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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23192
CELADON GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3361050
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
ONE CELADON DRIVE
INDIANAPOLIS, IN 46235-4207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 972-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Common Stock ($.033 par value) of the
Registrant as of the close of business on November 14, 2002 was 7,687,879.
CELADON GROUP, INC.
INDEX TO
SEPTEMBER 30, 2002 FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2002
and June 30, 2002......................................................................................3
Condensed Consolidated Statements of Income - For the three months
ended September 30, 2002 and 2001......................................................................4
Condensed Consolidated Statements of Cash Flows - For the three months
ended September 30, 2002 and 2001......................................................................5
Notes to Condensed Consolidated Financial Statements ..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................18
Item 2. Changes in Securities .........................................................................18
Item 3. Defaults upon Senior Securities ...............................................................18
Item 4. Submission of Matters to a Vote of Security Holders............................................18
Item 5. Other Information..............................................................................18
Item 6. Exhibits and Reports on Form 8-K...............................................................18
CELADON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30 JUNE 30,
2002 2002
------------ ---------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents ................................................. $ 1,238 $ 299
Trade receivables, net of allowance ....................................... 50,322 54,796
Accounts receivable - other ............................................... 4,881 5,728
Prepaid expenses and other current assets ................................. 9,683 6,222
Tires in service .......................................................... 4,359 4,181
Deferred income taxes ..................................................... 1,788 1,808
--------- ---------
Total current assets .................................................. 72,271 73,034
Property and equipment ......................................................... 136,211 140,142
Less accumulated depreciation and amortization ............................ 47,414 45,164
--------- ---------
Net property and equipment ............................................ 88,797 94,978
Tires in service ............................................................... 2,271 1,982
Goodwill ....................................................................... 16,702 16,702
Other assets ................................................................... 3,583 3,335
--------- ---------
Total assets .............................................................. $ 183,624 $ 190,031
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 2,948 $ 4,184
Accrued expenses .......................................................... 22,959 22,969
Insurance and claims accrual .............................................. 4,795 4,274
Bank borrowings and current maturities of long-term debt .................. 5,084 7,531
Current maturities of capital lease obligations ........................... 23,004 21,120
Income tax payable ........................................................ 187 51
--------- ---------
Total current liabilities ............................................. 58,977 60,129
Long-term debt, net of current maturities ...................................... 43,539 44,178
Capital lease obligations, net of current maturities ........................... 18,315 24,193
Deferred income taxes .......................................................... 7,970 7,590
Minority interest .............................................................. 25 25
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 179,985 shares; no shares
issued and outstanding ................................................ -- --
Common stock, $0.033 par value, authorized 12,000,000 shares; issued
7,789,764 shares ...................................................... 257 257
Additional paid-in capital ................................................ 60,050 60,044
Retained deficit .......................................................... (3,458) (4,349)
Accumulated other comprehensive loss ...................................... (1,617) (1,581)
Treasury stock, at cost, 106,989 and 112,115 shares at
September 30, 2002 and June 30, 2002, respectively ...................... (434) (455)
--------- ---------
Total stockholders' equity ............................................ 54,798 53,916
--------- ---------
Total liabilities and stockholders' equity ................................ $ 183,624 $ 190,031
========= =========
See accompanying notes to condensed consolidated financial statements.
