ITEM 1. BUSINESS
THE COMPANY
Celadon Group, Inc., was incorporated in 1986, in Delaware, primarily to provide trucking services for DaimlerChrysler Corporation ("DaimlerChrysler") to and from its Mexican assembly plants. Since that time, Celadon Group, Inc. (collectively, with its subsidiaries, the "Company") has grown into a leading trucking company that specializes in providing and arranging door-to-door transport services from the United States and Canada to and from locations in Mexico. The Company also provides van truckload and flatbed transport services within the United States. The Company acquired (i) the assets of General Electric Transportation Services ("GETS") in September 1997, (ii) the assets of Gerth Transport ("Gerth") in May 1998, and (iii) the assets, and assumed certain liabilities of, Zipp Express, Inc. ("Zipp") in July 1999. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Recent Acquisitions."
The Company is headquartered in Indianapolis, Indiana and maintains a regional network of eight terminals within the Ontario, Canada to Laredo, Texas corridor and four terminals within Mexico, which enables the Company to focus primarily on north-south trucking lanes. The Company currently operates a fleet of approximately 2,500 tractors and 7,000 trailers.
On February 9, 2000, the Company incorporated TruckersB2B, Inc. ("TruckersB2B"), an internet-based "business-to-business" membership program providing discounted fuel, tires and other products and services to small and medium-sized trucking companies through its website. TruckersB2B is a subsidiary of the Company as a majority of TruckersB2B's common stock is owned by Celadon E-Commerce, Inc., a wholly-owned subsidiary of the Company.
INDUSTRY OVERVIEW
The full truckload market is defined by the quantity of goods, generally over 10,000 pounds, shipped by a single customer and is divided into several segments by the type of trailer used to transport the goods. These segments include van, temperature-controlled, flatbed, and tank carriers. The Company participates primarily in the van and, to a lesser degree, the flatbed portion of the North American truckload market. The markets within the United States, Canada, and Mexico are fragmented, with many competitors.
Transportation of goods by truck between the United States, Canada, and Mexico is subject to the provisions of the North American Free Trade Agreement ("NAFTA"). United States and Canadian based carriers may operate within both countries. United States and Canadian carriers are not allowed to operate within Mexico, and Mexican carriers are not allowed to operate within the United States and Canada, in each case except for a 26 kilometer band along either side of the Mexican border. Trailers may cross the Mexican border.
Transportation of goods between the United States or Canada and Mexico consists of three components: (i) transport from the point of origin to the Mexican border, (ii) drayage, which is transportation across the border, and (iii) transportation from the border to the final destination. The Company is one of a limited number of trucking companies that participates in all three segments of this cross border market providing true door-to-door carriage.
Internet-based business-to-business savings programs for trucking companies is new and includes such competitors as other large trucking companies, other Internet-based buying programs, trucking industry co-ops and other possible new entrants.
OPERATIONS AND MARKETING
The Company approaches its operations as an integrated effort of marketing, customer service, and fleet management. The Company's customer service and marketing personnel emphasize both new account development and expanded service for current customers. Customer service representatives provide day-to-day contact with customers, while the sales force targets freight that will increase lane density.
The Company provides and arranges for long-haul, time sensitive, full truckload transport of goods between the United States and Canada and Mexico. The Company provides van truckload carriage through four operating units: Celadon Trucking Services Inc., ("CTSI"), Zipp, Gerth, and Servicios de Transportacion Jaguar S.A. de CV ("Jaguar"). Because most international shipments are carried on through-trailer service on U.S. or Canadian trailers, Mexican carriers use the Company's trailers. As a result, the Company maintains an above average trailer-to-tractor ratio. The Company utilized 2,580 tractors (of which 1,024 were owner-operators) and 7,042 trailers as of June 30, 2000. The Company provides flatbed carriage through its subsidiary Cheetah Transportation Company ("Cheetah"), which is headquartered in Mooresville, North Carolina. Flatbed services are employed for commodities such as steel coils, lumber and other building materials because of their special loading requirements and for shipments of large or oversized freight.
The Company targets large service-sensitive customers with time-definite delivery requirements throughout the United States, Canada and Mexico. The Company's customers frequently ship in the north-south lanes (i.e. to and from locations in Mexico to and from locations in the Midwestern and Eastern United States and Eastern Canada). The sales and marketing personnel in the various offices work together to source northbound and southbound transport, in addition to drayage. The Company currently services in excess of 3,500 trucking customers. Service to these customers is enhanced by a high trailer-to-tractor ratio, state-of-the-art technology, well maintained, late-model tractors and trailers, and 24-hours a day, seven-days a week dispatch and reporting services. The principal types of freight transported include automotive parts, paper products, manufacturing parts, semi-finished products, textiles, appliances, retail and toys.
The Company's largest customer is DaimlerChrysler, which accounted for approximately 24%, 25%, and 37% of the Company's total revenue for fiscal 2000, 1999, and 1998, respectively. The Company transports DaimlerChrysler original equipment automotive parts primarily between the United States and Mexico and DaimlerChrysler after-market replacement parts and accessories within the United States. The Company's most recent agreements with DaimlerChrysler are covered by three agreements: (a) an agreement for international freight with the Chrysler division, which expires in December 2000, (b) a domestic agreement with the Chrysler division, which expires in October 2000, and (c) an international contract with the Freightliner division, which expires in April 2001. The two Chrysler division agreements accounted for approximately 22%, 22%, and 37% of the Company's total revenue for fiscal 2000, 1999, and 1998, respectively. The Freightliner division contract accounted for approximately 2% and 3% of the Company's total revenue for fiscal 2000 and 1999, respectively. No other customer accounted for more than 10% of the Company's total revenue during any of its three most recent fiscal years.
The Company's TruckersB2B subsidiary provides discounted fuel, tires, and other products and services to small and medium-sized trucking companies through its website, www.truckersb2b.com. TruckersB2B provides small and medium-sized trucking company members with the ability to cut costs, and thereby compete more effectively and profitably with the larger fleets. As of June 30, 2000, TruckersB2B had approximately 158,000 members.
TECHNOLOGY
The Company uses state-of-the-art technology for customer service, dispatch, equipment control, driver communications, electronic data interchange ("EDI") and administrative purposes. CTSI, Zipp, Gerth and Jaguar have equipped all of their tractors with Qualcomm mobile communication terminals, which allow information to be passed to and from the driver and the Company instantaneously. Customer order information, load tracking, and service performance are all monitored using the latest in mobile communication technology. As an extension of this data capture, customers can track their own shipments utilizing CelaTrac, an Internet based tracking system that the Company introduced in August 1998. The Company has implemented Logistics.com load optimization and drop and swap software modules to further enhance its service performance levels.
