Exhibit 99.2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Roadway Express, Inc. and Subsidiaries
Years ended December 31, 2002, 2001 and 2000
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 31, 2002 and 2001, and the related
statements of consolidated income, parent company investment, and cash flows for
each of the three 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 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Akron, Ohio
January 22, 2003
1
Roadway Express, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
2002 2001
-----------------------------
(in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 82,016 $ 46,087
Accounts receivable, including retained interest in
securitized receivables, net 212,834 165,465
Prepaid expenses and supplies 13,936 11,295
Deferred income taxes 17,726 13,117
-----------------------------
Total current assets 326,512 235,964
Carrier operating property, at cost 1,414,794 1,435,931
Less allowance for depreciation 996,224 1,011,280
-----------------------------
Net carrier operating property 418,570 424,651
Goodwill, net 14,816 14,722
Deferred income taxes 36,525 31,054
Other assets 7,141 4,996
-----------------------------
Total assets $ 803,564 $ 711,387
=============================
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Payables $ 190,457 $ 166,197
Salaries and wages 141,242 112,099
Freight and casualty claims payable 45,606 49,492
-----------------------------
Total current liabilities 377,305 327,788
Long-term liabilities:
Casualty claims and other 55,953 63,536
Accrued pension and postretirement
health care 133,072 119,145
-----------------------------
Total long-term liabilities 189,025 182,681
-----------------------------
Parent company investment 237,234 200,918
-----------------------------
Total liabilities and parent company investment $ 803,564 $ 711,387
=============================
See accompanying notes.
2
Roadway Express, Inc. and Subsidiaries
Statements of Consolidated Income
YEAR ENDED DECEMBER 31
2002 2001 2000
-----------------------------------------------
(in thousands)
Revenue $ 2,797,582 $ 2,764,766 $ 3,039,560
Operating expenses:
Salaries, wages and benefits 1,783,872 1,768,744 1,889,928
Operating supplies and expenses 462,838 475,313 544,774
Purchased transportation 287,614 271,847 308,089
Operating taxes and licenses 70,451 70,955 78,271
Insurance and claims 59,286 46,804 64,442
Provision for depreciation 66,510 69,178 55,675
Net loss on sale of carrier operating property (654) 460 1,969
-----------------------------------------------
Total operating expenses 2,729,917 2,703,301 2,943,148
-----------------------------------------------
Operating income 67,665 61,465 96,412
Other (expense) income:
Interest expense (942) (732) (341)
Other, net (2,957) (3,267) 2,213
-----------------------------------------------
(3,899) (3,999) 1,872
-----------------------------------------------
Income before income taxes 63,766 57,466 98,284
Provision for income taxes 26,927 24,231 41,742
-----------------------------------------------
Net income $ 36,839 $ 33,235 $ 56,542
===============================================
See accompanying notes.
3
Roadway Express, Inc. and Subsidiaries
Statements of Consolidated Parent Company Investment
PARENT COMPANY
INVESTMENT
---------------
(in thousands)
Year ended December 31, 2000
Balance at January 1, 2000 290,955
Net income 56,542
Foreign currency translation adjustments (1,134)
----------
Total comprehensive income 55,408
Dividends declared (3,875)
Net transfers to Parent (2,617)
----------
Balance at December 31, 2000 339,871
Year ended December 31, 2001
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
YEAR ENDED DECEMBER 31, 2002
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
==========
See accompanying notes.
4
Roadway Express, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
YEAR ENDED DECEMBER 31
2002 2001 2000
------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 36,839 $ 33,235 $ 56,542
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 66,510 70,543 56,878
(Gain) loss on sale of carrier operating property (654) 460 1,969
Changes in assets and liabilities:
Accounts receivable (28,406) 30,668 420
Other assets (16,628) 4,058 (6,192)
Payables and accrued items 49,426 (28,328) (7,184)
Long-term liabilities 6,343 5,193 (2,812)
------------------------------------------
Net cash provided by operating activities 113,430 115,829 99,621
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of carrier operating property (66,132) (69,116) (109,617)
Sales of carrier operating property 6,358 3,553 3,617
Business acquisitions - - (2,885)
------------------------------------------
Net cash (used) in investing activities (59,774) (65,563) (108,885)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of accounts receivable - 100,000 -
Dividends paid - (1,937) (3,874)
Transfer to Parent (17,500) (167,235) (2,617)
------------------------------------------
Net cash (used) in financing activities (17,500) (69,172) (6,491)
Effect of exchange rate changes on cash (227) 54 (103)
------------------------------------------
Net increase (decrease) in cash and cash equivalents 35,929 (18,852) (15,858)
Cash and cash equivalents at beginning of year 46,087 64,939 80,797
------------------------------------------
Cash and cash equivalents at end of year $ 82,016 $ 46,087 $ 64,939
==========================================
See accompanying notes.
