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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1998
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 13-3361050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Celadon Drive
Indianapolis, IN 46235-4207
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (317) 972-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
-- --
The number of shares outstanding of the Common Stock ($.033 par value) of the
Registrant as of the close of business on November 13, 1998 was 7,726,989.
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CELADON GROUP, INC.
Index to
September 30, 1998 Form 10-Q
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets at September 30, 1998
and June 30, 1998...................................................................3
Condensed consolidated statements of operations - For the three months
ended September 30, 1998 and 1997...................................................4
Condensed consolidated statements of comprehensive income - For the three
months ended September 30, 1998 and 1997............................................5
Condensed consolidated statements of cash flows - For the three months ended
September 30, 1998 and 1997.........................................................6
Notes to condensed consolidated financial statements ...............................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................13
Part II. Other Information
Item 5. Other........................................................................18
Item 6. Exhibits and Reports on Form 8-K.............................................18
</TABLE>
2
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Part I - Financial Information
CELADON GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
----- ----
(unaudited)
A S S E T S
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 344 $ 2,537
Trade receivables, net of allowance......................................... 40,288 39,063
Accounts receivable - other................................................. 4,744 4,382
Prepaid expenses and other current assets................................... 5,408 5,018
Tires in service ........................................................... 4,017 3,555
Income tax recoverable...................................................... 975 960
Current portion of notes receivable......................................... 575 683
Deferred income tax assets ................................................. 6,385 7,056
-------- --------
Total current assets .................................................. 62,736 63,254
-------- --------
Property and equipment, at cost ................................................ 154,614 150,535
Less accumulated depreciation and amortization.............................. 38,687 35,476
-------- --------
Net property and equipment............................................. 115,927 115,059
-------- --------
Deposits ....................................................................... 459 496
Tires in service ............................................................... 2,171 2,000
Notes receivable, net of current portion........................................ 575 719
Intangible assets............................................................... 594 625
Goodwill, net of accumulated amortization....................................... 11,346 11,469
Other assets.................................................................... 1,251 1,155
-------- --------
Total assets........................................................... $195,059 $194,777
======== ========
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............................................................ $ 3,426 $ 6,469
Accrued expenses ........................................................... 19,331 18,301
Bank borrowings and current maturities of long-term debt.................... 3,431 3,508
Current maturities of capital lease obligations............................. 17,910 16,949
-------- --------
Total current liabilities.............................................. 44,098 45,227
-------- --------
Long-term debt, net of current maturities ...................................... 21,272 16,873
Capital lease obligations, net of current maturities............................ 61,563 65,970
Deferred income tax ........................................................... 14,658 14,373
-------- --------
Total liabilities...................................................... 141,591 142,443
-------- --------
Minority interest............................................................... 12 12
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 179,985 shares, issued and
outstanding zero shares............................................... --- ---
Common stock, $.033 par value, authorized 12,000,000 shares; issued
7,786,430 shares at September 30, 1998 and June 30, 1998 ............. 257 257
Additional paid-in capital.................................................. 56,667 56,664
Retained earnings (deficit)................................................. (1,990) (3,522)
Accumulated comprehensive income............................................ (923) (475)
Treasury stock, at cost, 59,441 and 64,441 shares at September 30, 1998
and June 30, 1998 respectively............................................ (555) (602)
-------- --------
Total stockholders' equity............................................. 53,456 52,322
-------- --------
Total liabilities and stockholders' equity............................. $195,059 $194,777
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Operating revenue.................................................... $72,113 $51,844
------- -------
Operating expenses:
