UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
/ / 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)
(254) 772-2120
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common stock $0.001 Par Value Nasdaq
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes X No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes X No
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (S 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes X No
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $33,164,410 as of July 1, 2005 (based upon the $2.85 per
share closing price on that date as reported by Nasdaq). In making this
calculation the registrant has assumed, without admitting for any purpose, that
all executive officers, directors, and holders of more than 10% of a class of
outstanding common stock, and no other persons, are affiliates.
The number of shares of common stock outstanding at March 23, 2006 was
18,291,032.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the registrant's definitive proxy statement for the 2006
Annual Meeting of Stockholders have been incorporated by reference into Part III
of this Form 10-K.
TABLE OF CONTENTS
Item Page
-------- --------
PART I
1. Business. 1
1A. Risk Factors. 4
2. Properties. 10
3. Legal Proceedings. 10
4. Submission of Matters to a Vote of Security Holders. 11
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities. 12
6. Selected Financial Data. 13
7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 15
7A. Quantitative and Qualitative Disclosures about Market Risk. 29
8. Financial Statements and Supplementary Data. 30
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 30
9A. Controls and Procedures. 31
9B. Other Information. 31
PART III
10. Directors and Executive Officers of the Registrant. 31
11. Executive Compensation. 31
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. 32
13. Certain Relationships and Related Transactions. 32
14. Principal Accountant Fees and Services. 32
PART IV
15. Exhibits and Financial Statement Schedules. 33
PART I
Item 1. Business.
Except for the historical information contained herein, the discussion in
this annual report contains "forward-looking statements," which include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation, and availability of
resources. These forward-looking statements include, without limitation,
statements regarding expectations as to operational improvements; statements
regarding consummation of the merger transaction with North American Truck
Lines, LLC; expectations as to cost savings, revenue growth, and earnings;
proposed new products and services; expectations that claims, lawsuits,
commitments, contingent liabilities, labor negotiations, or agreements, or other
matters will not have a materially adverse effect on our consolidated financial
position, results of operations, or liquidity; statements concerning
projections, predictions, expectations, estimates, or forecasts as to our
business, financial, and operational results and future economic performance;
and statements of management's goals and objectives, and other similar
expressions concerning matters that are not historical facts. Words such as
"may," "will," "should," "could," "would," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates,"
and similar expressions, as well as statements in future tense, identify
forward-looking statements. These statements are made pursuant to the safe
harbor provisions of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, 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 "Factors that May Affect Future Results" along with the various
disclosures by the Company in its press releases, stockholder reports, and
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 annual report.
References in this Annual Report to "we," "us," "our," or the "Company" or
similar terms refer to Central Freight Lines, Inc. and its operating subsidiary.
Overview
We are a regional less-than-truckload ("LTL") trucking company that has
operations in the Southwest, Midwest, and Northwest regions of the United
States. We also offer inter-regional service between our operating regions and
maintain alliances with other similar companies to complete transportation of
shipments outside of our operating territory. None of our employees is
represented by a union.
Our Southwest region is the eight-state territory of California, Texas,
Arizona, New Mexico, Oklahoma, Louisiana, Arkansas, and Nevada. 48 of our 63
terminals are strategically located in our Southwest region. Our Midwest region
is the four-state territory of Kansas, Missouri, Illinois, and Iowa. Our
Northwest region is the two-state territory of Oregon, and Washington.
As an LTL carrier, we typically transport multiple shipments for multiple
customers in each trailer. Our drivers pick up freight from customer locations
during the day and relay critical information to our planners. Upon arrival at
the origin terminal, freight is unloaded, and then re-loaded onto a linehaul
inter-city trailer that is bound for the destination city. Upon arrival at the
destination terminal, freight is unloaded, sorted, and delivered by local
delivery trucks. We move freight on strict schedules throughout our regions to
provide the next-day and second-day service required by our many time-sensitive
customers. We also provide information to our customers to allow them to monitor
our service standards and to track their shipments.
Page 1
Our Revenue Equipment
At December 31, 2005, our fleet contained 1,831 tractors and 8,066
trailers. The table below reflects, as of December 31, 2005, the average age of
our tractors and trailers:
Number Average Age
Type of Equipment (categorized by primary use) of Units in Years
Linehaul tractors.................................... 669 4.7
Pick-up and delivery tractors........................ 1,162 6.3
Trailers............................................. 8,066 14.4
Our Customers and Marketing
Our customers represent a broad range of industries, with the largest
concentration coming from the retail sector. In 2005, our five largest customers
were Home Depot, Dell Inc., Wal-Mart Stores, Inc., Tyco International and Sears.
These customers together generated approximately 13.6% of our revenue. Home
Depot, our largest customer in 2005, generated approximately 4.1% of our
revenue. Since our inception in 1997, no single customer has represented more
than 10% of our operating revenue in any year. We believe the diversity of our
customers and their industries lessens the impact of business cycles affecting
any one company or industry. However, the loss of one or more of our five
largest customers could significantly and adversely affect our cash flow, market
share, and profits. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Customers" for additional information.
We target shippers that have significant and growing distribution needs in
our operating regions and have freight that enhances our overall efficiency and
profitability. We accomplish this by involving sales, operations, and finance
personnel in evaluating and targeting potential new accounts. Our operations
personnel identify areas in our regions where additional freight could help fill
partially full trailers, fill trailers that return empty from scheduled trips,
or complement existing pick-up and delivery schedules. Our sales personnel
solicit business from these potential customers and our traffic and pricing
personnel determine whether the freight would contribute to our overall
profitability.
We have established transportation alliances with regional LTL carriers in
the Northeast and Southeast regions of the United States. In these arrangements,
we exchange shipments for delivery in each other's service territory. This
practice can help each carrier in several respects. First, the freight inflows
from the other regions add tonnage to the delivering company's operation. This
improves profitability by increasing freight density over the terminal network
and linehaul operation. Second, the alliances permit regional carriers to
provide out-of-territory service for their customers. This maintains customer
relationships and prevents regional carriers from losing revenue to national
carriers that could deliver the freight from pick-up to delivery. Third, the
alliances permit multiple regional carriers to bid for national accounts and
bring the advantages of non-union regional operations to national accounts.
Transportation alliances generated approximately 7.5% of our revenue in 2005.
Competition
The LTL industry is highly competitive on the basis of both service and
price. Our primary competitors are regional, inter-regional, and national LTL
carriers, and, to a lesser extent, truckload carriers, railroads, airfreight
companies, and overnight package companies. Our major competitors within the
regional LTL industry include certain regional operating subsidiaries of CNF
Inc., YRC Worldwide, Inc., and SCS Transportation, Inc. Many of our competitors
are larger, operate more equipment, and have greater financial resources than we
do. We believe that our terminal network and traffic density offer competitive
advantages within our regions.
Page 2
Employees
As of December 31, 2005, we had 2,794 full-time employees and 656 part-time
employees in our operations. These individuals were employed in the following
categories:
Number of
Category Employees
-------- ---------
Linehaul drivers.............. 492
Pickup and delivery drivers... 1,190
Platform...................... 952
Mechanics..................... 98
Sales......................... 97
Salaried, clerical, and other. 621
---
Total....................... 3,450
=====
None of our employees is currently represented under a collective bargaining
agreement.
Fuel Availability and Cost
We depend heavily upon the availability of diesel fuel. To address
fluctuations in fuel prices, we seek to impose fuel surcharges on our accounts.
Historically, we have not engaged in hedging transactions to insulate us from
fluctuations in fuel prices, and our surcharge arrangements may not fully
protect us from fuel price increases. Our management believes that our
operations and financial results are susceptible to the same fuel price
increases or fuel shortages as those of our competitors. Fuel costs, excluding
fuel taxes, averaged approximately 8.4% of our revenue in 2005.
Insurance
We carry insurance for our primary business risks with third party
insurance carriers. We currently carry $30.0 million of insurance coverage, with
a self-insured retention of $1.0 million in the aggregate per occurrence, for
claims resulting from cargo theft or loss, personal injury, property damage, and
physical damage to our equipment. We also self-insure for workers' compensation
up to $1.0 million per occurrence, and all health claims up to $300 thousand per
occurrence.
Regulation
We operate in a highly regulated industry. The primary regulatory agencies
affecting our business are the United States Department of Transportation, or
DOT, and similar state and local agencies that exercise broad powers over our
business, generally governing such activities as authorization to engage in
motor carrier operations, safety, and insurance requirements. Our company
drivers and independent contractors also must comply with the safety and fitness
regulations promulgated by the DOT, including those relating to drug and alcohol
testing, licensing requirements, and additional restrictions imposed by homeland
security requirements in January 2005. Changes in the laws and regulations
governing our industry could affect the economics of the industry by requiring
changes in operating practices or by influencing the demand for, and the costs
of providing, services to shippers. New and more restrictive hours of service
regulations for drivers became effective on January 4, 2004. After nine months
of operation under the revised hours-of-service regulations, citizens' advocacy
groups successfully challenged the regulations in court, alleging that they were
developed without properly considering issues of driver health. Pending further
action by the courts or the effectiveness of new rules addressing the issues
raised by the appellate court, Congress enacted a law that extended the
effectiveness of the revised hours-of-service rules until September 30, 2005.
Without significant further changes, the hours of service regulations became
effective on October 1, 2005. If driving hours are further restricted by new
revisions to the hours-of-service rules, we could experience a reduction in
driver miles that may adversely affect our business and results of operations.
Our operations involve certain inherent environmental risks. As such, our
operations are subject to environmental laws and regulations, including laws and
regulations dealing with underground fuel storage tanks, the transportation of
hazardous materials and other environmental matters. We maintain bulk fuel
storage and fuel islands at several of our facilities. Our operations involve
the risks of fuel spillage or seepage, environmental damage and hazardous waste
disposal, among others. Operations conducted in industrial areas, where truck
terminals are normally located, and where groundwater or other forms of
environmental contamination may have occurred, potentially expose us to claims
that we contributed to the environmental contamination. We have instituted
programs to monitor and control environmental risks and promote compliance with
applicable environmental laws and regulations. If we fail to comply with the
applicable regulations, then we could be subject to substantial fines or
penalties and to civil and criminal liability.
Page 3
Item 1A. Risk Factors.
We experienced losses from continuing operations during 2004, and 2005, and
we expect to experience additional losses in 2006.
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. We believe
that the merger transaction with North American Truck Lines, LLC, described in
more detail in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Pending Merger with North American Truck Lines, LLC,"
represents the best available strategic alternative to address our need for
liquidity and capital resources. If the pending merger transaction with North
American Truck Lines, LLC is not consummated, the value of stockholders'
investments may suffer. (See further discussion under Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".)
We operate in a highly competitive and fragmented industry and our business
will suffer if we are unable to adequately address potential downward pricing
pressures and other factors that may adversely affect our operations and
profitability.
Numerous competitive factors could impair our ability to achieve
profitability. These factors include the following:
o We compete with many other transportation service providers of varying
sizes, some of which have more equipment, a broader coverage network, a
wider range of services, and greater capital resources than we do or have
other competitive advantages.
o Some of our competitors periodically reduce their prices to gain business,
especially during times of reduced growth rates in the economy, which may
limit our ability to maintain or increase prices or maintain significant
growth in our business.
o Some of our competitors offer customers a money back guarantee if certain
shipments are delivered late.
o Many customers reduce the number of carriers they use by selecting
so-called ''core carriers'' as approved transportation service providers,
and in some instances we may not be selected.
o Many customers periodically accept bids from multiple carriers for their
shipping needs, and this process may depress prices or result in the loss
of some business to competitors.
o The trend towards consolidation in the ground transportation industry may
create other large carriers with greater financial resources than us and
other competitive advantages relating to their size.
o Advances in technology require increased investments to remain competitive,
and our customers may not be willing to accept higher prices to cover the
cost of these investments.
Page 4
o Competition from non-asset-based logistics and freight brokerage companies
may adversely affect our customer relationships and prices.
o Competitors that, in the past, have used us to deliver interline shipments
for them in our regions may not continue to do so, which would reduce our
revenue.
Our business is subject to general economic and business factors over which
we have little or no control.
Our business is affected by a number of factors that may have a materially
adverse effect on the results of our operations, many of which are beyond our
control. These factors include:
o Significant increases or rapid fluctuations in fuel prices.
o Excess capacity in the trucking industry.
o Decline in the resale value of used equipment.
o Fluctuations in interest rates.
o Rising healthcare costs.
o Higher fuel taxes and license and registration fees.
o Increases in insurance costs or liability claims.
o Difficulty in attracting and retaining qualified drivers.
We also are affected by recessionary economic cycles and downturns in
customers' business cycles, particularly in market segments and industries, such
as retail, where we have a significant concentration of customers. Economic
conditions may adversely affect our customers and their ability to pay for our
services. Customers encountering adverse economic conditions represent a greater
potential for loss and we may be required to increase our allowance for doubtful
accounts. A significant amount of our freight is concentrated in Texas and
California. Accordingly, we also are directly impacted by economic conditions in
and affecting Texas and California over which we have no control.
We have significant ongoing capital requirements that could adversely
affect our profitability if we are unable to generate sufficient cash from
operations.
The LTL industry is capital intensive. Historically, we have depended on
cash from operations, borrowing from banks and finance companies, and leases to
expand the size of our terminal network and maintain and expand our fleet of
revenue equipment. Our 2006 budget for capital expenditures, will be
approximately $7.5 million including approximately $6.0 million for replacement
trailers. We expect that proceeds from the sale of two terminals (in the first
quarter of 2006) and other proceeds (mainly from sales of revenue equipment)
will approximate $9.0 million after paying off related terminal debt in 2006. If
we are unable to generate sufficient cash from operations and obtain financing
on favorable terms in the future, we may have to limit our planned replacements,
enter into less favorable financing arrangements, or operate our revenue
equipment for longer periods, any of which could have a materially adverse
effect on our profitability.
The loss of one or more of our five largest customers could significantly
and adversely affect our cash flow, market share, and profits.
In 2005, our largest customer, Home Depot, accounted for approximately 4.1%
of our total revenue, and our five largest customers accounted for approximately
13.6% of our total revenue. Our largest customers are under no firm obligation
to ship with us and the contracts are generally terminable upon 30 or 60 days'
notice. In addition, we have significant exposure to the retail sector and to
the economies in Texas and California. If we lose one or more of our large
customers, or if there is a decline in the amount of services those customers
purchase from us, our cash flow, market share, and profits could be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Customers" for additional information.
Page 5
If we are unable to retain our key employees, our business, financial
condition, and results of operations could be harmed.
We are highly dependent upon the services of the following key employees:
Robert V. Fasso, our Chief Executive Officer and President; Jeffrey A. Hale, our
Senior Vice President and Chief Financial Officer; Walt Ainsworth, our Executive
Vice President; and Rich Stolz our Senior Vice President of Marketing and Sales.
The loss of any of their services could have a materially adverse effect on our
operations and future profitability. We must continue to develop and retain a
core group of managers if we are to realize our goal of restoring our growth. We
cannot assure you that we will be able to do so.
Our ability to compete would be substantially impaired if our employees
were to unionize.
None of our employees are represented under a collective bargaining
agreement by a labor union. In 2001, the International Brotherhood of Teamsters
filed a petition with the National Labor Relations Board seeking an election
among the employees at our Dallas, Texas facility. Our employees voted not to
form a union when that election was conducted in April 2002. In October 2002,
after we requested an election, the Teamsters withdrew from representing our
employees in Las Vegas, our only remaining facility where employees had at one
time requested union representation. While we believe our current relationship
with our employees is good, we cannot assure you that further unionization
efforts will not occur in the future. Our non-union status is a critical factor
in our ability to compete. If our employees vote to join a union and we sign a
collective bargaining agreement, the results probably would be adverse for
several reasons:
o Some shippers have indicated that they intend to limit their use of
unionized trucking companies because of the threat of strikes and other
work stoppages. A loss of customers would impair our revenue base.
o Restrictive work rules could hamper our efforts to improve and sustain
operating efficiency, for example by inhibiting our ability to implement
dynamic resource planning within our workplace.
o A strike or work stoppage would hurt our profitability and could damage
customer and other relationships.
o An election and bargaining process would distract management's time and
attention and impose significant expenses.
These results, and unionization of our workforce generally, could have a
materially adverse effect on our business, financial position, and results of
operations.
We are party to securities class action and derivative litigation which may
be costly to defend and the outcome of which is uncertain.
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 our initial public
offering registration statement and prospectus, during the period surrounding
our initial pubic offering, and up to the press release dated June 16, 2004. On
August 9 and 10, 2004, two purported derivative actions were filed against us,
as nominal defendant, and against certain of our officers, directors, and former
directors. These actions were filed in the District Court of McLennan County,
Texas and generally allege breach of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets, and unjust enrichment on the part of
certain of our present and former officers and directors in the period between
December 12, 2003 and August 2004. The purported derivative actions seek
declaratory, injunctive, and other relief.
Page 6
Further, on January 20, 2006, a lawsuit was filed against us, and certain
of our officers, directors, and former directors. This action was filed in the
District Court of McLennan County, Texas. The lawsuit includes a purported
derivative action on behalf of us and our stockholders against the officers,
directors, and former directors, generally alleging breach of fiduciary duty,
fraud, bad faith, and conspiracy.
On February 1, 2006, a purported derivative action was filed against us by
the same plaintiff that filed the derivative actions on August 9 and 10, 2004,
as nominal defendant, and against our current directors. This action was filed
in the District Court of McLennan County, Texas and generally alleges breach of
fiduciary duty and conflicts of interest on the part of the directors in
connection with their approval of the pending merger transaction with North
American Truck Lines, LLC. The purported derivative action seeks declaratory,
injunctive, and other relief preventing consummation of the pending merger
transaction. This litigation, as well as any other securities class action
litigation that might be initiated against us, could result in substantial costs
and a diversion of management's attention and resources.
We do not believe there is any factual or legal basis for the allegations
against us, and we intend to vigorously defend ourselves against these lawsuits.
We have informed our insurance carrier and have retained outside counsel to
assist in our defense. We cannot provide any assurances as to the outcome of
these litigations. Any conclusion of these litigations in a manner adverse to us
could have a material adverse effect on our business, financial condition, and
results of operations. In addition, the cost to us of defending the litigation,
even if resolved in our favor, could be substantial. Such litigation could also
divert the attention of our management and our resources in general.
Uncertainties resulting from the initiation and continuation of these
litigations also could harm our ability to compete in the marketplace.
Ongoing insurance and claims expenses could significantly affect our
operations.
Our future insurance and claims expenses might exceed historical levels,
which could reduce our earnings. We currently carry $30.0 million of insurance
coverage, with a self-insured retention of $1.0 million per occurrence for
claims resulting from cargo theft or loss, personal injury, property damage, and
physical damage to our equipment. We also self-insure for workers' compensation
up to $1.0 million per occurrence, and for all health claims up to $0.3 million
per occurrence. Insurance carriers have raised premiums for most trucking
companies. Additional increases could further increase our insurance and claims
expense as current coverages expire or cause us to raise our self-insured
retention. If the number or severity of claims for which we are self-insured
increases, we suffer adverse development in claims compared with our reserves,
or any claim exceeds the limits of our insurance coverage, our financial results
could be materially and adversely affected.
Our large self-insured retentions require us to make estimates of ultimate
loss amounts and accrue such estimates as expenses. Changes in estimates may
materially and adversely affect our financial results. In 2003, we recorded an
aggregate of $3.8 million in increases to our reserves for accident, workers'
compensation, and other liabilities arising in prior periods. Such accrual
included $1.8 million for two accidents that occurred in 2002. This compared to
an accrual of $0.5 million in additional expense in 2002, relating to claims
that arose in prior periods. The large accrual in 2003 caused our financial
results to suffer. We may be required to accrue such additional expenses in the
future.
In October 2002, we were forced to seek replacement excess insurance
coverage after our insurance agent failed to produce proof of insurance on
policies for which we had obtained binders as of July 15, 2002. We are not aware
of any claims during the period between July and October 2002 that are expected
to exceed the self-insured retention level we had at the time. For any claims
arising during such period that exceed that level, we intend to pursue our legal
rights against the insurance agent and its errors and omissions policy but we
cannot assure you that such coverage will be available, in which case our
financial results could be materially and adversely affected.
Ongoing insurance requirements could constrain our borrowing capacity.
Our ability to incur additional indebtedness could be adversely affected by
an increase in requirements that we post letters of credit in support of our
insurance policies. On January 31, 2005, we entered into a Credit Facility with
Bank of America, N.A., as Agent, and certain other lenders. The face amount of
letters of credit we are required to post may increase in the future. Increases
in letters of credit outstanding will reduce our borrowing capacity under the
Credit Facility, thereby adversely affecting our liquidity.
Page 7
Difficulty in attracting qualified drivers could adversely affect our
profitability and ability to grow.
Periodically, the trucking industry experiences substantial difficulty in
attracting and retaining qualified drivers, including independent contractors.
If we are unable to attract drivers and contract with independent contractors,
we could be required to adjust our compensation package, let trucks sit idle, or
operate with fewer independent contractors and face difficulty meeting shipper
demands, all of which could adversely affect our growth and profitability.
Fluctuations in the price or availability of fuel and our ability to
collect fuel surcharges may affect our costs of operation.
