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Frozen Food Express Industries 10-K 2006
FFEX Form 10K-2005 Frozen Food Express Industries Inc Year Ended December 31, 2005

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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
(State or other jurisdiction of
incorporation or organization)
 
75-1301831
(I.R.S. Employer
Identification No.)
     
1145 EMPIRE CENTRAL PLACE, DALLAS, TEXAS
(Address of principal executive offices)
 
75247-4309
(Zip Code)

Registrant's telephone number, including area code: (214) 630-8090

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12 (g) of the Act:

TITLE OF EACH CLASS
i) Common Stock $1.50 par value
ii) Rights to purchase Common Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes [ ] No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes [ ] No [ X ]

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 [   ] No [X]

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. [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [    ] Accelerated filer [ X ] Non-accelerated filer [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
 
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2005, the last day of the registrant's most recently completed second fiscal quarter, was approximately $187,209,000.  In making this calculation, the registrant has assumed that all directors and officers, and no other persons were affiliates on June 30, 2005.

The number of shares of common stock outstanding as of June 5, 2006 was 18,219,592.

DOCUMENTS INCORPORATED BY REFERENCE
NONE

 
   
     
 
PAGE
     
Business
1
     
Risk Factors
6
     
Properties
7
     
Legal Proceedings
8
     
Submission of Matters to a Vote of Security Holders
8
     
   
     
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
9
     
Selected Financial Data
10
     
Management's Discussion and Analysis of Financial Condition and Results of Operations
11
     
Quantitative and Qualitative Disclosures about Market Risk
23
     
Financial Statements and Supplementary Data
24
     
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
41
     
Controls and Procedures
41
     
Other Information
44
     
   
     
Directors and Executive Officers of The Registrant
44
     
Executive Compensation
45
     
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
49
     
Certain Relationships and Related Transactions
51
     
Principal Accountant Fees and Services
52
     
   
     
Exhibits and Financial Statement Schedules
52
     
 
53
     
  INDEX OF EXHIBITS 
54
Exhibit 3.2     Bylaws of the Registrant, as amended  
Exhibit 10.16     Form of Key Employee Supplemental Medical Plan  
Exhibit 10.18     Summary of compensation arrangements with Stoney M. Stubbs, Jr.  
Exhibit 10.21     Summary of compensation arrangements with Timothy L. Stubbs  
Exhibit 21.1     Subsidiaries of Frozen Food Express Industries, Inc.  
Exhibit 23.1     Consent of Independent Public Accounting Firm  
Exhibit 31.1      Certification of Chief Executive Officer Required by Rule 13a-14(a)(17 CFR 240.13a-14(a))  
Exhibit 31.2     Certification of Chief Financial Officer Required by Rule 13a-14(a)(17 CFR 240.13a-14(a))  
Exhibit 32.1     Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 to Section 906  
Exhibit 32.2     Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 to Section 906  

 

 
ITEM 1. Business.
Frozen Food Express Industries, Inc. is the largest publicly-owned temperature-controlled trucking company in North America. We were incorporated in Texas in 1969, as successor to a company formed in 1946. References to we or us, unless the context requires otherwise, include Frozen Food Express Industries, Inc. and our subsidiaries, all of which are wholly-owned. We are also the only nationwide temperature-controlled trucking company in the United States that is full-service, offering all of the following services:
- FULL-TRUCKLOAD LINEHAUL SERVICE: A load, typically weighing between 20,000 and 40,000 pounds and usually from a single shipper, filling the trailer. Normally, a full-truckload shipment has a single destination, although we are also able to provide multiple deliveries. According to industry publications and based on 2004 revenue (the most recent year for which data is available), we are one of the largest temperature-controlled, full-truckload carriers in North America.
- DEDICATED FLEETS: In providing certain full-truckload services, we contract with a customer to provide service involving the assignment of specific trucks and drivers to handle certain of the customer's transportation needs. Frequently, we and our customers anticipate that dedicated fleet logistics services will both lower the customer's transportation costs and improve the quality of service.
- LESS-THAN-TRUCKLOAD ("LTL") LINEHAUL SERVICE: A load, typically consisting of up to 30 shipments, each weighing as little as 50 pounds or as much as 20,000 pounds, from multiple shippers destined to multiple receivers. Our temperature-controlled LTL operation is the largest in the United States and the only one offering regularly scheduled nationwide service. In providing refrigerated LTL service, multi-compartment trailers enable us to haul products requiring various levels of temperature control as a single load.
- FREIGHT BROKERAGE: Our freight brokerage helps us to balance the level of demand in our core trucking business. Orders for shipments to be transported for which we have no readily available assets with which to provide the service are assigned to other unaffiliated motor carriers through our freight brokerage. We establish the price to be paid by and invoice the customer. We also assume the credit risk associated with the transaction. Our freight brokerage also negotiates the fee payable to the other motor carrier.
- OTHER: During the last four months of 2005, many of our resources were engaged in providing relief to the regions affected by Hurricanes Katrina and Rita. We provided dedicated fleet services, which contributed revenue of $5.7 million. We also provided refrigerated trailers, which were rented on a per-day basis for storage and transportation of perishable items. Such hurricane-related trailer rentals generated $3.2 million of revenue during the final three months of 2005.
 
    Following is a summary of certain data for each of the years in the five-year period ended December 31, 2005 (in millions):

Revenue from:
 
 2005
 
 2004
 
 2003
 
 2002
 
 2001
 
Full-truckload linehaul services
 
$
263.2
 
$
258.7
 
$
239.8
 
$
229.8
 
$
210.1
 
Dedicated fleets
   
31.5
   
20.3
   
14.5
   
13.0
   
16.4
 
Less-than-truckload linehaul services
   
131.2
   
123.2
   
115.5
   
87.9
   
90.9
 
Fuel adjustments
   
63.5
   
31.7
   
15.7
   
6.5
   
10.0
 
Freight brokerage
   
15.6
   
24.9
   
15.0
   
7.6
   
3.8
 
Equipment rental
   
9.0
   
5.9
   
5.4
   
3.9
   
2.2
 
Non-freight
   
10.1
   
9.7
   
16.1
   
12.1
   
51.1
 
Total
 
$
524.1
 
$
474.4
 
$
422.0
 
$
360.8
 
$
384.5
 
 
    Additional information regarding our business is presented in the notes to the financial statements included at Item 8 and in Management's Discussion and Analysis of Financial Condition and Results of Operations at Item 7 of this annual report on Form 10-K.
    We offer nationwide services to nearly 10,000 customers, each of which accounted for less than 10% of total revenue during each of the past five years. Revenue from international activities was less than 10% of total freight revenue during each of the past five years.
 
MARKETS WHICH WE SERVE
    Our refrigerated and non-refrigerated ("dry") trucking operations serve nearly 10,000 customers in the United States, Mexico and Canada. Refrigerated shipments account for about 80% of our total freight revenue. Our customers are involved in a variety of products including food products, pharmaceuticals, medical supplies and household goods. Our customer base is diverse in that our 5, 10 and 20 largest customers accounted for 22%, 31% and 40%, respectively, of our total freight revenue during 2005. None of our markets are dominated by any single competitor. We compete with several thousand other trucking companies. The principal methods of competition are price, quality of service and availability of equipment needed to satisfy customer requirements.
 

    Refrigerated Trucking: The products we haul include meat, ice, poultry, seafood, processed foods, candy and other confectioneries, dairy products, pharmaceuticals, medical supplies, fruits and vegetables, cosmetics and film. 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 twelve other temperature-controlled carriers generated $100 million or more of revenue in 2004, the most recent year for which data is available. In addition, many major food companies, food distribution firms and grocery chain companies transport a portion of their freight with their own fleets ("private carriage").
    High-volume shippers have often sought 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 core carriers continue to improve their service capabilities through such means as satellite communications systems and electronic data interchange, some shippers have abandoned their private carriage fleets in favor of common or contract carriage. According to published industry reports, private carriage accounts for more than 40% of the total temperature-controlled portion of the motor carrier industry.
    For decades, most of the market for nationwide refrigerated LTL service had been shared between us and one other company. We competed primarily on price and breadth of services. The competitor's annual LTL revenue was 50% of our revenue. During December of 2002, the competitor announced that it planned to cease operations and liquidate, a process that began in January of 2003, after which we experienced a significant increase in our volume of LTL shipments. In order to provide service to our expanded LTL customer base, in December of 2002, we opened terminals near Miami, FL and Modesto, CA.
    Non-refrigerated Trucking: Our non-refrigerated (“dry”) trucking fleet conducts business under the name American Eagle Lines ("AEL"). During 2005, AEL accounted for about 33.1% of our total full-truckload linehaul revenue, as compared to 29.5% in 2001. AEL serves the dry full-truckload market throughout the United States and Canada. Also, during 2005, about 10% of the full-truckload shipments transported by our refrigerated fleets were of dry commodities.

