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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2004
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number 000-50485
Central Freight Lines, Inc.
(Exact name of registrant as specified in its charter)
Nevada 74-2914331
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
5601 West Waco Drive, Waco, TX 76710
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(254) 741-5305
Not applicable
(Former name or former address, if changed since the last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. X Yes No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes X No
The number of shares of common stock outstanding at August 5, 2004 was
18,155,283.
1
Central Freight Lines, Inc.
Form 10-Q
Three months and six months ended July 3, 2004
Table of Contents
Page Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of July 3, 2004 (unaudited) and December 31, 2003 1
Consolidated Statements of Operations (unaudited) for the Three months and Six months
ended July 3, 2004 and July 5, 2003 2
Consolidated Statements of Cash Flows (unaudited) for the Six months
ended July 3, 2004 and July 5, 2003 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
of Equity Securities 20
Item 3. Defaults Upon Senior Securites 20
Item 4. Submission of Matters to a Vote of Securities Holders. 21
Item.5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 23
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 3, 2004 and December 31, 2003
(Dollars in thousands)
2004
Assets (Unaudited) 2003
------------------ -----------------
Cash and cash equivalents $ 12,992 $ 41,493
Accounts receivable less allowance for doubtful accounts and revenue
adjustments of $6,457 in 2004 and $5,353 in 2003 57,536 51,864
Other current assets 9,935 8,298
Deferred income taxes 9,721 4,588
------------------ -----------------
Total current assets 90,184 106,243
Property and equipment, net 126,289 114,693
Goodwill 4,324 4,324
Other assets 5,689 2,113
------------------ -----------------
Total assets $ 226,486 $ 227,373
================== =================
Liabilities and stockholders' equity
Current maturities of long-term debt $ 7,187 $ 6,375
Short-term notes payable 2,024 -
Trade accounts payable 22,454 18,136
Payables for related party transportation services 3,380 1,020
Accrued expenses 25,854 27,207
------------------ -----------------
Total current liabilities 60,899 52,738
Long-term debt, excluding current maturities 14,206 19,988
Related party financing 22,920 23,154
Other liabilities 21,990 23,055
------------------ -----------------
Total liabilities 120,015 118,935
------------------ -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.001 par value per share; 10,000,000 shares authorized;
none issued or outstanding - -
Common Stock; $0.001 par value per share; 100,000,000 shares authorized,
18,101,428 and 17,632,545 shares issued and outstanding as of
July 3, 2004 and December 31, 2003 18 17
Additional paid-in capital 109,729 108,143
Unearned compensation (704) (822)
Retained earnings (accumulated deficit) (2,572) 1,100
------------------ -----------------
Total stockholders' equity 106,471 108,438
------------------ -----------------
Total liabilities and stockholders' equity $ 226,486 $ 227,373
================== =================
See accompanying notes to consolidated financial statements.
3
CENTRAL FREIGHT LINES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share data)
Three months ended Six months ended
-------------------------------- --------------------------------
July 3, July 5, July 3, July 5,
2004 2003 2004 2003
---------------- -------------- --------------- ---------------
Operating revenues $ 105,513 $ 100,150 $ 202,551 $ 198,952
---------------- -------------- --------------- ---------------
Operating expenses:
Salaries, wages and benefits 60,084 55,651 115,740 108,470
Purchased transportation 11,387 9,679 22,692 17,504
Purchased transportation - related parties 5,965 6,003 8,242 12,209
Operating and general supplies and expenses 21,045 16,639 39,625 34,166
Operating and general supplies and expenses - related parties 39 (15) 134 20
Insurance and claims 6,657 5,507 10,401 8,386
Building and equipment rentals 1,044 805 1,973 1,633
Building and equipment rentals - related parties 376 350 896 772
Depreciation and amortization 3,951 4,286 7,870 8,558
---------------- -------------- --------------- ---------------
Total operating expenses 110,548 98,905 207,573 191,718
---------------- -------------- --------------- ---------------
(Loss) income from operations (5,035) 1,245 (5,022) 7,234
Other expense:
Interest expense (368) (1,024) (573) (2,001)
Interest expense - related parties (1,537) (1,583) (3,142) (3,095)
---------------- -------------- --------------- ---------------
(Loss) income from before income taxes (6,940) (1,362) (8,737) 2,138
Income taxes:
Income tax benefit (expense) 4,397 57 5,065 (129)
---------------- -------------- --------------- ---------------
Net (loss) income $ (2,543) $ (1,305) $ (3,672) $ 2,009
================ ============== =============== ===============
Net loss per share:
Basic $ (0.14) $ (0.21)
Diluted (0.14) (0.21)
Weighted average outstanding shares (in thousands):
Basic 17,842 17,777
Diluted 17,842 17,777
Pro forma C corporation data (Note 5):
Historical (loss) income before income taxes $ (1,362) $ 2,138
Pro forma income tax (expense) benefit 531 (1,029)
-------------- ---------------
Pro forma net (loss) income $ (831) $ 1,109
============== ===============
Net (loss) income per share:
Basic $ (0.08) $ 0.10
Diluted (0.08) 0.09
Weighted average outstanding shares (in thousands):
Basic 10,868 10,868
Diluted 10,868 12,077
See accompanying notes to consolidated financial statements.
4
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 3, 2004 and July 5, 2003
(Unaudited, dollars in thousands)
2004 2003
----------------- ----------------
Cash flows from operating activities:
Net (loss) income $ (3,672) $ 2,009
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Bad debt expense 184 691
Non-cash interest expense - related parties - 500
Equity in income (loss) of affiliate 25 (6)
Depreciation and amortization 7,870 8,558
Deferred income taxes (5,189) (120)
Decrease in unearned compensation 119 119
Gain on curtailment of health plan - (2,489)
Change in operating assets and liabilities, net
of purchase accounting effects:
Accounts receivable (5,856) (8,751)
Accounts receivable - related parties - 651
Other assets (1,543) (515)
Trade accounts payable 6,424 987
Trade accounts payable - related parties 254 982
Claims and insurance accruals 846 2,412
Accrued expenses and other liabilities (2,596) (4,210)
----------------- ----------------
Net cash (used in) provided by operating activities (3,134) 818
----------------- ----------------
Cash flows from investing activities:
Additions to property and equipment (16,310) (1,860)
Proceeds from sale of property and equipment 2,997 233
Cash paid for acquisition of business (8,058) -
----------------- ----------------
Net cash used in investing activities (21,371) (1,627)
----------------- ----------------
Cash flows from financing activities:
Proceeds from long-term debt - 19,114
Repayments of long-term debt (4,969) (18,698)
Exercise of stock options 1,043 -
Initial public offering costs (70) (492)
Distributions paid - (4,811)
----------------- ----------------
Net cash used in financing activities (3,996) (4,887)
----------------- ----------------
Net decrease in cash 28,501) (5,696)
Cash at beginning of period 41,493 7,350
----------------- ----------------
Cash at end of period $ 12,992 $ 1,654
================= ================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 3,768 $ 4,638
Income taxes $ 164 $ -
Non-cash transaction:
Note payable for acquisition of business: $ 2,024 $ -
See accompanying notes to consolidated financial statements.
