition purposes, and are
reported under the caption Transfer to Parent in the financing section of the
statements of consolidated cash flow.
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 in 2003 and 2002 aggregated $5,156,000 and $6,384,000,
respectively and was directly offset by a gain on allowance for accounts
receivable discounts upon the consolidation of the SPE. The financing expense
recognized in conjunction with the sale of accounts receivable was $2,372,000 in
2003 and $3,088,000 in 2002.
The arrangement provides that the Company's new 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 the Company retains collection and
administrative responsibilities for the undivided interests in the pool.
This agreement was terminated on December 11, 2003 immediately prior to Yellow's
acquisition of the company. Yellow satisfied our liability to the financial
conduit, and we have recorded the resultant obligation to Yellow as a current
liability.
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Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. SALE OF ACCOUNTS RECEIVABLE (CONTINUED)
The following transactions occurred between Roadway Express and the SPE: in the
years 2003 and 2002, respectively: proceeds from the accounts receivable sales,
$2,727,878,000 and $2,650,810,000, servicing fees received, $1,863,000 and
$1,529,000, payments received on investment in accounts receivable,
$2,720,975,000 and $2,589,576,000.
9. FINANCING ARRANGEMENTS
The Company's 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 bank's prime lending rate,
U.S. dollar base rate in Canada, or LIBOR plus 1.50% for periods up to 180 days.
At December 11, 2003, no amounts were outstanding on this facility.
At December 31, 2002, the Parent had in place a senior revolving credit facility
with a sublimit for letters of credit that expires November 30, 2006. The credit
facility was terminated effective December 11, 2003 upon consummation of the
Yellow transaction. 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. 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.
In addition, the Parent also paid in full the five-year senior term loan prior
to the acquisition by Yellow. The Parent also issued $225,000,000 of 8.25%
senior notes due December 1, 2008.
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Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. 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
Company's 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 Company's former parent, Caliber System, Inc., formerly known as Roadway
Services, Inc (which was subsequently 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 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 Company's
business prior to the spin-off. The amount and timing of such payments is
dependent on the ultimate resolution of the former parent's 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 approximately $0 to $16,000,000 in additional taxes and $0 to
$11,000,000 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 Company's
results of operations and financial position.
Various other legal proceedings arising from the normal conduct of business are
pending but, in the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the financial condition or
operations of the Company.
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