OPERATIONS
    The management of a number of factors is critical to a trucking company's growth and profitability, including:
    Employee-Drivers: We maintain an active driver recruiting program. Driver shortages and high turnover can reduce revenue and increase operating expenses through reduced operating efficiency and higher recruiting costs. Since 2001, our operations have periodically been affected by driver shortages. At various times, we have not been able to attract and retain a sufficient number of qualified drivers.
    For much of 2003, the labor market remained soft, and we experienced less difficulty in attracting qualified employee-drivers than in 2001 through 2002. Since 2003 the economy has improved and our ability to attract such drivers was negatively impacted. If the economic recovery continues during 2006, the availability of qualified drivers could continue to diminish. That, together with new federal regulations regarding the hours that truck drivers are allowed to work, led us to restructure our driver pay program.  Effective April 2006, we implemented a general rate increase of $0.02 per mile, an increase of 6.1%, for all company drivers.
    Owner-Operators: We actively seek to expand our fleet with equipment provided by owner-operators. Owner-operators provide tractors and drivers to pull our loaded trailers. Each owner-operator pays for 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 2005, we had contracts for approximately 515 owner-operator tractors in our full-truckload operations and approximately 144 in our LTL operations. Of the 515 such full-truckload tractors, 311 were owned by us and leased to the involved owner-operators.
The percent of linehaul full-truckload and LTL revenue generated from shipments transported by owner-operators during each of the last five years is summarized below:
Percent of Linehaul Revenue from Shipments
Transported by Owner-Operators
 
2005
 
 
2004
 
 
2003
 
 
2002
 
 
2001
 
Full-truckload
   
26
%
 
29
%
 
31
%
 
30
%
 
28
%
LTL
   
59
   
68
   
63
   
64
   
68
 
  
    To compensate owner-operators for the use of their trucks, we pay them commissions that are based primarily upon the amount of revenue we earn from the shipments they transport. Freight hauled by an owner-operator is transported under operating authorities and permits issued to us by various state and federal agencies.  We, and not the owner-operator, are accountable to the customers involved with each shipment for any problems encountered related to the shipment. We, and not the owner-operator, have sole discretion as to the price the customer will pay us for the service, but owner-operators may decline to haul specific loads for any reason including their belief that their revenue-based commission will not be to their satisfaction. Further, we, and not the owner-operator, are 100% at risk for credit losses should the customer fail to pay us for the service. For these reasons, revenue from shipments hauled by owner-operators is recorded as gross of owner-operator commissions, rather than as an agent net of such commissions. 
    Fuel: The average per gallon fuel cost we paid increased by approximately 27% in 2004, and an additional 35% during 2005. Cumulatively, such costs increased by almost 75% between 2001 and 2005. Owner-operators are responsible for all costs associated with their equipment, including fuel. Therefore, the cost of such fuel is not a direct expense of ours. Fuel price fluctuations result from many external market factors that cannot be influenced or predicted by us.
    In addition, each year, several states increase fuel and road use taxes. Recovery of future increases or realization of future decreases in fuel prices and fuel taxes, if any, will continue to depend upon competitive freight market conditions.
    We do not hedge our exposure to volatile energy prices, but we are able to mitigate the impact of such volatility by adding fuel adjustment charges to the basic rates for the freight services we provide. The adjustment charges are designed to, but often do not, fully offset the increased fuel expenses we incur when the prices escalate rapidly.
 
    Though we will continue to add fuel adjustment charges whenever possible, there can be no assurances that we can add fuel adjustment charges in an amount sufficient to minimize the impact of energy prices on our results of operations.
    Factors that prevent us from fully recovering fuel cost increases include the presence of deadhead (empty) miles, tractor engine idling and fuel to power our trailer refrigeration units. Such fuel consumption often cannot be attributable to a particular load and, therefore, there is no revenue to which a fuel adjustment may be applied. Also, our fuel adjustment charges are computed by reference to federal government indices that are released weekly for the preceding week. When prices are rising, the price we incur in a given week is more than the price the government reports for the preceding week. Accordingly, we are unable to recover the excess of the current week’s actual price to the preceding week’s indexed price. 
    Risk Management: Liability for accidents is a significant concern in the trucking industry. Exposure can be large and occurrences can be unpredictable. The cost and human impact of work-related injury claims can also be significant. We maintain a risk management program designed to minimize the frequency and severity of accidents and to manage insurance coverage and claims expense.
    Our risk management program is founded on the continual enhancement of safety in our operations. Our safety department conducts programs that 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 our training program, which includes tests for motor vehicle safety and over-the-road driving. They must have a current commercial driving license before being assigned to a tractor. Student drivers undergo a more extensive training program as a second driver with an experienced instructor-driver. Applicants who test positive for drugs are turned away and drivers who test positive for such substances are immediately disqualified. In accordance with federal regulations, we conduct drug tests on all driver candidates and maintain a continuing program of random testing for use of such substances.
    As of December 31, 2005, our liability insurance provides for a $3 million deductible for each occurence and provides that the insurance company and we share in losses between $3 million and $10 million per occurrence. We are fully insured for liability exposures between $10 million and $25 million. In May 2006, we renewed the policies under similar terms to expire in mid-2007.  Insurance premiums do not significantly contribute to our costs, partially because we carry large deductibles under our policies of liability insurance.
    Because of our retained liability, a series of very serious traffic accidents, work-related injuries or unfavorable developments in the outcomes of existing claims could materially and adversely affect our operating results. Claims and insurance expense can vary significantly from year to year. Reserves representing our estimate of ultimate claims outcomes 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.
    During 2004 and 2005, we retained the services of an independent actuarial firm to analyze our claims history and to establish reasonable estimates of our claims reserves. In addition, the actuarial firm provided us procedures with which to establish appropriate claims reserves in future periods.
    Customer Service: The service-oriented culture we gained from our many years as a successful LTL carrier enables us to compete on the basis of service, rather than solely on price. We also believe that major shippers will continue to 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.
    Temperature-controlled, full-truckload service requires a substantially lower capital investment for terminals and lower costs of shipment handling and information management than does LTL. Pricing is based primarily on mileage, weight and type of commodity. At the end of 2005, our full-truckload tractor fleet consisted of 1,510 tractors owned or leased by us and 515 tractors contracted to us by owner-operators, making us one of the seven largest temperature-controlled, full-truckload carriers in North America.
    We conduct operations involving "dedicated fleets". In such an arrangement, we contract with a customer to provide service involving the assignment of specific trucks to handle the transportation needs of our customers. Frequently, we and our customer anticipate that dedicated fleet logistics services will both lower the customer's transportation costs and improve the quality of the service the customer receives. We continuously improve our capability to provide, and expand our efforts to market, dedicated fleet services. About 9% of our company-operated full-truckload fleet is now engaged in dedicated fleet operations.
    Temperature-controlled LTL trucking requires a system of terminals capable of holding refrigerated and frozen products. LTL terminals are strategically located in or near New York City, Philadelphia, Atlanta, Lakeland (Florida), Miami, Chicago, Memphis, Dallas, Salt Lake City, Modesto (California) and Los Angeles. Some of these LTL terminals also serve as full-truckload driver centers where company-operated, full-truckload fleets are based. The Miami and Modesto terminals were added late in 2002 in order to help us manage increased LTL traffic to and from the southern Florida and northern California markets.
    In addition to the LTL terminals, which also serve as employee-driver centers, full-truckload activities are also conducted from a terminal in Fort Worth, Texas. 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, commodity type, trailer space and pick-up and delivery locations.