Salaries, wages and employee benefits............................ 19,190 17,481
Fuel............................................................. 6,954 7,289
Operating costs and supplies..................................... 6,588 3,986
Insurance and claims............................................. 1,569 1,577
Depreciation and amortization.................................... 3,499 2,956
Rent and purchased transportation ............................... 25,141 10,957
Professional and consulting fees................................. 305 415
Communications and utilities..................................... 1,004 780
Permits, licenses and taxes .................................... 1,344 861
Selling expenses................................................. 1,020 854
General and administrative....................................... 1,136 665
------- -------
Total operating expenses....................................... 67,750 47,821
------- -------
Operating income .............................................. 4,363 4,023
------- -------
Other (income) expense:
Interest income.................................................. (95) ---
Interest expense................................................. 1,995 1,284
Other expense.................................................... 6 ---
------- -------
Income before income taxes....................................... 2,457 2,739
Provisions for income taxes...................................... 925 1,068
------- -------
Net income..................................................... $1,532 $1,671
======= =======
Earnings per common share:
Diluted and basic earnings per share........................... $0.20 $0.22
Average shares outstanding:
Diluted........................................................ 7,851,186 7,708,063
Basic.......................................................... 7,726,663 7,622,580
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Net income....................................................... $ 1,532 $ 1,671
Other comprehensive income (expense)............................. (448) 31
-------- -------
Comprehensive income............................................. $ 1,084 $ 1,702
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Continuing Operations:
Cash flows from operating activities:
Net income............................................................. $ 1,532 $1,671
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................................... 3,499 2,956
Provision for deferred income taxes................................... 284 808
Provision for doubtful accounts....................................... 187 68
Changes in assets and liabilities:
Trade receivables.................................................. (1,412) 2,974
Accounts receivable -- other....................................... (362) (168)
Income tax recoverable............................................. 656 414
Tires in service................................................... (633) (293)
Prepaid expenses and other current assets......................... (390) (292)
Other assets....................................................... (115) 116
Accounts payable and accrued expenses.............................. (2,013) (1,350)
------- -------
Net cash provided by operating activities............................. 1,233 6,904
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment............................. 676
Purchase of property and equipment....................................... (5,134) (1,174)
Purchase of business, net of cash........................................ --- (4,566)
Disposals of property and equipment...................................... 68 223
(Increase) Decrease in deposits.......................................... 37 (3)
------- -------
Net cash used for investing activities............................... (4,353) (5,520)
Cash flows from financing activities:
Proceeds from issuances of common stock.................................. 51 ---
Proceeds from bank borrowings and debt................................... 6,553 1,202
Payments of bank borrowings and debt .................................... (2,231) ---
Principal payments under capital lease obligations....................... (3,446) (2,833)
------- -------
Net cash provided by (used for) financing activities ................. 927 (1,631)
------- -------
Decrease in cash and cash equivalents.................................... (2,193) (247)
Cash and cash equivalents at beginning of period......................... 2,537 1,845
------- -------
Cash and cash equivalents at end of period............................... $344 $1,598
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and the general instructions to Form 10-Q of
Regulation S-X. Accordingly, they do not include certain information and note
disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the consolidated
financial statements and notes thereto of Celadon Group, Inc. (the "Company")
for the years ended June 30, 1998, 1997 and 1996 included in the Company's Form
10-K and annual report to stockholders.
The unaudited interim financial statements reflect all adjustments (all
of a normal recurring nature) which management considers necessary for a fair
presentation of the financial condition and results of operations for these
periods. The results of operations for the interim period are not necessarily
indicative of the results that may be reported for the full year.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(2) Segment and Geographical Information; Significant Customer
The Company's operations consist of two divisions: van and flatbed, and
the Company generates revenue from its operations in the United States, Canada
and Mexico. Revenue from Chrysler accounts for a significant amount of the
Company's total revenue.
