EX-13 2 ex13a.txt EXHIBIT 13 Exhibit 13.1 ============ THIS FORM 10-K INCORPORATES CERTAIN SECTIONS OF THE REGISTRANT'S 2000 ANNUAL REPORT TO SHAREHOLDERS. ACCORDINGLY, ONLY THE PORTIONS OF REGISTRANT'S 2000 ANNUAL REPORT TO SHAREHOLDERS WHICH ARE INCORPORATED BY REFERENCE INTO THIS FORM 10-K ARE FILED AS THIS EXHIBIT 13.1. Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------- Results Of Operations Revenue (including revenue from non-freight activities) increased by 5.4% in 2000 to $392.4 million. For 1999, revenue totaled $372.1 million and was 6.3% above 1998 revenue. Freight revenue rose by 4.1% during 2000 and 1.5% in 1999. For our full-truckload operations, fuel adjustment charges as a percent of revenue were 0%, 0.1% and 3.3% during 1998, 1999 and 2000, respectively. Excluding the impact of these charges, full-truckload revenue rose by 1.5% in each of 1999 and 2000. These increases principally resulted from increased shipment volumes and weights, which were partially offset by a shorter length of haul. As a percent of total less-than-truckload ("LTL") revenue, fuel adjustment charges were 0.1%, 0.4% and 3.5% for 1998, 1999 and 2000, respectively. Excluding the impact of these charges, LTL revenue declined by 1% during 1999 and another 0.6% during 2000. These declines primarily resulted from a reduced number of LTL shipments since 1998, partially offset by increased average shipment size. At the end of 2000, our full-truckload fleet numbered approximately 1,725 trucks, as compared to about 1,620 at the end of 1999. Primarily due to the increased number of trucks, the number of full-truckload shipments rose by 5.4% during 2000 as compared to a 0.6% decrease during 1999. Independent contractor equipment generated 23.9%, 25.3% and 27.7% of full-truckload revenue during 1998, 1999 and 2000, respectively. This resulted from a continuing emphasis on the utilization of independent contractors to transport full-truckload freight. 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 December 31, 1998, there were approximately 430 such tractors in the full-truckload fleet. By December 31, 2000, there were approximately 535 such tractors. We plan to add up to 50 trucks to our company-operated, full- truckload fleet during 2001. The number of trucks in this fleet declined by almost 90 during 1999 and rose by 40 to approximately 1,190 during 2000. 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. We intend to further reduce the number of trailers in the fleet. Before 1998, we had limited dedicated fleet operations. In such an arrangement, we provide service involving the assignment of specific trucks to handle the transportation needs of a customer. Frequently 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. During 2000, about 10% of our company-operated, full-truckload fleet was engaged in dedicated fleet operations. The operation of our full-truckload fleet is facilitated by satellite technology to enhance efficiency and customer service. Location updates of each tractor are provided by the system and we exchange dispatch, fuel and other information with the driver by way of satellite. We have difficulty attracting qualified employee-drivers for our full-truckload operations. It is not unusual for as many as 100 company- operated trucks to occasionally be 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. It increases 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 a part of our recruiting and training program, we partner with driver training schools. Candidates are pre-qualified and we help fund their training, contingent upon successful and continuing employment as a driver for the company. Employee-drivers, as well as all other qualified employees, participate in 401(k), group health and other benefit programs. We continually seek to reduce employee-driver turnover and attract 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 better service expected to result from improved driver availability. It was in light of these factors that we implemented the employee-driver pay increase. 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. Accordingly, during the summer of 2000, we began to simultaneously incur escalating costs for fuel and labor. Most of the fuel cost increase was passed on to the shippers. Also during the summer of 2000, 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. Future recovery of such cost increases will depend largely on competitive freight market conditions. 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 27.3%, 28.7% and 26.9% for 2000, 1999 and 1998, respectively. The majority of the 1999 increase resulted from increased work-related injury claims. During 2000, such expenses 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 the new driver compensation program essentially offset those improvements. 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. 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 21.9% in 1998 to 22.6% in 1999 and 24.1% in 2000. We plan to further expand our fleet of owner-operator trucks during 2001. Supplies and expenses rose by $5.5 million in 1999 and $5.9 million in 2000. For 1999 and 2000, 35% and 44%, 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. Absent the 2000 increase in fuel expenses, the other components of supplies and expenses (principally repairs, tires and freight handling expenses) rose by $2.3 million in 1999 but fell by $4.1 million in 2000. The improvement during 2000 resulted from more effective management of our maintenance functions. Sudden and dramatic fuel price volatility impacts our profitability. We have in place a number of strategies designed to address such volatility. 