10-K 1 a10k2005ver19.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________. Commission file number 000-50485 CENTRAL FREIGHT LINES, INC. (Exact name of registrant as specified in its charter) Nevada 74-2914331 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5601 West Waco Drive, Waco, TX 76710 (Address of principal executive offices) (Zip Code) (254) 772-2120 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Common stock $0.001 Par Value Nasdaq Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes X No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer X Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes X No The aggregate market value of the voting stock held by non-affiliates of the registrant was $33,164,410 as of July 1, 2005 (based upon the $2.85 per share closing price on that date as reported by Nasdaq). In making this calculation the registrant has assumed, without admitting for any purpose, that all executive officers, directors, and holders of more than 10% of a class of outstanding common stock, and no other persons, are affiliates. The number of shares of common stock outstanding at March 23, 2006 was 18,291,032. DOCUMENTS INCORPORATED BY REFERENCE Materials from the registrant's definitive proxy statement for the 2006 Annual Meeting of Stockholders have been incorporated by reference into Part III of this Form 10-K.

PART I Item 1. Business. Except for the historical information contained herein, the discussion in this annual report contains "forward-looking statements," which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation, and availability of resources. These forward-looking statements include, without limitation, statements regarding expectations as to operational improvements; statements regarding consummation of the merger transaction with North American Truck Lines, LLC; expectations as to cost savings, revenue growth, and earnings; proposed new products and services; expectations that claims, lawsuits, commitments, contingent liabilities, labor negotiations, or agreements, or other matters will not have a materially adverse effect on our consolidated financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial, and operational results and future economic performance; and statements of management's goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," and similar expressions, as well as statements in future tense, identify forward-looking statements. These statements are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management's good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Readers should review and consider the factors discussed in "Factors that May Affect Future Results" along with the various disclosures by the Company in its press releases, stockholder reports, and filings with the Securities and Exchange Commission. We do not assume, and specifically disclaim, any obligation to update any forward-looking statement contained in this annual report. References in this Annual Report to "we," "us," "our," or the "Company" or similar terms refer to Central Freight Lines, Inc. and its operating subsidiary. Overview We are a regional less-than-truckload ("LTL") trucking company that has operations in the Southwest, Midwest, and Northwest regions of the United States. We also offer inter-regional service between our operating regions and maintain alliances with other similar companies to complete transportation of shipments outside of our operating territory. None of our employees is represented by a union. Our Southwest region is the eight-state territory of California, Texas, Arizona, New Mexico, Oklahoma, Louisiana, Arkansas, and Nevada. 48 of our 63 terminals are strategically located in our Southwest region. Our Midwest region is the four-state territory of Kansas, Missouri, Illinois, and Iowa. Our Northwest region is the two-state territory of Oregon, and Washington. As an LTL carrier, we typically transport multiple shipments for multiple customers in each trailer. Our drivers pick up freight from customer locations during the day and relay critical information to our planners. Upon arrival at the origin terminal, freight is unloaded, and then re-loaded onto a linehaul inter-city trailer that is bound for the destination city. Upon arrival at the destination terminal, freight is unloaded, sorted, and delivered by local delivery trucks. We move freight on strict schedules throughout our regions to provide the next-day and second-day service required by our many time-sensitive customers. We also provide information to our customers to allow them to monitor our service standards and to track their shipments. Page 1 Our Revenue Equipment At December 31, 2005, our fleet contained 1,831 tractors and 8,066 trailers. The table below reflects, as of December 31, 2005, the average age of our tractors and trailers: Number Average Age Type of Equipment (categorized by primary use) of Units in Years Linehaul tractors.................................... 669 4.7 Pick-up and delivery tractors........................ 1,162 6.3 Trailers............................................. 8,066 14.4 Our Customers and Marketing Our customers represent a broad range of industries, with the largest concentration coming from the retail sector. In 2005, our five largest customers were Home Depot, Dell Inc., Wal-Mart Stores, Inc., Tyco International and Sears. These customers together generated approximately 13.6% of our revenue. Home Depot, our largest customer in 2005, generated approximately 4.1% of our revenue. Since our inception in 1997, no single customer has represented more than 10% of our operating revenue in any year. We believe the diversity of our customers and their industries lessens the impact of business cycles affecting any one company or industry. However, the loss of one or more of our five largest customers could significantly and adversely affect our cash flow, market share, and profits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Customers" for additional information. We target shippers that have significant and growing distribution needs in our operating regions and have freight that enhances our overall efficiency and profitability. We accomplish this by involving sales, operations, and finance personnel in evaluating and targeting potential new accounts. Our operations personnel identify areas in our regions where additional freight could help fill partially full trailers, fill trailers that return empty from scheduled trips, or complement existing pick-up and delivery schedules. Our sales personnel solicit business from these potential customers and our traffic and pricing personnel determine whether the freight would contribute to our overall profitability. We have established transportation alliances with regional LTL carriers in the Northeast and Southeast regions of the United States. In these arrangements, we exchange shipments for delivery in each other's service territory. This practice can help each carrier in several respects. First, the freight inflows from the other regions add tonnage to the delivering company's operation. This improves profitability by increasing freight density over the terminal network and linehaul operation. Second, the alliances permit regional carriers to provide out-of-territory service for their customers. This maintains customer relationships and prevents regional carriers from losing revenue to national carriers that could deliver the freight from pick-up to delivery. Third, the alliances permit multiple regional carriers to bid for national accounts and bring the advantages of non-union regional operations to national accounts. Transportation alliances generated approximately 7.5% of our revenue in 2005. Competition The LTL industry is highly competitive on the basis of both service and price. Our primary competitors are regional, inter-regional, and national LTL carriers, and, to a lesser extent, truckload carriers, railroads, airfreight companies, and overnight package companies. Our major competitors within the regional LTL industry include certain regional operating subsidiaries of CNF Inc., YRC Worldwide, Inc., and SCS Transportation, Inc. Many of our competitors are larger, operate more equipment, and have greater financial resources than we do. We believe that our terminal network and traffic density offer competitive advantages within our regions. Page 2 Employees As of December 31, 2005, we had 2,794 full-time employees and 656 part-time employees in our operations. These individuals were employed in the following categories: Number of Category Employees -------- --------- Linehaul drivers.............. 492 Pickup and delivery drivers... 1,190 Platform...................... 952 Mechanics..................... 98 Sales......................... 97 Salaried, clerical, and other. 621 --- Total....................... 3,450 ===== None of our employees is currently represented under a collective bargaining agreement. Fuel Availability and Cost We depend heavily upon the availability of diesel fuel. To address fluctuations in fuel prices, we seek to impose fuel surcharges on our accounts. Historically, we have not engaged in hedging transactions to insulate us from fluctuations in fuel prices, and our surcharge arrangements may not fully protect us from fuel price increases. Our management believes that our operations and financial results are susceptible to the same fuel price increases or fuel shortages as those of our competitors. Fuel costs, excluding fuel taxes, averaged approximately 8.4% of our revenue in 2005. Insurance We carry insurance for our primary business risks with third party insurance carriers. We currently carry $30.0 million of insurance coverage, with a self-insured retention of $1.0 million in the aggregate per occurrence, for claims resulting from cargo theft or loss, personal injury, property damage, and physical damage to our equipment. We also self-insure for workers' compensation up to $1.0 million per occurrence, and all health claims up to $300 thousand per occurrence. Regulation We operate in a highly regulated industry. The primary regulatory agencies affecting our business are the United States Department of Transportation, or DOT, and similar state and local agencies that exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety, and insurance requirements. Our company drivers and independent contractors also must comply with the safety and fitness regulations promulgated by the DOT, including those relating to drug and alcohol testing, licensing requirements, and additional restrictions imposed by homeland security requirements in January 2005. Changes in the laws and regulations governing our industry could affect the economics of the industry by requiring changes in operating practices or by influencing the demand for, and the costs of providing, services to shippers. New and more restrictive hours of service regulations for drivers became effective on January 4, 2004. After nine months of operation under the revised hours-of-service regulations, citizens' advocacy groups successfully challenged the regulations in court, alleging that they were developed without properly considering issues of driver health. Pending further action by the courts or the effectiveness of new rules addressing the issues raised by the appellate court, Congress enacted a law that extended the effectiveness of the revised hours-of-service rules until September 30, 2005. Without significant further changes, the hours of service regulations became effective on October 1, 2005. If driving hours are further restricted by new revisions to the hours-of-service rules, we could experience a reduction in driver miles that may adversely affect our business and results of operations. Our operations involve certain inherent environmental risks. As such, our operations are subject to environmental laws and regulations, including laws and regulations dealing with underground fuel storage tanks, the transportation of hazardous materials and other environmental matters. We maintain bulk fuel storage and fuel islands at several of our facilities. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. Operations conducted in industrial areas, where truck terminals are normally located, and where groundwater or other forms of environmental contamination may have occurred, potentially expose us to claims that we contributed to the environmental contamination. We have instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations. If we fail to comply with the applicable regulations, then we could be subject to substantial fines or penalties and to civil and criminal liability. Page 3 Item 1A. Risk Factors. We experienced losses from continuing operations during 2004, and 2005, and we expect to experience additional losses in 2006. We have experienced recurring negative cash flows attributable primarily to operating losses. As a result of such negative cash flows and losses, there is substantial doubt about our ability to continue as a going concern. We believe that the merger transaction with North American Truck Lines, LLC, described in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Pending Merger with North American Truck Lines, LLC," represents the best available strategic alternative to address our need for liquidity and capital resources. If the pending merger transaction with North American Truck Lines, LLC is not consummated, the value of stockholders' investments may suffer. (See further discussion under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".) We operate in a highly competitive and fragmented industry and our business will suffer if we are unable to adequately address potential downward pricing pressures and other factors that may adversely affect our operations and profitability. Numerous competitive factors could impair our ability to achieve profitability. These factors include the following: o We compete with many other transportation service providers of varying sizes, some of which have more equipment, a broader coverage network, a wider range of services, and greater capital resources than we do or have other competitive advantages. o Some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase prices or maintain significant growth in our business. o Some of our competitors offer customers a money back guarantee if certain shipments are delivered late. o Many customers reduce the number of carriers they use by selecting so-called ''core carriers'' as approved transportation service providers, and in some instances we may not be selected. o Many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress prices or result in the loss of some business to competitors. o The trend towards consolidation in the ground transportation industry may create other large carriers with greater financial resources than us and other competitive advantages relating to their size. o Advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments. Page 4 o Competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and prices. o Competitors that, in the past, have used us to deliver interline shipments for them in our regions may not continue to do so, which would reduce our revenue. Our business is subject to general economic and business factors over which we have little or no control. Our business is affected by a number of factors that may have a materially adverse effect on the results of our operations, many of which are beyond our control. These factors include: o Significant increases or rapid fluctuations in fuel prices. o Excess capacity in the trucking industry. o Decline in the resale value of used equipment. o Fluctuations in interest rates. o Rising healthcare costs. o Higher fuel taxes and license and registration fees. o Increases in insurance costs or liability claims. o Difficulty in attracting and retaining qualified drivers. We also are affected by recessionary economic cycles and downturns in customers' business cycles, particularly in market segments and industries, such as retail, where we have a significant concentration of customers. Economic conditions may adversely affect our customers and their ability to pay for our services. Customers encountering adverse economic conditions represent a greater potential for loss and we may be required to increase our allowance for doubtful accounts. A significant amount of our freight is concentrated in Texas and California. Accordingly, we also are directly impacted by economic conditions in and affecting Texas and California over which we have no control. We have significant ongoing capital requirements that could adversely affect our profitability if we are unable to generate sufficient cash from operations. The LTL industry is capital intensive. Historically, we have depended on cash from operations, borrowing from banks and finance companies, and leases to expand the size of our terminal network and maintain and expand our fleet of revenue equipment. Our 2006 budget for capital expenditures, will be approximately $7.5 million including approximately $6.0 million for replacement trailers. We expect that proceeds from the sale of two terminals (in the first quarter of 2006) and other proceeds (mainly from sales of revenue equipment) will approximate $9.0 million after paying off related terminal debt in 2006. If we are unable to generate sufficient cash from operations and obtain financing on favorable terms in the future, we may have to limit our planned replacements, enter into less favorable financing arrangements, or operate our revenue equipment for longer periods, any of which could have a materially adverse effect on our profitability. The loss of one or more of our five largest customers could significantly and adversely affect our cash flow, market share, and profits. In 2005, our largest customer, Home Depot, accounted for approximately 4.1% of our total revenue, and our five largest customers accounted for approximately 13.6% of our total revenue. Our largest customers are under no firm obligation to ship with us and the contracts are generally terminable upon 30 or 60 days' notice. In addition, we have significant exposure to the retail sector and to the economies in Texas and California. If we lose one or more of our large customers, or if there is a decline in the amount of services those customers purchase from us, our cash flow, market share, and profits could be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Customers" for additional information. Page 5 If we are unable to retain our key employees, our business, financial condition, and results of operations could be harmed. We are highly dependent upon the services of the following key employees: Robert V. Fasso, our Chief Executive Officer and President; Jeffrey A. Hale, our Senior Vice President and Chief Financial Officer; Walt Ainsworth, our Executive Vice President; and Rich Stolz our Senior Vice President of Marketing and Sales. The loss of any of their services could have a materially adverse effect on our operations and future profitability. We must continue to develop and retain a core group of managers if we are to realize our goal of restoring our growth. We cannot assure you that we will be able to do so. Our ability to compete would be substantially impaired if our employees were to unionize. None of our employees are represented under a collective bargaining agreement by a labor union. In 2001, the International Brotherhood of Teamsters filed a petition with the National Labor Relations Board seeking an election among the employees at our Dallas, Texas facility. Our employees voted not to form a union when that election was conducted in April 2002. In October 2002, after we requested an election, the Teamsters withdrew from representing our employees in Las Vegas, our only remaining facility where employees had at one time requested union representation. While we believe our current relationship with our employees is good, we cannot assure you that further unionization efforts will not occur in the future. Our non-union status is a critical factor in our ability to compete. If our employees vote to join a union and we sign a collective bargaining agreement, the results probably would be adverse for several reasons: o Some shippers have indicated that they intend to limit their use of unionized trucking companies because of the threat of strikes and other work stoppages. A loss of customers would impair our revenue base. o Restrictive work rules could hamper our efforts to improve and sustain operating efficiency, for example by inhibiting our ability to implement dynamic resource planning within our workplace. o A strike or work stoppage would hurt our profitability and could damage customer and other relationships. o An election and bargaining process would distract management's time and attention and impose significant expenses. These results, and unionization of our workforce generally, could have a materially adverse effect on our business, financial position, and results of operations. We are party to securities class action and derivative litigation which may be costly to defend and the outcome of which is uncertain. In June and July 2004, three stockholder class actions were filed against us and certain of our officers and directors. The class actions were filed in the United States District Court - Western District of Texas and generally allege that false and misleading statements were made in our initial public offering registration statement and prospectus, during the period surrounding our initial pubic offering, and up to the press release dated June 16, 2004. On August 9 and 10, 2004, two purported derivative actions were filed against us, as nominal defendant, and against certain of our officers, directors, and former directors. These actions were filed in the District Court of McLennan County, Texas and generally allege breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment on the part of certain of our present and former officers and directors in the period between December 12, 2003 and August 2004. The purported derivative actions seek declaratory, injunctive, and other relief. Page 6 Further, on January 20, 2006, a lawsuit was filed against us, and certain of our officers, directors, and former directors. This action was filed in the District Court of McLennan County, Texas. The lawsuit includes a purported derivative action on behalf of us and our stockholders against the officers, directors, and former directors, generally alleging breach of fiduciary duty, fraud, bad faith, and conspiracy. On February 1, 2006, a purported derivative action was filed against us by the same plaintiff that filed the derivative actions on August 9 and 10, 2004, as nominal defendant, and against our current directors. This action was filed in the District Court of McLennan County, Texas and generally alleges breach of fiduciary duty and conflicts of interest on the part of the directors in connection with their approval of the pending merger transaction with North American Truck Lines, LLC. The purported derivative action seeks declaratory, injunctive, and other relief preventing consummation of the pending merger transaction. This litigation, as well as any other securities class action litigation that might be initiated against us, could result in substantial costs and a diversion of management's attention and resources. We do not believe there is any factual or legal basis for the allegations against us, and we intend to vigorously defend ourselves against these lawsuits. We have informed our insurance carrier and have retained outside counsel to assist in our defense. We cannot provide any assurances as to the outcome of these litigations. Any conclusion of these litigations in a manner adverse to us could have a material adverse effect on our business, financial condition, and results of operations. In addition, the cost to us of defending the litigation, even if resolved in our favor, could be substantial. Such litigation could also divert the attention of our management and our resources in general. Uncertainties resulting from the initiation and continuation of these litigations also could harm our ability to compete in the marketplace. Ongoing insurance and claims expenses could significantly affect our operations. Our future insurance and claims expenses might exceed historical levels, which could reduce our earnings. We currently carry $30.0 million of insurance coverage, with a self-insured retention of $1.0 million per occurrence for claims resulting from cargo theft or loss, personal injury, property damage, and physical damage to our equipment. We also self-insure for workers' compensation up to $1.0 million per occurrence, and for all health claims up to $0.3 million per occurrence. Insurance carriers have raised premiums for most trucking companies. Additional increases could further increase our insurance and claims expense as current coverages expire or cause us to raise our self-insured retention. If the number or severity of claims for which we are self-insured increases, we suffer adverse development in claims compared with our reserves, or any claim exceeds the limits of our insurance coverage, our financial results could be materially and adversely affected. Our large self-insured retentions require us to make estimates of ultimate loss amounts and accrue such estimates as expenses. Changes in estimates may materially and adversely affect our financial results. In 2003, we recorded an aggregate of $3.8 million in increases to our reserves for accident, workers' compensation, and other liabilities arising in prior periods. Such accrual included $1.8 million for two accidents that occurred in 2002. This compared to an accrual of $0.5 million in additional expense in 2002, relating to claims that arose in prior periods. The large accrual in 2003 caused our financial results to suffer. We may be required to accrue such additional expenses in the future. In October 2002, we were forced to seek replacement excess insurance coverage after our insurance agent failed to produce proof of insurance on policies for which we had obtained binders as of July 15, 2002. We are not aware of any claims during the period between July and October 2002 that are expected to exceed the self-insured retention level we had at the time. For any claims arising during such period that exceed that level, we intend to pursue our legal rights against the insurance agent and its errors and omissions policy but we cannot assure you that such coverage will be available, in which case our financial results could be materially and adversely affected. Ongoing insurance requirements could constrain our borrowing capacity. Our ability to incur additional indebtedness could be adversely affected by an increase in requirements that we post letters of credit in support of our insurance policies. On January 31, 2005, we entered into a Credit Facility with Bank of America, N.A., as Agent, and certain other lenders. The face amount of letters of credit we are required to post may increase in the future. Increases in letters of credit outstanding will reduce our borrowing capacity under the Credit Facility, thereby adversely affecting our liquidity. Page 7 Difficulty in attracting qualified drivers could adversely affect our profitability and ability to grow. Periodically, the trucking industry experiences substantial difficulty in attracting and retaining qualified drivers, including independent contractors. If we are unable to attract drivers and contract with independent contractors, we could be required to adjust our compensation package, let trucks sit idle, or operate with fewer independent contractors