7
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CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Dollars in thousands)
(Unaudited)
Information as to the Company's operations by division is summarized below (in
thousands):
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Operating revenue:
Van.............................................. $65,727 $45,456
Flatbed ......................................... 6,386 6,388
-------- --------
Total Revenue............................... $72,113 $51,844
======== ========
Operating income:
Van ............................................ $4,049 $3,771
Flatbed ......................................... 314 252
-------- --------
Total operating income...................... 4,363 4,023
Interest expense, (net).......................... 1,900 1,284
Other expense ................................... 6 ---
-------- --------
Net income before income taxes................... $2,457 $2,739
======== ========
Total assets:
Van ............................................ $184,592 $136,787
Flatbed ......................................... 8,697 8,510
-------- --------
Total from operating divisions.............. 193,289 145,297
Discontinued operations ......................... 1,770 5,482
-------- --------
Total....................................... $195,059 $150,779
======== ========
Capital expenditures (including capital leases):
Van ............................................ $5,134 $8,851
Flatbed ......................................... --- 122
-------- --------
Total....................................... $5,134 $8,973
======== ========
Depreciation and amortization:
Van ............................................ $3,439 $2,896
Flatbed ......................................... 60 60
-------- --------
Total....................................... $3,499 $2,956
======== ========
</TABLE>
8
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CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED STATEMENTS -- (CONTINUED)
(Dollar amounts in thousands)
(Unaudited)
Information as to the Company's operations by geographic area is summarized
below (in thousands):
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Operating revenue
United States................. $56,753 $49,777
Canada (i).................... 12,044 ----
Mexico (ii)................... 3,316 2,067
-------- --------
Total ................... $72,113 $51,844
======== ========
Income (loss) before income taxes
United States................. $1,277 $2,589
Canada (i).................... 843 ----
Mexico (ii)................... 337 150
-------- --------
Total ............... $2,457 $2,739
======== ========
Total assets
United States................. $174,782 $141,746
Canada (i).................... 14,835 ----
Mexico (ii)................... 4,316 2,265
Europe (iii).................. 1,126 1,286
-------- --------
Total................... $195,059 $145,297
======== ========
</TABLE>
- ----------
(i) Relates to the Company's van operations in Canada.
(ii) Relates to the Company's van operations in Mexico.
(iii) Relates to the Company's discontinued freight forwarding operations based
in the United Kingdom.
Significant Customer:
Revenue from Chrysler accounted for approximately 24% and 39% of the
Company's total revenue for the three months ended September 30, 1998 and 1997,
respectively. The Company transports Chrysler after-market replacement parts and
accessories within the United States and Chrysler original equipment automotive
parts primarily between the United States and the Mexican border, which
accounted for 28% and 72%, respectively, of the Company's revenue from Chrysler
for the three months ended September 30, 1998 and 26% and 74%, respectively, of
the Company's revenue from Chrysler for the three months ended September 30,
1997. Chrysler business is covered by two agreements, one of which covers the
United States-Mexico business and the other of which covers domestic business.
The international contract expires on December 31, 1999. The contract applicable
to domestic business expires October 1, 2000. Historically, these contracts have
been renewed upon expiration.
9
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CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1998
(Unaudited)
Revenue from General Electric accounted for approximately 6% of the
Company's total revenue for the three months ended September 30, 1998. In
conjunction with the General Electric Transportation Services ("GETS")
acquisition, the Company obtained a five year contract covering all loads
shipped for General Electric Industrial Control Systems ("GEICS"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisition History".
(3) Income Taxes
The Company's effective tax rate differs from the statutory federal tax
rate of 35% due to state income taxes and certain expenses which are not
deductible for income tax purposes. The effective tax rates for continuing
operations for the three months ending September 30, 1998 and 1997 were 38% and
39%, respectively.
(4) Hedging Activities, Commitments and Contingencies
The Company has outstanding commitments to purchase approximately $17.7
million of revenue equipment at September 30, 1998.
Standby letters of credit, not reflected in the accompanying
consolidated financial statements, aggregated approximately $2.5 million at
September 30, 1998.
The Company, from time-to-time, enters into arrangements to protect
against fluctuations in the price of the fuel used by its trucks. As of
September 30, 1998, the Company had contracts to purchase fuel for future
delivery in the months of October 1998 through May 1999. These contracts
represent approximately 17% of the anticipated fuel requirements for those
months. Additionally, the Company periodically acquires exchange-traded
petroleum futures contracts and engages in various commodity collar
transactions. Gains and losses on transactions, not designated as hedges, are
recognized based on market value at the date of the financial statements.