5
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share and per share amounts)
(1) Basis of Presentation
The accompanying consolidated financial statements of Central Freight
Lines, Inc. and its wholly owned subsidiaries ("the Company") have been prepared
by the Company in accordance with accounting principles generally accepted in
the United States of America for interim financial information and the
instructions to Quarterly Reports on Form 10-Q and Rule 10-01 of Regulation S-X,
and should be read in conjunction with the Annual Report on Form 10-K for the
year ended December 31, 2003. Accordingly, significant accounting policies and
other disclosures normally provided have been omitted since such information is
provided therein.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments (including normal recurring
adjustments) necessary to present fairly our consolidated financial position as
of July 3, 2004, the consolidated results of our operations for the three months
and six months ended July 3, 2004 and July 5, 2003 and our consolidated cash
flows for the six months ended July 3, 2004 and July 5, 2003. The results of our
operations for the six months ended July 3, 2004 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2004.
(2) Revenue Recognition
The Company recognizes revenue upon the delivery of the related freight. A
portion of the Company's revenue is derived from shipments that originated or
terminated in other regions, where a portion of freight movement is handled by
another carrier. Most of this revenue is with carriers with which the Company
maintains transportation alliances. The Company does not recognize revenue or
the associated expenses that relate to the portion of the shipment transported
by its alliance partners.
6
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
(3) Stock-Based Compensation
The Company has a stock-based employee compensation plan. The Company
accounts for that plan under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. As such, the Company records
compensation expense only if the fair value of the underlying stock exceeds the
exercise price on the date of grant. The following table illustrates the effect
on adjusted net (loss) income and adjusted (loss) income per share as if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, and as allowed by SFAS No. 148,
Accounting for Stock-Based Compensation -- Transition and Disclosure, an
Amendment of FASB No. 123, to stock-based employee compensation and had the
Company been a C corporation for all of 2003.
Three months ended Six months ended
----------------------------- --------------------------------
July 3, July 5, July 3, July 5,
2004 2003 2004 2003
-------------- ------------- --------------- --------------
Net loss, as reported: $ (2,543) $ (3,672)
Add:
Stock-based employee compensation expense included
in reported net (loss), net of related tax effects 60 119
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (156) (312)
-------------- ---------------
Pro forma net loss $ (2,639) $ 3,865)
============== ===============
Net loss per share
Basic
As reported $ (0.14) $ (0.21)
Pro forma (0.15) (0.22)
Diluted
As reported (0.14) (0.21)
Pro forma (0.15) (0.22)
Net (loss) income, as reported: $ (1,305) $ 2,009
Add:
Stock-based employee compensation expense included
in reported net (loss) income, net of related tax 60 119
effects
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (69) (138)
------------- --------------
Adjusted net (loss) income (1,314) 1,990
Pro forma federal income tax adjustment 535 (839)
------------- --------------
Adjusted pro forma net (loss) income $ (779) $ 1,151
============= ==============
Adjusted pro forma net income per share
Basic
As reported $ (0.08) $ 0.10
Pro forma (0.07) 0.11
Diluted
As reported (0.08) 0.09
Pro forma (0.07) 0.10
7
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
(4) Acquisition
Effective March 5, 2004, the Company purchased selected terminals and
rolling stock of Eastern Oregon Fast Freight ("EOFF") a non-union
less-than-truckload carrier that operated 21 terminals in the states of Oregon,
Washington, and Idaho. The selected assets of EOFF were purchased for
approximately $10.0 million in cash ($7.0 million of the purchase price was paid
in the first quarter, $1.0 million was paid in the second quarter and the
remainder to be paid before the end of 2004). Included in the purchase price was
a $600 non-compete agreement that will be amortized over five years. The purpose
of the acquisition was to expand the Company's operations into the Pacific
Northwest. The assets acquired were recorded at estimated fair values as
determined by the Company's management based on information currently available
and on assumptions as to future operations. If the results of the operations of
EOFF had been reflected in the Company's consolidated results effective January
1, 2004, the EOFF results would not have had a material effect on the Company's
consolidated results.
The $10.0 million purchase price was allocated as follows:
(dollars in millions)
Property and equipment $ 9.4
Non-compete agreement 0.6
-------
Total $10.0
=======
(5) (Loss) income Per Share
On November 1, 2003, the Company converted from an S corporation to a C
corporation (see note 7). (Loss) income per share has been calculated as if the
Company were a C corporation for federal income tax purposes for the three
months and six months ended July 3, 2003. Basic (loss) income per share is
calculated using the weighted average number of shares outstanding. The weighted
average shares outstanding used in the calculation of diluted (loss) income per
share includes the dilutive effect of options to purchase common stock,
calculated using the treasury stock method. Unexercised stock options are the
only reconciling items between basic and diluted income per share for 2003.
The following table presents information necessary to calculate basic and
diluted (loss) income per share:
Three months ended Six months ended
----------------------------- -----------------------------
July 3, July 5, July 3, July 5,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net (loss) income $ (2,543) $ (1,305) $ (3,672) $ 2,009
============ ============
Pro forma federal tax adjustment 474 (900)
------------ ------------
Pro forma net (loss) income $ (831) $ 1,109
============ ============
(Shares in thousands)
Weighted average shares outstanding - basic 17,842 10,868 17,777 10,868
Common stock equivalents - - - 1,209
------------ ------------ ------------ ------------
Weighted average shares outstanding - diluted 17,842 10,868 17,777 12,077
============ ============ ============ ============
Basic loss per share (0.14) (0.21)
Pro forma basic (loss) income per share (0.08) 0.10
Diluted loss per share (0.14) (0.21)
Pro forma diluted (loss) income per share (0.08) 0.09
Anti-dilutive unexercised options excluded
from calculation 1,581 2,921 1,581 204
8
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
(6) Debt and Related Party Financing
(a) Debt
Long-term debt consists of the following at July 3, 2004 and December 31,
2003:
2004 2003
---- ----
Securitization facility $ - $ -
Revolving facility - -
Equipment notes payable 131 169
Capital lease obligations 21,262 26,194
------ ------
21,393 26,363
Less: Current portion 7,187 6,375
------ ------
$14,206 $19,988
====== ======
On April 30, 2002, the Company entered into a $40,000 revolving accounts
receivable securitization facility (the Securitization Facility) and a $19,000
revolving credit facility (the Revolving Facility). Under the Securitization
Facility, the Company, on a revolving basis, sells its interests in its accounts
receivable to Central Receivables, a wholly-owned, special purpose subsidiary.
The assets and liabilities of Central Receivables are included in the
consolidated financial statements of the Company. The Company can receive up to
$40,000 of proceeds, subject to eligible receivables and will pay a service fee
recorded as interest expense, as defined in the agreement. The Company pays
commercial paper interest rates plus an applicable margin on the proceeds
received. Interest is generally payable monthly. The Securitization Facility
includes certain restrictions and financial covenants. The Company must pay a
commitment fee equal to 0.2% per annum of 102% of the facility limit minus the
aggregate principal balance, as well as an administrative fee equal to 0.15% per
annum of the uncommitted balance. As of July 3, 2004 and December 31, 2003,
there were no borrowings outstanding under the Securitization Facility.
Under the Revolving Facility, the Company can receive up to $19,000 of
proceeds, secured by certain revenue equipment. As of July 3, 2004 and December
31, 2003, the Company had no outstanding borrowings under this facility. The
Revolving Facility accrues interest at either a variable base rate equal to the
bank's prime lending rate or at a variable rate equal to LIBOR plus 175 basis
points. Interest is payable in periods from one to three months at the option of
the Company. The Company must maintain certain financial and non-financial
covenants. The Company also had letters of credit of $15,771 outstanding under
the Revolving Facility at July 3, 2004. The Company must pay a commitment fee
equal to 0.25% per annum on the daily unused Revolving Facility as well as a
letter of credit fee equal to 1.75% per annum on the average daily amount of the
letters of credit. The maturity date of the Revolving Facility is October 31,
2004. At July 3, 2004, the Company had $3,229 available under the Revolving
Facility.
