-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FTe88k21z+iU0bPPwWWsIfESCqUaaXzv2dWmfaWHm4lwm70EFPxDnEjsILOqZ8qT aBmAUe8HeOj9bvNN8v3wzA== 0000039273-98-000002.txt : 19980330 0000039273-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0000039273-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FROZEN FOOD EXPRESS INDUSTRIES INC CENTRAL INDEX KEY: 0000039273 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 751301831 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10006 FILM NUMBER: 98576242 BUSINESS ADDRESS: STREET 1: 1145 EMPIRE CENTRAL PLACE CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146308090 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 1-10006 FROZEN FOOD EXPRESS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Texas 75-1301831 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1145 Empire Central Place, Dallas, Texas 75247-4309 Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(214) 630-8090 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock $1.50 Par Value Nasdaq Stock Market Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 3, 1998, 16,902,217 shares of the registrant's common stock, $l.50 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The sections "Outstanding Capital Stock; Principal Shareholders", "Nominees for Directors", "Executive Compensation", and "Transactions with Management" of the Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 1998, are incorporated by reference into Part III of this Form 10-K. Portions of the Annual Report to Shareholders for the year ended December 31, 1997, are incorporated by reference into Parts I and II of this Form 10-K. PART I ITEM 1. BUSINESS. Frozen Food Express Industries, Inc. (the "company") is the largest temperature-controlled trucking company in North America. References to the company herein, unless the context requires otherwise, include Frozen Food Express Industries, Inc., and its subsidiaries, all of which are wholly owned. In its 52 years of operation, the company has not experienced an unprofitable year. The company is also the only nationwide, full-service, temperature- controlled trucking company in the United States offering all of the following services: - LESS-THAN-TRUCKLOAD: A load, typically consisting of 18 to 30 shipments, each weighing as little as 50 pounds or as much as 20,000 pounds, from multiple shippers destined for various deliveries across the United States, Canada and Mexico. The company's temperature-controlled "LTL" operation is the largest in the United States and the only one offering regularly scheduled nationwide LTL service. The company is the only major LTL carrier which uses multi-compartment refrigerated trailers to carry goods requiring different temperatures on one trailer, enhancing customer service and operating efficiencies. - FULL-TRUCKLOAD: A load, typically weighing between 20,000 and 40,000 pounds and usually from a single shipper, filling the trailer. Normally, a full-truckload has a single destination, although the company is also able to provide multiple deliveries. Management believes the company is one of the five largest temperature-controlled, full-truckload carriers in North America. - DISTRIBUTION: Distribution generally involves the delivery of cargo within a 50-to-75-mile radius of a company terminal. Full-truckload or large LTL loads are divided into smaller shipments at a terminal and delivered by distribution trucks to "end users," such as grocery stores, food brokers or drug stores, typically within a single metropolitan area. Following is a summary of certain financial and statistical data for the years ended December 31, 1993 through 1997 (LTL data also includes distribution shipments):
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Revenue* Full-truckload $190,576 $195,458 $180,598 $163,988 $129,549 Less-than-truckload 95,522 92,496 87,783 88,328 80,965 Non-freight 30,470 23,474 23,964 22,304 16,875 ------- ------- ------- ------- ------- Total $316,568 $311,428 $292,345 $274,620 $227,389 ======= ======= ======= ======= ======= Operating ratio 95.2% 95.1% 94.7% 93.0% 93.2% Full-truckload Loaded miles* 143,902 145,785 135,469 121,106 97,753 Shipments* 156.9 158.1 142.9 128.1 106.6 Revenue per shipment 1,215 1,236 1,264 1,280 1,215 Loaded miles per load 917 922 948 945 917 Less-than-truckload Hundredweight* 8,537 8,652 8,296 8,670 8,116 Revenue per hundredweight 11.19 10.69 10.58 10.19 9.98 Shipments* 293.1 304.6 292.1 305.2 292.0 Revenue per shipment 326 304 301 289 277 * In thousands
Freight revenue, from motor carrier operations, has accounted for more than 90% of total operating revenue during each of the last five years. The percent of total freight revenue contributed by full-truckload operations and by LTL operations during the past five years is summarized below:
Percent of Total Freight Revenue ------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Full-truckload 67% 68% 67% 65% 62% LTL and distribution 33 32 33 35 38 --- --- --- --- --- Total 100% 100% 100% 100% 100% === === === === ===
The company offers nationwide "one call does all" services to about 7,000 customers, none of which accounted for more than 10% of total revenue during any of the past five years. Freight revenue from international activities was less than 5% of total freight revenue during each of the five years ending December 31, 1997 TEMPERATURE-SENSITIVE MARKET More than 80% of the cargo transported by the company is temperature- sensitive. Examples are meat, poultry, seafood, processed foods, candy and other confectioneries, dairy products, pharmaceuticals, medical supplies, fruits and vegetables, cosmetics, film and heat-sensitive aerospace manufacturing materials. The common and contract hauling of temperature-sensitive cargo is highly fragmented and comprised primarily of carriers generating less than $50 million in annual revenue. Industry publications report that only 13 temperature- controlled carriers generated $100 million or more of revenue in 1996. In addition, many major food companies, food distribution firms and grocery chains continue to transport a portion of their freight with their own fleets ("private carriage"). Increasingly, large shippers are seeking to lower their cost structures by reducing their private carriage capabilities and turning to common and contract carriers ("core carriers") for their transportation needs. As these core carriers continue to improve their service capabilities through such means as satellite communications systems and electronic data interchange, shippers are expected to reduce their private carriage fleets in favor of common or contract carriage. Management believes that the temperature-controlled private carriage segment accounts for approximately 45% of the total temperature-controlled segment of the motor carrier industry. GROWTH STRATEGY The company has pursued a growth strategy that combines both internal growth and selected acquisitions. During 1987-1988 the company began to commit its own equipment to the temperature-controlled, full-truckload segment. From the beginning of 1993 through 1997, the company-operated, full-truckload tractor fleet increased from about 700 units to 1,130 units. During the same period, the company has emphasized expansion of its fleet of independent contractor ("owner-operator") provided full-truckload tractors. As of December 31, 1997, the company's full- truckload fleet included 378 tractors provided by owner-operators as compared to 217 at the beginning of 1993. From 1993 through 1997, revenue from full- truckload operations increased from 62% to 67% of total freight revenue. The management of a number of factors is critical to a trucking company's growth and profitability, including: - DRIVERS: Driver shortages and high turnover can reduce revenue and increase operating expenses through reduced operating efficiency and higher recruiting costs. During the five years ending December 31, 1997, operations were not significantly affected by driver shortages. The company maintains an active driver recruiting program and bases its employee-driver incentive pay package on longevity, safety, fuel efficiency and other operational goals. In addition, the company has continued to intensify its recruitment of truck driving school graduates. These "student-drivers" train with an experienced instructor-driver by riding as "second driver" and are paid student-driver wages by the company. They are assigned a tractor only after they have been qualified to become single drivers. Shortages of from 20 to 40 drivers on any given day were experienced during the 1997 second half. At the end of 1997, however, the company had drivers for all of its tractors and had about 225 student drivers undergoing over-the-road training. - OWNER-OPERATORS: The company actively seeks to expand its fleet with equipment provided by owner-operators. The owner-operator provides the tractor and driver to pull the company's loaded trailer. The owner-operator pays the drivers' wages, fuel, equipment-related expenses and other transportation expenses and receives a portion of the revenue from each load. At the end of 1997, the company had contracts for 378 owner-operator tractors in its full- truckload divisions and 250 in its LTL operations. The percent of full-truckload and LTL revenue generated from shipments transported by owner-operators during each of the last five years is summarized below:
Percent of Revenue from Shipments Transported by Owner-Operators ------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Full-truckload revenue 26% 28% 24% 22% 23% Less-than-truckload revenue 71% 71% 68% 65% 67% revenue
As competition for employee-drivers has increased, other trucking companies have sought to initiate or expand owner-operator fleets. Due primarily to the increased level of competition for owner-operator provided equipment, the number of owner-operator-provided trucks declined by about 75 trucks during 1997 with most of this decrease occurring in the first half of the year. The company is implementing programs designed to expand its fleet of owner-operator-provided trucks during 1998. - FUEL: Average per-gallon fuel costs (including fuel taxes) paid by the company decreased by 4% during 1997 as compared to 1996. Such costs increased by 11% in 1996 over 1995. The company attempts to mitigate the effect of fluctuating fuel costs primarily by using more fuel efficient tractors, by aggressively managing fuel purchasing and, when market conditions allow, by obtaining freight-rate increases and fuel-adjustment charges from its customers. Fuel price fluctuations result from many external market factors, most of which cannot be influenced or predicted by the company. In addition, each year several states increase their per-gallon fuel taxes. Recovery of future increases in fuel prices and fuel taxes, if any, will continue to depend upon competitive freight-market conditions. - RISK MANAGEMENT: Liability for accidents is a significant concern in the trucking industry. Exposure can be large and occurrences unpredictable. The cost and human impact of work-related injury claims are also significant concerns. To address these concerns, the company maintains a risk management program designed to minimize the frequency and severity of accidents and to manage insurance coverage and claims. As part of the program, the company carries insurance policies under which it retains liability for up to $1 million on each property, casualty and general liability claim, substantially all individual work-related injury claims and $100,000 on each cargo claim. Because of this retained liability, a series of very serious traffic accidents, work-related injury claims or unfavorable developments in or outcomes of existing claims could materially adversely affect the company's operating results. Insurance claims expense can vary significantly from year to year. Reserves representing the company's estimate of ultimate claims outcome are established based on the information available at the time of an incident. As additional information regarding the incident becomes