 
    Information Management: Information management is essential to a successful temperature-controlled LTL operation. On a typical day, our LTL system handles about 6,000 shipments - about 4,000 on the road, 1,000 being delivered and 1,000 being picked up. In 2005, our LTL operation handled about 280,000 individual shipments.
    Our full-truckload fleets use 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 is relayed by the drivers to our computers via the satellite.
    International Operations: Service to and from Canada is provided using tractors from our fleets. We partner with Mexico-based truckers to facilitate freight moving both ways across the southern United States border. Freight moving from Mexico is hauled in our trailers to the border by the Mexico-based carrier, where the trailer is exchanged. Southbound shipments work much the same way. This arrangement has been in place for approximately ten years. Often, we have sold used trailer equipment to these carriers for use in their operations. Based on discussions with our Mexico-based partners, we do not anticipate a need to change our manner of dealing with freight to or from Mexico. Less than 10% of our consolidated linehaul freight revenue during 2005 involved international shipments, all of which was billed in United States currency.

EQUIPMENT
    We operate 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 our customers. We believe that the higher initial investment for our equipment is recovered through the more efficient vehicle performance offered by such premium tractors and improved resale value. Prior to 2002, we had a three-year replacement policy for most of our full-truckload tractors. Repair costs are mostly recovered through manufacturers' warranties, but routine and preventative maintenance is our expense.
    During 2001, the demand for and value of previously-owned trucks plummeted. When we obtained such assets three years previously, the truck manufacturer agreed to buy the trucks back for a specified price at the end of our three-year replacement cycle. The manufacturer began expressing concern about its obligation to buy used trucks for which there was little demand. After discussions with the manufacturer, in 2002 we agreed to extend by six to twelve months the turn-in dates of our trucks and to reduce proportionally the price we will be paid for those used trucks. We also agreed that new trucks purchased from this manufacturer during 2002, 2003, 2004 and 2005 will be returned at predetermined prices to the manufacturer after 48 months of service. Since 2004, the market for such used assets has improved and we are negotiating with the vendor to shorten the 48 month tractor replacement cycle. At the beginning of 2004, about 10% of our company-operated tractors were more than three years old. By the end of 2005, that percentage had increased to about 17%. This aging of our tractor fleet has contributed to significant increases in our equipment maintenance expenses during 2004 and 2005 as compared to previous years.
    Most of our tractors which were put into service before 2002 were leased for 36-month terms. We approached our equipment lessors to request extended lease terms to match the extended trade-back schedule. Only one lessor refused to do so, and we were able to extend the maturity of those leases with financing provided by the financial services division of the manufacturer. During their primary term, the original leases qualified as off-balance sheet operating leases under accounting principles generally accepted in the United States ("GAAP"). The lease extensions were classified as financing leases on our 2002 balance sheet as required by GAAP.
    Depending upon the availability of drivers and customer demand for our services, we plan to add up to 100 trucks to our company-operated, full-truckload fleet during 2006. Changes in the fleet depend upon acquisitions, if any, of other motor carriers, developments in the nation's economy, demand for our 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.
 
REGULATION
    Our trucking operations are regulated by the United States Department of Transportation ("DOT"). The DOT generally governs matters such as safety requirements, registration to engage in motor carrier operations, accounting systems, certain mergers, consolidations, acquisitions and periodic financial reporting. The DOT conducts periodic on-site audits of our compliance with their rules and procedures. Our most recent audit, which was conducted during 2006, resulted in a rating of "satisfactory", the highest safety rating available. A "conditional" or "unsatisfactory" DOT safety rating could have an adverse effect on our business, as some of our contracts with customers require a satisfactory rating and our qualification to self-insure our liability claims would be impaired.
    During 2005, the Federal Motor Carrier Safety Administration ("FMCSA") began to enforce changes to the regulations which govern drivers' hours of service. Hours of Service ("HOS") rules issued by the FMCSA, in effect since 1939, generally limit the number of consecutive hours and consecutive days that a driver may work. The new rules reduce by one the number of hours that a driver may work in a shift, but increase by one the number of hours that drivers may drive during the same shift. Drivers often are working at a time they are not driving. Duties such as fueling, loading and waiting to load count as part of a driver's shift that are not considered driving. Under the old rules, a driver was required to rest for at least eight hours between shifts. The new rules increase that to ten hours, thereby reducing the amount of time a driver can be "on duty" by two hours.
    Because of the two additional hours of required rest period time and the amount of time our drivers spend loading and waiting to load, we believe that the new rules have reduced our productivity and may negatively impact our profitability during 2006 and beyond. Accordingly, we are seeking pricing concessions from our customers to mitigate the impact on our profitability. 
    We are also subject to regulation of various state regulatory agencies with respect to certain aspects of our operations. State regulations generally involve safety and the weight and dimensions of equipment.



SEASONALITY
    Our refrigerated 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. Our LTL operations are also impacted by the seasonality of certain commodities. 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. In addition, severe winter driving conditions can be hazardous and impair all of our trucking operations from time to time.

EMPLOYEES
    The number of our employees, none of whom are subject to collective bargaining arrangements, as of December 31, 2005 and 2004, was as follows:

   
2005
 
2004
 
Drivers and trainees
   
1,917
   
1,823
 
Non-driver personnel
         
Full time
   
980
   
939
 
Part time
   
59
   
66
 
 
   
2,956
   
2,828
 
 
OUTLOOK
    This report contains information and forward-looking statements that are based on management's current beliefs and expectations and assumptions we made based upon information currently available. Forward-looking statements include statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources and may be identified by words such as "will", "could", "should", "believe", "expect", "intend", "plan", "schedule", "estimate", "project" and similar expressions. These statements are based on our current expectations and are subject to uncertainty and change.
    Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results could differ materially from the expectations reflected in such forward-looking statements. Should one or more of the risks or uncertainties underlying such expectations not materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those we expect.
    Factors that are not within our control that could cause actual results to differ materially from those in such forward-looking statements include demand for our services and products, and our ability to meet that demand, which may be affected by, among other things, competition, weather conditions and the general economy, the availability and cost of labor, our ability to negotiate favorably with lenders and lessors, the effects of terrorism and war, the availability and cost of equipment, fuel and supplies, the market for previously-owned equipment, the impact of changes in the tax and regulatory environment in which we operate, operational risks and insurance, risks associated with the technologies and systems we use and the other risks and uncertainties described elsewhere in our filings with the Securities and Exchange Commission (“SEC”).
 
INTERNET WEB SITE
    We maintain a web site on the Internet through which additional information about our company is available. Our web site address is www.ffex.net. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, press releases, earnings releases and other reports filed with and furnished to the SEC, pursuant to Section 13 or 15 (d) of the Exchange Act are available, free of charge, on our web site as soon as practical after they are filed.

SEC FILINGS
    The annual, quarterly, special and other reports we file with and furnish to the SEC are available at the SEC's Public Reference Room, located at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information may be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. The SEC also maintains a web site at www.sec.gov that contains information we file with and furnish to the agency.
 