On July 28, 2004, the Company amended and restated the Revolving Facility
(the Amended and Restated Revolving Facility) to increase borrowing capacity to
$30,000 and to extend the maturity date to April 30, 2006 (see also Note 10 -
Subsequent Events).
The Company has entered into a number of note agreements with a third party
to acquire equipment for use in its operations. The balance of these notes was
$131 and $169 at July 3, 2004 and December 31, 2003, respectively. These notes
with fixed interest rates ranging from 7.75% to 8.75% mature at various dates
through January 2006 and require monthly principal and interest payments through
maturity. These notes are secured by the equipment acquired.
9
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
In March 2004, (see Note 4 above) the Company acquired certain assets of
EOFF for approximately $10,000. Under the terms of the agreement, the Company
paid approximately $7,000 of the purchase price at closing and $1,000 in the
second quarter of 2004. The remaining $2,000 is recorded on the consolidated
balance sheet as short-term notes payable.
(b) Related-Party Financing
In 1998, the Company entered into an agreement with Southwest Premier
Properties, L.L.C. ("Southwest Premier"), an entity controlled by the Company's
principal stockholder, for the sale and leaseback of the land, structures and
improvements of some of the Company's terminals. For financial accounting
purposes, this transaction has been accounted for as a financing arrangement.
Consequently, the related land, structures and improvements remain on the
Company's consolidated balance sheet. The initial lease term is for ten years
with an option for an additional ten years at the then fair market rental rate.
At the expiration of the original lease term, the Company has an option to
purchase all of the properties, excluding certain surplus properties, for the
then fair market value.
Since the fair value of the properties sold and leased back has always
equaled or exceeded the proceeds from the financing arrangement, the annual
lease payments have been reflected as a cost of the financing and recorded as
interest expense. During 2004, $234 of these properties were sold and accounted
for as a reduction in the financing obligation and a reduction in property. The
amount outstanding under the financing agreement was $22,920 and $23,154 at July
3, 2004 and December 31, 2003 respectively. If the Company exercises the fair
value purchase option, the excess of the amount paid over the recorded financing
obligation will be reflected as additional interest expense. If the fair value
purchase option is not exercised at the end of the lease term, the excess of the
recorded financing obligation over the net book value of the related properties
will be reflected as a gain on the financing arrangement.
(7) Income Taxes
On November 1, 2003, the Company converted to a C Corporation for federal
income tax purposes.
Prior to the C Corporation election, the Company elected S Corporation
status for federal income tax purposes. Accordingly, the accompanying unaudited
consolidated financial statements for the three months and six months ended July
5, 2003 do not include the effects of federal income taxes, and income taxes
consist solely of state income taxes.
Included in the three months and six months ended July 3, 2004 income tax
benefit is a $1.8 million benefit from the reversal of a previously recorded
deferred tax liability as a result of an IRS review.
(8) Contingencies
The Company is involved in certain claims and pending litigation arising
from the normal conduct of business. Based on the present knowledge of the
facts, management believes the resolution of these claims and pending litigation
will not have a material adverse effect on the consolidated financial position,
results of operations or liquidity of the Company.
In June and July 2004, three stockholder class actions were filed against
the Company and certain of its officers and directors. The class actions were
filed in the United States District Court - Western District of Texas and
generally allege that false and misleading statements were made in the Company's
initial public offering registration statement and prospectus, during the period
surrounding the Company's initial pubic offering and up to the press release
dated June 16, 2004. The class actions are in the initial phases and the Company
intends to vigorously defend against the suits. The Company maintains a
directors' and officers' insurance policy with a $350 deductible. The Company
has informed its insurance carrier and retained outside counsel to assist in its
defense.
10
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
The Company believes there is no factual or legal basis for the
allegations. Although it is not possible at this time to predict the litigation
outcome of these cases, the Company expects to prevail. However, an adverse
litigation outcome could be material to the Company's consolidated financial
position or results of operations. As a result of the uncertainty regarding the
outcome of this matter no provision has been made in the consolidated financial
statements with respect to this contingent liability.
The Company is subject to loss contingencies pursuant to federal, state,
and local environmental regulations dealing with the transportation, storage,
presence, use, disposal, and handling of hazardous materials, discharge of storm
water and fuel storage tanks. Environmental liabilities, including remediation
costs, are accrued when amounts are probable and can be reasonably estimated.
(9) Related-Party Transactions
During the three months and six months ended July 3, 2004 and July 5, 2003
the Company incurred approximately $5,965, $6,003, $8,242 and $12,209,
respectively, for transportation services provided by companies for which the
Company's principal stockholder is the Chairman. At July 3, 2004 and December
31, 2003, the Company had payables of $3,380 and $1,020, respectively, for these
transportation services.
During the three months and six months ended July 3, 2004 and July 5, 2003,
the Company incurred $39, ($15), $134, and $20, respectively, to an entity owned
by a stockholder of the Company for legal services. The Company also paid $117
for legal services in 2003, which were related to the initial public offering.
During the three months and six months ended July 3, 2004 and July 5, 2003,
the Company incurred $376, $350, $896, and $772, respectively, for building
rental expense with related parties.
(10) Subsequent Events
On July 28, 2004, the Company and SunTrust Bank entered into the Amended
and Restated Revolving Facility to replace the Revolving Facility existing on
July 3, 2004, to increase borrowing capacity to $30,000, and to extend the
maturity date to April 30, 2006. Under the Amended and Restated Revolving
Facility, the Company can receive up to an aggregate of $30,000 of proceeds in
the form of loans and letters of credit, with a sublimit of $10,000 that can be
received in the form of loans. The Amended and Restated Revolving Facility
accrues 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 will vary
depending on the Company's lease adjusted leverage ratio. Interest is payable in
periods from one to three months at the option of the Company. The Amended and
Restated Revolving Facility is secured by certain revenue equipment, and letters
of credit that are issued are secured by cash collateral. The facility contains,
among other things, certain financial and non-financial covenants. The Company
must pay a commitment fee equal to 0.25% per annum on the daily unused Amended
and Restated Revolving 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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Note Regarding Forward-Looking Statements
Except for the historical information contained herein, the discussion in
this annual report contains "forward-looking statements," which include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation, and availability of
resources. These forward-looking statements include, without limitation,
statements regarding: expectations as to operational improvements; expectations
as to cost savings, revenue growth, and income; the time by which certain
objectives will be achieved; proposed new products and services; expectations
that claims, lawsuits, commitments, contingent liabilities, labor negotiations,
or agreements, or other matters will not have a materially adverse effect on our
consolidated financial position, results of operations, or liquidity; statements
concerning projections, predictions, expectations, estimates, or forecasts as to
our business, financial, and operational results and future economic
performance; and statements of management's goals and objectives, and other
similar expressions concerning matters that are not historical facts. Words such
as "may," "will," "should," "could," "would," "predicts," "potential,"
"continue," "expects," "anticipates," "future," "intends," "plans," "believes,"
"estimates," and similar expressions, as well as statements in future tense,
identify forward-looking statements. These statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements. Readers should review and
consider the factors discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors that May Affect Future
Results" of our Annual Report on Form 10-K, filed on March 30, 2004, along with
the various disclosures by us in our press releases, stockholder reports, and
other filings with the Securities and Exchange Commission. We do not assume, and
specifically disclaim, any obligation to update any forward-looking statement
contained in this Report.
