UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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, 1996
[ ] 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
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 [ ]
As of March 19, 1997, 16,701,063 shares of the registrant's common stock,
$l.50 par value, were outstanding.
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Item 8 of the Form 10-K is amended by adding the financial statement and
supplementary data required to be filed on Form 10-K for the fiscal year ended
December 31, 1996.
On March 31, 1997, it came to the Registrant's attention that the
Registrant's Form 10-K which was filed with the Commission on March 27, 1997
omitted the information contained in Exhibit 13.1 filed herewith. Said
Exhibit is incorporated by reference into Registrant's Form 10-K filed with the
Commission on March 27, 1997, SEC File Number 1-10006.
1
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
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(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 on page 7
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
(formerly First Interstate Bank of Texas, N.A.), as agent; 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).
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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).
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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 share of common stock, assuming
full dilution (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,
1996).
13.1 Annual Report to Shareholders of the Registrant for the year
ended December 31, 1996. (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. (filed as
Exhibit 21.1 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).
25.1 A Power of Attorney is found on page 14 of this Report (filed as
Exhibit 25.1 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).
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27 Financial Data Schedule (filed as Exhibit 27 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).
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(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.
5
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INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
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Annual Report
to Shareholders
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Consolidated Statements of Income -- Years ended December 31, 21
1996, 1995 and 1994
Consolidated Balance Sheets -- December 31, 1996 and 1995 22
Consolidated Statements of Cash Flows -- Years ended December 31, 23
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity -- Years ended 24
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements 25
Report of Arthur Andersen LLP, Independent Public Accountants 28
Supplementary Information -- Quarterly financial data (unaudited) 28
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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, 1996, are hereby incorporated by reference,
and are filed herewith as Exhibit 13.1.
6
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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 31, 1997 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 31, 1997 By /s/ Stoney M. Stubbs, Jr. *
-------------- ------------------------------------------------
Stoney M. Stubbs, Jr.,
Chairman of the Board of Directors and President
(Principal Executive Officer)
Date: March 31, 1997 /s/ Charles G. Robertson *
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Charles G. Robertson
Executive Vice President and Director
Date: March 31, 1997 /s/ Edgar O. Weller *
-------------- ------------------------------------------------
Edgar O. Weller
Vice Chairman of the Board of Directors
Date: March 31, 1997 /s/ Brian R. Blackmarr *
-------------- ------------------------------------------------
Brian R. Blackmarr, Director
Date: March 31, 1997 /s/ Leroy Hallman *
-------------- ------------------------------------------------
Leroy Hallman, Director
Date: March 31, 1997 /s/ W. Grogan Lord *
-------------- ------------------------------------------------
W. Grogan Lord, Director
Date: March 31, 1997 /s/ T. Michael O'Connor *
-------------- ------------------------------------------------
T. Michael O'Connor, Director
* By: /s/Burl G. Cott
---------------
Burl G. Cott
Attorney-in-Fact
7
EXHIBIT 13.1
THIS FORM 10-K INCORPORATES CERTAIN SECTIONS OF THE REGISTRANT'S 1996
ANNUAL REPORT TO SHAREHOLDERS. ACCORDINGLY, ONLY THE PORTIONS OF REGISTRANT'S
1996 ANNUAL REPORT TO SHAREHOLDERS WHICH ARE INCORPORATED BY REFERENCE INTO
THIS FORM 10-K ARE FILED AS THIS EXHIBIT 13.1.
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ELEVEN-YEAR STATISTICS AND FINANCIAL DATA 1996 1995 1994 1993
(in thousands, except ratio, rates, equipment and per-share amounts)
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Summary of Operations
Revenue 311,428 292,345 274,620 227,389