We require large amounts of diesel fuel to operate our tractors. Diesel
fuel prices fluctuate greatly due to economic, political, and other factors
beyond our control. For example, diesel fuel prices, excluding Federal and State
taxes, recently reached historically high levels ($2.28 average price per gallon
in October 2005), with our cost averaging $1.83 per gallon for 2005, compared
with $1.23 per gallon for 2004. To address fluctuations in fuel prices, we seek
to impose fuel surcharges on our accounts. These arrangements will not fully
protect us from fuel price increases. In addition, any shortage or interruption
in the supply of fuel would negatively affect us. Accordingly, fluctuations in
fuel prices, or a shortage of diesel fuel, could materially and adversely affect
our results of operations. We base our fuel surcharge rates on the weekly
national average price of diesel fuel. Because our operations are concentrated
in the southwestern United States, there is some risk that the national average
will not fully reflect regional fuel prices, particularly in California.
Historically, we have not engaged in hedging transactions to protect us from
fluctuations in fuel prices.
We rely on transportation alliances with other LTL operators, and a
breakdown of these alliances could adversely affect our revenue.
In our regional LTL operations, we primarily pick up and deliver freight
within our own operating regions. Freight originating outside our territory for
delivery inside our territory is brought to us by several other trucking
companies with which we have formed transportation alliances. In return, we
deliver to them freight that originates in our territory for delivery in their
territories. In 2005, transportation alliances generated approximately 7.5% of
our revenue. These alliances subject us to certain risks, including:
o Expanding our own operations into an alliance company's territory may cause
that company to stop using our alliance.
o We may not control the customer relationship on freight moving into our
territory.
o Our alliance companies can end their relationships with us at any time and
could choose to form an alliance with one of our competitors in our
territory.
o The reduction or termination of our alliances could negatively impact our
business and results of operations.
Our former Chairman, Jerry Moyes, his family, and trusts for the benefit of
his family own approximately 35.5% of our stock and have substantial control
over us.
Jerry Moyes and trusts for the benefit of his family beneficially own
approximately 31.5% of our outstanding common stock. In addition, Mr. Moyes'
brother and sister-in-law, Ronald and Krista Moyes, beneficially own
approximately 4.0% of our outstanding common stock. Mr. Jerry Moyes, his family,
and certain trusts for the benefit of his family are able to influence decisions
requiring stockholder approval, including election of our board of directors,
our management and policies, the adoption or extension of anti-takeover
provisions, mergers, and other business combinations. This concentration of
ownership may allow Mr. Jerry Moyes to prevent or delay a change of control of
our company or an amendment to our certificate of incorporation or our bylaws.
In matters requiring stockholder approval, Mr. Jerry Moyes' interests may differ
from the interests of other holders of our common stock and he may take actions
affecting us with which you may disagree.
Page 8
We engage in transactions with other businesses controlled by our officers
and directors, and the interests of our officers and directors could conflict
with the interests of our other stockholders.
We engage in multiple transactions with related parties. These transactions
include the lease of 29 active terminals and four dormant terminals from
Southwest Premier Properties, L.L.C. Southwest Premier is owned by some of our
existing stockholders, including Jerry Moyes, our former Chairman of the Board,
and Robert V. Fasso, our Chief Executive Officer. These related party
transactions also include the lease of two active terminals from Jerry Moyes,
the lease of two terminals from Swift Transportation, and freight transportation
transactions with Swift Transportation Co., Inc. ("Swift") and Central
Refrigerated Service, Inc. ("Central Refrigerated"), companies for which Jerry
Moyes served as Chairman. As a result, our directors and executive officers may
have interests that conflict with yours. Although we have adopted a policy
requiring that all future transactions with affiliated parties be approved by
our audit committee or another committee of disinterested directors, we cannot
assure you that the policy will be successful in eliminating conflicts of
interests.
Our results of operations may be affected by seasonal factors and harsh
weather conditions.
Our operations are subject to seasonal trends common in the trucking
industry, particularly as customers tend to reduce shipments after the winter
holiday. Harsh weather can also adversely affect our performance by reducing
demand, impeding our ability to transport freight, and increasing operating
expenses.
We operate in a highly regulated industry and increased costs of compliance
with, or liability for violation of, existing or future regulations could have a
materially adverse effect on our business.
Our operations are regulated and licensed by various U.S. agencies. Our
drivers also must comply with the safety and fitness regulations of the United
States Department of Transportation, or DOT, including those relating to drug
and alcohol testing and hours-of-service. Such matters as weight and equipment
dimensions are also subject to U.S. regulations. We also may become subject to
new or more restrictive regulations relating to fuel emissions, drivers'
hours-of-service, ergonomics, or other matters affecting safety or operating
methods. Future laws and regulations may be more stringent and require changes
in our operating practices, influence the demand for transportation services, or
require us to incur significant additional costs. Higher costs incurred by us or
by our suppliers who pass the costs onto us through higher prices would
adversely affect our results of operations.
Our operations are subject to various environmental laws and regulations,
the violation of which could result in substantial fines or penalties.
We are subject to various environmental laws and regulations dealing with
the hauling and handling of hazardous materials, fuel storage tanks, air
emissions from our vehicles and facilities, and discharge and retention of
stormwater. We operate in industrial areas, where truck terminals and other
industrial activities are located, and where groundwater or other forms of
environmental contamination have occurred. Our operations involve the risks of
fuel spillage or seepage, environmental damage, and hazardous waste disposal,
among others. We also maintain bulk fuel storage tanks and fueling islands at
nineteen of our facilities. A small percentage of our freight consists of
low-grade hazardous substances, such as paint, which subjects us to a wide array
of regulations. If we are involved in a spill or other accident involving
hazardous substances, if there are releases of hazardous substances we
transport, or if we are found to be in violation of applicable laws or
regulations, we could be subject to liabilities that could have a materially
adverse effect on our business and operating results. If we should fail to
comply with applicable environmental regulations, we could be subject to
substantial fines or penalties and to civil and criminal liability.
Page 9
Item 2. Properties
Our corporate offices are located at 5601 West Waco Drive in Waco, Texas,
76702. We share a 185,000 square foot facility with our Waco, Texas terminal.
The property is located on approximately 40 acres, while the terminal has 71
dock doors. We rent this facility from Southwest Premier Properties, a related
party. The lease expires in February, 2013.
At December 31, 2005, we conducted our LTL operations through five owned
terminal locations and 58 leased terminal locations. Our ten largest terminals
by number of loading doors are listed below:
Total
Number of
Location Loading Doors
-------- -------------
Dallas, Texas............. 522
Houston, Texas............ 349
Fort Worth, Texas......... 200
San Antonio, Texas........ 147
Austin, Texas............. 132
Phoenix, Arizona.......... 121
Beaumont, Texas........... 113
Fontana, California....... 110
Chicago, Illinois......... 80
Tyler, Texas.............. 76
53 others................. 1,894
-----
Total................... 3,744
=====
We lease 29 of our active terminals and four dormant terminals from related
parties. See "Related Party Terminal Leases" under Item 7 in Part II of this
Annual Report for additional information concerning these leases.
Item 3. 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. At present, this motion is still
pending and no hearing date has been set.
On August 9 and 10, 2004, two purported derivative actions were filed
against us, as nominal defendant, and against certain of our officers,
directors, and former directors. These actions were filed in the District Court
of McLennan County, Texas and generally allege breach of fiduciary duty, abuse
of control, gross mismanagement, waste of corporate assets, and unjust
enrichment on the part of certain of our present and former officers and
directors in the period between December 12, 2003 and August 2004. The purported
derivative actions seek declaratory, injunctive, and other relief.
Page 10
On February 1, 2006, a purported derivative action was filed against us by
the same plaintiff that filed the actions in the preceding paragraph, as nominal
defendant, and against our current directors. This action was filed in the
District Court of McLennan County, Texas and generally alleges breach of
fiduciary duty and conflicts of interest on the part of the directors in
connection with their approval of the pending merger transaction with North
American Truck Lines, LLC. The purported derivative action seeks declaratory,
injunctive, and other relief preventing consummation of the pending merger
transaction.
On January 20, 2006, a lawsuit was filed against us, and certain of our
officers, directors, and former directors. This action was filed in the District
Court of McLennan County, Texas. The lawsuit includes a purported derivative
action on behalf of us and our stockholders against the officers, directors, and
former directors, generally alleging breach of fiduciary duty, fraud, bad faith,
and conspiracy.
We have informed our insurance carrier of the above litigations 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 these litigations, we recorded an expense of
$350,000, representing the full deductible amount under our current directors'
and officers' insurance policy.
We do not believe there is any factual or legal basis for the allegations
against us, and we intend to vigorously defend ourselves against these lawsuits.
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 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2005, no matters were submitted to a vote of
security holders.
Page 11
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market, under the symbol
"CENF". The following table sets forth, for the periods indicated, the high and
low bid information per share of our common stock as reported by Nasdaq.
High Low
---- ---
2004
----
First Quarter $19.32 $11.94
Second Quarter $13.23 $7.14
Third Quarter $8.20 $5.40
Fourth Quarter $7.25 $5.32
2005
----
First Quarter $7.50 $2.95
Second Quarter $3.88 $2.35
Third Quarter $3.32 $1.69
Fourth Quarter $2.31 $1.50
As of March 23, 2006, our common stock was held by 40 stockholders of
record. However, we believe that many additional holders of our common stock are
unidentified because a substantial number of shares are held of record by
brokers or dealers for their customers in street names.
Dividend Policy
Since our initial public offering, we have not paid cash dividends on our
common stock, and we do not anticipate paying any cash dividends on our common
stock in the foreseeable future. Any future dividends will be determined at the
discretion of our board of directors. The board may consider our financial
condition and results of operations, cash flows from operations, current and
anticipated capital requirements, the income tax laws then in effect, any legal
or contractual requirements, and other factors our board deems relevant.
Page 12
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
2005 2004 2003(1) 2002(1) 2001
---- ---- ------- ------- ----
(in thousands, except per share amounts and operating data)
Statements of Operations Data:
Operating revenues...................... $ 372,140 $ 386,601 $ 389,696 $ 371,445 $ 395,702
Operating expenses:
Salaries, wages, and benefits......... 208,846 222,230 205,393 209,302 233,571
Purchased transportation.............. 36,217 42,152 38,113 28,806 31,739
Purchased transportation - related
parties............................. 14,627 14,571 18,582 21,106 17,708
Operating and general supplies and
expenses.............................. 91,806 82,702 66,144 59,270 67,193
Operating and general supplies and
expenses - related parties.......... 305 274 12 286 53
Insurance and claims.................. 22,890 25,186 16,057 14,576 14,607
Building and equipment rentals........ 4,279 4,297 3,181 3,241 3,493
Building and equipment rentals -
related parties..................... 1,809 1,795 1,903 1,779 1,600
Goodwill impairment (8)............... 4,324 - - - -
Depreciation and amortization......... 18,169 17,049 16,605 17,974 21,241
------ ------ ------ ------ ------
Total operating expenses............ 403,272 410,256 365,990 356,340 391,205
------- ------- ------- ------- -------
Operating (loss) income................. (31,132) (23,655) 23,706 15,105 4,497
Interest expense........................ 3,860 1,469 3,547 4,916 5,620
Interest expense - related
parties(2)............................ 6,177 6,197 6,130 6,359 5,888
-- ----- ----- ----- ----- -----
(Loss) income from continuing
operations before income taxes........ (41,169) (31,321) 14,029 3,830 (7,011)
Income tax benefit (expense) (7)........ 1,686 8,473 (1,759) 1,412 119
Income tax expense-conversion to C
Corporation...................... - - (9,834) - -
------- ------- ------- ------- -------
(Loss) income from continuing (39,483) (22,848) 2,436 5,242 (6,892)
operations............................
Loss from discontinued operations - - (8,341) - -
------- ------- ------- ------- -------
Net (loss) income....................... $ (39,483) $ (22,848) $ (5,905) $ 5,242 $ (6,892)
=========== =========== =========== =========== ===========
Pro Forma C Corporation Data:(3)
Historical income (loss) from continuing
operations before income taxes........ $ - $ - $ 14,029 $ 3,830 $ (7,011)
Pro forma (provision) benefit for
income taxes attributable to
continuing operations................. - - (5,666) (2,781) 1,108
------ ------ ------ ------ -----
Pro forma income (loss) from
continuing operations................. $ - $ - $ 8,363 $ 1,049 $ (5,903)
Loss from discontinued operations - - (8,341) - -
------ ------ ------ ------ ------
Pro forma net income (loss)............... $ - $ - $ 22 $ 1,049 $ (5,903)
---------- ---------- ----------- ----------- -----------
Page 13
Year Ended December 31,
-----------------------
2005 2004 2003(1) 2002(1) 2001
---- ---- ------- ------- ----
Net loss per share
Basic................................. $ (2.17) $ (1.27) $ - $ - $ -
Diluted............................... (2.17) (1.27) - - -
Weighted average shares outstanding:
Basic................................. 18,230 17,971 - - -
Diluted............................... 18,230 17,971 - - -
Pro forma income (loss) from
continuing operations per share:
Basic................................. $ - $ - $ 0.75 $ 0.10 $ (0.54)
Diluted............................... - - 0.69 0.09 (0.54)
Weighted average shares outstanding:
Basic................................. - - 11,163 10,868 10,916
Diluted............................... - - 12,103 11,548 10,916
Other Financial Data:
Capital expenditures(4)................. 2,050 36,717 7,024 6,008 10,186
Operating Data:
LTL revenue per
hundredweight(5)...................... $ 11.83 $ 11.63 $ 11.37 $ 10.42 $ 10.06
Total tons hauled....................... 1,784,522 1,908,621 1,962,890 2,120,080 2,388,816
Operating ratio(6)...................... 108.4% 106.1% 93.9% 95.9% 98.9%
Number of working days.................. 253 253 253 253 253
Balance Sheet Data (at period end):
Cash and cash equivalents............... $ 348 $ 2,144 $ 37,269 $ 7,350 $ 187
Net property and equipment 111,349 135,274 114,693 126,751 139,954
Total assets........... 174,831 237,254 223,149 196,401 195,877
Long-term debt, capital leases,
and related party financing,
including current portion 53,726 55,694 49,517 103,054 111,270
Stockholders' equity... 48,386 87,558 108,438 30,374 23,302
(1) Our financial results for the fiscal year ended December 31, 2002,
included a $2.9 million reduction in depreciation expense resulting from a
January 2002 change in useful lives and salvage values of trailers and pick-up
and delivery tractors based on our historical experience, which might materially
affect the comparability of the information presented, and a $725,000
restructuring charge representing the cost to close 21 terminals. Our financial
results for the fiscal year ended December 31, 2003, included the following
items that might materially affect the comparability of the information
presented: (a) a $0.6 million reduction in depreciation expense (in addition to
the 2002 reduction) resulting from a January 2003 additional change in useful
lives and salvage values of trailers and line tractors based on our historical
experience; (b) a $7.8 million gain attributable to the amendment of a benefit
plan; and (c) a $3.8 million expense related to an increase in our claims
accruals relating to accident, workers' compensation, and other claims in which
the underlying events occurred prior to 2003. See Item 7 of this Annual Report
for additional information.
(2) Effective February 20, 2003, the payments for certain of the facilities
we lease from a related party were increased to reflect fair market value. The
lease is reflected as a financing arrangement in our consolidated financial
statements. Accordingly, our interest expense-related parties includes
approximately $3.3 million in annual non-cash interest expense and contributed
capital in all periods prior to February 20, 2003. See Item 7 of this Annual
Report for additional information.
(3) In 1998, we elected to be treated as an S corporation for federal
income tax purposes. An S corporation passes through essentially all taxable
earnings and losses to its stockholders and does not pay federal income taxes at
the corporate level. Historical income taxes consist mainly of state income
taxes. On November 1, 2003, we converted into a C corporation. For comparative
purposes, we have included a pro forma (provision) benefit for income taxes
assuming we had been taxed as a C corporation in all periods when our S
corporation election was in effect. In June 2002, we reversed approximately $1.8
million of tax reserves which were originally recorded in 1998 when we elected
to be treated as an S corporation. The $1.8 million tax benefit has been
excluded for purposes of presenting pro forma C corporation income taxes.
Page 14
(4) Includes $0.8 million of capital expenditures in 2002 attributable to
the operations of Central Refrigerated, which we divested on December 31, 2002.
See Item 7 of this Annual Report for additional information.
(5) Average revenue we receive for transporting 100 pounds of freight.
(6) Operating expenses as a percentage of operating revenues.
(7) In 2004, the IRS disallowed certain tax deductions taken by the S
corporation stockholders pursuant to a contested liability trust. As a result,
our tax basis was increased, resulting in a deferred tax benefit of $1.8
million. Also in 2004, we recorded a deferred tax asset valuation allowance of
approximately $4.9 million.
(8) In 2005, an annual impairment test of our goodwill, promulgated by
GAAP, determined that the carrying value exceeded its fair value thereby
requiring that we write off the remaining net book value of approximately $4.3
million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Overview
We are a regional LTL trucking company that has operations in the
Southwest, Midwest, and Northwest regions of the United States. We also offer
inter-regional service between our operating regions and maintain alliances with
other similar companies to complete transportation of shipments outside of our
operating territory. As an LTL carrier, we typically transport multiple
shipments for multiple customers in each trailer. Our drivers pick up freight
from customer locations during the day and relay critical information to our
planners. Upon arrival at the origin terminal, freight is unloaded, and then
re-loaded onto a linehaul inter-city trailer that is bound for the destination
city. Upon arrival at the destination terminal, freight is unloaded, sorted, and
delivered by local delivery trucks. The main factors that affect our results are
the rates we are able to charge our customers, the volume of freight we handle,
and our ability to control our costs.
Revenues
Our revenues vary with the revenue per hundredweight we charge to customers and
the volume of freight we transport:
o Revenue per hundredweight measures the rates we receive from customers and
varies with the type of goods being shipped and the distance these goods
are transported. Our LTL revenue per hundredweight increased approximately
1.7% from $11.63 in 2004, to $11.83 in 2005, due mainly to increases in
fuel surcharge revenue. Our LTL revenue per hundredweight, without fuel
surcharge revenue, declined to $10.62 in 2005 from $11.01 in 2004.
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 6.5% from 2004 to 2005.
Historically, most of our revenue has been generated from transporting LTL
shipments from customers within our operating regions. In 2005, approximately
7.5% of our revenue was derived from shipments that originated or terminated in
regions outside our network, where a portion of the freight movement was handled
by another carrier. We refer to this as "interline freight." Most of this
revenue was obtained from carriers with which we maintain transportation
alliances. The revenue from interline freight in 2005 was lower compared to
2004, due in large part to a reduction in interline revenue associated with the
overall reduction in business levels relating to Dell which is discussed in more
detail under "Customers" below. 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.
Page 15
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 $106,400 annually through June of 2007.
Purchased transportation. This category primarily consists of the payments
we make to third parties to handle a portion of a freight movement for us. The
largest category is outsourced linehaul movements, where we contract with
truckload carriers to move our freight between origin and destination terminals.
Swift Transportation, a related party, has been our largest provider of
outsourced linehaul service. Purchased transportation also includes outsourced
pick-up and delivery service when we use alternative providers to service areas
where we lack the terminal density to provide economical service.
Operating and general supplies and expenses. This category includes fuel,
repairs and maintenance, tires, parts, general and administrative costs, office
supplies, operating taxes and licenses, communications and utilities, and other
general expenses. Repairs and maintenance, fuel, tires, and parts expenses vary
with the age of equipment and the amount of usage. We have a fuel surcharge
program that enables us to recover a significant portion of fuel price
increases.
Insurance and claims. This category includes the cost of insurance premiums
and the accruals we make for claims within our self-insured retention amounts,
primarily for personal injury, property damage, physical damage to our
equipment, and cargo claims. These expenses will vary primarily based upon the
frequency and severity of our accident experience and the market for insurance.
Building and equipment rentals. This category consists mainly of payments
to unrelated third parties under terminal leases and payments to related parties
for seven terminals leased under operating leases.
Goodwill impairment. Pursuant to FASB Statement of Financial Accounting
Standards No. 142 ("SFAS 142") Goodwill and Other Intangible Assets, goodwill is
no longer amortized, but is tested annually, or more frequently if a triggering
event occurs, for impairment using a fair value approach.
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 goodwill 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 along with a $1.7
million deferred income tax benefit in our consolidated statement of operations.
Depreciation and amortization. This category relates to owned assets,
assets under capitalized leases, and 22 properties we lease from Southwest
Premier Properties that are considered to be a financing arrangement.
Customers
In 2005, our five largest customers were Home Depot, Dell Inc., Wal-Mart
Stores, Inc., Tyco International and Sears. These customers together generated
approximately 13.6% of our revenue. Our customer contract with Dell, which
accounted for approximately 3.8% of our revenue in 2005, expired in June 2005.
At that time, we determined that the rates being paid by Dell were inadequate to
achieve satisfactory yield, as those rates (a) had been frozen in the period
between June 2000 and May 2003, (b) had been reduced by approximately 8.0% in
May 2003, and (c) had been reduced by an additional 12.7% in June 2004.
Following expiration of the customer contract, we proposed an approximately
30.0% rate increase in our core business with Dell, and opted out of our
non-core interline business with Dell, due to unprofitable revenue splits with
interline carriers. Historically, the non-core interline business that was
discontinued had accounted for approximately 65.0% of revenue from Dell. Our
negotiations with Dell continued into November 2005, at which time Dell
requested that we take no rate increase. We were unwilling to continue serving
Dell on those terms, and we declined further business with Dell in December
2005. As a result of the foregoing, we do not expect that significant revenues
will be derived from Dell in the future.