and face difficulty meeting shipper demands, all of which could adversely affect our growth and profitability. Fluctuations in the price or availability of fuel and our ability to collect fuel surcharges may affect our costs of operation. We require large amounts of diesel fuel to operate our tractors. Diesel fuel prices fluctuate greatly due to economic, political, and other factors beyond our control. For example, diesel fuel prices, excluding Federal and State taxes, recently reached historically high levels ($2.28 average price per gallon in October 2005), with our cost averaging $1.83 per gallon for 2005, compared with $1.23 per gallon for 2004. To address fluctuations in fuel prices, we seek to impose fuel surcharges on our accounts. These arrangements will not fully protect us from fuel price increases. In addition, any shortage or interruption in the supply of fuel would negatively affect us. Accordingly, fluctuations in fuel prices, or a shortage of diesel fuel, could materially and adversely affect our results of operations. We base our fuel surcharge rates on the weekly national average price of diesel fuel. Because our operations are concentrated in the southwestern United States, there is some risk that the national average will not fully reflect regional fuel prices, particularly in California. Historically, we have not engaged in hedging transactions to protect us from fluctuations in fuel prices. We rely on transportation alliances with other LTL operators, and a breakdown of these alliances could adversely affect our revenue. In our regional LTL operations, we primarily pick up and deliver freight within our own operating regions. Freight originating outside our territory for delivery inside our territory is brought to us by several other trucking companies with which we have formed transportation alliances. In return, we deliver to them freight that originates in our territory for delivery in their territories. In 2005, transportation alliances generated approximately 7.5% of our revenue. These alliances subject us to certain risks, including: o Expanding our own operations into an alliance company's territory may cause that company to stop using our alliance. o We may not control the customer relationship on freight moving into our territory. o Our alliance companies can end their relationships with us at any time and could choose to form an alliance with one of our competitors in our territory. o The reduction or termination of our alliances could negatively impact our business and results of operations. Our former Chairman, Jerry Moyes, his family, and trusts for the benefit of his family own approximately 35.5% of our stock and have substantial control over us. Jerry Moyes and trusts for the benefit of his family beneficially own approximately 31.5% of our outstanding common stock. In addition, Mr. Moyes' brother and sister-in-law, Ronald and Krista Moyes, beneficially own approximately 4.0% of our outstanding common stock. Mr. Jerry Moyes, his family, and certain trusts for the benefit of his family are able to influence decisions requiring stockholder approval, including election of our board of directors, our management and policies, the adoption or extension of anti-takeover provisions, mergers, and other business combinations. This concentration of ownership may allow Mr. Jerry Moyes to prevent or delay a change of control of our company or an amendment to our certificate of incorporation or our bylaws. In matters requiring stockholder approval, Mr. Jerry Moyes' interests may differ from the interests of other holders of our common stock and he may take actions affecting us with which you may disagree. Page 8 We engage in transactions with other businesses controlled by our officers and directors, and the interests of our officers and directors could conflict with the interests of our other stockholders. We engage in multiple transactions with related parties. These transactions include the lease of 29 active terminals and four dormant terminals from Southwest Premier Properties, L.L.C. Southwest Premier is owned by some of our existing stockholders, including Jerry Moyes, our former Chairman of the Board, and Robert V. Fasso, our Chief Executive Officer. These related party transactions also include the lease of two active terminals from Jerry Moyes, the lease of two terminals from Swift Transportation, and freight transportation transactions with Swift Transportation Co., Inc. ("Swift") and Central Refrigerated Service, Inc. ("Central Refrigerated"), companies for which Jerry Moyes served as Chairman. As a result, our directors and executive officers may have interests that conflict with yours. Although we have adopted a policy requiring that all future transactions with affiliated parties be approved by our audit committee or another committee of disinterested directors, we cannot assure you that the policy will be successful in eliminating conflicts of interests. Our results of operations may be affected by seasonal factors and harsh weather conditions. Our operations are subject to seasonal trends common in the trucking industry, particularly as customers tend to reduce shipments after the winter holiday. Harsh weather can also adversely affect our performance by reducing demand, impeding our ability to transport freight, and increasing operating expenses. We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on our business. Our operations are regulated and licensed by various U.S. agencies. Our drivers also must comply with the safety and fitness regulations of the United States Department of Transportation, or DOT, including those relating to drug and alcohol testing and hours-of-service. Such matters as weight and equipment dimensions are also subject to U.S. regulations. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers' hours-of-service, ergonomics, or other matters affecting safety or operating methods. Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices would adversely affect our results of operations. Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties. We are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous materials, fuel storage tanks, air emissions from our vehicles and facilities, and discharge and retention of stormwater. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. We also maintain bulk fuel storage tanks and fueling islands at nineteen of our facilities. A small percentage of our freight consists of low-grade hazardous substances, such as paint, which subjects us to a wide array of regulations. If we are involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances we transport, or if we are found to be in violation of applicable laws or regulations, we could be subject to liabilities that could have a materially adverse effect on our business and operating results. If we should fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability. Page 9 Item 2. Properties Our corporate offices are located at 5601 West Waco Drive in Waco, Texas, 76702. We share a 185,000 square foot facility with our Waco, Texas terminal. The property is located on approximately 40 acres, while the terminal has 71 dock doors. We rent this facility from Southwest Premier Properties, a related party. The lease expires in February, 2013. At December 31, 2005, we conducted our LTL operations through five owned terminal locations and 58 leased terminal locations. Our ten largest terminals by number of loading doors are listed below: Total Number of Location Loading Doors -------- ------------- Dallas, Texas............. 522 Houston, Texas............ 349 Fort Worth, Texas......... 200 San Antonio, Texas........ 147 Austin, Texas............. 132 Phoenix, Arizona.......... 121 Beaumont, Texas........... 113 Fontana, California....... 110 Chicago, Illinois......... 80 Tyler, Texas.............. 76 53 others................. 1,894 ----- Total................... 3,744 ===== We lease 29 of our active terminals and four dormant terminals from related parties. See "Related Party Terminal Leases" under Item 7 in Part II of this Annual Report for additional information concerning these leases. Item 3. Legal Proceedings We are involved in certain claims and pending litigation arising from the normal conduct of business. Based on the present knowledge of the facts, we believe the resolution of the claims and pending litigation will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. In June and July 2004, three stockholder class actions were filed against us and certain of our officers and directors. The class actions were filed in the United States District Court - Western District of Texas and generally allege that false and misleading statements were made in the initial public offering registration statement and prospectus, during the period surrounding the initial public offering and up to the press release dated June 16, 2004. The class actions were subsequently consolidated in the United States District Court - Western District of Texas under the title In re: Central Freight Lines Securities Litigation. The Oklahoma Firefighters Pension and Retirement System has been named lead plaintiff in the consolidated action, and a Consolidated Amended Class Action Complaint was filed on May 9, 2005. The Consolidated Amended Class Action Complaint generally alleges that false and misleading statements were made in our initial public offering registration statement and prospectus, during the period surrounding the initial public offering and up to March 17, 2005. On July 8, 2005, we responded to the Consolidated Amended Class Action Complaint by filing a motion to dismiss. On August 23, 2005, the lead plaintiff filed its opposition to this motion to dismiss, and on September 12, 2005, we filed a response in which it again requested dismissal of the Consolidated Amended Class Action Complaint. At present, this motion is still pending and no hearing date has been set. On August 9 and 10, 2004, two purported derivative actions were filed against us, as nominal defendant, and against certain of our officers, directors, and former directors. These actions were filed in the District Court of McLennan County, Texas and generally allege breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment on the part of certain of our present and former officers and directors in the period between December 12, 2003 and August 2004. The purported derivative actions seek declaratory, injunctive, and other relief. Page 10 On February 1, 2006, a purported derivative action was filed against us by the same plaintiff that filed the actions in the preceding paragraph, as nominal defendant, and against our current directors. This action was filed in the District Court of McLennan County, Texas and generally alleges breach of fiduciary duty and conflicts of interest on the part of the directors in connection with their approval of the pending merger transaction with North American Truck Lines, LLC. The purported derivative action seeks declaratory, injunctive, and other relief preventing consummation of the pending merger transaction. On January 20, 2006, a lawsuit was filed against us, and certain of our officers, directors, and former directors. This action was filed in the District Court of McLennan County, Texas. The lawsuit includes a purported derivative action on behalf of us and our stockholders against the officers, directors, and former directors, generally alleging breach of fiduciary duty, fraud, bad faith, and conspiracy. We have informed our insurance carrier of the above litigations and have retained outside counsel to assist in our defense. Prior to December 12, 2004, we maintained a $5.0 million directors' and officers' insurance policy with a $350,000 deductible. On December 12, 2004, we increased our directors' and officers' insurance coverage. We currently maintain a $15.0 million directors' and officers' insurance policy with a $350,000 deductible. In the 2004 third quarter, in connection with these litigations, we recorded an expense of $350,000, representing the full deductible amount under our current directors' and officers' insurance policy. We do not believe there is any factual or legal basis for the allegations against us, and we intend to vigorously defend ourselves against these lawsuits. Although it is not possible at this time to predict the litigation outcome of these cases, we expect to prevail. However, an adverse litigation outcome could be material to our consolidated financial position or results of operations. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the consolidated financial statements with respect to this contingent liability except for the insurance deductible. We are subject to loss contingencies pursuant to federal, state, and local environmental regulations dealing with the transportation, storage, presence, use, disposal, and handling of hazardous materials, discharge of storm water and fuel storage tanks. Environmental liabilities, including remediation costs, are accrued when amounts are probable and can be reasonably estimated. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 2005, no matters were submitted to a vote of security holders. Page 11 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock Our common stock is traded on the Nasdaq National Market, under the symbol "CENF". The following table sets forth, for the periods indicated, the high and low bid information per share of our common stock as reported by Nasdaq. High Low ---- --- 2004 ---- First Quarter $19.32 $11.94 Second Quarter $13.23 $7.14 Third Quarter $8.20 $5.40 Fourth Quarter $7.25 $5.32 2005 ---- First Quarter $7.50 $2.95 Second Quarter $3.88 $2.35 Third Quarter $3.32 $1.69 Fourth Quarter $2.31 $1.50 As of March 23, 2006, our common stock was held by 40 stockholders of record. However, we believe that many additional holders of our common stock are unidentified because a substantial number of shares are held of record by brokers or dealers for their customers in street names. Dividend Policy Since our initial public offering, we have not paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future dividends will be determined at the discretion of our board of directors. The board may consider our financial condition and results of operations, cash flows from operations, current and anticipated capital requirements, the income tax laws then in effect, any legal or contractual requirements, and other factors our board deems relevant. Page 12 Item 6. Selected Financial Data

(1) Our financial results for the fiscal year ended December 31, 2002, included a $2.9 million reduction in depreciation expense resulting from a January 2002 change in useful lives and salvage values of trailers and pick-up and delivery tractors based on our historical experience, which might materially affect the comparability of the information presented, and a $725,000 restructuring charge representing the cost to close 21 terminals. Our financial results for the fiscal year ended December 31, 2003, included the following items that might materially affect the comparability of the information presented: (a) a $0.6 million reduction in depreciation expense (in addition to the 2002 reduction) resulting from a January 2003 additional change in useful lives and salvage values of trailers and line tractors based on our historical experience; (b) a $7.8 million gain attributable to the amendment of a benefit plan; and (c) a $3.8 million expense related to an increase in our claims accruals relating to accident, workers' compensation, and other claims in which the underlying events occurred prior to 2003. See Item 7 of this Annual Report for additional information. (2) Effective February 20, 2003, the payments for certain of the facilities we lease from a related party were increased to reflect fair market value. The lease is reflected as a financing arrangement in our consolidated financial statements. Accordingly, our interest expense-related parties includes approximately $3.3 million in annual non-cash interest expense and contributed capital in all periods prior to February 20, 2003. See Item 7 of this Annual Report for additional information. (3) In 1998, we elected to be treated as an S corporation for federal income tax purposes. An S corporation passes through essentially all taxable earnings and losses to its stockholders and does not pay federal income taxes at the corporate level. Historical income taxes consist mainly of state income taxes. On November 1, 2003, we converted into a C corporation. For comparative purposes, we have included a pro forma (provision) benefit for income taxes assuming we had been taxed as a C corporation in all periods when our S corporation election was in effect. In June 2002, we reversed approximately $1.8 million of tax reserves which were originally recorded in 1998 when we elected to be treated as an S corporation. The $1.8 million tax benefit has been excluded for purposes of presenting pro forma C corporation income taxes. Page 14 (4) Includes $0.8 million of capital expenditures in 2002 attributable to the operations of Central Refrigerated, which we divested on December 31, 2002. See Item 7 of this Annual Report for additional information. (5) Average revenue we receive for transporting 100 pounds of freight. (6) Operating expenses as a percentage of operating revenues. (7) In 2004, the IRS disallowed certain tax deductions taken by the S corporation stockholders pursuant to a contested liability trust. As a result, our tax basis was increased, resulting in a deferred tax benefit of $1.8 million. Also in 2004, we recorded a deferred tax asset valuation allowance of approximately $4.9 million. (8) In 2005, an annual impairment test of our goodwill, promulgated by GAAP, determined that the carrying value exceeded its fair value thereby requiring that we write off the remaining net book value of approximately $4.3 million. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Business Overview We are a regional LTL trucking company that has operations in the Southwest, Midwest, and Northwest regions of the United States. We also offer inter-regional service between our operating regions and maintain alliances with other similar companies to complete transportation of shipments outside of our operating territory. As an LTL carrier, we typically transport multiple shipments for multiple customers in each trailer. Our drivers pick up freight from customer locations during the day and relay critical information to our planners. Upon arrival at the origin terminal, freight is unloaded, and then re-loaded onto a linehaul inter-city trailer that is bound for the destination city. Upon arrival at the destination terminal, freight is unloaded, sorted, and delivered by local delivery trucks. The main factors that affect our results are the rates we are able to charge our customers, the volume of freight we handle, and our ability to control our costs. Revenues Our revenues vary with the revenue per hundredweight we charge to customers and the volume of freight we transport: o Revenue per hundredweight measures the rates we receive from customers and varies with the type of goods being shipped and the distance these goods are transported. Our LTL revenue per hundredweight increased approximately 1.7% from $11.63 in 2004, to $11.83 in 2005, due mainly to increases in fuel surcharge revenue. Our LTL revenue per hundredweight, without fuel surcharge revenue, declined to $10.62 in 2005 from $11.01 in 2004. o Volume depends on the number of customers we have, the amount of freight those customers ship, geographic coverage, and the general economy. Our total tonnage decreased by 6.5% from 2004 to 2005. Historically, most of our revenue has been generated from transporting LTL shipments from customers within our operating regions. In 2005, approximately 7.5% of our revenue was derived from shipments that originated or terminated in regions outside our network, where a portion of the freight movement was handled by another carrier. We refer to this as "interline freight." Most of this revenue was obtained from carriers with which we maintain transportation alliances. The revenue from interline freight in 2005 was lower compared to 2004, due in large part to a reduction in interline revenue associated with the overall reduction in business levels relating to Dell which is discussed in more detail under "Customers" below. We do not recognize the portion of revenue (or the associated expenses) that relate to the portion of shipments hauled by our alliance partners. In addition to transportation revenue, we also recognize revenue from fuel surcharges we receive from our customers when the national average diesel fuel price published by the U.S. Department of Energy exceeds prices listed in our contracts and tariffs. Page 15 Operating Expenses Our major expense categories can be summarized as follows: Salaries, wages, and benefits. This category includes compensation for our employees, health insurance, workers' compensation, 401(k) plan contributions, and other fringe benefits. These expenses will vary depending upon several factors, including our efficiency, our experience with health and workers' compensation claims, and increases in health care costs. Salaries, wages, and benefits also include the non-cash expense associated with stock options granted to several of our executives that had exercise prices that were determined to be below fair market value. This non-cash compensation expense is expected to amount to approximately $106,400 annually through June of 2007. Purchased transportation. This category primarily consists of the payments we make to third parties to handle a portion of a freight movement for us. The largest category is outsourced linehaul movements, where we contract with truckload carriers to move our freight between origin and destination terminals. Swift Transportation, a related party, has been our largest provider of outsourced linehaul service. Purchased transportation also includes outsourced pick-up and delivery service when we use alternative providers to service areas where we lack the terminal density to provide economical service. Operating and general supplies and expenses. This category includes fuel, repairs and maintenance, tires, parts, general and administrative costs, office supplies, operating taxes and licenses, communications and utilities, and other general expenses. Repairs and maintenance, fuel, tires, and parts expenses vary with the age of equipment and the amount of usage. We have a fuel surcharge program that enables us to recover a significant portion of fuel price increases. Insurance and claims. This category includes the cost of insurance premiums and the accruals we make for claims within our self-insured retention amounts, primarily for personal injury, property damage, physical damage to our equipment, and cargo claims. These expenses will vary primarily based upon the frequency and severity of our accident experience and the market for insurance. Building and equipment rentals. This category consists mainly of payments to unrelated third parties under terminal leases and payments to related parties for seven terminals leased under operating leases. Goodwill impairment. Pursuant to FASB Statement of Financial Accounting Standards No. 142 ("SFAS 142") Goodwill and Other Intangible Assets, goodwill is no longer amortized, but is tested annually, or more frequently if a triggering event occurs, for impairment using a fair value approach. We performed the impairment test required by SFAS 142 as of the end of the 2005 third quarter. As a result of this analysis, we determined that the carrying value of our goodwill exceeded fair value. Thus, we adjusted the carrying value of goodwill to fair value, resulting in the write off of all goodwill. As a result of this write off, we recognized and recorded an impairment charge of $4.3 million in the 2005 third quarter along with a $1.7 million deferred income tax benefit in our consolidated statement of operations. Depreciation and amortization. This category relates to owned assets, assets under capitalized leases, and 22 properties we lease from Southwest Premier Properties that are considered to be a financing arrangement. Customers In 2005, our five largest customers were Home Depot, Dell Inc., Wal-Mart Stores, Inc., Tyco International and Sears. These customers together generated approximately 13.6% of our revenue. Our customer contract with Dell, which accounted for approximately 3.8% of our revenue in 2005, expired in June 2005. At that time, we determined that the rates being paid by Dell were inadequate to achieve satisfactory yield, as those rates (a) had been frozen in the period between June 2000 and May 2003, (b) had been reduced by approximately 8.0% in May 2003, and (c) had been reduced by an additional 12.7% in June 2004. Following expiration of the customer contract, we proposed an approximately 30.0% rate increase in our core business with Dell, and opted out of our non-core interline business with Dell, due to unprofitable revenue splits with interline carriers. Historically, the non-core interline business that was discontinued had accounted for approximately 65.0% of revenue from Dell. Our negotiations with Dell continued into November 2005, at which time Dell requested that we take no rate increase. We were unwilling to continue serving Dell on those terms, and we declined further business with Dell in December 2005. As a result of the foregoing, we do not expect that significant revenues will be derived from Dell in the future. Page 16 Recent Results of Operations and Year-End Financial Condition In 2005, for reasons discussed below, we reported a loss from operations of approximately $31.1 million, and our operating ratio for the year was 108.4%. A summary of our recent performance in each of the four quarters of 2005 is as follows: First Quarter 2005 In the 2005 first quarter, we reported a loss from operations of $6.1 million, and a net loss of $8.3 million, on revenue of $89.3 million. Our operating ratio for the quarter was 106.8%. First quarter shipments and tonnage and revenue per hundredweight (excluding the fuel surcharge revenue) were all significantly lower compared to the 2004 first quarter. Second Quarter 2005 In the 2005 second quarter, we reported a loss from operations of $3.5 million, and a net loss of $6.1 million, on revenue of $99.5 million. Our operating ratio for the quarter was 103.5%. This second quarter loss resulted mainly from continuing reductions in shipments, tonnage, and revenue per hundredweight (excluding fuel surcharge revenue) when compared to the 2004 second quarter. There was continued sequential improvement in our operating ratio compared to the 2005 first quarter and the third and fourth quarters of 2004. Third Quarter 2005 In the 2005 third quarter, we reported a loss from operations of $12.7 million, and a net loss of $13.4 million, on revenue of $94.3 million. Our operating ratio for the quarter was 113.5%. The third quarter of 2005 loss included a write-off of goodwill of approximately $4.3 million (approximately 4.6% of revenue) pursuant to impairment testing under SFAS 142, continuing decreases in total tonnage and total shipments. The loss from operations, absent the goodwill write-off, was lower than the loss incurred in the 2004 third quarter as increases in operating and general supplies were more than offset by reductions in salaries and wages, purchased transportation and insurance claims expenses. Fourth Quarter 2005 In the 2005 fourth quarter, we reported a loss from operations of $8.8 million, and a net loss of $11.7 million, on revenue of $89.0 million. Our