EXHIBIT 13.1
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FROZEN FOOD EXPRESS INDUSTRIES, INC.
ANNUAL REPORT TO SHAREHOLDERS
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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Results Of Operations
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Revenue (including revenue from our non-freight activities) decreased by
3.6% in 2001 to $378.4 million. For 2000, revenue totaled $392.4 million and
was 5.4% above 1999 revenue. Freight revenue rose by 1.2% during 2001 and
4.1% in 2000.
For our full-truckload operations, fuel adjustment charges as a percent of
revenue were 0.1%, 3.3% and 3.2% during 1999, 2000 and 2001, respectively.
Excluding the impact of these charges, full-truckload revenue rose by 6.8% in
2001 and 1.5% in 2000 and 1999. The 2001 increase principally resulted from a
2.6% increase in the number of full-truckload shipments and an increased
average length of haul, which increased by 1.4%. Our prices are typically a
function of shipment weight, commodity type and distance traveled.
As a percent of total less-than-truckload ("LTL") revenue, fuel adjustment
charges were 0.4%, 3.5% and 3.1% for 1999, 2000 and 2001, respectively.
Excluding the impact of these charges, LTL revenue declined by 1% during 1999,
0.6% during 2000 and another 10.5% in 2001. These declines primarily resulted
from a reduced number of LTL shipments, partially offset by increased average
shipment size. Slackening demand for the refrigerated LTL service we offer,
reflected by an 11% drop in the number of shipments we hauled, was the primary
contributor to the 2001 decline.
Our full-truckload operations continued to expand during 2001, while our
LTL operation has continued to contract. Increased competition from logistics
outsourcing and freight consolidators has negatively impacted our penetration
of the market for refrigerated LTL services. Reduced demand for such
services, together with the increased presence of competitors capable of
arranging such services, has resulted in a decrease in the number of LTL
shipments we transported in 2001, as compared to 2000. While LTL operations
offer the opportunity to earn higher revenue on a per-mile and per-
hundredweight basis than do full-truckload operations, the level of
investment and fixed costs associated with LTL activities significantly exceed
those of full-truckload activities. Accordingly, as LTL revenue fluctuates,
many costs remain fixed, leveraging the impact from such revenue fluctuations
on operating income. During 2001, as LTL activity and revenue declined, many
LTL-related costs have remained static.
We are assessing the profitability of our LTL operations. As a result, we
have closed 5 LTL terminals during the past eighteen months. We have altered
the frequency at which we service locations where freight volumes have
declined. We have changed the mix of our company-operated vs. independent
contractor-provided trucks in order to more closely match our operating costs
to our lower LTL revenue. During 2001, we added 8 company-operated trucks to
our LTL fleet and we reduced the number of independent contractor-provided LTL
trucks by 20. At December 31, 2001, our entire LTL fleet consisted of
approximately 280 tractors.
At the end of 2001, our full-truckload fleet numbered approximately 1,810
trucks, as compared to about 1,725 at the end of 2000 and 1,620 at the end of
1999. Primarily due to the increased number of trucks, the number of full-
truckload shipments rose by 2.6% during 2001 as compared to 5.4% in 2000.
We plan to add up to 50 trucks to our company-operated, full-truckload
fleet during 2002. The number of trucks in this fleet declined by almost 90
during 1999, rose by 40 to approximately 1,190 during 2000, and rose again to
1,300 during 2001. Continued emphasis will be placed on improving the
efficiency and the utilization of this fleet through enhanced driver training
and retention, by reducing the percentage of non-revenue-producing miles, by
extending the average loaded miles per shipment and through expansion of
dedicated fleet operations. During 2000, we retired and did not replace about
180 trailers. During 2001, we reduced our trailer fleet by an additional 70
trailers. We do not intend to significantly reduce the number of trailers in
our fleets during 2002.
Before 1998, we had limited dedicated fleet operations. In such an
arrangement, we provide service involving the assignment of trucks solely to
handle transportation needs of a specific customer. Generally we, and the
customer, expect dedicated fleet logistics services to lower the customer's
transportation costs and improve the quality of the service. In late 1998, we
improved our capability to provide and expanded our efforts to market
dedicated fleet services. About 10% of our company-operated, full-truckload
fleet is now engaged in dedicated fleet operations.
The operation of our full-truckload fleet involves satellite technology to
enhance efficiency and customer service. Location updates of each tractor are
provided by this network and we exchange dispatch, fuel and other information
with the driver by way of satellite.
During non-recessionary economic periods, we have difficulty attracting
qualified employee-drivers for our full-truckload operations. Prior to 2001,
as many as 100 of our company-operated trucks were idle due to a shortage of
drivers. The shortage was a prime factor in reducing the size of the company-
operated fleet during 1999. This situation is typical in the industry.
Shortages increase costs of employee-driver compensation, training and
recruiting. Significant resources are continually devoted to recruiting and
retaining qualified employee-drivers and to improving their job satisfaction.
As the economy softened during 2001, the shortage of qualified drivers
diminished.
Employee-drivers, as well as all other qualified employees, participate in
401(k), group health and other benefit programs. During 2001, we reduced the
level of our matching 401(k) contributions from generally 100% of employee
contributions to 50%. This was done as a cost cutting initiative and to set
our matching policy at a level more comparable to other employers in our labor
markets.
In mid-2000, energy prices began to rise at an alarming rate. Pursuant to
the contracts and tariffs by which our freight rates are determined, those
rates automatically fluctuate as diesel fuel prices rise and fall.
During the summer of 2000, we also began to incur escalating costs for
labor.
We continually seek to attract and retain more qualified driver personnel.
In mid-2000, we increased the per-mile rate at which full-truckload employee
drivers are compensated. Shippers had occasionally expressed dissatisfaction
with our inability to provide service when needed. Shippers also had signaled
a willingness to accept freight rate increases in exchange for the improved
service expected to result from improved driver availability. It was in light
of these factors that we implemented the employee-driver pay increase.
We began to ask shippers to accept increases in basic freight rates to
compensate us for the increased employee-driver payroll costs. Many shippers
were unwilling to accept those increases. The shippers felt rates had already
increased as much as they were willing to pay because of the impact of energy
prices. Therefore, for most of 2000, we were forced to incur the increased
employee-driver payroll costs with little of the expected offsetting revenue.
As fuel prices and related fuel adjustment charges subsided during 2001, our
customers began to signal an increased willingness to re-negotiate our prices.
Changes in the percent of freight revenue generated from full-truckload
versus LTL shipments, as well as in the mix of company-provided versus owner-
operator-provided equipment and in the mix of leased versus owned equipment,
contribute to variations among related operating and interest expenses.
Salaries, wages and related expenses, as a percent of freight revenue,
were 26.9%, 27.0% and 28.4% for 2001, 2000, and 1999, respectively. During
2000, expenses from work-related injuries fell by $1.2 million as compared
to 1999. Other fringe benefits, primarily health insurance costs, declined
by $1.5 million during 2000 from 1999 levels. Increased driver payroll
expenses associated with a new driver compensation program partially offset
those improvements. During 2001, further decline in work-related injuries
and the reduced level of employer 401(k) contributions more than offset
increased driver wages, which resulted from the addition of about 125
tractors to our company-operated fleets.
Independent contractor equipment generated 25.3%, 27.7% and 26.3% of full-
truckload revenue during 1999, 2000 and 2001, respectively. Independent
contractors typically provide a tractor that they own to transport freight on
our behalf. Contractors pay for the cost of operating their tractors,
including but not limited to the expense of fuel, labor, taxes and
maintenance. We pay these independent contractor owner-operators amounts
determined by reference to the revenue associated with their activities. As
of January 1, 1999, there were approximately 430 such tractors in the full-
truckload fleet. At December 31, 2000, there were approximately 535 such
tractors. At December 31, 2001, there were 510. As the number of these
trucks fluctuates, so too does the amount of revenue generated by such units.
We have traditionally relied on owner-operator provided equipment to
transport much of our customers' freight. As demand for employee-drivers has
increased, our competitors initiated or expanded owner-operator fleets. The
number of full-truckload and LTL trucks provided to us by owner-operators rose
by about 60 during 2000, but declined by almost 50 trucks during 2001. We
attribute this reversal to a number of factors, foremost of which is the
recessionary economic environment of 2001.
As a result of fluctuations in the quantity and revenue contribution of
such equipment, and as a result of the impact of fuel adjustment charges,
which are passed through to independent contractors involved in the
transportation of shipments billed with such charges, the percent of freight
revenue absorbed by purchased transportation rose from 22.6% in 1999 to 24.1%
in 2000, but fell to 22.6% in 2001. We will attempt to expand our fleet of
owner-operator trucks during 2002.