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. During 2000, we installed 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. Successful use of this software product could reduce our fuel expenses by at least 1%. The total of revenue equipment rent and depreciation expense was 11.4% of freight revenue in 2000, 12.4% in 1999 and 11.4% for 1998. These fluctuations were due in part to the increased 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. Depreciation expense associated with our new information system was also a component of the 1999 increase. During 2000, some of our buildings became fully depreciated, contributing to reduced depreciation expenses. Claims and insurance expense, as a percent of freight revenue, was 5.6% in 2000, 6.0% in 1999 and 4.0% in 1998. Highway accidents are the primary cause of claims and insurance expense. These expenses tend to vary with miles traveled and with changes in the mix of full-truckload versus LTL operations. Insurance premiums do not significantly contribute to costs, partially because the company carries large deductibles under its policies of liability insurance. Claims and insurance costs on a per- mile basis rose by 49% during 1999 but fell by 4.5% during 2000. The higher 1999 and 2000 claims and insurance expense was due primarily to adverse claims experience. In December 2000, we renewed our liability insurance coverage. For several years prior to 2000, we had benefited from unusually low insurance 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 frequent. Because of these factors, we selected a liability insurance product that features a higher deductible and a higher premium. We will continue to emphasize operational safety in an effort to more than offset these cost increases. Such expenses 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 fell from $840,000 in 1998 to $594,000 in 1999 and increased to $1.6 million in 2000. 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 before 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, 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 fleets, 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 2001 and beyond. Because we do not intend to acquire significant quantities of trailers during 2001 or 2002, we do not expect diminished 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 rose by $3.5 million during 1999, almost 90% 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 be collected. During 2000, accounts receivable, net, fell by 9% reflecting improvements in our accounts receivable collection cycle. 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. We reduced our fleet by 183 trailers in 2000. However, attempts to negotiate some of the anticipated early lease terminations were not successful. Because of softness in the late 2000 market for previously- owned trucking assets we were unable to negotiate early lease termination arrangements. During the fourth quarter of 2000, we concluded that we would return the trailers to the leasing companies as originally specified in the lease agreements. Therefore, $1.8 million of the 1999 restructuring charge was reversed to income in the fourth quarter 2000. We also have a business engaged in the sale and service of refrigeration equipment and of trailers used in freight transportation. Products we market include trailers manufactured by Wabash and mobile trailer refrigeration machinery manufactured by Carrier Transicold. Our dealerships are located in major markets, primarily in Texas and Arkansas. As a percent of non-freight revenue, the operating margin for these activities improved slightly during 2000, but has not yet returned to 1998 levels. During 1999 the non-freight segment incurred significant costs associated with the establishment of new locations and rapidly increasing working capital. In 2000 such costs decreased, but margins remained under significant pressure from general softness in the market for new and previously-owned transportation equipment. Revenue from this segment was $68.8 million in 2000, $61.2 million in 1999 and $43.8 million during 1998. Operating profits from this segment of $2.6 million, $1.0 million and $1.9 million were posted for 2000, 1999 and 1998, respectively. For 2000 and 1998 we realized profits from all of our operations of $1.7 million and $16.7 million, respectively, as compared to a loss from operations of $15.2 million for 1999. For 2000, 1999 and 1998, interest and other expense was $3.6 million, $4.0 million and $1.0 million, respectively. Increased interest costs associated with borrowed funds during 1999 and 2000 and reduced interest income contributed to this increase. Our 2000 loss before benefit from income taxes was $1.9 million. In 1999, our pre-tax loss was $19.3 million. For 1998, our pre-tax income was $15.7 million. The effective income tax rate was 35.2% of pre-tax income for 2000, as compared to 37.0% for 1999 and 36.5% for 1998. During 2000, we incurred a net loss of $1.2 million as compared to a net loss of $12.1 million during 1999. For 