available, any necessary adjustments are made to previously recorded amounts. The aggregate amount of open claims, some of which involve litigation, is significant. In the opinion of management, however, these claims can be resolved without a material adverse effect on the company's financial position or its results of operations. A major component of the company's risk management program is the enhancement of safety in its operations. The company has a safety department which conducts programs which include driver education and over-the-road observation. All drivers must meet or exceed specific guidelines relating to safety records, driving experience and personal standards, including a physical examination and mandatory drug testing. Drivers must also complete the company's training program, which includes tests for motor vehicle safety and over-the-road driving, and they must have a current Commercial Drivers License before being assigned a tractor. Student drivers undergo a more extensive training program as a second driver with an experienced instructor-driver. In accordance with federal regulations, the company conducts drug tests on all driver candidates and maintains a continuing program of random testing for use of such substances. Applicants who test positive for drugs are turned away and drivers who test positive for such substances are immediately disqualified from driving. For the last six years, the company's principal operating subsidiary has placed among the top three of the Truckload Carriers Association safety competition for fleets which travel more than 100 million miles. For 1996, the company was named the first place winner in its category. OPERATING STRATEGY The company's "one call does all" full-service capability, combined with the service-oriented corporate culture it gained from its many years as a successful LTL carrier, enables it to compete on the basis of service, rather than solely on price. Management also believes that major shippers will require increasing levels of service and that they will rely on their core carriers to provide transportation and logistics solutions, such as providing the shipper real-time information about the movement and condition of any shipment. During 1996, the company completed the conversion of its full-truckload fleets to the use of computer and satellite technology to enhance efficiency and customer service. The satellite-based communications system provides automatic hourly position updates of each full-truckload tractor and permits real-time communication between operations personnel and drivers. Dispatchers relay pick-up, delivery, weather, road and other information to the drivers while shipment status and other information are relayed by the drivers to the company's computers via the satellite. The company plans to add about 100 tractors to its company-operated, full- truckload fleet during 1998. Any other changes in the fleet will depend upon acquisitions, if any, of other motor carriers, developments in the nation's economy, demand for the company's services and the availability of qualified employee drivers. Continued emphasis will be placed on improving the operating efficiency and increasing the utilization of this fleet through enhanced driver training and retention and reducing the percentage of empty, non-revenue producing miles. - LESS-THAN-TRUCKLOAD: Temperature-controlled LTL trucking is service and capital intensive. LTL freight rates are higher than those for full- truckload and are based on mileage, weight, type of commodity, space required in the trailer and pick-up and delivery. Management believes that only one other refrigerated LTL motor carrier competes with the company on a nationwide basis. Temperature-controlled LTL trucking requires a system of terminals, capable of holding refrigerated and frozen products, located at strategic distribution points across the United States. The company has 15 such LTL terminals. Terminals are located in or near New York City, Philadelphia, Atlanta, Orlando, Memphis, Nashville, Cincinnati, Chicago, Kansas City, Dallas, Houston, Denver, Salt Lake City, Oakland and Los Angeles. Several of these LTL terminals also serve as full-truckload driver centers where company-operated, full-truckload fleets are based. Efficient information management is essential to a successful temperature- controlled LTL operation. On a typical day, the company's LTL system handles about 5,000 shipments - about 3,000 on the road, 1,000 being delivered and 1,000 being picked up. In 1997, the LTL operation handled about 293,100 individual shipments. - FULL-TRUCKLOAD: Temperature-controlled, full-truckload service requires a substantially lower capital investment for terminals and lower costs of shipment handling and information management than that of LTL. Pricing is based primarily on mileage, weight and type of commodity. At the end of 1997, the company's full-truckload tractor fleet consisted of 1,130 tractors owned or leased by the company and 378 tractors contracted to the company by owner-operators, making it one of the five largest temperature- controlled, full-truckload carriers in North America. The company provides a wide range of transportation and logistics services which include railroad-based intermodal long-haul transportation. In providing such service, the company contracts with railroads to transport loaded full- truckload trailers on railroad flat cars. During 1997, the company's ability to offer intermodal service was negatively impacted by the reduced capacity of railroad companies. Less than 5% of the company's domestic full-truckload shipments is transported in this manner and this service is not expected to expand until current problems affecting the rail service are resolved. By providing intermodal transportation services, the company is able to transport more loaded trailers (which require relatively lower capital investment) while engaging fewer tractors (which involve relatively higher capital investment). When the emphasis on intermodal transportation is renewed, it is probable that the company's trailer fleet will continue to expand more rapidly than its tractor fleet. Also contributing to the increase in the trailer-to-tractor ratio from 1.3:1 at January 1, 1993, to 1.5:1 at yearend 1997 were continued expansion of dedicated fleet and short-haul, full- truckload services and, in general, the more rapid expansion of the company's full-truckload services in relation to its LTL service. Full-truckload services generally involve the utilization of more trailers to enable tractors to remain in service while idle trailers are being loaded and unloaded. In addition to the LTL terminals, which also serve as full-truckload employee-driver centers, full-truckload activities are conducted from terminals in Fort Worth and Laredo, Texas. Laredo, located on the Texas-Mexico border, is the drop-off point for company trailers, which are picked up by a Mexican trucking company for movement into Mexico's interior. The company also maintains small centers for employee-driver recruitment in El Paso, Tyler, Wichita Falls and Waco, Texas; Phoenix, Arizona; Baton Rouge and Shreveport, Louisiana; Tulsa, Oklahoma; Charlotte, North Carolina; and Carlisle, Pennsylvania. EQUIPMENT The company acquires premium company-operated tractors in order to help attract and retain qualified employee-drivers, promote safe operations, minimize maintenance and repair costs and assure dependable service to its customers. Management believes that the higher initial investment for its equipment is recovered through more efficient vehicle performance and improved resale value. The company has a three-year replacement policy for its full- truckload tractors. As a result, most repair costs are recovered through efficient vehicle performance and manufacturers' warranties. The three-year replacement policy also enables the company to maximize its fuel efficiency by benefiting from technological improvements in both engine efficiency and aerodynamics. The company plans to add about 100 and replace about 350 of its tractors during 1998. In addition, about 75 trailers will be added and about 250 will be replaced during the year. Management expects that the new tractors' average miles-per-gallon will improve over that of the tractors being replaced. In order to minimize fuel consumption, the company includes a fuel efficiency driving bonus in its employee-driver incentive pay package. REGULATION The company's interstate operations are subject to regulation by the United States Department of Transportation, which regulates driver qualifications, safety, equipment standards and insurance requirements. The company is also subject to regulation of various state regulatory agencies with respect to certain aspects of its operations. State regulations generally involve the weight and dimensions of equipment and safety. SEASONALITY The company's full-truckload operations are somewhat affected by seasonal changes. The early winter, late spring and summer growing seasons for fruits and vegetables in California and Texas typically create increased demand for trailers equipped to transport cargo requiring refrigeration. In addition, winter driving conditions can be hazardous and impair the company's operations from time to time in certain portions of the company's service areas. The company's LTL operations are also impacted by the seasonality of certain commodities. As a result, LTL shipment volume during the winter months is normally lower than other months. Shipping volumes of LTL freight are usually highest during July through October. EMPLOYEES A comparison of company's employees as of December 31, 1997 and 1996, is as follows:
Freight Operations: Drivers and Trainees 1,740 1,667 Non-driver personnel Full time 668 658 Part time 149 147 ----- ----- Total Freight Operations 2,557 2,472 Non-freight Operations 181 132 ----- ----- Total 2,738 2,604 ===== =====
NON-FREIGHT BUSINESSES The company is engaged in a number of non-freight businesses. The largest such enterprise is a franchised dealer and repair facility for Wabash trailers and Carrier-Transicold brand truck and trailer refrigeration equipment. This dealer also provides refrigeration units and repair service for the company's trailers. Other businesses are engaged in the rental of trailers, used tractor and trailer sales, wholesale distribution of motor vehicle air conditioning parts and the remanufacturing of mechanical air conditioning and refrigeration components. Collectively, these non-freight businesses contributed 9.6% of the company's 1997 consolidated revenue and 7.1% of the consolidated operating profit (after elimination of inter-company transactions). OUTLOOK Certain statements contained in this Report on Form 10-K, including the portions of the Company's Annual Report to Shareholders which are incorporated herein by reference, including statements regarding the anticipated development and expansion of the company's business or the industry in which the company operates, the intent, belief or current expectations of the company, its directors or its officers, primarily with respect to the future operating performance of the company and other statements contained herein regarding matters that are not historical facts, are "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied from such forward-looking statements. These risks and uncertainties include demand for the company's services and products, which may be affected by, among other things, competition, weather conditions and the general economy, the availability and cost of labor, equipment, fuel and supplies, the impact of changes in the tax and regulatory environment in which the company operates, operational risks and insurance, risks associated with the technologies and systems used by the company and the other risks and uncertainties described in this Report on Form 10-K, including the portions of the Company's Annual Report to Shareholders which are incorporated herein by reference. YEAR 2000 During 1997, progress was made in the project to convert and update