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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _______________________
Commission file number 0-12255
YELLOW CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-0948788
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10990 Roe Avenue, Overland Park, Kansas 66211
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(913) 696-6100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
No Changes
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 15, 2003
----- -------------------------------
Common Stock, $1 Par Value Per Share 29,587,422 shares
INDEX
Item Page
- ---- ----
PART I
1. Financial Statements
Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002 3
Statements of Consolidated Operations -
Three Months and Nine Months Ended September 30, 2003 and 2002 4
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
3. Quantitative and Qualitative Disclosures About Market Risk 27
4. Controls and Procedures 28
PART II
1. Legal Proceedings 29
2. Changes in Securities and Use of Proceeds 29
3. Defaults Upon Senior Securities 29
4. Submission of Matters to a Vote of Security Holders 29
5. Other Information 29
6. Exhibits and Reports on Form 8-K 29
Signatures 31
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Yellow Corporation and Subsidiaries
(Amounts in thousands except per share data)
(Unaudited)
September 30, December 31,
2003 2002
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 226,514 $ 28,714
Accounts receivable, net 372,761 327,913
Prepaid expenses and other 30,856 68,726
------------ -----------
Total current assets 630,131 425,353
------------ -----------
PROPERTY AND EQUIPMENT:
Cost 1,717,322 1,679,096
Less - Accumulated depreciation 1,137,938 1,114,120
------------ -----------
Net property and equipment 579,384 564,976
------------ -----------
Goodwill and other assets 65,708 52,656
------------ -----------
Total assets $ 1,275,223 $ 1,042,985
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 96,753 $ 114,989
Wages, vacations, and employees' benefits 166,448 159,998
Other current and accrued liabilities 127,723 101,111
Asset backed securitization (ABS) borrowings 50,000 50,000
Current maturities of long-term debt 5,008 24,261
------------ -----------
Total current liabilities 445,932 450,359
------------ -----------
OTHER LIABILITIES:
Long-term debt, less current portion 263,963 50,024
Deferred income taxes, net 27,285 25,657
Claims and other liabilities 134,508 156,987
------------ -----------
Total other liabilities 425,756 232,668
------------ -----------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value per share 31,947 31,825
Capital surplus 82,849 80,610
Retained earnings 366,829 325,474
Accumulated other comprehensive loss (33,178) (35,596)
Unamortized restricted stock awards (689) (1,053)
Treasury stock, at cost (2,359 and 2,244 shares) (44,223) (41,302)
------------ -----------
Total shareholders' equity 403,535 359,958
------------ -----------
Total liabilities and shareholders' equity $ 1,275,223 $ 1,042,985
============ ===========
The accompanying notes are an integral part of these statements.
3
STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Corporation and Subsidiaries
For the Three and Nine Months Ended September 30
(Amounts in thousands except per share data)
(Unaudited)
Three Months Nine Months
-------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ------------ -----------
OPERATING REVENUE $ 770,705 $ 682,473 $ 2,165,251 $ 1,907,336
----------- ----------- ------------ -----------
OPERATING EXPENSES:
Salaries, wages and employees' benefits 489,277 444,659 1,386,061 1,264,680
Operating expenses and supplies 106,490 97,808 320,341 271,629
Operating taxes and licenses 20,251 18,849 59,510 55,950
Claims and insurance 16,518 14,881 39,972 45,103
Depreciation and amortization 21,120 20,517 62,206 58,928
Purchased transportation 77,992 66,559 213,971 181,276
Losses on property disposals, net 381 351 422 1,257
Acquisition, spin-off and reorganization charges 864 5,367 864 6,164
----------- ----------- ------------ -----------
Total operating expenses 732,893 668,991 2,083,347 1,884,987
----------- ----------- ------------ -----------
OPERATING INCOME 37,812 13,482 81,904 22,349
----------- ----------- ------------ -----------
NONOPERATING (INCOME) EXPENSES:
Interest expense 6,525 1,306 11,796 5,053
ABS facility charges - 756 - 2,225
Other 2,414 (54) 1,978 (256)
----------- ----------- ------------ -----------
Nonoperating expenses, net 8,939 2,008 13,774 7,022
----------- ----------- ------------ -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 28,873 11,474 68,130 15,327
INCOME TAX PROVISION 11,504 4,177 26,775 5,549
----------- ----------- ------------ -----------
INCOME FROM CONTINUING OPERATIONS 17,369 7,297 41,355 9,778
Loss from discontinued operations, net - (48,578) - (117,875)
----------- ----------- ------------ -----------
NET INCOME (LOSS) $ 17,369 $ (41,281) $ 41,355 $ (108,097)
=========== =========== ============ ===========
AVERAGE SHARES OUTSTANDING-BASIC 29,565 29,175 29,578 27,525
=========== =========== ============ ===========
AVERAGE SHARES OUTSTANDING-DILUTED 29,843 29,523 29,832 27,882
=========== =========== ============ ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.59 $ 0.25 $ 1.40 $ 0.35
Loss from discontinued operations - (1.66) - (4.28)
----------- ----------- ------------ -----------
Net income (loss) $ 0.59 $ (1.41) $ 1.40 $ (3.93)
----------- ----------- ------------ -----------
DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.58 $ 0.25 $ 1.39 $ 0.35
Loss from discontinued operations - (1.65) - (4.23)
----------- ----------- ------------ -----------
Net income (loss) $ 0.58 $ (1.40) $ 1.39 $ (3.88)
----------- ----------- ------------ -----------
The accompanying notes are an integral part of these statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Corporation and Subsidiaries
For the Nine Months Ended September 30
(Amounts in thousands)
(Unaudited)
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 41,355 $(108,097)
Noncash items included in net income (loss):
Depreciation and amortization 62,206 58,928
Loss from discontinued operations - 117,875
Deferred income tax provision, net 15,758 (3,186)
Losses on property disposals, net 422 1,257
Changes in assets and liabilities, net:
Accounts receivable (44,848) (73,060)
Accounts receivable securitizations - (82,000)
Accounts payable (18,236) (25,777)
Other working capital items 22,351 85,093
Claims and other 11,606 15,357
Other (3,144) 1,978
Net change in operating activities of discontinued operations - 17,250
--------- ---------
Net cash from operating activities 87,470 5,618
--------- ---------
INVESTING ACTIVITIES:
Acquisition of property and equipment (77,172) (59,338)
Proceeds from disposal of property and equipment 1,468 1,789
Acquisition of companies - (18,712)
Net capital expenditures of discontinued operations - (24,372)
--------- ---------
Net cash used in investing activities (75,704) (100,633)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in long-term debt, net 187,187 (119,533)
ABS borrowings, net - -
Proceeds from issuance of common stock - 93,792
Dividend from subsidiary upon spin-off - 110,790
Treasury stock purchases (2,921) -
Proceeds from stock options 1,768 6,950
--------- ---------
Net cash from financing activities 186,034 91,999
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 197,800 (3,016)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,714 19,214
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 226,514 $ 16,198
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net $ 13,115 $ 6,629
========= =========
Interest paid $ 7,434 $ 9,107
========= =========
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Yellow Corporation and Subsidiaries
(unaudited)
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Yellow Corporation and its wholly owned subsidiaries (also referred
to as "Yellow," "we" or "our"). We have prepared the consolidated
financial statements, without audit by independent public accountants,
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). In management's opinion, all normal recurring
adjustments necessary for a fair statement of the financial position,
results of operations and cash flows for the interim periods included
herein have been made. Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
from these statements pursuant to SEC rules and regulations.
Accordingly, the accompanying consolidated financial statements should
be read in conjunction with the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December
31, 2002.
2. Description of Business
Yellow Corporation is a holding company that through wholly owned
operating subsidiaries offers its customers a wide range of asset and
non-asset based transportation services integrated by technology.
Yellow Transportation, Inc. (Yellow Transportation) offers a full range
of regional, national and international services for the movement of
industrial, commercial and retail goods. Meridian IQ, LLC (Meridian IQ)
is a non-asset global transportation management company that plans,
coordinates and manages the movement of goods worldwide to provide
customers a single source for transportation management solutions.
Yellow Technologies, Inc. provides innovative technology solutions and
services exclusively for Yellow Corporation companies.
On July 8, 2003, Yellow and Roadway Corporation (Roadway) announced a
definitive agreement under which Yellow will acquire Roadway for
approximately $966 million, or $48 per share (based on a fixed exchange
ratio and a 60-day average price per share of $24.95 for Yellow common
stock in a half cash, half stock transaction). As described more fully
in our Joint Proxy Statement/Prospectus dated October 17, 2003, the
exchange ratio is subject to adjustment if the 20-day average closing
price of Yellow common stock is not between $21.21 and $28.69 (the
collar). If the average closing price of Yellow common stock is above
or below the collar, the purchase price could increase or decrease
significantly. As of October 31, 2003, the 20-day average closing price
of Yellow common stock was above the collar. We will also assume an
expected $150 million in net Roadway indebtedness, bringing the
enterprise value of the acquisition to approximately $1.1 billion. Upon
completion of the transaction, Roadway will be an operating subsidiary
under the holding company, which will be renamed Yellow Roadway
Corporation. As a stipulation to the definitive agreement, Yellow
entered into arrangements for approximately $1.1 billion in committed
financing. Of this amount, $250 million has been funded through the
issuance of senior notes, as discussed in Note 3. As of September 30,
2003, we were committed to an estimated $8 million in additional
investment banking and financing fees as a result of this transaction.