1998, net income was $10.0 million. Liquidity and Capital Resources During 2000, cash provided by operating activities was $12.7 million as compared to cash used in operations of $2.6 million in 1999. For 1998, our operating activities provided cashflows of $13.9 million. These fluctuations have resulted from volatility in profitability coupled with fluctuating working capital. Expenditures for property and equipment totaled $7.7 million in 2000, $28.3 million during 1999 and $27.7 million during 1998. In addition, we financed, through operating leases, the acquisition of revenue equipment valued at approximately $36 million in 2000, $40 million during 1999 and $28 million during 1998. During 2000, we entered into a new $50 million credit agreement with a group of three banks. The new credit agreement is for a period of two years, but we may elect to convert the outstanding balance into a term loan with quarterly amortization over 4 years following the date of such an election. Debt is secured by our accounts receivable and inventories. The banks may elect to perfect liens against revenue equipment owned (but not leased) by the company. The banks have told us of their intent to do so. The new credit agreement amended and replaced an agreement that had been in place since 1992. Due to changes in the capital marketplace and other factors, the new credit agreement also imposes interest rates and commitment fees that are higher than those we had enjoyed since 1992. 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. 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. We had long-term debt of $14 million as of December 31, 2000. Also, we had issued $3.5 million letters of credit in connection with our risk management programs. Therefore, the unused portion of the credit facility was approximately $32.5 million. We plan to add up to 50 tractors to our company-operated fleet during 2001. Approximately 350 three-year old tractors, presently scheduled for retirement during 2001, 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. Recent Accounting Pronouncements The Financial Accounting Standards Board has issued and subsequently amended Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities", which requires recognition of all derivatives on the financial statements measured at fair value. Gains and losses from changes in such fair values could impact operating results. We do not currently have any derivative financial instruments and will not be impacted by this standard unless we engage in such transactions in the future. Ten-Year Statistics and Financial Data -------------------------------------- (unaudited and in thousands, except 2000 1999 1998 1997 ratio, rate, equipment and ---- ---- ---- ---- per-share amounts) Summary of Operations Revenue 392,393 372,149 349,932 316,568 Operating expenses 390,664 387,384 333,179 301,508 Net (loss) income (1,212) (12,130) 9,979 9,664 Pre-tax margin (0.5)% (5.2)% 4.5% 4.4% After-tax return on equity (1.5)% (13.4)% 10.4% 10.9% Net (loss) income per common share, diluted (.07) (.74) .59 .57 Financial Data Working capital 37,016 12,054 39,353 44,979 Current ratio 1.9 1.2 2.2 2.4 Cash provided by (used in) operations 12,739 (2,559) 13,877 28,460 Capital expenditures, net 129 23,917 22,236 7,955 Debt 14,000 26,500 - - Shareholders' equity 82,017 83,121 98,277 93,077 Debt-to-equity ratio .2 .3 - - Common Stock Average shares outstanding, diluted 16,318 16,352 17,039 17,056 Book value per share 5.03 5.09 5.96 5.53 Market value per share High 4.875 8.500 10.500 10.250 Low 1.234 3.250 5.688 8.375 Cash dividends per share - .09 .12 .12 Revenue Full-truckload 221,623 211,545 206,098 190,576 Less-than-truckload 101,932 99,357 100,015 95,522 TL/LTL % revenue contribution 57/26 57/27 59/29 60/30 Equipment in Service at Yearend Tractors Company operated 1,265 1,240 1,328 1,220 Provided by owner-operators 753 690 672 628 Total 2,018 1,930 2,000 1,848 Trailers Company operated 3,150 3,335 2,940 2,784 Provided by owner-operators 25 23 22 23 Total 3,175 3,358 2,962 2,807 Full-Truckload Revenue 221,623 211,545 206,098 190,576 Loaded miles 158,041 157,248 155,045 143,902 Shipments 173.9 165.0 166.0 156.9 Revenue per shipment 1,274 1,282 1,242 1,215 Loaded miles per shipment 909 953 934 917 Revenue per loaded mile 1.40 1.35 1.33 1.32 Shipments per business day 690 655 659 623 Revenue per business day 879 839 817 756 Less-than-Truckload Revenue 101,932 99,357 100,015 95,522 Hundredweight 8,290 8,075 8,502 8,537 Shipments 284.4 277.9 293.1 293.1 Revenue per hundredweight 12.29 12.30 11.76 11.19 Revenue per shipment 358 358 341 326 Revenue per business day 404 394 397 379 Pounds per shipment 2,915 2,906 2,901 2,913 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- 311,428 292,345 274,620 227,389 194,888 176,995 296,283 276,961 255,484 211,999 183,179 167,033 8,533 9,253 11,874 9,441 7,144 5,202 3.8% 4.5% 6.5% 6.3% 5.8% 4.8% 10.7% 13.3% 20.4% 20.1% 18.6% 16.0% .51 .56 .72 .58 .45 .34 34,162 25,024 25,623 20,823 16,949 15,612 2.1 1.7 1.8 1.8 1.8 2.1 10,800 24,180 20,025 17,482 16,395 14,968 7,191 8,383 8,160 18,453 18,375 (2,423) - - 9,000 17,000 12,000 5,000 83,953 75,021 64,288 51,983 41,799 35,059 - - .1 .3 .3 .1 16,838 16,519 16,451 16,276 15,910 15,249 5.04 4.59 4.03 3.31 2.72 2.42 13.875 13.900 15.000 15.000 11.475 4.088 7.875 8.500 11.000 7.275 3.938 1.800 .12 .12 .096 .096 .079 .06 195,458 180,598 163,988 129,549 109,178 103,582 92,496 87,783 88,328 80,965 72,864 65,068 63/30 62/30 60/32 57/36 56/37 59/37 1,202 1,149 1,099 945 800 737 703 667 505 457 432 421 1,905 1,816 1,604 1,402 1,232 1,158 2,998 2,770 2,406 2,027 1,609 1,475 20 27 21 32 24 28 3,018 2,797 2,427 2,059 1,633 1,503 195,458 180,598 163,988 129,549 109,178 103,582 145,785 135,469 121,106 97,753 83,247 80,663 158.1 142.9 128.1 106.6 92.9 85.5 1,236 1,264 1,280 1,215 1,175 1,211 922 948 945 917 896 943 1.34 1.33 1.35 1.33 1.31 1.28 627 567 508 423 367 339 776 717 651 514 431 411 92,496 87,783 88,328 80,965 72,864 65,068 8,652 8,296 8,670 8,116 6,848 6,211 304.6 292.1 305.2 292.0 253.3 231.3 10.69 10.58 10.19 9.98 10.64 10.48 304 301 289 277 288 281 367 348 351 321 288 258 2,840 2,840 2,841 2,779 2,704 2,685 Consolidated Statements of Income Frozen Food Express Industries, Inc. and Subsidiaries Years ended December 31, (in thousands, except per share amounts)
2000 1999 1998 ---- ---- ---- Revenue Freight revenue $323,555 $310,902 $306,113 Non-freight revenue 68,838 61,247 43,819 ------- ------- ------- 392,393 372,149 349,932 ------- ------- ------- Costs and expenses Freight operating expenses Salaries, wages and related expenses 88,411 89,174 82,479 Purchased transportation 77,833 70,353 67,124 Supplies and expenses 94,292 88,430 82,892 Revenue equipment rent 25,144 26,949 25,578 Depreciation 11,582 11,752 9,381 Communications and utilities 4,325 3,949 4,321 Claims and insurance 18,040 18,577 12,207 Operating taxes and licenses 4,239 5,488 4,908 Gain on disposition of equipment (1,604) (594) (840) Miscellaneous expense 3,969 6,674 3,172 Impairment of long-lived assets - 2,656 - Restructuring (1,821) 3,721 - ------- ------- ------- 324,410 327,129 291,222 Non-freight costs and operating expenses 66,254 60,255 41,957 ------- ------- ------- 390,664 387,384 333,179 ------- ------- ------- Income (loss) from operations 1,729 (15,235) 16,753 Interest and other expense 3,599 4,019 1,038 ------- ------- ------- (Loss) income before income tax (1,870) (19,254) 15,715 Income tax (benefit) provision (658) (7,124) 5,736 ------- ------- ------- Net (loss) income $ (1,212) $(12,130) $ 9,979 ======= ======= ======= Net (loss) income per share of common stock Basic $ (.07) $ (.74) $ .59 Diluted $ (.07) $ (.74) $ .59 ======= ======= ======= See accompanying notes.
Consolidated Balance Sheets Frozen Food Express Industries, Inc. and Subsidiaries As of December 31, (in thousands) 2000 1999 ---- ---- Assets Current assets Cash and cash equivalents $ 1,222 $ 1,613 Accounts receivable, net 47,652 52,312 Inventories 17,208 17,719 Tires on equipment in use 4,424 5,036 Deferred federal income tax - 289 Other current assets 7,546 3,978 ------- ------- Total current assets 78,052 80,947 Property and equipment, net 61,899 73,640 Other assets 14,778 15,496 ------- ------- $154,729 $170,083 ======= ======= Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 22,209 $ 24,797 Accrued claims 8,101 6,631 Accrued payroll 5,834 5,890 Short-term debt - 26,500 Deferred federal income tax 416 - Accrued liabilities 4,476 5,075 ------- ------- Total current liabilities 41,036 68,893 Long-term debt 14,000 - Deferred federal income tax 1,551 2,795 Accrued claims and liabilities 16,125 15,274 Commitments and contingencies - - ------- ------- Total liabilities and deferred credits 72,712 86,962 ------- ------- Shareholders' equity Common stock (17,281 shares issued) 25,921 25,921 Additional paid-in capital 4,655 5,056 Retained earnings 58,187 59,399 ------- ------- 88,763 90,376 Less: Treasury stock (965 and 960 shares), at cost 6,746 7,255 ------- ------- Total shareholders' equity 82,017 83,121 ------- ------- $154,729 $170,083 ======= ======= See accompanying notes. Consolidated Statements of Cash Flows Frozen Food Express Industries, Inc. and Subsidiaries Years ended December 31, (in thousands) 2000 1999 1998 ---- ---- ---- Cash flows from operating activities Net (loss) income $ (1,212) $(12,130) $ 9,979 Non-cash items involved in income Depreciation and amortization 15,988 13,564 10,854 Provision for losses on accounts receivable 3,122 5,296 2,285 Deferred federal income tax (539) (6,124) 997 Gain on disposition of equipment (1,604) (594) (840) Impairment of long-lived assets - 2,656 - Restructuring expense (1,821) 3,721 - Non-cash contribution to employee benefit plans - - 1,370 Change in assets and liabilities Accounts receivable 922 (13,359) (10,817) Inventories 511 (5,144) (1,967) Tires on equipment in use (1,410) 240 (501) Other current assets (3,659) (719) (85) Accounts payable (1,399) 6,505 4,553 Accrued claims and liabilities 3,896 5,377 (2,773) Accrued payroll (56) (744) 517 Federal income tax payable - (1,104) 305 ------ ------- ------ Net cash provided by (used in) operating activities 12,739 (2,559) 13,877 ------ ------- ------ Cash flows from investing activities Expenditures for equipment (7,711) (28,294) (27,722) Proceeds from sale of equipment 7,582 4,377 5,486 Other (609) (1,408) (2,787) ------ ------- ------ Net cash used in investing activities (738) (25,325) (25,023) ------ ------- ------ Cash flows from financing activities Borrowings under revolving credit agreement 19,000 72,500 2,000 Payments against revolving credit agreement (31,500) (46,000) (2,000) Dividends paid - (1,472) (2,016) Proceeds from sale of treasury stock 257 198 1,546 Purchases of treasury stock (149) (1,752) (5,679) ------ ------- ------ Net cash (used in) provided by financing activities (12,392) 23,474 (6,149) ------ ------- ------ Net decrease in cash and cash equivalents (391) (4,410) (17,295) Cash and cash equivalents at beginning of year 1,613 6,023 23,318 ------ ------- ------ Cash and cash equivalents at end of year $ 1,222 $ 1,613 $ 6,023 ====== ======= ====== See accompanying notes. Consolidated Statements of Shareholders' Equity Frozen Food Express Industries, Inc. and Subsidiaries December 31, 2000 (in thousands)