the company's computer systems. The primary objectives of the conversion and update efforts include: - To enhance the ability of the company to deliver interactive shipment, dispatch and billing information to customers with electronic data interchange ("EDI") capabilities. - To automate certain tasks that have traditionally been performed manually by drivers, dispatchers and office employees. - To provide management and other system users with improved and more current information regarding fleet operations, order status and financial results. The company is aware of potential problems associated with existing computer systems as the millennium year (Year 2000) approaches. Systems that do not properly recognize the Year 2000 could generate erroneous data or cause the system to fail. The computer systems currently in use by the company are primarily mainframe-based, "old" technology systems. The new systems being developed are based on more current technology which provide the aforementioned enhancements to functionality while at the same time addressing most issues associated with the millennium year. Accordingly, it is not practicable to isolate the portion of "new" system development costs that are specifically associated with the "Year 2000" problem. During the fourth quarter of 1997, one of the company's full-truckload fleets was successfully converted to the system currently being developed. The operations of the converted fleet are not as complex as the operations of other fleets, primarily in the areas of rating, billing, LTL operations, owner- operator settlements, and EDI. In order to complete the conversion, the development and testing of these new systems must be completed. Management expects the conversion to the "new" Year 2000 compliant system to be complete by December 31, 1998. Efforts to evaluate and resolve the company's exposure to "Year 2000" problems in other areas are continuing. Areas being addressed include the millennium problem as it affects the operation of trucks and trailers, environmental systems, non-freight operations, and the systems of service providers (such as banks) and of key vendors and customers. At this point, an estimate of future costs to be incurred has not been developed. If the company's remediation plans are not successful, there could be a significant disruption of the company's ability to transact business with its major customers and suppliers. ITEM 2. PROPERTIES. The company's corporate office, which was purchased and remodeled during 1992, and is located on 1.7 acres of land in northwestern Dallas, Texas. The building contains 34,000 useable square feet. The company's primary terminal and maintenance facility is located near Dallas on approximately 60 acres of land owned by the company in Lancaster, Texas. The buildings, which are also owned by the company, contain approximately 100,000 square feet, of which 60,000 square feet are used for warehousing and distribution, 14,000 square feet are devoted to offices housing the terminal dispatch, safety and related activities and 26,000 square feet are used for maintenance and repair facilities. The company owns approximately 20 acres of unimproved land abutting this facility. The company also owns a facility consisting of a terminal, offices and a repair shop in Fort Worth, Texas. This property is used by Lisa Motor Lines, Inc. ("Lisa"), a wholly-owned subsidiary of the company, and its divisions, Middleton Transportation Company and Great Western Express. This facility consists of three structures totaling 34,000 square feet on approximately seven acres of land. The company owns a cold storage LTL terminal located in Bridgeview, Illinois, near Chicago. The terminal includes approximately 37,000 square feet of office, dock and storage facilities. The Florida terminal, which is near Orlando, Florida, is owned by the company and consists of three buildings on approximately 15 acres of land, a dock facility of approximately 16,000 square feet, a shop of approximately 4,000 square feet and an office building. The company also owns a terminal and land in Avenel, New Jersey, which is near New York City. The building, on about five acres of land, contains approximately 17,000 square feet. At December 31, 1997, the company also maintained leased terminal or office facilities in or near the following cities: Atlanta, GA Nashville, TN Baton Rouge, LA Norman, OK Cincinnati, OH Oakland, CA Denver, CO Oklahoma City, OK Fort Worth, TX Philadelphia, PA Harlingen, TX Phoenix, AZ Houston, TX Salt Lake City, UT Kansas City, MO Shreveport, LA Laredo, TX Tulsa, OK Los Angeles, CA Waco, TX Lufkin, TX Wichita Falls, TX Memphis, TN Lease terms range from one month to six years. These terminals range in size from a small amount of office space to a terminal with office and dock facilities totaling approximately 44,000 square feet. The company expects that present facilities will be sufficient to support its operations in the near term. The following table sets forth certain information regarding revenue equipment utilized by the company at December 31, 1997 and 1996:
Age in Years ---------------------------------------- Tractors Less than 1 1 thru 3 4 or more Total - -------- ------------ ------------ ------------ ------------ 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ----- ---- ---- ---- ----- ----- Company-operated 344 477 851 722 25 3 1,220 1,202 Owner-operator provided 62 90 197 219 369 394 628 703 --- --- ----- --- --- --- ----- ----- Total 406 567 1,048 941 394 397 1,848 1,905 === === ===== === === === ==== =====
Age in Years ---------------------------------------- Trailers Less than 1 1 thru 5 6 or more Total - -------- ------------ ------------ ------------ ------------ 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ----- ----- ---- ---- ----- ----- Company-provided 397 414 2,120 1,823 267 761 2,784 2,998 Owner-operator provided -- -- 9 13 14 7 23 20 ---- ---- ----- ----- ---- ---- ----- ----- Total 397 414 2,129 1,836 281 768 2,807 3,018 ==== ==== ===== ===== ==== ==== ===== =====
The increases in the number of company-operated tractors and trailers during 1997 and 1996 resulted primarily from the addition of new equipment during each year for use in the company's full-truckload operations. Approximately 80% of the company's 2,784 trailers are insulated and equipped with refrigeration units capable of providing the temperature control necessary to handle perishable freight. Trailers that are used primarily in LTL operations are equipped with movable partitions permitting the transportation of goods requiring maintenance of different temperatures. The company also operates a fleet of non-refrigerated trailers in its "dry freight" full-truckload operation. Company-operated trailers are primarily 102 inches wide. Full-truckload trailers used in dry freight operations are 53 feet long, while temperature controlled operations are conducted with both 48 and 53 foot refrigerated trailers. The company's general policy is to replace its company-operated, heavy- duty tractors every three years. Company-operated, full-truckload trailers are usually retired after seven years of service. Occasionally, retired equipment is kept by the company for use in local delivery operations. ITEM 3. LEGAL PROCEEDINGS. The company is party to routine litigation incidental to its businesses, primarily involving claims for personal injury and property damage incurred in the transportation of freight. The aggregate amount of these claims is significant. The company maintains insurance programs and accrues for expected losses in amounts designed to cover liability resulting from personal injury and property damage claims. The company does not believe that adverse results in one or more of these pending cases would have a material effect on the financial condition of the company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of shareholders of the company during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The information regarding cash dividends, common stock price per share and common stock trading volume set forth under the caption "Quarterly Financial, Stock and Dividend Information" appearing on page 28 of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated by reference into this Report. ITEM 6. SELECTED FINANCIAL DATA. The information set forth under the caption "Eleven-Year Statistics and Financial Data" appearing on pages 18 and 19 of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated by reference into this Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 15 through 17 of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated by reference into this Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (a) The following Consolidated Financial Statements of Frozen Food Express Industries, Inc., and Report of Arthur Andersen LLP, Independent Public Accountants, with respect thereto set forth on pages 20 through 28 of the Annual Report to Shareholders for the year ended December 31, 1997, are incorporated by reference into this Report: Consolidated Statements of Income -- Years ended December 31, 1997, 1996 and 1995. Consolidated Balance Sheets -- December 31, 1997 and 1996. Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. Report of Arthur Andersen LLP, Independent Public Accountants. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. In accordance with General Instruction G to Form 10-K, the information required by Item 10 is incorporated herein by reference from the portion of the company's Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 1998, appearing under the caption "Nominees for Directors". ITEM 11. EXECUTIVE COMPENSATION. In accordance with General Instruction G to Form 10-K, the information required by Item 11 is incorporated herein by reference from the portions of the company's Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 1998 appearing under the captions "Executive Compensation" and "Transactions with Management". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. In accordance with General Instruction G to Form 10-K, the information required by Item 12 is incorporated herein by reference from the portions of the company's Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 1998, appearing under the captions "Outstanding Capital Stock; Principal Shareholders" and "Nominees for Directors". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In accordance with General Instruction G to Form 10-K, the information required by Item 13 is incorporated herein by reference from the portions of the company's Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 1998, appearing under the captions "Nominees for Directors", "Transactions with Management" and "Executive Compensation". PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. & 2. Financial Statements and Financial Statement Schedules: The financial statements listed in the index to financial statements and financial statement schedules in Item 8 hereof are filed as part of this Annual Report. Financial statement schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. 3. Exhibits: 3.l Articles of Incorporation of the Registrant and all amendments to date (filed as Exhibit 3.1 to Registrant's annual report on Form 10-K for the fiscal year ended December, 31, 1993; SEC File Number 1-10006 and incorporated herein by reference). 3.2 Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991; SEC File Number 1-10006 and incorporated herein by reference). 10.1 Frozen Food Express Industries, Inc., 1987 Non-Employee Director Stock Plan (filed as Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991; SEC File Number 1-10006 and incorporated herein by reference). 10.2 Amended and Restated Credit Agreement, dated December 30, 1992, among the registrant and its subsidiaries and Wells Fargo Bank (Texas, National Association) (formerly First Interstate Bank of Texas, N.A.), as agent; Chase Bank of Texas, N.A. (formerly Texas Commerce Bank, National Association); and The First National Bank of Boston (filed as Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992; SEC File Number 1-10006 and incorporated herein by reference). 