UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2006
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number 000-50485
Central Freight Lines, Inc.
(Exact name of registrant as specified in its charter)
Nevada 74-2914331
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 West Waco Drive, Waco, TX 76710
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(254) 741-5305
Not applicable
(Former name or former address, if changed since the last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. X Yes No
Indicate by check mark whether the registrant is 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 Exchange Act). Yes X No
The number of shares of common stock outstanding at May 5, 2006 was 18,294,454.
Central Freight Lines, Inc.
Form 10-Q
Three Months Ended April 1, 2006
Table of Contents
Page Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of April 1, 2006 (unaudited) and December 31, 2005 3
Consolidated Statements of Operations (unaudited) for the Three Months
Ended April 1, 2006 and April 2, 2005 4
Consolidated Statements of Cash Flows (unaudited) for the Three Months
Ended April 1, 2006 and April 2, 2005 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item.5. Other Information 29
Item 6. Exhibits 30
Signatures 31
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
April 1, 2006 and December 31, 2005
(Unaudited, in thousands, except share data)
2006
Assets (Unaudited) 2005
------------------- ----------------
Cash and cash equivalents $ 105 $ 348
Accounts receivable, less allowance for doubtful accounts and revenue
adjustments of $10,495 in 2006 and $10,754 in 2005 37,808 41,944
Other current assets 10,833 9,184
Assets held for sale --- 3,370
Deferred income taxes 4,866 5,105
------------------- ----------------
Total current assets 53,612 59,951
Property and equipment, net 100,708 111,349
Other assets 3,147 3,531
------------------- ----------------
Total assets $ 157,467 $ 174,831
=================== ================
Liabilities and stockholders' equity
Liabilities:
Current maturities of long-term debt $ 10,532 $ 8,809
Short-term notes payable 7,184 12,184
Trade accounts payable 17,312 17,485
Trade accounts payable-related parties 675 737
Accrued expenses 29,291 25,755
------------------- ----------------
Total current liabilities 64,994 64,970
Long-term debt, excluding current maturities 14,495 22,317
Related party financing 22,600 22,600
Deferred income taxes 4,866 5,105
Claims and insurance accruals and other liabilities 12,337 11,453
------------------- ----------------
Total liabilities 119,292 126,445
------------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.001 par value per share; 10,000,000 shares authorized,
none issued or outstanding --- ---
Common Stock; $0.001 par value per share; 100,000,000 shares authorized,
18,294,454 and 18,293,892 shares issued and outstanding as of
April 1, 2006 and December 31, 2005 18 18
Additional paid-in capital 109,729 109,759
Unearned compensation --- (160)
Accumulated deficit (71,572) (61,231)
------------------- ----------------
Total stockholders' equity 38,175 48,386
------------------- ----------------
Total liabilities and stockholders' equity $ 157,467 $ 174,831
=================== ================
See accompanying notes to consolidated financial statements (unaudited).
Page 3
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended
--------------------------------
April 1, April 2,
2006 2005
--------------- ---------------
Operating revenues $ 78,933 $ 89,322
--------------- ---------------
Operating expenses:
Salaries, wages and benefits 46,414 50,964
Purchased transportation 8,557 8,818
Purchased transportation - related parties 1,566 3,471
Operating and general supplies and expenses 20,671 20,605
Operating and general supplies and expenses - related parties 65 162
Insurance and claims 5,323 5,025
Building and equipment rentals 1,038 1,019
Building and equipment rentals - related parties 448 449
Depreciation and amortization 4,358 4,904
Gains on sales of operating assets (2,034) (27)
--------------- ---------------
Total operating expenses 86,406 95,390
--------------- ---------------
Loss from operations (7,473) (6,068)
Other expense:
Interest expense (1,317) (615)
Interest expense - related parties (1,551) (1,581)
--------------- ---------------
Loss before income taxes (10,341) (8,264)
Income taxes:
Income tax benefit --- ---
--------------- ---------------
Net loss $ (10,341) $ (8,264)
=============== ===============
Net loss per share:
Basic $ (0.57) (0.45)
Diluted (0.57) (0.45)
Weighted average outstanding shares:
Basic 18,288 18,192
Diluted 18,288 18,192
See accompanying notes to consolidated financial statements
(unaudited).
Page 4
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 1, 2006 and April 2, 2005
(Unaudited, in thousands)
2006 2005
----------------- -----------------
Cash flows from operating activities:
Net loss $ (10,341) $ (8,264)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Bad debt expense 88 611
Equity in loss of affiliate --- (2)
Depreciation and amortization 4,358 4,904
Amortization of deferred financing fees 374 44
Gains on sales of operating assets (2,034) (27)
Decrease in unearned compensation --- 27
Stock-based compensation expense 111 ---
Change in operating assets and liabilities:
Accounts receivable 4,048 (2,071)
Other assets (1,649) (2,760)
Trade accounts payable (173) (5,372)
Trade accounts payable - related parties (62) 549
Claims and insurance accruals (853) (505)
Accrued expenses and other liabilities 5,282 8,252
----------------- -----------------
Net cash used in operating activities (851) (4,614)
----------------- -----------------
Cash flows from investing activities:
Additions to property and equipment (387) (1,078)
Proceeds from sale of property and equipment 12,084 451
Cash paid for acquisition of business (135) ---
----------------- -----------------
Net cash provided by (used in) investing activities 11,562 (627)
----------------- -----------------
Cash flows from financing activities:
Restricted Cash --- 20,825
Proceeds from long-term debt --- 779
Repayments of long-term debt (6,108) (2,158)
(Repayments of) proceeds from short-term debt (4,865) 13,473
Repayment of securitization facility --- (27,300)
Stock transactions 19 51
Payment of deferred financing fees --- (1,371)
----------------- -----------------
Net cash (used in) provided by financing activities (10,954) 4,299
----------------- -----------------
Net decrease in cash (243) (942)
Cash at beginning of period 348 2,144
----------------- -----------------
Cash at end of period $ 105 $ 1,202
================= =================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 2,912 $ 2,295
Income taxes $ 6 $ ---
See accompanying notes to consolidated financial statements (unaudited).
Page 5
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Central
Freight Lines, Inc. and its wholly owned subsidiary (the "Company") have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the instructions to Quarterly Reports on Form 10-Q and Rule 10-01 of Regulation
S-X, and should be read in conjunction with the Annual Report on Form 10-K for
the year ended December 31, 2005. Accordingly, significant accounting policies
and other disclosures normally provided have been omitted since such information
is provided therein.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments (including normal recurring
adjustments) necessary to present fairly our consolidated financial position as
of April 1, 2006, the consolidated results of our operations and our
consolidated cash flows for the three months ended April 1, 2006 and April 2,
2005. The results of our operations for the three months ended April 1, 2006 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2006.