Supplies and expenses rose by $6.0 million in 1999, $5.8 million in 2000
and $3.8 million in 2001. For 1999, 2000 and 2001, 35%, 43% and 42%,
respectively, of these costs were related to fuel for the company-operated
fleet of tractors and refrigerated trailers. The average cost per gallon of
the fuel we used increased by nearly 35% during 2000. Although our 2001
average price per gallon fell by 18% by the end of the year, the average price
we paid throughout 2001 did not change from 2000. During the first three
months of 2002, however, our average price per gallon has risen by 12%.
The non-fuel components of supplies and expenses (principally repairs,
tires and freight handling expenses) rose by $1.9 million in 1999 but fell by
$3.3 million in 2000. The improvement during 2000 resulted from more
effective management of our maintenance functions. During 2001, these
expenses increased by about $3.6 million. A significant portion of this
increase was the result of a problem we discovered with some of our trailer
axles. Certain trailers delivered during 1998 and 1999 had a re-designed hub
assembly that was factory-installed with an insufficient amount of lubricant.
A number of these axles and components failed, but most were replaced at our
expense before failure occurred. We are seeking to recover these expenses
from the manufacturers involved, but the outcome is uncertain at this time.
Sudden and dramatic fuel price volatility impacts our profits. We have in
place a number of strategies designed to address this. Owner-operators are
responsible for all costs associated with their equipment, including fuel.
Therefore, the cost of such fuel is not a direct expense of the company. For
company-operated equipment, we attempt to mitigate the impact of fluctuating
fuel costs by purchasing more fuel-efficient tractors and aggressively
managing our fuel purchasing. The rates we charge for our services are usually
adjustable by reference to fuel prices. Relatively high or low fuel prices can
result in upward or downward adjustment of freight rates, further mitigating
the impact of such volatility on our profits. Such fluctuations result from
many external market factors that we cannot influence or predict. In addition,
each year several states increase fuel taxes. Recovery of future increases or
realization of future decreases in fuel prices and fuel taxes, if any, will
continue to depend upon competitive freight-market conditions.
We use a computer software product designed to optimize our routing and
fuel purchasing. The product enables us to select the most efficient route
for a trip. It also assists us in deciding how much fuel to buy at a
particular fueling station. The product helps us to optimize our fuel
purchasing by, among other things, analyzing the prices at various retail
locations as compared to prices at other retailers along a planned route of
travel. This product enabled us to reduce our fuel consumption during 2001.
The total of revenue equipment rent and depreciation expense was 11.8% of
freight revenue in 2001, 11.4% in 2000 and 12.4% for 1999. These fluctuations
were due in part to changes in the use of leasing to finance our fleet.
Equipment rental includes a component of interest-related expense that is
classified as non-operating expense when we incur debt to acquire equipment.
Equipment rent and depreciation also are affected by the replacement of less
expensive (three year old) company-operated tractors and (seven year old)
trailers with more expensive new equipment.
Effective in 2002, our tractor replacement cycle will be extended. For
more than 10 years through 2001, our primary tractor manufacturer contracted
to repurchase our new trucks at the end of 3 years of service for an agreed
price. During 2001, as the economy and demand for new trucking assets
slackened, the manufacturer found itself with a surplus of used trucks which
were difficult to re-sell at prices near the amount the manufacturer paid.
Such "sell-back" arrangements have been typical in the trucking industry for
many years.
As an accommodation to the manufacturer, in early 2002 we agreed to amend
our sell-back arrangement. The amendment provides that our tractors will be
sold back to the manufacturer under more restrictive terms. Also, the trade-
back cycle for most of our trucks in service on December 31, 2001 and for
trucks delivered to us after January 1, 2002 has been extended by up to 12
months. We expect the pre-agreed-to prices for trucks delivered to us after
January 1, 2002 will result in slightly higher monthly value declines over the
lives of the trucks.
In order to help us with the increased cost of maintaining tractors
beyond our former 36-month replacement cycle, the manufacturer has agreed to
extend the warranties on specified major components of these tractors. The
more restrictive terms on the tradeback will require that we more closely
align our tractor purchases with resale to the manufacturer. It is probable
that our maintenance costs will increase as a result of our new trade-back
arrangement. We believe that we are not paying more for our new trucks than
would be the case if we bought competitive equipment without such a trade-back
feature.
During 2000 and 2001, several motor carriers ceased or curtailed their
level of operations. This has resulted in a surplus of two-to-three year old
trucking assets available in the marketplace, at deeply discounted prices,
relative to the price of new equipment. We have been able to benefit from
this situation by acquiring some high-quality previously-owned tractors and
trailers at attractive prices. We will continue to seek out such
opportunities.
Effective in October 2002, tractor manufacturers will be required to
deliver trucks which produce significantly "cleaner" emissions than is
presently the case. We expect the new trucks to be more costly to purchase, to
be more expensive to maintain and to consume more fuel than is presently the
case. It is possible that this requirement may increase the demand for and
market value of late model previously-owned tractors.
Claims and insurance expense fell from 6.0% of freight revenue during 1999
to 5.6% in 2000 and to 5.0% in 2001. This resulted from a variety of factors,
including but not limited to fewer physical damage losses. In December 2000,
we renewed our liability insurance coverage. Previously, we had incurred
significant but fairly predictable premiums and a comparatively low deductible
for accident claims. During 1999 and 2000, however, insurance companies
generally began to increase premiums by as much as 40 to 50 percent. At the
same time, our overall accident frequency (measured as incidents per million
miles) improved, but accidents involving personal injury became more common.
Because of these factors, in 2000, we selected a liability insurance product
that featured a higher deductible and a higher premium.
In December 2001, we again renewed this insurance. During the first 8
months of 2001, the marketplace for such coverage continued to harden. The
September 11 attacks on America resulted in an unpredictable and costly
insurance market. Trucking and other transportation companies reported
significant cost increases in their insurance premiums. After a careful
analysis of our claims experience and premium quotations from the limited
number of carriers offering insurance to our industry in 2001, we selected a
liability insurance product with reduced limits, a modestly lower premium and
with a deductible of $5 million per occurrence, as compared to $1 million for
the expiring policy.
Continuing to maintain a $1 million deductible was cost-prohibitive. We
have had very few claims above $1 million in our history. Because the amount
of our retained risk is more than before, we expect to establish greater
amounts of insurance reserves and related expenses than we did prior to 2002.
We will continue to monitor the insurance market. When affordable policies
with lower deductibles return to the market, we will evaluate all
opportunities to lower our deductible.
We intend to recover as much of our potential increased claims and
insurance expense as possible by adjusting the amount of commissions we pay
our independent contractor fleet and/or increasing the rates our customers pay
for our services. We will continue to emphasize operational safety in an
effort to mitigate the impact of these cost increases.
Claims and insurance expenses can vary significantly from year to year.
The amount of open claims is significant. We believe that these claims will
be settled or litigated without a material adverse effect on our financial
position or our results of operations.
Gains on the disposition of equipment rose from $0.6 million in 1999, to
$1.6 million in 2000 and fell to $1.4 million in 2001. The amount of such
gains depends primarily upon conditions in the market for previously-owned
equipment and on the quantity of retired equipment sold.
We usually pre-arrange the retirement sales value when we accept delivery
of a new tractor. Before 2000, the market for used trucking equipment was
quite strong. The pre-arranged retirement value for tractors delivered in
1997-2000 was, accordingly, high. During 2000 and 2001, the market value of
previously-owned trucking equipment fell dramatically. That situation does
not impact the pre-arranged retirement value of tractors presently in our
fleet, but softness in the market for used equipment could diminish future
pre-arranged retirement values. That may require us to increase the amount of
depreciation and rental expense we incur in 2002 and beyond.
Because we do not intend to acquire significant quantities of trailers in
2002, we do not expect used equipment market prices to alter our current
depreciation or rental expense related to trailers, but diminished market
values could reduce the amount of gains on sale of trailers in future periods.
Miscellaneous expenses were $6.7 million during 1999, a large proportion
of which was due to increased provisions for uncollectible accounts receivable.
During 2000, these expenses fell to a more normal level. Accounts receivable,
net of allowances for doubtful accounts increased by 49% between 1997 and
1999, as compared to an 18% increase in revenue. Before offset of allowances
for doubtful accounts, the 1997 through 1999 increase was 60%. Much of the
increase occurred during the last six months of 1999. This was partially a
result of temporary delays in our collection cycle.