On September 30, 2002, Yellow completed the 100 percent distribution
(the spin-off) of all of its shares of SCS Transportation, Inc. (SCST)
to Yellow shareholders. Shares were distributed on the basis of one
share of SCST common stock for every two shares of Yellow common stock.
As a result of the spin-off, our financial statements were reclassified
to reflect SCST as discontinued operations for the periods prior to the
spin-off.
Summarized results of operations relating to SCST (as reported in
discontinued operations) for the three and nine months ended September
30, 2002 were as follows (amounts in thousands, except per share data):
6
Three Months Nine Months
------------ -----------
Operating revenue $ 201,155 $ 581,181
Operating expenses 192,498 559,751
------------ -----------
Operating income 8,657 21,430
Nonoperating expenses, net 1,635 4,735
------------ -----------
Income before income taxes 7,022 16,695
Income tax provision 2,953 6,748
------------ -----------
Income from continuing operations 4,069 9,947
Loss on disposal of SCST (52,647) (52,647)
Cumulative effect of change in accounting for goodwill - (75,175)
------------ -----------
Loss from discontinued operations, net $ (48,578) $ (117,875)
------------ -----------
Discontinued operations basic earnings (loss) per share:
Income from continuing operations $ 0.14 $ 0.36
Loss on disposal of SCST (1.80) (1.91)
Cumulative effect of change in accounting for goodwill - (2.73)
------------ -----------
Loss from discontinued operations $ (1.66) $ (4.28)
============ ===========
Discontinued operations diluted earnings (loss) per share:
Income from continuing operations $ 0.13 $ 0.36
Loss on disposal of SCST (1.78) (1.89)
Cumulative effect of change in accounting for goodwill - (2.70)
------------ -----------
Loss from discontinued operations $ (1.65) $ (4.23)
============ ===========
Management fees and other corporate services previously allocated to
SCST were not charged to discontinued operations, as we continue to
incur the expenses. We allocated interest expense to discontinued
operations based on the overall effective borrowing rate of Yellow
applied to the debt reduction that we realized from the spin-off.
Interest expense included in discontinued operations was $1.6 million
and $4.6 million for the three months and nine months ended September
30, 2002, respectively.
3. Debt and Financing
On August 8, 2003, Yellow closed the sale of $200 million of its 5.0
percent contingent convertible senior notes due 2023 (senior notes).
Yellow also closed the sale of an additional $50 million of the senior
notes on August 15, 2003 pursuant to the exercise of the option of the
initial purchasers bringing the total amount of senior notes sold to
$250 million. Yellow received net proceeds from the sales of $242.5
million, after discounts and commissions.
The senior notes have an annual interest rate of 5.0 percent and are
convertible into shares of Yellow common stock at a conversion price of
$39.24 per share only upon the occurrence of certain other events. The
senior notes may not be redeemed by Yellow for seven years, but are
redeemable at any time thereafter at par. Holders of the senior notes
have the option to require Yellow to purchase their senior notes at par
on August 8, 2010, 2013 and 2018, and upon a change in control. These
terms and other material terms and conditions applicable to the senior
notes are set forth in the indenture governing the senior notes. Yellow
expects to use the net proceeds from the offering as part of the
financing for its proposed acquisition of Roadway and, if such
transaction is not completed, for general corporate purposes.
On September 30, 2003, we completed the repurchase of $24 million
aggregate principal amount of our medium-term notes (MTNs). The
remaining $20 million aggregate principal amount of MTNs outstanding,
after scheduled principal payments of $11.3 million and repurchases of
$24.0 million, were defeased under the terms thereof. Defeasance refers
to the process of placing sufficient funds in an irrevocable trust to
pay and discharge the MTNs as they become due. As a result, we were
considered legally released as the primary obligor and the MTNs were
removed from our balance sheet. The interest rate on the notes ranged
from 6.1 percent to 7.8 percent with scheduled maturities ranging from
October 2003 to August 2008. We recognized a loss on the extinguishment
of debt of $2.3 million from the repurchase and defeasance that we
reflected in "other" nonoperating expenses on our Statement of
Consolidated Operations. We funded the repurchase and defeasance with
cash on hand.
As a result of these transactions, our total debt at September 30,
2003, increased by $194.7 million from December 31, 2002 as summarized
in the following table:
7
September 30, December 31,
2003 2002
------------ ------------
(in thousands)
Unsecured credit agreement $ - $ -
ABS borrowings 50,000 50,000
Unsecured medium-term notes - 55,250
Industrial development bonds (IDBs) 18,900 18,900
Contingent convertible senior notes 250,000 -
Capital leases and other 71 135
------------ ------------
Total debt $ 318,971 $ 124,285
ABS borrowings (50,000) (50,000)
Current maturities (5,008) (24,261)
------------ ------------
Long-term debt $ 263,963 $ 50,024
------------ ------------
The principal maturities of total debt, excluding ABS borrowings, for the next
five years and thereafter are as follows:
(in thousands) Senior notes IDBs Other Total
- ------------------------------------------------------------------------------------------
2003 $ - $ 5,000 $ 8 $ 5,008
2004 - - 63 63
2005 - 4,400 - 4,400
2006 - - - -
2007 - - - -
Thereafter 250,000 9,500 - 259,500
- ------------------------------------------------------------------------------------------
Total $ 250,000 $ 18,900 $ 71 $ 268,971
- ------------------------------------------------------------------------------------------
Based on the borrowing rates currently available to us for debt with
similar terms and remaining maturities and the quoted market price for
the senior notes, the fair value of fixed-rate debt at September 30,
2003 and December 31, 2002 was approximately $314.0 million and $81.5
million, respectively. The carrying amount of such fixed-rate debt at
September 30, 2003 and December 31, 2002 was $269.0 million and $74.3
million, respectively.
4. Business Segments
Yellow reports financial and descriptive information about its
reportable operating segments on a basis consistent with that used
internally for evaluating segment operating performance and allocating
resources to segments. We manage the segments separately because each
requires different operating strategies. We evaluate performance
primarily on operating income and return on capital.
Yellow has two reportable segments, which are strategic business units
that offer complementary transportation services to its customers.
Yellow Transportation is a unionized carrier that provides
comprehensive regional, national and international transportation
services. Meridian IQ provides domestic and international freight
forwarding, multi-modal brokerage and transportation management
services.
The accounting policies of the segments are the same as those described
in the Summary of Accounting Policies in our Annual Report on Form 10-K
for the year ended December 31, 2002. We charge management fees and
other corporate services to segments primarily based on direct benefit
received or allocated based on revenue. Corporate operating losses
represent operating expenses of the holding company, including
salaries, wages and employees' benefits, along with incentive
compensation and professional services. In 2003, corporate operating
losses also included $4.0 million for an industry conference that
Yellow hosted in the first quarter of 2003. Corporate identifiable
assets primarily include cash and cash equivalents, in addition to
pension intangible assets. Intersegment revenue consists of
transportation services provided by Yellow Transportation to Meridian
IQ and charges to Yellow Transportation for support functions and the
use of various Meridian IQ service names.
8
The following table summarizes our operations by business segment (in
thousands):
Yellow Corporate/
Transportation Meridian IQ Eliminations Consolidated
-------------- ----------- ------------ ------------
As of September 30, 2003
Identifiable assets $ 962,778 $77,559 $234,886 $ 1,275,223
As of December 31, 2002
Identifiable assets 940,252 64,617 38,116 1,042,985
Three months ended
September 30, 2003
External revenue 737,777 32,928 - 770,705
Intersegment revenue 534 548 (1,082) -
Operating income (loss) 42,835 156 (5,179) 37,812
Three months ended
September 30, 2002
External revenue 661,500 20,973 - 682,473
Intersegment revenue 663 549 (1,212) -
Operating income (loss) 22,989 26 (9,533) 13,482
Nine months ended
September 30, 2003
External revenue 2,088,154 77,097 - 2,165,251
Intersegment revenue 1,731 1,647 (3,378) -
Operating income (loss) 98,696 (673) (16,119) 81,904
Nine months ended
September 30, 2002
External revenue 1,853,117 54,219 - 1,907,336
Intersegment revenue 1,904 1,647 (3,551) -
Operating income (loss) 40,176 (1,943) (15,884) 22,349
5. Stock Compensation Plans
Yellow has various stock-based employee compensation plans, which are
described more fully in our Annual Report on Form 10-K for the year
ended December 31, 2002. Yellow accounts for those plans under the
recognition and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. We do not
reflect compensation cost in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
We estimated the fair value per option for each option granted in the
period using the Black-Scholes option pricing model with the following
weighted average assumptions for the three and nine months ended
September 30:
Three Months Nine Months
---------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Actual options granted 0 100,000 54,700 114,000
Dividend yield n/a -% -% -%
Expected volatility n/a 37.1% 46.9% 36.9%
Risk-free interest rate n/a 2.6% 2.1% 2.8%
Expected option life (years) n/a 3 3 3
Fair value per option n/a $ 5.29 $ 8.90 $ 5.33
The following table illustrates the effect on income from continuing
operations, net income and earnings per share if Yellow had applied the
fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, for the
three and nine months ended September 30:
9
Three Months Nine Months
---------------------- ------------------------
(In thousands except per share data) 2003 2002 2003 2002
------- -------- -------- ----------
Net income (loss), as reported $17,369 $(41,281) $ 41,355 $ (108,097)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects 486 343 1,587 1,048
------- -------- -------- ----------
Pro forma net income (loss) $16,883 $(41,624) $ 39,768 $ (109,145)
======= ======== ======== ==========
Basic earnings (loss) per share:
Income from continuing operations - as reported $ 0.59 $ 0.25 $ 1.40 $ 0.35
Income from continuing operations - pro forma 0.57 0.24 1.35 0.31
Net income (loss) - as reported 0.59 (1.41) 1.40 (3.93)
Net income (loss) - pro forma 0.57 (1.42) 1.35 (3.97)
Diluted earnings (loss) per share:
Income from continuing operations - as reported $ 0.58 $ 0.25 $ 1.39 $ 0.35
Income from continuing operations - pro forma 0.56 0.24 1.34 0.31
Net income (loss) - as reported 0.58 (1.40) 1.39 (3.88)
Net income (loss) - pro forma 0.56 (1.41) 1.34 (3.92)
6. Comprehensive Income
Our comprehensive income for the periods presented includes net income,
changes in the fair value of an interest rate swap and foreign currency
translation adjustments as follows:
(in thousands) Three Months Nine Months
---------------------- -----------------------
2003 2002 2003 2002
------- -------- ------- ----------
Net income (loss): $17,369 $(41,281) $41,355 $ (108,097)
Changes in foreign currency translation adjustments (21) (371) 1,307 62
Changes in the fair value of an interest rate swap 418 (22) 1,110 1,182
------- -------- ------- ----------
Comprehensive income (loss) $17,766 $(41,674) $43,772 $ (106,853)
------- -------- ------- ----------
7. Goodwill and Intangibles
As of September 30, 2003, the carrying amount of goodwill was $20.6
million and the gross amount of identifiable intangible assets was $8.3
million. Accumulated amortization of intangibles totaled $1.2 million.