operating ratio for the quarter was 109.9%. LTL bills and total tons, per day, declined 6.7% and 1.4% respectively compared to the 2004 fourth quarter. Insurance and claims and purchased transportation expenses as a percentage of revenue improved from the 2004 fourth quarter, but were offset by increases in other operating and general expenses, mainly fuel and legal expenses associated with the merger. At December 31, 2005, our balance sheet reflected $0.3 million in unrestricted cash, $53.7 million in long-term debt and capital lease obligations, including current portion, and $12.2 million in short-term debt. Our stockholders' equity was $48.4 million at December 31, 2005. Page 17 Pending Merger with North American Truck Lines, LLC On January 30, 2006, we announced that we have entered into an Agreement and Plan of Merger (the "Merger Agreement"), with North American Truck Lines, LLC, a Nevada limited liability company ("NATL"), and Green Acquisition Company, a Nevada corporation ("Purchaser"), pursuant to which Purchaser will merge with and into the Company (the "Merger"), with our company continuing as the surviving corporation. Purchaser is a wholly-owned subsidiary of NATL. Both Purchaser and NATL are controlled by Mr. Jerry Moyes. Pursuant to the Merger Agreement, at the effective time of the Merger, all of our stockholders, other than Mr. Moyes and certain Moyes family trusts will receive cash in an amount equal to $2.25 per share of our common stock. Holders of options with an exercise price below $2.25 will receive the difference between the exercise price and $2.25 multiplied by the number of shares of common stock subject to that option. Holders of options with an exercise price above $2.25 will receive $0.01 multiplied by the number of shares of common stock subject to that option. The Merger is subject to a number of conditions, including approval of the Merger Agreement and Merger by holders of a majority of the outstanding shares of common stock held by our stockholders other than Mr. Moyes and certain Moyes family trusts and resolution of pending stockholder litigation. We may terminate the Merger Agreement under certain circumstances, including if our board of directors determines in good faith that it has received an unsolicited bona fide "superior proposal," as defined in the Merger Agreement, and otherwise complies with certain terms of the Merger Agreement. In connection with such termination, we must pay a fee of $1.0 million to Purchaser and reimburse Purchaser's expenses up to $500,000. Stockholders are urged to read the definitive Proxy Statement, to be delivered in connection with the 2006 Annual Meeting of Stockholders, carefully when it becomes available because it will contain important information about us, the Merger and related matters. Other Recent Developments In January 2006, we sold our terminal in Portland, Oregon to Con-Way Transportation Services. Following the sale, we may lease up to 30 freight doors from Con-Way. In February 2006, we realized net proceeds from the sale of approximately $3.3 million and reported a gain on sale of approximately $1.9 million. In January 2006, we also entered into an agreement with Old Dominion Freight Lines with respect to the sale of our dormant terminal located in Phoenix, Arizona. We expect to realize net proceeds from the sale of approximately $3.0 million. In December 2005, we wrote down the bet book value of this terminal to reflect the selling price. The amount of the write-down was approximately $0.4 million. Unusual Items Affecting 2003 Results During 2003, we recorded an aggregate of $3.8 million in increases to our insurance reserves for accident, workers' compensation, and other liabilities arising prior to 2003 ($1.8 million of which related to two accidents that occurred in 2002). This compared to an accrual of $0.5 million relating to claims that arose in prior periods that we accrued in the year ended December 31, 2002. We recorded the increased accruals despite improvements in our rate of both accident claims and workers' compensation claims during 2003. We also amended a benefit plan to reduce our future obligations. As a result of this amendment, we recorded a curtailment gain of approximately $7.8 million in 2003. In addition, in January of 2002 and 2003, we increased the useful lives and decreased the salvage values of our tractors and trailers to reflect that we are operating the tractors and trailers for longer periods than previously estimated by our past management. These changes decreased our depreciation expense by approximately $3.5 million compared with the expense we would have recorded under the prior method. In the aggregate, these items had a positive effect of approximately $7.5 million on our operating income for the year ended December 31, 2003. We do not anticipate benefits similar to these in future periods. Page 18 Our financial statements for 2003 also reflect the discontinued operations of Central Refrigerated. The operations of Central Refrigerated began on April 22, 2002, when it was formed as our subsidiary to acquire certain assets from the bankruptcy estate of Simon Transportation Services, Inc. Effective December 31, 2002, we divested Central Refrigerated and it ceased to be our subsidiary. As part of the disposition of Central Refrigerated, we agreed to pay approximately $8.3 million to that company. This payment was made on October 28, 2003, and was reflected in our financial statements as an expense in our fourth fiscal quarter in 2003. Following our payment of $8.3 million to Central Refrigerated, Jerry Moyes, the principal owner of Central Refrigerated, repaid approximately $8.6 million in principal and interest due to us under loans we made to him prior to July 2002. Taken together, our payment to Central Refrigerated and the loan repayment by Mr. Moyes had no effect on our cash position. S Corporation Status Prior to November 1, 2003, we operated as an S corporation for federal income tax purposes. An S corporation passes through essentially all taxable income and losses to its stockholders and does not pay federal income taxes at the corporate level. For comparative purposes, we have included a pro forma provision for income taxes showing what those taxes would have been had we been taxed as a C corporation in all periods our S corporation election was in effect. The 2003 provision for income taxes reflects the approximately $9.8 million non-cash charge for recognition of deferred federal income taxes to reflect our conversion from an S corporation to a C corporation on November 1, 2003. Results of Operations The table below sets forth the percentage relationship of the specified items to operating revenues for the periods indicated. Year Ended December 31, ----------------------- 2005 2004 2003 ---- ---- ---- Operating revenues..................... 100.0% 100.0% 100.0% Operating expenses: Salaries, wages, and benefits........ 56.1 57.5 52.7 Purchased transportation............. 13.7 14.7 14.5 Operating and general supplies and expenses.......................... 24.7 21.4 17.0 Insurance and claims................. 6.2 6.5 4.1 Building and equipment rentals....... 1.6 1.6 1.3 Goodwill impairment.................. 1.2 --- --- Depreciation and amortization....... 4.9 4.4 4.3 --- --- --- Total operating expenses(1)....... 108.4 106.1 93.9 -- ----- ----- ---- Operating (loss) earnings.............. (8.4) (6.1) 6.1 Interest expense....................... 2.7 2.0 2.5 --- --- --- (Loss) earnings from continuing operations before income taxes.................. (11.1) (8.1) 3.6 ----- ---- --- Income tax benefit (expense)........... 0.5 2.2 (3.0) --- --- ---- (Loss) earnings from continuing operations (10.6) (5.9) 0.6 ----- ---- --- Loss from discontinued operations...... --- --- (2.1) ---- ---- ---- Net loss .............................. (10.6)% (5.9)% (1.5)% ===== ==== ==== Pro Forma C Corporation Data: Historical earnings from continuing operations........................... ---% ---% 3.6% Pro forma provision for income taxes attributable to continuing operations(2)........................ --- --- (1.5) -- ---- ---- ---- Pro forma earnings from continuing operations(2)........................ ---% ---% 2.1% == ==== ==== ==== Page 19 __________ (1) Total operating expenses as a percentage of operating revenues, as presented in this table, is also referred to as operating ratio. (2) Provision for federal income taxes and net earnings as if we were a C corporation for tax purposes for the period. Comparison of 2005 to 2004 Operating revenues. Operating revenues decreased $14.5 million, or 3.7%, from $386.6 million for 2004 to $372.1 million for 2005. Revenue per working day decreased from $1.53 million in 2004 to $1.47 million in 2005. The decrease in revenue per working day was attributable primarily to a 5.6% decrease in LTL tonnage offset in part by an increase in LTL revenue per hundredweight from $11.63 in 2004 to $11.83 in 2005. This increase in LTL revenue per hundredweight was due mainly to an increase in fuel surcharge revenue per working day, as the cost of fuel increased in 2005 compared to 2004. LTL bills per working day decreased 10.7% from 2004 to 2005. Total tonnage decreased 124,099 tons, or 6.5%, from 1,908,621 tons in 2004 to 1,784,522 tons in 2005. Salaries, wages, and benefits. Salaries, wages, and benefits decreased $13.4 million, or 6.0%, from $222.2 million for 2004 to $208.8 million for 2005. Consistent with the overall business volume reductions, hourly wage expense decreased $7.3 million, or 6.9%, from $105.8 million in 2005 to $98.5 million in 2005. Our group health expenses decreased by $1.7 million in 2005, due in large part to an 11.1% decrease in the number of employees in the group health program, while workers' compensation expenses increased by $0.2 million. Mileage-based payments to linehaul drivers decreased by $0.5 million from 2004 to 2005. As a percentage of operating revenues, salaries, wages, and benefits decreased from 57.5% for 2004, to 56.1% for 2005. Purchased transportation. Purchased transportation declined by $5.9 million, or 10.4%, from $56.7 million for 2004 to $50.8 million for 2005, due primarily to a reduction in tonnage and an increase in shipments being handled by company drivers. Purchased transportation paid to related parties decreased by $0.1 million. As a percentage of operating revenues, purchased transportation decreased from 14.7% for 2004 to 13.7% for 2005. Operating and general supplies and expenses. Operating and general supplies and expenses increased $9.1 million, or 11.0%, from $83.0 million for 2004 to $92.1 million for 2005. The increase in operating and general supplies and expenses resulted primarily from increases in the cost of fuel. The average price per gallon of diesel fuel was 48.8% higher during 2005 as compared to 2004. Also contributing to the increase in operating and general supplies and expenses were professional fees relating to our audit of internal controls under the Sarbanes-Oxley Act, and increased provisions for doubtful and late accounts. Vehicle repair costs were lower by $3.2 million as substantial investments in newer revenue equipment acquired in 2004 led to fewer overall fleet repairs in 2005. As a percentage of operating revenues, operating and general supplies and expenses increased from 21.4% for 2004 to 24.7% for 2005. Insurance and claims. Insurance and claims decreased $2.3 million, or 9.1%, from $25.2 million for 2004 to $22.9 million for 2005. The decrease in insurance and claims expense resulted primarily from a 12.7% decrease in the number of cargo claims filed. This decrease was offset, in part, by an increase in public liability (AL/GL) expenses from 2004 to 2005. Further, we increased our coverage limits for directors' and officers' insurance in December 2004 to $15.0 million from $5.0 million and premiums increased accordingly. We recorded a $350,000 expense in the 2004 third quarter in connection with the stockholder class action complaints. This amount represented the entire deductible under our directors' and officers' insurance policy. As a percentage of operating revenues, insurance and claims decreased from 6.5% for 2004 to 6.2% for 2005. Building and equipment rentals. Building and equipment rentals remained virtually the same at $6.1 million for 2005 and 2004. Despite the closing and consolidation of some terminals in late 2005, rental expense continues at those terminals until we can terminate the leases or find sublessees. As a percentage of operating revenues, building and equipment rentals remained at 1.6% for 2005. Page 20 Goodwill impairment. In the 2005 third quarter, we determined pursuant to SFAS No. 142 that our goodwill was impaired. We therefore incurred a non-cash charge of $4.3 million to completely write off all remaining goodwill from previous acquisitions. As a percentage of operating revenues, goodwill impairment was 1.2% for 2005. Depreciation and amortization. Depreciation and amortization expense increased approximately $1.2 million, or 7.1%, from $17.0 million for 2004 to $18.2 million for 2005. This increase was primarily attributable to the addition of approximately 400 new and used tractors and 261 new trailers during the second half of 2004. As a percentage of operating revenues, depreciation and amortization increased from 4.4% for 2004 to 4.9% for 2005. Operating ratio. Our operating ratio increased from 106.1% for 2004 to 108.4% for 2005. Interest expense. Interest expense increased $2.3 million, or 29.9%, from $7.7 million for 2004 to $10.0 million for 2005. As a percentage of operating revenues, interest expense increased from 2.0% for 2004 to 2.7% for 2005. While our average debt balances increased from $59.5 million in 2004 to $69.4 million in 2005, the average interest rates charged to us increased from 2.9% in 2004 to 7.5% in 2005. Increases in interest expense from 2004 to 2005 arose as a result of a terminal financing arrangement wherein we mortgaged our Portland, Oregon and two lesser terminals in June 2005, letter of credit fee increases, the Bank of America credit facility loan origination fee (amortization of $0.9 million in 2005) and capital lease interest expense increases related to approximately $16.0 million of new equipment leased in late 2004. During the second half of 2004, we cash collateralized approximately $20.8 million in letters of credit. Interest expense on this $20.8 million borrowing was generally offset by interest income on the invested cash. The loss from continuing operations before income taxes was $41.2 million for 2005 and $31.3 million for 2004. Our income tax benefit decreased from $8.5 million for 2004 to $1.7 million for 2005. The 2004 tax benefit is net of a $4.9 million valuation allowance established against our net deferred tax assets as of December 31, 2004. In 2005 we increased our valuation allowance to $19.1 million and recorded a tax benefit of $1.7 million that was directly related to the write-off of $4.3 million of goodwill in the 2005 third quarter. Comparison of 2004 to 2003 Operating revenues. Operating revenues decreased $3.1 million, or 0.8%, from $389.7 million for 2003 to $386.6 million for 2004. Revenue per working day decreased from $1.54 million in 2003 to $1.53 million in 2004. The decrease in revenue per working day was attributable primarily to a 3.9% decrease in LTL tonnage offset in part by an increase in LTL revenue per hundredweight from $11.37 in 2003 to $11.63 in 2004. This increase in LTL revenue per hundredweight was due mainly to an increase in fuel surcharge revenue per working day, as the cost of fuel increased in 2004 compared to 2003. LTL bills per working day decreased 6.4% from 2003 to 2004. Total tonnage decreased 54,269 tons, or 2.8%, from 1,962,890 tons in 2003 to 1,908,621 tons in 2004. Salaries, wages, and benefits. Salaries, wages, and benefits increased $16.8 million, or 8.2%, from $205.4 million for 2003 to $222.2 million for 2004. A substantial portion of this increase was attributable to the $7.8 million curtailment gain recognized in 2003 that related to a reduction of our obligations under a benefit plan. Further, our group health expenses increased by $4.0 million in 2004, despite a 5.4% decrease in the number of employees, while workers' compensation expenses increased by $2.5 million. Mileage-based payments to linehaul drivers also increased by $2.9 million from 2003 to 2004, as our length of haul increased by 8.1% to 478 miles. As a percentage of operating revenues, salaries, wages, and benefits increased from 52.7% for 2003, to 57.5% for 2004. Purchased transportation. Purchased transportation remained essentially constant at approximately $56.7 million in both 2003 and 2004. However, purchased transportation paid to related parties decreased by $4.0 million, which was offset by a similar increase in non-related party purchased transportation. As a percentage of operating revenues, purchased transportation increased from 14.5% for 2003 to 14.7% for 2004. Page 21 Operating and general supplies and expenses. Operating and general supplies and expenses increased $16.8 million, or 25.4%, from $66.2 million for 2003 to $83.0 million for 2004. The increase in operating and general supplies and expenses resulted primarily from increases in the cost of fuel, offset in part by an increase in fuel surcharge revenue. The average price per gallon of diesel fuel was 21.4% higher during 2004 as compared to 2003. Also contributing to the increase in operating and general supplies and expenses were professional fees relating to the Sarbanes-Oxley Act, increased property tax expense, increased provisions for doubtful accounts, and vehicle repair costs. As a percentage of operating revenues, operating and general supplies and expenses increased from 17.0% for 2003 to 21.4% for 2004. Insurance and claims. Insurance and claims increased $9.1 million, or 56.5%, from $16.1 million for 2003 to $25.2 million for 2004. The increase in insurance and claims expense resulted primarily from an increase in the number of cargo claims, an increase in insurance premiums and the approximate $690,000 settlement, in March of 2005, for a lawsuit filed in 2003 - all of which was expensed in 2004. The increase in insurance premiums was largely attributable to the cost of additional directors' and officers' insurance coverage. As a percentage of operating revenues, insurance and claims increased from 4.1% for 2003 to 6.5% for 2004. Building and equipment rentals. Building and equipment rentals increased approximately $1.0 million, or 19.6%, from $5.1 million for 2003 to $6.1 million for 2004. The increase in building and equipment rentals resulted primarily from the addition of leased terminals in connection with our Northwest expansion and the addition of a new terminal in California. As a percentage of operating revenues, building and equipment rentals increased from 1.3% for 2003 to 1.6% for 2004. Depreciation and amortization. Depreciation and amortization expense increased approximately $0.4 million, or 2.4%, from $16.6 million for 2003 to $17.0 million for 2004. This increase was primarily attributable to equipment acquired in March 2004 in our Northwest expansion and the addition of new and used tractors and new trailers added during the year. As a percentage of operating revenues, depreciation and amortization increased from 4.3% for 2003 to 4.4% for 2004. Operating ratio. Our operating ratio increased from 93.9% for 2003 to 106.1% for 2004. Interest expense. Interest expense decreased $2.0 million, or 20.6%, from $9.7 million for 2003 to $7.7 million for 2004. As a percentage of operating revenues, interest expense decreased from 2.5% for 2003 to 2.0% for 2004. Our average debt balances decreased from $95.4 million in 2003 to $66.6 million in 2004 due in large part to our payment of approximately $50.0 million in December 2003 to reduce outstanding debt utilizing part of the net proceeds from our initial public offering. Interest expense in 2003 included $0.5 million of non-cash interest expense attributable to a $3.3 million annual increase in payments under related party terminal leases effective February 20, 2003. These payments were increased to fair value, and we recorded non-cash interest expense in all prior periods to reflect the difference between the fair value rental and the former rental amount. After February 20, 2003, the interest amounts reflect cash payments. The amounts are recorded as interest because the leases are reflected as a financing arrangement in our consolidated financial statements. Income (loss) from continuing operations before income taxes was $14.0 million for 2003 and $(31.3) million for 2004. Pro forma income from continuing operations, assuming an effective tax rate of approximately 39% in 2003, amounted to $8.4 million for 2003 compared to a net loss of $22.8 million for 2004. Our income tax benefit (expenses) changed from ($1.8) million for 2003 (excluding the $9.8 million expense for the establishment of federal deferred income taxes) to $8.5 million for 2004. Additionally, income taxes for 2003 included federal income tax expense for the last two periods of the year. Page 22 Liquidity and Capital Resources Our business has required substantial, ongoing capital investments, particularly to replace revenue equipment such as tractors and trailers. Our primary sources of liquidity have historically been cash from operations, secured borrowings, and proceeds of our initial public offering. During 2005, our sources of liquidity included the following real estate transactions: o In June, 2005, we sold approximately 14 excess acres in Phoenix, Arizona, with net proceeds of approximately $1.1 million; o On July 13, 2005, we completed a sale-leaseback transaction involving our new terminal in Phoenix, Arizona, with net proceeds of approximately $6.2 million; and o On July 13, 2005, we completed the mortgage financing of three other properties, with net proceeds of approximately $7.9 million. During 2006 our capital expenditure requirements are expected to be approximately $7.5 million. Our capital expenditure expectations include approximately $6.0 million for replacement of trailers. If we decide not to replace these trailers, our capital expenditures may approximate $1.5 million for 2006. We expect to pay for the projected capital expenditures with borrowings under our credit facilities, borrowings under capital leases and cash flows from operations. We expect that proceeds from the sale of the two terminals mentioned below and other revenue equipment will approximate $13.7 million (less the payoff of a related mortgage of $4.7 million) in 2006. In January 2006, we entered into an agreement with respect to the sale of our dormant terminal in Phoenix, Arizona, which is one of the two terminals for sale. We expect to realize net proceeds from this sale of approximately $3.0 million. Further, in January 2006, we sold our Portland, Oregon terminal, and realized net proceeds in February 2006, after paying off the related mortgage, from the sale of approximately $3.3 million. We have experienced recurring negative cash flows attributable primarily to operating losses. As a result of such negative cash flows and losses, there is substantial doubt about our ability to continue as a going concern. Our ability to fund our cash requirements in future periods will depend on our ability to improve operating results, cash flow, our ability to comply with covenants contained in our financing arrangements or successfully renegotiating these arrangements, and our ability to identify additional sources of liquidity. At December 31, 2005, we had approximately $48.4 million in stockholders' equity and $53.7 million in long-term debt, including current maturities. At the same date, we had $2.1 million available under our primary credit facility which fluctuates from time-to-time with accounts receivable, payroll, and other items. As of March 31, 2006, we had approximately $5.1 million available. We have reached an agreement in principle with Bank of America, N.A. ("Agent") to increase our borrowing capacity under our New Credit Facility through an amendment. As required by the New Credit Facility, both we and the Agent currently are in negotiations with another lender to obtain its consent to that amendment. There can be no assurance, however, that the amendment or increase will be approved. Net cash (used in) provided by operating activities was approximately $(10.0) million, $(7.4) million and $15.1 million for the years ended December 31, 2005, 2004, and 2003, respectively. The decrease in net cash provided by operating activities, $3.1 million from 2004 to 2005, resulted mainly from $1.8 million in reduced cash as a result of a larger cash loss from operations plus a decrease in trade accounts payable of $6.6 million in 2005 compared to an increase of $8.4 million in 2004. These cash reductions were partially offset by a reduction of $6.5 million in accounts receivable compared to an increase of $1.4 million in 2004. The average age of our accounts receivable was 53.8 days for the year ended December 31, 2005, 55.0 days for the year ended December 31, 2004, and 52.2 days for the year ended December 31, 2003. Net cash provided by (used in) investing activities was approximately $6.8 million, $(41.8) million, and $(5.3) million for the years ended December 31, 2005, 2004, and 2003, respectively. Capital expenditures were financed with long-term debt and cash flows from operations. Our capital expenditures were approximately $2.1 million in 2005, mainly for electronic forklift scales and service cars, $36.7 million in 2004, and $7.0 million in 2003. We also paid $9.3 million in 2004 for certain assets related to our Northwest expansion. Net cash provided by financing activities was approximately $1.4 million, $14.1 million and $20.1 million for the years ended December 31, 2005, 2004, and 2003, respectively. In 2005, we liquidated our restricted cash of $20.8 million, borrowed $9.5 million, and paid off our securitization facility of $27.3 million. In July 2004, as a condition for amending our credit facility we agreed to place $20.8 million in a restricted cash account. This fund was established through a borrowing under our securitization facility. The restricted cash fund was established to cash collateralize an equal amount of letters of credit. Other funds provided by financing activities in 2004 arose mainly from borrowings under our securitization facility. Page 23 At December 31, 2005, we had outstanding long-term obligations of approximately $53.7 million. The following chart reflects the outstanding amounts by category: Property mortgage $ 8.6 million and automobile notes Capital lease obligations.. 22.5 million ------------ Total long-term debt..... 31.1 million Related party financing.... 