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 July 2, 2005
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) 741-5305
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.)
X Yes No
-------- -------
The number of shares of common stock outstanding at August 9, 2005 was
18,228,188.
Central Freight Lines, Inc.
Form 10-Q
Three months and six months ended July 2, 2005
Table of Contents
Page Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of July 2, 2005 (Unaudited) and December 31, 2004 2
Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months
ended July 2, 2005 and July 3, 2004 3
Consolidated Statements of Cash Flows (Unaudited) for the Six Months
ended July 2, 2005 and July 3, 2004 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 29
Part II. Other Information
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item.5. Other Information 32
Item 6. Exhibits 33
Signatures 34
Page 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 2, 2005 and December 31, 2004
(In thousands, except share data)
2005
Assets (Unaudited) 2004
------------------ -----------------
Cash and cash equivalents $ 312 $ 2,144
Restricted cash -- 20,825
Accounts receivable less allowance for doubtful accounts and revenue 52,743 51,582
adjustments of $9,892 in 2005 and $7,854 in 2004
Other current assets 9,299 8,655
Deferred income taxes 9,901 6,689
----------------- -----------------
Total current assets 72,255 89,895
Property and equipment, net 126,464 135,274
Goodwill 4,324 4,324
Other assets 7,617 7,761
------------------ -----------------
Total assets $ 210,660 $ 237,254
================== =================
Liabilities and stockholders' equity
Liabilities:
Current maturities of long-term debt $ 9,171 $ 10,958
Short-term notes payable 16,769 28,108
Trade accounts payable 16,697 23,835
Trade accounts payable - related parties 2,006 988
Accrued expenses 28,269 23,050
----------------- -----------------
Total current liabilities 72,912 86,939
Long-term debt, excluding current maturities 19,738 21,884
Related party financing 22,716 22,852
Deferred income taxes 11,587 8,375
Claims and insurance accruals 10,362 9,646
----------------- -----------------
Total liabilities 137,315 149,696
----------------- -----------------
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,
18,228,188 and 18,188,894 shares issued and outstanding as of
July 2, 2005 and December 31, 2004 19 18
Additional paid-in capital 109,662 109,554
Unearned compensation (213) (266)
Accumulated deficit (36,123) (21,748)
----------------- -----------------
Total stockholders' equity 73,345 87,558
----------------- -----------------
Total liabilities and stockholders' equity $ 210,660 $ 237,254
================== ================
See accompanying notes to consolidated financial statements.
Page 2
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended Six months ended
------------------------------- --------------------------------
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Operating revenues $ 99,518 $ 105,513 $ 188,840 $ 202,551
--------------- --------------- --------------- ---------------
Operating expenses:
Salaries, wages and benefits 53,982 60,084 104,946 115,740
Purchased transportation 9,129 11,387 17,947 22,692
Purchased transportation - related parties 4,482 5,965 7,953 8,242
Operating and general supplies and expenses 23,099 20,821 43,704 39,152
Operating and general supplies and expenses - related parties 35 39 197 134
Insurance and claims 6,736 6,881 11,761 10,874
Building and equipment rentals 1,007 1,044 2,026 1,973
Building and equipment rentals - related parties 449 376 898 896
Depreciation and amortization 4,127 3,951 9,004 7,870
--------------- --------------- --------------- ---------------
Total operating expenses 103,046 110,548 198,436 207,573
--------------- --------------- --------------- ---------------
Loss from operations (3,528) (5,035) (9,596) (5,022)
Other expense:
Interest expense (1,038) (368) (1,653) (573)
Interest expense - related parties (1,545) (1,537) (3,126) (3,142)
---------------- --------------- --------------- ---------------
Loss before income taxes (6,111) (6,940) (14,375) (8,737)
Income taxes:
Income tax benefit --- 4,397 --- 5,065
---------------- --------------- --------------- ---------------
Net loss $ (6,111) $ (2,543) $ (14,375) $ (3,672)
================ =============== =============== ===============
Net loss per share:
Basic $ (0.34) $ (0.14) $ (0.79) $ (0.21)
Diluted (0.34) (0.14) (0.79) (0.21)
Weighted average outstanding shares:
Basic 18,215 17,842 18,203 17,777
Diluted 18,215 17,842 18,203 17,777
See accompanying notes to consolidated financial statements.
Page 3
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 2, 2005 and July 3, 2004
(Unaudited, in thousands)
2005 2004
----------------- -----------------
Cash flows from operating activities:
Net loss $ (14,375) $ (3,672)
Adjustments to reconcile net loss to
net cash used in operating activities:
Bad debt expense 1,611 184
Equity in (loss) income of affiliate (3) 25
Depreciation and amortization 9,004 7,870
Amortization of deferred financing fees 362 --
Deferred income taxes -- (5,189)
Decrease in unearned compensation 53 119
Change in operating assets and liabilities, net
of purchase accounting effects:
Accounts receivable (2,772) (5,856)
Other assets (819) (1,543)
Trade accounts payable (7,138) 4,318
Trade accounts payable - related parties 1,018 2,360
Claims and insurance accruals (334) 846
Accrued expenses 6,270 (2,596)
----------------- -----------------
Net cash used in operating activities (7,123) (3,134)
----------------- -----------------
Cash flows from investing activities:
Additions to property and equipment (1,601) (16,310)
Proceeds from sale of property and equipment 3,068 2,997
Cash paid for acquisition of business -- (8,058)
----------------- -----------------
Net cash provided by (used in) investing activities 1,467 (21,371)
----------------- -----------------
Cash flows from financing activities:
Restricted cash 20,825 --
Proceeds from long-term debt 1,160 --
Repayments of long-term debt (5,173) (4,969)
Proceeds from (repayments of) short-term debt 15,905 --
Repayment of securitization facility (27,300) --
Exercise of stock options 109 973
Payment of deferred financing fees (1,702) --
----------------- -----------------
Net cash provided by (used in) financing activities 3,824 (3,996)
----------------- -----------------
Net decrease in cash (1,832) 28,501)
Cash at beginning of period 2,144 41,493
----------------- -----------------
Cash at end of period $ 312 $ 12,992
================= =================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 4,576 $ 3,768
Income taxes $ - $ 164
Non-cash transaction:
Note payable for acquisition of business $ - $ 2,024
See accompanying notes to consolidated financial statements.
Page 4
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except 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 the Annual Report on Form 10-K for the year ended
December 31, 2004. 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 July 2,
2005, the consolidated results of our operations for the three months and six
months ended July 2, 2005 and July 3, 2004 and our consolidated cash flows for
the six months ended July 2, 2005 and July 3, 2004. The results of our
operations for the six months ended July 2, 2005 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2005.
(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.
Page 5
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except 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 net loss and loss per share as if the Company had applied the fair value
recognition provisions of Financial Accounting Standards Board ("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.
Three months ended Six months ended
----------------------------- --------------------------------
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
------------- ------------- --------------- --------------
Net loss, as reported: $ (6,111) $ (2,543) $ (14,375) $ (3,672)
Add:
Stock-based employee compensation expense included
in reported net loss, net of related tax effects 26 60 53 119
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (see below) (2,221) (156) (2,425) (312)
------------- ------------- --------------- --------------
Pro forma net loss $ (8,306) $ (2,639) $ (16,747) $ (3,865)
============= ============= =============== ==============
Net loss per share:
Basic
As reported $ (0.34) $ (0.14) $ (0.79) $ (0.21)
Pro forma (0.46) (0.15) (0.92) (0.22)
Diluted
As reported (0.34) (0.14) (0.79) (0.21)
Pro forma (0.46) (0.15) (0.92) (0.22)
In December 2004, the FASB issued Statement No. 123R, Share-Based Payment. This
Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees and its related implementation guidance. This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This Statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
Statement does not change the accounting guidance for share-based transactions
with parties other than employees provided in Statement No. 123 as originally
issued and EITF Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. This Statement does not address the accounting for employee
share ownership plans, which are subject to AICPA Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans. The Company will be
required to adopt Statement No. 123R in fiscal 2006. The Company has not yet
determined the method of adoption or the effect of adopting Statement No. 123R
(see below).
Page 6
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
In June 2005, the Company accelerated the vesting of substantially all stock
options outstanding under the Company's stock-based employee compensation plan
that had exercise prices higher than the closing price of the Company's stock on
June 14, 2005, which was $2.38. Options to purchase approximately 624 shares of
the Company's common stock became exercisable immediately.
The primary purpose of the accelerated vesting was to eliminate future
compensation expense, which resulted in approximately $1,841 of additional pro
forma compensation expense as reflected in the table above for the three months
and six months ended July 2, 2005, beginning in the 2006 first quarter and
ending in 2013, that the Company would have otherwise recognized in its
consolidated statement of operations with respect to the accelerated options
upon the adoption of FASB Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R will require that
compensation expense associated with stock options be recognized in the
consolidated statement of operations, rather than as a footnote disclosure in
the Company's consolidated financial statements. The acceleration of the vesting
of these options did not result in a charge based on accounting principles
generally accepted in the United States of America.
(4) Acquisition
In March 2004, the Company expanded into the Pacific Northwest through the
purchase of selected terminal network and rolling stock of Eastern Oregon Fast
Freight ("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 $10,000, with the purchase price paid from cash reserves. The
assets acquired were recorded at fair market value as determined by management
based on information currently available and on assumptions as to future
operations.
(5) Loss Per Share
The basic loss per share is calculated using the weighted average number of
shares outstanding. The weighted average shares outstanding used in the
calculation of the diluted loss per share includes the dilutive effect of
options to purchase common stock, calculated using the treasury stock method as
may be applicable. All outstanding options were considered anti-dilutive at July
2, 2005 and July 3, 2004.