Operating expenses 296,283 276,961 255,484 211,999
Net income 8,533 9,253 11,874 9,441
Net margin 2.7% 3.2% 4.3% 4.2%
After-tax return on equity 10.7% 13.3% 20.4% 20.1%
Net income per common share, fully diluted .52 .57 .72 .58
Financial Data
Working capital 34,162 25,024 25,623 20,823
Current ratio 2.1 1.7 1.8 1.8
Cash provided by operations 10,800 24,180 20,025 17,482
Capital expenditures, net 7,191 8,383 8,160 18,453
Long-term debt -- -- 9,000 17,000
Shareholders' equity 83,953 75,021 64,288 51,983
Long-term debt-to-equity ratio -- -- .1 .3
Common Stock
Average shares outstanding, fully diluted 16,473 16,132 16,451 16,276
Book value per share 5.04 4.59 4.03 3.31
Market value per share
High 13 7/8 13 7/8 15 15
Low 7 7/8 8 1/2 11 7 1/4
Cash dividends per share .12 .12 .096 .096
Revenue Table
Full truckload 195,458 180,598 163,988 129,549
Less-than-truckload 92,496 87,783 88,328 80,965
TL/LTL % revenue contribution 63/30 62/30 60/32 57/36
Equipment in Service at Yearend
Tractors
Company operated 1,202 1,149 1,099 945
Provided by owner-operators 703 667 505 457
Total 1,905 1,816 1,604 1,402
Trailers
Company provided 2,998 2,770 2,406 2,027
Provided by owner-operators 20 27 21 32
Total 3,018 2,797 2,427 2,059
Full-Truckload
Revenue 195,458 180,598 163,988 129,549
Loaded miles 145,785 135,469 121,106 97,753
Shipments 158.1 142.9 128.1 106.6
Revenue per shipment 1,236 1,264 1,280 1,215
Loaded miles per shipment 922 948 945 917
Revenue per loaded mile 1.34 1.33 1.35 1.33
Number of loads per business day 627 567 508 423
Revenue per business day 776 717 651 514
Less-than-Truckload
Revenue 92,496 87,783 88,328 80,965
Hundredweight 8,652 8,296 8,670 8,116
Shipments 304.6 292.1 305.2 292.0
Revenue per hundredweight 10.69 10.58 10.19 9.98
Revenue per shipment 304 301 289 277
Revenue per business day 367 348 351 321
Pounds per shipment 2,840 2,840 2,841 2,779
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ELEVEN-YEAR STATISTICS AND FINANCIAL DATA 1992 1991 1990 1989
(in thousands, except ratio, rates, equipment and per-share amounts)
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Summary of Operations
Revenue 194,888 176,995 160,171 122,248
Operating expenses 183,179 167,033 152,370 115,769
Net income 7,144 5,202 3,618 3,779
Net margin 3.7% 2.9% 2.3% 3.1%
After-tax return on equity 18.6% 16.0% 12.6% 14.6%
Net income per common share, fully diluted .45 .34 .25 .26
Financial Data
Working capital 16,949 15,612 13,085 9,567
Current ratio 1.8 2.1 1.9 2.0
Cash provided by operations 16,395 14,968 9,022 9,174
Capital expenditures, net 18,375 (2,423) 16,285 11,619
Long-term debt 12,000 5,000 19,200 12,500
Shareholders' equity 41,799 35,059 30,005 27,255
Long-term debt-to-equity ratio .3 .1 .6 .5
Common Stock
Average shares outstanding, fully diluted 15,910 15,249 14,519 14,534
Book value per share 2.72 2.42 2.11 1.96
Market value per share
High 11 1/2 4 1/8 2 3/4 2 7/8
Low 3 7/8 1 7/8 1 7/8 2 1/8
Cash dividends per share .079 .06 .06 .05
Revenue Table
Full truckload 109,178 103,582 90,043 60,313
Less-than-truckload 72,864 65,068 64,589 60,114
TL/LTL % revenue contribution 56/37 59/37 56/40 49/49
Equipment in Service at Yearend
Tractors
Company operated 800 737 739 508
Provided by owner-operators 432 421 386 376
Total 1,232 1,158 1,125 884
Trailers
Company provided 1,609 1,475 1,419 1,204
Provided by owner-operators 24 28 38 41
Total 1,633 1,503 1,457 1,245
Full-Truckload
Revenue 109,178 103,582 90,043 60,313
Loaded miles 83,247 80,663 69,800 46,975
Shipments 92.9 85.5 75.8 51.9
Revenue per shipment 1,175 1,211 1,188 1,162
Loaded miles per shipment 896 943 921 905
Revenue per loaded mile 1.31 1.28 1.29 1.28
Number of loads per business day 367 339 301 206
Revenue per business day 431 411 357 239
Less-than-Truckload
Revenue 72,864 65,068 64,589 60,114
Hundredweight 6,848 6,211 6,314 6,051
Shipments 253.3 231.3 241.7 253.4
Revenue per hundredweight 10.64 10.48 10.23 9.93
Revenue per shipment 288 281 267 237
Revenue per business day 288 258 256 239
Pounds per shipment 2,704 2,685 2,612 2,388
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ELEVEN-YEAR STATISTICS AND FINANCIAL DATA 1988 1987 1986
(in thousands, except ratio, rates, equipment and per-share amounts)
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Summary of Operations
Revenue 102,136 84,585 91,195
Operating expenses 96,558 81,278 89,618
Net income 3,660 2,373 1,055
Net margin 3.6% 2.8% 1.2%
After-tax return on equity 16.5% 12.1% 5.6%
Net income per common share, fully diluted .26 .18 .08
Financial Data
Working capital 5,096 4,862 5,133
Current ratio 1.6 1.9 1.8
Cash provided by operations 9,191 7,320 7,398
Capital expenditures, net 15,060 3,454 2,332
Long-term debt 7,500 2,300 3,900
Shareholders' equity 24,348 20,121 19,105
Long-term debt-to-equity ratio .3 .1 .2
Common Stock
Average shares outstanding, fully diluted 14,095 13,200 13,220
Book value per share 1.78 1.52 1.44
Market value per share
High 2 3/8 1 5/8 1 3/8
Low 1 1 1
Cash dividends per share .038 .03 .006
Revenue Table