5
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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
74% 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, 2003.
Effective May 30, 2001, holders of common stock of Roadway Express, Inc. became
holders of an identical number of shares of common stock of Roadway Corporation,
and Roadway Express, Inc. became a wholly owned 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.
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. In addition, certain employees of the
Company participate in various stock compensation plans sponsored by the Parent
or involving the Parent's common stock (see Note 7). Compensation expense for
employees participating in these plans, if any, is allocated to the Company. All
transfers and allocations to and from the Parent have been reported in the
parent company investment account.
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.
6
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
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 $326,000 net of tax at December 31, 2002.
RECEIVABLES SALES
The Company sells receivables in securitization transactions, and retains an
equity interest in the receivables pool, servicing rights, and a cash reserve
account. These constitute the retained interests in the securitized receivables.
The estimated fair value is based on the present value of the expected cash
flows, which approximates face value adjusted for allowances for anticipated
losses (see Note 9).
2. ACCOUNTING POLICIES (CONTINUED)
7
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 31, 2002, the Company had net unamortized goodwill of $14,817,000
related to its Canadian subsidiaries. Goodwill amortization was zero in 2002,
$967,000 in 2001 and $826,000 in 2000.
The Company completed the required transitional goodwill impairment test under
SFAS No. 142 for all reporting units effective June 15, 2002 which did not
indicate any impairment. The Company expects to perform the required annual
goodwill impairment assessment on a recurring basis at the end of the second
quarter each year, or more frequently should any indicators of possible
impairment be identified.
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
The Company recognizes revenue as earned on the date of freight delivery to the
consignee. Related expenses are recognized as incurred.
STOCK BASED COMPENSATION
Stock based awards provided to the Company's employees are provided under Parent
sponsored plans in Roadway common stock. The Company accounts for stock based
compensation in accordance with the Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees.
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.
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.
9
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 is effective for the Company's financial statements beginning
January 1, 2003. The adoption of SFAS No. 145 is not expected to have a material
effect on the Company's financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 will be effective for the Company for
disposal activities initiated after December 31, 2002. The adoption of this
standard is not expected to have a material effect on the Company's financial
position, results of operations or cash flows.
10
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CARRIER OPERATING PROPERTY
Carrier operating properties consist of the following:
2002 2001
---------------------------
(in thousands)
Land $ 92,734 $ 93,234
Structures 420,245 400,853
Revenue equipment 654,320 703,239
Other operating property 247,495 238,605
---------------------------
Carrier operating property, at cost 1,414,794 1,435,931
Less allowance for depreciation 996,224 1,011,280
---------------------------
Net carrier operating property $ 418,570 $ 424,651
===========================
4. PAYABLES
Items classified as payables consist of the following:
2002 2001
-------------------------
(in thousands)
Trade and other payables $ 68,543 $ 66,337
Drafts outstanding 18,456 25,785
Income taxes payable 45,962 17,701
Taxes, other than income 28,942 29,006
Multi-employer health, welfare, and
pension plans 28,554 27,368
-------------------------
Payables $190,457 $166,197
=========================
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:
2002 2001 2000
-------------------------------------
(in thousands)
Current taxes:
Federal $ 27,290 $ 21,438 $ 41,014
State 4,420 3,495 6,674
Foreign 4,776 (766) 1,426
-------------------------------------
36,486 24,167 49,114
Deferred taxes:
Federal (8,504) (1,221) (6,009)
State (990) (79) (580)
Foreign (65) 1,364 (783)
-------------------------------------
(9,559) 64 (7,372)
-------------------------------------
Provision for income taxes $ 26,927 $ 24,231 $ 41,742
=====================================
In addition to the 2002 provision for income taxes of $26,927,000, income tax
benefits of $451,000 were allocated directly to parent company investment
related to the restricted stock awards from the Company's parent. Income tax
payments amounted to $5,443,000 in 2002, $24,039,000 in 2001, and $54,245,000 in
2000.