During 1999, we completed a major computer systems conversion. Following
this conversion, we had problems regarding the presentation of invoices to
some of our customers, contributing to increased past-due receivables. During
1999, an analysis resulted in an increased estimate of such receivables that
might not ultimately be collected. During 2000, accounts receivable, net,
fell by 9% reflecting improvements in our accounts receivable collection
cycle.
Net accounts receivable fell by an additional 17% during 2001. About half
of 2001's decline in accounts receivable resulted from our having sold the
majority of our non-freight business in December 2001.
In December 2001, we sold the largest component of our non-freight
operations. The business we sold is a dealership engaged in the sale and
service of refrigeration equipment and of trailers used in freight
transportation. Products offered included trailers manufactured by Wabashr and
mobile trailer refrigeration machinery manufactured by Carrier Transicoldr.
Dealerships were located in major markets, primarily in Texas and Arkansas.
It had been operating under the name of W&B Refrigeration Service Company.
There was no gain or loss on this transaction.
The buyer group was led by our former employee who until the date of the
sale managed the dealership on our behalf. We sold the majority of the
operating assets of the dealership including accounts receivable, inventory,
machinery, equipment and one real estate asset. The buyer also assumed all
liabilities associated with the dealership including, but not limited to
accounts payable and accrued payroll. The assets we sold had a book value of
$14.7 million. The assumed liabilities totaled approximately $2.8 million.
When the sale closed, we received as consideration $6.8 million in cash, a
note receivable from the buyer for $4.1 million and a limited partnership
interest in the buyer group to which we assigned a value of $1 million. Our
note receivable from the buyer is subordinated to senior debt which the buyer
borrowed to obtain the cash we received at closing. The note must be repaid in
3 equal installments in December 2007, 2008 and 2009, until which time monthly
interest payments are due. Because we retained a 19.9% ownership interest in
the buyer group, we were precluded from accounting for the dealership as a
discontinued operation. We will account for our limited partnership interest
according to the equity method.
Non-freight revenue of $51.1 million in 2001 consisted of about $41
million from the dealership we sold in December 2001 and about $10 million from
the rest of our non-freight business. Our remaining non-freight operations
consist of a distributor of motor vehicle air conditioning parts and a company
that sells new and remanufactured compressors for use in stationary commercial
refrigeration applications (such as supermarket freezer display cases). We
also have a small operation in Texas that specializes in the installation of
air conditioners in school busses.
The operating margin from our non-freight activities (including the
dealership) improved slightly during 2000, but turned negative during 2001.
Revenue from this segment was $51.1 million in 2001, $68.8 million in 2000,
and $61.2 million in 1999. Operating profits from this segment of $2.6
million, and $1.0 million, were posted for 2000, and 1999, respectively. In
2001, our non-freight operations incurred an $800,000 operating loss.
During the fourth quarter of 1999 we announced a plan to restructure
certain of our operations. The plan involved closing terminals, eliminating
certain non-driver employee positions and the early disposition of certain
trailers scheduled for retirement in 2001 and 2002. In 1999's fourth quarter
we recorded estimated restructuring expenses of $3.7 million which included
$0.9 million for severance payments and $2.8 million for expenses associated
with the early termination of trailer leases and the abandonment of a leased
facility. The $3.7 million appears as restructuring expense on the 1999
consolidated statement of income.
During the fourth quarter of 1999, we also recorded certain expenses
associated with impairment of long-lived assets. In the 4th quarter of 2000,
after negotiations with trailer lessors, we determined that we would not be
able to early-terminate the majority of the leases to which our 1999 estimate
of $2.8 million related. Accordingly, the remaining $1.8 million of the
restructuring charges was reversed in the 4th quarter of 2000. Most of these
trailers were returned to the lessors as the leases expired during 2001.
We reduced our fleet by 183 company-operated trailers in 2000 and an
additional 68 trailers in 2001. We do not intend to significantly reduce the
number of trailers in our fleets during 2002.
For 2000 and 2001 our consolidated operating income was $1.7 million in
each year, as compared to a loss from operations of $15.2 million for 1999.
Interest and other expense for 2001, 2000 and 1999, was $1.7 million, $3.7
million and $4.5 million, respectively. We began 2000 with debt of $26.5
million and ended 2001 with $2.0 million of debt. This ability to reduce debt
is the principal reason for reduced interest expense. Lower interest rates
also served to reduce our cost of borrowed funds. Interest and other expense
also includes costs associated with certain life insurance policies which we
own.
For 2001, 2000 and 1999, our loss before income taxes was $52,000, $2.0
million and $19.7 million, respectively. During 2001, we incurred income tax
expense of $102,000. During 2000 and 1999, our benefit from income taxes was
$658,000 and $7.1 million, respectively. Our pre-tax losses include certain
expenses associated with life insurance and other matters that are not tax
deductible. For 2001, this resulted in our having a pre-tax loss for
financial reporting purposes, but taxable income for purposes of determining
our income tax expense. Therefore, for 2001, our after-tax loss was more than
our pre-tax loss. For 2000 and 1999, our pre-tax losses resulted in a net
benefit from income taxes. We have net operating loss carry forwards that
will, if not taken against future taxable income, begin to expire in the year
2020.
During 2001, we incurred a net loss of $154,000 as compared to net losses
of $1.3 million and $12.6 million during 2000 and 1999, respectively.
In March of 2002, we retroactively changed the manner in which we account
for a life insurance policy that we acquired in 1993. The life insurance
policy, with a death benefit of at least $17.25 million, was purchased to
provide us funds with which we could purchase a large block of our common
stock owned by a non-employee shareholder. If we determined that the sale of
such shares in the open market by the estate would have an adverse effect on
the market price of our stock, we could use the life insurance proceeds to
purchase the shares directly from the estate.
Due to the unusual nature of the life insurance arrangement, beginning in
1993, we and our independent public accountants believed that capitalizing the
premium payments, not to exceed the policy's benefit payable on the death of
the insured, as an investment to purchase the shares in the future was an
acceptable accounting policy. We have changed the manner by which we account
for the insurance policy. We now expense the excess of the premiums over the
amount that we could actually realize under the insurance contract as of the
date of the related financial statements. Benefit proceeds under the policy, if
any, (and to the extent they exceed the book value of the policy) will be
recorded as a non-operating gain in the future. Accordingly, for 2000 and
1999, our operating income and our restated net loss, net loss per share and
shareholders' equity are as follows (in millions):
2000 1999
---- ----
Operating income (loss):
As previously reported $ 1.7 $(15.2)
As restated 1.7 (15.2)
Net loss:
As previously reported $(1.2) $(12.1)
As restated (1.3) (12.6)
Net loss per share:
As previously reported $(.07) $ (.74)
As restated (.08) (.77)
Shareholders' Equity:
As previously reported $82.0 $ 83.1
As restated 74.4 75.6
Although this change resulted in a slight improvement to 2001's net loss,
we expect this change to result in lower future earnings than would have been
the case using our former method of accounting. We expect that our pre-tax
income for 2002 will be about $500,000 less than it would have been absent
this change.
Other than the impact on the insurance markets, the attacks on the World
Trade Center and Pentagon in 2001 and the subsequent use of biological agents
to disrupt America's political, legal and economic systems have not yet had a
measurable impact on our operations.
Liquidity and Capital Resources
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We lease equipment and real estate. As of December 31, 2001 our debt was
$2 million and letters of credit issued by us to insurance and equipment
leasing companies were $4.7 million in total. Also, as of December 31, 2001,
we had contracts to purchase tractors and trailers of $35 million during 2002
and 2003. We also are committed to pay a life insurance premium of $1.3
million during 2002. A summary of these obligations is as follows (in
millions):
After
Payments Due by Year Total 2002 2003 2004 2005 2006 2006
- -------------------- ----- ---- ---- ---- ---- ---- ----
Rent $ 64.1 $26.0 $18.9 $10.4 $4.5 $2.9 $1.4
Debt 2.0 .3 1.7 - - - -
Letters of credit 4.7 .6 4.1 - - - -
Purchase obligations
and life insurance 36.3 23.3 13.0 - - - -
----- ---- ---- ---- --- --- ---
Total $107.1 $50.2 $37.7 $10.4 $4.5 $2.9 $1.4
===== ==== ==== ==== === === ===
Rentals are due under non-cancelable operating leases. During 2001, we
continued our long-standing practice of leasing most of our new company-
operated tractors and trailers from various unrelated leasing companies. Most
of our tractor leases involve end-of-lease residual values. We have partially
guaranteed our tractor lessors that they will recover those residuals when the
leases mature. At December 31, 2001, the amount of our obligations to lessors
for these residuals did not exceed the amount we expect to recover from the
manufacturer. Because our lease payments and residual guarantees do not cover
more than 90% of the leased tractor's cost, these lease agreements are
accounted for as operating leases and rentals are recorded to rent expense
over the terms of the leases.