Full truckload 42,947 26,226 30,157
Less-than-truckload 57,863 57,004 59,888
TL/LTL % revenue contribution 42/57 31/67 33/66
Equipment in Service at Yearend
Tractors
Company operated 256 98 75
Provided by owner-operators 496 421 541
Total 752 519 616
Trailers
Company provided 876 698 720
Provided by owner-operators 49 49 74
Total 925 747 794
Full-Truckload
Revenue 42,947 26,226 30,157
Loaded miles 33,762 18,872 21,741
Shipments 38.1 26.7 29.8
Revenue per shipment 1,127 982 1,010
Loaded miles per shipment 886 706 728
Revenue per loaded mile 1.27 1.39 1.39
Number of loads per business day 151 106 118
Revenue per business day 170 104 220
Less-than-Truckload
Revenue 57,863 57,004 59,888
Hundredweight 5,816 5,983 6,417
Shipments 256.7 268.6 294.8
Revenue per hundredweight 9.95 9.53 9.33
Revenue per shipment 225 212 203
Revenue per business day 230 226 238
Pounds per shipment 2,266 2,227 2,177
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3
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
RESULTS OF OPERATIONS
Available trucking capacity exceeded the demand for that capacity during
1995 and 1996. Decreased utilization of trucks, caused by this industry-wide
overcapacity, contributed to decreased productivity during both years and
placed downward pressure on full-truckload freight rates.
Demand for the company's services during most of 1994 exceeded the
capacity of its full-truckload fleet and equipment utilization was high. A
strong market for transportation of both temperature controlled and general
commodity freight was experienced by most of the nation's full-truckload motor
carriers. Contributing to the shortage of available trucks was the continuing
shortage of qualified drivers in most areas of the country. Although the
company experienced sporadic driver shortages during 1994, the industry-wide
shortage was much more severe. It is estimated that as much as 5% to 8% of the
nation's fleet of for-hire trucks was parked during much of 1994 due to a lack
of drivers. The strong demand for trucking services coupled with a general
undersupply of trucks provided for pricing stability and enabled the company to
obtain selective rate increases during 1994.
Beginning in late 1994 and continuing throughout 1995 and 1996, several
events occurred which significantly increased the supply of trucks and reduced
the demand for trucking services.
- The devaluation of the Mexican peso in December, 1994 significantly
reduced the flow of consumer products from the United States to Mexico thereby
increasing the number of trucks available for the domestic transportation of
goods.
- Softness in the construction industry and other alternative
employment sources for truck drivers enabled trucking companies to employ
sufficient numbers of drivers for trucks which had been underutilized during
1994, thereby increasing trucking capacity in 1995 by an estimated 5% to 8%.
- Transportation companies such as Frozen Food Express which had near
fully utilized capacity during 1994, added to their truck fleets during 1994
and 1995.
- Many large shippers elected to reduce inventory levels during 1995
thereby decreasing their need for transportation services.
During 1996, revenue increased by 6.5% to $311,428,000. For 1995, revenue
totaled $292,345,000 and was 6.5% above 1994 revenue of $274,620,000. Full-
truckload revenue rose during 1996 and 1995 by 8.2% and 10.1%, respectively,
while less-than-truckload (LTL) revenue rose by 5.4% during 1996, but fell by
0.6% during 1995.
The improved LTL revenue during 1996 resulted primarily from a 4.3%
increase in the number of shipments transported. Due in part to the effect of
fuel adjustment charges during 1996, average revenue per LTL shipment rose by
1%.
4
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MANAGEMENT'S DISCUSSION, Continued
Expansion of the full-truckload fleet increased full-truckload revenue
during 1996 and 1995. During 1996, the size of the company-operated, full-
truckload fleet rose by 53 tractors and average miles per full-truckload
shipment decreased by 2.7% as compared to 1995. During 1996, the company
continued to increase the number of tractors provided by owner-operators to its
full-truckload operations. During 1996 and 1995, the number of full-truckload
tractors provided by owner-operators increased by about 8% and 33%,
respectively.
During 1996 and 1995, the general slowdown in the growth of demand for
freight transportation services resulted in increased competition within the
trucking industry. Accordingly, average revenue per full-truckload loaded mile
did not significantly fluctuate between the two years. The number of full-
truckload shipments transported during 1996 and 1995 increased by approximately
11% and 12%, respectively, over previous year levels. During 1996, company-
operated, full-truckload equipment accounted for 72% of total full-truckload
revenue, while company-operated full-truckload equipment accounted for
approximately 75% of such revenue during 1994 and 1995.