Executive Overview
We are one of the ten largest regional less-than-truckload ("LTL") carriers
in the United States based on revenues, generating approximately $390.0 million
in revenue during 2003 and approximately $105.5 and $202.6 million,
respectively, in revenue during the second quarter and first half of 2004. In
our operations, we pick up and deliver multiple shipments for multiple customers
on each trailer. In 2003 and the first half of 2004, a significant portion of
our business was concentrated in our Southwest region, which is anchored by
Texas and California, two of the nation's three largest state economies.
We grew substantially between our first full year of operation in 1998 and
2001, but our operating results were less than we desired and we experienced an
operating loss during 2001. In 2002 and 2003, we assembled a new senior
management team and began executing a strategic plan designed to increase the
efficiency of our operations and expand our geographic territory. In 2002 and
2003, we focused on streamlining our terminal network, routing freight
efficiently through that network, improving our freight mix through a
comprehensive yield management program, and applying our dynamic resource
planning process to our operations. In 2002 and 2003, our profitability, as
measured by operating ratio, improved substantially, and we achieved an
operating ratio of 93.9% for the year ended December 31, 2003, compared to 98.9%
for 2001.
12
Our results for 2003 included several items that we consider to be unusual.
During 2003, we recorded an aggregate of $3.8 million in increases to our
insurance reserves for accident, workers' compensation, and other liabilities
arising prior to 2003 ($1.8 million of which related to two accidents that
occurred in 2002). This compared to an accrual of $0.5 million relating to
claims that arose in prior periods in that we accrued in the year ended December
31, 2002. We recorded the increased accruals despite improvements in our rate of
both accident claims and workers' compensation claims during 2003. We also
amended a benefit plan to reduce our future obligations. As a result of this
amendment, we recorded a curtailment gain of approximately $7.8 million in 2003.
In addition, in January of 2002 and 2003, we increased the useful lives and
decreased the salvage values of our tractors and trailers to reflect that we are
operating the tractors and trailers for longer periods than previously estimated
by our past management. These changes decreased our depreciation expense by
approximately $3.3 million compared with the expense we would have recorded
under the prior method. In the aggregate, these items had a positive effect of
approximately $7.3 million on our operating income for the year ended December
31, 2003. We do not anticipate benefits similar to these in future periods.
In December 2002, we expanded service in a seven-state, Midwest region,
establishing all-points coverage in six of these states. Our expenses for the
six months ended July 5, 2003, reflect the costs of this Midwest expansion,
primarily consisting of purchased transportation, employee training, and
relocation expenses.
On March 16, 2004, we announced the acceleration of our expansion into the
Pacific Northwest through the purchase of selected terminal network and rolling
stock of Eastern Oregon Fast Freight, Inc. ("EOFF"), a non-union LTL carrier
that operated in the states of Oregon, Washington, and Idaho. The selected
assets of EOFF were purchased for approximately $10.0 million, with $7.0 million
of the purchase price paid from cash reserves in the first quarter of 2004 and
another $1.0 million paid in the second quarter of 2004. The remainder of the
purchase price will be paid later in 2004. The assets acquired included six
owned terminal properties, eleven leased terminal properties, 160 tractors, and
644 trailers. Our operating expenses for the quarter ended July 3, 2004 and for
the six months ended July 3, 2004, reflect the costs of our accelerated
Northwest expansion, primarily consisting of additional employee costs,
additional purchased transportation costs, and additional lease expense for
terminals in the expanded territory.
In late July 2004, the Company hired Walt Ainsworth as Executive Vice
President. As Executive Vice President he will be involved in all aspects of the
Company. In addition, in July 2004, the Company hired David Heim as Vice
President of Transportation and Jeff Jordan as Director of Claims Prevention,
both newly created positions.
Revenues
Our operating revenues vary with the revenue per hundredweight we charge to
customers and the volume of freight we transport. From our first full year of
operation in 1998 to 2001, our revenue grew from approximately $276.3 million to
approximately $395.7 million, a compounded annual growth rate of approximately
13%. Our growth resulted from a combination of internal growth, geographic
expansion, and our acquisitions of two LTL carriers that expanded our presence
in California, Arizona, and Nevada.
Following the arrival of our new management team in early 2002, we closed
approximately 25% of our then existing terminals and implemented a yield
management process intended to eliminate freight that did not generate
sufficient returns. As a result of these efforts, our revenues decreased $24.3
million, or 6.1%, from $395.7 million for 2001 to approximately $371.4 million
in 2002, but revenue derived from the resulting improved freight portfolio began
to increase in the latter part of 2002 and in 2003 as our revenue increased to
$389.7 million. LTL revenue per hundredweight increased 9.1% in 2003 compared to
2002 on a 7.0% increase in average length of haul.
Due to our geographic expansion in 2003 and 2004, our average length of
haul has increased significantly, 11.0% in the six months ended July 3, 2004
compared to the same period in 2003. However, our LTL revenue per hundredweight,
excluding fuel surcharge revenue, has increased only 1.4%. Although total tons
hauled in the six months ended July 3, 2004 are lower by 1.3% per day compared
to the same period in 2003, total tons hauled in the 2004 second quarter are up
by 2.2% per day compared to the 2003 second quarter.
Operating Expenses
Our major expense categories can be summarized as follows:
Salaries, wages, and benefits. This category includes compensation for our
employees, health insurance, workers' compensation, 401(k) plan contributions,
and other fringe benefits. These expenses will vary depending upon several
factors, including our efficiency, our experience with health and workers'
compensation claims, and increases in health care costs. Salaries, wages, and
benefits also include the non-cash expense associated with stock options granted
to several of our executives that had exercise prices that were determined to be
below fair market value. This non-cash compensation expense is expected to
amount to approximately $237,000 annually through June of 2007.
13
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 and owner-operators 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 the 26 active properties we lease from a
related party that are considered to be a financing arrangement.
Net Loss
The net loss increased from pro forma C corporation net loss of $(0.8)
million, or $(0.08) per diluted share, for the second quarter of 2003 to a net
loss of $(2.5) million, or $(0.14) per diluted share, for the second quarter of
2004. For the six months ended July 3, 2004 and July 5, 2003, the Company
reported a net loss of $(3.7) million equal to $(0.21) per diluted share
compared to pro forma C corporation net income of $1.1 million equal to $0.09
per diluted share. The increase in net loss resulted primarily from increased
costs discussed in more detail below in "Results of Operations."
S Corporation Status
Prior to November 1, 2003, we operated as an S corporation for federal
income tax purposes. An S corporation passes through essentially all taxable
income and losses to its stockholders and does not pay federal income taxes at
the corporate level. For comparative purposes, we have included a pro forma
provision for income taxes showing what those taxes would have been had we been
taxed as a C corporation in all periods our S corporation election was in
effect.
14
Results of Operations
The table below sets forth the percentage relationship of the specified
items to operating revenues for the periods indicated.