The following table presents information necessary to calculate basic and
diluted loss per share:
Three months ended Six months ended
----------------------------- -----------------------------
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss $ (6,111) $ (2,543) $ (14,375) $ (3,672)
============ ============ ============ ============
Weighted average shares outstanding - basic 18,215 17,842 18,203 17,777
Common stock equivalents - - - -
------------ ------------ ------------ ------------
Weighted average shares outstanding - diluted 18,215 17,842 18,203 17,777
============ ============ ============ ============
Basic loss per share (0.34) (0.14) (0.79) (0.21)
Diluted loss per share (0.34) (0.14) (0.79) (0.21)
Anti-dilutive unexercised options excluded
from calculation 1,545 1,581 1,545 1,581
Page 7
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
(In thousands, except per share amounts)
(6) Debt and Related Party Financing
(a) Long-term Debt
Long-term debt consists of the following at July 2, 2005 and December 31, 2004:
2005 2004
---- ----
Capital lease obligations $ 28,534 $ 32,842
Notes Payable (Autos) 375 --
Less: Current portion 9,171 10,958
----- ------
$ 19,738 $ 21,884
======== ========
(b) Short-term Notes Payable and Liquidity
On April 30, 2002, the Company entered into a $40,000 revolving accounts
receivable securitization facility (the "Securitization Facility") and a
revolving credit facility (the "Revolving Facility"). Under the Securitization
Facility, the Company, on a revolving basis, sold its interests in its accounts
receivable to Central Receivables, a wholly-owned, special purpose subsidiary.
The Company could receive up to $40,000 of proceeds. The Company paid commercial
paper interest rates plus an applicable margin on the proceeds received. The
Securitization Facility included certain restrictions and financial covenants.
On July 28, 2004, the Company and SunTrust Bank entered into an amended and
restated revolving credit facility (the "Amended and Restated Revolving
Facility"), to increase borrowing capacity to $30,000, and to extend the
maturity date to April 30, 2006. On November 5, 2004, the Company executed a
first amendment to the Amended and Restated Revolving Credit Facility. Under the
first amendment to the Amended and Restated Revolving Facility, the Company
could receive up to an aggregate of $30,000 of proceeds in the form of letters
of credit, only. The Amended and Restated Revolving Facility accrued interest at
a variable rate equal, at the Company's option, to either (a) the bank's prime
lending rate minus an applicable margin, or (b) LIBOR plus an applicable margin.
The Amended and Restated Revolving Facility was secured by certain revenue
equipment, and letters of credit that were issued were secured by cash
collateral which was recorded as restricted cash on the Company's consolidated
balance sheet at December 31, 2004. The facility contained, among other things,
certain financial and non-financial covenants.
On January 31, 2005, the Company entered into a four-year senior secured
revolving credit facility and letter of credit sub-facility (the "New Credit
Facility") with Bank of America, N.A., as Agent, and certain other lenders from
time to time party to the New Credit Facility, in the aggregate principal amount
of up to $70,000. The New Credit Facility replaced both the Amended and Restated
Revolving Facility and the Securitization Facility. The New Credit Facility
terminates on January 31, 2009.
Subject to the terms of the New Credit Facility, the maximum revolving borrowing
limit under the New Credit Facility was the lesser of (a) $70,000, or (b) 85% of
the Company's eligible accounts receivable, plus 85% of the net orderly
liquidation value of the Company's eligible rolling stock owned as of January
31, 2005, plus 85% of the cost of eligible rolling stock acquired by Borrower
after January 31, 2005. Letters of Credit under the New Credit Facility are
subject to a sub-limit of $40,000 and are not required to be secured by cash
collateral.
Borrowings under the New Credit Facility bear interest at the base rate, as
defined, plus an applicable margin of 0.00% to 1.00%, or LIBOR plus an
applicable margin of 1.50% to 2.75%, based on the average quarterly availability
under the New Credit Facility. Letters of credit under the New Credit Facility
are subject to an applicable letter of credit margin of 1.25% to 2.50%, based on
the average quarterly availability under the New Credit Facility. The New Credit
Facility also prescribes additional fees for letter of credit transactions, and
an unused line of credit fee of 0.25% to 0.375%, based on aggregate amounts
outstanding.
Page 8
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
The New Credit Facility is collateralized by substantially all of the Company's
assets, other than certain revenue equipment and real estate that is (or may in
the future become) subject to other financing.
The New Credit Facility contains certain restrictions and covenants relating to,
among other things, minimum EBITDA levels, fixed charge coverage ratio, cash
flow, capital expenditures, acquisitions and dispositions, sale-leaseback
transactions, additional indebtedness, additional liens, dividends and
distributions, investment transactions, and transactions with affiliates.
However, if our borrowing availability is in excess of $15,000, financial
covenants will not apply. The New Credit Facility includes usual and customary
events of default for a facility of this nature and provides that, upon the
occurrence and continuation of an event of default, payment of all amounts
payable under the New Credit Facility may be accelerated, and the lenders'
commitments may be terminated.
Although it is a four-year credit facility, draws on the line are considered
current based on evolving interpretations of Emerging Issues Task Force 95-22
Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit
Agreements that include both a Subjective Acceleration Clause and a Lock-Box
Arrangement ("EITF 95-22"). EITF 95-22 requires revolving credit agreements with
a required lock-box arrangement that include subjective acceleration clauses to
be classified as current liabilities. The New Credit Facility includes a
lock-box agreement and also allows the lender, in its reasonable credit
judgment, to assess additional reserves against the borrowing base calculation
and take certain other discretionary actions. For example, certain reserve
requirements may result in an over advance borrowing position that could require
an accelerated repayment of the over advance portion. Since the inception of
this facility, the lender has not applied any additional reserves to the
borrowing base calculation. However, the lender, in its reasonable credit
judgment, can assess additional reserves to the borrowing base calculation to
account for changes in our business or the underlying value of the collateral.
The Company does not anticipate any changes that would result in any material
adjustments to the borrowing base calculation, but the Company cannot be certain
that additional reserves will not be assessed by the bank to the borrowing base
calculation. The Company believes the provisions in the New Credit Facility are
relatively common for credit facilities of this type and, while the Company does
not believe that this accounting requirement accurately reflects the long-term
nature of the facility, the Company acknowledges the requirements of EITF 95-22.
Accordingly, the Company has classified borrowings under the New Credit Facility
as a short-term obligation.
The line of credit established with Bank of America on January 31, 2005 had no
financial covenants until the end of May 2005. In lieu of covenants through May,
a $5,000 restriction on availability was in place. After May 2005, the $5,000
restriction would have been eliminated and no financial covenants would have
existed as long as excess availability on the line remained above $15,000. If
excess availability had dropped below $15,000 the Company was required to
maintain minimum EBITDA levels.
On May 12, 2005, the Company entered into a first amendment to the New Credit
Facility. Under this amendment, the maximum revolving borrowing limit was
reduced from $70,000 to $60,000 to more closely reflect the Company's borrowing
base of $55,000 as of July 2, 2005 (thereby reducing fees on unused amounts)
with an option to increase the borrowing limit to $70,000 at a later date. This
amendment has no financial covenants until August 15, 2005. In lieu of covenants
through August 15, 2005, a $5,000 restriction on availability is in place. After
August 15, 2005, the $5,000 restriction is eliminated and no financial covenants
exist as long as excess availability on the line remains above $15,000. If
excess availability drops below $15,000, the Company is required to maintain
minimum EBITDA levels or a fixed charge coverage ratio. As of July 2, 2005, the
Company had approximately $17,461 in availability under the revolving credit
facility before the $5,000 restriction. Loans drawn under the credit facility
amounted to $15,905, and letters of credit outstanding amounted to $21,692.
See also Note 11.
Page 9
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
In May 2005, the Company contracted to sell approximately 14 excess acres in
Phoenix for $1,200. This transaction closed in June and the Company recognized a
gain of $474 on the sale. In addition, in July 2005, the Company closed on an
agreement for the sale and leaseback of one of its terminals. The sale and
leaseback transaction generated $6,223 in net proceeds and the Company signed a
ten-year lease with a ten-year option. In July 2005, the Company also closed on
mortgage financing with respect to three other terminal properties. The mortgage
financing generated $7,860 in net proceeds. All of the proceeds from these
transactions were used to repay existing debt under the Company's New Credit
Facility with Bank of America.
After the closing of these financings and the continuation of improvements in
the Company's operating results, the Company expects to have borrowing
availability in excess of $15,000 such that the minimum EBITDA levels required
by the New Credit Facility will not apply.
Although there can be no assurance, the Company believes cash from operations,
borrowing available under its new credit facility, and other sources of
liquidity will be sufficient to fund its operations. To the extent that actual
results or events differ from the Company's financial projections or business
plans, our liquidity may be adversely affected and the Company may be unable to
meet its financial covenants. Specifically, the Company's liquidity may be
adversely affected by one or more of the following factors: weak freight demand
or a loss in customer relationships or volume, the Company's success in
executing its turnaround plans, the Company's ability to improve the collection
of its accounts receivable, elevated fuel prices and the ability to collect fuel
surcharges, costs associated with insurance and claims, an inability to maintain
compliance with, or negotiate amendments to, loan covenants, the ability to
finance tractors and trailers, and the possibility of shortened payment terms by
the Company's suppliers and vendors worried about our ability to meet payment
obligations.
In March 2004, the Company acquired certain assets of EOFF for approximately
$10,000. The remaining $864 is recorded on the consolidated balance sheet as
short-term notes payable. The Company expects to finalize and settle this
remaining liability before the end of 2005. Under terms of the agreement, the
Company paid approximately $7,000 of the purchase price at closing, and an
additional $2,200 during 2004. A remaining $864 (including purchase price
adjustments of $56) is recorded on the consolidated balance sheet under
short-term notes payable at July 2, 2005.
(c) 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.