Currently, the company does not plan to increase the size of its company-
operated, full-truckload fleet during 1997. Any expansion of the fleet will
depend upon acquisitions, if any, of other motor carriers, developments in the
nation's economy and demand for the company's services. Continued emphasis
will be placed on improving the operating efficiency and increasing the
utilization of this fleet through enhanced driver training and retention,
seeking longer haul and more specialized business, and reducing the percentage
of empty, non-revenue producing miles.
During 1996, the company expanded its use of computer and satellite
technology to enhance efficiency and customer service. The satellite-based
tracking and communication system provides automatic hourly updates of the
position of each full-truckload tractor and permits real-time communication
between operations personnel and drivers. Dispatchers relay pick-up and
delivery times, weather and road information, route and fueling directions, and
other instructions to the drivers while shipment status and other information
are relayed by the drivers to the company's computers via the 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. Railroads are paid fees for this
service and the company uses its tractors to transport the trailers to and from
railroad pick-up and drop-off points. Less than 5% of the company's domestic
full-truckload shipments are transported in this manner and this service is not
expected to expand until the current industry-wide oversupply of full-truckload
trucks subsides.
5
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MANAGEMENT'S DISCUSSION, Continued
During 1994 and 1995, the company expanded transportation services for
customers shipping products to and from Mexico and Canada. Canadian operations
are conducted with equipment operating directly under authority of the company.
The company does not presently operate its tractors in Mexico. To provide
service in Mexico, the company makes arrangements with railroads and Mexico-
based motor carriers. Pursuant to these arrangements, the company interchanges
its trailers with the Mexico freight service providers for movement within
Mexico. During 1994, approximately 6% of freight revenue was derived from
international activities, for which the company bills and collects primarily
United States currency, principally from United States-based customers. During
1995 and 1996, continuing efforts to expand international activities were
negatively impacted by the late 1994 devaluation of the Mexican peso, which
significantly reduced the amount of United States freight transported by all
motor carriers to Mexico.
In providing certain international and intermodal transportation services,
the company transports more loaded trailers (which require relatively lower
capital investment) while engaging fewer tractors (which involve relatively
higher capital investment). It is probable that the company's trailer fleet
will continue to expand more rapidly than its tractor fleet if these activities
continue to grow. Also contributing to the increase in the trailer-to-tractor
ratio, from 1.5:1 at January 1, 1994, to 1.6:1 at yearend 1996, was the
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 trailers are being loaded and unloaded.
In years prior to 1995, the company experienced cyclical shortages and
surpluses of qualified employee-drivers for company-operated tractors and
employee-driver turnover has been high. This situation, which has been typical
in the industry, tends to increase costs associated with employee-driver
compensation, training and recruiting. During 1995 and 1996, the company did
not experience a shortage of employee-drivers, although employee-driver
turnover continued at a high rate. Significant efforts are continually devoted
to recruiting and retaining qualified employee-drivers and to improving their
job satisfaction. The company offers monetary incentives to employee-drivers
meeting certain targeted fuel economy, safety and tenure goals. 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 1.6% during 1996 to $15,145,000 as
compared to $15,384,000 in 1995 and $19,136,000 in 1994. The industry-wide over-
capacity, particularly in the full-truckload segment, caused per-truck
utilization and freight rates to decline, resulting in a narrowing of profit
margins. The net margin (net income as a percent of total revenue) for 1996,
1995 and 1994 was 2.7%, 3.2% and 4.3%, respectively.
6
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MANAGEMENT'S DISCUSSION, Continued
Changes in the percentage of total revenue generated from full-truckload
versus LTL shipments, as well as changes in the mix of company-operated versus
owner-operated 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 1996, 1995 and 1994 were 24.7%, 25.6% and 24.9%, respectively. The 1996
decline was attributable primarily to the company's continued efforts to
increase the number of tractors provided by owner-operators.
As the percentage of total freight handled by company-operated equipment
declined, the percent of freight revenue absorbed by purchased transportation
(primarily payments to owner-operators) rose from 21.1% in 1994, to 21.9% in
1995 and 24.0% in 1996, due to the more rapid expansion of the owner-operator
provided fleet of trucks.
Average per-gallon fuel costs (including fuel taxes) paid by the company
were relatively stable during 1994 and 1995 but increased by 11% during 1996.
The company attempts to mitigate the effect of increases in fuel costs
primarily through the utilization of more fuel efficient tractors, by
aggressively managing its fuel purchasing and, when market conditions allow, by
obtaining freight rate increases and fuel adjustment charges from its
customers. Due to competitive pressures resulting from the industry-wide
oversupply of trucks, only about half of the increase in per-gallon fuel costs
was recovered through such fuel adjustment charges during 1996. Fuel price
fluctuations result from many external market factors, most of which cannot be
influenced or forecasted by the company. In addition, each year several states
increase their per-gallon fuel taxes. Recovery of future fuel tax or price
increases, if any, will continue to depend upon competitive freight market
conditions.
The total of revenue equipment rent and depreciation expense increased
from 10.2% of freight revenue in 1994 to 10.5% for 1995 and 10.7% for 1996.
