EXHIBIT 99.4
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Roadway LLC
The period December 12, 2003 to December 31, 2003;
with Report of Independent Auditors
1
Report of Independent Auditors
To the Board of Directors of Yellow Roadway Corporation:
We have audited the accompanying consolidated balance sheet of Roadway Express,
Inc. and Subsidiaries as of December 31, 2003, and the related consolidated
statements of operations, cash flows, parent company investment, and
comprehensive income for the period December 12, 2003 through December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides 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 Roadway Express,
Inc. and Subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for the period December 12 through December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
- ---------------
Kansas City, Missouri
February 20, 2004
2
CONSOLIDATED BALANCE SHEET
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Roadway LLC
As of December 31, 2003
(in thousands)
- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 24,552
Accounts receivable, less allowance of $4,793 349,016
Fuel and operating supplies 3,785
Deferred income taxes, net 12,199
Prepaid expenses 11,333
-----------
Total current assets 400,885
-----------
PROPERTY AND EQUIPMENT
Land 239,344
Structures 344,330
Revenue equipment 97,273
Technology equipment and software 20,572
Other 48,745
-----------
750,264
Less - accumulated depreciation (2,763)
-----------
Net property and equipment 747,501
Goodwill 474,513
Intangibles 371,081
Other assets 8,441
-----------
Total assets $ 2,002,421
-----------
LIABILITIES AND PARENT COMPANY INVESTMENT
CURRENT LIABILITIES
Checks outstanding in excess of bank balances $ 30,992
Accounts payable 77,433
Advances payable to parent and affiliates 115,202
Wages, vacations and employees' benefits 173,298
Claims and insurance accruals 49,090
Other current and accrued liabilities 61,476
-----------
Total current liabilities 507,491
-----------
OTHER LIABILITIES
Note payable to affiliate 500,000
Deferred income taxes, net 186,280
Claims and other liabilities 318,958
Commitments and contingencies
PARENT COMPANY INVESTMENT
Capital surplus 496,044
Retained earnings (5,454)
Accumulated other comprehensive loss (898)
-----------
Total parent company investment 489,692
-----------
Total liabilities and parent company investment $ 2,002,421
===========
The notes to consolidated financial statements are an integral part of these
statements.
3
STATEMENT OF CONSOLIDATED OPERATIONS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Roadway LLC
For the period December 12 to December 31, 2003
(in thousands)
- --------------
OPERATING REVENUE $ 131,249
----------
OPERATING EXPENSES:
Salaries, wages and employees' benefits 86,192
Operating expenses and supplies 21,315
Operating taxes and licenses 4,068
Claims and insurance 3,573
Depreciation and amortization 3,454
Purchased transportation 18,730
Gains on property disposals, net (8)
----------
Total operating expenses 137,324
----------
Operating loss (6,075)
----------
NONOPERATING (INCOME) EXPENSES:
Related party interest expense 2,188
Interest income (16)
Other 187
----------
Nonoperating expenses, net 2,359
----------
LOSS BEFORE INCOME TAXES (8,434)
INCOME TAX BENEFIT (2,980)
----------
NET LOSS $ (5,454)
==========
The notes to consolidated financial statements are an integral part of these
statements.
4
STATEMENT OF CONSOLIDATED CASH FLOWS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Roadway LLC
For the period December 12 to December 31, 2003
(in thousands)
- --------------
OPERATING ACTIVITIES:
Net loss $ (5,454)
Noncash items included in net loss:
Depreciation and amortization 3,454
Gain on property disposals, net (8)
Changes in assets and liabilities, net:
Accounts receivable 19,467
Accounts payable (11,371)
Other working capital items (14,939)
Claims and other (1,910)
Other (804)
---------
Net cash used in operating activities (11,565)
---------
INVESTING ACTIVITIES:
Acquisition of property and equipment (2,399)
Proceeds from disposal of property and equipment 1,183
---------
Net cash used in investing activities (1,216)
---------
FINANCING ACTIVITIES:
Advances payable to parent, net (22,943)
---------
Net cash used in financing activities (22,943)
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (35,724)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,276
---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 24,552
---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes received, net $ (28)
Interest paid -
=========
The notes to consolidated financial statements are an integral part of these
statements.
