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 October 1, 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
------ -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes X No
----- ------
The number of shares of common stock outstanding at November 10, 2005 was
18,263,450.
Page 1
Central Freight Lines, Inc.
Form 10-Q
Three months and nine months ended October 1, 2005
Table of Contents
Page Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of October 1, 2005 (Unaudited) and
December 31, 2004 3
Consolidated Statements of Operations (Unaudited) for the Three Months
and Nine Months ended October 1, 2005 and October 2, 2004 4
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months ended October 1, 2005 and October 2, 2004 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 30
Part II. Other Information
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item.5. Other Information 32
Item 6. Exhibits 33
Signatures 34
Exhibits 35
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 1, 2005 and December 31, 2004
(In thousands, except share data)
2005
(Unaudited) 2004
Assets ------------------- ----------------
Cash and cash equivalents $ 356 $ 2,144
Restricted cash - 20,825
Accounts receivable less allowance for doubtful accounts and revenue 46,959 51,582
adjustments of $10,848 in 2005 and $7,854 in 2004
Other current assets 9,605 8,655
Deferred income taxes 10,247 6,689
------------------ ----------------
Total current assets 67,167 89,895
Property and equipment, net 115,333 135,274
Goodwill - 4,324
Other assets 8,168 7,761
------------------- ----------------
Total assets $ 190,668 $ 237,254
=================== ================
Liabilities and stockholders' equity
Liabilities:
Current maturities of long-term debt $ 7,616 $ 10,958
Short-term notes payable 3,964 28,108
Trade accounts payable 15,910 23,835
Trade accounts payable - related parties 1,157 988
Accrued expenses 31,699 23,050
------------------- ----------------
Total current liabilities 60,346 86,939
Long-term debt, excluding current maturities 26,180 21,884
Related party financing 22,716 22,852
Deferred income taxes 10,247 8,375
Claims and insurance accruals 11,177 9,646
-------------------- ----------------
Total liabilities 130,666 149,696
-------------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.001 par value per share; 10,000,000 shares authorized;
none issued or outstanding - -
Common Stock; $0.001 par value per share; 100,000,000 shares authorized,
18,263,450 and 18,188,894 shares issued and outstanding as of
October 1, 2005 and December 31, 2004 18 18
Additional paid-in capital 109,722 109,554
Unearned compensation (186) (266)
Accumulated deficit (49,552) (21,748)
------------------- ----------------
Total stockholders' equity 60,002 87,558
------------------- ----------------
Total liabilities and stockholders' equity $ 190,668 $ 237,254
=================== ================
See accompanying notes to consolidated financial statements.
Page 3
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended Nine months ended
-------------------------------- --------------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
---------------- -------------- --------------- ---------------
Operating revenues $ 94,335 $ 98,539 $ 283,175 $ 301,090
---------------- -------------- --------------- ---------------
Operating expenses:
Salaries, wages and benefits 53,296 57,818 158,242 173,558
Purchased transportation 9,207 10,621 27,154 33,313
Purchased transportation - related parties 4,038 3,590 11,991 11,832
Operating and general supplies and expenses 23,698 22,235 67,402 61,387
Operating and general supplies and expenses - related parties 31 91 228 225
Insurance and claims 6,268 8,909 18,029 19,783
Building and equipment rentals 1,152 1,176 3,178 3,149
Building and equipment rentals - related parties 449 450 1,347 1,346
Depreciation and amortization 4,568 4,408 13,572 12,278
Goodwill impairment 4,324 -- 4,324 --
---------------- -------------- --------------- ---------------
Total operating expenses 107,031 109,298 305,467 316,871
---------------- -------------- --------------- ---------------
Loss from operations (12,696) (10,759) (22,292) (15,781)
Other expense:
Interest expense (894) (399) (2,547) (972)
Interest expense - related parties (1,525) (1,533) (4,651) (4,675)
---------------- -------------- --------------- ---------------
Loss before income taxes (15,115) (12,691) (29,490) (21,428)
Income taxes:
Income tax benefit 1,686 4,793 1,686 9,858
---------------- -------------- --------------- ---------------
Net loss $ (13,429) $ (7,898) $ (27,804) $ (11,570)
================ ============== =============== ===============
Net loss per share:
Basic $ (0.74) $ (0.43) $ (1.53) $ (0.65)
Diluted (0.74) (0.43) (1.53) (0.65)
Weighted average outstanding shares:
Basic 18,244 18,158 18,217 17,903
Diluted 18,244 18,158 18,217 17,903
See accompanying notes to consolidated financial statements.
Page 4
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended October 1, 2005 and October 2, 2004
(Unaudited, in thousands)
2005 2004
----------------- -----------------
Cash flows from operating activities:
Net loss $ (27,804) $ (11,570)
Adjustments to reconcile net loss to
net cash used in operating activities:
Bad debt expense 2,461 744
Equity in income of affiliate 7 28
Depreciation and amortization 13,572 12,278
Goodwill impairment 4,324 --
Amortization of deferred financing fees 506 --
Deferred income taxes (1,686) (9,999)
Decrease in unearned compensation 80 165
Change in operating assets and liabilities, net
of purchase accounting effects:
Accounts receivable 2,162 (5,556)
Other assets (1,125) (934)
Trade accounts payable (7,925) 1,106
Trade accounts payable - related parties 169 (33)
Claims and insurance accruals (240) 5,902
Accrued expenses 10,096 575
----------------- -----------------
Net cash used in operating activities (5,403) (7,294)
----------------- -----------------
Cash flows from investing activities:
Additions to property and equipment (1,747) (25,947)
Proceeds from sale of property and equipment 9,469 3,876
Cash paid for acquisition of business -- (9,058)
----------------- -----------------
Net cash provided by (used in) investing activities 7,722 (31,129)
----------------- -----------------
Cash flows from financing activities:
Restricted cash 20,825 (18,852)
Proceeds from long-term debt 9,493 --
Repayments of long-term debt (8,474) (6,409)
Proceeds from (repayments of) short-term debt 3,279 --
(Repayment of) proceeds from securitization facility (27,300) 25,300
Exercise of stock options 168 1,052
Payment of deferred financing fees (2,098) --
----------------- -----------------
Net cash (used in) provided by financing activities (4,107) 1,091
----------------- -----------------
Net decrease in cash (1,788) (37,332)
Cash at beginning of period 2,144 41,493
----------------- -----------------
Cash at end of period $ 356 $ 4,161
================= =================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 7,397 $ 5,788
Income taxes $ - $ 179
Non-cash transaction:
Note payable for acquisition of business $ - $ 1,023
See accompanying notes to consolidated financial statements.
Page 5
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
(1) Basis of Presentation
Interim Financial Statements: 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 October 1, 2005, the consolidated results of our operations for the three
months and nine months ended October 1, 2005 and October 2, 2004 and our
consolidated cash flows for the nine months ended October 1, 2005 and October 2,
2004. The results of our operations for the nine months ended October 1, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
(2) Liquidity and Going Concern
The Company has experienced recurring negative cash flows attributable
primarily to operating losses. As a result of such negative cash flows and
losses, there is substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements do not include
any adjustments that might be necessary should the Company be unable to continue
as a going concern.
Management is aggressively pursuing all aspects of its previously announced
turnaround plans which include: improving revenue yield, reducing cost
structure, streamlining freight movements, improving employee efficiency, and
reducing insurance and claims expense.
