UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 2004
[ ] 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 (317) 972-7000
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of April 27, 2004 (the latest practicable date), 7,825,003 shares of the
registrant's common stock, par value $0.033 per share, were outstanding.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A ("Amendment No. 1") amends the
Quarterly Report on Form 10-Q of Celadon Group, Inc. for the fiscal quarter
ended March 31, 2004, filed with the Securities and Exchange Commission on April
29, 2004 (the "Original Report"), by correcting errors in certain statistical
information set forth in, and making certain other minor revisions to, Item 2 of
Part I of the Original Report. Specifically, the changes reflected in this
Amendment No. 1. are as follows:
o On page 11 the word "nearly" has been replaced with the word
"approximately" as the third word in the second sentence of the second
paragraph under the subheading "Business Overview";
o On page 17, in the second sentence of the first paragraph under the
subheading "Comparison of Nine Months Ended March 31, 2004 to Nine
Months Ended March 31, 2003," the average revenue per total mile,
excluding fuel surcharge, figure for the nine months ended March 31,
2003, has been changed from $1.178 to $1.164, and a corresponding
change has been made to reflect that the improvement in average
revenue per total mile, excluding fuel surcharge, from the 2003 period
to the 2004 period was 4.1%, rather than 2.9% as indicated in the
Original Report;
o On page 17, in the fifth sentence of the first paragraph under the
subheading "Comparison of Nine Months Ended March 31, 2004 to Nine
Months Ended March 31, 2003," the average revenue per tractor per
week, excluding fuel surcharge, figure for the nine months ended March
31, 2003, has been changed from $2,568 to $2,538, and a corresponding
change has been made to reflect that the improvement in average
revenue per tractor per week, excluding fuel surcharge, from the 2003
period to the 2004 period was 5.3%, rather than 4.1% as indicated in
the Original Report; and
o On page 25 the last sentence of the paragraph entitled "Commodity
Price Risk" has been revised to reflect that the Company estimates
that a 10% movement in fuel futures prices would have an approximately
$80,000 impact under the Company's derivative contracts, rather than a
$75,000 impact as stated in the Original Report.
In connection with the filing of this Amendment No. 1 and pursuant to Rule
12b-15 under the Securities and Exchange Act of 1934, as amended, Celadon Group,
Inc. is including as exhibits certain currently dated certifications of its
Chief Executive Officer and Chief Financial Officer. Item 6 of Part II of this
Amendment No. 1 has been revised to reflect the addition of these exhibits.
This Amendment No. 1 only reflects the changes discussed above, and does
not amend, update, or change any other items or disclosures contained in the
Original Report.
CELADON GROUP, INC.
Index to
March 31, 2004 Form 10-Q
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2004 (Unaudited)
and June 30, 2003......................................................................................3
Condensed Consolidated Statements of Operations for the three and nine months
ended March 31, 2004 and 2003 (Unaudited)..............................................................4
Condensed Consolidated Statements of Cash Flows for the nine months
ended March 31, 2004 and 2003 (Unaudited)..............................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited) ......................................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.....................................24
Item 4. Controls and Procedures........................................................................25
Part II. Other Information
Item 1. Legal Proceedings..............................................................................26
Items 2, 3, 4 and 5 .........................................................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K...............................................................26
2
CELADON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except par value amounts)
March 31, June 30,
2004 2003
---- ----
A S S E T S (unaudited)
-----------
Current assets:
Cash and cash equivalents........................................... $ 1,533 $ 1,088
Trade receivables, net of allowance for doubtful accounts of
$1,235 and $1,065 in 2004 and 2003, respectively................ 48,466 44,182
Drivers advances and other receivables.............................. 3,632 3,432
Prepaid expenses and other current assets........................... 6,564 7,101
Tires in service.................................................... 4,771 4,714
Income tax receivable............................................... 350 ---
Deferred income taxes............................................... 5,968 2,296
-------- --------
Total current assets............................................ 71,284 62,813
Property and equipment, at cost......................................... 115,252 129,319
Less accumulated depreciation and amortization...................... 45,668 52,352
-------- --------
Net property and equipment...................................... 69,584 76,967
Tires in service........................................................ 2,036 2,207
Goodwill ............................................................... 16,702 16,702
Other assets............................................................ 2,763 3,384
-------- --------
Total assets.................................................... $162,369 $162,073
======== ========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Current liabilities:
Accounts payable.................................................... $ 7,877 $ 4,204
Accrued salaries and benefits....................................... 7,869 6,748
Accrued insurance and claims........................................ 5,801 5,163
Accrued independent contractor expense.............................. 2,552 2,728
Accrued fuel expense................................................ 2,791 3,138
Other accrued expenses.............................................. 13,772 11,074
Current maturities of long-term debt................................ 6,101 6,156
Current maturities of capital lease obligations..................... 9,947 14,960
Income tax payable.................................................. --- 299
-------- --------
Total current liabilities....................................... 56,710 54,470
Long-term debt, net of current maturities............................... 26,664 26,406
Capital lease obligations, net of current maturities.................... 7,801 13,272
Deferred income taxes................................................... 16,162 10,648
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 7,810,836 and 7,789,764 shares in March 31, 2004
and June 30, 2003............................................... 257 257
Additional paid-in capital........................................ 60,405 60,092
Retained deficit.................................................. (3,404) (761)
Accumulated other comprehensive loss.............................. (2,251) (1,947)
Treasury stock, at cost, 96,001 shares at June 30, 2003........... --- (389)
-------- --------
Total stockholders' equity...................................... 55,007 57,252
-------- --------
Total liabilities and stockholders' equity...................... $162,369 $162,073
======== ========
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
For the three months ended For the nine months ended
March 31, March, 31
2004 2003 2004 2003
---- ---- ---- ----
Operating revenue............................................. $98,822 $90,686 $291,610 $275,073
Operating expenses:
Salaries, wages and employee benefits..................... 30,540 27,474 91,205 83,814
Fuel...................................................... 15,083 13,604 41,014 35,692
Operations and maintenance................................ 7,990 7,928 24,211 23,710
Insurance and claims...................................... 4,269 3,361 11,877 9,962
Depreciation, amortization and impairment charge(1)....... 3,982 3,768 21,234 10,353
Revenue equipment rentals................................. 8,227 5,940 22,002 17,987
Purchased transportation.................................. 18,424 20,514 57,773 65,348
Costs of products and services sold....................... 985 812 4,109 3,342
Professional and consulting fees.......................... 708 736 1,778 1,870
Communications and utilities.............................. 1,070 1,068 3,159 3,069
Operating taxes and licenses.............................. 1,985 1,759 6,005 5,638
General and other operating............................... 1,650 1,706 5,191 5,184
------- ------- -------- --------
Total operating expenses............................. 94,913 88,670 289,558 265,969
------- ------- -------- --------
Operating income.............................................. 3,909 2,016 2,052 9,104
Other (income) expense:
Interest income........................................... (7) (29) (32) (67)
Interest expense(2)....................................... 886 1,211 3,047 5,147
Other (income) expense, net............................... 195 40 235 (25)
------- ------- -------- --------
Income (loss) before income taxes............................. 2,835 794 (1,198) 4,049
Provision for income taxes.................................... 1,464 340 1,445 1,676
------- ------- -------- --------
Net income (loss) ................................... $ 1,371 $ 454 $ (2,643) $ 2,373
======= ======= ======== ========
Earnings (loss) per common share:
Diluted earnings (loss) per share......................... $0.17 $0.06 $(0.34) $0.30
Basic earnings (loss) per share........................... $0.18 $0.06 $(0.34) $0.31
Average shares outstanding:
Diluted................................................... 8,248 8,018 7,760 8,049
Basic..................................................... 7,788 7,693 7,760 7,687
(1) Includes a $9.8 million pretax impairment charge on trailers in the three months ended September 30, 2003.