5
STATEMENT OF PARENT COMPANY INVESTMENT
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Roadway LLC
For the period December 12 to December 31, 2003
(in thousands)
- --------------
Balance at December 12, 2003 (allocated purchase price) $ 496,044
Net loss (5,454)
Change in foreign currency translation adjustment (898)
----------
Balance at December 31, 2003 $ 489,692
==========
The notes to consolidated financial statements are an integral part of these
statements.
STATEMENT OF COMPREHENSIVE INCOME
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Roadway LLC
For the period December 12 to December 31, 2003
(in thousands)
- --------------
Net loss $ (5,454)
Changes in foreign currency translation adjustment (898)
----------
Comprehensive loss $ (6,352)
==========
The notes to consolidated financial statements are an integral part of these
statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Roadway LLC
DESCRIPTION OF BUSINESS
Roadway Express, Inc. and subsidiaries (also referred to as "Roadway Express"
"the Company," "we" or "our"), a wholly owned subsidiary of Roadway LLC, which
is wholly owned by Yellow Roadway Corporation ("Yellow Roadway"), is a leading
transportation services provider that offers a full range of regional, national
and international services for the movement of industrial, commercial and retail
goods, primarily through decentralized management and customer facing
organizations. Approximately 30 percent of Roadway Express shipments are
completed in two days or less. Roadway Express owns 100 percent of Reimer
Express Lines Ltd. located in Canada that specializes in shipments into, across
and out of Canada. Roadway Express has no reportable operating segments as
management evaluates operating performance and allocates resources based on
Roadway Express consolidated results.
On December 11, 2003, Yellow Corporation completed the acquisition of Roadway
Corporation. The combined company was renamed Yellow Roadway Corporation.
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 million in cash and 18.0 million shares of
Yellow Roadway common stock. Roadway LLC principal subsidiaries include Roadway
Express and Roadway Next Day Corporation.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations ("Statement No. 141"), the acquisition was accounted for
under purchase accounting. As a result, our Statements of Consolidated
Operations and Statements of Consolidated Cash Flows include our results from
the date of acquisition through December 31, 2003. Our Consolidated Balance
Sheet as of December 31, 2003 includes our tangible and intangible assets and
liabilities after valuing them at their fair values. In addition, Roadway
Express adopted the significant accounting policies of Yellow Roadway
Corporation and 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.
PRINCIPLES OF CONSOLIDATION AND SUMMARY OF ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Roadway Express, Inc. 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 notes. Actual results could differ from those
estimates.
Accounting policies refer to specific accounting principles and the methods of
applying those principles to fairly present our 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 our financial statements and are not discussed in
a separate note.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits and highly liquid investments
purchased with maturities of three months or less.
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CONCENTRATION OF CREDIT RISKS
We sell services and extend 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. We
monitor our exposure for credit losses and maintain allowances for anticipated
losses.
REVENUE RECOGNITION
For shipments in transit, Roadway Express records revenue based on the
percentage of service completed as of the period end and accrues delivery costs
as incurred. In addition, Roadway Express recognizes revenue on a gross basis
since the Company is the primary obligor even when 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 Express retains all credit risk. 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.
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, property damage
and liability that insurance does not cover. We include these costs in claims
and insurance expense except for workers' compensation, which is included in
salaries, wages, and employees' benefits.
We base reserves for workers' compensation and property damage and liability
claims 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 United States (U.S.) Treasury rate
for maturities that match the expected payout of such claims. The process of
determining reserve requirements utilizes historical trends and involves an
evaluation of accident frequency and severity, claims management, changes in
health care costs, and 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, 2003, estimated future payments related to these claims
aggregated $175.5 million. The present value of these estimated future payments
was $157.6 million at December 31, 2003.