In addition, management is seeking ways to increase liquidity. In November,
a second amendment to the Company's primary credit facility was negotiated to
increase liquidity by $5,000. In addition to amounts available under our credit
facility, at October 1, 2005, the Company also had assets held for sale that the
Company expects to generate approximately $6,500 in net proceeds. The Company is
attempting to sell these assets in the next three to six months, although there
can be no assurance that the proceeds will, in fact, be received during this
time period or at all.
(3) 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 6
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(4) 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 Nine months ended
----------------------------- --------------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
------------- ------------- --------------- --------------
Net loss, as reported: $ (13,429) $ (7,898) $ (27,804) $ (11,570)
Add:
Stock-based employee compensation expense included
in reported net loss, net of related tax effects 27 46 80 165
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (see below) (110) (190) (2,535) (502)
------------- ------------- --------------- --------------
Pro forma net loss $ (13,512) $ (8,042) $ (30,259) $ (11,907)
============= ============= =============== ==============
Net loss per share:
Basic
As reported $ (0.74) $ (0.43) $ (1.53) $ (0.65)
Pro forma (0.74) (0.44) (1.66) (0.67)
Diluted
As reported (0.74) (0.43) (1.53) (0.65)
Pro forma (0.74) (0.44) (1.66) (0.67)
In December 2004, the FASB issued Statement No. 123R ("SFAS 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 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 SFAS 123R
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. 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 Company will be required
to adopt SFAS 123R in fiscal 2006. The Company has not yet determined the method
of adoption or the effect of adopting SFAS 123R (see below).
Page 7
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 nine months
ended October 1, 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 SFAS
123R. 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.
(5) Acquisition
In March 2004, the Company expanded into the Pacific Northwest through the
purchase of a 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. Under terms of the agreement, the Company paid approximately $7,000
of the purchase price at closing, and an additional $2,136 during 2004. The
Company made a $179 payment on the purchase price during the 2005 third quarter.
The remaining unpaid purchase price of $685 is recorded on the consolidated
balance sheet as short-term notes payable.
(6) 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
October 1, 2005 and October 2, 2004.
The following table presents information necessary to calculate basic and
diluted loss per share:
Three months ended Nine months ended
------------------------------ -------------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
------------- ------------- ------------- --------------
Net loss $ (13,429) $ (7,898) $ (27,804) $ (11,570)
============= ============= ============= ==============
Weighted average shares outstanding - basic 18,244 18,158 18,217 17,903
Common stock equivalents -- -- -- --
------------- ------------- ------------- --------------
Weighted average shares outstanding - diluted 18,244 18,158 18,217 17,903
============= ============= ============= ==============
Basic loss per share (0.74) (0.43) (1.53) (0.65)
Diluted loss per share (0.74) (0.43) (1.53) (0.65)
Anti-dilutive unexercised options excluded
from calculation 1,454 1,810 1,454 1,810
Page 8
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(7) Debt and Related Party Financing
(a) Long-term Debt
Long-term debt consists of the following at October 1, 2005 and December 31,
2004:
2005 2004
---------- ---------
Capital lease obligations $ 25,450 $ 32,842
Real Estate 8,007 --
Notes Payable (Autos) 339 --
Less: Current portion (7,616) (10,958)
---------- ---------
$ 26,180 $ 21,884
========== =========
(b) Short-term Notes Payable
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 have received 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 (as amended on May
12, 2005, 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. 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 is the lesser of (a) $60,000, 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.
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 an unused line of credit fee of
0.25% to 0.375%, based on aggregate amounts outstanding.
Page 9
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 (inclusive of a second amendment entered into
November 9, 2005) 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 $10,000, 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 Bulletin 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.
On July 14, 2005, the Company announced that it had closed on several real
estate transactions with net proceeds of approximately $15,200. 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 sale and leaseback transaction generated $6,223 in net
proceeds, and the Company signed a ten-year lease with a ten-year option. The
Company determined that the sale-leaseback will be treated as an operating lease
for accounting purposes. A gain of $316 was realized on this transaction, but
has been deferred and will be recognized over the 10 year life of the lease.
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. The mortgage financing
generated $7,860 in net proceeds. 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. The proceeds from the real estate transactions were used to repay
amounts drawn on the Company's revolving credit facility with Bank of America.
Following this repayment, and as of October 1, 2005, the Company's assets
supported gross borrowings of $51,443, which has been reduced by the issuance of
$22,499 of letters of credit for the Company's insurance programs, cash draws of
$3,279 and a $15,000 block which was in place until either the Company could
meet minimum EBITDA levels and fixed charge ratios set by the bank or
renegotiate the terms of the New Credit Facility, leaving available credit on
the current facility of $10,665. On November 9, 2005, the Company entered into a
second amendment to the New Credit Facility. This amendment lowered the $15,000
block to $10,000 thereby increasing available credit by an additional $5,000.
The amount borrowed under the New Credit Facility at October 1, 2005 is $3,279.
In addition, the Company expects to realize approximately $6,500 of net proceeds
from assets currently held for sale over the next three to six months.
In March 2004, the Company acquired certain assets of EOFF for
approximately $10,000. 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 $2,136
during 2004. The Company made a $179 payment on the purchase price during the
2005 third quarter. The remaining $685 is recorded on the consolidated balance
sheet as short-term notes payable.
Page 10
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(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.
Since the fair value of the properties sold and leased back from Southwest
Premier 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 October 1, 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.
(8) Income Taxes
At October 1, 2005 and December 31, 2004, the Company had a federal net
operating loss carry forward of approximately $40,143 and $24,258, respectively,
available to reduce future taxable income. The net operating loss generated in
the first nine months of 2005 and all of 2004 amounted to $15,885 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 October 1, 2005, the valuation
allowance for deferred tax assets was approximately $14,762. Pursuant to the
write off of goodwill required under SFAS 142 in the 2005 third quarter (note
12), the Company recognized a $1,686 deferred income tax benefit in the
consolidated statements of operations.
Page 11
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(9) 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.
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 23,
2005, the lead plaintiff filed its opposition to this motion to dismiss, and on
September 12, 2005, the Company filed a response in which it again requested
dismissal of the Consolidated Amended Class Action Complaint.
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.
Page 12
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(10) Related-Party Transactions
During the three months and nine months ended October 1, 2005 and October
2, 2004 the Company incurred approximately $4,038, $3,590, $11,991 and $11,832,
respectively, for transportation services provided by companies for which the
Company's principal stockholder is a Director. At October 1, 2005 and December
31, 2004, the Company had payables of $1,157 and $988, respectively, for these
transportation services.
During the three months and nine months ended October 1, 2005 and October
2, 2004, the Company incurred $31, $91, $228, and $225, for legal expenses
respectively, to an entity owned by a stockholder of the Company.
During the three months and nine months ended October 1, 2005 and October
2, 2004, the Company incurred $449, $450, $1,347, and $1,346, respectively, for
building rental expense with related parties.
See also Note 7(c).
(11) 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.
(12) Goodwill Impairment
The Company adopted FASB Statement of Financial Accounting Standards No.
142 ("SFAS 142"), Goodwill and Other Intangible Assets, on January 1, 2002. As
of that date, goodwill is no longer amortized (prior to the adoption of SFAS No.
142, goodwill had been amortized on a straight-line basis over 15 years), but is
tested annually, or more frequently if a triggering event occurs, for impairment
using a fair value approach.
The Company performed the impairment test required by SFAS 142 as of the
end of the 2005 third quarter. As a result of this analysis, the Company
determined that the carrying value of its net assets exceeded fair value. Thus,
the Company adjusted the carrying value of goodwill to fair value, resulting in
the write off of all goodwill. As a result of this write off, the Company
recognized and recorded an impairment charge of $4,324 in the 2005 third
quarter.