Income (loss) before income taxes consists of the following:
2002 2001 2000
-----------------------------------------
(in thousands)
Domestic $ 52,008 $ 55,034 $ 104,097
Foreign 11,758 2,432 (5,813)
-----------------------------------------
$ 63,766 $ 57,466 $ 98,284
=========================================
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:
2002 2001
----------------------
(in thousands)
Deferred tax assets:
Freight and casualty claims $ 36,618 $ 39,264
Retirement benefit liabilities 51,897 46,466
Accrued employee benefits 32,055 29,728
Other 10,058 7,390
Valuation allowance (2,229) (2,387)
----------------------
Total deferred tax assets 128,399 120,461
Deferred tax liabilities:
Depreciation 40,729 40,977
Multi-employer pension plans 33,420 35,313
----------------------
Total deferred tax liabilities 74,149 76,290
----------------------
Net deferred tax assets $ 54,250 $ 44,171
======================
At December 31, 2002, the Company had approximately $6,418,000 of foreign
operating loss carry forwards, which have expiration dates ranging from 2008 to
2011. For financial reporting purposes, a valuation allowance of $2,229,000 has
been recognized to offset the deferred tax asset relating to certain foreign
operating loss carry forwards.
13
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The effective tax rate differs from the federal statutory rate as set forth in
the following reconciliation:
2002 2001 2000
---------------------
(in thousands)
Federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
tax benefit 3.5 3.9 4.0
Non-deductible operating costs 3.2 3.1 2.1
Impact of foreign operations 0.5 0.3 1.6
Other, net - (0.1) (0.2)
--------------------
Effective tax rate 42.2% 42.2% 42.5%
====================
6. EMPLOYEE BENEFIT PLANS
MULTI-EMPLOYER PLANS
The Company charged to operations $161,696,000 in 2002, $164,358,000 in 2001,
and $174,253,000 in 2000 for contributions to multi-employer pension plans for
employees subject to labor contracts. The Company also charged to operations
$167,032,000 in 2002, $162,917,000 in 2001, and $165,018,000 in 2000 for
contributions to multi-employer plans that provide health and welfare benefits
to employees and certain retirees who are or were subject to labor contracts.
These amounts were determined in accordance with provisions of industry labor
contracts. Under provisions of the Multi-employer Pension Plan 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 31, 2002 and 2001:
PENSION BENEFITS HEALTH CARE BENEFITS
----------------------- ------------------------
2002 2001 2002 2001
-----------------------------------------------------
(in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 328,915 $ 293,100 $ 41,721 $ 42,713
Service cost 17,467 17,492 1,741 1,665
Interest cost 24,056 22,558 3,156 2,881
Actuarial losses (gains) 32,262 13,175 5,024 (2,911)
Benefits paid (18,154) (17,410) (2,482) (2,627)
-----------------------------------------------------
Benefit obligation at end of year 384,546 328,915 49,160 41,721
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 308,229 362,781 - -
Actual return on plan assets (48,751) (37,142) - -
Benefits paid (18,154) (17,410) - -
-----------------------------------------------------
Fair value of plan assets at end of year 241,324 308,229 - -
FUNDED STATUS
Plan assets less than
projected benefit obligation 143,222 20,686 49,160 41,721
Unamortized:
Net actuarial (loss) gain (26,917) 85,816 (10,281) 6,492
Net asset at transition 8,372 9,767 - -
Prior service (cost) benefit (43,739) (48,136) 13,255 2,799
-----------------------------------------------------
Accrued benefit cost $ 80,938 $ 68,133 $ 52,134 $ 51,012
=====================================================
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 by the consulting actuary,
and the related benefit cost information:
PENSION BENEFITS HEALTH CARE BENEFITS
----------------------------------- ---------------------------------
2002 2001 2000 2002 2001 2000
------------------------------------------------------------------------
( in thousands)
WEIGHTED-AVERAGE
ASSUMPTIONS
Discount rate 6.75% 7.50% 7.50% 6.75% 7.50% 7.50%
Future compensation 3.25% 3.25% 3.25% - - -
Expected long-term
return on plan assets 9.50% 9.50% 9.50% - - -
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service cost $ 17,467 $ 17,492 $ 15,458 $ 1,741 $ 1,665 $ 1,755
Interest cost 24,056 22,558 19,893 3,156 2,881 2,951
Expected return on
plan assets (28,574) (33,841) (32,404) - - -
Amortization of:
Prior service cost
(benefit) 5,249 5,230 5,229 (1,477) (305) (169)
Net asset gain at
transition (1,395) (1,396) (1,395) - - -
Unrecognized gain (3,940) (8,893) (10,584) 184 (177) (46)
------------------------------------------------------------------------
Net periodic benefit
cost (income) $ 12,863 $ 1,150 $ (3,803) $ 3,604 $ 4,064 $ 4,491
========================================================================
The Company has adjusted the expected long-term return on plan assets from 9.50%
to 8.50% effective January 1, 2003.
