EXHIBIT 13.1
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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 7.3% in 2002 to $350.9 million. For 2001, revenue totaled
$378.4 million and was 3.6% below 2000 revenue. Freight revenue rose by
3.4% during 2002 and 1.2% in 2001.
For our full-truckload operations, fuel adjustment charges as a
percent of revenue were 1.8%, 3.1% and 3.3% during 2002, 2001 and 2000,
respectively. Excluding the impact of these charges, full-truckload revenue
rose by 5.1% in 2002, 6.8% in 2001 and 1.5% in 2000. The 2002 increase
principally resulted from a 7% increase in the number of full-truckload
shipments, which was tempered by a reduced average length of haul. Our
prices are typically a function of shipment weight, commodity type and
distance traveled. We are starting to see some diminished pressure on our
freight rates which has negatively impacted our results during recent years.
Accordingly, during the last half of 2002, we began to increase certain of
our freight rates.
As a percent of total less-than-truckload ("LTL") revenue, fuel
adjustment charges were 2.2%, 3.1% and 3.5% for 2002, 2001 and 2000,
respectively. Excluding the impact of these charges, LTL revenue rose by 2.9%
during 2002, due to a 2.7% increase in the number of LTL shipments we hauled.
Such LTL revenue declined by 10.5% and 0.6% during 2001 and 2000, respectively.
Those declines primarily resulted from a reduced number of LTL shipments in
those years, partially offset by increased average shipment size.
For decades, most of the market for nationwide refrigerated LTL
service has been shared between one other company and ourselves. We
competed primarily on price and breadth of services. In recent years, the
competitor's annual LTL revenue was about one half as much as our LTL
revenue. During December 2002, the competitor announced that it planned to
cease operations and liquidate, a process that began in January 2003. As a
result, we have experienced a significant increase in our LTL volume of
shipments. In order to provide service to our expanded LTL customer base,
in December 2002, we opened terminals near Miami, FL and Modesto, CA.
Although we expect this increased activity to carry over into future periods,
there can be no assurance that will occur.
Reduced demand for LTL services,together with the increased presence
of competitors capable of arranging such services, 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 our operating income. During 2001, as LTL activity
and revenue declined, many LTL-related costs remained static.
We periodically assess the profitability of our LTL operations. As
a result, we closed 5 LTL terminals during 2000 and 2001. We also periodically
alter the frequency at which we service locations where freight volumes have
declined and change 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. At December 31, 2002, our entire LTL fleet consisted
of approximately 270 tractors.
At the end of 2002, our full-truckload fleet numbered approximately
1,880 trucks, as compared to about 1,810 at the end of 2001 and 1,725 at the
end of 2000. Primarily due to the increased number of trucks, the number of
full-truckload shipments rose by 7% during 2002 as compared to 2.6% in 2001.
The number of trucks in our full-truckload company-operated fleet
rose by almost 40 during 2000 and by 110 to approximately 1,300 during 2001.
As of December 31, 2002, there were approximately 1,340 tractors in our
full-truckload company-operated fleet.
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.
About 6% of our full-truckload company-operated fleet is now engaged
in 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. We have continued to improve our capability to
provide, and expanded our efforts to market, dedicated-fleet services.
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 typically 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 from time to time due to a shortage of drivers. 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 and 2002, the shortage of qualified drivers diminished.
Employee-drivers, as well as all other qualified employees, partici-
pate 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. 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.
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 27.5%, 26.9% and 27.0% for 2002, 2001 and 2000, respectively.
During 2001, a 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. Of the $5.2 million increase in salaries, wages and related expenses
during 2002, about 25% came from increased non-driver payroll expense, most
of which is associated with the expansion of our marketing and safety
departments. About 50% of 2002's increase resulted from higher expenses
related to work-related injury and the escalating cost of our group health
insurance programs. As a percentage of freight revenue, driver payroll
expenses declined somewhat during 2002.
Independent-contractor equipment generated 29.5%, 26.3% and 27.7% of
full-truckload revenue during 2002, 2001 and 2000, respectively. Independent
contractors typically provide a tractor that they own to transport freight
on our behalf. During each of the past three years, between 65% and 70% of
our LTL revenue was generated by owner-operator equipment. 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 generally determined by reference to the
revenue associated with their activities. As of January 1, 2001, there were
approximately 535 such tractors in the full-truckload fleet. At December 31,
2001, there were approximately 510 such tractors. At December 31, 2002, there
were about 545. As the number of these trucks fluctuates, so too does the
amount of revenue generated by such units.
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 2001 to 23.2%
in 2002. For 2000, such expenses were 24.1% of freight revenue. We will
attempt to further expand our fleet of owner-operator trucks during 2003.
Supplies and expenses rose by $5.8 million in 2000, by $3.8 million
in 2001 and then declined by $1.6 million during 2002. Most of 2002's decrease
was related to diesel fuel for our company-operated fleet of tractors and
trailers. Most of the 2001 increase was related to repairs to our company-
operated fleet of tractors and 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 2002, however, our
average price per gallon fell by 5%.
Sudden and dramatic fuel price volatility impacts our profits. For
example, in early 2003, the average price we pay for diesel fuel increased
by 35% or more compared to our average price during 2002. 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 (but not eliminating) the impact of such volatility on our profits.
Such fluctuations result from many external market factors that we cannot
influence or predict. Also, each year several states increase fuel taxes.
Recovery of future increases or realization of future decreases in fuel
prices, 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 2002
and 2001.
The non-fuel components of supplies and expenses (principally
repairs, tires and freight handling expenses) rose by $3.6 million in 2001
but fell by about $750,000 in 2002. The improvement during 2002 resulted
from more effective management of our efforts to recruit qualified drivers.
A significant portion of 2001's 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 remains uncertain at this time.
The total of revenue equipment rent and depreciation expense was
11.9% of freight revenue in 2002, 11.8% in 2001 and 11.4% in 2000. This
increase was 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, older model company-operated tractors and
trailers with more expensive new equipment.
In 2002, our tractor replacement cycle was 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 softened 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 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 was extended by up to 12
months. The pre-agreed-to prices for trucks delivered to us after January 1,
2002 resulted in slightly higher monthly cost 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 agreed to
extend the warranties on specified major components of these tractors. The
more restrictive terms on the trade-back 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 through 2002, several motor carriers ceased or curtailed
their level of operations. This 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 2002, tractor manufacturers are required by federal
regulations to produce trucks which produce significantly "cleaner"
emissions than was formerly the case. The new trucks are more costly to
purchase, and we expect them 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, which were not affected by the new federal regulations.
