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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2005
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number 000-50485
Central Freight Lines, Inc.
(Exact name of registrant as specified in its charter)
Nevada 74-2914331
( State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 West Waco Drive, Waco, TX 76710
(Address of principal executive offices) (Zip Code)
(Registrants telephone number, including area code)
(254) 741-5305
Not applicable
(Former name or former address, if changed since the last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.)
X Yes No
The number of shares of common stock outstanding at May 12, 2005 was 18,204,444.
Central Freight Lines, Inc.
Form 10-Q
Three months ended April 2, 2005
Table of Contents
Page Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of April 2, 2005 (unaudited) and
December 31, 2004 1
Consolidated Statements of Operations (unaudited) for the Three months
ended April 2, 2005 and April 3, 2004 2
Consolidated Statements of Cash Flows (unaudited) for the Three months
ended April 2, 2005 and April 3, 2004 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
Part II. Other Information 24
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders. 24
Item.5. Other Information 24
Item 6. Exhibits 25
Signatures 26
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 2, 2005 and December 31, 2004
(In thousands, except share data)
2005
Assets (Unaudited) 2004
------------------ -----------------
Cash and cash equivalents $ 1,202 $ 2,144
Restricted cash 20,825
Accounts receivable less allowance for doubtful accounts and revenue
adjustments of $8,801 in 2005 and $7,854 in 2004 53,042 51,582
Other current assets 11,337 8,655
Deferred income taxes 8,959 6,689
------------------ -----------------
Total current assets 74,540 89,895
Property and equipment, net 131,198 135,274
Goodwill 4,324 4,324
Other assets 8,994 7,761
------------------ -----------------
Total assets $ 219,056 $ 237,254
================== =================
Liabilities and stockholders' equity
Liabilities:
Current maturities of long-term debt $ 10,538 $ 10,958
Short-term notes payable 14,337 28,108
Trade accounts payable 18,463 23,835
Payables for related party transportation services 1,537 988
Accrued expenses 29,799 23,050
------------------ -----------------
Total current liabilities 74,674 86,939
Long-term debt, excluding current maturities 20,869 21,884
Related party financing 22,852 22,852
Deferred income taxes 10,645 8,375
Claims and insurance accruals 10,644 9,646
------------------ -----------------
Total liabilities 139,684 149,696
------------------ -----------------
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,
18,204,444 and 18,188,894 shares issued and outstanding as of
April 2, 2005 and December 31, 2004 18 18
Additional paid-in capital 109,605 109,554
Unearned compensation (239) (266)
Accumulated deficit (30,012) (21,748)
------------------ -----------------
Total stockholders' equity 79,372 87,558
------------------ -----------------
Total liabilities and stockholders' equity $ 219,056 $ 237,254
================== =================
See accompanying notes to consolidated financial statements.
Page 1
CENTRAL FREIGHT LINES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended
--------------------------------
April 2, April 3,
2005 2004
--------------- ---------------
$ 89,322 $ 97,038
Operating revenues
--------------- ---------------
Operating expenses:
Salaries, wages and benefits 50,964 55,656
Purchased transportation 8,818 11,305
Purchased transportation-related parties 3,471 2,277
Operating and general supplies and expenses 20,605 18,580
Operating and general supplies and expenses-related parties 162 95
Insurance and claims 5,025 3,744
Building and equipment rentals 1,019 929
Building and equipment rentals-related parties 449 520
Depreciation and amortization 4,877 3,919
--------------- ---------------
Total operating expenses 95,390 97,025
--------------- ---------------
(Loss) income from operations (6,068) 13
Other expense:
Interest expense (615) (205)
Interest expense - related parties (1,581) (1,605)
--------------- ---------------
Loss before income taxes (8,264) (1,797)
Income taxes:
Income tax benefit --- 668
--------------- ---------------
Net loss $ (8,264) $ (1,129)
=============== ===============
Net loss per share:
Basic $ (0.45) $ (0.06)
Diluted (0.45) (0.06)
Weighted average outstanding shares:
Basic 18,192 17,714
Diluted 18,192 17,714
See accompanying notes to consolidated financial statements.
Page 2
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 2, 2005 and April 3, 2004
(Unaudited, in thousands)
2005 2004
----------------- -----------------
Cash flows from operating activities:
Net loss $ (8,264) $ (1,129)
Adjustments to reconcile net loss to
net cash used in operating activities:
Bad debt expense (recovery) 611 (23)
Equity in loss of affiliate (2) (1)
Depreciation and amortization 4,877 3,919
Amortization of deferred financing fees 44 ---
Deferred income taxes --- (643)
Decrease in unearned compensation 27 59
Change in operating assets and liabilities, net
of purchase accounting effects:
Accounts receivable (2,071) (848)
Other assets (2,760) (1,376)
Trade accounts payable (5,372) (706)
Trade accounts payable -related parties 549 254
Claims and insurance accruals (505) (1,363)
Accrued expenses and other liabilities 8,252 (443)
----------------- -----------------
Net cash used in operating activities (4,614) (2,300)
----------------- -----------------
Cash flows from investing activities:
Additions to property and equipment (1,078) (2,505)
Proceeds from sale of property and equipment 451 244
Cash paid for acquisition of business --- (7,058)
----------------- -----------------
Net cash used in investing activities (627) (9,319)
----------------- -----------------
Cash flows from financing activities:
Restricted Cash 20,825 ---
Proceeds from long-term debt 779 ---
Repayments of long-term debt (2,158) (3,577)
Proceeds from short-term debt 13,473 ---
Repayment of securitization facility (27,300) ---
Exercise of stock options 51 450
Payment of deferred financing fees (1,371) ---
----------------- -----------------
Net cash provided by (used in) financing activities 4,299 (3,127)
----------------- -----------------
Net decrease in cash (942) (14,746)
Cash at beginning of period 2,144 41,493
----------------- -----------------
Cash at end of period $ 1,202 $ 26,747
================= =================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 2,295 $ 1,865
Income taxes $ --- $ 85
Non-cash transaction:
Note payable for acquisition of business: $ --- $ 3,024
See accompanying notes to consolidated financial statements.
Page 3
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
(1) Basis of Presentation
The accompanying consolidated financial statements of Central Freight Lines,Inc
and its wholly owned subsidiaries (the Company) have been prepared by the
Company in accordance with accounting principles generally accepted in
the United States of America for interim financial information and the
instructions to Quarterly Reports on Form 10-Q and Rule 10-01 of Regulation S-X,
and should be read in conjunction with the Annual Report on Form 10-K for the
year ended December 31, 2004. Accordingly, significant accounting policies and
other disclosures normally provided have been omitted since such information
is provided therein.
In the opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments (including normal recurring adjustments)
necessary to present fairly our consolidated financial position as of
April 2, 2005, the consolidated results of our operations for the three months
ended April 2, 2005 and April 3, 2004 and our consolidated cash flows for the
three months ended April 2, 2005 and April 3, 2004. The results of our
operations for the three months ended April 2, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005.