10.3 First Amendment to amended and restated credit agreement described at Exhibit 10.5 (filed as Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993; SEC File Number 1-10006 and incorporated herein by reference). 10.4 Form of Master Lease Agreement by and between Stoney M. Stubbs, Jr., and Charles G. Robertson and Conwell Corporation. (Filed as Exhibit 10.12 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991; SEC File Number 1- 10006 and incorporated herein by reference). 10.5 Frozen Food Express Industries, Inc., 1992 Incentive and Nonstatutory Stock Option Plan (filed as Exhibit 4.3 to Registrant's Registration #33-48494 as filed with the Commission, and incorporated herein by reference). 10.6 FFE Transportation Services, Inc., 1994 Incentive Bonus Plan, as amended (filed as Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994; SEC File Number 1-10006 and incorporated herein by reference). 10.7 FFE Transportation Services, Inc., Executive Bonus and Phantom Stock Plan, as amended (filed as Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994; SEC File Number 1-10006 and incorporated herein by reference). 10.8 FFE Transportation Services, Inc., Employee Stock Ownership Plan (filed as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994; SEC File Number 1-10006 and incorporated herein by reference). 10.9 Savings Plan for Employees of Frozen Food Express Industries, Inc. (filed as Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994; SEC File Number 1-10006 and incorporated herein by reference). 10.10 Conwell Corporation Employee Stock Ownership Plan (filed as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994; SEC File Number 1- 10006 and incorporated herein by reference). 10.11 Amendment to Frozen Food Express Industries, Inc., 1992 Incentive and Nonstatutory Stock Option Plan (filed as Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994; SEC File Number 1-10006 and incorporated herein by reference). 10.12 Frozen Food Express Industries, Inc. Employee Stock Option Plan (filed as Exhibit 4.1 to Registrant's Registration #333-21831 as filed with the Commission, and incorporated herein by reference). 10.13 FFE Transportation Services, Inc. 401(k) Wrap Plan (filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996; SEC File Number 1- 10006 and incorporated herein by reference). 10.14 First through Sixth Amendments to Savings Plan for Employees of Frozen Food Express Industries, Inc. (filed as Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996; SEC File Number 1-10006 and incorporated herein by reference). 11.1 Computation of net income per diluted share of common stock (incorporated by reference to Footnote 8 to the financial statements appearing in the Annual Report to Shareholders of the Registrant for the year ending December 31, 1997). 13.1 Annual Report to Shareholders of the Registrant for the year ended December 31, 1997. (Except for those portions of such Annual Report to Shareholders expressly incorporated by reference into this Report, such Annual Report to Shareholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "Filed" Document.) 21.1 Subsidiaries of Frozen Food Express Industries, Inc. 25.1 A Power of Attorney is found on page 16 of this Report. 27.1 Financial Data Schedule for the fiscal year ending December 31, 1997. 27.2 Restated Financial Data Schedule for the three, six and nine month reporting periods ended March 31, June 30 and September 30, 1997, respectively and for the fiscal year ending December 31, 1996. 27.3 Restated Financial Data Schedule for the three, six and nine month reporting periods ended March 31, June 30 and September 30, 1996, respectively and for the fiscal year ending December 31, 1995. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the company during the last quarter of the period covered by this Report.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Annual Report to Shareholders' ------------- Consolidated Statements of Income -- Years ended December 31, 1997, 1996 and 1995 20 Consolidated Balance Sheets -- December 31, 1997 and 1996 21 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995 22 Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1997, 1996 and 1995 23 Notes to Consolidated Financial Statements 24 Report of Arthur Andersen LLP, Independent Public Accountants 28 Supplementary Information -- Quarterly financial data (unaudited) 28
Financial statement schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. The financial statements listed in the above index, which are included in the Annual Report to Shareholders of Frozen Food Express Industries, Inc., for the year ended December 31, 1997, are hereby incorporated by reference, and are filed herewith as Exhibit 13.1. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors and officers of Frozen Food Express Industries, Inc., hereby appoints Stoney M. Stubbs, Jr., and Burl G. Cott his true and lawful attorneys-in-fact and agents, for him and in his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Annual Report on Form 10-K and to file each such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FROZEN FOOD EXPRESS INDUSTRIES, INC. Date: March 26, 1998 By: /s/ Burl G. Cott -------------- ----------------------------------------------- Burl G. Cott Senior Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 26, 1998 /s/ Stoney M. Stubbs, Jr. -------------- ------------------------------------------------ Stoney M. Stubbs, Jr., Chairman of the Board of Directors and President (Principal Executive Officer) Date: March 26, 1998 /s/ Burl G. Cott -------------- ----------------------------------------------- Burl G. Cott, Senior Vice President and Director (Principal Financial and Accounting Officer) Date: March 26, 1998 /s/ Charles G. Robertson -------------- ----------------------------------------------- Charles G. Robertson Executive Vice President and Director Date: March 26, 1998 /s/ Edgar O. Weller -------------- ----------------------------------------------- Edgar O. Weller Vice Chairman of the Board of Directors Date: March 26, 1998 /s/ W. Mike Baggett -------------- ----------------------------------------------- W. Mike Baggett, Director Date: March 26, 1998 /s/ Brian R. Blackmarr -------------- ----------------------------------------------- Brian R. Blackmarr, Director Date: March 26, 1998 /s/ Leroy Hallman -------------- ----------------------------------------------- Leroy Hallman, Director Date: March 26, 1998 /s/ W. Grogan Lord -------------- ----------------------------------------------- W. Grogan Lord, Director Date: March 26, 1998 /s/ T. Michael O'Connor -------------- ----------------------------------------------- T. Michael O'Connor, Director EX-13 2 EXHIBIT 13.1 THIS FORM 10-K INCORPORATES CERTAIN SECTIONS OF THE REGISTRANT'S 1997 ANNUAL REPORT TO SHAREHOLDERS. ACCORDINGLY, ONLY THE PORTIONS OF REGISTRANT'S 1997 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 1.7% in 1997 to $316,568,000. For 1996, revenue totaled $311,428,000 and was 6.5% above 1995 revenue of $292,345,000. Freight revenue declined by 0.6% during 1997 after posting an increase of 7.3% in 1996. Net income for 1997, however, increased by 13.3% after declining by 7.8% during 1996. Available trucking capacity exceeded the demand for that capacity during 1995, 1996 and the early part of 1997. During that time, decreased utilization of trucks, caused by this overcapacity in the refrigerated trucking industry, contributed to decreased productivity and placed downward pressure on full- truckload freight rates. To achieve more balance between capacity and the demand for its services, the company reduced the expansion of its company- operated, full-truckload fleet during 1997. Also, a net decline of about 75 owner-operator-provided, full-truckload trucks occurred during the first half of 1997. At the end of 1997, the company's full-truckload fleet numbered just over 1,500 trucks, as compared to about 1,600 in mid-1996. Primarily due to the reduced number of trucks, the number of full-truckload shipments declined by 0.8% during 1997 as compared to a 10.6% increase during 1996. During the 1995-1997 period, fluctuations in the demand for the company's less-than-truckload (LTL) services were less pronounced. LTL revenue posted increases of 3.3% in 1997 and 5.4% in 1996. After remaining essentially unchanged during 1996, revenue per LTL hundredweight increased by 4.7% and revenue per LTL shipment increased by 7.2% in 1997, while the number of LTL shipments increased by 4.3% in 1996 and declined by 3.8% during 1997. The company plans to add about 100 trucks to its company-operated, full- truckload fleet during 1998. Continued emphasis will be placed on improving the operating efficiency and increasing the utilization of this fleet through enhanced driver training and retention and reducing the percentage of empty, non-revenue-producing miles. The operation of the company's full-truckload fleets is facilitated by computer and satellite technology that enhances efficiency and customer service. The satellite-based communications system provides automatic hourly position updates of each full-truckload tractor and permits real-time communication between operations personnel and drivers. Dispatchers relay pick- up, delivery, weather, road and other information to drivers while shipment status and other information are relayed by the drivers to the company's computers via satellite. The company provides a wide range of transportation and logistics services which include railroad-based intermodal long-haul transportation. In providing such service, the company contracts with railroads to transport loaded full- truckload trailers on railroad flat cars. During 1997, the company's ability to offer intermodal service was negatively impacted by the reduced capacity of railroad companies. Less than 5% of the company's domestic full-truckload shipments is transported in this manner and this service is not expected to expand until current problems affecting rail service are resolved. MANAGEMENT'S DISCUSSION, Continued For several years, the company has experienced cyclical shortages and surpluses of qualified employee-drivers for company-operated tractors. Employee- driver turnover has been high. This situation, which has been typical in the industry, increases costs of employee-driver compensation, training and recruiting. During 1995, 1996 and the first half of 1997, the company did not experience a shortage of employee-drivers, although employee-driver turnover continued at a high rate. Shortages of from 20 to 40 drivers on any given day were experienced during the 1997 second half. Significant efforts are continually devoted to recruiting and retaining qualified employee-drivers and to improving their job satisfaction. As a part of its driver recruiting and training program, the company partners with selected driver training schools. The company pre-qualifies prospective employee-drivers and agrees to assist in funding their educational costs, contingent upon successful completion of the training curriculum, final qualification as an employee-driver, and continuing employment as a driver for the company. Monetary incentives are earned by employee-drivers meeting certain targeted fuel economy, safety and tenure goals. Employee-drivers, as well as all other qualified employees, participate in stock option, 401(k), group health and other benefit programs. In the future, certain aspects of employee-drivers' compensation will continue to be tied to improvements in productivity and quality of service. Recovery of future cost increases, if any, associated with driver turnover and compensation will depend upon competitive freight-market conditions. Income from operations declined by 0.6% during 1997 to $15,060,000 as compared to $15,145,000 in 1996 and $15,384,000 in 1995. The net margin for 1997, 1996 and 1995 was 3.1%, 2.7% and 3.2%, respectively. Changes in the percentage of total revenue generated from full-truckload versus LTL shipments, as well as changes in the mix of company-provided