(2) Pending Merger, Liquidity, & Going Concern
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 ("NATL") and Green Acquisition Company ("Green"). Under the Merger
Agreement, Green will merge with and into Central (the "Merger"), with the
Company continuing as the surviving corporation. Both NATL and Green are
controlled by Mr. Moyes (our former Chairman of the Board), with Green being a
wholly owned subsidiary of NATL.
On April 17, 2006, the Company filed a preliminary proxy statement with the
Securities and Exchange Commission (the "SEC") for its 2006 Annual Meeting of
Stockholders. Once the filing is reviewed and finalized, a definitive proxy
statement will be mailed to the Company's stockholders to solicit proxies for
voting at the Annual Meeting. According to the filing, the Merger will be
submitted to a vote of the Company's stockholders at that Annual Meeting.
In a press release issued on April 17, 2006 that announced the filing, Bob
Fasso, the Company's Chief Executive Officer and President was quoted as saying:
"We are very pleased that this important step has been taken toward completion
of the transaction with Jerry Moyes and his companies. We currently believe that
the Merger can be completed in July of 2006."
In the same press release, Jerry Moyes was quoted as saying: "Like Bob, I
am pleased that we have taken this additional step forward today. I look forward
to completing this transaction as soon as possible."
The Company's stockholders are urged to read the definitive proxy statement
carefully when it becomes available because it will contain important
information about the Company, the merger transaction, and related matters.
The Company also announced on April 17, 2006 that it took possession of
approximately $5,300 in revenue equipment and began operating that equipment in
the Company's fleet on April 15. The revenue equipment was made available to the
Company through arrangements facilitated by Mr. Moyes, and is being leased from
one of his affiliates on a short-term basis pending completion of the Merger on
terms that the Company believes are favorable.
In January 2006, the Company entered into an agreement with respect to the
sale of its dormant terminal in Phoenix, Arizona, which is one of the two
terminals for sale. The Company realized net proceeds from this sale of
approximately $3,000 in March 2006. Further, in January 2006, the Company sold
its Portland, Oregon terminal, and realized net proceeds in February 2006, after
paying off the related mortgage, from the sale of approximately $3,300.
Page 6
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
As a result of past negative cash flows and losses, and disregarding
planned operational improvements, the Merger and additional sources of
liquidity, there is substantial doubt about the Company's ability to continue as
a going concern. Management believes the Merger represents the best strategic
alternative to address the Company's need for liquidity and capital resources.
At April 1, 2006, the Company had approximately $38,200 in stockholders' equity
and $47,600 in long-term debt, including current maturities. At the same date,
the Company had $5,100 available under its primary credit facility which
fluctuates from time-to-time with accounts receivable, payroll, and other items.
On May 15, 2006, a third amendment to the Company's primary credit facility was
negotiated that increased borrowing capacity by $5,000, subject to certain
conditions described in more detail in note 12.
(3) 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.
(4) Stock-Based Compensation
The Company has a stock-based employee compensation plan. On January 1,
2006, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation. SFAS No. 123(R) requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors including employee stock options and restricted stock
based on estimated fair values. For periods beginning in fiscal 2006, SFAS
No. 123(R) supersedes the Company's previous method of accounting for
stock-based compensation under Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees.
The Company adopted SFAS No. 123(R) using the modified prospective method.
Under the modified prospective method, compensation expense is recognized
beginning with the effective date based on the requirements of SFAS No. 123(R)
for all share-based payments granted after the effective date and based on the
requirements of SFAS No. 123 for all awards granted to employees prior to the
effective date of SFAS No. 123(R) that remain unvested on the effective date.
The Company's consolidated financial statements for the three months ended
April 1, 2006 reflect the impact of SFAS No. 123(R). In accordance with the
modified prospective transition method, the Company's consolidated financial
statements for the prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R).
SFAS No. 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as stock-based compensation expense over the requisite service period
in the Company's consolidated financial statements. Prior to the adoption of
SFAS No. 123(R), the Company accounted for stock-based awards to employees and
directors using the intrinsic value method in accordance with APB Opinion No. 25
as allowed under SFAS No. 123. Under the intrinsic value method, stock-based
compensation expense was recognized in the Company's consolidated statements of
income for stock options because the exercise price of the Company's stock
options granted to employees and directors was less than the fair market value
of the underlying stock at the date of grant. The total intrinsic value of
options exercised was $29 and $0 for the first quarters ended April 2, 2005 and
April 1, 2006, respectively.
Page 7
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
As stock-based compensation expense recognized in the accompanying
unaudited consolidated statement of income for the three months ended April 1,
2006 is based on awards ultimately expected to vest, it has been reduced for any
forfeitures that may have occurred. In the Company's pro forma information
required under SFAS No. 123 for the periods prior to fiscal 2006, the Company
accounted for stock option forfeitures as they occurred. The Company is not
required to adjust the pro forma SFAS No. 123 disclosures.
Those companies that adopt SFAS No. 123(R) are required to calculate their
historical additional paid-in capital pool ("APIC Pool") for the period of 1995
to 2005 at such time that excess tax deficiencies arise in connection with
stock-based compensation. Under SFAS No. 123(R), a company may use one of two
methods to calculate its historical APIC Pool. A company may elect to calculate
its initial pool of excess tax benefits pursuant to the method described in
paragraph 81 of SFAS No. 123(R) or pursuant to the method described in FSP
No. SFAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards. Generally, the pool of excess tax benefits that
is available to offset future excess tax deficiencies is based on the amounts
that would have been recognized under SFAS No. 123 and SFAS No. 123(R) as if the
company had always applied those standards for recognition purposes.
The Company has not yet elected which method it will choose to calculate
its historical APIC Pool balance. The Company will elect a method in accordance
with the prescribed time limitation for doing so and understands that the
election will dictate the treatment of awards vested as of the date of adoption
of SFAS No. 123(R) for purposes of updating its APIC Pool post-adoption.
No unearned compensation is included in stockholders' equity under SFAS
No. 123(R) for stock options granted. Rather, such stock options and restricted
stock awards and units are included in stockholders' equity under SFAS
No. 123(R) when services required from employees and directors in exchange for
the awards are rendered and expensed. Upon the adoption of SFAS No. 123(R) on
January 1, 2006, the Company reversed the December 31, 2005 $160 unearned
compensation balance by a charge to additional paid-in capital.
Employee and director stock-based compensation expense recognized for stock
options, in the accompanying unaudited consolidated statement of income for the
three months ended April 1, 2006, was $111. Employee and director stock-based
compensation expense recognized in the accompanying unaudited consolidated
statement of income for the three months ended April 2, 2005 was $27. As a
result of the adoption SFAS No. 123(R), the Company's income before income taxes
and net income for the three months ended April 1, 2006 are $85 lower,
respectively, than if it had continued to account for share-based compensation
under APB Opinion No. 25. The adoption of SFAS No. 123(R) decreased the
Company's calculation of basic and diluted earnings per share by approximately
$0.005 during the three months ended April 1, 2006.