DRIVERS AND PERSONNEL
At June 30, 2000, the Company employed 2,377 persons, of whom 1,532 were drivers, 166 were truck maintenance personnel and 679 were administrative personnel. None of the Company's drivers or other employees are represented by a union or a collective bargaining unit.
Driver recruitment, retention, and satisfaction are essential components of the Company's success. Drivers are selected in accordance with specific guidelines, relating primarily to safety records, driving experience, and personal evaluations, including a physical examination and mandatory drug testing. The Company's drivers attend an orientation program and ongoing driver efficiency and safety programs. As of June 30, 2000, the average length of time that drivers had been employed by the Company was approximately 2.3 years.
Historically, the Company utilized owner-operators exclusively for flatbed shipments. However, with the General Electric Transportation Services ("GETS"), Gerth and Zipp acquisitions, owner-operator capacity was added to the Company. Owner-operators are independent contractors who, through a contract with the Company, supply one or more tractors and drivers for Company use. Owner-operators must pay their own tractor expenses, fuel, maintenance and driver costs and must meet specified Company guidelines with respect to safety. As of June 30, 2000, there were 1,024 owner-operator tractors providing 40% of the Company's tractor capacity.
REVENUE EQUIPMENT
The Company's equipment strategy is to utilize premium late-model tractors, maintain a high trailer-to-tractor ratio, actively manage equipment throughout its life cycle and employ a comprehensive service and maintenance program.
The Company's fleet is comprised of tractors manufactured by Freightliner and Peterbilt to the Company's specifications, which the Company believes helps attract and retain drivers and to minimize maintenance and repair costs. The Company owns or leases most of its tractors and trailers and, as of June 30, 2000, utilized 1,024 tractors owned by independent owner-operators.
As of June 30, 2000, the average age of the Company's owned and leased tractors and trailers was approximately 2.2 years and 3.8 years, respectively. The Company utilizes a comprehensive maintenance program to minimize downtime and control its maintenance costs. Centralized purchasing of spare parts and tires, and centralized control of over-the-road repairs are also used to control costs. The Company generally replaces its tractors every four to five years, although it retains some older tractors for use on shorter haul routes (including drayage) where they can be utilized more economically. The Company further reduces exposure to declines in the resale value of the Company's equipment by entering into agreements with certain manufacturers providing for pre-established resale values upon trade-in of existing equipment.
The following table shows by type and model year the Company's revenue equipment at June 30, 2000:
The Company maintains a 3.1 to 1 trailer-to-tractor ratio (including van truckload owner-operator equipment) in order to provide availability in Mexico and to allow it to leave trailers with its high volume shippers to load and unload at their convenience. As of June 30, 2000, the Company had 159 tractors on order for delivery in fiscal 2001. Additional growth in the tractor and trailer fleet beyond the Company's existing orders will require additional sources of financing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
FUEL
The Company purchases the majority of its fuel through a network of approximately 120 fuel stops throughout the United States and Canada. The Company has negotiated discounted pricing based on certain volume commitments with these fuel stops. Bulk fueling facilities are maintained in Indianapolis, Laredo and Kitchener, Ontario to further reduce fuel costs.
Shortages of fuel, increases in fuel prices or rationing of petroleum products can have a materially adverse effect on the operations and profitability of the Company. During fiscal year 2000, the Company experienced significant increases in the cost of fuel. The Company has recovered a portion of the increased cost from customers via the use of fuel surcharges. However, a significant portion of the fuel expense increase was not recovered during fiscal year 2000. This is due to several factors: the base fuel price levels which determine when surcharges are collected, truck idling, empty miles between freight shipments, and out-of-route miles caused in part by driver home time needs. Company management continues to meet with customers to explain the significant impact of high fuel prices and to improve the amount and percentage of fuel surcharge reimbursement. However, the Company cannot predict whether high fuel price levels will continue in the future or the extent to which fuel surcharges will be collected to offset such increases. At June 30, 2000, the Company had no derivative financial instruments to reduce its exposure to fuel price fluctuations.
COMPETITION
While the truckload industry is highly competitive and fragmented, the Company is one of a limited number of companies that is able to provide or arrange for door-to-door transport service between points in the United States and Canada and Mexico. Although both service and price drive competition in the premium long-haul, time sensitive portion of the market, the Company relies primarily on its high level of service to attract customers. This strategy requires the Company to focus on market segments that employ just-in-time inventory systems and other premium services. Competitors include other long-haul truckload carriers and, to a lesser extent, medium-haul truckload carriers and railroads.
REGULATION
The Company's operations are regulated and licensed by various U.S. federal and state, Canadian provincial and Mexican federal agencies. Interstate motor carrier operations are subject to safety requirements prescribed by the United States Department of Transportation. Such matters as weight and equipment dimensions are also subject to United States federal and state regulation and Canadian provincial regulations. The Company operates in the United States throughout the 48 contiguous states pursuant to operating authority granted by the Federal Highway Administration, in various Canadian provinces pursuant to operation authority granted by the Ministries of Transportation and Communications in such provinces, and within Mexico pursuant to operating authority granted by Secretaria de Communiciones y Transportes. To the extent that the Company conducts operation outside the United States, the Company is subject to the Federal Corrupt Practices Act, which generally prohibits United States companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping otherwise obtaining favorable treatment.
CARGO LIABILITY, INSURANCE, AND LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business, primarily involving claims for bodily injury or property damage incurred in the transportation of freight. The Company is responsible for the safe delivery of cargo. Since April 2000, the Company is responsible for liability claims up to $1 million, plus administrative expenses, for each occurrence involving personal injury or property damage. The Company is self insuring its physical damage losses and up to $150,000 for workers compensation losses and up to $25,000 for cargo claims. The Company maintains separate insurance in Mexico consisting of bodily injury and property damage coverage with acceptable deductibles. Management believes its uninsured exposure is reasonable for the transportation industry. Consequently, the Company does not believe that the litigation and claims experienced will have a material impact on the Company's financial position or results of operations.
ITEM 2.