(2) Revenue Recognition
The Company recognizes revenue upon the delivery of the related freight. A
portion of the Company's revenue is derived from shipments that originated or
terminated in other regions, where a portion of freight movement is handled by
another carrier. Most of this revenue is with carriers with which the Company
maintains transportation alliances. The Company does not recognize revenue or
the associated expenses that relate to the portion of the shipment transported
by its alliance partners.
Page 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
(3) Stock-Based Compensation
The Company has a stock-based employee compensation plan. The Company accounts
for that plan under the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, the Company records
compensation expense only if the fair value of the underlying stock exceeds the
exercise price on the date of grant. The following table illustrates the effect
on net (loss) income and (loss) income per share as if the
Company had applied the fair value recognition provisions of Financial
Aaccounting Standards Board ("FASB") Statement No.123, Accounting for
Stock-Based Compensation, and as allowed by SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB
No. 123, to stock-based employee compensation.
Three months ended
--------------------------------
April 2, April 3,
2005 2004
--------------- --------------
Net loss, as reported: $ (8,264) $ (1,129)
Add:
Stock-based employee compensation expense included
in reported net loss, net of related tax effects 27 59
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards (204) (156)
--------------- --------------
Pro forma net loss $ (8,441) (1,226)
=============== ===============
Net loss per share
Basic
As reported $ (0.45) (0.06)
Pro forma (0.46) (0.07)
Diluted
As reported $ (0.45) (0.06)
Pro forma (0.46) (0.07)
In December 2004, the FASB issued Statement No. 123R, Share-Based Payment.
This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for
goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based that are based
on the fair value of the entity's equity instruments or that may be settled by
the issuance of those equity instruments. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. This Statement does not change the
accounting guidance for share-based transactions with parties other than
employees provided in Statement No. 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 AICAP Statement of Position 93-6, Employers'
Accounting for Employee Stock Ownership Plans. The Company will be required to
adopt Statement No. 123R in fiscal 2006. 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.
Page 5
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
(4) Acquisition
In March 2004, the Company expanded into the Pacific Northwest through the
purchase of selected terminal network and rolling stock of Eastern Oregon
Fast Freight ("EOFF"), a non-union LTL carrier that operated in the states of
Oregon, Washington, and Idaho. The selected assets of EOFF were purchased for
approximately $10,000, with the purchase price paid from cash reserves. The
assets acquired were recorded at fair market value as determined by
management based on information currently available and on assumptions
as to future operations.
Under terms of the agreement, the Company paid approximately $7,000 of the
purchase price at closing, and an additional $2,200 during 2004. A remaining
$864 (including purchase price adjustments of $64) is recorded on the
consolidated balance sheet under short-term notes payable at April 2, 2005, and
is expected to be paid prior to the end of the 2005-second quarter.
(5) Loss Per Share
The basic loss per share is calculated using the weighted average number of
shares outstanding. The weighted average shares outstanding used in the
calculation of the diluted loss per share includes the dilutive effect of
options to purchase common stock, calculated using the treasury stock
method as may be applicable.
The following table presents information necessary to calculate basic and
diluted loss per share:
Three months ended
-----------------------------------
April 2, 2005 April 3, 2004
------------- -------------
Net loss $ (8,264) $ (1,129)
============== ==============
Weighted average shares outstanding - basic 18,192 17,714
Common stock equivalents
-------------- -------------
Weighted average shares outstanding - diluted 18,192 17,714
============== =============
Basic loss per share (0.45) (0.06)
Diluted loss per share (0.45) (0.06)
Anti-dilutive unexercised options excluded
from calculation 1,321 1,906
Page 6
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except per share amounts)
(6) Debt and Related Party Financing
(a) Long term Debt
Long-term debt consists of the following at April 2, 2005 and December 31,
2004:
2005 2004
---- ----
Capital lease obligations $ 31,407 32,842
Less: Current portion 10,538 10,958
--------- ---------
$ 20,869 $ 21,884
====== ======
(b) Short term notes payable and liquidity
On April 30, 2002, the Company entered into a $40,000 revolving accounts
receivable securitization facility (the "Securitization Facility") and a
revolving credit facility (the "Revolving Facility"). Under the Securitization
Facility, the Company, on a revolving basis, sold its interests in its accounts
receivable to Central Receivables, a wholly-owned, special purpose subsidiary.
The Company could receive up to $40,000 of proceeds. The Company paid
commercial paper interest rates plus an applicable margin on the proceeds
received. The Securitization Facility included certain restrictions and
financial covenants.
On July 28, 2004, the Company and SunTrust Bank entered into an amended and
restated revolving facility (the "Amended and Restated Revolving Facility") , to
increase borrowing capacity to $30,000, and to extend the maturity date to
April 30, 2006. On November 5, 2004, the Company executed a first amendment
to the Amended and Restated Revolving Credit Facility. Under the first amendment
to the Amended and Restated Revolving Facility, the Company could receive up to
an aggregate of $30,000 of proceeds in the form of letters of credit, only.
The Amended and Restated Revolving Facility accrued interest at a variable rate
equal. The Amended and Restated Revolving Facility was secured by certain
revenue equipment, and letters of credit that were issued were secured by cash
collateral which was recordrd as restricted cash on the Company's consolidated
balance sheet at December 31, 2004. The facility contained, among other things,
certain financial and non-financial covenants.
On January 31, 2005, the Company entered into a four-year senior secured
revolving credit facility and letter of credit sub-facility (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 and are not required to be secured by cash
collateral.
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.
Page 7
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
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.
Although it is a four-year credit facility, draws on the line are considered
current based on evolving interpretations of Emerging Issues Task Force 95-22
Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit
Agreements that include both a Subjective Acceleration Clause and a Lock-Box
Arrangement ("EITF 95-22"). EITF 95-22 requires revolving credit agreements
with a required lock-box arrangement that include subjective acceleration
clauses to be classified as current liabilities. The New Credit Facility
includes a lock-box agreement and also allows the lender, in its reasonable
credit judgment, to assess additional reserves against the borrowing base
calculation and take certain other discretionary actions. For example, certain
reserve requirements may result in an over advance borrowing position that
could require an accelerated repayment of the over advance portion. Since
the inception of this facility, the lender has not applied any additional
reserves to the borrowing base calculation. However, the lender, in its
reasonable credit judgment, can assess additional reserves to the borrowing
base calculation to account for changes in our business or the underlying value
of the collateral. The Company does not anticipate any changes that would
result in any material adjustments to the borrowing base calculation, but the
Company cannot be certain that additional reserves will not be assessed by the
bank to the borrowing base calculation. The Company believes the provisions in
the New Credit Facility are relatively common for credit facilities of this
type and, while the Company does not believe that this accounting requirement
accurately reflects the long-term nature of the facility, the Company
acknowledges the requirements of EITF 95-22. Accordingly, the Company has
classified borrowings under the New Credit Facility as a short-term obligation.