Three months ended Six months ended
------------------------------- --------------------------
July 3, July 5, July 3, July 5,
2004 2003 2004 2003
---------------- -------------- ------------- ------------
Operating revenues......................................100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:
Salaries, wages, and benefits..........................56.9 55.6 57.2 54.5
Purchased transportation...............................16.4 15.7 15.3 14.9
Operating and general supplies and
expenses............................................20.0 16.6 19.6 17.2
Insurance and claims....................................6.3 5.5 5.1 4.2
Building and equipment rentals..........................1.4 1.2 1.4 1.2
Depreciation and amortization...........................3.8 4.3 3.9 4.3
----- ----- ----- -----
Total operating expenses(1)........................104.8 98.8 102.5 96.3
----- ----- ----- -----
(Loss) income from operations............................(4.8) 1.2 (2.5) 3.7
Interest expense..........................................1.8 2.6 1.8 2.6
----- ----- ----- -----
(Loss) income before income taxes........................(6.6) (1.4) (4.3) 1.1
----- ----- ----- -----
Income tax (expense) benefit..............................4.2 0.1 2.5 (0.1)
----- ----- ----- -----
Net (loss) income........................................(2.4)% (1.3) (1.8)% 1.0
===== ----- ===== -----
Pro Forma Data:
(Loss) income before income taxes.........................-- (1.3) -- 1.1
Pro forma income tax benefit (expense)(2).................-- 0.5 -- (0.5)
----- -----
Pro forma (loss) income(2)................................-- (0.8)% -- 0.6%
===== =====
- ----------
(1) Total operating expenses as a percentage of operating revenues, as presented
in this table, is also referred to as operating ratio.
(2) Provision for federal income taxes and net income as if we were a C
corporation for tax purposes for all periods.
Comparison of Three Months Ended July 3, 2004, to Three Months Ended July 5,
2003
Operating revenues. Operating revenues increased $5.3 million, or 5.4%,
from $100.2 million for the second quarter of 2003 to $105.5 million for second
quarter of 2004. The increase in operating revenues was mainly due to increased
fuel surcharge revenue (due to higher cost of fuel) and one additional working
day in the 2004 quarter (the 2004 quarter had 64 working days, compared to 63
working days in the 2003 quarter). Revenue per working day was $1.65 million in
the 2004 quarter, which was 3.7% higher than the $1.59 million per working day
in the 2003 quarter. LTL revenue per hundredweight increased 2.1% from $11.08 in
the 2003 quarter to $11.31 in the 2004 quarter as a result of increased fuel
surcharge revenue and tonnage hauled. LTL revenue per hundredweight in the
second quarter of 2004, excluding fuel surcharge revenue, remained essentially
constant with the second quarter of 2003 despite an increase in the average
length of haul of 10.9%. Total tonnage increased 20.0 thousand tons, or 3.9%,
from 516.2 thousand tons in the 2003 quarter to 536.2 thousand tons in the 2004
quarter partially due to the one additional working day in the 2004 second
quarter.
Salaries, wages, and benefits. Salaries, wages, and benefits increased $4.4
million, or 8.1%, from $55.7 million for the second quarter of 2003 to $60.1
million for the second quarter of 2004. The increase in salaries, wages, and
benefits resulted primarily from an increase in compensation for most of our
employees, rising medical costs, and a reduction in employee productivity.
Increases in length of haul also contributed to the increase, due to the fact
that our linehaul drivers are paid on the basis of miles driven. As a percentage
of operating revenues, salaries, wages, and benefits increased from 55.6% for
the 2003 quarter, to 56.9% for the 2004 quarter.
15
Purchased transportation. Purchased transportation increased $1.7 million,
or 10.8%, from $15.7 million for the second quarter of 2003 to $17.4 million for
the second quarter of 2004. The increase in purchased transportation expenses
resulted primarily from an increased usage of third party purchased
transportation due to an increase in our average length of haul of 10.9%, one
extra working day in the current quarter and an increase in fuel costs passed
along from the third party providers. As a percentage of operating revenues,
purchased transportation increased from 15.7% for the 2003 quarter to 16.4% for
the 2004 quarter.
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $4.5 million, or 27.1%, from $16.6 million for the second
quarter of 2003 to $21.1 million for the second quarter of 2004. The increase in
operating and general supplies and expenses resulted primarily from an increase
in fuel, vehicle repairs, fuel tax and general supplies. As a percentage of
operating revenues, operating and general supplies and expenses increased from
16.6% for the 2003 quarter to 20.0% for the 2004 quarter.
Insurance and claims. Insurance and claims increased $1.2 million, or
21.8%, from $5.5 million for the second quarter of 2003 to $6.7 million for the
second quarter of 2004. The increase in insurance and claims expense resulted
primarily from an increase in cargo claims expense that was partially offset by
a reduction in our third party accident claims. We also included in insurance
and claims expense for the 2004 quarter our $0.4 million deductible for
directors and officer insurance in connection with the class action complaints
filed against us and certain of our officers and directors in late June and
early July. As a percentage of operating revenues, insurance and claims
increased from 5.5% for the 2003 quarter to 6.3% for the 2004 quarter.
Building and equipment rentals. Building and equipment rentals increased
approximately $0.2 million, or 16.7%, from $1.2 million for the second quarter
of 2003 to $1.4 million for the second quarter of 2004. The increase in building
and equipment rentals resulted primarily from the addition of leased terminals
in connection with our Northwest expansion, a new terminal in California and
normal annual rent increases for other terminals. As a percentage of operating
revenues, building and equipment rentals increased from 1.2% for the 2003
quarter to 1.4% for the 2004 quarter.
Depreciation and amortization. Depreciation and amortization expense
decreased approximately $0.3 million, or 7.0%, from $4.3 million for the second
quarter of 2003 to $4.0 million for the second quarter of 2004, mainly as a
result of equipment becoming fully depreciated during 2003 and sales of
non-essential equipment late in 2003. Gains on sales amounted to approximately
$0.2 million in the 2004 quarter, mainly from the sale of excess land, compared
to $15 thousand in the 2003 quarter. As a percentage of operating revenues,
depreciation and amortization decreased from 4.3% for the 2003 quarter to 3.8%
for the 2004 quarter.
Operating ratio. Our operating ratio increased from 98.8% for the second
quarter of 2003 to 104.8% for the second quarter of 2004.
Interest expense. Total interest expense decreased $0.7 million, or 26.9%,
from $2.6 million for the second quarter of 2003 to $1.9 million for the second
quarter of 2004. As a percentage of operating revenues, interest expense
decreased from 2.6% for the 2003 quarter to 1.8% for the 2004 quarter. Our debt
balances decreased by approximately $50.0 million in December 2003 as we
utilized part of the net proceeds from our initial public offering to pay off
debt. In the first quarter of 2004, we further reduced our outstanding debt by
$2.0 million through the utilization of net proceeds from our initial public
offering. Our related party interest expense decreased slightly from $1.6
million in the 2003 quarter to $1.5 million in the 2004 quarter. The amounts for
related party interest are recorded as interest expense because the associated
leases are reflected as a financing arrangement in our consolidated financial
statements.
Income taxes. We recorded a $4.4 million income tax benefit in the second
quarter of 2004 due partially to a pre-tax loss of $6.9 million. Also, included
in the $4.4 million benefit is a $1.8 million benefit from the reversal of a
previously recorded deferred liability as a result of an IRS review. Our pro
forma income tax benefit in the second quarter of 2003 was approximately $0.5
million on a pre-tax loss of $1.4 million. The effective tax rate in the 2004
second quarter was 63.3% (38.1% excluding the $1.8 million benefit mentioned
above) compared to pro forma 39.0% in the same quarter last year.
16
Comparison of Six Months Ended July 3, 2004, to Six Months Ended July 5, 2003
Operating revenues. Operating revenues increased $3.6 million, or 1.8%,
from $199.0 million for the 2003 period to $202.6 million for the 2004 period.