ITEM 2. PROPERTIES
The Company operates an international network of thirteen terminal locations, including facilities in Laredo and El Paso, Texas, which are the two largest inland freight gateway cities between the United States and Mexico. Operating terminals are currently located in the following cities:
Both the Laredo and Indianapolis facilities include administrative functions, lounge and sleeping facilities for drivers, parking, fuel and truck washing facilities. The Company's executive and administrative offices occupy four buildings located on 30 acres of property in Indianapolis, Indiana.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
See discussion under "Cargo Liability, Insurance, and Legal Proceedings," and footnote 10 to the consolidated financial statements "Hedging Activities, Commitments, and Contingencies."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended June 30, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since January 24, 1994, the date of the initial public offering of the Company's Common Stock, the Common Stock has been quoted through The Nasdaq National Market under the symbol "CLDN". The following table sets forth the high and low reported sales price for the Common Stock as quoted through The Nasdaq National Market for the periods indicated.
On September 20, 2000, there were approximately 2,200 holders of the Company's Common Stock, and the closing price of the Company's Common Stock was $10.00.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock as a public company and has no present intention of paying cash dividends on its Common Stock in the foreseeable future. Moreover, pursuant to its existing credit agreements, the Company and certain of its subsidiaries may pay cash dividends only up to certain specified levels and if certain financial ratios are met.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data and balance sheet data presented below have been derived from the Company's consolidated financial statements and related notes thereto. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related notes thereto.
- ------------ (1) Calculation of diluted net income (loss) per common share for the 1996 and 2000 periods are anti-dilutive. (2) Includes operating loss of $4.7 million related to TruckersB2B.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading trucking company that specializes in providing and arranging truckload transport services from the United States and Canada to and from locations in Mexico. The Company serves a diverse set of industries including automotive, technology, industrial equipment, textiles, retail, and furniture. The Company provides its customers with long-haul time sensitive transportation utilizing a network of company owned and leased tractors and, to a lesser extent, independent owner-operators.
The Company's capacity mix has changed with the acquisitions of GETS, Gerth and Zipp. Prior to these acquisitions, 82% of the Company's capacity was provided by Company owned and leased equipment. As of June 30, 2000, owner-operators provided 40% of the Company's capacity. As a result, purchased transportation expense has increased and equipment ownership costs, maintenance, and driver expenses have decreased as percentages of operating revenue.
During 2000, the Company has added an Internet-based "business-to-business" membership program providing discounts on fuel, tires and other services.
RECENT ACQUISITIONS
In September 1997, the Company acquired the assets of GETS for $8.2 million. The purchase included 150 owner-operator tractors, 455 trailers and a contract granting the right of first refusal on all loads shipped for General Electric Industrial Control Systems ("GEICS") for a five-year period. In addition to adding GEICS as a key customer, the GETS acquisition improved shipping density of the Company's core routes. The assets acquired in the GETS acquisition were successfully integrated into CTSI within six months of the date of acquisition.
In May 1998, the Company acquired the assets of Gerth for $13.8 million. Gerth is a leading Canadian truckload carrier to Mexico, with 425 tractors. This acquisition has strengthened the Company's presence in Canada and provides additional density in its core north-south transport lanes.
Effective July 1, 1999, the Company acquired the assets and assumed certain liabilities of Zipp for approximately $26 million. The consolidated financial statements include the results of Zipp's operations from the date of acquisition. The Company believes that Zipp will further strengthen its position in the market between the U.S. and Mexico as well as within the Midwest region. Zipp is a major carrier to and from Mexico and also maintains a strong base of business in the Midwest. In calendar year 1998, Zipp had $38 million in revenue and an operating ratio of 89.8%. At the acquisition date, Zipp operated a relatively new fleet of approximately 270 tractors and 800 trailers. As a result of this acquisition, the Company disposed of a group of its own older equipment and related items that were no longer required due to the acquired fleet having newer more fuel efficient equipment. The combined fleets resulted in operating efficiencies that allowed the Company to dispose of this excess equipment. The effect of upgrading the Company's fleet through this disposition resulted in a non-cash charge of approximately $3.3 million in the three months ended September 30, 1999.
RESULTS OF OPERATIONS
The following table includes certain information with respect to the operating revenue, operating profit, operating ratio, and operating expense of the Company for the years indicated.
The operating ratio excluding TruckersB2B was 96.1% in fiscal 2000.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1999
REVENUE. Consolidated revenue increased by $69.8 million, or 24.8%, to $351.6 million for fiscal 2000 from $281.8 million for fiscal 1999. A significant portion of the increase, $49.5 million, relates to Zipp, which was acquired effective July 1, 1999. In addition, the Company increased its overall rates per mile by 3.5% compared to fiscal 1999. This increase in rates reflects price increases
obtained by the Company through its continued efforts to focus on its core routes as well as an improvement in the Company's overall business mix.
OPERATING INCOME. Operating income, excluding TruckersB2B, decreased by $1.8 million, or 11.8%, to $13.5 million in fiscal 2000 from $15.3 million in fiscal 1999. The Company's operating ratio, which expresses operating expenses as a percentage of operating revenue, excluding TruckersB2B, increased from 94.6% in fiscal 1999 to 96.1% in fiscal 2000.
The decrease in operating income and the increased operating ratio were attributable to a significant increase in fuel costs, net of fuel surcharges, of approximately $5.8 million, or $.45 (tax effected) per diluted common share. The Company has recovered a portion of the increased cost from customers via the use of fuel surcharges. However, a significant portion of the fuel expense increase was not recovered during fiscal year 2000. This is due to several factors: the base fuel price levels which determine when surcharges are collected, truck idling, empty miles between freight shipments, and out-of-route miles caused in part by driver home time needs. Company management continues to meet with customers to explain the significant impact of high fuel prices and to improve the amount and percentage of fuel surcharge reimbursement.
Rent and purchased transportation expense increased as a result of growth in owner-operator capacity, higher equipment costs, and an increased use of independent Mexican carriers. This increase was partially offset by a decrease in depreciation expense and operating costs as a percentage of revenue.
TruckersB2B accounted for a $4.7 million operating loss for fiscal year 2000. This loss was primarily the result of non-cash charges related to the fair value of shares of TruckersB2B common stock earned by its strategic partners. TruckersB2B also incurred $2.0 million of pre-tax operating losses for salaries, advertising and other costs associated with the start-up of a new business. Those losses were offset by a benefit of $0.5 million for the Company's minority interest in the TruckersB2B subsidiary.