Page 10
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
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 2005 and 2004, $136 and $301, respectively, 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
$22,716 and $22,852 at July 2, 2005 and December 31, 2004 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
At July 2, 2005 and December 31, 2004, the Company had a federal net operating
loss carry forward of approximately $30,740 and $24,258, respectively, available
to reduce future taxable income. The net operating loss generated in the 2005
first half and all of 2004 amounted to $6,482 and $20,945, respectively, and
expires in varying amounts beginning in 2023 if not utilized.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Significant management judgment is required in determining the provision for
income taxes and in determining whether deferred tax assets will be realized in
full or in part. Deferred tax assets and liabilities are measured using enacted
tax rates that are expected to apply to taxable income in years in which the
temporary differences are expected to be reversed. Under SFAS No. 109 and
applicable interpretations, in 2004, the Company established a $4,864 valuation
allowance for deferred tax assets. As of July 2, 2005, the valuation allowance
for deferred tax assets was approximately $10,426.
(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.
Page 11
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
In June and July 2004, three stockholder class actions were filed against the
Company and certain officers and directors. The class actions were filed in the
United States District Court - Western District of Texas and generally allege
that false and misleading statements were made in the initial public offering
registration statement and prospectus, during the period surrounding the initial
public offering and up to the press release dated June 16, 2004. The class
actions were subsequently consolidated in the United States District Court -
Western District of Texas under the title In re Central Freight Lines Securities
Litigation. The Oklahoma Firefighters Pension and Retirement System has been
named lead plaintiff in the consolidated action, and a Consolidated Amended
Class Action Complaint was filed on May 9, 2005. The Consolidated Amended Class
Action Complaint generally alleges that false and misleading statements were
made in our initial public offering registration statement and prospectus,
during the period surrounding the initial public offering and up to March 17,
2005. On July 8, 2005, the Company responded to the Consolidated Amended Class
Action Complaint by filing a motion to dismiss. On August 9 and 10, 2004, two
purported derivative actions were filed against the Company, as nominal
defendant, and against certain officers, directors, and former directors. These
actions were filed in the District Court of McLennan County, Texas and generally
allege breach of fiduciary duty, abuse of control, gross mismanagement, waste of
corporate assets, and unjust enrichment on the part of certain of the Company's
present and former officers and directors in the period between December 12,
2003 and August 2004. The purported derivative actions seek declaratory,
injunctive, and other relief. The Company does not believe there is any factual
or legal basis for the allegations, and the Company intends to vigorously defend
against the suits. The Company has informed its insurance carrier and has
retained outside counsel to assist in the Company's defense. Prior to December
12, 2004, the Company maintained a $5,000 directors' and officers' insurance
policy with a $350 deductible. On December 12, 2004, the Company increased its
directors' and officers' insurance coverage. The Company currently maintains a
$15,000 directors' and officers' insurance policy with a $350 deductible. In the
2004 third quarter, in connection with this litigation, the Company recorded an
expense of $350, representing the full deductible amount under its current
directors' and officers' insurance policy.
Although it is not possible at this time to predict the litigation outcome of
these cases, the Company expects to prevail. However, an adverse litigation
outcome could be material to the Company's consolidated financial position or
results of operations. As a result of the uncertainty regarding the outcome of
this matter, no provision has been made in the consolidated financial statements
with respect to this contingent liability except for the insurance deductible.
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.
(9) Related-Party Transactions
During the three months and six months ended July 2, 2005 and July 3, 2004 the
Company incurred approximately $4,482, $5,965, $7,953 and $8,242, respectively,
for transportation services provided by companies for which the Company's
principal stockholder was the Chairman. At July 2, 2005 and December 31, 2004,
the Company had payables of $2,006 and $988, respectively, for these
transportation services.
Page 12
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
During the three months and six months ended July 2, 2005 and July 3, 2004, the
Company incurred $35, $39, $197, and $134, for legal expenses respectively, to
an entity owned by a stockholder of the Company.
During the three months and six months ended July 2, 2005 and July 3, 2004, the
Company incurred $449, $376, $898, and $896, respectively, for building rental
expense with related parties.
See also note 6(c).
(10) Employee Benefit Plan
The Company initiated an Employee Stock Purchase Plan ("the Plan") in August
2004 whose purpose is to allow qualified employees to acquire shares of the
Company at a 10% discount to the closing market price as of the end of each
calendar month. These shares are issued from authorized but unissued shares of
the Company. The Plan qualifies as an Employee Stock Purchase Plan under Section
423 of the Internal Revenue Code of 1986, as amended. One million total shares
have been authorized under the Plan.
(11) Subsequent Events
In July 2005, the Company closed on an agreement for the sale and leaseback of
one of its terminals. The sale and leaseback transaction generated $6,223 in net
proceeds, and the Company signed a ten-year lease with a ten-year option. Rent
for the first 12 months amounts to $607, and annual rent for the following nine
years is subject to a 2% annual escalation factor. In July 2005, the Company
also closed on mortgage financing with respect to three other terminal
properties. The mortgage financing generated $7,860 in net proceeds. All of the
proceeds from these transactions were used to repay existing debt under the
Company's New Credit Facility. The mortgage financing is to be repaid by July
12, 2010 based on a 20 year amortization schedule with an annual interest rate
of 9.15%. Total payments per year are approximately $900 with a final payment of
$7,176.
Page 13
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
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 Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended.
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 31, 2005, 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.
Business Overview
We are one of the ten largest regional LTL carriers in the United States based
on revenues, according to Transport Topics, generating approximately $386.6
million in revenue during fiscal 2004. In our operations, we pick up and deliver
multiple shipments for multiple customers on each trailer.
The history of the name Central Freight Lines and its franchise dates back to
1925, when Central Freight Lines was founded in Waco, Texas and served the
intrastate Texas LTL market for decades. Our company began its operations
effective June 30, 1997, when our former Chairman of the Board, Jerry Moyes,
organized our company and acquired the Central Freight Lines name, terminal
network, and physical assets from the Southwestern Division of Viking Freight
Lines, whose corporate group acquired our predecessor in 1993.
Page 14
Prior to 2002, we conducted our operations almost exclusively in our eight-state
Southwest region, which is anchored by Texas and California. Since 2002, a
significant portion of our business has continued to be concentrated in our
Southwest region. Through the following two expansions, however, we have
increased the geographic scope of our business:
o 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 year ended December 31, 2003, reflect the costs of this Midwest
expansion, primarily consisting of purchased transportation, employee
training, and relocation expenses.
o In March 2004, we expanded into the Pacific Northwest through the purchase
of selected terminal network and rolling stock of Eastern Oregon Fast
Freight ("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 the purchase price paid from cash
reserves. The assets acquired included six owned terminal properties,
fifteen leased terminal properties, 160 tractors, and 644 trailers.
Recent Results of Operations and Quarter-End Financial Condition
A pre-tax loss of $6.1 million was realized in the 2005 second quarter compared
to a pre-tax loss of $6.9 million in the 2004 second quarter. A net loss of
$6.1 million was realized in the second quarter of 2005. The $6.1 million pretax
loss in the second quarter of 2005 generated a tax benefit of approximately $2.3
million which was offset by the increase in the valuation allowance for deferred
tax assets. This resulted in no tax benefit being recorded in the second quarter
of 2005. The net loss in the second quarter of 2004 was $2.5 million, or $0.14
per diluted share. (See Results of Operations Below.)
At July 2, 2005, our consolidated balance sheet reflected $0.3 million in cash,
$51.6 million in long-term debt and capital lease obligations, including current
portion, and $16.8 million in short-term debt. Stockholders' equity was $73.3
million at July 2, 2005. As of that date, we had approximately $17.5 million in
availability, subject to a $5.0 million block under our revolving credit
facility with Bank of America, although availability fluctuates from day to day.
We have idle assets held for sale with an estimated net book value of $4.5
million that are planned to be disposed of in 2005.
On July 14, 2005, we announced that we had closed on several real estate
transactions with net proceeds of approximately $15.2 million. These real estate
transactions included the sale of approximately 14 excess acres in Phoenix, the
sale-leaseback of one terminal, and the mortgage financing of three other
properties. The proceeds from the real estate transactions were used to repay
amounts drawn on our revolving credit facility with Bank of America. Following
this repayment, and as of July 27, 2005, we had approximately $35.3 million in
availability, subject to a $5.0 million block under our revolving credit
facility with Bank of America, although availability fluctuates from day to day.
Page 15
Operating Strategy for 2005
Our main goals for 2005 are to achieve quarter-by-quarter sequential improvement
in our operating performance and to return to profitability in the fourth
quarter of 2005. We believe that both the first quarter and the second quarter
of 2005 were positive steps in that direction. Our operating ratio improved 240
basis points from 109.2% to 106.8% between the fourth quarter of 2004 and the
first quarter of 2005, and our operating ratio improved 330 additional basis
points from 106.8% to 103.5% between the first quarter and second quarter of
2005.
We have identified five specific areas of focus in our efforts to improve
results:
o Improving revenue yield and total tonnage.
o Reducing our cost structure to better align controllable costs with
our expected revenue base.
o Streamlining freight movements to consolidate movements and reduce the
use of third-party purchased transportation.
o Improving employee efficiency.
o Reducing insurance and claims expense.
We believe that much work remains to be done to return our results to acceptable
levels, particularly in the area of revenue yield and tonnage. However, we
believe the results for the first and second quarters of 2005 demonstrate
measurable improvement.
Revenues
Our revenues vary with the revenue per hundredweight we charge to customers and
the volume of freight we transport:
o 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 from $11.31 in
the second quarter of 2004 to $11.75 in the second quarter of 2005, due
mainly to increases in fuel surcharge revenue. Our LTL revenue per
hundredweight, without fuel surcharge revenue, declined to $10.61 in the
second quarter of 2005 from $10.77 in the second quarter of 2004 due to a
4.2% increase in average weight per LTL shipment. Effective May 2, 2005, we
enacted a general rate increase of 6.0% for customers on our proprietary
rate base. Partly as a result of this rate increase, our LTL revenue per
hundredweight, without fuel surcharge revenue improved slightly from $10.56
in the first quarter of 2005 to $10.61 in the second quarter of 2005.
o 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 10.8% from the second quarter of 2004 to the
second quarter of 2005. However, total tonnage per day in the 2005 second
quarter increased by approximately 10.4% compared to total tonnage per day
in the 2005 first quarter.