Shares of Common Par Value Additional Shares of Cost of Total Stock of Common Paid-In Retained Treasury Treasury Shareholders' Issued Stock Capital Earnings Stock Stock Equity -------- --------- ---------- -------- -------- -------- ----------- At December 31, 1997 17,281 $25,921 $4,779 $65,038 445 $2,661 $93,077 Net income - - - 9,979 - - 9,979 Cash dividends paid - - - (2,016) - - (2,016) Treasury stock reacquired - - - - 694 5,679 (5,679) Treasury stock reissued - - 673 - (250) (1,645) 2,318 Exercise of stock options - - (129) - (107) (727) 598 ------------------------------------------------------------------------- At December 31, 1998 17,281 25,921 5,323 73,001 782 5,968 98,277 Net loss - - - (12,130) - - (12,130) Cash dividends paid - - - (1,472) - - (1,472) Treasury stock reacquired - - - - 239 1,752 (1,752) Exercise of stock options - - (267) - (61) (465) 198 ------------------------------------------------------------------------- At December 31, 1999 17,281 25,921 5,056 59,399 960 7,255 83,121 Net loss - - - (1,212) - - (1,212) Treasury stock reacquired - - - - 115 318 (318) Treasury stock reissued - - (305) - (94) (706) 401 Exercise of stock options - - (96) - (16) (121) 25 -------------------------------------------------------------------------- At December 31, 2000 17,281 $25,921 $4,655 $58,187 965 $6,746 $82,017 ==========================================================================
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 its subsidiaries, all of which are wholly-owned (collectively, "FFEX"), and who 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 - FFEX considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Accounts Receivable - FFEX extends trade credit to customers primarily located in the united States. Accounts receivable from customers are stated net of allowances for doubtful accounts of $7,350,000 and $8,392,000 as of December 31, 2000 and 1999, respectively. Inventories - Inventories are valued at the lower of cost (principally weighted average cost or specific identification method) or market. Tires - FFEX records the cost of all tires purchased with vehicles and all replacement tires as a current asset. Tires are then recorded to expense on a per-mile basis. 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") providing guidance on revenue recognition issues in financial statements. The company has completed a thorough review of its revenue recognition policies and determined that the company is 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. Deferred taxes are recorded based upon statutory tax rates anticipated to be in effect when temporary differences are expected to reverse. Long-Lived Assets - FFEX periodically evaluates whether the remaining useful life of 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, FFEX uses an estimate of the asset's discounted cash flow in evaluating its recoverable value. Included in other non-current assets are costs associated with life insurance policies and related investments owned by FFEX. Prior Period Amounts - In order to maintain comparability in classification, certain amounts reported in prior periods have been reclassified to conform with the current year presentation. 2. 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 carried at historical cost and consists of the following (in thousands): Estimated December 31, Useful Life 2000 1999 (Years) ---- ---- ----------- Land $ 4,845 $ 4,845 - Buildings and improvements 16,421 15,599 20 - 30 Revenue equipment 53,098 64,046 3 - 7 Service equipment 17,233 16,642 2 - 20 Computer, software and related equipment 20,235 18,292 3 - 12 ------- ------- 111,832 119,424 Less accumulated depreciation 49,933 45,784 ------- ------- $ 61,899 $ 73,640 ======= ======= 3. Debt As of December 31, 2000, FFEX had a $50 million secured line of credit pursuant to a revolving credit agreement with three commercial banks. The agreement is terminable by any party upon sixty days' notice, with repayment due ratably over 4 years commencing upon termination. Interest is due quarterly. FFEX 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, 2000, $14 million was borrowed against this facility. The facility is secured by liens against FFEX's inventory and trade accounts receivable. The banks have the ability to request liens on the over-the-road trucking equipment of FFEX. 