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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the fiscal year ended December 31, 2004
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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) 772-2120
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common stock $0.001 Par Value Nasdaq (R)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K___.
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12-b of the Act). X Yes No
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $88.9 million as of July 2, 2004 (based upon the
$7.88 per share closing price on that date as reported by Nasdaq). In making
this calculation the registrant has assumed, without admitting for any purpose,
that all executive officers, director, and holders of more than 10% of a class
of outstanding common stock, and no other persons, are affiliates.
The number of shares of common stock outstanding at March 3, 2005 was
18,190,236.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the registrant's definitive proxy statement for the 2005
Annual Meeting of Stockholders to be held on May 3, 2005 have been incorporated
by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Item Page
Part I
1. Business 1
2. Properties 4
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
7A. Quantitative and Qualitative Disclosures about Market Risk 31
8. Financial Statements and Supplementary Data 32
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 32
9A. Controls and Procedures 32
9B. Other Information 33
Part III
10. Directors and Executive Officers of the Registrant 34
11. Executive Compensation 34
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 34
13. Certain Relationships and Related Transactions 34
14. Principal Accountant Fees and Services 35
Part IV
15. Exhibits, Financial Statement Schedules 35
Part I
Item 1. Business
Except for the historical information contained herein, the discussion in
this annual report contains "forward-looking statements," which include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation, and availability of
resources. These forward-looking statements include, without limitation,
statements regarding: expectations as to operational improvements; expectations
as to cost savings, revenue growth, and earnings; the time by which certain
objectives will be achieved; proposed new products and services; expectations
that claims, lawsuits, commitments, contingent liabilities, labor negotiations,
or agreements, or other matters will not have a materially adverse effect on our
consolidated financial position, results of operations, or liquidity; statements
concerning projections, predictions, expectations, estimates, or forecasts as to
our business, financial, and operational results and future economic
performance; and statements of management's goals and objectives, and other
similar expressions concerning matters that are not historical facts. Words such
as "may," "will," "should," "could," "would," "predicts," "potential,"
"continue," "expects," "anticipates," "future," "intends," "plans," "believes,"
"estimates," and similar expressions, as well as statements in future tense,
identify forward-looking statements. These statements are made pursuant to the
safe harbor provisions of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements. Readers should review and
consider the factors discussed in "Factors that May Affect Future Results" along
with the various disclosures by the Company in its press releases, stockholder
reports, and filings with the Securities and Exchange Commission.
References in this Annual Report to "we," "us," "our," or the "Company" or
similar terms refer to Central Freight Lines, Inc. and its subsidiaries.
Overview
We are a regional less-than-truckload ("LTL"), trucking company that has
operations in the Southwest, Northwest, West Coast and Midwest regions of the
United States of America. 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.
The history of the name Central Freight Lines and its Texas franchise dates
back to 1925, when Central Freight Lines was founded in Waco, Texas. That entity
was a regional LTL carrier that served the intrastate Texas LTL market for
decades.
Our company began its operations effective June 30, 1997, when our Chairman
of the Board, Jerry Moyes, organized our company and acquired the Central
Freight Lines name, terminal network, and physical assets from the Southwestern
Division of Viking Freight Lines. Roadway Express, Inc., which also owned Viking
Freight Lines, had previously purchased the company from its employees in 1993.
Between 1997 and 2001, we concentrated our efforts on growing our regional
LTL operations in Texas and surrounding states. During this period, we acquired
LTL carriers Jaguar Fast Freight, Inc. and Vecta Transportation Systems, Inc.,
as well as a small truckload carrier that we used for linehaul, Aggie Express,
Inc., to solidify our operations and to expand our presence in the western
United States.
In December 2002, we expanded service in a seven-state, Midwest region,
establishing all-points coverage in six of these states. Then, in March 2004, we
expanded 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.
1
Our Operations
We offer regional LTL services to customers in our eight-state Southwest
region, our seven-state Midwest region, our three-state Northwest region, and
two additional contiguous states. We currently offer direct service to all
twenty of these states.
Our Southwest region is the eight-state territory of California, Texas,
Arizona, New Mexico, Oklahoma, Louisiana, Arkansas, and Nevada. 54 of our 75
terminals are strategically located in our Southwest region. Our Midwest region
is the seven-state territory of Kansas, Missouri, Illinois, Iowa, Wisconsin,
Minnesota, and Nebraska. Our Northwest region is the three-state territory of
Oregon, Washington, and Idaho.
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.
Throughout our operations, we emphasize direct loading of freight between
terminals to avoid intermediate sorting and re-routing which increase labor
costs, damage claims, and delays. Within each region, we focus on achieving
short transit times and efficient pick-up and delivery schedules.
Our Revenue Equipment
At December 31, 2004, our fleet contained 1,993 tractors and 8,624
trailers. The table below reflects, as of December 31, 2004, the average age of
our tractors and trailers:
Number Average Age
Type of Equipment (categorized by primary use) of Units in Years
---------------------------------------------- --------- -----------
Linehaul tractors............................ 779 4.9
Pick-up and delivery tractors................ 1,214 5.8
Trailers..................................... 8,624 14.2
In 2004, the Company purchased 299 new tractors and 261 new trailers, in
addition to equipment purchased from EOFF. Throughout the year, excess and aging
equipment, including much of that purchased from EOFF, was sold.
Our Customers and Marketing
Our customers represent a broad range of industries, with the largest
concentration coming from the retail sector. In 2004, our five largest customers
were Dell Computer, Wal-Mart, Home Depot, Tyco International and 3M. These
customers together generated approximately 15.5% of our revenue. Dell Computer,
our largest customer in 2004, generated approximately 5.2% of our revenues.
Since our inception in 1997, no single customer has represented more than 10% of
our operating revenues in any year. We believe the diversity of our customers
and their industries lessens the impact of business cycles affecting any one
company or industry. However, the loss of one or more of our five largest
customers could significantly and adversely affect our cash flow, market share,
and profits.
We target shippers that have significant and growing distribution needs in
our operating regions and have freight that enhances our overall efficiency and
profitability. We accomplish this by involving sales, operations, and finance
personnel in evaluating and targeting potential new accounts. Our operations
personnel identify areas in our regions where additional freight could help fill
partially full trailers, fill trailers that return empty from scheduled trips,
or complement existing pick-up and delivery schedules. Our sales personnel
solicit business from these potential customers and our traffic and pricing
personnel apply our costing model to determine whether the freight would
contribute to our overall profitability.
2
We have established transportation alliances with regional LTL carriers in
the Northeast and Southeast regions of the United States. In these arrangements,
we exchange shipments for delivery in each other's service territory. This
practice can help each carrier in several respects. First, the freight inflows
from the other regions add tonnage to the delivering company's operation. This
improves profitability by increasing freight density over the terminal network
and linehaul operation. Second, the alliances permit regional carriers to
provide out-of-territory service for their customers. This maintains customer
relationships and prevents regional carriers from losing revenue to national
carriers that could deliver the freight from pick-up to delivery. Third, the
alliances permit multiple regional carriers to bid for national accounts and
bring the advantages of non-union regional operations to national accounts.
Transportation alliances generated approximately 9.9% of our revenue in 2004.
Competition
The LTL industry is highly competitive on the basis of both service and
price. Our primary competitors are regional, inter-regional, and national LTL
carriers, and, to a lesser extent, truckload carriers, railroads, airfreight
companies, and overnight package companies. Our major competitors within the
regional LTL industry include certain regional operating subsidiaries of CNF
Inc., USF Corporation, and SCS Transportation, Inc. Many of our competitors are
larger, operate more equipment, and have greater financial resources than we do.
We believe that our extensive terminal network and traffic density offer
competitive advantages within our region.
Employees
As of December 31, 2004, we had 3,043 full-time employees and 550 part-time
employees in our operations. These individuals were employed in the following
categories:
Number of
Category Employees
------------------------------ ----------
Linehaul drivers.............. 516
Pickup and delivery drivers... 1,324
Platform...................... 733
Mechanics..................... 107
Sales......................... 106
Salaried, clerical, and other. 807
------
Total....................... 3,593
======
None of our employees is currently represented under a collective
bargaining agreement.
Fuel Availability and Cost
We depend heavily upon the availability of diesel fuel. To address
fluctuations in fuel prices, we seek to impose fuel surcharges on our accounts.
Historically, we have not engaged in hedging transactions to insulate us from
fluctuations in fuel prices, and our surcharge arrangements may not fully
protect us from fuel price increases. Further, from time to time, we experience
shortages in the availability of fuel at certain locations and have been forced
to incur additional expense to ensure adequate supply on a timely basis. Our
management believes that our operations and financial results are susceptible to
the same fuel price increases or fuel shortages as those of our competitors.
Fuel costs, excluding fuel taxes, averaged approximately 5.9% of our revenue in
2004.
Insurance
We carry insurance for our primary business risks with third party
insurance carriers. We currently carry $30.0 million of insurance coverage, with
a self-insured retention of $1.0 million in the aggregate per occurrence, for
claims resulting from cargo theft or loss, personal injury, property damage, and
physical damage to our equipment. We also self-insure for workers' compensation
up to $1.0 million per occurrence, and all health claims up to $300 thousand per
occurrence.
3
Regulation
We operate in a highly regulated industry. The primary regulatory agencies
affecting our business are the United States Department of Transportation, or
DOT, and similar state and local agencies that exercise broad powers over our
business, generally governing such activities as authorization to engage in
motor carrier operations, safety, and insurance requirements. Our company
drivers and independent contractors also must comply with the safety and fitness
regulations promulgated by the DOT, including those relating to drug and alcohol
testing, licensing requirements, and additional restrictions imposed by homeland
security requirements in January 2005. Changes in the laws and regulations
governing our industry could affect the economics of the industry by requiring
changes in operating practices or by influencing the demand for, and the costs
of providing, services to shippers. New and more restrictive hours of service
regulations for drivers became effective on January 4, 2004. After nine months
of operation under the revised hours-of-service regulations, citizens' advocacy
groups successfully challenged the regulations in court, alleging that they were
developed without properly considering issues of driver health. Pending further
action by the courts or the effectiveness of new rules addressing the issues
raised by the appellate court, Congress has enacted a law that extends the
effectiveness of the revised hours-of-service rules until September 30, 2005. We
expect that any new rule making resulting from the litigation will be no more
favorable than existing rules. If driving hours are further restricted by new
revisions to the hours-of-service rules, we could experience a reduction in
driver miles that may adversely affect our business and results of operations.
Our operations involve certain inherent environmental risks. As such, our
operations are subject to environmental laws and regulations, including laws and
regulations dealing with underground fuel storage tanks, the transportation of
hazardous materials and other environmental matters. We maintain bulk fuel
storage and fuel islands at several of our facilities. Our operations involve
the risks of fuel spillage or seepage, environmental damage and hazardous waste
disposal, among others. Operations conducted in industrial areas, where truck
terminals are normally located, and where groundwater or other forms of
environmental contamination may have occurred, potentially expose us to claims
that we contributed to the environmental contamination. We have instituted
programs to monitor and control environmental risks and promote compliance with
applicable environmental laws and regulations. If we fail to comply with the
applicable regulations, then we could be subject to substantial fines or
penalties and to civil and criminal liability.
Item 2. Properties
Our corporate offices are located at 5601 West Waco Drive in Waco, Texas,
76702. We share a 185,000 square foot facility with our Waco, Texas terminal.
The property is located on approximately 40 acres, while the terminal has 71
dock doors. We rent this facility from Southwest Premier Properties, a related
party. The lease expires in February, 2013.
At December 31, 2004, we conducted our LTL operations through six owned
terminal locations and 69 leased terminal locations. Our ten largest terminals
by number of loading doors are listed below:
Total
Number of
Location Loading Doors
-------------------------- -----------------
Dallas, Texas............. 522
Houston, Texas............ 349
Fort Worth, Texas......... 200
San Antonio, Texas........ 147
Austin, Texas............. 132
Phoenix, Arizona.......... 121
Beaumont, Texas........... 113
Fontana, California....... 110
Chicago, Illinois......... 80
Tyler, Texas.............. 76
65 others................. 2,133
--------
Total................... 3,983
========
4
We lease 29 of our active terminals and seven dormant terminals from
related parties. See "Related Party Terminal Leases" under Item 7 in Part II of
this Annual Report for additional information concerning these leases.
Item 3. Legal Proceedings
We are involved in litigation incidental to our operations. These lawsuits
primarily involve claims for workers' compensation, personal injury, or property
damage incurred in the transportation of freight. We are not aware of any claims
that could materially affect our consolidated financial position or results of
operations.
In June and July 2004, three stockholder class actions were filed against
us and certain of our officers and directors. The class actions were filed in
the United States District Court - Western District of Texas and generally
allege that false and misleading statements were made in our initial public
offering registration statement and prospectus, during the period surrounding
our initial pubic offering and up to the press release dated June 16, 2004. The
class actions are in the initial phases. We do not believe there is any factual
or legal basis for the allegations and we intend to vigorously defend against
the suits. We have informed our insurance carrier and have retained outside
counsel to assist in our defense. Prior to December 12, 2004, we maintained a
$5.0 million directors' and officers' insurance policy with a $350,000
deductible. On December 12, 2004, we increased our directors' and officers'
insurance coverage. We currently maintain a $15 million directors' and officers'
insurance policy with a $350,000 deductible. In the 2004 third quarter, in
connection with this litigation, we recorded an expense of $350,000,
representing the full deductible amount under our current directors' and
officers' insurance policy.
On August 9 and 10, 2004, two purported derivative actions were filed
against us, as nominal defendant, and against certain of our officers,
directors, and former directors. These actions were filed in the District Court
of McLennan County, Texas and generally allege breach of fiduciary duty, abuse
of control, gross mismanagement, waste of corporate assets, and unjust
enrichment on the part of certain of our present and former officers and
directors in the period between December 12, 2003 and August 2004. The purported
derivative actions seek declaratory, injunctive, and other relief.
Although it is not possible at this time to predict the litigation outcome
of these cases, we expect to prevail. However, an adverse litigation outcome
could be material to our consolidated financial position or results of
operations. As a result of the uncertainty regarding the outcome of this matter,
no provision has been made in the consolidated financial statements with respect
to this contingent liability.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2004, no matters were submitted to a vote of
security holders.
5
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market, under the symbol
"CENF." Our stock began trading on December 12, 2003, in the fourth quarter of
2003, following completion of our initial public offering. The following table
sets forth, for the periods indicated, the high and low bid information per
share of our common stock as reported by Nasdaq.
High Low
2003
Fourth Quarter $19.00 $16.60
2004
First Quarter $19.32 $11.94
Second Quarter $13.23 $7.14
Third Quarter $8.20 $5.40
Fourth Quarter $7.25 $5.32
As of March 4, 2005, our common stock was held by 48 stockholders of
record. However, we believe that many additional holders of our common stock are
unidentified because a substantial number of shares are held of record by
brokers or dealers for their customers in street names.
Dividend Policy
Since our initial public offering, we have not paid cash dividends on our
common stock. We currently intend to retain all of our future earnings to
finance the growth and development of our business, and we do not anticipate
paying any cash dividends on our common stock in the foreseeable future. Any
future dividends will be determined at the discretion of our board of directors.
The board may consider our financial condition and results of operations, cash
flows from operations, current and anticipated capital requirements and
expansion plans, the income tax laws then in effect, any legal or contractual
requirements, and other factors our board deems relevant.
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 $50 million of the net proceeds we received were used to
repay debt, including: (a) $30.5 million under our accounts receivable
securitization facility; (b) $17.1 million under collateralized equipment and
terminal notes; and (c) $2.0 million under collateralized capital leases. In
addition, we used approximately $10.0 million of the net proceeds for the
acquisition of certain assets of Eastern Oregon Fast Freight, Inc. The remaining
6
net proceeds, approximately $18.0 million, were used to purchase capital assets
and for general corporate purposes, including working capital.
Item 6. Selected Financial Data
Year Ended December 31,
2004 2003(1) 2002(1) 2001 2000
------------- ------------- ------------- ------------- -------------
(in thousands, except per share amounts and operating data)
Statements of Operations Data:
Operating revenues...................... $ 386,601 $ 389,696 $ 371,445 $ 395,702 $ 362,649
Operating expenses:
Salaries, wages, and benefits......... 222,230 205,393 209,302 233,571 212,802
Purchased transportation.............. 42,152 38,113 28,806 31,739 23,087
Purchased transportation -- related
Parties............................. 14,571 18,582 21,106 17,708 12,438
Operating and general supplies and
expenses.............................. 82,702 66,144 59,270 67,193 63,837
Operating and general supplies and
expenses -- related parties.......... 274 12 286 53 182
Insurance and claims.................. 25,186 16,057 14,576 14,607 10,273
Building and equipment rentals........ 4,297 3,181 3,241 3,493 2,757
Building and equipment rentals --
related parties..................... 1,795 1,903 1,779 1,600 1,342
Depreciation and amortization......... 17,049 16,605 17,974 21,241 18,980
----------- ----------- ----------- ----------- -----------
Total operating expenses............ 410,256 365,990 356,340 391,205 345,698
----------- ----------- ----------- ----------- -----------
Operating (loss) income................. (23,655) 23,706 15,105 4,497 16,951
Interest expense........................ 1,469 3,547 4,916 5,620 5,078
Interest expense -- related
Parties(2)............................ 6,197 6,130 6,359 5,888 6,990
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing
operations before income taxes........ (31,321) 14,029 3,830 (7,011) 4,883
Income tax benefit (expense)............ 8,473 (1,759) 1,412 119 (402)
Income tax (expense)-conversion to C
Corporation........................... - (9,834) - - -
----------- ----------- ------------ ------------ -----------
(Loss) income from continuing
Operations............................ (22,848) 2,436 5,242 (6,892) 4,481
Loss from discontinued operations - (8,341) - - -
----------- ----------- ------------ ------------ -----------
Net (loss) income....................... $ (22,848) $ (5,905) $ 5,242 $ (6,892) $ 4,481
=========== =========== =========== ============ ===========
Pro Forma C Corporation Data:(3)
Historical income (loss) from continuing
operations before income taxes........ $ - $ 14,029 $ 3,830 $ (7,011) $ 4,883
Pro forma (provision) benefit for
income taxes attributable to
continuing operations................. - (5,666) (2,781) 1,108 (3,243)
----------- ----------- ----------- ----------- -----------
Pro forma income (loss) from
continuing operations................. $ - $ 8,363 $ 1,049 $ (5,903) $ 1,640
Loss from discontinued operations - (8,341) - -- -
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)............... $ - $ 22 $ 1,049 $ (5,903) $ 1,640
=========== =========== =========== =========== ===========
7
Net loss per share
Basic................................. $ (1.27) $ - $ - $ - $ -
Diluted............................... (1.27) - - - -
Weighted average shares outstanding:
Basic................................. 17,971 - - - -
Diluted............................... 17,971 - - - -
Pro forma income (loss) from
continuing operations per share:
Basic................................. $ - $ 0.75 $ 0.10 $ (0.54) $ 0.15
Diluted............................... - 0.69 0.09 (0.54) 0.14
Weighted average shares outstanding:
Basic................................. - 11,163 10,868 10,916 11,051
Diluted............................... - 12,103 11,548 10,916 11,469
Other Financial Data:
EBITDA(4)............................... $ (6,606) $ 40,311 $ 33,079 $ 25,738 $ 35,931
Capital expenditures(5)................. 36,717 7,024 6,008 10,186 13,982
Operating Data:
LTL revenue per
hundredweight(6)...................... $ 11.63 $ 11.37 $ 10.42 $ 10.06 $ 9.39
Total tons hauled....................... 1,908,621 1,962,890 2,120,080 2,388,816 2,392,992
Operating ratio(7)...................... 106.1% 93.9% 95.9% 98.9% 95.3%
Number of working days.................. 253 253 253 253 253
Balance Sheet Data (at period end):
Cash and cash equivalents............... $ 2,144 $ 37,269 $ 7,350 $ 187 $ 215
Net property and equipment.............. 135,274 114,693 126,751 139,954 143,445
Total assets............................ 237,254 223,149 196,401 195,877 198,065
Long-term debt, capital leases,
and related party financing,
including current portion............. 55,694 49,517 103,054 111,270 112,727
Stockholders' equity.................... 87,558 108,438 30,374 23,302 35,577
(1) Our financial results for the fiscal year ended December 31, 2002,
included a $2.9 million reduction in depreciation expense resulting from a
January 2002 change in useful lives and salvage values of trailers and pick-up
and delivery tractors based on our historical experience, which might materially
affect the comparability of the information presented, and a $725,000
restructuring charge representing the cost to close 21 terminals. Our financial
results for the fiscal year ended December 31, 2003, included the following
items that might materially affect the comparability of the information
presented: (a) a $0.6 million reduction in depreciation expense (in addition to
the 2002 reduction) resulting from a January 2003 additional change in useful
lives and salvage values of trailers and line tractors based on our historical
experience; (b) a $7.8 million gain attributable to the amendment of a benefit
plan; and (c) a $3.8 million expense related to an increase in our claims
accruals relating to accident, workers' compensation, and other claims in which
the underlying events occurred prior to 2003. See Item 7 of this Annual Report
for additional information.
(2) Effective February 20, 2003, the payments for certain of the facilities
we lease from a related party were increased to reflect fair market value. The
lease is reflected as a financing arrangement in our consolidated financial
statements. Accordingly, our interest expense-related parties includes
approximately $3.3 million in annual non-cash interest expense and contributed
capital in all periods prior to February 20, 2003. See Item 7 of this Annual
Report for additional information.
8
(3) In 1998, we elected to be treated as an S corporation for federal
income tax purposes. An S corporation passes through essentially all taxable
earnings and losses to its stockholders and does not pay federal income taxes at
the corporate level. Historical income taxes consist mainly of state income
taxes. On November 1, 2003, we converted into a C corporation. For comparative
purposes, we have included a pro forma (provision) benefit for income taxes
assuming we had been taxed as a C corporation in all periods when our S
corporation election was in effect. In June 2002, we reversed approximately $1.8
million of tax reserves which were originally recorded in 1998 when we elected
to be treated as an S corporation. The $1.8 million tax benefit has been
excluded for purposes of presenting pro forma C corporation income taxes.