Page 8
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
Had the Company determined compensation costs based on the estimated fair
value at the grant dates for its stock options granted prior to adoption of SFAS
No. 123(R), the Company's pro forma net income and earnings per common share for
the three months ended April 2, 2005 would have been as follows:
Three Months Ended
April 2,
2005
-------------------
Net loss, as reported $ (8,264)
Add: Stock-based compensation expenses included in reported net income, net of tax 27
Deduct: Total stock-based compensation expenses determined under the fair value method
for all awards, net of tax (204)
-------------------
Net loss, pro forma $ (8,441)
===================
Loss per common share:
Basic and Diluted - as reported $ (0.45)
===================
Basic and Diluted - pro forma $ (0.46)
===================
The Company will continue to use the Black-Scholes option pricing model for
purposes of valuing share-based awards. The Company's determination of fair
value of share-based payment awards on the date of grant using the Black-Scholes
option pricing model is affected by the Company's stock price as well as
assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, the Company's expected price
volatility over the term of the awards, the risk-free interest rate and actual
and projected employee stock option exercise behaviors. The fair value of
options granted was estimated using the following assumptions for 2003, 2004 and
2005 grants to employees: risk-free interest rate of 4.8%, 3.8% and 4.1%,
respectively; 0.0%, 6.9% and 37.8% expected volatility, respectively; an
expected life of approximately 6.5 years and a zero dividend yield.
Option-pricing models were developed for use in estimating the value of traded
options that have no vesting or hedging restrictions and are fully transferable.
Because the Company's employee stock options have certain characteristics that
are significantly different from traded options, and because changes in the
subjective assumptions can materially affect the estimated value, in
management's opinion, the existing valuation models may not provide an accurate
measure of the fair value of the Company's employee stock options. Although the
fair value of employee stock options is determined in accordance with SFAS
No. 123(R) using an option-pricing model, that value may not be indicative of
the fair value observed in a willing buyer/willing seller market transaction.
The Company did not grant any stock options during the three months ended
April 1, 2006 and April 2, 2005.
Page 9
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
The following table represents stock option activity for the three months
ended April 1, 2006 and April 2, 2005 :
Three Months Ended April 1, 2006 Three Months Ended April 2, 2005
-------------------------------- --------------------------------
Weighted Weighted Weighted Weighted
Number of Average Average Number of Average Average
Shares Exercise Remaining Shares Exercise Remaining
Price Contract Life Price Contract Life
Outstanding options at beginning
of period 1,426,245 $3.42 1,328,868 $4.00
Granted --- ---
Exercised --- (7,985) $2.15
Canceled --- ---
-------- --------
Outstanding options at end of period 1,426,245 $3.42 4.19 years 1,320,883 $4.01 5.40 years
--------- ---------
Outstanding exercisable at end of period 1,130,014 $ 3.85 4.36 years 423,105 $2.44 3.83 years
--------- ---------
Subject to the closing of the pending merger with NATL, the Company will
cancel all remaining outstanding stock options and may record the remainder of
its unamortized stock-based employee compensation expenses in the second quarter
of 2006. This additional expense will be approximately $444.
(5) Acquisition
In March 2004, the Company expanded into the Pacific Northwest through the
purchase of selected terminal network and rolling stock of Eastern Oregon Fast
Freight ("EOFF"), a non-union LTL carrier that operated in the states of Oregon,
Washington, and Idaho. The selected assets of EOFF were purchased for
approximately $10,000, with the purchase price paid from cash reserves. The
assets acquired were recorded at fair market value as determined by management
based on information currently available and on assumptions as to future
operations.
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 was recorded on the consolidated balance sheet as part of short-term notes
payable at December 31, 2005, and was paid in full in the first quarter of 2006.
(6) Loss Per Share
The basic loss per share is calculated using the weighted average number of
shares outstanding. The weighted average shares outstanding used in the
calculation of the diluted loss per share includes the dilutive effect of
options to purchase common stock, calculated using the treasury stock method as
may be applicable.
The following table presents information necessary to calculate basic and
diluted loss per share:
Three months ended
-------------------------------
April 1, April 2,
2006 2005
Net loss $ (10,341) $ (8,264)
Weighted average shares outstanding - basic 18,288 18,192
Common stock equivalents - -
-------------- -------------
Weighted average shares outstanding - diluted 18,288 18,192
Basic loss per share (0.57) (0.45)
Diluted loss per share (0.57) (0.45)
Anti-dilutive unexercised options excluded
from calculation 1,426 1,321
Page 10
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(7) Debt and Related Party Financing
(a) Long- term Debt
Long-term debt consists of the following at April 1, 2006 and December 31,
2005:
2006 2005
---- ----
Real estate mortgage notes $ 3,830 $ 8,583
Capital lease obligations 21,197 22,543
------ ------
25,027 31,126
Less: Current portion 10,532 8,809
------ -----
$ 14,495 $ 22,317
====== ======
On July 13, 2005, the Company completed a mortgage financing secured by
three 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.
Page 11
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
On January 31, 2005, the Company entered into a four-year senior secured
revolving credit facility (as amended on May 15, 2005, November 9, 2005 and May
15, 2006, 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 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 $5,000. 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 April 1, 2006 was
10.75%. 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 fee arrangement that if availability is
less than $5,000, then the Company will incur a daily charge of $1 for each day
that availability is less than $5,000. 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. 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.
Page 12
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(c) Related-Party Financing
In 1998, the Company entered into an agreement with Southwest Premier
Properties, L.L.C. ("Southwest Premier"), an entity controlled by the Company's
principal stockholder, for the sale and leaseback of the land, structures and
improvements of some of the Company's terminals. For financial accounting
purposes, this transaction has been accounted for as a financing arrangement.
Consequently, the related land, structures and improvements remain on the
Company's consolidated balance 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, the Company has an option to
purchase all of the properties, excluding certain surplus properties, for the
then fair market value.
Since the fair value of the properties sold and leased back has always
equaled or exceeded the proceeds from the financing arrangement, the annual
lease payments have been reflected as a cost of the financing and recorded as
interest expense. The amount outstanding under the financing agreement was
$22,600 at April 1, 2006 and December 31, 2005. If the Company exercises the
fair value purchase option, the excess of the amount paid over the recorded
financing obligation will be reflected as additional interest expense. If the
fair value purchase option is not exercised at the end of the lease term, the
excess of the recorded financing obligation over the net book value of the
related properties will be reflected as a gain on the financing arrangement.
(8) Income Taxes
At April 1, 2006 and December 31, 2005, the Company had a federal net
operating loss carry forward of approximately $61,822 and $56,001, respectively,
available to reduce future taxable income. The net operating loss generated in
the 2006 first quarter and all of 2005 amounted to $5,821 and $31,743,
respectively, and expires in varying amounts beginning in 2025 if not utilized.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Significant management judgment is required in determining the provision
for income taxes and in determining whether deferred tax assets will be realized
in full or in part. Deferred tax assets and liabilities are measured using
enacted tax rates that are expected to apply to taxable income in years in which
the temporary differences are expected to be reversed. Under SFAS No. 109 and
applicable interpretations, the Company has established a valuation allowance
for deferred tax assets. At April 1, 2006 and December 31, 2005, the valuation
allowance for deferred tax assets was approximately $24,831 and $19,071,
respectively.