PROPERTY AND EQUIPMENT
Roadway Express carries property and equipment at cost less accumulated
depreciation. The values assigned to property and equipment at the date of the
acquisition were principally determined by independent, third party appraisers.
We compute depreciation using the straight-line method based on the following
service lives:
8
Years
-------
Structures 10 - 40
Revenue equipment 5 - 14
Technology equipment and software 3 - 5
Other 3 - 10
=======
We charge maintenance and repairs to expense as incurred, and capitalize
replacements and improvements when these costs extend the useful life of the
asset.
Our investment in technology equipment and software consists primarily of
advanced customer service and freight management equipment and related software.
We capitalize 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 period ended December 31, 2003, the amount capitalized was immaterial to our
financial statements.
For the period December 12 through December 31, 2003, depreciation expense was
$3.0 million.
IMPAIRMENT OF LONG-LIVED ASSETS
If facts and circumstances indicate that the carrying value of identifiable
amortizable intangibles and property, plant and equipment may be impaired, we
would perform an evaluation of recoverability in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. If an evaluation
were required, we would compare the estimated future undiscounted cash flows
associated with the asset to the asset's carrying amount to determine if a
write-down is required.
ACQUISITION
In accordance with Statement No. 141, Yellow Roadway allocates the purchase
price of its acquisitions to the tangible and intangible assets and liabilities
of the acquired entity based on their fair values. Yellow Roadway records the
excess purchase price over the fair values as goodwill. The fair value assigned
to intangible assets acquired is based on valuations prepared by independent
third party appraisal firms using estimates and assumptions provided by
management. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets ("Statement No. 142"), goodwill and intangible assets with indefinite
useful lives are not amortized but are reviewed at least annually for
impairment. An impairment loss would be recognized to the extent that the
carrying amount exceeds the assets' fair value. Intangible assets with
estimatable useful lives are amortized on a straight-line basis over their
respective useful lives.
ROADWAY CORPORATION
On December 11, 2003, Yellow Corporation completed the acquisition of Roadway
Corporation and all of its outstanding stock in approximately a half cash, half
stock transaction. As part of the transaction, Yellow Corporation changed its
name to Yellow Roadway Corporation. In addition, Roadway Corporation became
Roadway LLC ("Roadway") and a wholly owned subsidiary of Yellow Roadway.
Principal operating subsidiaries of Roadway include Roadway Express and New
Penn. Roadway Express is a leading transporter of industrial, commercial and
retail goods in the two- to five-day regional and long-haul markets. New Penn is
a next-day, ground, less-than-truckload, carrier of general commodities. The
acquisition now provides Yellow Roadway with the increased scale, strong
financial base
9
and market reach that are necessary to increase shareholder value and enhance
customer service. It also has the potential to accelerate the Yellow Roadway
strategy of offering a broader range of services for business-to-business
transportation decision makers.
Consideration for the acquisition included $494 million in cash and 18.0 million
shares of Yellow Roadway common stock, based on an exchange ratio of 1.752 and
an average price per share of $31.51, for a total purchase price of $1.1
billion. The purchase price also included approximately $19 million for
investment banking, legal and accounting fees that Yellow Roadway incurred to
consummate the acquisition, resulting in total cash consideration of $513
million. In addition, by virtue of the merger, Roadway LLC assumed $225.0
million of principal senior notes with a fair value of $248.9 million. The cash
portion of the purchase price was funded primarily through a term loan of $175
million under a new credit facility, a private placement of $250 million of 5.0
percent contingent convertible senior notes due 2023 and a private placement of
$150 million of 3.375 percent contingent convertible senior notes due 2023. The
18.0 million common shares Yellow Roadway issued were valued based on the simple
average of the daily opening and closing trade prices for the period December 9
through December 15, 2003, which represents two days prior and after the date
the price was fixed under the terms of the merger agreement.