  
ITEM 1A. Risk Factors
    The following issues, uncertainties, and risks, among others, should be considered in evaluating our business and growth outlook:
    We are subject to general economic factors and business risks that are beyond our control, any of which could significantly reduce our operating margins and income.  Recessionary economic cycles, changes in customers’ business activity and outlook and excess tractor or trailer capacity in comparison with shipping demand could impact our operations. Economic conditions that decrease shipping demand or increase the supply of tractors and trailers generally available in the transportation sector of the economy can exert downward pressure on our equipment utilization, thereby decreasing asset productivity. Economic conditions also may harm our customers and their ability to pay for our services. Customers encountering adverse economic conditions represent a greater potential for loss, and we may be required to increase our allowance for uncollectible accounts.
    We are also subject to increases in costs that are outside of our control that could materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but are not limited to, declines in the resale value of used equipment, increases in interest rates, fuel prices, taxes, tolls, license and registration fees, insurance, revenue equipment, and wages and health care for our employees. Although none of our employees are covered by collective bargaining agreements, we could be affected by strikes or other work stoppages at shipping locations.
    In addition, we cannot predict the effects on the economy or consumer confidence of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state, or heightened security requirements. Enhanced security measures could impair our operating efficiency and productivity and result in higher operating costs.
    Future insurance and claims expense could reduce our earnings.  Our future insurance and claims expense might exceed historical levels, which could reduce our earnings. We self-insure for significant portions of our claims exposure resulting from work-related injuries, auto liability, general liability, cargo and property damage claims, as well as employees’ health insurance. We reserve currently for anticipated losses and expenses. We periodically evaluate and adjust our claims reserves to reflect our experience. However, ultimate results usually differ from our estimates.
    We maintain insurance above the amounts for which we self-insure. Although we believe the aggregate insurance limits should be sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed our aggregate coverage limits. Insurance carriers have raised premiums for many businesses, including trucking companies. As a result, our insurance and claims expense could increase, or we could raise our self-insured retention when our policies are renewed. If these expenses increase, if we experience a claim in excess of our coverage limits, or we experience a claim for which coverage is not provided, results of our operations and financial condition could be materially and adversely affected.
    Higher fuel prices could reduce our operating margins and income.  We are subject to risk with respect to purchases of fuel for use in our tractors and refrigerated trailers. Fuel prices are influenced by many factors that are not within our control. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition unless we are able to pass increased costs on to customers through rate increases or fuel surcharges. Historically, we have sought to recover a portion of short-term increases in fuel prices from customers through fuel adjustment charges. Fuel adjustment charges that can be collected have not always fully offset the increase in the cost of diesel fuel in the past and there can be no assurance that fuel adjustment charges that can be collected will offset the increase in the cost of diesel fuel in the future. 
    We will have significant ongoing capital requirements which could negatively impact our growth and profitability.  The trucking industry is capital intensive, and replacing older equipment requires significant investment. If we elect to expand our fleet in future periods, our capital needs would increase. We expect to pay for our capital expenditures with cash flows from operations, leasing and borrowings under our revolving credit facility. If we are unable to generate sufficient cash from operations and obtain financing on favorable terms, we may need to limit our growth, enter into less favorable financing arrangements, or operate our revenue equipment for longer periods, any of which could impact our profitability.
    Difficulty in attracting or retaining qualified employee-drivers and independent contractors who provide tractors for use in our business could impact our growth and profitability.  Our independent contractors are responsible for paying for their own equipment, labor, fuel, and other operating costs.  Significant increases in these costs could cause them to seek higher compensation from us or other opportunities. Competition for employee-drivers continues to increase. If a shortage of employee-drivers occurs, or if we were unable to continue to sufficiently contract with independent contractors, we could be forced to limit our growth or experience an increase in the number of our tractors without drivers, which would lower our profitability.  We could be required to further adjust our driver's compensation, which could impact our profitability if not offset by a corresponding increase in the rates we charge for our services.
    
    Reductions in service by the railroads or increases in railroad rates can impact our intermodal operations, which could reduce our operating margins and income. Our intermodal operations are dependent on railroads, and our dependence on railroads may increase if we expand our intermodal services. In most markets, rail service is limited to a few railroads or even a single railroad. Any reduction in service by the railroads may increase the cost of the rail-based services we provide and reduce the reliability, timeliness and overall attractiveness of our rail-based services. Railroads are relatively free to adjust their rates as market conditions change. That could result in higher costs to our customers and impact our ability to offer intermodal services. There is no assurance that we will be able to negotiate replacement of or additional contracts with railroads, which could limit our ability to provide this service.
    Interruptions in the operation of our computer and communications systems could reduce our operating margins and income.  We depend on the efficient and uninterrupted operation of our computer and communications systems and infrastructure. Our operations and those of our technology and communications service providers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, Internet failures, computer viruses, and other events beyond our control. In the event of a system failure, our business could experience significant disruption.
    Changes in the availability of or the demand for new and used trucks could reduce our growth and negatively impact our operating margins and income.  More restrictive federal emissions standards for 2007 model year trucks will require new technology diesel engines. Trucking companies may seek to purchase large numbers of tractors with pre-2007 engines, possibly leading to shortages. Our business could be harmed if we are unable to continue to obtain an adequate supply of new assets. As a result, we expect to continue to pay increased prices for equipment and incur additional expenses and related financing costs for the foreseeable future. The new engines are also expected to reduce equipment productivity and increase fuel consumption. The new engines are also likely to be more expensive to maintain.
    We have a conditional commitment from our principal tractor vendor regarding the amount that we will be paid on the disposal of most of our tractors. We could incur a financial loss upon disposition of our equipment if the vendor cannot meet its obligations under these agreements.
    We are subject to various environmental laws and regulations, and costs of compliance with and liabilities for violations of existing or future regulations could significantly increase our costs of doing business. We operate in industrial areas, where truck terminals and other industrial facilities are located, and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage, environmental damage and hazardous waste disposal, among others.  If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable laws or regulations, it could significantly increase our cost of doing business. Additionally, under specific environmental laws, we could be held responsible for all of the costs relating to any contamination at our past or present terminals and at third party waste disposal sites.  
    We operate in an industry subject to extensive government regulations, and costs of compliance with and liability for violation of existing or future regulations could significantly increase our costs of doing business.  Our operations are overseen by various agencies. Our drivers must comply with federal safety and fitness regulations, including those relating to drug and alcohol testing and hours of service. Such matters as weight and equipment dimensions are also the subject of federal and state regulations. We are also governed by federal and state regulations about fuel emissions, and other matters affecting safety or operations. Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services or require us to incur significant additional costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices could adversely affect our results of operations.
ITEM 2.  Properties.
    The following tables set forth certain information regarding our revenue equipment at December 31, 2005 and 2004:
   
 Age in Years
           
Tractors
 
 Less than 1
 
 1 thru 3
 
 More than 3
 
 Total
 
   
 2005
 
 2004
 
 2005
 
 2004
 
 2005
 
 2004
 
 2005
 
 2004
 
Company-owned and leased
   
484
   
346
   
844
   
1,055
   
279
   
172
   
1,607
   
1,573
 
Owner-operator provided
   
11
   
13
   
88
   
48
   
560
   
655
   
659
   
716
 
Total
   
495
   
359
   
932
   
1,103
   
839
   
827
   
2,266
   
2,289
 

   
Age in Years
         
Trailers
 
Less than 1
 
1 thru 5
 
More than 5
 
Total
 
   
 2005
 
 2004
 
 2005
 
 2004
 
 2005
 
 2004
 
 2005
 
 2004
 
Company-owned and leased
   
483
   
709
   
2,216
   
2,062
   
1,583
   
1,363
   
4,282
   
4,134
 
Owner-operator provided
   
--
   
--
   
4
   
4
   
7
   
9
   
11
   
13
 
Total
   
483
   
709
   
2,220
   
2,066
   
1,590
   
1,372
   
4,293
   
4,147
 
 
    Approximately two-thirds of our 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. We also operate a fleet of non-refrigerated trailers in our "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. Temperature-controlled operations are conducted with both 48 and 53 foot refrigerated trailers.
    Our general policy is to replace our company-operated, heavy-duty tractors after 42 or 48 months, subject to cumulative mileage and condition. Our refrigerated and dry trailers are usually retired after seven or ten years of service, respectively. Occasionally, we retain older equipment for use in local delivery operations.


    At December 31, 2005, we maintained terminal or office facilities of 10,000 square feet or more in or near the cities listed below. Lease terms range from one month to twelve years. We expect that our present facilities are sufficient to support our operations. We also own three properties in Texas that we lease to W&B Service Company, LLP, and a property in Texas that we lease to AirPro Mobile Air, LLC, both entities in which we hold a minority ownership interest.

Division/Location
 
 Approximate Square Footage
 
Acreage
 
(O)wned or
(L)eased
 
Freight Division
                   
Dallas, TX
   
100,000
   
80.0
   
O
 
Ft. Worth, TX
   
34,000
   
7.0
   
O
 
Chicago, IL
   
37,000
   
5.0
   
O
 
Lakeland, FL
   
26,000
   
15.0
   
O
 
Newark, NJ
   
17,000
   
5.0
   
O
 
Atlanta, GA(1)
   
40,000
   
7.0
   
L
 
Los Angeles, CA
   
40,000
   
6.0
   
L
 
Salt Lake City, UT
   
12,500
   
*
   
L
 
Miami, FL
   
17,500
   
*
   
L
 
Memphis, TN
   
11,000
   
*
   
L
 
Corporate Office
Dallas, TX
   
34,000
   
1.7
   
O
 

     (1)
Our lease in the Atlanta area expired during 2005, but has been extended through mid-2006 while construction on a new (owned) facility is completed. The new facility, when complete, will be approximately 50,000 square feet on nearly 13 acres of land.

*Facilities are part of an industrial park in which we share acreage with other tenants.