The increase in operating revenues was partially due to an increase in fuel
surcharge revenue due to higher cost of fuel. Revenue per working day was $1.56
million in the 2004 period, which was 2.0% higher than the $1.53 million per
working day in the 2003 period. LTL revenue per hundredweight increased 2.5%
from $11.10 in the 2003 period to $11.37 in the 2004 period due in part to an
increase in fuel surcharge revenue and average length of haul of 11.0%. Total
tonnage decreased 13.7 thousand tons, or 1.3%, from 1,032.1 thousand tons in the
2003 period to 1,018.4 thousand tons in the 2004 period.
Salaries, wages, and benefits. Salaries, wages, and benefits increased $7.2
million, or 6.6%, from $108.5 million for the 2003 period to $115.7 million for
the 2004 period due partially to a $2.5 million curtailment gain relating to a
reduction of our obligations under a post-retirement health plan in the 2003
period. The increase in salaries, wages, and benefits, before the curtailment
gain, resulted primarily from an increase in compensation for most of our
employees, rising medical costs, increased length of haul and lower employee
productivity. As a percentage of operating revenues, salaries, wages, and
benefits increased from 54.5% for the 2003 period, to 57.2% for the 2004 period.
Purchased transportation. Purchased transportation increased $1.2 million,
or 4.0%, from $29.7 million for the 2003 period to $30.9 million for the 2004
period. The increase in purchased transportation expenses resulted primarily
from an increased usage of third party purchased transportation due to an
increase in our average length of haul and higher fuel surcharge costs paid to
the third party providers. As a percentage of operating revenues, purchased
transportation increased from 14.9% for the 2003 period to 15.3% for the 2004
period.
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $5.6 million, or 16.4%, from $34.2 million for the 2003
period to $39.8 million for the 2004 period. The increase in operating and
general supplies and expenses resulted primarily from an increase in vehicle
repairs, fuel, utilities and general supplies. As a percentage of operating
revenues, operating and general supplies and expenses increased from 17.2% for
the 2003 period to 19.6% for the 2004 period.
Insurance and claims. Insurance and claims increased $2.0 million, or
23.8%, from $8.4 million for the 2003 period to $10.4 million for the 2004
period. The increase in insurance and claims expense resulted primarily from an
increase in cargo claims expense that was partially offset by a reduction in our
third party accident claims. As a percentage of operating revenues, insurance
and claims increased from 4.2% for the 2003 period to 5.1% for the 2004 period.
Building and equipment rentals. Building and equipment rentals increased
approximately $0.5 million, or 20.8%, from $2.4 million for the 2003 period to
$2.9 million for the 2004 period. The increase in building and equipment rentals
resulted primarily from the addition of leased terminals in connection with our
Northwest expansion, a new terminal in California and normal annual rent
increases for other terminals. As a percentage of operating revenues, building
and equipment rentals increased from 1.2% for the 2003 period to 1.4% for the
2004 period.
Depreciation and amortization. Depreciation and amortization expense
decreased approximately $0.7 million, or 8.1%, from $8.6 million for the 2003
period to $7.9 million for the 2004 period, mainly as a result of equipment
becoming fully depreciated during 2003 and sales of non-essential equipment late
in 2003. We reported gains on sales of $0.4 million in the 2004 period compared
to only $15 thousand in the 2003 period, due mainly to gains on sales of excess
land. As a percentage of operating revenues, depreciation and amortization
decreased from 4.3% for the 2003 period to 3.9% for the 2004 period.
Operating ratio. Our operating ratio increased from 96.3% for the 2003
period to 102.5% for the 2004 period.
17
Interest expense. Total interest expense decreased $1.4 million, or 27.4%,
from $5.1 million for the 2003 period to $3.7 million for the 2004 period. As a
percentage of operating revenues, interest expense decreased from 2.6% for the
2003 period to 1.8% for the 2004 period. Our debt balances decreased by
approximately $50.0 million in December 2003 as we utilized part of the net
proceeds from our initial public offering to pay off debt. In the first quarter
of 2004, we further reduced our outstanding debt by $2.0 million through the
utilization of net proceeds from our initial public offering. Our related party
interest expense was largely unchanged at $3.1 million in both the 2003 and 2004
periods. The amounts for related party interest are recorded as interest expense
because the associated leases are reflected as a financing arrangement in our
consolidated financial statements.
Income taxes. We recorded an income tax benefit in the 2004 period of $5.1
million, which yields an effective tax rate of 58.0% (including a $1.8 million
benefit for the reversal of a previously recorded deferred tax liability due to
an IRS review) on a pre-tax loss of $8.7 million. Excluding the $1.8 million
benefit, the effective tax rate would have been 37.9%. Our pro forma income
taxes in the 2003 period were approximately $1.0 million on a pre-tax income of
$2.1 million. The effective tax rate was 48.1%. Included in the pro forma 2003
pre-tax income was a non-deductible interest expense of $0.5 million. Excluding
the non-deductible interest expense, the effective tax rate would have been 39%.
Liquidity and Capital Resources
Our business requires substantial, ongoing capital investments,
particularly to replace revenue equipment such as tractors and trailers. Our
primary sources of liquidity have historically been cash from operations,
secured borrowings, and proceeds of our initial public offering. We believe
these and other sources of liquidity will be sufficient to fund our operations
at least through the end of 2004. We believe, based on past experience with our
lenders, that such financing will be available if needed to provide liquidity
beyond 2004.
Net cash (used in) provided by operating activities was approximately
$(3.1) million and $0.8 million for the six months ended July 3, 2004 and July
5, 2003, respectively. Net cash used in the 2004 period resulted mainly from
payments on accrued expenses and other liabilities of $2.6 million, an increase
in other assets (mainly prepaid licenses) of $1.5 million and an increase in
accounts receivable of $5.9 million offset by an increase in accounts payable of
$6.4 million. Our net income, for the six months ended July 5, 2003 amounted to
$2.0 million including non-cash expenses of $8.6 million for depreciation. Other
significant items affecting net cash of $0.8 million provided in the 2003 period
were a $4.2 million decrease in accrued expenses and other liabilities, an
increase in trade accounts receivable of $8.8 million and an increase of $2.4
million in claims and insurance accruals.
Net cash used in investing activities was approximately $21.4 million and
$1.6 million for the six months ended July 3, 2004 and July 5, 2003. Our capital
expenditures were approximately $16.3 million in the 2004 period and $1.9
million in the 2003 period. In 2004, we paid $8.0 million (of the total purchase
price of $10.0 million) for the terminal network and rolling stock of EOFF - our
Northwest expansion. We expect our net capital expenditures, for the second half
of 2004, to be approximately $15 million consisting primarily of the acquisition
of new tractors and trailers.
Net cash used in financing activities was approximately $4.0 million for
the six months ended July 3, 2004 due mainly to payments on long term debt. In
the six months ended July 5, 2003, net cash used amounted to $4.9 million due
mainly to $4.8 million distribution made to stockholders of our former S
corporation relating to the fourth quarter of 2002.
On April 30, 2002, we entered into a $40.0 million revolving accounts
receivable securitization facility that expires April 27, 2005, with Three
Pillars Funding Corporation and a revolving credit facility with Suntrust Bank.
Under the securitization facility, we can borrow up to $40.0 million, subject to
eligible receivables. We pay commercial paper interest rates plus an applicable
margin on amounts borrowed. Interest is generally payable monthly. The
securitization facility includes certain restrictions and financial covenants.