Prior to the acquisition, Roadway had agreements in place with key management
personnel that would require Roadway to pay specific amounts to those
individuals upon a change in control of the entity. On December 11, 2003, in
conjunction with the closing of the transaction, Roadway paid $15.9 million to
the individuals covered by the agreement that would not be joining the new
Yellow Roadway organization. This amount was expensed in the pre-acquisition
financial statements of Roadway Corporation. The remaining amount covered under
the agreement of $10.6 million was placed in a trust account for possible
payment to the three individuals that remain Roadway employees. If any of these
individuals are terminated within two years and the applicable conditions of
their respective agreements are met, they would receive the agreed to payments,
and Roadway LLC would recognize an expense for those payments at the time of the
triggering event. If termination does not occur within two years, the funds will
be released from restriction and reclassified from a long-term asset to cash on
the Roadway LLC Consolidated Balance Sheet.
Based on an independent valuation prepared using estimates and assumptions
provided by management, Yellow Roadway allocated approximately $496.0 million of
the total purchase price of approximately $1.1 billion to Roadway Express as
follows:
(in thousands)
- --------------
Cash and cash equivalents $ 60,276
Accounts receivable 343,485
Other current assets 29,181
Property, plant and equipment 749,477
Other long-term assets 8,440
Intangible assets 371,800
Goodwill 474,738
Accounts payable and other current liabilities (533,347)
Note payable to affiliate (500,000)
Deferred income taxes, net (187,137)
Other long-term liabilities (320,869)
---------
Total purchase price $ 496,044
=========
As the Roadway acquisition occurred in December 2003, the allocation of the
purchase price included in the December 31, 2003 Consolidated Balance Sheet is
preliminary and subject to refinement. Although Yellow Roadway does not expect
any subsequent changes to have a material impact on its results of operations or
amounts allocated to goodwill, such changes could result in material adjustments
to the preliminary purchase allocation. The most significant pending items
include the following: finalization of independent asset valuation for the
Roadway tangible and intangible assets including associated remaining lives;
completion of all direct costs associated with the
10
acquisition; updating Roadway personnel information used to calculate the
pension benefit obligation; determination of the fair value of tax-related
contingencies; calculation of an estimate for certain contractual obligations;
and numerous other refinements. Yellow Roadway expects substantially all of the
above refinements will be completed by the end of second quarter 2004.
Intangible Assets
Of the $371.8 million allocated to intangibles assets, $307.9 million was
assigned to the Roadway trade name and is not subject to amortization. Of the
remaining value, $48.9 million and $15.0 million were assigned to customer
relationships and software related assets, respectively. Yellow Roadway assigned
the customer relationships and software assets a weighted average life of 19
years and 3 years, respectively.
Goodwill
In considering the acquisition of Roadway, Yellow Corporation based its proposed
purchase price on the increased value that the combined Yellow Roadway
organization could provide to its investors, customers and employees. This value
can be attributed to its increased scale and ability to compete in a highly
competitive domestic and global transportation marketplace, the reputation and
recognition of the distinct brands, and the service capabilities and
technologies of both companies. Yellow Roadway recorded $597.1 million in
goodwill as part of the acquisition, allocating $474.8 million to Roadway
Express and $122.3 million to New Penn. Of the total goodwill recorded, the
amount that may be deductible for tax purposes is not material to the results of
operations of Yellow Roadway.
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. In
accordance with Statement No. 142, we do not amortize goodwill and review
goodwill at least annually for impairment based on a fair value approach.
The following table shows the amount of goodwill and changes therein:
Foreign Equity
December 12, Translation December 31,
(in thousands) 2002 Adjustment 2003
- ----------------------------------------------------------------------------
Goodwill $ 474,738 $ (225) $ 474,513
========== ========== ==========
The components of amortizable intangible assets at December 31, 2003, are as
follows:
Weighted
Average Gross
Life Carrying Accumulated
(in thousands) (years) Amount Amortization
- ----------------------------------------------------------------------------
Customer related 19 $ 48,900 $ 164
Technology based 3 15,000 256
-------- --------
Intangible assets $ 63,900 $ 420
======== ========
Total marketing related intangible assets with indefinite lives were $307.6
million for the period ended December 31, 2003.