(4) EBITDA represents earnings (loss) from continuing operations before
interest, taxes, depreciation, and amortization. EBITDA is presented because we
believe it is useful in evaluating our operating performance compared to that of
other companies in our industry, as the calculation of EBITDA eliminates the
effects of financing, income taxes and the accounting effects of capital
spending, which items may vary for different companies for reasons unrelated to
overall operating performance. In addition, management tracks EBITDA because our
amended revolving credit facility contained a minimum EBITDA requirement. When
analyzing our operating performance, however, investors should use EBITDA in
addition to, not as an alternative for, operating earnings, net earnings, and
cash flows from operating activities, as those items are defined under GAAP.
Investors should also note that our presentation of EBITDA may not be comparable
to similarly titled measures used by other companies. EBITDA is calculated in
the following manner for each of the periods presented:
Year ended December 31,
----------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------ -------------- ------------ -----------
(in thousands)
(Loss) earnings from continuing
operations........................... $ (22,848) $ 2,436 $ 5,242 $ (6,892) $ 4,481
Add interest expense................ 7,666 9,677 11,275 11,508 12,068
(Subtract) add income taxes
(benefit).......................... (8,473) 11,593 (1,412) (119) 402
Add depreciation and
Amortization....................... 17,049 16,605 17,974 21,241 18,980
------- -------- -------- -------- -------
EBITDA........................... $ (6,606) $ 40,311 $ 33,079 $ 25,738 $ 35,931
======= ======== ======== ======== =======
(5) Includes $0.8 million of capital expenditures in 2002 attributable to
the operations of Central Refrigerated, which we divested on December 31, 2002.
See Item 7 of this Annual Report for additional information.
(6) Average revenue we receive for transporting 100 pounds of freight.
(7) Operating expenses as a percentage of operating revenues.
(8) In 2004, the IRS disallowed certain tax deductions taken by the S
corporation shareholders pursuant to a contested liability trust. As a result,
our tax basis was increased, resulting in a deferred tax benefit of $1.75
million. Also in 2004, we recorded a deferred tax asset valuation allowance of
approximately $4.9 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Overview
We are one of the ten largest regional LTL carriers in the United States
based on revenues, according to Transport Topics, generating approximately
$386.6 million in revenue during 2004. In our operations, we pick up and deliver
multiple shipments for multiple customers on each trailer.
The history of the name Central Freight Lines and its franchise dates back
to 1925, when Central Freight Lines was founded in Waco, Texas and served the
intrastate Texas LTL market for decades. Our company began its operations
effective June 30, 1997, when our Chairman of the Board, Jerry Moyes, organized
our company and acquired the Central Freight Lines name, terminal network, and
physical assets from the Southwestern Division of Viking Freight Lines, whose
corporate group acquired our predecessor in 1993.
9
Prior to 2002, we conducted our operations almost exclusively in our
eight-state Southwest region, which is anchored by Texas and California. Since
2002, a significant portion of our business has continued to be concentrated in
our Southwest region. Through the following two expansions, however, we have
increased the geographic scope of our business:
o In December 2002, we expanded service in a seven-state, Midwest
region, establishing all-points coverage in six of these states. Our
expenses for the year ended December 31, 2003, reflect the costs of
this Midwest expansion, primarily consisting of purchased
transportation, employee training, and relocation expenses. We
increased our use of purchased transportation in the Midwest region as
a more efficient method of transporting freight in lanes where we do
not yet have sufficient freight volume to profitably transport the
freight in our own trucks. As we continue to develop our operations in
the Midwest, we expect our purchased transportation costs to return to
historical levels.
o In March 2004, we expanded into the Pacific Northwest through the
purchase of selected terminal network and rolling stock of EOFF, a
non-union LTL carrier that operated in the states of Oregon,
Washington, and Idaho. The selected assets of EOFF were purchased for
approximately $10.0 million, with the purchase price paid from cash
reserves. The assets acquired included six owned terminal properties,
fifteen leased terminal properties, 160 tractors, and 644 trailers.
Recent Results of Operations and Year-End Financial Condition
In 2004, for reasons discussed below, we reported a loss from operations of
approximately $23.7 million, and our operating ratio for the year was 106.1%. A
summary of our recent performance in each of the four quarters of 2004 is as
follows:
First Quarter 2004
In the 2004 first quarter, we reported marginally positive income from
operations, and a net loss of $1.1 million, on revenue of $97.0 million. Our
operating ratio for the quarter was 100.0%. We attribute these results, in part,
to additional expenses from our accelerated Northwest expansion. These
additional expenses mainly related to additional employees, terminal leases, and
employee relocations. The Northwest expansion also contributed to lower overall
productivity in our operations during the period.
Second Quarter 2004
In the 2004 second quarter, we reported a loss from operations of $5.0
million, and a net loss of $2.5 million, on revenue of $105.5 million. Our
operating ratio for the quarter was 104.8%. This second quarter loss resulted
mainly from continuing start up expenses in our Northwest region, additional
purchased transportation expenses resulting from freight imbalances to and from
the Northwest and Midwest regions, and delays in implementing planned operating
improvement initiatives.
Third Quarter 2004
In the 2004 third quarter, we reported a loss from operations of $10.8
million, and a net loss of $7.9 million, on revenue of $98.5 million. Our
operating ratio for the quarter was 110.9%. The third quarter loss was due in
large part to lower revenue, compared to the 2004second quarter, as tonnage and
yield declined. Increases in expenses relating to insurance and claims also
contributed to the third quarter loss. In an effort to align expenses with
business volumes, during the third quarter we consolidated the operations of ten
terminals into surrounding facilities that had excess capacity and converted an
additional seven terminals into driver-only locations. This terminal
consolidation resulted in reductions of employees by approximately 310 full-time
and 220 part-time employees. In addition, we opened a new 121door terminal in
Phoenix, Arizona to replace an outdated and inefficient facility, and
re-engineered our linehaul system to gain efficiencies and to reduce purchased
transportation expenses.
10
Fourth Quarter 2004
In the 2004 fourth quarter, we reported a loss from operations of $7.9
million, and a net loss of $11.3 million, on revenue of $85.5 million. Our
operating ratio for the quarter was 109.2%. Despite lower revenue in the fourth
quarter, compared to the third quarter of 2004 (due in part to three less
working days in the fourth quarter), we lowered our operating ratio by 170 basis
points. Insurance and claims and labor expenses improved as a percentage of
revenue when compared to the 2004 third quarter, due in part to the initiatives
taken in the third quarter described above.
At December 31, 2004, our balance sheet reflected $2.1 million in
unrestricted cash, $20.8 million in restricted cash that served as collateral
for letters of credit under our prior credit facility, $55.7 million in
long-term debt and capital lease obligations, including current portion, and
$28.1 million in short term debt, of which $20.8 million represented the cash
collateral for letters of credit. Our stockholders' equity was $87.6 million at
December 31, 2004.
Recent Development
On January 31, 2005, we entered into a four-year senior collateralized
revolving credit facility and letter of credit sub-facility (the "New Credit
Facility") with Bank of America, N.A., as Agent, and certain other lenders from
time to time party to the New Credit Facility. The New Credit Facility replaces
both our amended and restated revolving credit facility with SunTrust Bank,
originally dated July 28, 2004, and our $40.0 million revolving accounts
receivable securitization facility with SunTrust Bank, originally dated April
30, 2002. Subject to the terms of the New Credit Facility, the maximum revolving
borrowing limit under the New Credit Facility is the lesser of (a) $70.0
million, or (b) 85% of Borrower's eligible accounts receivable, plus 85% of the
net orderly liquidation value of Borrower's eligible rolling stock owned as of
January 31, 2005, plus 85% of the cost of eligible rolling stock acquired by
Borrower after January 31, 2005. Letters of Credit under the New Credit Facility
are subject to a sub-limit of $40.0 million. The New Credit Facility terminates
on January 31, 2009.
Borrowings under the New Credit Facility bear interest at the base rate, as
defined, plus an applicable margin of 0.00% to 1.00%, or LIBOR plus an
applicable margin of 1.50% to 2.75%, based on the average quarterly availability
under the New Credit Facility. Letters of credit under the New Credit Facility
are subject to an applicable letter of credit margin of 1.25% to 2.50%, based on
the average quarterly availability under the New Credit Facility. The New Credit
Facility also prescribes additional fees for letter of credit transactions, and
an unused line fee of 0.25% to 0.375%, based on aggregate amounts outstanding.
The New Credit Facility is collateralized by substantially all of our assets,
other than certain revenue equipment and real estate that is (or may in the
future become) subject to other financing.
Operating Strategy for 2005
Our main goals for 2005 are to achieve quarter-by-quarter sequential
improvement in our operating performance and to return to profitability by the
end of 2005. We believe the fourth quarter of 2004 was the first step in that
direction, as our operating ratio improved 170 basis points to 109.2% from
110.9% between the third and fourth quarters of 2004.
We have identified five specific areas of focus in our efforts to improve
results:
o Improving revenue yield and total tonnage.
o Reducing our cost structure to better align controllable costs with
our expected revenue base.
o Streamlining freight movements to consolidate movements and reduce the
use of third-party purchased transportation.
o Improving employee efficiency.
o Reducing insurance and claims expense.
11
We are encouraged by the fact that improvements were made in four of these
five areas in the fourth quarter of 2004, as compared to the third quarter of
2004. We believe that much work remains to be done to return our results to
acceptable levels, particularly in the area of revenue yield and tonnage.
However, we believe the results for the fourth quarter of 2004 demonstrate
measurable improvement. Achieving sequential improvement in the first quarter of
2005 will be difficult because of the seasonal effects on revenue and cost, but
it remains our immediate goal.
Revenues
Our revenues vary with the revenue per hundredweight we charge to customers
and the volume of freight we transport:
o Revenue per hundredweight measures the rates we receive from customers
and varies with the type of goods being shipped and the distance these
goods are transported. Our LTL revenue per hundredweight increased
approximately 2.3% from $11.37 in 2003, to $11.63 in 2004, due mainly
to increases in fuel surcharge revenue. Our LTL revenue per
hundredweight, without fuel surcharge revenue, declined to $11.01 in
2004 from $11.08 in 2003.
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 2.8% from 2003 to 2004, with a
more dramatic decrease occurring during the second half of 2004.
Historically, most of our revenue has been generated from transporting LTL
shipments from customers within our operating regions. In 2004, approximately
9.9% 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 2004 was lower compared to
2003, due in large part to our geographic expansion. Because of the geographic
expansion of our network, our need to rely upon other carriers for freight
movements declined. In addition, some of our relationships with carriers
handling interline freight were negatively affected by our geographic expansion.
We do not recognize the portion of revenue (or the associated expenses) that
relate to the portion of shipments hauled by our alliance partners. In addition
to transportation revenue, we also recognize revenue from fuel surcharges we
receive from our customers when the national average diesel fuel price published
by the U.S. Department of Energy exceeds prices listed in our contracts and
tariffs.
Operating Expenses
Our major expense categories can be summarized as follows:
Salaries, wages, and benefits. This category includes compensation for our
employees, health insurance, workers' compensation, 401(k) plan contributions,
and other fringe benefits. These expenses will vary depending upon several
factors, including our efficiency, our experience with health and workers'
compensation claims, and increases in health care costs. Salaries, wages, and
benefits also include the non-cash expense associated with stock options granted
to several of our executives that had exercise prices that were determined to be
below fair market value. This non-cash compensation expense is expected to
amount to approximately $106,400 annually through June of 2007.
Purchased transportation. This category primarily consists of the payments
we make to third parties to handle a portion of a freight movement for us. The
largest category is outsourced linehaul movements, where we contract with
truckload carriers to move our freight between origin and destination terminals.
Swift Transportation, a related party, has been our largest provider of
outsourced linehaul service. Purchased transportation also includes outsourced
pick-up and delivery service when we use alternative providers to service areas
where we lack the terminal density to provide economical service.
Operating and general supplies and expenses. This category includes fuel,
repairs and maintenance, tires, parts, general and administrative costs, office
supplies, operating taxes and licenses, communications and utilities, and other
general expenses. Repairs and maintenance, fuel, tires, and parts expenses vary
with the age of equipment and the amount of usage. We have a fuel surcharge
program that enables us to recover a significant portion of fuel price
increases.
12
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 eight terminals leased under operating leases.
Depreciation and amortization. This category relates to owned assets,
assets under capitalized leases, and 26 properties we lease from Southwest
Premier Properties that are considered to be a financing arrangement.
Unusual Items Affecting 2003 Results
During 2003, we recorded an aggregate of $3.8 million in increases to our
insurance reserves for accident, workers' compensation, and other liabilities
arising prior to 2003 ($1.8 million of which related to two accidents that
occurred in 2002). This compared to an accrual of $0.5 million relating to
claims that arose in prior periods 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 $3.5 million compared with the expense we would have recorded
under the prior method. In the aggregate, these items had a positive effect of
approximately $7.5 million on our operating income for the year ended December
31, 2003. We do not anticipate benefits similar to these in future periods.
Discontinued Operations of Central Refrigerated
In 2002, Central Refrigerated, a refrigerated truckload carrier, was formed
to acquire certain assets from the bankruptcy estate of Simon Transportation
Services, Inc., a refrigerated truckload carrier controlled by Jerry Moyes prior
to the bankruptcy. The goal was to obtain certain efficiencies for the
refrigerated business, such as decreased insurance costs, in the period
immediately following the acquisition. The acquisition closed, and the
operations of Central Refrigerated began, on April 22, 2002. We determined that
it was advisable to divest Central Refrigerated in order to focus on our LTL
growth strategy and devote our capital resources to our LTL operations.
Effective December 31, 2002, ownership of Central Refrigerated was transferred
to Jerry Moyes, our Chairman, and one of his affiliates, and Central
Refrigerated ceased to be our subsidiary.
Since December 31, 2002, Central Refrigerated has continued to provide us
with transportation services. In the year ended December 31, 2004, Central
Refrigerated provided us with approximately $2.0 million of such services,
representing approximately 3.5% of the total amount paid by us for third-party
linehaul services in the period. Although Central Refrigerated is owned by Jerry
Moyes, we believe that amounts paid by us to Central Refrigerated are equivalent
to rates that could have been obtained in an arm's length transaction with an
unrelated third party. We expect our arrangements with Central Refrigerated for
transportation services to continue, so long as its rates and service remain
competitive with those offered by other carriers. For additional information on
our relationship with Central Refrigerated, see "Management - Compensation
Committee Interlocks and Participation" in the definitive Proxy Statement to be
delivered to our stockholders in connection with the 2005 Annual Meeting of
Stockholders to be held on May 3, 2005.
Separation Payment to Central Refrigerated and Repayment of Moyes Loans
As part of the disposition of Central Refrigerated, we agreed to pay
approximately $8.3 million to Central Refrigerated to compensate Central
Refrigerated and Jerry Moyes for facilitating the transaction. This payment was
made on October 28, 2003, and was reflected in our financial statements as an
expense in our fourth fiscal quarter in 2003. Following our payment of $8.3
13
million to Central Refrigerated, Mr. Moyes repaid approximately $8.6 million in
principal and interest due to us under loans we made to him prior to July 2002,
which were separate from and unrelated to our transactions with Central
Refrigerated. The loans to Mr. Moyes had been recorded in our consolidated
financial statements as a reduction of stockholders' equity because of their
related party nature and this reduction of equity was reversed with the
repayment of the loan. Accordingly, taken together, our payment to Central
Refrigerated and the loan repayment by Mr. Moyes had no effect on our cash
position and stockholders' equity.
Related Party Terminal Leases
We lease 29 active terminals and seven dormant terminals from related
parties. The lease for most of these properties is accounted for as a financing
arrangement in our consolidated financial statements, with the rental payments
being reflected as interest. The aggregate paid rent for these properties was
approximately $6.8 million in 2004, $7.0 million in 2003 and $4.7 million in
2002. We believe the rent on certain of these properties had been below fair
market value and agreed to increase the aggregate rent. As a result of the rent
increase, we have recognized approximately $3.3 million annually in non-cash
interest expense in all periods prior to February 20, 2003, to reflect the
rental of the affected properties at fair market value. Aggregate rent and
non-cash interest expense combined was approximately $8.0 million in 2004, $8.0
million in 2003 and $8.1 million in 2002 for all properties leased from related
parties. We are actively seeking to sublease or arrange for the sale of the
dormant terminals. For additional information on our related party terminal
leases, see "Management - Compensation Committee Interlocks and Insider
Participation" in the definitive Proxy Statement to be delivered to our
stockholders in connection with the 2005 Annual Meeting of Stockholders to be
held on May 3, 2005.
S Corporation Status
Prior to November 1, 2003, we operated as an S corporation for federal
income tax purposes. An S corporation passes through essentially all taxable
income and losses to its stockholders and does not pay federal income taxes at
the corporate level. For comparative purposes, we have included a pro forma
provision for income taxes showing what those taxes would have been had we been
taxed as a C corporation in all periods our S corporation election was in
effect. The 2003 provision for income taxes reflects the approximately $9.8
million non-cash charge for recognition of deferred federal income taxes to
reflect our conversion from an S corporation to a C corporation on November 1,
2003.
Change in Fiscal Quarters
Our fiscal year ends on December 31. From inception through December 31,
2002, our first three fiscal quarters consisted of 12 weeks each, and our fourth
fiscal quarter consisted of 16 weeks. Commencing January 1, 2003, our year
consists of four quarters, each with 13 weeks. This change in accounting periods
will not affect the comparability of year-end financial results. The change
will, however, affect comparisons of periods less than a full year. Each of our
first three quarters in 2003 and beyond includes one additional week, and our
fourth quarter in 2003 and beyond will include three fewer weeks, as compared to
previous years.
14
Results of Operations
The table below sets forth the percentage relationship of the specified
items to operating revenues for the periods indicated.
Year Ended December 31,
2004 2003 2002
--------- --------- ---------
Operating revenues..................... 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and benefits........ 57.5 52.7 56.3
Purchased transportation............. 14.7 14.5 13.4
Operating and general supplies and
Expenses.......................... 21.4 17.0 16.1
Insurance and claims................. 6.5 4.1 3.9
Building and equipment rentals....... 1.6 1.3 1.4
Depreciation and amortization........ 4.4 4.3 4.8
----- ----- -----
Total operating expenses(1)....... 106.1 93.9 95.9
----- ----- -----
Operating (loss) earnings.............. (6.1) 6.1 4.1
Interest expense....................... 2.0 2.5 3.1
----- ----- -----
(Loss) earnings from continuing operations
before income taxes.................. (8.1) 3.6 1.0
----- ----- -----
Income tax (expense) benefit........... 2.2 (3.0) 0.4
----- ----- -----
(Loss) earnings from continuing operations (5.9) 0.6 1.4
----- ----- -----
Loss from discontinued operations...... - (2.1) -
----- ----- -----
Net (loss) earnings.................... (5.9)% (1.5)% 1.4%
===== ===== =====
Pro Forma C Corporation Data:
Historical earnings from continuing
Operations........................... -% 3.6% 1.0%
Pro forma (provision) benefit for income
taxes attributable to continuing
operations(2)........................ - (1.5) (0.7)
----- ----- ------
Pro forma earnings from continuing
operations(2)........................ -% 2.1% 0.3%
===== ===== =====
- ----------
(1) Total operating expenses as a percentage of operating revenues, as
presented in this table, is also referred to as operating ratio.
(2) Provision for federal income taxes and net earnings (loss) as if we were a
C corporation for tax purposes for all periods.
Comparison of 2004 to 2003
Operating revenues. Operating revenues decreased $3.1 million, or 0.8%,
from $389.7 million for 2003 to $386.6 million for 2004. Revenue per working day
decreased from $1.54 million in 2003 to $1.53 million in 2004. The decrease in
revenue per working day was attributable primarily to a 3.9% decrease in LTL
tonnage offset in part by an increase in LTL revenue per hundredweight from
$11.37 in 2003 to $11.63 in 2004. This increase in LTL revenue per hundredweight
was due mainly to an increase in fuel surcharge revenue per working day, as the
cost of fuel increased in 2004 compared to 2003. LTL bills per working day
decreased 6.4% from 2003 to 2004. Total tonnage decreased 54,274 tons, or 2.8%,
from 1,962,890 tons in 2003 to 1,908,621 tons in 2004.
Salaries, wages, and benefits. Salaries, wages, and benefits increased
$16.8 million, or 8.2%, from $205.4 million for 2003 to $222.2 million for 2004.
A substantial portion of this increase was attributable to the $7.8 million
curtailment gain recognized in 2003 that related to a reduction of our
obligations under a benefit plan. Further, our group health expenses increased
15
by $4.0 million in 2004, despite a 5.4% decrease in the number of employees,
while workers' compensation expenses increased by $2.5 million. Mileage-based
payments to linehaul drivers also increased by $2.9 million from 2003 to 2004,
as our length of haul increased by 8.1% to 478 miles. As a percentage of
operating revenues, salaries, wages, and benefits increased from 52.7% for 2003,
to 57.5% for 2004.
Purchased transportation. Purchased transportation remained essentially
constant at approximately $56.7 million in both 2003 and 2004. However,
purchased transportation paid to related parties decreased by $4.0 million,
which was offset by a similar increase in non-related party purchased
transportation. We used third party contractors for a significant portion of our
shipments. As a percentage of operating revenues, purchased transportation
increased from 14.5% for 2003 to 14.7% for 2004.
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $16.8 million, or 25.4%, from $66.2 million for 2003 to
$83.0 million for 2004. The increase in operating and general supplies and
expenses resulted primarily from increases in the cost of fuel, offset in part
by an increase in fuel surcharge revenue. The average price per gallon of diesel
fuel was 21.4% higher during 2004 as compared to 2003. Also contributing to the
increase in operating and general supplies and expenses were professional fees
relating to our audit of internal controls under the Sarbanes-Oxley Act,
increased property tax expense, increased provisions for doubtful accounts, and
vehicle repair costs. As a percentage of operating revenues, operating and
general supplies and expenses increased from 17.0% for 2003 to 21.4% for 2004.