Page 16
Recent Results of Operations and Year-End Financial Condition
In 2005, for reasons discussed below, we reported a loss from operations of
approximately $31.1 million, and our operating ratio for the year was 108.4%. A
summary of our recent performance in each of the four quarters of 2005 is as
follows:
First Quarter 2005
In the 2005 first quarter, we reported a loss from operations of $6.1
million, and a net loss of $8.3 million, on revenue of $89.3 million. Our
operating ratio for the quarter was 106.8%. First quarter shipments and tonnage
and revenue per hundredweight (excluding the fuel surcharge revenue) were all
significantly lower compared to the 2004 first quarter.
Second Quarter 2005
In the 2005 second quarter, we reported a loss from operations of $3.5
million, and a net loss of $6.1 million, on revenue of $99.5 million. Our
operating ratio for the quarter was 103.5%. This second quarter loss resulted
mainly from continuing reductions in shipments, tonnage, and revenue per
hundredweight (excluding fuel surcharge revenue) when compared to the 2004
second quarter. There was continued sequential improvement in our operating
ratio compared to the 2005 first quarter and the third and fourth quarters of
2004.
Third Quarter 2005
In the 2005 third quarter, we reported a loss from operations of $12.7
million, and a net loss of $13.4 million, on revenue of $94.3 million. Our
operating ratio for the quarter was 113.5%. The third quarter of 2005 loss
included a write-off of goodwill of approximately $4.3 million (approximately
4.6% of revenue) pursuant to impairment testing under SFAS 142, continuing
decreases in total tonnage and total shipments.
The loss from operations, absent the goodwill write-off, was lower than the
loss incurred in the 2004 third quarter as increases in operating and general
supplies were more than offset by reductions in salaries and wages, purchased
transportation and insurance claims expenses.
Fourth Quarter 2005
In the 2005 fourth quarter, we reported a loss from operations of $8.8
million, and a net loss of $11.7 million, on revenue of $89.0 million. Our
operating ratio for the quarter was 109.9%. LTL bills and total tons, per day,
declined 6.7% and 1.4% respectively compared to the 2004 fourth quarter.
Insurance and claims and purchased transportation expenses as a percentage of
revenue improved from the 2004 fourth quarter, but were offset by increases in
other operating and general expenses, mainly fuel and legal expenses associated
with the merger.
At December 31, 2005, our balance sheet reflected $0.3 million in
unrestricted cash, $53.7 million in long-term debt and capital lease
obligations, including current portion, and $12.2 million in short-term debt.
Our stockholders' equity was $48.4 million at December 31, 2005.
Page 17
Pending Merger with North American Truck Lines, LLC
On January 30, 2006, we announced that we have entered into an Agreement
and Plan of Merger (the "Merger Agreement"), with North American Truck Lines,
LLC, a Nevada limited liability company ("NATL"), and Green Acquisition Company,
a Nevada corporation ("Purchaser"), pursuant to which Purchaser will merge with
and into the Company (the "Merger"), with our company continuing as the
surviving corporation. Purchaser is a wholly-owned subsidiary of NATL. Both
Purchaser and NATL are controlled by Mr. Jerry Moyes.
Pursuant to the Merger Agreement, at the effective time of the Merger, all
of our stockholders, other than Mr. Moyes and certain Moyes family trusts will
receive cash in an amount equal to $2.25 per share of our common stock. Holders
of options with an exercise price below $2.25 will receive the difference
between the exercise price and $2.25 multiplied by the number of shares of
common stock subject to that option. Holders of options with an exercise price
above $2.25 will receive $0.01 multiplied by the number of shares of common
stock subject to that option.
The Merger is subject to a number of conditions, including approval of the
Merger Agreement and Merger by holders of a majority of the outstanding shares
of common stock held by our stockholders other than Mr. Moyes and certain Moyes
family trusts and resolution of pending stockholder litigation.
We may terminate the Merger Agreement under certain circumstances,
including if our board of directors determines in good faith that it has
received an unsolicited bona fide "superior proposal," as defined in the Merger
Agreement, and otherwise complies with certain terms of the Merger Agreement. In
connection with such termination, we must pay a fee of $1.0 million to Purchaser
and reimburse Purchaser's expenses up to $500,000.
Stockholders are urged to read the definitive Proxy Statement, to be
delivered in connection with the 2006 Annual Meeting of Stockholders, carefully
when it becomes available because it will contain important information about
us, the Merger and related matters.
Other Recent Developments
In January 2006, we sold our terminal in Portland, Oregon to Con-Way
Transportation Services. Following the sale, we may lease up to 30 freight doors
from Con-Way. In February 2006, we realized net proceeds from the sale of
approximately $3.3 million and reported a gain on sale of approximately $1.9
million.
In January 2006, we also entered into an agreement with Old Dominion
Freight Lines with respect to the sale of our dormant terminal located in
Phoenix, Arizona. We expect to realize net proceeds from the sale of
approximately $3.0 million. In December 2005, we wrote down the bet book value
of this terminal to reflect the selling price. The amount of the write-down was
approximately $0.4 million.
Unusual Items Affecting 2003 Results
During 2003, we recorded an aggregate of $3.8 million in increases to our
insurance reserves for accident, workers' compensation, and other liabilities
arising prior to 2003 ($1.8 million of which related to two accidents that
occurred in 2002). This compared to an accrual of $0.5 million relating to
claims that arose in prior periods that we accrued in the year ended December
31, 2002. We recorded the increased accruals despite improvements in our rate of
both accident claims and workers' compensation claims during 2003. We also
amended a benefit plan to reduce our future obligations. As a result of this
amendment, we recorded a curtailment gain of approximately $7.8 million in 2003.
In addition, in January of 2002 and 2003, we increased the useful lives and
decreased the salvage values of our tractors and trailers to reflect that we are
operating the tractors and trailers for longer periods than previously estimated
by our past management. These changes decreased our depreciation expense by
approximately $3.5 million compared with the expense we would have recorded
under the prior method. In the aggregate, these items had a positive effect of
approximately $7.5 million on our operating income for the year ended December
31, 2003. We do not anticipate benefits similar to these in future periods.
Page 18
Our financial statements for 2003 also reflect the discontinued operations
of Central Refrigerated. The operations of Central Refrigerated began on April
22, 2002, when it was formed as our subsidiary to acquire certain assets from
the bankruptcy estate of Simon Transportation Services, Inc. Effective December
31, 2002, we divested Central Refrigerated and it ceased to be our subsidiary.
As part of the disposition of Central Refrigerated, we agreed to pay
approximately $8.3 million to that company. This payment was made on October 28,
2003, and was reflected in our financial statements as an expense in our fourth
fiscal quarter in 2003. Following our payment of $8.3 million to Central
Refrigerated, Jerry Moyes, the principal owner of Central Refrigerated, repaid
approximately $8.6 million in principal and interest due to us under loans we
made to him prior to July 2002. Taken together, our payment to Central
Refrigerated and the loan repayment by Mr. Moyes had no effect on our cash
position.
S Corporation Status
Prior to November 1, 2003, we operated as an S corporation for federal
income tax purposes. An S corporation passes through essentially all taxable
income and losses to its stockholders and does not pay federal income taxes at
the corporate level. For comparative purposes, we have included a pro forma
provision for income taxes showing what those taxes would have been had we been
taxed as a C corporation in all periods our S corporation election was in
effect. The 2003 provision for income taxes reflects the approximately $9.8
million non-cash charge for recognition of deferred federal income taxes to
reflect our conversion from an S corporation to a C corporation on November 1,
2003.
Results of Operations
The table below sets forth the percentage relationship of the specified
items to operating revenues for the periods indicated.
Year Ended December 31,
-----------------------
2005 2004 2003
---- ---- ----
Operating revenues..................... 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and benefits........ 56.1 57.5 52.7
Purchased transportation............. 13.7 14.7 14.5
Operating and general supplies and
expenses.......................... 24.7 21.4 17.0
Insurance and claims................. 6.2 6.5 4.1
Building and equipment rentals....... 1.6 1.6 1.3
Goodwill impairment.................. 1.2 --- ---
Depreciation and amortization....... 4.9 4.4 4.3
--- --- ---
Total operating expenses(1)....... 108.4 106.1 93.9
-- ----- ----- ----
Operating (loss) earnings.............. (8.4) (6.1) 6.1
Interest expense....................... 2.7 2.0 2.5
--- --- ---
(Loss) earnings from continuing operations
before income taxes.................. (11.1) (8.1) 3.6
----- ---- ---
Income tax benefit (expense)........... 0.5 2.2 (3.0)
--- --- ----
(Loss) earnings from continuing operations (10.6) (5.9) 0.6
----- ---- ---
Loss from discontinued operations...... --- --- (2.1)
---- ---- ----
Net loss .............................. (10.6)% (5.9)% (1.5)%
===== ==== ====
Pro Forma C Corporation Data:
Historical earnings from continuing
operations........................... ---% ---% 3.6%
Pro forma provision for income
taxes attributable to continuing
operations(2)........................ --- --- (1.5)
-- ---- ---- ----
Pro forma earnings from continuing
operations(2)........................ ---% ---% 2.1%
== ==== ==== ====
Page 19
__________
(1) Total operating expenses as a percentage of operating revenues, as
presented in this table, is also referred to as operating ratio.
(2) Provision for federal income taxes and net earnings as if we were a C
corporation for tax purposes for the period.
Comparison of 2005 to 2004
Operating revenues. Operating revenues decreased $14.5 million, or 3.7%,
from $386.6 million for 2004 to $372.1 million for 2005. Revenue per working day
decreased from $1.53 million in 2004 to $1.47 million in 2005. The decrease in
revenue per working day was attributable primarily to a 5.6% decrease in LTL
tonnage offset in part by an increase in LTL revenue per hundredweight from
$11.63 in 2004 to $11.83 in 2005. This increase in LTL revenue per hundredweight
was due mainly to an increase in fuel surcharge revenue per working day, as the
cost of fuel increased in 2005 compared to 2004. LTL bills per working day
decreased 10.7% from 2004 to 2005. Total tonnage decreased 124,099 tons, or
6.5%, from 1,908,621 tons in 2004 to 1,784,522 tons in 2005.
Salaries, wages, and benefits. Salaries, wages, and benefits decreased
$13.4 million, or 6.0%, from $222.2 million for 2004 to $208.8 million for 2005.
Consistent with the overall business volume reductions, hourly wage expense
decreased $7.3 million, or 6.9%, from $105.8 million in 2005 to $98.5 million in
2005. Our group health expenses decreased by $1.7 million in 2005, due in large
part to an 11.1% decrease in the number of employees in the group health
program, while workers' compensation expenses increased by $0.2 million.
Mileage-based payments to linehaul drivers decreased by $0.5 million from 2004
to 2005. As a percentage of operating revenues, salaries, wages, and benefits
decreased from 57.5% for 2004, to 56.1% for 2005.
Purchased transportation. Purchased transportation declined by $5.9
million, or 10.4%, from $56.7 million for 2004 to $50.8 million for 2005, due
primarily to a reduction in tonnage and an increase in shipments being handled
by company drivers. Purchased transportation paid to related parties decreased
by $0.1 million. As a percentage of operating revenues, purchased transportation
decreased from 14.7% for 2004 to 13.7% for 2005.
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $9.1 million, or 11.0%, from $83.0 million for 2004 to
$92.1 million for 2005. The increase in operating and general supplies and
expenses resulted primarily from increases in the cost of fuel. The average
price per gallon of diesel fuel was 48.8% higher during 2005 as compared to
2004. Also contributing to the increase in operating and general supplies and
expenses were professional fees relating to our audit of internal controls under
the Sarbanes-Oxley Act, and increased provisions for doubtful and late accounts.
Vehicle repair costs were lower by $3.2 million as substantial investments in
newer revenue equipment acquired in 2004 led to fewer overall fleet repairs in
2005. As a percentage of operating revenues, operating and general supplies and
expenses increased from 21.4% for 2004 to 24.7% for 2005.
Insurance and claims. Insurance and claims decreased $2.3 million, or 9.1%,
from $25.2 million for 2004 to $22.9 million for 2005. The decrease in insurance
and claims expense resulted primarily from a 12.7% decrease in the number of
cargo claims filed. This decrease was offset, in part, by an increase in public
liability (AL/GL) expenses from 2004 to 2005. Further, we increased our coverage
limits for directors' and officers' insurance in December 2004 to $15.0 million
from $5.0 million and premiums increased accordingly. We recorded a $350,000
expense in the 2004 third quarter in connection with the stockholder class
action complaints. This amount represented the entire deductible under our
directors' and officers' insurance policy. As a percentage of operating
revenues, insurance and claims decreased from 6.5% for 2004 to 6.2% for 2005.
Building and equipment rentals. Building and equipment rentals remained
virtually the same at $6.1 million for 2005 and 2004. Despite the closing and
consolidation of some terminals in late 2005, rental expense continues at those
terminals until we can terminate the leases or find sublessees. As a percentage
of operating revenues, building and equipment rentals remained at 1.6% for 2005.
Page 20
Goodwill impairment. In the 2005 third quarter, 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. As a percentage of operating revenues, goodwill
impairment was 1.2% for 2005.
Depreciation and amortization. Depreciation and amortization expense
increased approximately $1.2 million, or 7.1%, from $17.0 million for 2004 to
$18.2 million for 2005. This increase was primarily attributable to the addition
of approximately 400 new and used tractors and 261 new trailers during the
second half of 2004. As a percentage of operating revenues, depreciation and
amortization increased from 4.4% for 2004 to 4.9% for 2005.
Operating ratio. Our operating ratio increased from 106.1% for 2004 to
108.4% for 2005.
Interest expense. Interest expense increased $2.3 million, or 29.9%, from
$7.7 million for 2004 to $10.0 million for 2005. As a percentage of operating
revenues, interest expense increased from 2.0% for 2004 to 2.7% for 2005. While
our average debt balances increased from $59.5 million in 2004 to $69.4 million
in 2005, the average interest rates charged to us increased from 2.9% in 2004 to
7.5% in 2005. Increases in interest expense from 2004 to 2005 arose as a result
of a terminal financing arrangement wherein we mortgaged our Portland, Oregon
and two lesser terminals in June 2005, letter of credit fee increases, the Bank
of America credit facility loan origination fee (amortization of $0.9 million in
2005) and capital lease interest expense increases related to approximately
$16.0 million of new equipment leased in late 2004. During the second half of
2004, we cash collateralized approximately $20.8 million in letters of credit.
Interest expense on this $20.8 million borrowing was generally offset by
interest income on the invested cash.
The loss from continuing operations before income taxes was $41.2 million
for 2005 and $31.3 million for 2004.
Our income tax benefit decreased from $8.5 million for 2004 to $1.7 million
for 2005. The 2004 tax benefit is net of a $4.9 million valuation allowance
established against our net deferred tax assets as of December 31, 2004. In 2005
we increased our valuation allowance to $19.1 million and recorded a tax benefit
of $1.7 million that was directly related to the write-off of $4.3 million of
goodwill in the 2005 third quarter.
Comparison of 2004 to 2003
Operating revenues. Operating revenues decreased $3.1 million, or 0.8%,
from $389.7 million for 2003 to $386.6 million for 2004. Revenue per working day
decreased from $1.54 million in 2003 to $1.53 million in 2004. The decrease in
revenue per working day was attributable primarily to a 3.9% decrease in LTL
tonnage offset in part by an increase in LTL revenue per hundredweight from
$11.37 in 2003 to $11.63 in 2004. This increase in LTL revenue per hundredweight
was due mainly to an increase in fuel surcharge revenue per working day, as the
cost of fuel increased in 2004 compared to 2003. LTL bills per working day
decreased 6.4% from 2003 to 2004. Total tonnage decreased 54,269 tons, or 2.8%,
from 1,962,890 tons in 2003 to 1,908,621 tons in 2004.
Salaries, wages, and benefits. Salaries, wages, and benefits increased
$16.8 million, or 8.2%, from $205.4 million for 2003 to $222.2 million for 2004.
A substantial portion of this increase was attributable to the $7.8 million
curtailment gain recognized in 2003 that related to a reduction of our
obligations under a benefit plan. Further, our group health expenses increased
by $4.0 million in 2004, despite a 5.4% decrease in the number of employees,
while workers' compensation expenses increased by $2.5 million. Mileage-based
payments to linehaul drivers also increased by $2.9 million from 2003 to 2004,
as our length of haul increased by 8.1% to 478 miles. As a percentage of
operating revenues, salaries, wages, and benefits increased from 52.7% for 2003,
to 57.5% for 2004.
Purchased transportation. Purchased transportation remained essentially
constant at approximately $56.7 million in both 2003 and 2004. However,
purchased transportation paid to related parties decreased by $4.0 million,
which was offset by a similar increase in non-related party purchased
transportation. As a percentage of operating revenues, purchased transportation
increased from 14.5% for 2003 to 14.7% for 2004.
Page 21
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $16.8 million, or 25.4%, from $66.2 million for 2003 to
$83.0 million for 2004. The increase in operating and general supplies and
expenses resulted primarily from increases in the cost of fuel, offset in part
by an increase in fuel surcharge revenue. The average price per gallon of diesel
fuel was 21.4% higher during 2004 as compared to 2003. Also contributing to the
increase in operating and general supplies and expenses were professional fees
relating to the Sarbanes-Oxley Act, increased property tax expense, increased
provisions for doubtful accounts, and vehicle repair costs. As a percentage of
operating revenues, operating and general supplies and expenses increased from
17.0% for 2003 to 21.4% for 2004.
Insurance and claims. Insurance and claims increased $9.1 million, or
56.5%, from $16.1 million for 2003 to $25.2 million for 2004. The increase in
insurance and claims expense resulted primarily from an increase in the number
of cargo claims, an increase in insurance premiums and the approximate $690,000
settlement, in March of 2005, for a lawsuit filed in 2003 - all of which was
expensed in 2004. The increase in insurance premiums was largely attributable to
the cost of additional directors' and officers' insurance coverage. As a
percentage of operating revenues, insurance and claims increased from 4.1% for
2003 to 6.5% for 2004.
Building and equipment rentals. Building and equipment rentals increased
approximately $1.0 million, or 19.6%, from $5.1 million for 2003 to $6.1 million
for 2004. The increase in building and equipment rentals resulted primarily from
the addition of leased terminals in connection with our Northwest expansion and
the addition of a new terminal in California. As a percentage of operating
revenues, building and equipment rentals increased from 1.3% for 2003 to 1.6%
for 2004.
Depreciation and amortization. Depreciation and amortization expense
increased approximately $0.4 million, or 2.4%, from $16.6 million for 2003 to
$17.0 million for 2004. This increase was primarily attributable to equipment
acquired in March 2004 in our Northwest expansion and the addition of new and
used tractors and new trailers added during the year. As a percentage of
operating revenues, depreciation and amortization increased from 4.3% for 2003
to 4.4% for 2004.
Operating ratio. Our operating ratio increased from 93.9% for 2003 to
106.1% for 2004.
Interest expense. Interest expense decreased $2.0 million, or 20.6%, from
$9.7 million for 2003 to $7.7 million for 2004. As a percentage of operating
revenues, interest expense decreased from 2.5% for 2003 to 2.0% for 2004. Our
average debt balances decreased from $95.4 million in 2003 to $66.6 million in
2004 due in large part to our payment of approximately $50.0 million in December
2003 to reduce outstanding debt utilizing part of the net proceeds from our
initial public offering. Interest expense in 2003 included $0.5 million of
non-cash interest expense attributable to a $3.3 million annual increase in
payments under related party terminal leases effective February 20, 2003. These
payments were increased to fair value, and we recorded non-cash interest expense
in all prior periods to reflect the difference between the fair value rental and
the former rental amount. After February 20, 2003, the interest amounts reflect
cash payments. The amounts are recorded as interest because the leases are
reflected as a financing arrangement in our consolidated financial statements.
Income (loss) from continuing operations before income taxes was $14.0
million for 2003 and $(31.3) million for 2004.
Pro forma income from continuing operations, assuming an effective tax rate
of approximately 39% in 2003, amounted to $8.4 million for 2003 compared to a
net loss of $22.8 million for 2004.
Our income tax benefit (expenses) changed from ($1.8) million for 2003
(excluding the $9.8 million expense for the establishment of federal deferred
income taxes) to $8.5 million for 2004. Additionally, income taxes for 2003
included federal income tax expense for the last two periods of the year.
Page 22
Liquidity and Capital Resources
Our business has required substantial, ongoing capital investments,
particularly to replace revenue equipment such as tractors and trailers. Our
primary sources of liquidity have historically been cash from operations,
secured borrowings, and proceeds of our initial public offering. During 2005,
our sources of liquidity included the following real estate transactions:
o In June, 2005, we sold approximately 14 excess acres in Phoenix, Arizona,
with net proceeds of approximately $1.1 million;
o On July 13, 2005, we completed a sale-leaseback transaction involving our
new terminal in Phoenix, Arizona, with net proceeds of approximately $6.2
million; and
o On July 13, 2005, we completed the mortgage financing of three other
properties, with net proceeds of approximately $7.9 million.