11
Amortization expense for intangible assets, as reflected in our net loss, was
$420 thousand for the period December 12 through December 31, 2003. Estimated
amortization expense for the next five years is as follows:
(in thousands) 2004 2005 2006 2007 2008
- --------------------------------------------------------------------------------------------------------------
Estimated amortization expense $ 7,574 $ 7,574 $ 7,318 $ 2,574 $ 2,574
======= ======= ======= ======= =======
EMPLOYEE BENEFITS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Qualified and Nonqualified Defined Benefit Pension Plans
Roadway Express sponsors qualified and nonqualified defined benefit pension
plans for most employees not covered by collective bargaining agreements
(approximately 6,000 employees). Qualified and nonqualified pension benefits are
based on years of service and the employees' covered earnings. Employees covered
by collective bargaining agreements participate in various multi-employer
pension plans to which Roadway Express contributes, as discussed later in this
section. Additionally, beginning January 1, 2004, all new nonunion employees
will participate in a new defined contribution retirement plan. The existing
Roadway Express defined benefit pension plan will be closed to new participants.
Our funding policy is to target contributions at the minimum required
tax-deductible contribution for the year while taking into consideration each
plan's funded status, any variable Pension Benefit Guarantee Corporation
premiums and the outlooks for required funding. Our actuarial valuation
measurement date for our principal pension plans and post retirement benefits
plan is December 31.
Other Postretirement Benefit Plan
Roadway Express sponsors a postretirement healthcare benefit plan that covers
non-union employees of Roadway Express hired before February 1, 1997. Health
care benefits under this plan end when the participant attains age 65.
Definitions
We have defined the following terms to provide a better understanding of our
pension and other postretirement benefits:
Projected benefit obligation: The projected benefit obligation is the present
value of future benefits to employees attributed to service as of the
measurement date, including assumed salary increases.
Plan assets: Represents the assets currently invested in the plans. Assets used
in calculating the funded status are measured at the current market value at
December 31.
Funded status: The funded status represents the difference between the projected
benefit obligation and the market value of the assets.
Net amount recognized: The net amount recognized represents the amount accrued
by Roadway Express for pension costs.
Unfunded accumulated benefit obligation: The accumulated benefit obligation is
the present value of future benefits attributed to service as of the measurement
date, assuming no future salary growth. The unfunded accumulated benefit
obligation represents the difference between the accumulated benefit obligation
and the fair market value of the assets.
Accumulated postretirement benefit obligation: The accumulated postretirement
benefit obligation is the present value of other postretirement benefits to
employees attributed to service as of the measurement date.