Offsetting our lease residual guarantees, when our tractors were
originally leased, the tractor manufacturer has agreed to re-purchase the
tractors at the end of the term of the lease. The price to be paid by the
manufacturer is generally equal to the full amount of the lessor's residual.
When a leased tractor is removed from service, we pay the residual to the
lessor and collect the funds from the manufacturer.
Most of our $35 million obligation to acquire equipment during 2002 and
2003 relates to tractors. We expect to lease these tractors when they are
placed into service during 2002 and 2003.
We also lease a significant portion of our company-operated trailers.
Because trailer leases generally do not involve guaranteed residuals, the
lessor is fully at risk for the end-of-term value of the asset. Before 2001,
the market value of used trailers was higher than it was during 2001.
Due to the decline in values, many leasing companies incurred losses on
their trailers that came off of lease in 2001. These losses have caused some
lessors to exit the trailer leasing market and others to reduce the amount of
their anticipated end-of-term residuals on leases commencing during 2001 and
beyond. These reduced residual expectations will result in higher rental
payments during the term of the lease.
Our primary objective in leasing trailers has been the lower expense such
arrangements had as compared to purchasing the asset ourselves. Because this
advantage may no longer be as readily available to us in the future, we expect
to buy, rather than lease more of our new trailers during 2002 and 2003.
Trailers we buy will be paid for with proceeds from old trailers we sell, with
borrowed funds and with cashflows from operations.
Our lease commitments for 2002 and 2003 also include $1.1 and $0.5
million, respectively for rentals of tractors owned by 2 of our senior
officers. Because the terms of these leases with related parties are more
flexible than those governing tractors we lease from unaffiliated lessors, we
pay the officers a modest premium over the rentals we pay to unaffiliated
lessors. We also rent, on a month-to-month basis, certain trailers from the
same officers at rates that are generally less than market-rate monthly
trailer rentals.
During 2000, we entered into a new $50 million credit agreement with a
group of three banks. The credit agreement, which has since been amended,
expires on June 1, 2002, and we may elect to convert the outstanding balance
into a term loan. Debt is secured by our revenue equipment, trade accounts
receivable and inventories.
In December of 2001, our credit agreement was amended to obtain the bank's
consent to sell our trailer and refrigeration unit dealership business in
December 2001. That amendment provided, among other things, that the amount
of credit available to us was reduced from $50 million to $33 1/3 million,
that the interest margins applied to borrowing were increased by 50 basis
points and that the term-loan option available to us was shortened from 48 to
13 months. The amended credit agreement expires on June 1, 2002.
If we were to elect the term loan option available to us at that time, the
term loan would be due on July 1, 2003, and one-fourth of the loan amount
would be paid in 12 monthly installments beginning July 1, 2002. If we were to
elect the term loan option, $4.7 million in letters of credit issued under the
credit agreement at December 31, 2001 would likely be funded, resulting in $4.7
million more debt and $4.7 million in other non-current assets on our balance
sheet.
We are currently discussing the potential terms and conditions of a
replacement credit facility with some banks and other lenders. Based on those
discussions, we expect to obtain new financing on terms no more stringent than
presently available to us.
Our primary needs for capital resources are to finance working capital,
capital expenditures and, from time to time, acquisitions. (The credit
agreement requires the banks' approval prior to an acquisition.) Our working
capital investment typically increases during periods of sales expansion when
higher levels of receivables and, with regard to non-freight operations,
inventory are present.
On April 1, 2002 we announced a retroactive change in the manner by which
we account for a life insurance policy that we own. The balance sheet impact
of the change was to reduce shareholders' equity by $7.1 million as of
December 31, 2001. Because our credit agreement contains restrictions as to
the minimum amount of our shareholders' equity, on March 29, we and the banks
amended the credit agreement. The amended agreement accommodates the
reduction of shareholders' equity, retroactively to December 31, 2001.
We had long-term debt including current maturities of $2 million as of
December 31, 2001. Also, we had issued $4.7 million on letters of credit in
connection with our risk management and leasing programs. Therefore, the
unused portion of the credit facility was approximately $27 million.
We plan to add up to 50 tractors to our company-operated fleet during
2002. Approximately 170 three-year old tractors, presently scheduled for
retirement during 2002, are expected to be replaced. These expenditures will
be financed with internally generated funds, borrowings under available credit
agreements and leasing. We expect these sources of capital to be sufficient
to finance the company's operations.
During 2001 and 2000, cash provided by operating activities was $10.9
million and $11.6 million, respectively, as compared to cash used in
operations of $3.8 million in 1999. These fluctuations have resulted from
volatility in profitability coupled with fluctuating working capital.
Expenditures for property and equipment totaled $11.7 million in 2001,
$7.7 million in 2000, and $28.3 million during 1999. In addition, we
financed, through operating leases, the acquisition of revenue equipment
valued at approximately $40 million in 2001, $36 million in 2000, and $40
million during 1999.
Fair Value of Financial Instruments
- -----------------------------------
As of December 31, 2001, debt was $2.0 million, which approximated fair
market value.
During 2000 and 2001, we contributed approximately 237,000 shares of
treasury stock into a rabbi trust for benefit of participants in a SERP. At
December 31, 2001, 137,000 shares remained in the trust. The EITF has stated
that the assets, liabilities and income (realized and unrealized) of such
trusts must be reflected in our financial statements. If trust assets are
invested in our common stock, EITF Issue 97-14 requires that future pre-tax
income reflect changes in our stock's value. Future net income will be
increased or decreased to reflect changes in the value of our shares held by
the rabbi trust.
We own life insurance policies that have cash surrender value. The
investment returns earned by the insurance company serve to pay insurance
costs and increase cash surrender value, which is a key determinant of the
amount that we could receive pursuant to the policy as of the date of our
financial statements. Accordingly, changes in the market value of and returns
from those investments could impact the value of our life insurance assets.
We held no other material market risk sensitive instruments (for trading
or non-trading purposes) that would involve significant relevant market risks,
such as equity price risk. Accordingly, the potential loss in our future
earnings resulting from changes in such market rates or prices is not
significant.
Critical Accounting Policies
- ----------------------------
We have a number of critical accounting policies. These require a more
significant amount of management judgement than the other accounting policies
we employ.
The trucking business involves an inherent risk of injury to our employees
and the public. Prior to 2002, we retained the first $500,000 and $1 million
of these risks, respectively, on a per occurrence basis, due primarily to
conditions in the insurance marketplace. In 2002, we will retain the first $1
million for work-related injuries and the first $5 million for public
liability risk. Since our company was founded in 1946, events above the level
of our pre-2002 retentions have been extremely rare.
Because 2002's public liability and work-related injury retentions are
significantly higher than in previous years, the potential adverse impact a
single occurrence can have on our finances is more significant than before.
When an event involving potential liability for one of these risks occurs, our
internal staff of risk management professionals, in conjunction with
management, estimates the most probable amount of our loss at the outcome of
settlement or litigation. Our risk management department will, if
appropriate, establish a reserve for this estimate. As additional information
becomes available, we increase or reduce the amount of this reserve. We also
maintain additional reserves for public liability and work-related injury
events that may have been incurred but not reported.
We extend credit terms to our customers. We also establish a reserve to
represent our estimate of accounts that will not ultimately be collected.
Once we conclude that a specific invoice is unlikely to be paid by the
customer, we charge the invoice against the reserve. We estimate the amount
of our bad debt reserve based on the composite age of our receivables. During
2001, the amount of our bad debt reserve declined by $3.1 million and the
amount of receivables that were more than 90 days old also declined by a
similar amount. Because we estimate our bad debt reserve based on the aging
of our accounts receivable, significant changes in our receivables aging could
impact our financial profits and financial condition.
Our deferred tax liability is stated net of offsetting deferred tax
assets. The assets consist of anticipated future tax deductions for an
operating loss carryforward as well as insurance and bad debt expenses which
have been reflected on our income statement but which are not yet tax
deductible. We believe it is more likely than not that sufficient taxable
income will occur in time to realize the full value of our tax assets. If our
expectation of such realizability diminishes, we may be required to
establish a valuation allowance on our balance sheet. This could diminish
our net income.