Claims and insurance expense was 5.6% of freight revenue during 2000
and declined to 5.0% in 2001 and to 4.4% for 2002. 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,
insurance companies 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 severe. 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 attacks on America resulted in a more 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. During 2002, we renewed our liability insurance upon essentially the
same terms as in 2001.
Continuing to maintain a $1 million deductible was cost-prohibitive.
We have had very few claims costing more than that level in our history.
Because the amount of our retained risk is more than before, we may need to
establish greater amounts of per-claim insurance reserves and related
expenses than we did before. This could significantly increase the volatility
of our earnings. 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.
Although our experience during 2002 was not as detrimental to our
profitability as it might have been, 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 occupational and operational safety in an effort to mitigate
the impact of any cost increases.
Claims and insurance expenses can vary significantly from year to
year. The amount of open claims is significant. There can be no assurance
that these claims will be settled without a material adverse effect on our
financial position or our results of operations.
Gains on the disposition of equipment were approximately $1.5 million
in each of the three years ended December 31, 2002. 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 were accordingly, high. During 2000 and 2001, the
market value of previously-owned trucking equipment fell dramatically. The
market value of these assets improved somewhat during 2002. Fluctuations in
the market value of our leased equipment do 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 2003 and beyond.
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 expense was $4.4 million, $3.2 million and $4.0
million during 2002, 2001 and 2000, respectively. A primary component of
miscellaneous expense is our loss from uncollectable accounts receivable,
which was the primary reason for the 2001 decrease as well as the 2002
increase. Increased legal fees associated with matters other than the
management of liability claims against us also contributed to the higher
level of miscellaneous expense during 2002.
The operating margin from our non-freight activities turned negative
in 2001 and worsened during 2002. For 2002, our remaining non-freight
operations generated revenue of $12.4 million and incurred an operating loss
of $3.1 million. During the third quarter of 2002, we wrote down the value
of some slow-moving inventories in our non-freight business. Then, later in
2002's fourth quarter, we further lowered our expectations as to what those
inventories are worth, due to continued weakening demand for the inventory.
The write-downs were approximately $1.4 million and $500,000 in the third
and fourth quarters, respectively.
In 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. We
sold the majority of the operating assets of the dealership. The buyer also
assumed all liabilities associated with the dealership. 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 beginning in December 2007. Interest
payments are due monthly. We 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.
During the fourth quarter of 1999 we announced a plan to restructure
certain of our trucking 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 we
recorded estimated restructuring expenses, including $2.8 million for expenses
associated with the early termination of trailer leases and the abandonment
of a leased facility. In 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 estimate related. Accordingly, the remaining $1.8
million of the restructuring charge was reversed during 2000. These trailers
were returned to the lessors as the leases expired during 2001 and 2002.
We reduced our fleet of company-operated trailers in 2000 and 2001.
During 2002, we added about 200 trailers to our fleets, primarily in order
to accommodate the needs of major customers who prefer to have trailers on
site at their locations in order to pre-load the trailers prior to our
having picked up the shipment. Such arrangements intend to streamline the
operations of the shipper and us. We charge a fee for such services.
For 2000 and 2001 our consolidated operating income was $1.7 million
in each year, as compared to $0.6 million for 2002.
Interest and other expense for 2002, 2001 and 2000, was $1.5
million, $1.7 million and $3.7 million, respectively. We began 2000 with
debt of $26.5 million and ended 2001 with $2.0 million of debt. Reduced
debt is the principal reason for our lower interest expense. Falling
interest rates also served to reduce our cost of borrowed funds. During 2002,
2001 and 2000, interest expense associated with our lines of credit was
approximately $0.5 million, $1.1 million and $2.2 million, respectively.
Interest and other expense also includes costs associated with certain life
insurance policies which we own.
For 2002, 2001 and 2000, our loss before income taxes was $809,000,
$52,000 and $1,993,000, respectively. During 2001, we incurred income tax
expense of $102,000. During 2002 and 2000, our benefit from income taxes
was $4 million and $658,000, 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.
During 2002, we reported a benefit from income taxes of $4 million.
In certain prior years, we recorded income tax deductions for interest paid
on loans against insurance policies as allowed under the U. S. Tax Code. Due
to the uncertainty of such deductions, we maintained a $4 million reserve for
the contingent expense that could have resulted from any related tax
assessments. During 2002, the risk of a tax assessment had ended and the
reserve for any related expense was no longer required. We therefore reversed
the amount of the reserve as a non-recurring reduction of our income tax
expense.
We have net operating loss carry-forwards that will, if not taken
against future taxable income, begin to expire in the year 2020.
During 2002, we reported net income of $3.2 million as compared to
net losses of $154,000 for 2001 and $1.3 million for 2000.
Liquidity and Capital Resources
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We lease equipment and real estate. As of December 31, 2002 our
debt was $6 million and letters of credit issued by us to insurance and
equipment leasing companies were $5.4 million in total. Accordingly, the
unused and available portion of the credit facility was approximately $29
million. As of December 31, 2002, we had capital lease obligations of $2.6
million. Also, as of December 31, 2002, we had contracts to purchase
tractors and trailers totaling $25.7 million during 2003. A summary of these
obligations is as follows (in millions):
After
Payments Due by Year Total 2003 2004 2005 2006 2007 2007
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Operating leases $ 62.3 $25.3 $16.1 $ 9.9 $5.4 $2.7 $2.9
Debt and letters of credit 11.4 - - 11.4 - - -
Capital leases 2.6 2.6 - - - - -
Purchase obligations 25.7 25.7 - - - - -
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Total $102.0 $53.6 $16.1 $21.3 $5.4 $2.7 $2.9
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Rentals are due under non-cancelable operating leases. During 2002,
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, 2002, 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,
most of our 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 conditionally 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 $25.7 million obligation to acquire equipment during
2003 relates to tractors. We expect to lease most of these tractors when
they are placed into service.
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.
Our lease commitments for 2003 and beyond include $3.1 million
for rentals of tractors owned by related parties. Because the terms of
these leases with related parties are more flexible than those governing
tractors we lease from unaffiliated lessors, we pay the related parties a
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 2002, we entered into a new $40 million credit agreement with
a group of two banks. The credit agreement expires on May 30, 2005. Debt is
secured by our revenue equipment, trade accounts receivable and inventories.
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.
Due primarily to an increase in the level of our LTL revenue late
in 2002,net accounts receivable rose by 15% during 2002.