The line of credit established with Bank of America on January 31, 2005 has no
financial covenants until the end of May 2005. In lieu of covenants through May,
a $5,000 restriction on availability is in place. After May 2005, the $5,000
restriction is eliminated and no financial covenants exist as long as excess
available on the line remain above $15,000. If excess availability drops below
$15,000 the Company is required to maintain minimum EBITDA levels. As of April
2, 2005, the Company had approximately $18,783 in availability under the
revolving credit facility before the $5,000 restriction, loans drawn under the
credit facility amounted to $13,473, and letters of credit outstanding amounted
to $20,753.
On May 12, 2005, the Company entered into a first amendment to the New Credit
Facility. Under this amendment, the maximum revolving borrowing limit was
reduced from $70,000 to $60,000 to more closely reflect the Company's
borrowing base of $53,300 (thereby reducing fees on unused amounts) with an
option to increase the borrowing limit to $70,000 at a later date. This
amendment has no financial covenants until August 15, 2005. In lieu of
covenants through August 15, 2005, a $5,000 restriction on availability is in
place. After August 15, 2005, the $5,000 restriction is eliminated and no
financial covenants exist as long as excess availability on the line remains
above $15,000. If excess availability drops below $15,000, the Company is
required to maintain minimum EBITDA levels.
The Company's most recent internal projections show that the Company expects to
achieve positive earnings before deprecation and amortization expense in the
third and fourth quarters of 2005. Such projections accurately reflect the
Company's good faith best estimate of future performance as of the date of
preparation. If projected results are achieved, the Company also believes that
it will have "covenant free" availability under its Bank of America credit
facility at the end of the second, third, and fourth quarters of 2005,
respectively. If the Company does not have "covenant free" availability under
the credit facility during 2005, the Company believes the mortgage or sale
and leaseback of certain of its operating terminals can provide sufficient
liquidity during 2005. The Company is pursuing such a mortgage or sale
and leaseback, and the Company believes it will be able to obtain such
financing. The Company also has the intent to sell its owned dormant Phoenix
terminal and believes that it will obtain proceeds of approximately $3.6
million. Although the Company cannot assure you that its efforts will be
successful, the Company expects to gain significant additional liquidity from
these assets.
Page 8
In May 2005 the Company contracted to sell approximately 14 excess acres in
Phoenix and expected to recognize a gain on the sale. In addition, the Company
entered into agreements in principle covering an estimated $14,000 to $15,000 in
sale-leaseback and mortgage financing transactions on five terminal properties.
The Company signed a letter of intent concerning a sale-leaseback of the new
Phoenix terminal and is negotiating the definitive agreements concerning the
transaction. It is expected that the transaction will generate approximately
$6,000 in net proceeds and the Company will sign a ten-year lease with a
ten-year option with annual lease payments of approximately $0.6m annually. The
Company also signed a commitment letter concerning mortgage financing on four
other terminal properties that is expected to generate approximately $9,000 in
net proceeds. These transactions are subject to customary closing conditions.
The transactions are expected to close within 45 to 60 days.
Assuming the closing of these financings, or financings or other transactions
generating comparable proceeds, and the continuation of improvements in the
Company's operating results, the Company expects to have borrowing availability
in excess of $15,000 such that minimum EBITDA levels will not apply.
Although there can be no assurance, the Company believes cash from operations,
borrowing available under its new credit facility, and other sources of
liquidity will be sufficient to fund its operations at least through the end of
2005. To the extent that actual results or events differ from the Company's
financial projections or business plans, our liquidity may be adversely
affected and the Company may be unable to meet its financial covenants.
Specifically, the Company's liquidity may be adversely affected by one or
more of the following factors: weak freight demand or a loss in customer
relationships or volume, the Company's success in executing its turnaround
steps described above, the Company's ability to improve the collection of its
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 the Company's suppliers and vendors worried about our ability
to meet payment obligations.
In March 2004, the Company acquired certain assets of EOFF for approximately
$10,000. The remaining $864 is recorded on the consolidated balance sheet as
short-term notes payable. The Company expects to finalize and settle this
remaining liability in the second quarter of 2005.
(b) Related-Party Financing
In 1998, the Company entered into an agreement with Southwest Premier
Properties, L.L.C. ("Southwest Premier"), an entity controlled by the Company's
principal stockholder, for the sale and leaseback of the land, structures and
improvements of some of the Company's terminals. For financial accounting
purposes, this transaction has been accounted for as a financing arrangement.
Consequently, the related land, structures and improvements remain on the
Company's consolidated balance sheet. The initial lease term is for ten
years with an option for an additional ten years at the then fair market rental
rate. At the expiration of the original lease term, the Company has an option
to purchase all of the properties, excluding certain surplus properties, for
the then fair market value.
Since the fair value of the properties sold and leased back has always equaled
or exceeded the proceeds from the financing arrangement, the annual lease
payments have been reflected as a cost of the financing and recordedas 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 at April 2, 2005 and
December 31, 2004 respectively. If the Company exercises the fair value purchase
option, the excess of the amount paid over the recorded financing obligation
will be reflected as additional interest expense. If the fair value purchase
option is not exercised at the end of the lease term, the excess of the
recorded financing obligation over the net book value of the related properties
will be reflected as a gain on the financing arrangement.
Page 9
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
(7) Income Taxes
At April 2, 2005 and December 31, 2004, the Company had a federal net operating
loss carry forward of approximately $29,653 and $24,258, respectively, available
to reduce future taxable income. The net operating loss generated in the 2005
first quarter and all of 2004 amounted to $5,395 and $20,945, respectively,
and expires in varying amounts beginning in 2023 if not utilized.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Significant management judgment is required in determining the provision for
income taxes and in determining whether deferred tax assets will be realized
in full or in part. Deferred tax assets and liabilities are measured using
enacted tax rates that are expected to apply to taxable income in years in
which the temporary differences are expected to be reversed. Under SFAS No.109
and applicable interpretations, in 2004, the Company established a $4,864
valuation allowance for deferred tax assets. Despite the requirements for such
allowance, the Company believes that the remaining net deferred tax assets will
be realized through future taxable income. As of April 2, 2005, the valuation
allowance for deferred tax assets was approximately $8,024.
(8) Contingencies
The Company is involved in certain claims and pending litigation arising from
the normal conduct of business. Based on the present knowledge of the facts,
management believes the resolution of 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. On August 9 and 10, 2004, two
purported derivative actions were filed agsinst 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. The Company does not believe there
is any factual or legal basis for the allegations and the Company intends to
vigorously defend against the suits. The Company has informed its insurance
carrier and has retained outside counsel to assist in the Company's defense.