versus owner-operator-provided equipment and in the mix of leased versus owned equipment, contributed to variations in related operating and interest expenses during the three-year period. Salaries, wages and related expenses, as a percentage of freight revenue, for 1997, 1996 and 1995 were 25.5%, 24.7% and 25.6%, respectively. These variations are attributable primarily to changes in the relative size of the company-operated, full-truckload fleet as compared to the number of trucks provided by owner-operators. The percentage of total full-truckload revenue from shipments transported on company-operated trucks was 74.4% in 1997, 71.8% in 1996 and 75.9% in 1995. The company has traditionally relied on owner-operator-provided equipment to transport much of its customers' freight. As competition for employee- drivers has increased, other trucking companies have sought to initiate or expand owner-operator fleets. Due primarily to the increased level of competition for owner-operator-provided equipment, the number of owner-operator- provided trucks declined by about 75 trucks during 1997 with most of this decrease occurring in the first half of the year. As the percentage of total freight handled by company-operated equipment rose during 1997, the percent of freight revenue absorbed by purchased transportation (primarily payments to owner-operators) declined from 24.0% in 1996 to 23.1% in 1997. Purchased transportation expense was 21.9% in 1995. The company is implementing programs designed to expand its fleet of owner-operator-provided trucks during 1998. MANAGEMENT'S DISCUSSION, Continued Average per-gallon fuel costs (including fuel taxes) paid by the company decreased by 4% during 1997 as compared to 1996. Such costs increased by 11% in 1996 over 1995. The company attempts to mitigate the effect of fluctuating fuel costs primarily by using more fuel efficient tractors, by aggressively managing fuel purchasing and, when market conditions allow, by obtaining freight rate increases and fuel-adjustment charges from its customers. Fuel price fluctuations result from many external market factors, most of which cannot be influenced or predicted by the company. In addition, each year several states increase their per-gallon fuel taxes. Recovery of future increases in fuel prices and fuel taxes, if any, will continue to depend upon competitive freight- market conditions. The total of revenue equipment rent and depreciation expense increased to 11.2% of freight revenue in 1997 from 10.7% for 1996 and 10.5% for 1995. These increases were due in part to the increased use of leasing to finance the company's fleet. Equipment rental includes a component of interest-related expense which is classified as non-operating expense when the company incurs 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. The decreased proportion of tractors provided by owner-operators was also a factor in the proportional increase in equipment rental. Insurance and claims expense, as a percentage of freight revenue, was 4.1% in 1997, 4.5% in 1996 and 5.4% in 1995. Insurance premiums do not significantly contribute to overall insurance costs, partially because the company carries large deductibles under its policies of liability insurance. Claims against the company for highway accidents are the primary component of insurance and claims expense. These expenses tend to vary with miles traveled and with changes in the mix of full-truckload versus LTL operations. Insurance costs on a per-mile basis declined by 16% during 1996, and declined by an additional 10% during 1997. Favorable claims experience was a primary reason for these declines. Driver selection, safety training, performance evaluations and rewards for accident-free driving will continue to be major areas of concentration. FFE Transportation Services, Inc. (FFE), the company's largest subsidiary, was awarded first place among trucklines which run over 100 million miles annually in the Truckload Carriers Association's 1996 National Fleet Safety Contest. FFE's safety record has placed it in the top three competitors among the largest full-truckload motor carriers in each of the past six years. Insurance and claims expense can vary significantly from year to year. Reserves representing the company's estimate of ultimate claims outcome are established based on the information available at the time of an incident. As additional information regarding the incident becomes available, any necessary adjustments are made to previously recorded amounts. The aggregate amount of open claims, some of which involve litigation, is significant. In the opinion of management, however, these claims can be resolved without a material adverse effect on the company's financial position or its results of operations. Gains from the sale of equipment rose from $706,000 in 1995 to $1,069,000 in 1996 and then to $1,149,000 in 1997. The amount of gains from the sale of equipment depends primarily upon conditions in the market for used equipment. MANAGEMENT'S DISCUSSION, Continued The company also has operations engaged in the sale and service of refrigeration equipment and in the sale and repair of trailers used in freight transportation. Non-freight revenue associated with these operations totaled $30,470,000 during 1997, $23,474,000 during 1996 and $23,964,000 during 1995. The increase in non-freight revenue during 1997 is attributable to increased sales of trailers, the initiation of an operation which rebuilds and distributes refrigeration compressors and increased sales of trailer refrigeration equipment. Operating profits from these operations of $1,076,000, $942,000 and $1,753,000 were posted for 1997, 1996 and 1995, respectively. Programs designed to improve gross margins and to reduce overhead expenses were implemented and certain assets associated with unprofitable divisions were sold during 1995 and 1996. The results of these programs, together with the new operations and related increased revenue, improved non-freight operating results in 1997. For 1997, 1996 and 1995, interest and other expense was $1,244,000, $3,370,000 and $2,136,000, respectively. During the three years ending December 31, 1997, bank debt was reduced from $9,000,000 to zero. The increase in interest and other expenses during 1996 was primarily attributable to net pre- tax expenses associated with a company-owned life insurance ("COLI") program begun in 1994. During 1996, the President signed legislation which, effective January 1, 1996, limits the deductibility of COLI-related interest. In addition, the Internal Revenue Service has initiated other challenges of COLI programs. In light of these developments, the company has begun a phase-out of its COLI program. The COLI phase-out is the primary reason for the 1997 decrease in interest and other expense. Pre-tax income increased by 17.3% in 1997 and fell by 11.1% in 1996. Net income increased by 13.3% in 1997 and decreased by 7.8% in 1996. The provision for income tax was 30.1% of pre-tax income for 1997, as compared to 27.5% for 1996 and 30.2% for 1995. Fluctuations in effective income tax rates (as compared to the statutory federal rate of approximately 34%) are primarily attributable to the presence of non-taxable income from the COLI program. Offsetting this non-taxable income are interest costs associated with the COLI program. The combination of non-taxable COLI income and tax-deductible COLI interest expense has negatively impacted pre-tax income since 1994. The effect has been to reduce income tax expense through the deductibility of COLI interest costs. Since 1994, the tax savings from COLI have more than offset net pre-tax expense. LIQUIDITY The company continues to maintain a strong financial position. The table on page 18 provides a summary of certain liquidity measures. The 1997 increase in cash provided by operations is attributable primarily to improved net income and reduced working capital requirements. CAPITAL RESOURCES Expenditures for property and equipment totaled $14.7 million during 1997, $13.7 million during 1996 and $10.7 million in 1995. In addition, the company financed, through operating leases, the acquisition of revenue equipment valued at approximately $27 million during 1997, $40 million during 1996 and $30 million in 1995. MANAGEMENT'S DISCUSSION, Continued In connection with the potential need for funds to finance the purchase of acquired businesses and expansion of the company-operated, full-truckload fleet, the company has in place a $50 million line of credit. Interest rates under the credit agreement are at prime or below. No commitment fee is charged on the unused portion of the credit line, and no compensating balances are required. This line of credit is also used to support letters of credit issued in connection with the company's insurance and risk management programs. The amount available for borrowing is reduced by such letters of credit which totaled approximately $5 million at December 31, 1997. At the end of 1997, approximately $45 million was available under the credit line. The company plans to add about 100 and replace about 350 of its tractors during 1998. In addition, about 75 trailers will be added and about 325 will be replaced during the year. These expenditures will be financed by internally generated funds, borrowings under the credit agreement and leasing. Management believes these sources of capital will be sufficient to finance the company's operations and capital expenditures during 1998. At December 31, 1997 and 1996 there was no long-term debt outstanding. YEAR 2000 During 1997, progress was made in the project to convert and update the company's computer systems. The primary objectives of the conversion and update efforts include: - To enhance the ability of the company to deliver interactive shipment, dispatch and billing information to customers with electronic data interchange ("EDI") capabilities. - To automate certain tasks that have traditionally been performed manually by drivers, dispatchers and office employees. - To provide management and other system users with improved and more current information regarding fleet operations, order status and financial results. The company is aware of potential problems associated with existing computer systems as the millennium year (Year 2000) approaches. Systems that do not properly recognize the Year 2000 could generate erroneous data or cause the system to fail. The computer systems currently in use by the company are primarily mainframe-based, "old" technology systems. The new systems being developed are based on more current technology which provide the aforementioned enhancements to functionality while at the same time addressing most issues associated with the millennium year. Accordingly, it is not practicable to isolate the portion of "new" system development costs that are specifically associated with the "Year 2000" problem. MANAGEMENT'S DISCUSSION, Continued During the fourth quarter of 1997, one of the company's full-truckload fleets was successfully converted to the system currently being developed. The operations of the converted fleet are not as complex as the operations of other fleets, primarily in the areas of rating, billing, LTL operations, owner- operator settlements, and EDI. In order to complete the conversion, the development and testing of these new systems must be completed. Management expects the conversion to the "new" Year 2000 compliant system to be complete by December 31, 1998. Efforts to evaluate and resolve the company's exposure to "Year 2000" problems in other areas are continuing. Areas being addressed include the millennium problem as it affects the operation of trucks and trailers, environmental systems, non-freight operations, and the systems of service providers (such as banks) and of key vendors and customers. At this point, an estimate of future costs to be incurred has not been developed. If the company's remediation plans are not successful, there could be a significant disruption of the company's ability to transact business with its major customers and suppliers.