Page 13
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(9) Contingencies
The Company is involved in certain claims and pending litigation arising
from the normal conduct of business. Based on the present knowledge of the
facts, management believes the resolution of the claims and pending litigation
will not have a material adverse effect on the consolidated financial position,
results of operations or liquidity of the Company.
In June and July 2004, three stockholder class actions were filed against
the Company and certain of its officers and directors. The class actions were
filed in the United States District Court for the Western District of Texas and
generally allege that false and misleading statements were made in the
registration statement and prospectus filed in connection with the Company's
initial public offering ("IPO"), and thereafter in certain public statements
during the first quarter of 2004. The class actions were subsequently
consolidated in the United States District Court for the 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, purportedly on behalf of purchasers of the
Company's common stock from December 12, 2003 through 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 January 20, 2006, a lawsuit was filed against the Company, 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 the Company and its 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 the
Company, as nominal defendant, and against the Company's current directors, by
the same plaintiff that filed one of the derivative actions in April 2004. 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 merger.
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.
Page 14
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
The Company is subject to loss contingencies pursuant to federal, state,
and local environmental regulations dealing with the transportation, storage,
presence, use, disposal, and handling of hazardous materials, discharge of storm
water and fuel storage tanks. Environmental liabilities, including remediation
costs, are accrued when amounts are probable and can be reasonably estimated.
(10) Related-Party Transactions
During the three months ended April 1, 2006 and April 2, 2005, the Company
incurred approximately $1,566 and $3,471, respectively, for transportation
services provided by companies for which the Company's principal stockholder was
the former Chairman of one of the companies. At April 1, 2006 and December 31,
2005, the Company had payables of $675 and $737, respectively, for these
transportation services.
During the three months ended April 1, 2006 and April 2, 2005, the Company
incurred $65 and $162, respectively, of legal services with an entity owned by a
stockholder of the Company.
During the three months ended April 1, 2006 and April 2, 2005, the Company
incurred $448 and $449, respectively, for building rental expense with related
parties.
See also note 7(c).
(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 quarters ended April 1, 2006 and April 2, 2005, the
Company's contributions to the plan, including matching 401(k) contributions,
were $484 and $519, 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 April 1, 2006, approximately
eighty-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.
(12) Subsequent Events
On May 15, 2006, the Company entered into a third amendment to its New
Credit Facility. This amendment increased borrowing availability by $5,000,
subject to a daily fee of $1 when the availability is less than $5,000. The
amendment includes a 1.0% early termination fee provision in the event that the
New Credit Facility is terminated by the Company prior to May 15, 2007. The
amendment modified financial covenants relating to minimum EBITDA levels and
minimum fixed charge coverage ratio. The new covenants on minimum EBITDA become
effective on April 1, 2006 and the new covenants on minimum fixed charge
coverage ratio become effective September 30, 2006.
Page 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Note Regarding Forward-Looking Statements
Except for the historical information contained herein, the discussion in
this report contains "forward-looking statements," which include information
relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation, and availability of
resources. These forward-looking statements include, without limitation,
statements regarding expectations as to operational improvements; 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 "Item 1A - Risk Factors" of our Annual Report on Form 10-K, filed
on April 17, 2006, 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 report.
References in this report to "we," "us," "our," or the "Company" or similar
terms refer to Central Freight Lines, Inc. and its operating subsidiary.
Business 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.
We operate 62 terminals in 16 states including: California, Texas, Arizona,
New Mexico, Oklahoma, Louisiana, Arkansas, Nevada, Kansas, Missouri, Illinois,
Iowa, Tennessee, Mississippi, 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 16
Recent Results of Operations and Quarter-End Financial Condition
For the quarter ended April 1, 2006, we reported a net loss of $10.3
million equal to $(0.57) per diluted share compared to a net loss of $8.3
million for the same period in 2005. The increase in net loss resulted primarily
from an 11.6% decline in operating revenues offset by a 9.4% decrease in
operating costs as discussed in more detail below in "Results of Operations."
At April 1, 2006, our consolidated balance sheet reflected $0.1 million in
cash, $47.6 million in long-term debt and capital lease obligations, including
current portion, and $7.2 million in short-term debt. Stockholders' equity was
$38.2 million at April 1, 2006. As of that date, we had approximately $5.1
million in availability under our revolving credit facility with Bank of
America, although availability fluctuates from day to day. On May 15, 2006, a
third amendment to our revolving credit facility with Bank of America was
negotiated that increased our borrowing capacity by $5.0 million, subject to
certain conditions described in more detail in note 12 to the unaudited
financial statements included in this Form 10-Q.
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. The discontinuation of business with
Dell had a negative impact on our revenues in the first quarter of 2006 compared
to the first quarter of 2005.
Revenues
Our revenues vary with the revenue per hundredweight we charge to customers
and the volume of freight we transport:
o Revenue per hundredweight and revenue per shipment measure 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 2.7% from $11.51 in the first quarter of 2005 to $11.82 in the
first quarter of 2006, due mainly to increases in fuel surcharge revenue.
Our LTL revenue per hundredweight, without fuel surcharge revenue, declined
to $10.53 in the first quarter of 2006 from $10.56 in the first quarter of
2005 due to a 7.2% increase in the average weight of LTL shipments. LTL
revenue per shipment, without fuel surcharge revenue, increased 6.9% from
$97.18 in the first quarter of 2005 to $103.90 in the first quarter of
2006. Effective April 10, 2006, we enacted a general rate increase for
customers on our proprietary rate base.
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 13.6% from the first quarter of 2005 to the
first quarter of 2006 in part due to one less working day in the 2006 first
quarter. Total tonnage per day in April 2006 has increased by approximately
6.1% compared to total tonnage per day in the 2006 first quarter.
Page 17
Historically, most of our revenue has been generated from transporting LTL
shipments from customers within our operating regions. In the first quarter of
2006, approximately 6.1% of our revenue was derived from shipments that
originated or terminated in regions outside our network, where a portion of the
freight movement was handled by another carrier. We refer to this as "interline
freight." Most of this revenue was obtained from carriers with which we maintain
transportation alliances. The revenue from interline freight in the first
quarter of 2006 was lower compared to the first quarter of 2005, due in large
part to our overall decline in business levels and to some extent due to the
elimination of interline revenue associated with Dell, a former customer, as
discussed under "Customers" above. We do not recognize the portion of revenue
(or the associated expenses) that relates to the portion of shipments hauled by
our alliance partners. In addition to transportation revenue, we also recognize
revenue from fuel surcharges we receive from our customers when the national
average diesel fuel price published by the U.S. Department of Energy exceeds
prices listed in our contracts and tariffs.