Page 16
Historically, most of our revenue has been generated from transporting LTL
shipments from customers within our operating regions. In the first half of 2005
and all of 2004, approximately 8.5% and 9.9%, respectively, of our revenue was
derived from shipments that originated or terminated in regions outside our
network, where a portion of the freight movement was handled by another carrier.
We refer to this as "interline freight." Most of this revenue was obtained from
carriers with which we maintain transportation alliances. The revenue from
interline freight in the second quarter of 2005 was lower compared to the second
quarter of 2004, due in large part to our geographic expansion. Because of the
geographic expansion of our network, our need to rely upon other carriers for
freight movements declined. In addition, some of our relationships with carriers
handling interline freight were negatively affected by our geographic expansion.
We do not recognize the portion of revenue (or the associated expenses) that
relate to the portion of shipments hauled by our alliance partners. In addition
to transportation revenue, we also recognize revenue from fuel surcharges we
receive from our customers when the national average diesel fuel price published
by the U.S. Department of Energy exceeds prices listed in our contracts and
tariffs.
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 $106 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 seven terminals leased under operating leases.
Depreciation and amortization. This category relates to owned assets, assets
under capitalized leases, gains and losses on sales of assets, and 29 properties
we lease from Southwest Premier Properties, a related party, that are considered
to be a financing arrangement.
Page 17
Results of Operations
The table below sets forth the percentage relationship of the specified items to
operating revenues for the periods indicated.
Three months ended Six months ended
------------------------------ --------------------------
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
--------------- ------------- ------------ ------------
Operating revenues........................................ 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:
Salaries, wages, and benefits........................... 54.2 56.9 55.6 57.2
Purchased transportation................................ 13.7 16.4 13.7 15.3
Operating and general supplies and
expenses............................................. 23.2 19.7 23.2 19.3
Insurance and claims.................................... 6.8 6.6 6.2 5.4
Building and equipment rentals.......................... 1.5 1.4 1.6 1.4
Depreciation and amortization........................... 4.1 3.8 4.8 3.9
--- --- --- ---
Total operating expenses(1).......................... 103.5 104.8 105.1 102.5
----- ----- ----- -----
Loss from operations...................................... (3.5) (4.8) (5.1) (2.5)
Interest expense.......................................... 2.6 1.8 2.5 1.8
--- --- --- ---
Loss before income taxes.................................. (6.1) (6.6) (7.6) (4.3)
---- ---- ---- ----
Income tax benefit........................................ 0.0 4.2 0.0 2.5
--- --- --- ---
Net loss.................................................. (6.1)% (2.4)% (7.6)% (1.8)%
======== ======== ======== ========
(1) Total operating expenses as a percentage of operating revenues, as presented
in this table, is also referred to as operating ratio.
Comparison of Three Months Ended July 2, 2005, to Three Months Ended July 3,
2004
Operating revenues. Operating revenues decreased $6.0 million, or 5.7%, from
$105.5 million for the second quarter of 2004 to $99.5 million for second
quarter of 2005. The decrease in operating revenues was mainly due to a 10.8%
decrease in total tonnage and 12.6% decrease in total shipments hauled, offset
in part by a $4.7 million increase in fuel surcharge due to higher cost of fuel.
LTL revenue per hundredweight increased 3.9% from $11.31 in the 2004 quarter to
$11.75 in the 2005 quarter as a result of increased fuel surcharge revenue. LTL
revenue per hundredweight, excluding fuel surcharge revenue, decreased 1.5% from
$10.77 in the 2004 second quarter to $10.61 in the 2005 second quarter due to an
increase of 4.2% in average weight per LTL shipment. The average length of haul
increased 1.9% from 479 miles in the 2004 second quarter to 488 miles in the
2005 second quarter. Total tonnage decreased 58.2 thousand tons, or 10.8%, from
536.2 thousand tons in the 2004 quarter to 478.0 thousand tons in the 2005
quarter.
Page 18
Salaries, wages, and benefits. Salaries, wages, and benefits decreased $6.1
million, or 10.1%, from $60.1 million for the second quarter of 2004 to $54.0
million for the second quarter of 2005. The decrease in salaries, wages, and
benefits resulted primarily from an overall reduction in business volumes and a
reduction in headcount of approximately 12.1% from the second quarter of 2004 to
the second quarter of 2005. A general increase in salary and wage rates of
approximately 2.5% partially offset the effects of reduced volumes and
headcount. Further, group health expense decreased only 4.9% between the 2004
quarter and the 2005 quarter, despite the 12.1% reduction in the number of
employees. Line mileage pay decreased only 4.5% as more shipments were handled
by company drivers and less by purchased transportation. As a percentage of
operating revenues, salaries, wages, and benefits decreased from 56.9% for the
2004 quarter, to 54.2% for the 2005 quarter.
Purchased transportation. Purchased transportation decreased $3.8 million, or
21.8%, from $17.4 million for the second quarter of 2004 to $13.6 million for
the second quarter of 2005. The decrease in purchased transportation resulted
primarily from a decreased usage of third-party contractors handling portions of
our shipments. The decreased use of third-party contractors in the 2005 quarter
was due to both the decrease in total tonnage hauled and to improved lane
balance in our network, which allowed more shipments to be handled by company
drivers. As a percentage of operating revenues, purchased transportation
decreased from 16.4% for the 2004 quarter to 13.7% for the 2005 quarter.
Operating and general supplies and expenses. Operating and general supplies and
expenses increased $2.2 million, or 10.6%, from $20.9 million for the second
quarter of 2004 to $23.1 million for the second quarter of 2005. The increase in
operating and general supplies and expenses resulted primarily from increases in
fuel expense, bad debt expense and related collection costs, license expenses
and internal control consulting fees (relating to Sarbanes-Oxley). These
increased costs were offset in part by improvements in vehicle repairs and
maintenance, which we attribute to our investment in new tractors and trailers
in late 2004. As a percentage of operating revenues, operating and general
supplies and expenses increased from 19.7% for the 2004 quarter to 23.2% for the
2005 quarter.
Insurance and claims. Insurance and claims decreased $0.2 million, or 2.9%, from
$6.9 million for the second quarter of 2004 to $6.7 million for the second
quarter of 2005. The decrease in insurance and claims expense resulted primarily
from a reduction in our cargo claims expense that was partially offset by an
increase in third party accident claims expense. We also included in insurance
and claims expense for the 2004 quarter our $0.4 million deductible for
directors and officer insurance in connection with the class action complaints
filed against us and certain of our officers and directors in late June and
early July. As a percentage of operating revenues, insurance and claims
increased from 6.6% for the 2004 quarter to 6.8% for the 2005 quarter.
Building and equipment rentals. Building and equipment rentals increased
approximately $0.1 million, or 7.1%, from $1.4 million for the second quarter of
2004 to $1.5 million for the second quarter of 2005. As a percentage of
operating revenues, building and equipment rentals increased from 1.4% for the
2004 quarter to 1.5% for the 2005 quarter.
Page 19
Depreciation and amortization. Depreciation and amortization expense increased
approximately $0.1 million, or 2.5%, from $4.0 million for the second quarter of
2004 to $4.1 million for the second quarter of 2005, due mainly to increases in
depreciation expense from new tractors and trailers acquired in late 2004. As a
percentage of operating revenues, depreciation and amortization increased from
3.8% for the 2004 quarter to 4.1% for the 2005 quarter.
Operating ratio. Our operating ratio improved from 104.8% in the second quarter
of 2004 to 103.5% for the second quarter of 2005.
Interest expense. Total interest expense increased $0.7 million, or 36.8%, from
$1.9 million for the second quarter of 2004 to $2.6 million for the second
quarter of 2005. As a percentage of operating revenues, interest expense
increased from 1.8% for the 2004 quarter to 2.6% for the 2005 quarter. In the
2005 second quarter, we elected to reduce the maximum revolving borrowing limit
under our credit agreement to more closely reflect our borrowing base. In
connection with that reduction, and consistent with EITF 98-14, we incurred a
$0.2 million non-cash charge in the 2005 quarter. Our average (non-related
party) debt for the 2005 quarter amounted to $45.7 million compared to $24.6
million for the 2004 quarter. In the fourth quarter of 2004, we increased
capital leases by approximately $16.0 million to fund the acquisition of revenue
equipment. Our related party interest expense remained virtually the same at
$1.5 million in each quarter. 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. A pre-tax loss of $6.1 million was realized in the 2005 second
quarter. The $6.1 million pretax loss in the second quarter of 2005 generated a
tax benefit of approximately $2.3 million, which was offset by the increase in
the valuation allowance for deferred tax assets. This resulted in no tax benefit
being recorded in the second quarter of 2005. The total valuation allowance as
of July 2, 2005 amounted to approximately $10.4 million. In the 2004 second
quarter, we recorded a $4.4 million income tax benefit due partially to a
pre-tax loss of $6.9 million. Also, included in the $4.4 million benefit is a
$1.8 million benefit from the reversal of a previously recorded deferred tax
liability as a result of an IRS review.
Despite the valuation allowances established above, we believe that the
remaining net deferred tax assets will be realized through future taxable
income.