Transactions designated as hedges and therefore not marked-to-market value had a
negative value of $195,000. The current and future delivery prices of fuel are
monitored closely and transaction positions are adjusted accordingly. Total
commitments are also monitored to ensure they will not exceed actual fuel
requirements in any period. During the quarters ended September 30, 1998 and
1997, a loss of $267,000 and a gain of $174,000, respectively, on futures
contracts and commodity collar transactions were included in fuel expense. To
the extent that company hedges portions of its fuel purchases, it may not fully
benefit from market decreases in fuel prices.
There are various claims, lawsuits and pending actions against the
Company and its subsidiaries incidental to the operation 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.
10
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CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1998
(Unaudited)
The Company has been assessed approximately $750,000 by the State of
Texas for Interstate Motor Carrier Sales and Use Tax for the period from April
1988 through June 1992. The Company disagrees with the State of Texas over the
method used by the state in computing such taxes and intends to vigorously
pursue all of its available remedies. On October 30, 1996, the company made a
payment of $1.1 million, under protest, which includes interest to the date of
payment and enables the Company to pursue resolution of the matter with the
State of Texas Attorney General. In fiscal 1997, the Company filed its Original
Petition against representatives of the State of Texas. The state responded and
denied the Company's claims. As of September 30, 1998, the parties to the
litigation were exchanging discovery requests and documentation. The Company has
accrued an amount that management estimates is due based upon methods they
believe are appropriate. 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.
Two litigations have been filed by the same law firm in the Delaware
Court of chancery in and for New Castle County (David Finkelstein v. Stephen
Russell et al. (The "Finkelstein Action") and Lila Gold and Jocelyn Feuerstein
v. Stephen Russell et al. (The "Gold Action") (civil action nos. 16480NC and
16481NC, respectively)) challenging the proposed merger (the "Merger") of the
Company and Laredo Acquisition Corp. ("Laredo"), a newly-formed wholly owned
subsidiary of Odyssey Investment Partners, pursuant to the Agreement and Plan of
Merger, dated as of June 23, 1998, by and between the Company and Laredo. Upon
the effectiveness of the Merger, Laredo will be merged with and into the
Company, the separate corporate existence of Laredo shall cease and the Company
shall continue as the surviving corporation. In sum, these putative class
actions allege that the $20.00 per share to be paid to stockholders pursuant to
the Merger would permit management of the Company to acquire the public shares
of for less than fair and adequate consideration because, inter alia, the
intrinsic value of the Company's Common Stock is claimed to be (an unspecified
amount) higher. The Cash Merger Price (as defined in the Merger Agreement)
allegedly does not provide an adequate premium to the public stockholders of the
Company and the Cash Merger Price is supposedly arbitrary, not the result of
arm's length negotiations and reached without "shopping" the Company or taking
other (unspecified) steps to ascertain the best price for the Company. Both
actions named the Company and its directors and claim that the individual
defendants breached their fiduciary duties to the Company and its stockholders.
Odyssey Investment Partners, LLC is also named in the Finkelstein Action. The
complaints seek certification of the class, certain injunctive and declaratory
relief, recision of the Merger if it is consummated, and unspecified money
damages and costs. No answer has yet been filed to these complaints. The Company
intends to defend these suits vigorously. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments".