(2) Includes a $914 pretax write-off of unamortized loan origination costs for refinancing the Company's line of credit in the
three months ended September 30, 2002.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the nine months ended
March 31,
2004 2003
------ ----
Cash flows from operating activities:
Net (loss) income....................................................... $(2,643) $ 2,373
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization....................................... 11,400 10,353
Impairment charge................................................... 9,834 ---
Write-off of loan origination cost.................................. --- 914
Provision for deferred income taxes................................. 1,842 1,048
Provision for doubtful accounts..................................... 503 572
Changes in assets and liabilities:
Trade receivables.............................................. (2,304) 7,401
Accounts receivable - other.................................... (78) 1,470
Income tax receivable.......................................... (350) ---
Tires in service............................................... 114 (426)
Prepaid expenses and other current assets...................... 852 (2,446)
Other assets................................................... 646 (175)
Accounts payable and accrued expenses.......................... 6,940 2,584
Income tax (receivable) payable................................ (299) 608
-------- --------
Net cash provided by operating activities........................... 26,457 24,276
Cash flows from investing activities:
Purchase of property and equipment...................................... (15,685) (4,726)
Proceeds on sale of property and equipment.............................. 11,636 8,234
Purchase of a business, net of cash acquired............................ (3,594) ---
-------- --------
Net cash (used in) provided by investing activities................. (7,643) 3,508
Cash flows from financing activities:
Proceeds from issuances of stock........................................ 702 75
Proceeds from bank borrowings and debt.................................. 1,957 2,941
Payments on bank borrowings and debt.................................... (9,195) (17,080)
Principal payments under capital lease obligations...................... (11,833) (13,277)
-------- --------
Net cash used in financing activities............................... (18,369) (27,341)
-------- --------
Increase in cash and cash equivalents........................................ 445 443
Cash and cash equivalents at beginning of period............................. 1,088 299
-------- --------
Cash and cash equivalents at end of period................................... $ 1,533 $ 742
======== ========
Supplemental disclosure of cash flow information:
Interest paid........................................................... $ 3,062 $ 4,145
Income taxes paid....................................................... $ 234 $ 200
Supplemental disclosure of cash flow investing activities:
Lease obligation incurred in the purchase of equipment................. $ 1,168 ---
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Celadon Group, Inc. and its majority owned subsidiaries (the
"Company"). All material intercompany balances and transactions have been
eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in the United
States of America pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited financial statements reflect all
adjustments (all of a normal recurring nature), which are 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 for a full year. These consolidated financial
statements and notes thereto should be read in conjunction with the Company's
consolidated financial statements and notes thereto, included in the Company's
Annual Report on Form 10-K for the year ended June 30, 2003.
The preparation of the financial statements in conformity with GAAP
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. Earnings Per Share
The difference in basic and diluted weighted average shares is due to the
assumed conversion of outstanding stock options. A reconciliation of the basic
and diluted earnings per share calculation was as follows:
(In thousands except share and per share data) For the three months ended For the nine months ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss).................................... $1,371 $ 454 $(2,643) $2,373
Denominator
Weighted average number of common shares
outstanding.................................... 7,788 7,693 7,760 7,687
Equivalent shares issuable upon exercise of
stock options.................................. 460 325 --- 362
------ ------ ------- ------
Diluted shares..................................... 8,248 8,018 7,760 8,049
Earnings (loss) per share:
Basic.............................................. $0.18 $0.06 $(0.34) $0.31
Diluted............................................ $0.17 $0.06 $(0.34) $0.30
Diluted loss per share for the nine months ended March 31, 2004 does not include
the anti-dilutive effect of 442 thousand stock options and other incremental
shares.
6
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
3. Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized for such
options.
Statements of Financial Accounting Standards ("SFAS") 123, "Accounting for
Stock-Based Compensation," and SFAS 148 "Accounting for Stock-Based Compensation
- Transition and Disclosure" requires presentation of pro forma net income and
earnings per share if the Company had accounted for its employee stock options
granted subsequent to June 30, 1995 under the fair value method of that
statement. For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the vesting period. Under the fair value
method, the Company's net income (loss) and earnings (loss) per share would have
been:
(In thousands except per share data) For three months ended For nine months ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss)........................................... $1,371 $454 $(2,643) $2,373
Stock-based compensation expense (net of tax)............... 84 184 290 621
------ ---- ------- ------
Pro forma net income (loss)................................. $1,287 $270 $(2,933) $1,752
====== ==== ======== ======
Earnings (loss) per share:
Diluted earnings (loss) per share...........................
As reported............................................... $0.17 $0.06 $(0.34) $0.30
Pro forma................................................. $0.16 $0.03 $(0.38) $0.22
Basic earnings (loss) per share
As reported............................................... $0.18 $0.06 $(0.34) $0.31
Pro forma................................................. $0.17 $0.04 $(0.38) $0.23
7
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
4. Segment Information and Significant Customers
The Company operates in two segments, transportation and e-commerce. The
Company generates revenue in the transportation segment primarily by providing
truckload transportation services through its subsidiaries, Celadon Trucking
Services, Inc. ("CTSI"), Servicios de Transportacion Jaguar, S.A de C.V.
("Jaguar") and Celadon Canada, Inc. ("CelCan"). The Company provides certain
services over the Internet through its e-commerce subsidiary, TruckersB2B, Inc.
("TruckersB2B"). The e-commerce segment generates revenue by providing
discounted fuel, tires, equipment and other products and services to small and
medium-sized trucking companies. The Company evaluates the performance of its
operating segments based on operating income.
(In thousands) Transportation E-commerce Consolidated
-------------- ---------- ------------
Three months ended March 31, 2004
Operating revenue.................................. $97,180 $1,642 $98,822
Operating income................................... $3,639 $270 $3,909
Three months ended March 31, 2003
Operating revenue.................................. $89,327 $1,359 $90,686
Operating income................................... $1,826 $190 $2,016
Nine months ended March 31, 2004
Operating revenue.................................. $285,075 $6,535 $291,610
Operating income................................... $857(1) $1,195 $2,052
Nine months ended March 31, 2003
Operating revenue.................................. $269,793 $5,280 $275,073
Operating income................................... $8,259 $845 $9,104
(1) Includes a $9.8 million pretax impairment charge on trailers in the nine
months ended March 31, 2004.
Information as to the Company's operating revenue by geographic area is
allocated based primarily on the country of the customer and summarized below:
(In thousands) For the three months ended For the nine months ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Operating revenue:
United States............................. $80,518 $74,042 $237,013 $226,520
Canada.................................... 13,537 12,300 40,464 34,842
Mexico.................................... 4,767 4,344 14,133 13,711
------- ------- -------- --------
Total..................................... $98,822 $90,686 $291,610 $275,073
======= ======= ======== ========
8
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
4. Segment Information and Significant Customers (continued)
The Company's largest customer is DaimlerChrysler. 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 2006.
For the three months ended For the nine months ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Percent of revenue from DaimlerChrysler 11% 13% 11% 13%
5. Income Taxes
Income tax expense varies from the federal corporate income tax rate of 34%
due to state income taxes, net of the federal income tax effect, and adjustment
for permanent non-deductible differences. The permanent non-deductible
differences include primarily per diem pay for drivers, meals and entertainment,
and fines. For the nine months ended March 31, 2004, the Company recorded an
income tax benefit as a result of the impairment charge recognized on the
planned disposal of trailers (Note 8). The income tax benefit recorded was
partially offset by amounts accrued for certain income tax exposures.
6. Comprehensive Income (Loss)
Comprehensive income (loss) consisted of the following components for the
three and nine months ended March 31, 2004 and 2003, respectively:
(In thousands) Three months ended Nine months ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $1,371 $454 $(2,643) $2,373
Foreign currency translations adjustments 19 (251) (304) (343)
------ ------ -------- -------
Total comprehensive income (loss) $1,390 $203 $(2,947) $2,030
====== ====== ======== =======
9
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
7. Commitments and Contingencies
There are various claims, lawsuits and pending actions against the Company
and its subsidiaries in the normal course of the operations of its businesses
with respect to cargo and auto liability. The Company believes many of these
proceedings are covered in whole or in part by insurance and accrued amounts on
the Company's balance sheet for the self-insured retention amount of outstanding
claims. The Company also believes that none of these matters will have a
materially adverse effect on its consolidated financial position or results of
operations in any given period.
8. Impairment of Equipment Values
In September 2003, the Company initiated a plan to dispose of approximately
1,600 trailers and recognized a pretax impairment charge of $9.8 million. Due to
shipper compatibility issues, the Company plans to dispose of all of its 48-foot
trailers, as well as 53-foot trailers over 9 years old. The majority of the
Company's customers require 53-foot trailers, and management anticipates that
the disposal of 48-foot trailers will reduce logistical issues with those
customers. The Company is in the process of replacing the approximately 1,600
trailers with approximately 1,300 new 53-foot trailers. This replacement cycle
is expected to be completed by the end of the fiscal year. This change in the
trailer fleet is expected to increase operating efficiencies and reduce
out-of-route miles. The pretax impairment charge consisted of a write-down of
revenue equipment by $8.4 million (net of accumulated depreciation), a write-off
of tires in-service of $0.9 million and an accrual for costs of disposal of $0.5
million. As a result, the Company has equipment held for sale of $3.0 million
included in property and equipment on its March 31, 2004 consolidated balance
sheet.
9. Acquisition
In August 2003, the Company acquired certain assets of Highway Express,
Inc. ("Highway"). The results of operations of Highway are included in the
Company's financial statements from August 1, 2003 through March 31, 2004. The
Company has preliminarily assigned values to the acquired assets of Highway
consisting primarily of $8.6 million of property and equipment, $2.4 million of
trade receivables and $0.4 million of cash. The purchase price of approximately
$11.4 million consisted of $4.0 million of cash and a $7.4 million thirty-six
month note payable. The Company will finalize the allocation of the purchase
price upon the valuation of intangible assets acquired. The Company used
borrowings under its existing credit facility to fund the cash portion of the
purchase price. Highway's revenue for fiscal 2002 was approximately $27.0
million.