Operating Expenses
Our major expense categories can be summarized as follows:
Salaries, wages, and benefits. This category includes compensation for our
employees, health insurance, workers' compensation, 401(k) plan contributions,
and other fringe benefits. These expenses will vary depending upon several
factors, including our efficiency, our experience with health and workers'
compensation claims, and increases in health care costs. Under recently adopted
accounting rule FAS 123(R), we are now required to expense stock options that
were previously granted to key employees with exercise prices at fair market
value. Prior to January 1, 2006, these amounts were disclosed in a footnote to
the financial statements. This non-cash compensation expense is expected to
amount to approximately $111 thousand per quarter in 2006.
Purchased transportation. This category primarily consists of the payments
we make to third parties to handle a portion of a freight movement for us. The
largest category is outsourced linehaul movements, where we contract with
truckload carriers to move our freight between origin and destination terminals.
Swift Transportation, a related party, has been our largest provider of
outsourced linehaul service. Purchased transportation also includes outsourced
pick-up and delivery service when we use alternative providers to service areas
where we lack the terminal density to provide economical service.
Operating and general supplies and expenses. This category includes fuel,
repairs and maintenance, tires, parts, general and administrative costs, office
supplies, operating taxes and licenses, communications and utilities, and other
general expenses. Repairs and maintenance, fuel, tires, and parts expenses vary
with the age of equipment and the amount of usage. We have a fuel surcharge
program that enables us to recover a significant portion of fuel price
increases.
Insurance and claims. This category includes the cost of insurance premiums
and the accruals we make for claims within our self-insured retention amounts,
primarily for personal injury, property damage, physical damage to our
equipment, and cargo claims. These expenses will vary primarily based upon the
frequency and severity of our accident experience and the market for insurance.
Building and equipment rentals. This category consists mainly of payments
to unrelated third parties under terminal leases and payments to related parties
for seven terminals leased under operating leases.
Depreciation and amortization. This category relates to owned assets,
assets under capitalized leases, and 22 active terminals we lease from Southwest
Premier Properties, a related party that are considered to be a financing
arrangement.
Gains on sales of operating assets. This category consists of gains or
losses recognized upon the disposal of operating assets - mainly tractors,
trailers and occasionally, terminals.
Page 18
Results of Operations
The table below sets forth the percentage relationship of the specified
items to operating revenues for the periods indicated.
Three months ended
--------------------------
April 1, April 2,
2006 2005
------------- ------------
Operating revenues........................................ 100.0% 100.0%
----- -----
Operating expenses:
Salaries, wages, and benefits........................... 58.8 57.1
Purchased transportation................................ 12.8 13.8
Operating and general supplies and
Expenses............................................. 26.3 23.2
Insurance and claims.................................... 6.7 5.6
Building and equipment rentals.......................... 1.9 1.6
Depreciation and amortization........................... 5.5 5.5
Gains on sales of operating assets
(2.5) 0.0
----- -----
Total operating expenses (1)......................... 109.5 106.8
----- -----
Loss from operations...................................... (9.5) (6.8)
Interest expense.......................................... (3.6) (2.5)
----- -----
Loss before income taxes.................................. (13.1) (9.3)
Income tax benefit........................................ --- ---
----- -----
Net loss.................................................. (13.1)% (9.3)%
===== =====
(1) Total operating expenses as a percentage of operating revenues, as presented
in this table, is also referred to as operating ratio.
Comparison of Three Months Ended April 1, 2006, to Three Months Ended April 2,
2005
Operating revenues. Operating revenues decreased $10.4 million, or 11.6%,
from $89.3 million for the first quarter of 2005 to $78.9 million for first
quarter of 2006. Approximately $4.5 million of the total revenue decrease was
due to reduced business from Dell, for whom the Company declined to perform
further services in November 2005. Additionally, the decrease in operating
revenues was partially due to one less working day in the 2006 quarter. (The
2006 quarter had 64 working days, compared to 65 working days in the 2005
quarter.) Further, revenue per working day was $1.23 million in the 2006
quarter, which was 10.2% lower than the $1.37 million per working day in the
2005 quarter. LTL revenue per hundredweight increased 2.7% from $11.51 in the
2005 quarter to $11.82 in the 2006 quarter as a result of increased fuel
surcharge revenue. Our LTL revenue per hundredweight, without fuel surcharge
revenue, declined to $10.53 in the first quarter of 2006 from $10.56 in the
first quarter of 2005 due to a 7.2% increase in the average weight of LTL
shipments. LTL revenue per shipment, without fuel surcharge revenue, increased
6.9% from $97.18 in the first quarter of 2005 to $103.90 in the first quarter of
2006. Total tonnage decreased 59.7 thousand tons, or 13.6%, from 439.9 thousand
tons in the 2005 quarter to 380.2 thousand tons in the 2005-quarter partially
due to the one less working day in the 2006 first quarter. The average length of
haul declined by 1.4% in the current quarter to 483 miles from 490 miles in the
2005 quarter.
Salaries, wages, and benefits. Salaries, wages, and benefits decreased $4.6
million, or 9.0%, from $51.0 million for the first quarter of 2005 to $46.4
million for the first quarter of 2006. The decrease in salaries, wages, and
benefits resulted primarily from a decrease in headcount of approximately 10%,
which was equivalent to a decrease of approximately $3.7 million in hourly wage
expense. Further, we experienced a decrease in workers' compensation expense of
approximately $0.8 million in the first quarter of 2006, due mainly to a single
large claim of $1.0 million (representing our maximum deductible) that occurred
in January 2005. As a percentage of operating revenues, salaries, wages, and
benefits increased from 57.1% for the 2005 quarter to 58.8% for the 2006
quarter.
Page 19
Purchased transportation. Purchased transportation decreased $2.2 million
($1.9 million of the decrease was with a related party provider), or 17.9%, from
$12.3 million for the first quarter of 2005 to $10.1 million for the first
quarter of 2006. The decrease in purchased transportation expenses resulted
primarily from a decreased usage of third party purchased transportation due to
a reduction in total tonnage shipped and a reduction in total line miles of
16.3%. As a percentage of operating revenues, purchased transportation decreased
from 13.8% for the 2005 quarter to 12.8% for the 2006 quarter.
Operating and general supplies and expenses. Operating and general supplies
and expenses decreased $0.1 million, or 0.5%, from $20.8 million for the first
quarter of 2005 to $20.7 million for the first quarter of 2006. The decrease in
operating and general supplies and expenses resulted primarily from decreases
in: vehicle repairs of $0.9 million and allowance for doubtful accounts of $0.5
million offset in part by increases in fuel expense of $1.2 million (that was
partially offset by increases in fuel surcharge revenue). As a percentage of
operating revenues, operating and general supplies and expenses increased from
23.2% for the 2005 quarter to 26.3% for the 2006 quarter.