These increases were due in part to the increased use of leasing to finance the
expansion of the company's fleet of trailers. Equipment rent and depreciation
is also affected by the replacement of less expensive (3 year old) tractors and
(7 year old) trailers with more expensive new equipment. Tractors and trailers
acquired during 1996 were more costly than the tractors and trailers they
replaced.
Insurance and claims expense, as a percentage of freight revenue, was 4.5%
in 1996, 5.4% in 1995 and 5.2% in 1994. Premiums paid to insurance companies
do not significantly contribute to overall insurance costs, partially because
the company carries significant 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 in
relation to miles traveled. In recent years, full-truckload operations, from
which per-mile revenue is relatively low, have been expanding more rapidly than
LTL operations, from which per-mile revenue is relatively high. Accordingly,
while insurance expense on a per-mile basis did not change significantly
between 1994 and 1995, the increased percentage of full-truckload
7
<PAGE>
MANAGEMENT'S DISCUSSION, Continued
miles and revenue during 1995 resulted in the increase in insurance and claims
expense as a percentage of combined full-truckload and LTL freight revenue.
During 1996, these costs on a per-mile basis fell by 16% as compared to 1995,
resulting in the overall decrease in insurance and claims expense.
Insurance and claims expense can vary significantly from year to year.
Reserves representing the company's estimate of total ultimate claims cost are
established for potential claims based on the information available at the time
of an incident. As additional information regarding the incident becomes
available, adjustments may be 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.
In order to improve its safety performance, reduce accidents and lower
insurance and claims expense, the company has strengthened restrictions on the
manner in which equipment may be operated on its behalf. 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 five years.
Gains from the sale of equipment rose from $405,000 in 1994, to $706,000
in 1995 and then to $1,069,000 in 1996. The company generally replaces tractors
and trailers after three and seven years of service, respectively. The amount
of gains from the sale of equipment depends primarily upon market conditions
for used equipment.
The company also has operations engaged in the sale and service of
refrigeration equipment. Non-freight revenue associated with these operations
totaled $23,474,000 during 1996, $23,964,000 during 1995 and $22,304,000 during
1994. Operating profits from these operations of $765,000, $1,753,000 and
$942,000 were posted for 1994, 1995 and 1996, respectively. Programs designed
to improve gross margins and to reduce overhead expenses were implemented and
certain assets associated with unprofitable divisions were sold. The results of
these programs, together with increased non-freight activity, combined to
improve operating results in 1995, while general softness in demand for many of
the products distributed by this subsidiary resulted in lower non-freight
revenue and operating income during 1996.
For 1996, 1995 and 1994, interest and other expense was $3,370,000,
$2,136,000 and $1,372,000, respectively. Prior to 1994, interest incurred on
bank debt was the primary component of interest and other expenses. During the
8
<PAGE>
MANAGEMENT'S DISCUSSION, Continued
three years ending December 31, 1996, bank debt was reduced from $9,000,000 to
zero. The increase in interest and other expenses during 1995 and 1996 is
primarily attributable to net pre-tax expenses associated with the 1994
implementation of a company-owned life insurance program.
Pre-tax income fell by 25.4% in 1995 and 11.1% during 1996. Net income
decreased by 22.1% in 1995 and 7.8% in 1996. The provision for income tax was
27.5% of pre-tax income for 1996, as compared to 30.2% for 1995 and 33.2% for
1994. This reduced effective income tax rate is primarily attributable to the
increased level of non-taxable book income from the company-owned life
insurance (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. In years prior to 1996, the tax
savings have more than offset net pre-tax expense, resulting in increased net
income. During 1996, the President signed legislation which, effective January
1, 1996, limits the deductibility of COLI-related interest. The adverse effect
on 1996 was minimal. The effect on years after 1996 could be significant if
the present COLI program is continued into those years. In light of these
developments, management is currently implementing plans to discontinue the
COLI program.
LIQUIDITY
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
- - --------------------------- ------- ------- -------
<S> <C> <C> <C>
Cash provided by operations $10,800 $24,180 $20,025
Working capital $34,162 $25,024 $25,623
Current ratio 2.1 1.7 1.8
</TABLE>
The company continues to maintain a strong financial position. The table
above provides a summary of certain liquidity measures.
The decrease in cash provided by operations is attributable primarily to
reduced net income, increased working capital and the settlement during 1996 of
certain self-insured liability claims.
CAPITAL RESOURCES
Expenditures for property and equipment totaled $13.7 million during 1996,
$10.7 million during 1995 and $13.6 million in 1994. In addition, the company
financed, through operating leases, the acquisition of revenue equipment valued
9
<PAGE>
MANAGEMENT'S DISCUSSION, Continued
at approximately $40 million during 1996 and $30 million during each of 1995
and 1994. During recent years, the company has expanded its fleet of company-
operated tractors and trailers, and acquired the businesses and certain assets
of other motor carriers in connection with the expansion of its activities.