ITEM 3Legal Proceedings.
    We are party to routine litigation incidental to our business, primarily involving claims for personal injury and property damage incurred in the ordinary and routine highway transportation of freight. As of December 31, 2005, the aggregate amount of reserves for such claims on our Consolidated Balance Sheet was nearly $24.0 million. We maintain insurance programs and accrue for expected losses in amounts designed to cover liability resulting from personal injury, property damage, cargo and work-related injury claims.
    On January 4, 2006, the Owner Operator Independent Drivers Association, Inc. and three independent contractors with trucks formerly contracted to one of our operating subsidiaries filed a putative class action complaint against the subsidiary in the United States District Court for the Northern District of Texas. The complaint alleges that parts of the subsidiary’s independent contractor agreements violate the federal Truth-in-Leasing regulations at 49 CFR Part 376. The complaint seeks to certify a class comprised of all independent contractors of motor vehicle equipment who have been party to a federally-regulated lease with the subsidiary during the time period beginning four years before the complaint was filed and continuing to the present, and seeks injunctive relief, an unspecified amount of damages, and legal costs. The subsidiary's response to the complaint was filed during March of 2006. Due to the early stage of this litigation, the Company does not believe it is in a position to conclude whether or not there is a reasonable possibility of an adverse outcome in this case or what damages, if any, the plaintiffs would be awarded should they prevail on all or any part of their claims. However, we believe that the subsidiary has meritorious defenses, which it intends to assert vigorously.

ITEM 4Submission of Matters to a Vote of Security Holders.
    No matters were submitted to a vote of our shareholders during the fourth quarter of 2005.



ITEM 5Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Market for Registrant's Common Equity and Related Shareholder Matters.
    No dividends have been paid since 1999, we have no current plans to pay dividends and our credit agreement restricts our ability to pay cash dividends.
    As of June 5, 2006, we had approximately 3,700 beneficial shareholders, including participants in our retirement plans. Our $1.50 par value common stock trades on the Nasdaq Stock Market under the symbol FFEX. Information regarding our common stock is as follows:
 
2005
 
Year 
 
First
Quarter 
 
Second Quarter 
 
Third
Quarter 
 
Fourth
Quarter 
 
Common stock price per share
                               
High
 
$
13.500
 
$
13.500
 
$
12.050
 
$
12.190
 
$
11.880
 
Low
   
9.080
   
10.750
   
9.080
   
9.380
   
9.860
 
Common stock trading volume (a)
   
21,671
   
6,533
   
7,079
   
4,282
   
3,777
 
 

2004
 
Year 
 
First
Quarter 
 
Second Quarter 
 
Third
Quarter 
 
Fourth
Quarter 
 
Common stock price per share
                               
High
 
$
13.860
 
$
7.400
 
$
7.990
 
$
7.870
 
$
13.860
 
Low
   
5.640
   
5.750
   
5.640
   
5.640
   
7.300
 
Common stock trading volume (a)
   
14,145
   
2,274
   
2,605
   
1,901
   
7,365
 

 
(a)
In thousands

Issuer Purchases of Equity Securities
Period
 
Total Number of Shares (or Units) Purchased
(a)
 
Average Price
Paid per
Share (or Unit)
(b)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(c)
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1)
(d)
October 1, 2005 to October 31, 2005
   
5,800
     
$
10.50
     
5,800
   
269,600
 
November 1, 2005 to November 30, 2005
   
--
       
--
     
--
   
269,600
 
December 1, 2005 to December 31, 2005(2)
   
34,300
     
$
10.50
     
33,300
   
236,300
 
Total
   
40,100
     
$
10.50
     
39,100
   
236,300
 

 
(1)
On August 11, 2004, our Board of Directors authorized the purchase of up to 750,000 shares of common stock from time to time on the open market or through private transactions at such times as management deems appropriate. The authorization did not specify an expiration date. Purchases may be increased, decreased or discontinued by our Board of Directors at any time without prior notice.
 
(2)
During December of 2005, a non-executive officer of our primary operating subsidiary exchanged 1,000 shares he had owned for more than one year as consideration for the exercise of stock options, as permitted by our stock option plans. Such transactions are not deemed as having been purchased as part of our publicly announced plans or programs.
 

ITEM 6. Selected Financial Data.
    The following unaudited data for each of the years in the five-year period ended December 31, 2005 should be read in conjunction with our Consolidated Financial Statements and Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 and other financial information contained in Item 8 included elsewhere in this Report. Much of the selected data presented below is derived from our Consolidated Financial Statements. The historical information is not necessarily indicative of future results or performance:
Summary of Operations
 
2005
 
2004(e)
 
2003
 
2002
 
2001
 
Revenue from:
                               
Freight operations (a)
   
514.0
   
464.7
   
405.9
   
348.7
   
333.4
 
Non-freight operations (a)
   
10.1
   
9.7
   
16.1
   
12.1
   
51.1
 
Total revenue (a)
   
524.1
   
474.4
   
422.0
   
360.8
   
384.5
 
Net income (loss) (a)
   
20.4
   
10.8
   
4.3
   
3.2
 
 
(0.2
)
Net income (loss) per common share, diluted
   
1.09
   
.59
   
.24
   
.19
 
(.01
)
Operating expenses (a)
   
494.1
   
457.3
   
415.4
   
360.1
   
382.9
 
Operating income (loss) from
                               
Freight operations (a)
   
29.7
   
16.4
   
11.9
   
4.1
   
2.5
 
Non-freight operations (a)
   
0.3
   
0.8
   
(5.4
)
 
(3.3
)
 
(0.8
)
Financial Data
                               
Total assets (a)
   
201.0
   
174.5
   
155.2
   
137.6
   
126.5
 
Working capital (a)
   
33.0
   
19.2
   
37.1
   
31.3
   
25.1
 
Current ratio (b)
   
1.5
   
1.3
   
1.9
   
1.8
   
1.7
 
Cash provided by operations (a)
   
30.0
   
41.6
   
14.3
   
9.4
   
10.9
 
Debt (a)
   
--
   
2.0
   
14.0
   
6.0
   
2.0
 
Shareholders' equity (a)
   
119.2
   
97.0
   
84.1
   
78.6
   
74.6
 
Debt-to-equity ratio (c)
   
--
   
--
   
.2
   
.1
   
--
 
Common Stock
                               
Average shares outstanding, diluted (a)
   
18.7
   
18.1
   
17.8
   
16.7
   
16.4
 
Book value per share
   
6.64
   
5.50
   
4.88
   
4.66
   
4.50
 
Market value per share
                               
High
   
13.50
   
13.86
   
8.85
   
3.50
   
2.79
 
Low
   
9.08
   
5.64
   
2.18
   
1.90
   
1.50
 
Freight Revenue from
                               
Full-truckload linehaul services (a)
   
263.2
   
258.7
   
239.8
   
229.8
   
210.1
 
Dedicated fleets (a)
   
31.5
   
20.3
   
14.5
   
13.0
   
16.4
 
Less-than-truckload linehaul services (a)
   
131.2
   
123.2
   
115.5
   
87.9
   
90.9
 
Fuel adjustments (a)
   
63.5
   
31.7
   
15.7
   
6.5
   
10.0
 
Freight brokerage (a)
   
15.6
   
24.9
   
15.0
   
7.6
   
3.8
 
Equipment rental (a)
   
9.0
   
5.9
   
5.4
   
3.9
   
2.2
 
Equipment in Service at Year-end
                               
Tractors
                               
Company operated
   
1,607
   
1,573
   
1,534
   
1,411
   
1,389
 
Provided by owner-operators
   
659
   
716
   
757
   
737
   
704
 
Total
   
2,266
   
2,289
   
2,291
   
2,148
   
2,093
 
Trailers
   
4,293
   
4,147
   
3,802
   
3,308
   
3,103
 
 
Computational notes:
(a) 
In millions
(b)  
Current assets divided by current liabilities
(c)  
Debt divided by shareholder’s equity
(d) Certain line items when added together do not equal totals shown, due to rounding
(e) Certain amounts for 2004 have been restated or reclassified from the amounts previously reported.  For a complete description of the amounts that were restated or reclassified, please see Note 2 to the financial statements included as Item 8 to this report. 
 