Insurance and claims. Insurance and claims increased $9.1 million, or
56.5%, from $16.1 million for 2003 to $25.2 million for 2004. The increase in
insurance and claims expense resulted primarily from an increase in the number
of cargo claims, an increase in insurance premiums and the approximate $690,000
settlement, in March of 2005, for a lawsuit filed in 2003 - all of which was
expensed in 2004. The increase in insurance premiums was largely attributable to
the cost of additional directors' and officers' insurance coverage. The increase
in insurance and claims expense also reflects our recording of a $350,000
expense in the third quarter in connection with the stockholder class action
complaints. The amount represents the entire deductible under our directors' and
officers' insurance policy. As a percentage of operating revenues, insurance and
claims increased from 4.1% for 2003 to 6.5% for 2004.
Building and equipment rentals. Building and equipment rentals increased
approximately $1.0 million, or 19.6%, from $5.1 million for 2003 to $6.1 million
for 2004. The increase in building and equipment rentals resulted primarily from
the addition of leased terminals in connection with our Northwest expansion and
the addition of a new terminal in California. As a percentage of operating
revenues, building and equipment rentals increased from 1.3% for 2003 to 1.6%
for 2004.
Depreciation and amortization. Depreciation and amortization expense
increased approximately $0.4 million, or 2.4%, from $16.6 million for 2003 to
$17.0 million for 2004. This increase was primarily attributable to equipment
acquired in March 2004 in our Northwest expansion and the addition of
approximately 400 other new and used tractors and 261 new trailers added during
the year. As a percentage of operating revenues, depreciation and amortization
increased from 4.3% for 2003 to 4.4% for 2004.
Operating ratio. As a result of the foregoing, our operating ratio
increased from 93.9% for 2003 to 106.1% for 2004.
Interest expense. Interest expense decreased $2.0 million, or 20.6%, from
$9.7 million for 2003 to $7.7 million for 2004. As a percentage of operating
revenues, interest expense decreased from 2.5% for 2003 to 2.0% for 2004. Our
average debt balances decreased from $95.4 million in 2003 to $66.6 million in
2004 due in large part to our payment of approximately $50.0 million in December
2003 to reduce outstanding debt utilizing part of the net proceeds from our
initial public offering. During the second half of 2004, we cash collateralized
approximately $20.8 million in letters of credit. Interest expense on this $20.8
million borrowing was generally offset by interest income on the invested cash.
Interest expense in 2003 included $0.5 million of non-cash interest expense
attributable to a $3.3 million annual increase in payments under related party
terminal leases effective February 20, 2003. These payments were increased to
fair value, and we recorded non-cash interest expense in all prior periods to
reflect the difference between the fair value rental and the former rental
amount. After February 20, 2003, the interest amounts reflect cash payments. The
amounts are recorded as interest because the leases are reflected as a financing
arrangement in our consolidated financial statements.
16
Income (loss) from continuing operations before income taxes was $14.0
million for 2003 and $(31.3) million for 2004.
Pro forma income from continuing operations, assuming an effective tax rate
of approximately 39% in 2003, amounted to $8.4 million for 2003 compared to a
net loss of $22.8 million for 2004.
Our income tax benefit (expenses) changed from ($1.8) million for 2003
(excluding the $9.8 million expense for the establishment of federal deferred
income taxes) to $8.5 million for 2004. The 2004 net tax benefit is net of a
$4.9 million valuation allowance established against our net deferred tax assets
as of December 31, 2004. Additionally, income taxes for 2003 included federal
income tax expense for the last two periods of the year.
Comparison of 2003 to 2002
Operating revenues. Operating revenues increased $18.3 million, or 4.9%,
from $371.4 million for 2002 to $389.7 million for 2003. Revenue per working day
increased from $1.47 million in 2002 to $1.54 million in 2003. The increase in
revenue per working day was attributable primarily to a 9.1% increase in LTL
revenue per hundredweight from $10.42 in 2002 to $11.37 in 2003 and to an
increase in fuel surcharge revenue per working day. The overall increase in
revenue per working day was partially offset by a 7.4% decrease in total tonnage
per working day. As a result of yield improvement efforts, we eliminated less
profitable freight and, where possible, replaced it with more profitable loads.
Total tonnage decreased 157,190 tons, or 7.4%, from 2,120,080 tons in 2002 to
1,962,890 tons in 2003. Our Midwest expansion also contributed to our overall
increase in revenues.
Salaries, wages, and benefits. Salaries, wages, and benefits decreased $3.9
million, or 1.9%, from $209.3 million for 2002 to $205.4 million for 2003 due
mainly to a $7.8 million gain relating to a reduction of our obligations under a
benefit plan. Without this reduction, salaries, wages and benefits would have
amounted to $213.2 million. The resultant increase in salaries, wages, and
benefits resulted primarily from an increase in compensation for most of our
employees, rising medical costs, the costs of additional sales personnel, and
the costs of additional employees and relocation expenses incurred in connection
with our Midwest expansion. In addition to these factors, salaries, wages, and
benefits expense for 2003 also included a $0.9 million increase to our workers'
compensation reserves for claims that arose prior to 2003, compared with a $0.5
million increase to such reserves for prior period claims recorded in 2002.
These factors partially offset a decrease in the total number of employees
resulting from our management initiatives. As a percentage of operating
revenues, salaries, wages, and benefits decreased from 56.3% for 2002, to 52.7%
for 2003.
Purchased transportation. Purchased transportation increased $6.8 million,
or 13.6%, from $49.9 million for 2002 to $56.7 million for 2003. The increase in
purchased transportation resulted primarily from an increase in our Midwest
expansion. Because of the geographic breadth and lane characteristics of that
particular expansion effort, we used third party contractors for a significant
portion of our shipments. Our use of contractors in the Midwest decreased
beginning in the third quarter of 2003. As a percentage of operating revenues,
purchased transportation increased from 13.4% for 2002 to 14.5% for 2003.
Operating and general supplies and expenses. Operating and general supplies
and expenses increased $6.6 million, or 11.1%, from $59.6 million for 2002 to
$66.2 million for 2003. The increase in operating and general supplies and
expenses resulted primarily from an increase in the cost of fuel and vehicle
repairs. As a percentage of operating revenues, operating and general supplies
and expenses increased from 16.1% for 2002 to 17.0% for 2003, primarily because
the average price per gallon of diesel fuel was 13.3% higher during 2003 as
compared to 2002.
Insurance and claims. Insurance and claims increased $1.5 million, or
10.3%, from $14.6 million for 2002 to $16.1 million for 2003. The increase in
insurance and claims expense resulted primarily from an increase in the accrual
of $3.8 million in estimated liabilities for claims that arose prior to 2003
($1.8 million of which related to two accidents in 2002), compared with no
increase in such reserves for prior period claims recorded in the 2002 period.
As a percentage of operating revenues, insurance and claims increased from 3.9%
for 2002 to 4.1% for 2003.
Building and equipment rentals. Building and equipment rentals increased
approximately $0.1 million, or 2.0%, from $5.0 million for 2002 to $5.1 million
17
for 2003. The increase in building and equipment rentals resulted primarily from
the addition of leased terminals in connection with our Midwest expansion. As a
percentage of operating revenues, building and equipment rentals decreased
slightly from 1.4% for 2002 to 1.3% for 2003.
Depreciation and amortization. Depreciation and amortization expense
decreased approximately $1.4 million, or 7.8%, from $18.0 million for 2002 to
$16.6 million for 2003, as a result of a change in the estimated useful lives
and sales of our revenue equipment. In January 2003, we increased useful lives
of trailers from twelve to fifteen years and reduced salvage values from 5% to
0%. We also increased useful lives of line tractors from seven to ten years and
reduced salvage values on pick-up and delivery and line tractors from 5% to 0%.
These changes were made to reflect the fact that we are currently operating
these tractors for longer periods of time than previously estimated by our past
management. The changes reduced depreciation expense by approximately $0.6
million in 2003. As a percentage of operating revenues, depreciation and
amortization decreased from 4.8% for 2002 to 4.3% for 2003.
Operating ratio. As a result of the foregoing, our operating ratio improved
from 95.9% for 2002 to 93.9% for 2003.
Interest expense. Interest expense decreased $1.6 million, or 14.2%, from
$11.3 million for 2002 to $9.7 million for 2003. As a percentage of operating
revenues, interest expense decreased from 3.1% for 2002 to 2.5% for 2003. Our
average debt balances decreased from $116.4 million in 2002 to $95.4 million in
2003 due in large part to our payment of approximately $50.0 million in December
2003 to reduce outstanding debt utilizing part of the net proceeds from our
initial public offering, and our average non-related party interest rates
decreased from 6.4% in the 2002 to 5.8% in 2003. 2002 includes $3.3 million and
2003 includes $0.5 million of non-cash interest expense attributable to a $3.3
million annual increase in payments under related party terminal leases
effective February 20, 2003.
Income from continuing operations before income taxes was $3.8 million for
2002 and $14.0 million for 2003.
Pro forma income from continuing operations, assuming an effective tax rate
of approximately 39% in each period, improved from $1.0 million for 2002 to $8.4
million for 2003.
Our income taxes changed from a net tax benefit of $1.4 million for 2002 to
a net tax expense of $(1.8) million for 2003 (excluding the $9.8 million expense
for establishment of federal deferred income taxes) primarily due to the
reversal of a $1.8 million reserve for the contingent expense that could have
resulted from any tax assessments related to our election of S corporation tax
status in 1998. During the fiscal quarter ended June 15, 2002, we determined
that this reserve was no longer necessary because the allowable period for a tax
assessment had ended.
Liquidity and Capital Resources
Our business has required substantial, ongoing capital investments,
particularly to replace revenue equipment such as tractors and trailers. Our
primary sources of liquidity have historically been cash from operations,
secured borrowings, and proceeds of our initial public offering. During 2005 our
net capital expenditure requirements are expected to be only $4.0 million to
$7.0 million, as our tractor and trailer fleets are at average ages that do not
require substantial replacements and we do not expect to purchase any terminals.
Our net capital expenditure expectations include roughly $6 million for
replacement of revenue equipment and selling our former Phoenix location. If we
decide not to replace revenue equipment and are successful in selling the former
Phoenix facility, our net capital expenditures may be close to zero for 2005. We
do not believe a substantial increase in net capital expenditures over the $4.0
million to $7.0 million level assumed for 2005 will be required in 2006.
At December 31, 2004, we had approximately $87.6 million in stockholders'
equity and $55.7 in long-term debt, including current maturities. Under our new
credit facility described under "Recent Development" above, we had an average of
approximately $17.5 million of availability during the first three weeks of
March 2005.
In addition to the availability under our new credit facility, we have
approximately $20 million (cost basis) in active terminals that we are able to
use in one or more sale-leaseback or borrowing transactions, and we have
approximately $6 million in assets, primarily real estate, held for sale.
Management is presently pursuing financing alternatives involving the active
terminals and is attempting to sell the assets held for sale.
18
Although we cannot assure you that our efforts will be successful, we
expect to gain significant additional liquidity from these assets. Our
discussion above concerning net capital expenditures does not take into account
any proceeds from a potential sale-leaseback of our terminals.
Although there can be no assurance, we believe cash from operations,
borrowing available under our new credit facility, and other sources of
liquidity will be sufficient to fund our operations at least through the end of
2006. To the extent that actual results or events differ from management's
financial projections or business plans, our liquidity may be adversely affected
and we may be unable to meet our financial covenants. Specifically, our
liquidity may be adversely affected by one or more of the following factors:
weak freight demand or a loss in customer relationships or volume, our success
in executing management's turnaround steps described above, our ability to
improve the collection of our accounts receivable, elevated fuel prices and the
ability to collect fuel surcharges, costs associated with insurance and claims,
an inability to maintain compliance with, or negotiate amendments to, loan
covenants, the ability to finance tractors and trailers, and the possibility of
shortened payment terms by our suppliers and vendors worried about our ability
to meet payment obligations.
We are currently executing a turnaround plan that is designed to reverse
recent negative cash flows. During 2004 and into early 2005 we have experienced
a period of negative cash flow attributable primarily to operating losses and
approximately $25.0 in acquisitions of revenue equipment during 2004. During the
third and fourth quarters of 2004, our management began implementing several
steps that are intended to improve our operating results and maintain compliance
with our financial covenants. These steps include: reducing our cost structure
to better align controllable costs with our expected revenue base, streamlining
freight movements to consolidate movements and reduce the use of third-party
purchased transportation, improving employee efficiency, reducing insurance and
claims expense, and improving revenue yield and total tonnage. These steps
contributed to a 250 basis-point improvement in our operating ratio between the
third quarter of 2004 (when the steps were implemented) and the fourth quarter
of 2004. We expect additional improvement in our operating ratio between the
fourth quarter of 2004 and the first quarter of 2005. Although our management
believes that these actions should generate the required improvements, there can
be no assurance that the improvements will occur as planned. Our ability to fund
our cash requirements in future periods will depend on our ability to improve
operating results and cash flow and our ability to comply with covenants
contained in our financing arrangements. Our ability to achieve required
improvements will depend on general shipping demand by our customers, insurance
and claims expense, and other factors.
On January 31, 2005, we entered into our New Credit Facility with Bank of
America and others that replaced the Securitization Facility and the Amended and
Restated Revolving Facility. See "Recent Development" above for additional
information. The New Credit Facility contains certain restrictions and covenants
relating to, among other things, 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.
Net cash (used in) provided by operating activities was approximately $(7.4
) million, $15.1 million and $35.2 million for the years ended December 31,
2004, 2003, and 2002, respectively. The decrease in net cash, provided by
operating activities, from 2003 to 2004 - $22.5 million, resulted mainly from
$38.4 million in reduced cash as a result of a larger cash loss from operations
offset by an $8.4 million increase in trade accounts payable in 2004, compared
to a $3.9 million decrease in trade accounts payable in 2003, and a $1.4 million
increase in accounts receivable in 2004, compared to a $4.0 million increase in
2003. The average age of our accounts receivable was 55.0 days for the year
ended December 31, 2004, 52.2 days for the year ended December 31, 2003, and
46.9 days for the year ended December 31, 2002.
Net cash used in investing activities was approximately $41.8 million, $5.3
million, and $8.8 million for the years ended December 31, 2004, 2003, and 2002,
respectively. These expenditures were financed with long-term debt and cash
flows from operations. Our capital expenditures were approximately $36.7 million
in 2004 mainly for revenue equipment and two new terminals, $7.0 million in
2003, and $6.0 million in 2002. We also paid $9.3 million in 2004 for certain
assets related to our Northwest expansion. Our budget for net capital
expenditures, giving effect to any offset from sales or trades of equipment, is
expected to range between $4.0 and $7.0 million in 2005. We expect our capital
19
expenditures to consist primarily of the acquisition of new tractors and
trailers. We expect to pay for the projected capital expenditures with
borrowings under our credit facilities, borrowings under capital leases and cash
flows from operations. Our capital expenditure budget excludes the effect of any
acquisitions.
Net cash provided by (used in) financing activities was approximately $14.1
million, $20.1 million and $(19.2) million for the years ended December 31,
2004, 2003, and 2002, respectively. In July 2004, as a condition for amending
our credit facility we agreed to place $20.8 million in a restricted cash
account. This fund was established through a borrowing under our securitization
facility. The restricted cash fund was established to cash collateralize an
equal amount of letters of credit. Other funds provided by financing activities
in 2004 arose mainly from borrowings under our securitization facility while in
2003 they were mainly derived from the $77.6 million net proceeds from our
initial public offering in December, 2003.
At December 31, 2004, we had outstanding long-term obligations of
approximately $55.7 million. The following chart reflects the outstanding
amounts by category:
Capital lease obligations.. 32.9 million
-------------
Total long-term debt..... 32.9 million
Related party financing.... 22.8 million
-------------
Total................. $55.7 million
=============
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. Under the Securitization Facility, we sell, on a
revolving basis, our interests in accounts receivable to Central Receivables, a
wholly-owned, special purpose subsidiary. The assets and liabilities of Central
Receivables are 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.
On July 28, 2004, we entered into a $30.0 million amended and restated
revolving credit facility with SunTrust Bank (the "Amended and Restated
Revolving Facility"). On November 5, 2004, we executed a first amendment to the
Amended and Restated Revolving Credit Facility. Under the first amendment to the
Amended and Restated Revolving Facility, we could receive up to an aggregate of
$30.0 million of proceeds in the form of letters of credit, only. The Amended
and Restated Revolving Facility accrued interest at a variable rate equal, at
our option, to either (a) the bank's prime lending rate minus an applicable
margin, or (b) LIBOR plus an applicable margin. The 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 Revolving 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
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. We were also required to cash
collateralize our outstanding letters of credit. At December 31, 2004, we had
restricted cash of $20.8 million, as reported on our consolidated balance sheet
related to these letters of credit. At December 31, 2004, we had letters of
credit of $19.8 million outstanding and $ 10.2 available under the Amended and
Restated Revolving Facility. On January 31, 2005, we entered into our New Credit
Facility with Bank of America and others that replaced the Securitization
Facility and the Amended and Restated Revolving Facility.
In March 2004, we acquired certain assets of EOFF for approximately $10.0
million. Under the terms of the agreement, we paid approximately $7.0 million of
the purchase price at closing, $1.0 million in the second quarter of 2004, $1.0
million in the third quarter of 2004 and $0.2 million in the fourth quarter of
2004. The remaining $0.8 million is recorded on the consolidated balance sheet
as short-term notes payable at December 31, 2004 and is expected to be paid or
liquidated prior to the end of our 2005 first quarter.
20
In 1998, we entered into an agreement with Southwest Premier Properties
L.L.C., for the sale and leaseback of the land, structures, and improvements of
36 terminal properties and one additional property in Waco, Texas. The sale
price for the properties was approximately $27.8 million in 1998. For financial
accounting purposes, the lease for these properties is accounted for in our
consolidated financial statements as a financing arrangement. Consequently, the
related land, structures, and improvements remain on our consolidated balance
sheet. The annual lease payments are reflected as a cost of the financing and
recorded as interest expense. In February 2003, the lease covering these
properties was extended to February 2013, with further options through 2023. In
addition, the annual rental amount on active terminal properties was adjusted to
reflect agreed market values. The annual rental amount was increased from $2.9
million to $6.3 million. We have recognized approximately $3.3 million annually
in non-cash interest expense in all periods prior to February 2003 in the
accompanying financial statements to reflect the rental of the affected
properties at the increased values. The rent will be adjusted upward after five
years to reflect any increase in interest rates between February 2003 and
February 2008.
The following table summarizes our significant contractual obligations and
commercial commitments as of December 31, 2004.
Payments Due by Period (in thousands)
Less than After 5
Total 1 Year 1-3 Years 4-5 Years Years
------- -------- --------- --------- ------
Contractual obligations
Long-term debt............... - - - - -
Capital lease obligations.... $ 32,842 $10,958 $14,024 $ 6,547 $ 1,313
Related party real estate
financing................... 22,852 - - - 22,852
Operating lease obligations.. 20,200 5,266 7,660 3,836 3,438
Securitization facility 27,300 27,300 - - -
------- ------- ------- -------- -------
Total...................... $103,194 $43,524 $21,684 $ 10,383 $27,603
======= ======= ======= ======== =======
Amount of Commitment Expiration per Period
(in thousands)
Less than After 5
Total 1 Year 1-3 Years 4-5 Years Years
------- -------- --------- --------- ------
Other commercial commitments
Standby letters of credit..... $19,753 $19,753 - - -
======= ======== ========= ========= ======
We finance revenue equipment through borrowing, a portion of the
indebtedness is categorized as a current liability, although the revenue
equipment is classified as a long-term asset. Consequently, each purchase of
financed revenue equipment decreases working capital. We had a working capital
surplus of $3.0 million at December 31, 2004, $53.5 million at December 31, 2003
and $4.2 million at December 31, 2002.
Off-Balance Sheet Arrangements
Certain of our terminals are financed off-balance sheet through operating
leases. As of December 31, 2004, 47 of our terminals, including seven owned by
related parties, were subject to operating leases.
21
Quarterly Results of Operations
The following table presents our unaudited operating results for the eight
quarters ended December 31, 2004. In our opinion, all necessary adjustments
(consisting only of normal recurring adjustments) have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with our consolidated financial statements and notes, which are
included elsewhere in this Annual Report. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full year or for future periods. Our fiscal year consists of four quarters, each
with 13 weeks.
Quarter Ended
-------------------------------------------------------------------------------------------
Apr. 5, July 5, Oct. 4, Dec. 31, Apr. 3, July 3, Oct. 2 Dec. 31,
2003(2)(7) 2003(3)(7) 2003(4)(5) 2003(5)(6) 2004 2004 2004 2004
--------- ---------- --------- ---------- --------- --------- -------- ---------
(unaudited)
(in thousands, except per share data)
Operating revenues.... $ 98,802 $ 100,150 $ 101,209 $ 89,535 $ 97,038 $ 105,513 $ 98,539 $ 85,511
Operating income
(loss).............. 5,989 1,245 10,852 5,620 13 (5,035) (10,759) (7,874)
(Loss) income from
continuing
operations.......... 3,314 (1,305) 8,037 (7,610) (1,129) (2,543) (7,898) (11,278)
Income (loss) from
discontinued
operations (6)...... - - - (8,341) - - - -
Net (loss)
Income(1)........... 3,314 (1,305) 8,037 (15,951) (1,129) (2,543) (7,898) (11,278)
Net loss per share
Basic............. $ (0.06) $ (0.14) $ (0.43) $ (0.62)
========= ========= ======== ========
Diluted........... $ (0.06) $ (0.14) $ (0.43) $ (0.62)
========= ========= ======== ========
Pro forma data:(1)
Pro forma income
tax benefit
(expense)......... (1,560) 531 (3,259) (1,378)
Pro forma net
(loss) income..... 1,940 (831) 5,098 (6,185)
Pro forma net
Income (loss)
per share:
Basic.. ........... $ 0.18 $ (0.08) $ 0.47 $ (0.51)
======== ========== ========= ==========
Diluted........... $ 0.16 $ (0.08) $ 0.43 $ (0.47)
======== ========== ========= ==========
(1) Prior to November 1, 2003, we maintained S corporation status under which
federal income tax attributes flowed directly to stockholders. Accordingly,
income tax expenses recorded by us reflect state income taxes. Pro forma
net (loss) income has been adjusted to reflect the application of federal
income taxes. On November 1, 2003 we elected C corporation status for
federal income taxes and recorded $9.8 million federal deferred taxes upon
conversion.