In connection with the need for funds to finance the purchase of assets
from acquired businesses and the 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, 1996. At the end
of 1996, approximately $45 million was available under the credit line.
The company plans to replace about 300 of its tractors during 1997. 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 1997.
At December 31, 1996 and 1995 there was no long-term debt outstanding.
10
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Frozen Food Express Industries, Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue
Freight revenue $287,954 $268,381 $252,316
Non-freight revenue 23,474 23,964 22,304
------- ------- -------
311,428 292,345 274,620
------- ------- -------
Costs and expenses
Freight operating expenses
Salaries, wages and related expenses 71,049 68,692 62,900
Purchased transportation 69,172 58,876 53,340
Supplies and expenses 79,243 74,250 68,430
Revenue equipment rent 21,367 17,469 16,027
Communications and utilities 3,625 3,457 3,285
Insurance and claims 13,028 14,462 13,066
Depreciation 9,478 10,719 9,752
Operating taxes and licenses 4,979 5,060 4,988
Gain on sale of equipment (1,069) (706) (405)
Miscellaneous expense 2,879 2,471 2,562
------- ------- -------
273,751 254,750 233,945
Non-freight costs and operating expenses 22,532 22,211 21,539
------- ------- -------
296,283 276,961 255,484
------- ------- -------
Income from operations 15,145 15,384 19,136
Interest and other expense 3,370 2,136 1,372
------- ------- -------
Income before income tax 11,775 13,248 17,764
Provision for income tax 3,242 3,995 5,890
------- ------- -------
Net income $ 8,533 $ 9,253 $ 11,874
======= ======= =======
Net income per share of common stock
Primary and fully diluted $ .52 $ .57 $ .72
======= ======= =======
See accompanying notes.
</TABLE>
11
<PAGE>
CONSOLIDATED BALANCE SHEETS
Frozen Food Express Industries, Inc. and Subsidiaries
December 31, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,670 $ 7,480
Accounts receivable, net 39,464 37,093
Inventories 8,440 8,221
Tires on equipment in use 5,517 5,217
Deferred federal income tax 408 --
Other current assets 4,987 3,636
------- -------
Total current assets 65,486 61,647
Property and equipment, net 51,880 52,430
Other assets 12,188 9,585
------- -------
$129,554 $123,662
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 13,997 $ 17,529
Accrued claims liabilities 6,887 8,401
Accrued payroll 4,950 4,679
Federal income tax payable 155 --
Deferred federal income tax -- 850
Other accrued liabilities 5,335 5,164
------- -------
Total current liabilities 31,324 36,623
Long-term debt -- --
Deferred federal income tax 6,962 4,311
Accrued claims and other liabilities 7,315 7,707
------- -------
Total liabilities and deferred credits 45,601 48,641
------- -------
Commitments and contingencies -- --
Shareholders' equity
Common stock, 17,281 shares issued in 1996 and in 1995 25,921 25,921
Additional paid-in capital 3,462 1,992
Retained earnings 57,386 50,830
------- -------
86,769 78,743
Less - Treasury stock, at cost 2,816 3,722
------- -------
Total shareholders' equity 83,953 75,021
------- -------
$129,554 $123,662
======= =======
See accompanying notes.
</TABLE>
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Frozen Food Express Industries, Inc. and Subsidiaries
December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 8,533 $ 9,253 $ 11,874
Non-cash items involved in net income
Depreciation and amortization 10,012 11,118 10,224
Provision for losses on accounts receivable 1,434 1,496 1,136
Deferred federal income tax 1,393 486 233
Gain on sale of equipment (1,069) (706) (405)
Non-cash contribution to employee benefit plans 1,415 2,265 1,609
Change in assets and liabilities,
net of effects from acquired businesses
Accounts receivable (4,219) (2,488) (6,420)
Inventories (219) (1,520) (1,693)
Tires on equipment in use (300) (883) (332)
Other current assets (1,351) 931 (1,390)
Trade accounts payable (3,520) 4,570 2,584
Accrued claims and other liabilities (1,906) 793 2,348
Accrued payroll 271 (327) 743
Federal income tax payable 155 -- (1,809)
Other accrued liabilities 171 (808) 1,323
------- ------- -------
Net cash provided by operating activities 10,800 24,180 20,025
------- ------- -------
Cash flows from investing activities
Business dispositions (acquisitions) 375 2,300 (937)
Expenditures for equipment (13,734) (10,698) (13,615)
Proceeds from sale of equipment 6,543 2,315 5,455
Other (3,778) (5,214) (1,223)
------- ------- -------
Net cash used in investing activities (10,594) (11,297) (10,320)
------- ------- -------
Cash flows from financing activities
Borrowings under revolving credit agreement 28,000 33,000 25,000
Payments against revolving credit agreement (28,000) (42,000) (33,000)
Dividends paid (1,977) (1,936) (1,520)
Proceeds from sale of treasury stock 1,521 1,644 1,012
Purchases of treasury stock (560) (492) (650)
------- ------- -------
Net cash used in financing activities (1,016) (9,784) (9,158)
------- ------- -------
Net (decrease) increase in cash and cash equivalents (810) 3,099 547
Cash and cash equivalents at beginning of year 7,480 4,381 3,834
------- ------- -------
Cash and cash equivalents at end of year $ 6,670 $ 7,480 $ 4,381
======= ======= =======
See accompanying notes.