 
ITEM 7Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW
    We are principally a motor-carrier, also commonly referred to as a trucking company. We offer various transportation services to customers in the United States, Canada and Mexico. Our services primarily involve the over-the-road movement of freight. In the United States, we sometimes also arrange for the use of railroads to transport our loaded trailers between major cities. Most of our revenue is from service which is order-based, meaning that we separately bill our customers for each shipment. A minority of our revenue is from services which are asset-based, meaning that we bill our customer for the use of a truck and driver or the use of a trailer for a period of time, without regard to the number of shipments hauled. We also refer to our truck and driver asset-based service as "dedicated fleets", because in these arrangements, the trucks and drivers involved are dedicated for use by a specific customer on a full-time basis.
    During the latter part of 2005, many of our resources were engaged in providing relief to the regions affected by Hurricanes Katrina and Rita. We provided dedicated fleet services in these hurricane relief efforts, which contributed revenue of $5.7 million. We also provided refrigerated trailers, which were rented on a per-day basis for storage and transportation of perishable items. Such hurricane-related trailer rentals generated $3.2 million of revenue during the final three months of 2005.
    Order-based services are either full-truckload or less-than-truckload ("LTL"). Our trailers are designed to carry up to 40,000 pounds of freight. Shipments weighing 20,000 pounds or more are full-truckload, while shipments of less than that amount are classified as LTL.
    Customers let us know that they have shipments requiring transportation and inform us as to any special requirements, such as an identification of the type of product to be shipped, the origin and destination of the load and the expected time by which delivery must occur. We inform our customers of our availability to haul the freight and of the price we will charge. If these fit with the needs of the customer, we schedule the freight for pickup.
    Shipments have three stages: pick-up, linehaul and delivery. The linehaul stage is over-the-road and involves longer distances. Most of our full-truckload shipments will have all of these stages performed by the same truck.
    LTL shipments typically involve different trucks for each of the three stages. For LTL, the linehaul stage may also involve more than one truck as the freight moves within our network of LTL terminals. For example, an LTL truck bound from Los Angeles to Dallas may carry shipments destined for Dallas, Chicago and Atlanta. Once the truck arrives in Dallas, the freight for Chicago and Atlanta will be sorted and sent out from Dallas on different trucks to those cities with other LTL shipments that originated in Dallas or arrived there on trucks from other areas of the country. A linehaul load of LTL typically weighs 25,000 to 35,000 pounds and is comprised of between 5 and 30 individual shipments.
    We operate under three primary brand names, FFE Transportation Services ("FFE"), Lisa Motor Lines ("LML") and American Eagle Lines ("AEL"). FFE and LML specialize in products that require temperature control. Most shipments require the maintenance of a cold temperature ranging from minus 10 degrees to plus 40 degrees Fahrenheit. Examples include perishable food, beverages, candy, pharmaceuticals, photographic supplies and electronics. Other products require maintenance of a warm temperature in the colder months to prevent freezing while in transit, such as nursery stock and liquid products. FFE conducts all of our LTL business and also has significant order-based and asset-based full-truckload operations. LML specializes in order-based full-truckload operations. AEL serves the market for order-based and asset-based full-truckload activities that do not require temperature control.
    The assets we must have for temperature-controlled service are costly to acquire and maintain. The rates we charge for our temperature-controlled services are usually higher than other companies who offer no temperature-controlled services. Many products that require protection from the heat during the warmer months of the year do not require protection during the colder months. Therefore, during the warmer months, demand for our temperature-controlled full-truckload and LTL services expands.
    There are several companies that provide national temperature-controlled full-truckload services. We know of no other company providing nationwide LTL temperature-controlled service. The vast majority of trucking companies that are nationwide in scope, like our AEL brand, offer only full-truckload service with no temperature control. Therefore, the markets that are served by AEL tend to be very price-competitive and generally lack the level of seasonality present in our FFE and LML operations. Because consumer demand for products requiring temperature control is often less sensitive to economic cycles, revenue from FFE and LML tends to be less volatile during such cycles.
    LTL linehaul revenue increased by 6.5% during 2005 as compared to 2004, and by 6.7% during 2004 as compared to 2003.
    The trucking business is highly competitive. During 2004, the last year for which data is available, there were several thousand companies operating in all sectors of the trucking business in the United States. Among those, the top five companies offering primarily temperature-controlled services collectively generated 2004 revenue of $2.4 billion. The next 20 such companies collectively generated revenues of $2.1 billion. In 2004, we ranked fourth in terms of revenue generated among all temperature-controlled motor carriers.
    We have nearly 10,000 active customers for our trucking business. We generally collect cash for our services between 30 and 50 days after our service is provided.
    Trucking companies of our size face challenges to be successful. Costs for labor, maintenance and insurance typically rise every year. Fuel prices can increase or decrease quite rapidly. Due to the high level of competitiveness, it is often difficult to pass these rising costs on to our customers. Over the past few years, many trucking companies have ceased operations, resulting in a reduced number of alternatives and increasing the awareness among customers that price increases for trucking services are likely. Throughout 2005, we more aggressively sought and obtained price increases from our customers. These efforts will continue into 2006 and beyond.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
    We have several critical accounting estimates. These require a more significant amount of management judgement than the other accounting policies we employ. Our critical accounting policies are as follows:
    Revenue and Expense Recognition: In all of our freight operations, we recognize revenue and all estimated direct operating expenses such as fuel and labor on the date we pick-up shipments from our customers. In 1991, the Emerging Issues Tax Force ("EITF") of the Financial Accounting Standards Board promulgated Issue 91-9, "Revenue and Expense Recognition for Freight Services in Process" ("EITF 91-9"). In 2001, the Securities and Exchange Commission issued Staff Accounting Bulletin 101,"Revenue Recognition in Financial Statements" ("SAB 101"), which provides that EITF 91-9 sets forth the revenue and expense recognition methods that may be used in our industry. According to EITF 91-9 and SAB 101, our manner of recognizing revenue and expenses for freight in process is acceptable.
    The other methods generally defer the recognition of revenue and expenses to as late as the date on which delivery of the shipments is completed. We have consistently utilized our manner of revenue and expense recognition since we began operations in 1946. Because our consolidated financial statements contain accruals for revenue and all associated estimated direct expenses as of the beginning and the end of each reporting period, if we were to change our manner of recognizing revenue and associated estimated direct expenses to one of the other methods allowed by EITF 91-9 and SAB 101, our results of operations would not be substantially affected. In such an event, each period's revenue and expenses would be adjusted to include in revenue and expense amounts from freight in process at the beginning of the period and to exclude from revenue and expense those amounts from freight in process at the end of the same period. These amounts would essentially offset one another from period to period, resulting in minimal impact to our revenue or our operating or net income.
    Revenue from equipment rental is recognized on a per-day basis over the term of the associated rental agreements.
    Personal and Work-Related Injuries: The trucking business involves risk of injury to our employees and the public. Prior to 2002, we retained the first $500,000 and $1 million of these risks, respectively, on a per occurrence basis. Due primarily to conditions in the insurance marketplace, during 2003 we retained the first $1 million for work-related injuries and the first $5 million for public liability risk. That arrangement continued during the first six months of 2004. From mid-2004 until mid-2005, our retention for public liability claims was lowered to $3 million and we were fully insured for losses between $3 million and $5 million, but we shared equally with the insurer losses from liability claims between $5 million and $10 million. Beginning in mid-2005 until mid-2006, our liability policies also contained a $3 million deductible. We presently also retain 25% of the losses between $3 million and $10 million. Since 2005, our retention for work-related injuries has been $1 million. In May of 2006, we renewed our 2005 liability policies to expire in mid-2007.  Throughout each of the years in the three-year period ended December 31, 2005, we have been fully insured above $10 million to a policy limit of $25 million for liability claims.
    Because of our large public liability and work-related injury retentions, the potential adverse impact a single occurrence can have on our results is significant. When an event involving potential liability occurs, our internal staff of risk management professionals determines the range of most probable outcomes. Based on that estimate, we record a reserve in our financial statements during the period in which the event occurred. As additional information becomes available, we increase or reduce the amount of this reserve. We also maintain additional reserves for public liability and work-related injury events that may have been incurred but not reported. As of December 31, 2005, our reserves for personal injury, work-related injury, cargo and other claims against us aggregated nearly $24.0 million. If we were to change our estimates making up those reserves up or down by 10% in the aggregate, the impact on 2005 net income would have been about $1.5 million, and diluted net income per share of common stock would have been impacted by $0.08.
    Estimate of Uncollectible Accounts: We extend trade credit to our customers. We also establish a reserve to represent our estimate of accounts that will not ultimately be collected. Once we conclude that a specific invoice is unlikely to be paid by the customer, we charge the invoice against the reserve. We estimate the amount of our bad debt reserve based on the composite age of our receivables and historical trends regarding such uncollectible amounts. During 2005, the amount of our bad debt reserve did not change appreciably and the amount of receivables that were more than 90 days old declined by approximately $1.0 million. Significant changes in our receivables aging could impact our profits and financial condition. As of December 31, 2005, our reserve for uncollectible accounts was $3.4 million. If our estimate were to change by 10%, 2005 net income would have been impacted by about $210,000 or $0.01 per diluted share of common stock.
    Deferred Taxes: Our net deferred tax liability of $3.0 million is stated net of offsetting deferred tax assets. The assets consist of anticipated future tax deductions for items such as personal and work-related injury and bad debt expenses which have been reflected on our financial statements but which are not yet tax deductible. In total, our deferred tax assets as of December 31, 2005 were about $12.7 million. At current federal tax rates, we will need to generate about $36 million in future taxable income in order to fully realize our deferred tax assets.
    We believe it probable that we will generate sufficient taxable income in 2006 and beyond to realize the remainder of our deferred tax assets. If our expectation of such realizability diminishes, we may be required to establish a valuation allowance on our balance sheet. That could diminish our net income in future periods.


