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 quarterly period ended April 3, 2004
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number 000-50485
Central Freight Lines, Inc.
(Exact name of registrant as specified in its charter)
Nevada 74-2914331
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 West Waco Drive, Waco, TX 76710
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(254) 772-2120
Not applicable
(Former name or former address, if changed since the last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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. X Yes No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. -- Yes X No
The number of shares of common stock outstanding at May 5, 2004 was 17,781,195.
1
Central Freight Lines, Inc.
Form 10-Q
Quarter ended April 3, 2004
Table of Contents
Page Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of April 3, 2004 (unaudited) and December 31, 2003 3
Consolidated Statements of Operations (unaudited) for the quarters
Ended April 3, 2004 and April 5, 2003 4
Consolidated Statements of Cash Flows (unaudited)for the quarters ended April 3, 2004
And April 5, 2003 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
of Equity Securities 22
Items 3,4 and 5 (Not applicable) 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications 25
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 3, 2004 and December 31, 2003
(Dollars in thousands, except share data)
Assets 2004 (Unaudited) 2003
------------------- -----------------
Cash and cash equivalents $ 26,747 $ 41,493
Accounts receivable less allowance for doubtful accounts and revenue 52,735 51,864
adjustments of $5,838 in 2004 and $5,353 in 2003
Other current assets 9,789 8,298
Deferred income taxes 5,595 4,588
------------------- -----------------
Total current assets 94,866 106,243
Property and equipment, net 122,167 114,693
Goodwill 4,324 4,324
Other assets 2,739 2,113
------------------- -----------------
Total assets $ 224,096 $ 227,373
=================== =================
Liabilities and stockholders' equity
Current maturities of long-term debt $ 6,036 $ 6,375
Short-term notes payable 3,024 -
Trade accounts payable 17,452 18,136
Payables for related party transportation services 1,274 1,020
Accrued expenses 25,775 27,207
------------------- -----------------
Total current liabilities 53,561 52,738
Long-term debt, excluding current maturities 16,750 19,988
Related party financing 22,920 23,154
Other liabilities 22,473 23,055
------------------- -----------------
Total liabilities 115,704 118,935
------------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.001 par value per share; 10,000,000 shares authorized;
none issued or outstanding - -
Common Stock; $0.001 par value per share; 100,000,000 shares authorized,
17,776,621 and 17,632,545 shares issued and outstanding as of
April 3, 2004 and December 31, 2003 18 17
Additional paid-in capital 109,166 108,143
Unearned compensation (763) (822)
Retained (deficit)earnings (29) 1,100
------------------- -----------------
Total stockholders' equity 108,392 108,438
------------------- -----------------
Total liabilities and stockholders' equity $ 224,096 $ 227,373
=================== =================
See accompanying notes to consolidated financial statements.
3
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarters ended April 3, 2004 and April 5, 2003
(Unaudited, dollars in thousands except per share data)
2004 2003
------------------- ------------------
Operating revenues
$ 97,038 $ 98,802
------------------- ------------------
Operating expenses:
Salaries, wages and benefits 55,656 52,651
Purchased transportation 11,305 7,825
Purchased transportation - related parties 2,277 6,206
Operating and general supplies and expenses 18,580 17,695
Operating and general supplies and expenses - related parties 95 35
Insurance and claims 3,744 2,879
Building and equipment rentals 929 828
Building and equipment rentals - related parties 520 422
Depreciation and amortization 3,919 4,272
------------------- ------------------
Total operating expenses 97,025 92,813
------------------- ------------------
Income from operations 13 5,989
Other expense:
Interest expense (205) (977)
Interest expense - related parties (1,605) (1,512)
------------------- ------------------
(Loss) income from before income taxes (1,797) 3,500
Income taxes:
Income tax benefit (expense) 668 (186)
------------------- ------------------
Net (loss) income $ (1,129) $ 3,314
=================== ==================
Net loss per share:
Basic $ (0.06)
Diluted (0.06)
Weighted average outstanding shares (in thousands):
Basic 17,714
Diluted 17,714
Pro forma C corporation data (Note 5):
Historical income before income taxes $ 3,500
Pro forma income tax expense (1,560)
-------------------
Pro forma net income $ 1,940
===================
Net income per share:
Basic $ 0.18
Diluted 0.16
Weighted average outstanding shares (in thousands):
Basic 10,868
Diluted 12,025
See accompanying notes to consolidated financial statements.
4
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarters ended April 3, 2004 and April 5, 2003
(Unaudited, dollars in thousands)
2004 2003
-------------- -------------
Cash flows from operating activities:
Net (loss) income $ (1,129) $ 3,314
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Bad debt expense (23) 276
Non-cash interest expense - related parties - 500
Equity in income of affiliate (1) (2)
Depreciation and amortization 3,919 4,272
Deferred income taxes (643) 33
Decrease in unearned compensation 59 59
Gain on curtailment of health plan - (2,489)
Change in operating assets and liabilities, net
of purchase accounting effects:
Accounts receivable (848) (4,655)
Accounts receivable - related parties - 651
Other assets (1,376) (143)
Trade accounts payable (706) (2,154)
Trade accounts payable - related parties 254 966
Claims and insurance accruals (1,363) (894)
Accrued expenses and other liabilities (443) (234)
-------------- -------------
Net cash used in operating activities (2,300) (500)
-------------- -------------
Cash flows from investing activities:
Additions to property and equipment (2,505) (824)
Proceeds from sale of property and equipment 244 97
Cash paid for acquisition of business (7,058) -
-------------- -------------
Net cash used in investing activities (9,319) (727)
-------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt - 7,174
Repayments of long-term debt (3,577) (6,361)
Exercise of stock options 497 -
Initial public offering costs (44) (413)
Distributions paid - (2,612)
-------------- -------------
Net cash used in financing activities (3,127) (2,212)
-------------- -------------
Net decrease in cash (14,746) (3,439)
Cash at beginning of year 41,493 7,350
Cash at end of period $ 26,747 $ 3,911
============== =============
Supplemental disclosure of cash flow information:
Cash paid during the quarterfor:
Interest $ 1,865 $ 2,977
Income taxes $ 85 $ -
Non-cash transaction:
Note payable for acquisition of business: $ 3,024 $ -
See accompanying notes to consolidated financial statements.