During 2006 our capital expenditure requirements are expected to be
approximately $7.5 million. Our capital expenditure expectations include
approximately $6.0 million for replacement of trailers. If we decide not to
replace these trailers, our capital expenditures may approximate $1.5 million
for 2006. We expect to pay for the projected capital expenditures with
borrowings under our credit facilities, borrowings under capital leases and cash
flows from operations. We expect that proceeds from the sale of the two
terminals mentioned below and other revenue equipment will approximate $13.7
million (less the payoff of a related mortgage of $4.7 million) in 2006.
In January 2006, we entered into an agreement with respect to the sale of
our dormant terminal in Phoenix, Arizona, which is one of the two terminals for
sale. We expect to realize net proceeds from this sale of approximately $3.0
million. Further, in January 2006, we sold our Portland, Oregon terminal, and
realized net proceeds in February 2006, after paying off the related mortgage,
from the sale of approximately $3.3 million.
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. Our ability
to fund our cash requirements in future periods will depend on our ability to
improve operating results, cash flow, our ability to comply with covenants
contained in our financing arrangements or successfully renegotiating these
arrangements, and our ability to identify additional sources of liquidity. At
December 31, 2005, we had approximately $48.4 million in stockholders' equity
and $53.7 million in long-term debt, including current maturities. At the same
date, we had $2.1 million available under our primary credit facility which
fluctuates from time-to-time with accounts receivable, payroll, and other items.
As of March 31, 2006, we had approximately $5.1 million available. We have
reached an agreement in principle with Bank of America, N.A. ("Agent") to
increase our borrowing capacity under our New Credit Facility through an
amendment. As required by the New Credit Facility, both we and the Agent
currently are in negotiations with another lender to obtain its consent to that
amendment. There can be no assurance, however, that the amendment or increase
will be approved.
Net cash (used in) provided by operating activities was approximately
$(10.0) million, $(7.4) million and $15.1 million for the years ended December
31, 2005, 2004, and 2003, respectively. The decrease in net cash provided by
operating activities, $3.1 million from 2004 to 2005, resulted mainly from $1.8
million in reduced cash as a result of a larger cash loss from operations plus a
decrease in trade accounts payable of $6.6 million in 2005 compared to an
increase of $8.4 million in 2004. These cash reductions were partially offset by
a reduction of $6.5 million in accounts receivable compared to an increase of
$1.4 million in 2004. The average age of our accounts receivable was 53.8 days
for the year ended December 31, 2005, 55.0 days for the year ended December 31,
2004, and 52.2 days for the year ended December 31, 2003.
Net cash provided by (used in) investing activities was approximately $6.8
million, $(41.8) million, and $(5.3) million for the years ended December 31,
2005, 2004, and 2003, respectively. Capital expenditures were financed with
long-term debt and cash flows from operations. Our capital expenditures were
approximately $2.1 million in 2005, mainly for electronic forklift scales and
service cars, $36.7 million in 2004, and $7.0 million in 2003. We also paid $9.3
million in 2004 for certain assets related to our Northwest expansion.
Net cash provided by financing activities was approximately $1.4 million,
$14.1 million and $20.1 million for the years ended December 31, 2005, 2004, and
2003, respectively. In 2005, we liquidated our restricted cash of $20.8 million,
borrowed $9.5 million, and paid off our securitization facility of $27.3
million. In July 2004, as a condition for amending our credit facility we agreed
to place $20.8 million in a restricted cash account. This fund was established
through a borrowing under our securitization facility. The restricted cash fund
was established to cash collateralize an equal amount of letters of credit.
Other funds provided by financing activities in 2004 arose mainly from
borrowings under our securitization facility.
Page 23
At December 31, 2005, we had outstanding long-term obligations of
approximately $53.7 million. The following chart reflects the outstanding
amounts by category:
Property mortgage $ 8.6 million
and automobile notes
Capital lease obligations.. 22.5 million
------------
Total long-term debt..... 31.1 million
Related party financing.... 22.6 million
---------------
Total................. $ 53.7 million
===============
In 1998, we entered into an agreement with Southwest Premier Properties,
L.L.C. ("Southwest Premier"), an entity controlled by our principal stockholder,
for the sale and leaseback of the land, structures and improvements of some of
our terminals. For financial accounting purposes, this transaction has been
accounted for as a financing arrangement. Consequently, the related land,
structures and improvements remain on our consolidated balance 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. The properties sold and
leased back from Southwest Premier are accounted for as a financing arrangement.
The annual lease payments, of $6.2 million in 2005 and 2004, have been recorded
as interest expense. During 2005 and 2004, $0.3 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 $22.6 million at December 31, 2005. 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.
On April 30, 2002, we entered into a $40.0 million revolving accounts
receivable securitization facility (the "Securitization Facility") that was set
to expire on April 27, 2005. While the Securitization Facility was in place, we
sold, on a revolving basis, our interests in accounts receivable to Central
Receivables, a then wholly-owned, special purpose subsidiary. The assets and
liabilities of Central Receivables were included in our consolidated financial
statements. The Securitization Facility allowed us to receive up to $40.0
million of proceeds, subject to eligible receivables and pay a service fee
recorded as interest expense, as defined in the agreement. We were required to
pay commercial paper interest rates plus an applicable margin on the proceeds
received. Interest was generally payable monthly. The Securitization Facility
included certain restrictions and financial covenants. We were required to pay a
commitment fee equal to 0.35% per annum of 102% of the facility limit minus the
aggregate principal balance, as well as an administrative fee equal to 0.15% per
annum of the uncommitted balance. As of December 31, 2004 there were borrowings
of $27.3 million and at December 31, 2003, there were no borrowings outstanding
under the Securitization Facility.
In March 2004, we acquired certain assets of EOFF for approximately $10.0
million. Under the terms of the agreement, we paid approximately $7.0 million of
the purchase price at closing, $1.0 million in the second quarter of 2004, $1.0
million in the third quarter of 2004 and $0.2 million in the fourth quarter of
2004 and $0.2 million in the third quarter of 2005. A favorable purchase price
adjustment of $0.5 million was recorded in the 2005 fourth quarter. The
remaining $0.1 million is recorded on our consolidated balance sheet as part of
short-term notes payable at December 31, 2005 and was paid in the first quarter
of 2006.
On July 28, 2004, we entered into a $30.0 million amended and restated
revolving credit facility with SunTrust Bank (the "Amended and Restated SunTrust
Facility"). On November 5, 2004, we executed a first amendment to the Amended
and Restated SunTrust Credit Facility. Under the first amendment to the Amended
and Restated SunTrust Facility, we could receive up to an aggregate of $30.0
million of proceeds in the form of letters of credit, only. The Amended and
Restated SunTrust Facility accrued interest at a variable rate equal, at our
option, to either (a) the bank's prime lending rate minus an applicable margin,
or (b) LIBOR plus an applicable margin. The applicable margins for both types of
loans varied depending on our lease adjusted leverage ratio. Interest was
payable in periods from one to three months at our option. The Amended and
Restated SunTrust Facility was collateralized by certain revenue equipment, and
letters of credit that were issued were collateralized by cash collateral. The
facility contained, among other things, certain financial and non-financial
covenants, and was set to mature on April 30, 2006. We were required to pay a
commitment fee equal to 0.50% per annum on the daily unused Amended and Restated
SunTrust Facility as well as a letter of credit fee equal to 0.25% per annum on
the average daily amount of the letters of credit. We were also required to cash
collateralize our outstanding letters of credit.
Page 24
On January 31, 2005, we entered into a four-year senior secured revolving
credit facility (as amended on May 12, 2005 and November 9, 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. The New Credit Facility replaced both
the Securitization Facility and the Amended and Restated SunTrust Facility.
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 net 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 us between
January 31, 2005 and November 9, 2005, minus $10.0 million. 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 provides for an unused line fee of 0.25% to 0.375%, based on
aggregate amounts outstanding.
The New Credit Facility is secured by substantially all of our assets,
other than certain revenue equipment and real estate that is (or may in the
future become) subject to other financing.
The New Credit Facility contains a requirement that $10.0 million of
availability be maintained. The New Credit Facility also 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.
In essence, the financial covenants are irrelevant because they are only tested
if availability is below $10.0 million, and if we are below $10.0 million we
would already be in violation of the New Credit Facility. At December 31, 2005,
we were not in compliance with certain of these irrelevant covenants. However
since the borrowing availability was in excess of $10.0 million, the financial
covenants did 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 interpretations of Emerging Issues Task Force 95-22
("EITF 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 requires revolving credit agreements with
a required lock-box arrangement that include subjective acceleration clauses to
be classified as current liabilities. The New Credit Facility includes a
lock-box agreement and also allows the lender, in its reasonable credit
judgment, to assess additional reserves against the borrowing base calculation
and take certain other discretionary actions. For example, certain reserve
requirements may result in an over advance borrowing position that could require
an accelerated repayment of the over advance portion. Since the inception of
this facility, the lender has not applied any additional reserves to the
borrowing base calculation. However, the lender, in its reasonable credit
judgment, can assess additional reserves to the borrowing base calculation to
account for changes in our business or the underlying value of the collateral.
We do not anticipate any changes that would result in any material adjustments
to the borrowing base calculation, but we cannot be certain that additional
reserves will not be assessed by the bank to the borrowing base calculation. We
believe the provisions in the New Credit Facility are relatively common for
credit facilities of this type and, while we do not believe that this accounting
requirement accurately reflects the long-term nature of the facility, we
acknowledge the requirements of EITF 95-22. Accordingly, we have classified
borrowings under the New Credit Facility as a short-term obligation.
Page 25
On July 13, 2005, we entered into a sale-leaseback arrangement involving
our new terminal in Phoenix, Arizona. Net proceeds of the transaction were
approximately $6.2 million. In the transaction we signed a ten-year lease for
the Phoenix terminal 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.
On July 13, 2005, we completed a mortgage financing secured by three other
properties. This financing generated approximately $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%. In January 2006, we
sold the Portland, Oregon terminal (one of the three properties) and paid off
$4.7 million of this debt. Total payments per year, after the Portland, Oregon
sale, are approximately $0.4 million with a final payment of $3.0 million.
Subsequent to the transactions completed on July 13, 2005 , our 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.
The following table summarizes our significant contractual obligations and
commercial commitments as of December 31, 2005.
Payments (in thousands) due by period
---------------------------------------------------------------------
Contractual Obligations Less than More than 5
Total 1 year 1-3 years 3-5 years years
------ ------ --------- --------- -----
Long-term debt............................ $ 8,583 $ 419 $ 683 $ 7,481 $ -
Capital lease obligations................. 22,543 8,390 8,165 4,856 1,132
Related party financing................... 22,600 - 22,600 - -
Operating lease obligations............... 23,583 6,641 8,858 3,454 4,630
Credit facility........................... 12,049 12,049 - - -
------ ------ ------ ------ ------
Total..................................... $ 89,358 $ 27,499 $ 40,306 $ 15,791 $ 5,762
========= ======== ======== ======== =========
Amount of Commitment Expiration per Period
(in thousands)
---------------------------------------------------------------------
Less than More than 5
Other commercial commitments Total 1 year 1-3 years 3-5 years years
---------------------------- ----- ------ --------- --------- -----
Standby letters of credit................. $ 23,846 $ 23,846 - - -
-------- -------- -------- -------- --------
We finance revenue equipment through borrowing and a portion of the
indebtedness is categorized as a current liability although the revenue
equipment is classified as a long-term asset. Consequently, each purchase of
financed revenue equipment decreases working capital. We had a working capital
(deficit) surplus of $(5.0) million at December 31, 2005, $3.0 million at
December 31, 2004, and $53.5 million at December 31, 2003.
Off-Balance Sheet Arrangements
Certain of our terminals are financed off-balance sheet through operating
leases. As of December 31, 2005, 36 of our terminals, including seven owned by
related parties, were subject to operating leases.
Page 26
Quarterly Results of Operations
The following table presents our unaudited operating results for the eight
quarters ended December 31, 2005. In our opinion, all necessary adjustments
(consisting only of normal recurring adjustments) have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with our consolidated financial statements and notes, which are
included elsewhere in this Annual Report. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full year or for future periods. Our fiscal year consists of four quarters, each
with 13 weeks.
Quarter Ended
-------------
Apr. 3, July 3, Oct. 2, Dec. 31, Apr. 2, July 2, Oct. 1 Dec. 31,
2004(1) 2004 2004 2004 (2) 2005 2005 2005 (3) 2005
------- ---- ---- -------- ---- ---- -------- ----
(unaudited)
(in thousands, except per share data)
Operating revenues.... $ 97,038 $ 105,513 $ 98,539 $ 85,511 $ 89,322 $ 99,518 $ 94,335 $ 88,965
Operating income
(loss).............. 13 (5,035) (10,759) (7,874) (6,068) (3,528) (12,696) (8,840)
Net loss (1).......... (1,129) (2,543) (7,898) (11,278) (8,264) (6,111) (13,429) (11,679)
Net loss per share
Basic............. $ (0.06)$ (0.14) $ (0.43) $ (0.62) $ (0.45) $ (0.34) $ (0.74) $ (0.64)
=========== ========== ========== ======== =========== ========== ========== ========
Diluted........... $ (0.06)$ (0.14) $ (0.43) $ (0.62) $ (0.45) $ (0.34) $ (0.74) $ (0.64)
=========== ========== ========== ======== =========== ========== ========== ========
(1) During 2004, the IRS disallowed certain tax deductions taken by the S
corporation stockholders pursuant to a contested liability trust. As a result of
the disallowance of such deductions, the C corporation's tax basis was increased
resulting in a deferred tax benefit of $1.8 million.
(2) During 2004, we analyzed our deferred tax assets and liabilities and
determined that, under current accounting treatment, a valuation allowance of
$4.9 million was applicable to our net deferred tax assets.
(3) In the 2005 third quarter, we analyzed our goodwill and determined that
its carrying value exceeded its fair value. We, therefore, wrote off the
remaining net book value of approximately $4.3 million.
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
financials statements.
Revenue Recognition. Operating revenue and associated expenses are
recognized upon delivery of the related freight, as is fuel surcharge revenue.
In 2005, approximately 7.5% of our revenue was derived from interline shipments.
Most of this 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.
Page 27
From June 28, 2000 to June 28, 2001, our self-insured retention for bodily
injury and property damage, cargo loss and damage, and physical damage to our
equipment was an aggregate $0.5 million per occurrence. Effective June 28, 2001,
we increased our self-insured retention to $1.0 million per occurrence, on
October 28, 2003 reduced our self-insured retention to $0.8 million per
occurrence and on January 1, 2004 increased our self-insured retention to $1.0
million. 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 $0.3 million per occurrence. We expect our claims reserves
to increase in future periods as a result of our higher self-insured retention.
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.
Income Taxes. The determination of the combined tax rate used to calculate
our provision for income taxes for both current and deferred income taxes also
requires significant judgment by management. Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes, requires that the net
deferred tax asset or liability be valued using enacted tax rates that we
believe will be in effect when these temporary differences reverse. We use the
combined tax rates in effect at the time the financial statements are prepared
since no better information is available. If changes in the federal statutory
rate or significant changes in the statutory state and local tax rates occur
prior to or during the reversal of these items or if our filing obligations were
to change materially, this could change the combined rate and, by extension, our
provision for income taxes.
Under SFAS No. 109 and applicable interpretations, if all or some portion
of specific deferred tax assets, such as state tax credit carry-forwards or
state net operating loss carry-forwards, are determined not to be realizable, a
valuation allowance must be established for the amount of such deferred tax
assets. In 2004, based on our results of operations and existing accounting
interpretations that do not allow us to consider future expectations, only past
results, we established a $4.9 million valuation allowance for deferred tax
assets. This reserve was increased to $19.1 million as of December 31, 2005.
Goodwill. Our business acquisitions resulted in goodwill, which was
determined to be impaired in the 2005 third quarter and therefore a charge of
$4.3 million was incurred to completely write off our remaining goodwill value.
As of December 31, 2005, our goodwill, net of accumulated amortization, was
zero.
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 operating expenses have been
higher in the winter months due to decreased fuel efficiency and increased
maintenance costs for our tractors and trailers in colder weather. Our southern
operating region has lessened the seasonal impact of colder weather to some
extent.
Page 28
Recent Accounting Pronouncements
In December 2004, the FASB issued a revision to SFAS 123, with SFAS 123(R).
SFAS 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95, "Statement of
Cash Flows." SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. Pro forma disclosure, as included in Note
3 to the consolidated financial statements, is no longer an alternative. We are
required to adopt SFAS 123(R) for the fiscal year beginning January 1, 2006, and
anticipate doing so under the modified prospective method. See further
discussion in Note 3 to the consolidated financial statements. We are currently
evaluating the impact the adoption of SFAS 123(R) will have, including giving
consideration to changes made with the private placement discussed in Note 2 to
the consolidated financial statements, and because it will depend on the levels
of share-based payments granted in the future. However, had we adopted SFAS
123(R) in prior periods, the impact of the standard would have approximated the
impact of SFAS 123 as described in our disclosure of pro forma net loss and net
loss per share in Note 3 to the consolidated financial statements. In addition,
in November 2005, the FASB issued final FASB Staff Position ("FSP") FAS No.
123(R)-3, ("FSP 123(R)-3") "Transition Election Related to Accounting for the
Tax Effects of Share-Based Payment Awards." FSP 123(R)-3 provides an alternative
method of calculating excess tax benefits from the method defined in SFAS 123(R)
for share-based payments. A one-time election to adopt the transition method of
the FSP is available to those entities adopting SFAS 123(R) using either the
modified retrospective or modified prospective method. We are currently
evaluating (we have up to one year from the initial adoption of SFAS 123(R) to
make this one-time election) the potential impact of calculating the tax
benefits with this alternative method and have not determined which method we
will adopt, or the expected impact on our consolidated financial statements.
In June 2005, we accelerated the vesting of substantially all stock options
outstanding under our stock-based employee compensation plan that had exercise
prices higher than the closing price of the our stock on June 16, 2005, which
was $2.49. Options to purchase approximately 624,000 shares of our common stock
became exercisable immediately.
The primary purpose of the accelerated vesting, which resulted in
approximately $1.8 million of additional pro forma compensation expense in the
three months and year ended July 2, 2005 and December 31, 2005, respectively,
was to eliminate future compensation expense beginning in the 2006 first quarter
and ending in 2013 that we would have otherwise recognized in our consolidated
statement of operations with respect to the accelerated options upon the
adoption of FASB Statement of Financial Accounting Standards No. 123 (Revised
2004), Share-Based Payment ("SFAS 123R"). SFAS 123R will require that
compensation expense associated with stock options be recognized in the
consolidated statement of operations, rather than as a footnote disclosure in
our consolidated financial statements. The acceleration of the vesting of these
options did not result in a charge based on accounting principles generally
accepted in the United States of America.
Item 7A. 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 are based on the weekly
national average price of diesel fuel and our operations are concentrated in the
Southwest, there is some risk that the national average will not fully reflect
regional fuel prices, particularly in California. We are highly dependent on
adequate supplies of diesel fuel. If our supply was 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.
Page 29
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 December 31, 2005, although we may enter into such swaps in the future
if we deem appropriate.
Our New Credit Facility, provided there has been no default, carries a
variable interest rate based on either the prime rate or LIBOR. Assuming
borrowings equal to the $2.1 million available on the credit facility at
December 31, 2005, a one percentage point increase in the prime rate would
increase our annual interest expense by $21,000.
Item 8. Financial Statements and Supplementary Data
Our audited consolidated balance sheets, statements of operations, cash
flows, stockholders' equity and notes related thereto, are contained at Pages
F-1 to F-27 of this report.
Item 9.Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
On January 31, 2006, Central Freight Lines, Inc. engaged a new auditing
firm, McGladrey & Pullen LLP ("McGladrey"), as our independent registered public
accounting firm to audit our financial statements. Our Audit Committee
recommended and approved the change of accountants. On January 30, 2006, we
dismissed KPMG LLP ("KPMG"), who had served as our independent registered public
accounting firm for the two fiscal years ended December 31, 2004 and for the
interim periods through October 1, 2005 and until the appointment of McGladrey.
The decision to change accountants was determined by the Audit Committee to be
in our best interests.
During the two fiscal years ended December 31, 2004, and the subsequent
interim periods preceding the change in accountants, there were no disagreements
with KPMG on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement(s), if
not resolved to KPMG's satisfaction, would have caused KPMG to make reference to
the subject matter of such disagreement(s) in connection with its reports on our
consolidated financial statements. KPMG's report on our financial statements for
either of the last two years did not contain an adverse opinion or a disclaimer
of opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles.
During the two fiscal years ended December 31, 2004, and the subsequent
interim periods preceding the change in accountants, there have been no
reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K), except
that we disclosed in Item 9A, Controls and Procedures, of our Annual Report on
Form 10-K for the year ended December 31, 2004, that in evaluating our internal
controls over financial reporting, we identified deficiencies that we considered
to be material weaknesses. The material weaknesses in our internal controls
related to the following facts and circumstances: our policies and procedures
were not sufficient to ensure that transactions processed through our billing
system resulted in accurate reporting of revenue, we did not reconcile our
physical inventories to the year-end general ledger, and we did not maintain
policies and procedures to ensure that the valuation allowance associated with
deferred taxes was in accordance with accounting principles generally accepted
in the United States. Due to these material weaknesses, in preparing our
consolidated financial statements as of and for the year ended December 31,
2004, we performed additional procedures relating to revenue, accounts
receivable, inventory, and income taxes to ensure that the consolidated
financial statements were stated fairly in all material respects in accordance
with accounting principles generally accepted in the United States. We
determined that the material weaknesses did not have an impact on the reported
year-end financial results.