Insurance and claims. Insurance and claims increased $0.3 million, or 6.0%,
from $5.0 million for the first quarter of 2005 to $5.3 million for the first
quarter of 2006. The increase in insurance and claims expense resulted primarily
from an increase in our premiums for third party accidents due to an annual rate
increase. Accidents per million miles improved by 13.3% compared to the first
quarter of 2005. As a percentage of operating revenues, insurance and claims
increased from 5.6% for the 2005 quarter to 6.7% for the 2006 quarter.
Building and equipment rentals. Building and equipment rentals remained
essentially flat at $1.5 million in each of the two quarters. As a percentage of
operating revenues, building and equipment rentals increased from 1.6% for the
2005 quarter to 1.9% for the 2006 quarter.
Depreciation and amortization. Depreciation and amortization expense
decreased approximately $0.5 million, or 10.2%, from $4.9 million for the first
quarter of 2005 to $4.4 million for the first quarter of 2006. Depreciation
expense was lower by $0.5 million due to a reduction in the fleet size compared
to the first quarter of 2005. As a percentage of operating revenues,
depreciation and amortization remained constant at 5.5% for the 2005 and 2006
quarters.
Gains on sales of operating assets. Gains in the first quarter of 2006
amounted to $2.0 million due mainly to a gain on the sale of two terminals and
to a lesser extent gains on the sales of revenue equipment. As a percentage of
operating revenues, gains on sales of operating assets increased from 0.0% in
the 2005 quarter to (2.5%) in the 2006 quarter.
Operating ratio. Our operating ratio increased from 106.8% for the first
quarter of 2005 to 109.5% for the first quarter of 2006.
Interest expense. Total interest expense increased $0.7 million, or 31.8%,
from $2.2 million for the first quarter of 2005 to $2.9 million for the first
quarter of 2006. Interest expense on terminal financing (not effective until the
third quarter of 2005) amounted to $0.1 million while amortization of deferred
financing charges related to the New Credit Facility (not effective until late
in the first quarter of 2005) amounted to approximately $0.4 million. Our
related party interest expense remained relatively flat in each quarter. The
amounts for related party interest are recorded as interest expense because the
associated leases are reflected as a financing arrangement in our consolidated
financial statements. As a percentage of operating revenues, interest expense
increased from 2.5% for the 2005 quarter to 3.6% for the 2006 quarter.
Income taxes. In each of the two first quarters of 2006 and 2005, we
maintained a tax valuation allowance and recorded income tax benefits of
approximately $4.0 million and $3.2 million, respectively, due partially to
pre-tax losses of $10.4 million and $8.3 million, respectively. These benefits
were fully reserved by increasing the valuation allowance for deferred tax
assets. The total valuation allowance as of April 1, 2006 amounted to
approximately $24.8 million.
Page 20
Liquidity and Capital Resources
Our business has required substantial, ongoing capital investments,
particularly to replace revenue equipment such as tractors and trailers. During
the remainder of 2006 our capital expenditure requirements are expected to be
approximately $7.1 million. Included in this range is approximately $6.0 million
for replacing trailers. If we decide to purchase the $6.0 million in replacement
trailers, we expect to obtain financing independent from our New Credit
Facility. If we decide not to replace these trailers, our capital expenditures
may approximate $1.1 million for 2006. We expect to pay for this $1.1 million in
projected capital expenditures with borrowings under our credit facilities,
borrowings under capital leases, and cash flows from operations. During the
remainder of 2006 $1.8 of proceeds from the sale of revenue equipment is
expected. Proceeds from the sale of the two terminals mentioned below and other
revenue equipment approximated $12.1 million (less the payoff of a related
mortgage of $4.7 million) in the first quarter of 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 realized net proceeds from this sale of approximately $3.0 million in
March 2006. 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.
On January 30, 2006, we announced that we had entered into an Agreement and
Plan of Merger (the "Merger Agreement"), with North American Truck Lines, LLC
("NATL") and Green Acquisition Company ("Green"). Under the Merger Agreement,
Green will merge with and into Central (the "Merger"), with our Company
continuing as the surviving corporation. Both NATL and Green are controlled by
Mr. Moyes (our former Chairman of the Board), with Green being a wholly owned
subsidiary of NATL.
On April 17, 2006, we filed a preliminary proxy statement with the
Securities and Exchange Commission (the "SEC") for our 2006 Annual Meeting of
Stockholders. Once the filing is reviewed and finalized, a definitive proxy
statement will be mailed to our stockholders to solicit proxies for voting at
the Annual Meeting. According to the filing, the Merger will be submitted to a
vote of our stockholders at that Annual Meeting.
In a press release issued on April 17, 2006 that announced the filing, Bob
Fasso, our Chief Executive Officer and President was quoted as saying: "We are
very pleased that this important step has been taken toward completion of the
transaction with Jerry Moyes and his companies. We currently believe that the
Merger can be completed in July of 2006."
In the same press release, Jerry Moyes was quoted as saying: "Like Bob, I
am pleased that we have taken this additional step forward today. I look forward
to completing this transaction as soon as possible."
Our stockholders are urged to read the definitive proxy statement carefully
when it becomes available because it will contain important information about
us, the merger transaction, and related matters.
We also announced on April 17, 2006 that we took possession of
approximately $5.3 million in revenue equipment and began operating that
equipment in our fleet on April 15. The revenue equipment was made available to
us through arrangements facilitated by Mr. Moyes, and is being leased from one
of his affiliates on a short-term basis pending completion of the Merger on
terms that we believe are favorable.
Page 21
As a result of past negative cash flows and losses, and disregarding
planned operational improvements, the Merger and additional sources of
liquidity, there is substantial doubt about our ability to continue as a going
concern. We believe the Merger represents the best strategic alternative to
address our need for liquidity and capital resources. At April 1, 2006, we had
approximately $38.2 million in stockholders' equity and $47.6 million in
long-term debt, including current maturities. At the same date, we had $5.1
million available under our primary credit facility which fluctuates from
time-to-time with accounts receivable, payroll, and other items. On May 15,
2006, a third amendment to our primary credit facility was negotiated that
increased our borrowing capacity by $5.0 million, subject to certain conditions
described in more detail in note 12 to the unaudited financial statements in
this Form 10-Q.
Net cash used in operating activities was approximately $0.9 million and
$4.6 million for the three months ended April 1, 2006 and April 2, 2005,
respectively. Net cash used in the 2006 period was primarily due to the cash net
loss for the period plus an increase in other assets of $1.6 million offset in
part by collections of accounts receivable of $4.0 million and an increase in
accrued expenses of $5.3 million. Net cash used in the 2005 period resulted
mainly from the cash net loss for the period, $5.4 million in payments through
trade accounts payable and an increase in accounts receivable of $2.1 million,
offset by an increase in accrued expenses.