5
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(1) Basis of Presentation
The accompanying consolidated financial statements of Central Freight Lines,
Inc. and its wholly owned subsidiaries ("the Company") have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Quarterly Reports on Form 10-Q and Rule 10-01 of Regulation S-X, and should
be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2003. Accordingly, significant accounting policies and other
disclosures normally provided have been omitted since such information is
provided therein.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments (including normal recurring
adjustments) necessary to present fairly our consolidated financial position as
of April 3, 2004, the consolidated results of our operations for the quarters
ended April 3, 2004 and April 5, 2003 and our consolidated cash flows for the
quarters ended April 3, 2004 and April 5, 2003. The results of our operations
for the quarter ended April 3, 2004 is not necessarily indicative of the results
that may be expected for the year ending December 31, 2004.
(2) Revenue Recognition
The Company recognizes revenue upon the delivery of the related freight. A
portion of the Company's revenue is derived from shipments that originated or
terminated in other regions, where a portion of freight movement is handled by
another carrier. Most of this revenue is with carriers with which the Company
maintains transportation alliances. The Company does not recognize revenue or
the associated expenses that relate to the portion of the shipment transported
by its alliance partners.
6
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -continued
(Dollars in thousands, except share and per share amounts)
(3) Stock-Based Compensation
The Company has a stock-based employee compensation plan. The Company
accounts for that plan under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. As such, the Company records
compensation expense only if the fair value of the underlying stock exceeds the
exercise price on the date of grant. The following table illustrates the effect
on adjusted net (loss) income and adjusted (loss) income per share as if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, and as allowed by SFAS No. 148,
Accounting for Stock-Based Compensation -- Transition and Disclosure, an
Amendment of FASB No. 123, to stock-based employee compensation and had the
Company been a C corporation in the 2003 first quarter.
Quarters Ended
----------------------
April 3, April 5,
2004 2003
---------- --------
Net loss, as reported: $ (1,129)
Add:
Stock-based employee compensation expense included in
reported net (loss), net of related tax effects 59
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (156)
-----------
Pro forma net loss $ (1,226)
===========
Net loss per share
Basic
As reported $ (0.06)
Pro forma (0.07)
Diluted
As reported (0.06)
Pro forma (0.07)
Net income, as reported: $ 3,314
Add:
Stock-based employee compensation expense included in
reported net income, net of related tax effects 59
Deduct:
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects (69)
Adjusted net income 3,304
Pro forma federal income tax adjustment (1,374)
-----------
Adjusted pro forma net income $ 1,930
===========
Adjusted pro forma net income per share
Basic
As reported $ 0.18
Pro forma 0.18
Diluted
As reported 0.16
Pro forma 0.16
7
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -continued
(Dollars in thousands, except share and per share amounts)
(4) Acquisition
Effective March 5, 2004, the Company purchased selected terminals and
rolling stock of Eastern Oregon Fast Freight ("EOFF") a non-union
less-than-truckload carrier that operated 21 terminals in the states of Oregon,
Washington, and Idaho. The selected assets of EOFF were purchased for
approximately $10.0 million in cash ($7.0 million of the purchase price was paid
in the first quarter with the remainder to be paid before the end of 2004).
Included in the purchase price was a $600 non-compete agreement that will be
amortized over the length of the agreement. The purpose of the acquisition was
to expand the Company's operations into the Pacific Northwest. The assets
acquired were recorded at estimated fair values as determined by the Company's
management based on information currently available and on assumptions as to
future operations. If the results of the operations of EOFF had been reflected
in the Company's consolidated results effective January 1, 2004, the EOFF
results would not have had a material effect on the Company's consolidated
results.
The $10.0 million purchase price was allocated as follows:
(dollars in millions)
Property and equipment $9.4
Non-compete agreement 0.6
-----
Total $10.0
=====
(5) (Loss) income Per Share
On November 1, 2003, the Company converted from an S corporation to a C
corporation (see note 7). (Loss) income per share has been calculated as if the
Company were a C corporation for federal income tax purposes for the first
quarter of 2003. Basic (loss) income per share is calculated using the weighted
average number of shares outstanding. The weighted average shares outstanding
used in the calculation of diluted (loss) income per share in the 2003 first
quarter includes the dilutive effect of options to purchase common stock,
calculated using the treasury stock method. Unexercised stock options are the
only reconciling items between basic and diluted income per share for 2003.
The following table presents information necessary to calculate basic and
diluted (loss) income per share:
Quarters ended
April 3, 2004 April 5, 2003
------------- -------------
Net (loss) income $ (1,129) $ 3,314
========
Pro forma federal tax adjustment (1,374)
-------
Pro forma net income $ 1,940
(Shares in thousands) =======
Weighted average shares outstanding - basic 17,714 10,068
Common stock equivalents - 1,157
-------- -------
Weighted average shares outstanding - diluted 17,714 12,025
======== =======
Basic loss per share (0.06)
Pro forma basic income per share 0.18
Diluted loss per share (0.06)
Pro forma diluted income per share 0.16
Anti-dilutive unexercised options excluded
From calculation 1,906 206
8
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -continued
(Dollars in thousands, except share and per share amounts)
(6) Debt and Related Party Financing
(a) Debt
Long-term debt consists of the following at April 3, 2004 and December 31,
2003:
2004 2003
------- -------
Securitization facility $ - $ -
Revolving facility - -
Equipment notes payable 131 169
Capital lease obligations 22,655 26,194
------- -------
22,786 26,363
Less: Current portion 6,036 6,375
------- -------
$16,750 $19,988
======= =======
On April 30, 2002, the Company entered into a $40,000 revolving accounts
receivable securitization facility (the Securitization Facility) and a $19,000
revolving credit facility (the Revolving Facility). Under the Securitization
Facility, the Company, on a revolving basis, sells its interests in its accounts
receivable to Central Receivables, a wholly-owned, special purpose subsidiary.