Pursuant to the write off of goodwill required under SFAS 142 in the 2005
third quarter, the Company recognized a $1,686 deferred income tax benefit in
the consolidated statements of operations.
(13) Subsequent Events
On November 9, 2005, the Company entered into a second amendment to its
credit facility, with Bank of America, which had the effect of increasing
available borrowing capacity by $5,000. Prior to this amendment, the Company was
restricted from drawing upon the last $15,000 of availability under the facility
unless the Company could meet specified EBITDA and fixed charge coverage ratio
requirements. Following the amendment, the Company is able to draw all but the
last $10,000 of availability without satisfying those requirements, and
available borrowing capacity under the credit facility as of October 1, 2005,
was increased from $10,665 to $15,665.
On November 10, 2005, the Company announced that it had received a proposal
from a company controlled by the Company's largest stockholder and former
Chairman of the Board of Directors, Jerry Moyes, to take the Company private in
a transaction in which all Company stockholders, other than Mr. Moyes and
certain related parties, would receive cash in an amount equal to $2.25 per
share. The proposal is subject to reaching a definitive agreement, along with
customary conditions, including, without limitation, financial and legal due
diligence, financing, approval of the Company's Board of Directors and
stockholders, and the absence of any materially adverse change to the condition
(financial or otherwise) of the Company. The proposal will be reviewed by a
special committee of the Company's Board of Directors comprised of independent
directors.
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; statements regarding expected expenditures and our ability to
continue as a going concern; 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. 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.
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.
Page 14
Recent Results of Operations and Quarter-End Financial Condition
For the third quarter of 2005, our operating revenue was $94.3 million on
63 working days, compared to operating revenue of $98.5 million on the same
number of working days for the third quarter of 2004. For the nine months ended
October 1, 2005, operating revenue amounted to $283.2 million on 192 working
days, compared to operating revenue of $301.1 million on 193 working days for
the nine months ended October 2, 2004.
For the three and nine months ended October 1, 2005, our financial results
were impacted by a $4.3 million non-cash impairment charge and a related $1.7
million income tax benefit to write off all goodwill associated with prior
acquisitions.
For the third quarter of 2005, we experienced a pre-tax loss, before the
$4.3 million impairment charge, of $10.8 million, compared with a pre-tax loss
of $12.7 million in the third quarter of 2004. Including the impairment charge,
the pre-tax loss in the third quarter of 2005 was $15.1 million.
The 2005 pre-tax loss before Goodwill impairment charge is a non-GAAP
measure. Management believes that this measure provides an alternative
presentation of results that more accurately reflects our on-going operations,
without the distorting effect of the non-cash Goodwill impairment charge. This
measure should be considered in addition to, not as a substitute for, loss
before income taxes. The following table reconciles the 2005 loss before income
taxes as reported to the loss before income taxes before the Goodwill impairment
charge.
Reconciliation of non-GAAP measures ($ in millions):
2005 third quarter 2004 third quarter
------------------- -------------------
Loss before income taxes as reported $ (15.1) $ (12.7)
Goodwill impairment charge 4.3 0.0
------------ -----------
Pre-tax loss before Goodwill impairment charge $ (10.8) $ (12.7)
We realized a net loss of $13.4 million, or $0.74 per diluted share, in the
third quarter of 2005, compared to a net loss of $7.9 million, or $0.43 per
diluted share, in the third quarter of 2004. The net loss reported for the 2004
third quarter included an income tax benefit of $4.8 million, or $0.26 per
diluted share, related to the pre-tax loss. The net loss reported for the 2005
third quarter did not include a tax benefit related to the pre-tax loss other
than an income tax benefit of $1.7 million related to the goodwill impairment as
discussed above.
For the nine months ended October 1, 2005, we realized a net loss of $27.8
million, or $1.53 per diluted share compared to a net loss of $11.6 million, or
$0.65 per diluted share, for the nine months ended October 2, 2004. The net loss
reported for the 2004 period included an income tax benefit of $9.9 million, or
$0.55 per diluted share, related to the pre-tax loss. The net loss reported for
the 2005 period did not include a tax benefit related to the pre-tax loss other
than an income tax benefit of $1.7 million related to the goodwill impairment as
discussed above.
At October 1, 2005, our consolidated balance sheet reflected $0.4 million
in cash, $56.5 million in long-term debt and capital lease obligations,
including current portion, and $4.0 million in short-term debt. Stockholders'
equity was $60.0 million at October 1, 2005.
Page 15
Recent Developments
On November 9, 2005, we entered into a second amendment to our credit
facility, with Bank of America, which had the effect of increasing our available
borrowing capacity by $5.0 million. Prior to this amendment, we were restricted
from drawing upon the last $15.0 million of availability under the facility
unless we could meet specified EBITDA and fixed charge coverage ratio
requirements. Following the amendment, we are able to draw all but the last
$10.0 million of availability without satisfying those requirements.
On November 10, 2005, we announced that we had received a proposal from a
company controlled by our largest stockholder and former Chairman of the Board
of Directors, Jerry Moyes, to take Central private in a transaction in which all
Central stockholders, other than Mr. Moyes and certain related parties, would
receive cash in an amount equal to $2.25 per share. The proposal is subject to
reaching a definitive agreement, along with customary conditions, including,
without limitation, financial and legal due diligence, financing, approval of
our Board of Directors and stockholders, and the absence of any materially
adverse change to our condition (financial or otherwise). The proposal will be
reviewed by a special committee of our Board of Directors comprised of
independent directors.
Operating Strategy for 2005
Our operating strategy for 2005 is to execute a turnaround plan that is designed
to reverse recent negative cash flows. In this regard, we have identified five
specific areas of focus:
o Improving revenue yield.
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.
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. Despite increases in fuel surcharge revenue,
our LTL revenue per hundredweight decreased from $11.83 in the third
quarter of 2004 to $11.73 in the third quarter of 2005 due mainly to
an increase in weight per shipment. Our LTL revenue per hundredweight,
without fuel surcharge revenue, declined to $10.46 in the third
quarter of 2005 from $11.13 in the third quarter of 2004 due mainly to
a 7.6% increase in average weight per LTL shipment.
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 5.2% from the third quarter of
2004 to the third quarter of 2005.
Page 16
Historically, most of our revenue has been generated from transporting LTL
shipments from customers within our operating regions. In the first nine months
of 2005 and all of 2004, approximately 7.8% 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.
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.
Page 17
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 depreciation of
owned assets, assets under capitalized leases, gains and losses on sales of
assets, and 27 properties we lease from Southwest Premier Properties, a related
party, that are considered to be a financing arrangement.
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 Nine months ended
------------------------------ ---------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
--------------- ------------- ------------ -------------
Operating revenues........................................ 100.0% 100.0% 100.0% 100.0%
--------- ------------- ------------ -----------
Operating expenses:
Salaries, wages, and benefits........................... 56.5 58.7 55.9 57.6
Purchased transportation................................ 14.0 14.4 13.8 15.0
Operating and general supplies and
Expenses............................................. 25.2 22.7 23.9 20.5
Insurance and claims.................................... 6.6 9.0 6.4 6.6
Building and equipment rentals.......................... 1.7 1.6 1.6 1.4
Depreciation and amortization........................... 4.9 4.5 4.7 4.1
Goodwill impairment..................................... 4.6 - 1.6 -
--------- ------------- ------------ ----------
Total operating expenses(1).......................... 113.5 110.9 107.9 105.2
--------- ------------- ------------ ----------
Loss from operations...................................... (13.5) (10.9) (7.9) (5.2)
Interest expense.......................................... 2.6 2.0 2.5 1.9
--------- ------------- ------------ ----------
Loss before income taxes.................................. (16.1) (12.9) (10.4) (7.1)
--------- ------------- ------------- ----------
Income tax benefit........................................ 1.8 4.9 0.6 3.3
--------- -------------- ------------ ----------
Net loss.................................................. (14.3)% (8.0)% (9.8)% (3.8)%
========== ============== ============ ===========
(1) Total operating expenses as a percentage of operating revenues, as presented in this table, is also referred to as operating
ratio.