(2) In the first quarter of 2003, we recorded a $2.5 million gain as a result
of amendments made to a benefit plan.
(3) In the second quarter of 2003, we recorded a $3.8 million increase in our
claims accrual related to accident, workers' compensation, and other claims
(including $1.8 million related to two accidents that occurred in 2002) in
which the underlying events occurred prior to 2003.
(4) In the third quarter of 2003, we recorded a $5.3 million gain as a result
of further amendments made to the benefit plan referenced above.
(5) In 2003, we recorded reduced depreciation expense as a result of additional
changes in useful lives and salvage values of trailers and line tractors of
$145,000 in each of the quarters. These changes in useful lives and salvage
values were made based on our historical experience.
(6) On November 1, 2003 we elected C corporation status for federal income
taxes. In the fourth quarter, we recognized a loss from discontinued
22
operations of $8.3 million which along with the $9.8 million income tax
expense from converting to C corporation status was primarily responsible
for the $7.6 million net loss from continuing operations for the quarter.
(7) During 2004, the IRS disallowed certain tax deductions taken by the S
corporation shareholders pursuant to a contested liability trust. As a
result of the disallowance of such deductions, the C corporation's tax
basis was increased resulting in a deferred tax benefit of $1.75 million..
(8) During 2004, we analyzed our deferred tax assets and liabilities and
determined that , under current accounting treatment, a valuation allowance
of $4.9 million was applicable to our net deferred tax assets.
Critical Accounting Policies
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financials statements.
Revenue Recognition. Operating revenue is recognized upon delivery of the
related freight, as is fuel surcharge revenue. In 2004, approximately 9.9% of
our revenue was derived from interline shipments. Most of this revenue was with
carriers with which we maintain transportation alliances. We do not recognize
revenue (or the associated expenses) that relates to the portion of the shipment
transported by our alliance partners.
Insurance and Claims Accruals. We record insurance and claims accruals
based upon our estimate of the ultimate total cost of claims, not covered by
insurance, for bodily injury and property damage, cargo loss and damage,
physical damage to our equipment, workers' compensation, long-term disability,
and group health, and post-retirement health benefits. Our estimates are based
on our evaluation of the nature and severity of the claims and our past claims
experience. We include an estimate for incurred but not reported claims. The
estimated costs for bodily injury and property damage, cargo loss and damage,
and physical damage to our equipment are charged to insurance and claims. The
other estimated costs are charged to employee benefits expense.
From June 28, 2000 to June 28, 2001, our self-insured retention for bodily
injury and property damage, cargo loss and damage, and physical damage to our
equipment was an aggregate $0.5 million per occurrence. Effective June 28, 2001,
we increased our self-insured retention to $1.0 million per occurrence, on
October 28, 2003 reduced our self-insured retention to $0.75 million per
occurrence and on January 1, 2004 increased our self-insured retention to $1.0
million. Our self-insured retention for workers' compensation has been $1.0
million per occurrence since October 28, 2002. We also self-insure for all
health claims up to $0.3 million per occurrence. We expect our claims reserves
to increase in future periods as a result of our higher self-insured retention.
In October 2002, we were forced to seek replacement excess insurance
coverage after our insurance agent failed to produce proof of insurance on
policies for which we had obtained binders as of July 15, 2002. We are not aware
of any claims during the period between July and October 2002 that are expected
to exceed the self-insured retention level we had at the time. For any claims
arising during such period, that would exceed that level, we intend to pursue
our legal rights against the insurance agent and its errors and omissions policy
but we cannot assure you that such coverage will be available, in which case our
financial results could be materially and adversely affected.
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.
Income Taxes. Significant management judgment is required in determining
our provision for income taxes and in determining whether deferred tax assets
will be realized in full or in part. Deferred tax assets and liabilities are
measured using enacted tax rates that are expected to apply to taxable income in
years in which the temporary differences are expected to be reversed. Under SFAS
No. 109 and applicable interpretations, if all or some portion of specific
deferred tax assets, such as state tax credit carry-forwards or state net
operating loss carry-forwards, are determined not to be realizable, a valuation
23
allowance must be established for the amount of such deferred tax assets. In
2004, based on our results of operations and existing accounting interpretations
that do not allow us to consider future expectations, only past results, we
established a $4.9 million valuation allowance for deferred tax assets. Despite
the requirement for such allowance, we believe that the remaining net deferred
tax assets will be realized through future taxable income.
The determination of the combined tax rate used to calculate our provision
for income taxes for both current and deferred income taxes also requires
significant judgment by management. Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," requires that the net deferred
tax asset or liability be valued using enacted tax rates that we believe will be
in effect when these temporary differences reverse. We use the combined tax
rates in effect at the time the financial statements are prepared since no
better information is available. If changes in the federal statutory rate or
significant changes in the statutory state and local tax rates occur prior to or
during the reversal of these items or if our filing obligations were to change
materially, this could change the combined rate and, by extension, our provision
for income taxes.
Goodwill. Our business acquisitions have resulted in goodwill, which may
become impaired in the future. As of December 31, 2004, our goodwill, net of
accumulated amortization, was $4.3 million. We perform our goodwill impairment
tests annually and more frequently if an event or circumstance indicates that
impairment may have occurred occurred. A drop in our market value could result
in an impairment charge of all or a portion of our goodwill. Based on our
current market value, it is possible that a non-cash impairment charge of all or
a portion of our goodwill will occur in the first quarter of 2005.
Inflation
Most of our expenses are affected by inflation, which generally results in
increased operating costs. In response to fluctuations in the cost of petroleum
products, particularly diesel fuel, we have implemented a fuel surcharge in our
tariffs and contractual agreements. The fuel surcharge is designed to offset the
cost of fuel above a base price and increases as fuel prices escalate over the
base. We do not expect the net effect of inflation on our results of operations
to be different from the effect on LTL carriers generally.
Seasonality
We experience some seasonal fluctuations in freight volume. Historically,
our shipments decrease during winter months and our operating expenses have been
higher in the winter months due to decreased fuel efficiency and increased
maintenance costs for our tractors and trailers in colder weather. Our southern
operating region has lessened the seasonal impact of colder weather to some
extent. Our expansion into the Midwest and planned expansion into the Northwest
may increase our exposure to seasonal fluctuations in operating expenses.
Recent Accounting Pronouncements
In December 2004, the FASB revised SFAS No. 123, Share-Based Payment, This
Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement does not
change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement 123 as originally issued and EITF
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." This Statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans. The Company has not
yet determined the method of adoption or the effect of adopting SFAS No. 123R,
and the Company has not determined whether the adoption will result in amounts
that are similar to the current pro forma disclosures under SFAS No. 123.
24
Factors That May Affect Future Results
Our future results may be affected by a number of factors over which we
have little or no control. The following issues and uncertainties, among others,
should be considered in evaluating our business and growth outlook.
We operate in a highly competitive and fragmented industry and our business
will suffer if we are unable to adequately address potential downward pricing
pressures and other factors that may adversely affect our operations and
profitability.
Numerous competitive factors could impair our ability to achieve
profitability. These factors include the following:
o We compete with many other transportation service providers of varying
sizes, some of which have more equipment, a broader coverage network,
a wider range of services, and greater capital resources than we do or
have other competitive advantages.
o Some of our competitors periodically reduce their prices to gain
business, especially during times of reduced growth rates in the
economy, which may limit our ability to maintain or increase prices or
maintain significant growth in our business.
o Some of our competitors have begun offering customers a money back
guarantee if certain shipments are delivered late, and we have not yet
evaluated the effect of such product offerings on the marketplace or
the possible effects on our financial condition.
o Many customers reduce the number of carriers they use by selecting
so-called "core carriers" as approved transportation service
providers, and in some instances we may not be selected.
o Many customers periodically accept bids from multiple carriers for
their shipping needs, and this process may depress prices or result in
the loss of some business to competitors.
o The trend towards consolidation in the ground transportation industry
may create other large carriers with greater financial resources than
us and other competitive advantages relating to their size.
o Advances in technology require increased investments to remain
competitive, and our customers may not be willing to accept higher
prices to cover the cost of these investments.
o Competition from non-asset-based logistics and freight brokerage
companies may adversely affect our customer relationships and prices.
o Competitors that, in the past, have used us to deliver interline
shipments for them in our regions may not continue to do so, which
would reduce our revenue.
We have a limited operating history as an independent company and
experienced net losses during 2001, 2003 and 2004.
We began our operations on June 30, 1997, after acquiring the name "Central
Freight Lines" and substantially all of the operating assets of the Southwestern
Division of Viking Freight System. Thus, our operating history is brief and
provides a limited basis for evaluating our performance. Further, we experienced
a net loss of approximately $6.9 million in 2001 and $5.9 million in 2003.
Although we generated income from continuing operations of approximately $5.2
million and $2.4 million in 2002 and 2003, respectively, we experienced a loss
from continuing operations of approximately $22.8 million in 2004. Although we
have identified certain steps
25
designed to return the Company to profitability by the end of 2005, we cannot
assure you that our efforts will be successful or that we will again achieve
profitability. As a result, we cannot assure you that we will not experience net
losses in the future. If we are unable to make planned improvements in our
operations, the value of stockholders' investments may suffer. Further, there
can be no assurance as to our ability to generate positive cash flow in future
periods. If we are unable to generate positive cash flow in the future, we may
not be able to satisfy contractual obligations or fund our working capital
needs.
Our business is subject to general economic and business factors over which
we have little or no control.
Our business is affected by a number of factors that may have a materially
adverse effect on the results of our operations, many of which are beyond our
control. These factors include:
o Significant increases or rapid fluctuations in fuel prices.
o Excess capacity in the trucking industry.
o Decline in the resale value of used equipment.
o Fluctuations in interest rates.
o Rising healthcare costs.
o Higher fuel taxes and license and registration fees.
o Increases in insurance costs or liability claims.
o Difficulty in attracting and retaining qualified drivers.
We also are affected by recessionary economic cycles and downturns in
customers' business cycles, particularly in market segments and industries, such
as retail, where we have a significant concentration of customers. Economic
conditions may adversely affect our customers and their ability to pay for our
services. Customers encountering adverse economic conditions represent a greater
potential for loss and we may be required to increase our allowance for doubtful
accounts. A significant amount of our freight is concentrated in Texas and
California. Accordingly, we also are directly impacted by economic conditions in
and affecting Texas and California over which we have no control.
If we are unable to successfully execute our operating strategy, our
business and future results of operations may suffer.
As part of our operating strategy for the immediate future, we have
identified five specific areas of focus in our efforts to improve operating
results: Reducing our cost structure to better align controllable costs with our
expected revenue base, streamlining freight movements to consolidate movements
and reduce the use of third-party purchased transportation, improving employee
efficiency, reducing insurance and claims expense, and improving revenue yield
and total tonnage. This business strategy is subject to a number of risks, which
include the following:
o Revenue growth may be delayed or not occur at all.
o Improvements in revenue yield and tonnage growth may be delayed or not
occur at all.
o Our service, safety, and productivity measures may be further delayed
or not be successfully implemented throughout our operations.
o Our cost-cutting measures may have unintended and unforeseen
consequences that adversely affect our business.
o Our insurance and claims costs may continue to exceed our expectations
and may not return to acceptable levels on a timely basis or at all.
26
If these risks materialize, or if our efforts to improve performance are
otherwise unsuccessful, our business, financial condition, and results of
operations will suffer.
We may not be able to successfully manage our growth or integrate
acquisitions, which could cause our business to suffer.
In December 2002, we expanded our LTL service in a seven-state region in
the Midwest. In March 2004, we expanded our business further to serve a
three-state region in the Northwest through the acquisition of the terminal
network and selected assets of EOFF. We cannot assure you that our Midwest
expansion or our Northwest expansion will be successful. Further, in connection
with our growth generally, we may need to purchase additional equipment, add new
terminals, hire additional personnel, and increase our marketing efforts. Our
growth exposes us to a number of risks, including the following:
o Our geographic expansion has disrupted (and may continue to disrupt)
our existing transportation alliances with carriers in those regions.
o Our geographic expansion has produced (and may continue to produce)
freight imbalances, customer service issues, operational issues, or
other consequences that we cannot manage successfully on a timely
basis or at all.
o Our growth has strained (and may continue to strain) our management,
capital resources, and computer and other systems.
We cannot assure you that we will overcome the risks associated with the
growth of our company.
We have significant ongoing capital requirements that could adversely
affect our profitability if we are unable to generate sufficient cash from
operations.
The LTL industry is capital intensive. Historically, we have depended on
cash from operations, proceeds from our accounts receivable securitization,
borrowing from banks and finance companies, and leases to expand the size of our
terminal network and maintain and expand our fleet of revenue equipment. We are
projecting continuing expenditures for tractors and trailers in 2005 and beyond,
primarily due to the need to replace older equipment in the fleet and increased
costs of new tractors following the October 2002 implementation of new emissions
control regulations. Our budget for capital expenditures, giving effect to any
offsets from sales or trades of equipment, will range from $4.0 to $7.0 million
for 2005. If we are unable to generate sufficient cash from operations and
obtain financing on favorable terms in the future, we may have to limit our
growth, enter into less favorable financing arrangements, or operate our revenue
equipment for longer periods, any of which could have a materially adverse
effect on our profitability.
If we are unable to retain our key employees, our business, financial
condition, and results of operations could be harmed.
We are highly dependent upon the services of the following key employees:
Robert V. Fasso, our Chief Executive Officer and President; Jeffrey A. Hale, our
Senior Vice President and Chief Financial Officer; and Walt Ainsworth, our
Executive Vice President. The loss of any of their services could have a
materially adverse effect on our operations and future profitability. We must
continue to develop and retain a core group of managers if we are to realize our
goal of expanding our operations and continuing our growth. We cannot assure you
that we will be able to do so.
Our ability to compete would be substantially impaired if our employees
were to unionize.
None of our employees are represented under a collective bargaining
agreement by a labor union. In 2001, the International Brotherhood of Teamsters
filed a petition with the National Labor Relations Board seeking an election
among the employees at our Dallas, Texas facility. Our employees voted not to
form a union when that election was conducted in April 2002. In October 2002,
after we requested an election, the Teamsters withdrew from representing our
27
employees in Las Vegas, our only remaining facility where employees had at one
time requested union representation. While we believe our current relationship
with our employees is good, we cannot assure you that further unionization
efforts will not occur in the future. Our non-union status is a critical factor
in our ability to compete. If our employees vote to join a union and we sign a
collective bargaining agreement, the results probably would be adverse for
several reasons:
o Some shippers have indicated that they intend to limit their use of
unionized trucking companies because of the threat of strikes and
other work stoppages. A loss of customers would impair our revenue
base.
o Restrictive work rules could hamper our efforts to improve and sustain
operating efficiency, for example by inhibiting our ability to
implement dynamic resource planning within our workplace.
o A strike or work stoppage would hurt our profitability and could
damage customer and other relationships.
o An election and bargaining process would distract management's time
and attention and impose significant expenses.
These results, and unionization of our workforce generally, could have a
materially adverse effect on our business, financial position, and results of
operations.
Ongoing insurance and claims expenses could significantly affect our
operations .
Our future insurance and claims expenses might exceed historical levels,
which could reduce our earnings. We currently carry $30.0 million of insurance
coverage, with a self-insured retention of $1.0 million per occurrence for
claims resulting from cargo theft or loss, personal injury, property damage, and
physical damage to our equipment. We also self-insure for workers' compensation
up to $1.0 million per occurrence, and for all health claims up to $0.3 million.
Insurance carriers have raised premiums for most trucking companies. Additional
increases could further increase our insurance and claims expense as current
coverages expire or cause us to raise our self-insured retention. If the number
or severity of claims for which we are self-insured increases, we suffer adverse
development in claims compared with our reserves, or any claim exceeds the
limits of our insurance coverage, our financial results could be materially and
adversely affected.
Our large self-insured retentions require us to make estimates of ultimate
loss amounts and accrue such estimates as expenses. Changes in estimates may
materially and adversely affect our financial results. In 2003, we recorded an
aggregate of $3.8 million in increases to our reserves for accident, workers'
compensation, and other liabilities arising in prior periods. Such accrual
included $1.8 million for two accidents that occurred in 2002. This compared to
an accrual of $0.5 million in additional expense in 2002, relating to claims
that arose in prior periods. The large accrual in 2003 caused our financial
results to suffer. We may be required to accrue such additional expenses in the
future.
In October 2002, we were forced to seek replacement excess insurance
coverage after our insurance agent failed to produce proof of insurance on
policies for which we had obtained binders as of July 15, 2002. We are not aware
of any claims during the period between July and October 2002 that are expected
to exceed the self-insured retention level we had at the time. For any claims
arising during such period that exceed that level, we intend to pursue our legal
rights against the insurance agent and its errors and omissions policy but we
cannot assure you that such coverage will be available, in which case our
financial results could be materially and adversely affected.
Ongoing insurance requirements could constrain our borrowing capacity.
Our ability to incur additional indebtedness could be adversely affected by
an increase in requirements that we post letters of credit in support of our
insurance policies. On January 31, 2005, we entered into our New Credit Facility
with Bank of America, N.A., as Agent, and certain other lenders. As of March 8,
2005, $10.9 million in borrowings and $20.8 million in letters of credit were
outstanding. Available borrowings under the New Credit Facility as of that date
were $19.1 million. The face amount of letters of credit we are required to post
is expected to increase in the future. Increases in letters of credit
outstanding will reduce our borrowing capacity under the New Credit Facility,
thereby adversely affecting our liquidity.
28
Difficulty in attracting qualified drivers could adversely affect our
profitability and ability to grow.
Periodically, the trucking industry experiences substantial difficulty in
attracting and retaining qualified drivers, including independent contractors.
If we are unable to attract drivers and contract with independent contractors,
we could be required to adjust our compensation package, let trucks sit idle, or
operate with fewer independent contractors and face difficulty meeting shipper
demands, all of which could adversely affect our growth and profitability.
Fluctuations in the price or availability of fuel and our ability to
collect fuel surcharges may affect our costs of operation.
We require large amounts of diesel fuel to operate our tractors. Diesel
fuel prices fluctuate greatly due to economic, political, and other factors
beyond our control. For example, diesel fuel prices recently reached
historically high levels ($2.21 average price per gallon in October 2004), with
our cost averaging $1.76 per gallon for 2004, compared with $1.45 per gallon for
2003. To address fluctuations in fuel prices, we seek to impose fuel surcharges
on our accounts. These arrangements will not fully protect us from fuel price
increases. In addition, any shortage or interruption in the supply of fuel would
negatively affect us. Accordingly, fluctuations in fuel prices, or a shortage of
diesel fuel, could materially and adversely affect our results of operations. We
base our fuel surcharge rates on the weekly national average price of diesel
fuel. Because our operations are concentrated in the southwestern United States,
there is some risk that the national average will not fully reflect regional
fuel prices, particularly in California. Historically, we have not engaged in
hedging transactions to protect us from fluctuations in fuel prices.
We rely on transportation alliances with other LTL operators, and a
breakdown of these alliances could adversely affect our revenues.
In our regional LTL operations, we primarily pick up and deliver freight
within our own operating regions. Freight originating outside our territory for
delivery inside our territory is brought to us by several other trucking
companies with which we have formed transportation alliances. In return, we
deliver to them freight that originates in our territory for delivery in their
territories. In 2004, transportation alliances generated approximately 9.9% of
our revenue. These alliances subject us to certain risks, including:
o Expanding our own operations into an alliance company's territory may
cause that company to stop using our alliance.
o We may not control the customer relationship on freight moving into
our territory.
o Our alliance companies can end their relationships with us at any time
and could choose to form an alliance with one of our competitors in
our territory.
o The reduction or termination of our alliances could negatively impact
our business and results of operations.
Our Chairman, Jerry Moyes, his family, and trusts for the benefit of his
family own approximately 35.8% of our stock and have substantial control over
us.
Jerry Moyes and trusts for the benefit of his family beneficially own
approximately 31.7% of our outstanding common stock. In addition, Mr. Moyes'
brother and sister-in-law, Ronald and Krista Moyes, beneficially own
approximately 4.1% of our outstanding common stock. Mr. Jerry Moyes, his family,
and certain trusts for the benefit of his family are able to influence decisions
requiring stockholder approval, including election of our board of directors,
our management and policies, the adoption or extension of anti-takeover
provisions, mergers, and other business combinations. This concentration of
ownership may allow Mr. Jerry Moyes to prevent or delay a change of control of
our company or an amendment to our certificate of incorporation or our bylaws.
In matters requiring stockholder approval, Mr. Jerry Moyes' interests may differ
from the interests of other holders of our common stock and he may take actions
affecting us with which you may disagree.
29
We engage in transactions with other businesses controlled by our officers
and directors, and the interests of our officers and directors could conflict
with the interests of our other stockholders.
We engage in multiple transactions with related parties. These transactions
include the lease of 29 active terminals and seven dormant terminals from
Southwest Premier Properties, L.L.C. Southwest Premier is owned by some of our
existing stockholders, including Jerry Moyes, our Chairman of the Board, Robert
V. Fasso, our Chief Executive Officer and Patrick J. Curry, our former Executive
Vice President. These related party transactions also include the lease of two
active terminals from Jerry Moyes, the lease of two terminals from Swift
Transportation, the lease of independent contractor drivers and their tractors
from Interstate Equipment Leasing, Inc., and freight transportation transactions
with Swift Transportation and Central Refrigerated, companies for which Jerry
Moyes serves as Chairman. As a result, our directors and executive officers may
have interests that conflict with yours. Although we have adopted a policy
requiring that all future transactions with affiliated parties be approved by
our audit committee or another committee of disinterested directors, we cannot
assure you that the policy will be successful in eliminating conflicts of
interests.