3
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
-------- --------
Operating revenue ................................ $ 93,560 $ 82,870
Operating expenses:
Salaries, wages and employee benefits ....... 28,478 24,224
Fuel ........................................ 10,687 9,507
Operating costs and supplies ................ 7,964 7,113
Insurance and claims ........................ 3,469 2,979
Depreciation and amortization ............... 3,534 3,289
Rent and purchased transportation ........... 28,840 27,702
Cost of products and services sold .......... 1,237 733
Professional and consulting fees ............ 550 364
Communications and utilities ................ 1,063 1,023
Permits, licenses and taxes ................. 1,939 1,575
General, administrative, and selling ........ 1,863 1,874
-------- --------
Total operating expenses ................ 89,624 80,383
-------- --------
Operating income ................................. 3,936 2,487
-------- --------
Other (income) expense:
Interest income ............................. (24) (30)
Interest expense ............................ 2,480 2,109
Other (income) expense, net ................. (40) 7
-------- --------
Income before income taxes ....................... 1,520 401
Provision for income taxes ....................... 629 260
-------- --------
Net income .................................. $ 891 $ 141
======== ========
Earnings per common share:
Diluted earnings per share .................. $ 0.11 $ 0.02
Basic earnings per share .................... $ 0.12 $ 0.02
Average shares outstanding:
Diluted ..................................... 8,068 7,564
Basic ....................................... 7,680 7,540
See accompanying notes to condensed consolidated financial statements.
4
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net Income ...................................................... $ 891 $ 141
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 3,534 3,289
Provision (benefit) for deferred income taxes ............... 400 (337)
Provision for doubtful accounts ............................. 238 236
Changes in assets and liabilities:
Trade receivables ...................................... 4,236 3,234
Accounts receivable - other ............................ 847 341
Income tax recoverable ................................. -- 532
Tires in service ....................................... (467) (273)
Prepaid expenses and other current assets .............. (3,471) (688)
Other assets ........................................... 49 (21)
Accounts payable and accrued expenses .................. (725) (1,053)
Income tax payable ..................................... 136 --
-------- --------
Net cash provided by operating activities ................... 5,668 5,401
Cash flows from investing activities:
Purchase of property and equipment .............................. (1,468) (866)
Proceeds on sale of property and equipment ...................... 3,792 1,207
-------- --------
Net cash provided by investing activities ................... 2,324 341
Cash flows from financing activities:
Proceeds from issuances of common stock ......................... 27 --
Proceeds from bank borrowings and debt .......................... 39,487 3,152
Payments on bank borrowings and debt ............................ (42,573) (5,507)
Principal payments under capital lease obligations .............. (3,994) (3,917)
-------- --------
Net cash used in financing activities ....................... (7,053) (6,272)
-------- --------
Increase (decrease) in cash and cash equivalents ................ 939 (530)
Cash and cash equivalents at beginning of year ....................... 299 794
-------- --------
Cash and cash equivalents at end of period ........................... $ 1,238 $ 264
======== ========
Supplemental disclosure of cash flow information:
Interest paid ................................................... $ 1,568 $ 2,344
Income taxes paid ............................................... $ 47 $ 30
Supplemental disclosure of non-cash flow investing activities:
Lease obligation incurred in the purchase of equipment .......... -- $ 333
See accompanying notes to condensed consolidated financial statements.
5
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and the general instructions to Form 10-Q of
Regulation S-X and includes the results of Celadon Group, Inc. and it's majority
owned subsidiaries. Accordingly, they do not include certain information and
note disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the consolidated
financial statements and notes thereto of Celadon Group, Inc. (the "Company") as
of and for each of the three years in the period ended June 30, 2002.
The unaudited interim financial statements reflect all adjustments (all
of a normal recurring nature) which management considers necessary for a fair
presentation of the financial condition and results of operations for these
periods. The results of operations for the interim period are not necessarily
indicative of the results that may be reported for the full year.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board issued Statement No.
143 (SFAS 143), Accounting for Asset Retirement Obligations. SFAS 143 requires
companies to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, which is adjusted to its
present value each period. In addition, companies must capitalize a
corresponding amount by increasing the carrying amount of the related long-lived
asset, which is depreciated over the useful life of the related asset. The
Company adopted SFAS 143 on July 1, 2002, and there was no material impact on
its consolidated financial position or results of operations.
In 2001, the Financial Accounting Standards Board issued Statement No.
144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 provides additional restrictive criteria that would have to be met
to classify an asset as held-for-sale. This statement also requires expected
future operating losses from discontinued operations to be recorded in the
period in which the losses are incurred (rather than as of the date management
commits to a formal plan to dispose of a segment, as previously required). In
addition, more dispositions will qualify for discontinued operations treatment
in the income statement. The Company adopted SFAS 144 on July 1, 2002, and there
was no material impact on its consolidated financial position or results of
operations.