Comparison of Six Months Ended July 2, 2005, to Six Months Ended July 3, 2004
Operating revenues. Operating revenues decreased $13.8 million, or 6.8%, from
$202.6 million for the 2004 period to $188.8 million for the 2005 period. The
decrease in operating revenues was mainly due to a 9.9% decrease in total
tonnage and a 12.8% decrease in total shipments hauled, offset in part by a $9.2
million increase in fuel surcharge revenue due to higher cost of fuel. Revenue
per working day was $1.46 million in the 2005 period, which was 6.4% lower than
the $1.56 million per working day in the 2004 period. LTL revenue per
hundredweight increased 2.4% from $11.37 in the 2004 period to $11.64 in the
2005 period as a result of increased fuel surcharge revenue. LTL revenue per
hundredweight, excluding fuel surcharge revenue, decreased 3.2% from $10.93 in
the 2004 period to $10.58 in the 2005 period partially due to a 4.3% increase in
average weight per LTL shipment. The average length of haul increased 3.2% from
473 miles in the 2004 period to 488 miles in the 2005 period. Total tonnage
decreased 100.4 thousand tons, or 9.9%, from 1,018.4 thousand tons in the 2004
period to 918.0 thousand tons in the 2005 period.
Page 20
Salaries, wages, and benefits. Salaries, wages, and benefits decreased $10.8
million, or 9.3%, from $115.7 million for the 2004 period to $104.9 million for
the 2005 period. The decrease in salaries, wages, and benefits resulted
primarily from an overall reduction in business volumes and a reduction in
headcount of approximately 12.0% from the 2004 period to the 2005 period. A
general increase in salary and wage rates in March 2005 partially offset the
effects of reduced volumes and headcount. Further, the 2005 period included a
large workers' compensation accident, for which the maximum deductible of $1.0
million was expensed in the 2005 first quarter. As a percentage of operating
revenues, salaries, wages, and benefits decreased from 57.2% for the 2004
period, to 55.6% for the 2005 period.
Purchased transportation. Purchased transportation decreased $5.0 million, or
16.2%, from $30.9 million for the 2004 period to $25.9 million for the 2005
period. The decrease in purchased transportation expenses resulted mainly from a
reduction in usage of third-party contractors in handling portions of our
shipments. The decreased used of third-party contractors in the 2005 period was
due both to the decrease in total tonnage hauled and to improved lane balance in
our network, which allowed more shipments to be hauled by company drivers. As a
percentage of operating revenues, purchased transportation decreased from 15.3%
for the 2004 period to 13.7% for the 2005 period.
Operating and general supplies and expenses. Operating and general supplies and
expenses increased $4.6 million, or 11.7%, from $39.3 million for the 2004
period to $43.9 million for the 2005 period. The increase in operating and
general supplies and expenses resulted primarily from increases in fuel expense,
bad debt expense and related collection costs, license expenses, and internal
control consulting fees (relating to Sarbanes-Oxley). These increased costs were
offset in part by improvements in vehicle repairs and maintenance, which we
attribute to our investment in new tractors and trailers in late 2004. As a
percentage of operating revenues, operating and general supplies and expenses
increased from 19.3% for the 2004 period to 23.2% for the 2005 period.
Insurance and claims. Insurance and claims increased $0.9 million, or 8.3%, from
$10.9 million for the 2004 period to $11.8 million for the 2005 period. The
increase in insurance and claims expense resulted primarily from an increase in
our third party accident claims (our first quarter 2004 expense was unusually
low) that were partially offset by a reduction in cargo claims expense. As a
percentage of operating revenues, insurance and claims increased from 5.4% for
the 2004 period to 6.2% for the 2005 period.
Building and equipment rentals. Building and equipment rentals remained
virtually the same at $2.9 million in each of the six months periods. As a
percentage of operating revenues, building and equipment rentals increased from
1.4% for the 2004 period to 1.6% for the 2005 period.
Depreciation and amortization. Depreciation and amortization expense increased
approximately $1.1 million, or 13.9%, from $7.9 million for the 2004 period to
$9.0 million for the 2005 period, mainly as a result of revenue equipment added
late in the 2004 fourth quarter. As a percentage of operating revenues,
depreciation and amortization increased from 3.9% for the 2004 period to 4.8%
for the 2005 period.
Operating ratio. Our operating ratio increased from 102.5% for the 2004 period
to 105.1% for the 2005 period.
Page 21
Interest expense. Total interest expense increased $1.1 million, or 29.7%, from
$3.7 million for the 2004 period to $4.8 million for the 2005 period. As a
percentage of operating revenues, interest expense increased from 1.8% for the
2004 period to 2.5% for the 2005 period. Our average non-related party debt for
the first half of 2005 amounted to $53.3 million compared to $24.9 million for
the first half of 2004. In the fourth quarter of 2004, we increased capital
leases by approximately $16.0 million to fund the acquisition of revenue
equipment. Our related party interest expense was unchanged at $3.1 million in
both the 2004 and 2005 periods. 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. For the six months ended July 2, 2005, the pre-tax loss of $14.4
million generated an income tax benefit of approximately $5.5 million which was
offset by an increase in the valuation for deferred tax assets. This resulted in
no tax benefit being recorded in the first half of 2005. The total valuation
allowance as of July 2, 2005 amounted to approximately $10.4 million. We
recorded an income tax benefit in the 2004 period of $5.1 million, which yields
an effective tax rate of 58.0% (including a $1.8 million benefit for the
reversal of a previously recorded deferred tax liability due to an IRS review)
on a pre-tax loss of $8.7 million. Excluding the $1.8 million benefit, the
effective tax rate would have been 37.9%.
Despite the valuation allowances established above, we believe that the
remaining net deferred tax assets will be realized through future taxable
income.
Liquidity and Capital Resources
Our business has required substantial, ongoing capital investments, particularly
to replace revenue equipment such as tractors and trailers. Our primary sources
of liquidity have historically been cash from operations and secured borrowings.
During the remainder of 2005 our gross capital expenditures are expected to be
approximately $1.5 million to $7.5 million. Included in this range is
approximately $6.0 million for the possible replacement of revenue equipment. If
we decide to purchase the $6.0 million in replacement equipment, we expect to
obtain financing independent from our Bank of America led credit facility.
We continue to execute a turnaround plan that is designed to reverse recent
negative cash flows. During 2004 and into early 2005 we have experienced a
period of negative cash flow attributable primarily to operating losses and
approximately $7.0 million of un-financed purchases of revenue equipment during
late 2004 and early 2005. During the third and fourth quarters of 2004, our
management began implementing several steps that are intended to improve our
operating results and maintain compliance with our financial covenants. These
steps include: reducing our cost structure to better align controllable costs
with our expected revenue base, streamlining freight movements to consolidate
movements and reduce the use of third-party purchased transportation, improving
employee efficiency, reducing insurance and claims expense, and improving
revenue yield and total tonnage. These steps contributed to a 740 basis-point
improvement in our operating ratio between the third quarter of 2004 (when the
steps were implemented) and the second quarter of 2005. We expect additional
improvement in our operating ratio between the second quarter of 2005 and the
third quarter of 2005. Although our management believes that these actions
should generate the required improvements, there can be no assurance that the
improvements will occur as planned. Our ability to fund our cash requirements in
future periods will depend on our ability to improve operating results and cash
flow and our ability to comply with covenants contained in our financing
arrangements. Our ability to achieve required improvements will depend on
general shipping demand by our customers, insurance and claims expense, and
other factors.
Page 22
On July 14, 2005, we announced that we had closed on several real estate
transactions with net proceeds of approximately $15.2 million. These real estate
transactions included the sale of approximately 14 excess acres in Phoenix, the
sale-leaseback of one terminal, and the mortgage financing of three other
properties. The proceeds from the real estate transactions were used to repay
amounts drawn on our revolving credit facility with Bank of America. Following
this repayment, and as of July 27, 2005, we had approximately $35.3 million in
availability, subject to a $5.0 million block under our revolving credit
facility with Bank of America, although availability fluctuates from day to day.
In addition, we currently have approximately $5.0 million of idle assets held
for sale that may be disposed of in the remainder of 2005.
Assuming the continuation of improvements in our operating results, we expect to
have borrowing availability in excess of $15.0 million such that the minimum
EBITDA levels required by the New Credit Facility will not apply.
Subsequent to these transactions, annual rent expense is expected to increase by
approximately $0.6 million subject to a 2% escalation factor beginning in July
2006. Annual depreciation expense is expected to decline by approximately $0.3
million. Interest expense is expected to increase by approximately $0.7 million
between July 2005 and June 2006 and decrease thereafter.
Although there can be no assurance, we believe cash from operations, borrowing
available under our new credit facility, and other sources of liquidity will be
sufficient to fund our operations. To the extent that actual results or events
differ from management's financial projections or business plans, our liquidity
may be adversely affected and we may be unable to meet our financial covenants.
Specifically, our liquidity may be adversely affected by one or more of the
following factors: weak freight demand or a loss in customer relationships or
volume, our success in executing management's turnaround steps described above,
our ability to improve the collection of our accounts receivable, elevated fuel
prices and the ability to collect fuel surcharges, costs associated with
insurance and claims, an inability to maintain compliance with, or negotiate
amendments to, loan covenants, the ability to finance tractors and trailers, and
the possibility of shortened payment terms by our suppliers and vendors worried
about our ability to meet payment obligations.
Net cash used in operating activities was approximately $7.1 million and $3.1
million for the six months ended July 2, 2005 and July 3, 2004, respectively.
Net cash used in the 2005 period resulted mainly from a $7.1 million reduction
in trade accounts payable and an increase in accounts receivable of $2.8
million, offset by an increase in accrued expenses. In 2004, net cash used
resulted mainly from an increase in accounts receivable of $5.9 million,
payments on accrued expenses and other liabilities of $2.6 million, an increase
in other assets (mainly licenses) of $1.5 million and offset by increases in
trade accounts payable of $6.7 million.