10. Reclassification
Certain reclassifications have been made to the March 31, 2003 financial
statements to conform to the March 31, 2004 presentation.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information in this Form 10-Q
constitutes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and, as such, involves known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed in or implied by
such forward-looking statements. You can identify such statements by the fact
that they do not relate strictly to historical or current facts. These
statements generally use words such as "believe," "expect," "anticipate,"
"project," "forecast," "should," "estimate," "plan," "outlook," "goal," and
similar expressions. Because forward-looking statements involve risks and
uncertainties, the Company's actual results may differ materially from the
results expressed in or implied by the forward-looking statements. While it is
impossible to identify all factors that may cause actual results to differ from
those expressed in or implied by forward-looking statements, the risks and
uncertainties that may affect the Company's business, performance, and results
of operations include the factors listed on Exhibit 99.1 to this report.
All such forward-looking statements speak only as of the date of this Form
10-Q. You are cautioned not to place undue reliance on such forward-looking
statements. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in the events, conditions, or circumstances on which any
such statement is based.
References to the "Company," "we," "us," "our," and words of similar import
refer to Celadon Group, Inc. and its consolidated subsidiaries.
Business Overview
We are one of North America's fifteen largest truckload carriers as
measured by revenue. We generated $367.1 million in operating revenue during our
fiscal year ended June 30, 2003. We have grown significantly throughout our
history through internal growth and a series of acquisitions since 1995. As a
dry van truckload carrier, we generally transport full trailer loads of freight
from origin to destination without intermediate stops or handling. Our customer
base includes Fortune 500 shippers such as DaimlerChrysler, General Electric,
Phillip Morris, Wal-Mart, Procter & Gamble, and Target. At March 31, 2004, we
operated 2,798 tractors and 7,498 trailers. None of our employees is subject to
a union contract.
We operate in two main market sectors. In our international operations, we
offer time-sensitive transportation in and between the United States, Mexico,
and Canada. We generated approximately one-half of our revenue in fiscal 2003
from international movements, and we believe our approximately 150,000 annual
border crossings make us the largest provider of international truckload
movements in North America. We believe that our strategically located terminals
and experience with the language, culture, and border crossing requirements of
each North American country provide a competitive advantage in the international
trucking marketplace.
In addition to our international business, we offer a broad range of
truckload transportation services within the United States, including regional,
long-haul, dedicated, and logistics. With the acquisitions of certain assets of
Zipp Express in 1999, Burlington Motor Carriers in 2002, and Highway Express in
2003, we expanded our operations and service offerings within the United States
and significantly improved our lane density, freight mix, and customer
diversity. The Highway Express
11
acquisition was particularly important to us, and we believe it has contributed
to our recent operating improvements. We also operate TruckersB2B, Inc., a
profitable marketing business that affords volume purchasing power for items
such as fuel, tires, and equipment to more than 16,300 member trucking fleets
representing approximately 435,000 tractors.
We generate substantially all of our revenue by transporting freight for
our customers. Generally, we are paid by the mile for our services. We also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, other trucking-related services, and from TruckersB2B. The main
factors that affect our revenue are the revenue per mile we receive from our
customers, the number of miles we generate with our equipment, and the
percentage of miles for which we are compensated. These factors are affected by,
among other things, the United States, Mexican, and Canadian economies,
customers' inventory levels, the level of capacity in our industry, and customer
demand. Going forward, we believe that our revenue also may be affected to some
extent by the recently effective revised hours-of-service requirements adopted
by the Department of Transportation, which could reduce the amount of time that
our drivers can spend driving. To reduce the effect of these new requirements,
we have imposed fees on customers that detain our equipment or drivers. We
cannot assure you, however, that our customers will pay these fees.
The main factors that impact our profitability on the expense side are the
variable costs of transporting freight for our customers. These costs include
fuel expense, driver-related expenses, such as wages, benefits, training, and
recruitment, and independent contractor costs, which we record as purchased
transportation. Expenses that have both fixed and variable components include
maintenance and tire expense and our total cost of insurance and claims. These
expenses generally vary with the miles we travel, but also have a controllable
component based on safety, fleet age, efficiency, and other factors. Our main
fixed cost is the acquisition and financing of long-term assets, primarily
revenue equipment and operating terminals. We have other mostly fixed costs,
such as our non-driver personnel. Competitive rate pressures, coupled with
significant increases in the costs of fuel, insurance, and equipment over the
last few years, have created a difficult operating environment for most of the
industry.
Strategic Plan
In fiscal 2002, we began to implement a strategic plan designed to improve
our profitability. The primary components of our strategic plan are improving
our freight mix by replacing lower yielding freight with more profitable
freight; diversifying our customer base; upgrading our equipment fleet;
emphasizing discipline in all aspects of our operations; and successfully
identifying and acquiring suitable acquisition candidates and integrating
acquired operations. The processes we have undertaken included the following:
o We analyzed our customers, lanes, and loads for profitability, based
on revenue per mile, length of time for completion of the movement,
attractiveness of positioning for the next load, driver friendliness,
and total cost. We then sought rate increases and implemented a
continuous process of attempting to improve our freight mix by
replacing less profitable freight with more attractive freight.
o Our operations group routed trucks to serve more profitable lanes and
customers and maintained disciplined equipment positioning in
favorable lanes, while striving to provide safe, dependable service to
control our costs and justify a rate structure based on service in
addition to price.
o We established customer guidelines that included reducing our exposure
to the automotive industry; increasing our amount of higher yielding
freight from less cyclical industries, such as consumer non-durables;
and seeking freight in targeted geographic areas that would improve
our backhaul lanes and maintain compatibility with driver domiciles
and our overall traffic patterns.
12
o We shortened the trade cycle of our tractor fleet from five to four
years to obtain cost savings in the maintenance area and decided to
replace the remaining 48-foot trailers and older 53-foot trailers in
our fleet to obtain operating efficiencies.
o We targeted acquisitions as a method to replace the freight we
discontinued as part of our yield management efforts, as well as to
grow our regional operations, balance lane flows, and add density in
selected lanes. Our acquisitions of certain assets of Burlington Motor
Carriers in 2002 and Highway Express in 2003 were consistent with
these goals.
The implementation of our strategic plan still is ongoing, and we expect
significant additional improvements in our operating performance and
profitability as we continue to execute the plan. Specifically, we expect
further improvements in asset productivity and substantial benefits from our
revenue equipment upgrade.
Recent Results of Operations
For the quarter ended March 31, 2004, our results of operations improved as
follows versus the same quarter of the prior year:
o Operating revenue increased 8.9%, to $98.8 million from $90.7 million;
o Net income increased 180.0%, to $1.4 million from $0.5 million; and
o Diluted earnings per share increased to $0.17 from $0.06.
We believe these improvements are attributable primarily to higher average
revenue per tractor per week (excluding fuel surcharge), our main measure of
asset productivity, which improved 7.4%, to $2,696 from $2,510, as a result of
higher rates per mile and miles per tractor. This improvement was partially
offset by a higher Canadian dollar exchange ratio.
Revenue Equipment Upgrade
We are in the process of undertaking a significant upgrade of our tractor
and trailer fleets, which has had and will continue to have significant effects
on our balance sheet, statements of operations, and statement of cash flows. See
"Liquidity and Capital Resources." We recently have shortened our normal tractor
replacement cycle to four years of service from five years of service. We also
intend to replace all of our 48-foot trailers, as well as 53-foot trailers over
nine years old, with new units. We anticipate that operating a more modern fleet
will result in a decrease in our maintenance and tire expense as a percentage of
operating revenue, in addition to enhancing driver recruiting and retention. We
also believe that we will improve trailer utilization and ultimately be able to
operate a smaller trailer fleet by using a uniform fleet of 53-foot trailers.
We intend to finance most of the new tractors and trailers under
off-balance sheet operating leases. Financing revenue equipment acquisitions
with operating leases, rather than borrowings or capital leases, moves the
interest component of our financing activities into "above-the-line" operating
expenses on our statements of operations. Consequently, we believe that pretax
margin (income before income taxes as a percentage of operating revenue) is a
more useful measure of our operating performance than operating ratio (operating
expenses as a percentage of operating revenue) because it eliminates the effect
of our revenue equipment financing decisions.