</TABLE>
13
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Frozen Food Express Industries, Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
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
------ ------- ---------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1993 13,825 $20,737 $ 259 $36,164 1,262 $ 3,962 $1,215 $51,983
Net income -- -- -- 11,874 -- -- -- 11,874
Cash dividends paid
($.096 per share) -- -- -- (1,520) -- -- -- (1,520)
Treasury stock purchased -- -- -- -- 94 1,487 -- (1,487)
Treasury stock reissued -- -- 1,427 -- (110) (358) -- 1,785
Exercise of stock options -- -- 493 -- (172) (553) -- 1,046
Retroactive effect of
a 5-for-4 stock split
in the form of a 25%
stock dividend 3,456 5,184 (2,179) (3,005) 268 -- -- --
Contributions/payments -- -- -- -- -- -- (607) 607
------ ----- ------ ------ ----- ------ ----- ------
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
====== ====== ====== ====== ===== ====== ===== ======
See accompanying notes.
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Frozen Food Express Industries, Inc. and Subsidiaries
December 31, 1996
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 and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reported period. Actual outcomes may vary from these estimates.
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 credit to its customers which are located throughout the
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 $2,390,000 and $1,525,000 as
of December 31, 1996 and 1995, 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 enacted 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 cash flow in evaluating its fair value.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Maintenance and repairs are
charged to operations currently. Capitalized interest on funds borrowed to
finance the construction and development of major assets, replacements and
improvements was $122,000 during 1996 and $295,000 during 1995.
Property and equipment, net consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 2,389 $ 2,389
Buildings and improvements 13,251 13,032
Revenue equipment 59,106 63,504
Service equipment 10,070 9,286
Computer, software and related equipment 12,551 11,079
------ ------
97,367 99,290
Less accumulated depreciation 45,487 46,860
------ ------
$51,880 $52,430
====== ======
</TABLE>
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.
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, 1996 or 1995.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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, 1996, 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
1996, 1995 and 1994 were $130,000, $649,000 and $809,000, respectively.
4. FINANCING AND INVESTING ACTIVITIES NOT AFFECTING CASH
During 1996, 1995 and 1994, the Company funded contributions to its
Employee Savings Plan and one of its Employee Stock Ownership Plans and Trusts
(ESOPs) by transferring 141,112, 159,236 and 78,035 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 $1,415,000,
$1,657,000 and $1,002,000, for 1996, 1995 and 1994, respectively.
During 1995 and 1994, $608,000 and $607,000, respectively, of the
Company's contribution to another ESOP was applied against amounts owed by the
ESOP to the Company (see Note 6).
As of December 31, 1996 and 1995, accounts payable included $13,000 and
$25,000, respectively, for the purchase of equipment delivered during 1996 and
1995. As of December 31, 1996 and 1995, accounts receivable included $891,000
and $414,000, respectively, from the sale of equipment retired and sold during
1996 and 1995.
5. INCOME TAXES
The provision for income tax consists of the following (in thousands):
<TABLE>
<CAPTIONS>
1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
Taxes currently payable
Federal $1,544 $3,234 $5,337
State 305 275 320
Deferred federal taxes 1,393 486 233
----- ----- -----
$3,242 $3,995 $5,890
===== ===== =====
</TABLE>
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The differences between the statutory federal income tax rate and the
Company's effective income tax rate are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate 34.2% 34.2% 34.9%
Company-owned life insurance (8.1) (5.3) (2.9)
Other, net 1.4 1.3 1.2
---- ---- ----
27.5% 30.2% 33.2%
==== ==== ====
</TABLE>
Total income taxes paid by the Company were $153,000, $2,012,000 and
$7,259,000 for 1996, 1995 and 1994, respectively.