Page 23
Net cash provided by investing activities in the 2005 first half amounted to
$1.5 million due mainly to proceeds from the sales of excess land in Phoenix and
sales of revenue equipment. Net cash used in the 2004 first half amounted to
$21.4 million. Our gross capital expenditures were approximately $1.6 million in
the 2005 period and $16.3 million in the 2004 period. In the 2004 first half, we
paid approximately $8.3 million for new terminals in Phoenix and Fresno. In the
2004 first half, we also paid $8.1 million (of the total purchase price of $10.0
million) for the terminal network and rolling stock of EOFF - our Northwest
expansion. The remaining capital expenditures in the 2004 first half and the
2005 first half were for replacement revenue equipment. We expect our gross
capital expenditures for the remainder of 2005 to be approximately $1.5 million
to $7.5 million. Included in this range is approximately $6.0 million for the
possible replacement of revenue equipment. If we decide to purchase the $6.0
million in replacement equipment, we expect to obtain financing independent from
our Bank of America led credit facility.
Net cash provided by financing activities was approximately $3.8 million for the
six months ended July 2, 2005 due mainly to net borrowings from our new credit
facility of $15.9 million. During the transition from our previous
securitization facility to the current credit facility, we liquidated our
restricted cash investment of $20.8 million and used it to pay off part of the
$27.3 million debt under the securitization facility. In the six months ended
July 3, 2004, net cash used amounted to $4.0 million due mainly to payments of
long-term debt.
On April 30, 2002, we entered into a $40.0 million revolving accounts receivable
securitization facility (the "Securitization Facility") and a revolving credit
facility (the "Revolving Facility"). Under the Securitization Facility, we, on a
revolving basis, sold our interests in our accounts receivable to Central
Receivables, a wholly-owned, special purpose subsidiary. We could receive up to
$40.0 million of proceeds. We paid commercial paper interest rates plus an
applicable margin on the proceeds received. The Securitization Facility included
certain restrictions and financial covenants.
On July 28, 2004, SunTrust Bank and we entered into an amended and restated
revolving credit facility (the "Amended and Restated Revolving Facility"), to
increase borrowing capacity to $30.0 million, and to extend the maturity date to
April 30, 2006. On November 5, 2004, we executed a first amendment to the
Amended and Restated Revolving Credit Facility. Under the first amendment to the
Amended and Restated Revolving Facility, we could receive up to an aggregate of
$30.0 million of proceeds in the form of letters of credit, only. The Amended
and Restated Revolving Facility accrued interest at a variable rate equal, at
our option, to either (a) the bank's prime lending rate minus an applicable
margin, or (b) LIBOR plus an applicable margin. The Amended and Restated
Revolving Facility was secured by certain revenue equipment, and letters of
credit that were issued were secured by cash collateral. The facility contained,
among other things, certain financial and non-financial covenants.
On January 31, 2005, the Company entered into a four-year senior secured
revolving credit facility with Bank of America, N.A., as Agent, and certain
other lenders from time to time party to the New Credit Facility, in the
aggregate principal amount of up to $70.0 million. The New Credit Facility
replaced both the Amended and Restated Revolving Facility and the Securitization
Facility. The New Credit Facility terminates on January 31, 2009.
Page 24
Subject to the terms of the New Credit Facility, the maximum revolving borrowing
limit under the New Credit Facility was the lesser of (a) $70.0 million, or (b)
85% of our eligible accounts receivable, plus 85% of the net orderly liquidation
value of our eligible rolling stock owned as of January 31, 2005, plus 85% of
the cost of eligible rolling stock acquired by Borrower after January 31, 2005.
Letters of Credit under the New Credit Facility are subject to a sub-limit of
$40.0 million and were not required to be secured by cash collateral.
Borrowings under the New Credit Facility bear interest at the base rate, as
defined, plus an applicable margin of 0.00% to 1.00%, or LIBOR plus an
applicable margin of 1.50% to 2.75%, based on the average quarterly availability
under the New Credit Facility. Letters of credit under the New Credit Facility
are subject to an applicable letter of credit margin of 1.25% to 2.50%, based on
the average quarterly availability under the New Credit Facility. The New Credit
Facility also prescribes additional fees for letter of credit transactions, and
an unused line fee of 0.25% to 0.375%, based on aggregate amounts outstanding.
The New Credit Facility is collateralized by substantially all of our assets,
other than certain revenue equipment and real estate that is (or may in the
future become) subject to other financing.
The New Credit Facility contains certain restrictions and covenants relating to,
among other things, minimum EBITDA levels, fixed charge coverage ratio, cash
flow, capital expenditures, acquisitions and dispositions, sale-leaseback
transactions, additional indebtedness, additional liens, dividends and
distributions, investment transactions, and transactions with affiliates.
However, if our borrowing availability is in excess of $15.0 million, financial
covenants will not apply. The New Credit Facility includes usual and customary
events of default for a facility of this nature and provides that, upon the
occurrence and continuation of an event of default, payment of all amounts
payable under the New Credit Facility may be accelerated, and the lenders'
commitments may be terminated.
Although it is a four-year credit facility, draws on the line are considered
current based on evolving interpretations of Emerging Issues Task Force 95-22
Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit
Agreements that include both a Subjective Acceleration Clause and a Lock-Box
Arrangement ("EITF 95-22"). EITF 95-22 requires revolving credit agreements with
a required lock-box arrangement that include subjective acceleration clauses to
be classified as current liabilities. The New Credit Facility includes a
lock-box agreement and also allows the lender, in its reasonable credit
judgment, to assess additional reserves against the borrowing base calculation
and take certain other discretionary actions. For example, certain reserve
requirements may result in an over advance borrowing position that could require
an accelerated repayment of the over advance portion. Since the inception of
this facility, the lender has not applied any additional reserves to the
borrowing base calculation. However, the lender, in its reasonable credit
judgment, can assess additional reserves to the borrowing base calculation to
account for changes in our business or the underlying value of the collateral.
We do not anticipate any changes that would result in any material adjustments
to the borrowing base calculation, but we cannot be certain that additional
reserves will not be assessed by the bank to the borrowing base calculation. We
believe the provisions in the New Credit Facility are relatively common for
credit facilities of this type and, while we do not believe that this accounting
requirement accurately reflects the long-term nature of the facility, we
acknowledge the requirements of EITF 95-22. Accordingly, we have classified
borrowings under the New Credit Facility as a short-term obligation.
Page 25
The line of credit established with Bank of America on January 31, 2005 had no
financial covenants until the end of May 2005. In lieu of covenants through May
2005, a $5.0 million restriction on availability was in place. After May 2005,
the $5.0 million restriction would have been eliminated and no financial
covenants would have existed as long as excess availability on the line remained
above $15.0 million. If excess availability had dropped below $15.0 million we
were required to maintain minimum EBITDA levels or a fixed-charge coverage
ratio.
On May 12, 2005, we entered into an amendment to the New Credit Facility. Under
this amendment, the maximum revolving borrowing limit was reduced from $70.0
million to $60.0 million to more closely reflect our borrowing base (thereby
reducing fees on unused amounts) with an option to increase the borrowing limit
to $70.0 million at a later date. This amendment has no financial covenants
until August 15, 2005. In lieu of covenants through August 15, 2005, a $5.0
million restriction on availability is in place. After August 15, 2005, the $5.0
million restriction is eliminated and no financial covenants exist as long as
excess availability on the line remains above $15.0 million. If excess
availability drops below $15.0 million we are required to maintain minimum
EBITDA levels and other covenants. As of July 2, 2005, the Company had
approximately $17,461 in availability under the revolving credit facility before
the $5,000 restriction, loans drawn under the credit facility amounted to
$15,905, and letters of credit outstanding amounted to $21,692.
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 the
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 sheets. 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, we have 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 2005 and 2004, $0.2 million and $0.3 million ,respectively, 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 $22.7 and $22.9 million respectively at July 2, 2005 and
December 31, 2004. If we exercise 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.
Page 26
Off-Balance Sheet Arrangements
Certain of our terminals and revenue equipment are financed off-balance sheet
through operating leases. As of July 2, 2005, 47 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 consolidated balance sheets, and lease payments in respect of such terminals
and revenue equipment are reflected in our consolidated statements of operations
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 $2.9 million for the first
six months of 2005, compared to $2.9 million for the first six months of 2004.
The total amount of remaining payments under operating leases as of July 2, 2005
was $24.5 million, with $6.0 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 is an aggregate $1.0 million 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 non-collectible
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.
Page 27
Income Taxes. Significant management judgment is required in determining the
provision for income taxes and in determining whether deferred tax assets will
be realized in full or in part. Deferred tax assets and liabilities are measured
using enacted tax rates that are expected to apply to taxable income in years in
which the temporary differences are expected to be reversed. Under SFAS No. 109
and applicable interpretations, in 2004, the Company established a $4.9 million
valuation allowance for deferred tax assets. Despite the requirements for such
allowance, the Company believes that the remaining net deferred tax assets will
be realized through future taxable income. As of July 2, 2005, the valuation
allowance for deferred tax assets was approximately $10.4 million.
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. Quantitative 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, typically, are based on
the weekly national average price of diesel fuel and our operations are
concentrated in the Southwest and West coast, we have structured our fuel
surcharge to reflect the cost in those regions where we conduct the majority of
our business. There remains some risk that this blended national average will
not fully reflect regional fuel prices. 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 July 2,
2005, although we may enter into such swaps in the future if we deem
appropriate.
Our variable rate obligation consists of our credit facility. Our credit
facility, provided there has been no default, carries a variable interest rate
based on either the prime rate or LIBOR. We currently have $15.9 million in
drawings under our New Credit Facility at July 2, 2005, a one percentage point
increase in LIBOR rates would increase our annual interest expense by $159,000.
Page 28
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated our
disclosure controls and procedures, as defined by the Securities and Exchange
Commission (the "SEC"), as of the end of the period covered by this report.
Based upon this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective at the reasonable assurance level to ensure that information required
to be disclosed by us in reports filed with the SEC is recorded, processed,
summarized, and reported on a timely basis.