For measurement purposes, the Company assumed a weighted-average annual rate of
increase in the per capita cost of health care benefits (health care cost trend
rate) of 11.5% for 2002 declining gradually to 5.0% in 2010 and thereafter.
A decrease in the assumed health care cost trend rate has a significant effect
on the amounts reported. For example, a one percentage point decrease in the
assumed health care cost trend rate would decrease the accumulated
postretirement benefit obligation by $5,392,000 and the service and interest
cost components by $582,000 as of December 31, 2002. A one percentage point
increase in the assumed health care cost trend rate would have no effect on the
accumulated postretirement benefit obligation or the service and interest cost
components. The Company's policy regarding the management of health care costs
passes the increases beyond a fixed threshold to the plan participants.
16
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company charged to operations $10,250,000 in 2002, $10,788,000 in 2001, and
$10,395,000 in 2000 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. STOCK PLANS
Concurrent with the Reorganization (Note 1), all stock plans formerly sponsored
by the Company were transferred to Roadway except for the Union Stock Plan,
which is specific to the Company's unionized employees. Subsequent to the
Reorganization, the Parent allocated to the Company all compensation expense
under these plans directly attributable its employees that are eligible to
participate in the plans.
STOCK GRANTED UNDER THE MANAGEMENT INCENTIVE STOCK PLAN AND EQUITY OWNERSHIP
PLAN
The Parent's Management Incentive Stock Plan and Equity Ownership Plan (the
Stock Plans) authorize the granting of common stock at the discretion of
Roadway's Board of Directors to officers and certain key employees of Roadway
and its subsidiaries. These grants are recorded by Roadway as the unearned
portion of restricted stock awards. The grants, originally recorded at market
price, are amortized to compensation expense over the period for which the stock
is restricted. Compensation expense allocated to the Company amounted to
$3,835,000 in 2002, $2,990,000 in 2001, and $2,600,000 in 2000.
EMPLOYEE STOCK PURCHASE PLAN
Under the Parent's Employees' Stock Purchase Plan, all full-time eligible
employees may purchase shares of the Roadway's common stock up to 10% of their
respective compensation through payroll deductions. The purchase price under the
plan is 85% of the fair market value of Roadway's common stock. Under this plan,
employees purchased 139,000 shares in 2002, 171,000 shares in 2001, and 198,000
shares in 2000.
UNION STOCK PLAN
The Company's Union Stock Plan provides stock awards of Roadway stock to
employees subject to labor contracts who meet the eligibility and performance
requirements of providing a safe, reliably staffed, and injury-free work
environment. The Company allocated 50,000 Roadway shares in 2002, 20,000 shares
in 2001, and 100,000 shares in 2000 for grant under this plan.
17
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. STOCK PLANS (CONTINUED)
OPTIONS GRANTED UNDER THE EQUITY OWNERSHIP PLAN
Under the Parent's Equity Ownership Plan, the Board is authorized to award
officers and key employees of the Parent and its subsidiaries with various types
of stock-based compensation, including stock options. Stock options vest over a
period of four years from the date of grant, are exercisable at the rate of 25%
each year, and expire at the end of ten years. The number of shares of common
stock that may be issued or transferred under this plan may not exceed
2,000,000. No options were granted under this plan in 2002, 2001 or 2000.