During our two most recent fiscal years, and the subsequent interim periods
preceding the change in accountants, McGladrey was not consulted on any matter
relating to accounting principles to a specific transaction, either completed or
proposed, or the type of audit opinion that might be rendered on our financial
statements.
Page 30
Item 9A - 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.
Our management, including the Chief Executive Officer and Chief Financial
Officer, do not expect that our disclosure controls and procedures 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.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
We incorporate by reference the information contained under the headings
"Proposal Three - Election of Directors," "Corporate Governance - Board of
Directors," "Corporate Governance - Committees of the Board of Directors - Audit
Committee," "Corporate Governance - Executive Officers of the Company,"
"Corporate Governance - Code of Conduct and Ethics," and "Corporate Governance -
Section 16(a) Beneficial Ownership Reporting Compliance" from our definitive
Proxy Statement to be delivered to our stockholders in connection with the 2006
Annual Meeting of Stockholders; provided, however, that the Report of the Audit
Committee in such Proxy Statement is not incorporated by reference.
Item 11. Executive Compensation
We incorporate by reference the information contained under the headings
"Executive Compensation" and "Corporate Governance - Director Compensation" from
our definitive Proxy Statement to be delivered to our stockholders in connection
with the 2006 Annual Meeting of Stockholders; provided, however, that the
Compensation Committee Report on Executive Compensation that appears under the
heading "Executive Compensation" in such Proxy Statement is not incorporated by
reference.
Page 31
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table provides certain information, as of December 31, 2005,
with respect to our compensation plans and other arrangements under which shares
of our Common Stock are authorized for issuance.
Equity Compensation Plan Information
Number of securities
remaining eligible
Number of securities for future issuance
to be issued upon Weighted average under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options (excluding securities
warrants and rights warrants and rights reflected
in column (a))
Plan category (a) (b) (c)
- ------------------------------------- ----------------------- ------------------------ --------------
Equity compensation plans 1,426,245 $3.42 991,258
approved by security holders
Equity compensation plans not - - -
approved by security holders
---------- -------- --------
Total 1,426,245 $ 3.42 991,258
========= ======= =======
We incorporate by reference the information contained under the heading
"Security Ownership of Certain Beneficial Owners and Management" from our
definitive Proxy Statement to be delivered to our stockholders in connection
with the 2006 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
We incorporate by reference the information contained under the headings
"Executive Compensation - Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" from our
definitive Proxy Statement to be delivered to our stockholders in connection
with the 2006 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
We incorporate by reference the information contained under the heading
"Principal Accountant Fees and Services" from our definitive Proxy Statement to
be delivered to our stockholders in connection with the 2006 Annual Meeting of
Stockholders.
Page 32
PART IV
Item 15. Exhibits and Financial Statements Schedules
(a) The following documents are filed as part of this report on Form 10-K at
pages F-1 through F-27, below.
1. Consolidated Financial Statements:
Central Freight Lines, Inc. and Subsidiary
Report of Independent Registered Public Accounting Firm(s)
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004, and 2003
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2005, 2004, and 2003
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004, and 2003
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules required to be filed by Item 8
and Paragraph (d) of Item 15:
All schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or the notes thereto.
3. Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed at paragraph
(c), below, and at the Exhibit Index appearing at the end of this report.
(b) The following exhibits are filed with this Form 10-K or incorporated
herein by reference to the document set forth next to the exhibit listed below:
Exhibit
Number Descriptions
- ------ ------------
2.1 Amended and Restated Asset Purchase Agreement dated April 18, 2002, by and
among Central Refrigerated Service, Inc., a Nebraska corporation, and Simon
Transportation Services Inc., a Nevada corporation, and its subsidiaries,
Dick Simon Trucking, Inc., a Utah corporation, and Simon Terminal, LLC, an
Arizona limited liability company. (Incorporated by reference to Exhibit
2.1 to the Company's Registration Statement on Form S-1 No. 333-109068.)
2.2(a) Separation Agreement dated November 30, 2002, by and among Central
Freight Lines, Inc., a Texas corporation, Central Refrigerated Service,
Inc., a Nebraska corporation, the Jerry and Vickie Moyes Family Trust,
Interstate Equipment Leasing, Inc., an Arizona corporation, and Jerry Moyes
individually. (Incorporated by reference to Exhibit 2.2(a) to the Company's
Registration Statement on Form S-1 No. 333-109068.)
2.2(b) Amendment Number One to Separation Agreement dated December 23, 2002, by
and among Central Freight Lines, Inc., a Texas corporation, Central
Refrigerated Service, Inc., a Nebraska corporation, the Jerry and Vickie
Moyes Family Trust, Interstate Equipment Leasing, Inc., an Arizona
corporation, and Jerry Moyes individually. (Incorporated by reference to
Exhibit 2.2(b) to the Company's Registration Statement on Form S-1
No. 333-109068.)
Page 33
2.2(c) Amendment Number Two to Separation Agreement effective as of October 28,
2003, by and among Central Freight Lines, Inc., a Texas corporation,
Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry and
Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc. an Arizona
corporation, and Jerry Moyes individually. (Incorporated by reference to
Exhibit 2.2(c) to the Company's Registration Statement on Form S-1
No. 333-109068.)
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-K.)
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated
by reference to Exhibit 3.2 to this Report on Form 10-K.)
10.1(a)+ Central Freight Lines, Inc. 401(k) Savings Plan. (Incorporated by
reference to Exhibit 10.1(a) to the Company's Registration Statement on
Form S-1 No. 333-109068.)
10.1(b)+ First Amendment to Central Freight Lines, Inc. 401(k) Savings Plan.
(Incorporated by reference to Exhibit 10.1(b) to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.2(a)+ Central Freight Lines, Inc. Incentive Stock Plan. (Incorporated by
reference to Exhibit 10.2(a) to the Company's Registration Statement on
Form S-1 No. 333-109068.)
10.2(b)+ Form of Stock Option Agreement. (Incorporated by reference to Exhibit
10.28 to the Company's Report on Form 10-Q for the quarterly period ended
July 2, 2005.)
10.3+ Form of Outside Director Stock Option Agreement. (Incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on Form
S-1 No. 333-109068.)
10.4(a) First Amended and Restated Revolving Credit Loan Agreement, dated July
28, 2004, by and between Central Freight Lines, Inc., a Texas corporation,
and SunTrust Bank, a Georgia state banking corporation. (Incorporated by
reference to Exhibit 10.4(a) to the Company's Report on Form 10-Q for the
quarterly period ended July 3, 2004.)
10.4(b) Revolving Credit Note, dated July 28, 2004, by Central Freight Lines,
Inc., a Texas corporation, in favor of SunTrust Bank, a Georgia state
banking corporation. (Incorporated by reference to Exhibit 10.4(b) to the
Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.)
10.4(c)* First Amendment to First Amended and Restated Revolving Credit Loan
Agreement, dated July 28, 2004, by and between Central Freight Lines, Inc.,
a Texas corporation, and SunTrust Bank, a Georgia state banking
corporation. (Incorporated by reference to Exhibit 10.4(c) to the Company's
Report on Form 10-K for the year ended December 31, 2004.)
10.5 Guaranty, dated July 28, 2004, by Central Freight Lines, Inc., a Nevada
corporation, in favor of SunTrust Bank, a Georgia state banking
corporation. (Incorporated by reference to Exhibit 10.5 to the Company's
Report on Form 10-Q for the quarterly period ended July 3, 2004.)
10.6 Security Agreement, dated July 28, 2004, by and between Central Freight
Lines, Inc., a Texas corporation and Suntrust Bank, a Georgia state banking
corporation. (Incorporated by reference to Exhibit 10.6 to the Company's
Report on Form 10-Q for the quarterly period ended July 3, 2004.)
Page 34
10.7(a) Loan Agreement dated April 30, 2002, by and among Central Receivables,
Inc., a Nevada corporation, Three Pillars Funding Corporation, a Delaware
corporation, and Suntrust Capital Markets, Inc., a Tennessee corporation,
as agent. (Incorporated by reference to Exhibit 10.8(a) to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.7(b) First Amendment to Loan Agreement dated April 29, 2003, by and among
Central Receivables, Inc., a Nevada corporation, Three Pillars Funding
Corporation, a Delaware corporation, and SunTrust Capital Markets, Inc., a
Tennessee corporation, as agent. (Incorporated by reference to Exhibit
10.8(b) to the Company's Registration Statement on Form S-1 No.
333-109068.)
10.8 Receivables Purchase Agreement dated April 30, 2002, by and between Central
Freight Lines, Inc., a Texas corporation, and Central Receivables, Inc., a
Nevada corporation. (Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.9 Second Amended and Restated Master Lease Agreement - Parcel Group A dated
February 20, 2003 by and between Southwest Premier Properties, L.L.C., a
Texas limited liability company, and Central Freight Lines, Inc., a Texas
corporation. (Incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.10 Second Amended and Restated Master Lease Agreement - Parcel Group B dated
February 20, 2003 by and between Southwest Premier Properties, L.L.C., a
Texas limited liability company, and Central Freight Lines, Inc., a Texas
corporation. (Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.11 Amended and Restated Lease dated February 20, 2003 by and between JVM
Associates and Central Freight Lines, Inc., a Texas corporation.
(Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.12 Amended and Restated Lease dated February 20, 2003 by and between Jerry
and Vickie Moyes and Central Freight Lines, Inc., a Texas corporation.
(Incorporated by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.13 Amended and Restated Lease dated February 20, 2003 by and between Jerry
and Vickie Moyes and Central Freight Lines, Inc., a Texas corporation.
(Incorporated by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.14+ Employment Agreement dated January 7, 2002, by and between Central
Freight Lines, Inc., a Texas corporation, and Robert V. Fasso.
(Incorporated by reference to Exhibit 10.15 to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.15+ Employment Offer Letter to Jeffrey A. Hale, dated June 7, 2002, by
Central Freight Lines, Inc. (Incorporated by reference to Exhibit 10.19 to
the Company's Registration Statement on Form S-1 No. 333-109068.)
10.16(a) Indemnification Agreement, effective as of December 31, 2002, by and
between Central Freight Lines, Inc., a Texas corporation, and Central
Refrigerated Service, Inc., a Nebraska corporation. (Incorporated by
reference to Exhibit 10.23(a) to the Company's Registration Statement on
Form S-1 No. 333-109068.)
10.16(b) Amendment Number One to Indemnification Agreement effective as of
December 31, 2002, by and between Central Freight Lines, Inc., a Texas
corporation, and Central Refrigerated Service, Inc., a Nebraska
corporation. (Incorporated by reference to Exhibit 10.23(b) to the
Company's Registration Statement on Form S-1 No. 333-109068.)
Page 35
10.17+ Employment Offer Letter to Walt Ainsworth, dated July 15, 2004, by
Central Freight Lines, Inc. (Incorporated by reference to Exhibit 10.24 to
the Company's Report on Form 10-K for the year ended December 31, 2004.)
10.18(a) Amended and Restated Credit Agreement, dated March 24, 2005, by and
among the Financial Institutions named Therein as the Lenders, Bank of
America, N.A. as the Agent, and Central Freight Lines, Inc., a Texas
corporation, as the Borrower. (Incorporated by reference to Exhibit 10.26
to the Company's Report on Form 10-Q for the quarterly period ended April
2, 2005.)
10.18(b) First Amendment to Amended and Restated Credit Agreement, dated May 12,
2005, by and among Central Freight Lines, Inc., a Texas corporation,
Required Lenders under the Credit Agreement, Bank of America, N.A., in its
capacity as Agent for Lenders under the Credit Agreement. (Incorporated by
reference to Exhibit 10.27 to the Company's Report on Form 10-Q for the
quarterly period ended April 2, 2005.)
10.18(c)* Second Amendment to Amended and Restated Credit Agreement, dated
November 9, 2005, by and among Central Freight Lines, Inc., a Texas
corporation, Required Lenders under the Credit Agreement, Bank of America,
N.A., in its capacity as Agent for Lenders under the Credit Agreement.
10.19 Obligation Guaranty dated January 31, 2005, by Central Freight Lines,
Inc., a Nevada corporation, for the benefit of Bank of America, N.A., in
its capacity as Agent for the benefit of the Lenders. (Incorporated by
reference to Exhibit 10.25 to the Company's Current Report on Form 8-K
filed on February 4, 2005.)
10.20 Form of Director Indemnification Agreement. (Incorporated by reference to
Exhibit 10.29 to the Company's Report on Form 10-Q for the quarterly period
ended October 1, 2005.)
11.1 Schedule of Computation of Net Income Per Share (Incorporated by reference
to Note 17, Loss Per Share, in the Notes to Consolidated Financial
Statements contained in this Report on Form 10-K.)
21.1* Subsidiary of Central Freight Lines, Inc., a Nevada corporation.
23.1* Consent of McGladrey & Pullen, LLP.
23.2* Consent of KPMG LLP.
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.
+ Management contract or compensatory plan or arrangement.
Page 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 14, 2006 By: /s/ Robert V. Fasso
Name: Robert V. Fasso
Title: Chief Executive Officer and President
Signature and Title Date
/s/ Robert V. Fasso April 14, 2006
- ---------------------------------------------------
Robert V. Fasso
President, Chief Executive Officer; and Director
(principal executive officer)
/s/ Jeffrey A. Hale April 14, 2006
- ---------------------------------------------------
Jeffrey A. Hale
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
/s/ J. C. Carruth April 14, 2006
- ---------------------------------------------------
J. C. Carruth
Director
/s/ John Breslow April 14, 2006
- ---------------------------------------------------
John Breslow
Director
/s/ Porter J. Hall April 14, 2006
- ---------------------------------------------------
Porter J. Hall
Director
Page 37
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Central Freight Lines, Inc.
Waco, Texas
We have audited the consolidated balance sheet of Central Freight Lines, Inc.
and subsidiary (the "Company") as of December 31, 2005, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provided a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Freight
Lines, Inc. and subsidiary as of December 31, 2005, and the results of their
operations and their cash flows for the year then ended, in conformity with U.S.
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has experienced recurring negative cash flows, primarily from operations.
This raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ McGladrey & Pullen, LLP
Dallas, Texas
April 4, 2006
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Central Freight Lines, Inc.:
We have audited the accompanying consolidated balance sheet of Central Freight
Lines, Inc. and subsidiaries (the Company) as of December 31, 2004, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Freight
Lines, Inc. and subsidiaries as of December 31, 2004, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
KPMG LLP
Dallas, Texas
March 30, 2005
F-2
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
(Dollars in thousands, except share data)
Assets 2005 2004
---------------- -----------------
Cash and cash equivalents $ 348 $ 2,144
Restricted cash - 20,825
Accounts receivable less allowance for doubtful accounts and revenue 41,944 51,582
adjustments of $10,754 in 2005 and $7,854 in 2004
Other current assets 9,184 8,655
Assets held for sale 3,370 -
Deferred income taxes 5,105 6,689
---------------- -----------------
Total current assets 59,951 89,895
Property and equipment, net 111,349 135,274
Goodwill - 4,324
Other assets 3,531 7,761
---------------- -----------------
Total assets $ 174,831 $ 237,254
================ =================
Liabilities and stockholders' equity
Liabilities:
Current maturities of long-term debt $ 8,809 $ 10,958
Short-term notes payable 12,184 28,108
Trade accounts payable 17,485 23,835
Trade accounts payable - related parties 737 988
Accrued expenses 25,755 23,050
---------------- -----------------
Total current liabilities 64,970 86,939
Long-term debt, excluding current maturities 22,317 21,884
Related party financing 22,600 22,852
Deferred income taxes 5,105 8,375
Claims and insurance accruals and other liabilities 11,453 9,646
---------------- -----------------
Total liabilities 126,445 149,696
---------------- -----------------
Commitments and contingencies (Notes 13 and 15)
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,
18,283,892 and 18,188,894 shares issued and outstanding as of
December 31, 2005 and 2004, respectively 18 18
Additional paid-in capital 109,759 109,554
Unearned compensation (160) (266)
Accumulated deficit (61,231) (21,748)
---------------- -----------------
Total stockholders' equity 48,386 87,558
---------------- -----------------
Total liabilities and stockholders' equity $ 174,831 $ 237,254
================ =================
See accompanying notes to consolidated financial statements.
F-3
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2005, 2004 and 2003
(Dollars in thousands except per share data)
2005 2004 2003
--------------------------------------------------------
Operating revenues $ 372,140 $ 386,601 $ 389,696
--------------------------------------------------------
Operating expenses:
Salaries, wages and benefits 208,846 222,230 205,393
Purchased transportation 36,217 42,152 38,113
Purchased transportation - related parties 14,627 14,571 18,582
Operating and general supplies and expenses 91,806 82,702 66,144
Operating and general supplies and expenses - related parties 305 274 12
Insurance and claims 22,890 25,186 16,057
Building and equipment rentals 4,279 4,297 3,181
Building and equipment rentals - related parties 1,809 1,795 1,903
Goodwill impairment 4,324 - -
Depreciation and amortization 18,169 17,049 16,605
--------------------------------------------------------
Total operating expenses 403,272 410,256 365,990
--------------------------------------------------------
(Loss) income from operations (31,132) (23,655) 23,706
Other expense:
Interest expense (3,860) (1,469) (3,547)
Interest expense - related parties (6,177) (6,197) (6,130)
--------------------------------------------------------
(Loss) income from continuing operations before income taxes (41,169) (31,321) 14,029
Income taxes:
Income tax benefit (expense) 1,686 8,473 (1,759)
Income tax expense - conversion to C corporation - - (9,834)
--------------------------------------------------------
(Loss) income from continuing operations (39,483) (22,848) 2,436
Loss from discontinued operations - - (8,341)
--------------------------------------------------------
Net loss $ (39,483) $ (22,848) $ (5,905)
========================================================
Pro forma C Corporation data (unaudited):
Historical income from continuing operations before
income taxes $ - $ - $ 14,029
Pro forma income tax expense - - (5,666)
--------------------------------------------------------
Pro forma income from continuing operations - - 8,363
Loss from discontinued operations - - (8,341)
--------------------------------------------------------
Pro forma net income $ - $ - $ 22
========================================================
Net loss per share:
Basic
$ (2.17) $ (1.27) $ -
Diluted (2.17) (1.27) -
Pro forma net income (loss) per share:
Basic:
Income from continuing operations $ - $ - $ 0.75
Loss from discontinued operations - - (0.75)
Net income - - -
Diluted:
Income from continuing operations $ - $ - $ 0.69
Loss from discontinued operations - - (0.69)
Net income - - -
Weighted average outstanding shares (in thousands):
Basic 18,230 17,971 11,163
Diluted 18,230 17,971 12,103
See accompanying notes to consolidated financial statements.
F-4
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2005, 2004, and 2003
(Dollars in thousands, except per share data)
Common stock
--------------------- Notes receivable
Additional from stockholder Retained Total
paid-in Unearned and earnings Treasury stockholders'
Shares Amount capital Compensation affiliate (Accumulated stock equity
deficit)
-------------- ------ ---------- ------------ ---------------- -------- -------- -------------
Balances at December 31, 2002 10,868,218 $ 11 $ 31,297 $ (1,059) $ (7,988) $8,113 - $ 30,374
Exercise of stock options, including 1,064,327 1 3,088 - - - - 3,089
non-cash tax benefit of $1,340
Non-cash contribution from stockholder - - 500 - - - - 500
Proceeds from initial public offering 5,700,000 5 77,629 - - - - 77,634
Distributions paid - - - - - (6,139) - (6,139)
Payment from stockholder - - 660 - 7,988 - - 8,648
Net loss - - - - - (5,905) - (5,905)
Transfer of undistributed S corporation
deficit or "loss" - - (5,031) - - 5,031 - -
Stock option compensation - - - 237 - - - 237
-------------- ------ ---------- ------------ ---------------- -------- -------- -------------
Balances at December 31, 2003 17,632,545 $ 17 $ 108,143 $ (822) $ - $ 1,100 - $ 108,438
Exercise of stock options, including
non-cash tax benefit of $621 545,686 1 1,727 - - - - 1,728
Issuance of common stock 10,663 - 48 - - - - 48
Net loss - - - - - (22,848) - (22,848)
Stock option compensation, net of
forfeitures - - (364) 556 - - - 192
------------- ------ ---------- ------------ ---------------- -------- -------- -------------
Balances at December 31, 2004 18,188,894 $ 18 $ 109,554 $ (266) $ - $(21,748) $ - $ 87,558
Exercise of stock options 29,228 - 51 - - - - 51
Issuance of common stock 65,770 - 154 - - - - 154
Net loss - - - - - (39,483) - (39,483)
Stock option compensation, net of - - - 106 - - 106
forfeitures
------------- ------ ---------- ------------ ---------------- -------- -------- -------------
Balances at December 31, 2005 18,283,892 $ 18 $109,759 $ (160) $ - $(61,231) $ - $ 48,386
------------- ------ ---------- ------------ ---------------- -------- -------- -------------
------------- ------ ---------- ------------ ---------------- -------- -------- -------------
See accompanying notes to consolidated financial statements.