Prior to December 12, 2004, the Company maintained a $5,000 directors' and
officers' insurance policy with a $350 deductible. On December 12, 2004, the
Company increased its directors' and officers' insurance coverage. The Company
currently maintains a $15,000 directors' and officers' insurance policy with a
$350 deductible. In the 2004 third quarter, in connection with this litigation,
the Company recorded an expense of $350, representing the full deductible
amount under its current directors' and officers' insurance policy.
Although it is not possible at this time to predict the litigation outcome of
these cases, the Company expects to prevail. However, an adverse litigation
outcome could be material to the Company's consolidated financial position
or results of operations. As a result of the uncertainty regarding the
outcome of this matter, no provision has been made in the consolidated financial
statements with respect to this contingent liability.
Page 10
CENTRAL FREIGHT LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -continued
(In thousands, except share and per share amounts)
The Company is subject to loss contingencies pursuant to federal, state, and
local environmental regulations dealing with the transportation, storage,
presence, use, disposal, and handling of hazardous materials, discharge of
storm water and fuel storage tanks. Environmental liabilities, including
remediation costs, are accrued when amounts are probable and can be reasonably
estimated.
(9) Related-Party Transactions
During the three months and nine months ended April 2, 2005 and April 3, 2004
the Company incurred approximately $3,471 and $2,277, respectively, for
transportation services provided by companies for which the Company's principal
stockholder was the Chairman. At April 2, 2005 and December 31, 2004, the
Company had payables of $1,537 and $988, respectively, for these transportation
services.
During the three months ended April 2, 2005 and April 3, 2004, the Company
incurred $162 and $95, respectively, of legal services with an entity owned by
a stockholder of the Company.
During the three months ended April 2, 2005 and April 3, 2004, the Company
incurred $449 and $520, respectively, for building rental expense with
related parties.
See also note 6(c)
(10) Employee Benefit Plan
The Company initiated an Employee Stock Purchase Plan ("the Plan") in August
2004 whose purpose is to allow qualified employees to acquire shares of the
Company at a 10% discount to the closing market price as of the end of each
calendar month. These shares are issued from authorized but unissued shares
of the Company. The Plan qualifies as an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code of 1986, as amended.
One million total shares have been authorized under the Plan.
Page 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Note Regarding Forward-Looking Statements
Except for the historical information contained herein, the discussion in this
annual report contains "forward-looking statements," which include information
relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation, and availability of
resources. These forward-looking statements include, without limitation,
statements regarding: expectations as to operational improvements; expectations
as to cost savings, revenue growth, and income; the time by which certain
objectives will be achieved; proposed new products and services; expectations
that claims, lawsuits, commitments, contingent liabilities, labor negotiations,
or agreements, or other matters will not have a materially adverse effect
on our consolidated financial position, results of operations, or liquidity;
statements concerning projections, predictions, expectations, estimates, or
forecasts as to our business, financial, and operational results and future
economic performance; and statements of management's goals and objectives,
and other similar expressions concerning matters that are not historical facts.
Words such as "may," "will," "should," "could," "would," "predicts," "plans,"
"potential," "continue," "expects," "anticipates," "future," "intends,"
"believes," "estimates," and similar expressions, as well as statements in
future tense, identify forward-looking statements. These statements are made
pursuant to the safe harbor provisions of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of
1933, as amended. Forward-looking statements should not be read as a guarantee
of future performance or results, and will not necessarily be accurate
indications of the times at, or by which, such performance or results will be
achieved.Forward-looking information is based on information available at the
time and/or management's good faith belief with respect to future events, and
is subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in the statements.
Readers should review and consider the factors discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors that May Affect Future Results" of our Annual Report on Form 10-K,
filed on March 31, 2005, along with the various disclosures by us in our press
releases, stockholder reports, and other filings with the Securities and
Exchange Commission. We do not assume, and specifically disclaim, any
obligation to update any forward-looking statement contained in this Report.
Business Overview
We are one of the ten largest regional LTL carriers in the United States based
on revenues, according to Transport Topics, generating approximately $386.6
million in revenue during fiscal 2004. In our operations, we pick up and deliver
multiple shipments for multiple customers on each trailer.
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 former 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.
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.
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.
Page 12
Recent Results of Operations and Quarter-End Financial Condition
For the quarter ended April 2, 2005, we reported a net loss of $8.3 million
equal to $(0.45) per diluted share compared to a net loss of $1.1 million for
the same period in 2004. A $0.17 per diluted share tax benefit generated, in
the 2005 first quarter, by the $8.3 million net loss was eliminated due to an
increase in our tax valuation for deferred tax assets. The increase in net loss
resulted primarily from an 8.0% decline in operating revenues and increased
costs discussed in more detail below in "Results of Operations."
At April 2, 2005, our consolidated balance sheet reflected $1.2 million in cash
$54.3 million in long-term debt and capital lease obligations, including
current portion, and $14.3 million in short-term debt. Stockholders' equity was
$79.4 million at April 2, 2005. As of that date, we had approximately $18.8
million in availability, subject to a $5.0 million restriction under our
revolving credit facility with Bank of America, although availability
fluctuates from day to day. We own real estate held for sale with an
estimated market value of $6.0 million that may be disposed of in 2005.
In May 2005, we entered into agreements in principle covering transactions
involving an estimated $14.0 million to $15.0 million in real estate proceeds
and financing on five terminal properties. We signed a letter of intent
concerning a sale-leaseback of a terminal and are negotiating the
definitive agreements concerning the transaction. It is expected that the
transaction will generate approximately $6.0 million in net proceeds and we will
sign a ten-year lease with a ten-year option with annual lease payments of
approximately $0.6 million. We also signed a commitment letter concerning
mortgage financing on four other terminal properties that is expected to
generate approximately $9.0 million in net proceeds. Both transactions are
subject to customary closing conditions. The transactions are expected to close
within 45 to 60 days. We also contracted to sell approximately 14 excess acres
in Phoenix for $1.3 million and expect to recognize a gain on the sale.
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 first quarter of 2005 was a positive step in that direction, as
our operating ratio improved 240 basis points from 109.2% to 106.8% between the
fourth quarter of 2004 and the first quarter of 2005.
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.
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 first quarter of 2005 demonstrate
measurable improvement.
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 slightly from $11.45
in the first quarter of 2004 to $11.51 in the first quarter of 2005, due
mainly to increases in fuel surcharge revenue. Our LTL revenue per
hundredweight, without fuel surcharge revenue, declined to $10.56 in the first
quarter of 2005 from $11.11 in the first quarter of 2004. Effective
May 2, 2005, we enacted a general rate increase of 6.0% for customers
on our proprietary rate base.
o Volume depends on the number of customers we have, the amount of freight
those customers ship, geographic coverage, and the general economy. Our total
tonnage decreased by 8.8% from the first quarter of 2004 to the first quarter
of 2005 in part due to one less working day in the 2005 first quarter.