Recent Developments Affecting Our Results of Operations
Our financial results for the nine months ended March 31, 2004, were
affected by two events in the first quarter of fiscal 2004. In August 2003, we
purchased the assets of Highway Express and incurred the costs of acquisition
and integration, including some short-term disruption in freight patterns within
our system. We also recognized a $9.8 million pretax impairment charge relating
to approximately 1,600
13
trailers in our fleet, consisting of approximately 1,400 remaining 48-foot
trailers and approximately 200 53-foot trailers over nine years old. During the
first quarter of fiscal 2004, we initiated a plan to dispose of those trailers
and expect operating benefits from a uniform fleet of 53-foot trailers following
replacement.
In addition, our results for the quarter and nine months ended March 31,
2004, were adversely affected by a historically high Canadian dollar exchange
rate during the period. Historically, the exchange rate for the Canadian dollar
has been relatively stable at approximately $0.65 per U.S. dollar. However,
during the nine months ended March 31, 2004, the Canadian dollar exchange rate
averaged $0.75 per U.S. dollar, compared to an average of $0.65 per U.S. dollar
during the same period in the prior year. For the quarter ended March 31, 2004,
the Canadian dollar exchange rate averaged $0.76 per U.S. dollar, compared to an
average of $0.65 per U.S. dollar during the same quarter in the prior year.
While a significant portion of the revenue generated by our Canadian operations
is billed in U.S. dollars because most customers are U.S. shippers transporting
freight to or from Canada, virtually all of our expenses associated with these
operations, such as independent contractor costs, Company driver compensation,
and administrative costs, are paid in Canadian dollars. We expect our
profitability will continue to be adversely affected if the Canadian dollar
exchange rate remains at higher than historical levels.
Results of Operations
The following table sets forth the percentage relationship of expense items
to operating revenue for the periods indicated:
For the three months ended For the nine months ended
March 31, March 31,
2004 2003 2004 2003
------ ------ ------ ------
Operating revenue.................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and employee benefits........... 30.9% 30.3.% 31.3% 30.5%
Fuel............................................. 15.3% 15.0% 14.1% 13.0%
Operations and maintenance....................... 8.1% 8.7% 8.3% 8.6%
Insurance and claims............................. 4.3% 3.7% 4.1% 3.6%
Depreciation, amortization and impairment 3.8%
charges........................................ 4.0% 4.2% 7.3%(1)
Revenue equipment rentals........................ 8.3% 6.6% 7.5% 6.5%
Purchased transportation......................... 18.6% 22.6% 19.8% 23.8%
Costs of products and services sold.............. 1.0% 0.9% 1.4% 1.2%
Professional and consulting fees................. 0.7% 0.8% 0.6% 0.7%
Communications and utilities..................... 1.1% 1.2% 1.1% 1.1%
Operating taxes and licenses..................... 2.0% 1.9% 2.1% 2.0%
General and other operating...................... 1.7% 1.9% 1.7% 1.9%
------ ------ ------ ------
Total operating expenses........................... 96.0% 97.8% 99.3% 96.7%
------ ------ ------ ------
Operating income .................................. 4.0% 2.2% 0.7% 3.3%
------ ------ ------ ------
Other (income) expense:
Interest income.................................. 0.0% 0.0% 0.0% 0.0%
Interest expense................................. 0.9% 1.3% 1.0% 1.8%(2)
Other (income) expense, net...................... 0.2% 0.0% 0.1% 0.0%
------ ------ ------ ------
Income (loss) before income taxes.................. 2.9% 0.9% (0.4)% 1.5%
Provision for income taxes......................... 1.5% 0.4% 0.5% 0.6%
------ ------ ------ ------
Net income (loss).................................. 1.4% 0.5% (0.9)% 0.9%
====== ====== ======= ======
(1) Includes a $9.8 million pretax impairment charge in the three months ended
September 30, 2003.
(2) Includes a $914,000 pretax write-off of unamortized loan origination costs
for refinancing the Company's line of credit in the three months ended
September 30, 2002.
14
Comparison of Three Months Ended March 31, 2004 to Three Months
Ended March 31, 2003
Operating revenue increased by $8.1 million, or 8.9%, to $98.8 million for
the third quarter of fiscal 2004, from $90.7 million for the same period in
fiscal 2003. This increase was primarily attributable to a 4.6% improvement in
average revenue per total mile, excluding fuel surcharge, from $1.178 to $1.232,
a 2.7% increase in average miles per tractor per week, from 2,131 to 2,188, and
a 4.9% increase in average tractors from 2,182 to 2,289. The improvement in
average revenue per total mile resulted primarily from better overall freight
rates in the fiscal 2004 period, a decrease in the percentage of our freight
comprised of automotive parts and a corresponding increase in the percentage of
our freight comprised of consumer non-durables, and to a lesser extent a
reduction in our percentage of non-revenue miles. The increase in miles per
tractor per week was primarily attributable to stronger overall freight demand
in the 2004 period. Revenue per seated tractor per week, excluding fuel
surcharge, which is our primary measure of asset productivity, increased 7.4% to
$2,696 in the third quarter of fiscal 2004, from $2,510 for the same period in
fiscal 2003, as a result of increases in revenue per mile and miles per tractor.
The increase in average tractors was primarily related to our acquisition of
certain assets of Highway Express in the first quarter of fiscal 2004. Revenue
for TruckersB2B was $1.6 million in the third quarter of fiscal 2004, compared
to $1.4 million for the same period in fiscal 2003. The TruckersB2B revenue
increase resulted from an increase in member usage of various programs,
including the fuel and tire discount programs.
Salaries, wages, and employee benefits were $30.5 million, or 30.9% of
operating revenue, for the third quarter of fiscal 2004, compared to $27.5
million, or 30.3% of operating revenue, for the same period in fiscal 2003. The
increase in the overall dollar amount primarily was related to an 18.1% increase
in company miles, which in turn increased driver wages. The 0.6% increase in
this expense category as a percentage of operating revenue was primarily
attributable to an increase in the percentage of our fleet comprised of company
trucks, an increase in driver compensation, and an increase in administrative
payroll and related expenses for the Highway Express employees. We expect this
line item to increase as a percentage of revenue in the near term primarily
because of a driver pay increase implemented during March 2004.
Fuel expenses increased to $15.1 million, or 15.3% of operating revenue,
for the third quarter of fiscal 2004, compared to $13.6 million, or 15.0% of
operating revenue, for the same period in fiscal 2003. This increase was
primarily attributable to an 18.1% increase in Company miles which increased
fuel expense, partially offset by a decrease in average fuel prices of
approximately $0.07 per gallon. Fuel expense also was partially offset by the
collection of $3.1 million in fuel surcharge revenue in the fiscal 2004 period,
compared to $3.2 million in the fiscal 2003 period. We expect fuel prices may
remain at relatively high levels due to low inventory and unrest in the Middle
East. Higher fuel prices will increase our operating expenses to the extent we
cannot offset them with surcharges.
Operations and maintenance expenses increased to $8.0 million for the third
quarter of fiscal 2004, from $7.9 million for the third quarter of fiscal 2003.
This dollar amount increase was primarily the result of our larger fleet of
company-operated equipment in the fiscal 2004 period. As a percentage of
revenue, operations and maintenance decreased to 8.1% of revenue for the third
quarter of fiscal 2004, compared to 8.7% for the same period in fiscal 2003. The
decrease in maintenance expense as a percentage of revenue in the fiscal 2004
period was primarily the result of our fleet upgrade initiative, as newer
tractors and trailers generally require less maintenance, which was partially
offset by a larger percentage of our fleet being comprised of company-operated
equipment in the fiscal 2004 period. Operations and maintenance consist of
direct operating expense, maintenance and tire expense.
Insurance and claims expense was $4.3 million, or 4.3% of operating
revenue, for the third quarter of fiscal 2004, compared to $3.4 million, or 3.7%
of operating revenue, for the same period in fiscal 2003. Our insurance expenses
consist of premiums for liability, physical damage and cargo damage insurance.
Our insurance program involves self-insurance at various risk retention levels.
Claims in excess of these risk levels are covered by insurance in amounts we
consider to be adequate. We accrue for the uninsured portion of claims based on
known claims and historical experience. We regularly
15
evaluate our insurance program in an effort to maintain a balance between
premium expense and the risk retention we are willing to assume. The primary
reason for the increase in insurance and claims expense was adverse loss
development principally related to two claims from prior years.
Depreciation and amortization, consisting primarily of depreciation of
revenue equipment, increased to $4.0 million in the third quarter of fiscal 2004
from $3.8 million for the same period of fiscal 2003. This increase was
primarily attributable to losses on disposition of certain tractors acquired in
the purchase of certain assets of Burlington Motor Carriers. As a percentage of
revenue, depreciation and amortization decreased to 4.0% of revenue for the
third quarter of fiscal 2004, compared to 4.2% for the same period in fiscal
2003. This decrease primarily resulted from our increased use of operating
leases to finance acquisitions of revenue equipment. Revenue equipment held
under operating leases is not reflected on our balance sheet and the expenses
related to such equipment are reflected on our statements of operations in
revenue equipment rentals, rather than in depreciation and amortization and
interest expense, as is the case for revenue equipment that is financed with
borrowings or capital leases. We expect most of the new tractors and trailers
acquired in connection with our fleet upgrade will be financed under off-balance
sheet operating leases. In such event, we expect a decrease in depreciation and
amortization going forward, excluding the impact of the impairment charge.