The assets and liabilities of Central Receivables are included in the
consolidated financial statements of the Company. The Company can receive up to
$40,000 of proceeds, subject to eligible receivables and will pay a service fee
recorded as interest expense, as defined in the agreement. The Company pays
commercial paper interest rates plus an applicable margin on the proceeds
received. Interest is generally payable monthly. The Securitization Facility
includes certain restrictions and financial covenants. The Company must pay a
commitment fee equal to 0.2% per annum of 102% of the facility limit minus the
aggregate principal balance, as well as an administrative fee equal to 0.15% per
annum of the uncommitted balance. As of April 3, 2004, there were no borrowings
outstanding under the Securitization Facility.
Under the Revolving Facility, the Company can receive up to $19,000 of
proceeds, secured by certain revenue equipment. As of December 31, 2003 and
April 3, 2004, the Company had no outstanding borrowings under this facility.
The Revolving Facility accrues interest at either a variable base rate equal to
the bank's prime lending rate or at a variable rate equal to LIBOR plus 175
basis points. Interest is payable in periods from one to three months at the
option of the Company. The Company must maintain certain financial and
non-financial covenants. The Company also had letters of credit of $14,406
outstanding under the Revolving Facility at April 3, 2004. The Company must pay
a commitment fee equal to 0.25% per annum on the daily unused Revolving Facility
as well as a letter of credit fee equal to 1.75% per annum on the average daily
amount of the letters of credit. The maturity date of the Revolving Facility is
October 31, 2004. At April 3, 2004, the Company had $4,594 available under the
Revolving Facility.
The Company has entered into a number of note agreements with a third party
to acquire equipment for use in its operations. The balance of these notes was
$131 and $169 at April 3, 2004 and December 31, 2003, respectively. These notes
with fixed interest rates ranging from 7.75% to 8.75% mature at various dates
through January 2006 and require monthly principal and interest payments through
maturity. These notes are secured by the equipment acquired.
9
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -continued
(Dollars in thousands, except share and per share amounts)
In March 2004, (see Note 4 above) the Company acquired certain assets of
EOFF for approximately $10,000. Under the terms of the agreement, the Company
paid approximately $7.0 million of the purchase price at closing. The remaining
$3,024 is recorded on the consolidated balance sheet as short-term notes
payable.
(b) Related-Party Financing
In 1998, the Company entered into an agreement with Southwest Premier
Properties, L.L.C. ("Southwest Premier"), an entity controlled by the Company's
principal stockholder, for the sale and leaseback of the land, structures and
improvements of some of the Company's terminals. For financial accounting
purposes, this transaction has been accounted for as a financing arrangement.
Consequently, the related land, structures and improvements remain on the
Company's consolidated balance sheet. The initial lease term is for ten years
with an option for an additional ten years at the then fair market rental rate.
At the expiration of the original lease term, the Company has an option to
purchase all of the properties, excluding certain surplus properties, for the
then fair market value.
Since the fair value of the properties sold and leased back has always
equaled or exceeded the proceeds from the financing arrangement, the annual
lease payments have been reflected as a cost of the financing and recorded as
interest expense. During 2004, $234 of these properties were sold and accounted
for as a reduction in the financing obligation and a reduction in property. The
amount outstanding under the financing agreement was $22,920 and $23,154 at
April 3, 2004 and December 31, 2003, respectively. If the Company exercises the
fair value purchase option, the excess of the amount paid over the recorded
financing obligation will be reflected as additional interest expense. If the
fair value purchase option is not exercised at the end of the lease term, the
excess of the recorded financing obligation over the net book value of the
related properties will be reflected as a gain on the financing arrangement.
(7) Income Taxes
On November 1, 2003, the Company converted to a C Corporation for federal
income tax purposes.
Prior to the C Corporation election, the Company elected S Corporation
status for federal income tax purposes. Accordingly, the accompanying unaudited
consolidated financial statements for the quarter ended April 5, 2003 do not
include the effects of federal income taxes, and income taxes consist solely of
state income taxes.
(8) Contingencies
The Company is involved in certain claims and pending litigation arising
from the normal conduct of business. Based on the present knowledge of the
facts, management believes the resolution of the claims and pending litigation
will not have a material adverse effect on the consolidated financial position,
results of operations or liquidity of the Company.
The Company is subject to loss contingencies pursuant to federal, state, and
local environmental regulations dealing with the transportation, storage,
presence, use, disposal, and handling of hazardous materials, discharge of storm
water and fuel storage tanks. Environmental liabilities, including remediation
costs, are accrued when amounts are probable and can be reasonably estimated.
10
(9) Related-Party Transactions
During the quarters ended April 3, 2004 and April 5, 2003 the Company
incurred approximately $2,277 and $6,206, respectively, for transportation
services provided by companies for which the Company's principal stockholder is
the Chairman. At April 3, 2004, the Company had payables of $1,274 for these
transportation services.
During the quarters ended April 3, 2004 and April 5, 2003, the Company
incurred $95, and $35, respectively, to an entity owned by a stockholder of the
Company for legal services. The Company also paid $117 for legal services in
2003, which were related to the initial public offering.
During the quarters ended April 3, 2004 and April 5, 2003, the Company
incurred $520, and $422, respectively, for building rental expense with related
parties.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
Except for the historical information contained herein, the discussion in
this annual report contains "forward-looking statements," which include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation, and availability of
resources. These forward-looking statements include, without limitation,
statements regarding: expectations as to operational improvements; expectations
as to cost savings, revenue growth, and income; the time by which certain
objectives will be achieved; proposed new products and services; expectations
that claims, lawsuits, commitments, contingent liabilities, labor negotiations,
or agreements, or other matters will not have a materially adverse effect on our
consolidated financial position, results of operations, or liquidity; statements
concerning projections, predictions, expectations, estimates, or forecasts as to
our business, financial, and operational results and future economic
performance; and statements of management's goals and objectives, and other
similar expressions concerning matters that are not historical facts. Words such
as "may," "will," "should," "could," "would," "predicts," "potential,"
"continue," "expects," "anticipates," "future," "intends," "plans," "believes,"
"estimates," and similar expressions, as well as statements in future tense,
identify forward-looking statements. These statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements. Readers should review and
consider the factors discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors that May Affect Future
Results" of our Annual Report on Form 10-K, filed on March 30, 2004, along with
the various disclosures by us in our press releases, stockholder reports, and
other filings with the Securities and Exchange Commission. We do not assume, and
specifically disclaim, any obligation to update any forward-looking statement
contained in this Report.