Net cash provided by (used in) investing activities was approximately $11.6
million and $(0.6) million for the three months ended April 1, 2006 and April 2,
2005, respectively. In the first quarter of 2006, we sold two terminals and
revenue equipment and recorded proceeds of approximately $12.1 million. Our
capital expenditures were $0.4 million and we paid the remaining purchase price
for an acquisition that was effected in 2004. Our capital expenditures were
approximately $1.1 million in the 2005 period. We expect our capital
expenditures for the remainder of 2006 to be approximately $7.1 million.
Included in this range is approximately $6.0 million for replacing trailers. If
we decide to purchase the $6.0 million in replacement trailers, we expect to
obtain financing independent from our New Credit Facility.
Net cash used in financing activities, for the three months ended April 1,
2006, was approximately $(11.0) million used primarily to pay off a mortgage on
the Portland, Oregon terminal of $4.7 million and to repay short-term borrowings
under the New Credit Facility of approximately $4.9 million. Net cash provided
by financing activities amounted to $4.3 million for the three months ended
April 2, 2005 due mainly to borrowings from our new credit facility of $13.5
million. During the transition from our previous securitization facility to the
current credit facility, we liquidated our restricted cash investment of $20.8
million and used it to partially pay off the debt under the securitization
facility.
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 lease payments, $1.6
million in the first quarters of 2006 and 2005, 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. There were no properties sold in the
first quarter of 2006. The amount outstanding under the financing agreement was
$22.6 million at April 1, 2006 and 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.
Page 22
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. The effective interest rate at December 31,
2004 was 2.4%.
In March 2004, we acquired certain assets of EOFF for approximately $10.0
million (See note 5). The remaining purchase price liability from this
transaction was $0.1 million at December 31, 2005 which was recorded on the
accompanying consolidated balance sheet as part of short-term notes payable. We
paid this remaining liability in full 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.
On January 31, 2005, we entered into a four-year senior secured revolving
credit facility (as amended on May 12, 2005, November 9, 2005 and May 15, 2006,
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 $5.0 million. Letters of Credit
under the New Credit Facility are subject to a sub-limit of $40.0 million.
Page 23
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 April 1, 2006 was
10.75%. 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 fee arrangement that if availability is
less than $5.0 million, then we will incur a daily charge of $1,000 for each day
that availability is less than $5.0 million. 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. 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 24
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.
Off-Balance Sheet Arrangements
Certain of our terminals and revenue equipment are financed off-balance
sheet through operating leases. As of April 1, 2006, 36 of our terminals,
including seven owned by related parties, were subject to operating leases.
Terminals and revenue equipment held under operating leases are not carried
on our consolidated balance sheets, and lease payments in respect of such
terminals and revenue equipment are reflected in our consolidated statements of
operations in the line items "Building and equipment rentals" and "Building and
equipment rentals - related parties." Our total rental expense related to
operating leases, including rent paid to related parties, was $1.5 million for
the first quarter of 2006 and 2005. The total amount of remaining payments under
operating leases as of April 1, 2006 was $21.7 million, with $6.4 million due in
the next 12 months.
Critical Accounting Policies
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Page 25
Revenue Recognition. We recognize revenue and associated expenses upon the
delivery of the related freight. A portion of our 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 we maintain transportation alliances. We do not recognize
revenue or the associated expenses that relate to the portion of the shipment
transported by its alliance partners.
Insurance and Claims Accruals. We record insurance and claims accruals
based upon our estimate of the ultimate total cost of claims, not covered by
insurance, for bodily injury and property damage, cargo loss and damage,
physical damage to our equipment, workers' compensation, long-term disability,
and group health, and post-retirement health benefits. Our estimates are based
on our evaluation of the nature and severity of the claims and our past claims
experience. We include an estimate for incurred but not reported claims. The
estimated costs for bodily injury and property damage, cargo loss and damage,
and physical damage to our equipment are charged to insurance and claims. The
other estimated costs are charged to employee benefits expense.
While we believe that our insurance and claims accruals are adequate, such
estimates may be more or less than the amount ultimately paid when claims are
settled. The estimates are continually reviewed and any changes are reflected in
current operations.
Our self-insured retention for bodily injury and property damage, cargo
loss and damage, and physical damage to our equipment is an aggregate $1.0
million per occurrence.
Our self-insured retention for workers' compensation has been $1.0 million
per occurrence since October 28, 2002. We also self-insure for all health claims
up to $0.3 million per occurrence.
Allowance for Doubtful Accounts and Revenue Adjustments. We maintain
allowances for doubtful accounts and revenue adjustments. Such allowances
represent our estimate of accounts that will not ultimately be collected and
correspondingly adjust our operating revenues to reflect the estimates of
non-collectible accounts. Estimates used in determining this allowance are based
on our historical collection experience, current trends, credit policy, and a
percentage of our accounts receivable by aging category. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Income Taxes. Significant management judgment is required in determining
the provision for income taxes and in determining whether deferred tax assets
will be realized in full or in part. Deferred tax assets and liabilities are
measured using enacted tax rates that are expected to apply to taxable income in
years in which the temporary differences are expected to be reversed. Under SFAS
No. 109 and applicable interpretations, the Company has established a valuation
allowance for deferred tax assets. At April 1, 2006 and December 31, 2005, the
valuation allowance for deferred tax assets was approximately $24.8 million and
$19.1 million, respectively.
Inflation
Most of our expenses are affected by inflation, which generally results in
increased operating costs. In response to fluctuations in the cost of petroleum
products, particularly diesel fuel, we have implemented a fuel surcharge in our
tariffs and contractual agreements. The fuel surcharge is designed to offset the
cost of fuel above a base price and increases as fuel prices escalate over the
base. We do not expect the net effect of inflation on our results of operations
to be different from the effect on LTL carriers generally.
Seasonality
We experience some seasonal fluctuations in freight volume. Historically,
our shipments decrease during winter months and our fuel efficiency declines,
but our operating expenses have been higher in the summer months due to
increased maintenance costs for our tractors and trailers in hotter weather as a
large percentage of our operating region is in the South and Southwest United
States. Our expansion into the Midwest and the Northwest may increase our
exposure to seasonal fluctuations in operating expenses.
Page 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to a variety of market risks, most importantly the effects
of the price and availability of diesel fuel and changes in interest rates. To
address the risk of high fuel prices, we maintain a fuel surcharge program. Fuel
surcharge programs are well established in the industry and are broadly accepted
by our customers. We believe our fuel surcharge program is effective at
mitigating the risk of high fuel prices. Accordingly, we have not engaged in any
fuel price hedging activities. Because fuel surcharges, typically, are based on
the weekly national average price of diesel fuel and our operations are
concentrated in the Southwest and West coast, we have structured our fuel
surcharge to reflect the cost in those regions where we conduct the majority of
our business. There remains some risk that this blended national average will
not fully reflect regional fuel prices. We are highly dependent on adequate
supplies of diesel fuel. If our supply were interrupted, for example as a result
of war or hostile action against the United States or in fuel producing regions,
we would be exposed to significant risks.