It is expected that the operating expenses of TruckersB2B will continue to increase in the near future. This increase will include anticipated non-cash charges to be recognized in connection with the future issuance of shares of TruckersB2B Class A common stock, under agreements with certain o its vendor partners. Upon issuance of these shares, the fair value of the common stock at the date the shares are earned will be recognized as an operating expense in the company's consolidated statement of operations.
NET INTEREST EXPENSE. Net interest expense increased by $1.8 million, or 24.3%, to $9.2 million in fiscal 2000 from $7.4 million in fiscal 1999. The increase was the result of higher borrowings under the Company's existing credit facility due to the Zipp acquisition, partially offset by reduced borrowings under capital leases.
INCOME TAXES. Income taxes resulted in a benefit of $1.3 million in fiscal 2000 compared to an expense of $3.0 million in fiscal 1999. This change in income taxes is a result of the Company's pre-tax loss in fiscal 2000.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1998
REVENUE. Consolidated revenue increased by $51.9 million, or 22.6%, to $281.8 million for fiscal 1999 from $229.9 million for fiscal 1998. This increase was principally attributable to a $44.4 million increase in Gerth revenue which was acquired in May 1998. In addition, the Company increased its overall rates per mile by 2% compared to fiscal 1998. This increase in rates reflects price increases obtained by the Company through its continued efforts to focus on its core routes as well as an improvement in the Company's overall business mix.
OPERATING INCOME. Operating income decreased by $0.5 million, or 3.2%, to $15.3 million in fiscal 1999 from $15.8 million in fiscal 1998. The Company's operating ratio, which expresses operating expenses as a percentage of operating revenue, increased from 93.1% in fiscal 1998 to 94.6% in fiscal 1999.
The decrease in operating income and the increased operating ratio were attributable to a charge of approximately $1.2 million, or $0.10 per diluted common share, of transaction costs incurred by the Company related to the expiration of its previously announced merger agreement with Odyssey Investment Partners. These charges were offset by the Gerth acquisition, volume growth and rate per mile increases. Rent and purchased transportation expense increased as a result of growth in owner-operator capacity and an increased use of independent Mexican carriers. This increase was partially offset by a decrease in salaries, wages, fuel and depreciation expense as a percentage of revenue.
NET INTEREST EXPENSE. Net interest expense increased by $1.5 million, or 25.4%, to $7.4 million in fiscal 1999 from $5.9 million in fiscal 1998. The increase was the result of higher borrowings under the Company's existing credit facility partially offset by reduced borrowings under capital leases.
INCOME TAXES. Income taxes decreased by $0.9 million, or 23.1%, to $3.0 million in fiscal 1999 from $3.9 million in fiscal 1998. The decrease in income tax expense is reflective of the Company's lower pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow of $10.3 million, $12.3 million and $18.5 million from operating activities in fiscal 2000, 1999 and 1998, respectively. In fiscal 2000, the decrease in cash flow relative to fiscal year 1999 was due to reduced profitability, the increase in fuel expense and an increase in trade receivables. These items were partially offset by non-cash expenses for the loss on disposition of equipment and TruckersB2B non-cash member and vendor development costs. The Company's primary capital requirements over the last three years have been funding the acquisition of equipment, the start-up of TruckersB2B, and the GETS, Gerth and Zipp acquisitions. Capital expenditures (including the value of equipment procured under capital leases) totaled $24.5 million, $15.8 million and $41.5 million in fiscal 2000, 1999 and 1998, respectively. The Company purchased $13.2 million, $8.1 million and $37.5 million of revenue equipment under capitalized leases and debt financing in fiscal 2000, 1999 and 1998, respectively. The Company has historically met its capital investment requirements with a combination of internally generated funds, bank financing, equipment lease financing (both capitalized and operating) and the issuance of common stock.
In August 1999, the Company completed a $60 million banking facility ("credit agreement") with ING (U.S.) Capital, LLC ("ING"). The arrangement includes a $30 million revolving loan and a $30 million term loan. In November 1999, the Company's credit agreement with ING was increased by $5 million to $65 million. In May 2000, the Company's credit agreement with ING was amended to reflect modifications to the Company's covenants. The modifications allowed the Company to remain in compliance with the terms and conditions of the credit agreement. In September 2000, the Company's credit agreement with ING was increased by $2 million to $67 million to finance the start-up of TruckersB2B. The ING credit agreement was obtained primarily to finance the $26 million asset purchase of Zipp.
At June 30, 2000, $47.7 million of the Company's credit facility was utilized as outstanding borrowings and $1.8 million was utilized for standby letters of credit. The average balance outstanding during fiscal 2000 was $48.5 million and the highest balance outstanding was $59.7 million. The Company also has financed its capital requirements by obtaining lease financing on revenue equipment. At June 30, 2000, the Company had an aggregate of $58.6 million in capital lease financing at interest rates ranging from 5.3 % to 8.0%, maturing at various dates through 2005. Of this amount, $15.7 million is due prior to June 30, 2001.
As of June 30, 2000, the Company had 159 tractors on order for delivery in fiscal 2001. A commitment for lease financing on these units has been obtained. Management believes that there are presently adequate sources of secured equipment financing together with its existing credit facilities and cash flow from operations to provide sufficient funds to meet the Company's anticipated working capital requirements. Additional growth in the tractor and trailer fleet beyond the Company's existing orders will require additional sources of financing.
SEASONALITY
To date, the Company's revenues have not shown any significant seasonal pattern. However, because the Company's primary traffic lane is between the Midwest United States and Mexico, winter generally may have an unfavorable impact upon the Company's results of operations. Also, many manufacturers close or curtail their operations during holiday periods, and observe vacation shutdowns, which may impact the Company's operations in any particular period.
INFLATION
Many of the Company's operating expenses, including fuel costs and related fuel taxes, are sensitive to the effects of inflation, which result in higher operating costs. The effects of inflation on the Company's business during the past three years were most significant in fuel. The Company has limited the effects of inflation through increases in freight rates and fuel surcharges.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Two amendments to this statement have extended the required implementation date to fiscal years beginning after June 15, 2000 and addressed a limited number of implementation issues. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in foreign currency exchange rates, interest rates, and fuel prices. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.
The Company is exposed to interest rate risk primarily from its Credit Agreement ("Credit Agreement") in which floating rates are based, at the Company's option, upon either the bank's base rate plus a margin ranging from .5% to 1.5% or the London Interbank Offered Rate plus a margin ranging from 1.5% to 2.5%, depending upon performance by the Company. A hypothetical 10% movement in interest rates would have an impact on net income of approximately $300,000. In the event of a change of such magnitude, management would likely consider actions to further mitigate its exposure to the change.