Executive Overview
We are one of the ten largest regional less-than-truckload ("LTL") carriers
in the United States based on revenues, generating approximately $390.0 million
in revenue during 2003 and approximately $97.0 million in revenue during the
first quarter of 2004. In our operations, we pick up and deliver multiple
shipments for multiple customers on each trailer. In 2003 and the first quarter
of 2004, a significant portion of our business was concentrated in our Southwest
region, which is anchored by Texas and California, two of the nation's three
largest state economies.
11
We grew substantially between our first full year of operation in 1998 and
2001, but our operating results were less than we desired and we experienced an
operating loss during 2001. In 2002 and 2003, we assembled a new senior
management team and began executing a strategic plan designed to increase the
efficiency of our operations and expand our geographic territory. In 2002 and
2003, we focused on streamlining our terminal network, routing freight
efficiently through that network, improving our freight mix through a
comprehensive yield management program, and applying our dynamic resource
planning process to our operations. In 2002 and 2003, our profitability, as
measured by operating ratio, recovered from a negative trend that resulted in an
operating ratio of 100.4% for the fourth quarter of 2001. In 2002 and 2003, our
profitability improved substantially, and we achieved an operating ratio of
93.9% for the year ended December 31, 2003. Our results for 2003 included
several items that we consider to be unusual. During 2003, we recorded an
aggregate of $3.8 million in increases to our insurance reserves for accident,
workers' compensation, and other liabilities arising prior to 2003 ($1.8 million
of which related to two accidents that occurred in 2002). This compared to an
accrual of $0.5 million relating to claims that arose in prior periods in that
we accrued in the year ended December 31, 2002. We recorded the increased
accruals despite improvements in our rate of both accident claims and workers'
compensation claims during 2003. We also amended a benefit plan to reduce our
future obligations. As a result of this amendment, we recorded a curtailment
gain of approximately $7.8 million in 2003. In addition, in January of 2002 and
2003, we increased the useful lives and decreased the salvage values of our
tractors and trailers to reflect that we are operating the tractors and trailers
for longer periods than previously estimated by our past management. These
changes decreased our depreciation expense by approximately $3.5 million
compared with the expense we would have recorded under the prior estimate.
Except for the depreciation benefit (approximately $3.5 million per year), we do
not anticipate benefits similar to these in future periods. In the aggregate,
therefore, these items had a positive effect of approximately $7.5 million ($4.0
million excluding the depreciation benefit) on our operating income for the year
ended December 31, 2003. Because our dynamic resource planning process has only
been partially applied in our freight movement process, we believe that our
strategic plan affords us the opportunity for continued margin improvement and
revenue growth in the future. However, our ability to apply the process in other
areas and realize the efficiencies we believe to be obtainable will be deferred
pending integration of our expanded Northwest region discussed below.
In December 2002, we expanded service in a seven-state, Midwest region,
establishing all-points coverage in six of these states. Our expenses for the
quarter ended April 5, 2003, reflect the costs of this Midwest expansion,
primarily consisting of purchased transportation, employee training, and
relocation expenses.
On March 16, 2004, we announced the acceleration of our expansion into the
Pacific Northwest through the purchase of selected terminal network and rolling
stock of Eastern Oregon Fast Freight, Inc. ("EOFF"), a non-union LTL carrier
that operated in the states of Oregon, Washington, and Idaho. The selected
assets of EOFF were purchased for approximately $10.0 million, with $7.0 million
of the purchase price paid from cash reserves in the first quarter of 2004. The
remainder of the purchase price will be paid later in 2004. The assets acquired
included six owned terminal properties, eleven leased terminal properties, 160
tractors, and 644 trailers.
12
Our operating expenses for the quarter ended April 3, 2004, reflect the
costs of our accelerated Northwest expansion, primarily consisting of additional
employee costs, relocation expenses, and additional lease expense for terminals
in the expanded territory. Further, our Northwest expansion contributed to lower
productivity and delays in the roll-out of our efficiency initiatives, due in
substantial part to our management's focus on the expansion. As previously
described in more detail in our annual report on Form 10-K, filed with the
Securities and Exchange Commission on March 30, 2004, we expect the costs and
revenue impacts from our Northwest expansion to negatively affect our results
throughout most of 2004.
For the quarter ended April 3, 2004, total revenue decreased $1.8 million
compared to the quarter ended April 5, 2003, due primarily to one less working
day in 2004. Net income (loss) decreased from pro forma C corporation net income
of $1.9 million, or $0.16 per diluted share, in the first quarter of 2003 to a
loss of $(1.1) million, or $(0.06) per diluted share, in the first quarter of
2004. The decrease in net income (loss) resulted primarily from decreased
revenues and increased costs discussed in more detail below in "Results of
Operations."
Revenues
Our operating revenues vary with the revenue per hundredweight we charge to
customers and the volume of freight we transport. From our first full year of
operation in 1998 to 2001, our revenue grew from approximately $276.3 million to
approximately $395.7 million, a compounded annual growth rate of approximately
13%. Our growth resulted from a combination of internal growth, geographic
expansion, and our acquisitions of two LTL carriers that expanded our presence
in California, Arizona, and Nevada.
Following the arrival of our new management team in early 2002, we closed
approximately 25% of our then existing terminals and implemented a yield
management process intended to eliminate freight that did not generate
sufficient returns. As a result of these efforts, our revenues decreased $24.3
million, or 6.1%, from $395.7 million for 2001 to approximately $371.4 million
in 2002, but revenue derived from the resulting improved freight portfolio began
to increase in the latter part of 2002 and in 2003 as our revenue increased to
$389.7 million. Revenue per day was largely unchanged in the first quarter of
2004, as compared to the first quarter of 2003, at approximately $1.47 million,
due in large part to a delay in implementation of planned sales initiatives
resulting from management's focus on the Northwest expansion. We continue to
evaluate our freight mix and eliminate less profitable freight.