F-5
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004, and 2003
(Dollars in thousands)
2005 2004 2003
---------------- -------------- -------------
Cash flows from operating activities:
Net loss $ (39,483 ) $ (22,848 ) $ (5,905)
Adjustments to reconcile net loss to
net cash (used in)provided by operating activities:
Bad debt expense 3,155 1,669 876
Non-cash interest expense - related parties - - 500
Equity in loss (income) of affiliate 7 21 (4)
Loss on sale of subsidiary - - 8,341
Depreciation and amortization 18,169 17,049 16,605
Goodwill impairment 4,324 - -
Amortization of deferred financing fees 875 - -
Deferred income taxes (1,686) (8,738) 1,707
Establishment of deferred taxes upon conversion to
C corporation - - 9,834
Decrease in unearned compensation 106 192 237
Gain on curtailment of health plan - - (7,799)
Change in operating assets and liabilities, net
of purchase accounting effects:
Accounts receivable 6,483 (1,387) (4,657)
Accounts receivable - related parties - - 651
Assets held for sale 1,205 - -
Other assets (704) (1,363) (1,261)
Trade accounts payable (6,350) 8,444 (3,226)
Trade accounts payable - related parties (251) (32) (690)
Claims and insurance accruals 1,671 4,314 2,010
Accrued expenses and other liabilities 2,476 (4,768) (2,144)
---------------- -------------- -------------
Net cash (used in) provided by operating (10,003) (7,447) 15,075
activities
---------------- -------------- -------------
Cash flows from investing activities:
Additions to property and equipment (2,050) (36,717) (7,024)
Proceeds from sale of property and equipment 9,003 4,204 1,466
Cash paid for disposition of subsidiary - - (8,341)
Cash paid for acquisition of business (174) (9,273) -
Repayment of advances to affiliate - - 8,648
---------------- -------------- -------------
Net cash provided by (used in) investing 6,779 (41,786) (5,251)
activities
---------------- -------------- -------------
Cash flows from financing activities:
Restricted cash 20,825 (20,825) -
Proceeds from long-term debt 9,493 14,937 47,198
Repayments of long-term debt (11,045) (8,459) (100,347)
Proceeds from short-term debt 11,499 34,300 -
Repayments of securitization facility (27,300) (7,000) -
Exercise of stock options 51 1,107 1,749
Proceeds from issuance of common stock 154 48 77,634
Payment of deferred financing fees (2,249) - -
Distributions paid - - (6,139)
---------------- -------------- -------------
Net cash provided by financing activities
1,428 14,108 20,095
---------------- -------------- -------------
Net (decrease) increase in cash (1,796) (35,125) 29,919
Cash and cash equivalents at beginning of year 2,144 37,269 7,350
---------------- -------------- -------------
Cash and cash equivalents at end of year $ 348 $ 2,144 $ 37,269
================ ============== =============
See accompanying notes to consolidated financial statements.
F-6
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars, except share and per share amounts)
(1) Business of the Company
(a) Basis of Presentation
Central Freight Lines, Inc. is a Nevada holding company that owns Central
Freight Lines, Inc., a Texas corporation, (collectively the "Company" or
"Central"). Central is an inter-regional less-than-truckload ("LTL") trucking
company that has operations in the Southwest, Northwest and Midwest regions of
the United States of America. Central maintains alliances with other similar
companies to complete transportation of shipments outside of its operating
territory.
(b) Initial Public Offering of Common Stock
On December 12, 2003, the Company completed an initial public offering (the
"Offering") of 8,500,000 shares of common stock at $15 per share, of which
5,700,000 were sold by the Company and 2,800,000 were sold by certain of the
Company's stockholders. The net proceeds to the Company from the sale of
5,700,000 shares of common stock, after deduction of associated expenses, were
$77,634.
On November 1, 2003, the Company converted from an S corporation to a C
corporation for federal income tax purposes. An undistributed S Corporation loss
(accumulated deficit) of $5,031 was transferred to additional paid-in capital.
(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.
The Company has entered into a merger agreement with North American Truck
Lines, LLC. Management believes that this transaction represents the best
available strategic alternative to address the Company's need for liquidity and
capital resources. (See note 20)
(3) Summary of Significant Accounting Policies and Practices
(a) Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of Central and
its subsidiary. All significant intercompany balances and transactions with the
consolidated subsidiary have been eliminated. As discussed in note 4, the
Company acquired and disposed of Central Refrigerated Service, Inc. ("Central
Refrigerated") during 2002. Central Refrigerated has been accounted for as a
discontinued operation.
F-7
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(b) Use of Estimates
Management of the Company makes estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reporting of
revenues and expenses during the reporting periods to prepare the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from those
estimates.
(c) Tires in Service
The Company capitalizes tires placed in service on new revenue equipment as
a part of the equipment cost. Replacement tires and costs for recapping tires
are expensed at the time the tires are placed in service.
(d) Property and Equipment
Property and equipment are recorded at cost. In the first quarter of 2003,
the Company revised the estimated useful lives and salvage values of certain
classes of property and equipment to more appropriately reflect how the assets
are expected to be used over time. In the first quarter of 2003, the Company
increased revenue equipment lives to five to 15 years from five to 12 years. If
the Company had not changed the estimated useful lives of such property and
equipment, additional depreciation expense of approximately $580 would have been
recorded during the year ended December 31, 2003. Accordingly, the change in
estimate resulted in an increase in income from continuing operations of
approximately $557 for the year ended December 31, 2003.
Net gains on the disposition of property and equipment were $353, $595 and
$446 for the years ended December 31, 2005, 2004 and 2003, respectively.
(e) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Other than assets held for sale, there were no
impairments during 2005, 2004 or 2003.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, the Company determined that, as of October
1, 2005 there was an impairment to the carrying value of goodwill. Based on this
analysis, the Company wrote off the remaining value of its goodwill - $4,324.
F-8
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(f) Revenue Recognition
The Company recognizes revenue and associated expenses 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.
At December 31, 2005 and 2004, there was approximately $2,050 and $4,100 of
services performed not yet invoiced, but included in accounts receivable.
(g) Income Taxes
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, if all or some portion of specific deferred tax
assets are determined more likely than not to be realizable, a valuation
allowance must be established for the amount of such deferred tax assets. In
2004, the Company established a $4,864 valuation allowance for deferred tax
assets. The Company increased its valuation allowance to $19,071 as of December
31, 2005.
On November 1, 2003, the Company converted from an S corporation to a C
corporation for federal income tax purposes. Prior to November 1, 2003, the
Company had elected S corporation status under which federal income tax
attributes flow directly to the stockholders. Accordingly, the accompanying
consolidated financial statements prior to November 1, 2003, do not include
provisions for federal income taxes.
(h) Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and the diverse range of industries
which they represent. As of December 31, 2005 and 2004, the Company had no
significant concentrations of credit risk.
F-9
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(i) Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is
described more fully in note 9. 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, net loss per
share, adjusted pro forma net loss and adjusted pro forma net loss per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, and as allowed by SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment of FASB No. 123, to stock-based employee compensation and had the
Company been a C corporation in 2003.
2005 2004 2003
--------------- --------------- -----------------
Net loss, as reported: $ (39,483 ) $ (22,848 )
Add:
Stock-based employee compensation expense included
in reported net loss, net of related tax effects 106 192
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards (2,645)* (511)
--------------- ---------------
Pro forma net loss $ (42,022) $ (23,167)
=============== ===============
Net loss per share
Basic
As reported $ (2.17) $ (1.27)
Pro forma (2.31) (1.29)
Diluted
As reported (2.17) (1.27)
Pro forma (2.31) (1.29)
Net loss, as reported: $ (5,905)
Add:
Stock-based employee compensation expense included
in reported net loss, net of related tax effects 237
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (395)
-----------------
Adjusted net loss (6,063)
Pro forma federal income tax adjustment (unaudited) 5,989
-----------------
Adjusted pro forma net loss (unaudited) $ (74)
=================
Adjusted pro forma net loss per share (unaudited):
Basic
As reported $ 0.00
Pro forma (0.01)
Diluted
As reported 0.00
Pro forma (0.01)
* See note 9
F-10
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
In 2002, the Company granted options at an exercise price that was less
than fair value, resulting in approximately $1,189 of compensation to employees,
which is being expensed over the vesting period of these options. Compensation
expense is calculated net of options that have been forfeited. Compensation
expense of $106, $192 and $237 was recognized in 2005, 2004, and 2003.
(j) Claims and Insurance Accruals
Claims accruals represent the estimated costs to repair and replace damaged
goods resulting from cargo claims. Insurance accruals reflect the estimated cost
of claims for bodily injury and property damage, workers' compensation and
employee health care not covered by insurance. These liabilities for
self-insurance are accrued based on claims incurred and on estimates of both
unasserted and unsettled claims which are assessed based on management's
evaluation of the nature of the claims and the Company's past claims experience.
The portion of the accrual classified as a current liability represents
management's estimate of that portion of the claims that will be settled in the
next twelve months. Total claims and insurance accruals were $27,442 and $25,081
at December 31, 2005 and 2004, respectively.
While management believes that amounts included in the accompanying
consolidated financial statements are adequate, such estimates may be more or
less than the amounts ultimately paid when the claims are settled. The estimates
are continually reviewed and any changes are reflected in current operations.
(k) Allowance for Doubtful Accounts and Revenue Adjustments
The Company establishes an allowance for doubtful accounts and an allowance
for revenue adjustments to reduce its accounts receivable balance to an amount
that it estimates is collectible from its customers. The allowance for doubtful
accounts is estimated by management based on factors such as aging of the
receivables and historical collection experience. At December 31, 2005 and 2004,
the allowance for doubtful accounts was $6,358 and $3,567, respectively.
The allowance for revenue adjustments is also established by management
based on factors such as historical trends in actual adjustments to revenue.
Revenue will be adjusted for various reasons, such as customer disputes, billing
and rating errors, and weight and inspection corrections. At December 31, 2005
and 2004, the allowance for revenue adjustments was $4,396 and $4,287,
respectively.
(l) Loss per Share and Pro Forma Loss per Share
Pro forma loss per share has been calculated as if the Company were a C
corporation for federal income tax purposes for 2003. Basic loss per share and
pro forma basic loss per share are calculated using the weighted average number
of shares outstanding. The weighted average shares outstanding used in the
calculation of diluted loss per share and pro forma diluted loss per share
include the dilutive effect of options to purchase common stock, calculated
using the treasury stock method.
(m) Recently Issued Accounting Standards
In December 2004, the FASB issued a revision to SFAS 123, with SFAS 123(R).
SFAS 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95, "Statement of
Cash Flows." SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. Pro forma disclosure, as included above,
is no longer an alternative. The Company is required to adopt SFAS 123(R) for
the fiscal year beginning January 1, 2006, and anticipates doing so under the
modified prospective method. The Company is currently evaluating the impact the
adoption of SFAS
F-11
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
123(R) will have, including giving consideration to changes made with the
planned merger agreement discussed in note 2 above, and because it will depend
on the levels of share-based payments granted in the future. However, had the
Company adopted SFAS 123(R) in prior periods, the impact of the standard would
have approximated the impact of SFAS 123 as described above in our disclosure of
pro forma net loss and net loss per share in this Note. In addition, in November
2005, the FASB issued final FASB Staff Position ("FSP") FAS No. 123(R)-3, ("FSP
123(R)-3") "Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards." FSP 123(R)-3 provides an alternative method of
calculating excess tax benefits from the method defined in SFAS 123(R) for
share-based payments. A one-time election to adopt the transition method of the
FSP is available to those entities adopting SFAS 123(R) using either the
modified retrospective or modified prospective method The Company is currently
evaluating (it has up to one year from the initial adoption of SFAS 123(R) to
make this one-time election)the potential impact of calculating the tax benefits
with this alternative method and has not determined which method it will adopt,
nor the expected impact on the consolidated financial statements.
Subject to the closing of the pending merger with NATL (see note 20), the
Company will cancel all remaining stock options and may record the remainder of
its unamortized stock-based employee compensation expenses in the second quarter
of 2006. This amount will approximate an additional expense of $584.
(4) Acquisition and Discontinued Operations
On April 22, 2002, the Company, through its subsidiary Central
Refrigerated, acquired substantially all of the operations and assets of Simon
Transportation Services Inc. DIP, and its subsidiaries, Dick Simon Trucking,
Inc. DIP and Simon Terminal LLC DIP in exchange for cash and the assumption of
certain liabilities. The purpose of the acquisition was to expand into the
refrigerated transportation business. The assets acquired and liabilities
assumed were recorded at estimated fair values as determined by the Company's
management based on information currently available and on assumptions as to
future operations. The total consideration paid was approximately $600 less than
the estimated fair value of the acquired assets and was recorded as a reduction
to property and equipment. In connection with this acquisition, the Company
borrowed approximately $3,300 and assumed certain notes payable to the Company's
principal stockholder and affiliates totaling $11,400. The following table
summarizes the estimated fair value of the assets acquired and liabilities
assumed in the acquisition:
Assets acquired:
Current assets.............................. $ 26,511
Property and equipment...................... 57,271
Other assets................................ 55
----
Total assets acquired.................... 83,837
Less:
Notes payable to stockholder and affiliate.. (11,400)
Liabilities assumed......................... (69,104)
Direct costs of the acquisition............. (727)
----
Cash consideration paid.................. $ 2,606
===========
F-12
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
The following unaudited pro forma consolidated results of operations for
fiscal 2002 assume the Central Refrigerated acquisition was completed on January
1, 2001:
2002
----
Net loss....... $ (30,023)
Loss per share:
Basic.......... (2.76)
Diluted........ (2.76)
Effective December 31, 2002, the Company transferred all of its outstanding
shares of Central Refrigerated to the principal stockholder of the Company and
one of his affiliates in exchange for the cancellation of approximately $14,700
of debt owed by the Company to them. The purchase price was based on the
beginning equity of Central Refrigerated. As such, the net book value of Central
Refrigerated assets exceeded the purchase price by the amount of current year
earnings of Central Refrigerated. Thus, the loss on disposal of Central
Refrigerated is offset by the earnings from its operations as follows:
Earnings from discontinued operations.......... $ 1,256
Loss on disposal............................... (1,256)
------
Net earnings from discontinued operations...... $ -
==========
Included in the earnings from discontinued operations is Central
Refrigerated depreciation expense of $4,845 for 2002.
On October 28, 2003, the Company amended its agreement with Central
Refrigerated and agreed to accelerate payment of approximately $8,341 originally
due to Central Refrigerated upon closing of the Company's initial public
offering. The $8,341 payment was made on October 28, 2003, and was recorded as
an additional loss on disposal of Central Refrigerated.
In March 2004, the Company expanded into the Pacific Northwest through the
purchase of selected terminal network and rolling stock of Eastern Oregon Fast
Freight ("EOFF"), a non-union LTL carrier that operated in the states of Oregon,
Washington, and Idaho. The selected assets of EOFF were purchased for
approximately $10,000, with the purchase price paid from cash reserves. The
assets acquired were recorded at fair market value as determined by management
based on information currently available and on assumptions as to future
operations.
Under the terms of the agreement, the Company paid approximately $7,000 of
the purchase price at closing, an additional $2,273 during 2004 and $174 during
2005. Due to a reduction in the value assigned to the assets purchased, the
Company adjusted the purchase price downward by $418 during 2005. The remaining
$135 is recorded on the consolidated balance sheet as part of short-term notes
payable at December 31, 2005, and was paid in the first quarter of 2006.
F-13
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(5) Property and Equipment
Property and equipment consist of the following at December 31, 2005 and
2004:
2005 2004
---- ----
Revenue and service equipment...................... $ 172,894 $ 177,141
Land............................................... 13,427 14,937
Structures and improvements........................ 31,613 36,209
Furniture and office equipment..................... 8,134 9,039
----- -----
226,068 237,326
Less accumulated depreciation and amortization..... 114,719 102,052
------- -------
$ 111,349 $ 135,274
=========== ===========
Revenue and service equipment includes assets under capitalized leases of
$39,227 and $55,346 at December 31, 2005 and 2004, respectively, and related
accumulated amortization of $16,595 and $20,518 at December 31, 2005 and 2004,
respectively.
In 2003, the Company closed certain terminals that were being financed by a
related party (see note 7(c)). These assets, which consist of land and
structures, are no longer in service and were classified as assets held for sale
in the amounts of $126 and $504 as of December 31, 2005 and 2004, respectively,
in the accompanying consolidated balance sheets. During 2005 and 2004, $252 and
$302, respectively, of these properties were sold and accounted for as a
reduction of the related party financing.
Also included in assets held for sale is a terminal, which is not financed
by a related party, in Phoenix, Arizona. The book value of this asset totaled
$3,220 and $3,616 as of December 31, 2005 and 2004, respectively. The Phoenix
terminal is currently under a sales contract that is expected to close on or
near the end of the first quarter of 2006.
(6) Accrued Expenses
Current accrued expenses consist of the following at December 31, 2005 and 2004:
2005 2004
---- ----
Employee related compensation and benefits..... $ 5,361 $ 5,703
Claims and insurance accruals.................. 16,260 15,435
Other accrued expenses......................... 4,134 1,912
----- -----
$ 25,755 $ 23,050
========== ==========
(7) Debt and Related Party Financing
(a) Long-Term Debt
Long-term debt consists of the following at December 31, 2005, and 2004:
2005 2004
---- ----
Real estate mortgage notes $ 8,583 $ -
Capital lease obligations (see note 13).. 22,543 32,842
------ ------
31,126 32,842
Less current portion..................... 8,809 10,958
----- ------
$ 22,317 $ 21,884
========== =========
F-14
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
On July 13, 2005, the Company completed a mortgage financing secured by
three other properties. This financing generated approximately $7,900 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%. In January
2006, the Company sold the Portland, Oregon terminal (one of the three
properties) and paid off $4,690 of this debt. Total payments per year, after the
Portland, Oregon sale, are approximately $400 with a final payment of
approximately $3,000.
(b) Short-Term Notes Payable
On April 30, 2002, the Company entered into a $40,000 revolving accounts
receivable securitization facility (the "Securitization Facility") that was set
to expire on April 27, 2005. While the Securitization Facility was in place, the
Company sold, on a revolving basis, its interests in accounts receivable to
Central Receivables, a then wholly-owned, special purpose subsidiary. The assets
and liabilities of Central Receivables were included in the Company's
consolidated financial statements. The Securitization Facility allowed the
Company to receive up to $40,000 of proceeds, subject to eligible receivables
and pay a service fee recorded as interest expense, as defined in the agreement.
The Company was required to pay commercial paper interest rates plus an
applicable margin on the proceeds received. Interest was generally payable
monthly. The Securitization Facility included certain restrictions and financial
covenants. The Company was required to pay a commitment fee equal to 0.35% per
annum of 102% of the facility limit minus the aggregate principal balance, as
well as an administrative fee equal to 0.15% per annum of the uncommitted
balance. As of December 31, 2004 there were borrowings of $27,300 and at
December 31, 2003, there were no borrowings outstanding under the Securitization
Facility. The effective interest rate at December 31, 2004 was 2.4%.
On July 28, 2004, the Company entered into a $30,000 amended and restated
revolving credit facility with SunTrust Bank (the "Amended and Restated SunTrust
Facility"). On November 5, 2004, the Company executed a first amendment to the
Amended and Restated SunTrust Credit Facility. Under the first amendment to the
Amended and Restated SunTrust Facility, the Company could receive up to an
aggregate of $30,000 of proceeds in the form of letters of credit, only. The
Amended and Restated SunTrust 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
applicable margins for both types of loans varied depending on the Company's
lease adjusted leverage ratio. Interest was payable in periods from one to three
months at the Company's option. The Amended and Restated SunTrust Facility was
collateralized by certain revenue equipment, and letters of credit that were
issued were collateralized by cash collateral. The facility contained, among
other things, certain financial and non-financial covenants, and was set to
mature on April 30, 2006. The Company was required to pay a commitment fee equal
to 0.50% per annum on the daily unused Amended and Restated SunTrust Facility as
well as a letter of credit fee equal to 0.25% per annum on the average daily
amount of the letters of credit. The Company was also required to cash
collateralize its outstanding letters of credit in the amount of $20,825 as of
December 31, 2004.
In March 2004, the Company acquired certain assets of EOFF for
approximately $10,000 (See note 4). The remaining purchase price liability from
this transaction is $135 and $808 at December 31, 2005 and 2004, respectively,
which is recorded on the accompanying consolidated balance sheet as part of
short-term notes payable. The Company paid this remaining liability in the first
quarter of 2006.
On January 31, 2005, the Company entered into a four-year senior secured
revolving credit facility (as amended on May 12, 2005 and November 9, 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. The New Credit Facility replaced both
the Securitization Facility and the Amended and Restated SunTrust Facility.
F-15
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
Subject to the terms of the New Credit Facility, the maximum revolving
borrowing limit is the lesser of (a) $60,000, or (b) 85% of the Company's net
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 the Company between January 31, 2005 and
November 9, 2005, minus $10,000. Letters of Credit under the New Credit Facility
are subject to a sub-limit of $40,000.
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. The effective interest rate at December 31, 2005
was 10.0%. 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 provides for an unused line fee of 0.25% to 0.375%, based on aggregate
amounts outstanding.