Jaguar's revenues and expenses are generally recorded in Mexican pesos and Gerth's revenues and expenses are recorded in United States and Canadian dollars. The Company's foreign currency revenues are generally proportionate to its foreign currency expenses and the Company does not generally engage in currency hedging transactions. For purposes of consolidation, however, the operating results earned by the Company's subsidiaries in foreign currencies is converted into United States dollars. As a result, a decrease in the value of the Mexican peso or Canadian dollar could adversely affect the Company's consolidated results of operations and equity.
See "Fuel" section on page 8 of this Form 10-K for further discussion regarding market risks associated with changes in fuel prices.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements," which is Item 14(a), and the consolidated financial statements and schedules included as a part of this Annual Report.
CELADON GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Three years ended June 30, 2000 with Report of Independent Auditors
Contents
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Celadon Group, Inc.
We have audited the accompanying consolidated balance sheets of Celadon Group, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Celadon Group, Inc. and subsidiaries at June 30, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana August 24, 2000
CELADON GROUP, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND 1999 (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
CELADON GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
CELADON GROUP, INC CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2000 AND 1999 (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
CELADON GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (Dollars in thousands, except share amounts)
See accompanying notes to financial statements.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Celadon Group, Inc. (the "Company") through its operating subsidiaries, provides long-haul, full truckload services between the United States, Canada and Mexico. The Company's primary trucking subsidiaries are: Celadon Trucking Services, Inc. ("CTSI"), a U.S. based Company; Servicio de Transportation Jaguar, S.A. de C.V. ("Jaguar"), a Mexican based company; Gerth Transport ("Gerth"), a Canadian based company; Zipp Express, Inc. ("Zipp"), a U.S. based Company; and Cheetah Transportation Company ("Cheetah"), a U.S. based company.
TruckersB2B, Inc. ("TruckersB2B") is an internet based "business-to-business" membership program, majority owned by Celadon E-Commerce, Inc., a wholly owned subsidiary of Celadon Group, Inc.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Celadon Group, Inc. and its wholly and majority owned subsidiaries, all of which are wholly owned except for Jaguar and TruckersB2B in which the Company has a 75% and 84% interest, respectively. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise noted, all references to annual periods refer to the respective fiscal years ended June 30.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Such estimates include provisions for damage and liability claims and uncollectible accounts receivable. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months or less when purchased to be cash equivalents.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Revenue Recognition
Trucking revenue is recognized as of the date the freight is delivered by the Company.
TruckersB2B revenue is recognized at different times depending on the product or service purchased by the TruckersB2B member ("member"). Revenue for fuel rebates is recognized in the month the fuel was purchased by a member. The tire rebate revenue is recognized when proof-of-purchase documents are received from members. In most other programs, TruckersB2B receives commissions, royalties or transaction fees based upon percentages of member purchases. TruckersB2B records revenue under these programs when earned and it receives the necessary information to calculate the revenue.
Tires in Service
Original and replacement tires on tractors and trailers are included in tires in service and are amortized over 12 to 36 months.
Fuel
Fuel is generally expensed when purchased, except for the fuel supplies at terminals, which are classified as prepaid expenses.
Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital leases are stated at fair value at the inception of the lease.
Depreciation of property and equipment and amortization of assets under capital leases is generally computed using the straight-line method and is based on the estimated useful lives (net of salvage value) of the related assets as follows:
Initial delivery costs relating to placing tractors and trailers in service, which are included in revenue and service equipment, are being amortized on a straight-line basis over the lives of the assets or in the case of leased equipment, over the respective lease term. The cost of maintenance and repairs, including tractor overhauls, is charged to expense as incurred.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Goodwill
Goodwill reflects the excess of cost over net assets of businesses acquired and is being amortized by the straight-line method over 15-40 years. The carrying value of the goodwill is reviewed if the facts and circumstances suggest that it may be permanently impaired. Such review is based upon the undiscounted expected future operating profit derived from such businesses and, in the event such result is less than the carrying value of the goodwill, the carrying value of the goodwill is reduced to an amount that reflects the expected future benefit.
Insurance Reserves
Reserves for known claims and incurred but not reported claims up to specific policy limits are accrued based upon information provided by insurance adjusters. Such amounts are included in accrued expenses.
Advertising
Advertising costs are expensed as incurred by the Company. Advertising expenses for fiscal 2000, 1999, and 1998 were approximately $3.5 million, $1.3 million, and $0.9 million, respectively, and are included in salaries, wages and employee benefits and general, administrative, and selling expenses in the statement of operations.
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting, based on enacted tax laws and rates. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States.
Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to trade receivables are generally limited due to the Company's large number of customers and the diverse range of industries, which they represent. Accounts receivable balances due from DaimlerChrysler totaled $6.3 million or 12% of the gross trade receivables at June 30, 2000. The Company had no other significant concentrations of credit risk.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Foreign Currency Translation
Foreign financial statements are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Assets and liabilities of the Company's foreign operations are translated into U.S. dollars at year-end exchange rates. Income statement accounts are translated at the average exchange rate prevailing during the year. Resulting translation adjustments are included in other comprehensive income.
Reclassifications
Certain reclassifications have been made to the 1999 and 1998 financial statements in order to conform to the 2000 presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Two amendments to this statement have extended the required implementation date to fiscal years beginning after June 15, 2000 and addressed a limited number of implementation issues. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company.
(2) ACQUISITIONS
Effective July 1, 1999, the Company acquired the assets and assumed certain liabilities of Zipp for approximately $26 million. Zipp is a major carrier to and from Mexico and also maintains a strong base of business in the Midwest. At the acquisition date, Zipp operated a relatively new fleet of about 270 tractors and 800 trailers. The Company accounted for the transaction as a purchase and funded the acquisition using its line of credit. The allocation of the Zipp purchase price resulted in $10.1 million of goodwill to be amortized over a period of 15 years. The results of operations are included in consolidated results of operations beginning July 1, 1999.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Assuming the transaction described above was consummated as of the beginning of the fiscal year ended June 30, 1999, and after giving effect to certain pro forma adjustments, the pro forma consolidated results of operations for the fiscal year ended June 30, 1999 would be as follows:
In addition, as a result of this acquisition, the Company disposed of a group of its own older equipment and related items that will no longer be required due to the acquired fleet having newer more fuel efficient equipment. The combined fleets resulted in operating efficiencies that allowed the Company to dispose of this excess equipment. The effect of upgrading the company's fleet through this disposition resulted in a non-cash charge of approximately $3.3 million in fiscal year 2000.