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 incurred by FFEX. The agreement restricts, among other things, payments of cash dividends, repurchase of FFEX stock and the amount of capital expenditures. The amount FFEX may borrow under the facility may not exceed the lesser of $50 million, as adjusted for letters of credit and other debt as defined in the agreement, or a multiple of a measure of cashflow as described in the agreement. The amended and restated credit agreement expires on June 1, 2002. Upon expiration of the agreement, FFEX is required to repay the amount then borrowed in 48 consecutive monthly installments. Letters of credit issued against the credit facility in connection with the company's risk management program totaling approximately $3.5 million were in effect as of December 31, 2000. Accordingly, approximately $32.5 million was available under the agreement. Total interest payments under the credit line during 2000, 1999 and 1998 were $2,155,000, $1,341,000 and $5,000, respectively. The weighted average interest rate incurred by the company during 2000 was 8.6%. 4. Commitments and Contingencies FFEX leases real estate and equipment. The aggregate future minimum rentals under non-cancelable operating leases at December 31, 2000 were (in thousands): Third Related Parties Parties Total ------- ------- ----- 2001 $22,762 $ 1,672 $24,434 2002 17,075 1,123 18,198 2003 10,303 454 10,757 2004 5,838 - 5,838 2005 3,841 - 3,841 After 2005 2,949 - 2,949 ------ ------ ------ Total $62,768 $ 3,249 $66,017 ====== ====== ====== Related parties involve tractors leased from officers of FFEX under non-cancelable operating leases. For 2000, 1999 and 1998, payments to officers under these leases were $1,755,000, $1,414,000 and $1,389,000, respectively. Rentals for equipment leased from related parties are determined by reference to similar amounts paid by FFEX to unrelated third party lessors. At December 31, 2000, FFEX had purchase commitments of approximately $30 million for the purchase of revenue equipment during 2001. FFEX has accrued for costs related to public liability, cargo and work-related injury claims. When an incident occurs FFEX records a reserve for the incident's estimated outcome. As additional information becomes available, adjustments are made. Accrued claims liabilities include all such reserves and FFEX's estimate for incidents which may have been incurred but not reported. In the opinion of management, any additional costs incurred over amounts previously accrued to resolve these claims will not materially deviate from the aggregate amounts accrued. At December 31, 2000, FFEX had established $3.5 million of irrevocable letters of credit in favor of insurance companies and pursuant to certain insurance agreements. The letters of credit may be drawn upon in the event of default for failure to pay claims. 5. Financing and Investing Activities Not Affecting Cash During 2000, FFEX funded contributions to a Supplemental Executive Retirement Plan (a "SERP") by transferring 79,346 shares of treasury stock to a Rabbi Trust in which SERP assets are invested. During 1998, FFEX funded contributions to its Employee Savings Plan and one of its Employee Stock Ownership Plans and Trusts (ESOPs) by transferring 140,194 shares of treasury stock to the plans' trustees. No shares were contributed to the ESOPs in 2000 or 1999. FFEX recorded expense for the fair market value of the shares, which at the time of the contributions, was approximately $169,000 for 2000 and $1,370,000 for 1998. As of December 31, 2000 and 1999, accounts receivable included $735,000 and $118,000, respectively, from the sale of equipment retired and sold during 2000 and 1999. 6. Savings Plan FFEX sponsors a 401(k) Savings Plan for its employees. Contributions by FFEX to the 401(k) are determined by reference to voluntary contributions made by each employee. Additional contributions are made at the discretion of the Board of Directors. FFEX contributions are made in cash. For 2000, 1999 and 1998, total company contributions to the plan were approximately $1,370,000, $1,481,000 and $1,653,000, respectively. 7. Net Loss or Income Per Share of Common Stock Basic Earnings Per Share ("EPS") is computed by dividing net loss or income by the weighted average number of shares of common stock outstanding during the year. Diluted EPS is determined by dividing net income by the weighted average shares outstanding assuming the exercise of all dilutive items (using the treasury stock method). The table below sets forth information regarding weighted average basic and diluted shares (in thousands): 2000 1999 1998 ---- ---- ---- Basic shares 16,318 16,352 16,789 Common stock equivalents - - 250 ------ ------ ------ Diluted shares 16,318 16,352 17,039 ====== ====== ====== All common stock equivalents result from dilutive stock options. For 1998, the percentage of stock options excluded from common stock equivalents due to exercise prices in excess of average market prices was 52%. For 2000 and 1999, approximately 18,000 and 81,000, respectively, of common stock equivalent shares were excluded because their impact would have been anti-dilutive. 