ELEVEN-YEAR STATISTICS AND FINANCIAL DATA 1997 1996 1995 1994 (in thousands, except ratio, rates, equipment and per share amounts) Summary of Operations Revenue 316,568 311,428 292,345 274,620 Operating expenses 301,508 296,283 276,961 255,484 Net income 9,664 8,533 9,253 11,874 Net margin 3.1% 2.7% 3.2% 4.3% After-tax return on equity 10.9% 10.7% 13.3% 20.4% Net income per common share, diluted .57 .52 .57 .72 Financial Data Working capital 44,979 34,162 25,024 25,623 Current ratio 2.4 2.1 1.7 1.8 Cash provided by operations 28,460 10,800 24,180 20,025 Capital expenditures, net 7,955 7,191 8,383 8,160 Long-term debt -- -- 0 9,000 Shareholders' equity 93,077 83,953 75,021 64,288 Long-term debt-to-equity ratio -- -- -- .1 Common Stock Average shares outstanding, diluted 17,056 16,473 16,132 16,451 Book value per share 5.53 5.04 4.59 4.03 Market value per share High 10 1/4 13 7/8 13 7/8 15 Low 8 3/8 7 7/8 8 1/2 11 Cash dividends per share .12 .12 .12 .096 Revenue Table Full truckload 190,576 195,458 180,598 163,988 Less-than-truckload 95,522 92,496 87,783 88,328 TL/LTL % revenue contribution 60/30 63/30 62/30 60/32 Equipment In Service At Yearend Tractors Company operated 1,220 1,202 1,149 1,099 Provided by owner-operators 628 703 667 505 Total 1,848 1,905 1,816 1,604 Trailers Company provided 2,784 2,998 2,770 2,406 Provided by owner-operators 23 20 27 21 Total 2,807 3,018 2,797 2,427 Full-Truckload Revenue 190,576 195,458 180,598 163,988 Loaded miles 143,902 145,785 135,469 121,106 Shipments 156.9 158.1 142.9 128.1 Revenue per shipment 1,215 1,236 1,264 1,280 Loaded miles per load 917 922 948 945 Revenue per loaded mile 1.32 1.34 1.33 1.35 Number of loads per business day 623 627 567 508 Revenue per business day 756 776 717 651 Less-Than-Truckload Revenue 95,522 92,496 87,783 88,328 Hundredweight 8,537 8,652 8,296 8,670 Shipments 293.1 304.6 292.1 305.2 Revenue per hundredweight 11.19 10.69 10.58 10.19 Revenue per shipment 326 304 301 289 Revenue per business day 379 367 348 351 Pounds per shipment 2,913 2,840 2,840 2,841
ELEVEN-YEAR STATISTICS AND FINANCIAL DATA 1993 1992 1991 1990 (in thousands, except ratio, rates, equipment and per share amounts) Summary of Operations Revenue 227,389 194,888 176,995 160,171 Operating expenses 211,999 183,179 167,033 152,370 Net income 9,441 7,144 5,202 3,618 Net margin 4.2% 3.7% 2.9% 2.3% After-tax return on equity 20.1% 18.6% 16.0% 12.6% Net income per common share, diluted .58 .45 .34 .25 Financial Data Working capital 20,823 16,949 15,612 13,085 Current ratio 1.8 1.8 2.1 1.9 Cash provided by operations 17,482 16,395 14,968 9,022 Capital expenditures, net 18,453 18,375 (2,423) 16,285 Long-term debt 17,000 12,000 5,000 19,200 Shareholders' equity 51,983 41,799 35,059 30,005 Long-term debt-to-equity ratio .3 .3 .1 .6 Common Stock Average shares outstanding, diluted 16,276 15,910 15,249 14,519 Book value per share 3.31 2.72 2.42 2.11 Market value per share High 15 11 1/2 4 1/8 2 3/4 Low 7 1/4 3 7/8 1 7/8 1 7/8 Cash dividends per share .096 .079 .06 .06 Revenue Table Full truckload 129,549 109,178 103,582 90,043 Less-than-truckload 80,965 72,864 65,068 64,589 TL/LTL % revenue contribution 57/36 56/37 59/37 56/40 Equipment in Service at Yearend Tractors Company operated 945 800 737 739 Provided by owner-operators 457 432 421 386 Total 1,402 1,232 1,158 1,125 Trailers Company provided 2,027 1,609 1,475 1,419 Provided by owner-operators 32 24 28 38 Total 2,059 1,633 1,503 1,457 Full-Truckload Revenue 129,549 109,178 103,582 90,043 Loaded miles 97,753 83,247 80,663 69,800 Shipments 106.6 92.9 85.5 75.8 Revenue per shipment 1,215 1,175 1,211 1,188 Loaded miles per load 917 896 943 921 Revenue per loaded mile 1.33 1.31 1.28 1.29 Number of loads per business day 423 367 339 301 Revenue per business day 514 431 411 357 Less-than-Truckload Revenue 80,965 72,864 65,068 64,589 Hundredweight 8,116 6,848 6,211 6,314 Shipments 292.0 253.3 231.3 241.7 Revenue per hundredweight 9.98 10.64 10.48 10.23 Revenue per shipment 277 288 281 267 Revenue per business day 321 288 258 256 Pounds per shipment 2,779 2,704 2,685 2,612
ELEVEN-YEAR STATISTICS AND FINANCIAL DATA 1989 1988 1987 (in thousands, except ratio, rates, equipment and per share amounts) Summary of Operations Revenue 122,248 102,136 84,585 Operating expenses 115,769 96,558 81,278 Net income 3,779 3,660 2,373 Net margin 3.1% 3.6% 2.8% After-tax return on equity 14.6% 16.5% 12.1% Net income per common share, diluted .26 .26 .18 Financial Data Working capital 9,567 5,096 4,862 Current ratio 2.0 1.6 1.9 Cash provided by operations 9,174 9,191 7,320 Capital expenditures, net 11,619 15,060 3,454 Long-term debt 12,500 7,500 2,300 Shareholders' equity 27,255 24,348 20,121 Long-term debt-to-equity ratio .5 .3 .1 Common Stock Average shares outstanding, diluted 14,534 14,095 13,200 Book value per share 1.96 1.78 1.52 Market value per share High 2 7/8 2 3/8 1 5/8 Low 2 1/8 1 1 Cash dividends per share .05 .038 .03 Revenue Table Full truckload 60,313 42,947 26,226 Less-than-truckload 60,114 57,863 57,004 TL/LTL % revenue contribution 49/49 42/57 31/67 Equipment in Service at Yearend Tractors Company operated 508 256 98 Provided by owner-operators 376 496 421 Total 884 752 519 Trailers Company provided 1,204 876 698 Provided by owner-operators 41 49 49 Total 1,245 925 747 Full-Truckload Revenue 60,313 42,947 26,226 Loaded miles 46,975 33,762 18,872 Shipments 51.9 38.1 26.7 Revenue per shipment 1,162 1,127 982 Loaded miles per load 905 886 706 Revenue per loaded mile 1.28 1.27 1.39 Number of loads per business day 206 151 106 Revenue per business day 239 170 104 Less-than-Truckload Revenue 60,114 57,863 57,004 Hundredweight 6,051 5,816 5,983 Shipments 253.4 256.7 268.6 Revenue per hundredweight 9.93 9.95 9.53 Revenue per shipment 237 225 212 Revenue per business day 239 230 226 Pounds per shipment 2,388 2,266 2,227
CONSOLIDATED STATEMENTS OF INCOME Frozen Food Express Industries, Inc. and Subsidiaries Years ended December 31, 1997, 1996 and 1995 (in thousands, except per-share amounts)
1997 1996 1995 -------- -------- ------- Revenue Freight revenue $286,098 $287,954 $268,381 Non-freight revenue 30,470 23,474 23,964 ------- ------- ------- 316,568 311,428 292,345 ------- ------- ------- Costs and expenses Freight operating expenses Salaries, wages and related expenses 72,989 71,049 68,692 Purchased transportation 65,988 69,172 58,876 Supplies and expenses 78,854 79,243 74,250 Revenue equipment rent 22,349 21,367 17,469 Communications and utilities 3,294 3,625 3,457 Insurance and claims 11,634 13,028 14,462 Depreciation 9,643 9,478 10,719 Operating taxes and licenses 4,857 4,979 5,060 Gain on sale of equipment (1,149) (1,069) (706) Miscellaneous expense 3,655 2,879 2,471 ------- ------- ------- 272,114 273,751 254,750 Non-freight costs and operating expenses 29,394 22,532 22,211 ------- ------- ------- 301,508 296,283 276,961 ------- ------- ------- Income from operations 15,060 15,145 15,384 Interest and other expense 1,244 3,370 2,136 ------- ------- ------- Income before income tax 13,816 11,775 13,248 Provision for income tax 4,152 3,242 3,995 ------- ------- ------- Net income $ 9,664 $ 8,533 $ 9,253 ======= ======= ======= Net income per share of common stock Basic $ .58 $ .52 $ .57 Diluted $ .57 $ .51 $ .56 ======= ======= ======= See accompanying notes.
CONSOLIDATED BALANCE SHEETS Frozen Food Express Industries, Inc. and Subsidiaries December 31, 1997 and 1996 (in thousands)
1997 1996 -------- -------- ASSETS Current assets Cash and cash equivalents $ 23,318 $ 6,670 Accounts receivable, net 35,028 39,464 Inventories 10,608 8,440 Tires on equipment in use 4,775 5,517 Deferred federal income tax 78 408 Other current assets 3,175 4,987 ------- ------- Total current assets 76,982 65,486 Property and equipment, net 53,333 51,880 Other assets 12,433 12,188 ------- ------- $142,748 $129,554 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Trade accounts payable $ 14,389 $ 13,997 Accrued claims 5,843 6,887 Accrued payroll 5,242 4,950 Federal income tax payable 799 155 Accrued liabilities 5,730 5,335 ------- ------- Total current liabilities 32,003 31,324 Long-term debt -- -- Deferred federal income tax 7,711 6,962 Accrued claims and liabilities 9,957 7,315 ------- ------- Total liabilities and deferred credits 49,671 45,601 ------- ------- Commitments and contingencies -- -- Shareholders' equity Common stock, 17,281 shares issued in 1997 and in 1996 25,921 25,921 Additional paid-in capital 4,779 3,462 Retained earnings 65,038 57,386 ------- ------- 95,738 86,769 Less - Treasury stock, at cost 2,661 2,816 ------- ------- Total shareholders' equity 93,077 83,953 ------- ------- $142,748 $129,554 ======= ======= See accompanying notes.