Refer to our Annual Report on Form 10-K for the year ended December 31,
2002 for a description of our goodwill and intangibles policies.
8. Rental Expenses
Yellow incurs rental expenses under noncancelable lease agreements for
certain buildings and operating equipment. Rental expense is charged to
"operating expenses and supplies" on the Statements of Consolidated
Operations. The following table represents the actual rental expense,
as reflected in operating income, incurred for the three and nine
months ended September 30 (in thousands):
Three Months Nine Months
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- ------
Rental expense $10,123 $ 8,559 $29,854 $25,514
9. Multi-Employer Pension Plans
Under current legislation regarding multi-employer pension plans, a
termination, withdrawal or partial withdrawal from any multi-employer
plan that is in an under-funded status would render Yellow liable for a
proportionate share of such multi-employer plans' unfunded vested
liabilities. This potential unfunded pension liability also applies to
our unionized competitors who contribute to multi-employer plans. Based
on the limited information available from plan administrators, which we
cannot independently validate, we believe that our portion of the
contingent liability in the case of a full withdrawal or termination
would be material to our financial position and results of operations.
Yellow Transportation has no current intention of taking any action
that would subject Yellow to obligations under the legislation.
10
Yellow Transportation has collective bargaining agreements with its
unions that stipulate the amount of contributions it must make to
union-sponsored, multi-employer pension plans. The Internal Revenue
Code and related regulations establish minimum funding requirements for
these plans. If any of these plans fail to meet these requirements and
the trustees of these plans are unable to obtain waivers of the
requirements from the Internal Revenue Service or reduce pension
benefits to a level where the requirements are met, the Internal
Revenue Service could impose an excise tax on all employers
participating in these plans to correct the funding deficiency. If an
excise tax were imposed on the participating employers, it could have a
material adverse impact on the financial results of Yellow.
10. Condensed Consolidating Financial Statements
As discussed in Note 3 above, in August 2003 Yellow Corporation issued
5.0 percent senior notes due 2023 pursuant to Rule 144A under the
Securities Act of 1933, as amended. In connection with the senior
notes, the following 100 percent owned subsidiaries of Yellow
Corporation issued guarantees in favor of the holders of the senior
notes: Yellow Transportation, Inc., Mission Supply Company, Yellow
Redevelopment Corporation, Yellow Relocation Services, Yellow
Technologies, Inc., Yellow Dot Com Subsidiary, Inc., MegaSys, Inc.,
Meridian IQ, LLC, Yellow GPS, LLC and Globe.com Lines, Inc. Each of the
guarantees is full and unconditional and joint and several.
The summarized consolidating financial statements are presented in lieu
of separate financial statements and other related disclosures of the
subsidiary guarantors and issuer because management does not believe
that such separate financial statements and related disclosures would
be material to investors. There are currently no significant
restrictions on the ability of Yellow Corporation or any guarantor to
obtain funds from its subsidiaries by dividend or loan.
The following represents summarized condensed consolidating financial
information as of September 30, 2003 and December 31, 2002 with respect
to the financial position, for the three and nine months ended
September 30, 2003 and 2002 for results of operations and for the nine
months ended September 30, 2003 and 2002 for cash flows of Yellow
Corporation and its subsidiaries. The Parent column presents the
financial information of Yellow Corporation, the primary obligor of the
senior notes. The Guarantor Subsidiaries column presents the financial
information of all guarantor subsidiaries of the senior notes. The
Non-Guarantor Subsidiaries column presents the financial information of
all non-guarantor subsidiaries, including Yellow Receivables
Corporation, the special-purpose entity that manages our ABS agreement,
and those subsidiaries that are governed by foreign laws.
11
Condensed Consolidating Balance Sheets
September 30, 2003
(in thousands) Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
---------- ------------ ------------ ----------- ------------
Cash and cash equivalents $ 219,948 $ 1,966 $ 4,600 $ - $ 226,514
Intercompany advances receivable 122,196 82,968 - (205,164) -
Accounts receivable, net 3,552 40,456 328,753 - 372,761
Prepaid expenses and other 1,093 29,717 46 - 30,856
---------- ---------- --------- ---------- -----------
Total current assets 346,789 155,107 333,399 (205,164) 630,131
Property and equipment, at cost 302 1,708,607 8,413 - 1,717,322
Less - accumulated depreciation 218 1,132,989 4,731 - 1,137,938
---------- ---------- --------- ---------- -----------
Net property and equipment 84 575,618 3,682 - 579,384
Investment in subsidiaries 231,326 - - (231,326) -
Goodwill and other assets 17,824 43,114 4,770 - 65,708
---------- ---------- --------- ---------- -----------
Total assets $ 596,023 $ 773,839 $ 341,851 $ (436,490) $ 1,275,223
========== ========== ========= ========== ===========
Intercompany advances payable $ - $ - $ 205,164 $ (205,164) $ -
Accounts payable 1,786 94,440 527 - 96,753
Wages, vacations, and employees' benefits 3,663 162,473 312 - 166,448
Other current and accrued liabilities (935) 130,431 (1,727) (46) 127,723
ABS borrowings - - 50,000 - 50,000
Current maturities of long-term debt - 5,008 - - 5,008
---------- ---------- --------- ---------- -----------
Total current liabilities 4,514 392,352 254,276 (205,210) 445,932
Intercompany debt (26,811) 26,811 - - -
Long-term debt, less current portion 250,000 13,963 - - 263,963
Deferred income taxes, net (32,919) 59,759 445 - 27,285
Claims and other liabilities 14,597 119,613 298 - 134,508
Shareholders' equity 386,642 161,341 86,832 (231,280) 403,535
---------- ---------- --------- ---------- -----------
Total liabilities and shareholders' equity $ 596,023 $ 773,839 $ 341,851 $ (436,490) $ 1,275,223
========== ========== ========= ========== ===========
12
Condensed Consolidating Balance Sheets
December 31, 2002
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
---------- ------------ ------------ ----------- ------------
Cash and cash equivalents $ 21,898 $ 2,470 $ 4,346 $ - $ 28,714
Intercompany advances receivable 141,057 46,291 - (187,348) -
Accounts receivable, net 3,211 29,017 295,685 - 327,913
Prepaid expenses and other 3,518 65,148 60 - 68,726
---------- ---------- --------- ---------- -----------
Total current assets 169,684 142,926 300,091 (187,348) 425,353
Property and equipment, at cost 289 1,671,327 7,480 - 1,679,096
Less - accumulated depreciation 213 1,109,710 4,197 - 1,114,120
---------- ---------- --------- ---------- -----------
Net property and equipment 76 561,617 3,283 - 564,976
Investment in subsidiaries 263,577 - - (263,577) -
Goodwill and other assets 3,729 44,756 4,171 - 52,656
---------- ---------- --------- ---------- -----------
Total assets $ 437,066 $ 749,299 $ 307,545 $ (450,925) $ 1,042,985
========== ========== ========= ========== ===========
Intercompany advances payable $ - $ - $ 187,348 $ (187,348) $ -
Accounts payable 1,412 113,251 326 - 114,989
Wages, vacations, and employees' benefits 2,389 157,230 379 - 159,998
Other current and accrued liabilities (1,098) 101,287 922 - 101,111
ABS borrowings - - 50,000 - 50,000
Current maturities of long-term debt 19,250 5,011 - - 24,261
---------- ---------- --------- ---------- -----------
Total current liabilities 21,953 376,779 238,975 (187,348) 450,359
Intercompany debt (20,658) 20,658 - - -
Long-term debt, less current portion 36,000 14,024 - - 50,024
Deferred income taxes, net (17,319) 43,381 (405) - 25,657
Claims and other liabilities 15,782 141,495 (290) - 156,987
Shareholders' equity 401,308 152,962 69,265 (263,577) 359,958
---------- ---------- --------- ---------- -----------
Total liabilities and shareholders' equity $ 437,066 $ 749,299 $ 307,545 $ (450,925) $ 1,042,985
========== ========== ========= ========== ===========
13
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2003
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
---------- ------------ ------------ ----------- ------------
Operating revenue $ 3,125 $ 764,013 $ 6,692 $ (3,125) $ 770,705
---------- ---------- --------- ---------- -----------
Operating expenses:
Salaries, wages and employees' benefits 3,911 482,802 2,564 - 489,277
Operating expenses and supplies 3,120 100,824 5,696 (3,150) 106,490
Operating taxes and licenses 46 19,869 336 - 20,251
Claims and insurance 199 16,247 72 - 16,518
Depreciation and amortization 10 21,035 75 - 21,120
Purchased transportation - 75,643 2,349 - 77,992
Losses (gains) on property disposals, net (26) 404 3 - 381
Acquisition, spin-off and reorganization
charges 482 382 - - 864
---------- ---------- --------- ---------- -----------
Total operating expenses 7,742 717,206 11,095 (3,150) 732,893
---------- ---------- --------- ---------- -----------
Operating income (loss) (4,617) 46,807 (4,403) 25 37,812
---------- ---------- --------- ---------- -----------
Nonoperating (income) expenses:
Interest expense 5,925 937 1,402 (1,739) 6,525
ABS facility charges - - - - -
Other 1,242 14,799 (15,391) 1,764 2,414