(3) NON-CASH MEMBER AND VENDOR DEVELOPMENT COSTS
Non-cash member and vendor development costs represents the fair value, at measurement date, of TruckersB2B common stock issued to strategic partners in connection with the development of its member base and product and service offerings.
(4) PROPERTY, EQUIPMENT AND LEASES
Property, Equipment and Revenue Equipment Under Capital Leases
Property and equipment consists of the following (in thousands):
Included in accumulated depreciation was $23.5 million and $21.9 million in 2000 and 1999, respectively, related to revenue equipment under capital leases.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Depreciation and amortization expense relating to property and equipment owned and revenue equipment under capital leases was $13.0 million in 2000, $12.4 million in 1999, $12.3 million in 1998.
Lease Obligations
The Company leases certain revenue and service equipment under long-term lease agreements, payable in monthly installments with interest at rates ranging from 5.3% to 8.0% per annum, maturing at various dates through 2005.
The Company leases warehouse and office space under noncancellable operating leases expiring at various dates through September 2016. Certain leases contain renewal options.
Future minimum lease payments relating to capital leases and to operating leases with initial or remaining terms in excess of one year are as follows (in thousands):
Total rental expense for operating leases is as follows (in thousands):
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
(5) BANK BORROWINGS AND LONG-TERM DEBT
The Company's outstanding borrowings consist of the following at June 30:
Lines of Credit
In August 1999, the Company completed a $60 million banking facility ("credit agreement") with ING (U.S.) Capital LLC. The arrangement includes $30 million revolving loan and a $30 million term loan. In November 1999, the Company's credit agreement was increased by $5 million to $65 million. In May 2000, the Company's credit agreement with ING was amended to reflect modifications to the Company's covenants. The modifications allowed the Company to remain in compliance with the terms and conditions of the credit agreement. On September 6, 2000, the Company's credit agreement was increased by $2 million to $67 million, primarily to finance the operations of TruckersB2B. Interest is based, at the Company's option, upon either the bank's base rate plus a margin ranging from .5% to 1.5% or the London Interbank Offered Rate plus a margin ranging from 1.5% to 2.5% depending upon performance by the Company. At June 30, 2000, the interest rate charged on outstanding borrowings was 8.8%. In addition, the Company pays a commitment fee of .5% on the unused portion of the 2000 credit agreement.
Amounts available under the credit agreement are determined based upon the Company's borrowing base, as defined. In addition, there are certain covenants which restrict, among other things, the payment of cash dividends, and require the Company to maintain certain financial ratios and certain other financial conditions. Such borrowings are secured by a significant portion of the Company's assets.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Maturities of long-term debt, assuming the Company exercises the conversion feature within its credit agreement entered into in August 1999, for the years ending June 30 are as follows (in thousands):
Other debt borrowings consist primarily of mortgage debt financing for equipment purchases.
(6) EMPLOYEE BENEFIT PLANS
401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan which permits U.S. employees of the Company to contribute up to 15% of their annual compensation, up to certain Internal Revenue Service limits. The contributions made by each employee are fully vested at all times and are not subject to forfeiture. The Company makes a matching contribution of 25% of the employee's contribution up to 5% of their annual compensation and may make additional discretionary contributions. The aggregate Company contribution may not exceed 5% of the employee's compensation. Employees vest in the Company's contribution to the plan at the rate of 20% per year from the date of contribution. Contributions made by the Company during 2000, 1999 and 1998 amounted to $173,000, $117,000 and $112,000, respectively. No discretionary contributions were made during 2000, 1999 or 1998.
Employee Stock Purchase Plan
The Company's Board of Directors authorized the sale of up to 250,000 shares of the Company's Common Stock under an employee purchase plan. The common stock, which may be treasury shares or newly issued shares, sold at a price equal to 85% of the fair market value of the shares as of the day of sale. There were approximately 197 active participants in the plan as of June 30, 2000. Participation in the plan is limited to employees who meet the eligibility requirements set forth in the plan, and executive officers of the Company may not participate. As of June 30, 2000, 85,619 shares had been purchased by employees under the Plan in open market transactions for an average price of $11.50 per share. The Company's contribution to the purchases made was $45,000 in fiscal 2000.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
(7) STOCK PLANS
Stock Options -- Celadon Group, Inc.
The Company has a Stock Option Plan ("Plan") which provides for the granting of stock options, stock appreciation rights and restricted stock awards to purchase not more than 800,000 shares of Common Stock, subject to adjustment under certain circumstances, to select management and key employees of the Company and its subsidiaries. The options have a three year vesting period.
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 No. 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 the Celadon options.
On August 11, 1999, the Company cancelled 65,000 out-of-the-money options and issued replacement options with an exercise price equal to the then-current market price of $8.00 per share. The replacement options began a three year vesting period on that date. Through June 30, 2000, the Company has accounted for these replacement options under the provisions of the Emerging Issues Task Force's ("EITF") consensus 87-33, Stock Compensation Issues Related to Market Decline. As such, no compensation expense has been recognized for the year ended June 30, 2000. However, effective July 1, 2000, the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25, supersede those of EITF consensus 87-33 with regards to these options. Under FASB Interpretation No. 44, since the replacement options were not vested at July 1, 2000, the portion of the options' intrinsic value measured at that time that is attributable to the remaining vesting period will be recognized over the future remaining vesting period. On July 1, 2000, the intrinsic value of the options was $211,000 and will be amortized the remaining vesting period of the options.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock options granted subsequent to June 30, 1995 under the fair value method of that statement. Under SFAS No. 123, total compensation expense for stock-based awards of $796,000 and $378,000 in 2000 and 1999, respectively, on a pro forma basis, would have been reflected in income on a pretax basis. 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 (in thousands) and earnings per share would have been reduced as follows:
The weighted-average per share fair value of the individual options granted during fiscal year 2000 and 1999 for Celadon is estimated as $8.28 and $6.22, respectively, on the date of grant.