As permitted under SFAS No.123, Accounting for Stock Based Compensation, the
Parent has elected to follow APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for stock-based awards to
its employees and employees of its wholly owned subsidiaries. Under APB Opinion
No. 25, compensation expense is not recognized in the Company's financial
statements because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant.
8. LEASES
The Company leases certain terminals and revenue equipment under noncancellable
operating leases requiring minimum future rentals aggregating $138,047,000
payable as follows: 2003--$48,219,000; 2004--$32,271,000; 2005--$22,211,000;
2006--$12,967,000; 2007--$9,145,000; and thereafter $13,234,000. Rental expense
for operating leases was $54,836,000, $50,718,000, and $45,445,000 for 2002,
2001, and 2000, respectively. The Company has interest rate swap agreements with
major commercial banks to fix the interest rate of its trailer leases from
previous variable interest rates principally based on LIBOR. The value of the
leases upon which the payments are based was not changed. The agreements, which
expire from 2003 to 2004, fix the Company's interest costs at rates varying from
5.62% to 6.39% on leases with a notional amount of $14,400,000.
The fair value of the Company's interest rate swaps at December 31, 2002 is a
liability of approximately $326,000, net of income taxes, and has been
determined using proprietary financial models developed by the lending
institutions which are counterparties to the swap arrangements. As a result of
declining interest rates throughout 2002, the Company recognized incremental
interest expense of approximately $734,000, which is included in interest
expense in the accompanying financial statements. The ineffective portions of
the Company's interest rate swap agreements were not material.
18
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SALE OF ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
2002 2001
------------------------
(in thousands)
Accounts receivable $ 3,259 $ 7,514
Retained interest in securitized accounts receivable 217,617 165,396
Allowance for doubtful accounts (8,042) (7,445)
------------------------
$ 212,834 $ 165,465
========================
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. At December 31, 2002,
undivided interests in the accounts receivable pool aggregating zero in 2002 and
$100,000,000 in 2001 were sold under this arrangement. 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 2002 and 2001 aggregated $6,384,000 and $585,000 respectively
and was directly offset by a gain on allowance for accounts receivable discounts
upon the consolidation of the SPE. The financing expense recognized in
conjunction with the sale of accounts receivable was $3,088,000 in 2002 and
$317,000 in 2001.
The arrangement provides that 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.
The following transactions occurred between Roadway Express and the SPE:
proceeds from the accounts receivable sales, $2,650,810,000, $493,673,000;
servicing fees received, $1,529,000, $150,000; payments received on investment
in accounts receivable, $2,589,576,000, $328,696,000 in the years 2002 and 2001,
respectively.
19
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. 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 31, 2002, no amounts were outstanding on this facility.
At December 31, 2002, the Parent has in place a senior revolving credit facility
with a sublimit for letters of credit that expires November 30, 2006. The
original amount of the senior revolving credit facility was $150,000,000 with a
$100,000,000 sublimit for letters of credit, which was amended on August 6,
2002. The result of the amendment increased the senior revolving credit facility
to $215,000,000 and increased the sublimit for letters of credit to
$165,000,000. 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 has a five-year senior term loan, of which $82,216,000
(at an interest amount of 2.91%) was outstanding as of December 31, 2002. The
Parent also issued $225,000,000 of 8.25% senior notes due December 1, 2008.
The credit facility borrowings and the senior notes rank equally and are secured
by a first-priority perfected lien on all of the capital stock of the Parent's
direct subsidiaries and are also supported by guarantees provided by all of the
Parent's current material subsidiaries and all future material subsidiaries.
11. 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
20
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. CONTINGENCIES (CONTINUED)
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 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
$9,000,000 in related interest, net of tax benefit. The Company has established
certain reserves with respect to these proposed adjustments. There can be no
assurance, however, that the amount or timing of any liability of the Company to
the former parent will not have a material adverse effect on the 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.
12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The following condensed consolidating financial statements set forth the
Company's balance sheets as of December 31, 2002 and 2001 and the statements of
income and statements of cash flows for the years ended December 31, 2002, 2001,
and 2000. In the following schedules "Guarantor Subsidiaries" refers to Roadway
Express' non-minor domestic subsidiaries, and "Non-guarantor subsidiaries"
refers to foreign and minor domestic subsidiaries and "Eliminations" represent
the adjustments necessary to (a) eliminate intercompany transactions and (b)
eliminate the investments in the Company's subsidiaries.