6
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
In 2002, the Financial Accounting Standards Board issued Statement No.
145 (SFAS 145), Recession of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13
and Technical Corrections. This SFAS addresses the recording of debt
extinguishment costs as extraordinary items and accounting for sale-lease back
transactions. Effective July 1 2002, the Company adopted the provisions of SFAS
145. Under this new standard, $0.9 million in expenses associated with the
refinancing of the Company's Credit Agreement in September 2002, which under
prior standards would have been recorded as an extraordinary item, were recorded
in interest expense in the Consolidated Statement of Income. (See Note 3)
In 2002, the Financial Accounting Standards Board issued Statement No.
146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS 146 also establishes
that fair value is the objective for initial measurement of the liability. The
provisions of this Statement are required to be applied starting with exit or
disposal activities that are initiated after December 31, 2002. Early
application is encouraged.
3. CREDIT AGREEMENT
On September 26, 2002, the Company entered into a Loan and Security
Agreement ("Credit Agreement") with Fleet Capital Corporation, Fleet Capital
Canada Corporation and several other lenders named in the Loan Agreement. The
Credit Agreement provides a credit facility in the aggregate amount of $55
million. The facility consists of two revolving loan facilities, two term loan
subfacilities and a commitment to issue and guaranty letters of credit. The term
loan subfacilities consist of a domestic term loan in the aggregate principal
amount of approximately $10 million and a Canadian term loan in the aggregate
principal amount of approximately $800 thousand. Repayment of the amounts
outstanding under the Credit Agreement is secured by a lien on certain assets.
The Credit Agreement replaces in full the credit facility the Company entered
into with ING (U.S.) Capital, LLC, in August 1999. Proceeds of $39 million from
this Credit Agreement were used to satisfy the Company's obligations under its
previous credit facility. The Credit Agreement, which is for a term of three
years, terminates on September 26, 2005. The Company incurred a one-time
non-cash write-off of approximately $900 thousand related to unamortized debt
issuance costs from the previous credit facility.
7
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
4. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators
used in computing earnings per share (in thousands except for per share
amounts):
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---------- ----------
Income available to common shareholders $ 891 $ 141
========== ==========
Basic earnings per share:
Weighted - average number of common shares outstanding 7,679,592 7,539,642
Basic earnings per share $ 0.12 $ 0.02
========== ==========
Diluted earnings per share:
Weighted - average number of common shares outstanding 7,679,592 7,539,642
Effect of stock options and other incremental shares 388,390 23,877
---------- ----------
Weighted - average number of common shares
outstanding - diluted 8,067,982 7,563,519
========== ==========
Diluted earnings per share $ 0.11 $ 0.02
========== ==========
8
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
5. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in two segments, transportation and e-commerce.
The Company generates revenue, in the transportation segment, providing
truckload hauling services through, Celadon Trucking Services, Inc., ("CTSI")
and various other subsidiaries. The Company provided certain services over the
Internet through its e-commerce subsidiary TruckersB2B, Inc., ("TruckersB2B").
The e-commerce segment generates revenue by providing discounted fuel, tires,
and other products and services to small and medium-sized trucking companies.
The Company evaluates its operating segments on operating income.
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
2002 2001
------- -------
Operating revenue
Transportation $91,630 $81,609
E-commerce 1,930 1,261
------- -------
$93,560 $82,870
======= =======
Operating income
Transportation $ 3,615 $ 2,376
E-commerce 321 111
------- -------
$ 3,936 $ 2,487
======= =======
Information as to the Company's operating revenue by geographic area, is
allocated based primarily on country of customer origin and summarized below:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
(DOLLARS IN THOUSANDS)
2002 2001
------- -------
Operating revenue:
United States $77,424 $65,933
Canada 11,268 12,099
Mexico 4,868 4,838
------- -------
Total $93,560 $82,870
======= =======
The Company's largest customer is DaimlerChrysler, which accounted for
approximately 14% and 22% of the Company's total truckload revenue for the three
months ended September 30, 2002 and 2001, respectively. The Company transports
DaimlerChrysler original equipment automotive parts primarily between the United
States and Mexico and DaimlerChrysler after-market replacement parts and
accessories within the United States. The Company's agreement with
DaimlerChrysler is an agreement for international freight with the Chrysler
division, which expires in October 2003. No other customer accounted for more
than 10% of the Company's total revenue during any of its three most recent
fiscal years.