Revenue equipment rentals were $8.2 million, or 8.3% of operating revenue,
for the third quarter of fiscal 2004, compared to $5.9 million, or 6.6% of
operating revenue for the same period in fiscal 2003. This increase was
attributable to a higher proportion of our tractor fleet held under operating
leases during the 2004 period. During the third quarter of fiscal 2004, an
average of 1,678 tractors, or 73.4% of our average total Company tractors for
the period, were held under operating leases compared to an average of 1,358
tractors, or 68.1% of our average total tractors, during the same period in
fiscal 2003. As we expect to finance most of our new tractors and trailers under
off-balance sheet operating leases, we expect revenue equipment rentals will
increase going forward.
Purchased transportation decreased to $18.4 million, or 18.6% of operating
revenue for the third quarter of fiscal 2004, from $20.5 million, or 22.6% of
operating revenue, for the same period in fiscal 2003. This decrease was
primarily related to reduced independent contractor expense, as the percentage
of our fleet comprised of independent contractors decreased. Independent
contractors are drivers who cover all their operating expenses (fuel, driver
salaries, maintenance, and equipment costs) for a fixed payment per mile. We
expect the majority of our equipment additions to come in our company-operated
fleet. As a result, the percentage of our fleet comprised of independent
contractors may continue to decline, with a corresponding decrease in this
expense category. It has become difficult to recruit and train independent
contractors.
All of our other operating expenses are relatively minor in amount, and
there were no significant changes in these expenses.
Net interest expense decreased 25.6% to $0.9 million in the third quarter
of fiscal 2004, from $1.2 million for the same period in fiscal 2003. This
decrease was a result of reduced bank borrowings, which decreased to $21.0
million at March 31, 2004, from $26.9 million at March 31, 2003, and capital
lease obligations, which decreased to $17.7 million at March 31, 2004, from
$32.0 million at March 31, 2003. The reduction in our borrowings and capital
lease obligations has resulted largely from our increased use of operating
leases to finance acquisitions of revenue equipment. Our trend toward financing
revenue equipment with operating leases instead of borrowing moves the interest
component of the leases into revenue equipment rentals, an "above the line"
operating expense, with a corresponding decrease in this expense category. We
expect this trend to continue as we finance new tractors and trailers under
operating leases versus borrowings.
Our pretax margin, which we believe is a useful measure of our operating
performance because it is neutral with regard to the method of revenue equipment
financing that a company uses, improved 200 basis points to 2.9% for the third
quarter of fiscal 2004, from 0.9% for the same period in fiscal 2003. In
addition to other factors described above, Canadian exchange rate fluctuations
principally impact salaries,
16
wages, and benefits and purchased transportation and, therefore, impact our
pretax margin and results of operations.
Income taxes increased to $1.5 million, with an effective tax rate of
51.6%, for the third quarter of fiscal 2004, from $0.3 million, with an
effective tax rate of 42.8%, for the same period in fiscal 2003. The effective
tax rate increased as a result of an increase in non-deductible expenses related
to our driver per diem pay structure. As per diem charges are partially
non-deductible for income tax purposes, our effective tax rate will fluctuate as
our net income fluctuates.
As a result of the factors described above, net income increased to $1.4
million for the third quarter of fiscal 2004, from $0.5 million for the same
period in fiscal 2003.
Comparison of Nine Months Ended March 31, 2004 to Nine Months
Ended March 31, 2003
Operating revenue increased by $16.5 million, or 6.0%, to $291.6 million
for the nine months ended March 31, 2004, from $275.1 million for the same
period in fiscal 2003. This increase was primarily attributable to a 4.1%
improvement in average revenue per total mile, excluding fuel surcharge, to
$1.212 from $1.164; an increase in average miles per tractor per week, to 2,205
from 2,181; and a 3.8% increase in average tractors to 2,254 from 2,172. The
improvement in average revenue per total mile resulted primarily from better
overall freight rates in the fiscal 2004 period, a decrease in the percentage of
our freight comprised of automotive parts and a corresponding increase in the
percentage of our freight comprised of consumer non-durables, and to a lesser
extent a reduction in our percentage of non-revenue miles. The increase in miles
per tractor per week primarily was attributable to stronger overall freight
demand in the 2004 period. Revenue per tractor per week, excluding fuel
surcharge, which is our primary measure of asset productivity, increased 5.3% to
$2,673 in the nine months ended March 31, 2004, from $2,538 for the same period
in fiscal 2003, as a result of increases in revenue per mile and miles per
tractor. The increase in average tractors was primarily related to our
acquisition of certain assets of Highway Express in August 2003. Revenue from
TruckersB2B was $6.5 million for the nine months ended March 31, 2004, compared
to $5.3 million for the same period in fiscal 2003. The TruckersB2B revenue
increase resulted from an increase in member usage of various programs,
including the fuel and tire discount programs.
Salaries, wages, and benefits were $91.2 million, or 31.3% of operating
revenue, for the nine months ended March 31, 2004, compared to $83.8 million, or
30.5% of operating revenue, for the same period in fiscal 2003. The increase in
the overall dollar amount was primarily related to a 15.5% increase in company
miles, which in turn increased driver wages. The increase in this expense
category as a percentage of operating revenue was primarily attributable to an
increase in the percentage of our fleet comprised of company trucks, an increase
in driver compensation, and an increase of approximately 64% in expenses related
to employer-paid health insurance. We expect this line item to increase as a
percentage of revenue in the near term primarily because of a driver pay
increase implemented during March 2004.
Fuel expenses increased to $41.0 million, or 14.1% of operating revenue,
for the nine months ended March 31, 2004, compared to $35.7 million, or 13.0% of
operating revenue, for the nine months of fiscal 2003. This increase primarily
was attributable to a 15.5% increase in company miles, which increased fuel
expense, partially offset by a slight decrease in average fuel prices of
approximately $0.006 per gallon. Fuel expense also partially was offset by the
collection of $7.8 million in fuel surcharge revenue in the fiscal 2004 period,
compared to $6.7 million in the fiscal 2003 period. We expect fuel prices may
remain at relatively high levels due to low inventory and unrest in the Middle
East. Higher fuel prices will increase our operating expenses to the extent we
cannot offset them with surcharges.
Operations and maintenance expenses increased to $24.2 million for the nine
months of fiscal 2004, from $23.7 million for the nine months ended March 31,
2003. This dollar amount increase primarily was the result of our larger fleet
of company-operated equipment in the fiscal 2004 period. As a percentage of
revenue, operations and maintenance decreased slightly to 8.3% of revenue for
the nine
17
months ended March 31, 2004, from 8.6% for the same period in fiscal 2003. The
decrease in maintenance expense as a percentage of revenue in the fiscal 2004
period primarily was the result of our fleet upgrade initiative, as newer
tractors and trailers generally require less maintenance, which partially was
offset by a larger percentage of our fleet being comprised of company-operated
equipment in the fiscal 2004 period. Operations and maintenance consist of
direct operating expense, maintenance and tire expense.
Insurance and claims expense was $11.9 million, or 4.1% of operating
revenue, for the nine months of fiscal 2004, compared to $10.0 million, or 3.6%
of operating revenue, for the same period in fiscal 2003. Our insurance expenses
consist of premiums for liability, physical damage, and cargo damage insurance.
Our insurance program involves self-insurance at various risk retention levels.
Claims in excess of these risk levels are covered by insurance in amounts we
consider to be adequate. We accrue for the uninsured portion of claims based on
known claims and historical experience. We regularly evaluate our insurance
program in an effort to maintain a balance between premium expense and the risk
retention we are willing to assume. The primary reason for the increase in
insurance and claims expense was adverse loss development principally related to
two claims from prior years.
Depreciation and amortization, consisting primarily of depreciation of
revenue equipment, increased to $21.2 million, or 7.3% of operating revenue, in
the nine months ended March 31, 2004, from $10.4 million, or 3.8% of operating
revenue, for the same period of fiscal 2003. This increase primarily was
attributable to the pretax impairment charge of $9.8 million, or 3.4% of
operating revenue, that we recognized in the first quarter of fiscal 2004 as a
result of our decision to dispose of all of our remaining 48-foot trailers and
our 53-foot trailers over nine years old. We also incurred higher depreciation
due to the equipment we acquired in the Highway Express acquisition and losses
on disposition of some of the tractors acquired from Burlington Motor Carriers.