Page 18
Comparison of Three Months Ended October 1, 2005, to Three Months Ended October
2, 2004
Operating revenues. Operating revenues decreased $4.2 million, or 4.3%,
from $98.5 million for the third quarter of 2004 to $94.3 million for the third
quarter of 2005. The decrease in operating revenues was mainly due to a 5.2%
decrease in total tonnage and 10.5% decrease in total shipments hauled, offset
in part by a $4.5 million increase in fuel surcharge due to higher cost of fuel.
LTL revenue per hundredweight decreased 0.8% from $11.83 in the 2004 quarter to
$11.73 in the 2005 quarter. LTL revenue per hundredweight, excluding fuel
surcharge revenue, decreased 6.0% from $11.13 in the 2004 third quarter to
$10.46 in the 2005 third quarter due to an increase of 7.6% in average weight
per LTL shipment. The average length of haul increased 2.7% from 481 miles in
the 2004 third quarter to 494 miles in the 2005 third quarter. Total tonnage
decreased 24.8 thousand tons, or 5.2%, from 481.0 thousand tons in the 2004
quarter to 456.2 thousand tons in the 2005 quarter.
Salaries, wages, and benefits. Salaries, wages, and benefits decreased $4.5
million, or 7.8%, from $57.8 million for the third quarter of 2004 to $53.3
million for the third quarter of 2005. The decrease in salaries, wages, and
benefits resulted primarily from an overall reduction in business volumes and a
reduction in headcount from the third quarter of 2004 to the third 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 14.1% between the 2004 quarter and the 2005 quarter,
due mainly to the reduction in the number of employees. Line mileage pay, offset
in part by the March 2005 general wage increase, decreased only 4.1%. As a
percentage of operating revenues, salaries, wages, and benefits decreased from
58.7% for the 2004 quarter, to 56.5% for the 2005 quarter.
Purchased transportation. Purchased transportation decreased $1.0 million,
or 7.0%, from $14.2 million for the third quarter of 2004 to $13.2 million for
the third 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 the 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 14.4% for the 2004 quarter to 14.0% for the 2005 quarter.
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $1.4 million, or 6.3%, from $22.3 million for the third
quarter of 2004 to $23.7 million for the third 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, and expenses
associated with compliance of the Sarbanes-Oxley Act. 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 22.7% for the 2004 quarter to 25.2% for the 2005 quarter.
Insurance and claims. Insurance and claims decreased $2.6 million, or
29.2%, from $8.9 million for the third quarter of 2004 to $6.3 million for the
third quarter of 2005. The decrease in insurance and claims expense resulted
primarily from a reduction in our cargo claims and in third party accident
claims expense. We also included in insurance and claims expense for the 2004
quarter our $0.8 million deductible for an August accident. As a percentage of
operating revenues, insurance and claims decreased from 9.0% for the 2004
quarter to 6.6% for the 2005 quarter.
Page 19
Building and equipment rentals. Building and equipment rentals remained
unchanged at $1.6 million for each quarter. As a percentage of operating
revenues, building and equipment rentals were 1.6% for the 2004 quarter and 1.7%
for the 2005 quarter.
Depreciation and amortization. Depreciation and amortization expense
increased approximately $0.2 million, or 4.5%, from $4.4 million for the third
quarter of 2004 to $4.6 million for the third 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 4.5% for the 2004 quarter to 4.9% for the 2005 quarter.
Goodwill impairment. We determined pursuant to SFAS No. 142 that our
goodwill was impaired. We therefore incurred a non-cash charge of $4.3 million
to write off all remaining goodwill from previous acquisitions.
Operating ratio. Our operating ratio improved from 110.9% in the third
quarter of 2004 to 108.9%, excluding the non-cash goodwill impairment charge of
$4.3 million, for the third quarter of 2005. The reported operating ratio for
the 2005 third quarter was 113.5%.
Interest expense. Total interest expense increased $0.5 million, or 26.3%,
from $1.9 million for the third quarter of 2004 to $2.4 million for the third
quarter of 2005. As a percentage of operating revenues, interest expense
increased from 2.0% for the 2004 quarter to 2.6% for the 2005 quarter. Our
average (non-related party) debt for the 2005 quarter amounted to $41.7 million
compared to $34.8 million for the 2004 quarter. In the fourth quarter of 2004,
we increased capital leases by approximately $14.9 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 $15.1 million was realized in the 2005
third quarter. The $15.1 million pre-tax loss in the third quarter of 2005
generated a tax benefit of approximately $4.3 million which was offset by an
increase in the valuation allowance for deferred tax assets. The total valuation
allowance as of October 1, 2005 amounted to approximately $14.8 million. A
goodwill impairment charge of $4.3 million, and a related income tax benefit of
$1.7 million were recorded in the 2005 third quarter. In the 2004 third quarter,
we recorded a $4.8 million income tax benefit due mainly to a pre-tax loss of
$12.7 million.
Page 20
Comparison of Nine Months Ended October 1, 2005, to Nine Months Ended October
2, 2004
Operating revenues. Operating revenues decreased $17.9 million, or 5.9%,
from $301.1 million for the 2004 period to $283.2 million for the 2005 period.
The decrease in operating revenues was mainly due to an 8.4% decrease in total
tonnage and a 12.1% decrease in total shipments hauled, offset in part by a
$13.7 million increase in fuel surcharge revenue due to higher cost of fuel.
Revenue per working day was $1.47 million in the 2005 period, which was 5.8%
lower than the $1.56 million per working day in the 2004 period. LTL revenue per
hundredweight increased 1.3% from $11.52 in the 2004 period to $11.67 in the
2005 period as a result of increased fuel surcharge revenue. LTL revenue per
hundredweight, excluding fuel surcharge revenue, decreased 4.1% from $10.99 in
the 2004 period to $10.54 in the 2005 period partially due to a 5.3% increase in
average weight per LTL shipment. The average length of haul increased 3.2% from
475 miles in the 2004 period to 490 miles in the 2005 period. Total tonnage
decreased 125.2 thousand tons, or 8.4%, from 1,499.4 thousand tons in the 2004
period to 1,374.2 thousand tons in the 2005 period.
Salaries, wages, and benefits. Salaries, wages, and benefits decreased
$15.4 million, or 8.9%, from $173.6 million for the 2004 period to $158.2
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 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. The 2005 period included a 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 57.6% for the 2004 period, to 55.9% for the 2005 period.
Purchased transportation. Purchased transportation decreased $6.0 million,
or 13.3%, from $45.1 million for the 2004 period to $39.1 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 use of third-party contractors in the 2005 period was
due to both the decrease in total tonnage hauled and the 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
15.0% for the 2004 period to 13.8% for the 2005 period.
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $6.0 million, or 9.7%, from $61.6 million for the 2004
period to $67.6 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 expenses
associated with compliance of the Sarbanes-Oxley Act. 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 20.5% for the 2004 period to 23.9% for the 2005 period.