RESULTS OF OPERATIONS
    Certain amounts for 2004 have been restated or reclassified from the amounts previously reported.  For a complete description of the amounts that were restated or reclassified, please see Note 2 to the financial statements included as Item 8 to this report. 
    Freight Revenue: Our freight revenue is derived from five types of transactions. Linehaul revenue is order-based and earned by transporting cargo for our customers using tractors and trailers that we control by ownership, long-term leases or by agreements with independent contractors (sometimes referred to as “owner-operators”). Within our linehaul freight service portfolio we offer both full-truckload and less-than truckload services. Over 90% of our LTL linehaul shipments must be temperature-controlled to prevent damage to the cargo. We operate fleets that focus on refrigerated or “temperature-controlled” less-than-truckload (“LTL”), on full-truckload temperature-controlled shipments and on full-truckload non-refrigerated or “dry” shipments. Of the shipments transported by our temperature-controlled fleets during 2005, about 10% were dry commodities.
    Our dedicated fleet operation consists of fleets of tractors and trailers that haul only freight for a specific customer. Dedicated fleet revenue is asset based. Customers typically pay us weekly for trucks assigned to their service. 
    During the fourth quarter of 2005, we provided refrigerated trailers, which were rented on a per-day basis, for storage and transportation of perishable items to regions affected by Hurricanes Rita and Katrina.  Such hurricane-related trailer rentals generated $3.2 million of revenue.  Income from equipment rental also includes amounts we charge to independent contractors for the use of trucks which we own and lease to the owner-operator.
    During the last four months of 2005, many of our resources were engaged in providing relief to the regions affected by Hurricanes Katrina and Rita. We provided dedicated fleet services, which contributed revenue of $5.7 million.
    The rates we charge for our freight services include fuel adjustment charges. In periods when the price we incur for diesel fuel is high, we raise our prices in an effort to recover this increase from our customers. The opposite is true when fuel prices decline.
    The following table summarizes and compares the significant components of freight revenue and presents our freight operating ratio and revenue per truck per week for each of the years in the three year period ended December 31, 2005:
 
   
2005
   
2004
   
2003
 
Freight revenue from (a)
   
 
   
 
   
 
 
Temperature-controlled fleet
 
$
176.2
 
$
174.1
 
$
164.5
 
Dry-freight fleet
   
87.0
   
84.6
   
75.3
 
Total truckload linehaul services
   
263.2
   
258.7
   
239.8
 
Dedicated fleets
   
31.5
   
20.3
   
14.5
 
Total full-truckload
   
294.7
   
279.0
   
254.3
 
Less-than truckload linehaul services
   
131.2
   
123.2
   
115.5
 
Fuel adjustments
   
63.5
   
31.7
   
15.7
 
Freight brokerage
   
15.6
   
24.9
   
15.0
 
Equipment rental  
   
9.0
   
5.9
   
5.4
 
Total freight revenue 
   
514.0
   
464.7
   
405.9
 
Freight operating expenses
   
484.4
   
448.3
   
394.0
 
Income from freight operations(b)
   
29.7
   
16.4
   
11.9
 
Freight operating ratio (c)
   
94.2
%
 
96.5
%
 
97.1
%
Total full-truckload revenue
 
$
294.7
 
$
279.0
 
$
254.3
 
Less-than-truckload linehaul revenue
   
131.2
   
123.2
   
115.5
 
Total linehaul and dedicated fleet revenue 
 
$
425.9
 
$
402.2
 
$
369.8
 
Weekly average trucks in service
   
2,282
   
2,292
   
2,250
 
Revenue per truck per week (d)
 
$
3,579
 
$
3,356
 
$
3,152
 
 
 
Computational notes:
(a)
Revenue and expense amounts are stated in millions of dollars.
(b)  2005 does not foot due to rounding. 
(c)
Freight operating expenses divided by total freight revenue.
(d) Average daily revenue times seven divided by weekly average trucks in service.
 
 
    The following table summarizes and compares selected statistical data relating to our freight operations for each of the years in the three year period ended December 31, 2005:
Truckload     2005     2004     2003  
    Total linehaul miles (a)
   
192.9
   
205.3
   
198.2
 
    Loaded miles (a)
   
173.3
   
185.7
   
180.1
 
    Empty mile ratio (b)
   
10.2
%
 
9.5
%
 
9.1
%
    Linehaul revenue per total mile (c)
 
$
1.36
 
$
1.26
 
$
1.21
 
    Linehaul revenue per loaded mile (d)
 
$
1.52
 
$
1.39
 
$
1.33
 
    Linehaul shipments (e)
   
181.6
   
187.3
   
182.2
 
    Loaded miles per shipment (f)
   
954
   
991
   
988
 
Less-than-truckload                     
    Hundredweight (e)
   
8,800
   
8,579
   
8,098
 
    Shipments (e)
   
280.8
   
291.6
   
289.4
 
    Linehaul revenue per hundredweight (g)
 
$
14.91
 
$
14.36
 
$
14.26
 
    Linehaul revenue per shipment (h)
 
$
467
 
$
422
 
$
399
 
    Average weight per shipment (i)
   
3,134
   
2,942
   
2,798
 
 
Computational notes:
(a)
In millions.
(b)
Total truckload linehaul miles less truckload loaded miles divided by total truckload linehaul miles.
(c) Revenue from truckload linehaul services divided by truckload total linehaul miles.
(d) Revenue from truckload linehaul services divided by truckload loaded miles.
(e) In thousands.
(f) Total truckload loaded miles divided by number of truckload linehaul shipments.
(g) LTL revenue divided by LTL hundredweight.
(h) LTL revenue divided by number of LTL shipments.
(i) LTL hundredweight times one hundred divided by number of LTL shipments. 
 