Revenue per hundredweight measures the rates we receive from customers and
varies with the type of goods being shipped and the distance these goods are
transported. Our LTL revenue per hundredweight increased approximately 3.1% from
$11.11 in the first quarter of 2003, to $11.45 in the first quarter of 2004, as
our yield management program continued to have the desired effect. Volume
depends on the number of customers we have, the amount of freight those
customers ship, geographic coverage, and the general economy. Our total tonnage
decreased by 6.5% from the first quarter of 2003 to the first quarter of 2004,
due in part to one less business day in the period, as well as reductions
resulting from our continuing yield management program.
13
Operating Expenses
Our major expense categories can be summarized as follows:
Salaries, wages, and benefits. This category includes compensation for our
employees, health insurance, workers' compensation, 401(k) plan contributions,
and other fringe benefits. These expenses will vary depending upon several
factors, including our efficiency, our experience with health and workers'
compensation claims, and increases in health care costs. Salaries, wages, and
benefits also include the non-cash expense associated with stock options granted
to several of our executives that had exercise prices that were determined to be
below fair market value. This non-cash compensation expense is expected to
amount to approximately $237,000 annually through June of 2007.
Purchased transportation. This category primarily consists of the payments
we make to third parties to handle a portion of a freight movement for us. The
largest category is outsourced linehaul movements, where we contract with
truckload carriers to move our freight between origin and destination terminals.
Swift Transportation, a related party, has been our largest provider of
outsourced linehaul service. Purchased transportation also includes outsourced
pick-up and delivery service when we use alternative providers to service areas
where we lack the terminal density to provide economical service.
Operating and general supplies and expenses. This category includes fuel,
repairs and maintenance, tires, parts, general and administrative costs, office
supplies, operating taxes and licenses, communications and utilities, and other
general expenses. Repairs and maintenance, fuel, tires, and parts expenses vary
with the age of equipment and the amount of usage. We have a fuel surcharge
program that enables us to recover a significant portion of fuel price
increases.
Insurance and claims. This category includes the cost of insurance premiums
and the accruals we make for claims within our self-insured retention amounts,
primarily for personal injury, property damage, physical damage to our
equipment, and cargo claims. These expenses will vary primarily based upon the
frequency and severity of our accident experience and the market for insurance.
Building and equipment rentals. This category consists mainly of payments to
unrelated third parties under terminal leases and payments to related parties
for eight terminals leased under operating leases.
Depreciation and amortization. This category relates to owned assets, assets
under capitalized leases, and the 26 properties we lease from a related party
that are considered to be a financing arrangement.
S Corporation Status
Prior to November 1, 2003, we operated as an S corporation for federal
income tax purposes. An S corporation passes through essentially all taxable
income and losses to its stockholders and does not pay federal income taxes at
the corporate level. For comparative purposes, we have included a pro forma
provision for income taxes showing what those taxes would have been had we been
taxed as a C corporation in all periods our S corporation election was in
effect.
14
Results of Operations
The table below sets forth the percentage relationship of the specified
items to operating revenues for the periods indicated.
Quarter ended
---------------------------------------
April 3, April 5,
2004 2003
------------------- -----------------
Operating revenues........................................ 100.0% 100.0%
--------- ----------
Operating expenses:
Salaries, wages, and benefits........................... 57.4 53.3
Purchased transportation................................ 14.0 14.2
Operating and general supplies and expenses............. 19.2 17.9
Insurance and claims.................................... 3.9 2.9
Building and equipment rentals.......................... 1.5 1.3
Depreciation and amortization........................... 4.0 4.3
--------- ----------
Total operating expenses(1).......................... 100.0 93.9
--------- ----------
Income from operations.................................... 0.0 6.1
Interest expense.......................................... 1.9 2.5
--------- ----------
(Loss) income before income taxes......................... (1.9) 3.6
--------- ----------
Income tax (expense) benefit.............................. 0.7 (0.2)
--------- ----------
Net (loss) income......................................... (1.2)% 3.4
========= ----------
Pro Forma Data:
Income before income taxes................................ - 3.6
Pro forma income tax expense(2)........................... - (1.6)
----------
Pro forma income(2)....................................... - 2.0%
==========
- ----------
(1) Total operating expenses as a percentage of operating revenues, as presented
in this table, is also referred to as operating ratio.
(2) Provision for federal income taxes and net income as if we were a C
corporation for tax purposes for all periods.
Comparison of First Quarter 2004 to First Quarter 2003
Operating revenues. Operating revenues decreased $1.8 million, or 1.8%, from
$98.8 million for the first quarter of 2003 to $97.0 million for the 2003 first
quarter. The decrease in operating revenues was partially due to one less
working day in the 2004 quarter (66 working days) compared to 67 working days in
the 2003 quarter. Revenue per working day was $1.470 million in 2004, which was
only slightly lower than the $1.474 million per working day in the 2003 first
quarter. LTL revenue per hundredweight increased 3.1% from $11.11 in 2003 to
$11.45 in 2004 as a result of our continued yield improvement efforts. Total
tonnage decreased 33.7 thousand tons, or 6.5%, from 515.9 thousand tons in the
2003 quarter to 482.2 thousand tons in the 2004 quarter as efforts to eliminate
less profitable freight, which began late in 2003, have lowered tonnage and
shipments compared to the 2003 first quarter.
15
Salaries, wages, and benefits. Salaries, wages, and benefits increased $3.0
million, or 5.7%, from $52.7 million for 2003 to $55.7 million for the 2004
quarter due mainly to a $2.5 million curtailment gain relating to a reduction of
our obligations under a post-retirement health plan in the 2003 first quarter.
The increase in salaries, wages, and benefits, before the curtailment gain,
resulted primarily from an increase in compensation for most of our employees,
rising medical costs and the costs of additional employees expenses incurred in
connection with our Northwest expansion. These factors were partially offset by
a decrease in the total number of employees (excluding those from our Northwest
expansion) resulting from our management initiatives. As a percentage of
operating revenues, salaries, wages, and benefits increased from 53.3% for the
2003 quarter, to 57.4% for the 2004 quarter.
Purchased transportation. Purchased transportation decreased $0.4 million,
or 2.9%, from $14.0 million for 2003 to $13.6 million for the 2004 quarter. The
decrease in purchased transportation resulted primarily from a reduced usage of
third party purchased transportation as we improved the balance of freight
movements within our primary shipping lanes. As a percentage of operating
revenues, purchased transportation decreased from 14.2% for the 2003 quarter to
14.0% for the 2004 quarter.