We may add up to 50 tractors to our company-operated fleet during
2003. Approximately 375 of our oldest tractors, presently scheduled for
retirement during 2003, 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 2002, 2001 and 2000 cash provided by operating activities was
$9.4 million, $10.9 million and $11.6 million, respectively. The 2002 decline
in operating cash flows resulted primarily from increased accounts receivable.
Expenditures for property and equipment totaled $24.3 million in
2002, $11.7 million in 2001 and $7.7 million during 2000. In addition, we
financed, through operating leases, the addition of revenue equipment valued
at approximately $37 million in 2002, $40 million in 2001 and $36 million
during 2000.
We own a life insurance policy with a death benefit of more than $20
million on the life of one of our founding shareholders. We were founded in
1946. We paid annual premiums of $1.3 million during each of the last ten
years, and it has not been determined what premiums may need to be paid in
the future. The policy's cash surrender value of $4.3 million as of December
31, 2002 is included in other assets on our balance sheet. In the event that
a benefit was to become payable under the policy, we would record as income
the difference between the benefit and the cash surrender value. During
2002, we received an offer from a potential purchaser of the policy, who
offered to pay us about $4.5 million dollars more than the policy's cash
surrender value. After careful consideration of the offer, we decided not to
accept it. We will continue to evaluate such alternatives as they arise in the
future.
Fair Value of Financial Instruments
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As of December 31, 2002, debt was $6.0 million, which approximated
fair market value. We sponsor a Supplemental Executive Retirement Plan, the
assets of which are held in a rabbi trust. At December 31, 2002, 154,000
shares of our common stock remained in the trust. The Financial Accounting
Standards Board's Emerging Issues Task Force ("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 policies 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
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We have a number of critical accounting policies. These require a
more significant amount of management judgement than the other accounting
policies we employ. Our critical accounting policies are as follows:
-Revenue and Expense Recognition: In our freight operations, which
accounted for 96.5% of our consolidated 2002 revenue, we recognize revenue
and estimated direct operating expenses such as fuel and labor on the date
we receive shipments from our customers. In 1991, the EITF promulgated
Issue 91-9, Revenue and Expense Recognition for Freight Services in Process
("EITF 91-9"). In 2001, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements, which
provides that EITF 91-9 sets forth four alternative revenue and expense
recognition methods that may be used in our industry. According to EITF 91-
9, our manner of recognizing revenue and expenses for freight in process is
acceptable.
The other three methods generally defer the recognition of revenue
and expenses to as late as the date on which delivery of the shipments is
completed. We have consistently utilized our manner of revenue and expense
recognition since we began operations in 1946. Because our income statements
contain accruals for revenue and associated estimated direct expenses as of
the beginning and the end of each reporting period, we believe that if we
were to change our manner of recognizing revenue and associated estimated
direct expenses to one of the other methods allowed by EITF 91-9, our
results of operations would be substantially unaffected. In such event, each
period's revenue and expenses would be adjusted to include in revenue amounts
from freight in process at the beginning of the period and to exclude from
revenue those amounts from freight in process at the end of the same period.
We believe that these amounts would essentially offset one another from
period to period, resulting in minimal impact to our operating or net income.
-Personal and Work-Related Injury: 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 retained the first $1 million for work-related
injuries and the first $5 million for public liability risk. This
arrangement will continue during 2003. Since our company was founded in
1946, events above the level of our pre-2002 retentions have been extremely
rare.
Because our public liability and work-related injury retentions are
higher than in previous years, the potential adverse impact a single
occurence can have on our finances is more significant than before. When an
event involving potential liability occurs, our internal staff of risk
mangagement professionals estimates the rang of most probably outcomes. Based
on that estimate, we record a reserve in our financial statements during the
period in which the event occurred. Our risk management department will, if
appropriate, establish a reserve based on 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.
As of December 31, 2002, our reserves for personal injury, work-
related injury, cargo and other claims against us aggregated $23.7 million.
If we were to change our estimates making up those reserves up or down by 10%
in the aggregate, the impact on 2002 net income would have been $1.5 million,
and earnings per share of common stock would have been impacted by $0.09.
-Estimate of Uncollectible Accounts: 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 2002, the amount of our bad debt
reserve declined by $2.1 million and the amount of receivables that were more
than 90 days old declined by $1.6 million. Significant changes in our
receivables aging could impact our profits and financial condition.
As of December 31, 2002, our reserve for uncollectible accounts was
$2.2 million. If our estimate of such uncollectible accounts were to change
by 10%, 2002 net income would have been impacted by $140,000 or $0.01 per
share of common stock.
-Deferred Tax Asset: Our deferred tax asset is stated net of
offsetting deferred tax liabilities. The asset consists 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. That could
diminish our net income.
As of December 31, 2002, our net deferred tax assets were $1.5
million. If we were to conclude that it is more likely than not that we
would not be able to generate sufficient taxable income to realize those
assets in the future, our net income for 2002 would have been reduced by
$1.5 million or $0.09 per share of common stock.
New Accounting Pronouncements
- -----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Standards No. 142, Goodwill and Intangible
Assets ("SFAS No. 142"). SFAS No. 142 generally requires that goodwill and
intangible assets with indefinite lives, are not amortized but are tested for
impairment annually. Effective January 1, 2002 goodwill is no longer subject
to amortization. We adopted SFAS No. 142 effective with the year ended
December 31, 2002. Because our balance sheet does not contain such assets
in material amounts, the adoption of SFAS No. 142 had no effect on the
Company's results of operations or financial position.
In June 2001, FASB issued Statement of Financial Accounts Standards
No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143"). We
are required to adopt adoption of SFAS No. 143 is not expected to have a
material effect on our financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144). SFAS No. 144
supercedes previous guidance for financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a business to
be disposed of. The adoption of SFAS No. 144 on January 1, 2002 had no effect
on our results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Recission of FASB
statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections ("SFAS No. 145"). We are required to adopt SFAS
No. 145 effective January 1, 2003. SFAS No. 145 signicantly limits the
treatment of losses associated with early extinguishment of debt as an
extraordinary item. SFAS No. 145 also impacts certain sale-leaseback
transactions. We do not anticipate that the adoption of SFAS No. 145
will have a material impact on our financial position, net earnings or cash
flows.