22.6 million --------------- Total................. $ 53.7 million =============== In 1998, we entered into an agreement with Southwest Premier Properties, L.L.C. ("Southwest Premier"), an entity controlled by our principal stockholder, for the sale and leaseback of the land, structures and improvements of some of our terminals. For financial accounting purposes, this transaction has been accounted for as a financing arrangement. Consequently, the related land, structures and improvements remain on our consolidated balance sheets. The initial lease term is for ten years with an option for an additional ten years at the then fair market rental rate. At the expiration of the original lease term, we have an option to purchase all of the properties, excluding certain surplus properties, for the then fair market value. The properties sold and leased back from Southwest Premier are accounted for as a financing arrangement. The annual lease payments, of $6.2 million in 2005 and 2004, have been recorded as interest expense. During 2005 and 2004, $0.3 million and $0.3 million, respectively, of these properties were sold and accounted for as a reduction in the financing obligation and a reduction in property. The amount outstanding under the financing agreement was $22.6 million at December 31, 2005. If we exercise the fair value purchase option, the excess of the amount paid over the recorded financing obligation will be reflected as additional interest expense. If the fair value purchase option is not exercised at the end of the lease term, the excess of the recorded financing obligation over the net book value of the related properties will be reflected as a gain on the financing arrangement. On April 30, 2002, we entered into a $40.0 million revolving accounts receivable securitization facility (the "Securitization Facility") that was set to expire on April 27, 2005. While the Securitization Facility was in place, we sold, on a revolving basis, our interests in accounts receivable to Central Receivables, a then wholly-owned, special purpose subsidiary. The assets and liabilities of Central Receivables were included in our consolidated financial statements. The Securitization Facility allowed us to receive up to $40.0 million of proceeds, subject to eligible receivables and pay a service fee recorded as interest expense, as defined in the agreement. We were required to pay commercial paper interest rates plus an applicable margin on the proceeds received. Interest was generally payable monthly. The Securitization Facility included certain restrictions and financial covenants. We were required to pay a commitment fee equal to 0.35% per annum of 102% of the facility limit minus the aggregate principal balance, as well as an administrative fee equal to 0.15% per annum of the uncommitted balance. As of December 31, 2004 there were borrowings of $27.3 million and at December 31, 2003, there were no borrowings outstanding under the Securitization Facility. In March 2004, we acquired certain assets of EOFF for approximately $10.0 million. Under the terms of the agreement, we paid approximately $7.0 million of the purchase price at closing, $1.0 million in the second quarter of 2004, $1.0 million in the third quarter of 2004 and $0.2 million in the fourth quarter of 2004 and $0.2 million in the third quarter of 2005. A favorable purchase price adjustment of $0.5 million was recorded in the 2005 fourth quarter. The remaining $0.1 million is recorded on our consolidated balance sheet as part of short-term notes payable at December 31, 2005 and was paid in the first quarter of 2006. On July 28, 2004, we entered into a $30.0 million amended and restated revolving credit facility with SunTrust Bank (the "Amended and Restated SunTrust Facility"). On November 5, 2004, we executed a first amendment to the Amended and Restated SunTrust Credit Facility. Under the first amendment to the Amended and Restated SunTrust Facility, we could receive up to an aggregate of $30.0 million of proceeds in the form of letters of credit, only. The Amended and Restated SunTrust Facility accrued interest at a variable rate equal, at our option, to either (a) the bank's prime lending rate minus an applicable margin, or (b) LIBOR plus an applicable margin. The applicable margins for both types of loans varied depending on our lease adjusted leverage ratio. Interest was payable in periods from one to three months at our option. The Amended and Restated SunTrust Facility was collateralized by certain revenue equipment, and letters of credit that were issued were collateralized by cash collateral. The facility contained, among other things, certain financial and non-financial covenants, and was set to mature on April 30, 2006. We were required to pay a commitment fee equal to 0.50% per annum on the daily unused Amended and Restated SunTrust Facility as well as a letter of credit fee equal to 0.25% per annum on the average daily amount of the letters of credit. We were also required to cash collateralize our outstanding letters of credit. Page 24 On January 31, 2005, we entered into a four-year senior secured revolving credit facility (as amended on May 12, 2005 and November 9, 2005, the "New Credit Facility") with Bank of America, N.A., as Agent, and certain other lenders from time to time party to the New Credit Facility. The New Credit Facility terminates on January 31, 2009. The New Credit Facility replaced both the Securitization Facility and the Amended and Restated SunTrust Facility. Subject to the terms of the New Credit Facility, the maximum revolving borrowing limit under the New Credit Facility is the lesser of (a) $60.0 million, or (b) 85% of our net eligible accounts receivable, plus 85% of the net orderly liquidation value of our eligible rolling stock owned as of January 31, 2005, plus 85% of the cost of eligible rolling stock acquired by us between January 31, 2005 and November 9, 2005, minus $10.0 million. Letters of Credit under the New Credit Facility are subject to a sub-limit of $40.0 million. Borrowings under the New Credit Facility bear interest at the base rate, as defined, plus an applicable margin of 0.00% to 1.00%, or LIBOR plus an applicable margin of 1.50% to 2.75%, based on the average quarterly availability under the New Credit Facility. Letters of credit under the New Credit Facility are subject to an applicable letter of credit margin of 1.25% to 2.50%, based on the average quarterly availability under the New Credit Facility. The New Credit Facility also provides for an unused line fee of 0.25% to 0.375%, based on aggregate amounts outstanding. The New Credit Facility is secured by substantially all of our assets, other than certain revenue equipment and real estate that is (or may in the future become) subject to other financing. The New Credit Facility contains a requirement that $10.0 million of availability be maintained. The New Credit Facility also contains certain restrictions and covenants relating to, among other things, minimum EBITDA levels, fixed charge coverage ratio, cash flow, capital expenditures, acquisitions and dispositions, sale-leaseback transactions, additional indebtedness, additional liens, dividends and distributions, investment transactions, and transactions with affiliates. However, if our borrowing availability is in excess of $10.0 million, financial covenants will not apply. In essence, the financial covenants are irrelevant because they are only tested if availability is below $10.0 million, and if we are below $10.0 million we would already be in violation of the New Credit Facility. At December 31, 2005, we were not in compliance with certain of these irrelevant covenants. However since the borrowing availability was in excess of $10.0 million, the financial covenants did not apply. The New Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the New Credit Facility may be accelerated, and the lenders' commitments may be terminated. Although it is a four-year credit facility, draws on the line are considered current based on interpretations of Emerging Issues Task Force 95-22 ("EITF 95-22") Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement EITF 95-22 requires revolving credit agreements with a required lock-box arrangement that include subjective acceleration clauses to be classified as current liabilities. The New Credit Facility includes a lock-box agreement and also allows the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation and take certain other discretionary actions. For example, certain reserve requirements may result in an over advance borrowing position that could require an accelerated repayment of the over advance portion. Since the inception of this facility, the lender has not applied any additional reserves to the borrowing base calculation. However, the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in our business or the underlying value of the collateral. We do not anticipate any changes that would result in any material adjustments to the borrowing base calculation, but we cannot be certain that additional reserves will not be assessed by the bank to the borrowing base calculation. We believe the provisions in the New Credit Facility are relatively common for credit facilities of this type and, while we do not believe that this accounting requirement accurately reflects the long-term nature of the facility, we acknowledge the requirements of EITF 95-22. Accordingly, we have classified borrowings under the New Credit Facility as a short-term obligation. Page 25 On July 13, 2005, we entered into a sale-leaseback arrangement involving our new terminal in Phoenix, Arizona. Net proceeds of the transaction were approximately $6.2 million. In the transaction we signed a ten-year lease for the Phoenix terminal with a ten-year option. We determined that the sale-leaseback will be treated as an operating lease for accounting purposes. A gain of $0.3 million was realized on this transaction, but has been deferred and will be recognized over the 10 year life of the lease. Rent for the first 12 months amounts to $0.6 million, and annual rent for the following nine years is subject to a 2% annual escalation factor. On July 13, 2005, we completed a mortgage financing secured by three other properties. This financing generated approximately $7.9 million in net proceeds. The mortgage financing is to be repaid by July 12, 2010 based on a 20 year amortization schedule with an annual interest rate of 9.15%. In January 2006, we sold the Portland, Oregon terminal (one of the three properties) and paid off $4.7 million of this debt. Total payments per year, after the Portland, Oregon sale, are approximately $0.4 million with a final payment of $3.0 million. Subsequent to the transactions completed on July 13, 2005 , our annual rent expense is expected to increase by approximately $0.6 million subject to a 2% escalation factor beginning in July 2006. Annual depreciation expense is expected to decline by approximately $0.3 million. Interest expense is expected to increase by approximately $0.7 million between July 2005 and June 2006 and decrease thereafter. The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2005.

We finance revenue equipment through borrowing and a portion of the indebtedness is categorized as a current liability although the revenue equipment is classified as a long-term asset. Consequently, each purchase of financed revenue equipment decreases working capital. We had a working capital (deficit) surplus of $(5.0) million at December 31, 2005, $3.0 million at December 31, 2004, and $53.5 million at December 31, 2003. Off-Balance Sheet Arrangements Certain of our terminals are financed off-balance sheet through operating leases. As of December 31, 2005, 36 of our terminals, including seven owned by related parties, were subject to operating leases. Page 26 Quarterly Results of Operations The following table presents our unaudited operating results for the eight quarters ended December 31, 2005. In our opinion, all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with our consolidated financial statements and notes, which are included elsewhere in this Annual Report. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or for future periods. Our fiscal year consists of four quarters, each with 13 weeks.

(1) During 2004, the IRS disallowed certain tax deductions taken by the S corporation stockholders pursuant to a contested liability trust. As a result of the disallowance of such deductions, the C corporation's tax basis was increased resulting in a deferred tax benefit of $1.8 million. (2) During 2004, we analyzed our deferred tax assets and liabilities and determined that, under current accounting treatment, a valuation allowance of $4.9 million was applicable to our net deferred tax assets. (3) In the 2005 third quarter, we analyzed our goodwill and determined that its carrying value exceeded its fair value. We, therefore, wrote off the remaining net book value of approximately $4.3 million. Critical Accounting Policies We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financials statements. Revenue Recognition. Operating revenue and associated expenses are recognized upon delivery of the related freight, as is fuel surcharge revenue. In 2005, approximately 7.5% of our revenue was derived from interline shipments. Most of this revenue was with carriers with which we maintain transportation alliances. We do not recognize revenue (or the associated expenses) that relates to the portion of the shipment transported by our alliance partners. Insurance and Claims Accruals. We record insurance and claims accruals based upon our estimate of the ultimate total cost of claims, not covered by insurance, for bodily injury and property damage, cargo loss and damage, physical damage to our equipment, workers' compensation, long-term disability, and group health, and post-retirement health benefits. Our estimates are based on our evaluation of the nature and severity of the claims and our past claims experience. We include an estimate for incurred but not reported claims. The estimated costs for bodily injury and property damage, cargo loss and damage, and physical damage to our equipment are charged to insurance and claims. The other estimated costs are charged to employee benefits expense. Page 27 From June 28, 2000 to June 28, 2001, our self-insured retention for bodily injury and property damage, cargo loss and damage, and physical damage to our equipment was an aggregate $0.5 million per occurrence. Effective June 28, 2001, we increased our self-insured retention to $1.0 million per occurrence, on October 28, 2003 reduced our self-insured retention to $0.8 million per occurrence and on January 1, 2004 increased our self-insured retention to $1.0 million. Our self-insured retention for workers' compensation has been $1.0 million per occurrence since October 28, 2002. We also self-insure for all health claims up to $0.3 million per occurrence. We expect our claims reserves to increase in future periods as a result of our higher self-insured retention. Allowance for Doubtful Accounts and Revenue Adjustments. We maintain allowances for doubtful accounts and revenue adjustments. Such allowances represent our estimate of accounts that will not ultimately be collected and correspondingly adjust our operating revenues to reflect the estimates of non-collectible accounts. Estimates used in determining this allowance are based on our historical collection experience, current trends, credit policy, and a percentage of our accounts receivable by aging category. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Income Taxes. The determination of the combined tax rate used to calculate our provision for income taxes for both current and deferred income taxes also requires significant judgment by management. Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, requires that the net deferred tax asset or liability be valued using enacted tax rates that we believe will be in effect when these temporary differences reverse. We use the combined tax rates in effect at the time the financial statements are prepared since no better information is available. If changes in the federal statutory rate or significant changes in the statutory state and local tax rates occur prior to or during the reversal of these items or if our filing obligations were to change materially, this could change the combined rate and, by extension, our provision for income taxes. Under SFAS No. 109 and applicable interpretations, if all or some portion of specific deferred tax assets, such as state tax credit carry-forwards or state net operating loss carry-forwards, are determined not to be realizable, a valuation allowance must be established for the amount of such deferred tax assets. In 2004, based on our results of operations and existing accounting interpretations that do not allow us to consider future expectations, only past results, we established a $4.9 million valuation allowance for deferred tax assets. This reserve was increased to $19.1 million as of December 31, 2005. Goodwill. Our business acquisitions resulted in goodwill, which was determined to be impaired in the 2005 third quarter and therefore a charge of $4.3 million was incurred to completely write off our remaining goodwill value. As of December 31, 2005, our goodwill, net of accumulated amortization, was zero. Inflation Most of our expenses are affected by inflation, which generally results in increased operating costs. In response to fluctuations in the cost of petroleum products, particularly diesel fuel, we have implemented a fuel surcharge in our tariffs and contractual agreements. The fuel surcharge is designed to offset the cost of fuel above a base price and increases as fuel prices escalate over the base. We do not expect the net effect of inflation on our results of operations to be different from the effect on LTL carriers generally. Seasonality We experience some seasonal fluctuations in freight volume. Historically, our shipments decrease during winter months and our operating expenses have been higher in the winter months due to decreased fuel efficiency and increased maintenance costs for our tractors and trailers in colder weather. Our southern operating region has lessened the seasonal impact of colder weather to some extent. Page 28 Recent Accounting Pronouncements In December 2004, the FASB issued a revision to SFAS 123, with SFAS 123(R). SFAS 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95, "Statement of Cash Flows." SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure, as included in Note 3 to the consolidated financial statements, is no longer an alternative. We are required to adopt SFAS 123(R) for the fiscal year beginning January 1, 2006, and anticipate doing so under the modified prospective method. See further discussion in Note 3 to the consolidated financial statements. We are currently evaluating the impact the adoption of SFAS 123(R) will have, including giving consideration to changes made with the private placement discussed in Note 2 to the consolidated financial statements, and because it will depend on the levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of the standard would have approximated the impact of SFAS 123 as described in our disclosure of pro forma net loss and net loss per share in Note 3 to the consolidated financial statements. In addition, in November 2005, the FASB issued final FASB Staff Position ("FSP") FAS No. 123(R)-3, ("FSP 123(R)-3") "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." FSP 123(R)-3 provides an alternative method of calculating excess tax benefits from the method defined in SFAS 123(R) for share-based payments. A one-time election to adopt the transition method of the FSP is available to those entities adopting SFAS 123(R) using either the modified retrospective or modified prospective method. We are currently evaluating (we have up to one year from the initial adoption of SFAS 123(R) to make this one-time election) the potential impact of calculating the tax benefits with this alternative method and have not determined which method we will adopt, or the expected impact on our consolidated financial statements. In June 2005, we accelerated the vesting of substantially all stock options outstanding under our stock-based employee compensation plan that had exercise prices higher than the closing price of the our stock on June 16, 2005, which was $2.49. Options to purchase approximately 624,000 shares of our common stock became exercisable immediately. The primary purpose of the accelerated vesting, which resulted in approximately $1.8 million of additional pro forma compensation expense in the three months and year ended July 2, 2005 and December 31, 2005, respectively, was to eliminate future compensation expense beginning in the 2006 first quarter and ending in 2013 that we would have otherwise recognized in our consolidated statement of operations with respect to the accelerated options upon the adoption of FASB Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R will require that compensation expense associated with stock options be recognized in the consolidated statement of operations, rather than as a footnote disclosure in our consolidated financial statements. The acceleration of the vesting of these options did not result in a charge based on accounting principles generally accepted in the United States of America. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to a variety of market risks, most importantly the effects of the price and availability of diesel fuel and changes in interest rates. To address the risk of high fuel prices, we maintain a fuel surcharge program. Fuel surcharge programs are well established in the industry and are broadly accepted by our customers. We believe our fuel surcharge program is effective at mitigating the risk of high fuel prices. Accordingly, we have not engaged in any fuel price hedging activities. Because fuel surcharges are based on the weekly national average price of diesel fuel and our operations are concentrated in the Southwest, there is some risk that the national average will not fully reflect regional fuel prices, particularly in California. We are highly dependent on adequate supplies of diesel fuel. If our supply was interrupted, for example as a result of war or hostile action against the United States or in fuel producing regions, we would be exposed to significant risks. Page 29 Our market risk is also affected by changes in interest rates. Historically, we have used a combination of fixed rate and variable rate obligations to manage our interest rate exposure. Fixed rate obligations expose us to the risk that interest rates might fall. Variable rate obligations expose us to the risk that interest rates might rise. We did not have any interest rate swaps at December 31, 2005, although we may enter into such swaps in the future if we deem appropriate. Our New Credit Facility, provided there has been no default, carries a variable interest rate based on either the prime rate or LIBOR. Assuming borrowings equal to the $2.1 million available on the credit facility at December 31, 2005, a one percentage point increase in the prime rate would increase our annual interest expense by $21,000. Item 8. Financial Statements and Supplementary Data Our audited consolidated balance sheets, statements of operations, cash flows, stockholders' equity and notes related thereto, are contained at Pages F-1 to F-27 of this report. Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure On January 31, 2006, Central Freight Lines, Inc. engaged a new auditing firm, McGladrey & Pullen LLP ("McGladrey"), as our independent registered public accounting firm to audit our financial statements. Our Audit Committee recommended and approved the change of accountants. On January 30, 2006, we dismissed KPMG LLP ("KPMG"), who had served as our independent registered public accounting firm for the two fiscal years ended December 31, 2004 and for the interim periods through October 1, 2005 and until the appointment of McGladrey. The decision to change accountants was determined by the Audit Committee to be in our best interests. During the two fiscal years ended December 31, 2004, and the subsequent interim periods preceding the change in accountants, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to KPMG's satisfaction, would have caused KPMG to make reference to the subject matter of such disagreement(s) in connection with its reports on our consolidated financial statements. KPMG's report on our financial statements for either of the last two years did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During the two fiscal years ended December 31, 2004, and the subsequent interim periods preceding the change in accountants, there have been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K), except that we disclosed in Item 9A, Controls and Procedures, of our Annual Report on Form 10-K for the year ended December 31, 2004, that in evaluating our internal controls over financial reporting, we identified deficiencies that we considered to be material weaknesses. The material weaknesses in our internal controls related to the following facts and circumstances: our policies and procedures were not sufficient to ensure that transactions processed through our billing system resulted in accurate reporting of revenue, we did not reconcile our physical inventories to the year-end general ledger, and we did not maintain policies and procedures to ensure that the valuation allowance associated with deferred taxes was in accordance with accounting principles generally accepted in the United States. Due to these material weaknesses, in preparing our consolidated financial statements as of and for the year ended December 31, 2004, we performed additional procedures relating to revenue, accounts receivable, inventory, and income taxes to ensure that the consolidated financial statements were stated fairly in all material respects in accordance with accounting principles generally accepted in the United States. We determined that the material weaknesses did not have an impact on the reported year-end financial results. During our two most recent fiscal years, and the subsequent interim periods preceding the change in accountants, McGladrey was not consulted on any matter relating to accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements. Page 30 Item 9A - Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures, as defined by the Securities and Exchange Commission (the "SEC"), as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports filed with the SEC is recorded, processed, summarized, and reported on a timely basis. Our management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Notwithstanding the foregoing limitations, our management believes that our disclosure controls and procedures provide reasonable assurances that the objectives of our control system are met. Item 9B. Other Information Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant We incorporate by reference the information contained under the headings "Proposal Three - Election of Directors," "Corporate Governance - Board of Directors," "Corporate Governance - Committees of the Board of Directors - Audit Committee," "Corporate Governance - Executive Officers of the Company," "Corporate Governance - Code of Conduct and Ethics," and "Corporate Governance - Section 16(a) Beneficial Ownership Reporting Compliance" from our definitive Proxy Statement to be delivered to our stockholders in connection with the 2006 Annual Meeting of Stockholders; provided, however, that the Report of the Audit Committee in such Proxy Statement is not incorporated by reference. Item 11. Executive Compensation We incorporate by reference the information contained under the headings "Executive Compensation" and "Corporate Governance - Director Compensation" from our definitive Proxy Statement to be delivered to our stockholders in connection with the 2006 Annual Meeting of Stockholders; provided, however, that the Compensation Committee Report on Executive Compensation that appears under the heading "Executive Compensation" in such Proxy Statement is not incorporated by reference. Page 31 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table provides certain information, as of December 31, 2005, with respect to our compensation plans and other arrangements under which shares of our Common Stock are authorized for issuance.