As of July 3, 2004, we had no borrowings outstanding under the securitization
facility. Under the securitization facility, we pay a commitment fee equal to
0.2% per year of 102% of the facility limit minus the aggregate outstanding
principal balance, as well as an administrative fee equal to 0.15% per annum of
the uncommitted balance.
18
On July 28, 2004, we entered into an Amended and Restated Revolving
Facility to replace the Revolving Facility existing on July 3, 2004, to increase
borrowing capacity to $30,000, and to extend the maturity date to April 30,
2006. Under the Amended and Restated Revolving Facility, the Company can receive
up to an aggregate of $30,000 of proceeds in the form of loans and letters of
credit, with a sublimit of $10,000 that can be received in the form of loans.
The Amended and Restated Revolving Facility accrues 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 will vary depending on the Company's
lease adjusted leverage ratio. Interest is payable in periods from one to three
months at the option of the Company. The Amended and Restated Revolving Facility
is secured by certain revenue equipment, and letters of credit that are issued
are secured by cash collateral. The facility contains, among other things,
certain financial and non-financial covenants. The Company must pay a commitment
fee equal to 0.25% per annum on the daily unused Amended and Restated Revolving
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.
Substantially all of the amounts outstanding under our $30.0 million
revolving credit facility are used to fund outstanding letters of credit. As of
July 3, 2004, we had no borrowings and $15.8 million in letters of credit
outstanding under that facility. The face amount of letters of credit we are
required to post is expected to increase in the future because of our larger
self-insured retentions. However, to the extent that insurance requirements
cause our letters of credit outstanding to rise above this level, our borrowing
capacity under the revolving credit facility will be reduced and we may be
required to draw upon other resources, such as our securitization facility, to
address our liquidity needs.
We have entered into a number of note agreements with a third party to
acquire equipment for use in our operations. The outstanding principal balance
of these notes was $0.1 million at July 3, 2004. These notes have fixed interest
rates ranging from 7.75% to 8.75% and mature at various dates through July 2006.
In 1998, we entered into an agreement with Southwest Premier Properties,
L.L.C. ("Southwest Premier"), an entity controlled by our principal stockholder,
for the sale and leaseback of the land, structures and improvements of some of
our terminals. For financial accounting purposes, this transaction has been
accounted for as a financing arrangement. Consequently, the related land,
structures and improvements remain on our consolidated balance sheet. The lease
was amended in February 2003 to increase the rent and provide for a term of ten
years with an option for an additional ten years at the then fair market rental
rate. At the expiration of the original lease term, we have an option to
purchase all of the properties, excluding certain surplus properties, for the
then fair market value.
Because the fair value of the properties sold and leased back has always
equaled or exceeded the proceeds from the financing arrangement, the annual
lease payments have been reflected as a cost of the financing and recorded as
interest expense. The amount outstanding under the financing agreement was $22.9
million and $23.2 million at July 3, 2004 and December 31, 2003, respectively.
Off-Balance Sheet Arrangements
Certain of our terminals and revenue equipment are financed off-balance
sheet through operating leases. As of July 3, 2004, 56 of our terminals,
including seven owned by related parties, were subject to operating leases.
Terminals and revenue equipment held under operating leases are not carried
on our balance sheet, and lease payments in respect of such terminals and
revenue equipment are reflected in our statements of operations in the line
items "Building and equipment rentals" and "Building and equipment rentals -
related parties." Our total rental expense related to operating leases,
including rent paid to related parties, was $2.5 million for the first half of
2004, compared to $2.1 million for the first half of 2003. The total amount of
remaining payments under operating leases as of July 3, 2004 was $22.6 million,
with $5.4 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.
Revenue Recognition. Operating revenue is recognized upon delivery of the
related freight, as is fuel surcharge revenue. We also generate revenues derived
from interline shipments. Most of this interline revenue was with carriers with
which we maintain transportation alliances. We do not recognize revenue (or the
associated expenses) that relates to the portion of the shipment transported by
our alliance partners.
19
Insurance and Claims Accruals. We record insurance and claims accruals
based upon our estimate of the ultimate total cost of claims, not covered by
insurance, for bodily injury and property damage, cargo loss and damage,
physical damage to our equipment, workers' compensation, long-term disability,
and group health, and post-retirement health benefits. Our estimates are based
on our evaluation of the nature and severity of the claims and our past claims
experience. We include an estimate for incurred but not reported claims. The
estimated costs for bodily injury and property damage, cargo loss and damage,
and physical damage to our equipment are charged to insurance and claims. The
other estimated costs are charged to employee benefits expense.
While we believe that our insurance and claims accruals are adequate, such
estimates may be more or less than the amount ultimately paid when claims are
settled. The estimates are continually reviewed and any changes are reflected in
current operations.
Our self-insured retention for bodily injury and property damage, cargo
loss and damage, and physical damage to our equipment was an aggregate $750,000
per occurrence.
Our self-insured retention for workers' compensation has been $1.0 million
per occurrence since October 28, 2002. We also self-insure for all health claims
up to $300,000 per occurrence.
Allowance for Doubtful Accounts and Revenue Adjustments. We maintain
allowances for doubtful accounts and revenue adjustments. Such allowances
represent our estimate of accounts that will not ultimately be collected and
correspondingly adjust our operating revenues to reflect the estimates of
noncollectible accounts. Estimates used in determining this allowance are based
on our historical collection experience, current trends, credit policy, and a
percentage of our accounts receivable by aging category. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Inflation
Most of our expenses are affected by inflation, which generally results in
increased operating costs. In response to fluctuations in the cost of petroleum
products, particularly diesel fuel, we have implemented a fuel surcharge in our
tariffs and contractual agreements. The fuel surcharge is designed to offset the
cost of fuel above a base price and increases as fuel prices escalate over the
base. We do not expect the net effect of inflation on our results of operations
to be different from the effect on LTL carriers generally.
Seasonality
We experience some seasonal fluctuations in freight volume. Historically,
our shipments decrease during winter months and our fuel efficiency declines,
but our operating expenses have been higher in the summer months due to
increased maintenance costs for our tractors and trailers in hotter weather as a
large percentage of our operating region is in the South and Southwest United
States. Our expansion into the Midwest and the Northwest may increase our
exposure to seasonal fluctuations in operating expenses.
Item 3. Quantatative and Qualitative Disclosures About Market Risk.
We are exposed to a variety of market risks, most importantly the effects
of the price and availability of diesel fuel and changes in interest rates. To
address the risk of high fuel prices, we maintain a fuel surcharge program. Fuel
surcharge programs are well established in the industry and are broadly accepted
by our customers. We believe our fuel surcharge program is effective at
mitigating the risk of high fuel prices. Accordingly, we have not engaged in any
fuel price hedging activities. Because fuel surcharges, typically, are based on
the weekly national average price of diesel fuel and our operations are
concentrated in the Southwest and West coast, we have structured our fuel
surcharge to reflect the cost in those regions where we conduct the majority of
our business. There remains some risk that this blended national average will
not fully reflect regional fuel prices. We are highly dependent on adequate
supplies of diesel fuel. If our supply were interrupted, for example as a result
of war or hostile action against the United States or in fuel producing regions,
we would be exposed to significant risks.
Our market risk is also affected by changes in interest rates.