The loss of one or more of our five largest customers could significantly
and adversely affect our cash flow, market share, and profits.
In 2004, our largest customer, Dell Computer, accounted for approximately
5.2% of our total revenues, and our five largest customers accounted for
approximately 15.5% of our total revenues. Our largest customers are under no
firm obligation to ship with us and the contracts are generally terminable upon
30 or 60 days' notice. In addition, we have significant exposure to the retail
sector and to the economies in Texas and California. If we lose one or more of
our large customers, or if there is a decline in the amount of services those
customers purchase from us, our cash flow, market share, and profits could be
adversely affected.
Our results of operations may be affected by seasonal factors and harsh
weather conditions.
Our operations are subject to seasonal trends common in the trucking
industry, particularly as customers tend to reduce shipments after the winter
holiday. Harsh weather can also adversely affect our performance by reducing
demand, impeding our ability to transport freight, and increasing operating
expenses.
We are party to securities class action and derivative litigation which may
be costly to defend and the outcome of which is uncertain.
In June and July 2004, three stockholder class actions were filed against
us and certain of our officers and directors. The class actions were filed in
the United States District Court - Western District of Texas and generally
allege that false and misleading statements were made in our initial public
offering registration statement and prospectus, during the period surrounding
our initial pubic offering, and up to the press release dated June 16, 2004. The
class actions are in the initial phases and we intend to vigorously defend
against the suits. On August 9 and 10, 2004, two purported derivative actions
were filed against us, as nominal defendant, and against certain of our
officers, directors, and former directors. These actions were filed in the
District Court of McLennan County, Texas and generally allege breach of
fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets, and unjust enrichment on the part of certain of our present and former
officers and directors in the period between December 12, 2003 and August 2004.
The purported derivative actions seek declaratory, injunctive, and other relief.
We cannot provide any assurances as to the outcome of this litigation. Any
conclusion of this litigation in a manner adverse to us could have a material
adverse effect on our business, financial condition, and results of operations.
In addition, the cost to us of defending the litigation, even if resolved in our
favor, could be substantial. Such litigation could also divert the attention of
our management and our resources in general. Uncertainties resulting from the
initiation and continuation of this litigation also could harm our ability to
compete in the marketplace.
30
We operate in a highly regulated industry and increased costs of compliance
with, or liability for violation of, existing or future regulations could have a
materially adverse effect on our business.
Our operations are regulated and licensed by various U.S. agencies. Our
drivers also must comply with the safety and fitness regulations of the United
States Department of Transportation, or DOT, including those relating to drug
and alcohol testing and hours-of-service. Such matters as weight and equipment
dimensions are also subject to U.S. regulations. We also may become subject to
new or more restrictive regulations relating to fuel emissions, drivers'
hours-of-service, ergonomics, or other matters affecting safety or operating
methods. Future laws and regulations may be more stringent and require changes
in our operating practices, influence the demand for transportation services, or
require us to incur significant additional costs. Higher costs incurred by us or
by our suppliers who pass the costs onto us through higher prices would
adversely affect our results of operations.
Beginning in 2004, motor carriers were required to comply with several
changes to DOT hours-of-service requirements that may have a positive or
negative effect on driver hours (and miles) and our operations. A citizens'
advocacy group successfully petitioned the courts that the new rules were
developed without driver health in mind. Pending further action by the courts or
the effectiveness of new rules addressing these issues, Congress has enacted a
law that extends the effectiveness of the new rules until September 30, 2005. We
cannot predict whether there will be changes to the hours-of-service rules, the
extent of any changes, or whether there will be further court challenges. Given
this uncertainty, we are unable to determine the future effect of driver hour
regulations on our operations. The DOT is also considering implementing higher
safety requirements on trucks. These regulatory changes may have an adverse
affect on our future profitability.
Our operations are subject to various environmental laws and regulations,
the violation of which could result in substantial fines or penalties.
We are subject to various environmental laws and regulations dealing with
the hauling and handling of hazardous materials, fuel storage tanks, air
emissions from our vehicles and facilities, and discharge and retention of
stormwater. We operate in industrial areas, where truck terminals and other
industrial activities are located, and where groundwater or other forms of
environmental contamination have occurred. Our operations involve the risks of
fuel spillage or seepage, environmental damage, and hazardous waste disposal,
among others. We also maintain bulk fuel storage tanks and fueling islands at
nineteen of our facilities. A small percentage of our freight consists of
low-grade hazardous substances, such as paint, which subjects us to a wide array
of regulations. If we are involved in a spill or other accident involving
hazardous substances, if there are releases of hazardous substances we
transport, or if we are found to be in violation of applicable laws or
regulations, we could be subject to liabilities that could have a materially
adverse effect on our business and operating results. If we should fail to
comply with applicable environmental regulations, we could be subject to
substantial fines or penalties and to civil and criminal liability.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, most importantly the effects
of the price and availability of diesel fuel and changes in interest rates. To
address the risk of high fuel prices, we maintain a fuel surcharge program. Fuel
surcharge programs are well established in the industry and are broadly accepted
by our customers. We believe our fuel surcharge program is effective at
mitigating the risk of high fuel prices. Accordingly, we have not engaged in any
fuel price hedging activities. Because fuel surcharges are based on the weekly
national average price of diesel fuel and our operations are concentrated in the
Southwest, there is some risk that the national average will not fully reflect
regional fuel prices, particularly in California. We are highly dependent on
adequate supplies of diesel fuel. If our supply 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 December 31, 2004, although we may enter into such swaps in the future
if we deem appropriate.
31
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. Assuming borrowings equal to
the $12.7 million available on the securitization facility at December 31, 2004,
a one percentage point increase in commercial paper rates would increase our
annual interest expense by $127,000.
Item 8. Financial Statements and Supplementary Data
Our audited consolidated balance sheets, statements of operations, cash
flows, stockholders' equity and notes related thereto, are contained at Pages
F-1 to F-26 of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A - Controls and Procedures
(a) Disclosures Control and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we performed
an evaluation of the design and operation of our disclosure controls and
procedures as of December 31, 2004, pursuant to Exchange Act Rules 13a-15 and
15d-15 of the Securities and Exchange Act of 1934. Based on that evaluation and
because of the material weaknesses described in Item 9A(b) below, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2004, such disclosure controls and procedures were not effective. Due to these
material weaknesses, the Company, in preparing its consolidated financial
statements as of and for the year ended December 31, 2004, performed additional
procedures relating to revenue, accounts receivable, inventory, and income taxes
to ensure that the consolidated financial statements were stated fairly in all
material respects in accordance with U.S. generally accepted accounting
principles.
(b) Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. Our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2004, based on the framework in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our evaluation,
management concluded that three deficiencies in our internal control over
financial reporting as of December 31, 2004, constituted "material weaknesses"
within the meaning of the Public Company Accounting Oversight Board's Auditing
Standard No. 2. These material weaknesses as of December 31, 2004 are as
follows:
The Company's policies and procedures were not sufficient to ensure that
transactions processed through the Company's billing system resulted in
accounting for and reporting of such transactions pursuant to the provisions of
the respective customer contract. Specifically, the Company's billing process
lacked controls to ensure the accuracy of entries to the billing system and to
ensure that changes to customer contracts were reflected in the billing system
accurately and timely. These deficiencies result in more than a remote
likelihood that a material misstatement of the annual or interim consolidated
financial statements would not be prevented or detected.
The Company's procedures were not sufficient to ensure the accuracy of reported
amounts for the Company's tire and spare parts inventories. Specifically, the
Company did not reconcile, pursuant to its policy, physical counts of tire and
spare parts inventories to the Company's year-end general ledger. As a result,
errors in accounting for inventory were identified and corrected prior to
issuance of the Company's 2004 consolidated financial statements. This
deficiency results in more than a remote likelihood that a material misstatement
of the annual or interim consolidated financial statements would not be
prevented or detected.
The Company did not maintain policies and procedures to ensure that the
accounting for valuation allowances associated with deferred taxes was in
accordance with U.S. generally accepted accounting principles. Specifically,
management's procedures did not provide for an effective review of deferred tax
asset amounts for purposes of evaluating realizability. As a result, a material
error in the determination of the valuation allowances for deferred tax assets
was identified and corrected prior to issuance of the Company's 2004
consolidated financial statements. This deficiency results in more than a remote
likelihood that a material misstatement of the annual or interim consolidated
financial statements would not be prevented or detected.
Because of the material weaknesses described above, our management has
concluded that our internal controls over financial reporting were not effective
as of December 31, 2004. KPMG LLP has issued an attestation report on our
management's assessment of our internal control over financial reporting, which
is included in Item 8.
(c) Changes in Internal Controls over Financial Reporting
Since December 31, 2004, the Company has undertaken the following measures
to remediate the material weaknesses in internal control over financial
reporting discussed in 9A(b) above:
Our rate auditor, who was hired in the fourth quarter of 2004, is being
trained to effectively audit a representative sample of revenue transactions on
a daily basis, in order to monitor the accuracy of billing entries being made to
the Company's billing system. In addition, our pricing personnel are comparing
changes in customer contracts and tariffs to the billing system in order to
ensure such changes are being made timely and accurately.
Physical inventories of tires and spare parts will be completed on a
quarterly basis. The accounting department is implementing a control to
reconcile physical counts of tires and spare parts to the general ledger on a
quarterly basis.
In the fourth quarter of 2004, we engaged a Big Four accounting firm to
assist our management in ensuring the accuracy of the valuation allowance for
deferred taxes. Despite such assistance, an error in the determination of the
valuation allowance for deferred tax assets was identified and corrected prior
to issuance of the Company's 2004 consolidated financial statements. In 2005, we
developed a detailed analysis of our future utilization of deferred tax assets
and liabilities to ensure the valuation allowance is properly stated in future
periods.
Other than the changes discussed above, there have been no changes to the
Company's internal control over financial reporting that occurred since the
beginning of the Company's fourth quarter of 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
Item 9B. Other Information
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
We incorporate by reference the information contained under the headings
"Proposal One - Election of Directors," "Corporate Governance - Board of
Directors," "Corporate Governance - Committees of the Board of Directors - Audit
Committee," "Corporate Governance - Executive Officers of the Company,"
"Corporate Governance - Code of Conduct and Ethics," and "Corporate Governance -
Section 16(a) Beneficial Ownership Reporting Compliance" from our definitive
Proxy Statement to be delivered to our stockholders in connection with the 2005
Annual Meeting of Stockholders to be held May 3, 2005; provided, however, that
the Report of the Audit Committee in such Proxy Statement is not incorporated by
reference.
Item 11. Executive Compensation
We incorporate by reference the information contained under the headings
"Executive Compensation" and "Corporate Governance - Director Compensation" from
our definitive Proxy Statement to be delivered to our stockholders in connection
with the 2005 Annual Meeting of Stockholders to be held May 3, 2005; provided,
however, that the Compensation Committee Report on Executive Compensation that
appears under the heading "Executive Compensation" in such Proxy Statement is
not incorporated by reference.
33
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table provides certain information, as of December 31, 2004,
with respect our compensation plans and other arrangements under which shares of
our Common Stock are authorized for issuance.
Equity Compensation Plan Information
Number of securities
remaining eligible
Number of securities for future issuance
to be issued upon Weighted average under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options (excluding securities
warrants and rights warrants and rights reflected
in column (a))
Plan category (a) (b) (c)
- -------------------------------------------- -------------------- ------------------- ---------------------
Equity compensation plans 1,328,868 $4.00 1,117,863
approved by security holders
Equity compensation plans not - -
approved by security holders -------------------- ------------------- ---------------------
Total 1,328,868 $4.00 1,117,863
==================== =================== =====================
We incorporate by reference the information contained under the heading
"Security Ownership of Certain Beneficial Owners and Management" from our
definitive Proxy Statement to be delivered to our stockholders in connection
with the 2005 Annual Meeting of Stockholders to be held May 3, 2005.
Item 13. Certain Relationships and Related Transactions
We incorporate by reference the information contained under the headings
"Executive Compensation - Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" from our
definitive Proxy Statement to be delivered to our stockholders in connection
with the 2005 Annual Meeting of Stockholders to be held May 3, 2005.
Item 14. Principal Accountant Fees and Services
We incorporate by reference the information contained under the heading
"Principal Accountant Fees and Services" from our definitive Proxy Statement to
be delivered to our stockholders in connection with the 2005 Annual Meeting of
Stockholders to be held May 3, 2005.
Part IV
Item 15. Exhibits, Financial Statements Schedules
(a) The following documents are filed as part of this report on Form 10-K at
pages F-1 through F-26, below.
1. Consolidated Financial Statements:
Central Freight Lines, Inc. and Subsidiaries
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002 Consolidated Statements of
Stockholders' Equity for the years ended December 31, 2004,
2003, and 2002
34
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002 Notes to
Consolidated Financial Statements
2. Consolidated Financial Statement Schedules required to be filed
by Item 8 and Paragraph (d) of Item 15:
All schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or the notes thereto.
3. Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed at paragraph
(c), below, and at the Exhibit Index appearing at the end of this report.
(b) Exhibits:
The following exhibits are filed with this Form 10-K or incorporated herein
by reference to the document set forth next to the exhibit listed below:
Exhibit
Number Descriptions
2.1 Amended and Restated Asset Purchase Agreement dated April 18, 2002, by
and among Central Refrigerated Service, Inc., a Nebraska corporation,
and Simon Transportation Services Inc., a Nevada corporation, and its
subsidiaries, Dick Simon Trucking, Inc., a Utah corporation, and Simon
Terminal, LLC, an Arizona limited liability company. (Incorporated by
reference to Exhibit 2.1 to the Company's Registration Statement on
Form S-1 No. 333-109068.)
2.2(a) Separation Agreement dated November 30, 2002, by and among Central
Freight Lines, Inc., a Texas corporation, Central Refrigerated
Service, Inc., a Nebraska corporation, the Jerry and Vickie Moyes
Family Trust, Interstate Equipment Leasing, Inc., an Arizona
corporation, and Jerry Moyes individually. (Incorporated by reference
to Exhibit 2.2(a) to the Company's Registration Statement on Form S-1
No. 333-109068.)
2.2(b) Amendment Number One to Separation Agreement dated December 23,
2002, by and among Central Freight Lines, Inc., a Texas corporation,
Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry
and Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc., an
Arizona corporation, and Jerry Moyes individually. (Incorporated by
reference to Exhibit 2.2(b) to the Company's Registration Statement on
Form S-1 No. 333-109068.)
2.2(c) Amendment Number Two to Separation Agreement effective as of October
28, 2003, by and among Central Freight Lines, Inc., a Texas
corporation, Central Refrigerated Service, Inc., a Nebraska
corporation, the Jerry and Vickie Moyes Family Trust, Interstate
Equipment Leasing, Inc. an Arizona corporation, and Jerry Moyes
individually. (Incorporated by reference to Exhibit 2.2(c) to the
Company's Registration Statement on Form S-1 No. 333-109068.)
3.1 Amended and Restated Articles of Incorporation of Central Freight
Lines, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 3.1(b) to the Company's Registration Statement on Form S-1 No.
333-109068.)
3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation.
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
4.1 Amended and Restated Articles of Incorporation of Central Freight
Lines, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 3.1 to this Report on Form 10-K.)
35
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation.
(Incorporated by reference to Exhibit 3.2 to this Report on Form
10-K.)
10.1(a)+ Central Freight Lines, Inc. 401(k) Savings Plan. (Incorporated by
reference to Exhibit 10.1(a) to the Company's Registration Statement
on Form S-1 No. 333-109068.)
10.1(b)+ First Amendment to Central Freight Lines, Inc. 401(k) Savings
Plan. (Incorporated by reference to Exhibit 10.1(b) to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.2(a)+ Central Freight Lines, Inc. Incentive Stock Plan. (Incorporated by
reference to Exhibit 10.2(a) to the Company's Registration Statement
on Form S-1 No. 333-109068.)
10.2(b)+ Form of Stock Option Agreement. (Incorporated by reference to
Exhibit 10.2(b) to the Company's Registration Statement on Form S-1
No. 333-109068.)
10.3+ Form of Outside Director Stock Option Agreement. (Incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 No. 333-109068.)
10.4(a) First Amended and Restated Revolving Credit Loan Agreement, dated
July 28, 2004, by and between Central Freight Lines, Inc., a Texas
corporation, and SunTrust Bank, a Georgia state banking corporation.
(Incorporated by reference to Exhibit 10.4(a) to the Company's Report
on Form 10-Q for the quarterly period ended July 3, 2004.)
10.4(b) Revolving Credit Note, dated July 28, 2004, by Central Freight
Lines, Inc., a Texas corporation, in favor of SunTrust Bank, a Georgia
state banking corporation. (Incorporated by reference to Exhibit
10.4(b) to the Company's Report on Form 10-Q for the quarterly period
ended July 3, 2004.)
10.4(c)* First Amendment to First Amended and Restated Revolving Credit
Loan Agreement, dated July 28, 2004, by and between Central Freight
Lines, Inc., a Texas corporation, and SunTrust Bank, a Georgia state
banking corporation.
10.5 Guaranty, dated July 28, 2004, by Central Freight Lines, Inc., a
Nevada corporation, in favor of SunTrust Bank, a Georgia state banking
corporation. (Incorporated by reference to Exhibit 10.5 to the
Company's Report on Form 10-Q for the quarterly period ended July 3,
2004.)
10.6 Security Agreement, dated July 28, 2004, by and between Central
Freight Lines, Inc., a Texas corporation and Suntrust Bank, a Georgia
state banking corporation. (Incorporated by reference to Exhibit 10.6
to the Company's Report on Form 10-Q for the quarterly period ended
July 3, 2004.)
10.7 Note dated April 30, 2002, by Jerry C. Moyes in favor of Central
Freight Lines, Inc., a Texas corporation. (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on Form S-1
No. 333-109068.)
10.8(a) Loan Agreement dated April 30, 2002, by and among Central
Receivables, Inc., a Nevada corporation, Three Pillars Funding
Corporation, a Delaware corporation, and Suntrust Capital Markets,
Inc., a Tennessee corporation, as agent. (Incorporated by reference to
Exhibit 10.8(a) to the Company's Registration Statement on Form S-1
No. 333-109068.)
10.8(b) First Amendment to Loan Agreement dated April 29, 2003, by and
among Central Receivables, Inc., a Nevada corporation, Three Pillars
Funding Corporation, a Delaware corporation, and SunTrust Capital
Markets, Inc., a Tennessee corporation, as agent. (Incorporated by
reference to Exhibit 10.8(b) to the Company's Registration Statement
on Form S-1 No. 333-109068.)
10.9 Receivables Purchase Agreement dated April 30, 2002, by and between
Central Freight Lines, Inc., a Texas corporation, and Central
Receivables, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1 No.
333-109068.)
36
10.10 Second Amended and Restated Master Lease Agreement -- Parcel Group A
dated February 20, 2003 by and between Southwest Premier Properties,
L.L.C., a Texas limited liability company, and Central Freight Lines,
Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1 No. 333-109068.)
10.11 Second Amended and Restated Master Lease Agreement -- Parcel Group B
dated February 20, 2003 by and between Southwest Premier Properties,
L.L.C., a Texas limited liability company, and Central Freight Lines,
Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.11
to the Company's Registration Statement on Form S-1 No. 333-109068.)
10.12 Amended and Restated Lease dated February 20, 2003 by and between JVM
Associates and Central Freight Lines, Inc., a Texas corporation.
(Incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.13 Amended and Restated Lease dated February 20, 2003 by and between
Jerry and Vickie Moyes and Central Freight Lines, Inc., a Texas
corporation. (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.14 Amended and Restated Lease dated February 20, 2003 by and between
Jerry and Vickie Moyes and Central Freight Lines, Inc., a Texas
corporation. (Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.15+ Employment Agreement dated January 7, 2002, by and between Central
Freight Lines, Inc., a Texas corporation, and Robert V. Fasso.
(Incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.16+ Employment Offer Letter to Doak D. Slay, dated December 23, 2002, by
Central Freight Lines, Inc., as countersigned by Doak D. Slay.
(Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.17+ Equity Advancement Letter to Doak D. Slay, dated July 9, 2003, by
Central Freight Lines, Inc., as countersigned by Doak D. Slay and
Denise D. Slay. (Incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.18+ Employment Offer Letter to J. Mark Conard, dated August 16, 2003, by
Central Freight Lines, Inc. (Incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1 No.
333-109068.)
10.19+ Employment Offer Letter to Jeffrey A. Hale, dated June 7, 2002, by
Central Freight Lines, Inc. (Incorporated by reference to Exhibit
10.19 to the Company's Registration Statement on Form S-1 No.
333-109068.)
10.20+ Employment Separation Agreement and Release, dated as of February
21, 2002, to be effective as of March 9, 2002, by and between Central
Freight Lines, Inc. and Joseph Gentry. (Incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on Form S-1 No.
333-109068.)
10.21+ Consulting Agreement, dated February 20, 2002, by and between Joseph
B. Gentry and Central Freight Lines, Inc., a Nevada corporation.
(Incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.22 Contract for the Sale of Land dated September 19, 2003, between Doak
D. Slay and Denise D. Slay and Central Freight Lines, Inc.
(Incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.23(a) Indemnification Agreement, effective as of December 31, 2002, by
and between Central Freight Lines, Inc., a Texas corporation, and
Central Refrigerated Service, Inc., a Nebraska corporation.
(Incorporated by reference to Exhibit 10.23(a) to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.23(b) Amendment Number One to Indemnification Agreement effective as of
December 31, 2002, by and between Central Freight Lines, Inc., a Texas
37
corporation, and Central Refrigerated Service, Inc., a Nebraska
corporation. (Incorporated by reference to Exhibit 10.23(b) to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.24*+ Employment Offer Letter to Walt Ainsworth, dated July 15, 2004, by
Central Freight Lines, Inc.