We incorporate by reference the information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" from our definitive Proxy Statement to be delivered to our stockholders in connection with the 2006 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions We incorporate by reference the information contained under the headings "Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" from our definitive Proxy Statement to be delivered to our stockholders in connection with the 2006 Annual Meeting of Stockholders. Item 14. Principal Accountant Fees and Services We incorporate by reference the information contained under the heading "Principal Accountant Fees and Services" from our definitive Proxy Statement to be delivered to our stockholders in connection with the 2006 Annual Meeting of Stockholders. Page 32 PART IV Item 15. Exhibits and Financial Statements Schedules (a) The following documents are filed as part of this report on Form 10-K at pages F-1 through F-27, below. 1. Consolidated Financial Statements: Central Freight Lines, Inc. and Subsidiary Report of Independent Registered Public Accounting Firm(s) Consolidated Balance Sheets as of December 31, 2005 and 2004 Consolidated Statements of Operations for the years ended December 31, 2005, 2004, and 2003 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2004, and 2003 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003 Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedules required to be filed by Item 8 and Paragraph (d) of Item 15: All schedules are omitted because they are not required, are not applicable, or the information is included in the consolidated financial statements or the notes thereto. 3. Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed at paragraph (c), below, and at the Exhibit Index appearing at the end of this report. (b) The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below: Exhibit Number Descriptions ------ ------------ 2.1 Amended and Restated Asset Purchase Agreement dated April 18, 2002, by and among Central Refrigerated Service, Inc., a Nebraska corporation, and Simon Transportation Services Inc., a Nevada corporation, and its subsidiaries, Dick Simon Trucking, Inc., a Utah corporation, and Simon Terminal, LLC, an Arizona limited liability company. (Incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 No. 333-109068.) 2.2(a) Separation Agreement dated November 30, 2002, by and among Central Freight Lines, Inc., a Texas corporation, Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry and Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc., an Arizona corporation, and Jerry Moyes individually. (Incorporated by reference to Exhibit 2.2(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 2.2(b) Amendment Number One to Separation Agreement dated December 23, 2002, by and among Central Freight Lines, Inc., a Texas corporation, Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry and Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc., an Arizona corporation, and Jerry Moyes individually. (Incorporated by reference to Exhibit 2.2(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) Page 33 2.2(c) Amendment Number Two to Separation Agreement effective as of October 28, 2003, by and among Central Freight Lines, Inc., a Texas corporation, Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry and Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc. an Arizona corporation, and Jerry Moyes individually. (Incorporated by reference to Exhibit 2.2(c) to the Company's Registration Statement on Form S-1 No. 333-109068.) 3.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.1(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) 3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 No. 333-109068.) 4.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-K.) 4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.2 to this Report on Form 10-K.) 10.1(a)+ Central Freight Lines, Inc. 401(k) Savings Plan. (Incorporated by reference to Exhibit 10.1(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.1(b)+ First Amendment to Central Freight Lines, Inc. 401(k) Savings Plan. (Incorporated by reference to Exhibit 10.1(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.2(a)+ Central Freight Lines, Inc. Incentive Stock Plan. (Incorporated by reference to Exhibit 10.2(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.2(b)+ Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.28 to the Company's Report on Form 10-Q for the quarterly period ended July 2, 2005.) 10.3+ Form of Outside Director Stock Option Agreement. (Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.4(a) First Amended and Restated Revolving Credit Loan Agreement, dated July 28, 2004, by and between Central Freight Lines, Inc., a Texas corporation, and SunTrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.4(a) to the Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.) 10.4(b) Revolving Credit Note, dated July 28, 2004, by Central Freight Lines, Inc., a Texas corporation, in favor of SunTrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.4(b) to the Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.) 10.4(c)* First Amendment to First Amended and Restated Revolving Credit Loan Agreement, dated July 28, 2004, by and between Central Freight Lines, Inc., a Texas corporation, and SunTrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.4(c) to the Company's Report on Form 10-K for the year ended December 31, 2004.) 10.5 Guaranty, dated July 28, 2004, by Central Freight Lines, Inc., a Nevada corporation, in favor of SunTrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.5 to the Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.) 10.6 Security Agreement, dated July 28, 2004, by and between Central Freight Lines, Inc., a Texas corporation and Suntrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.) Page 34 10.7(a) Loan Agreement dated April 30, 2002, by and among Central Receivables, Inc., a Nevada corporation, Three Pillars Funding Corporation, a Delaware corporation, and Suntrust Capital Markets, Inc., a Tennessee corporation, as agent. (Incorporated by reference to Exhibit 10.8(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.7(b) First Amendment to Loan Agreement dated April 29, 2003, by and among Central Receivables, Inc., a Nevada corporation, Three Pillars Funding Corporation, a Delaware corporation, and SunTrust Capital Markets, Inc., a Tennessee corporation, as agent. (Incorporated by reference to Exhibit 10.8(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.8 Receivables Purchase Agreement dated April 30, 2002, by and between Central Freight Lines, Inc., a Texas corporation, and Central Receivables, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.9 Second Amended and Restated Master Lease Agreement - Parcel Group A dated February 20, 2003 by and between Southwest Premier Properties, L.L.C., a Texas limited liability company, and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.10 Second Amended and Restated Master Lease Agreement - Parcel Group B dated February 20, 2003 by and between Southwest Premier Properties, L.L.C., a Texas limited liability company, and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.11 Amended and Restated Lease dated February 20, 2003 by and between JVM Associates and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.12 Amended and Restated Lease dated February 20, 2003 by and between Jerry and Vickie Moyes and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.13 Amended and Restated Lease dated February 20, 2003 by and between Jerry and Vickie Moyes and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.14+ Employment Agreement dated January 7, 2002, by and between Central Freight Lines, Inc., a Texas corporation, and Robert V. Fasso. (Incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.15+ Employment Offer Letter to Jeffrey A. Hale, dated June 7, 2002, by Central Freight Lines, Inc. (Incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.16(a) Indemnification Agreement, effective as of December 31, 2002, by and between Central Freight Lines, Inc., a Texas corporation, and Central Refrigerated Service, Inc., a Nebraska corporation. (Incorporated by reference to Exhibit 10.23(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.16(b) Amendment Number One to Indemnification Agreement effective as of December 31, 2002, by and between Central Freight Lines, Inc., a Texas corporation, and Central Refrigerated Service, Inc., a Nebraska corporation. (Incorporated by reference to Exhibit 10.23(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) Page 35 10.17+ Employment Offer Letter to Walt Ainsworth, dated July 15, 2004, by Central Freight Lines, Inc. (Incorporated by reference to Exhibit 10.24 to the Company's Report on Form 10-K for the year ended December 31, 2004.) 10.18(a) Amended and Restated Credit Agreement, dated March 24, 2005, by and among the Financial Institutions named Therein as the Lenders, Bank of America, N.A. as the Agent, and Central Freight Lines, Inc., a Texas corporation, as the Borrower. (Incorporated by reference to Exhibit 10.26 to the Company's Report on Form 10-Q for the quarterly period ended April 2, 2005.) 10.18(b) First Amendment to Amended and Restated Credit Agreement, dated May 12, 2005, by and among Central Freight Lines, Inc., a Texas corporation, Required Lenders under the Credit Agreement, Bank of America, N.A., in its capacity as Agent for Lenders under the Credit Agreement. (Incorporated by reference to Exhibit 10.27 to the Company's Report on Form 10-Q for the quarterly period ended April 2, 2005.) 10.18(c)* Second Amendment to Amended and Restated Credit Agreement, dated November 9, 2005, by and among Central Freight Lines, Inc., a Texas corporation, Required Lenders under the Credit Agreement, Bank of America, N.A., in its capacity as Agent for Lenders under the Credit Agreement. 10.19 Obligation Guaranty dated January 31, 2005, by Central Freight Lines, Inc., a Nevada corporation, for the benefit of Bank of America, N.A., in its capacity as Agent for the benefit of the Lenders. (Incorporated by reference to Exhibit 10.25 to the Company's Current Report on Form 8-K filed on February 4, 2005.) 10.20 Form of Director Indemnification Agreement. (Incorporated by reference to Exhibit 10.29 to the Company's Report on Form 10-Q for the quarterly period ended October 1, 2005.) 11.1 Schedule of Computation of Net Income Per Share (Incorporated by reference to Note 17, Loss Per Share, in the Notes to Consolidated Financial Statements contained in this Report on Form 10-K.) 21.1* Subsidiary of Central Freight Lines, Inc., a Nevada corporation. 23.1* Consent of McGladrey & Pullen, LLP. 23.2* Consent of KPMG LLP. 31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer. 31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer. 32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer. 32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer. * Filed herewith. + Management contract or compensatory plan or arrangement. Page 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 14, 2006 By: /s/ Robert V. Fasso Name: Robert V. Fasso Title: Chief Executive Officer and President Signature and Title Date /s/ Robert V. Fasso April 14, 2006 --------------------------------------------------- Robert V. Fasso President, Chief Executive Officer; and Director (principal executive officer) /s/ Jeffrey A. Hale April 14, 2006 --------------------------------------------------- Jeffrey A. Hale Senior Vice President and Chief Financial Officer (principal financial and accounting officer) /s/ J. C. Carruth April 14, 2006 --------------------------------------------------- J. C. Carruth Director /s/ John Breslow April 14, 2006 --------------------------------------------------- John Breslow Director /s/ Porter J. Hall April 14, 2006 --------------------------------------------------- Porter J. Hall Director Page 37 Report of Independent Registered Public Accounting Firm To the Board of Directors Central Freight Lines, Inc. Waco, Texas We have audited the consolidated balance sheet of Central Freight Lines, Inc. and subsidiary (the "Company") as of December 31, 2005, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provided a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Freight Lines, Inc. and subsidiary as of December 31, 2005, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has experienced recurring negative cash flows, primarily from operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ McGladrey & Pullen, LLP Dallas, Texas April 4, 2006 F-1 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Central Freight Lines, Inc.: We have audited the accompanying consolidated balance sheet of Central Freight Lines, Inc. and subsidiaries (the Company) as of December 31, 2004, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Freight Lines, Inc. and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. KPMG LLP Dallas, Texas March 30, 2005 F-2

F-3

F-4 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended December 31, 2005, 2004, and 2003 (Dollars in thousands, except per share data)

F-5 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 2005, 2004, and 2003 (Dollars in thousands)

F-6 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Thousands of dollars, except share and per share amounts) (1) Business of the Company (a) Basis of Presentation Central Freight Lines, Inc. is a Nevada holding company that owns Central Freight Lines, Inc., a Texas corporation, (collectively the "Company" or "Central"). Central is an inter-regional less-than-truckload ("LTL") trucking company that has operations in the Southwest, Northwest and Midwest regions of the United States of America. Central maintains alliances with other similar companies to complete transportation of shipments outside of its operating territory. (b) Initial Public Offering of Common Stock On December 12, 2003, the Company completed an initial public offering (the "Offering") of 8,500,000 shares of common stock at $15 per share, of which 5,700,000 were sold by the Company and 2,800,000 were sold by certain of the Company's stockholders. The net proceeds to the Company from the sale of 5,700,000 shares of common stock, after deduction of associated expenses, were $77,634. On November 1, 2003, the Company converted from an S corporation to a C corporation for federal income tax purposes. An undistributed S Corporation loss (accumulated deficit) of $5,031 was transferred to additional paid-in capital. (2) Liquidity and Going Concern The Company has experienced recurring negative cash flows attributable primarily to operating losses. As a result of such negative cash flows and losses, there is substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Management is aggressively pursuing all aspects of its previously announced turnaround plans which include: improving revenue yield, reducing cost structure, streamlining freight movements, improving employee efficiency, and reducing insurance and claims expense. The Company has entered into a merger agreement with North American Truck Lines, LLC. Management believes that this transaction represents the best available strategic alternative to address the Company's need for liquidity and capital resources. (See note 20) (3) Summary of Significant Accounting Policies and Practices (a) Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of Central and its subsidiary. All significant intercompany balances and transactions with the consolidated subsidiary have been eliminated. As discussed in note 4, the Company acquired and disposed of Central Refrigerated Service, Inc. ("Central Refrigerated") during 2002. Central Refrigerated has been accounted for as a discontinued operation. F-7 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) (b) Use of Estimates Management of the Company makes estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reporting of revenues and expenses during the reporting periods to prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (c) Tires in Service The Company capitalizes tires placed in service on new revenue equipment as a part of the equipment cost. Replacement tires and costs for recapping tires are expensed at the time the tires are placed in service. (d) Property and Equipment Property and equipment are recorded at cost. In the first quarter of 2003, the Company revised the estimated useful lives and salvage values of certain classes of property and equipment to more appropriately reflect how the assets are expected to be used over time. In the first quarter of 2003, the Company increased revenue equipment lives to five to 15 years from five to 12 years. If the Company had not changed the estimated useful lives of such property and equipment, additional depreciation expense of approximately $580 would have been recorded during the year ended December 31, 2003. Accordingly, the change in estimate resulted in an increase in income from continuing operations of approximately $557 for the year ended December 31, 2003. Net gains on the disposition of property and equipment were $353, $595 and $446 for the years ended December 31, 2005, 2004 and 2003, respectively. (e) Impairment of Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Other than assets held for sale, there were no impairments during 2005, 2004 or 2003. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, the Company determined that, as of October 1, 2005 there was an impairment to the carrying value of goodwill. Based on this analysis, the Company wrote off the remaining value of its goodwill - $4,324. F-8 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) (f) Revenue Recognition The Company recognizes revenue and associated expenses upon the delivery of the related freight. A portion of the Company's revenue is derived from shipments that originated or terminated in other regions, where a portion of freight movement is handled by another carrier. Most of this revenue is with carriers with which the Company maintains transportation alliances. The Company does not recognize revenue or the associated expenses that relate to the portion of the shipment transported by its alliance partners. At December 31, 2005 and 2004, there was approximately $2,050 and $4,100 of services performed not yet invoiced, but included in accounts receivable. (g) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant management judgment is required in determining the provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in years in which the temporary differences are expected to be reversed. Under SFAS No. 109 and applicable interpretations, if all or some portion of specific deferred tax assets are determined more likely than not to be realizable, a valuation allowance must be established for the amount of such deferred tax assets. In 2004, the Company established a $4,864 valuation allowance for deferred tax assets. The Company increased its valuation allowance to $19,071 as of December 31, 2005. On November 1, 2003, the Company converted from an S corporation to a C corporation for federal income tax purposes. Prior to November 1, 2003, the Company had elected S corporation status under which federal income tax attributes flow directly to the stockholders. Accordingly, the accompanying consolidated financial statements prior to November 1, 2003, do not include provisions for federal income taxes. (h) Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers and the diverse range of industries which they represent. As of December 31, 2005 and 2004, the Company had no significant concentrations of credit risk. F-9 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) (i) Stock-Based Compensation The Company has a stock-based employee compensation plan, which is described more fully in note 9. The Company accounts for that plan under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, the Company records compensation expense only if the fair value of the underlying stock exceeds the exercise price on the date of grant. The following table illustrates the effect on net loss, net loss per share, adjusted pro forma net loss and adjusted pro forma net loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, and as allowed by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB No. 123, to stock-based employee compensation and had the Company been a C corporation in 2003.