11
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CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1998
(Dollar amounts in thousands)
(Unaudited)
(5) Pending Merger
On June 23, 1998 the Company entered into the Agreement and Plan of
Merger (the "Merger Agreement"), dated as of June 23, 1998, by and between the
Company and Laredo Acquisition Corp. ("Laredo"), a newly-formed wholly-owned
subsidiary of Odyssey Investment Partners, pursuant to which Laredo will be
merged with and into the Company (the "Merger"). Upon effectiveness of the
Merger, the separate corporate existence of Laredo shall cease and the Company
will continue as the surviving corporation (the "Surviving Corporation"). In
connection with the Merger, except as described below, each share of common
stock, par value $0.033, of the Company issued and outstanding immediately prior
to the consummation of the Merger will be converted into the right to receive
$20.00, subject to the right of a holder to exercise dissenter's rights. Certain
of the Company's current officers and stockholders will retain an aggregate of
320,000 shares of the Company's common stock currently held by them in lieu of
receiving the merger consideration. These shares will, upon the effectiveness of
the Merger, be converted into the right to receive one share of common stock of
the Surviving Corporation in the Merger. The affirmative vote of a majority of
the outstanding shares of the Company's common stock is required to consummate
the Merger.
(6) Recent Developments
The Company announced on September 18, 1998 that it had received written
notice from Laredo to the effect that the institution (Bankers Trust
Corporation) that is to provide $125,000,000 in bridge financing for the Merger
had concluded as of September 15, 1998, that under current market conditions, it
would not be obligated to provide the financing contemplated by the merger
Agreement and the commitment letter issued to Laredo with respect thereto.
However, Bankers Trust Corporation noted that the conditions to funding
contemplated by its commitment letter need only be satisfied on the date of
request for funds and that its commitment letter had not been terminated or
otherwise modified. If no amounts have yet been funded thereunder, the
commitment letter with respect to financing for the merger will terminate in
accordance with its terms on November 30, 1998. Laredo would not be obligated to
close the Merger if financing were not available.
(7) Supplemental Cash Flow Information
During the three months ended September 30, 1998 and September 30, 1997
obligations in the amount of $3.5 million and $7.0 million, respectively, were
incurred in connection with the purchase of, or option to purchase, revenue
equipment and the associated tires in service.
During the three months ended September 30, 1998 and September 30, 1997,
the Company made interest payments of $1.5 million and $0.7 million,
respectively.
12
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Item 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This Report on Form 10-Q contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such comments
are based upon information currently available to management and management's
perception thereof as of the date of this report being filed. Actual results of
the Company's operations could materially differ from those forward looking
statements. Such differences could be caused by a number of factors including,
but not limited to, potential adverse affects of regulation and litigation;
changes in competition and the effects of such changes; increased competition;
change in fuel prices; changes in economic, political or regulatory
environments; changes in the availability of a stable labor force; ability of
the Company to hire drivers meeting Company standards; changes in management
strategies; environmental or tax matters; viability to obtain and implement year
2000 ("Y2K") hardware and software; and risks described from time to time in
reports filed by the Company with the Securities and Exchange Commission.
Readers should take these factors into account in evaluating any such forward
looking statements.
Acquisition History
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 GEICS for
a five-year period. GETS had approximately $28.0 million in sales in calendar
1996, most of which were generated within the Company's shipping routes. 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.
The Company believes that Gerth is the leading Canadian truckload carrier to
Mexico, having 301 tractors and 817 trailers as of June 30, 1998, and
approximately $31.0 million of revenue in calendar 1997. The Company believes
that this acquisition will strengthen its presence in Canada and provide
additional density in its core north-south transport lanes.
Results of Operations
Three months ended September 30, 1998 compared with the three months ended
September 30, 1997
Revenue. Consolidated revenue increased by $20.3 million or 39.1%, to
$72.1 million for fiscal 1999 from $51.8 million for fiscal 1998.
Revenue from the van division, which includes the operations of CTSI, the
Company's largest business unit, as well as those of its Mexican subsidiary,
Jaguar, and its Canadian subsidiary, Gerth, increased by $20.3 million or 44.6%,
to $65.7 million in fiscal 1999 from $45.5 million in fiscal 1998. This increase
in revenue was due to the acquired operations, as well as an increase in rate
per mile and billings to customers for the
13
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<PAGE>
Mexican portion of their transportation. The increase in rates reflected price
increases and the Company's continued efforts to focus on its core routes as
well as an improvement in the Company's overall business mix. The number of
tractors operated by the van division increased to 1,934 at September 30, 1998,
compared to 1,587 at September 30, 1997.