8. Income Taxes Total federal income taxes paid by FFEX were $5,150,000 for 1998. No such taxes were paid during 2000 or 1999. Net operating loss carry- forwards will begin to expire in 2020. Changes in the primary components of the net deferred tax liability were (in thousands): Deferred December 31, (Provision) December 31, 1999 Benefit 2000 ----------- ---------- ----------- Deferred Tax Assets: Accrued claims $ 5,779 $ 1,436 $ 7,215 Net operating loss 5,934 (4,969) 965 Allowance for bad debts 1,745 909 2,654 ------ ------ ------- 13,458 (2,624) 10,834 ------ ------ ------ Deferred Tax Liabilities: Prepaid expense (2,901) 126 (2,775) Property and equipment (10,987) 3,329 (7,658) Other (2,076) (292) (2,368) ------ ----- ------ (15,964) 3,163 (12,801) ------ ----- ------ $ (2,506) $ 539 $ (1,967) ====== ===== ====== The (benefit from) provision for income tax consists of the following (in thousands): 2000 1999 1998 ---- ---- ---- Taxes currently payable: Federal $(114) $(1,104) $4,264 State (5) 104 475 Deferred federal taxes (539) (6,124) 997 ---- ------ ----- $(658) $(7,124) $5,736 ==== ====== ===== Differences between the statutory federal income tax rate and FFEX's effective income tax rate are as follows: 2000 1999 1998 ---- ---- ---- Statutory federal income tax rate 34.0% 35.0% 34.5% State income taxes and other 1.2 2.0 2.0 ---- ---- ---- 35.2% 37.0% 36.5% ==== ==== ==== 9. Shareholders' Equity As of December 31, 2000, 1999 and 1998, there were authorized 40 million shares of FFEX's $1.50 par value common stock. Stock option plans were adopted in 1996, 1994, 1993, 1987 and 1982 and options may be granted to officers and employees of FFEX at the fair market value on the date of grant and to non-employee directors of FFEX at the greater of $1.00 or 50% of the market value at date of grant. Expense for grants to non-employee directors was $29,000, $35,000 and $56,000 for 2000, 1999 and 1998, respectively. Options may be granted for 10 years following plan adoption and expire 10 years after a grant. The following table summarizes information regarding stock options (in thousands, except per-share amounts): 2000 1999 1998 ---- ---- ---- Options outstanding at beginning of year 3,182 3,217 2,329 Cancelled (323) (566) (705) Granted 711 592 1,700 Exercised (16) (61) (107) ----- ----- ----- Options outstanding at year end 3,554 3,182 3,217 ===== ===== ===== Exercisable options 1,363 1,402 1,045 Options available for future grants 1,642 2,045 1,761 Weighted average price of options Cancelled during year $8.36 $8.66 $8.66 Granted during year $2.77 $7.70 $8.48 Exercised during year $2.36 $3.13 $5.20 Outstanding at year end $7.44 $8.55 $8.03 The range of unexercised option prices at December 31, 2000 was as follows: Quantity of Options (in thousands) Priced Between ----------------- -------------- 840 $1.00 - $ 5.00 490 $5.01 - $ 8.00 2,224 $8.01 - $12.40 FFEX applies APB Opinion 25 and related interpretations in accounting for its stock options. Accordingly, no expense has been recognized for stock option grants to employees. Had FFEX elected to apply Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123 to account for stock options, FFEX's net loss would have increased to $2.2 and $13.3 million ($0.13 and $0.81 per share) for 2000 and 1999, respectively. FFEX's net income would have been reduced to $9.2 million ($0.54 per share) for 1998. For purposes of pro forma disclosures, the estimated fair value of the options is recognized over the options' 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: 2000 1999 1998 ---- ---- ---- Risk-free interest rate 6.00% 4.71% 5.27% Dividend yield - 1.50% 1.46% Volatility factor .467 .700 .365 Expected life (years) 6.0 6.2 5.8 The Black-Scholes model uses highly subjective assumptions and was developed for use in estimating the value of options that have no restrictions on vesting or transfer. FFEX's stock options have such restrictions. Therefore, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The company sponsors 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 the company's financial statements. Upon the formation of the Rabbi Trust during 2000, 79,346 shares of FFEX stock were issued by the company into the Rabbi Trust. As of December 31, 2000, all of those shares remained in the trust. Consistent with the FASB's Emerging Issues Task Force ("EITF") Issue 97-14, the shares of company common stock held in a Rabbi Trust are accounted for as Treasury Stock until SERP participants elect to liquidate the stock. During 2000, the Board of Directors approved a Rights Agreement that authorized a distribution of a dividend of one Common Stock Purchase Right for each outstanding share of its Common Stock. The Rights become exercisable upon the occurrence of certain events generally relating to a change of control. Rights initially have an exercise price of $11. Upon the occurrence of such events, the Rights will be exercisable for a number of shares having a market value equal to two times the exercise price of the Rights. The Company 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 the Board of Directors, which may recommend its modification or termination. Until the Rights become exercisable upon certain triggering events, the Rights trade as a unit with the Common Stock. 