Page 21
Insurance and claims. Insurance and claims decreased $1.8 million, or 9.1%,
from $19.8 million for the 2004 period to $18.0 million for the 2005 period. The
decrease in insurance and claims expense resulted primarily from an decrease in
our cargo claims expense as a result of a lower number of claims filed. This
reduction in cargo claims expense was partially offset by increases in third
party accident claims. As a percentage of operating revenues, insurance and
claims decreased from 6.6% for the 2004 period to 6.4% for the 2005 period.
Building and equipment rentals. Building and equipment rentals remained
virtually the same at $4.5 million in each of the nine month 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 $1.3 million, or 10.6%, from $12.3 million for the 2004
period to $13.6 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 4.1% for the 2004 period
to 4.7% for the 2005 period.
Goodwill impairment. We determined pursuant to SFAS No. 142 that our
goodwill was impaired. We therefore incurred a non-cash charge of $4.3 million
to completely write off all remaining goodwill from previous acquisitions.
Operating ratio. Our operating ratio increased from 105.2% for the 2004
period to 106.3%, excluding the $4.3 million non-cash goodwill impairment
charge, for the 2005 period. Our reported operating ratio amounted to 107.9% for
the nine months ended October 1, 2005.
Interest expense. Total interest expense increased $1.6 million, or 28.6%,
from $5.6 million for the 2004 period to $7.2 million for the 2005 period. As a
percentage of operating revenues, interest expense increased from 1.9% for the
2004 period to 2.5% for the 2005 period. Our average non-related party debt for
2005 amounted to $49.4 million compared to $36.3 million for 2004. In the fourth
quarter of 2004, we increased capital leases by approximately $14.9 million to
fund the acquisition of revenue equipment. Our related party interest expense
was unchanged at $4.7 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 nine months ended October 1, 2005, the pre-tax loss
of $29.5 million ($25.2 million excluding the goodwill impairment charge of $4.3
million) generated an income tax benefit of approximately $9.9 million which was
offset by an increase in the valuation for deferred tax assets. We recorded a
tax benefit of $1.7 million in 2005 which relates to the goodwill impairment
charge. The total valuation allowance as of October 1, 2005 amounted to
approximately $14.8 million. We recorded an income tax benefit in the 2004
period of $9.9 million, which yields an effective tax rate of 46.0% (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 $21.4 million. Excluding
the $1.8 million benefit, the effective tax rate would have been 37.8%.
Page 22
Liquidity, Going Concern and Capital Resources
We have experienced recurring negative cash flows attributable primarily to
operating losses. As a result of such negative cash flows and losses, there is
substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might be necessary should we be unable to continue as a going concern.
Management is aggressively pursuing all aspects of its previously announced
turnaround plans which include: improving revenue yield, reducing cost
structure, streamlining freight movements, improving employee efficiency, and
reducing insurance and claims expense.
In addition, management is seeking ways to increase liquidity. In November,
a second amendment to our primary credit facility was negotiated to increase
liquidity by $5.0 million. In addition to amounts available under our credit
facility, at October 1, 2005, we also had assets held for sale that we expect to
generate approximately $6.5 million in net proceeds. We are attempting to sell
these assets in the next three to six months, although there can be no assurance
that the proceeds will, in fact, be received during this time period or at all.
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 $1.0 million to $7.0 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 have obtained approved financing independent of our Bank of America led
credit facility.
Our ability to fund our cash requirements in future periods, and continue
as a going concern, will depend on our ability to improve operating results,
cash flow and our ability to comply with covenants contained in our financing
arrangements or successfully renegotiate these arrangements.
At October 1, 2005, we had $10.7 million available under our primary credit
facility which fluctuates from time-to-time with accounts receivable, payroll,
and other items. Under this facility, an additional $15.0 million of credit was
blocked due to minimum EBITDA tests. On November 9, 2005, we entered into a
second amendment to the New Credit Facility. This amendment lowered the $15.0
million block to $10.0 million thereby increasing available credit by an
additional $5.0 million. In addition, we also have assets held for sale that we
expect to generate approximately $6.5 million in net proceeds. We are attempting
to sell these assets during the next three to six months, although we cannot
assure you that the proceeds will, in fact, be received during the next three to
six months or at all.
In addition to working to increase our access to liquidity, we continue to
pursue our turnaround plan. To date, we have achieved some progress in our plan,
although not the level we desired. The operating ratio for the third quarter of
2005, before the $4.3 million goodwill impairment charge, improved 200 basis
points compared to the 2004 third quarter. Also, for the nine months ended
October 1, 2005, our net cash used in operating activities improved $1.9 million
from the comparable 2004 period.
Net cash used in operating activities decreased $1.9 million from $7.3
million used in the nine months ended October 2, 2004 to $5.4 million used in
the nine months ended October 1, 2005. This improvement resulted primarily from
an increase in operating assets and liabilities of approximately $2.1 million,
which was primarily the result of an increase in the change in accounts
receivable and accrued expenses of $7.7 million and $9.5 million, respectively,
offset by a reduction in the change in accounts payable and claims and insurance
accruals of $9.0 million and $6.1 million, respectively.
Net cash provided by investing activities in the 2005 first nine months
amounted to $7.7 million due mainly to proceeds from the sale and leaseback of a
terminal in Phoenix and sales of revenue equipment. Net cash used in the 2004
first nine months amounted to $31.1 million. Our gross capital expenditures were
approximately $1.7 million in the 2005 period and $25.9 million in the 2004
period. In 2004, we paid approximately $8.3 million for new terminals in Phoenix
and Fresno. In 2004, we also paid $9.1 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 2004 and 2005 were
for replacement revenue equipment.
Page 23
Net cash used in financing activities was approximately $4.1 million for
2005 due mainly to payments of deferred financing fees on our New Credit
Facility of $2.1 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 2004, net cash provided amounted to
$1.1 million due partially to cash received from stock option exercises. In
2004, we borrowed against our securitization facility and invested $18.9 million
to cash collateralize our letters of credit.
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 have received 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, we entered into a four-year senior secured revolving
credit facility (as amended on May 12, 2005, 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. 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 is the lesser of (a) $60.0
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.
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 an unused line fee of 0.25% to
0.375%, based on aggregate amounts outstanding.
Page 24
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 (inclusive of a second amendment entered into on
November 9, 2005) 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 $10.0 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.
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 sale and leaseback transaction generated $6.2 million in net
proceeds, and we signed a ten-year lease with a ten-year option. We determined
that the sale-leaseback will be treated as an operating lease for accounting
purposes. A gain of $0.3 million was realized on this transaction, but has been
deferred and will be recognized over the 10 year life of the lease. Rent for the
first 12 months amounts to $0.6 million, and annual rent for the following nine
years is subject to a 2% annual escalation factor. The mortgage financing
generated $7.9 million in net proceeds. 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 $0.9 million
with a final payment of $7.2 million. 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 October 1, 2005, our
assets supported gross borrowings of $51.4 million, which has been reduced by
the issuance of $22.4 million of letters of credit for our insurance programs,
cash draws of $3.3 million and a $15.0 million block which was in place until
either we could meet minimum EBITDA levels set by the bank or renegotiate the
terms of the line of credit, leaving available credit on the current facility of
$10.7 million. On November 9, 2005, we entered into a second amendment to the
New Credit Facility. This amendment lowered the $15.0 million block to $10.0
million thereby increasing available credit by an additional $5.0 million. The
amount borrowed under the New Credit Facility at October 1, 2005 was $3.3
million. In addition, we expect to realize approximately $6.5 million of net
proceeds from assets currently held for sale over the next three to six months.
Page 25
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.
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 from Southwest
Premier 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, $0.1 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 October 1, 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.