---------- ---------- --------- ---------- -----------
Nonoperating (income) expenses, net 7,167 15,736 (13,989) 25 8,939
---------- ---------- --------- ---------- -----------
Income (loss) before income taxes (11,784) 31,071 9,586 - 28,873
Income tax provision (benefit) (4,159) 12,071 3,513 79 11,504
---------- ---------- --------- ---------- -----------
Net income (loss) $ (7,625) $ 19,000 $ 6,073 $ (79) $ 17,369
========== ========== ========= ========== ===========
14
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2002
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
---------- ------------ ------------ ----------- ------------
Operating revenue $ 14,125 $ 676,331 $ 6,142 $ (14,125) $ 682,473
---------- ---------- --------- ---------- -----------
Operating expenses:
Salaries, wages and employees' benefits 3,781 438,957 1,921 - 444,659
Operating expenses and supplies 3,399 91,164 7,407 (4,162) 97,808
Operating taxes and licenses 37 18,675 137 - 18,849
Claims and insurance 85 14,792 4 - 14,881
Depreciation and amortization 10 20,440 67 - 20,517
Purchased transportation - 64,194 2,365 - 66,559
Losses on property disposals, net - 345 6 - 351
Spin-off and reorganization charges 5,274 93 - - 5,367
---------- ---------- --------- ---------- -----------
Total operating expenses 12,586 648,660 11,907 (4,162) 668,991
---------- ---------- --------- ---------- -----------
Operating income (loss) 1,539 27,671 (5,765) (9,963) 13,482
---------- ---------- --------- ---------- -----------
Nonoperating (income) expenses:
Interest expense 2,014 827 511 (2,046) 1,306
ABS facility charges (18) - 774 - 756
Other (1,203) 22,367 (13,301) (7,917) (54)
---------- ---------- --------- ---------- -----------
Nonoperating (income) expenses, net 793 23,194 (12,016) (9,963) 2,008
---------- ---------- --------- ---------- -----------
Income from continuing operations
before income taxes 746 4,477 6,251 - 11,474
Income tax provision (benefit) (318) 2,009 2,205 281 4,177
---------- ---------- --------- ---------- -----------
Income (loss) from continuing operations 1,064 2,468 4,046 (281) 7,297
Loss from discontinued
operations, net - - (48,578) - (48,578)
---------- ---------- --------- ---------- -----------
Net income (loss) $ 1,064 $ 2,468 $ (44,532) $ (281) $ (41,281)
========== ========== ========= ========== ===========
15
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2003
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
---------- ------------ ------------ ----------- ------------
Operating revenue $ 10,052 $2,145,488 $ 19,763 $ (10,052) $ 2,165,251
---------- ---------- --------- ---------- -----------
Operating expenses:
Salaries, wages and employees' benefits 10,094 1,369,089 6,878 - 1,386,061
Operating expenses and supplies 13,332 297,427 19,634 (10,052) 320,341
Operating taxes and licenses 139 58,742 629 - 59,510
Claims and insurance 410 39,354 208 - 39,972
Depreciation and amortization 29 61,959 218 - 62,206
Purchased transportation - 206,709 7,262 - 213,971
Losses on property disposals, net 1 417 4 - 422
Acquisition, spin-off and reorganization
charges 482 382 - - 864
---------- ---------- --------- ---------- -----------
Total operating expenses 24,487 2,034,079 34,833 (10,052) 2,083,347
---------- ---------- --------- ---------- -----------
Operating income (loss) (14,435) 111,409 (15,070) - 81,904
---------- ---------- --------- ---------- -----------
Nonoperating (income) expenses:
Interest expense 9,996 2,902 4,254 (5,356) 11,796
ABS facility charges - - - - -
Other (438) 41,823 (44,763) 5,356 1,978
---------- ---------- --------- ---------- -----------
Nonoperating (income) expenses, net 9,558 44,725 (40,509) - 13,774
---------- ---------- --------- ---------- -----------
Income (loss) before income taxes (23,993) 66,684 25,439 - 68,130
Income tax provision (benefit) (8,410) 26,028 9,203 (46) 26,775
---------- ---------- --------- ---------- -----------
Net income (loss) $ (15,583) $ 40,656 $ 16,236 $ 46 $ 41,355
=========== ========== ========= ========== ===========
16
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2002
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------
Operating revenue $ 40,325 $ 1,888,634 $ 18,702 $ (40,325) $ 1,907,336
------------- ------------- ------------- ------------- -------------
Operating expenses:
Salaries, wages and employees' benefits 9,061 1,250,059 5,560 - 1,264,680
Operating expenses and supplies 8,779 253,612 21,725 (12,487) 271,629
Operating taxes and licenses 185 55,347 418 - 55,950
Claims and insurance 1,129 43,960 14 - 45,103
Depreciation and amortization 30 58,701 197 - 58,928
Purchased transportation - 174,398 6,878 - 181,276
Losses (gains) on property disposals, net - 1,398 (141) - 1,257
Spin-off and reorganization charges 5,852 312 - - 6,164
------------- ------------- ------------- ------------- -------------
Total operating expenses 25,036 1,837,787 34,651 (12,487) 1,884,987
------------- ------------- ------------- ------------- -------------
Operating income (loss) 15,289 50,847 (15,949) (27,838) 22,349
------------- ------------- ------------- ------------- -------------
Nonoperating (income) expenses:
Interest expense 6,829 2,860 1,054 (5,690) 5,053
ABS facility charges (18) - 2,243 - 2,225
Other (4,125) 62,914 (36,897) (22,148) (256)
------------- ------------- ------------- ------------- -------------
Nonoperating (income) expenses, net 2,686 65,774 (33,600) (27,838) 7,022
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes 12,603 (14,927) 17,651 - 15,327
Income tax provision (benefit) 3,942 (4,583) 6,792 (602) 5,549
------------- ------------- ------------- ------------- -------------
Income (loss) from continuing operations 8,661 (10,344) 10,859 602 9,778
Loss from discontinued
operations, net - - (117,875) - (117,875)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 8,661 $ (10,344) $ (107,016) $ 602 $ (108,097)
============= ============= ============= ============= =============
17
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2003
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------
Operating Activities:
Net cash from (used in) operating
activities $ (17,688) $ 125,441 $ (20,283) $ - $ 87,470
------------- ------------- ------------- ------------- -------------
Investing activities:
Acquisition of property and equipment (44) (77,025) (103) - (77,172)
Proceeds from disposal of property and
equipment 6 1,466 (4) - 1,468
Net capital expenditures of discontinued
operations - - - - -
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (38) (75,559) (107) - (75,704)
------------- ------------- ------------- ------------- -------------
Financing activities:
Increase (decrease) in long-term debt, net 187,250 (63) - - 187,187
ABS borrowings, net - - - - -
Treasury stock purchases (2,921) - - - (2,921)
Proceeds from stock options 1,768 - - - 1,768
Intercompany advances/repayments 29,679 (50,323) 20,644 - -
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 215,776 (50,386) 20,644 - 186,034
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 198,050 (504) 254 - 197,800
Cash and cash equivalents, beginning
of period 21,898 2,470 4,346 - 28,714
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end
of period $ 219,948 $ 1,966 $ 4,600 $ - $ 226,514
============= ============= ============= ============= =============
18
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2002
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Elimination Consolidated
-------------------------------------------------------------------------------------
Operating Activities:
Net cash from (used in) operating
activities $ 6,690 $ 114,768 $ (111,415) $ (4,425) $ 5,618
------------- ------------- ------------- ------------- -------------
Investing activities:
Acquisition of property and equipment (51) (59,159) (128) - (59,338)
Proceeds from disposal of property and
equipment - 1,589 200 - 1,789
Acquisition of companies (17,105) (1,607) - - (18,712)
Net capital expenditures of discontinued
operations - - (24,372) - (24,372)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (17,156) (59,177) (24,300) - (100,633)
------------- ------------- ------------- ------------- -------------
Financing activities:
Increase (decrease) in long-term debt, net (97,000) (8) (22,525) - (119,533)
Proceeds from issuance of common stock 93,792 - - - 93,792
Dividend from subsidiaries upon spin-off - - 110,790 - 110,790
Proceeds from stock options 6,950 - - - 6,950
Intercompany advances/repayments 2,258 (52,976) 46,293 4,425 -
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 6,000 (52,984) 134,558 4,425 91,999
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents (4,466) 2,607 (1,157) - (3,016)
Cash and cash equivalents, beginning
of period 11,154 1,944 6,116 - 19,214
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end
of period $ 6,688 $ 4,551 $ 4,959 $ - $ 16,198
============= ============= ============= ============= =============
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements of Yellow
Corporation (also referred to as "Yellow," "we" or "our"). MD&A and certain
statements in the Notes to Consolidated Financial Statements include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934,
as amended (each a forward-looking statement). Forward-looking statements
include those preceded by, followed by or include the words "should," "expects,"
"believes," "anticipates," "estimates" or similar expressions. Our actual
results could differ materially from those projected by these forward-looking
statements due to a number of factors, including (without limitation),