These items were partially offset by our increased use of operating leases to
finance acquisitions of revenue equipment. Revenue equipment held under
operating leases is not reflected on our balance sheet, and the expenses related
to this equipment are reflected on our statement of operations in revenue
equipment rentals, rather than in depreciation and amortization and interest
expense, as is the case for revenue equipment that is financed with borrowings
or capital leases. We expect most of the new tractors and trailers acquired in
connection with our fleet upgrade will be financed under off-balance sheet
operating leases. In such event, we expect a decrease in depreciation and
amortization going forward, excluding the impact of the impairment charge.
Revenue equipment rentals were $22.0 million, or 7.5% of operating revenue,
for the nine months of fiscal 2004, compared to $18.0 million, or 6.5% of
operating revenue for the same period in fiscal 2003. This increase was
attributable to a higher proportion of our tractor fleet held under operating
leases during the 2004 period. During the nine months of fiscal 2004, an average
of 1,551 tractors, or 71.1% of our average total tractors for the period, were
held under operating leases compared to an average of 1,306 tractors, or 65.2%
of our average total tractors, during the same period in fiscal 2003. As we
expect to finance most of our new tractors and trailers under off-balance sheet
operating leases, we expect revenue equipment rentals will increase going
forward.
Purchased transportation decreased to $57.8 million, or 19.8% of operating
revenue, for the nine months ended March 31, 2004, from $65.3 million, or 23.8%
of operating revenue, for the same period in fiscal 2003. This decrease was
primarily related to reduced independent contractor expense, as the percentage
of our fleet comprised of independent contractors decreased. Independent
contractors are drivers who cover all their operating expenses (fuel, driver
salaries, maintenance, insurance, and equipment costs) for a fixed payment per
mile. We expect the majority of our equipment additions to come in our
company-operated fleet. As a result, the percentage of our fleet comprised of
independent contractors may continue to decline, with a corresponding decrease
in this expense category. It has become difficult to recruit and retain
independent contractors.
All of our other operating expenses are relatively minor in amount, and
there were no significant changes in these expenses.
18
Net interest expense decreased 40.7% to $3.0 million in the nine months
ended March 31, 2004, from $5.1 million for the same period in fiscal 2003. This
decrease was a result of reduced bank borrowings, which decreased to $21.0
million at March 31, 2004, from $26.9 million at March 31, 2003, and capital
lease obligations, which decreased to $17.7 million at March 31, 2004, from
$32.0 million at March 31, 2003, as well as the pretax write-off of loan
origination costs of approximately $914,000 in the fiscal 2003 period. The
reduction in our borrowings and capital lease obligations has resulted largely
from our increased use of operating leases to finance acquisitions of revenue
equipment. Our trend toward financing revenue equipment with operating leases
instead of borrowing moves the interest component of the leases into revenue
equipment rentals, an "above the line" operating expense, with a corresponding
decrease in this expense category. We expect this trend to continue as we
finance new tractors and trailers under operating leases versus borrowings.
Our pretax margin, which we believe is a useful measure of our operating
performance because it is neutral with regard to the method of revenue equipment
financing that we use, improved 120 basis points to 3.0% for the nine months of
fiscal 2004, from 1.8% for the same period of fiscal 2003. These margins exclude
the impact of both the $9.8 million pretax impairment charge in the fiscal 2004
period and a one-time, pretax write-off of unamortized loan origination costs of
approximately $914,000 related to the refinancing of our line of credit in the
fiscal 2003 period. In addition to other factors described above, Canadian
exchange rate fluctuations principally impact salaries, wages, and benefits and
purchased transportation and, therefore, impact our pretax margin and results of
operations.
Income taxes decreased to $1.4 million for the nine months ended March 31,
2004, from $1.7 million, for the same period in fiscal 2003. The decrease in
income tax expense resulted from the tax benefit associated with the $9.8
million pretax impairment charge in the fiscal 2004 period, partially offset by
an increase in non-deductible expenses related to our driver per diem pay
structure. As per diem charges are partially non-deductible for income tax
purposes, our effective tax rate will fluctuate as our net income fluctuates.
As a result of the factors described above, we incurred a net loss of $2.6
million for the nine months of fiscal 2004, compared to net income of $2.4
million in the same period in fiscal 2003. Excluding the impact of both the $9.8
million pretax impairment charge in the fiscal 2004 period and a one-time,
pretax write-off of unamortized loan origination costs of approximately $914,000
related to the refinancing of our line of credit in the fiscal 2003 period, net
income would have increased by 48.3% to $4.3 million for the nine months ended
March 31, 2004, from $2.9 million for the same period in fiscal 2003.
Liquidity and Capital Resources
Trucking is a capital-intensive business. We require cash to fund our
operating expenses (other than depreciation and amortization), to make capital
expenditures and acquisitions, and to repay debt, including principal and
interest payments. Other than ordinary operating expenses, we anticipate that
capital expenditures for the acquisition of revenue equipment will constitute
our primary cash requirement over the next twelve months. Our principal sources
of liquidity are cash generated from operations, bank borrowings, capital and
operating lease financing of revenue equipment, proceeds from the sale of used
revenue equipment, and to a lesser extent, the sale of shares of our common
stock.
For the nine months of fiscal 2004, net cash provided by operations was
$26.5 million, compared to $24.3 million for the same period in fiscal 2003.
Net cash used in investing activities was $7.6 million for the nine months
of fiscal 2004, compared to net cash provided by investing activities of $3.5
million for the same period in fiscal 2003. Approximately $3.6 million of the
cash used in investing activities for the fiscal 2004 period was related to our
purchase of certain assets of Highway Express in August of 2003. In addition,
cash used in (provided by) investing activities includes the net cash effect of
acquisitions and dispositions of revenue equipment during each period. Capital
expenditures (excluding the assets purchased from Highway Express) totaled
19
$15.7 million in the nine months of fiscal 2004 and $4.7 million for the same
period in fiscal 2003. We generated proceeds from the sale of property and
equipment of $11.6 million during the nine months of fiscal 2004, compared to
$8.2 million in proceeds for the same period in fiscal 2003.
Net cash used in financing activities was $18.4 million for the nine months
of fiscal 2004, compared to $27.3 million for the same period in fiscal 2003.
Financing activity represents bank borrowings (new borrowings, net of repayment)
and payment of the principal component of capital lease obligations.
As of March 31, 2004, we had on order 414 tractors and 850 trailers for
delivery through December 2004. These revenue equipment orders represent a
capital commitment of approximately $50.6 million, before considering the
proceeds of equipment dispositions. In connection with our fleet upgrade, we
have financed most of the new tractors and new trailers we have acquired to date
under off-balance sheet operating leases. A portion of the used equipment that
has been or will be replaced by these new units was or is owned or held under
capital leases and, therefore, carried on our balance sheet. As a result of our
increased use of operating leases to finance acquisitions of revenue equipment,
we have reduced our balance sheet debt. At March 31, 2004, our total balance
sheet debt, including capital lease obligations, was $50.5 million, compared to
$69.6 million at March 31, 2003. Our debt-to-capitalization ratio (total balance
sheet debt as a percentage of total balance sheet debt plus total stockholders'
equity) decreased to 47.9% at March 31, 2004, from 55.4% at March 31, 2003.
Over the past several years, we have financed most of our new tractors and
trailers under operating leases, which are not reflected on our balance sheet.
The use of operating leases also affects our statement of cash flows. For assets
subject to these operating leases, we do not record depreciation as an increase
to net cash provided by operations, nor do we record any entry with respect to
investing activities or financing activities.
Our operating leases include some under which we do not guarantee the value
of the asset at the end of the lease term ("walk-away leases") and some under
which we do guarantee the value of the asset at the end of the lease term. We
were obligated for residual value payments related to operating leases of $33.7
million and $40.1 million at March 31, 2003 and 2004, respectively. A portion of
these amounts is covered by repurchase and/or trade agreements we have with the
equipment manufacturer. We believe that any residual payment obligations that
are not covered by the manufacturer will be satisfied, in the aggregate, by the
value of the related equipment at the end of the lease. We anticipate that our
continued reliance on operating leases, rather than bank borrowings or capital
leases, to finance the acquisition of revenue equipment in connection with our
fleet upgrade will allow us to use our cash flows to further reduce our balance
sheet debt.
The tractors on order are not protected by manufacturers' repurchase
arrangements and are not subject to "walk-away" leases under which we can return
the equipment without liability regardless of its market value at the time of
return. Therefore, we are subject to the risk that equipment values may decline,
in which case we would suffer a loss upon disposition and be required to make
cash payments because of the residual value guarantees we provide to our
equipment lessors.