New Accounting Pronouncements
- -----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
two new statements, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 supersedes Accounting Principles Board Opinion No. 16,
"Business Combinations", eliminates the pooling-of-interests method of
accounting for business combinations and modifies the application of the
purchase accounting method. SFAS 141 is effective for all transactions
completed after June 30, 2001, except transactions using the pooling-of-
interests method that were initiated prior to July 1, 2001. Because we had no
business combination transactions in process or otherwise initiated at June
30, 2001, adoption of SFAS 141 did not have an impact on our consolidated
financial statements.
SFAS 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets". It eliminates the requirement to amortize goodwill and
indefinite-lived intangible assets, addresses the amortization of intangible
assets with a defined life and requires impairment testing and recognition for
goodwill and intangible assets. SFAS 142 became effective on January 1, 2002.
Because we do not have a significant amount of goodwill included on our
balance sheet, SFAS 142 did not have an impact on our consolidated financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). This statement supercedes Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30 ("APB 30"). SFAS 144 retains the fundamental provisions of SFAS 121 and the
basic requirements of APB 30; however, it establishes a single accounting
model to be used for long-lived assets to be disposed of by sale and it
expands the presentation of discontinued operations to include more disposal
transactions. The provisions of SFAS 144 became effective January 1, 2002. Our
adoption of SFAS 144 did not have an impact on our consolidated financial
statements.
*********
Five-Year Financial and Statistical Information
- -----------------------------------------------
(unaudited and in thousands, except
ratio, rate, equipment and per-share
amounts) 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Summary of Operations
Total revenue 378,409 392,393 372,149 349,932 316,568
Operating expenses 376,751 390,664 387,384 333,179 301,508
Net (loss) income* (154) (1,335) (12,575) 9,252 8,397
Pre-tax margin* - (0.5)% (5.3)% 4.3% 4.0%
After-tax return on equity* (0.2)% (1.8)% (15.1)% 10.4% 10.1%
Net (loss) income per
common share, diluted* (.01) (.08) (.77) .54 .49
Financial Data
Working capital 25,124 37,016 12,054 39,353 44,979
Current ratio 1.7 1.9 1.2 2.2 2.4
Cash provided by (used in)
operations* 10,890 11,641 (3,826) 12,610 27,193
Capital expenditures, net 4,922 129 23,917 22,236 7,955
Debt 2,000 14,000 26,500 - -
Shareholders' equity* 74,576 74,387 75,614 91,215 86,742
Debt-to-equity ratio* - .2 .4 - -
Common Stock
Average shares outstanding,
diluted 16,378 16,318 16,352 17,039 17,056
Book value per share* 4.50 4.54 4.63 5.53 5.15
Market value per share
High 2.790 4.875 8.500 10.500 10.250
Low 1.500 1.234 3.250 5.688 8.375
Revenue
Full-truckload 236,443 221,623 211,545 206,098 190,576
Less-than-truckload 90,888 101,932 99,357 100,015 95,522
TL/LTL % revenue contribution 62/24 57/26 57/27 59/29 60/30
Equipment in Service at Yearend
Tractors
Company operated 1,389 1,265 1,240 1,328 1,220
Provided by owner-operators 704 753 690 672 628
----- ----- ----- ----- -----
Total 2,093 2,018 1,930 2,000 1,848
Trailers
Company operated 3,082 3,150 3,335 2,940 2,784
Provided by owner-operators 21 25 23 22 23
----- ----- ----- ----- -----
Total 3,103 3,175 3,358 2,962 2,807
Full-Truckload
Revenue 236,443 221,623 211,545 206,098 190,576
Loaded miles 166,322 158,041 157,248 155,045 143,902
Shipments 178.5 173.9 165.0 166.0 156.9
Revenue per shipment 1,325 1,274 1,282 1,242 1,215
Loaded miles per shipment 932 919 953 934 917
Revenue per loaded mile 1.42 1.40 1.35 1.33 1.32
Shipments per business day 708 690 655 659 623
Revenue per business day 938 879 839 817 756
Less-than-Truckload
Revenue 90,888 101,932 99,357 100,015 95,522
Hundredweight 7,386 8,290 8,075 8,502 8,537
Shipments 253.0 284.4 277.9 293.1 293.1
Revenue per shipment 359 358 358 341 326
Revenue per hundredweight 12.31 12.29 12.30 11.76 11.19
Revenue per business day 361 404 394 397 379
Pounds per shipment 2,919 2,915 2,906 2,901 2,913
*Prior year amounts have been restated. See Note 2 of the Consolidated Notes.
********************************************************
Consolidated Statements of Income
Frozen Food Express Industries, Inc. and Subsidiaries
Years ended December 31,
(in thousands, except per share amounts)
2001 2000* 1999*
---- ---- ----
Revenue
Freight revenue $327,331 $323,555 $310,902
Non-freight revenue 51,078 68,838 61,247
------- ------- -------
378,409 392,393 372,149
Costs and expenses ------- ------- -------
Freight operating expenses
Salaries, wages and related expenses 87,900 87,984 88,734
Purchased transportation 73,897 77,833 70,353
Supplies and expenses 98,545 94,719 88,870
Revenue equipment rent 27,024 25,144 26,949
Depreciation 11,458 11,582 11,752
Communications and utilities 3,766 4,325 3,949
Claims and insurance 16,673 18,040 18,577
Operating taxes and licenses 3,808 4,239 5,488
Gain on disposition of equipment (1,440) (1,604) (594)
Miscellaneous expense 3,230 3,969 6,674
Impairment of long-lived assets - - 2,656
Restructuring - (1,821) 3,721
------- ------- -------
324,861 324,410 327,129
Non-freight costs and operating expenses 51,890 66,254 60,255
------- ------- -------
376,751 390,664 387,384
------- ------- -------
Income (loss) from operations 1,658 1,729 (15,235)
Interest and other expense* 1,710 3,722 4,464
------- ------- -------
Loss before income tax* (52) (1,993) (19,699)
Income tax provision (benefit) 102 (658) (7,124)
------- ------- -------
Net loss* $ (154) $ (1,335) $(12,575)
======= ======= =======
Net loss per share of common stock*
Basic $ (.01) $ (.08) $ (.77)
Diluted $ (.01) $ (.08) $ (.77)
- ---------------------- ======= ======= =======
See accompanying notes.
*Prior year amounts have been restated. See Note 2 of the Consolidated Notes.
***********************************************
Consolidated Balance Sheets
Frozen Food Express Industries, Inc. and Subsidiaries
As of December 31,
(in thousands)
2001 2000*
Assets ---- ----
Current assets
Cash and cash equivalents $ 3,236 $ 1,222
Accounts receivable, net 39,600 47,652
Inventories 7,409 17,208
Tires on equipment in use 4,558 4,424
Other current assets 5,246 7,546
------- -------
Total current assets 60,049 78,052
Property and equipment, net 55,154 61,899
Other assets * 11,334 7,148
------- -------
$126,537 $147,099
======= =======
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 19,056 $ 22,209
Accrued claims 7,960 8,101
Accrued payroll 5,471 5,834
Current maturities of long-term debt 250 -
Deferred federal income tax 289 416
Accrued liabilities 1,899 4,476
------- -------
Total current liabilities 34,925 41,036
Long-term debt 1,750 14,000
Deferred federal income tax 2,186 1,551
Accrued claims and liabilities 13,100 16,125
Commitments and contingencies - -
------- -------
51,961 72,712
Shareholders' equity ------- -------
Common stock (17,281 shares issued) 25,921 25,921
Additional paid-in capital 3,753 4,655
Retained earnings * 50,403 50,557
------- -------
80,077 81,133
Less - Treasury stock (845 and
965 shares), at cost 5,501 6,746
------- -------
Total shareholders' equity 74,576 74,387
------- -------
$126,537 $147,099
======= =======
- ----------------------
See accompanying notes.
* Prior year amounts have been restated. See Note 2 of the Consolidated Notes.