inflation, labor relations, inclement weather, price and availability of fuel,
competitor pricing activity, expense volatility, changes in and customer
acceptance of new technology, changes in equity and debt markets and a downturn
in general or regional economic activity.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following table summarizes the Statements of Consolidated Operations for the
three and nine months ended September 30 (in millions):
Three Months Nine Months
------------------------------- -----------------------------------
Percent Percent
2003 2002 Change 2003 2002 Change
------------------------------- -----------------------------------
Operating Revenue $ 770.7 $ 682.5 12.9% $ 2,165.3 $ 1,907.3 13.5%
Operating Income 37.8 13.5 180.5% 81.9 22.3 266.5%
Nonoperating Expenses, net 8.9 2.0 345.2% 13.8 7.0 96.2%
Income from Continuing Operations 17.4 7.3 138.0% 41.4 9.8 322.9%
Loss from Discontinued Operations - (48.6) n/m(1) - (117.9) n/m(1)
------------------------------- -----------------------------------
Net Income (Loss) $ 17.4 $ (41.3) 142.1% $ 41.4 $ (108.1) 138.3%
(1) Not meaningful.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Our consolidated operating revenue for the third quarter of 2003 increased by
$88.2 million over the third quarter of 2002, primarily as a result of increased
volumes and improved pricing at Yellow Transportation from growth in premium
services and increased market share from the September 2002 closure of
Consolidated Freightways, Inc. (CF), a major competitor of Yellow
Transportation. We also recognized $12.0 million of additional revenue at
Meridian IQ from a combination of organic growth, higher premium services and
the August 2003 acquisition of certain United States (U.S.) assets of GPS
Logistics, a global logistics provider.
Operating income improved by $24.3 million for the third quarter of 2003
compared to the third quarter of 2002 due to increased revenue and effective
cost management. Our strong operating income highlights our continued ability to
effectively balance volume and price. Operating income for the three months
ended September 30, 2003 included $1.2 million of acquisition costs and losses
on property disposals. Acquisition costs consisted of approximately $0.4 million
for certain U.S. assets of GPS Logistics and $0.5 million for the pending
acquisition of Roadway Corporation (Roadway). In addition to the Roadway
acquisition expenses included in operating income (consisting primarily of
marketing and promotional activities), we recorded $4.9 million of deferred
charges, including investment banking, legal and accounting fees, related to the
acquisition. These deferred charges will be reclassified as part of purchase
accounting once the acquisition is complete. If the transaction does not occur,
Yellow will expense the entire amount immediately and may be required to pay a
termination fee of $25 million to Roadway in connection with the termination per
the merger agreement. Third quarter 2002 operating income included $5.3 million
of costs related to the spin-off of SCST, as discussed below, and $0.4 million
in losses on property disposals. Corporate expenses in the third quarter of 2003
were $4.4 million lower than the prior year period, which included the spin-off
charges of $5.3 million. When excluding these charges, corporate expenses
increased from the prior year period by $0.9 million mostly due to higher
performance incentive accruals based on improved operating results. These
charges are reflected under "corporate" in the Business Segments note.
Nonoperating expenses increased $6.9 million in the third quarter of 2003
compared to the same period last year as a result of acquisition-related
financing costs. As discussed further in the liquidity section, in July 2003 we
entered into arrangements for approximately $1.1 billion of committed financing
of which $250 million was funded in August 2003 through the issuance of 5.0
percent contingent convertible senior notes (senior notes). These transactions
impacted the third quarter by increasing interest
20
expense $4.3 million. When excluding these items, combined interest expense and
asset backed securitization (ABS) facility charges were in line with the prior
year period. In addition, "other" nonoperating expenses on the Statement of
Consolidated Operations included a loss on the extinguishment of debt of $2.3
million from the repurchase and defeasance of the remaining $44.0 million of
medium-term notes (MTNs) outstanding. Other nonoperating expenses, after
excluding the extinguishment of MTNs, were consistent with the prior year
period.
In the third quarter of 2002, ABS obligations were not reflected on the balance
sheet and financing costs were recorded as "ABS facility charges" on the
Statement of Consolidated Operations. Due to the December 31, 2002 amendment to
the facility, ABS borrowings were prospectively reflected on the Consolidated
Balance Sheets and the related interest was recorded as "interest expense" on
the Statement of Consolidated Operations. Interest expense for the third quarter
of 2003 included approximately $0.3 million related to the ABS facility compared
to $0.8 million of ABS facility charges in the third quarter of 2002. The
decrease resulted from a combination of lower average ABS borrowings and lower
interest rates.
Our effective tax rate on continuing operations for the third quarter of 2003
was 39.8 percent compared to 36.4 percent in the third quarter of 2002. The
higher tax rate was mainly a function of our income allocation among
subsidiaries and their relative state tax rates. In 2003, Yellow Transportation,
a higher tax rate subsidiary, generated a larger percentage of our profits
before tax compared to the same period in 2002.
In September 2002, we successfully completed the 100 percent distribution (the
spin-off) of all of the shares of SCS Transportation, Inc. (SCST) to our
shareholders. As a result of the spin-off, the historical results of operations
for SCST have been reclassified as discontinued operations on our 2002 Statement
of Consolidated Operations.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Our consolidated operating revenue for the nine months ended September 30, 2003
surpassed the nine months ended September 30, 2002 by $257.9 million or 13.5
percent. As discussed above, Yellow Transportation realized increased volumes
and improved pricing from growth in premium services and the closure of CF in
September 2002. In addition, Meridian IQ generated additional year-to-date
revenue of $22.9 million mostly due to organic growth, higher premium services
and its August 2003 acquisition of certain U.S. assets of GPS Logistics.
Operating income for the first nine months of 2003 improved by $59.6 million
compared to the first nine months of 2002 due to increased revenue, effective
cost management and productivity improvements. Our strong operating income
highlights our continued ability to effectively balance volume and price.
Year-to-date 2003 operating income included a $5.0 million reduction in claims
and insurance expense for an insurance recovery related to two former employees
falsifying claims over several years. Approximately $1.3 million of the recovery
was recognized in first quarter 2003 and the remaining $3.7 was recognized in
second quarter 2003. We reviewed and made appropriate adjustments to our
procedures and controls in response to the claims. Year-to-date 2003 corporate
expenses included approximately $4.0 million for an industry conference that
Yellow hosts every other year and year-to-date 2002 included $6.2 million of
spin-off charges. After excluding these two items, corporate expenses increased
in 2003 by approximately $2.0 million mostly due to higher performance incentive
accruals based on improved operating results and acquisition expenses related to
the pending Roadway acquisition. Operating income for the first nine months of
2002 included $7.4 million related to losses on property disposals and spin-off
and reorganization charges. The first nine months of 2003 included $1.3 million
of losses on property disposals and acquisition charges.
Nonoperating expenses increased by $6.8 million in the first nine months of 2003
compared to the same period in 2002. Interest expense for year-to-date 2003
increased $4.5 million over the combined interest and ABS facility charges for
year-to-date 2002 as a result of the additional interest of $4.3 million from
the senior notes and committed financing discussed above. Other nonoperating
expenses increased $2.2 million in 2003 compared to 2002 due to the $2.3 million
loss on extinguishment of the MTNs partially offset by favorable currency
translation. After excluding these transactions, other nonoperating expenses on
a year-to-date basis were consistent between 2003 and 2002.
Our effective tax rate for the first nine months of 2003 was 39.3 percent
compared to 36.2 percent for the first nine months of 2002. The higher tax rate
was mainly a function of our income allocation among subsidiaries and their
relative state tax rates. In 2003, Yellow Transportation, a higher tax rate
subsidiary, generated a larger percentage of our profits before tax compared to
the same period in 2002.
Our net loss of $108.1 million in the first nine months of 2002 occurred
primarily due to the impairment of goodwill associated with Jevic
Transportation, Inc. (Jevic), a subsidiary of SCST, and the spin-off of SCST. In
the first quarter of 2002, we recorded a non-cash charge of $75.2 million as a
cumulative effect of change in accounting for the impairment of Jevic goodwill.