21.1* Subsidiaries of Central Freight Lines, Inc., a Nevada corporation.
23.1* Consent of KPMG LLP.
31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by
Robert V. Fasso, the Company's Chief Executive Officer.
31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by
Jeffrey A. Hale, the Company's Chief Financial Officer.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso,
the Company's Chief Executive Officer.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale,
the Company's Chief Financial Officer.
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2005 By: /s/ Robert V. Fasso
----------------------------------------------
Name: Robert V. Fasso
Title: Chief Executive Officer and President
Signature and Title Date
/s/ Robert V. Fasso March 31, 2005
- -------------------------------------------------
Robert V. Fasso
President, Chief Executive Officer; and Director
(principal executive officer)
/s/ Jeffrey A. Hale March 31, 2005
- --------------------------------------------------
Jeffrey A. Hale
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
Jerry Moyes March 31, 2005
- --------------------------------------------------
Jerry Moyes
Chairman of the Board of Directors
/s/ J. C. Carruth March 31, 2005
- --------------------------------------------------
J. C. Carruth
Director
/s/ John Breslow March 31, 2005
- --------------------------------------------------
John Breslow
Director
/s/ Porter J. Hall March 31, 2005
- --------------------------------------------------
Porter J. Hall
Director
/s/ Gordan W. Winburne March 31, 2005
- --------------------------------------------------
Gordan W. Winburne
Director
39
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Central Freight Lines, Inc.:
We have audited Management's Report on Internal Control Over Financial
Reporting, appearing under item 9A(b), that Central Freight Lines, Inc. and
subsidiaries (the Company) did not maintain effective internal control over
financial reporting as of December 31, 2004, because of the effect of the
material weaknesses identified in management's assessment, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following three material weaknesses have been identified and
included in management's assessment as of December 31, 2004:
The Company's policies and procedures were not sufficient to ensure that
transactions processed through the Company's billing system resulted in
accounting for and reporting of such transactions pursuant to the provisions of
the respective customer contract. Specifically, the Company's billing process
lacked controls to ensure the accuracy of entries to the billing system and to
ensure that changes to customer contracts were reflected in the billing system
accurately and timely. These deficiencies result in more than a remote
likelihood that a material misstatement of the annual or interim consolidated
financial statements would not be prevented or detected.
The Company's procedures were not sufficient to ensure the accuracy of reported
amounts for the Company's tire and spare parts inventories. Specifically, the
Company did not reconcile, pursuant to its policy, physical counts of tire and
spare parts inventories to the Company's year-end general ledger. As a result,
errors in accounting for inventory were identified and corrected prior to
issuance of the Company's 2004 consolidated financial statements. This
deficiency results in more than a remote likelihood that a material misstatement
of the annual or interim consolidated financial statements would not be
prevented or detected.
The Company did not maintain policies and procedures to ensure that the
accounting for valuation allowances associated with deferred taxes was in
accordance with U.S. generally accepted accounting principles. Specifically,
management's procedures did not provide for an effective review of deferred tax
asset amounts for purposes of evaluating realizability. As a result, a material
error in the determination of the valuation allowances for deferred tax assets
was identified and corrected prior to issuance of the Company-s 2004
consolidated financial statements. This deficiency results in more than a remote
likelihood that a material misstatement of the annual or interim consolidated
financial statements would not be prevented or detected.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Central Freight Lines, Inc. and subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2004. These material weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2004 consolidated
financial statements, and this report does not affect our report dated March 30,
2005, which expressed an unqualified opinion on those consolidated financial
statements.
In our opinion, management's assessment that Central Freight Lines, Inc. and
subsidiaries did not maintain effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, because of the effect of the material weaknesses described
above on the achievement of the objectives of the control criteria, Central
Freight Lines, Inc. and subsidiaries have not maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
KPMG LLP
Dallas, Texas
March 30, 2005
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Central Freight Lines, Inc.:
We have audited the accompanying consolidated balance sheets of Central
Freight Lines, Inc. and subsidiaries (the Company) as of December 31, 2004 and
2003, and the related consolidated statements of operations, stockholders-
equity, and cash flows for each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements are the
responsibility of the Company-s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Freight Lines, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, in 2002.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Central
Freight Lines, Inc. and subsidiaries' internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 30, 2005,
expressed an unqualified opinion on management's assessment of, and an adverse
opinion on the effective operation of, internal control over financial
reporting.
KPMG LLP
Dallas, Texas
March 30, 2005
F-3
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Dollars in thousands, except share data)
Assets 2004 2003
---------------- ----------------
Cash and cash equivalents $ 2,144 $ 37,269
Restricted cash 20,825 -
Accounts receivable less allowance for doubtful accounts and revenue 51,582 51,864
Adjustments of $7,854 in 2004 and $5,353 in 2003
Other current assets 8,655 8,298
Deferred income taxes 6,689 4,588
---------------- ----------------
Total current assets 89,895 102,019
Property and equipment, net 135,274 114,693
Goodwill 4,324 4,324
Other assets 7,761 2,113
---------------- ----------------
Total assets $ 237,254 $ 223,149
================ ================
Liabilities and stockholders' equity
Current maturities of long-term debt $ 10,958 $ 6,375
Short-term notes payable 28,108 -
Trade accounts payable 23,835 15,391
Payables for related party transportation services 988 1,020
Accrued expenses 23,050 25,728
---------------- ----------------
Total current liabilities 86,939 48,514
Long-term debt, excluding current maturities 21,884 19,988
Related party financing 22,852 23,154
Deferred income taxes 8,375 15,633
Claims and insurance accruals 9,646 7,422
---------------- ----------------
Total liabilities 149,696 114,711
---------------- ----------------
Commitments and contingencies(Notes 12 and 14)
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,
18,188,894 and 17,632,545 shares issued and outstanding as of
December 31, 2004 and 2003 18 17
Additional paid-in capital 109,554 108,143
Unearned compensation (266) (822)
Retained earnings (accumulated deficit) (21,748) 1,100
---------------- ----------------
Total stockholders' equity 87,558 108,438
---------------- ----------------
Total liabilities and stockholders' equity $ 237,254 $ 223,149
================ ================
See accompanying notes to consolidated financial statements.
F-4
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2004, 2003 and 2002
(Dollars in thousands except per share data)
2004 2003 2002
------------ ------------ ------------
Operating revenues $ 386,601 $ 389,696 $ 371,445
------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits 222,230 205,393 209,302
Purchased transportation 42,152 38,113 28,806
Purchased transportation - related parties 14,571 18,582 21,106
Operating and general supplies and expenses 82,702 66,144 59,270
Operating and general supplies and expenses - related parties 274 12 286
Insurance and claims 25,186 16,057 14,576
Building and equipment rentals 4,297 3,181 3,241
Building and equipment rentals - related parties 1,795 1,903 1,779
Depreciation and amortization 17,049 16,605 17,974
------------ ------------ ------------
Total operating expenses 410,256 365,990 356,340
------------ ------------ ------------
(Loss) income from operations (23,655) 23,706 15,105
Other expense:
Interest expense (1,469) (3,547) (4,916)
Interest expense - related parties (6,197) (6,130) (6,359)
------------ ------------ ------------
(Loss) income from continuing operations before income taxes (31,321) 14,029 3,830
Income taxes:
Income tax benefit (expense) 8,473 (1,759) 1,412
Income tax expense - conversion to C corporation - (9,834) -
------------ ------------ ------------
(Loss) income from continuing operations (22,848) 2,436 5,242
Loss from discontinued operations - (8,341) -
------------ ------------ ------------
Net (loss) income $ (22,848) $ (5,905) $ 5,242
============ ============ ============
Pro forma C Corporation data (unaudited):
Historical income from continuing operations before
income taxes $ - $ 14,029 $ 3,830
Pro forma income tax expense - (5,666) (2,781)
------------ ------------ ------------
Pro forma income from continuing operations - 8,363 1,049
Loss from discontinued operations - (8,341) -
------------ ------------ ------------
Pro forma net income $ - $ 22 $ 1,049
============ ============ ============
Net loss per share:
Basic $ (1.27) $ - $ -
Diluted (1.27) - -
Pro forma income (loss) per share:
Basic:
Income from continuing operations $ - $ 0.75 $ 0.10
Loss from discontinued operations - (0.75) -
Net income - - 0.10
Diluted:
Income from continuing operations $ - $ 0.69 $ 0.09
Loss from discontinued operations - (0.69) -
Net income - - 0.09
Weighted average outstanding shares (in thousands):
Basic 17,971 11,163 10,868
Diluted 17,971 12,103 11,548
See accompanying notes to consolidated financial statements.
F-5
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands, except share data)
Common stock
--------------------- Notes receivable
Shares, net of Additional from stockholder Retained Total
treasury paid-in Unearned and earnings Treasury stockholders'
shares Amount capital Compensation affiliate (Accumulated stock equity
deficit)
-------------- ------ ---------- ------------ ---------------- -------- -------- -------------
Balances at December 31, 2001 10,868,218 $ 12 $ 28,894 $ - $ (6,688) $ 2,871 $(1,787) $ 23,302
Issuance of common shares 11,148 - - - - - - -
Purchase of treasury stock (11,148) - - - - - (300) (300)
Retirement of treasury stock - (1) (2,086) - - - 2,087 -
Advances to stockholder - - - - (1,300) - - (1,300)
Non-cash contribution from stockholder - - 3,300 - - - - 3,300
Net earnings - - - - - 5,242 - 5,242
Stock option compensation - - 1,189 (1,059) - - - 130
-------------- ------ ---------- ------------ ---------------- -------- -------- -------------
Balances at December 31, 2002 10,868,218 $ 11 31,297 (1,059) (7,988) 8,113 - 30,374
Exercise of stock options, including 1,064,327 1 3,088 - - - - 3,089
non-cash tax benefit of $1,340
Non-cash contribution from stockholder - - 500 - - - - 500
Proceeds from initial public offering 5,700,000 5 77,629 - - - - 77,634
Distributions paid - - - - - (6,139) - (6,139)
Payment from stockholder - - 660 - 7,988 - - 8,648
Net loss - - - - - (5,905) - (5,905)
Transfer of undistributed S corporation
deficit or "loss" - - (5,031) - - 5,031 - -
Stock option compensation - - - 237 - - - 237
-------------- ------ ---------- ------------ ---------------- -------- -------- -------------
Balances at December 31, 2003 17,632,545 $ 17 108,143 (822) - 1,100 - 108,438
Exercise of stock options, including
non-cash tax benefit of $621 545,686 1 1,727 - - - - 1,728
Issuance of common stock 10,663 - 48 - - - - 48
Net loss - - - - - (22,848) - (22,848)
Stock option compensation, net of
forfeitures - - (364) 556 - - - 192
------------- ------ ---------- ------------ ---------------- -------- -------- -------------
Balances at December 31, 2004 18,188,894 $ 18 $ 109,554 $ (266) $ - $(21,748) $ - $ 87,558
============== ====== ========== ============ ================ ======== ======== =============
See accompanying notes to consolidated financial statements.
F-6
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(Dollars in thousands)
2004 2003 2002
------------- ------------- ------------
Cash flows from operating activities:
Net (loss) income $ (22,848) $ (5,905) $ 5,242
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Bad debt expense 1,669 876 82
Non-cash interest expense - related parties - 500 3,300
Equity in loss (income) of affiliate 21 (4) (4)
Loss on sale of subsidiary - 8,341 1,256
Depreciation and amortization 17,049 16,605 22,819
Deferred income taxes (8,738) 1,707 712
Establishment of deferred taxes upon conversion to C
corporation - 9,834 -
Decrease in unearned compensation 192 237 130
Gain on curtailment of health plan - (7,799) -
Change in operating assets and liabilities, net
of purchase accounting effects:
Accounts receivable (1,387) (4,657) (4,434)
Accounts receivable - related parties - 651 449
Other assets (1,363) (1,261) (1,078)
Trade accounts payable 8,444 (3,226) 8,332
Trade accounts payable - related parties (32) (690) (670)
Claims and insurance accruals 4,314 2,010 1,601
Accrued expenses and other liabilities (4,768) (2,144) (2,579)
------------- ------------- ------------
Net cash (used in) provided by operating (7,447) 15,075 35,158
activities
------------- ------------- ------------
Cash flows from investing activities:
Additions to property and equipment (36,717) (7,024) (6,008)
Proceeds from sale of property and equipment 4,204 1,466 1,980
Cash paid for disposition of subsidiary - (8,341) -
Cash paid for acquisition of businesses (9,273) - (2,606)
Cash of subsidiary sold - - (1,197)
Advances to stockholders and affiliates - - (1,300)
Repayment of advances to affiliate - 8,648 367
------------- ------------- ------------
Net cash used in investing activities (41,786) (5,251) (8,764)
------------- ------------- ------------
Cash flows from financing activities:
Restricted cash (20,825) - -
Proceeds from long-term debt 14,937 47,198 149,508
Repayments of long-term debt (8,459) (100,347) (168,072)
Proceeds from securitization facility 34,300 - -
Repayments of securitization facility (7,000) - -
Exercise of stock options 1,107 1,749 -
Proceeds from issuance of common stock 48 77,634 (367)
Purchase of treasury stock - - (300)
Distributions paid - (6,139) -
------------- ------------- ------------
Net cash provided by (used in) financing
activities 14,108 20,095 (19,231)
------------- ------------- ------------
Net increase (decrease) in cash (35,125) 29,919 7,163
Cash at beginning of year 37,269 7,350 187
------------- ------------- ------------
Cash at end of year $ 2,144 $ 37,269 $ 7,350
============= ============= ============
See accompanying notes to consolidated financial statements.
F-7
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of dollars, except share and per share amounts)
(1) Business of the Company
(a) Basis of Presentation
Central Freight Lines, Inc. is a Nevada holding company that owns Central
Freight Lines, Inc., a Texas corporation, (collectively, the Company or
Central). Central is an inter-regional less-than-truckload ("LTL") trucking
company that has operations in the Southwest, Northwest, West Coast and Midwest
regions of the United States of America. Central maintains alliances with other
similar companies to complete transportation of shipments outside of its
operating territory.
(b) Initial Public Offering of Common Stock
On December 12, 2003, the Company completed an initial public offering (the
"Offering") of 8,500,000 shares of common stock at $15 per share, of which
5,700,000 were sold by the Company and 2,800,000 were sold by certain of the
Company's stockholders. The net proceeds to the Company from the sale of
5,700,000 shares of common stock, after deduction of associated expenses, were
$77,634.
On November 1, 2003 the Company converted from an S corporation to a C
corporation for federal income tax purposes. Undistributed S Corporation loss
(accumulated deficit) of $5,031 was transferred to additional paid-in capital.
(2) Summary of Significant Accounting Policies and Practices
(a) Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of Central and
its subsidiaries. All significant intercompany balances and transactions of the
consolidated subsidiaries have been eliminated. As discussed in note 3, the
Company acquired and disposed of Central Refrigerated Service, Inc. ("Central
Refrigerated") during 2002. Central Refrigerated has been accounted for as a
discontinued operation.
(b) Use of Estimates
Management of the Company makes estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reporting of
revenues and expenses during the reporting periods to prepare the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from those
estimates.
(c) Tires in Service
The Company capitalizes tires placed in service on new revenue equipment as
a part of the equipment cost. Replacement tires and costs for recapping tires
are expensed at the time the tires are placed in service.
(d) Property and Equipment
Property and equipment are recorded at cost. In the first quarters of 2003
and 2002, the Company revised the estimated useful lives and salvage values of
certain classes of property and equipment to more appropriately reflect how the
assets are expected to be used over time. In the first quarter of 2003, the
Company increased revenue equipment lives to five to 15 years from five to 12
years. If the Company had not changed the estimated useful lives of such
property and equipment, additional depreciation expense of approximately $580
would have been recorded during the year ended December 31, 2003. Accordingly,
the change in estimate resulted in an increase in income from continuing
operations of approximately $557 for the year ended December 31, 2003.
F-8
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
In the first quarter of 2002, the Company increased revenue equipment lives
from three to seven years to five to 12 years. Prior to 2002, depreciation of
property and equipment was calculated on the straight-line method over the
estimated useful lives of three to seven years for revenue and service
equipment, three to 20 years for structures and improvements and three to seven
years for furniture and office equipment. If the Company had not changed the
estimated useful lives of such property and equipment, additional depreciation
expense of approximately $2,939 would have been recorded during the year ended
December 31, 2002. Accordingly the change in estimate resulted in an increase in
income from continuing operations of approximately $2,807 for the year ended
December 31, 2002.
Net gains (losses) on the disposition of property and equipment were $595,
$446 and ($1) for the years ended December 31, 2004, 2003 and 2002,
respectively.
(e) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. There were no impairments during 2004, 2003 or 2002.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. As of that
date, goodwill is no longer amortized (prior to the adoption of SFAS No. 142,
goodwill had been amortized on a straight-line basis over 15 years), but is
tested annually, or more frequently if a triggering event occurs, for impairment
using a fair value approach. Pursuant to SFAS No. 142, the Company has
determined that, as of December 31, 2004 and 2003 there were no impairments to
the carrying value of goodwill. The Company's market value has declined since
December 31, 2004. As this is a triggering event, the Company will test for
impairment in the first quarter of 2005.
(f) 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.
At December 31, 2004 and 2003, there was approximately $4,100 and $7,400 of
services performed and not yet billed.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Significant management judgment is required in determining the provision
for income taxes and in determining whether deferred tax assets will be realized
in full or in part. Deferred tax assets and liabilities are measured using
enacted tax rates that are expected to apply to taxable income in years in which
the temporary differences are expected to be reversed. Under SFAS No. 109 and
applicable interpretations, if all or some portion of specific deferred tax
assets are determined not to be realizable, a valuation allowance must be
established for the amount of such deferred tax assets. In 2004, the Company
established a $4.9 million valuation allowance for deferred tax assets.
F-9
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
On November 1, 2003, the Company converted from an S corporation to a C
corporation for federal income tax purposes. Prior to November 1, 2003, the
Company had elected S corporation status under which federal income tax
attributes flow directly to the stockholders. Accordingly, the accompanying
consolidated financial statements prior to November 1, 2003, do not include
federal income taxes.
(h) Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and the diverse range of industries
which they represent. As of December 31, 2004 and 2003, the Company had no
significant concentrations of credit risk.
F-10
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(i) Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is
described more fully in note 8. The Company accounts for that plan under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, the Company records compensation expense only if the
fair value of the underlying stock exceeds the exercise price on the date of
grant. The following table illustrates the effect on net loss, net loss per
share, adjusted pro forma net income (loss) and adjusted pro forma net income
(loss) per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
and as allowed by SFAS No. 148, Accounting for Stock-Based Compensation --
Transition and Disclosure, an Amendment of FASB No. 123, to stock-based employee
compensation and had the Company been a C corporation in such years.
2004 2003 2002
------------ ----------- -----------
Net loss, as reported: $ (22,848)
Add:
Stock-based employee compensation expense included
in reported net (loss), net of related tax effects 192
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards (511)
------------
Pro forma net loss $ (23,167)
============
Net loss per share
Basic
As reported $ (1.27)
Pro forma (1.29)
Diluted
As reported (1.27)
Pro forma (1.29)
Net (loss) income, as reported: $ (5,905) $ 5,242
Add:
Stock-based employee compensation expense included
in reported net (loss) income, net of related tax effects 237 130
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (395) (1,284)
----------- ------------
Adjusted net (loss) income (6,063) 4,088
Pro forma federal income tax adjustment (unaudited) 5,989 (4,609)
----------- ------------
Adjusted pro forma net loss (unaudited) $ (74) $ (521)
=========== ============
Adjusted pro forma net income (loss) per share (unaudited):
Basic
As reported $ 0.00 $ 0.10
Pro forma (0.01) (0.05)
Diluted
As reported 0.00 0.09
Pro forma (0.01) (0.05)
In 2002, the Company granted options at an exercise price that was less
than fair value, resulting in approximately $1,189 of compensation to employees
which is being expensed over the vesting period of these
F-11
CENTRAL FREIGHT LINES, INC.
AND SUBSIDIARIES NOTES TO CONSOLDIATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
options. Compensation expense is calculated net of options that have been
forfeited. Compensation expense of $192, $237 and $130 was recognized in 2004,
2003, and 2002.
(j) Claims and Insurance Accruals
Claims accruals represent the estimated costs to repair and replace damaged
goods resulting from cargo claims. Insurance accruals reflect the estimated cost
of claims for bodily injury and property damage, workers' compensation and
employee health care not covered by insurance. These liabilities for
self-insurance are accrued based on claims incurred and on estimates of both
unasserted and unsettled claims which are assessed based on management's
evaluation of the nature of the claims and the Company's past claims experience.
The portion of the accrual classified as a current liability represents
management's estimate of that portion of the claims that will be settled in the
next twelve months. Total claims and insurance accruals were $25,081 and $20,767
at December 31, 2004 and 2003, respectively.
While management believes that amounts included in the accompanying
consolidated financial statements are adequate, such estimates may be more or
less than the amounts ultimately paid when the claims are settled. The estimates
are continually reviewed and any changes are reflected in current operations.
(k) Allowance for Doubtful Accounts and Revenue Adjustments
The Company establishes an allowance for doubtful accounts and an allowance
for revenue adjustments to reduce its accounts receivable balance to an amount
that it estimates is collectible from its customers. The allowance for doubtful
accounts is estimated by management based on factors such as aging of the
receivables and historical collection experience. At December 31, 2004 and 2003,
the allowance for doubtful accounts was $3,567 and $2,452, respectively.
The allowance for revenue adjustments is also established by management
based on factors such as historical trends in actual adjustments to revenue.
Revenue will be adjusted for various reasons, such as customer disputes, billing
and rating errors, and weight and inspection corrections. At December 31, 2004
and 2003, the allowance for revenue adjustments was $4,287 and $2,901,
respectively.