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $1.0 million, or 5.6%, from $17.7 million for the 2003
quarter to $18.7 million for the 2004 quarter. The increase in operating and
general supplies and expenses resulted primarily from an increase in vehicle
repairs, fuel, utilities and general supplies. As a percentage of operating
revenues, operating and general supplies and expenses increased from 17.9% for
the 2003 quarter to 19.2% for the 2004 quarter.
Insurance and claims. Insurance and claims increased $0.8 million, or 27.6%,
from $2.9 million for the 2003 quarter to $3.7 million for the 2004 quarter. The
increase in insurance and claims expense resulted primarily from an increase in
the frequency and severity of cargo claims that were partially offset by a
reduction in our third party accident claims. As a percentage of operating
revenues, insurance and claims increased from 2.9% for the 2003 quarter to 3.9%
for the 2004 quarter. The 2003 first quarter, as a percentage of revenue, was
the lowest quarter in 2003. For the 2003 full year, insurance and claims
amounted to 4.0% of revenues.
Building and equipment rentals. Building and equipment rentals increased
approximately $0.1 million, or 7.7%, from $1.3 million for 2003 to $1.4 million
for 2004. The increase in building and equipment rentals resulted primarily from
the addition of leased terminals in connection with our Northwest expansion, a
new terminal in California and normal annual increases in other terminals. As a
percentage of operating revenues, building and equipment rentals increased from
1.3% for 2003 to 1.5% for 2004.
Depreciation and amortization. Depreciation and amortization expense
decreased approximately $0.4 million, or 9.3%, from $4.3 million for the 2003
quarter to $3.9 million for the 2004 quarter, mainly as a result of equipment
becoming fully depreciated during 2003 and sales of non-essential equipment late
in 2003. As a percentage of operating revenues, depreciation and amortization
decreased from 4.3% for the 2003 quarter to 4.0% for the 2004 quarter.
16
Operating ratio. Our operating ratio increased from 93.9% for the 2003
quarter to 100.0% for the 2004 quarter.
Interest expense. Total interest expense decreased $0.7 million, or 28.0%,
from $2.5 million for the 2003 quarter to $1.8 million for the 2004 quarter. As
a percentage of operating revenues, interest expense decreased from 2.5% for the
2003 quarter to 1.9% for the 2004 quarter. Our debt balances decreased by
approximately $50.0 million in December 2003 as we utilized part of the net
proceeds from our initial public offering to pay off debt. In the first quarter
of 2004, we further reduced our outstanding debt by $2.0 million through the
utilization of net proceeds from our initial public offering. Our related party
interest expense increased from $1.5 million in 2003 to $1.6 million in 2004.
The amounts for related party interest are recorded as interest expense because
the associated leases are reflected as a financing arrangement in our
consolidated financial statements.
Income taxes. We recorded an income tax benefit in the 2004 quarter of $0.7
million due to a pre-tax loss of $1.8 million. Our pro forma income taxes in the
2003 quarter were approximately $1.6 million on a pre-tax income of $3.5
million. The effective tax rate in the 2004 first quarter was 37.2% compared to
44.6% in the same quarter last year. The tax rate was higher in the 2003 quarter
as pro forma income taxes were computed on a higher taxable income compared to
book income due to the increase in related party interest expense.
Liquidity and Capital Resources
Our business requires substantial, ongoing capital investments,
particularly to replace revenue equipment such as tractors and trailers. In
addition, our implementation of dynamic resource planning throughout our
operations and our Northwest expansion are expected to involve additional
expenses, such as the costs of added employees, relocation costs for equipment,
increased building and equipment rentals, and increased purchased transportation
expense. Our primary sources of liquidity have been cash from operations,
secured borrowings, and proceeds of our initial public offering. We believe
these and other sources of liquidity will be sufficient to fund our operations
at least through the end of 2004. Further, we expect to finalize long-term
financing before the end of the 2004 second quarter, with our lenders, that will
provide liquidity into 2007. At April 3, 2004, we have approximately $38 million
of drawings available under our securitization and revolving credit facilities.
Net cash used in operating activities was approximately $2.3 million and
$0.5 million for the quarters ended April 3, 2004 and April 5, 2003,
respectively. Net cash used in the 2004 first quarter resulted mainly from
payments on claims of $1.4 million, an increase in other assets (mainly prepaid
licenses) of $1.4 million and an increase in accounts receivable of $0.8
million. Net cash used in the 2003 first quarter was due to a $4.7 million
increase in trade accounts receivable, a $2.2 million decrease in accounts
payable and an increase of $0.9 million in claims paid offset by a reduction in
payments to related parties of $1.0 million.
17
Net cash used in investing activities was approximately $9.3 million and
$0.7 million for the first quarters of 2004 and 2003. Our capital expenditures
were approximately $2.5 million in 2004 and $0.8 million in 2003. In 2004, we
paid $7.0 million (of the total purchase price of $10.0 million) for the
terminal network and rolling stock of EOFF - our Northwest expansion. We expect
our capital expenditures, for the rest of 2004, to be approximately $35 million
consisting primarily of the acquisition of new tractors and trailers.
Net cash used in financing activities was approximately $3.1 million for the
first quarter of 2004 due mainly to payments on long term debt. In the 2003
first quarter, net cash used amounted to $2.2 million due mainly to a $2.6
million distribution made to stockholders of our former S corporation relating
to the fourth quarter of 2002.
On April 30, 2002, we entered into a $40.0 million revolving accounts
receivable securitization facility that expires April 27, 2005, with Three
Pillars Funding Corporation and a revolving credit facility with Suntrust Bank.
Under the securitization facility, we can borrow up to $40.0 million, subject to
eligible receivables. We pay commercial paper interest rates plus an applicable
margin on amounts borrowed. Interest is generally payable monthly. The
securitization facility includes certain restrictions and financial covenants.
As of April 3, 2004, we had no borrowings outstanding under the securitization
facility. Under the securitization facility, we pay a commitment fee equal to
0.2% per year of 102% of the facility limit minus the aggregate outstanding
principal balance, as well as an administrative fee equal to 0.15% per annum of
the uncommitted balance.