However, total tonnage per day in April 2005 has increased by approximately
8.3% compared to total tonnage per day in the 2005 first quarter.
Page 13
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 the first quarter of 2005
was lower compared to the first quarter of 2004, 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.
Insurance and claims. This category includes the cost of insurance premiums and
the accruals we make for claims within our self-insured retention amounts,
primarily for personal injury, property damage, physical damage to our
equipment, and cargo claims. These expenses will vary primarily based upon
the frequency and severity of our accident experience and the market for
insurance.
Building and equipment rentals. This category consists mainly of payments to
unrelated third parties under terminal leases and payments to related parties
for seven terminals leased under operating leases.
Depreciation and amortization. This category relates to owned assets, assets
under capitalized leases, and 29 properties we lease from Southwest Premier
Properties, a related party, that are considered to be a financing arrangement.
Page 14
Results of Operations
The table below sets forth the percentage relationship of the specified
items to operating revenues for the periods indicated.
Three months ended
----------------------------
April 2, April 3,
2005 2004
------------ ------------
Operating revenues........................................ 100.0% 100.0%
Operating expenses:
Salaries, wages, and benefits........................... 57.1 57.4
Purchased transportation................................ 13.8 14.0
Operating and general supplies and
expenses............................................. 23.2 19.2
Insurance and claims.................................... 5.6 3.9
Building and equipment rentals.......................... 1.6 1.5
Depreciation and amortization........................... 5.5 4.0
--- ---
Total operating expenses (1)......................... 106.8 100.0
----- -----
Loss from operations...................................... (6.8) 0.0
Interest expense.......................................... (2.5) (1.9)
---- ----
Loss before income taxes.................................. (9.3) (1.9)
Income tax benefit........................................ --- 0.7
---
Net loss.................................................. (9.3)% (1.2)%
===== =====
__________
(1) Total operating expenses as a percentage of operating revenues, as presented
in this table, is also referred to as operating ratio.
Comparison of Three Months Ended April 2, 2005, to Three Months Ended April 3,
2004
Operating revenues. Operating revenues decreased $7.7 million, or 7.9%, from
$97.0 million for the first quarter of 2004 to $89.3 million for first quarter
of 2005. The decrease in operating revenues was partially due to one less
working day in the 2005 quarter (the 2005 quarter had 65 working days, compared
to 66 working days in the 2004 quarter). Further, revenue per working day was
$1.37 million in the 2005 quarter, which was 6.8% lower than the $1.47 million
per working day in the 2004 quarter. LTL revenue per hundredweight increased
0.5% from $11.45 in the 2004 quarter to $11.51 in the 2005 quarter as a
result of increased fuel surcharge revenue and length of haul. LTL revenue per
hundredweight in the first quarter of 2005, excluding fuel surcharge revenue,
decreased by 5.0% compared to the first quarter of 2004 despite an increase in
the average length of haul of 5.1%. Total tonnage decreased 42.3 thousand tons,
or 8.8%, from 482.2 thousand tons in the 2004-quarter to 439.9 thousand tons
in the 2005-quarter partially due to the one less working day in the 2005 first
quarter.
Page 15
Salaries, wages, and benefits. Salaries, wages, and benefits decreased $4.7
million, or 8.4%, from $55.7 million for the first quarter of 2004 to $51.0
million for the first quarter of 2005. The decrease in salaries, wages, and
benefits resulted primarily from a decrease in headcount of approximately 13%
offset, in part, by an increase in workers compensation expense due mainly to a
single large claim ($1.0 million - the maximum deductible was expensed).Despite
this accident, the number of injuries reported for 200,000 hours worked in the
first quarter of 2005, was 27% lower than the average for 2004.) that occurred
in January 2005, and an increase in miles-based compensation for linehaul
drivers due to increases in length of haul. As a percentage of operating
revenues, salaries, wages, and benefits decreased from 57.4% for the 2004
quarter to 57.1% for the 2005 quarter.
Purchased transportation. Purchased transportation decreased $1.3 million, or
9.6%, from $13.6 million for the first quarter of 2004 to $12.3 million for the
first quarter of 2005. The decrease in purchased transportation expenses
resulted primarily from a decreased usage of third party purchased
transportation due to a reduction in total tonnage shipped, an improvement
in lane balance and a reduction in total line miles of 9.1%. As a percentage
of operating revenues, purchased transportation decreased from 14.0% for
the 2004 quarter to 13.8% for the 2005 quarter.
Operating and general supplies and expenses. Operating and general supplies and
expenses increased $2.1 million, or 11.2%, from $18.7 million for the first
quarter of 2004 to $20.8 million for the first quarter of 2005. The increase in
operating and general supplies and expenses resulted primarily from an increase
in fuel expense that was partially offset by increases in fuel surcharge
revenue. As a percentage of operating revenues, operating and general supplies
and expenses increased from 19.2% for the 2004 quarter to 23.2% for the 2005
quarter.
Insurance and claims. Insurance and claims increased $1.3 million, or 35.1%,
from $3.7 million for the first quarter of 2004 to $5.0 million for the first
quarter of 2005. The increase in insurance and claims expense resulted
primarily from an increase in our third party accident claims (our first
quarter 2004 expense was unusually low) partially offset by a decrease in
cargo claims expense. As a percentage of operating revenues, insurance and
claims increased from 3.9% for the 2004 quarter to 5.6% for the 2005 quarter.
Building and equipment rentals. Building and equipment rentals remained
essentially flat at $1.5 million in each of the two quarters. As a percentage
of operating revenues, building and equipment rentals increased from 1.5%
for the 2004 quarter to 1.6% for the 2005 quarter.
Depreciation and amortization. Depreciation and amortization expense increased
approximately $1.0 million, or 25.6%, from $3.9 million for the first quarter of
2004 to $4.9 million for the first quarter of 2005, mainly as a result of
additional depreciation on replacement tractors and trailers added to our fleet
in the 2004 fourth quarter. As a percentage of operating revenues, depreciation
and amortization increased from 4.0% for the 2004 quarter to 5.5% for the 2005
quarter.
Operating ratio. Our operating ratio increased from 100.0% for the first
quarter of 2004 to 106.8% for the first quarter of 2005.
Interest expense. Total interest expense increased $0.4 million, or 22.2%, from
$1.8 million for the first quarter of 2004 to $2.2 million for the first
quarter of 2005. Average debt, in the first quarter of 2005 amounted to
approximately $42.9 million compared to $26.1 million in the 2004 first
quarter. Our related party interest expense remained relatively flat in each
quarter. The amounts for related party interest are recorded as interest
expense because the associated leases are reflected as a financing arrangement
in our consolidated financial statements. As a percentage of operating
revenues, interest expense increased from 1.9% for the 2004 quarter to 2.5%
for the 2005 quarter.