Off-Balance Sheet Arrangements
Certain of our terminals and revenue equipment are financed off-balance
sheet through operating leases. As of October 1, 2005, 44 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 $4.5 million for
the first nine months of 2005, compared to $4.5 million for the first nine
months of 2004. The total amount of remaining payments under operating leases as
of October 1, 2005 was $23.8 million, with $6.2 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.
Page 26
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.
Goodwill. Our business acquisitions have resulted in goodwill, which may
become impaired in the future. As of December 31, 2004, our goodwill, net of
accumulated amortization, was $4.3 million. We perform our goodwill impairment
tests annually and more frequently if an event or circumstance indicates that
impairment may have occurred. A drop in our market value could result in an
impairment charge of all or a portion of our goodwill.
We performed the impairment test required by SFAS 142 as of the end of the
2005 third quarter. As a result of this analysis, we determined that the
carrying value of our net assets exceeded fair value. Thus, we adjusted the
carrying value of goodwill to fair value, resulting in the write off of all
goodwill. As a result of this write off, we recognized and recorded an
impairment charge of $4.3 million in the 2005 third quarter.
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, we established a $4.9 million
valuation allowance for deferred tax assets. As of October 1, 2005, the
valuation allowance for deferred tax assets was approximately $14.8 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.
Page 28
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 October 1, 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 $3.3 million in
drawings under our New Credit Facility at October 1, 2005, a one percentage
point increase in LIBOR rates would increase our annual interest expense by
$33,000.
Page 29
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, was
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.
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 each of the 2005 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.
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.
Page 30
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 certain claims and pending litigation arising from the
normal conduct of business. Based on the present knowledge of the facts, we
believe the resolution of the claims and pending litigation will not have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
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
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, we responded to the Consolidated Amended Class
Action Complaint by filing a motion to dismiss. On August 23, 2005, the lead
plaintiff filed its opposition to this motion to dismiss, and on September 12,
2005, we filed a response in which it again requested dismissal of the
Consolidated Amended Class Action Complaint.
Page 31
On August 9 and 10, 2004, two purported derivative actions were filed
against us, as nominal defendant, and against of our 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 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. 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.
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 except for the insurance deductible.
We are 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.
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.
Not applicable.
Item 5. Other Information.
On November 9, 2005, we entered into a second amendment to our
credit facility, with Bank of America, which had the effect of
increasing our available borrowing capacity by $5.0 million.
Prior to this amendment, we were restricted from drawing upon the
last $15.0 million of availability under the facility unless we
could meet specified EBITDA and fixed charge coverage ratio
requirements. Following the amendment, we are able to draw all
but the last $10.0 million of availability without satisfying
those requirements.
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.)
10.29* Form of Director Indemnification 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.
November 10, 2005
Central Freight Lines, Inc.
---------------------------
/s/ Jeffrey A. Hale
-------------------
Jeffrey A. Hale
Senior Vice President and Chief Financial Officer
Page 34
EXHIBIT 10.29
FORM OF DIRECTOR INDEMNIFICATION AGREEMENT
THIS DIRECTOR INDEMNIFICATION AGREEMENT (this "Agreement") is made
effective as of ___________, 20___, by and between Central Freight Lines, Inc.,
a Nevada corporation (the "Company"), and ___________, a duly elected and
incumbent director of the Company ("Indemnitee").
WHEREAS, it is essential for the Company to retain and attract as directors
the most capable persons available;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims currently being asserted against directors of
corporations;
WHEREAS, the Company's Amended and Restated Articles of Incorporation and
Bylaws permit the Company to provide its directors with the maximum
indemnification permitted to be given by the Company under Nevada law, and to
enter into agreements to provide such indemnification; and
WHEREAS, in recognition of Indemnitee's need for (i) substantial protection
against personal liability based on Indemnitee's reliance on certain provisions
of the Company's Amended and Restated Articles of Incorporation and Bylaws;
(ii) specific contractual assurance that the protection promised by such
provisions of the Amended and Restated Articles of Incorporation and Bylaws will
be available to Indemnitee (regardless of, among other things, any amendment to
or revocation of the Amended and Restated Articles of Incorporation and Bylaws
or any change in the composition of the Board of Directors or acquisition
transaction relating to the Company); and (iii) an inducement to provide
effective services to the Company as a director, the Board of Directors of the
Company has found it in the Company's best interests to provide in this
Agreement for the indemnification of and the advancement of expenses to
Indemnitee to the fullest extent (whether partial or complete) permitted by law
and as set forth in this Agreement.
NOW, THEREFORE, in consideration of the above premises, and for other good
and valuable consideration the receipt and sufficiency of which hereby are
acknowledged, and intending to be legally bound hereby, the parties agree as
follows:
Section 1. Definitions. As used in Agreement:
(a) "Board" means the board of directors of the Company.
(b) "Affiliate" means any corporation or other person or entity that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
Page 35
(c) A "Change in Control" shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing twenty percent (20%) or
more of the total voting power represented by the Company's then outstanding
Voting Securities; (ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board and any new director
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (?) of the directors
then still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute a majority of the Board; (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation that would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least eighty percent (80%) of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation; (iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company (in one transaction or a series of transactions) of all or substantially
all of the Company's assets; or (v) there occurs any other event of a nature
that would be required to b reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or a response to any similar item on any similar schedule or
form) promulgated under the Exchange Act, whether or not the Company is then
subject to such reporting requirement. Notwithstanding anything to the contrary
herein, the following transactions shall not constitute a Change of Control: (A)
any acquisition directly from the Company; (B) any acquisition by the Company;
(C) any acquisition by, or transfer for the benefit of, Jerry Moyes, Vickie
Moyes, the Jerry and Vickie Moyes Family Trust, the Moyes Children's Trust, any
Affiliate thereof, or any immediate family member of Mr. or Mrs. Moyes; or (D)
any acquisition by a trustee or other fiduciary holding securities under an
employee benefit plan sponsored or maintained by the Company or an Affiliate
thereof.
(d) "Expenses" mean any expense, damages, liability, or loss, including
attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts
paid or to be paid in settlement, any interest, assessments, or other charges
imposed thereon, any federal, state, local, or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement, and all
other costs and obligations, paid or incurred in connection with investigating,
defending, being a witness in, participating in (including on appeal), or
preparing for any of the foregoing in, any Proceeding and all fees and
disbursements of attorneys, experts, or other professionals relating to any
Indemnifiable Event.
Page 36
(e) "Indemnifiable Event" means any event or occurrence that takes place
either prior to or after the execution of this Agreement, related to the fact
that Indemnitee is or was a director of the Company, or while a director is or
was serving at the request of the Company as a director, officer, employee,
trustee, agent, or fiduciary of another foreign or domestic corporation,
partnership, joint venture, employee benefit plan, trust, or other enterprise,
or was a director, officer, employee, or agent of a foreign or domestic
corporation that was a predecessor corporation of the Company or of another
enterprise at the request of such predecessor corporation, or related to
anything done or not done by Indemnitee in any such capacity, whether or not the
basis of the Proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent of the Company, as described above.