(l) Loss per Share and Pro Forma Income (Loss) per Share
Pro forma income (loss) per share has been calculated as if the Company
were a C corporation for federal income tax purposes for years presented prior
to 2004. Basic loss per share and pro forma basic income (loss) per share are
calculated using the weighted average number of shares outstanding. The weighted
average shares outstanding used in the calculation of diluted loss per share and
pro forma diluted income (loss) per share include the dilutive effect of options
to purchase common stock, calculated using the treasury stock method.
(m) Recently Issued Accounting Standards
In December 2004, the FASB revised SFAS No. 123, Share-Based Payment. This
Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement does not
change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement 123 as originally issued and EITF
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. This Statement does not address the accounting for
F-12
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
employee share ownership plans, which are subject to AICPA Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans. The Company has
not yet determined the method of adoption or the effect of adopting SFAS No.
123R, and the Company has not determined whether the adoption will result in
amounts that are similar to the current pro forma disclosures under SFAS No.
123.
(n) Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
(o) Liquidity
Although there can be no assurance, management believes cash from
operations, borrowings available under the new credit facility, and other
sources of liquidity will be sufficient to fund operations at least through the
end of 2005. To the extent that actual results or events differ from
management's financial projections or business plans, liquidity may be adversely
affected and the Company may be unable to meet its financial covenants.
Specifically, liquidity may be adversely affected by one or more of the
following factors: weak freight demand or a loss in customer relationships or
volume, success in executing management's turnaround steps , an ability to
improve the collection of accounts receivable, elevated fuel prices and the
ability to collect fuel surcharges, costs associated with insurance and claims,
an inability to maintain compliance with, or negotiate amendments to, loan
covenants, the ability to finance tractors and trailers, and the possibility of
shortened payment terms by suppliers and vendors worried about the Company's
ability to meet payment obligations.
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(3) Acquisition and Discontinued Operations
On April 22, 2002, the Company, through its subsidiary Central
Refrigerated, acquired substantially all of the operations and assets of Simon
Transportation Services Inc. DIP, and its subsidiaries, Dick Simon Trucking,
Inc. DIP and Simon Terminal LLC DIP in exchange for cash and the assumption of
certain liabilities. The purpose of the acquisition was to expand into the
refrigerated transportation business. The assets acquired and liabilities
assumed were recorded at estimated fair values as determined by the Company's
management based on information currently available and on assumptions as to
future operations. The total consideration paid was approximately $600 less than
the estimated fair value of the acquired assets and was recorded as a reduction
to property and equipment. In connection with this acquisition, the Company
borrowed approximately $3,300 and assumed certain notes payable to the Company's
principal stockholder and affiliates totaling $11,400. The following table
summarizes the estimated fair value of the assets acquired and liabilities
assumed in the acquisition:
Assets acquired:
Current assets.............................. $ 26,511
Property and equipment...................... 57,271
Other assets................................ 55
-----------
Total assets acquired.................... 83,837
Less:
Notes payable to shareholder and affiliate.. (11,400)
Liabilities assumed......................... (69,104)
Direct costs of the acquisition............. (727)
-----------
Cash consideration paid.................. $ 2,606
===========
F-13
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
The following unaudited pro forma consolidated results of operations for
fiscal 2002 assume the Central Refrigerated acquisition was completed on January
1, 2001:
2002
---------
Net loss....... $(30,023)
Loss per share:
Basic.......... (2.76)
Diluted........ (2.76)
Effective December 31, 2002, the Company transferred all of its outstanding
shares of Central Refrigerated to the principal stockholder of the Company and
one of his affiliates in exchange for the cancellation of approximately $14,700
of debt owed by the Company to them. The purchase price was based on the
beginning equity of Central Refrigerated. As such, the net book value of Central
Refrigerated assets exceeded the purchase price by the amount of current year
earnings of Central Refrigerated. Thus, the loss on disposal of Central
Refrigerated is offset by the earnings from its operations as follows:
Earnings from discontinued operations.......... $ 1,256
Loss on disposal............................... (1,256)
---------
Net earnings from discontinued operations.... $ -
=========
Included in the earnings from discontinued operations is Central
Refrigerated depreciation expense of $4,845 for 2002.
On October 28, 2003, the Company amended its agreement with Central
Refrigerated and agreed to accelerate payment of approximately $8,341 originally
due to Central Refrigerated upon closing of the Company's initial public
offering. The $8,341 payment was made on October 28, 2003, and was recorded as
an additional loss on disposal of Central Refrigerated.
In March 2004, the Company expanded into the Pacific Northwest through the
purchase of selected terminal network and rolling stock of Eastern Oregon Fast
Freight ("EOFF"), a non-union LTL carrier that operated in the states of Oregon,
Washington, and Idaho. The selected assets of EOFF were purchased for
approximately $10.0 million, 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 $7.0
million of the purchase price at closing, and an additional $2.2 million during
2004. The remaining $0.8 million is recorded on the consolidated balance sheet
as short-term notes payable at December 31, 2004, and is expected to be paid
prior to the end of our 2005 first quarter.
F-14
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(4) Property and Equipment
Property and equipment consist of the following at December 31, 2004 and
2003:
2004 2003
----------- -----------
Revenue and service equipment...................... $ 177,141 $ 153,345
Land............................................... 14,937 12,343
Structures and improvements........................ 36,209 29,629
Furniture and office equipment..................... 9,039 8,415
----------- -----------
237,326 203,732
Less accumulated depreciation and amortization..... 102,052 89,039
----------- -----------
$ 135,274 $ 114,693
=========== ===========
Revenue and service equipment includes assets under capitalized leases of
$55,346 and $44,820 at December 31, 2004 and 2003, respectively, and related
accumulated amortization of $20,518 and $16,486 at December 31, 2004 and 2003,
respectively.
In 2003, the Company closed certain terminals that were being financed by a
related party (see note 6(c)). These assets, which consist of land and
structures, are no longer in service and were classified as assets held for sale
in the amounts of $504 and $857 as of December 31, 2004 and 2003, respectively,
and are included in other assets in the accompanying consolidated balance
sheets. During 2004 and 2003, $301 and $390, respectively, of these properties
were sold and accounted for as a reduction of the related party financing.
Also included in assets held for sale is a terminal, which is not financed
by a related party, in Phoenix, Arizona, as well as terminals purchased in the
EOFF transaction. The book value of these assets totaled $3,616 and $994, as of
December 31, 2004 and 2003, respectively.
(5) Accrued Expenses
Current accrued expenses consist of the following at December 31, 2004, and
2003:
2004 2003
---------- ----------
Employee related compensation and benefits..... $ 5,703 $ 11,751
Claims and insurance accruals.................. 15,435 13,345
Other accrued expenses......................... 1,912 632
---------- ----------
$ 23,050 $ 25,728
========== ==========
(6) Debt and Related Party Financing
(a) Long-Term Debt
Long-term debt consists of the following at December 31, 2004, and 2003:
2004 2003
--------- ---------
Equipment notes payable.................. $ - $ 169
Capital lease obligations (see note 12).. 32,842 26,194
--------- --------
32,842 26,363
Less current portion..................... 10,958 6,375
--------- --------
$ 21,884 $ 19,988
========= ========
The Company had a note agreement with a third party to acquire equipment
for use in its operations. The balance of the note was $169 at December 31,
2003, and was paid in full in 2004 The note had a fixed interest rate of 8.75%.
F-15
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(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. 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 accompanying 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 0.35% 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, included in short term notes payable in the accompanying consolidated
balance sheet, and at December 31, 2003, there were no borrowings outstanding
under the Securitization Facility. As of December 31, 2004, the borrowing rate
amounted to 2.73%.
On July 28, 2004, the Company and SunTrust Bank entered into a $30,000
amended and restated revolving credit facility (the Amended and Restated
Revolving Facility). On November 5, 2004, the Company executed a first amendment
to the Amended and Restated Revolving Credit Facility. Under the first amendment
to the Amended and Restated Revolving Facility, the Company can receive up to an
aggregate of $30,000 of proceeds in the form of letters of credit, only. 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 collateralized by certain revenue equipment, and letters of credit that are
issued are collateralized by cash collateral. The facility contains, among other
things, certain financial and non-financial covenants, and was to mature on
April 30, 2006. The Company must pay a commitment fee equal to 0.50% 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. The Company must also cash collateralize its outstanding
letters of credit. At December 31, 2004, the Company had restricted cash of
$20,825 (funded by borrowings under the securitization facility), as reported on
the Company's consolidated balance sheet related to these letters of credit. At
December 31, 2004, the Company had letters of credit of $19,753 outstanding and
$ 10,247 available under the Amended and Restated Revolving Facility.
On January 31, 2005, the Company entered into the New Credit Facility with
Bank of America, N.A., as Agent, and certain other lenders from time to time
party to the New Credit Facility, in the aggregate principal amount of up to
$70,000. The New Credit Facility replaces both the Amended and Restated
Revolving Facility and the Securitization Facility. The New Credit Facility
terminates on January 31, 2009. (See note 19)
In March 2004, the Company acquired certain assets of EOFF for
approximately $10,000 (See note 3). The remaining liability from this
transaction at year end is $808 which is recorded on the accompanying
consolidated balance sheet as short-term notes payable at December 31, 2004. The
Company expects to finalize and settle this remaining liability in the first
quarter of 2005.
(c) Related-Party Financing
In 1998, the Company entered into an agreement with Southwest Premier
Properties, L.L.C., an entity controlled by the Company's principal stockholder,
for the sale and leaseback of the land, structures and improvements of some of
the Company's terminals. For financial accounting purposes, this transaction has
F-16
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
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, $301 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 $22,852 and $23,154 at
December 31, 2004 and 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.
(d) Aggregate Maturities
Aggregate maturities of long-term debt, related party financing and capital
lease obligations for each of the five years following December 31, 2004, and
thereafter are as follows:
Years ending December 31:
2005........................ $ 10,958
2006........................ 6,339
2007........................ 7,685
2008........................ 2,426
2009........................ 4,121
Thereafter.................. 24,165
-----------
$ 55,694
===========
(7) Stockholders' Equity
During 2003, the Company amended its Articles of Incorporation, and all
Class A and Class B common stock were combined into a single class of stock. All
shares existing, prior to the public offering, were canceled and re-issued with
shares of the new publicly traded company. The number of authorized common
shares was increased from 60,000,000 to 100,000,000. The newly issued shares
have a par value of $0.001 per share.
At December 31, 2004, there were 18,188,894 shares of common stock issued
and outstanding. 5,700,000 newly issued shares of the Company were sold during
the initial public offering in December 2003 along with 2,800,000 sold by
selling stockholders.
In December 2003, the authorized number of preferred shares was also
increased from 5,000,000 to 10,000,000. No shares of preferred stock have been
issued.
(8) Stock-Based Compensation
In 1997, the Company established an incentive stock plan that provides
multiple alternatives to compensate eligible employees and nonemployee directors
with Company common stock. Under the plan, the Company is authorized to award,
in aggregate, options to purchase not more than 5,000,000 shares of its common
stock. Grants to optionees of qualified stock options shall have a per share
exercise price of no less than fair value of the underlying common stock on the
date of grant. At December 31, 2004, there were 1,117,863 shares available for
granting under the plan.
The awards are issuable at the discretion of the board of directors. All
option grants to date expire 10 years from the date of grant. Options granted
under the plan to senior management (754,000 outstanding at December 31, 2004)
generally vest 20% on the first anniversary of the date of grant and 20% on each
subsequent anniversary until fully vested. On January 7, 2002, the Company
granted 1,260,000 options at an exercise price of $1.35 to its newly hired CEO
F-17
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
as part of his employment agreement. These options vest 50% at grant date and
20% per year beginning January 7, 2003 (756,000 options were exercised in the
fourth quarter of 2003). Options granted under the plan to upper management
(282,146 outstanding at December 31, 2004) vest 20% on the fifth anniversary of
the date of grant and 20% on each subsequent anniversary until fully vested.
Termination of the employee for any reason other than death, disability or
certain cases of retirement causes the unvested portion of the award to be
forfeited.
At December 31, 2004, there were 100,000 options outstanding granted to the
Company's board of directors. 20,000 of these options vest ratably over a five
year period beginning in July 2002. The remaining 80,000 of these options vest
at 1,000 shares per board of directors meeting attended in person by the
directors. This vesting began in December 2003. At December 31, 2004, options
outstanding for all non-management employees and others totaled 192,722. These
options generally vest 20% on the first anniversary of the date of grant and 20%
on each subsequent anniversary until fully vested.
Stock option activity during the years ended December 31, 2002, 2003, and
2004 is as follows:
Weighted
Number of Average
Shares Exercise Price
Balance at December 31, 2001..... 1,152,622 $ 3.53
Granted.......................... 2,161,428 1.46
Exercised........................ - -
Forfeited........................ (276,793) 4.50
-----------
Balance at December 31, 2002..... 3,037,257 1.96
-----------
Granted.......................... 305,000 8.22
Exercised........................ (1,064,327) 1.70
Forfeited........................ (227,767) 1.79
----------
Balance at December 31, 2003..... 2,050,163 3.05
----------
Granted.......................... 342,758 7.30
Exercised........................ (545,686) 2.25
Forfeited........................ (518,367) 4.25
-----------
Balance at December 31, 2004 1,328,868 $ 4.00
===========
F-18
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
The fair value of options granted was estimated using the Black-Scholes
option pricing model with the following assumptions for 2002, 2003, and 2004
grants to employees: risk-free interest rate of 6.51%, 4.75%, and 3.38%,
respectively; 15%, 0%, and 6.9% expected volatility, respectively; an expected
life of 10 years and a zero dividend yield. The fair values of options granted
were as follows:
Weighted Average
-------------------------
Fair Value
Exercise Price of Option
-------------- ----------
Granted during 2002.... $ 1.46 $ 2.56
Granted during 2003.... 8.22 11.27
Granted during 2004.... 7.30 4.43
Options outstanding and exercisable are summarized as follows:
December 31, 2004
---------------------------------------------------------------------------
Weighted
Average Weighted
Weighted Remaining Average
Exercise Options Average Contractual Options Exercise
Price Outstanding Exercise Price Life Exercisable Price
----------- ----------- -------------- ----------- ----------- -----------
$ 1.35 704,000 $ 1.35 3.6 200,000 $ 1.35
2.15--2.70 107,392 2.19 3.5 39,729 2.18
5.77--5.86 45,000 5.79 8.2 6,000 5.78
6.50 89,718 6.50 6.4 27,740 6.50
7.35--7.80 322,758 7.39 9.6 - -
15.00 60,000 15.00 9.0 18,000 15.00
------- -------
1,328,868 4.00 291,469 2.89
========= =======
F-18
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
At December 31, 2004, 2003, and 2002, options exercisable were 291,469,
559,054 and 1,353,998 respectively, and the weighted average exercise price of
these options was $2.89, $2.39 and $2.04 respectively.
(9) Income Taxes
On November 1, 2003, the Company converted its federal income tax status
from a subchapter S corporation to a C Corporation
Prior to November 1, 2003, the Company had elected to be taxed as a
subchapter S corporation for federal income tax purposes. Accordingly, the
consolidated financial statements prior to November 1, 2003, did not include the
effects of federal income taxes.
The components of income tax (benefit) expense consists of the following
for the years ended December 31:
Years Ended December 31,
-------------------------------
2004 2003 2002
--------- --------- --------
Current -- Federal.... $ - $ (110) $(1,784)
Deferred -Federal..... (12,207) 10,867 -
Current -- state...... 265 189 (340)
Deferred -- state..... (1,395) 647 712
Deferred -- valuation allowance 4,864 - -
--------- --------- --------
$ (8,473) $ 11,593 $(1,412)
========= ========= ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2004, and 2003, are as follows:
2004 2003
---------- ----------
Deferred tax assets:
Current:
Accounts receivable and other current assets.... $ 3,850 $ 2,921
Accrued expenses and other current liabilities.. 5,169 3,871
Other assets.................................... - 1,313
---------- ----------
9,019 8,105
Noncurrent:
Lease obligations............................... 23,077 19,399
Other liabilities............................... 3,762 2,917
Net operating loss carryforward................. 9,390 -
---------- ----------
36,229 22,316
Less valuation allowance........................ 4,864 -
---------- ----------
Total deferred tax assets... .................... 40,384 30,421
---------- ----------
Deferred tax liabilities:
Current:
Prepaid expenses................................ (1,360) (1,317)
Other liabilities............................... - (2,200)
---------- ----------
(1,360) (3,517)
Noncurrent:
Other assets .................................... (205) (67)
Property and equipment due to differences in
Depreciation and basis.......................... (40,505) (37,882)
---------- ----------
(40,710) (37,949)
Total deferred tax liabilities................... (42,070) (41,466)
---------- ----------
Net deferred tax liability $ (1,686)$ (11,045)
========== ==========
F-19
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
At December 31, 2004, the Company has a federal net operating loss
carryforward of approximately $24,258 available to reduce future taxable income.
The net operating losses generated in 2003 and 2004 were $3,313 and $20,945,
respectively, and expire in 2023 and 2024 if not utilized.
Significant management judgment is required in determining the provision
for income taxes and in determining whether deferred tax assets will be realized
in full or in part. Deferred tax assets and liabilities are measured using
enacted tax rates that are expected to apply to taxable income in years in which
the temporary differences are expected to be reversed. Under SFAS No. 109 and
applicable interpretations, if all or some portion of specific deferred tax
assets are determined not to be realizable, a valuation allowance must be
established for the amount of such deferred tax assets. In 2004, the Company
established a $4.9 million valuation allowance for deferred tax assets.
A reconciliation of the statutory federal income tax rate with our
effective income tax rate from continuing operations is as follows:
2004 2003
--------- -----------
Federal income tax at statutory rate (35%) ..... $(10,962) $ 4,910
Permanent differences and other................ 628 190
State income tax ............................... (1,253) 836
Reversal of Contested Liability Trust.......... (1,750) -
Net change in valuation allowance............... 4,864 -
Conversion from S to C Corp, net of deferred.... - 5,657
---------- -------------
Total income tax (benefit) expense.............. $ (8,473) $ 11,593
========== ============
During 2004, the IRS disallowed certain tax deductions taken by the S
corporation shareholders pursuant to a contested liability trust. As a result of
the disallowance of such deductions, the C corporation's tax basis was increased
resulting in a deferred tax benefit of $1,750.
(10) 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
Central matching contributions after one year of service. The Company's
contributions to the plan each year are made at the discretion of the Company's
board of directors. For the years ended December 31, 2004, 2003, and 2002, the
Company's contributions to the plan, including matching 401(k) contributions,
were $2,113, $2,199 and $2,282, respectively.
The Company initiated an Employee Stock Purchase Plan ("the Plan") in
August 2004 whose purpose is to allow qualified employees to acquire shares of
the Company at a 10% discount to the closing market price as of the end of each
calendar month. These shares are issued from authorized but unissued shares of
the Company. The Plan qualifies as an Employee Stock Purchase Plan under Section
423 of the Internal Revenue Code of 1986, as amended. One million total shares
have been authorized under the Plan. As of December 31, 2004, approximately
eleven thousand shares have been issued. The Plan is administered and the shares
held by Computershare Trust Company, Inc.
The Company also sponsors a health plan that provides postretirement
medical benefits to full-time employees who meet minimum age and service
requirements. The plan is 100% contributory, with retiree contributions adjusted
annually to cover all projected costs. The Company does not fund any of the
retiree costs. The plan has no assets, and accordingly, no reconciliation of
fair value of plan assets is provided.
F-20
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
During 2003 the Company amended its health plan resulting in a reduction of
benefits. The amendment to the plan eliminated any future post retirement
benefit obligation. The Company reported a gain of $7,799 as a result of the
amendment. The change in the benefit obligations and net benefit costs is as
follows:
Years Ended
December 31,
-----------------------
2003 2003
---------- ------------
Change in benefit obligation:
Benefit obligation at beginning of year.. $ - $ 8,313
Service cost............................. - -
Interest cost............................ - -
Benefits paid............................ - (2,212)
Plan amendment........................... - (7,799)
Participant contributions................ - 1,698
Actuarial loss........................... - -
---------- ----------
Benefit obligation at end of year........ - -
Unrecognized plan amendment gain......... - -
---------- ----------
Accrued postretirement benefits.......... $ - $ -
========== ==========
Years Ended
December 31,
--------------------------
2004 2003 2002
------- ------- --------
Net benefit cost included the following components:
Service cost........................................ $ - $ - $ 36
Interest cost....................................... - - 194
------- ------- --------
$ - $ - $ 230
======= ======= ========
(11) Fair Value of Financial Instruments
At December 31, 2004 and 2003, the carrying value of the Securitization
Facility approximates fair value because amounts outstanding bear interest at
current commercial paper rates. At December 31, 2004 and 2003, the fair value of
the related party financing arrangement cannot be determined without incurring
excessive costs due to the related party nature of the instrument. At December
31, 2004, and 2003, the carrying value of other long-term debt approximates fair
value.
(12) Leases
In 1998, the Company entered into agreements with its principal stockholder
to lease the land and related improvements of two terminals. The leases are for
10 years, cancelable within one month's notice by either party, with a renewal
option for an additional ten-year term. The annual lease payments over the
initial term of the lease are $297. The leases have been accounted for as
operating leases.
In 1999, the Company entered into agreements to lease one terminal from
Southwest Premier for 10 years with a renewal option for an additional 10 years.
The annual lease payments over the initial term of the lease are $139. The lease
has been accounted for as an operating lease.
In 2001, the Company entered into agreements to lease two terminals from
Southwest Premier for 76 and 77 months with a renewal option for an additional
10 years. The annual lease payments over the initial term of the leases are
$445. These leases have been accounted for as operating leases.
The Company leases various terminal and office facilities, tractors,
trailers and other equipment under noncancelable operating leases. Rental
expense was $6,092, $5,084 and $5,114 for the years ended December 31, 2004,
2003, and 2002, respectively. Included in these amounts are $1,795, $1,903, and
$1,779 in 2004, 2003, and 2002, respectively, paid to affiliates of the Company
for the rental of revenue and service equipment, terminals and office space.