21
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------
(in millions)
Cash and cash equivalents $ 75 $ 7 $ - $ 82
Accounts receivable, including retained interest in
securitized receivables, net 197 14 - 211
Due from affiliates 33 2 (33) 2
Prepaid expenses and supplies 13 - - 13
Deferred income taxes 18 - - 18
-------------------------------------------------------
Total current assets 336 23 (33) 326
Carrier operating property, at cost 1,387 28 - 1,415
Less allowance for depreciation 981 15 - 996
-------------------------------------------------------
Net carrier operating property 406 13 - 419
Goodwill, net - 15 - 15
Investment in subsidiaries 4 - (4) -
Deferred income taxes 37 - - 37
Long-term assets 7 - - 7
-------------------------------------------------------
Total assets $ 790 $ 51 $ (37) $ 804
=======================================================
Accounts payable $ 179 $ 11 $ - $ 190
Due to affiliates 2 31 (33) -
Salaries and wages 137 4 - 141
Freight and casualty claims payable 45 1 - 46
-------------------------------------------------------
Total current liabilities 363 47 (33) 377
Casualty claims and other 57 - - 57
Accrued pension and retiree medical 133 - - 133
Parent company investment 237 4 (4) 237
-------------------------------------------------------
Total liabilities and parent company investment $ 790 $ 51 $ (37) $ 804
=======================================================
22
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------
(in millions)
Cash and cash equivalents $ 45 $ 1 $ - $ 46
Accounts receivable 150 15 - 165
Due from affiliates 36 1 (37) -
Prepaid expenses and supplies 11 - - 11
Deferred income taxes 13 - - 13
-----------------------------------------------------
Total current assets 255 17 (37) 235
Carrier operating property, at cost 1,410 26 - 1,436
Less allowance for depreciation 998 13 - 1,011
-----------------------------------------------------
Net carrier operating property 412 13 - 425
Goodwill, net - 15 - 15
Investment in subsidiaries (4) - 4 -
Long-term assets 31 - - 31
Deferred income taxes 5 - - 5
-----------------------------------------------------
Total assets $ 699 $ 45 $ (33) $ 711
=====================================================
Accounts payable $ 157 $ 9 $ - $ 166
Due to affiliates 1 36 (37) -
Salaries and wages 109 3 - 112
Freight and casualty claims payable 48 1 - 49
-----------------------------------------------------
Total current liabilities 315 49 (37) 327
Casualty claims and other 64 - - 64
Accrued pension and retiree medical 119 - - 119
Parent company investment 201 (4) 4 201
-----------------------------------------------------
Total liabilities and parent company investment $ 699 $ 45 $ (33) $ 711
=====================================================
23
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------
(in millions)
Revenue $2,673 $ 126 $ (1) $ 2,798
Operating expenses:
Salaries, wages and benefits 1,745 39 - 1,784
Operating supplies and expenses 436 28 (1) 463
Purchased transportation 247 40 - 287
Operating taxes and licenses 68 2 - 70
Insurance and claims expenses 58 1 - 59
Provision for depreciation 63 4 - 67
Net loss on disposal of
operating property - - - -
Results of affiliates (8) - 8 -
----------------------------------------------------------
Total operating expenses 2,609 114 7 2,730
----------------------------------------------------------
Operating income 64 12 (8) 68
Other (expense) income, net (5) 1 - (4)
----------------------------------------------------------
Income before income taxes 59 13 (8) 64
Provision for income taxes 22 5 - 27
----------------------------------------------------------
Net income (loss) $ 37 $ 8 $ (8) $ 37
==========================================================
YEAR ENDED DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------
(in millions)
Revenue $2,643 $ 122 $ (1) $ 2,764
Operating expenses:
Salaries, wages and benefits 1,728 40 - 1,768
Operating supplies and expenses 447 29 (1) 475
Purchased transportation 231 41 - 272
Operating taxes and licenses 69 2 - 71
Insurance and claims expenses 46 1 - 47
Provision for depreciation 65 4 - 69
Net loss on disposal of
operating property 1 - - 1
Results of affiliates (2) - 2 -
----------------------------------------------------------
Total operating expenses 2,585 117 1 2,703
----------------------------------------------------------
Operating income 58 5 (2) 61
Other (expense), net (2) (2) - (4)
----------------------------------------------------------
Income before income taxes 56 3 (2) 57
Provision for income taxes 23 1 - 24
----------------------------------------------------------
Net income (loss) $ 33 $ 2 $ (2) $ 33