9
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
6. INCOME TAXES
Income tax expense varies from the amount computed by applying the
federal corporate rate of 35% to income before income taxes, primarily due to
state income taxes, permanent tax differences and Mexican taxes being based on
assets in lieu of income. The effective income tax rate for the three months
ended September 30, 2002 and 2001 were 41% and 65%, respectively.
7. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) was $0.9 million and $(0.1) million
for the three months ended September 30, 2002 and 2001, respectively. The
difference between the total comprehensive income (loss) and net income relates
to the effect of foreign currency translation adjustments.
10
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On September 26, 2002, Celadon completed a new $55 million three-year,
senior secured revolving credit facility led by Fleet Capital Corporation
("Fleet"). This facility currently bears interest at 250 basis points over
LIBOR. Availability under this facility is based on a formula of eligible
receivables, revenue equipment and owned properties. The Company incurred a
one-time non-cash write-off of approximately $900 thousand related to
unamortized loan origination and bank amendment fees related to the previous
credit agreement with ING Capital.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of expense
items to operating revenues for the periods indicated:
PERCENTAGE OF OPERATING REVENUES
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2002 2001
-------- ---------
Operating Revenues 100% 100%
Operating expenses
Salaries, wages and employee benefits......... 30.4% 29.2%
Fuel.......................................... 11.4% 11.5%
Operating costs and supplies.................. 8.5% 8.6%
Insurance and claims.......................... 3.7% 3.6%
Depreciation and amortization................. 3.8% 4.0%
Rent and purchased transportation............. 30.8% 33.4%
Cost of products and services sold............ 1.3% 0.9%
Communications and utilities.................. 1.1% 1.2%
Permits, licenses and taxes................... 2.1% 1.9%
Other......................................... 2.7% 2.7%
---- ----
Total operating expenses........................ 95.8% 97.0%
---- ----
Operating income................................ 4.2% 3.0%
==== ====
11
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue increased by $10.7 million, or 13%, to $93.6 million for the
first quarter of fiscal 2003 from $82.9 million for the first quarter of fiscal
2002. This increase is related to a 9% increase in truckload volume and a slight
increase in rate per mile. Non-truckload revenues, which constitute dedicated
operations and material handling, increased $2.8 million in the first quarter of
fiscal 2003. New dedicated operations represented approximately $1.5 million of
this increase. Revenue for TruckersB2B was approximately $1.9 million in the
first quarter fiscal 2003 compared to $1.3 million in the first quarter of
fiscal 2002. The TruckersB2B revenue for the September 2002 quarter represents
over $43 million in purchases made by its member companies through the
TruckersB2B network.
Consolidated operating income increased by $1.4 million, or 56%, to
$3.9 million in fiscal 2003 from $2.5 million in fiscal 2002. The increase in
operating income was primarily a result of increased revenue offset by increased
salaries, wages and benefits, increased rent and purchased transportation and
increased fuel. The Company's operating ratio, which expresses operating
expenses as a percentage of operating revenue improved from 97.0% in fiscal 2002
to 95.8% in fiscal 2003.
The Company's fleet increased to 2,668 tractors, including 552
owner-operated tractors and 150 lease-purchase owner operated tractors at
September 30, 2002 from 2,355 tractors including 544 owner-operated tractors and
179 lease-purchase owner operated tractors at September 30, 2001.