In the third quarter of 2002, we recorded a non-cash charge of $52.6 million for
the difference between the carrying value of SCST and the fair value, as
determined by the market capitalization of SCST at the spin-off date. As a
result of the spin-off, both non-cash
21
charges and income from operations of $9.9 million for SCST have been
reclassified as discontinued operations on our 2002 Statement of Consolidated
Operations.
YELLOW TRANSPORTATION RESULTS
The table below provides summary information for Yellow Transportation for the
three and nine months ended September 30 (in millions):
Three Months Nine Months
-------------------------------------- ------------------------------------------
2003 2002 Percent Change 2003 2002 Percent Change
-------------------------------------- ------------------------------------------
Operating Revenue $ 738.3 $ 662.2 11.5% $ 2,089.9 $ 1,855.0 12.7%
Operating Income 42.8 23.0 86.3% 98.7 40.2 145.7%
Operating Ratio 94.2% 96.5% 2.3 pp 95.3% 97.8% 2.5 pp
-------------------------------------- ------------------------------------------
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
As discussed under our consolidated results, Yellow Transportation realized
increases in volumes and price in the third quarter of 2003 compared to the
third quarter of 2002 as a result of its premium services, pricing discipline,
service quality and market share growth from the CF closure. Less-than-truckload
(LTL) revenue per day increased 12.1 percent over the third quarter of 2002,
primarily reflecting a 7.3 percent increase in LTL tonnage per day and a 4.5
percent improvement in LTL revenue per hundred weight. A primary indicator of
pricing, LTL revenue per hundred weight excluding fuel surcharge, was up 3.7
percent in the third quarter of 2003 compared to the third quarter of 2002.
Yellow Transportation realized improved operating income of $19.8 million from
the third quarter of 2002 to the third quarter of 2003 due to increased volumes,
pricing discipline and cost management. Our strong operating income highlights
our continued ability to effectively balance volume and price. Higher volumes
combined with contractual wage and benefit increases impacted third quarter 2003
salaries, wages and employees' benefits expense by $35 million. Variation in the
labor mix slightly offset the increased wages. In addition, salaries, wages and
employees' benefits as a percentage of revenue declined by 1.2 percentage points
and total operating expenses as a percentage of revenue decreased by 2.3
percentage points compared to third quarter 2002, resulting in a 2003 third
quarter operating ratio of 94.2 percent.
Workers' compensation expense in the third quarter of 2003 declined by $3.1
million compared to the third quarter of 2002, primarily as a result of improved
safety statistics in 2003, added resources to manage claims and additional
expenses recorded in the third quarter of 2002. In the third quarter of 2002,
Yellow Transportation recorded additional workers' compensation expenses due to
increased costs per claim and the longer duration of prior years' cases.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Yellow Transportation generated increased volumes and improved pricing
throughout the first nine months of 2003 compared to the first nine months of
2002. With increased volumes from premium services and market share growth from
the CF closure, Yellow Transportation reported increased revenue of $234.9
million in the first nine months of 2003 compared to the first nine months of
2002. LTL revenue per day increased 12.9 percent over the first nine months of
2002, primarily reflecting a 7.1 percent increase in LTL tonnage per day and a
5.4 percent improvement in LTL revenue per hundred weight. A primary indicator
of pricing, LTL revenue per hundred weight excluding fuel surcharge, was up 3.7
percent in the first nine months of 2003 compared to the first nine months of
2002.
Despite increases in contractual wages and benefits and purchased transportation
rates, Yellow Transportation recorded improved operating income of $58.5 million
for the first nine months of 2003 compared to the first nine months of 2002. Our
strong operating income highlights our continued ability to effectively balance
volume and price. Variation in the labor mix slightly offset the increased
wages. Fuel costs and purchased transportation (mostly rail) raised operating
expenses by $44.7 million in the first nine months of 2003 compared to the same
period in 2002. The increases resulted from a combination of higher volumes and
increased rates. Despite the increases, operating expenses as a percentage of
revenue decreased for the first nine months of 2003 by 2.5 percentage points
compared to the first nine months of 2002, resulting in an operating ratio of
95.3 percent for year-to-date 2003. During the nine months ended September 30,
2003, Yellow Transportation recognized a benefit in operating income of $5.0
million related to the insurance recovery discussed under our Consolidated
Results.
In the prior year, Yellow Transportation recorded increased expenses for
workers' compensation due to increased costs per claim and longer duration of
cases. As a result of recording these additional expenses, improved safety
statistics and additional
22
resources to manage claims, workers' compensation expense in the first nine
months of 2003 was $3.8 million less than the first nine months of 2002. Total
workers' compensation expense as a percentage of revenue declined by 0.5
percentage points.
MERIDIAN IQ RESULTS
The table below provides summary information for Meridian IQ for the three and
nine months ended September 30 (in millions):
Three Months Nine Months
--------------------------------------- -----------------------------------
2003 2002 Percent Change 2003 2002 Percent Change
--------------------------------------- -----------------------------------
Operating Revenue $ 33.5 $ 21.5 55.5% $ 78.7 $ 55.9 41.0%
Operating Income / (Loss) 0.2 0.0 n/m (0.7) (1.9) 65.4%
--------------------------------------- -----------------------------------
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
As discussed under our consolidated results, Meridian IQ realized additional
revenue of $12.0 million in the third quarter of 2003 compared to the third
quarter of 2002, due to a combination of organic growth, higher premium services
and the August 2003 acquisition of certain U.S. assets of GPS Logistics.
Meridian IQ recorded net acquisition expenses related to GPS Logistics of $0.4
million that are reflected as "acquisition, spin-off and reorganization charges"
on the Statement of Consolidated Operations. In the third quarter of 2003,
Meridian IQ reported operating income of $0.2 million, an improvement over its
breakeven performance in the third quarter of 2002. Improved operating results
were attributed to increased revenue and effective cost management.
In August 2003, a subsidiary of Meridian IQ, Yellow Global LLC, acquired certain
U.S. assets of GPS Logistics. Yellow Global LLC was then renamed Yellow GPS LLC
(Yellow GPS). In exchange for the acquisition, Yellow GPS assumed certain of GPS
Logistics customer, lease and other obligations and became obligated to pay GPS
Logistics earnout payments if certain financial targets for the combined
business of Yellow GPS are met. There was no net cash consideration paid in the
transaction. In addition, Yellow GPS received a call option to purchase the
stock of each of GPS Worldwide Logistics (U.K.) Ltd., the related United Kingdom
operations of GPS Logistics, and GPS Logistics Group Ltd., the related Asian
operations of GPS Logistics. If Yellow GPS does not exercise an option, it would
be required to pay a deferred option price to the shareholders of the entity
with respect to which the option remained unexercised.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Meridian IQ reported increased revenue of $22.8 million in the first nine months
of 2003 compared to the first nine months of 2002, as a result of organic
growth, higher premium services and its acquisition of certain U.S. assets of
GPS Logistics. Operating losses at Meridian IQ declined for the first nine
months of 2003 by nearly $1.2 million compared to the first nine months of 2002,
even with $0.4 million in GPS Logistics acquisition charges in 2003 results.
Increased revenue, improved margins and effective cost management contributed to
the improved operating results.
FINANCIAL CONDITION
LIQUIDITY
Our liquidity needs arise primarily from capital investment in new equipment,
land and structures, and information technology, as well as funding working
capital requirements and debt service obligations. To provide short-term and
longer-term liquidity, we maintain capacity under a bank credit agreement and an
ABS agreement involving Yellow Transportation accounts receivable. We believe
these facilities provide adequate capacity to fund current working capital and
capital expenditure requirements excluding those requirements that will result
from the closing of our pending acquisition of Roadway (discussed below). It is
not unusual for us to have a deficit working capital position, as we can operate
in this position due to rapid turnover of accounts receivable, effective cash
management and ready access to funding.
On July 8, 2003, Yellow and Roadway announced a definitive agreement under which
Yellow will acquire Roadway for approximately $966 million, or $48 per share
(based on a fixed exchange ratio and a 60-day average price per share of $24.95
for Yellow common stock in a half cash, half stock transaction). As described
more fully in our Joint Proxy Statement/Prospectus dated October 17, 2003, the
exchange ratio is subject to adjustment if the 20-day average closing price of
Yellow common stock is not between $21.21 and $28.69 (the collar). If the
average closing price of Yellow common stock is above or below the collar, the
purchase price could increase or decrease significantly. As of October 31, 2003,
the 20-day average closing price of Yellow common stock was above the collar. We
will also assume an expected $150 million in net Roadway indebtedness, bringing
the
23
enterprise value of the acquisition to approximately $1.1 billion. Upon
completion of the transaction, Roadway will be an operating subsidiary under the
holding company, which will be renamed Yellow Roadway Corporation. As a
stipulation to the definitive agreement, Yellow entered into arrangements for
approximately $1.1 billion in committed financing. Of this amount, $250 million
has been funded through the issuance of senior notes, as discussed below. As of
September 30, 2003, we were committed to an estimated $8 million in additional
investment banking and financing fees as a result of this transaction.