Historically, we have used a combination of fixed rate and variable rate
obligations to manage our interest rate exposure. Fixed rate obligations expose
us to the risk that interest rates might fall. Variable rate obligations expose
us to the risk that interest rates might rise. We did not have any interest rate
swaps at July 3, 2004, although we may enter into such swaps in the future if we
deem appropriate.
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Our variable rate obligations consist of our revolving line of credit and
our accounts receivable securitization facility. Our revolving line of credit,
provided there has been no default, carries a variable interest rate based on
either the prime rate or LIBOR. Our securitization facility carries a variable
interest rate based on the commercial paper rate. We currently have no drawings
under our securitization facility, but assuming borrowings were equal to the
$37.6 million available on the securitization facility at July 3, 2004, a one
percentage point increase in commercial paper rates would increase our annual
interest expense by $376,000.
Item 4. Controls and Procedures.
As required by Rule 13a-15 under the Exchange Act, the Company has carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. This evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report. During the Company's first two quarters of 2004, there were no
changes in the Company's internal control over financial reporting that have
materially affected, or that are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer as appropriate, to allow timely decisions regarding
disclosures.
The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors or intentional
fraud. An internal control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of such
internal controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in litigation incidental to our operations. These lawsuits
primarily involve claims for workers' compensation, personal injury, or property
damage incurred in the transportation of freight.
In June and July 2004, three stockholder class actions were filed against
us and certain of our officers and directors. The class actions were filed in
the United States District Court - Western District of Texas and generally
allege that false and misleading statements were made in our initial public
offering registration statement and prospectus, during the period surrounding
our initial pubic offering and up to the Company's press release dated June 16,
2004. The class actions are in the initial phases and we intend to vigorously
defend against the suits. We maintain a directors' and officers' insurance
policy with a $350,000 deductible. We have informed our insurance carrier and
retained outside counsel to assist us in our defense.
We believe there is no factual or legal basis for the allegations. Although
it is not possible at this time to predict the litigation outcome of these
cases, we expect to prevail. However, an adverse litigation outcome could be
material to our consolidated financial position or results of operations. As a
result of the uncertainty regarding the outcome of this matter no provision has
been made in the consolidated financial statements with respect to this
contingent liability.
We are not aware of any other claims that could materially affect our
consolidated financial position or results of operations.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Use of Proceeds from Registered Securities.
The effective date of the registration statement relating to our initial
public offering, filed on Form S-1 under the Securities Act (File No.
333-109068), was December 11, 2003. A total of 9,775,000 of our common shares
were sold. The managing underwriters for the offering were Bear, Stearns & Co.
Inc., BB&T Capital Markets, a division of Scott & Stringfellow, Inc., Legg Mason
Wood Walker, Incorporated, Morgan Keegan & Company, Inc., and Stephens Inc.
The offering commenced on December 11, 2003, and has been completed. Of the
8,500,000 shares of common stock registered, 5,700,000 shares were offered and
sold by us and 2,800,000 shares were offered and sold by Jerry Moyes and certain
trusts for the benefit of Mr. Moyes and his family, as selling shareholders. The
aggregate offering price of shares sold by us was $85,500,000. The underwriting
discount on those shares was $5,985,000. We incurred approximately $1,881,000 of
other expenses in connection with the offerings. The net proceeds to us totaled
approximately $77,634,000. We did not receive any of the proceeds from the sale
of shares by the selling stockholders.
Approximately $49.6 million of the proceeds we received have been used to
repay debt, including: (a) $30.5 million under our accounts receivable
securitization facility; (b) $17.1 million under secured equipment and terminal
notes; and (c) $2.0 million under secured capital leases. As of July 3, 2004, we
had used approximately $8.0 million for the acquisition of certain assets of
EOFF. We expect to use an additional $2.0 million in connection with this
acquisition. We have also used another $10.6 million, in the first six months of
2004, to acquire two terminals and purchase used and new revenue equipment.
As of July 3, 2004, approximately $9.4 million of the proceeds received in
our initial public offering remain unused. We intend to use the remainder of the
proceeds to repay amounts under secured capital leases, and for general
corporate purposes, including working capital and capital expenditures.
(e) Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
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Item 4. Submission of Matters to a Vote of Securities Holders.
The Annual Meeting of Stockholders of Central Freight Lines, Inc. was held
on May 19, 2004, for the purposes of (a) electing six directors for one-year
terms, and (b) considering and acting upon a proposal to approve the 2004
Employee Stock Purchase Plan. Proxies for the meeting were solicited pursuant to
Section 14(a) of the Securities Exchange Act of 1934, and there was no
solicitation in opposition to management's nominees for director. Each of
management's nominees for director as listed in the Proxy Statement was elected,
and the 2004 Employee Stock Purchase Plan was approved.
The voting tabulation on the election of directors in item (a) was as
follows:
Shares Voted Shares Voted hares Voted
"FOR" "AGAINST" "ABSTAIN"
Robert V. Fasso 15,569,554 0 287,800
Jerry Moyes 15,575,984 0 281,370
Duane W. Acklie 15,502,629 0 354,725
John Breslow 15,534,584 0 322,770
Porter J. Hall 15,502,629 0 354,725
Gordan W. Winburne 15,543,329 0 314,025
The voting tabulation on the approval of the 2004 Employee Stock Purchase Plan
in item (b) was 13,738,139 shares voted "FOR," 525,595 shares voted "AGAINST,"
and 900 shares voted "ABSTAIN."
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K .
(a) Exhibits
Exhibit No. Description
3.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc.,
a Nevada corporation. (Incorporated by reference to Exhibit 3.1(b) to the
Company's Registration Statement on Form S-1 No. 333-109068.)
3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1
No. 333-109068.)
4.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc.,
a Nevada corporation. (Incorporated by reference to Exhibit 3.1 to this
Report on Form 10-Q.)
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by
reference to Exhibit 3.2 to this Report on Form 10-Q.)
10.4(a)* First Amended and Restated Revolving Credit Loan Agreement, dated
July 28, 2004, by and between Central Freight Lines, Inc., a Texas
corporation, and Suntrust Bank, a Georgia state banking corporation.
10.4(b)* Revolving Credit Note, dated July 28, 2004, by Central Freight Lines, Inc., a
Texas corporation, in favor of Suntrust
Bank, a Georgia state banking corporation.
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10.5* Guaranty, dated July 28, 2004, by Central Freight Lines, Inc., a Nevada
corporation, in favor of Suntrust Bank, a Georgia state banking corporation.
10.6* Security Agreement, dated July 28, 2004, by and between Central Freight
Lines, Inc., a Texas corporation and Suntrust Bank, a Georgia state banking
corporation.
31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso,
the Company's Chief Executive Officer.
31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale,
the Company's Chief Financial Officer.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the
Company's Chief Executive Officer.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the
Company's Chief Financial Officer.
* Filed herewith.
(b) Reports on Form 8-K
On April 28, 2004, Central Freight Lines, Inc. filed a current report on
Form 8-K to furnish under item 12 Central's press release presenting its
2004 first quarter results.
On June 16, 2004, Central Freight Lines, Inc. filed a current report on
Form 8-K to furnish under item 12 Central's press release announcing its
expected results of operations for its 2004 second quarter.
On July 29, 2004, Central Freight Lines, Inc. filed a current report on
Form 8-K to furnish under item 12 Central's press release presenting its
2004 second quarter results.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Quarterly Report to be signed on its
behalf by the undersigned thereunto duly authorized.
August 13, 2004
Central Freight Lines, Inc.
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Senior Vice President and
Chief Financial Officer
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