Revenue for the flatbed division, which operates under the name of
Cheetah Transportation Company (Cheetah), was unchanged at $6.4 million. The
number of owner-operated tractors in Cheetah's network was 252 at September 30,
1998 compared to 268 at September 30, 1997. Approximately 20 owner-operators
transferred from Cheetah to CTSI in September 1998.
Operating Income. Operating income increased by $0.3 million or 8.5%, to
$4.4 million in fiscal 1999 from $4.0 million in fiscal 1998. The Company's
operating ratio, which expresses operating expenses as a percentage of operating
revenue, decreased from 92.2% in fiscal 1998 to 93.9% in fiscal 1999.
Operating income within the van division increased by $0.3 million or
7.4%, to $4.0 million in fiscal 1999 from $3.8 million in fiscal 1998. The van
division's operating ratio increased from 91.7% in fiscal 1998 to 93.8% in
fiscal 1999. The increase in operating income was due to volume, and the
increase in the operating ratio was attributable to an increase in the mix of
capacity toward owner operators, the cost associated with Mexican transportation
and an increase in maintenance expense.
Operating income within the flatbed division increased by $0.1 million or
24.6%, to $0.3 million in fiscal 1999 from $0.2 million in fiscal 1998. The
flatbed division's operating ratio decreased from 96.1% to 95.1%, as the
business mix during the current quarter allowed more favorable margin
attainment.
Net Interest Expense. Net interest expense increased by $0.6 million or
46.2%, to $1.9 million in fiscal 1999 from $1.3 million in fiscal 1998. The
increase was the result of the conversion of operating leases to capitalized
leases and an increase in borrowings under the Company's credit facilities.
Income Taxes. Income taxes decreased by $0.1 million or 13.4%, to $0.9
million in fiscal 1999 from $1.1 million in fiscal 1998. The decrease in income
tax expense reflects the Company's lower pre-tax income partially offset by a
reduction in the Company's effective tax rate to 38% in fiscal 1999 from 39% in
fiscal 1998.
Liquidity and Capital Resources
The Company generated $1.2 million and $6.9 million in cash from
operating activities for periods ended September 30, 1998 and September 30,
1997. In fiscal 1999, the decrease is primarily attributable to an increase in
accounts receivable resulting from the acquisition of Gerth. Capital
expenditures (including the value of equipment procured under capital leases)
totaled $5.1 million and $8.9 million in fiscal 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.
At September 30, 1998, the Company had a credit facility aggregating
$32.4 million. At September 30, 1998, $17.6 million was utilized as outstanding
borrowings and $2.5 million was utilized for standby letters of credit.
14
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<PAGE>
The Company has financed its capital requirements by obtaining lease
financing on revenue equipment. At September 30, 1998, the Company had an
aggregate of $79.4 million in capital lease financing at interest rates ranging
from 5.7% to 10.6%, maturing at various dates through 2004. Of this amount,
$17.9 million is due prior to September 30, 1999.
As of September 30, 1998, the Company had 199 tractors on order for
delivery in fiscal 1999 and 2000. 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, severe winter weather 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 negatively impact the Company's operations in any
particular period.
Inflation
Many of the Company's operating expenses, including fuel costs and fuel
taxes, are sensitive to the effects of inflation, which could result in higher
operating costs. The effects of inflation on the Company's business during
fiscal 1999 and 1998 were not significant.
Recent Accounting Pronouncements
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Under the
provisions of this statement, the Company has included a financial statement
presentation of comprehensive income to conform to these new requirements. SFAS
No. 130 requires the Company to record all foreign currency translation
adjustments to comprehensive income, which prior to adoption were reported
separately in stockholders' equity. As a consequence of this change, certain
reclassifications will be necessary to previously reported amounts to achieve
the required presentation of comprehensive income. Implementation of this
disclosure standard did not affect the Company's financial position or results
of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information,
was issued. The statement must be adopted by the Company on June 30, 1999. Under
provisions of this statement, the Company will be required to modify or expand
the financial statement disclosures for operating segments, products and
services, and geographic areas. Implementation of this disclosure standard will
not affect the Company's financial position or results of operations.