Consolidated Statements of Cash Flows Frozen Food Express Industries, Inc. and Subsidiaries Years ended December 31, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 -------- -------- -------- Cash flows from operating activities Net income $ 9,664 $ 8,533 $ 9,253 Non-cash items involved in net income Depreciation and amortization 10,331 10,012 11,118 Provision for losses on accounts receivable 1,964 1,434 1,496 Deferred federal income tax 1,079 1,393 486 Gain on sale of equipment (1,149) (1,069) (706) Non-cash contribution to employee benefit plans 1,631 1,415 2,265 Change in assets and liabilities Accounts receivable 2,508 (4,219) (2,488) Inventories (2,168) (219) (1,520) Tires on equipment in use 742 (300) (883) Other current assets 2,313 (1,351) 931 Trade accounts payable (1,384) (3,520) 4,570 Accrued claims and liabilities 1,993 (1,735) (15) Accrued payroll 292 271 (327) Federal income tax payable 644 155 -- ------- ------- ------- Net cash provided by operating activities 28,460 10,800 24,180 ------- ------- ------- Cash flows from investing activities Business dispositions -- 375 2,300 Expenditures for equipment (14,656) (13,734) (10,698) Proceeds from sale of equipment 6,701 6,543 2,315 Other (1,686) (3,778) (5,214) ------- ------- ------- Net cash used in investing activities (9,641) (10,594) (11,297) ------- ------- ------- Cash flows from financing activities Borrowings under revolving credit agreement 19,000 28,000 33,000 Payments against revolving credit agreement (19,000) (28,000) (42,000) Dividends paid (2,012) (1,977) (1,936) Proceeds from sale of treasury stock 1,513 1,521 1,644 Purchases of treasury stock (1,672) (560) (492) ------- ------- ------- Net cash used in financing activities (2,171) (1,016) (9,784) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 16,648 (810) 3,099 Cash and cash equivalents at beginning of year 6,670 7,480 4,381 ------- ------- ------- Cash and cash equivalents at end of year $ 23,318 $ 6,670 $ 7,480 ======= ======= ======= See accompanying notes.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Frozen Food Express Industries, Inc. and Subsidiaries Years ended December 31, 1997, 1996 and 1995 (In thousands)
Shares Par of Value Shares Cost Common of Additional of of Total Stock Common Paid-In Retained Treasury Treasury ESOP Shareholders' Issued Stock Capital Earnings Stock Stock Debt Equity ------ ------- ---------- -------- -------- -------- ----- ------------- At December 31, 1994 17,281 $25,921 $ -- $43,513 1,342 $ 4,538 $ 608 $64,288 Net income -- -- -- 9,253 -- -- -- 9,253 Cash dividends paid ($.12 per share) -- -- -- (1,936) -- -- -- (1,936) Treasury stock purchased -- -- -- -- 102 1,012 -- (1,012) Treasury stock reissued -- -- 1,881 -- (279) (997) -- 2,878 Exercise of stock options -- -- 111 -- (222) (831) -- 942 Contributions/payments -- -- -- -- -- -- (608) 608 ------ ------ ----- ------ ----- ------ ---- ------ At December 31, 1995 17,281 25,921 1,992 50,830 943 3,722 -- 75,021 Net income -- -- -- 8,533 -- -- -- 8,533 Cash dividends paid ($.12 per share) -- -- -- (1,977) -- -- -- (1,977) Treasury stock purchased -- -- -- -- 58 560 -- (560) Treasury stock reissued -- -- 1,597 -- (267) (1,081) -- 2,678 Exercise of stock options -- -- (127) -- (95) (385) -- 258 ------ ------ ----- ------ ----- ------ ---- ------ At December 31, 1996 17,281 25,921 3,462 57,386 639 2,816 -- 83,953 Net income -- -- -- 9,664 -- -- -- 9,664 Cash dividends paid ($.12 per share) -- -- -- (2,012) -- -- -- (2,012) Treasury stock purchased -- -- -- -- 183 1,686 -- (1,686) Treasury stock reissued -- -- 1,377 -- (304) (1,475) -- 2,852 Exercise of stock options -- -- (60) -- (73) (366) -- 306 ------ ------ ----- ------ ----- ------ ---- ------ At December 31, 1997 17,281 $25,921 $4,779 $65,038 445 $ 2,661 $ -- $93,077 ====== ====== ===== ====== ===== ====== ==== ====== See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Frozen Food Express Industries, Inc. and Subsidiaries December 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - Frozen Food Express Industries, Inc. (FFEX), a Texas corporation, and its subsidiaries, all of which are wholly-owned, are primarily engaged in motor carrier transportation of perishable commodities, providing direct service for both full-truckload and less-than-truckload shipments in all 48 contiguous states as well as Canada and Mexico. The consolidated financial statements include FFEX and all subsidiary companies (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. ACCOUNTING ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Estimates and assumptions also influence the disclosure of contingent assets, and liabilities at the date of the financial statements. Actual outcomes may vary from these estimates and assumptions. CASH EQUIVALENTS - The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. ACCOUNTS RECEIVABLE - In the normal course of business, the Company extends unsecured trade credit to its customers which are primarily located in United States. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its estimate of amounts which will eventually become uncollectible. Accounts receivable from customers are stated net of allowances for doubtful accounts of $2,876,000 and $2,390,000 as of December 31, 1997 and 1996, respectively. INVENTORIES - Inventories are valued at the lower of cost (principally weighted average cost or specific identification method) or market. 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. 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 these temporary differences are expected to reverse. LONG-LIVED ASSETS - The Company 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, the Company uses an estimate of the asset's discounted cash flow in evaluating its recoverable value. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued PRIOR PERIOD AMOUNTS - As discussed in Note 8, certain prior period amounts have been restated to conform with the current year presentation. ACCOUNTING PRONOUNCEMENTS - During 1997, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard No. 131 ("FAS 131") - "Disclosures About Segments of an Enterprise and Related Information." FAS 131 requires, beginning in 1998, disclosure of certain information regarding each significant business segment in which operations are conducted. Because the Company has only one reportable statement, the Company will not be required to change its financial reporting under FAS 131. During 1999, the Company plans to adopt Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." The Company has determined that SOP 98-1 will not materially affect the financial statements of the Company. 2. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Maintenance and repairs are charged to operations as incurred. Capitalized interest on funds borrowed to finance the construction and development of major assets, replacements and improvements was $136,000 during 1997 and $122,000 during 1996. Property and equipment, net consists of the following (in thousands): 1997 1996 ------- ------- Land $ 3,223 $ 2,389 Buildings and improvements 14,740 13,251 Revenue equipment 50,134 59,106 Service equipment 13,641 10,070 Computer, software and related equipment 15,426 12,551 ------ ------ 97,164 97,367 Less accumulated depreciation 43,831 45,487 ------ ------ $53,333 $51,880 ====== ======
Depreciation of property and equipment is calculated using the straight- line method generally over estimated useful lives of 20 to 30 years for buildings, 3 to 10 years for improvements to owned or leased facilities, 3 to 7 years for revenue equipment, 2 to 20 years for service equipment and 2 to 5 years for computer, software and related equipment. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 3. LONG-TERM DEBT The Company has a $50 million line of credit pursuant to a revolving credit agreement with three commercial banks. The agreement, which has no stated expiration date, can be terminated by either party upon sixty days' notice, with repayment due in 48 equal monthly payments commencing 13 months following the termination. The agreement provides for interest payable quarterly at the prime rate of one of the banks. The Company may elect to borrow for specified periods of time at fixed interest rates. The fixed interest rates are based on the London Interbank Offered Rate or specified 90- day or 180-day certificate of deposit rates. No borrowings were outstanding at December 31, 1997 or 1996. The agreement sets certain minimum limits on consolidated net worth. Cash dividends paid during any four consecutive quarters may not exceed 40% of the total net income of the four quarters preceding the declaration of any cash dividend. In addition, the Company is required to maintain certain minimum financial and coverage ratios. Future investments, mergers and leases of property are also restricted. Additionally, the agreement provides that the amount the Company is permitted to borrow is reduced by outstanding letters of credit (see Note 7). At December 31, 1997, approximately $45 million was available under the agreement. No commitment fees are charged on the unused portion of the credit line, and no compensating balances are required. Total interest payments made on borrowings under this credit line during 1997, 1996 and 1995 were $149,000, $130,000, and $649,000, respectively. 4. FINANCING AND INVESTING ACTIVITIES NOT AFFECTING CASH During 1997, 1996 and 1995, the Company funded contributions to its Employee Savings Plan and one of its Employee Stock Ownership Plans and Trusts (ESOPs) by transferring 179,998, 141,112 and 159,236 shares, respectively, of treasury stock to the trustees of the plans. The fair market value of the shares, at the time of the contributions, was approximately $1,631,000, $1,415,000 and $1,657,000, for 1997, 1996 and 1995, respectively. As of December 31, 1997 and 1996, accounts payable included $1,789,000 and $13,000, respectively, for the purchase of equipment delivered during 1997 and 1996. As of December 31, 1997 and 1996, accounts receivable included $982,000 and $891,000, respectively, from the sale of equipment retired and sold during 1997 and 1996. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 5. INCOME TAXES The provision for income tax consists of the following (in thousands):
1997 1996 1995 ------ ------ ------ Taxes currently payable Federal $2,531 $1,544 $3,234 State 542 305 275 Deferred federal taxes 1,079 1,393 486 ----- ----- ----- $4,152 $3,242 $3,995 ===== ===== =====
The differences between the statutory federal income tax rate and the Company's effective income tax rate are as follows:
1997 1996 1995 ----- ----- ----- Statutory federal income tax rate 34.3% 34.2% 34.2% Company-owned life Insurance (3.5) (8.1) (5.3) Other, net (0.7) 1.4 1.3 ---- ---- ---- 30.1% 27.5% 30.2% ==== ==== ====
Total income taxes paid by the Company were $832,000, $153,000 and $2,012,000 for 1997, 1996 and 1995, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued The following presents the changes in the primary components of the total deferred tax liability (in thousands):