The fair values of Celadon option grants for both years were determined using a Black-Scholes option-pricing model with the following weighted average assumptions:
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Stock option activity for Celadon is summarized below:
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
The following table summarizes information concerning outstanding and exercisable Celadon options at June 30, 2000:
Celadon shares exercisable at June 30, 2000 and 1999 were 227,414 and 240,726, respectively.
Stock Options - TruckersB2B, Inc.
On March 15, 2000, TruckersB2B, Celadon E-Commerce's majority owned subsidiary, adopted the 2000 Stock Option Plan ("2000 Plan"). Under the 2000 Plan, TruckersB2B is authorized to grant options for up to 1,000,000 shares of common stock to employees of TruckersB2B, Celadon, directors of TruckersB2B, and vendors. Options granted under the 2000 Plan are for periods not to exceed ten years and must be issued at prices not less than 100% of the fair market value of the stock on the date of grant as determined by the Board of Directors. Incentive stock options granted to stockholders with greater than 10% ownership of the outstanding stock are for periods not to exceed five years. Options generally vest at a rate of 5% per month, with a total of 50% vesting at the date of TruckersB2B's pending initial public offering and the other 50% vesting one year after the effective date of the pending initial public offering. In certain cases, a portion of the options vests immediately on the date of grant.
TruckersB2B 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 No. 25, because the exercise price of TruckersB2B employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized for the options. Options granted to employees from February 9, 2000 to June 30, 2000 under the 2000 Plan resulted in the recognition of approximately $459,500 in deferred stock compensation expense. TruckersB2B also entered into a tire rebate agreement with Michelin North America, Inc. (Michelin), whereby TruckersB2B issued an option to Michelin to purchase TruckersB2B stock as consideration for entering into the agreement. Because Michelin has no contractual commitment to provide products and services over the term of the agreement, TruckersB2B has recognized an additional $266,750 of expense related to this transaction.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
The weighted-average per share fair value of the individual options granted during fiscal year 2000 for TruckersB2B is estimated as $.67 on the date of the grant.
The fair value of TruckersB2B option grants for 2000 was determined using a Black-Scholes option-pricing model with the following weighted average assumptions:
For the period from February 9, 2000 (TruckersB2B's inception date) to June 30, 2000, 693,250 TruckersB2B options were granted at a weighted average exercise price of $1.00. All of these options were outstanding as of June 30, 2000.
The following table summarizes information concerning outstanding and exercisable TruckersB2B options at June 30, 2000:
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Stockholder Rights Plan
On June 28, 2000, the Company's Board of Directors approved a Stockholder Rights Plan whereby, on July 31, 2000, common stock purchase rights ("Rights") were distributed as a dividend at the rate of one Right for each share of the Company's common stock held as of the close of business on July 20, 2000. The Rights will expire on July 18, 2010. Under the plan, the Rights will be exercisable only if triggered by a person or group's acquisition of 15% or more of the Company's common stock. Each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of the Company's common shares for 50% of their market value at the time.
Following the acquisition of 15% or more of the Company's common stock by a person or group, the Board of Directors may authorize the exchange of the Rights, in whole or in part, for shares of the Company's common stock at an exchange ratio of one share for each Right, provided that at the time of such proposed exchange no person or group is then the beneficial owner of 50% or more of the Company's common stock.
Unless a 15% acquisition has occurred, the Rights may be redeemed by the Company at any time prior to the termination date of the plan.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
(8) EARNINGS PER SHARE
The following is a reconciliation of the numerators and demoninators used in computing earnings per share (in thousands):
Diluted loss per share for fiscal year 2000 does not include the anti-dilutive effect of 113 thousand stock options and other incremental shares.
(9) RELATED PARTY TRANSACTIONS
The Company, the Company's Chief Executive Officer (the "Company Executive"), and Hanseatic, a significant shareholder, are parties to a stockholders agreement. This agreement provides that, as long as Hanseatic or the Company Executive each beneficially own at least five percent of the outstanding shares of Common Stock, the Company shall use its best efforts to ensure that one member of the Company's board of directors is a designee of Hanseatic and that another member of the Company's board of directors is a designee of the Company Executive. In addition, the Company Executive and Hanseatic have agreed to vote all shares of Common Stock owned by them in favor of the election of such nominees or, upon the death of the Company Executive, for the designee of the holder of a majority of the Company Executive's shares of Common Stock on the date of death.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
On March 10, 2000, TruckersB2B sold 787,500 shares of its Class A common stock for $1 per share. Hanseatic purchased 350,000 shares, CG Asian - American Fund, L.P. ("CG Asian") purchased 350,000 shares, and Michael Miller, a Company board member, purchased 87,500 shares. CG Asian is an investment fund advised by Sycamore Management Corporation, whose President is Kilin To. Kilin To is a member of the Company's board of directors and a member of the TruckersB2B board of directors.
(10) HEDGING ACTIVITIES, COMMITMENTS AND CONTINGENCIES
The Company has outstanding commitments to purchase approximately $14.0 million of revenue equipment at June 30, 2000, which will be financed utilizing long-term lease agreements.
Standby letters of credit, not reflected in the accompanying consolidated financial statements, aggregated approximately $1.8 million at June 30, 2000.
The Company has employment and consulting agreements with various key employees providing for minimum combined annual compensation over the next two years ranging from $1.6 million in 2001 to $0.3 million in 2002.
There are various claims, lawsuits and pending actions against the Company and its subsidiaries in the normal course of the operations of its businesses. 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.
The Company had a lawsuit by the State of Texas for Interstate Motor Carrier Sales and Use Tax for the period from April 1988 through June 1992. Subsequent to June 30, 2000, this lawsuit was settled. The result of this settlement was reflected in the June 30, 2000 financial statements and did not have a material impact on the Company's financial condition or results of operations.
The Company has a lawsuit filed by Reliance National Indemnity Company ("Reliance") relating to two truckers liability insurance policies. The Company disagrees with Reliance and intends to vigorously defend this lawsuit. This case is in the very early stages, and to date, no formal discovery has been completed. While there can be no certainty as to the outcome, the Company believes that the ultimate resolution of this matter will not have a material adverse effect on its consolidated financial position.