Our market risk is also affected by changes in interest rates.
Historically, we have used a combination of fixed rate and variable rate
obligations to manage our interest rate exposure. Fixed rate obligations expose
us to the risk that interest rates might fall. Variable rate obligations expose
us to the risk that interest rates might rise. We did not have any interest rate
swaps at April 1, 2006, although we may enter into such swaps in the future if
we deem appropriate.
Our variable rate obligation consists of our credit facility. Our credit
facility, provided there has been no default, carries a variable interest rate
based on either the prime rate or LIBOR. We currently have $7.2 million in
drawings under our New Credit Facility at April 1, 2006. A one or two percentage
point increase in LIBOR rates would increase our annual interest expense by
$72,000 or $144,000, respectively.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated our
disclosure controls and procedures, as defined by the Securities and Exchange
Commission (the "SEC"), as of the end of the period covered by this report.
Based upon this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective at the reasonable assurance level to ensure that information required
to be disclosed by us in reports filed with the SEC is recorded, processed,
summarized, and reported on a timely basis.
Page 27
Limitations on the Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial
Officer, do not expect that our disclosure controls and procedures will prevent
all errors or intentional fraud. An internal control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of such internal controls are met. Further, the design of an
internal control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected.
Notwithstanding the foregoing limitations, our management believes that our
disclosure controls and procedures provide reasonable assurances that the
objectives of our control system are met.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in certain claims and pending litigation arising from the
normal conduct of business. Based on the present knowledge of the facts,
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
us and certain of our officers and directors. The class actions were filed in
the United States District Court for the Western District of Texas and generally
allege that false and misleading statements were made in the registration
statement and prospectus filed in connection with our initial public offering
("IPO"), and thereafter in certain public statements during the first quarter of
2004. The class actions were subsequently consolidated in the United States
District Court for the 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,
purportedly on behalf of purchasers of our common stock from December 12, 2003
through 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 we 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 Central, 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.
On January 20, 2006, a lawsuit was filed against Central, 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 Central and our stockholders against the
officers, directors, and former directors, generally alleging breach of
fiduciary duty, fraud, bad faith, and conspiracy.
Page 28
On February 1, 2006, a purported derivative action was filed against
Central, as nominal defendant, and against our current directors, by the same
plaintiff that filed one of the derivative actions in April 2004. 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 NATL.
The purported derivative action seeks declaratory, injunctive, and other relief
preventing consummation of the merger.
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. Although it is not possible at this time to predict the
litigation outcome of these cases, we expect to prevail. However, an adverse
litigation outcome could be material to our consolidated financial position or
results of operations. As a result of the uncertainty regarding the outcome of
this matter, no provision has been made in the consolidated financial statements
with respect to this contingent liability.
We are 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 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
On May 15, 2006, the Company entered into a third amendment to its New
Credit Facility. This amendment increased borrowing availability by $5,000,
subject to a daily fee of $1 when the availability is less than $5,000. The
amendment includes a 1.0% early termination fee provision in the event that the
New Credit Facility is terminated by the Company prior to May 15, 2007. The
amendment modified financial covenants relating to minimum EBITDA levels and
minimum fixed charge coverage ratio. The new covenants on minimum EBITDA become
effective on April 1, 2006 and the new covenants on minimum fixed charge
coverage ratio become effective September 30, 2006.
Page 29
Item 6. Exhibits.
Exhibit No. Description
- ----------- -----------
2.3 Agreement and Plan of Merger, dated January 30, 2006, by and among Central Freight Lines, Inc., a
Nevada corporation, North American Truck Lines, LLC, a Nevada limited liability company, and Green
Acquisition Company, a Nevada corporation. (Incorporated by reference to Annex A to the Company's
Preliminary Proxy Statement on Schedule 14A filed with the SEC on April 17, 2006.)
3.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada
corporation. (Incorporated by reference to Exhibit 3.1(b) to the Company's Registration Statement
on Form S-1 No. 333-109068.)
3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 No. 333-109068.)
4.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada
corporation. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-Q.)
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 3.2 to this Report on Form 10-Q.)
10.21 Agreement and Plan of Merger, dated January 30, 2006, by and among Central Freight Lines, Inc., a
Nevada corporation, North American Truck Lines, LLC, a Nevada limited liability company, and Green
Acquisition Company, a Nevada corporation. (Incorporated by reference to Exhibit 2.3 to this
Report on Form 10-Q.)
31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer.
31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer.
- ------------------
* Filed herewith.
Page 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Quarterly Report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: May 16, 2006
Central Freight Lines, Inc.
---------------------------
/s/ Jeffrey A. Hale
-------------------
Jeffrey A. Hale
Senior Vice President and Chief Financial Officer
Page 31
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.3 Agreement and Plan of Merger, dated January 30, 2006, by and among Central Freight Lines, Inc., a Nevada
corporation, North American Truck Lines, LLC, a Nevada limited liability company, and Green Acquisition
Company, a Nevada corporation. (Incorporated by reference to Annex A to the Company's Preliminary Proxy
Statement on Schedule 14A filed with the SEC on April 17, 2006.)
3.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada corporation.
(Incorporated by reference to Exhibit 3.1(b) to the Company's Registration Statement on Form S-1
No. 333-109068.)
3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
4.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada corporation.
(Incorporated by reference to Exhibit 3.1 to this Report on Form 10-Q.)
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.2 to
this Report on Form 10-Q.)
10.21 Agreement and Plan of Merger, dated January 30, 2006, by and among Central Freight Lines, Inc., a Nevada
corporation, North American Truck Lines, LLC, a Nevada limited liability company, and Green Acquisition
Company, a Nevada corporation. (Incorporated by reference to Exhibit 2.3 to this Report on Form 10-Q.)
31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer.
31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Robert V. Fasso, the Company's Chief Executive Officer.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer.
Page 32
EXHIBIT 31.1
CERTIFICATION
I, Robert V. Fasso, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Freight
Lines, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(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: May 16, 2006
/s/ Robert V. Fasso
-------------------
Robert V. Fasso
Chief Executive Officer
Page 33
EXHIBIT 31.2
CERTIFICATION
I, Jeffrey A. Hale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Freight
Lines, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(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: May 16, 2006
/s/ Jeffrey A. Hale
-------------------
Jeffrey A. Hale
Chief Financial Officer
Page 34
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central Freight Lines, Inc. (the
"Company") on Form 10-Q for the period ended April 1, 2006, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Robert
V. Fasso, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: May 16, 2006
/s/ Robert V. Fasso
-------------------
Robert V. Fasso
Chief Executive Officer
Page 35
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central Freight Lines, Inc. (the
"Company") on Form 10-Q for the period ended April 1, 2006, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey
A. Hale, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: May 16, 2006
/s/ Jeffrey A. Hale
-------------------
Jeffrey A. Hale
Chief Financial Officer
Page 36