The following presents the changes in the primary components of the total
deferred tax liability (in thousands):
<TABLE>
<CAPTION>
Deferred
December (Provision) December
31, 1995 Benefit 31, 1996
-------- ----------- --------
<S> <C> <C> <C>
Accrued claims $ 4,961 $ (538) $ 4,423
Allowance for bad debts 668 214 882
Prepaid expense (2,369) (250) (2,619)
Fixed assets (8,697) (554) (9,251)
Other 276 (265) 11
------ ------ ------
$(5,161) $(1,393) $(6,554)
====== ====== ======
</TABLE>
6. RETIREMENT PLANS
The Company sponsors ESOPs for its employees. Contributions to the ESOPs
are made at the discretion of the Board of Directors. Prior to 1994, one of
the ESOPs financed purchases of FFEX stock with funds borrowed from the
Company. These loans matured in annual installments through 1999 and bore
interest at the prime rate. The interest rate for these loans at December 31,
1994 was 8.5%. The loans were fully retired during 1995. The following table
sets forth a summary of ESOP related expense (in thousands):
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
1996 1995 1994
---- ----- -----
<S> <C> <C> <C>
Level payments required $ -- $ -- $ --
Contribution in excess of required payments -- 963 1,296
Interest paid by Company on behalf of ESOP -- 67 85
--- ----- -----
$ -- $1,030 $1,381
=== ===== =====
Dividends on ESOP shares used for debt service $ -- $ 19 $ 29
=== ===== =====
</TABLE>
The leveraged ESOP utilized dividends received on the shares pledged as
collateral under the loan agreement to service the ESOP debt. To the extent
these dividends were not sufficient to satisfy the full amount of the interest
on the debt, the contribution required of the Company was increased. As of
December 31, 1996, the leveraged ESOP owned 2,703,614 shares, all of which had
been allocated to participants' accounts.
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.
Company contributions are made on a quarterly basis by transferring, at fair
market value, shares of FFEX stock to the Plan. For 1996, 1995 and 1994,
Company contributions to the Plan were approximately $996,000, $941,000 and
$1,002,000, 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, 1996, are (in thousands):
<TABLE>
<CAPTION>
Related Third
Parties Parties Total
------- ------- -------
<S> <C> <C> <C>
1997 $1,167 $18,318 $19,485
1998 438 15,537 15,975
1999 174 10,436 10,610
2000 -- 6,821 6,821
2001 -- 4,967 4,967
After 2001 -- 4,750 4,750
----- ------ ------
Total $1,779 $60,829 $62,608
===== ====== ======
</TABLE>
19
<PAGE>
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 1996, 1995 and 1994, payments under these leases were
$1,028,000, $750,000 and $489,000, respectively.
At December 31, 1996, the Company had purchase commitments of
approximately $22 million for the purchase of tractors, trailers and
information systems in 1997 and 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, 1996, in
connection with its accrued claims liabilities, the Company had established
approximately $5,000,000 of irrevocable letters of credit in favor of insurance
companies and pursuant to certain self-insurance agreements. Under the terms of
the insurance agreements, the letters of credit may be drawn upon in the event
of default for failure to pay claims (within retention levels specified in the
policies).
8. NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed using the weighted
average number of common and common equivalent shares, (calculated using the
treasury stock method) outstanding during the year. Computation of primary
common stock equivalents assumes exercise of dilutive options at the average
market price of FFEX's shares during each year. The computation of fully
diluted common stock equivalents assumes exercise of dilutive options at the
yearend market price. The primary and fully diluted weighted average number of
shares were (in thousands) 16,473 in 1996, 16,132 in 1995 and 16,451 in 1994.
9. SHAREHOLDERS' EQUITY
As of December 31, 1996, 1995 and 1994, 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.
20
<PAGE>
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):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Options outstanding at beginning of year 1,222 1,001 1,010
Cancelled (23) (16) (1)
Granted 259 454 207
Exercised (95) (217) (215)
----- ----- -----
Options outstanding at yearend 1,363 1,222 1,001
===== ===== =====
Exercisable options 1,114 781 795
Options available for future grants 55 296 708
Average price of options
Exercised during year $2.72 $4.05 $4.87
Outstanding at yearend $8.23 $7.86 $6.10
===== ===== =====
</TABLE>
At December 31, 1996, 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 employees of the Company. 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 key employees. The expense that has been
charged against income for grants to non-employee directors was $54,000 and
$53,000 for 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 for 1996 and 1995 would have been
reduced to $7,570,000 ($.46 per share) and $8,184,000 ($.51 per share),
respectively.
21
<PAGE>
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, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Dallas, Texas ARTHUR ANDERSEN LLP
February 12, 1997
22
<PAGE>
Quarterly Financial, Stock and Dividend Information
(Unaudited)
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
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
Primary and fully diluted .08 .16 .15 .12 .52
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
------ ------ ------ ------ -------
1995
Revenue $66,978 $73,837 $75,778 $75,752 $292,345
Income from operations 2,973 6,066 3,583 2,762 15,384
Net income 1,786 3,809 2,102 1,556 9,253
Net income per share of common stock
Primary and fully diluted .11 .23 .13 .10 .57
Cash dividends per share .03 .03 .03 .03 .12
Common stock price per share
High 13 7/8 13 10 3/4 10 1/8 13 7/8
Low 11 3/4 8 7/8 8 1/2 8 3/4 8 1/2
Common stock trading volume 979 2,937 1,593 1,540 7,049
</TABLE>
As of March 7, 1997, the Company had approximately 6,500 beneficial
shareholders, including participants in the Company's Employee Stock Ownership
Plans.
23