Deferred December (Provision) December 31, 1996 Benefit 31, 1997 -------- ----------- --------- Accrued claims $ 4,423 $ 347 $ 4,770 Allowance for bad debts 882 56 938 Prepaid expense (2,619) 156 (2,463) Fixed assets (9,251) (1,257) (10,508) Other 11 (381) (370) ------ ------ ------- $(6,554) $(1,079) $ (7,633) ====== ====== =======
6. RETIREMENT PLANS The Company sponsors ESOPs for its employees. Contributions to the ESOPs are made at the discretion of the Board of Directors. The Company sponsors a Savings Plan (the Plan) for its employees. Contributions by the Company to the Plan for the benefit of employees are determined by reference to voluntary contributions made by each employee. Additional contributions are made at the discretion of the Board of Directors. Company contributions are made on a quarterly basis by transferring, at fair market value, shares of FFEX stock to the Plan. For 1997, 1996 and 1995, Company contributions to the Plan were approximately $1,631,000, $996,000, and $941,000, respectively. 7. COMMITMENTS AND CONTINGENCIES The Company leases certain office space, terminals, maintenance facilities and equipment. The aggregate future minimum rentals under non-cancelable operating leases at December 31, 1997, are (in thousands):
Related Third Parties Parties Total ------- ------- ------- 1998 $1,182 $20,198 $21,380 1999 829 14,978 15,807 2000 411 9,516 9,927 2001 -- 6,382 6,382 2002 -- 4,708 4,708 After 2002 -- 3,842 3,842 ----- ------ ------ Total $2,422 $59,624 $62,046 ===== ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Leases with related parties involve tractors leased from certain officers of the Company under three year non-cancelable operating leases. Rentals are determined by reference to amounts paid by the Company to unaffiliated third- party lessors. For 1997, 1996 and 1995, payments under these leases were $1,191,000, $1,028,000, and $750,000, respectively. At December 31, 1997, the Company had purchase commitments of approximately $32 million for the purchase of tractors, trailers and information systems during 1998. The Company has accrued for costs related to public liability and work- related injury claims, some of which involve litigation. The aggregate amount of these claims is significant. In the opinion of management, these actions can be successfully defended or resolved, and any additional costs incurred over amounts accrued will not have a material adverse effect on the Company's financial position or results of operations. At December 31, 1997, in connection with its accrued claims liabilities, the Company had established $5,000,000 of irrevocable letters of credit in favor of insurance companies and pursuant to certain self-insurance agreements. The letters of credit may be drawn upon in the event of default for failure to pay claims. 8. NET INCOME PER SHARE OF COMMON STOCK In 1997, the Company adopted Financial Accounting Standard No. 128, "Earnings per Share," (FAS 128). FAS 128 requires the Company to disclose basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing net 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). Basic and diluted shares outstanding were (in thousands) 16,767 and 17,056, respectively in 1997, 16,473 and 16,838, respectively in 1996 and 16,132 and 16,519, respectively in 1995. Differences between the number of basic and diluted weighted average shares outstanding, all of which result from dilutive stock options granted by the Company, were (in thousands) 289 in 1997, 365 in 1996 and 387 in 1995. As a result of these changes, the $.52 and $.57 previously reported as fully-diluted EPS for 1996 and 1995, respectively, were restated to $.51 and $.56, diluted, respectively. These changes did not impact the previously reported primary EPS for 1996 or 1995. 9. SHAREHOLDERS' EQUITY As of December 31, 1997, 1996 and 1995, there were authorized 40 million shares of FFEX's $1.50 par value common stock. FFEX has stock option plans adopted in 1994, 1993, 1987 and 1982 which provide that options for shares of FFEX common stock may be granted to officers and key employees of the Company at the fair market value on the date of grant and to non-employee directors of FFEX at the greater of 50% of the fair market value at date of grant or $1.00. The options expire 10 years from the date of grant. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Under the 1994, 1993 and 1982 stock option plans, options may be granted for 10 years following shareholder ratification. Accordingly, no future options may be granted under the 1982 plan. The table below sets forth summarized information regarding the stock option plans (in thousands except per-share amounts):
1997 1996 1995 ------ ------ ------ Options outstanding at beginning of year 1,363 1,222 1,001 Cancelled (268) (23) (16) Granted 1,307 259 454 Exercised (73) (95) (217) ----- ----- ----- Options outstanding at yearend 2,329 1,363 1,222 ===== ===== ===== Exercisable options 1,031 1,114 781 Options available for future grants 1,262 55 296 Average price of options Exercised during year $4.17 $2.72 $4.05 Outstanding at yearend $8.61 $8.23 $7.86 ===== ===== =====
At December 31, 1997, the prices at which options may be exercised ranged from $1.00 to $12.40. During 1996, the Company adopted a plan providing grants of non-qualified stock options to substantially all of its employees. All grants under this plan will be at market value on the date of the grant and will generally not vest for five years following the grant. The Company has reserved for issuance 1,500,000 shares of common stock in connection with this plan. Initial grants pursuant to this plan were made during 1997. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no expense has been recognized for stock option grants to officers and other employees. The expense that has been charged against income for grants to non-employee directors was $42,000, $54,000 and $53,000 for 1997, 1996 and 1995, respectively. If expense for grants under the Company's stock option plans was determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income would have been reduced to $8,784,000 ($.52 per share, diluted) for 1997, $7,570,000 ($.45 per share, diluted) for 1996 and $8,184,000 ($.50 per share, diluted) for 1995. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued Pro forma information regarding net income and earnings per share is required and has been determined as if the Company had accounted for its employee stock options under the fair value method. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996 and 1995:
1997 1996 1995 ----- ----- ----- Risk-free interest rate 6.25% 5.90% 6.50% Dividend yield 1.36% 1.47% 1.20% Volatility factor .368 .368 .361 Weighted average expected life (years) 6 6 6
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. During 1997, the FFEX Board of Directors authorized the repurchase in the open market of up to an aggregate of 500,000 shares of FFEX common stock. During 1997, $1,189,000 was expended to acquire 128,000 shares. 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Dallas, Texas ARTHUR ANDERSEN LLP February 11, 1998 QUARTERLY FINANCIAL, STOCK AND DIVIDEND INFORMATION (Unaudited) (in thousands, except per-share amounts)
First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- -------- 1997 Revenue $72,686 $81,256 $82,981 $79,645 $316,568 Income from operations 2,948 4,114 4,354 3,644 15,060 Net income 1,371 2,772 2,944 2,577 9,664 Net income per share of common stock Basic .08 .17 .18 .15 .58 Diluted .08 .16 .17 .15 .57 Cash dividends per share .03 .03 .03 .03 .12 Common stock price per share High 9 7/8 9 1/2 10 1/8 10 1/4 10 1/4 Low 8 3/8 8 5/8 8 1/2 8 3/4 8 3/8 Common stock trading volume 1,283 1,973 1,650 1,196 6,102 ------ ------ ------ ------ ------ 1996 Revenue $74,173 $79,409 $80,824 $77,022 $311,428 Income from operations 2,343 4,571 4,313 3,918 15,145 Net income 1,350 2,754 2,454 1,975 8,533 Net income per share of common stock Basic .08 .17 .15 .12 .52 Diluted .08 .16 .15 .12 .51 Cash dividends per share .03 .03 .03 .03 .12 Common stock price per share High 13 1/4 13 7/8 11 1/4 9 7/8 13 7/8 Low 8 1/2 10 3/8 9 3/8 7 7/8 7 7/8 Common stock trading volume 2,396 2,212 1,249 1,821 7,678
As of March 3, 1998, the Company had approximately 7,500 beneficial shareholders, including participants in the company's Employee Stock Ownership Plans. EX-21 3 EXHIBIT 21.1 SUBSIDIARIES OF FROZEN FOOD EXPRESS INDUSTRIES, INC.
Jurisdiction of Name of Subsidiary Incorporation - ----------------------------------- --------------- FFE Transportation Services, Inc. Delaware W & B Refrigeration Service Company Delaware Conwell Corporation Delaware Lisa Motor Lines, Inc. Delaware FFE, Inc. Texas Conwell Cartage, Inc. * Texas Frozen Food Express, Inc. Texas Middleton Transportation Company * Texas Each active subsidiary does business under its corporate name. * Inactive
EX-27.1 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1997, AND THE CONSOLIDATED STATEMENTS OF INCOME, CASH FLOWS AND STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 23,318 0 37,904 2,876 10,608 76,982 97,164 43,831 142,748 32,003 0 0 0 25,921 67,156 142,748 30,470 316,568 0 301,508 1,244 1,964 1,244 13,816 4,152 9,664 0 0 0 9,664 .58 .57
EX-27.2 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES AS OF THE PERIOD-END DATES INDICATED HEREIN AND THE CONSOLIDATED STATEMENTS OF INCOME, CASH FLOWS AND STOCKHOLDERS' EQUITY FOR THE PERIODS ENDED AS INDICATED HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997 6,670 1,020 5,510 17,291 0 0 0 0 41,854 39,811 43,546 42,767 2,390 2,540 2,693 2,928 8,440 7,807 9,491 9,307 65,486 64,230 63,381 73,703 97,367 104,783 102,246 98,971 45,487 46,254 44,730 44,474 129,554 135,242 134,693 139,583 31,324 26,164 29,686 31,773 0 0 0 0 0 0 0 0 0 0 0 0 25,921 25,921 25,921 25,921 58,032 59,457 62,388 64,977 129,554 135,242 134,693 139,583 23,474 4,860 14,099 23,713 311,428 72,686 153,942 236,923 0 0 0 0 296,283 69,738 146,880 225,507 3,370 978 1,139 1,243 1,434 576 786 1,262 3,370 140 111 120 11,775 1,970 5,923 10,133 3,242 599 1,780 3,046 8,533 1,371 4,143 7,087 0 0 0 0 0 0 0 0 0 0 0 0 8,533 1,371 4,143 7,087 .52 .08 .17 .18 .51 .08 .16 .17
EX-27.3 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES AS OF THE PERIOD-END DATES INDICATED HEREIN, AND THE CONSOLIDATED STATEMENTS OF INCOME, CASH FLOWS AND STOCKHOLDERS' EQUITY FOR THE PERIODS ENDED AS INDICATED HEREIN, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 7,480 4,764 4,232 2,776 0 0 0 0 38,618 41,273 42,711 46,016 1,525 1,715 1,786 2,087 8,221 8,832 8,504 9,403 61,647 62,614 64,971 70,100 99,290 100,888 94,652 96,463 46,860 48,724 46,280 45,892 123,662 125,700 127,953 134,234 36,623 34,078 32,906 41,978 0 0 0 0 0 0 0 0 0 0 0 0 25,921 25,921 25,921 25,921 49,100 50,632 53,150 55,389 123,662 125,700 127,953 134,234 23,964 6,364 13,111 19,133 292,345 74,173 153,582 234,406 0 0 0 0 276,961 71,830 146,668 223,179 2,136 582 1,503 2,431 1,496 478 840 1,218 0 0 0 0 13,248 1,761 5,411 8,796 3,995 411 1,307 2,238 9,253 1,350 4,104 6,558 0 0 0 0 0 0 0 0 0 0 0 0 9,253 1,350 4,104 6,558 .57 .08 .17 .15 .56 .08 .16 .15
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