Salaries, wages and benefits were $28.5 million, or 30.4% of operating
revenues for the three-month period ending September 30, 2002 compared to $24.2
million, or 29.2% of operating revenues for the same period in 2001. This
increase is related to an increase in driver payroll for the additional
truckload volume. In addition, the Company has added approximately 85
administrative personnel since September 2001 for the additional volume and the
material handling operations.
Fuel increased to $10.7 million, or 11.4% of revenue in the first
quarter of fiscal 2003 compared to $9.5 million, or 11.5% of revenue in the
first quarter of fiscal 2002. As a percentage of revenue fuel expense remained
consistent year-over-year. The $1.2 million increase relates primarily to the
purchase of additional gallons for the additional dispatch miles driven.
Insurance and claims expense was $3.5 million, or 3.7% of revenue in
the first quarter of fiscal 2003 compared to $3.0 million, or 3.6% of revenue
for the first quarter of fiscal 2002. Insurance consists of premiums for
liability, physical damage and cargo damage. The Company's insurance program
involves self-insurance at various risk retention levels. Claims in excess of
these risk levels are covered by insurance in amounts the Company considers
adequate. The Company accrues for the uninsured portion of claims based on
historical experience.
12
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
Rent and purchased transportation increased to $28.8 million, or 30.8%
of revenue in the first quarter of fiscal 2003 from $27.7 million, or 33.4% in
the first quarter of fiscal 2002. As a percentage of revenue, rent and purchased
transportation dropped 8.4% in fiscal 2003. The percentage of revenue for rent
and purchased transportation decreased due to maintaining the same size
owner-operator fleet year over year while increasing the truckload revenue.
Additional expense was incurred for the material handling operation of
approximately $1.2 million. Also, as the company tractor fleet has grown by
approximately 300 tractors, the monthly operating lease rent expense has
increased rent and purchased transportation.
Net interest expense increased by $0.4 million, or 19%, to $2.5 million
in the first quarter of fiscal 2003 from $2.1 million in the first quarter of
fiscal 2002. The increase was the result of a one-time non-cash write-off of
loan origination costs of approximately $900 thousand related to the Company's
previous credit facility. This write-off was offset by a 2 percentage point
decrease, or 27% decline in interest rates year over year and reduced capital
lease obligations resulting in reduced capital lease related interest expense.
Other income and expense includes approximately $1.1 million of
commission income related to a receivables collection agreement entered into
between Foothill Capital and the Company. This agreement related to the
collection of receivables tied to the bankrupt Burlington Motor Carriers'
("BMC") business. The Company also recognized approximately $1.0 million of
other expense related to a write-down of revenue equipment acquired from
Foothill Capital for equipment which has not been located.
The effective income tax rate decreased to 41% for fiscal 2003 from 65%
for fiscal 2002. The decreased tax rate is the effect of the permanent tax
differences being allocated to increased income, which deflates the effective
tax rate. In addition, taxes for Mexico are based on assets in lieu of income,
which has an effect on the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements in fiscal 2003 will be for
the acquisition of revenue equipment. The Company has historically met its
capital investment requirements with a combination of internally generated
funds, bank financing, equipment lease financing (both capitalized and
operating) and the issuance of common stock. Management believes that there are
presently adequate sources of secured equipment financing together with its
existing credit facilities and cash flow from operations to provide sufficient
funds to meet the Company's anticipated working capital requirements.
Furthermore, sources available under the Company's credit facilities are
dependant upon the Company maintaining compliance with its covenants or
obtaining waivers or amendments with respect to future covenant violations.
The Company's primary source of cash flow for fiscal 2003 was provided
by operations and the collection of from trade receivables offset by increased
prepaid expenses. The net cash provided by operations in the first quarter of
fiscal 2003 was $5.7 million compared to $5.4 million in the first quarter of
fiscal 2002.
13
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
Net cash provided by investing activities increased to $2.3 million in
the first quarter of fiscal 2003 from $0.3 million in the first quarter of
fiscal 2002. This primarily relates to the purchase and sale of revenue
equipment as the Company continues to trade older equipment for new equipment.