Income taxes. In 2005 we maintained a tax valuation allowance, and
recorded an income tax benefit of approximately $3.2 million due
partially to a pre-tax loss of $8.3 million. This benefit was fully
reserved by increasing the valuation allowance for deferred tax
assets. The total valuation as of April 2, 2005 amounted to
approximately $8.0 million. In the 2004 first quarter, we recorded a
$0.7 million income tax benefit due partially to a pre-tax loss of
$1.8 million. Page 16
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 and
secured borrowings. During 2005 our net capital expenditure requirements
(purchases less proceeds from sales) are expected to be approximately ($3.0)
million to $3.0 million (gross capital expenditures for the remainder of
2005 are expected to range between $3.0 million to $9.0 million). Included in
this range is approximately $6.0 million for replacing revenue equipment. If
we decide to purchase the $6.0 million in replacement equipment, we expect to
obtain financing independent from our Newcredit facility.
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 million for purchases 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 410 basis-point improvement in our operating ratio
between the third quarter of 2004 (when the steps were implemented) and the
first quarter of 2005. We expect additional improvement in our operating
ratio between the first quarter of 2005 and the second 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.
In May 2005 we contracted to sell approximately 14 excess acres in
Phoenix for $1.3 million and expect to recognize a gain on the sale.
In addition, we entered into agreements in principle covering an
estimated $14.0 million to $15.0 million in sale-leaseback and
mortgage financing transactions on five terminal properties. We signed
a letter of intent concerning a sale-leaseback of a terminal and are
negotiating the definitive agreements concerning the transaction. It
is expected that the transaction will generate approximately $6.0
million in net proceeds and we will sign a ten year lease with a ten
year option with annual payments of approximately $0.6 million. We
also signed a commitment letter concerning mortgage financing on four
other terminal properties that is expected to generate approximately
$9.0 million in net proceeds. Both transactions are subject to
customary closing conditions. The transactions are expected to close
within 45 to 60 days.
Assuming the closing of these financings, or financings or other
transactions generating comparable proceeds, and the continuation of
improvements in our operating results, we expect to have borrowing
availability in excess of $15.0 million such that the minimum EBITDA
levels rerquired by the New credit facility will not apply.
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 2005. 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.
Page 17
Net cash used in operating activities was approximately $4.6 million
and $2.3 million for the three months ended April 2, 2005 and April 3,
2004, respectively. Net cash used in the 2005 period resulted mainly
from $5.4 million in payments through trade accounts payable and an
increase in accounts receivable of $2.1 million, offset by an increase
in accrued expenses. In 2004, net cash used resulted mainly from
payments on claims of $1.4 million, an increase in other assets
(mainly licenses) of $1.4 million and an increase in accounts
receivable of $0.8 million.
Net cash used in investing activities was approximately $0.6 million and $9.3
million for the three months ended April 2, 2005 and April 3, 2004 respectively
Our capital expenditures (purchases less proceeds from sales) were
approximately $0.6 million in the 2005 period and $2.3 million in the 2004
period. In 2004, we paid $7.0 million (of the total purchase price of $10.0
million) for the terminal network and rolling stock of EOFF - our Northwest
expansion. We expect our net capital expenditures for the remainder of 2005 to
be approximately $(3.0) million to $3.0 million. Included in this range is
approximately $6.0 million for replacing revenue equipment. If we decide to
purchase the $6.0 million in replacement equipment, we expect to obtain
financing independent from our Bank of America credit facility.
Net cash provided by financing activities was approximately $4.3 million for
the three months ended April 2, 2005 due mainly to borrowings from our new
credit facility of $13.5 million. During the transition from our previous
securitization facility to the current credit facility, we liquidated our
restricted cash investment of $20.8 million and used it to partially pay off
the debt under the securitization facility. In the three months ended
April 3, 2004, net cash used amounted to $3.1 million due mainly to payments
of long-term debt.
On April 30, 2002, we entered into a $40.0 million revolving accounts
receivable securitization facility (the "Securitization Facility") and a
revolving credit facility (the "Revolving Facility"). Under the Securitization
Facility, we, on a revolving basis, sold our interests in our accounts
receivable to Central Receivables, a wholly-owned, special purpose subsidiary.
We could receive up to $40.0 million of proceeds. We paid commercial
paper interest rates plus an applicable margin on the proceeds received. The
Securitization Facility included certain restrictions and financial covenants.
On July 28, 2004, SunTrust Bank and we entered into an amended and restated
revolving facility (the "Amended and Restated Revolving Facility"), to increase
borrowing capacity to $30.0 million, and to extend the maturity date to April
30, 2006. 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. The
Amended and Restated Revolving Facility was secured by certain revenue
equipment, and letters of credit that were issued were secured by cash
collateral. The facility contained, among other things, certain
financial and non-financial covenants.
On January 31, 2005, we 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 $70.0
million. 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 was the lesser of (a) $70.0
million, or (b) 85% of our eligible accounts receivable, plus 85% of the net
orderly liquidation value of our eligible rolling stock owned as of January 31,
2005, plus 85% of the cost of eligible rolling stock acquired by Borrower after
January 31, 2005. Letters of Credit under the New Credit Facility are subject
to a sub-limit of $40.0 million.
Page 18
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.
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.
Although it is a four-year credit facility, draws on the line are considered
current based on evolving interpretations of Emerging Issues Task Force 95-22
Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit
Agreements that include both a Subjective Acceleration Clause and a Lock-Box
Arrangement ("EITF 95-22"). EITF 95-22 requires revolving credit agreements
with a required lock-box arrangement that include subjective acceleration
clauses to be classified as current liabilities. The New Credit Facility
includes a lock-box agreement and also allows the lender, in its reasonable
credit judgment, to assess additional reserves against the borrowing base
calculation and take certain other discretionary actions. For example, certain
reserve requirements may result in an over advance borrowing position that
could require an accelerated repayment of the over advance portion. Since
the inception of this facility, the lender has not applied any additional
reserves to the borrowing base calculation. However, the lender, in its
reasonable credit judgment, can assess additional reserves to the borrowing
base calculation to account for changes in our business or the underlying value
of the collateral. The Company does not anticipate any changes that would
result in any material adjustments to the borrowing base calculation, but the
Company cannot be certain that additional reserves will not be assessed by the
bank to the borrowing base calculation. The Company believes the provisions in
the New Credit Facility are relatively common for credit facilities of this
type and, while the Company does not believe that this accounting requirement
accurately reflects the long-term nature of the facility, the Company
acknowledges the requirements of EITF 95-22. Accordingly, the Company has
classified borrowings under the New Credit Facility as a short-term obligation.