Notwithstanding anything in this Agreement to the contrary, Indemnitee shall not
be entitled to indemnification under this Agreement (i) in any action in which
there is a final adjudication that Indemnitee's acts or omissions involved
intentional misconduct, fraud, or a knowing violation of law, a breach of
Indemnitee's duty of good faith or loyalty, or were not in the best interest of
the Company; (ii) on account of any Proceeding in which there is a final
adjudication against Indemnitee for an accounting of profits made from the
purchase or sale by Indemnitee of securities of the Company pursuant to the
provisions of Section 16(b) of the Exchange Act or similar provisions of any
federal, state, or local laws; (iii) in any derivative action in which
Indemnitee has been finally adjudged to be liable to the Company unless and only
to the extent that the court in which the proceeding was brought shall determine
that, despite the adjudication of liability, the Indemnitee is entitled to
indemnity for such Expenses as the court shall deem proper; and (iv) prior to a
Change of Control, in connection with any claim initiated by Indemnitee against
the Company or any officer or director thereof unless permitted under Section
2(b).
(f) "Independent Counsel" means the person or body appointed in connection
with Section 4.
(g) "Proceeding" means any threatened, pending, or completed action, suit,
or proceeding (including an action by or in the right of the Company), or any
inquiry, hearing, or investigation, claim, demand, method of alternative dispute
resolution, notice, complaint, or other proceeding, whether conducted by the
Company or any other party, that Indemnitee in good faith believes might lead to
the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative, or other.
(h) "Reviewing Party" means the person or body appointed in accordance with
Section 4.
(i) "Voting Securities" mean any securities of the Company that vote
generally in the election of directors.
Section 2. Agreement to Indemnify.
(a) General Agreement. During the Term (as defined in Section 3) of this
Agreement, in the event Indemnitee was, is, or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, a Proceeding by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee from and against any
and all Expenses to the fullest extent permitted by law, as the same exists or
may hereafter be amended or interpreted (but in the case of any such amendment
or interpretation, only to the extent that such amendment or interpretation
permits the Company to provide broader indemnification rights than were
permitted prior thereto).
Page 37
(b) Initiation of Proceeding. Notwithstanding anything in this Agreement to
the contrary, Indemnitee shall not be entitled to indemnification or advancement
of Expenses pursuant to this Agreement in connection with any Proceeding
initiated by Indemnitee against the Company or any director or officer of the
Company unless (i) the Company has joined in or the Board has consented to the
initiation of such Proceeding; (ii) the Proceeding is one to enforce
indemnification rights under Section 5; or (iii) the Proceeding is instituted
after a Change in Control (other than a Change in Control approved by a majority
of the directors on the Board who were directors immediately prior to such
Change in Control) and Independent Counsel has approved its initiation.
(c) Expense Advances. If so requested by Indemnitee, the Company shall
advance (within ten (10) business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance"); provided, that (i) such an Expense Advance
shall be made only upon delivery to the Company of an undertaking by or on
behalf of the Indemnitee to repay the amount thereof if it is ultimately
determined that Indemnitee is not entitled to be indemnified by the Company;
(ii) if and to the extent that the Reviewing Party determines that Indemnitee
would not be permitted to be so indemnified under applicable law, the Company
shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse
the Company) for all such amounts theretofore paid; and (iii) such an Expense
Advance shall only be made if permitted under applicable law. If Indemnitee has
commenced or commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, as provided in Section 5, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding, and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or have lapsed). Indemnitee's obligation to reimburse the Company for
Expense Advances shall be unsecured and no interest shall be charged thereon.
(d) Mandatory Indemnification. Notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any Proceeding relating in whole or in part to an
Indemnifiable Event or in defense of any issue or matter therein, Indemnitee
shall be indemnified against all Expenses incurred in connection therewith.
(e) Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some portion of
Expenses, but not, however, for the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled.
Page 38
Section 3. Term. The indemnification herein given shall be deemed to have
commenced upon the commencement of Indemnitee's service as a director of the
Company, even if such election occurred prior to the date of this Agreement, and
shall continue for the period of membership on the Company's Board and
thereafter for any Indemnifiable Event arising from actions or events occurring
during service as a director even though he may have ceased to be a director and
shall inure to the benefit of the estate, heirs, and personal representatives of
Indemnitee. If this Agreement is cancelled, modified, or amended, in whole or in
part, any claims arising from actions or events occurring during the term of
this Agreement shall be covered under the same terms and conditions as described
herein.
Section 4. Reviewing Party. Prior to any Change in Control, the Reviewing
Party shall be any appropriate person or body consisting of a member or members
of the Board or any other person or body appointed by the Board who is not a
party to the particular Proceeding with respect to which Indemnitee is seeking
indemnification. After a Change in Control, the Independent Counsel referred to
below shall become the Reviewing Party. With respect to all matters arising
after a Change in Control (other than a Change in Control approved by a majority
of the directors on the Board who were directors immediately prior to such
Change in Control) concerning the rights of Indemnitee to indemnity payments and
Expense Advances under this Agreement or any other agreement or under applicable
law or the Company's Restated Articles of Incorporation or Amended Bylaws now or
hereafter in effect relating to indemnification for Indemnifiable Events, the
Company shall seek legal advice only from Independent Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company or the
Indemnitee (other than in connection with indemnification matters) within the
last five years. The Independent Counsel shall not include any person who, under
the applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or Indemnitee in an
action to determine Indemnitee's rights under this Agreement. Such counsel,
among other things, shall render its written opinion to the Company and
Indemnitee as to whether and to what extent the Indemnitee should be permitted
to be indemnified under applicable law. The Company agrees to pay the reasonable
fees of the Independent Counsel and to indemnify fully such counsel against any
and all Expenses (including attorneys' fees), claims, liabilities, loss, and
damages arising out of or relating to this Agreement or the engagement of
Independent Counsel pursuant hereto.
Section 5. Indemnification Process and Appeal.
(a) Indemnification Payment. Indemnitee shall be entitled to
indemnification and advancement of Expenses, and shall receive payment thereof,
from the Company in accordance with this Agreement as soon as practicable after
Indemnitee has made written demand on the Company for such indemnification or
advancement of Expenses, unless the Reviewing Party has given a written opinion
to the Company that Indemnitee is not entitled to indemnification or advancement
of Expenses under applicable law.
Page 39
(b) Suit to Enforce Rights. Regardless of any action by the Reviewing
Party, if Indemnitee has not received full indemnification or advancement of
Expenses within thirty (30) days after making a demand in accordance with
Section 5(a), Indemnitee shall have the right to enforce its indemnification
rights under this Agreement by commencing litigation in any court having subject
matter jurisdiction, which seeks an initial determination by the court or
challenges any determination by the Reviewing Party or any aspect thereof. The
Company hereby consents to service of process and to appear in any such
proceeding. Any determination by the Reviewing Party not challenged by the
Indemnitee shall be binding on the Company and Indemnitee. The remedy provided
for in this Section 5(b) shall be in addition to any other remedies available to
Indemnitee at law or in equity.
(c) Defense to Indemnification, Burden of Proof, and Presumptions. It shall
be a defense to any action brought by Indemnitee against the Company to enforce
this Agreement that it is not permissible under applicable law for the Company
to indemnify, or provide an advancement of Expenses to, Indemnitee for the
amount claimed. In connection with any such action or any determination by the
Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified or receive an advancement of Expenses hereunder, the burden of
proving such a defense or determination shall be on the Company. Neither the
failure of the Reviewing Party or the Company (including its Board, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such action by Indemnitee that indemnification of the claimant
or an advancement of Expenses relating thereto is proper under the circumstances
because Indemnitee has met the standard of conduct set forth in applicable law,
nor an actual determination by the Reviewing Party or Company (including its
Board, independent legal counsel, or its stockholders) that the Indemnitee had
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met the applicable standard of
conduct.