The acquisition of Roadway is subject to the approval of the shareholders of
both companies, the successful completion of the financing of the cash portion
of the purchase price, the replacement of certain existing debt facilities of
both companies, and customary regulatory clearances, including the expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and review under the Investment Canada
Act, as amended. On October 17, 2003, Yellow and Roadway certified substantial
compliance to the second request for additional information from the U.S.
Department of Justice (DOJ) related to its antitrust review of the pending
acquisition. The DOJ is expected to respond within 30 days. Also on October 17,
2003, a Joint Proxy Statement/Prospectus on a Registration Statement on Form S-4
filed with the U.S. Securities and Exchange Commission became effective.
Shareholders of record of both Yellow and Roadway as of October 16, 2003 (a
record date established for both companies) will vote at special meetings of
shareholders on December 9, 2003 to consider the approval of applicable aspects
of the transaction.
Contingent Convertible Senior Notes
As part of the cash portion of the purchase price for the Roadway acquisition,
Yellow issued $250 million of 5.0 percent contingent convertible senior notes
due 2023. On August 8, 2003, Yellow closed the sale of $200 million of the
senior notes and on August 15, 2003 we closed the sale of an additional $50
million of senior notes pursuant to the exercise of the option of the initial
purchasers. We received net proceeds from the sales of $242.5 million, after
discounts and commissions.
The senior notes have an annual interest of 5.0 percent and are convertible into
shares of Yellow common stock at a conversion price of $39.24 per share only
upon the occurrence of certain other events. The senior notes may not be
redeemed by Yellow for seven years, but are redeemable at any time thereafter at
par. Holders of the senior notes have the option to require Yellow to purchase
their senior notes at par on August 8, 2010, 2013 and 2018, and upon a change in
control. These terms and other material terms and conditions applicable to the
senior notes are set forth in the indenture governing the senior notes. We
expect to use the net proceeds from the offering as part of the financing for
our proposed acquisition of Roadway and, if such transaction is not completed,
for general corporate purposes.
Medium-Term Notes
Another change in our capital structure in support of the pending Roadway
acquisition was the repurchase and defeasance of our MTNs. On September 30,
2003, we completed the repurchase of $24 million aggregate principal amount of
MTNs and defeased the remaining $20 million aggregate principal amount
outstanding, after making scheduled principal payments of $11.3 million.
Defeasance refers to the process of placing sufficient funds in an irrevocable
trust to pay and discharge the MTNs as they become due. As a result, we were
considered legally released as the primary obligor and the MTNs were removed
from our balance sheet. The interest rate on the MTNs ranged from 6.1 percent to
7.8 percent with scheduled maturities ranging from October 2003 to August 2008.
We recognized a loss on the extinguishment of debt of $2.3 million from the
repurchase and defeasance that we reflected in "other" nonoperating expenses on
our Statement of Consolidated Operations. We funded the repurchase and
defeasance with cash on hand.
Bank Credit Agreement
We maintain a $300 million bank credit agreement scheduled to expire in April
2004. We expect to replace this credit agreement with a new credit facility in
conjunction with the acquisition of Roadway. In addition to funding short-term
liquidity needs, we also use the facility to provide letters of credit that
reduce available borrowings under the credit agreement. Letters of credit serve
as collateral for our self-insurance programs, primarily in the areas of
workers' compensation and liability claims. The following table summarizes the
availability under the bank credit agreement at each period end (in millions):
September 30, December 31,
2003 2002
--------------- ---------------
Total capacity $ 300.0 $ 300.0
Outstanding borrowings - -
Letters of credit (134.6) (146.2)
--------------- ---------------
Available unused capacity $ 165.4 $ 153.8
24
Our outstanding letters of credit at September 30, 2003 included $13.6 million
for liability and workers' compensation claims against SCST. Yellow agreed to
maintain the letters of credit outstanding at the spin-off date until SCST
obtained replacement letters of credit or third party guarantees. SCST agreed to
use its reasonable best efforts to obtain these letters of credit or guarantees,
which in many cases would allow Yellow to obtain a release of its letters of
credit. SCST also agreed to indemnify Yellow for any claims against the letters
of credit provided by Yellow. SCST reimburses Yellow for all fees incurred
related to the remaining outstanding letters of credit. We also provide a
guarantee regarding certain lease obligations of SCST equaling $6.3 million at
September 30, 2003.
Asset Backed Securitization Facility
Our ABS facility provides us with additional liquidity and lower borrowing costs
through access to the asset backed commercial paper market. By using the ABS
facility, we obtain a variable rate based on the A1 commercial paper rate plus a
fixed increment for utilization and administration fees. A1 rated commercial
paper comprises more than 90 percent of the commercial paper market,
significantly increasing our liquidity. We averaged a rate of 2.1 percent on the
ABS facility for the first nine months of 2003 compared to a rate of 2.3 percent
for the year ended December 31, 2002.
Our ABS facility involves receivables of Yellow Transportation only and has a
limit of $200 million. Under the terms of the agreement, Yellow Transportation
provides servicing of the receivables and retains the associated collection
risks. Although the facility has no stated maturity, there is an underlying
letter of credit with the administering financial institution that has a 364-day
maturity. Refer to our Annual Report on Form 10-K for the year ended December
31, 2002 for a further understanding of the process related to the ABS facility.
Cash Flow Measurements
We use free cash flow as a measurement to manage working capital and capital
expenditures. Free cash flow indicates cash available to fund additional capital
expenditures, to reduce outstanding debt (including current maturities), or to
invest in our growth strategies. This measurement should not be construed as a
better measurement than net cash from operating activities as defined by
generally accepted accounting principles. The following table illustrates our
calculation for determining free cash flow for the nine months ended September
30 (in millions):
2003 2002
--------- ---------
Net cash from operating activities $ 87.5 $ 5.6
Net change in operating activities of discontinued operations - (17.3)
Accounts receivable securitizations, net - 82.0
Net property and equipment acquisitions (75.7) (57.5)
Proceeds from stock options 1.8 7.0
--------- ---------
Free cash flow $ 13.6 $ 19.8
--------- ---------
The decline of $6.2 million in free cash flow from the first nine months of 2002
compared to the first nine months of 2003 resulted primarily from increases in
net property and equipment acquisitions of $18.2 million and decreases in stock
option proceeds of $5.2 million, partially offset by improved operating results
and favorable accounts receivable collections. Other working capital
fluctuations resulted primarily from increased pension funding of $23.5 million
in 2003 compared to 2002 and the timing of other working capital items, such as
wages and benefits.
Variances included in net cash from operating activities were changes in
accounts receivable securitizations related to our ABS facility and net
operating activities of discontinued operations. In the first nine months of
2002, we reduced ABS obligations by $82.0 million. In 2003, ABS obligations were
reflected as a financing activity on the Statements of Consolidated Cash Flows
and had no impact on free cash flow or net cash from operating activities.
Changes in operating activities of discontinued operations in 2002 related to
SCST activity until the spin-off in September 2002.
Nonunion Pension Obligations
As discussed in more detail in our Annual Report on Form 10-K for the year ended
December 31, 2002, we provide defined benefit pension plans for most employees
not covered by collective bargaining agreements, or approximately 4,000
employees. Increases in our pension benefit obligations combined with market
losses in 2002 and 2001 negatively impacted the funded status of our plans,
resulting in additional funding and expense over the next several years. Based
on a valuation study in the first quarter of 2003 from the independent actuary,
our actual 2003 pension expense will be approximately $17 million, significantly
less than the $24 million we expected at December 31, 2002. As pension expense
for the following year is determined based on the discount rate at the
measurement date, December 31 for Yellow, we do not have more accurate
information than that provided
25
at December 31, 2002 for 2004 estimated pension expense. However, high-grade
corporate bonds with principal payments and maturities that approximate our
expected benefit payments have experienced significant drops in rates over the
last nine months and could be lower than the 6.75 percent we used as of December
31, 2002 to estimate 2004 pension expense, ultimately resulting in additional
pension expense in 2004. Discount rates do not have a direct impact on cash
funding requirements. As a result, we made our scheduled pension payment of $35
million on July 1, 2003 and expect to fund an additional $25 to $35 million in
2004.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following tables provide aggregated information regarding our contractual
obligations and commercial commitments as of September 30, 2003.
Contractual Cash Obligations
Payments Due by Period
Less than 2 - 3 4 - 5 After 5
(amounts in millions) 1 year years years years Total
---------------------------------------------------------
Balance sheet obligations:
ABS borrowings $ 50.0 $ - $ - $ - $ 50.0
Long-term debt 5.0 4.5 - 259.5 269.0
Off-balance sheet obligations:
Operating leases 27.4 31.9 7.0 4.2 70.5 (1)
--------- --------- --------- --------- ---------
Total contractual obligations $ 82.4 $ 36.4 $ 7.0 $ 263.7 $ 389.5
========= ========= ========= ========= =========
(1) The net present value of operating leases, using a discount rate of 10
percent, was $58.3 million at September 30, 2003.
Other Commercial Commitments
The following table reflects other commercial commitments or potential cash
outflows that may result from a contingent event.
Amount of Commitment Expiration Per Period
Less than 2 - 3 4 - 5 After 5
(amounts in millions) 1 year years years years Total
-----------------------------------------------------------------
Available line of credit $ 165.4 (1) $ - $ - $ - $ 165.4
Letters of credit 134.6 - - - 134.6
Committed financing 875.0 (2) 875.0
Lease guarantees for SCST 1.8 3.0 1.4 0.1 6.3
Surety bonds 51.3 (3) 3.8 1.4 - 56.5
--------- --------- --------- ---------- ---------
Total commercial commitments $ 1,228.1 $ 6.8 $ 2.8 $ 0.1 $ 1,237.8
========= ========= ========= ========== =========
(1) The line of credit expires in April 2004.