In June 2002, the FASB Issued SFAS No. 146, Accounting for Costs
Associated with Exit of Disposal Activities ("SFAS No. 146"). We are required
to adopt SFAS No. 146 effective January 1, 2003. SFAS 146 requires that
expenses associated restructuring charges be accrued as liabilities in the
period in which the liability in incurred. We do not anticipate the adoption
of SFAS No. 146 will have a material impact on the Company's financial
position, net earnings or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantee, Including Indirect
Guarantees of Indebtedness of Others ("FIN No. 45"), which elaborates on the
existing disclosure requirements for most guarantees, including guaranteed
leased asset residual values. FIN No. 45 also clarifies that at the time a
company issues a guarantee, we must recognize an initial liability for the
fair value, or market value, of the obligations we assume under the guarantee
and must disclose that information in our interim and annual financial
statements. The initial recognition and initial measurement provisions apply
on a prospective basis to guarantees issued or modified after December 31,
2002. We are evaluating the impact, if any, that adoption of the
recognition and measurement provisions of FIN No. 45 will have on our
consolidated financial statements.
We lease most of our tractors under arrangements know as Split
Terminal Residual Adjustment Clause ("Split-TRAC") operating leases. In
such arrangement, when we lease a tractor, we and the lessor agress on a value
that the asset will be worth at the end of the lease's term. We guarantee the
lessor (and the lessor guarantees us) that the lessor will receive that value,
no more and no less, at the end of the lease's term. If the tractor sells
for more, the lessor is obligated to pay us all of the excess. If the tractor
sells for less, we are obligated to pay some of all of the deficiency to the
lessor.
At the time we place a tractor into service, the manufacturer of the
tractor (a wholly-owned subsidiary of Daimler-Chryler Corp.) conditionally
guarantees us that they will buy the truck back from us at the end of a
tractor's service life for a pre-determined amount. When we lease tractors,
we and the lessor set the gross amount of the residual at an amount equal to
what the manufacturer has agreed to pay us. When a tractor reaches the end
of its service life, we typically pay the lessor the full amount of the
residual and then collect the same amount from the manufacturer.
We have been structuring our tractor acquisition and leasing
arrangements in this manner for more than 10 years. Split-TRAC arrangements
are commonplace in our industry. Statement of Financial Accounting Standards
No. 13 provides that a lease in which the future minimum lease payments
(including any guaranteed residual) exceed 90% of an asset's fair market value
must be accounted for as a capital, rather than an operating, lease. A
Split-TRAC arrangement qualifies as an operating lease because in a Split-
TRAC, the lessor retains the bottom 13% to 15% of an asset's residual risk.
If the residual is set at 50% and the lessor retains a Split-TRAC of 15%,
then our guarantee is limited to 35%. In surch an example we guarantee less
than 90% of the asset's cost.
As of December 31, 2002, we had approximately 1,150 tractors
subject to Split-TRAC lease arrangements. The gross amount of the residuals
we have guaranteed pursuant to those arrangments was approximately $47
million. Net of the lessors' retention of residual risk, if the tractors
were worth zero at the end of their service lives, we would be liable to the
lessors for Split-TRAC residuals of approximately $36 million.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123 ("SFAS No. 148"). This statement amends FASB Statement
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements.
Certain of the disclosure modifications are required for fiscal years ending
after December 15, 2002 and are included in the notes to our 2002 consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51 (FIN No. 46).
FIN No. 46 addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. FIN No. 46 applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interest in variable interest entities
obtained after January 31, 2003. The application of FIN No. 46 is not expected
to have a material effect on our financial statements. The interpretation
requires certain disclosure in financial statements issued after January 31,
2003, if it is reasonably possible that we will consolidate or disclose
information about variable interest entities when the interpretation
becomes effective.
*********
Five-Year Financial and Statistical Information
- -----------------------------------------------
(unaudited and in thousands, except ratio,
rate, equipment and per-share amounts)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Summary of Operations
Total revenue 350,934 378,409 392,393 372,149 349,932
Operating expenses 350,287 376,751 390,664 387,384 333,179
Net income (loss) 3,176 (154) (1,335) (12,575) 9,252
Pre-tax margin (0.2)% - (0.5)% (5.3)% 4.3%
After-tax return on equity 4.1 % (0.2)% (1.8)% (15.1)% 10.4%
Net income (loss) per
common share, diluted .19 (.01) (.08) (.77) .54
Financial Data
Total assets 137,586 126,537 147,099 162,576 142,618
Working capital 31,352 25,124 37,016 12,054 39,353
Current ratio 1.8 1.7 1.9 1.2 2.2
Cash provided by (used in)
operations 9,372 10,890 11,641 (3,826) 12,610
Capital expenditures, net 11,589 4,922 129 23,917 22,236
Debt 6,000 2,000 14,000 26,500 -
Shareholders' equity 78,550 74,576 74,387 75,614 91,215
Debt-to-equity ratio .1 - .2 .4 -
Common Stock
Average shares outstanding,
diluted 16,738 16,378 16,318 16,352 17,039
Book value per share 4.66 4.50 4.54 4.63 5.53
Cash dividends per share - - - .09 .12
Market value per share
High 3.500 2.790 4.875 8.500 10.500
Low 1.900 1.500 1.234 3.250 5.688
Revenue
Full-truckload 245,930 236,443 221,623 211,545 206,098
Less-than-truckload 92,654 90,888 101,932 99,357 100,015
TL/LTL % revenue contribution 70/26 62/24 57/26 57/27 59/29
Equipment in Service at Yearend
Tractors
Company operated 1,411 1,389 1,265 1,240 1,328
Provided by owner-operators 737 704 753 690 672
Total 2,148 2,093 2,018 1,930 2,000
Trailers
Company operated 3,289 3,082 3,150 3,335 2,940
Provided by owner-operators 19 21 25 23 22
Total 3,308 3,103 3,175 3,358 2,962
Full-Truckload
Revenue 245,930 236,443 221,623 211,545 206,098
Loaded miles 175,336 166,322 158,041 157,248 155,045
Shipments 191.0 178.5 173.9 165.0 166.0
Revenue per shipment 1,288 1,325 1,274 1,282 1,242
Loaded miles per shipment 918 932 919 953 934
Revenue per loaded mile 1.40 1.42 1.40 1.35 1.33
Shipments per business day 758 708 690 655 659
Revenue per business day 976 938 879 839 817
Less-than-Truckload
Revenue 92,654 90,888 101,932 99,357 100,015
Hundredweight 7,630 7,386 8,290 8,075 8,502
Shipments 259.9 253.0 284.4 277.9 293.1
Revenue per shipment 356 359 358 358 341
Revenue per hundredweight 12.14 12.31 12.29 12.30 11.76
Revenue per business day 368 361 404 394 397
Pounds per shipment 2,935 2,919 2,915 2,906 2,901
********************************************************
Consolidated Statements of Income
Frozen Food Express Industries, Inc. and Subsidiaries
Years ended December 31,
(in thousands, except per share amounts)
2002 2001 2000
---- ---- ----
Revenue
Freight revenue $338,584 $327,331 $323,555
Non-freight revenue 12,350 51,078 68,838
------- ------- -------
350,934 378,409 392,393
Costs and expenses ------- ------- -------
Freight operating expenses
Salaries, wages and related expenses 93,111 87,900 87,984
Purchased transportation 78,672 73,897 77,833
Supplies and expenses 96,922 98,545 94,719
Revenue equipment rent 26,848 27,024 25,144
Depreciation 13,374 11,458 11,582
Communications and utilities 3,934 3,766 4,325
Claims and insurance 14,938 16,673 18,040
Operating taxes and licenses 4,168 3,808 4,239
Gain on disposition of equipment (1,505) (1,440) (1,604)
Miscellaneous expense 4,367 3,230 3,969
Restructuring - - (1,821)
------- ------- -------
334,829 324,861 324,410
Non-freight costs and operating expenses 15,458 51,890 66,254
------- ------- -------
350,287 376,751 390,664
------- ------- -------
Income from operations 647 1,658 1,729
Interest and other expense 1,456 1,710 3,722
------- ------- -------
Loss before income tax (809) (52) (1,993)
Income tax(benefit) provision (3,985) 102 (658)
------- ------- -------
Net income (loss) $ 3,176 $ (154) $ (1,335)
======= ======= =======
Net income (loss) per share of common stock
Basic $ .19 $ (.01) $ (.08)
Diluted $ .19 $ (.01) $ (.08)
- ---------------------- ======= ======= =======
See accompanying notes.