==========================================================
24
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2000
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------
(in millions)
Revenue $2,922 $ 120 $ (2) $ 3,040
Operating expenses:
Salaries, wages and benefits 1,848 42 - 1,890
Operating supplies and expenses 513 33 (1) 545
Purchased transportation 272 37 (1) 308
Operating taxes and licenses 76 1 - 77
Insurance and claims expenses 63 2 - 65
Provision for depreciation 52 4 - 56
Net loss (gain) on disposal of
operating property 2 - - 2
Results of affiliates 6 - (6) -
---------------------------------------------------------
Total operating expenses 2,832 119 (8) 2,943
---------------------------------------------------------
Operating income 90 1 6 97
Other income (expense), net 8 (7) - 1
---------------------------------------------------------
Income (loss) before income taxes 98 (6) 6 98
Provision for income taxes 41 - - 41
---------------------------------------------------------
Net income (loss) $ 57 $ (6) $ 6 $ 57
=========================================================
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------
(in millions)
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 104 $ 9 $ - $ 113
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of carrier operating property, net (57) (3) - (60)
----------------------------------------------------------
Net cash used in investing activities (57) (3) - (60)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid - - - -
Accounts receivable securitization - - - -
Transfer to parent (17) - - (17)
----------------------------------------------------------
Net cash used in financing activities (17) - - (17)
Effect of exchange rates on cash - - - -
----------------------------------------------------------
Net decrease in cash and cash equivalents 30 6 - 36
Cash and cash equivalents at beginning
of year 45 1 - 46
----------------------------------------------------------
Cash and cash equivalents at end of year $ 75 $ 7 $ - $ 82
==========================================================
25
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------
(in millions)
Net cash provided by operating activities $ 116 $ - $ - $ 116
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of carrier operating property, net (63) (3) - (66)
Business acquisitions - - - -
-------------------------------------------------------------
Net cash used in investing activities (63) (3) - (66)
CASH FLOWS FROM FINANCING ACTIVITIES (2) - - (2)
Dividends paid 100 - - 100
Transfer to parent (167) - - (167)
-------------------------------------------------------------
Net cash used in financing activities (69) - - (69)
Effect of exchange rates on cash - -
-------------------------------------------------------------
Net decrease in cash and cash equivalents (16) (3) - (19)
Cash and cash equivalents at
beginning of year 61 4 - 65
-------------------------------------------------------------
Cash and cash equivalents at end of year $ 45 $ 1 $ - $ 46
=============================================================
YEAR ENDED DECEMBER 31, 2000
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------
(in millions)
Net cash provided (used) by operating activities $ 103 $ (3) $ - $ 100
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of carrier operating property, net (103) (3) - (106)
Business acquisitions (3) - - (3)
-------------------------------------------------------------
Net cash used in investing activities (106) (3) - (109)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4) - - (4)
Transfer to parent (3) - - (3)
-------------------------------------------------------------
Net cash used in financing activities (7) - - (7)
Effect of exchange rates on cash - - - -
-------------------------------------------------------------
Net increase in cash and cash equivalents (10) (6) - (16)
Cash and cash equivalents at
beginning of year 71 10 - 81
-------------------------------------------------------------
Cash and cash equivalents at end of year $ 61 $ 4 $ - $ 65
=============================================================
26
Roadway Express, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's selected results of operations for the four quarters of 2002 and
2001 are as follows:
1ST 2ND 3RD 4TH
2002 QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------
REVENUES $ 553,558 $ 606,409 $ 631,158 $ 1,006,457
OPERATING INCOME $ 407 $ 9,243 $ 11,746 $ 46,269
NET (LOSS) INCOME $ (675) $ 5,563 $ 6,335 $ 25,616
2001
Revenues $ 650,485 $ 642,109 $ 631,657 $ 840,515
Operating income $ 14,103 $ 6,143 $ 15,164 $ 26,055
Net income $ 4,990 $ 4,023 $ 8,940 $ 15,282
27