The line of credit established with Bank of America on January 31, 2005 had no
financial covenants until the end of May 2005. In lieu of covenants through
May 2005, a $5.0 million restriction on availability is in place. After May 2005
the $5.0 million restriction is eliminated and no financial covenants would have
existed as
long as excess available on the line remain above $15.0 million. If excess
availability had dropped below $15.0 million we were required to maintain
minimum
EBITDA levels. As of April 2, 2005, we had approximately $18.8 million in
availability under the revolving credit facility before the $5.0 million
restriction, loans drawn under the credit facility amounted to $13.5 million,
and letters of credit outstanding amounted to $20.8 million.
On May 12, 2005, we entered into a first amendment to the New Credit Facility.
Under this amendment, the maximum revolving borrowing limit was reduced from
$70.0 million to $60.0 million to more closely reflect our borrowing base of
$53.3 million (thereby reducing fees on unused amounts) with an option to
increase the borrowing limit to $70.0 million at a later date. This amendment
has no financial covenants until August 15, 2005. In lieu of covenants through
August 15, 2005, a $5.0 million restriction on availability is in place. After
August 15, 2005, the $5.0 million restriction is eliminated and no financial
covenants exist as long as excess availability on the line remains above $15.0
million. If excess availability drops below $15.0 million we are required
In 1998, we entered into an agreement with Southwest Premier Properties, L.L.C.
(Southwest Premier), an entity controlled by our principal stockholder,
for the sale and leaseback of the land, structures and improvements of some of
the our terminals. For financial accounting purposes, this transaction
has been accounted for as a financing arrangement. Consequently, the related
land, structures and improvements remain on our consolidated balance 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, we have an option to purchase all of the properties, excluding
certain surplus properties, for the then fair market value.
Page 19
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, $0.3 million 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 $22.9
million at April 2, 2005 and December 31, 2004 respectively. If we exercise the
fair value purchase option, the excess of the amount paid over the recorded
financing obligation will be reflected as additional interest expense. If the
fair value purchase option is not exercised at the end of the lease term, the
excess of the recorded financing obligation over the net book value of the
related properties will be reflected as a gain on the financing arrangement.
Off-Balance Sheet Arrangements
Certain of our terminals and revenue equipment are financed off-balance sheet
through operating leases. As of April 2, 2005, 47 of our terminals, including
seven owned by related parties, were subject to operating leases.
Terminals and revenue equipment held under operating leases are not carried on
our consolidated balance sheets, and lease payments in respect of such
terminals and revenue equipment are reflected in our consolidated statements of
operations in the line items "Building and equipment rentals related parties."
Our total rental expense related to operating leases, including rent paid
to related parties, was $1.5 million for the first quarter of 2005, compared
to $1.4 million for the first quarter of 2004. The total amount of remaining
payments under operating leases as of April 2, 2005 was $18.8 million, with
$5.0 million due in the next 12 months.
Critical Accounting Policies
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition. Operating revenue is recognized upon delivery of the
related freight, as is fuel surcharge revenue. We also generate revenues derived
from interline shipments. Most of this interline revenue was with carriers with
which we maintain transportation alliances. We do not recognize revenue
(or the associated expenses) that relates to the portion of the shipment
transported by our alliance partners.
Insurance and Claims Accruals. We record insurance and claims accruals based
upon our estimate of the ultimate total cost of claims, not covered by
insurance, for bodily injury and property damage, cargo loss and damage,
physical damage to our equipment, workers compensation, long-term disability,
and group health, and post-retirement health benefits. Our estimates are based
on our evaluation of the nature and severity of the claims and our past claims
experience. We include an estimate for incurred but not reported claims. The
estimated costs for bodily injury and property damage, cargo loss and damage,
and physical damage to our equipment are charged to insurance and claims. The
other estimated costs are charged to employee benefits expense.
While we believe that our insurance and claims accruals are adequate, such
estimates may be more or less than the amount ultimately paid when claims are
settled. The estimates are continually reviewed and any changes are
reflected in current operations.
Our self-insured retention for bodily injury and property damage, cargo loss
and damage, and physical damage to our equipment is an aggregate $1.0 million
per occurrence.
Our self-insured retention for workers compensation has been $1.0 million per
occurrence since October 28, 2002. We also self-insure for all health
claims up to $300,000 per occurrence.
Allowance for Doubtful Accounts and Revenue Adjustments. We maintain allowances
for doubtful accounts and revenue adjustments. Such allowances represent
our estimate of accounts that will not ultimately be collected and
correspondingly adjust our operating revenues to reflect the estimates of
non-collectible accounts. Estimates used in determining this allowance are
based on our historical collection experience, current trends, credit
policy, and a percentage of our accounts receivable by aging category. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances
may be required.
Page 20
Income Taxes. Significant management judgement is required in determining the
provision for income taxes and in determining whether deferred tax assets will
be realized in full or in part. Deferred tax assets and liabilities are measured
using enacted tax rates that are expected to apply to taxable income in years in
which the temporary differences are expected to be reversed. Under SFAS No. 109
and applicable interpretations, in 2004, the Company established a $4.9 million
valuation allowance for deferred tax assets. Despite the requirements for such
allowance, the Company believes that the remaining net deferred tax assets will
be realized through future taxable income.As of April 2, 2005, the valuation
allowance for deferred tax assets was approximately $8.0 million.
Inflation
Most of our expenses are affected by inflation, which generally results in
increased operating costs. In response to fluctuations in the cost of
petroleum products, particularly diesel fuel, we have implemented a fuel
surcharge in our tariffs and contractual agreements. The fuel surcharge
is designed to offset the cost of fuel above a base price and increases as fuel
prices escalate over the base. We do not expect the net effect of inflation
on our results of operations to be different from the effect on LTL carriers
generally.
Seasonality
We experience some seasonal fluctuations in freight volume. Historically, our
shipments decrease during winter months and our fuel efficiency declines,
but our operating expenses have been higher in the summer months due to
increased maintenance costs for our tractors and trailers in hotter weather as
a large percentage of our operating region is in the South and Southwest United
States. Our expansion into the Midwest and the Northwest may increase our
exposure to seasonal fluctuations in operating expenses.
Page 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to a variety of market risks, most importantly the effects of
the price and availability of diesel fuel and changes in interest rates. To
address the risk of high fuel prices, we maintain a fuel surcharge program.
Fuel surcharge programs are well established in the industry and are broadly
accepted by our customers. We believe our fuel surcharge program is effective at
mitigating the risk of high fuel prices. Accordingly, we have not engaged in
any fuel price hedging activities. Because fuel surcharges, typically, are
based on the weekly national average price of diesel fuel and our operations
are concentrated in the Southwest and West coast, we have structured our fuel
surcharge to reflect the cost in those regions where we conduct the majority of
our business. There remains some risk that this blended national average will
not fully reflect regional fuel prices. We are highly dependent on adequate
supplies of diesel fuel. If our supply were interrupted, for example as a
result of war or hostile action against the United States or in fuel producing
regions, we would be exposed to significant risks.