As of September 30, 2002, the Company had on order revenue equipment
representing a capital commitment of approximately $8.2 million.
Net cash used in financing activities was $7.1 million in the first
quarter of fiscal 2003 compared to $6.3 million in the first quarter of fiscal
2002. Financing activity generally represents bank borrowings (payment and
proceeds) and payment of capital lease obligations. As of September 30, 2002,
the Company had outstanding debt of $89.9 million as compared to $99.3 million
as of September 30, 2001. This debt consists of:
SEPTEMBER 30,
-------------------------
2002 2001
------ -------
(Dollars in thousands)
Capital lease obligations.................. 41,319 51,699
Credit agreement........................... 37,828 41,390
Mortgage debt relating to equipment........ 6,442 2,595
Mortgage debt relating to property......... 3,389 2,894
Other debt................................. 964 766
------ ------
Total outstanding debt..................... 89,942 99,344
====== ======
The Company continues to reduce obligations owed on capital leased
equipment through scheduled monthly payments and end-of-lease residual payments.
The Company has been replacing all expiring capital leased equipment with
operating leased equipment that is accompanied with a fair market value
residual.
On September 26, 2002, the Company entered into a credit facility
("Credit Agreement") with Fleet Capital Corporation, which matures September
2005. Borrowings available under the Credit Agreement are secured based on a
formula of eligible receivables and owned properties. Borrowings under the
Credit Agreement are based on the banks' base rate and/or LIBOR with interest
rates at LIBOR plus an applicable margin that is adjusted quarterly based on the
Company's fixed charge coverage ratio. At September 30, 2002, the margin was
2.5%. The Credit Agreement has a maximum borrowing limit of $55 million. As of
September 30, 2002, the Company had borrowings under the Credit Agreement in the
amount of $37.8 million. Proceeds from this facility were used to satisfy the
Company's obligations under its previous credit facility.
Standby letters of credit, not reflected in the accompanying
consolidated financial statements, aggregated approximately $5.3 million at
September 30, 2002.
14
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions and
estimates that can have a material impact on the reported results of operations.
While management applies its judgment based on assumptions believed to be
reasonable under the circumstances, actual results could vary from those
assumptions, and it is possible that materially different amounts would be
reported using differing assumptions.
We are self-insured for most medical insurance claims, workers
compensation claims, and general liability and automotive liability losses.
Reported claims and related loss reserves are estimated by third party
administrators. Claims incurred but not reported are accrued based on historical
experience and industry trends, which are continually monitored, and accruals
are adjusted when warranted by changes in facts and circumstances. Insurance and
claims expense will vary from period to period based on the severity and
frequency of claims incurred in a given period.
Long-lived assets are depreciated over estimated useful lives based on
our historical experience and prevailing industry practice. Estimated useful
lives are periodically reviewed to ensure they remain appropriate. Long-lived
assets are tested for impairment whenever an event occurs that indicates
impairment may exist. Future cash flows and operating performance are used for
analyzing impairment losses. If the sum of expected undiscounted cash flows is
less than the carrying value an impairment loss is recognized. The Company
measures the impairment loss by comparing the fair value of the asset to its
carrying value. Fair value is determined based on a discounted cash flow
analysis or appraised values as appropriate. Long-lived assets that are held for
sale are recorded at the lower of carrying value or the fair value less costs to
sell.
We seek to reduce the potential adverse effects that fuel markets may
have on operating results. All fuel derivatives and hedges are recognized on the
balance sheet at fair value in conformance with SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities. Any adjustment related to
adjusting to fair value on the balance sheet is recorded in fuel expense.
SEASONALITY
To date, the Company's revenues have not shown any significant seasonal
pattern. However, because the Company's primary traffic lane is between the
Midwest United States and Mexico, winter may have an unfavorable impact upon the
Company's results of operations. Also, many manufacturers close or curtail their
operations during holiday periods, and observe vacation shutdowns, which may
impact the Company's operations in any particular period.