On September 26, 2002, we entered into our current primary credit facility
with Fleet Capital Corporation, Fleet Capital Canada Corporation and several
other lenders. This $55.0 million facility consists of revolving loan
facilities, approximately $10.8 million in term loan subfacilities, and a
commitment to issue and guaranty letters of credit. Repayment of the amounts
outstanding under the credit facility is secured by a lien on our assets,
including the stock or other equity interests of our subsidiaries, and the
assets of certain of our subsidiaries. In addition, certain of our subsidiaries
that are not party to the credit facility have guaranteed repayment of the
amount outstanding under the credit facility and have granted a lien on their
respective assets to secure such repayment. The credit facility expires on
September 26, 2005.
20
Amounts available under the credit facility are determined based on our
accounts receivable borrowing base. The facility contains restrictive covenants,
which, among other things, limit our ability to pay cash dividends and make
capital expenditures and lease payments, and require us to maintain compliance
with certain financial ratios, including a minimum fixed charge coverage ratio.
We were in compliance with these covenants at March 31, 2004, and expect to
remain in compliance for the foreseeable future. At March 31, 2004, $21.0
million of our credit facility was utilized as outstanding borrowings and $6.8
million was utilized for standby letters of credit, and we had approximately
$17.1 million in remaining availability under the facility.
We believe we will be able to fund our operating expenses, as well as our
current commitments for the acquisition of revenue equipment in connection with
our fleet upgrade, over the next twelve months with a combination of cash
generated from operations, borrowings available under our primary credit
facility, and lease financing arrangements. We will continue to have significant
capital requirements over the long term, and the availability of the needed
capital will depend upon our financial condition and operating results and
numerous other factors over which we have limited or no control, including
prevailing market conditions and the market price of our common stock. However,
based on our improving operating results, anticipated future cash flows, current
availability under our credit facility, and sources of equipment lease financing
that we expect will be available to us, we do not expect to experience
significant liquidity constraints in the foreseeable future.
Contractual Obligations and Commercial Commitments
As of March 31, 2004, our bank loans, capital leases, operating leases,
other debts and future commitments have stated maturities or minimum annual
payments as follows:
Annual Cash Requirements
as of March 31, 2004
(in thousands)
Amounts Due by Period
Less than One to Three to Over
Total One Year Three Years Five Years Five Years
----- --------- ----------- ---------- ----------
Operating leases(1)......................... $153,662 $39,305 $64,586 $27,957 $21,814
Capital leases obligations(1)............... 17,749 9,947 6,708 465 629
Long-term debt.............................. 32,766 6,101 24,427 313 1,925
-------- ------- ------- ------- -------
Sub-total................................... 204,177 55,353 95,721 28,735 24,368
Future purchase of revenue equipment........ 50,629 3,736 14,944 23,092 8,857
Employment and consulting agreements(2)..... 1,306 818 488 --- ---
Standby letters of credit................... 6,766 6,766 --- --- ---
-------- ------- ------- ------- -------
Total....................................... $262,878 $66,673 $111,153 $51,827 $33,225
======== ======= ======== ======= =======
(1) Included in these balances are residual equipment value guarantees of $50.4
million in total and $12.9 million coming due in less than one year. We
believe the majority of these amounts will be satisfied by manufacturer
commitments.
(2) The amounts reflected in the table do not include amounts that could become
payable to our Chief Executive Officer, Chief Financial Officer, and our
Executive Vice President under certain circumstances if their employment by
the Company is terminated.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that impact the amounts reported in our consolidated financial
statements and accompanying notes. Therefore, the reported amounts of assets,
liabilities, revenues, expenses and associated disclosures of contingent assets
and
21
liabilities are affected by these estimates and assumptions. We evaluate these
estimates and assumptions on an ongoing basis, utilizing historical experience,
consultation with experts, and other methods considered reasonable in the
particular circumstances. Nevertheless, actual results may differ significantly
from our estimates and assumptions, and it is possible that materially different
amounts would be reported using differing estimates or assumptions. We consider
our critical accounting policies to be those that require us to make more
significant judgments and estimates when we prepare our financial statements.
Our critical accounting policies include the following:
Revenue Recognition. Upon delivery of a load, we recognize all revenue
related to that load, including revenue from detention charges and our fuel
surcharge program. In this connection, we make estimates concerning the
collectibility of our accounts receivable and the required amounts of reserves
for uncollectible accounts. We also recognize direct operating expenses, such as
drivers' wages and fuel, on the date of delivery of the relevant load.
Depreciation of Property and Equipment. We depreciate our property and
equipment using the straight line method over the estimated useful life of the
asset. We generally use estimated useful lives of 4 to 12 years for tractors and
trailers, and estimated salvage values for tractors and trailers generally range
from 25% to 40% of the capitalized cost. Gains and losses on the disposal of
revenue equipment are included in depreciation expense in our statements of
operations.
We periodically review the reasonableness of our estimates regarding useful
lives and salvage values of our revenue equipment and other long-lived assets
based upon, among other things, our experience with similar assets, conditions
in the used equipment market, and prevailing industry practice. Changes in our
useful life or salvage value estimates, or fluctuations in market values that
are not reflected in our estimates, could have a material effect on our results
of operations.
Revenue equipment and other long-lived assets are tested for impairment
whenever an event occurs that indicates an impairment may exist. Expected future
cash flows are used to analyze whether an impairment has occurred. If the sum of
expected undiscounted cash flows is less than the carrying value of the
long-lived asset, then an impairment loss is recognized. We measure 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 the
appraised value of the asset, as appropriate.
Operating leases. We recently have financed a substantial majority of our
revenue equipment acquisitions with operating leases, rather than with bank
borrowings or capital lease arrangements. These leases generally contain
residual value guarantees, which provide that the value of equipment returned to
the lessor at the end of the lease term will be no lower than a negotiated
amount. To the extent that the value of the equipment is below the negotiated
amount, we are liable to the lessor for the shortage at the expiration of the
lease. For approximately 75% of our current tractors and 30% of our current
trailers, we have residual value guarantees from manufacturers at amounts equal
to our residual obligation to the lessors. For all other equipment (or to the
extent we believe any manufacturer will refuse or be unable to meet its
obligation), we are required to recognize additional rental expense to the
extent we believe the fair market value at the lease termination will be less
than our obligation to the lessor.
In accordance with SFAS 13, "Accounting for Leases," property and equipment
held under operating leases, and liabilities related thereto, are not reflected
on our balance sheet. All expenses related to revenue equipment operating leases
are reflected on our statements of operations in the line item entitled "Revenue
equipment rentals." As such, financing revenue equipment with operating leases
instead of bank borrowings or capital leases effectively moves the interest
component of the financing arrangement into operating expenses on our statements
of operations. Consequently, we believe that pretax margin (income before income
taxes as a percentage of operating revenue) may provide a more useful measure of
our operating performance than operating ratio (operating expenses as a
percentage of operating revenue) because it eliminates the impact of revenue
equipment financing decisions.
22
Claims Reserves and Estimates. The primary claims arising for us consist of
cargo liability, personal injury, property damage, collision and comprehensive,
workers' compensation, and employee medical expenses. We maintain self-insurance
levels for these various areas of risk and have established reserves to cover
these self-insured liabilities. We also maintain insurance to cover liabilities
in excess of these self-insurance amounts. Claims reserves represent accruals
for the estimated uninsured portion of reported claims, including adverse
development of reported claims, as well as estimates of incurred but not
reported claims. Reported claims and related loss reserves are estimated by
third party administrators, and we refer to these estimates in establishing our
reserves. Claims incurred but not reported are estimated based on our historical
experience and industry trends, which are continually monitored, and accruals
are adjusted when warranted by changes in facts and circumstances. In
establishing our reserves we must take into account and estimate various
factors, including, but not limited to, assumptions concerning the nature and
severity of the claim, the effect of the jurisdiction on any award or
settlement, the length of time until ultimate resolution, inflation rates in
health care and in general, interest rates, legal expenses, and other factors.
Our actual experience may be different than our estimates, sometimes
significantly. Changes in assumptions as well as changes in actual experience
could cause these estimates to change in the near term. Insurance and claims
expense will vary from period to period based on the severity and frequency of
claims incurred in a given period.
Impairment of Goodwill. Our consolidated balance sheets at June 30, 2003,
and March 31, 2004, included goodwill of acquired businesses of approximately
$16.7 million. This amount has been recorded as a result of prior business
acquisitions accounted for under the purchase method of accounting. Prior to
July 1, 2001, goodwill from each acquisition was generally amortized on a
straight-line basis. Under FASB No. 142, Goodwill and Other Intangible Assets,
which we adopted as of July 1, 2001, goodwill is tested for impairment annually
(or more often, if an event or circumstance indicates that an impairment loss
has been incurred) in lieu of amortization. The provisions of FASB No. 142
required the completion of a transitional impairment test within six months of
adoption. We completed this transitional test and there was no impairment as of
July 1, 2001. During the fourth quarter of fiscal 2003, we completed our most
recent annual impairment test for that fiscal year and concluded that there was
no indication of impairment.