The New Credit Facility is secured by substantially all of the Company's
assets, other than certain revenue equipment and real estate that is (or may in
the future become) subject to other financing.
The New Credit Facility contains a requirement that $10,000 of availability
be maintained. The New Credit Facility also 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 the Company's borrowing availability is in excess of
$10,000, financial covenants will not apply. In essence, the financial covenants
are irrelevant because they are only tested if availability is below $10,000,
and if the Company is below $10,000 the Company would already be in violation of
the New Credit Facility. At December 31, 2005, the Company was not in compliance
with certain of these irrelevant covenants. However since the borrowing
availability was in excess of $10,000, the financial covenants did 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 interpretations of Emerging Issues Task Force 95-22
("EITF 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 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 it 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.
(c) Related-Party Financing
In 1998, the Company entered into an agreement with Southwest Premier
Properties, L.L.C., 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.
F-16
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
The properties sold and leased back are accounted for as a financing
arrangement. The annual lease payments of $6,177 and $6,197 in 2005 and 2004,
respectively, have been recorded as interest expense. During 2005 and 2004, $252
and $302, 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 $22,600 and $22,852 at December
31, 2005 and 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.
(d) Aggregate Maturities
Aggregate maturities of long-term debt, related party financing and capital
lease obligations for each of the five years following December 31, 2005, and
thereafter are as follows:
Years ending December 31:
2006........................ $ 8,809
2007........................ 6,180
2008........................ 2,668
2009........................ 4,587
2010........................ 7,750
Thereafter.................. 23,732
------
$ 53,726
===========
(8) Stockholders' Equity
During 2003, the Company amended its Articles of Incorporation, and all
Class A and Class B common stock were combined into a single class of stock. All
shares existing, prior to the public offering, were canceled and re-issued with
shares of the new publicly traded company. The number of authorized common
shares was increased from 60,000,000 to 100,000,000. The newly issued shares
have a par value of $0.001 per share.
At December 31, 2005, there were 18,283,892 shares of common stock issued
and outstanding. 5,700,000 newly issued shares of the Company were sold during
the initial public offering in December 2003 along with 2,800,000 sold by
selling stockholders.
In December 2003, the authorized number of preferred shares was also
increased from 5,000,000 to 10,000,000. No shares of preferred stock have been
issued.
(9) Stock-Based Compensation
In 1997, the Company established an incentive stock plan that provides
multiple alternatives to compensate eligible employees and nonemployee directors
with Company common stock. Under the plan, the Company is authorized to award,
in aggregate, options to purchase not more than 5,000,000 shares of its common
stock. Grants to optionees of qualified stock options shall have a per share
exercise price of no less than fair value of the underlying common stock on the
date of grant. At December 31, 2005, there were 991,258 shares available for
granting under the plan.
F-17
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
The awards are issuable at the discretion of the board of directors. All
option grants to date expire 10 years from the date of grant. Options granted
under the plan to senior management (854,000 outstanding at December 31, 2005)
generally vest 20% on the first anniversary of the date of grant and 20% on each
subsequent anniversary until fully vested. On January 7, 2002, the Company
granted 1,260,000 options at an exercise price of $1.35 to its newly hired CEO
as part of his employment agreement. These options vest 50% at grant date and
20% per year beginning January 7, 2003 (756,000 options were exercised in the
fourth quarter of 2003). Options granted under the plan to upper management
(258,695 outstanding at December 31, 2005) vest 20% on the fifth anniversary of
the date of grant and 20% on each subsequent anniversary until fully vested.
Termination of the employee for any reason other than death, disability or
certain cases of retirement causes the unvested portion of the award to be
forfeited.
At December 31, 2005, there were 60,000 options outstanding granted to the
Company's board of directors. All of these options are fully vested. At December
31, 2005, options outstanding for all non-management employees and others
totaled 253,550. These options generally vest 20% on the first anniversary of
the date of grant and 20% on each subsequent anniversary until fully vested.
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 16, 2005, which was $2.49. Options to purchase approximately
624,000 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, 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.
Stock option activity during the years ended December 31, 2003, 2004, and
2005 is as follows:
Weighted
Number of Average
Shares Exercise Price
------ --------------
Balance at December 31, 2002..... 3,037,257 $ 1.96
Granted.......................... 305,000 8.22
Exercised........................ (1,064,327) 1.70
Forfeited........................ (227,767) 1.79
--------
Balance at December 31, 2003..... 2,050,163 3.05
---------
Granted.......................... 342,758 7.30
Exercised........................ (545,686) 2.25
Forfeited........................ (518,367) 4.25
--------
Balance at December 31, 2004..... 1,328,868 4.00
---------
Granted.......................... 292,500 2.46
Exercised........................ (29,228) 1.76
Forfeited........................ (165,895) 6.72
--------
Balance at December 31, 2005 1,426,245 $ 3.42
=========
F-18
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
The fair value of options granted was estimated using the Black-Scholes
option pricing model with the following assumptions for 2003, 2004, and 2005
grants to employees: risk-free interest rate of 4.75%, 3.38%, and 4.12%,
respectively; 0%, 6.9%, and 37.8% expected volatility, respectively; an expected
life of approximately 6.5 years and a zero dividend yield. The fair values of
options granted were as follows:
Weighted Average
----------------
Fair Value
Exercise Price of Option
-------------- ---------
Granted during 2003.... $ 8.22 $ 11.27
Granted during 2004.... 7.30 4.43
Granted during 2005.... 2.46 1.13
Options outstanding and exercisable are summarized as follows:
December 31, 2005
-------------------------------------------------------------------------------
Weighted
Average
Weighted Remaining Weighted
Exercise Options Average Contractual Options Average
Price Outstanding Exercise Price Life Exercisable Exercise Price
----- ----------- -------------- ---- ----------- --------------
$ 1.35 679,000 $ 1.35 2.6 353,000 $ 1.35
1.78 40,000 1.78 9.8 - 1.78
2.15 - 2.70 328,045 2.47 3.5 274,634 2.51
5.77 - 5.86 45,000 5.79 7.2 45,000 5.79
6.50 42,150 6.50 5.4 25,710 6.50
7.35 - 7.80 242,050 7.43 8.6 242,050 7.43
15.00 50,000 15.00 8.0 50,000 15.00
------ ------ -----
1,426,245 3.42 990,394 4.18
========= =======
At December 31, 2005, 2004, and 2003, options exercisable were 990,394,
291,469 and 559,054 respectively, and the weighted average exercise price of
these options was $4.18, $2.89 and $2.39 respectively.
(10) Income Taxes
On November 1, 2003, the Company converted its federal income tax status
from a subchapter S corporation to a C Corporation
Prior to November 1, 2003, the Company had elected to be taxed as a
subchapter S corporation for federal income tax purposes. Accordingly, the
consolidated financial statements prior to November 1, 2003, did not include the
effects of federal income taxes.
The components of income tax (benefit) expense consists of the following
for the years ended December 31:
2005 2004 2003
---- ---- ----
Current - Federal.... $ - $ - $ (110)
Deferred -Federal... (16,379) (12,207) 10,867
Current - state...... - 265 189
Deferred - state..... 486 (1,395) 647
Deferred - valuation allowance 14,207 4,864 -
------ ----- -----
$(1,686) $(8,473) $11,593
======= ======= =======
F-19
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2005, and 2004, are as follows:
2005 2004
---- ----
Deferred tax assets:
Current:
Accounts receivable and other current assets.... $ 4,788 $ 3,850
Accrued expenses and other current liabilities.. 5,732 5,169
----- -----
10,520 9,019
Noncurrent:
Other assets.................................... 724 -
Lease obligations............................... 16,444 23,077
Other liabilities............................... 4,255 3,762
Net operating loss carryforward................. 21,841 9,390
------ -----
43,264 36,229
Less valuation allowance........................ 19,071 4,864
------ -----
Total deferred tax assets....................... 34,713 40,384
------ ------
Deferred tax liabilities:
Current:
Prepaid expenses............................. (1,685) (1,360)
Noncurrent:
Other assets ................................. - (205)
Property and equipment due to differences in
depreciation and basis......................... (33,028) (40,505)
------- -------
(33,028) (40,710)
------- -------
Total deferred tax liabilities................... $(34,713) (42,070)
-------- -------
Net deferred tax liability ...................... $ - $ (1,686)
======== ========
At December 31, 2005, the Company has a federal net operating loss
carryforward of approximately $56,001 available to reduce future taxable income.
The net operating losses generated in 2003, 2004 and 2005 were $3,313, $20,945
and $31,743, respectively, and expire in 2023, 2024 and 2025 if not utilized.
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, if all or some portion of specific deferred tax
assets are determined not to be realizable, a valuation allowance must be
established for the amount of such deferred tax assets. In 2004, the Company
established a $4,864 valuation allowance for deferred tax assets. This valuation
allowance was increased to $19,071 as of December 31, 2005.
F-20
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate from continuing operations is as follows:
2005 2004 2003
---- ---- ----
Federal income tax at statutory rate (35%) ..... $ (14,409) $ (10,962) $ 4,910
Permanent differences and other................ 209 628 190
State income tax ............................... (1,693) (1,253) 836
Reversal of Contested Liability Trust .......... - (1,750) -
Net change in valuation allowance............... 14,207 4,864 -
Conversion from S to C corp. net of deferred.... - - 5,657
----- ----- -----
Total income tax benefit........................ $ (1,686) $ (8,473)$(11,593)
========= ========= ========
During 2004, the IRS disallowed certain tax deductions taken by the S
corporation stockholders pursuant to a contested liability trust. As a result of
the disallowance of such deductions, the C corporation's tax basis was increased
resulting in a deferred tax benefit of $1,750.
(11) Employee Benefit Plans
The Company maintains a defined contribution employee retirement plan,
which includes a 401(k) option, under which employees are eligible to
participate after they complete 90 days of service. Employees are eligible for
Company matching contributions after one year of service. The Company's
contributions to the plan each year are made at the discretion of the Company's
board of directors. For the years ended December 31, 2005, 2004, and 2003, the
Company's contributions to the plan, including matching 401(k) contributions,
were $1,952, $2,113 and $2,199, respectively.
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. As of December 31, 2005, approximately
seventy-six thousand shares have been issued.The Plan is administered and the
shares held by Computershare Trust Company, Inc.
The Company also sponsors a health plan that provides postretirement
medical benefits to full-time employees who meet minimum age and service
requirements. The plan is 100% contributory, with retiree contributions adjusted
annually to cover all projected costs. The Company does not fund any of the
retiree costs. The plan has no assets, and accordingly, no reconciliation of
fair value of plan assets is provided.
F-21
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(12) Fair Value of Financial Instruments
At December 31, 2005 and 2004, the carrying value of the New Credit
Facility and the Securitization Facility approximates fair value because amounts
outstanding bear interest at current prime related and commercial paper rates,
respectively. At December 31, 2005 and 2004, the fair value of the related party
financing arrangement cannot be determined without incurring excessive costs due
to the related party nature of the instrument. At December 31, 2005 and 2004,
the carrying value of other long-term debt approximates fair value because the
debts bear interest at current commercial paper rates.
At December 31, 2004, the carrying value of cash equivalents approximated
fair value due to the short-term nature of the investment.
(13) Leases
In 1998, the Company entered into agreements with its principal stockholder
to lease the land and related improvements of two terminals. The leases are for
10 years, cancelable within one month's notice by either party, with a renewal
option for an additional ten-year term. The annual lease payments over the
initial term of the lease are $297. The leases have been accounted for as
operating leases.
In 1999, the Company entered into agreements to lease one terminal from
Southwest Premier for 10 years with a renewal option for an additional 10 years.
The annual lease payments over the initial term of the lease are $139. The lease
has been accounted for as an operating lease.
In 2001, the Company entered into agreements to lease two terminals from
Southwest Premier for 76 and 77 months with a renewal option for an additional
10 years. The annual lease payments over the initial term of the leases are
$445. These leases have been accounted for as operating leases.
The Company leases various terminal and office facilities, tractors,
trailers and other equipment under noncancelable operating leases. Rental
expense was $6,088, $6,092 and $5,084 for the years ended December 31, 2005,
2004, and 2003, respectively. Included in these amounts are $1,809, $1,795, and
$1,903 in 2005, 2004, and 2003, respectively, paid to affiliates of the Company
for the rental of revenue and service equipment, terminals and office space.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and capital leases
(mainly revenue equipment) at December 31, 2005 are:
Capital Operating
Leases Leases
------ ------
Year ending December 31:
2006................................ $ 9,290 $ 6,641
2007................................ 6,123 5,409
2008................................ 2,700 3,449
2009................................ 4,545 1,894
2010................................ 529 1,560
Thereafter 1,162 4,630
----- -----
Total minimum lease payments..... 24,349 $ 23,583
==========
Less amount representing interest.... 1,806
-----
$ 22,543
=========
F-22
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(14) Cash Flow Information
Short-term interest-bearing instruments with maturities of three months or
less at the date of purchase are considered cash equivalents.
During 2005, 2004, and 2003, the Company paid cash for interest of $10,072,
$7,892, and $9,852, respectively.
During 2005, 2004, and 2003, the Company paid cash for income taxes of $45,
$311, and $132, respectively.
During 2005, 2004, and 2003, the Company leased certain equipment under
capital leases in the amount of $11,231, $14,938, and $5,672, respectively.
During 2005 and 2004, the Company had non-cash reduction of properties held
for sale of $252 and $302, respectively, which were accounted for as a reduction
of the related party financing.
(15) 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 of its 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 the Company's 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. At present, this motion is still pending and no hearing date has been
set.
On August 9 and 10, 2004, two purported derivative actions were filed
against the Company, as nominal defendant, and against certain of the Company's
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.
On February 1, 2006, a purported derivative action was filed against the
Company, by the same plaintiff that filed the actions in the preceding
paragraph, as nominal defendant, and against its current directors. This action
was filed in the District Court of McLennan County, Texas and generally alleges
breach of fiduciary duty and conflicts of interest on the part of the directors
in connection with their approval of the pending merger transaction with North
American Truck Lines, LLC. The purported derivative action seeks declaratory,
injunctive, and other relief preventing consummation of the pending merger
transaction.
F-23
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
On January 20, 2006, a lawsuit was filed against the Company, and certain
of the Company's officers, directors, and former directors. This action was
filed in the District Court of McLennan County, Texas. The lawsuit also includes
a purported derivative action on behalf of the Company and its stockholders
against the officers, directors, and former directors, generally alleging breach
of fiduciary duty, fraud, bad faith, and conspiracy.
The Company does not believe there is any factual or legal basis for the
allegations against the Company, and the Company intends to vigorously defend
itself against these lawsuits. The Company has informed its insurance carrier
and has retained outside counsel to assist in the Company's defense. 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.
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.
(16) Related-Party Transactions
During the years ended December 31, 2005, 2004, and 2003, the Company
incurred approximately $14,627, $14,571, and $18,582, respectively, for
transportation services provided by companies for which the Company's principal
stockholder was the former Chairman of one of the companies. At December 31,
2005, and 2004, the Company had payables of $737 and $988, respectively, for
these transportation services.
During the years ended December 31, 2005, 2004, and 2003, the Company
incurred $305, $274 and $12, respectively, to an entity owned by a stockholder
of the Company for legal services. The Company also paid $525 for legal services
in 2003, which are related to the initial public offering and accounted for as a
reduction of proceeds.
F-24
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
During the year ended December 31, 2003, the Company had tire sales of
approximately $962 to an affiliate. In 2004 and 2005, the Company did not have
any transactions of this nature.
See also notes 4, 7, 8, and 13 for additional disclosures regarding related
party transactions.
(17) Loss per Share and Pro Forma Income Per Share
2005 2004 2003
--------- ---------- ----------
Net (loss) income:
Net loss........................ $ (39,483) $ (22,848) $ (5,905)
========= =========
Pro forma federal tax adjustment
(unaudited) 14,268
----------
Pro forma net income from
continuing operations (unaudited) 8,363
Loss from discontinued operations (8,341)
----------
Pro forma net income (unaudited) $ 22
==========
Shares:
Basic shares (weighted-average shares
outstanding).................. 18,230,099 17,970,595 11,162,814
Stock options.................. - - 935,124
Other.......................... - - 4,796
----------- ---------- ----------
Diluted shares................. 18,230,099 17,970,595 12,102,734
========== ========== ==========
Net loss per share:
Basic $ (2.17) (1.27) -
Diluted $ (2.17) (1.27) -
Pro forma basic income per share
(unaudited)................... $ 0.00
Pro forma diluted income per share
(unaudited).................... $ 0.00
For the year ended December 31, 2005 and 2004, the Company had 1,426,245
and 1,328,868 stock options that were anti-dilutive, respectively. There were no
anti-dilutive options in 2003. As a result, the assumed shares under the
treasury stock method related to anti-dilutive options have been excluded from
the calculation of diluted loss per share.
F-25
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(18) Pro Forma C Corporation Data (unaudited)
On November 1, 2003, the Company converted from an S corporation to a C
corporation for federal income tax purposes. The unaudited pro forma C
corporation data for the year ended December 31, 2003 are based on the
historical consolidated statement of operations and gives effect to pro forma
income taxes as if the Company was a C corporation for the year presented.
(19) Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and Net End of
of Year Expenses Writeoffs Year
------- -------- --------- ----
Allowance for doubtful accounts
Year ended December 31, 2005....... $ 3,567 $ 3,155 $ 364 $ 6,358
Year ended December 31, 2004....... 2,452 1,669 554 3,567
Year ended December 31, 2003....... 2,294 876 718 2,452
Allowance for revenue adjustments
Year ended December 31, 2005....... $ 4,287 $ 9,841 $ 9,732 $ 4,396
Year ended December 31, 2004....... 2,901 11,355 9,969 4,287
Year ended December 31, 2003....... 2,850 12,356 12,305 2,901
Balance at Charged to Balance at
Beginning Costs and Claims End of
of Year Expenses Paid Year
------- -------- ---- ----
Cargo claims accruals
Year ended December 31, 2005...... $ 5,457 $ 13,127 $ 13,866 $ 4,718
Year ended December 31, 2004...... 3,788 19,423 17,754 5,457
Year ended December 31, 2003...... 4,039 10,326 10,577 3,788
Insurance accruals
Year ended December 31, 2005...... $ 19,624 $ 37,575 $ 34,475 $ 22,724
Year ended December 31, 2004...... 16,979 32,781 30,136 19,624
Year ended December 31, 2003...... 14,717 28,949 26,687 16,979
(20) Subsequent Events
(a) Pending Merger with North American Truck Lines, LLC
On January 30, 2006, the Company announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement"), with North American Truck
Lines, LLC, a Nevada limited liability company ("NATL"), and Green Acquisition
Company, a Nevada corporation ("Purchaser"), pursuant to which Purchaser will
merge with and into the Company (the "Merger"), with the Company continuing as
the surviving corporation. Purchaser is a wholly-owned subsidiary of NATL. Both
Purchaser and NATL are controlled by Mr. Jerry Moyes.
Pursuant to the Merger Agreement, at the effective time of the Merger, all
of the Company's stockholders, other than Mr. Moyes and certain Moyes family
trusts will receive cash, from the Purchaser, in an amount equal to $2.25 per
share of the Company's common stock. Holders of options with an exercise price
below $2.25 will receive the difference between the exercise price and $2.25
multiplied by the number of shares of common stock subject to that option.
Holders of options with an exercise price above $2.25 will receive $0.01
multiplied by the number of shares of common stock subject to that option.
F-26
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
The Merger is subject to a number of conditions, including approval of the
Merger Agreement and Merger by holders of a majority of the outstanding shares
of common stock held by the Company's stockholders other than Mr. Moyes and
certain Moyes family trusts and resolution of pending stockholder litigation.
The Company may terminate the Merger Agreement under certain circumstances,
including if its board of directors determines in good faith that it has
received an unsolicited bona fide "superior proposal," as defined in the Merger
Agreement, and otherwise complies with certain terms of the Merger Agreement. In
connection with such termination, the Company must pay a fee of $1,000 to
Purchaser and reimburse Purchaser's expenses up to $500.
(b) Terminal Sales
In January 2006, the Company sold its terminal in Portland, Oregon to
Con-Way Transportation Services. Following the sale, the Company may lease up to
30 freight doors from Con-Way. In February 2006, the Company realized net
proceeds from the sale of $3,337, reported a gain on sale of $1,944 and paid off
a related mortgage of $4,690.
In January 2006, the Company entered into an agreement with Old Dominion
Freight Lines with respect to the sale of its dormant terminal located in
Phoenix, AZ. The Company expects net proceeds from the sale of approximately
$3,000. In December 2005, the Company wrote down the net book value of this
terminal to reflect the selling price. The amount of the write down was $396.
F-27
EXHIBIT INDEX
Number Description
2.1 Amended and Restated Asset Purchase Agreement dated April 18, 2002, by and
among Central Refrigerated Service, Inc., a Nebraska corporation, and Simon
Transportation Services Inc., a Nevada corporation, and its subsidiaries,
Dick Simon Trucking, Inc., a Utah corporation, and Simon Terminal, LLC, an
Arizona limited liability company. (Incorporated by reference to Exhibit
2.1 to the Company's Registration Statement on Form S-1 No. 333-109068.)