Under our revolving facility, we can borrow up to $19.0 million, secured by
approximately 240 of our tractors. The revolving facility accrues interest at
either a variable base rate equal to the bank's prime lending rate or at a
variable rate equal to LIBOR plus 175 basis points. Interest is payable in
periods from one to three months at our option. We are subject to certain
financial and nonfinancial covenants under this facility. We pay a commitment
fee equal to 0.25% per annum on the daily unused revolving facility as well as a
letter of credit fee equal to 1.75% per annum on the average daily amount of the
letters of credit. The maturity date of the revolving facility is October 31,
2004.
Substantially all of the amounts outstanding under our $19.0 million
revolving credit facility are used to fund outstanding letters of credit. As of
April 3, 2004, we had no borrowings and $14.4 million in letters of credit
outstanding under that facility. The face amount of letters of credit we are
required to post is expected to increase in the future because of our larger
self-insured retentions. As of April 3, 2004, we had $4.6 million available for
borrowing or additional letters of credit under the revolving facility. However,
to the extent that insurance requirements cause our letters of credit
outstanding to rise above this level, our borrowing capacity under the revolving
credit facility will be reduced and we may be required to draw upon other
resources, such as our securitization facility, to address our liquidity needs.
We have entered into a number of note agreements with a third party to
acquire equipment for use in our operations. The outstanding principal balance
of these notes was $0.1 million at April 3, 2004. These notes have fixed
interest rates ranging from 7.75% to 8.75% and mature at various dates through
July 2006.
In 1998, we entered into an agreement with Southwest Premier Properties,
L.L.C. ("Southwest Premier"), an entity controlled by our principal stockholder,
for the sale and leaseback of the land, structures and improvements of some of
our terminals. For financial accounting purposes, this transaction has been
accounted for as a financing arrangement. Consequently, the related land,
structures and improvements remain on our consolidated balance sheet. The lease
was amended in February 2003 to increase the rent and provide for a term of ten
years with an option for an additional ten years at the then fair market rental
rate. At the expiration of the original lease term, we have an option to
purchase all of the properties, excluding certain surplus properties, for the
then fair market value.
Because the fair value of the properties sold and leased back has always
equaled or exceeded the proceeds from the financing arrangement, the annual
lease payments have been reflected as a cost of the financing and recorded as
interest expense. The amount outstanding under the financing agreement was $22.9
million and $23.2 million at April 3, 2004 and December 31, 2003, respectively.
18
Off-Balance Sheet Arrangements
Certain of our terminals and revenue equipment are financed off-balance
sheet through operating leases. As of April 3, 2004, 56 of our terminals,
including seven owned by related parties, were subject to operating leases.
Terminals and revenue equipment held under operating leases are not
carried on our balance sheet, and lease payments in respect of such terminals
and revenue equipment are reflected in our income statements in the line items
"Building and equipment rentals" and "Building and equipment rentals - related
parties." Our total rental expense related to operating leases, including rent
paid to related parties, was $1.3 million for the first quarter of 2004,
compared to $1.1 million for the first quarter of 2003. The total amount of
remaining payments under operating leases as of April 3, 2004 was $24.0 million,
with $5.5 million due in the next 12 months.
Critical Accounting Policies
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition. Operating revenue is recognized upon delivery of the
related freight, as is fuel surcharge revenue. We also generate revenues derived
from interline shipments. Most of this interline revenue was with carriers with
which we maintain transportation alliances. We do not recognize revenue (or the
associated expenses) that relates to the portion of the shipment transported by
our alliance partners.
Insurance and Claims Accruals. We record insurance and claims accruals based
upon our estimate of the ultimate total cost of claims, not covered by
insurance, for bodily injury and property damage, cargo loss and damage,
physical damage to our equipment, workers' compensation, long-term disability,
and group health, and post-retirement health benefits. Our estimates are based
on our evaluation of the nature and severity of the claims and our past claims
experience. We include an estimate for incurred but not reported claims. The
estimated costs for bodily injury and property damage, cargo loss and damage,
and physical damage to our equipment are charged to insurance and claims. The
other estimated costs are charged to employee benefits expense.
While we believe that our insurance and claims accruals are adequate,
such estimates may be more or less than the amount ultimately paid when claims
are settled. The estimates are continually reviewed and any changes are
reflected in current operations.
Our self-insured retention for bodily injury and property damage, cargo loss
and damage, and physical damage to our equipment was an aggregate $750,000 per
occurrence.
Our self-insured retention for workers' compensation has been $1.0 million
per occurrence since October 28, 2002. We also self-insure for all health claims
up to $300,000 per occurrence.
Allowance for Doubtful Accounts and Revenue Adjustments. We maintain
allowances for doubtful accounts and revenue adjustments. Such allowances
represent our estimate of accounts that will not ultimately be collected and
correspondingly adjust our operating revenues to reflect the estimates of
noncollectible accounts. Estimates used in determining this allowance are based
on our historical collection experience, current trends, credit policy, and a
percentage of our accounts receivable by aging category. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
19
Inflation
Most of our expenses are affected by inflation, which generally results in
increased operating costs. In response to fluctuations in the cost of petroleum
products, particularly diesel fuel, we have implemented a fuel surcharge in our
tariffs and contractual agreements. The fuel surcharge is designed to offset the
cost of fuel above a base price and increases as fuel prices escalate over the
base. We do not expect the net effect of inflation on our results of operations
to be different from the effect on LTL carriers generally.
Seasonality
We experience some seasonal fluctuations in freight volume. Historically,
our shipments decrease during winter months and our fuel efficiency declines,
but our operating expenses have been higher in the summer months due to
increased maintenance costs for our tractors and trailers in hotter weather as a
large percentage of our operating region is in the South and Southwest United
States. Our expansion into the Midwest and the Northwest may increase our
exposure to seasonal fluctuations in operating expenses.
Item 3. Quantatative and Qualitative Disclosures About Market Risk.