***********************************************
Consolidated Balance Sheets
Frozen Food Express Industries, Inc. and Subsidiaries
As of December 31,
(in thousands)
2002 2001
Assets ---- ----
Current assets
Cash and cash equivalents $ 2,861 $ 3,236
Accounts receivable, net 45,345 39,600
Inventories 7,024 7,409
Tires on equipment in use 5,113 4,558
Deferred federal income tax 1,542 -
Other current assets 6,382 5,246
------- -------
Total current assets 68,267 60,049
Property and equipment, net 57,462 55,154
Other assets 11,857 11,334
------- -------
$137,586 $126,537
======= =======
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 20,315 $ 19,056
Accrued claims 7,639 7,960
Accrued payroll 4,068 5,471
Current maturities of long-term debt - 250
Deferred federal income tax - 289
Capital lease obligations 2,562 -
Accrued liabilities 2,331 1,899
------- -------
Total current liabilities 36,915 34,925
Long-term debt 6,000 1,750
Deferred taxes and other 42 2,186
Accrued claims and liabilities 16,079 13,100
Commitments and contingencies
------- -------
59,036 51,961
Shareholders' equity ------- -------
Common stock (17,281 shares issued) 25,921 25,921
Additional paid-in capital 2,569 3,753
Retained earnings 53,579 50,403
------- -------
82,069 80,077
Less - Treasury stock (587 and
845 shares), at cost 3,519 5,501
------- -------
Total shareholders' equity 78,550 74,576
------- -------
$137,586 $126,537
======= =======
- ----------------------
See accompanying notes.
Consolidated Statements of Cash Flows
Frozen Food Express Industries, Inc. and Subsidiaries
Years ended December 31,
(in thousands)
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income (loss) $ 3,176 $ (154) $ (1,335)
Non-cash items involved in net
income (loss)
Depreciation and amortization 17,845 15,459 15,988
Provision for losses on accounts
receivable 3,085 2,143 3,122
Deferred federal income tax (15) 508 (539)
Gain on disposition of equipment (1,505) (1,440) (1,604)
Life insurance - (927) (1,144)
Restructuring - - (1,821)
Non-cash investment income (221) - -
Non-cash contribution to employee
benefit plans 641 368 169
Change in assets and liabilities,
net of divestiture
Accounts receivable (8,882) 1,576 922
Inventories 385 642 511
Tires on equipment in use (3,098) (2,498) (1,410)
Other current assets (1,308) 1,868 (3,520)
Accounts payable 1,506 (1,917) (1,399)
Accrued claims and liabilities 3,090 (4,774) 3,757
Accrued payroll and other (5,327) 36 (56)
------ ------ -------
Net cash provided by operating activities 9,372 10,890 11,641
------- ------- ------
Cash flows from investing activities
Proceeds from divestiture - 6,832 -
Expenditures for property and equipment (24,334) (11,746) (7,711)
Proceeds from sale of property and
equipment 12,745 6,824 7,582
Other (1,788) 1,239 658
------- ------- ------
Net cash (used in) provided by
investing activities (13,377) 3,149 529
------- ------- ------
Cash flows from financing activities
Borrowings 40,700 20,000 19,000
Payments against borrowings (36,700) (32,000) (31,500)
Capital leases (370) - -
Proceeds from sale of treasury stock - - 257
Purchases of treasury stock - (25) (318)
Net cash provided by (used in) ------- ------- ------
financing activities 3,630 (12,025) (12,561)
------- ------- ------
Net (decrease) increase in cash and
cash equivalents (375) 2,014 (391)
Cash and cash equivalents at beginning of year 3,236 1,222 1,613
------- ------- ------
Cash and cash equivalents at end of year $ 2,861 $ 3,236 $ 1,222
======= ======= =======
- --------------------------
See accompanying notes.
Consolidated Statements of Shareholders' Equity
Frozen Food Express Industries, Inc. and Subsidiaries
Three Years Ended December 31, 2002
(in thousands)
Shares Par
of Value Cost
Common of Additional of Total
Stock Common Paid-in Retained Treasury Treasury Shareholder's
Issued Stock Capital Earnings Stock Stock Equity
------ ----- ------- -------- ----- ----- ------
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
Net income - - - 3,176 - - 3,176
Treasury stock
reissued - - (1,184) - (258) (1,982) 798
------ ------ ------ ------ --- ------ ------
At 12/31/2002 17,281 $25,921 $ 2,569 $53,579 587 $ 3,519 $78,550
====== ====== ====== ====== === ====== ======
See accompanying 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
$2.2 million and $4.3 million as of December 31, 2002 and 2001,
respectively. We generally write off receivables that become aged more than
360 days from the date we recognized the revenue.