INFLATION
Many of the Company's operating expenses, including fuel costs and
related fuel taxes, are sensitive to the effects of inflation, which could
result in higher operating costs. The effects of inflation on the Company's
business during fiscal 2003 and 2002 generally were not significant.
15
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such comments
are based upon information currently available to management and management's
perception thereof as of the date of this report being filed. Actual results of
the Company's operations could materially differ from those forward looking
statements. Such differences could be caused by a number of factors including,
but not limited to, potential adverse affects of regulation and litigation;
changes in competition and the effects of such changes; increased competition;
changes in fuel prices; changes in economic, political or regulatory
environments; changes in the availability of a stable labor force; ability of
the Company to hire drivers meeting company standards; changes in management
strategies; environmental or tax matters; and risks described from time to time
in reports filed by the Company with the Securities and Exchange Commission.
Readers should take these factors into account in evaluating any such
forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates, interest rates, and fuel prices. The Company
does not enter into derivatives or other financial instruments for trading or
speculative purposes.
The Company is exposed to interest rate risk primarily from its Credit
Agreement ("Credit Agreement") in which floating rates are based, at the
Company's option, upon either the bank's base rate plus a margin ranging from
..5% to 3.0%. A hypothetical 10% movement in interest rates would have an impact
on income before taxes of approximately $200 thousand. In the event of a change
of such magnitude, management would likely consider actions to further mitigate
its exposure to the change.
Shortages of fuel, increases in prices or rationing of petroleum
products can have a materially adverse effect on the operations and
profitability of the Company. Fuel is subject to economic, political and market
factors that are outside of the Company's control. The Company has historically
been able to recover a portion of high fuel prices from customers in the form of
fuel surcharges. The Company from time-to-time will enter into futures contracts
and derivative financial instruments to reduce its exposure to fuel price
fluctuations. As of September 30, 2002, the Company had 8% of estimated fuel
purchases hedged through January 2003. The Company recognized approximately $100
thousand of income for the quarter ended September 30, 2002 related to these
derivative contracts. A hypothetical 10% movement on the price of fuel futures
would have virtually no impact related to these derivative contracts.
16
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
The Company's foreign currency revenues are generally proportionate to
its foreign currency expenses and the Company does not generally engage in
currency hedging transactions. For purposes of consolidation, however, the
operating results earned by the Company's subsidiaries in foreign currencies is
converted into United States dollars. As a result, a decrease in the value of
the Mexican peso or Canadian dollar could adversely affect the Company's
consolidated results of operations and equity.
17
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims, lawsuits and pending actions against the
Company and its subsidiaries which arose in the normal course of the operations
of its business. The Company believes many of these proceedings are covered in
whole or in part by insurance and that none of these matters will have a
material adverse effect on its consolidated financial position or results of
operations in any given period.
The Company is a defendant in a lawsuit filed by Reliance National
Indemnity Company ("Reliance") relating to one trucker's liability insurance
policy. The Company disagrees with Reliance and has vigorously defended this
lawsuit. The Company has been advised that Reliance has decided to dismiss its
cause of action against the Company and it is in the process of closing this
litigation.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of September 30, 2002.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
September 30, 2002.
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company did not file any reports on form 8-K during the three
months ended September 30, 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Celadon Group, Inc.
(Registrant)
/s/ Stephen Russell
-----------------------
Stephen Russell
Chief Executive Officer
/s/ Paul A. Will
-----------------------
Paul A. Will
Chief Financial Officer
Date: November 14, 2002
19
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Stephen Russell, certify that;
1. I have reviewed this quarterly report on Form 10-Q
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registration as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedure to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Stephen Russell
-----------------------
Stephen Russell
Chairman of the Board and Chief Executive Officer
November 14, 2002
20
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Paul A. Will, certify that;
1. I have reviewed this quarterly report on Form 10-Q
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registration as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedure to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Paul A. Will
-----------------------
Paul A. Will
Chief Financial Officer
November 14, 2002
21