15
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<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. 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.
Impact of the Year 2000
An issue exists for all companies that rely on computers as the year 2000
approaches. The "Year 2000" problem is the result of the past practice in the
computer industry of using two digits rather than four to identify the
applicable year. This practice will result in incorrect results when computers
perform arithmetic operations, comparisons or data field sorting involving years
later than 1999. In an effort to assess its state of readiness for the
technological challenges posed by the Year 2000 problem the Company has
performed a complete inventory assessment of both its information technology
("IT") and non-IT systems. In assessing its level of readiness the Company
considered the following to be the most important factors: (i) the level of
compliance of the Company's central computer systems; (ii) the level of
compliance of the software used in the Company's ongoing operations; (iii) the
level of readiness of the Company's largest vendors; (iv) the level of readiness
of the Company's largest customers; and (v) the level of compliance of the
Company's non-IT systems. The Company's non-IT systems are Year 2000 compliant
in all material respects.
The Company's central computer systems are Year 2000 compliant, with the
exception of minimal numbers of obsolete desktop personal computers ("PC's").
Obsolete PC's are routinely replaced with newer models by the Company as part of
its ongoing technology maintenance. The Company relies on prepackaged,
non-modified software programs for approximately 95% of its software needs. Most
of these software programs are currently Year 2000 compliant, and upgrades are
available for those software programs used by the Company that are not currently
compliant. Upgrades on non-compliant software programs will be performed as an
integral part of the Company's routine software upgrade program. The costs
associated with the upgrades are included in the annual software support
payments made by the Company to its software vendors.
While the Company has taken steps to encourage its suppliers and
customers to become Year 2000 compliant in a timely manner, there can be no
assurances that such customers and suppliers will be Year 2000 compliant. The
Company has contacted its suppliers with respect to the Year 2000 problem and
has received certifications from most of its suppliers indicating that they have
taken, or will on a timely basis take, such measures as are necessary to become
Year 2000 compliant. Failure of the Company's suppliers to become Year 2000
compliant on a timely basis may cause the Company to utilize more labor
intensive means to place orders and make payments.
The Company's largest customer, Chrysler, is currently doing business
with the Company using Year 2000 compliant technology for the exchange of load
tendering and shipment status information. However, the Company's electronic
invoice system, through which it provides electronic billing for several of its
customers including Chrysler, is not yet Year 2000 compliant. The Company has
taken steps to insure that its electronic billing system will be Year 2000
compliant. However, in the event that the Company's electronic invoicing system
were to fail, the Company would use its standard invoicing system, which
provides for the printing and mailing of customer invoices, in place of the
electronic billing format. The Company currently uses its standard invoicing
system, which is Year 2000 compliant, to bill the majority of its customers. If
it became necessary for the Company to use its standard invoicing system to
provide billing for all of its customers, the Company might incur increased
administrative costs resulting from the need for additional clerical staff.
16
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The Company does not yet know the extent to which its customers, other
than Chrysler, have completed or initiated Year 2000 remediation programs. In
the event that the Company's customers do not install Year 2000 compliant
systems, the Company may need additional clerical staff to perform certain
tasks, such as order entry and cash posting, and to provide the information
currently provided to customers electronically.
Notwithstanding any of the foregoing, there can be no assurance that the
Company will not have to bear additional costs and expense in the future related
to the Year 2000 problem.