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 by our non-freight operation.
During 2002, we recorded lower of cost or market write-downs of our
inventories aggregating $1.9 million. We recorded no such adjustments
during 2001 or 2000.
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 personal or work-related injury and cargo claims at the time
an event occurs. If additional information becomes available, we then
determine whether our estimate should be revised.
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
Staff Accounting Bulletin No. 101 Revenue Recognition in Financial
Statements, ("SAB 101") 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 SAB 101.
Specifically, SAB 101 refers to the FASB's Emerging Issues Task Force's
Issue No. 91-9 Revenue and Expense Recognition for Freight Services in
Progress, which refers to our method of revenue and expense recognition as
acceptable.
In our non-freight operations, we recognize revenue when products
are shipped to our customers.
Income Taxes - We use the asset and liability method to account for
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.
Stock-Based Compensation - 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 our stock options, our
net income or loss (in millions) and diluted earnings per share of common
stock for 2002, 2001 and 2000 would have been as follows:
2002 2001 2000
Net Income (loss): ---- ---- ----
As reported $ 3.2 $ (0.2) $ (1.3)
Impact of
SFAS No. 123 (0.7) (0.2) (1.0)
----- ----- -----
$ 2.5 $ (0.4) $ (2.3)
===== ===== =====
Net Income (loss)per share:
As reported $ 0.19 $(0.01) $(0.08)
Impact of
SFAS No. 123 (0.05) (0.02) (0.06)
----- ----- -----
$ 0.14 $(0.03) $(0.14)
===== ===== =====
In calculating the above 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:
2002 2001 2000
---- ---- ----
Risk-free interest rate 4.88% 5.12% 6.00%
Dividend yield - - -
Volatility factor .464 .477 .467
Expected life (years) 7.0 7.0 6.0
==== ==== ====
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.
Long-Lived Assets - Neither SFAS No. 142 Goodwill and Intangible
Assets, SFAS No. 143 Accounting for Asset Retirement Obligations nor SFAS
No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets has had
an effect on our results of operations or financial position.
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 realizeable value.
Included in other non-current assets is the cash surrender value of
life insurance policies and related investments.
Prior-Period Amounts-Certain prior-period amounts have been
reclassified to conform with the current year presentation.
2. Accounts Receivable
-------------------
Our accounts receivable are shown net of our estimate of those
accounts that will not be paid by our customers. A summary of the activity
in our allowance for such doubtful accounts is as follows (in millions):
2002 2001 2000
---- ---- ----
Balance at January 1 $ 4.3 $ 7.4 $ 8.4
Current year provision 3.1 2.1 3.1
Accounts charged off and other (5.2) (5.2) (4.1)
---- ---- ----
Balance at December 31 $ 2.2 $ 4.3 $ 7.4
==== ==== ====
3. Debt
----
As of December 31, 2002, we had a $40 million secured line of credit
pursuant to a revolving credit agreement with two commercial banks. Interest
is due monthly. 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, 2002, $6 million was borrowed
against this facility.
Loans may be 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, repurchases of our stock and the amount of our capital
expenditures. The amount we may borrow under the facility may not exceed
the lesser of $40 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
cash flow as described in the agreement. The agreement expires on May 30,
2005, at which time loans and letters of credit will become due. As of
December 31, 2002, we were in compliance with the terms of the agreement.
Letters of Credit issued against the credit facility in connection
with our risk management and leasing programs totaling approximately $5.4
million were in effect as of December 31, 2002. Accordingly, approximately
$29 million was available under the agreement. To the extent that the line
of credit is not used for borrowing or letters of credit, we pay a
commitment fee to the banks. Total interest payments under the credit line
during 2002, 2001 and 2000 were approximately $500,000, $1,118,000 and
$2,155,000, respectively. The weighted average interest rate we incurred on
our debt during 2002 and 2001 was 4.8% and 6.9%, respectively.
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
2002 2001 (Years)
---- ---- -----
Land $ 4,215 $ 4,215 -
Buildings and improvements 16,715 16,118 20 - 30
Revenue equipment 55,479 50,481 3 - 7
Service equipment 15,412 15,708 2 - 20
Computer, software and
related equipment 22,103 21,008 3 - 12
------- -------
113,924 107,530
Less accumulated depreciation 56,462 52,376
------ -------
$ 57,462 $ 55,154
====== =======
5. Income Taxes
------------
The (benefit from) provision for income tax consists of the
following (in thousands):
2002 2001 2000
Current (benefit) provision: ---- ---- ----
Federal $(3,960) $(415) $(114)
State (10) 9 (5)
Deferred federal taxes (15) 508 (539)
------ ---- ----
Total(benefit)provision $(3,985) $ 102 $(658)
====== ==== ====
We paid no federal income tax during 2002, 2001 or 2000. Realization
of our deferred tax assets depends on our ability to generate sufficient
taxable income in the future. Net operating loss carryforwards will begin to
expire in 2020. We anticipate that we will be able to realize our deferred tax
assets in future years. Changes in the primary components of the net deferred
tax liability were (in thousands):
December 31, December 31,
2001 Activity 2002
Deferred Tax Assets: ---- -------- ----
Accrued claims $ 6,598 $ 1,132 $ 7,730
Net operating loss 958 (292) 666
Allowance for bad debts 1,628 (833) 795
Other 1,379 7 1,386
----- ------ ------
10,563 14 10,577
------ ------ ------
Deferred Tax Liabilities:
Prepaid expense (2,601) (205) (2,806)
Property and equipment (6,477) 206 (6,271)
------ ------ ------
(9,078) 1 (9,077)
------ ------ ------
$ 1,485 $ 15 $ 1,500
====== ====== ======
For 2002, we reported a benefit from income taxes of $4 million. In
certain prior years, we recorded income tax deductions for interest paid on
loans against insurance policies as allowed under the U. S. Tax Code. Due
to the uncertainty of such deductions, we maintained a $4 million reserve
for the contingent expense that could have resulted from any related tax
assessments. During 2002, the risk of a tax assessment had ended and the
reserve for any related expense was no longer required. We therefore
reversed the amount of the reserve as a non-recurring reduction of our
income tax expense.