12
Funded Status
The following table sets forth the plans' funded status for the period December
12 through December 31, 2003:
Other
Postretirement
(in thousands) Pension Benefits Benefits
- -------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at December 12, 2003 $ 455,289 $ 52,934
Service cost 1,190 109
Interest cost 1,454 169
Benefits paid (5,119) (136)
---------- ---------
Benefit obligation at December 31, 2003 $ 452,814 $ 53,076
========== =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at December 12, 2003 $ 280,601 $ -
Actual return on plan assets 7,574 -
Employer contributions - 134
Benefits paid (5,119) (134)
---------- ---------
Fair value of plan assets at December 31, 2003 $ 283,056 $ -
========== =========
FUNDED STATUS:
Funded status $ (169,757) $ (53,076)
Unrecognized net actuarial gain (6,309) (2)
---------- ---------
Net amount recognized $ (176,066) $ (53,078)
========== =========
Benefit Plan Obligations
Amounts recognized for the benefit plan liabilities in the Consolidated Balance
Sheet at December 31, 2003 are as follows:
Other
Postretirement
(in thousands) Pension Benefits Benefits
- -------------------------------------------------------------------------------
(Accrued) benefit costs $ (176,066) $(53,078)
---------- --------
Net amount recognized $ (176,066) $(53,078)
========== ========
Weighted average actuarial assumptions used to determine benefit obligations at
December 31, 2003:
Other
Postretirement
Pension Benefits Benefits
- -----------------------------------------------------------------------------------------
Discount rate 6.25% 6.25%
Rate of increase in compensation levels 3.25% -
==== ====
Information for pension plans with an accumulated benefit obligation in excess
of plan assets at December 31, 2003:
(in thousands)
- ----------------------------------------------------------
Projected benefit obligation $ 452,814
Accumulated benefit obligation 376,584
Fair value of plan assets 283,056
=========
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Plan assets by category
Plan assets as a percentage of total plan assets at December 31, 2003 are as
follows:
Asset Category
- -------------------------------------------
Equity securities 70%
Debt securities 30%
---
Total 100%
===
Our investment policies are based on target asset allocations. We review our
pension portfolio periodically and rebalance when significant differences occur
from target. Target asset allocations are as follows:
Small-cap U.S. equities 12.5%
Mid-cap U.S. equities 12.5%
Large-cap U.S. equities 25.0%
International equities 15.0%
Fixed-income securities 35.0%
-----
Total 100.0%
=====
Contributions
We expect to contribute approximately $20 million to our pension plans in 2004.
Pension and Other Postretirement Costs
The components of our net periodic pension and other postretirement costs from
the date of acquisition through December 31, 2003 were as follows:
Other
Postretirement
(in thousands) Pension Costs Costs
- ---------------------------------------------------------------------------------------------------------------------
Service cost $ 1,190 $ 109
Interest cost 1,454 169
Expected return on plan assets (1,266) -
-------- -----
Net periodic pension cost $ 1,378 $ 278
======== =====
Weighted average assumptions for the period ended December 31:
Discount rate 6.75% 6.25%
Rate of increase in compensation levels 3.25% -
Expected rate of return on assets 8.50% -
======== =====
We developed the expected long-term rate of return on assets assumption by
considering the historical returns and the future expectations for returns of
each asset class, as well as the target asset allocation of the pension
portfolio. We believe our 2003 expected rate of return of 8.5 percent accurately
represents our investment portfolio that has performed to this level over time.
In accordance with our policy on establishing the long-term rate of return, we
have increased the rate of return to 8.75 percent as a result of the acquisition
by Yellow Corporation and the combined portfolio of both entities in determining
the 2004 pension expense.
14
Other Postretirement Benefit Plans
Assumed health care cost trend rates at December 31, 2003 are as follows:
Health care cost trend used in the current period 11.5%
Health care cost trend rate assumed for next year 10.5%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.0%
Year that the rate reaches the ultimate trend rate 2010
=====
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. The policy of Roadway Express regarding the
management of health care costs passes the increase beyond a fixed threshold to
the plan participants. As a result, 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 the interest cost
components. A one-percentage-point decrease in assumed health care cost trend
rates would have the following effects:
(in thousands)
- --------------------------------------------------------------
Effect on total of service and interest cost $ 618
Effect on postretirement benefit obligation 5,938
========
MULTI-EMPLOYER PLANS
Roadway Express contributes to multi-employer health, welfare and pension plans
for employees covered by collective bargaining agreements (approximately 75
percent of total employees). The largest of these plans, the Central States
Southeast and Southwest Areas Pension Plan (the "Central States Plan") provides
retirement benefits to approximately 54 percent of our 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. Roadway Express contributed and charged to expense the following
amounts to these plans from the date of acquisition through December 31, 2003:
(in thousands)
- --------------------------------------------------
Health and welfare $ 8,124
Pension 9,757
--------
Total $ 17,881
========
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 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. Roadway Express
has no current intention of taking any action that would subject it to
obligations under the legislation.