*************************************
Consolidated Statements of Cash Flows
Frozen Food Express Industries, Inc. and Subsidiaries
Years ended December 31,
(in thousands)
2001 2000* 1999*
---- ---- ----
Cash flows from operating activities
Net loss * $ (154) $(1,335) $(12,575)
Non-cash items involved in net loss
Depreciation and amortization 15,459 15,988 13,564
Provision for losses on accounts
receivable 2,143 3,122 5,296
Deferred federal income tax 508 (539) (6,124)
Gain on disposition of equipment (1,440) (1,604) (594)
Life insurance * (927) (1,144) (822)
Impairment of long-lived assets - - 2,656
Restructuring expense - (1,821) 3,721
Non-cash contribution to employee
benefit plans 368 169 -
Change in assets and liabilities,
net of divestiture
Accounts receivable 1,576 922 (13,359)
Inventories 642 511 (5,144)
Tires on equipment in use (2,498) (1,410) 240
Other current assets 1,868 (3,520) (719)
Accounts payable (1,917) (1,399) 6,505
Accrued claims and liabilities (4,774) 3,757 5,377
Accrued payroll 36 (56) (744)
Federal income tax payable - - (1,104)
------ ------ ------
Net cash provided by (used in)
operating activities 10,890 11,641 (3,826)
------ ------ ------
Cash flows from investing activities
Proceeds from divestiture 6,832 - -
Expenditures for property and equipment (11,746) (7,711) (28,294)
Proceeds from sale of property and
equipment 6,824 7,582 4,377
Other* 1,239 658 (141)
------ ------ ------
Net cash provided by (used in)
investing activities 3,149 529 (24,058)
------ ------ ------
Cash flows from financing activities
Borrowings 20,000 19,000 72,500
Payments against borrowings (32,000) (31,500) (46,000)
Cash dividends paid - - (1,472)
Proceeds from sale of treasury stock - 257 198
Purchases of treasury stock (25) (318) (1,752)
Net cash (used in) provided by ------ ------ ------
financing activities (12,025) (12,561) 23,474
------ ------ ------
Net increase (decrease) in cash and
cash equivalents 2,014 (391) (4,410)
Cash and cash equivalents at beginning of year 1,222 1,613 6,023
------ ------ ------
Cash and cash equivalents at end of year $ 3,236 $ 1,222 $ 1,613
====== ====== ======
- --------------------------
See accompanying notes.
* Prior year amounts have been restated. See Note 2 of Consolidated Notes.
*******************************************
Consolidated Statements of Shareholders' Equity
Frozen Food Express Industries, Inc. and Subsidiaries
Three Years Ended December 31, 2001
(in thousands)
Shares Par
of Value Shares Cost
Common of Additional of of Total
Stock Common Paid-In Retained Treasury Treasury Shareholders'
Issued Stock Capital Earnings Stock Stock Equity
------ ----- ------- -------- ----- ----- ------
At 12/31/1998
as previously
reported 17,281 $25,921 $5,323 $73,001 782 $5,968 $98,277
Effect of
restatement
(see Note 2) - - - (7,062) - - (7,062)
Net loss* - - - (12,575) - - (12,575)
Cash dividends
paid - - - (1,472) - - (1,472)
Treasury stock
reacquired - - - - 239 1,752 (1,752)
Exercise of
stock options - - (267) - (61) (465) 198
------ ------ ----- ------ --- ----- ------
At 12/31/1999* 17,281 25,921 5,056 51,892 960 7,255 75,614
Net loss* - - - (1,335) - - (1,335)
Treasury stock
reacquired - - - - 115 318 (318)
Treasury stock
reissued - - (305) - (94) (706) 401
Exercise of
stock options - - (96) - (16) (121) 25
------ ------ ----- ------ --- ----- ------
At 12/31/2000* 17,281 25,921 4,655 50,557 965 6,746 74,387
Net loss - - - (154) - - (154)
Treasury stock
reacquired - - - - 11 25 (25)
Treasury stock
reissued - - (902) - (131) (1,270) 368
------ ------ ----- ------ --- ----- ------
At 12/31/2001 17,281 $25,921 $3,753 $50,403 845 $5,501 $74,576
====== ====== ===== ====== === ===== ======
See accompanying notes.
*Prior year amounts have been restated. See Note 2 of the Consolidated Notes.
*********************************************
Notes to Consolidated Financial Statements
- ------------------------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation - These consolidated financial statements
include Frozen Food Express Industries, Inc., a Texas corporation, and
our subsidiaries, all of which are wholly-owned. We are primarily
engaged in motor carrier transportation of perishable commodities,
providing service for full-truckload and less-than-truckload throughout
North America. All significant intercompany balances and transactions
have been eliminated in consolidation.
Accounting Estimates - The preparation of financial statements
requires estimates and assumptions that affect the value of assets,
liabilities, revenue and expenses. Estimates and assumptions also
influence the disclosure of contingent assets and liabilities. Actual
outcomes may vary from these estimates and assumptions.
Cash Equivalents - We consider all highly liquid investments with a
maturity of three months or less at the time of purchase to be cash
equivalents.
Accounts Receivable - We extend trade credit to our customers who are
primarily located in the United States. Accounts receivable from
customers are stated net of estimated allowances for doubtful accounts
of $4.3 million and $7.4 million as of December 31, 2001 and 2000,
respectively.
Inventories - Inventories are valued at the lower of cost
(principally weighted average cost) or market and primarily consist of
finished products which are ready for resale.
Tires - We record the cost of tires purchased with vehicles and
replacement tires as a current asset. Tires are then recorded to
expense on a per-mile basis.
Accrued Claims - We record an expense equal to our estimate of our
liability for work-related or cargo claims at the time an event occurs.
If additional information subsequently becomes available, we then
determine whether our estimate should be revised.
Freight Revenue and Expense Recognition - Freight revenue and
associated direct operating expenses are recognized on the date the
freight is picked up from the shipper. The Securities and Exchange
Commission has issued a Staff Accounting Bulletin ("SAB") which provides
guidance on revenue recognition issues in financial statements. We have
reviewed our revenue recognition policies and determined that we are in
compliance with the SAB.
Income Taxes - Deferred income taxes are provided for temporary
differences between the tax basis of assets and liabilities and their
financial reporting amounts and are valued based upon statutory tax
rates anticipated to be in effect when temporary differences are
expected to reverse.
Long-Lived Assets - We periodically evaluate whether the remaining
useful life of our long-lived assets may require revision or whether the
remaining unamortized balance is recoverable. When factors indicate that
an asset should be evaluated for possible impairment, we use an estimate
of the asset's undiscounted cash flow in evaluating whether an
impairment exists. If an impairment exists, the asset is written down
to net market value. Included in other non-current assets are costs
associated with life insurance policies and related investments.
Prior Period Amounts - Certain other prior period amounts have been
reclassified to conform with the current year presentation.
2. Prior Year Restatement
----------------------
In March of 2002, we retroactively changed the manner in which we
account for a life insurance policy that we acquired in 1993. The life
insurance policy, with a death benefit of at least $17.25 million, was
purchased to provide us funds with which we could purchase a large block
of our common stock owned by a non-employee shareholder.
Beginning in 1993, we had capitalized the premium payments as an
investment to purchase the shares in the future. We have changed the
manner in which we account for the insurance policy. We now expense
the excess of the premiums over the amount that we could actually
realize under the insurance contract as of the date of the related
financial statements in accordance with the provisions of Financial
Accounting Standards Board Technical Bulletin 85-4, "Accounting for
Purchases of Life Insurance". Benefit proceeds under the policy, if any, (and
to the extent they exceed the book value of the policy) will be recorded as a
non-operating gain in the future. Accordingly, for 2000 and 1999, our
operating income and our restated net loss and net loss per share were as
follows (in millions):
2000 1999
---- ----
Operating income (loss):
As previously reported $ 1.7 $(15.2)
As restated 1.7 (15.2)
Net loss:
As previously reported $ (1.2) $(12.1)
As restated (1.3) (12.6)
Net loss per share:
As previously reported $ (.07) $ (.74)
As restated (.08) (.77)
3. Divestiture
-----------
In December 2001, we sold the largest component of our non-freight
operations. The business we sold is a dealership involved in the sale
and service of semi trailers and related refrigeration equipment. It
had been operating under the name of W&B Refrigeration Service Company.
The buyer group was led by our former employee who until the date of
the sale managed the dealership on our behalf. We sold the majority of
the operating assets of the dealership including accounts receivable,
inventory, machinery, equipment and one real estate asset. The buyer
also assumed all liabilities associated with the dealership including,
but not limited to accounts payable and accrued payroll. The assets we
sold had a net book value of $14.7 million. The assumed liabilities
totaled approximately $2.8 million. There was no gain or loss on this
transaction.
When the sale closed, we received as consideration $6.8 million in
cash, a note receivable from the buyer for $4.1 million and a limited
partnership interest in the buyer group to which we assigned a value of
$1 million, based on our estimate of its fair market value. Our note
receivable from the buyer is subordinated to senior debt which the buyer
borrowed to obtain the cash we received at closing. The note must be
repaid in 3 equal installments in December 2007, 2008 and 2009, until
which time monthly interest payments are due. At December 31, 2001, the
note bore interest at 7%. Because we retained a 19.9% ownership
interest in the buyer group, we were precluded from accounting for the
dealership as a discontinued operation. The note and partnership
interest are included in other non-current assets on our balance sheet.