Differences between the statutory federal income tax (benefit)
expense and our income tax (benefit) expense are as follows (in thousands):
2002 2001 2000
---- ---- ----
Income tax benefit at statutory federal rate $ (283) $(18) $(636)
Non-deductible life insurance expense 242 116 42
Reversal of reserve for taxes (3,960) - -
State income taxes and other 16 4 (64)
----- --- ----
$(3,985) $102 $(658)
====== === ====
6. Commitments and Contingencies
-----------------------------
We lease real estate and equipment. The aggregate future minimum
rentals under non-cancelable operating leases at December 31, 2002 were (in
thousands):
Third Related
Parties Parties Total
------- ------- -----
2003 $23,852 $1,416 $25,268
2004 15,307 820 16,127
2005 9,468 440 9,908
2006 5,003 403 5,406
2007 2,676 - 2,676
After 2007 2,959 - 2,959
------ ----- ------
Total $59,265 $3,079 $62,344
====== ===== ======
Related parties involve tractors leased from two of our officers
under non-cancelable operating leases. For 2002, 2001 and 2000, payments to
officers under these leases were $1.5 million, $1.6 million and $1.8
million, respectively. Because the terms of our leases with related parties
are more flexible than those involving tractors we lease from unaffiliated
lessors, we pay the officers a 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.
As of December 31, 2002, we had guaranteed the residual value of
certain leased tractors totaling approximately $36 million pursuant to
leases with remaining lease terms that range from one month to three years.
Our estimate of the fair market values of such tractors exceed the
guaranteed values. Consequently, no provision has been made for any losses
related to such guarantees. Such guarantees are fully recoverable to the
extent that additional tractors are purchased from the same supplier that
manufactured the related tractors.
At December 31, 2002, we had commitments of approximately $25.7
million for the purchase of revenue equipment during 2003.
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 often made. Accrued claims liabilities include
all such reserves and our estimate for incidents which have been incurred
but not reported. At December 31, 2002, we had established $5.4 million of
irrevocable letters of credit in favor of service providers and pursuant to
certain insurance and leasing agreements.
7. Shareholders' Equity
--------------------
Since before 2000 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 generally vest after one year and expire 10 years
after a grant. During 2002,our shareholders adopted our 2002 Incentive and
Non-Statutory Option Plan and reserved 850,000 shares of our common stock
for issuances under that plan.
The following table summarizes information regarding stock options
(in thousands, except per-share amounts):
2002 2001 2000
---- ---- ----
Options outstanding at beginning of year 2,416 3,554 3,182
Cancelled (391) (1,183) (323)
Granted 848 45 711
Exercised - - (16)
----- ------ -----
Options outstanding at year-end 2,873 2,416 3,554
===== ====== =====
Exercisable options 1,262 1,076 1,363
Year-end weighted average remaining
life of options at (years) 7.0 6.7 6.9
Options available for future grants 871 2,748 1,642
Expense from director stock options $ 10 $ 9 $ 29
Weighted average price of options
Cancelled during year $ 7.14 $ 9.20 $ 8.36
Granted during year $ 2.07 $ 1.89 $ 2.77
Exercised during year $ - $ - $ 2.36
Outstanding at year-end $ 5.09 $ 6.47 $ 7.44
===== ===== =====
The range of unexercised option prices at December 31, 2002 was as
follows:
Quantity of Options
(in thousands) Priced Between
-------------- --------------
1,564 $1.50 - $ 5.00
276 $5.01 - $ 8.00
1,033 $8.01 - $12.00
===== ==============
We sponsor a Supplemental Executive Retirement Plan ("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. As of December 31, 2002,
there were 154,000 shares remaining 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 2002, SERP participants
liquidated 58,000 shares from the rabbi trust.
We have in place a rights agreement that authorizes a distribution
of one common stock purchase right for each outstanding share of our common
stock. 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.
8. Non-Cash Financing and Investing Activities
-------------------------------------------
During 2002 and 2001, we funded contributions to a SERP and our
401(k) savings plan by transferring approximately 276,000 and 187,000 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 $643,000 for 2002 and $368,000 for 2001.
During 2002, we utilized common stock valued at $155,000 to meet
certain deferred compensation obligations.
During 2002, we entered into capital lease agreements in connection
with some of our trucks valued at $3 million, of which we had paid $0.4
million as of December 31.
As of December 31, 2002 and 2001, accounts receivable included
$122,000 and $549,000, respectively, from the sale of equipment retired and
sold in those years and accounts payable included $13,000 and $260,000,
respectively, related to capital expenditures.
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. We continue to own a 19.9% share
of the business, which has a current book value of $1.2 million.
9. 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 and 2000, our total cash contributions to
the 401(k) were approximately $1,091,000 and $1,370,000, respectively.
During 2002 and 2001, respectively, we contributed 201,000 and 29,000 shares
of our treasury stock valued at $468,000 and $62,000, respectively to the
401(k).
10. Net Income (Loss) Per Share of Common Stock
--------------------------------------------
Our basic income or loss per share was computed by dividing our net
income or 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):
2002 2001 2000
------ ------ ------
Basic Shares 16,576 16,378 16,318
Common Stock Equivalents 162 - -
------ ------ ------
Diluted Shares 16,738 16,378 16,318
====== ====== ======
For 2001 and 2000, respectively, approximately 15,000 and 18,000 of
common stock equivalent ("CSE") shares were excluded because we incurred net
losses in those years. Therefore, their impact would have been anti-
dilutive. All CSEs result from stock options. For 2002, 2001 and 2000,
respectively, we excluded (in millions) 2.0, 2.3 and 3.5 stock options from
our calculation of CSEs because their exercise prices exceeded the market
price of our stock, which would have caused further anti-dilution.
11. Divestiture
-----------
In 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. We sold the majority of
the operating assets of the dealership. The buyer also assumed all liabilities
associated with the dealership. 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.
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 annual installments beginning in
2007. Interest payments are due monthly. At December 31, 2002, the note
receivable bore interest at 7%. The note and partnership interest are
included in other non-current assets on our balance sheet. We account for our
limited partnership interest according to the equity method. During 2002, we
recorded income from our equity interest of approximately $200,000.
Had revenue from the sold dealership not been included in our
operations for 2001 and 2000, our non-freight revenue would have been $9.6
million for 2001 and $10.5 million for 2000.
For 2000, our consolidated pre-tax loss was $2.0 million. Had the
results of the sold dealership not been included in the pre-tax results for
2000, our consolidated pre-tax loss would have not been affected. For 2001,
our consolidated pre-tax income would have been $1.1 million as compared to
our actual pre-tax loss of $52,000.