The Company purchases the majority of its fuel through a network of approximately 120 fuel stops throughout the United States and Canada. The Company has negotiated discounted pricing based on certain volume commitments with these fuel stops. Bulk fueling facilities are maintained in Indianapolis, Laredo and Kitchener, Ontario to further reduce fuel costs.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Shortages of fuel, increases in fuel prices or rationing of petroleum products can have a materially adverse effect on the operations and profitability of the Company. The Company cannot predict whether high fuel price levels will continue in the future or the extent to which fuel surcharges will be collected to offset such increases. During the years ended June 30, 1999 and 1998, a loss of $996,000 and $997,000, respectively, on futures contracts and commodity collar transactions were included in fuel expense. At June 30, 2000, the Company had no derivative financial instruments to reduce its exposure to fuel price fluctuations.
The Company is a party to routine litigation incidentals to its business, primarily involving claims for bodily injury or property damage incurred in the transportation of freight. The Company is responsible for the safe delivery of cargo. Since April 2000, the Company is responsible for liability claims up to $1 million, plus administrative expenses, for each occurrence involving personal injury or property damage. The Company is self insuring its physical damage losses and up to $150,000 for workers compensation losses and up to $25,000 for cargo claims. The Company maintains separate insurance in Mexico consisting of bodily injury and property damage coverage with minimum deductibles. Management believes its uninsured exposure is reasonable for the transportation industry. Consequently, the Company does not believe that the litigation and claims experienced will have a material impact on the Company's financial position or results of operations.
Between February 29, 2000 and April 11, 2000, TruckersB2B entered into two vendor agreements to provide transaction processing services and assist in the enrollment of members. Under the terms of these agreements, the vendors are entitled to earn up to 1,000,000 shares of TruckersB2B's Class A common stock in exchange for the enrollment of members in the TruckersB2B network of participating trucking companies, as stipulated in the agreements. As of June 30, 2000, 200,000 shares pursuant to these agreements have been earned. These transactions are valued at the fair value of the underlying shares as of the date that the specified performance commitments have been met, and recognized as a non-cash member and vendor development cost in the statement of operations at that time. If these vendors do not meet the thresholds outlined in the agreements prior to December 31, 2000, TruckersB2B's obligation to issue the shares will expire.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
(11) INCOME TAXES
The income tax provision for operations in 2000, 1999 and 1998 consisted of the following (in thousands):
No provision is made for U.S. federal income taxes on undistributed earnings of foreign subsidiaries of approximately $5.2 million at June 30, 2000, as management intends to permanently reinvest such earnings in the Company's operations in the respective foreign countries where earned.
The Company's effective tax rate on income (loss) differs from the statutory federal tax rate as follows:
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2000 and 1999 consisted of the following (in thousands):
As of June 30, 2000, the Company had approximately $5.4 million of net operating loss carryforwards with expiration dates through 2015.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
(12) SUPPLEMENTAL CASH FLOW INFORMATION
In 2000, 1999 and 1998, capital lease obligations and debt financing in the amount of $13.2 million, $8.1 million and $37.5 million, respectively, were incurred in connection with the purchase of, or option to purchase, revenue equipment and tires in service.
For 2000, 1999 and 1998, the Company made interest payments of $9.7 million, $7.4 million and $6.3 million, respectively.
For 2000, 1999 and 1998, the Company made income tax payments of $1.7 million, $1.1 million, and $1.1 million, respectively.
(13) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in two segments, transportation and e-commerce. The Company generates revenue, in the transportation segment, providing truckload hauling services through its subsidiaries, CTSI, Jaguar, Gerth, Zipp and Cheetah. The Company began providing certain services over the internet through its e-commerce subsidiary TruckersB2B in the last half of fiscal year 2000. The e-commerce segment generates revenue by providing discounted fuel, tires, and other products and services to small and medium-sized trucking companies. The Company evaluates the performance of its operating segments based on operating income (loss). As the e-commerce segment began in fiscal year 2000, there is no reportable information for this segment for fiscal year 1999 and 1998 (all numbers in thousands).
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
Information as to the Company's operations by geographic area is summarized below (in thousands):
The Company's largest customer is DaimlerChrysler, which accounted for approximately 24%, 25%, and 37% of the Company's total revenue for fiscal 2000, 1999, and 1998, respectively. The Company transports DaimlerChrysler original equipment automotive parts primarily between the United States and Mexico and DaimlerChrysler after-market replacement parts and accessories within the United States. The Company's most recent agreements with DaimlerChrysler are covered by three agreements: (a) an agreement for international freight with the Chrysler division which expires in December 2000, (b) a domestic agreement with the Chrysler division which expires in October 2000, and (c) an international contract with the Freightliner division, which expires in April 2001. The two Chrysler division agreements accounted for approximately 22%, 22%, and 37% of the company's total revenue for fiscal 2000, 1999, and 1998, respectively. The Freightliner division contract accounted for approximately 2% and 3% of the Company's total revenue for fiscal 2000 and 1999, respectively. No other customer accounted for more than 10% of the Company's total revenue during any of its three most recent fiscal years.
CELADON GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 2000
(14) SELECTED QUARTERLY DATA (UNAUDITED)
Summarized quarterly data for fiscal 2000 and 1999 follows (in thousands except per share amounts):
The effect of stock options for the quarters with net losses is antidilutive because of the net loss. In these cases, the diluted per share amounts equal the basic per share amounts.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There were no changes in or disagreements with accountants on accounting or financial disclosures within the last three fiscal years.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive Proxy Statement to be filed in connection with the 2000 Annual Meeting of Stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive Proxy Statement to be filed in connection with the 2000 Annual Meeting of Stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's definitive Proxy Statement to be filed in connection with the 2000 Annual Meeting of Stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive Proxy Statement to be filed in connection with the 2000 Annual Meeting of Stockholders.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
All other Financial Statements Schedules have been omitted because they are not required or are not applicable.
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K).
----------------- *Confidential treatment for portions of this Exhibit has been granted pursuant to Rule 24b-2 of the Securities Exchange Act of 1934.
(4) REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed during the three months ended June 30, 2000.
(5) EXHIBITS.
The exhibits required to be filed with this Annual Report on Form-10-K pursuant to Item 601 of Regulation S-K are listed under "Exhibits" in Part IV, Item 14(a)(3) of this Annual Report on Form 10-K, and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 this September 28, 2000.
Celadon Group, Inc.
By: /s/ Stephen Russell ------------------------------- STEPHEN RUSSELL CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SCHEDULE II
CELADON GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2000, 1999, AND 1998
- ------------------- (a) Represents accounts receivable write-offs. (b) Represents claims paid. (c) Represents allowances for doubtful accounts of acquired companies at dates of acquisitions.
CELADON GROUP, INC. FORM 10-K
TABLE OF EXHIBITS