We will account for our limited partnership interest according to the
equity method.
Our total non-freight revenue was $51.1 million for 2001, $68.8
million for 2000 and $61.2 million for 1999. Had revenue from the sold
dealership not been included in each of those years operations, our non-
freight revenue would have been $9.6 million for 2001, $10.5 million for
2000 and $9.2 million for 1999.
During 2000 and 1999, our consolidated pre-tax losses were $2.0
million and $19.7 million, respectively. Had the results of the sold
dealership not been included in the pre-tax results for these years, our
consolidated pre-tax loss would have been $2.0 million for 2000 and
$20.1 million for 1999. For 2001, our consolidated pre-tax income would
have been $1.1 million as compared to 2001's pre-tax loss of $52,000.
4. Property and Equipment
----------------------
Depreciation expense is recorded by the straight-line method.
Repairs and maintenance are charged to expense as incurred. Property
and equipment is shown at historical cost and consists of the following
(in thousands):
December 31, Estimated
----------- Useful Life
2001 2000 (Years)
---- ---- -----
Land $ 4,215 $ 4,845 -
Buildings and improvements 16,118 16,421 20 - 30
Revenue equipment 50,481 53,098 3 - 7
Service equipment 15,708 17,233 2 - 20
Computer, software and
related equipment 21,008 20,235 3 - 12
------- -------
107,530 111,832
Less accumulated depreciation 52,376 49,933
------- -------
$ 55,154 $ 61,899
======= =======
5. Debt
----
As of December 31, 2001, we had a $33 1/3 million secured line of
credit pursuant to a revolving credit agreement with three commercial
banks. Interest is due quarterly. We may elect to borrow at a daily
interest rate based on the bank's prime rate or for specified periods of
time at fixed interest rates which are based on the London Interbank
Offered Rate in effect at the time of a fixed rate borrowing. At
December 31, 2001, $2 million was borrowed against this facility.
Loans are secured by liens against our inventory, trade accounts
receivable and over-the-road trucking equipment. The agreement also
contains a pricing "grid" where increased levels of profitability and
cash flows or reduced levels of indebtedness can reduce the rates of
interest expense we incur. The agreement restricts, among other things,
payments of cash dividends, repurchase of our stock and the amount of
our capital expenditures. The amount we may borrow under the facility
may not exceed the lesser of $33 1/3 million, as adjusted for letters of
credit and other debt as defined in the agreement, a borrowing base or a
multiple of a measure of cashflow as described in the agreement.
The agreement expires on June 1, 2002, prior to which time we may
elect to convert the amount then borrowed to a 13-month term loan. The
term loan would be payable in 12 monthly installments beginning July 1,
2002, each in an amount equal to 1/48 of the amount borrowed. A final
payment equal to the remaining 75% would be due on July 1, 2003.
Because six of the monthly payments would be due during 2002, we have
classified 6/48 of our long-term debt as a current liability at December
31, 2001. We intend to refinance this facility prior to June 1, 2002.
In March 2002, we retroactively changed the manner by which we account
for a life insurance policy that we own. The cumulative balance sheet impact
of the change was to reduce shareholders' equity by $7.1 million as of
December 31, 2001. Because our credit agreement contains restrictions as to
the minimum amount of our shareholders' equity, on March 29, we and the banks
amended the credit agreement. The amended agreement accommodates the reduction
of shareholders' equity, retroactively to December 31, 2001.
Letters of Credit issued against the credit facility in connection
with our risk management and leasing programs totaling approximately
$4.7 million were in effect as of December 31, 2001. Accordingly,
approximately $26.6 million was available under the agreement. Total
interest payments under the credit line during 2001, 2000 and 1999 were
$1,118,000, $2,155,000 and $1,341,000, respectively. The weighted
average interest rate we incurred during 2001 was 6.9%.
6. Commitments and Contingencies
-----------------------------
We lease real estate and equipment. The aggregate future minimum
rentals under non-cancelable operating leases at December 31, 2001 were
(in thousands):
Third Related
Parties Parties Total
------- ------- -----
2002 $24,907 $1,123 $26,030
2003 18,406 454 18,860
2004 10,358 - 10,358
2005 4,545 - 4,545
2006 2,931 - 2,931
After 2006 1,360 - 1,360
------ ----- ------
Total $62,507 $1,577 $64,084
====== ===== ======
Related parties involve tractors leased from two of our officers
under non-cancelable operating leases. For 2001, 2000 and 1999,
payments to officers under these leases were $1.6 million, $1.8 million
and $1.4 million, respectively. Because the terms of our leases with
related parties are more flexible than those governing tractors we lease
from unaffiliated lessors, we pay the officers a modest premium over the
rentals we pay to unaffiliated lessors. We also rent, on a month-to-
month basis, certain trailers from the same officers at rates that are
generally less than market-rate monthly trailer rentals.
At December 31, 2001, we had commitments of approximately $35 million
for the purchase of revenue equipment during 2002 and 2003 and $1.3
million for a life insurance premium due during November, 2002.
We have accrued for costs related to public liability, cargo and
work-related injury claims. When an incident occurs we record a reserve
for the incident's estimated outcome. As additional information becomes
available, adjustments are made. Accrued claims liabilities include all
such reserves and our estimate for incidents which may have been
incurred but not reported. In our opinion, any additional costs incurred
over amounts incurred to resolve these claims will not materially
deviate from the aggregate amounts accrued. At December 31, 2001, we
had established $4.7 million of irrevocable letters of credit in favor
of insurance companies and pursuant to certain insurance and leasing
agreements.
7. Financing and Investing Activities Not Affecting Cash
-----------------------------------------------------
During 2001 and 2000, we funded contributions to a Supplemental
Executive Retirement Plan (a "SERP") and our 401(k) savings plan by
transferring 187,188 and 79,346 shares, respectively, of treasury stock
to the plan trustees. We recorded expense for the fair market value of
the shares, which at the time of the contributions, was approximately
$368,000 for 2001 and $169,000 for 2000.
On December 26, 2001, we sold the largest component of our non-
freight business. In addition to $6.8 million cash the buyer paid us,
the buyer executed a note payable to us for $4.1 million and assumed
liabilities of the business amounting to $2.8 million. The buyer also
issued us a 19.9% interest in the buyer's business which we value at
$1.0 million.
As of December 31, 2001 and 2000, accounts receivable included
$549,000 and $735,000, respectively, from the sale of equipment retired
and sold in those years. At December 31, 2001 and 2000, accounts
payable included $260,000 and $118,000, respectively, related to capital
expenditures.
8. Savings Plan
------------
We sponsor a 401(k) Savings Plan for our employees. Our contributions
to the 401(k) are determined by reference to voluntary contributions
made by each of our employees. Additional contributions are made at the
discretion of the Board of Directors. Prior to 2001, our 401(k)
contributions were made in cash. Beginning in late 2001, we paid our
contributions with shares of our treasury stock. For 2001, 2000 and
1999, our total cash contributions to the 401(k) were approximately
$1,091,000, $1,370,000 and $1,481,000, respectively. During 2001, we
also contributed 29,000 shares of our treasury stock valued at $62,000
to the 401(k).
9. Net Loss Per Share of Common Stock
----------------------------------
Our basic loss per share was computed by dividing our net loss by the
weighted average number of shares of common stock outstanding during the
year. The table below sets forth information regarding weighted average
basic and diluted shares (in thousands):
2001 2000 1999
----- ---- ----
Basic Shares 16,378 16,318 16,352
Common Stock Equivalents - - -
------ ------ ------
Diluted Shares 16,378 16,318 16,352
====== ====== ======
For 2001, 2000 and 1999, approximately 15,000, 18,000 and 81,000,
respectively, of common stock equivalent shares were excluded because
their impact would have been anti-dilutive. All common stock equivalents
result from stock options.