Roadway Express has collective bargaining agreements with its unions that
stipulate the amount of contributions it 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,
including (without limitation) the Central States Plan, fail to meet these
requirements and the trustees of
15
these plans are unable to obtain waivers of the requirements 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 require contributions in excess of our
contractually agreed upon rates 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 Express.
401(k) SAVINGS PLANS
Roadway Express sponsors defined contribution plans, primarily for employees not
covered by collective bargaining agreements. The plans principally consist of a
contributory 401(k) savings plan and a noncontributory profit sharing plan. The
401(k) savings plan provides a fixed matching percentage of 100 percent of the
first four and a half percent of an eligible employee's contributions. We
provide the entire matching component of the Roadway Express plans with Yellow
Roadway common stock. Contributions for the period December 12 through December
31, 2003 were not material to our operations.
Our employees covered under collective bargaining agreements can also
participate in a contributory 401(k) plan. We do not make employer contributions
to the plan on their behalf.
DEBT AND FINANCING
On December 10, 2003, Roadway Express executed a $500 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
December 11, 2003 and December 31, 2003. The fair value of this debt
approximates its carrying value at December 31, 2003.
At December 31, 2003, Reimer had a $10.0 million secured revolving line of
credit available with no outstanding borrowings. In the first quarter of 2004,
we closed the facility.
INCOME TAXES
Deferred income taxes are determined based upon the difference between the book
and the tax basis of our assets and liabilities. Deferred taxes are recorded at
the enacted tax rates expected to be in effect when these differences reverse.
The deferred tax liabilities (assets) were not materially different at December
12, 2003 compared to the deferred tax liabilities (assets) comprised of the
following at December 31, 2003:
(in thousands)
- -------------------------------------------
Depreciation $ 170,159
Employee benefits 28,654
Intangibles 144,436
Other (89)
---------
Gross tax liabilities $ 343,160
---------
Claims and insurance $ (60,427)
Employee benefits (109,053)
Other (1,631)
Valuation allowance 2,032
---------
Gross tax assets $(169,079)
---------
Net tax liability $ 174,081
=========
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At December 31, 2003, the Company has approximately $5.9 million of foreign net
operating loss carry forwards, which have expiration dates ranging from 2009 to
2013. For financial reporting purposes, a valuation allowance of $2.0 million
has been recognized to offset the deferred tax assets relating to all foreign
net operating loss carry forwards.
We have a tax sharing agreement with Yellow Roadway Corporation that requires us
to share in its consolidated tax burden based on our respective share of taxable
income or losses relative to Yellow Roadway Corporation's other subsidiaries. In
addition, we retain any respective tax credits related to our operations.
A reconciliation between income taxes at the federal statutory rate and the
consolidated effective tax rate from our net loss for the period December 12
through December 31, 2003 is as follows:
Federal statutory rate 35.0%
State income taxes, net 3.0
Nondeductible business expenses (1.6)
Foreign tax credit and rate differential (1.0)
Other, net (0.1)
----
Effective tax rate 35.3%
====
The income tax benefit for the period December 12 through December 31, 2003
consisted of the following:
(in thousands)
- --------------------------------------------------------------------------------------
Current:
U.S federal $ (1,856)
State (338)
Foreign 16
---------
Current income tax benefit $ (2,178)
---------
Deferred:
U.S federal $ (537)
State (53)
Foreign (212)
---------
Deferred income tax benefit $ (802)
---------
Income tax benefit $ (2,980)
---------
Based on the loss before income taxes:
Domestic $ (7,604)
Foreign (830)
---------
Loss from operations before income taxes $ (8,434)
=========
COMMITMENTS, CONTINGENCIES, AND UNCERTAINTIES
Roadway Express incurs rental expenses under noncancelable lease agreements for
certain buildings and operating equipment. Rental expense is charged to
operating expense and supplies on the Statement of Consolidated Operations.