Our market risk is also affected by changes in interest rates. Historically,
we have used a combination of fixed rate and variable rate obligations to
manage our interest rate exposure. Fixed rate obligations expose us to the risk
that interest rates might fall. Variable rate obligations expose us to the
risk that interest rates might rise. We did not have any interest rate swaps at
April 2, 2005, although we may enter into such swaps in the future if we
deem appropriate.
Our variable rate obligation consists of our credit facility. Our credit
facility, provided there has been no default, carries a variable interest
rate based on either the prime rate or LIBOR. We currently have $13.5 million
in drawings under our New Credit Facility at April 2, 2005, a one percentage
point increase in LIBOR rates would increase our annual interest expense by
$135,000.
Page 22
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated our
disclosure controls and procedures, as defined by the Securities and Exchange
Commission (the "SEC"), as of the end of the period covered by this report.
Based upon this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective at the reasonable assurance level to ensure that information
required to be disclosed by us in reports filed with the SEC is recorded,
processed, summarized, and reported on a timely basis.
Changes in Internal Controls
In our Annual Report on Form 10-K for the year ended December 31, 2004, our
management identified three material weaknesses in our internal controls over
financial reporting related to our accounting for revenue, inventory, and a
deferred tax asset. Specifically, as of December 31, 2004: (a) our billing
process lacked controls to ensure the accuracy of entries to the billing
system and to ensure that changes to customer contracts were reflected in the
billing system accurately and timely, (b) we did not reconcile, pursuant to
our policy, physical counts of tire and spare parts inventories to our year-end
general ledger, and (c) we did not provide for an effective review of deferred
tax asset amounts for purposes of evaluating realizability.
Subsequent to December 31, 2004, we have undertaken the following measures to
remediate the material weaknesses in internal control over financial reporting
discussed above:
o Our rate auditor, who was hired in the fourth quarter of 2004, has been
trained to effectively audit a representative sample of revenue transactions
on a daily basis, in order to monitor the accuracy of billing entries being
made to our billing system. Our traffic manager to ensure additional accuracy
is auditing a sample of the rate auditors work. In addition, our pricing
personnel are comparing changes in customer contracts and tariffs to the
billing system in order to ensure such changes are being made timely
and accurately. We continue to minotor the rate audit process and asess its
effectiveness. However, because sufficient time has not passed that will
allow us to determine that this control has operated successfully over a
required number of cycles, we believe that as of April 2, 2005 this control
is not completely remediated.
o Physical inventories of tires and spare parts will be completed by us at
least semi-annually. Our accounting department has implemented a control to
reconcile physical counts of tires and spare parts to the general ledger on a
quarterly basis. We conducted a physical inventory near the end of the 2005
first quarter that resulted in no material change to our consolidated balance
sheets.
o We developed a detailed analysis of our future utilization of deferred tax
assets and liabilities to ensure the valuation allowance is properly stated.
Other than as discussed above, during the last fiscal quarter, there were no
changes in our internal controls over financial reporting that have materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial
Officer, do not expect that our disclosure controls and procedures or our
internal controls will prevent all errors or intentional fraud. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of such internal
controls are met. Further, the design of an internal control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
Notwithstanding the foregoing limitations, our management believes that our
disclosure controls and procedures provide reasonable assurances that the
objectives of our control system are met.
Page 23
PART II OTHER INFORMATION
We are involved in litigation incidental to our operations. These
lawsuits primarily involve claims for workers' compensation, personal
injury, or property damage incurred in the transportation of freight.
In June and July 2004, three stockholder class actions were filed
against us and certain of our officers and directors. The class
actions were filed in the United States District Court - Western
District of Texas and generally alleged 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 were subsequently consolidated in the United States
District Court Western District of Texas under the title In re
Central Freight Lines Securities Litigation. The Oklahoma Firefighters
Pension and Retirement System has been named lead plaintiff in the
consolidated action, and a Consolidated Amended Class Action Complaint
was filed on May 9, 2005. The Consolidated Amended Class Action
Complaint generally alleges that false and misleading statements were
made in our initial public offering registration statement and
prospectus, during the period surrounding our initial pubic offering
and up to March 17, 2005. We do not believe there is any factual or
legal basis for the allegations and we intend to vigorously defend
against the suits. We have informed our insurance carrier and have
retained outside counsel to assist in our defense. Prior to December
12, 2004, we maintained a $5.0 million directors' and officers'
insurance policy with a $350,000 deductible. On December 12, 2004, we
increased our directors' and officers' insurance coverage. We
currently maintain a $15.0 million directors' and officers' insurance
policy with a $350,000 deductible. In the 2004 third quarter, in
connection with this litigation, we recorded an expense of $350,000,
representing the full deductible amount under our current directors'
and officers' insurance policy.
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. We are not aware of any other claims that
could materially affect our consolidated financial position or results
of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Page 24
Item 6. Exhibits.
Exhibit No. Description
3.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada
corporation. Incorporated by reference to Exhibit 3.1(b) to the Company's Registration
Statement on Form S-1 No. 333-109068.
3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 No.333-109068.)
4.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada
corporation. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-Q.)
4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to
Exhibit 3.2 to this Report on Form 10-Q.)
10.25 Obligation Guaranty dated January 31, 2005, by Central Freight Lines, Inc., a Nevada
corporation, for the benefit of Bank of America, N.A., in its capacity as Agent for the benefit
of the Lenders. (Incorporated by reference to Exhibit 10.25 to the Company's Current Report
on Form 8-K filed on February 4, 2005.)
10.26* Amended and Restated Credit Agreement, dated March 24, 2005, by and among the Financial
Institutions named Therein as the Lenders, Bank of America, N.A. as the Agent, and Central
Freight Lines, Inc., a Texas corporation, as the Borrower.
31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer.
31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer.
* Filed herewith.
Page 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Quarterly Report to be signed on
its behalf by the undersigned thereunto duly authorized.
May 12, 2005
Central Freight Lines, Inc.
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Senior Vice President and Chief Financial Officer
Page 26
EXHIBIT 31.1
CERTIFICATION
I, Robert V. Fasso, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Freight
Lines, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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
andthe 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: May 12, 2005
/s/ Robert V. Fasso
Robert V. Fasso
Chief Executive Officer
Page 27
EXHIBIT 31.2
CERTIFICATION
I, Jeffrey A. Hale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Freight
Lines, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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
andthe 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: May 12, 2005
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Chief Financial Officer
Page 28
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central Freight Lines, Inc.
(the "Company") on Form 10-Q for the period ended April 2, 2005, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Robert V. Fasso, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ Robert V. Fasso
Robert V. Fasso
Chief Executive Officer
May 12, 2005
Page 29
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central Freight Lines, Inc.
(the "Company") on Form 10-Q for the period ended April 2, 2005, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
I, Jeffrey A. Hale, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ Jeffrey A. Hale
Jeffrey A. Hale
Chief Financial Officer
May 12, 2005
Page 30