2.2(a) Separation Agreement dated November 30, 2002, by and among Central
Freight Lines, Inc., a Texas corporation, Central Refrigerated Service,
Inc., a Nebraska corporation, the Jerry and Vickie Moyes Family Trust,
Interstate Equipment Leasing, Inc., an Arizona corporation, and Jerry Moyes
individually. (Incorporated by reference to Exhibit 2.2(a) to the Company's
Registration Statement on Form S-1 No. 333-109068.)
2.2(b) Amendment Number One to Separation Agreement dated December 23, 2002, by
and among Central Freight Lines, Inc., a Texas corporation, Central
Refrigerated Service, Inc., a Nebraska corporation, the Jerry and Vickie
Moyes Family Trust, Interstate Equipment Leasing, Inc., an Arizona
corporation, and Jerry Moyes individually. (Incorporated by reference to
Exhibit 2.2(b) to the Company's Registration Statement on Form S-1
No. 333-109068.)
2.2(c) Amendment Number Two to Separation Agreement effective as of October 28,
2003, by and among Central Freight Lines, Inc., a Texas corporation,
Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry and
Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc. an Arizona
corporation, and Jerry Moyes individually. (Incorporated by reference to
Exhibit 2.2(c) to the Company's Registration Statement on Form S-1
No. 333-109068.)
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-K.)
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated
by reference to Exhibit 3.2 to this Report on Form 10-K.)
10.1(a)+ Central Freight Lines, Inc. 401(k) Savings Plan. (Incorporated by
reference to Exhibit 10.1(a) to the Company's Registration Statement on
Form S-1 No. 333-109068.)
10.1(b)+ First Amendment to Central Freight Lines, Inc. 401(k) Savings Plan.
(Incorporated by reference to Exhibit 10.1(b) to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.2(a)+ Central Freight Lines, Inc. Incentive Stock Plan. (Incorporated by
reference to Exhibit 10.2(a) to the Company's Registration Statement on
Form S-1 No. 333-109068.)
10.2(b)+ Form of Stock Option Agreement. (Incorporated by reference to Exhibit
10.28 to the Company's Report on Form 10-Q for the quarterly period ended
July 2, 2005.)
10.3+ Form of Outside Director Stock Option Agreement. (Incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on Form
S-1 No. 333-109068.)
IV-1
10.4(a) First Amended and Restated Revolving Credit Loan Agreement, dated July
28, 2004, by and between Central Freight Lines, Inc., a Texas corporation,
and SunTrust Bank, a Georgia state banking corporation. (Incorporated by
reference to Exhibit 10.4(a) to the Company's Report on Form 10-Q for the
quarterly period ended July 3, 2004.)
10.4(b) Revolving Credit Note, dated July 28, 2004, by Central Freight Lines,
Inc., a Texas corporation, in favor of SunTrust Bank, a Georgia state
banking corporation. (Incorporated by reference to Exhibit 10.4(b) to the
Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.)
10.4(c)* First Amendment to First Amended and Restated Revolving Credit Loan
Agreement, dated July 28, 2004, by and between Central Freight Lines, Inc.,
a Texas corporation, and SunTrust Bank, a Georgia state banking
corporation. (Incorporated by reference to Exhibit 10.4(c) to the Company's
Report on Form 10-K for the year ended December 31, 2004.)
10.5 Guaranty, dated July 28, 2004, by Central Freight Lines, Inc., a Nevada
corporation, in favor of SunTrust Bank, a Georgia state banking
corporation. (Incorporated by reference to Exhibit 10.5 to the Company's
Report on Form 10-Q for the quarterly period ended July 3, 2004.)
10.6 Security Agreement, dated July 28, 2004, by and between Central Freight
Lines, Inc., a Texas corporation and Suntrust Bank, a Georgia state banking
corporation. (Incorporated by reference to Exhibit 10.6 to the Company's
Report on Form 10-Q for the quarterly period ended July 3, 2004.)
10.7(a) Loan Agreement dated April 30, 2002, by and among Central Receivables,
Inc., a Nevada corporation, Three Pillars Funding Corporation, a Delaware
corporation, and Suntrust Capital Markets, Inc., a Tennessee corporation,
as agent. (Incorporated by reference to Exhibit 10.8(a) to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.7(b) First Amendment to Loan Agreement dated April 29, 2003, by and among
Central Receivables, Inc., a Nevada corporation, Three Pillars Funding
Corporation, a Delaware corporation, and SunTrust Capital Markets, Inc., a
Tennessee corporation, as agent. (Incorporated by reference to Exhibit
10.8(b) to the Company's Registration Statement on Form S-1
No. 333-109068.)
10.8 Receivables Purchase Agreement dated April 30, 2002, by and between Central
Freight Lines, Inc., a Texas corporation, and Central Receivables, Inc., a
Nevada corporation. (Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.9 Second Amended and Restated Master Lease Agreement - Parcel Group A dated
February 20, 2003 by and between Southwest Premier Properties, L.L.C., a
Texas limited liability company, and Central Freight Lines, Inc., a Texas
corporation. (Incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.10 Second Amended and Restated Master Lease Agreement - Parcel Group B dated
February 20, 2003 by and between Southwest Premier Properties, L.L.C., a
Texas limited liability company, and Central Freight Lines, Inc., a Texas
corporation. (Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.11 Amended and Restated Lease dated February 20, 2003 by and between JVM
Associates and Central Freight Lines, Inc., a Texas corporation.
(Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.12 Amended and Restated Lease dated February 20, 2003 by and between Jerry
and Vickie Moyes and Central Freight Lines, Inc., a Texas corporation.
(Incorporated by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 No. 333-109068.)
IV-2
10.13 Amended and Restated Lease dated February 20, 2003 by and between Jerry
and Vickie Moyes and Central Freight Lines, Inc., a Texas corporation.
(Incorporated by reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.14+ Employment Agreement dated January 7, 2002, by and between Central
Freight Lines, Inc., a Texas corporation, and Robert V. Fasso.
(Incorporated by reference to Exhibit 10.15 to the Company's Registration
Statement on Form S-1 No. 333-109068.)
10.15+ Employment Offer Letter to Jeffrey A. Hale, dated June 7, 2002, by
Central Freight Lines, Inc. (Incorporated by reference to Exhibit 10.19 to
the Company's Registration Statement on Form S-1 No. 333-109068.)
10.16(a) Indemnification Agreement, effective as of December 31, 2002, by and
between Central Freight Lines, Inc., a Texas corporation, and Central
Refrigerated Service, Inc., a Nebraska corporation. (Incorporated by
reference to Exhibit 10.23(a) to the Company's Registration Statement on
Form S-1 No. 333-109068.)
10.16(b) Amendment Number One to Indemnification Agreement effective as of
December 31, 2002, by and between Central Freight Lines, Inc., a Texas
corporation, and Central Refrigerated Service, Inc., a Nebraska
corporation. (Incorporated by reference to Exhibit 10.23(b) to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.17+ Employment Offer Letter to Walt Ainsworth, dated July 15, 2004, by
Central Freight Lines, Inc. (Incorporated by reference to Exhibit 10.24 to
the Company's Report on Form 10-K for the year ended December 31, 2004.)
10.18(a) Amended and Restated Credit Agreement, dated March 24, 2005, by and
among the Financial Institutions named Therein as the Lenders, Bank of
America, N.A. as the Agent, and Central Freight Lines, Inc., a Texas
corporation, as the Borrower. (Incorporated by reference to Exhibit 10.26
to the Company's Report on Form 10-Q for the quarterly period ended April
2, 2005.)
10.18(b) First Amendment to Amended and Restated Credit Agreement, dated May 12,
2005, by and among Central Freight Lines, Inc., a Texas corporation,
Required Lenders under the Credit Agreement, Bank of America, N.A., in its
capacity as Agent for Lenders under the Credit Agreement. (Incorporated by
reference to Exhibit 10.27 to the Company's Report on Form 10-Q for the
quarterly period ended April 2, 2005.)
10.18(c)* Second Amendment to Amended and Restated Credit Agreement, dated
November 9, 2005, by and among Central Freight Lines, Inc., a Texas
corporation, Required Lenders under the Credit Agreement, Bank of America,
N.A., in its capacity as Agent for Lenders under the Credit Agreement.
10.19 Obligation Guaranty dated January 31, 2005, by Central Freight Lines,
Inc., a Nevada corporation, for the benefit of Bank of America, N.A., in
its capacity as Agent for the benefit of the Lenders. (Incorporated by
reference to Exhibit 10.25 to the Company's Current Report on Form 8-K
filed on February 4, 2005.)
10.20 Form of Director Indemnification Agreement. (Incorporated by reference to
Exhibit 10.29 to the Company's Report on Form 10-Q for the quarterly period
ended October 1, 2005.)
11.1 Schedule of Computation of Net Income Per Share (Incorporated by reference
to Note 17, Loss Per Share, in the Notes to Consolidated Financial
Statements contained in this Report on Form 10-K.)
21.1* Subsidiary of Central Freight Lines, Inc., a Nevada corporation.
IV-3
23.1* Consent of McGladrey & Pullen LLP.
23.2* Consent of KPMG LLP.
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.
+ Management contract or compensatory plan or arrangement.
IV-4
EXHIBIT 10.18(C)
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") is entered into as of November 9, 2005, among CENTRAL FREIGHT
LINES, INC., a Texas corporation ("Borrower"), Required Lenders under the Credit
Agreement, BANK OF AMERICA, N.A., in its capacity as Agent for Lenders under the
Credit Agreement (the "Agent"), and the Parent under the Credit Agreement
(hereinafter defined).
Reference is made to the Amended and Restated Credit Agreement, dated as of
March 24, 2005 (as amended, modified, and supplemented, the "Credit Agreement"),
among the Borrower, the Agent, and Lenders party thereto. Unless otherwise
defined in this Amendment, capitalized terms used herein shall have the meanings
set forth in the Credit Agreement; all Section references herein are to Sections
in the Credit Agreement; and all Paragraph references herein are to Paragraphs
in this Amendment.
RECITALS
A. Borrower has requested that Required Lenders amend certain provisions of
the Credit Agreement.
B. Subject to the terms and conditions of this Amendment, Required Lenders
are willing to agree to such amendments and waivers.
Accordingly, for adequate and sufficient consideration, the parties hereto
agree, as follows: Amendments. By execution of this Amendment, the Credit
Agreement is hereby amended as follows:
Section 7.23 is amended in its entirety to read as follows:
"(a) At all times from the earlier of: (i) delivery by the Borrower to the
Agent of the June, 2005 financial statements in compliance with Section 5.2(c),
and (ii) August 15, 2005, until the earlier of: (i) delivery by the Borrower to
the Agent of the May, 2006 financial statements in compliance with Section
5.2(c), and (ii) June 30, 2006, as of the last day of each fiscal month of the
Borrower set forth below, the fiscal year-to-date (fiscal year-to-date in fiscal
year 2005 shall mean fiscal year-to-date, and with respect to each month in
fiscal year 2006, shall mean the immediately preceding twelve fiscal months)
Adjusted EBITDA of Parent and its Subsidiaries shall not be less than the amount
set forth opposite each date.
- ------------------------------------------------------------ ---------------------------------------------------------
Fiscal Month Ending Minimum Year-to-Date Adjusted EBITDA
- ------------------------------------------------------------ ---------------------------------------------------------
June, 2005 ($1,000,000)
- ------------------------------------------------------------ ---------------------------------------------------------
July, 2005 $350,000
- ------------------------------------------------------------ ---------------------------------------------------------
August, 2005 $2,727,000
- ------------------------------------------------------------ ---------------------------------------------------------
September, 2005 $5,179,000
- ------------------------------------------------------------ ---------------------------------------------------------
October, 2005 $7,249,000
- ------------------------------------------------------------ ---------------------------------------------------------
November, 2005 $8,503,000
- ------------------------------------------------------------ ---------------------------------------------------------
December, 2005 $10,254,000
- ------------------------------------------------------------ ---------------------------------------------------------
January, 2006 $13,103,000
- ------------------------------------------------------------ ---------------------------------------------------------
February, 2006 $14,973,000
- ------------------------------------------------------------ ---------------------------------------------------------
March, 2006 $15,726,000
- ------------------------------------------------------------ ---------------------------------------------------------
April, 2006 $18,758,000
- ------------------------------------------------------------ ---------------------------------------------------------
May, 2006 $20,740,000
- ------------------------------------------------------------ ---------------------------------------------------------
IV-5
(b) Commencing on and after the earlier of: (i) August 15, 2006, and
(ii) the delivery of the June, 2006 quarterly financial statements in compliance
with Section 5.2(b), the Borrower will maintain a Fixed Charge Coverage Ratio
for each period of four consecutive fiscal quarters ended on the last day of
each fiscal quarter of not less than 1.0 to 1.0.
(c) Notwithstanding anything set forth above to the contrary, Borrower
shall not be required to comply with either covenant set forth in (a) or (b)
above if Availability (plus any amount deducted from the Borrowing Base pursuant
to clause (b) of the definition of Borrowing Base) ("Adjusted Availability") has
exceeded $10,000,000 for at least 60 consecutive days, and (ii) Adjusted
Availability is not again less than $10,000,000 on any day following such 60-day
period.
(d) For purposes of this Section 7.23, on any date that compliance
hereunder is required with respect to Borrower's Adjusted EBITDA or Fixed Charge
Coverage Ratio, compliance shall commence on such date with reference to the
most recently reported monthly or quarterly financial information, as the case
may be." The definition of "Borrowing Base" set forth in Annex A to the Credit
Agreement shall be amended in its entirety to read as follows: "Borrowing Base"
means, at any time, an amount equal to (a) the sum of (A) up to eighty-five
percent (85%) of the Net Amount of Eligible Accounts; plus (B) the sum of (i) up
to eighty-five percent (85%) of the Net Orderly Liquidation Value of Eligible
Rolling Stock adjusted for monthly depreciation and for any dispositions of
Rolling Stock, and (ii) up to eighty-five percent (85%) of the cost of Eligible
Rolling Stock acquired after the Closing Date and before the Effective Date (as
defined in Second Amendment to the Amended and Restated Credit Agreement dated
as of November 9, 2005 between Borrower and Required Lenders) (excluding sales
tax, delivery charges or other soft costs) and adjusted for monthly
depreciation, but in no event shall the sum of (i) and (ii) exceed 90% of the
net book value of such Eligible Rolling Stock; minus (b) $10,000,000, minus (c)
Reserves from time to time established by the Agent in its reasonable credit
judgment; provided that the aggregate Revolving Loans advanced against Eligible
Rolling Stock shall not exceed the Maximum Rolling Stock Loan Amount, and
provided further that the aggregate Revolving Loans advanced against Eligible
Unbilled Accounts shall not exceed $5,000,000. For the purposes hereof,
depreciation shall be calculated based upon the average remaining life of the
Eligible Rolling Stock as shown on the then most recent appraisal."
Exhibit B, "Form of Borrowing Base Certificate" shall be amended in its entirety
to read as Exhibit B attached hereto. Conditions.
(a) Notwithstanding any contrary provision, this Amendment is not effective
until the date (the "Effective Date") upon which (i) the representations and
warranties in this Amendment are true and correct; (ii) after giving effect to
this Amendment, no Default or Event of Default has occurred and is continuing
under the Credit Agreement; and (iii) the Agent has received counterparts of
this Amendment executed by Borrower, Parent, and Required Lenders.
(b) Borrower shall have paid to Agent for the benefit of Lenders an
amendment fee as set forth in the Fee Letter dated the date hereof among
Borrower, Parent, Agent, and Lenders, in immediately available funds.
IV-6
(c) Borrower and Parent shall deliver to Agent such other agreements,
documents, instruments, opinions, certificates, and evidences as the Agent or
Required Lenders may reasonably request.
Acknowledgment and Ratification. As a material inducement to the Agent and
Lenders to execute and deliver this Amendment, Borrower and Parent (a) consent
to the agreements in this Amendment and (b) agree and acknowledge that the
execution, delivery, and performance of this Amendment shall in no way release,
diminish, impair, reduce, or otherwise affect the respective obligations of
Borrower or Parent under their respective Loan Documents, which Loan Documents
shall remain in full force and effect, and all Liens, guaranties, and rights
thereunder are hereby ratified and confirmed and shall secure the Obligations.
Notwithstanding anything to the contrary set forth in any other Loan Document
and in furtherance of the acknowledgements and ratifications set forth herein,
Borrower agrees that Agent may, at Borrower's expense, at any time and from time
to time, take such steps as Agent deems advisable or necessary to perfect or
maintain perfection of, the liens in any and all of the Collateral.
Representations. As a material inducement to Lenders to execute and deliver this
Amendment, Borrower and Parent represent and warrant to Lenders (with the
knowledge and intent that Lenders are relying upon the same in entering into
this Amendment) that as of the Effective Date and as of the date of execution of
this Amendment, (a) all representations and warranties in the Loan Documents are
true and correct in all material respects as though made on the date hereof,
except to the extent that (i) any of them speaks to a different specific date or
(ii) the facts on which any of them were based have been changed by transactions
contemplated or permitted by the Credit Agreement, or (iii) any of them is
waived herein and (b) no Default or Event of Default exists other than as waived
herein.
Expenses. Borrower agrees to pay all reasonable costs, fees, and expenses paid
or incurred by Agent in connection with this Amendment, including, without
limitation, attorney fees of Agent in connection with the negotiation,
preparation, delivery, and execution of this Amendment and any related
documents.
Miscellaneous
This Amendment is a "Loan Document" referred to in the Credit Agreement, and the
provisions relating to Loan Documents in Article 13 of the Credit Agreement are
incorporated in this Amendment by reference. Unless stated otherwise (a) the
singular number includes the plural and vice versa and words of any gender
include each other gender, in each case, as appropriate, (b) headings and
captions may not be construed in interpreting provisions, (c) this Amendment
must be construed, and its performance enforced, under Texas law, (d) if any
part of this Amendment is for any reason found to be unenforceable, all other
portions of it nevertheless remain enforceable, and (e) this Amendment may be
executed in any number of counterparts with the same effect as if all
signatories had signed the same document, and all of those counterparts must be
construed together to constitute the same document. The Loan Documents shall
remain unchanged and in full force and effect, except as provided in this
Amendment, and are hereby ratified and confirmed. On and after the Effective
Date, all references to the "Credit Agreement" shall be to the Credit Agreement
as herein amended. The execution, delivery, and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
rights of Lenders under any Loan Document, nor constitute a waiver under any of
the Loan Documents. ENTIRE AGREEMENT. THIS AMENDMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF THIS AMENDMENT AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
Parties. This Amendment binds and inures to Borrower, Parent, Agent, Lenders,
and their respective successors and assigns.
The parties hereto have executed this Amendment in multiple counterparts to be
effective as of the Effective Date.
IV-7
Remainder of Page Intentionally Blank.
Signature Pages to Follow.
IV-8
BANK OF AMERICA, N.A.,
as Agent and a Lender
By: /s/ Joy L. Bartholomew
Joy L. Bartholomew
Senior Vice President
IV-9
TEXTRON FINANCIAL CORPORATION,
as a Lender
By: /s/ Robert J. Dysart, Jr.
Name: Robert J. Dysart, Jr.
Title: Senior Account Executive
IV-10
BORROWER:
CENTRAL FREIGHT LINES, INC.,
a Texas corporation, as Borrower
By: /s/ Jeff Hale
Name: Jeff Hale
Title: CFO
IV-11
GUARANTOR:
CENTRAL FREIGHT LINES, INC.,
a Nevada corporation, as Parent
By: /s/ Jeff Hale
Name: Jeff Hale
Title: CFO
IV-12
EXHIBIT 21.1
Subsidiary of the Registrant
State or Jurisdiction of
Name of Subsidiary Incorporation or Organization
------------------ -----------------------------
Central Freight Lines, Inc. Texas
IV-13
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
--------------------------------------------------------
To the Board of Directors and Stockholders
Central Freight Lines, Inc.:
We consent to the incorporation by reference in Registration Statements (Nos.
333-111795, 333-114721, and 333-118032) on Form S-8 of Central Freight Lines,
Inc. of our report dated April 4, 2006, relating to our audit of the
consolidated financial statements, which appear in this Annual Report on Form
10-K of Central Freight Lines, Inc. for the year ended December 31, 2005.
McGladrey & Pullen, LLP
April 14, 2006
IV-14
EXHIBIT 23.2
Consent of Independent Registered Public Accounting Firm
--------------------------------------------------------
The Board of Directors
Central Freight Lines, Inc.:
We consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 333-111795, 333-114721 and 333-118032) of our report dated March
30, 2005, with respect to the consolidated balance sheet of Central Freight
Lines, Inc. and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 2004, which report
appears in the December 31, 2005, annual report on Form 10-K of Central Freight
Lines, Inc.
KPMG LLP
Dallas, Texas
April 12, 2006
IV-15
EXHIBIT 31.1
CERTIFICATION
I, Robert V. Fasso, certify that:
1. I have reviewed this annual report on Form 10-K 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(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) 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: April 14, 2006
/s/ Robert V. Fasso
Robert V. Fasso
Chief Executive Officer
IV-16
EXHIBIT 31.2
CERTIFICATION
I, Jeffrey A. Hale, certify that:
1. I have reviewed this annual report on Form 10-K 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(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) 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: April 14, 2006
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Chief Financial Officer
IV-17
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-K for the period ended December 31, 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 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
April 14, 2006
IV-18
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-K for the period ended December 31, 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 my knowledge:
(3) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Chief Financial Officer
April 14, 2006
IV-19