Actual rental expense, as reflected in our net loss, was $2.9 million for the
period December 12 through December 31, 2003.
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We utilize certain terminals and equipment under operating leases. At December
31, 2003, we were committed under noncancelable lease agreements requiring
minimum annual rentals payable as follows:
(in thousands) 2004 2005 2006 2007 2008 Thereafter
- ----------------------------------------------------------------------------------------------------------------------------
Minimum annual rentals $40,394 $ 27,931 $18,527 $13,523 $ 9,023 $ 10,865
------- -------- ------- ------- ------- --------
We expect in the ordinary course of business that leases will be renewed or
replaced as they expire. Projected 2004 net capital expenditures are expected to
be $80 to $85 million, of which $12 million was committed at December 31, 2003.
Roadway Express is involved in litigation or proceedings that arise in ordinary
business activities. We insure against these risks to the extent deemed prudent
by our management, but no assurance can be given that the nature and amount of
such insurance will be sufficient to fully indemnify us against liabilities
arising out of pending and future legal proceedings. Many of these insurance
policies contain self-insured retentions in amounts we deem prudent. Based on
our current assessment of information available as of the date of these
financial statements, we believe that our financial statements include adequate
provisions for estimated costs and losses that may be incurred with regard to
the litigation and proceedings to which we are a party.
Tax Matters
Roadway Express is responsible for certain federal tax obligations under a tax
sharing agreement with its former parent corporation. The former parent of
Roadway Express, Caliber System, Inc. (which subsequently was acquired by FDX
Corporation, a wholly owned subsidiary of FedEx Corporation), is involved in tax
litigation with the IRS for tax years 1994 and 1995, years prior to Caliber
System, Inc.'s spin-off of Roadway. The IRS has proposed substantial adjustments
for these tax years for multi-employer pension plan deductions. FedEx
Corporation filed a petition challenging the IRS's position, and this matter is
presently in litigation. We are unable to predict the ultimate outcome of this
matter; however, the former parent of Roadway Express intends to vigorously
contest these proposed adjustments.
Under tax sharing agreements entered into by Roadway Express and its former
parent at the time of the spin-off, Roadway LLC, a wholly owned subsidiary of
Yellow Roadway Corporation and successor in interest to Roadway Corporation, is
obligated to reimburse its former parent for any additional taxes and interest
that related to Roadway Express business prior to the spin-off. The amount and
timing of any payments is dependent on the ultimate resolutions 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, Roadway
Express 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 maximum remaining payments that may be due to the former parent
of Roadway Express to be approximately $19 million in additional taxes and $5
million in related interest, net of tax benefit. We have 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 LLC to the former
parent of Roadway Express will not have a material adverse effect on the
financial position of Roadway Express.
In addition, Roadway LLC, as successor in interest to Roadway Corporation, has a
similar tax issue in each of its subsequent income tax returns and the IRS has
made additional claims for taxes for tax years 1996 through 2000. The outcome of
these proposed adjustments is dependent upon the outcome of the existing tax
litigation. We estimate that the potential taxes and interest, net of tax
effect, for all years subsequent to 1995 are approximately $10 million and $3
million, respectively.
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Environmental Matters
Remediation costs are accrued based on estimates of known environmental
remediation exposure using currently available facts, existing environmental
permits and technology and presently enacted laws and regulations. Our estimates
of costs are developed based on internal evaluations and, when necessary,
recommendations from external environmental consultants. These accruals are
recorded when it is probable that we will be obligated to pay amounts for
environmental site evaluation, remediation or related costs, and the amounts can
be reasonably estimated. If the obligation can only be estimated within a range,
we accrue the minimum amount in the range. These accruals are recorded even if
significant uncertainties exist over the ultimate cost of the remediation. Where
we have been identified as a potentially responsible party in a U.S. federal
"Superfund" site, we accrue our share of the estimated remediation costs of the
site based on the ratio of the estimated volume of waste contributed to the site
by us to the total volume of waste at the site.
19