F-10 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) In 2002, the Company granted options at an exercise price that was less than fair value, resulting in approximately $1,189 of compensation to employees, which is being expensed over the vesting period of these options. Compensation expense is calculated net of options that have been forfeited. Compensation expense of $106, $192 and $237 was recognized in 2005, 2004, and 2003. (j) Claims and Insurance Accruals Claims accruals represent the estimated costs to repair and replace damaged goods resulting from cargo claims. Insurance accruals reflect the estimated cost of claims for bodily injury and property damage, workers' compensation and employee health care not covered by insurance. These liabilities for self-insurance are accrued based on claims incurred and on estimates of both unasserted and unsettled claims which are assessed based on management's evaluation of the nature of the claims and the Company's past claims experience. The portion of the accrual classified as a current liability represents management's estimate of that portion of the claims that will be settled in the next twelve months. Total claims and insurance accruals were $27,442 and $25,081 at December 31, 2005 and 2004, respectively. While management believes that amounts included in the accompanying consolidated financial statements are adequate, such estimates may be more or less than the amounts ultimately paid when the claims are settled. The estimates are continually reviewed and any changes are reflected in current operations. (k) Allowance for Doubtful Accounts and Revenue Adjustments The Company establishes an allowance for doubtful accounts and an allowance for revenue adjustments to reduce its accounts receivable balance to an amount that it estimates is collectible from its customers. The allowance for doubtful accounts is estimated by management based on factors such as aging of the receivables and historical collection experience. At December 31, 2005 and 2004, the allowance for doubtful accounts was $6,358 and $3,567, respectively. The allowance for revenue adjustments is also established by management based on factors such as historical trends in actual adjustments to revenue. Revenue will be adjusted for various reasons, such as customer disputes, billing and rating errors, and weight and inspection corrections. At December 31, 2005 and 2004, the allowance for revenue adjustments was $4,396 and $4,287, respectively. (l) Loss per Share and Pro Forma Loss per Share Pro forma loss per share has been calculated as if the Company were a C corporation for federal income tax purposes for 2003. Basic loss per share and pro forma basic loss per share are calculated using the weighted average number of shares outstanding. The weighted average shares outstanding used in the calculation of diluted loss per share and pro forma diluted loss per share include the dilutive effect of options to purchase common stock, calculated using the treasury stock method. (m) Recently Issued Accounting Standards In December 2004, the FASB issued a revision to SFAS 123, with SFAS 123(R). SFAS 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95, "Statement of Cash Flows." SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure, as included above, is no longer an alternative. The Company is required to adopt SFAS 123(R) for the fiscal year beginning January 1, 2006, and anticipates doing so under the modified prospective method. The Company is currently evaluating the impact the adoption of SFAS F-11 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) 123(R) will have, including giving consideration to changes made with the planned merger agreement discussed in note 2 above, and because it will depend on the levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of the standard would have approximated the impact of SFAS 123 as described above in our disclosure of pro forma net loss and net loss per share in this Note. In addition, in November 2005, the FASB issued final FASB Staff Position ("FSP") FAS No. 123(R)-3, ("FSP 123(R)-3") "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." FSP 123(R)-3 provides an alternative method of calculating excess tax benefits from the method defined in SFAS 123(R) for share-based payments. A one-time election to adopt the transition method of the FSP is available to those entities adopting SFAS 123(R) using either the modified retrospective or modified prospective method The Company is currently evaluating (it has up to one year from the initial adoption of SFAS 123(R) to make this one-time election)the potential impact of calculating the tax benefits with this alternative method and has not determined which method it will adopt, nor the expected impact on the consolidated financial statements. Subject to the closing of the pending merger with NATL (see note 20), the Company will cancel all remaining stock options and may record the remainder of its unamortized stock-based employee compensation expenses in the second quarter of 2006. This amount will approximate an additional expense of $584. (4) Acquisition and Discontinued Operations On April 22, 2002, the Company, through its subsidiary Central Refrigerated, acquired substantially all of the operations and assets of Simon Transportation Services Inc. DIP, and its subsidiaries, Dick Simon Trucking, Inc. DIP and Simon Terminal LLC DIP in exchange for cash and the assumption of certain liabilities. The purpose of the acquisition was to expand into the refrigerated transportation business. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by the Company's management based on information currently available and on assumptions as to future operations. The total consideration paid was approximately $600 less than the estimated fair value of the acquired assets and was recorded as a reduction to property and equipment. In connection with this acquisition, the Company borrowed approximately $3,300 and assumed certain notes payable to the Company's principal stockholder and affiliates totaling $11,400. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed in the acquisition: Assets acquired: Current assets.............................. $ 26,511 Property and equipment...................... 57,271 Other assets................................ 55 ---- Total assets acquired.................... 83,837 Less: Notes payable to stockholder and affiliate.. (11,400) Liabilities assumed......................... (69,104) Direct costs of the acquisition............. (727) ---- Cash consideration paid.................. $ 2,606 =========== F-12 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) The following unaudited pro forma consolidated results of operations for fiscal 2002 assume the Central Refrigerated acquisition was completed on January 1, 2001: 2002 ---- Net loss....... $ (30,023) Loss per share: Basic.......... (2.76) Diluted........ (2.76) Effective December 31, 2002, the Company transferred all of its outstanding shares of Central Refrigerated to the principal stockholder of the Company and one of his affiliates in exchange for the cancellation of approximately $14,700 of debt owed by the Company to them. The purchase price was based on the beginning equity of Central Refrigerated. As such, the net book value of Central Refrigerated assets exceeded the purchase price by the amount of current year earnings of Central Refrigerated. Thus, the loss on disposal of Central Refrigerated is offset by the earnings from its operations as follows: Earnings from discontinued operations.......... $ 1,256 Loss on disposal............................... (1,256) ------ Net earnings from discontinued operations...... $ - ========== Included in the earnings from discontinued operations is Central Refrigerated depreciation expense of $4,845 for 2002. On October 28, 2003, the Company amended its agreement with Central Refrigerated and agreed to accelerate payment of approximately $8,341 originally due to Central Refrigerated upon closing of the Company's initial public offering. The $8,341 payment was made on October 28, 2003, and was recorded as an additional loss on disposal of Central Refrigerated. In March 2004, the Company expanded into the Pacific Northwest through the purchase of selected terminal network and rolling stock of Eastern Oregon Fast Freight ("EOFF"), a non-union LTL carrier that operated in the states of Oregon, Washington, and Idaho. The selected assets of EOFF were purchased for approximately $10,000, with the purchase price paid from cash reserves. The assets acquired were recorded at fair market value as determined by management based on information currently available and on assumptions as to future operations. Under the terms of the agreement, the Company paid approximately $7,000 of the purchase price at closing, an additional $2,273 during 2004 and $174 during 2005. Due to a reduction in the value assigned to the assets purchased, the Company adjusted the purchase price downward by $418 during 2005. The remaining $135 is recorded on the consolidated balance sheet as part of short-term notes payable at December 31, 2005, and was paid in the first quarter of 2006. F-13 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) (5) Property and Equipment Property and equipment consist of the following at December 31, 2005 and 2004: 2005 2004 ---- ---- Revenue and service equipment...................... $ 172,894 $ 177,141 Land............................................... 13,427 14,937 Structures and improvements........................ 31,613 36,209 Furniture and office equipment..................... 8,134 9,039 ----- ----- 226,068 237,326 Less accumulated depreciation and amortization..... 114,719 102,052 ------- ------- $ 111,349 $ 135,274 =========== =========== Revenue and service equipment includes assets under capitalized leases of $39,227 and $55,346 at December 31, 2005 and 2004, respectively, and related accumulated amortization of $16,595 and $20,518 at December 31, 2005 and 2004, respectively. In 2003, the Company closed certain terminals that were being financed by a related party (see note 7(c)). These assets, which consist of land and structures, are no longer in service and were classified as assets held for sale in the amounts of $126 and $504 as of December 31, 2005 and 2004, respectively, in the accompanying consolidated balance sheets. During 2005 and 2004, $252 and $302, respectively, of these properties were sold and accounted for as a reduction of the related party financing. Also included in assets held for sale is a terminal, which is not financed by a related party, in Phoenix, Arizona. The book value of this asset totaled $3,220 and $3,616 as of December 31, 2005 and 2004, respectively. The Phoenix terminal is currently under a sales contract that is expected to close on or near the end of the first quarter of 2006. (6) Accrued Expenses Current accrued expenses consist of the following at December 31, 2005 and 2004: 2005 2004 ---- ---- Employee related compensation and benefits..... $ 5,361 $ 5,703 Claims and insurance accruals.................. 16,260 15,435 Other accrued expenses......................... 4,134 1,912 ----- ----- $ 25,755 $ 23,050 ========== ========== (7) Debt and Related Party Financing (a) Long-Term Debt Long-term debt consists of the following at December 31, 2005, and 2004: 2005 2004 ---- ---- Real estate mortgage notes $ 8,583 $ - Capital lease obligations (see note 13).. 22,543 32,842 ------ ------ 31,126 32,842 Less current portion..................... 8,809 10,958 ----- ------ $ 22,317 $ 21,884 ========== ========= F-14 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) On July 13, 2005, the Company completed a mortgage financing secured by three other properties. This financing generated approximately $7,900 in net proceeds. The mortgage financing is to be repaid by July 12, 2010 based on a 20 year amortization schedule with an annual interest rate of 9.15%. In January 2006, the Company sold the Portland, Oregon terminal (one of the three properties) and paid off $4,690 of this debt. Total payments per year, after the Portland, Oregon sale, are approximately $400 with a final payment of approximately $3,000. (b) Short-Term Notes Payable On April 30, 2002, the Company entered into a $40,000 revolving accounts receivable securitization facility (the "Securitization Facility") that was set to expire on April 27, 2005. While the Securitization Facility was in place, the Company sold, on a revolving basis, its interests in accounts receivable to Central Receivables, a then wholly-owned, special purpose subsidiary. The assets and liabilities of Central Receivables were included in the Company's consolidated financial statements. The Securitization Facility allowed the Company to receive up to $40,000 of proceeds, subject to eligible receivables and pay a service fee recorded as interest expense, as defined in the agreement. The Company was required to pay commercial paper interest rates plus an applicable margin on the proceeds received. Interest was generally payable monthly. The Securitization Facility included certain restrictions and financial covenants. The Company was required to pay a commitment fee equal to 0.35% per annum of 102% of the facility limit minus the aggregate principal balance, as well as an administrative fee equal to 0.15% per annum of the uncommitted balance. As of December 31, 2004 there were borrowings of $27,300 and at December 31, 2003, there were no borrowings outstanding under the Securitization Facility. The effective interest rate at December 31, 2004 was 2.4%. On July 28, 2004, the Company entered into a $30,000 amended and restated revolving credit facility with SunTrust Bank (the "Amended and Restated SunTrust Facility"). On November 5, 2004, the Company executed a first amendment to the Amended and Restated SunTrust Credit Facility. Under the first amendment to the Amended and Restated SunTrust Facility, the Company could receive up to an aggregate of $30,000 of proceeds in the form of letters of credit, only. The Amended and Restated SunTrust Facility accrued interest at a variable rate equal, at the Company's option, to either (a) the bank's prime lending rate minus an applicable margin, or (b) LIBOR plus an applicable margin. The applicable margins for both types of loans varied depending on the Company's lease adjusted leverage ratio. Interest was payable in periods from one to three months at the Company's option. The Amended and Restated SunTrust Facility was collateralized by certain revenue equipment, and letters of credit that were issued were collateralized by cash collateral. The facility contained, among other things, certain financial and non-financial covenants, and was set to mature on April 30, 2006. The Company was required to pay a commitment fee equal to 0.50% per annum on the daily unused Amended and Restated SunTrust Facility as well as a letter of credit fee equal to 0.25% per annum on the average daily amount of the letters of credit. The Company was also required to cash collateralize its outstanding letters of credit in the amount of $20,825 as of December 31, 2004. In March 2004, the Company acquired certain assets of EOFF for approximately $10,000 (See note 4). The remaining purchase price liability from this transaction is $135 and $808 at December 31, 2005 and 2004, respectively, which is recorded on the accompanying consolidated balance sheet as part of short-term notes payable. The Company paid this remaining liability in the first quarter of 2006. On January 31, 2005, the Company entered into a four-year senior secured revolving credit facility (as amended on May 12, 2005 and November 9, 2005, the "New Credit Facility") with Bank of America, N.A., as Agent, and certain other lenders from time to time party to the New Credit Facility. The New Credit Facility terminates on January 31, 2009. The New Credit Facility replaced both the Securitization Facility and the Amended and Restated SunTrust Facility. F-15 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) Subject to the terms of the New Credit Facility, the maximum revolving borrowing limit is the lesser of (a) $60,000, or (b) 85% of the Company's net eligible accounts receivable, plus 85% of the net orderly liquidation value of our eligible rolling stock owned as of January 31, 2005, plus 85% of the cost of eligible rolling stock acquired by the Company between January 31, 2005 and November 9, 2005, minus $10,000. Letters of Credit under the New Credit Facility are subject to a sub-limit of $40,000. Borrowings under the New Credit Facility bear interest at the base rate, as defined, plus an applicable margin of 0.00% to 1.00%, or LIBOR plus an applicable margin of 1.50% to 2.75%, based on the average quarterly availability under the New Credit Facility. The effective interest rate at December 31, 2005 was 10.0%. Letters of credit under the New Credit Facility are subject to an applicable letter of credit margin of 1.25% to 2.50%, based on the average quarterly availability under the New Credit Facility. The New Credit Facility also provides for an unused line fee of 0.25% to 0.375%, based on aggregate amounts outstanding. The New Credit Facility is secured by substantially all of the Company's assets, other than certain revenue equipment and real estate that is (or may in the future become) subject to other financing. The New Credit Facility contains a requirement that $10,000 of availability be maintained. The New Credit Facility also contains certain restrictions and covenants relating to, among other things, minimum EBITDA levels, fixed charge coverage ratio, cash flow, capital expenditures, acquisitions and dispositions, sale-leaseback transactions, additional indebtedness, additional liens, dividends and distributions, investment transactions, and transactions with affiliates. However, if the Company's borrowing availability is in excess of $10,000, financial covenants will not apply. In essence, the financial covenants are irrelevant because they are only tested if availability is below $10,000, and if the Company is below $10,000 the Company would already be in violation of the New Credit Facility. At December 31, 2005, the Company was not in compliance with certain of these irrelevant covenants. However since the borrowing availability was in excess of $10,000, the financial covenants did not apply. The New Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the New Credit Facility may be accelerated, and the lenders' commitments may be terminated. Although it is a four-year credit facility, draws on the line are considered current based on interpretations of Emerging Issues Task Force 95-22 ("EITF 95-22") Balance Sheet Classifications, Borrowings Outstanding Under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement. EITF 95-22 requires revolving credit agreements with a required lock-box arrangement that include subjective acceleration clauses to be classified as current liabilities. The New Credit Facility includes a lock-box agreement and also allows the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation and take certain other discretionary actions. For example, certain reserve requirements may result in an over advance borrowing position that could require an accelerated repayment of the over advance portion. Since the inception of this facility, the lender has not applied any additional reserves to the borrowing base calculation. However, the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in our business or the underlying value of the collateral. The Company does not anticipate any changes that would result in any material adjustments to the borrowing base calculation, but it cannot be certain that additional reserves will not be assessed by the bank to the borrowing base calculation. The Company believes the provisions in the New Credit Facility are relatively common for credit facilities of this type. (c) Related-Party Financing In 1998, the Company entered into an agreement with Southwest Premier Properties, L.L.C., an entity controlled by the Company's principal stockholder, for the sale and leaseback of the land, structures and improvements of some of the Company's terminals. For financial accounting purposes, this transaction has been accounted for as a financing arrangement. Consequently, the related land, structures and improvements remain on the Company's consolidated balance sheet. The initial lease term is for ten years with an option for an additional ten years at the then fair market rental rate. At the expiration of the original lease term, the Company has an option to purchase all of the properties, excluding certain surplus properties, for the then fair market value. F-16 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) The properties sold and leased back are accounted for as a financing arrangement. The annual lease payments of $6,177 and $6,197 in 2005 and 2004, respectively, have been recorded as interest expense. During 2005 and 2004, $252 and $302, respectively, of these properties were sold and accounted for as a reduction in the financing obligation and a reduction in property. The amount outstanding under the financing agreement was $22,600 and $22,852 at December 31, 2005 and 2004, respectively. If the Company exercises the fair value purchase option, the excess of the amount paid over the recorded financing obligation will be reflected as additional interest expense. If the fair value purchase option is not exercised at the end of the lease term, the excess of the recorded financing obligation over the net book value of the related properties will be reflected as a gain on the financing arrangement. (d) Aggregate Maturities Aggregate maturities of long-term debt, related party financing and capital lease obligations for each of the five years following December 31, 2005, and thereafter are as follows: Years ending December 31: 2006........................ $ 8,809 2007........................ 6,180 2008........................ 2,668 2009........................ 4,587 2010........................ 7,750 Thereafter.................. 23,732 ------ $ 53,726 =========== (8) Stockholders' Equity During 2003, the Company amended its Articles of Incorporation, and all Class A and Class B common stock were combined into a single class of stock. All shares existing, prior to the public offering, were canceled and re-issued with shares of the new publicly traded company. The number of authorized common shares was increased from 60,000,000 to 100,000,000. The newly issued shares have a par value of $0.001 per share. At December 31, 2005, there were 18,283,892 shares of common stock issued and outstanding. 