10. Income Taxes
------------
No federal income taxes were paid during 2001, 2000 or 1999. Net
operating loss carryforwards will begin to expire in 2020. Changes in
the primary components of the net deferred tax liability were (in
thousands):
December 31, December 31,
2000 Activity 2001
---- -------- ----
Deferred Tax Assets:
Accrued claims $ 7,215 $ (617) $ 6,598
Net operating loss 965 (7) 958
Allowance for bad debts 2,654 (1,026) 1,628
------ ------ ------
10,834 (1,650) 9,184
------ ------ ------
Deferred Tax Liabilities:
Prepaid expense (2,775) 174 (2,601)
Property and equipment (7,658) 1,181 (6,477)
Other (2,368) (213) (2,581)
------ ------ ------
(12,801) 1,142 (11,659)
------ ------ ------
$ (1,967) $ (508) $ (2,475)
====== ====== ======
The provision for (benefit from) income tax consists of the following
(in thousands):
2001 2000 1999
Taxes currently payable: ---- ---- ----
Federal $(415) $(114) $(1,104)
State 9 (5) 104
Deferred federal taxes 508 (539) (6,124)
--- ---- -----
Total provision (benefit) $ 102 $(658) $(7,124)
=== ==== =====
Differences between the statutory federal income tax expense
(benefit) and our effective income tax expense (benefit) are as follows
(in thousands):
2001 2000 1999
---- ---- ----
Income tax benefit at statutory federal rate $ (18) $(636) $(6,739)
Non-deductible life insurance expense 116 42 156
State income taxes and other 4 (64) (541)
--- ---- ------
$102 $(658) $(7,124)
=== ==== ======
11. Shareholders' Equity
--------------------
Since before 1999 there have been authorized 40 million shares of our
$1.50 par value common stock.
Our stock option plans provide that options may be granted to
officers and employees at our stock's fair market value on the date of
grant and to our non-employee directors at the greater of $1.50 or 50%
of the market value at date of grant. Options may be granted for 10
years following plan adoption. Options expire 10 years after a grant.
The following table summarizes information regarding stock options
(in thousands, except per-share amounts):
2001 2000 1999
---- ---- ----
Options outstanding at beginning of year 3,554 3,182 3,217
Cancelled (1,183) (323) (566)
Granted 45 711 592
Exercised - (16) (61)
----- ----- -----
Options outstanding at year-end 2,416 3,554 3,182
===== ===== =====
Exercisable options 1,076 1,363 1,402
Options available for future grants 2,748 1,642 2,045
Expense from director stock options $ 9 $ 29 $ 35
Weighted average price of options
Cancelled during year $ 9.20 $ 8.36 $ 8.66
Granted during year $ 1.89 $ 2.77 $ 7.70
Exercised during year - $ 2.36 $ 3.13
Outstanding at year-end $ 6.47 $ 7.44 $ 8.55
===== ===== =====
The range of unexercised option prices at December 31, 2001 was as
follows:
Quantity of Options
(in thousands) Priced Between
-------------- --------------
816 $1.00 - $ 5.00
582 $5.01 - $ 8.00
1,018 $8.01 - $12.00
===== ==============
We apply APB Opinion 25 and related interpretations to account for
our stock options. Accordingly, no expense has been recognized for
stock option grants to employees. Had we elected to apply Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123 to account for stock options, our net loss
would have increased to $0.4, $2.3 and $13.7 million ($0.03, $0.14 and
$0.84 per share) for 2001, 2000 and 1999, respectively. In calculating
these amounts, we assumed that expenses from employee stock options
would accrue over each option's vesting period.
The fair value for these options was estimated at the date of grant
using a Black-Scholes option valuation model with the following weighted
average assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate 5.12% 6.00% 4.71%
Dividend yield - - 1.50%
Volatility factor .477 .467 .700
Expected life (years) 7.0 6.0 6.2
==== ==== ====
The Black-Scholes model uses highly subjective assumptions. This
model was developed for use in estimating the value of options that have
no restrictions on vesting or transfer. Our stock options have such
restrictions. Therefore, in our opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of our
stock options.
We sponsor a SERP for the benefit of certain "highly compensated"
personnel (as determined in accordance with the Employee Retirement
Income Security Act of 1974). The SERP's investment income, assets and
liabilities which are contained in a rabbi trust, are included in our
financial statements. During 2000 and 2001, we issued 237,000 shares of
treasury stock into the rabbi trust. As of December 31, 2001, 137,000
shares remained in the trust. Consistent with the FASB's Emerging
Issues Task Force ("EITF") Issue 97-14, the shares of our common stock
held in a rabbi trust are accounted for as treasury stock until SERP
participants elect to liquidate the stock.
During 2000, our Board of Directors approved a rights agreement that
authorized a distribution of one common stock purchase right for each
outstanding share of our common stock. The rights become exercisable if
certain events generally relating to a change of control occur. Rights
initially have an exercise price of $11. If such events occur, the
rights will be exercisable for a number of shares having a market value
equal to two times the exercise price of the rights. We may redeem the
rights for $.001 each. The rights will expire in 2010, but the rights
agreement is subject to review every three years by an independent
committee of our Board of Directors.
12. Operating Segments
------------------
We have two reportable operating segments as defined by SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information".
The larger segment consists of our motor carrier operations, which are
conducted in a number of divisions and subsidiaries and are similar in
nature. We report all motor carrier operations as one segment. The
smaller segment consists of our non-freight operations that were, until
December 26, 2001, engaged primarily in the sale and service of
refrigeration equipment and of trailers used in freight transportation.
Although we sold the transportation equipment dealership in December, we
retained a 19.9% ownership interest in the buyer. We will account for
that interest by the equity method. The other portions of our non-
freight segment, of which we continue to own 100%, are engaged in the
sale and service of air conditioning and refrigeration components.
Financial information for each segment is as follows (in millions):
2001 2000 1999
---- ---- ----
Freight Operations
Total Revenue $327.3 $323.6 $310.9
Restructuring Expense - (1.8) 3.7
Operating Income (Loss) 2.5 (0.9) (16.2)
Total Assets 123.8 140.3* 149.0*
Non-Freight Operations
Total Revenue $ 54.9 $ 72.6 $ 74.7
Operating (Loss) Income (0.8) 2.6 1.0
Total Assets 18.8 31.5 33.2
Intercompany Eliminations
Revenue $ 3.8 $ 3.8 $ 13.5
Total Assets 16.1 24.7 19.6
Consolidated
Revenue $378.4 $392.4 $372.1
Restructuring Expense - (1.8) 3.7
Operating Income (Loss) 1.7 1.7 (15.2)
Total Assets 126.5 147.1* 162.6*
*Prior Year amounts have been restated. See Note 2.
Intercompany eliminations relate to non-freight revenue from
transfers at cost of inventory such as trailers and refrigeration units
from the non-freight segment for use by the freight segment.
****************************************************
Report of Independent Public Accountant
---------------------------------------
To Frozen Food Express Industries, Inc.:
We have audited the accompanying consolidated balance sheets of
Frozen Food Express Industries, Inc. and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2001, (2000 and 1999 as restated - see Note 2 of
the Consolidated Notes). 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 audits.
We conducted our audits in accordance with auditing standards
generally accepted in the 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 financial statements referred to above present
fairly, in all material respects, the financial position of Frozen Food
Express Industries, Inc. and subsidiaries as of December 31, 2001 and
2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
Dallas, Texas /s/ ARTHUR ANDERSEN LLP
April 3, 2002 -----------------------
*********************************************
Unaudited Quarterly Financial and Stock Information
- ---------------------------------------------------
(in thousands, except per-share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------ ----
2001
- ----
Revenue $89,488 $99,273 $98,129 $91,519 $378,409
(Loss) Income from operations (831) 856 818 815 1,658
Net (loss) income* (884) 248 277 205 (154)
Net (loss) income per share of
common stock*
Basic (.05) .02 .02 .01 (.01)
Diluted (.05) .02 .02 .01 (.01)
Common stock price per share
High 2.500 2.710 2.790 2.480 2.790
Low 1.500 1.620 1.650 1.960 1.500
Common stock trading volume 1,076 2,059 677 712 4,524
====== ====== ====== ====== =======
2000
- ----
Revenue $92,416 $99,999 $101,402 $98,576 $392,393
Income (loss) from operations 258 1,904 (1,371) 938 1,729
Net (loss) income * (594) 722 (1,500) 37 (1,335)
Net (loss) income per share of
common stock*
Basic (.04) .04 (.09) - (.08)
Diluted (.04) .04 (.09) - (.08)
Common stock price per share
High 4.875 3.688 3.063 2.469 4.875
Low 2.906 2.250 2.281 1.234 1.234
Common stock trading volume 1,423 2,026 1,078 3,624 8,151
====== ====== ======= ====== =======
* Prior year amounts have been restated. See Note 2 of the Consolidated Notes.
As of March 2, 2002, we had approximately 5,000 beneficial
shareholders, including participants in our retirement plans.