A significant amount of judgment is required in performing goodwill
impairment tests. Such tests include estimating the fair value of our reporting
units. As required by FASB No. 142, we compare the estimated fair value of our
reporting units with their respective carrying amounts including goodwill. We
define a reporting unit as an operating segment. Under FASB No. 142, fair value
refers to the amount for which the entire reporting unit could be bought or
sold. Our methods for estimating reporting unit values include market
quotations, asset and liability fair values, and other valuation techniques,
such as discounted cash flows and multiples of earnings, revenue, or other
financial measures. With the exception of market quotations, all of these
methods involve significant estimates and assumptions, including estimates of
future financial performance and the selection of appropriate discount rates and
valuation multiples.
Accounting for Income Taxes. Deferred income taxes represent a substantial
liability on our consolidated balance sheet. Deferred income taxes are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carry-forwards. We evaluate our tax
assets and liabilities on a periodic basis and adjust these balances as
appropriate. We believe that we have adequately provided for our future tax
consequences based upon current facts and circumstances and current tax law.
However, should our tax positions be challenged and not prevail, different
outcomes could result and have a significant impact on the amounts reported in
our consolidated financial statements.
The carrying value of our deferred tax assets (tax benefits expected to be
realized in the future) assumes that we will be able to generate, based on
certain estimates and assumptions, sufficient future taxable income in certain
tax jurisdictions to utilize these deferred tax benefits. If these estimates and
23
related assumptions change in the future, we may be required to reduce the value
of the deferred tax assets resulting in additional income tax expense. We
believe that it is more likely than not that the deferred tax assets, net of
valuation allowance, will be realized, based on forecasted income. However,
there can be no assurance that we will meet our forecasts of future income. We
evaluate the deferred tax assets on a periodic basis and assess the need for
additional valuation allowances.
Federal income taxes are provided on that portion of the income of foreign
subsidiaries that is expected to be remitted to the United States.
Seasonality
We have substantial operations in the Midwestern and Eastern United States
and Canada. In those geographic regions, our tractor productivity may be
adversely affected during the winter season because inclement weather may impede
our operations. Moreover, some shippers reduce their shipments during holiday
periods as a result of curtailed operations or vacation shutdowns. At the same
time, operating expenses generally increase, with fuel efficiency declining
because of engine idling and harsh weather creating higher accident frequency,
increased claims, and more equipment repairs.
Inflation
Many of our operating expenses, including fuel costs, revenue equipment,
and driver compensation are sensitive to the effects of inflation, which results
in higher operating costs and reduced operating income, unless offset by revenue
increases. The effects of inflation on our business during the past three years
were most significant in fuel. However, the effect of higher fuel prices on our
revenue was not material in the past three years because of increases in our
freight rates and fuel surcharges.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We experience various market risks, including changes in interest rates,
foreign currency exchange rates, and fuel prices. We do not enter into
derivatives or other financial instruments for trading or speculative purposes,
nor when there are no underlying related exposures.
Interest Rate Risk. We are exposed to interest rate risk principally from
our primary credit facility. The credit facility carries a maximum variable
interest rate of either the bank's base rate plus 3.0% or LIBOR plus 3.5%. At
March 31, 2004, we had variable rate borrowings of $21.0 million outstanding
under the credit facility. At March 31, 2004, the interest rate for revolving
borrowings under our credit facility was LIBOR plus 2.25%. Assuming variable
rate borrowings under the credit facility at March 31, 2004 levels, a
hypothetical 10% increase in the bank's base rate and LIBOR would reduce our
annual net income by approximately $120,000. In the event of a change of this
magnitude, management would likely consider actions to further mitigate our
exposure.
Foreign Currency Exchange Rate Risk. We are subject to foreign currency
exchange rate risk, specifically in connection with our Canadian operations.
While virtually all of the expenses associated with our Canadian operations,
such as independent contractor costs, company driver compensation, and
administrative costs, are paid in Canadian dollars, a significant portion of our
revenue generated from those operations is billed in U.S. dollars because many
of our customers are U.S. shippers transporting goods to or from Canada. As a
result, increases in the Canadian dollar exchange rate adversely affect the
profitability of our Canadian operations. Assuming revenue and expenses for our
Canadian operations identical to that in the nine months ended March 31, 2004
(both in terms of amount and currency mix), we estimate that a $0.01 increase in
the Canadian dollar exchange rate would reduce our annual net income by
approximately $250,000. We generally do not face the same magnitude of foreign
currency exchange rate risk in connection with our intra-Mexico operations
conducted through our Mexican subsidiary, Jaguar, because our foreign currency
revenues are generally proportionate to our foreign currency expenses for those
operations. For purposes of consolidation, however, the operating results earned
by our subsidiaries, including Jaguar, in foreign currencies are converted into
United States
24
dollars. As a result, a decrease in the value of the Mexican peso could
adversely affect our consolidated results of operations. Assuming revenue and
expenses for our Mexican operations identical to that in the nine months ended
March 31, 2004 (both in terms of amount and currency mix), we estimate that a
$0.01 decrease in the Mexican peso exchange rate would reduce our annual net
income by approximately $45,000. In response to the increase in Canadian dollar
exchange rates, we entered into derivative financial instruments to reduce our
exposure to currency fluctuations. In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Certain Hedging Activities." In June
2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activity, an Amendment of SFAS 133." SFAS 133 and SFAS 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. Derivatives that are not hedges must be adjusted
to fair value through earnings. As of March 31, 2004, we had 25% of our
estimated currency exposure hedged through July 2004. These derivative contracts
resulted in a $165,000 expense for the nine months ended March 31, 2004.
Commodity Price Risk. Shortages of fuel, increases in prices, or rationing
of petroleum products can have a materially adverse effect on our operations and
profitability. Fuel is subject to economic, political and market factors that
are outside of our control. Historically, we have sought to recover a portion of
short-term increases in fuel prices from customers through the collection of
fuel surcharges. However, fuel surcharges do not always fully offset increases
in fuel prices. In addition, from time-to-time we may enter into derivative
financial instruments to reduce our exposure to fuel price fluctuations. In
accordance with SFAS 133, we adjust our derivative instruments to fair value
through earnings on a monthly basis. As of March 31, 2004, we had 9% of
estimated fuel purchases hedged through June 2004. These derivative contracts
had no material impact on our results of operations for the nine months ended
March 31, 2004. We estimate a 10% movement in the price of fuel futures would
have an approximately $80,000 impact related to these derivative contracts.
Item 4. Controls and Procedures
As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Company has carried out an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the period covered by this report. This
evaluation was carried out under the supervision and with the participation of
the Company's management, including our Chief Executive Officer and our Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this report. There were no
changes in the Company's internal control over financial reporting that occurred
during the quarter ended March 31, 2004 that have materially affected, or that
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission (the "Commission").
Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed in Company reports filed under
the Exchange Act is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer as appropriate, to
allow timely decisions regarding disclosures.
The Company has confidence in its disclosure controls and procedures.
Nevertheless, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure controls and
procedures will prevent all errors or intentional fraud. An internal control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of such internal controls are met.
Further, the design of an internal control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all internal
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected.
25
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-1
filed with the Commission on November 24, 1993 (No. 33-72128).
3.2 Certificate of Amendment of Certificate of Incorporation dated
February 2, 1995 decreasing aggregate number of authorized shares
to 12,179,985. Incorporated by reference to Exhibit 3.2 to Annual
Report on Form 10-K for the fiscal year ended June 30, 1995 filed
with the Commission on December 1, 1995.
3.3 Certificate of Designation for Series A Junior Participating
Preferred Stock. Incorporated by reference to Exhibit 3.3 to
Annual Report on Form 10-K for the fiscal year ended June 30,
2000 filed with the Commission on September 28, 2000.
3.4 By-laws of the Company. Incorporated by reference to Exhibit 3.2
to Registration Statement on Form S-1 filed with the Commission
on November 24, 1993 (No. 33-72128).
10.21 Fourth Amendment to Credit Agreement, dated January 16, 2004,
among the Company, certain of its subsidiaries, Fleet Capital
Corporation, Fleet Capital Canada Corporation, and certain other
lenders.*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification 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.
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements.
----------------------------
* Previously filed with the Original Report.
(b) During the quarter ended March 31, 2004, the Company filed with, or
furnished to, the Commission the following Current Reports on Form 8-K. On
January 20, 2004, the Company furnished to the Commission a Current Report Form
8-K, dated January 14, 2004, to report information regarding the Company's press
release announcing its fiscal second quarter financial and operating results.
26
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)
Date: May 14, 2004 /s/Stephen Russell
-------------------
Stephen Russell
Chief Executive Officer
Date: May 14, 2004 /s/Paul A. Will
-----------------
Paul A. Will
Chief Financial Officer
27