12. Operating Segments
------------------
We have two reportable operating segments as defined by SFAS No. 131
Disclosures About Segments of an Enterprise and Related Information ("SFAS"
No. 131"). The larger segment consisted of our motor carrier operations,
which are conducted in a number of divisions and subsidiaries and are similar
in nature. We reported all motor carrier operations as one segment. The
smaller segment consisted of our non-freight operations that were, until
December 26, 2001, engaged primarily in the sale and service of mobile
refrigeration equipment and of trailers used in freight transportation.
Although we sold the transportation equipment dealership in December 2001,
we retained a 19.9% ownership interest in the company that bought the
dealership. We account for that asset 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. Although our remaining non-freight operations do
not qualify as a reportable segment under SFAS No. 131 for 2002, we have
presented below financial information for each of the three years ended
December 31, 2002 (in millions):
2002 2001 2000
---- ---- ----
Freight Operations
Total revenue $338.6 $327.3 $323.6
Restructuring expense - - (1.8)
Operating income 3.8 2.5 (0.9)
Total assets 136.8 123.8 140.3
Non-Freight Operations
Total revenue $ 12.4 $ 54.9 $ 72.6
Operating (loss) income (3.1) (0.8) 2.6
Total assets 18.2 18.8 31.5
Intercompany Eliminations
Revenue - $ 3.8 $ 3.8
Total assets 17.4 16.1 24.7
Consolidated
Revenue $350.9 $378.4 $392.4
Restructuring expense - - (1.8)
Operating income 0.6 1.7 1.7
Total assets 137.6 126.5 147.1
===== ===== =====
Intercompany eliminations of revenue 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.
****************************************************
Reports of Independent Public Accountants
-----------------------------------------
To Frozen Food Express Industries, Inc.:
We have audited the accompanying consolidated balance sheet of
Frozen Food Express Industries, Inc. and subsidiaries as of December 31,
2002 and the related consolidated statements of income, shareholders' equity
and cash flows for the year ended December 31, 2002. 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. The consolidated balance sheet of Frozen Food Express
Industries, Inc. and subsidiaries as of December 31, 2001 and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 2001, were audited by
other auditors who have ceased operations. These Independent Public
Accountants expressed an unqualified opinion on those financial statements
in their report dated April 3, 2002.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. 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 provides a reasonable basis for our
opinion.
In our opinion, the 2002 consolidated 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,
2002 and the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in
the United States of America.
February 28, 2003
Dallas, Texas /s/ KPMG LLP
------------
*********************************************
The following audit report of Arthur Andersen LLP ("Andersen") is a
copy of the original report dated April 3, 2002 rendered by Andersen on our
consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2001. Andersen has not reissued it's audit
report since that date. We have been unable to obtain, after reasonable
efforts, Andersen's written consent to our incorporation by reference into
our registration statements of Andersen's audit report with respect to our
financial statements as of December 31, 2001, and for the year then ended.
Under these circumstances, Rule 437a under the Securities Act of 1993 (the
"Securities Act") permits us to file this Form 10-K without a written
consent from Andersen. As a result, however, Andersen will not have any
liability under Section 11(a) of the Securities Act for any untrue
statements of a material fact contained in the financial statements audited
by Andersen or any omissions of a material fact required to be stated
therein. Accordingly, you would be unable to assert a claim against
Andersen under Section 11(a) of the Securities Act for any purchases of
securities under our registration statements made on or after the date of
this Form 10-K. To the extent provided in Section 11(b)(3)(C) of the
Securities Act, however, other persons who are liable under Section 11(a) of
the Securities Act, including our officers and directors, may still rely on
Andersen's original audit reports as being made by an expert for purposes of
establishing a due diligence defense under Section 11(b) of the Securities
Act.
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 -----------------------
Common Stock Information and Unaudited Quarterly Financial Data
- ---------------------------------------------------------------
During 1999, our Board of Directors announced a decision to
discontinue our policy of paying quarterly cash dividends. No dividends have
been paid since 1999, and we have no current plans to reinstate a policy of
paying dividends, and our credit agreement restricts our ability to pay cash
dividends.
As of March 2, 2003, we had approximately 5,000 beneficial
shareholders, including participants in our retirement plans. Our $1.50 par
value common stock trades on the Nasdaq Stock Market under the symbol FFEX.
Information regarding our quarterly financial performance and common stock
is as follows (in thousands, except per-share amounts):
(Restated)(Restated) (Restated)
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Year
- ---- ------- ------- ------- ------- ----
Revenue $79,057 $88,528 $92,855 $90,494 $350,934
(Loss) income from operations (813) 687 (113) 886 647
Net (loss) income (944) 206 3,338 576 3,176
Net (loss) income per share of
common stock
Basic (.06) .01 .20 .03 .19
Diluted (.06) .01 .20 .03 .19
Common stock price per share
High 2.700 3.500 3.000 2.620 3.500
Low 2.000 2.150 1.900 1.950 1.900
Common stock trading volume 751 936 636 972 3,295
====== ====== ======= ====== =======
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter Year
- ---- ------- ------- ------- ------- ----
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
====== ====== ====== ====== =======
We have identified certain expenses which should have been included
in, but were omitted from our operating expenses during the first three
quarters of 2002. We have reflected the corrections of those omissions in
the above quarterly table. For the first quarter of 2002, we have reflected an
increase of $130,000 in our loss from operations to include payroll expense
and other operating expenses that should have been, but were not,recorded by
our non-freight subsidiary during that quarter. Similar adjustments of $149,000
and $70,000 have been made to the second and third quarters of 2002,
respectively. Net of benefit from income taxes, the impact of the adjustments
was to increase our first quarter of 2002 net loss by $85,000 and to reduce
our net income for the second and third quarters of 2002 by $97,000 and
$45,000, respectively. Net loss or income per share for the third quarter
of 2002 were not impacted by the adjustments, and net income per share for
the second quarter of 2002 has been reduced by $0.01 and net loss per share
for the first quarter of 2002 has been increased by $0.01.
In addition to $349,000 in omitted pre-tax expenses described above,
we identified $227,000 in pre-tax expenses with regard to which we have been
unable to determine the quarter of 2002 during which the expenses should have
been recorded. We believe that the $227,000 is not material to our financial
statements and has been included in non-freight operating expenses for the
fourth quarter of 2002.
During the third and fourth quarters of 2002, we recorded lower of
cost or market write-downs of inventories owned by our non-freight subsidiary
of $1.4 million and $0.5 million, respectively.
During the third quarter of 2002, we reversed to income $4.0 million
in income tax liabilities because events which could have given rise to
payment of those liabilities were no longer probable to occur.