We are exposed to a variety of market risks, most importantly the effects of
the price and availability of diesel fuel and changes in interest rates. To
address the risk of high fuel prices, we maintain a fuel surcharge program. Fuel
surcharge programs are well established in the industry and are broadly accepted
by our customers. We believe our fuel surcharge program is effective at
mitigating the risk of high fuel prices. Accordingly, we have not engaged in any
fuel price hedging activities. Because fuel surcharges are based on the weekly
national average price of diesel fuel and our operations are concentrated in the
Southwest, there is some risk that the national average will not fully reflect
regional fuel prices, particularly in California. We are highly dependent on
adequate supplies of diesel fuel. If our supply were interrupted, for example as
a result of war or hostile action against the United States or in fuel producing
regions, we would be exposed to significant risks.
Our market risk is also affected by changes in interest rates. Historically,
we have used a combination of fixed rate and variable rate obligations to manage
our interest rate exposure. Fixed rate obligations expose us to the risk that
interest rates might fall. Variable rate obligations expose us to the risk that
interest rates might rise. We did not have any interest rate swaps at April 3,
2004, although we may enter into such swaps in the future if we deem
appropriate.
Our variable rate obligations consist of our revolving line of credit and
our accounts receivable securitization facility. Our revolving line of credit,
provided there has been no default, carries a variable interest rate based on
either the prime rate or LIBOR. Our securitization facility carries a variable
interest rate based on the commercial paper rate. We currently have no drawings
under our securitization facility, but assuming borrowings were equal to the
$33.3 million available on the securitization facility at April 3, 2004, a one
percentage point increase in commercial paper rates would increase our annual
interest expense by $333,000.
20
Item 4. Controls and Procedures.
As required by Rule 13a-15 under the Exchange Act, the Company has carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. This evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report. During the Company's first fiscal quarter, there were no changes in
the Company's internal control over financial reporting that have materially
affected, or that are reasonably likely to materially affect, the Company's
internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer as appropriate, to allow timely decisions regarding
disclosures.
The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors or intentional
fraud. An internal control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of such
internal controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in litigation incidental to our operations. These lawsuits
primarily involve claims for workers' compensation, personal injury, or property
damage incurred in the transportation of freight. We are not presently a party
to any legal proceedings other than litigation arising in the ordinary course of
our business and are not aware of any claims that could materially affect our
consolidated financial position or results of operations.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Use of Proceeds from Registered Securities.
The effective date of the registration statement relating to our initial
public offering, filed on Form S-1 under the Securities Act (File No.
333-109068), was December 11, 2003. A total of 9,775,000 of our common shares
were sold. The managing underwriters for the offering were Bear, Stearns & Co.
Inc., BB&T Capital Markets, a division of Scott & Stringfellow, Inc., Legg Mason
Wood Walker, Incorporated, Morgan Keegan & Company, Inc., and Stephens Inc.
The offering commenced on December 11, 2003, and has been completed. Of the
8,500,000 shares of common stock registered, 5,700,000 shares were offered and
sold by us and 2,800,000 shares were offered and sold by Jerry Moyes and certain
trusts for the benefit of Mr. Moyes and his family, as selling shareholders. The
aggregate offering price of shares sold by us was $85,500,000. The underwriting
discount on those shares was $5,985,000. We incurred approximately $1,881,000 of
other expenses in connection with the offerings. The net proceeds to us totaled
approximately $77,634,000. We did not receive any of the proceeds from the sale
of shares by the selling stockholders.
Approximately $49.6 million of the proceeds we received have been used to
repay debt, including: (a) $30.5 million under our accounts receivable
securitization facility; (b) $17.1 million under secured equipment and terminal
notes; and (c) $2.0 million under secured capital leases. In addition, as of
April 3, 2004, we had used approximately $7.0 million for the acquisition of
certain assets of EOFF. We expect to use an additional $3.0 million in
connection with this acquisition.
As of April 3, 2004, approximately $21.0 million of the proceeds received in
our initial public offering remain unused. We intend to use the remainder of the
proceeds to prepay amounts under secured capital leases, and for general
corporate purposes, including working capital.
(e) Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
22
Item 6. Exhibits and Reports on Form 8-K .
(a) Exhibits
Exhibit No. Description
3.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc.,
a Nevada corporation. (Incorporated by reference to Exhibit 3.1(b) to the
Company's Registration Statement on Form S-1 No. 333-109068.)
3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1
No. 333-109068.)
4.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc.,
a Nevada corporation. (Incorporated by reference to Exhibit 3.1 to this
Report on Form 10-Q.)
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by
reference to Exhibit 3.2 to this Report on Form 10-Q.)
11.1 Schedule of Computation of Net Income Per Share (Incorporated by reference to
Note 5, Basic and Diluted (Loss) Income Per Share, in the Notes to
Consolidated Financial Statements contained in this Report on Form 10-Q.)
31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso,
the Company's Chief Executive Officer.
31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale,
the Company's Chief Financial Officer.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the
Company's Chief Executive Officer.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the
Company's Chief Financial Officer.
* Filed herewith.
(b) Reports on Form 8-K
On February 5, 2004, Central Freight Lines, Inc. filed a current report
on Form 8-K to furnish under items 7 and 12 Central's press release
presenting its 2003 fourth quarter and full year results.
On March 16, 2004, Central Freight Lines, Inc. filed a current report
on Form 8-K to file under item 9 Central's press release announcing its
expansion into the Pacific Northwest.
On April 28, 2004, Central Freight Lines, Inc. filed a current report
on Form 8-K to furnish under item 12 Central's press release presenting
its 2004 first quarter results.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Form 10-Quarterly Report to be signed on its
behalf by the undersigned thereunto duly authorized.
May 17, 2004
Central Freight Lines, Inc.
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Senior Vice President and Chief Financial Officer
24
Exhibit 31.1
CERTIFICATION
I, Robert V. Fasso, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Freight
Lines, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 17, 2004
/s/ Robert V. Fasso
Robert V. Fasso
Chief Executive Officer
25
Exhibit 31.2
CERTIFICATION
I, Jeffrey A. Hale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Freight
Lines, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: May 17, 2004
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Chief Financial Officer
26
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central Freight Lines, Inc.
(the "Company") on Form 10-Q for the period ended April 3, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Robert V. Fasso, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Robert V. Fasso
Robert V. Fasso
Chief Executive Officer
May 17, 2004
27
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central Freight Lines, Inc. (the
"Company") on Form 10-Q for the period ended April 3, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey
A. Hale, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(3) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Chief Financial Officer
May 17, 2004
28