Recent Developments
On June 23, 1998, the Company and Laredo entered into the Merger
Agreement, which contemplates the merger of Laredo with and into the Company at
the effective time. Pursuant to the terms of the Merger Agreement, each
stockholder of the Company shall receive $20.00 per share of Company Common
Stock held by such stockholder upon consummation of the Merger. On September 18,
1998, the company announced that it had received written notice from Laredo
that, as of September 15, 1998, the institution that is to provide the bridge
financing for the Merger believed that it was not obligated to provide such
financing due to the market conditions existing at that time. Laredo would have
no obligation to consummate the Merger if financing were not available. As a
result of the information available to the Company, including, without
limitation, the notice from BT and the Company's understanding of current market
conditions, the Company believes it is highly unlikely that the Merger will be
consummated at the Cash Merger Price. Notwithstanding the Company's belief as to
the likelihood that the Merger will be consummated, the Company is proceeding to
take the actions required to close the Merger, including the mailing of this
Proxy Statement and obtaining stockholder approval of the Merger at a special
meeting of the stockholders scheduled to be held on November 30, 1998 (the
"Special Meeting"). However, even if the Company's stockholders adopt and
approve the Merger Agreement, there can be no assurance that the Merger will be
consummated. See Notes 5 and 6 to the condensed consolidated financial
statements included as part of this quarterly Form 10-Q report.
17
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Part II - Other Information
Item 5. Other
On November 9, 1998, the Company solicited proxies for a special meeting
of stockholders to be held at the Celadon Headquarters, One Celadon Drive, 9503
East 33rd Street, Indianapolis, Indiana 46235 on Monday, November 30, 1998 at
10:00 am (local time) for stockholders of record as of October 22, 1998. At the
special meeting the Company's stockholders will be asked to consider and vote
upon (i) a proposal to approve and adopt the Merger Agreement and (ii) a
proposal to adjourn or postpone the special meeting in the event that the number
of proxies obtained is not sufficient to insure approval and adoption of the
Merger Agreement.
<TABLE>
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit 11 - Computation of per share earnings
Exhibit 27 - Financial Data Schedule
(b) Form 8-K None
</TABLE>
18
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Celadon Group, Inc.
(Registrant)
/s/ Stephen Russell
----------------------------------------
Stephen Russell, Chief Executive Officer
/s/ Robert Goldberg
----------------------------------------
Robert Goldberg, Executive Vice President
Chief Financial Officer
Date: November 13, 1998
19
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EXHIBIT 11
CELADON GROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the three months ended
September 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Numerator:
Net Income........................................ $1,532,000 $1,670,727
---------- ----------
Numerator for basic and
diluted earnings per share........................ $1,532,000 $1,670,727
Denominator:
Denominator for basic earnings
per share-weighted-average shares................. 7,726,663 7,622,580
Effect of dilutive securities:
Employee stock options............................ 120,125 67,220
Warrants ......................................... 4,398 18,263
---------- -----------
Dilutive potential common shares...................... 124,523 85,483
Denominator for diluated earnings
per share-adjusted weighted-
average shares and assumed
conversions....................................... 7,851,186 7,708,063
========== ===========
Basic earnings per share.............................. $0.20 $0.22
========== ===========
Diluted earnings per share............................ $0.20 $0.22
========== ===========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Celadon Group, Inc. at
September 30, 1998 and the condensed consolidated statement of
operations of Celadon Group, Inc. for the quarter then ended and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 344
<SECURITIES> 0
<RECEIVABLES> 40,857
<ALLOWANCES> 629
<INVENTORY> 0
<CURRENT-ASSETS> 62,736
<PP&E> 154,614
<DEPRECIATION> (38,687)
<TOTAL-ASSETS> 195,059
<CURRENT-LIABILITIES> 44,098
<BONDS> 104,176
0
0
<COMMON> 257
<OTHER-SE> 53,199
<TOTAL-LIABILITY-AND-EQUITY> 195,059
<SALES> 0
<TOTAL-REVENUES> 72,113
<CGS> 0
<TOTAL-COSTS> 67,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,900
<INCOME-PRETAX> 2,457
<INCOME-TAX> 925
<INCOME-CONTINUING> 1,532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,532
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