5,700,000 newly issued shares of the Company were sold during the initial public offering in December 2003 along with 2,800,000 sold by selling stockholders. In December 2003, the authorized number of preferred shares was also increased from 5,000,000 to 10,000,000. No shares of preferred stock have been issued. (9) Stock-Based Compensation In 1997, the Company established an incentive stock plan that provides multiple alternatives to compensate eligible employees and nonemployee directors with Company common stock. Under the plan, the Company is authorized to award, in aggregate, options to purchase not more than 5,000,000 shares of its common stock. Grants to optionees of qualified stock options shall have a per share exercise price of no less than fair value of the underlying common stock on the date of grant. At December 31, 2005, there were 991,258 shares available for granting under the plan. F-17 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) The awards are issuable at the discretion of the board of directors. All option grants to date expire 10 years from the date of grant. Options granted under the plan to senior management (854,000 outstanding at December 31, 2005) generally vest 20% on the first anniversary of the date of grant and 20% on each subsequent anniversary until fully vested. On January 7, 2002, the Company granted 1,260,000 options at an exercise price of $1.35 to its newly hired CEO as part of his employment agreement. These options vest 50% at grant date and 20% per year beginning January 7, 2003 (756,000 options were exercised in the fourth quarter of 2003). Options granted under the plan to upper management (258,695 outstanding at December 31, 2005) vest 20% on the fifth anniversary of the date of grant and 20% on each subsequent anniversary until fully vested. Termination of the employee for any reason other than death, disability or certain cases of retirement causes the unvested portion of the award to be forfeited. At December 31, 2005, there were 60,000 options outstanding granted to the Company's board of directors. All of these options are fully vested. At December 31, 2005, options outstanding for all non-management employees and others totaled 253,550. These options generally vest 20% on the first anniversary of the date of grant and 20% on each subsequent anniversary until fully vested. In June 2005, the Company accelerated the vesting of substantially all stock options outstanding under the Company's stock-based employee compensation plan that had exercise prices higher than the closing price of the Company's stock on June 16, 2005, which was $2.49. Options to purchase approximately 624,000 shares of the Company's common stock became exercisable immediately. The primary purpose of the accelerated vesting was to eliminate future compensation expense, which resulted in approximately $1,841 of additional pro forma compensation expense, beginning in the 2006 first quarter and ending in 2013, that the Company would have otherwise recognized in its consolidated statement of operations with respect to the accelerated options upon the adoption of SFAS 123R. Stock option activity during the years ended December 31, 2003, 2004, and 2005 is as follows: Weighted Number of Average Shares Exercise Price ------ -------------- Balance at December 31, 2002..... 3,037,257 $ 1.96 Granted.......................... 305,000 8.22 Exercised........................ (1,064,327) 1.70 Forfeited........................ (227,767) 1.79 -------- Balance at December 31, 2003..... 2,050,163 3.05 --------- Granted.......................... 342,758 7.30 Exercised........................ (545,686) 2.25 Forfeited........................ (518,367) 4.25 -------- Balance at December 31, 2004..... 1,328,868 4.00 --------- Granted.......................... 292,500 2.46 Exercised........................ (29,228) 1.76 Forfeited........................ (165,895) 6.72 -------- Balance at December 31, 2005 1,426,245 $ 3.42 ========= F-18 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) The fair value of options granted was estimated using the Black-Scholes option pricing model with the following assumptions for 2003, 2004, and 2005 grants to employees: risk-free interest rate of 4.75%, 3.38%, and 4.12%, respectively; 0%, 6.9%, and 37.8% expected volatility, respectively; an expected life of approximately 6.5 years and a zero dividend yield. The fair values of options granted were as follows: Weighted Average ---------------- Fair Value Exercise Price of Option -------------- --------- Granted during 2003.... $ 8.22 $ 11.27 Granted during 2004.... 7.30 4.43 Granted during 2005.... 2.46 1.13 Options outstanding and exercisable are summarized as follows: December 31, 2005 ------------------------------------------------------------------------------- Weighted Average Weighted Remaining Weighted Exercise Options Average Contractual Options Average Price Outstanding Exercise Price Life Exercisable Exercise Price ----- ----------- -------------- ---- ----------- -------------- $ 1.35 679,000 $ 1.35 2.6 353,000 $ 1.35 1.78 40,000 1.78 9.8 - 1.78 2.15 - 2.70 328,045 2.47 3.5 274,634 2.51 5.77 - 5.86 45,000 5.79 7.2 45,000 5.79 6.50 42,150 6.50 5.4 25,710 6.50 7.35 - 7.80 242,050 7.43 8.6 242,050 7.43 15.00 50,000 15.00 8.0 50,000 15.00 ------ ------ ----- 1,426,245 3.42 990,394 4.18 ========= ======= At December 31, 2005, 2004, and 2003, options exercisable were 990,394, 291,469 and 559,054 respectively, and the weighted average exercise price of these options was $4.18, $2.89 and $2.39 respectively. (10) Income Taxes On November 1, 2003, the Company converted its federal income tax status from a subchapter S corporation to a C Corporation Prior to November 1, 2003, the Company had elected to be taxed as a subchapter S corporation for federal income tax purposes. Accordingly, the consolidated financial statements prior to November 1, 2003, did not include the effects of federal income taxes. The components of income tax (benefit) expense consists of the following for the years ended December 31: 2005 2004 2003 ---- ---- ---- Current - Federal.... $ - $ - $ (110) Deferred -Federal... (16,379) (12,207) 10,867 Current - state...... - 265 189 Deferred - state..... 486 (1,395) 647 Deferred - valuation allowance 14,207 4,864 - ------ ----- ----- $(1,686) $(8,473) $11,593 ======= ======= ======= F-19 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2005, and 2004, are as follows: 2005 2004 ---- ---- Deferred tax assets: Current: Accounts receivable and other current assets.... $ 4,788 $ 3,850 Accrued expenses and other current liabilities.. 5,732 5,169 ----- ----- 10,520 9,019 Noncurrent: Other assets.................................... 724 - Lease obligations............................... 16,444 23,077 Other liabilities............................... 4,255 3,762 Net operating loss carryforward................. 21,841 9,390 ------ ----- 43,264 36,229 Less valuation allowance........................ 19,071 4,864 ------ ----- Total deferred tax assets....................... 34,713 40,384 ------ ------ Deferred tax liabilities: Current: Prepaid expenses............................. (1,685) (1,360) Noncurrent: Other assets ................................. - (205) Property and equipment due to differences in depreciation and basis......................... (33,028) (40,505) ------- ------- (33,028) (40,710) ------- ------- Total deferred tax liabilities................... $(34,713) (42,070) -------- ------- Net deferred tax liability ...................... $ - $ (1,686) ======== ======== At December 31, 2005, the Company has a federal net operating loss carryforward of approximately $56,001 available to reduce future taxable income. The net operating losses generated in 2003, 2004 and 2005 were $3,313, $20,945 and $31,743, respectively, and expire in 2023, 2024 and 2025 if not utilized. Significant management judgment is required in determining the provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in years in which the temporary differences are expected to be reversed. Under SFAS No. 109 and applicable interpretations, if all or some portion of specific deferred tax assets are determined not to be realizable, a valuation allowance must be established for the amount of such deferred tax assets. In 2004, the Company established a $4,864 valuation allowance for deferred tax assets. This valuation allowance was increased to $19,071 as of December 31, 2005. F-20 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) A reconciliation of the statutory federal income tax rate with the Company's effective income tax rate from continuing operations is as follows: 2005 2004 2003 ---- ---- ---- Federal income tax at statutory rate (35%) ..... $ (14,409) $ (10,962) $ 4,910 Permanent differences and other................ 209 628 190 State income tax ............................... (1,693) (1,253) 836 Reversal of Contested Liability Trust .......... - (1,750) - Net change in valuation allowance............... 14,207 4,864 - Conversion from S to C corp. net of deferred.... - - 5,657 ----- ----- ----- Total income tax benefit........................ $ (1,686) $ (8,473)$(11,593) ========= ========= ======== During 2004, the IRS disallowed certain tax deductions taken by the S corporation stockholders pursuant to a contested liability trust. As a result of the disallowance of such deductions, the C corporation's tax basis was increased resulting in a deferred tax benefit of $1,750. (11) Employee Benefit Plans The Company maintains a defined contribution employee retirement plan, which includes a 401(k) option, under which employees are eligible to participate after they complete 90 days of service. Employees are eligible for Company matching contributions after one year of service. The Company's contributions to the plan each year are made at the discretion of the Company's board of directors. For the years ended December 31, 2005, 2004, and 2003, the Company's contributions to the plan, including matching 401(k) contributions, were $1,952, $2,113 and $2,199, respectively. The Company initiated an Employee Stock Purchase Plan ("the Plan") in August 2004 whose purpose is to allow qualified employees to acquire shares of the Company at a 10% discount to the closing market price as of the end of each calendar month. These shares are issued from authorized but unissued shares of the Company. The Plan qualifies as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code of 1986, as amended.One million total shares have been authorized under the Plan. As of December 31, 2005, approximately seventy-six thousand shares have been issued.The Plan is administered and the shares held by Computershare Trust Company, Inc. The Company also sponsors a health plan that provides postretirement medical benefits to full-time employees who meet minimum age and service requirements. The plan is 100% contributory, with retiree contributions adjusted annually to cover all projected costs. The Company does not fund any of the retiree costs. The plan has no assets, and accordingly, no reconciliation of fair value of plan assets is provided. F-21 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) (12) Fair Value of Financial Instruments At December 31, 2005 and 2004, the carrying value of the New Credit Facility and the Securitization Facility approximates fair value because amounts outstanding bear interest at current prime related and commercial paper rates, respectively. At December 31, 2005 and 2004, the fair value of the related party financing arrangement cannot be determined without incurring excessive costs due to the related party nature of the instrument. At December 31, 2005 and 2004, the carrying value of other long-term debt approximates fair value because the debts bear interest at current commercial paper rates. At December 31, 2004, the carrying value of cash equivalents approximated fair value due to the short-term nature of the investment. (13) Leases In 1998, the Company entered into agreements with its principal stockholder to lease the land and related improvements of two terminals. The leases are for 10 years, cancelable within one month's notice by either party, with a renewal option for an additional ten-year term. The annual lease payments over the initial term of the lease are $297. The leases have been accounted for as operating leases. In 1999, the Company entered into agreements to lease one terminal from Southwest Premier for 10 years with a renewal option for an additional 10 years. The annual lease payments over the initial term of the lease are $139. The lease has been accounted for as an operating lease. In 2001, the Company entered into agreements to lease two terminals from Southwest Premier for 76 and 77 months with a renewal option for an additional 10 years. The annual lease payments over the initial term of the leases are $445. These leases have been accounted for as operating leases. The Company leases various terminal and office facilities, tractors, trailers and other equipment under noncancelable operating leases. Rental expense was $6,088, $6,092 and $5,084 for the years ended December 31, 2005, 2004, and 2003, respectively. Included in these amounts are $1,809, $1,795, and $1,903 in 2005, 2004, and 2003, respectively, paid to affiliates of the Company for the rental of revenue and service equipment, terminals and office space. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and capital leases (mainly revenue equipment) at December 31, 2005 are: Capital Operating Leases Leases ------ ------ Year ending December 31: 2006................................ $ 9,290 $ 6,641 2007................................ 6,123 5,409 2008................................ 2,700 3,449 2009................................ 4,545 1,894 2010................................ 529 1,560 Thereafter 1,162 4,630 ----- ----- Total minimum lease payments..... 24,349 $ 23,583 ========== Less amount representing interest.... 1,806 ----- $ 22,543 ========= F-22 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) (14) Cash Flow Information Short-term interest-bearing instruments with maturities of three months or less at the date of purchase are considered cash equivalents. During 2005, 2004, and 2003, the Company paid cash for interest of $10,072, $7,892, and $9,852, respectively. During 2005, 2004, and 2003, the Company paid cash for income taxes of $45, $311, and $132, respectively. During 2005, 2004, and 2003, the Company leased certain equipment under capital leases in the amount of $11,231, $14,938, and $5,672, respectively. During 2005 and 2004, the Company had non-cash reduction of properties held for sale of $252 and $302, respectively, which were accounted for as a reduction of the related party financing. (15) Contingencies The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Based on the present knowledge of the facts, management believes the resolution of the claims and pending litigation will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. In June and July 2004, three stockholder class actions were filed against the Company and certain of its officers and directors. The class actions were filed in the United States District Court - Western District of Texas and generally allege that false and misleading statements were made in the initial public offering registration statement and prospectus, during the period surrounding the initial public offering and up to the press release dated June 16, 2004. The class actions were subsequently consolidated in the United States District Court - Western District of Texas under the title In re: Central Freight Lines Securities Litigation. The Oklahoma Firefighters Pension and Retirement System has been named lead plaintiff in the consolidated action, and a Consolidated Amended Class Action Complaint was filed on May 9, 2005. The Consolidated Amended Class Action Complaint generally alleges that false and misleading statements were made in the Company's initial public offering registration statement and prospectus, during the period surrounding the initial public offering and up to March 17, 2005. On July 8, 2005, the Company responded to the Consolidated Amended Class Action Complaint by filing a motion to dismiss. On August 23, 2005, the lead plaintiff filed its opposition to this motion to dismiss, and on September 12, 2005, the Company filed a response in which it again requested dismissal of the Consolidated Amended Class Action Complaint. At present, this motion is still pending and no hearing date has been set. On August 9 and 10, 2004, two purported derivative actions were filed against the Company, as nominal defendant, and against certain of the Company's officers, directors, and former directors. These actions were filed in the District Court of McLennan County, Texas and generally allege breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment on the part of certain of the Company's present and former officers and directors in the period between December 12, 2003 and August 2004. The purported derivative actions seek declaratory, injunctive, and other relief. On February 1, 2006, a purported derivative action was filed against the Company, by the same plaintiff that filed the actions in the preceding paragraph, as nominal defendant, and against its current directors. This action was filed in the District Court of McLennan County, Texas and generally alleges breach of fiduciary duty and conflicts of interest on the part of the directors in connection with their approval of the pending merger transaction with North American Truck Lines, LLC. The purported derivative action seeks declaratory, injunctive, and other relief preventing consummation of the pending merger transaction. F-23 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) On January 20, 2006, a lawsuit was filed against the Company, and certain of the Company's officers, directors, and former directors. This action was filed in the District Court of McLennan County, Texas. The lawsuit also includes a purported derivative action on behalf of the Company and its stockholders against the officers, directors, and former directors, generally alleging breach of fiduciary duty, fraud, bad faith, and conspiracy. The Company does not believe there is any factual or legal basis for the allegations against the Company, and the Company intends to vigorously defend itself against these lawsuits. The Company has informed its insurance carrier and has retained outside counsel to assist in the Company's defense. Although it is not possible at this time to predict the litigation outcome of these cases, the Company expects to prevail. However, an adverse litigation outcome could be material to the Company's consolidated financial position or results of operations. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the consolidated financial statements with respect to this contingent liability. The Company is subject to loss contingencies pursuant to federal, state, and local environmental regulations dealing with the transportation, storage, presence, use, disposal, and handling of hazardous materials, discharge of storm water and fuel storage tanks. Environmental liabilities, including remediation costs, are accrued when amounts are probable and can be reasonably estimated. (16) Related-Party Transactions During the years ended December 31, 2005, 2004, and 2003, the Company incurred approximately $14,627, $14,571, and $18,582, respectively, for transportation services provided by companies for which the Company's principal stockholder was the former Chairman of one of the companies. At December 31, 2005, and 2004, the Company had payables of $737 and $988, respectively, for these transportation services. During the years ended December 31, 2005, 2004, and 2003, the Company incurred $305, $274 and $12, respectively, to an entity owned by a stockholder of the Company for legal services. The Company also paid $525 for legal services in 2003, which are related to the initial public offering and accounted for as a reduction of proceeds. F-24 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) During the year ended December 31, 2003, the Company had tire sales of approximately $962 to an affiliate. In 2004 and 2005, the Company did not have any transactions of this nature. See also notes 4, 7, 8, and 13 for additional disclosures regarding related party transactions. (17) Loss per Share and Pro Forma Income Per Share 2005 2004 2003 --------- ---------- ---------- Net (loss) income: Net loss........................ $ (39,483) $ (22,848) $ (5,905) ========= ========= Pro forma federal tax adjustment (unaudited) 14,268 ---------- Pro forma net income from continuing operations (unaudited) 8,363 Loss from discontinued operations (8,341) ---------- Pro forma net income (unaudited) $ 22 ========== Shares: Basic shares (weighted-average shares outstanding).................. 18,230,099 17,970,595 11,162,814 Stock options.................. - - 935,124 Other.......................... - - 4,796 ----------- ---------- ---------- Diluted shares................. 18,230,099 17,970,595 12,102,734 ========== ========== ========== Net loss per share: Basic $ (2.17) (1.27) - Diluted $ (2.17) (1.27) - Pro forma basic income per share (unaudited)................... $ 0.00 Pro forma diluted income per share (unaudited).................... $ 0.00 For the year ended December 31, 2005 and 2004, the Company had 1,426,245 and 1,328,868 stock options that were anti-dilutive, respectively. There were no anti-dilutive options in 2003. As a result, the assumed shares under the treasury stock method related to anti-dilutive options have been excluded from the calculation of diluted loss per share. F-25 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) (18) Pro Forma C Corporation Data (unaudited) On November 1, 2003, the Company converted from an S corporation to a C corporation for federal income tax purposes. The unaudited pro forma C corporation data for the year ended December 31, 2003 are based on the historical consolidated statement of operations and gives effect to pro forma income taxes as if the Company was a C corporation for the year presented. (19) Valuation and Qualifying Accounts Balance at Charged to Balance at Beginning Costs and Net End of of Year Expenses Writeoffs Year ------- -------- --------- ---- Allowance for doubtful accounts Year ended December 31, 2005....... $ 3,567 $ 3,155 $ 364 $ 6,358 Year ended December 31, 2004....... 2,452 1,669 554 3,567 Year ended December 31, 2003....... 2,294 876 718 2,452 Allowance for revenue adjustments Year ended December 31, 2005....... $ 4,287 $ 9,841 $ 9,732 $ 4,396 Year ended December 31, 2004....... 2,901 11,355 9,969 4,287 Year ended December 31, 2003....... 2,850 12,356 12,305 2,901 Balance at Charged to Balance at Beginning Costs and Claims End of of Year Expenses Paid Year ------- -------- ---- ---- Cargo claims accruals Year ended December 31, 2005...... $ 5,457 $ 13,127 $ 13,866 $ 4,718 Year ended December 31, 2004...... 3,788 19,423 17,754 5,457 Year ended December 31, 2003...... 4,039 10,326 10,577 3,788 Insurance accruals Year ended December 31, 2005...... $ 19,624 $ 37,575 $ 34,475 $ 22,724 Year ended December 31, 2004...... 16,979 32,781 30,136 19,624 Year ended December 31, 2003...... 