F-21
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and capital leases at
December 31, 2004 are:
Capital Operating
Leases Leases
--------- ---------
Year ending December 31:
2005................................ $ 12,205 $ 5,266
2006................................ 7,240 4,398
2007................................ 7,965 3,262
2008................................ 2,585 2,393
2009................................ 4,263 1,443
Thereafter 1,386 3,438
------ --------
Total minimum lease payments..... 35,644 $ 20,200
========
Less amount representing interest..... 2,802
---------
$ 32,842
=========
13) Cash Flow Information
Short-term interest-bearing instruments with maturities of three months or
less at the date of purchase are considered cash equivalents.
During 2004, 2003, and 2002, the Company paid cash for interest of $7,892,
$9,852, and $7,815, respectively.
During 2004, 2003, and 2002, the Company paid cash for income taxes of
$311, $132, and $31, respectively.
During 2004, 2003, and 2002, the Company leased certain equipment under
capital leases in the amount of $14,938, $5,672, and $2,680, respectively.
During 2004 and 2003, the Company had non-cash reduction of properties held
for sale of $301 and $390, respectively, , which were accounted for as a
reduction of the related party financing.
During 2002, the Company assumed certain notes payable totaling $11,400 as
part of the Central Refrigerated acquisition. See note 3.
(14) Contingencies
The Company is involved in certain claims and pending litigation arising
from the normal conduct of business. Based on the present knowledge of the
facts, management believes the resolution of the claims and pending litigation
will not have a material adverse effect on the consolidated financial position,
results of operations or liquidity of the Company.
In June and July 2004, three stockholder class actions were filed against
the Company and certain officers and directors. The class actions were filed in
the United States District Court - Western District of Texas and generally
allege that false and misleading statements were made in the initial public
offering registration statement and prospectus, during the period surrounding
the initial pubic offering and up to the press release dated June 16, 2004. The
class actions are in the initial phases. The Company does not believe there is
any factual or legal basis for the allegations and the Company intends to
vigorously defend against the suits. The Company has informed its insurance
carrier and has retained outside counsel to assist in the Company's defense.
Prior to December 12, 2004, the Company maintained a $5.0 million directors' and
officers' insurance policy with a $350,000 deductible. On December 12, 2004, the
Company increased its directors' and officers' insurance coverage. The Company
currently maintains a $15 million directors' and officers' insurance policy with
a $350,000 deductible. In the 2004 third quarter, in connection with this
litigation, the Company recorded an expense of $350,000, representing the full
deductible amount under its current directors' and officers' insurance policy.
F-22
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
On August 9 and 10, 2004, two purported derivative actions were filed
against the Company, 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 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.
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.
(15) Related-Party Transactions
At December 31, 2002, the Company had approximately $7,988 of outstanding
advances to its principal stockholder, including $3,400 of notes receivable
bearing interest at a rate of 4.10%. There is also an uncollateralized note
agreement in the amount of $4,500 with a stated interest rate of 9.0%. These
notes have been reflected as a reduction of stockholders' equity. These notes,
along with $660 of unaccrued interest, were paid off in 2003.
During the years ended December 31, 2004, 2003, and 2002, the Company
incurred approximately $14,571, $18,582, and $21,106, respectively, for
transportation services provided by companies for which the Company's principal
stockholder is the Chairman. At December 31, 2004, and 2003, the Company had
payables of $988 and $1,020, respectively, for these transportation services.
During the years ended December 31, 2004, 2003, and 2002, the Company
incurred $274, $12 and $286, respectively, to an entity owned by a stockholder
of the Company for legal services. The Company also paid $525 for legal services
in 2003, which are related to the initial public offering and accounted for as a
reduction of proceeds.
During the years ended December 31, 2003 and 2002, the Company had tire
sales of approximately $962 and $3,330, respectively, to an affiliate. In 2004,
the Company did not have any transactions of this nature.
See also notes 3, 6, 7, and 12 for additional disclosures regarding related
party transactions.
F-23
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(16) Loss per Share and Pro Forma Income (Loss) Per Share
The calculation for loss per share and pro forma income (loss) per share
was calculated as shown below.
2004 2003 2002
--------- ---------- ----------
Net income (loss):
Net (loss) income................ $ (22,848) $ (5,905) $ 5,242
Pro forma federal tax adjustment
(unaudited) - 14,268 (4,193)
========= ---------- ----------
Pro forma net income (loss) from
continuing operations (unaudited) - 8,363 1,049
Loss from discontinued operations - (8,341) -
---------- ----------
Pro forma net income (unaudited) $ - $ 22 $ 1,049
========== ==========
Shares:
Basic shares (weighted-average shares
outstanding).................. 17,970,595 11,162,814 10,868,218
Stock options.................. - 935,124 654,348
Other.......................... - 4,796 25,004
----------- ---------- ----------
Diluted shares................. 17,970,595 12,102,734 11,547,570
========== ========== ==========
Net loss per share:
Basic $ (1.27) - -
Diluted $ (1.27) - -
Pro forma basic income per share
(unaudited)................... - $ 0.00 $ 0.10
Pro forma diluted income per share
(unaudited).................... $ - $ 0.00 $ 0.09
For the year ended December 31, 2002 and 2004, the Company had 245,295 and
1,328,868 stock options that were anti-dilutive, respectively. There were no
anti-dilutive options in 2003.. As a result, the assumed shares under the
treasury stock method related to anti-dilutive options have been excluded from
the calculation of diluted income (loss) per share.
(17) Pro Forma C Corporation Data (unaudited)
On November 1, 2003, the Company converted from an S corporation to a C
corporation for federal income tax purposes. The unaudited pro forma C
corporation data for the years ended December 31, 2003 and 2002 are based on the
historical consolidated statements of operations and give effect to pro forma
income taxes as if the Company were a C corporation for the entire duration of
all years presented.
F-24
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
(18) Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and Net End of
of Year Expenses Writeoffs Year
---------- ---------- --------- ---------
Allowance for doubtful accounts
Year ended December 31, 2004....... $ 2,452 $ 1,669 554 $ 3,567
Year ended December 31, 2003....... 2,294 876 718 2,452
Year ended December 31, 2002....... 3,591 82 1,379 2,294
Allowance for revenue adjustments
Year ended December 31, 2004....... $ 2,901 $ 11,355 $ 9,969 $ 4,287
Year ended December 31, 2003....... 2,850 12,356 12,305 2,901
Year ended December 31, 2002....... 3,112 13,692 13,954 2,850
Balance at Charged to Balance at
Beginning Costs and Claims End of
of Year Expenses Paid Year
---------- ---------- --------- ---------
Cargo claims accruals
Year ended December 31, 2004...... $ 3,788 $ 19,423 $ 17,754 $ 5,457
Year ended December 31, 2003...... 4,039 10,326 10,577 3,788
Year ended December 31, 2002...... 4,023 10,793 10,777 4,039
Insurance accruals
Year ended December 31, 2004...... $ 16,979 $ 32,781 $ 30,136 $ 19,624
Year ended December 31, 2003...... 14,717 28,949 26,687 16,979
Year ended December 31, 2002...... 15,532 26,632 27,447 14,717
(19) Subsequent Event
On January 31, 2005, the Company entered into the New Credit Facility with
Bank of America, N.A., as Agent, and certain other lenders from time to time
party to the New Credit Facility, in the aggregate principal amount of up to
$70,000. The New Credit Facility replaces both the Amended and Restated
Revolving Facility and the Securitization Facility. The New Credit Facility
terminates on January 31, 2009.
Subject to the terms of the New Credit Facility, the maximum revolving
borrowing limit under the New Credit Facility is the lesser of (a) $70,000, or
(b) 85% of the Company's eligible accounts receivable, plus 85% of the net
orderly liquidation value of the Company's eligible rolling stock owned as of
January 31, 2005, plus 85% of the cost of eligible rolling stock acquired by
Borrower after January 31, 2005. Letters of Credit under the New Credit Facility
are subject to a sub-limit of $40,000 .
Borrowings under the New Credit Facility bear interest at the base rate, as
defined, plus an applicable margin of 0.00% to 1.00%, or LIBOR plus an
applicable margin of 1.50% to 2.75%, based on the average quarterly availability
under the New Credit Facility. Letters of credit under the New Credit Facility
are subject to an applicable letter of credit margin of 1.25% to 2.50%, based on
the average quarterly availability under the New Credit Facility. The New Credit
Facility also prescribes additional fees for letter of credit transactions, and
an unused line fee of 0.25% to 0.375%, based on aggregate amounts outstanding.
The New Credit Facility is collateralized by substantially all of the
Company's assets, other than certain revenue equipment and real estate that is
(or may in the future become) subject to other financing.
The New Credit Facility contains certain restrictions and covenants
relating to, among other things, 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
F-25
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued
(Thousands of dollars, except share and per share amounts)
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.
F-26
EXHIBIT INDEX
Number Description
2.1 Amended and Restated Asset Purchase Agreement dated April 18, 2002, by
and among Central Refrigerated Service, Inc., a Nebraska corporation,
and Simon Transportation Services Inc., a Nevada corporation, and its
subsidiaries, Dick Simon Trucking, Inc., a Utah corporation, and Simon
Terminal, LLC, an Arizona limited liability company. (Incorporated by
reference to Exhibit 2.1 to the Company's Registration Statement on
Form S-1 No. 333-109068.)
2.2(a) Separation Agreement dated November 30, 2002, by and among Central
Freight Lines, Inc., a Texas corporation, Central Refrigerated
Service, Inc., a Nebraska corporation, the Jerry and Vickie Moyes
Family Trust, Interstate Equipment Leasing, Inc., an Arizona
corporation, and Jerry Moyes individually. (Incorporated by reference
to Exhibit 2.2(a) to the Company's Registration Statement on Form S-1
No. 333-109068.)
2.2(b) Amendment Number One to Separation Agreement dated December 23,
2002, by and among Central Freight Lines, Inc., a Texas corporation,
Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry
and Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc., an
Arizona corporation, and Jerry Moyes individually. (Incorporated by
reference to Exhibit 2.2(b) to the Company's Registration Statement on
Form S-1 No. 333-109068.)
2.2(c) Amendment Number Two to Separation Agreement effective as of October
28, 2003, by and among Central Freight Lines, Inc., a Texas
corporation, Central Refrigerated Service, Inc., a Nebraska
corporation, the Jerry and Vickie Moyes Family Trust, Interstate
Equipment Leasing, Inc. an Arizona corporation, and Jerry Moyes
individually. (Incorporated by reference to Exhibit 2.2(c) to the
Company's Registration Statement on Form S-1 No. 333-109068.)
3.1 Amended and Restated Articles of Incorporation of Central Freight
Lines, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 3.1(b) to the Company's Registration Statement on Form S-1 No.
333-109068.)
3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation.
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
4.1 Amended and Restated Articles of Incorporation of Central Freight
Lines, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 3.1 to this Report on Form 10-K.)
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation.
(Incorporated by reference to Exhibit 3.2 to this Report on Form
10-K.)
10.1(a)+ Central Freight Lines, Inc. 401(k) Savings Plan. (Incorporated by
reference to Exhibit 10.1(a) to the Company's Registration Statement
on Form S-1 No. 333-109068.)
10.1(b)+ First Amendment to Central Freight Lines, Inc. 401(k) Savings
Plan. (Incorporated by reference to Exhibit 10.1(b) to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.2(a)+ Central Freight Lines, Inc. Incentive Stock Plan. (Incorporated by
reference to Exhibit 10.2(a) to the Company's Registration Statement
on Form S-1 No. 333-109068.)
10.2(b)+ Form of Stock Option Agreement. (Incorporated by reference to
Exhibit 10.2(b) to the Company's Registration Statement on Form S-1
No. 333-109068.)
10.3+ Form of Outside Director Stock Option Agreement. (Incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 No. 333-109068.)
IV-1
10.4(a) First Amended and Restated Revolving Credit Loan Agreement, dated
July 28, 2004, by and between Central Freight Lines, Inc., a Texas
corporation, and SunTrust Bank, a Georgia state banking corporation.
(Incorporated by reference to Exhibit 10.4(a) to the Company's Report
on Form 10-Q for the quarterly period ended July 3, 2004.)
10.4(b) Revolving Credit Note, dated July 28, 2004, by Central Freight
Lines, Inc., a Texas corporation, in favor of SunTrust Bank, a Georgia
state banking corporation. (Incorporated by reference to Exhibit
10.4(b) to the Company's Report on Form 10-Q for the quarterly period
ended July 3, 2004.)
10.4(c)* First Amendment to First Amended and Restated Revolving Credit
Loan Agreement, dated July 28, 2004, by and between Central Freight
Lines, Inc., a Texas corporation, and SunTrust Bank, a Georgia state
banking corporation.
10.5 Guaranty, dated July 28, 2004, by Central Freight Lines, Inc., a
Nevada corporation, in favor of SunTrust Bank, a Georgia state banking
corporation. (Incorporated by reference to Exhibit 10.5 to the
Company's Report on Form 10-Q for the quarterly period ended July 3,
2004.)
10.6 Security Agreement, dated July 28, 2004, by and between Central
Freight Lines, Inc., a Texas corporation and Suntrust Bank, a Georgia
state banking corporation. (Incorporated by reference to Exhibit 10.6
to the Company's Report on Form 10-Q for the quarterly period ended
July 3, 2004.)
10.7 Note dated April 30, 2002, by Jerry C. Moyes in favor of Central
Freight Lines, Inc., a Texas corporation. (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on Form S-1
No. 333-109068.)
10.8(a) Loan Agreement dated April 30, 2002, by and among Central
Receivables, Inc., a Nevada corporation, Three Pillars Funding
Corporation, a Delaware corporation, and Suntrust Capital Markets,
Inc., a Tennessee corporation, as agent. (Incorporated by reference to
Exhibit 10.8(a) to the Company's Registration Statement on Form S-1
No. 333-109068.)
10.8(b) First Amendment to Loan Agreement dated April 29, 2003, by and
among Central Receivables, Inc., a Nevada corporation, Three Pillars
Funding Corporation, a Delaware corporation, and SunTrust Capital
Markets, Inc., a Tennessee corporation, as agent. (Incorporated by
reference to Exhibit 10.8(b) to the Company's Registration Statement
on Form S-1 No. 333-109068.)
10.9 Receivables Purchase Agreement dated April 30, 2002, by and between
Central Freight Lines, Inc., a Texas corporation, and Central
Receivables, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1 No.
333-109068.)
10.10 Second Amended and Restated Master Lease Agreement -- Parcel Group A
dated February 20, 2003 by and between Southwest Premier Properties,
L.L.C., a Texas limited liability company, and Central Freight Lines,
Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1 No. 333-109068.)
10.11 Second Amended and Restated Master Lease Agreement -- Parcel Group B
dated February 20, 2003 by and between Southwest Premier Properties,
L.L.C., a Texas limited liability company, and Central Freight Lines,
Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.11
to the Company's Registration Statement on Form S-1 No. 333-109068.)
10.12 Amended and Restated Lease dated February 20, 2003 by and between JVM
Associates and Central Freight Lines, Inc., a Texas corporation.
(Incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.13 Amended and Restated Lease dated February 20, 2003 by and between
Jerry and Vickie Moyes and Central Freight Lines, Inc., a Texas
corporation. (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
IV-2
10.14 Amended and Restated Lease dated February 20, 2003 by and between
Jerry and Vickie Moyes and Central Freight Lines, Inc., a Texas
corporation. (Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.15+ Employment Agreement dated January 7, 2002, by and between Central
Freight Lines, Inc., a Texas corporation, and Robert V. Fasso.
(Incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.16+ Employment Offer Letter to Doak D. Slay, dated December 23, 2002, by
Central Freight Lines, Inc., as countersigned by Doak D. Slay.
(Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.17+ Equity Advancement Letter to Doak D. Slay, dated July 9, 2003, by
Central Freight Lines, Inc., as countersigned by Doak D. Slay and
Denise D. Slay. (Incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.18+ Employment Offer Letter to J. Mark Conard, dated August 16, 2003, by
Central Freight Lines, Inc. (Incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1 No.
333-109068.)
10.19+ Employment Offer Letter to Jeffrey A. Hale, dated June 7, 2002, by
Central Freight Lines, Inc. (Incorporated by reference to Exhibit
10.19 to the Company's Registration Statement on Form S-1 No.
333-109068.)
10.20+ Employment Separation Agreement and Release, dated as of February
21, 2002, to be effective as of March 9, 2002, by and between Central
Freight Lines, Inc. and Joseph Gentry. (Incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on Form S-1 No.
333-109068.)
10.21+ Consulting Agreement, dated February 20, 2002, by and between Joseph
B. Gentry and Central Freight Lines, Inc., a Nevada corporation.
(Incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.22 Contract for the Sale of Land dated September 19, 2003, between Doak
D. Slay and Denise D. Slay and Central Freight Lines, Inc.
(Incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.23(a) Indemnification Agreement, effective as of December 31, 2002, by
and between Central Freight Lines, Inc., a Texas corporation, and
Central Refrigerated Service, Inc., a Nebraska corporation.
(Incorporated by reference to Exhibit 10.23(a) to the Company's
Registration Statement on Form S-1 No. 333-109068.)
10.23(b) Amendment Number One to Indemnification Agreement effective as of
December 31, 2002, by and between Central Freight Lines, Inc., a Texas
corporation, and Central Refrigerated Service, Inc., a Nebraska
corporation. (Incorporated by reference to Exhibit 10.23(b) to the
Company's Registration Statement on Form S-1 No. 333-109068.)
10.24*+ Employment Offer Letter to Walt Ainsworth, dated July 15, 2004, by
Central Freight Lines, Inc.
21.1* Subsidiaries of Central Freight Lines, Inc., a Nevada corporation.
23.1* Consent of KPMG LLP.
IV-3
31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by
Robert V. Fasso, the Company's Chief Executive Officer.
31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by
Jeffrey A. Hale, the Company's Chief Financial Officer.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso,
the Company's Chief Executive Officer.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale,
the Company's Chief Financial Officer.
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
IV-4
EXHIBIT 21.1
Subsidiaries of the Registrant
State or Jurisdiction of
Name of Subsidiary Incorporation or Organization
------------------ -----------------------------
Central Freight Lines, Inc. Texas
Central Receivables, Inc. Nevada
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Central Freight Lines, Inc.:
We consent to the incorporation by reference in the registration statements
on Form S-8 ( File Nos. 333-111795, 333-114721 and 333-118032) of Central
Freight Lines, Inc. and subsidiaries (the Company) of our reports dated March
30, 2005, with respect to the consolidated balance sheets of Central Freight
Lines, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2004, management's assessment
of the effectiveness of internal control over financial reporting as of December
31, 2004, and the effectiveness of internal control over financial reporting as
of December 31, 2004, which reports appear in the December 31, 2004, annual
report on Form 10-K of Central Freight Lines, Inc. Our report on the
consolidated financial statements refers to a change in the method of accounting
for goodwill and other intangible assets in 2002.
Our report dated March 30, 2005, on management's assessment of the
effectiveness of internal control over financial reporting and the effectiveness
of internal control over financial reporting as of December 31, 2004, expresses
our opinion that the Company did not maintain effective internal control over
financial reporting as of December 31, 2004, because of the effect of material
weaknesses on the achievement of the objectives of the control criteria and
contains an explanatory paragraph that states that the following material
weaknesses have been identified and included in management's assessment as of
December 31, 2004:
The Company's policies and procedures were not sufficient to ensure that
transactions processed through the Company's billing system resulted in
accounting for and reporting of such transactions pursuant to the provisions of
the respective customer contract. Specifically, the Company's billing process
lacked controls to ensure the accuracy of entries to the billing system and to
ensure that changes to customer contracts were reflected in the billing system
accurately and timely. These deficiencies result in more than a remote
likelihood that a material misstatement of the annual or interim consolidated
financial statements would not be prevented or detected.
The Company's procedures were not sufficient to ensure the accuracy of reported
amounts for the Company's tire and spare parts inventories. Specifically, the
Company did not reconcile, pursuant to its policy, physical counts of tire and
spare parts inventories to the Company's year-end general ledger. As a result,
errors in accounting for inventory were identified and corrected prior to
issuance of the Company's 2004 consolidated financial statements. This
deficiency results in more than a remote likelihood that a material misstatement
of the annual or interim consolidated financial statements would not be
prevented or detected.
The Company did not maintain policies and procedures to ensure that the
accounting for valuation allowances associated with deferred taxes was in
accordance with U.S. generally accepted accounting principles. Specifically,
management's procedures did not provide for an effective review of deferred tax
asset amounts for purposes of evaluating realizability. As a result, a material
error in the determination of the valuation allowances for deferred tax assets
was identified and corrected prior to issuance of the Company's 2004
consolidated financial statements. This deficiency results in more than a remote
likelihood that a material misstatement of the annual or interim consolidated
financial statements would not be prevented or detected.
In light of this information, management is unable to conclude that as of
December 31, 2004, its internal controls over financial reporting are effective.
KPMG LLP
Dallas, Texas
March 30, 2005
Exhibit 31.1
CERTIFICATION
I, Robert V. Fasso, certify that:
1. I have reviewed this annual report on Form 10-K of Central Freight
Lines, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 30, 2005
/s/ Robert V. Fasso
--------------------------------
Robert V. Fasso
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Jeffrey A. Hale, certify that:
1. I have reviewed this annual report on Form 10-K of Central Freight
Lines, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 30, 2005
/s/ Jeffrey A. Hale
-------------------------------
Jeffrey A. Hale
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central Freight Lines, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Robert V. Fasso, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Robert V. Fasso
--------------------------------
Robert V. Fasso
Chief Executive Officer
March 30, 2005
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central Freight Lines, Inc. (the
"Company") on Form 10-K for the period ended December 31, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Jeffrey A. Hale, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/Jeffrey A. Hale
--------------------------------
Jeffrey A. Hale
Chief Financial Officer
March 30, 2005