Changes in Internal Controls
In our Annual Report on Form 10-K for the year ended December 31, 2004, our
management identified three material weaknesses in our internal controls over
financial reporting related to our accounting for revenue, inventory, and a
deferred tax asset. Specifically, as of December 31, 2004: (a) our billing
process lacked controls to ensure the accuracy of entries to the billing system
and to ensure that changes to customer contracts were reflected in the billing
system accurately and timely, (b) we did not reconcile, pursuant to our policy,
physical counts of tire and spare parts inventories to our year-end general
ledger, and (c) we did not provide for an effective review of deferred tax asset
amounts for purposes of evaluating realizability.
Subsequent to December 31, 2004, we have undertaken the following measures to
remediate the material weaknesses in internal control over financial reporting
discussed above:
o Our rate auditor, who was hired in the fourth quarter of 2004, is being
trained to effectively audit a representative sample of revenue
transactions on a daily basis, in order to monitor the accuracy of billing
entries being made to our billing system. Our traffic manager, to ensure
additional accuracy, is auditing a sample of the rate auditor's work. In
addition, our pricing personnel are comparing changes in customer contracts
and tariffs to the billing system in order to ensure such changes are being
made timely and accurately. We continue to monitor the rate audit process
and assess its effectiveness. While we believe that as of July 2, 2005 this
control is remediated, nevertheless we have not yet tested it to ensure its
full remediation. We expect to begin testing in the third quarter of 2005.
o Physical inventories of tires and spare parts will be completed by us at
least semi-annually. Our accounting department has implemented a control to
reconcile physical counts of tires and spare parts to the general ledger on
a quarterly basis. We conducted a physical inventory at the end of the 2005
first and second quarters that resulted in no material changes to our
consolidated balance sheet.
o We developed a detailed analysis of our future utilization of deferred tax
assets and liabilities to ensure the valuation allowance is properly
stated.
Page 29
Other than as discussed above, during the last fiscal quarter, there were no
changes in our internal controls over financial reporting that have materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial
Officer, do 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.
Notwithstanding the foregoing limitations, our management believes that our
disclosure controls and procedures provide reasonable assurances that the
objectives of our control system are met.
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.
In June and July 2004, three stockholder class actions were filed against us and
certain of our officers and directors. The class actions were filed in the
United States District Court - Western District of Texas and generally alleged
that false and misleading statements were made in our initial public offering
registration statement and prospectus, during the period surrounding our initial
pubic offering and up to the press release dated June 16, 2004. The class
actions were subsequently consolidated in the United States District Court -
Western District of Texas under the title In re Central Freight Lines Securities
Litigation. The Oklahoma Firefighters Pension and Retirement System has been
named lead plaintiff in the consolidated action, and a Consolidated Amended
Class Action Complaint was filed on May 9, 2005. The Consolidated Amended Class
Action Complaint generally alleges that false and misleading statements were
made in our initial public offering registration statement and prospectus,
during the period surrounding our initial pubic offering and up to March 17,
2005. On July 8, 2005, we responded to the Consolidated Amended Class Action
Complaint by filing a motion to dismiss. We do not believe there is any factual
or legal basis for the allegations and we intend to vigorously defend against
the suits. We have informed our insurance carrier and have retained outside
counsel to assist in our defense. Prior to December 12, 2004, we maintained a
$5.0 million directors' and officers' insurance policy with a $350,000
deductible. On December 12, 2004, we increased our directors' and officers'
insurance coverage. We currently maintain a $15.0 million directors' and
officers' insurance policy with a $350,000 deductible. In the 2004 third
quarter, in connection with this litigation, we recorded an expense of $350,000,
representing the full deductible amount under our current directors' and
officers' insurance policy.
Page 30
On August 9 and 10, 2004, two purported derivative actions were filed against
us, as nominal defendant, and against certain of our officers, directors, and
former directors. These actions were filed in the District Court of McLennan
County, Texas and generally allege breach of fiduciary duty, abuse of control,
gross mismanagement, waste of corporate assets, and unjust enrichment on the
part of certain of our present and former officers and directors in the period
between December 12, 2003 and August 2004. The purported derivative actions seek
declaratory, injunctive, and other relief.
Although it is not possible at this time to predict the litigation outcome of
these cases, we expect to prevail. However, an adverse litigation outcome could
be material to our consolidated financial position or results of operations. As
a result of the uncertainty regarding the outcome of this matter, no provision
has been made in the consolidated financial statements with respect to this
contingent liability.
We are not aware of any other claims that could materially affect our
consolidated financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of Central Freight Lines, Inc. was held on
May 3, 2005, for the purposes of electing five directors for one-year terms.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934, and there was no solicitation in opposition to
management's nominees for director. Each of management's nominees for director
as listed in the Proxy Statement was elected.
The voting tabulation on the election of directors was as follows:
Shares Voted Shares Voted
"FOR" "ABSTAIN"
Robert V. Fasso 13,932,176 199,123
Jerry Moyes 13,344,306 786,993
John Breslow 13,899,541 231,758
John Campbell Carruth 13,942,481 188,818
Porter J. Hall 13,898,491 232,808
Page 31
Item 5. Other Information.
On August 9, 2005, the Company's Board of Directors approved the amendment of
certain provisions of the Company's form of Stock Option Agreement for use under
the Company's Incentive Stock Plan. Previously, the form of Stock Option
Agreement provided for termination of vested options immediately upon
involuntary termination of employment, thirty days after voluntary termination
of employment, three years after termination of employment due to retirement
with the consent of the Board of Directors or disability, twelve months after
death, and in all events ten years after the grant date. As amended, the form of
Stock Option Agreement will provide for termination of vested options
immediately upon involuntary termination of employment on account of gross
misconduct, ninety days after involuntary termination of employment for any
other reason, thirty days after voluntary termination of employment, three years
after termination of employment due to retirement with the consent of the Board
of Directors or disability, twelve months after death, and in all events ten
years after the grant date. A copy of the form of Stock Option Agreement, as
amended, is filed as Exhibit 10.28 to this report on Form 10-Q.
On August 9, 2005, the Company's Board of Directors also approved the amendment
of all existing Stock Option Agreements signed by the Company with respect to
options previously granted in order to conform with the above changes to the
provisions regarding termination of vested options in the form of Stock Option
Agreement. The existing Stock Option Agreements thus amended included Stock
Option Agreements between the Company and certain of its executive officers.
Page 32
Item 6. 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.)
10.27 First Amendment to Amended and Restated Credit Agreement, dated May 12, 2005, by and among
Central Freight Lines, Inc., a Texas corporation, Required Lenders under the Credit
Agreement, Bank of America, N.A., in its capacity as Agent for Lenders under the Credit
Agreement. (Incorporated by reference to Exhibit 10.27 to the Company's Report on Form 10-Q
for the quarterly period ended April 2, 2005.)
10.28* Form of Stock Option Agreement.
11.1 Schedule of Computation of Net Income Per Share (Incorporated by reference to Note 5, Loss
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.
Page 33
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.
August 10, 2005
Central Freight Lines, Inc.
/s/ Jeffrey A. Hale
____________________
Jeffrey A. Hale
Senior Vice President and Chief Financial Officer
Page 34
EXHIBIT 10.28
FORM OF STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made as of ____________ (the
"Grant Date") to document a stock option grant effective ___________ (the
"Effective Date") between Central Freight Lines, Inc., a Nevada corporation (the
"Company"), and ______________________, a key employee of an operating
subsidiary of the Company (the "Optionee").
BACKGROUND
By this Agreement, the Company and the Optionee desire to establish the terms
upon which the Company is willing to grant to the Optionee, and upon which the
Optionee is willing to accept from the Company, an option to purchase shares of
Class A Common Stock of the Company ("Common Stock"). The option is granted
under the Company's Incentive Stock Plan (the "Plan") adopted by the Board of
Directors and Stockholders effective May 6, 1997, and assumed by the Company
from Central Freight Lines, Inc., a Texas corporation, on December 31, 2000.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed in the Plan.
AGREEMENTS
1. Grant of Stock Option. Subject to the terms and conditions herein and in
the Plan, the Company grants to the Optionee the right and option (the
"Option") to purchase from the Company all or any part of an aggregate
Address2 shares of Common Stock, authorized but unissued or, at the
option of the Company, treasury stock if available (the "Option Shares").
To the extent allowable, the grant of Option Shares is intended to qualify
as an incentive stock option ("ISO"), as such term is defined under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). The
exercise price of the Option Shares shall be $_____ per share (the
"Purchase Price").
2. Exercise of Option. Subject to the terms and conditions of this Agreement
and the Plan, the vested portion of the Option may be exercised only by
completing and signing a written notice in substantially the following
form:
Page 35
I hereby exercise [all/part of] the Option granted to me by Central Freight
Lines, Inc., a Nevada corporation, and elect to purchase ____________________
(__________) shares of the Company's Class A Common Stock for $_____ per share.
3. Payment of Purchase Price. Payment of the Purchase Price may be made as
follows:
a. In United States dollars in cash or by check, bank draft, or money order
payable to the Company.
b. At the sole discretion of the Board, through the delivery of shares of
Common Stock with an aggregate Fair Market Value at the date of such
delivery equal to the Purchase Price.
c. At the sole discretion of the Board, through the surrender of part of the
Option or other exercisable options having a difference between (i) the
exercise price of such surrendered Options and (ii) the Fair Market Value
of the Common Stock equal to the Purchase Price.
d. At the sole discretion of the Board, in any combination of Sections 3.a.,
3.b., and 3.c. above.
The Board in its sole discretion shall determine acceptable methods for
surrendering Common Stock or options as payment upon exercise of the Option and
may impose such limitations and conditions on the use of Common Stock or options
to exercise the Option as it deems appropriate. Among other factors, the Board
will consider the restrictions of Rule 16b-3 of the Exchange Act or any
successor rule.