10. Fair Value of Financial Instruments As of December 31, 2000, debt was $14 million, which approximated fair market value. In October 2000 and January 2001, FFEX contributed approximately 160,000 shares of its common stock into a Rabbi Trust for benefit of participants in a SERP. The EITF has stated that the assets, liabilities and income (realized and unrealized) of such trusts must be reflected in the financial statements of the company. To the extent that trust assets are invested in equities of the SERP's sponsor, the impact of EITF issue 97-14 is that future pre-tax income will reflect changes in the market valuation of the company's stock. Future net income will be increased or decreased to reflect decreases or increases, respectively, in the value of FFEX shares held by the Rabbi Trust. Except as described in the preceding paragraph, FFEX held no material market-risk-sensitive instruments (for trading or non-trading purposes) which would involve significant foreign currency exchange rate risk, commodity price risk or other relevant market risks, such as equity price risk. Accordingly, except for the impact of EITF Issue 97-14, the potential loss to FFEX in future earnings, fair values or cash flows of market-risk-sensitive investments resulting from changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices is not significant. 11. Restructuring Expense During the fourth quarter of 1999, FFEX announced a restructuring plan. The plan called for the closure of certain terminals, elimination of approximately 150 non-driver employee positions and early disposition of some trailers previously scheduled for retirement in 2001 and 2002. In connection with the plan, during 1999's fourth quarter, FFEX recorded estimated restructuring expenses, including severance payments, estimated costs for early termination of trailer leases and the cost of a facility abandonment. During 2000, FFEX approached lessors regarding their willingness to terminate some trailer leases. The lessors generally responded that they would not terminate the leases under terms acceptable to FFEX. During the fourth quarter of 2000, management concluded that FFEX would continue the leases on the majority of the involved trailers. Accordingly, during the fourth quarter of 2000, $1.8 million of the original restructuring estimate was reversed to income. A summary of the 1999 restructuring charge and its application during 2000 is as follows (in millions):
Amount Amount Amount Amount Expected of Used in Reversed To Be used Amounts Associated With Charge 2000 In 2000 In 2001 ------------------------ ------- ------- -------- ---------- Severance payments and facility closures $0.9 $(0.7) $ - $0.2 Early trailer retirement and rehabilitation 2.8 (0.3) (1.8) 0.7 --- --- --- --- Total $3.7 $(1.0) $(1.8) $0.9 === === === ===
12. Impairment of Long-Lived Assets During the first half of 1999, FFEX converted to a management information system that had been in development for several years. Consistent with American Institute of Certified Public Accountants ("AICPA") Statement of Position No. 98-1, FFEX capitalized as a long- lived asset the direct costs associated with the development effort. During the fourth quarter 1999, FFEX determined that certain components of the system were impaired. In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets" associated costs of $2.7 million were charged to expense during the fourth quarter of 1999. 13. Operating Segments The operations of FFEX consist of two reportable segments as defined by SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information". The larger segment consists of FFEX's motor carrier operations. Such operations are conducted in a number of divisions and subsidiaries and are similar in nature. FFEX has elected to report all motor carrier operations as one reportable segment. The smaller segment consists of FFEX's non-freight operations that are engaged primarily in the sale and service of refrigeration equipment and of trailers used in freight transportation. Financial information for each reportable segment is as follows (in millions): 2000 1999 1998 ---- ---- ---- Freight Operations Total revenue $323.6 $310.9 $306.1 Restructuring expense (1.8) 3.7 - Operating (loss) income (0.9) (16.2) 14.9 Total assets 147.9 156.5 140.3 Non-Freight operations Total revenue $ 72.6 $ 74.7 $ 56.6 Operating income 2.6 1.0 1.9 Total assets 31.5 33.2 23.0 Intercompany eliminations Revenue $ 3.8 $ 13.5 $ 12.8 Total assets 24.7 19.6 13.6 Consolidated Revenue $392.4 $372.1 $349.9 Restructuring expense (1.8) 3.7 - Operating (loss) income 1.7 (15.2) 16.8 Total assets 154.7 170.1 149.7 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 ACCOUNTANTS 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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Dallas, Texas /s/ ARTHUR ANDERSEN LLP February 16, 2001
Unaudited Quarterly Financial, Stock and Dividend Information ============================================================= (in thousands, except per-share amounts) First Second Third Fourth ---------------------------------------- Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- 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 (563) 753 (1,469) 67 (1,212) Net (loss) income per share of common stock Basic (.03) .05 (.09) - (.07) Diluted (.03) .05 (.09) - (.07) 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 1999 Revenue $88,257 $96,818 $97,171 $89,903 $372,149 Income (loss) from operations 2,435 2,576 (830) (19,416) (15,235) Net income (loss) 1,263 1,317 (1,166) (13,544) (12,130) Net income (loss) per share of common stock Basic .08 .08 (.07) (.83) (.74) Diluted .08 .08 (.07) (.83) (.74) Cash dividends per share .03 .03 .03 - .09 Common stock price per share High 8.500 7.625 7.625 6.250 8.500 Low 6.000 5.813 4.875 3.250 3.250 Common stock trading volume 1,250 1,560 1,733 2,045 6,588
As of March 2, 2001, FFEX had approximately 5,000 beneficial shareholders, including participants in savings and retirement plans