Section 6. Indemnification for Expenses Incurred in Enforcing Rights. The
Company shall indemnify Indemnitee against any and all Expenses that are
incurred by Indemnitee in connection with any action brought by Indemnitee for
(i) indemnification or advancement of Expenses by the Company under this
Agreement or any other agreement or under applicable law or the Company's
Restated Articles of Incorporation or Amended Bylaws now or hereafter in effect
relating to indemnification for Indemnifiable Events; and/or (ii) recovery under
directors' and officers' liability insurance policies maintained by the Company,
but only in the event that Indemnitee ultimately is determined to be entitled to
such indemnification or insurance recovery, as the case may be. In addition, the
Company shall, if so requested by Indemnitee, advance the foregoing Expenses to
Indemnitee, subject to and in accordance with Section 2(c).
Section 7. Notification and Defense of Proceeding.
(a) Notice. Promptly after receipt by Indemnitee of notice of the
commencement of any Proceeding, Indemnitee shall, if a claim in respect thereof
is to be made against the Company under this Agreement, notify the Company of
the commencement thereof; but the omission so to notify the Company will not
relieve the Company from any liability that it may have to Indemnitee, except as
provided in Section 7(c).
Page 40
(b) Defense. With respect to any Proceeding as to which Indemnitee notifies
the Company of the commencement thereof, the Company will be entitled to
participate in the Proceeding at its own expense and except as otherwise
provided below, to the extent the Company so wishes, it may assume the defense
thereof with counsel reasonably satisfactory to Indemnitee. After notice from
the Company to Indemnitee of its election to assume the defense of any
Proceeding, the Company shall not be liable to Indemnitee under this Agreement
or otherwise for any Expenses subsequently incurred by Indemnitee in connection
with the defense of such Proceeding other than reasonable costs of investigation
or as otherwise provided below. Indemnitee shall have the right to employ legal
counsel in such Proceeding, but all Expenses related thereto incurred after
notice from the Company of its assumption of the defense shall be at
Indemnitee's expense unless: (i) the employment of legal counsel by Indemnitee
has been authorized by the Company; (ii) Indemnitee has reasonably determined
that there may be a conflict of interest between Indemnitee and the Company in
the defense of the Proceeding; (iii) after a Change in Control (other than a
Change in Control approved by a majority of the directors on the Board who were
directors immediately prior to such Change in Control), the employment of
counsel by Indemnitee has been approved by the Independent Counsel; or (iv) the
Company shall not in fact have employed counsel to assume the defense of such
Proceeding, in each of which cases all Expenses of the Proceeding shall be borne
by the Company. The Company shall not be entitled to assume the defense of any
Proceeding brought by or on behalf of the Company or in the event (ii), (iii) or
(iv) above exists.
(c) Settlement of Claims. The Company shall not be liable to indemnify
Indemnitee under this Agreement or otherwise for any amounts paid in settlement
of any Proceeding effected without the Company's written consent, such consent
not to be unreasonably withheld; provided, however, that if a Change in Control
has occurred (other than a Change in Control approved by a majority of the
directors on the Board who were directors immediately prior to such Change in
Control), the Company shall be liable for indemnification of Indemnitee for
amounts paid in settlement if the Independent Counsel has approved the
settlement. The Company shall not settle any Proceeding in any manner that would
impose any penalty or limitation on Indemnitee without Indemnitee's written
consent. The Company shall not be liable to indemnify the Indemnitee under this
Agreement with regard to any judicial award if the Company was not given a
reasonable and timely opportunity, at its expense, to participate in the defense
of such action; the Company's liability hereunder shall not be excused if
participation in the Proceeding by the Company was barred by this Agreement.
Section 8. Service. It is contemplated that Indemnitee will continue to
serve as a director of the Company. However, nothing herein contained shall
obligate Indemnitee to such continued service; it being acknowledged by the
Company that Indemnitee retains the right to resign as a director of the Company
for any reason whatsoever. Neither shall this Agreement be construed as
obligating either the Company or the stockholders to continue to elect
Indemnitee to the Company's Board.
Section 9. Non-Exclusivity. The rights of Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's Restated
Articles of Incorporation, Bylaws, applicable law, or otherwise. To the extent
that a change in applicable law (whether by statute or judicial decision)
permits greater indemnification than would be afforded currently under the
Company's Amended and Restated Articles of Incorporation, Bylaws, applicable
law, or this Agreement, it is the intent of the parties that Indemnitee enjoy by
this Agreement the greater benefits so afforded by such change.
Page 41
Section 10. Liability Insurance. To the extent the Company decides to
maintain or has maintained an insurance policy or policies providing general
and/or directors' and officers' liability insurance, Indemnitee shall be covered
by such policy or policies, in accordance with its or their terms, to the
maximum extent of the coverage available for any director or officer.
Section 11. Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or on behalf of the Company or any
Affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs,
executors, or personal or legal representatives after the expiration of two (2)
years from the date of accrual of such cause of action, or such longer period as
may be required by state law under the circumstances. Any claim or cause of
action of the Company or its Affiliate shall be extinguished and deemed released
unless asserted by the timely filing and notice of a legal action within such
period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action, the shorter period shall
govern.
Section 12. Amendment of this Agreement. No supplement, modification, or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be binding unless in the form of a writing signed by the party against
whom enforcement of the waiver is sought, and no such waiver shall operate as a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver. Except as specifically provided herein,
no failure to exercise or any delay in exercising any right or remedy hereunder
shall constitute a waiver thereof.
Section 13. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights (unless such action would make Indemnitee liable under
applicable documents).
Section 14. No Duplication of Payments. The Company shall not be liable
under this Agreement to make any payment in connection with any claim made
against Indemnitee to the extent Indemnitee has otherwise received payment
(under any insurance policy, article, bylaw, or otherwise) of the amounts
otherwise indemnifiable hereunder.
Section 15. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation, or otherwise to all or substantially all of the business and/or
assets of the Company), assigns, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation, or otherwise) to all,
substantially all, or a substantial part, of the business and/or assets of the
Company, by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity pertaining to an Indemnifiable Event even though he
may have ceased to serve in such capacity at the time of any Proceeding.
Page 42
Section 16. Severability. If any provision (or portion thereof) of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, or otherwise unenforceable, the remaining provisions of this Agreement
shall remain enforceable to the fullest extent permitted by law. Furthermore, to
the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of this Agreement containing any provision held
to be invalid, void, or otherwise unenforceable, which is not itself invalid,
void, or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, void, or unenforceable.
Section 17. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Nevada
applicable to contracts made and to be performed in such state without giving
effect to its principles of conflicts of laws.
Section 18. Notices. All notices, demands, and other communications
required or permitted hereunder may be effected by personal delivery in writing,
by facsimile, or by registered or certified mail, postage prepaid, return
receipt requested, and shall be deemed communicated as of the date of personal
delivery, facsimile, or mailing. Mailed notices shall be addressed as set forth
below, but each party may change its address by written notice in accordance
with this Section 18.
If to the Company: Central Freight Lines, Inc.
5601 West Waco Dr.
Waco, TX 76710
If to Indemnitee:
Section 19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day specified above.
INDEMNITEE: CENTRAL FREIGHT LINES, INC., a Nevada corporation
___________________________ By:______________________________
Name: Robert V. Fasso
Title: Chief Executive Officer and President
Page 43
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: November 10, 2005
/s/ Robert V. Fasso
-------------------
Robert V. Fasso
Chief Executive Officer
Page 44
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: November 10, 2005
/s/ Jeffrey A. Hale
-------------------
Jeffrey A. Hale
Chief Financial Officer
Page 45
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 October 1, 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
November 10, 2005
Page 46
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 October 1, 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
November 10, 2005
Page 47