14,717 28,949 26,687 16,979 (20) Subsequent Events (a) Pending Merger with North American Truck Lines, LLC On January 30, 2006, the Company announced that it had entered into an Agreement and Plan of Merger (the "Merger Agreement"), with North American Truck Lines, LLC, a Nevada limited liability company ("NATL"), and Green Acquisition Company, a Nevada corporation ("Purchaser"), pursuant to which Purchaser will merge with and into the Company (the "Merger"), with the Company continuing as the surviving corporation. Purchaser is a wholly-owned subsidiary of NATL. Both Purchaser and NATL are controlled by Mr. Jerry Moyes. Pursuant to the Merger Agreement, at the effective time of the Merger, all of the Company's stockholders, other than Mr. Moyes and certain Moyes family trusts will receive cash, from the Purchaser, in an amount equal to $2.25 per share of the Company's common stock. Holders of options with an exercise price below $2.25 will receive the difference between the exercise price and $2.25 multiplied by the number of shares of common stock subject to that option. Holders of options with an exercise price above $2.25 will receive $0.01 multiplied by the number of shares of common stock subject to that option. F-26 CENTRAL FREIGHT LINES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -continued (Thousands of dollars, except share and per share amounts) The Merger is subject to a number of conditions, including approval of the Merger Agreement and Merger by holders of a majority of the outstanding shares of common stock held by the Company's stockholders other than Mr. Moyes and certain Moyes family trusts and resolution of pending stockholder litigation. The Company may terminate the Merger Agreement under certain circumstances, including if its board of directors determines in good faith that it has received an unsolicited bona fide "superior proposal," as defined in the Merger Agreement, and otherwise complies with certain terms of the Merger Agreement. In connection with such termination, the Company must pay a fee of $1,000 to Purchaser and reimburse Purchaser's expenses up to $500. (b) Terminal Sales In January 2006, the Company sold its terminal in Portland, Oregon to Con-Way Transportation Services. Following the sale, the Company may lease up to 30 freight doors from Con-Way. In February 2006, the Company realized net proceeds from the sale of $3,337, reported a gain on sale of $1,944 and paid off a related mortgage of $4,690. In January 2006, the Company entered into an agreement with Old Dominion Freight Lines with respect to the sale of its dormant terminal located in Phoenix, AZ. The Company expects net proceeds from the sale of approximately $3,000. In December 2005, the Company wrote down the net book value of this terminal to reflect the selling price. The amount of the write down was $396. F-27 EXHIBIT INDEX Number Description 2.1 Amended and Restated Asset Purchase Agreement dated April 18, 2002, by and among Central Refrigerated Service, Inc., a Nebraska corporation, and Simon Transportation Services Inc., a Nevada corporation, and its subsidiaries, Dick Simon Trucking, Inc., a Utah corporation, and Simon Terminal, LLC, an Arizona limited liability company. (Incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 No. 333-109068.) 2.2(a) Separation Agreement dated November 30, 2002, by and among Central Freight Lines, Inc., a Texas corporation, Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry and Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc., an Arizona corporation, and Jerry Moyes individually. (Incorporated by reference to Exhibit 2.2(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 2.2(b) Amendment Number One to Separation Agreement dated December 23, 2002, by and among Central Freight Lines, Inc., a Texas corporation, Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry and Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc., an Arizona corporation, and Jerry Moyes individually. (Incorporated by reference to Exhibit 2.2(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) 2.2(c) Amendment Number Two to Separation Agreement effective as of October 28, 2003, by and among Central Freight Lines, Inc., a Texas corporation, Central Refrigerated Service, Inc., a Nebraska corporation, the Jerry and Vickie Moyes Family Trust, Interstate Equipment Leasing, Inc. an Arizona corporation, and Jerry Moyes individually. (Incorporated by reference to Exhibit 2.2(c) to the Company's Registration Statement on Form S-1 No. 333-109068.) 3.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.1(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) 3.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 No. 333-109068.) 4.1 Amended and Restated Articles of Incorporation of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.1 to this Report on Form 10-K.) 4.2 Bylaws of Central Freight Lines, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 3.2 to this Report on Form 10-K.) 10.1(a)+ Central Freight Lines, Inc. 401(k) Savings Plan. (Incorporated by reference to Exhibit 10.1(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.1(b)+ First Amendment to Central Freight Lines, Inc. 401(k) Savings Plan. (Incorporated by reference to Exhibit 10.1(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.2(a)+ Central Freight Lines, Inc. Incentive Stock Plan. (Incorporated by reference to Exhibit 10.2(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.2(b)+ Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.28 to the Company's Report on Form 10-Q for the quarterly period ended July 2, 2005.) 10.3+ Form of Outside Director Stock Option Agreement. (Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 No. 333-109068.) IV-1 10.4(a) First Amended and Restated Revolving Credit Loan Agreement, dated July 28, 2004, by and between Central Freight Lines, Inc., a Texas corporation, and SunTrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.4(a) to the Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.) 10.4(b) Revolving Credit Note, dated July 28, 2004, by Central Freight Lines, Inc., a Texas corporation, in favor of SunTrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.4(b) to the Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.) 10.4(c)* First Amendment to First Amended and Restated Revolving Credit Loan Agreement, dated July 28, 2004, by and between Central Freight Lines, Inc., a Texas corporation, and SunTrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.4(c) to the Company's Report on Form 10-K for the year ended December 31, 2004.) 10.5 Guaranty, dated July 28, 2004, by Central Freight Lines, Inc., a Nevada corporation, in favor of SunTrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.5 to the Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.) 10.6 Security Agreement, dated July 28, 2004, by and between Central Freight Lines, Inc., a Texas corporation and Suntrust Bank, a Georgia state banking corporation. (Incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-Q for the quarterly period ended July 3, 2004.) 10.7(a) Loan Agreement dated April 30, 2002, by and among Central Receivables, Inc., a Nevada corporation, Three Pillars Funding Corporation, a Delaware corporation, and Suntrust Capital Markets, Inc., a Tennessee corporation, as agent. (Incorporated by reference to Exhibit 10.8(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.7(b) First Amendment to Loan Agreement dated April 29, 2003, by and among Central Receivables, Inc., a Nevada corporation, Three Pillars Funding Corporation, a Delaware corporation, and SunTrust Capital Markets, Inc., a Tennessee corporation, as agent. (Incorporated by reference to Exhibit 10.8(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.8 Receivables Purchase Agreement dated April 30, 2002, by and between Central Freight Lines, Inc., a Texas corporation, and Central Receivables, Inc., a Nevada corporation. (Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.9 Second Amended and Restated Master Lease Agreement - Parcel Group A dated February 20, 2003 by and between Southwest Premier Properties, L.L.C., a Texas limited liability company, and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.10 Second Amended and Restated Master Lease Agreement - Parcel Group B dated February 20, 2003 by and between Southwest Premier Properties, L.L.C., a Texas limited liability company, and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.11 Amended and Restated Lease dated February 20, 2003 by and between JVM Associates and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.12 Amended and Restated Lease dated February 20, 2003 by and between Jerry and Vickie Moyes and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 No. 333-109068.) IV-2 10.13 Amended and Restated Lease dated February 20, 2003 by and between Jerry and Vickie Moyes and Central Freight Lines, Inc., a Texas corporation. (Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.14+ Employment Agreement dated January 7, 2002, by and between Central Freight Lines, Inc., a Texas corporation, and Robert V. Fasso. (Incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.15+ Employment Offer Letter to Jeffrey A. Hale, dated June 7, 2002, by Central Freight Lines, Inc. (Incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.16(a) Indemnification Agreement, effective as of December 31, 2002, by and between Central Freight Lines, Inc., a Texas corporation, and Central Refrigerated Service, Inc., a Nebraska corporation. (Incorporated by reference to Exhibit 10.23(a) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.16(b) Amendment Number One to Indemnification Agreement effective as of December 31, 2002, by and between Central Freight Lines, Inc., a Texas corporation, and Central Refrigerated Service, Inc., a Nebraska corporation. (Incorporated by reference to Exhibit 10.23(b) to the Company's Registration Statement on Form S-1 No. 333-109068.) 10.17+ Employment Offer Letter to Walt Ainsworth, dated July 15, 2004, by Central Freight Lines, Inc. (Incorporated by reference to Exhibit 10.24 to the Company's Report on Form 10-K for the year ended December 31, 2004.) 10.18(a) Amended and Restated Credit Agreement, dated March 24, 2005, by and among the Financial Institutions named Therein as the Lenders, Bank of America, N.A. as the Agent, and Central Freight Lines, Inc., a Texas corporation, as the Borrower. (Incorporated by reference to Exhibit 10.26 to the Company's Report on Form 10-Q for the quarterly period ended April 2, 2005.) 10.18(b) First Amendment to Amended and Restated Credit Agreement, dated May 12, 2005, by and among Central Freight Lines, Inc., a Texas corporation, Required Lenders under the Credit Agreement, Bank of America, N.A., in its capacity as Agent for Lenders under the Credit Agreement. (Incorporated by reference to Exhibit 10.27 to the Company's Report on Form 10-Q for the quarterly period ended April 2, 2005.) 10.18(c)* Second Amendment to Amended and Restated Credit Agreement, dated November 9, 2005, by and among Central Freight Lines, Inc., a Texas corporation, Required Lenders under the Credit Agreement, Bank of America, N.A., in its capacity as Agent for Lenders under the Credit Agreement. 10.19 Obligation Guaranty dated January 31, 2005, by Central Freight Lines, Inc., a Nevada corporation, for the benefit of Bank of America, N.A., in its capacity as Agent for the benefit of the Lenders. (Incorporated by reference to Exhibit 10.25 to the Company's Current Report on Form 8-K filed on February 4, 2005.) 10.20 Form of Director Indemnification Agreement. (Incorporated by reference to Exhibit 10.29 to the Company's Report on Form 10-Q for the quarterly period ended October 1, 2005.) 11.1 Schedule of Computation of Net Income Per Share (Incorporated by reference to Note 17, Loss Per Share, in the Notes to Consolidated Financial Statements contained in this Report on Form 10-K.) 21.1* Subsidiary of Central Freight Lines, Inc., a Nevada corporation. IV-3 23.1* Consent of McGladrey & Pullen LLP. 23.2* Consent of KPMG LLP. 31.1* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer. 31.2* Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer. 32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Robert V. Fasso, the Company's Chief Executive Officer. 32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Jeffrey A. Hale, the Company's Chief Financial Officer. * Filed herewith. + Management contract or compensatory plan or arrangement. IV-4 EXHIBIT 10.18(C) SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is entered into as of November 9, 2005, among CENTRAL FREIGHT LINES, INC., a Texas corporation ("Borrower"), Required Lenders under the Credit Agreement, BANK OF AMERICA, N.A., in its capacity as Agent for Lenders under the Credit Agreement (the "Agent"), and the Parent under the Credit Agreement (hereinafter defined). Reference is made to the Amended and Restated Credit Agreement, dated as of March 24, 2005 (as amended, modified, and supplemented, the "Credit Agreement"), among the Borrower, the Agent, and Lenders party thereto. Unless otherwise defined in this Amendment, capitalized terms used herein shall have the meanings set forth in the Credit Agreement; all Section references herein are to Sections in the Credit Agreement; and all Paragraph references herein are to Paragraphs in this Amendment. RECITALS A. Borrower has requested that Required Lenders amend certain provisions of the Credit Agreement. B. Subject to the terms and conditions of this Amendment, Required Lenders are willing to agree to such amendments and waivers. Accordingly, for adequate and sufficient consideration, the parties hereto agree, as follows: Amendments. By execution of this Amendment, the Credit Agreement is hereby amended as follows: Section 7.23 is amended in its entirety to read as follows: "(a) At all times from the earlier of: (i) delivery by the Borrower to the Agent of the June, 2005 financial statements in compliance with Section 5.2(c), and (ii) August 15, 2005, until the earlier of: (i) delivery by the Borrower to the Agent of the May, 2006 financial statements in compliance with Section 5.2(c), and (ii) June 30, 2006, as of the last day of each fiscal month of the Borrower set forth below, the fiscal year-to-date (fiscal year-to-date in fiscal year 2005 shall mean fiscal year-to-date, and with respect to each month in fiscal year 2006, shall mean the immediately preceding twelve fiscal months) Adjusted EBITDA of Parent and its Subsidiaries shall not be less than the amount set forth opposite each date.

IV-5 (b) Commencing on and after the earlier of: (i) August 15, 2006, and (ii) the delivery of the June, 2006 quarterly financial statements in compliance with Section 5.2(b), the Borrower will maintain a Fixed Charge Coverage Ratio for each period of four consecutive fiscal quarters ended on the last day of each fiscal quarter of not less than 1.0 to 1.0. (c) Notwithstanding anything set forth above to the contrary, Borrower shall not be required to comply with either covenant set forth in (a) or (b) above if Availability (plus any amount deducted from the Borrowing Base pursuant to clause (b) of the definition of Borrowing Base) ("Adjusted Availability") has exceeded $10,000,000 for at least 60 consecutive days, and (ii) Adjusted Availability is not again less than $10,000,000 on any day following such 60-day period. (d) For purposes of this Section 7.23, on any date that compliance hereunder is required with respect to Borrower's Adjusted EBITDA or Fixed Charge Coverage Ratio, compliance shall commence on such date with reference to the most recently reported monthly or quarterly financial information, as the case may be." The definition of "Borrowing Base" set forth in Annex A to the Credit Agreement shall be amended in its entirety to read as follows: "Borrowing Base" means, at any time, an amount equal to (a) the sum of (A) up to eighty-five percent (85%) of the Net Amount of Eligible Accounts; plus (B) the sum of (i) up to eighty-five percent (85%) of the Net Orderly Liquidation Value of Eligible Rolling Stock adjusted for monthly depreciation and for any dispositions of Rolling Stock, and (ii) up to eighty-five percent (85%) of the cost of Eligible Rolling Stock acquired after the Closing Date and before the Effective Date (as defined in Second Amendment to the Amended and Restated Credit Agreement dated as of November 9, 2005 between Borrower and Required Lenders) (excluding sales tax, delivery charges or other soft costs) and adjusted for monthly depreciation, but in no event shall the sum of (i) and (ii) exceed 90% of the net book value of such Eligible Rolling Stock; minus (b) $10,000,000, minus (c) Reserves from time to time established by the Agent in its reasonable credit judgment; provided that the aggregate Revolving Loans advanced against Eligible Rolling Stock shall not exceed the Maximum Rolling Stock Loan Amount, and provided further that the aggregate Revolving Loans advanced against Eligible Unbilled Accounts shall not exceed $5,000,000. For the purposes hereof, depreciation shall be calculated based upon the average remaining life of the Eligible Rolling Stock as shown on the then most recent appraisal." Exhibit B, "Form of Borrowing Base Certificate" shall be amended in its entirety to read as Exhibit B attached hereto. Conditions. (a) Notwithstanding any contrary provision, this Amendment is not effective until the date (the "Effective Date") upon which (i) the representations and warranties in this Amendment are true and correct; (ii) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing under the Credit Agreement; and (iii) the Agent has received counterparts of this Amendment executed by Borrower, Parent, and Required Lenders. (b) Borrower shall have paid to Agent for the benefit of Lenders an amendment fee as set forth in the Fee Letter dated the date hereof among Borrower, Parent, Agent, and Lenders, in immediately available funds. IV-6 (c) Borrower and Parent shall deliver to Agent such other agreements, documents, instruments, opinions, certificates, and evidences as the Agent or Required Lenders may reasonably request. Acknowledgment and Ratification. As a material inducement to the Agent and Lenders to execute and deliver this Amendment, Borrower and Parent (a) consent to the agreements in this Amendment and (b) agree and acknowledge that the execution, delivery, and performance of this Amendment shall in no way release, diminish, impair, reduce, or otherwise affect the respective obligations of Borrower or Parent under their respective Loan Documents, which Loan Documents shall remain in full force and effect, and all Liens, guaranties, and rights thereunder are hereby ratified and confirmed and shall secure the Obligations. Notwithstanding anything to the contrary set forth in any other Loan Document and in furtherance of the acknowledgements and ratifications set forth herein, Borrower agrees that Agent may, at Borrower's expense, at any time and from time to time, take such steps as Agent deems advisable or necessary to perfect or maintain perfection of, the liens in any and all of the Collateral. Representations. As a material inducement to Lenders to execute and deliver this Amendment, Borrower and Parent represent and warrant to Lenders (with the knowledge and intent that Lenders are relying upon the same in entering into this Amendment) that as of the Effective Date and as of the date of execution of this Amendment, (a) all representations and warranties in the Loan Documents are true and correct in all material respects as though made on the date hereof, except to the extent that (i) any of them speaks to a different specific date or (ii) the facts on which any of them were based have been changed by transactions contemplated or permitted by the Credit Agreement, or (iii) any of them is waived herein and (b) no Default or Event of Default exists other than as waived herein. Expenses. Borrower agrees to pay all reasonable costs, fees, and expenses paid or incurred by Agent in connection with this Amendment, including, without limitation, attorney fees of Agent in connection with the negotiation, preparation, delivery, and execution of this Amendment and any related documents. Miscellaneous This Amendment is a "Loan Document" referred to in the Credit Agreement, and the provisions relating to Loan Documents in Article 13 of the Credit Agreement are incorporated in this Amendment by reference. Unless stated otherwise (a) the singular number includes the plural and vice versa and words of any gender include each other gender, in each case, as appropriate, (b) headings and captions may not be construed in interpreting provisions, (c) this Amendment must be construed, and its performance enforced, under Texas law, (d) if any part of this Amendment is for any reason found to be unenforceable, all other portions of it nevertheless remain enforceable, and (e) this Amendment may be executed in any number of counterparts with the same effect as if all signatories had signed the same document, and all of those counterparts must be construed together to constitute the same document. The Loan Documents shall remain unchanged and in full force and effect, except as provided in this Amendment, and are hereby ratified and confirmed. On and after the Effective Date, all references to the "Credit Agreement" shall be to the Credit Agreement as herein amended. The execution, delivery, and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any rights of Lenders under any Loan Document, nor constitute a waiver under any of the Loan Documents. ENTIRE AGREEMENT. THIS AMENDMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF THIS AMENDMENT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Parties. This Amendment binds and inures to Borrower, Parent, Agent, Lenders, and their respective successors and assigns. The parties hereto have executed this Amendment in multiple counterparts to be effective as of the Effective Date. IV-7 Remainder of Page Intentionally Blank. Signature Pages to Follow. IV-8 BANK OF AMERICA, N.A., as Agent and a Lender By: /s/ Joy L. Bartholomew Joy L. Bartholomew Senior Vice President IV-9 TEXTRON FINANCIAL CORPORATION, as a Lender By: /s/ Robert J. Dysart, Jr. Name: Robert J. Dysart, Jr. Title: Senior Account Executive IV-10 BORROWER: CENTRAL FREIGHT LINES, INC., a Texas corporation, as Borrower By: /s/ Jeff Hale Name: Jeff Hale Title: CFO IV-11 GUARANTOR: CENTRAL FREIGHT LINES, INC., a Nevada corporation, as Parent By: /s/ Jeff Hale Name: Jeff Hale Title: CFO IV-12 EXHIBIT 21.1 Subsidiary of the Registrant State or Jurisdiction of Name of Subsidiary Incorporation or Organization ------------------ ----------------------------- Central Freight Lines, Inc. Texas IV-13 EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm -------------------------------------------------------- To the Board of Directors and Stockholders Central Freight Lines, Inc.: We consent to the incorporation by reference in Registration Statements (Nos. 333-111795, 333-114721, and 333-118032) on Form S-8 of Central Freight Lines, Inc. of our report dated April 4, 2006, relating to our audit of the consolidated financial statements, which appear in this Annual Report on Form 10-K of Central Freight Lines, Inc. for the year ended December 31, 2005. McGladrey & Pullen, LLP April 14, 2006 IV-14 EXHIBIT 23.2 Consent of Independent Registered Public Accounting Firm -------------------------------------------------------- The Board of Directors Central Freight Lines, Inc.: We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-111795, 333-114721 and 333-118032) of our report dated March 30, 2005, with respect to the consolidated balance sheet of Central Freight Lines, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2004, which report appears in the December 31, 2005, annual report on Form 10-K of Central Freight Lines, Inc. KPMG LLP Dallas, Texas April 12, 2006 IV-15 EXHIBIT 31.1 CERTIFICATION I, Robert V. Fasso, certify that: 1. I have reviewed this annual report on Form 10-K of Central Freight Lines, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2006 /s/ Robert V. Fasso Robert V. Fasso Chief Executive Officer IV-16 EXHIBIT 31.2 CERTIFICATION I, Jeffrey A. Hale, certify that: 1. I have reviewed this annual report on Form 10-K of Central Freight Lines, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2006 /s/ Jeffrey A. Hale Jeffrey A. Hale Chief Financial Officer IV-17 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Central Freight Lines, Inc. (the "Company") on Form 10-K for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert V. Fasso, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert V. Fasso Robert V. Fasso Chief Executive Officer April 14, 2006 IV-18 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Central Freight Lines, Inc. (the "Company") on Form 10-K for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey A. Hale, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (3) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jeffrey A. Hale Jeffrey A. Hale Chief Financial Officer April 14, 2006 IV-19

CENTRAL FREIGHT LINES INC 10-K