(2) Equates to the $1.1 billion of committed financing required per the merger
agreement with Roadway less the $250 million of senior notes funded in August
2003 that are included in the "contractual cash obligations" table above.
(3) Includes $4.3 million of surety bonds for SCST related to liability claims
and workers' compensation self insurance.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to a variety of market risks, including the effects of interest
rates, equity prices, foreign currency exchange rates and fuel prices.
Risk from Interest Rates and Equity Prices
To provide adequate funding through seasonal business cycles and minimize
overall borrowing costs, we utilize both fixed rate and variable rate financial
instruments with varying maturities. At September 30, 2003, we had approximately
16 percent of our debt at variable rates with the balance at fixed rates. We use
an interest rate swap to hedge our exposure to variable interest rates, and at
September 30, 2003, we hedged 100 percent of our variable debt under the swap
agreement.
The table below provides information regarding our interest rate risk as of
September 30, 2003. For fixed-rate debt, principal cash flows are stated in
millions and weighted average interest rates are by contractual maturity. The
fair value of our industrial development bonds has been estimated by discounting
the principal and interest payments at current rates available for debt of
similar terms and maturity. The fair value of our senior notes has been
calculated based on the quoted market price at September 30, 2003, which
reflects the combination of the debt and equity components of the convertible
instrument. Variable-rate debt is estimated to approximate the carrying amount
due to the fact that the interest rates are generally set for periods of three
months or less, and is excluded from the following table. For the interest rate
swap, the table presents the notional amount (in millions) and contractual
interest rate.
There- Fair
2003 2004 2005 2006 2007 After Total Value
---- ---- ---- ---- ---- ----- ----- -----
Fixed-Rate Debt $ 5.0 $ 0.1 $ 4.4 $ - $ - $ 259.5 $ 269.0 $ 314.0
Average interest rate 4.95% 5.50% 5.25% - - 5.04%
Interest Rate Swap
Notional amount $ 50.0 (1) - - - - - $ 50.0 $ 50.6
Avg. pay rate (fixed) 6.06% - - - - -
Avg. receive rate (variable) 1.16% - - - - -
(1) Interest rate swap on the ABS facility. The variable rate is based on the
3-month LIBOR as of September 30, 2003.
Foreign Currency Exchange Rates
Revenue, operating expenses, assets and liabilities of our Canadian and Mexican
subsidiaries are denominated in local currencies, thereby creating exposure to
fluctuations in exchange rates. The risks related to foreign currency exchange
rates are not material to our consolidated financial position or results of
operations.
Fuel Price Volatility
Yellow Transportation has an effective fuel surcharge program in place. These
programs are well established within the industry, and customer acceptance of
fuel surcharges remains high. Since the amount of fuel surcharge is based on
average, national diesel fuel prices and is reset weekly, our exposure to fuel
price volatility is significantly reduced.
27
Item 4. Controls and Procedures
The company maintains a rigorous set of disclosure controls and procedures and
internal controls designed to ensure that information required to be disclosed
in its filings under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The company's principal
executive and financial officers have evaluated its disclosure controls and
procedures within 90 days prior to the filing of this Quarterly Report on Form
10-Q and have determined that such disclosure controls and procedures are
effective.
Subsequent to the evaluation by the company's principal executive and financial
officers, there were no significant changes in internal controls or other
factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of July 8, 2003, by and
among Yellow Corporation, Yankee LLC and Roadway Corporation
(incorporated by reference to Exhibit 2.1 to Yellow
Corporation's Current Report on Form 8-K, as amended, filed on
July 8, 2003, Reg. No. 000-12255). Pursuant to Item 601(b)(2)
of Regulation S-K, certain schedules, exhibits and similar
attachments to this Agreement have not been filed with this
exhibit. The schedules contain various items relating to the
assets of the business being acquired and the representations
and warranties made by the parties to the Agreement. The
registrants agree to furnish supplementally any omitted
schedule, exhibit or similar attachment to the SEC upon
request.
4.1 Indenture (including form of note) dated August 8, 2003 among
Yellow Corporation, certain subsidiary guarantors and Deutsche
Bank Trust Company Americas, as trustee, relating to Yellow
Corporation's 5.0% Contingent Convertible Senior Notes due
2023 (incorporated by reference to Exhibit 4.5 to Yellow
Corporation's Registration Statement on Form S-4, filed August
19, 2003, Reg. No. 333-108081).
4.2 Registration Rights Agreement dated August 8, 2003 among
Yellow corporation, certain subsidiary guarantors and Deutsche
Bank Securities Inc., as representative of the initial
purchasers (incorporated by reference to Exhibit 4.6 to Yellow
Corporation's Registration Statement on Form S-4, filed on
August 18, 2003, Reg. No. 333-108081).
10.1 Employment Agreement, dated as of October 10, 2003, by and
between Yankee LLC and James D. Staley (incorporated by
reference to Exhibit 10.1 to Amendment No. 3 to Yellow
Corporation's Registration Statement on Form S-4, filed on
October 17, 2003, Reg. No. 333-108081).
31.1 Certification pursuant to Exchange Act Rules 13a-14 and
15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Exchange Act Rules 13a-14 and
15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On July 8, 2003, a Form 8-K/A was filed under Item 5, Other Events, to
announce the signing of a definitive agreement under which Yellow will
acquire Roadway Corporation for approximately $966 million in cash and
Yellow common stock on approximately a 50/50 basis.
On July 18, 2003, a Form 8-K was furnished under Item 7, Financial
Statements and Exhibits, and Item 9, Information Being Provided Under
Item 12. We made available our results of operations and financial
condition for the quarter ending June 30, 2003 by means of a press
release.
29
On August 4, 2003, two press releases were furnished on Form 8-K. One
press release, furnished under Item 9, Regulation FD Disclosure,
announced Yellow Corporation's intention to raise approximately $150
million through a private offering of contingent convertible senior
notes. An additional $50 million may be raised if the initial
purchasers exercised their right to acquire additional notes in
connection with the offering. The other press release, furnished under
Item 12, Results of Operations and Financial Position, reconfirmed
third quarter earnings per share guidance.
On August 5, 2003, a Form 8-K was furnished under Item 9, Regulation FD
Disclosure, in which Yellow announced via a press release its intention
to increase its private offering of contingent convertible senior notes
from $150 million to $200 million, with an additional $50 million
option exercisable by the initial purchasers.
On August 11, 2003, a Form 8-K was furnished under Item 9, Regulation
FD Disclosure, in which Yellow furnished a slideshow presented to
investors and analysts on July 31, 2003 and subsequent dates.
On August 18, 2003, a Form 8-K was furnished under Item 9, Regulation
FD Disclosure, in which Yellow announced via a press release that the
Company had completed its private offering of $250 million in
contingent convertible senior notes.
On August 19, 2003, a Form 8-K was furnished under Item 9, Regulation
FD Disclosure, in which Yellow announced via a press release that the
Company had received second requests for additional information from
the Department of Justice in connection with the proposed acquisition
of Roadway Corporation by Yellow.
On September 3, 2003, a Form 8-K was furnished under Item 9, Regulation
FD Disclosure, in which Yellow furnished a slideshow the Company
intended to present to investors and analysts on September 3-5, 2003.
On September 4, 2003, a Form 8-K was furnished under Item 9, Regulation
FD Disclosure, in which Yellow furnished the transcript of an address
made by William D. Zollars, President, CEO and Chairman of the Board of
Yellow Corporation, to a meeting of Roadway Corporation employees on
August 27, 2003.
On September 8, 2003, a Form 8-K was furnished under Item 9, Regulation
FD Disclosure, in which Yellow furnished its historical Consolidated
Balance Sheets, Statements of Consolidated Operations, and Statements
of Consolidated Cash flows for the years ended December 31, 2002, 2001,
2000, 1999 and 1998.
On September 18, 2003, a Form 8-K was furnished under Item 9,
Regulation FD Disclosure, in which Yellow issued a press release
regarding third quarter 2003 earnings, certain costs of the proposed
Roadway acquisition, the record date for the special meeting of Yellow
shareholders and the targeted closing of the Roadway transaction.
On September 26, 2003, a Form 8-K was furnished under Item 9,
Regulation FD Disclosure, in which Yellow furnished a transcript of a
presentation delivered by Donald G. Barger, Senior Vice President and
Chief Financial Officer of Yellow Corporation, at the Morgan Stanley
2003 Convertible Conference.
On October 1, 2003, a Form 8-K was filed under Item 5, Other Events, in
which Yellow announced the completion of the repurchase of $24 million
aggregate principal amount of medium-term notes. The remaining $20
million aggregate principal amount of medium-term notes were defeased
under the terms thereof.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YELLOW CORPORATION
Registrant
Date: November 3, 2003 /s/ William D. Zollars
----------------------------------
William D. Zollars
Chairman of the Board of
Directors, President & Chief
Executive Officer
Date: November 3, 2003 /s/ Donald G. Barger, Jr.
---------------------------------
Donald G. Barger, Jr.
Senior Vice President
& Chief Financial Officer
31