4. Vesting and Exercisability of Option. Subject to the provisions of
Sections 5, 7, and 8 hereof, the Option shall vest and may be exercised by
the Optionee in whole or in part from time to time, but only in accordance
with the following schedule:
Date Cumulative Percentage of Option Shares Vested and as to which Option
may be Exercised
First Anniversary of Effective Date 20%
Second Anniversary of Effective Date 40%
Third Anniversary of Effective Date 60%
Fourth Anniversary of Effective Date 80%
Fifth Anniversary of Effective Date 100%
Page 36
Not withstanding anything herein to the contrary, no vesting shall occur in the
event of termination of Optionee's Continuous Status as an Employee or if the
Option has otherwise terminated under this Agreement prior to such date.
5. Termination of Option. The Option, to the extent not already exercised,
shall terminate upon the first to occur of the following dates:
a. The date on which the Optionee's employment by the Company is involuntarily
terminated for gross misconduct. For purposes of this Agreement, "gross
misconduct" means any act by the Optionee which deliberately or willfully
violates the Company's rules, deliberately or willfully threatens or
violates the Company's interests, shows a repeated disregard for the
Optionee's obligations to the Company, or disregards standards of behavior
which the Company has a right to expect of the Optionee.
b. Ninety (90) days after involuntary termination for any reason other than
gross misconduct;
c. Thirty (30) days after voluntary termination;
d. Three years after termination due to retirement with the consent of the
Board or disability (provided, that Optionee recognizes that he or she may
not receive ISO tax treatment as to any part of the Option exercised more
than twelve (12) months after termination of employment due to disability
or three (3) months after termination due to retirement);
e. Twelve (12) months after the Optionee's death; or
f. Notwithstanding any other provision herein, the date ten years after the
Grant Date.
6. Adjustments. In the event of any stock split, reverse stock split, stock
dividend, business combination, reclassification, or similar event, the
number of Optioned Shares (including any Option Shares outstanding after
termination of employment or death) and the Purchase Price per share shall
be proportionately and appropriately adjusted without any change in the
aggregate Purchase Price to be paid therefor upon exercise of the Option.
The determination by the Board as to the terms of any of the foregoing
adjustments shall be final, binding, and conclusive.
7. Liquidation, Sale of Assets, or Merger. In the event of a proposed
dissolution or liquidation of the Company, the Option shall terminate
immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Option shall become
immediately exercisable with respect to all then outstanding Option Shares
(whether or not vested) and the Optionee may elect, during the period
commencing on the date that such sale or merger is consummated and ending
at the closing of business on the thirtieth (30th) day following the date
of such sale or merger, to exercise the Option in whole or in part. In the
event the thirtieth (30th) day referred to in this Section shall fall on a
day that is not a business day, then the thirtieth (30th) day shall be
deemed to be the next following business day.
Page 37
8. Acquisition. If any person, corporation, or other entity or group thereof
other than Jerry Moyes, Ronald Moyes, and entities or trusts controlled by
either (the "Acquiror"), acquires (an "Acquisition"), other than by merger
or consolidation or purchase from the Company, the beneficial ownership (as
that term is used in Section 13(d)(1) of the Exchange Act and the rules and
regulations promulgated thereunder) of shares of the Company's stock which,
when added to any other shares, the beneficial ownership of which is held
by the Acquiror, shall have the right to cast more than 51% of the votes
that are entitled to be cast at meetings of stockholders, any portion of
the Option that was not currently exercisable prior to the date of the
Acquisition shall become immediately exercisable and the Optionee may
elect, during the period commencing on the date of the Acquisition and
ending at the closing of business on the thirtieth (30th) day following the
date of the Acquisition, to exercise the Option in whole or in part. In the
event the thirtieth (30th) day referred to in this Section 8 shall fall on
a day that is not a business day, then the thirtieth (30th) day shall be
deemed to be the next following business day.
9. Notices. Any notice to be given under the terms of the Agreement ("Notice")
shall be addressed to the Company in care of its President at 5601 W. Waco
Drive, Waco, Texas 76710, or at its then current corporate headquarters.
Notice to be given to the Optionee shall be addressed to him or her by hand
delivery or at his or her then current residential address as appearing on
the payroll records. Notice shall be deemed duly given when enclosed in a
properly sealed envelope and deposited by certified mail, return receipt
requested, in a post office or branch post office regularly maintained by
the United States Government.
10. Transferability of Option. The Option shall not be transferable by the
Optionee and may be exercised during the life of the Optionee only by the
Optionee, unless otherwise set forth in the Plan.
11. Optionee Not a Stockholder. The Optionee shall not be deemed for any
purposes to be a stockholder of the Company with respect to any of the
Option Shares except to the extent that the Option has been exercised,
payment made, and a stock certificate issued.
12. Disputes or Disagreements. The Optionee agrees, for himself and his
personal representatives, that any disputes or disagreements which arise
under or as a result of or pursuant to this Agreement shall be determined
by the Board in its sole discretion, and that any interpretation by the
Board of the terms of this Agreement shall be final, binding, and
conclusive.
13. Withholding. The Optionee acknowledges that under certain circumstances,
including but not limited to a "disqualifying disposition" of an ISO under
Section 422(a)(i) of the Code, Optionee may recognize ordinary income,
which, for tax purposes, is considered payment of wages for services. As a
result, the Company may have certain tax withholding and reporting
obligations. The Company shall not be obligated to issue any stock
certificate upon the exercise of the right to purchase, or the transfer of,
Option Shares until the Optionee has delivered sufficient funds to cover
all income, FICA, FUTA and other applicable tax withholding. Optionee shall
notify the Company of any disqualifying disposition of Option Shares
(currently, any disposition within two years of the Grant Date or one year
of the exercise date) and take all actions necessary for the Company to
obtain a tax deduction if compensation income is deemed to result from any
exercise or disposition. Optionee shall indemnify and hold the Company
harmless against any loss it may experience as a result of Optionee's
failure to comply with this Section 13. At the Board's sole discretion, to
satisfy the Company's withholding obligations, the Company may retain such
number of shares of Common Stock subject to the exercised Option which have
an aggregate Fair Market Value on the date of exercise equal to the
Company's aggregate federal, state, local, and foreign tax withholding
obligations as a result of the exercise of the Option by Optionee. The
Board may consider the Optionee's preference in making such determination,
but the Optionee acknowledges that the Board is under no obligation to
follow or even consider Optionee's preference, and that the Board will
consider the Section 16 restrictions of the Exchange Act, including the
holding period, advance notice and election windows required for any
withholding of shares to be exempt.
Page 38
14. Right of First Refusal. The Optionee may sell or transfer any or all of the
Common Stock owned by him or her to any person who makes a good faith, bona
fide offer therefor, but prior to an initial public offering of the Common
Stock of the Company, the Company shall have the right of first refusal to
purchase such Common Stock from the Optionee as set forth below. The
Optionee shall give prior notice in writing (the "Offer Notice") to the
Company of each intended sale or transfer, which Offer Notice shall contain
all the terms of the proposed transfer or disposition, including, without
limitation, the name and address of the prospective transferee, the
purchase price and other terms and conditions of payment, and the number of
shares of Common Stock to be disposed of by the Optionee (such shares being
referred to herein as the "Offered Stock"). The Optionee shall specifically
represent and warrant in such Offer Notice that the above terms reflect an
actual bona fide offer that the Optionee intends to accept, subject to
compliance with the terms of this Agreement. The Company shall have a prior
right to purchase the Offered Stock on the terms and conditions set forth
in this Section 14. The price and terms to the Company under this right of
first refusal shall be the price and terms set forth in the Offer Notice.
a. By notice (the "Company Notice") to the Optionee given not more than thirty
(30) days after the date of the mailing of the Offer Notice, the Company
shall specify if it desires to purchase all, but not less than all, of the
Offered Stock.
b. If, after following the procedures outlined in Section 14.a. above, the
Offered Stock is not subscribed for by the Company, the Optionee, for a
period of sixty (60) days following expiration of the thirty (30) day
period provided in Section 14.a., shall then be free to sell the Offered
Stock, free and clear of all the restrictions contained in this Agreement,
but only to the purchaser named in the Offer Notice and only upon the terms
specified therein. If the Optionee fails to consummate such sale to such
purchaser on such terms and conditions within such sixty (60) day period,
any sale or other transfer by the Optionee to any person shall again be
subject to the right of first refusal specified in this Section 14.
c. If the Company subscribes for the Offered Stock, then such Offered Stock
shall be sold to the Company. On a date no later than fifteen days (15)
days following the date of the Company Notice the Company shall deliver to
the Secretary of the Company for delivery to the Optionee upon delivery of
the certificates provided herein, together with stock powers attached
thereto, the amount of the purchase price for the Offered Stock.
d. The Company's right of first refusal with respect to the Offered Stock
shall expire on the date of the initial public offering of the Common Stock
of the Company, and thereafter any right of the Company to repurchase its
outstanding stock shall be governed by federal and state securities laws.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
duly authorized officer, and the Optionee has hereunto affixed his or her
signature.
CENTRAL FREIGHT LINES, INC., OPTIONEE
a Nevada corporation
By: ________________________________________ ____________
Robert V. Fasso, Chief Executive Officer
Page 39
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) 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
(d) 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: August 10, 2005
/s/ Robert V. Fasso
_____________________
Robert V. Fasso
Chief Executive Officer
Page 40
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) 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
(d) 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: August 10, 2005
/s/ Jeffrey A. Hale
___________________
Jeffrey A. Hale
Chief Financial Officer
Page 41
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 July 2, 2005, 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
August 10, 2005
Page 42
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 July 2, 2005, 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:
(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/ Jeffrey A. Hale
___________________
Jeffrey A. Hale
Chief Financial Officer
August 10, 2005
Page 43