    Particularly in response to the rapidly escalating price of diesel fuel, we have begun to obtain compensation from our customers for empty miles. Our linehaul rates are typically related to providing service between an origin and a destination. Often, it is necessary for trucks to run empty, traveling long distances from the city of their last destination to the city of their next origin in order to reposition the equipment. Historically, the expenses we incurred for such repositioning activities were not passed through to the customer. Our trucks currently average between five and seven miles per gallon. Between December 31, 2004 and December 31, 2005, the average per-gallon price we incurred for fuel rose by 32%, to $2.54. Due to this rapid increase, we have determined that we can no longer bear 100% of the costs of repositioning, and many of our customers have agreed to absorb at least some of our incremental expense. Our revenue from such repositioning activities is accounted for as linehaul revenue.   
    Full-truckload linehaul revenue for the years ended December 31, 2005 and 2004 increased by $4.5 million (1.7%) and $18.9 million (7.9%), respectively, each as compared to the immediately preceding year. During 2005, the average miles of our full-truckload shipments did not change appreciably. The number of full-truckload linehaul shipments during 2005 declined by 3.0%, to 181,600. The decline was primarily related to the deployment of assets previously assigned to linehaul service to dedicated fleet service, the revenue from which improved by $11.2 million (55.2%) during 2005, as compared to 2004. The negative impact on full-truckload linehaul revenue from the decline in the number of shipments was more than offset by the rate increases that we implemented during the year. During 2005, our full-truckload revenue per loaded mile increased by 9.4% to $1.52, which was tempered somewhat by a slight increase in our empty-mile ratio.
    LTL linehaul revenue for the years ended December 31, 2005 and 2004 increased by $8.0 million (6.5%) and $7.7 million (6.7%), respectively, each as compared to the immediately preceding year.
    LTL operations offer the opportunity to earn higher revenue on a per-mile and per-hundredweight basis than do full-truckload operations, but the level of investment and fixed costs associated with LTL activities significantly exceed those of full-truckload activities. Accordingly, as LTL revenue fluctuates, many costs remain fixed, leveraging the impact from such revenue fluctuations on our operating income. During 2004 and 2005, as LTL activity and revenue rose, many LTL related costs remained static.
    During 2005, LTL linehaul revenue increased by $8.0 million to $131.2 million, despite a 3.7% decline in the number of LTL shipments. The average weight of such shipments increased by 6.5%. The remainder of 2005’s increase in LTL revenue is a result of rate increases we implemented beginning in the second half of 2004 and continued through the end of 2005.
    We continuously assess the performance of our LTL operations. As a result, we periodically alter the frequency at which we service locations where freight volumes have declined and change the mix of our company-operated vs. independent contractor-provided trucks in order to more closely match our operating costs to the level of our LTL revenue.

    The following table summarizes and compares the makeup of our fleets between company-provided tractors and tractors provided by owner-operators as of December 31, 2005, 2004 and 2003:

   
2005
 
2004
 
2003
 
Full-truckload tractors
             
Company-provided
   
1,510
   
1,470
   
1,428
 
Owner-operator
   
515
   
565
   
568
 
Total full-truckload
   
2,025
   
2,035
   
1,996
 
LTL tractors
                   
Company-provided
   
97
   
103
   
106
 
Owner-operator
   
144
   
151
   
189
 
Total LTL
   
241
   
254
   
295
 
Total company-provided
   
1,607
   
1,573
   
1,534
 
Total owner-operator
   
659
   
716
   
757
 
Tractors in service
   
2,266
   
2,289
   
2,291
 
Trailers in service
   
4,293
   
4,147
   
3,802
 
 
    Linehaul and dedicated fleet revenue per truck per week was $3,579 during 2005, $3,356 during 2004 and $3,152 during 2003. The 2005 increase is a reflection of improved productivity among our dedicated fleets and of general rate increases taken for our linehaul full-truckload and LTL services.
    At December 31, 2005, our entire LTL fleet consisted of 241 tractors, as compared to 254 at the end of 2004 and 295 at the end of 2003. When the level of our LTL activity increases during peak times of the year, we often re-deploy full-truckload trucks to handle the increase.
    The number of trucks in our full-truckload company-operated fleet rose by 90 to 1,428 during 2003. As of December 31, 2005, there were 1,510 tractors in our full-truckload company-operated fleet, as compared to 1,470 at the end of 2004.
    Continued emphasis will be placed on improving the efficiency and the utilization of our fleets through enhanced driver training and retention, by reducing the percentage of non-revenue-producing miles, by extending the average loaded miles per shipment and through expansion of dedicated fleet operations.
    During 2005, the federal agency that regulates motor carrier safety began to enforce new Hours of Service ("HOS") rules, which limit the number of hours truck drivers may work and drive in a shift. Time in a shift spent by a driver in fueling, loading and waiting to load or unload freight count as non-driving work hours. The old HOS rules were introduced in 1939, and the new rules are intended by the government to reflect more closely the equipment and roads in use today, as compared to 65 years ago.
    The new rules generally expand from 10 to 11 the number of hours that a person can drive an over-the-road truck in a shift, but reduce from 15 to 14 the number of hours such a person can work during the same shift. Also, under the old HOS rules, time spent in the middle of a shift waiting to load or unload did not count as hours worked, but such time does count as hours worked under the new HOS rules. The new rules also extend from 8 to 10 the number of hours that drivers must rest between on-duty shifts.
    In order to compensate our drivers and offset other expenses from diminished asset utilization, we are seeking compensation from our customers, such as rate increases and detention fees. Such detention fees are designed to motivate our customers to expedite the loading and unloading of their freight, thereby maximizing the number of hours that our drivers can drive during a work shift.
    Our full-truckload fleets use satellite technology to enhance efficiency and customer service. Location updates of each tractor are provided by this network and we exchange dispatch, fuel and other information with the driver by way of satellite.
    Revenue from our freight brokerage operation increased by $9.9 million (66%) and declined by $9.3 million (37.3%) during 2004 and 2005 each as compared to the immediately preceding year. During 2004, we significantly expanded our freight brokerage, which enables us to better adjust our ability to transport loads offered to us but for which we have no available equipment. Our brokerage engages a third party licensed trucking company to haul the freight. Our brokerage bills the customer and pays the third party trucking company. During 2005, we determined that some of the specialists involved in this operation would be replaced, a process that remained incomplete at year-end 2005. Accordingly, freight brokerage revenue and associated expenses (principally for purchased transportation) declined during 2005, as compared to 2004.
    Throughout 2004 and 2005, we sought and obtained rate increases from our customers in an effort to compensate us for increased costs, and to reflect diminished capacity of the trucking industry to meet expanding customer demand for trucking services. Those rate increases were the principal contributor to increased per-mile revenue. Factors mitigating the increased per-mile revenue during 2005 as compared to 2004 included fewer loaded, or revenue-producing miles, for such shipments and a moderate increase in the proportion of our empty, or non-revenue-producing, miles to loaded miles.
    Recent high operating expenses, particularly for maintenance and fuel, has resulted in a sharp decline in the number of independent contractors providing equipment to the trucking industry. Our ability to mitigate this industry-wide trend by expanding our company-operated fleets has been constrained by an industry-wide lack of drivers qualified to operate the equipment.
 
 
    Freight Operating Expenses: Changes in the proportion of revenue from full-truckload versus LTL shipments, as well as in the mix of company-provided versus independent contractor-provided equipment and in the mix of leased versus owned equipment, contribute to variations among operating and interest expenses.
    The following table sets forth, as a percentage of freight revenue, certain major freight operating expenses for each of the years in the three-year period ended December 31, 2005:
   
2005
 
2004
 
2003
 
Salaries, wages and related expenses
   
26.0
%
 
26.5
%
 
28.9
%
Purchased transportation
   
24.3
   
27.1
   
26.4
 
Fuel
   
15.8
   
12.9
   
11.7
 
Supplies and expenses
   
12.3
   
12.2
   
11.7
 
Revenue equipment rent and depreciation
   
10.0
   
11.0
   
11.5
 
Claims and insurance
   
3.9
   
3.9
   
3.6
 
Other
   
1.9
   
2.9
   
3.3
 
     
94.2
%
 
96.5
%
 
97.1
%
 
    Salaries, Wages and Related Expenses: Salaries, wages and related expenses increased by $10.2 million (8.3%) during 2005 and $5.8 million (5.0%) during 2004, each as compared to the immediately preceding year. The following table summarizes and compares the major components of these expenses for each of the years in the three-year period ended December 31, 2005 (in millions):

Amount of Salaries, Wages and
Related Expenses Attributable to:
 
2005
 
2004
 
2003
 
Driver salaries and per-diem expenses
 
$
74.7
 
$
71.9
 
$
66.5
 
Non-driver salaries
   
40.2
   
36.7
   
32.6
 
Payroll taxes
   
8.5
   
8.0
   
8.7
 
Work-related injuries
   
4.3
   
3.2
   
4.8
 
Health insurance and other
   
5.8
   
3.5
   
4.9
 
   
$
133.5
 
$
123.3
 
$
117.5
 
 
    Employee full-truckload linehaul drivers are typically paid a certain rate per mile. The number of such miles increased during 2005 and 2004, each as compared to the immediately preceding year. The increased number of miles contributed to the increases in driver salaries and per-diem expenses during both 2005 and 2004.
    Employee dedicated fleet drivers are typically paid by the hour or by the day. During 2005 and 2004, we added trucks to our dedicated fleet operations. Those increases also contributed to increases in driver salaries and per-diem expenses.
    Also impacting the 2005 and 2004 increases in driver salaries and per-diem expenses were changes in the level of shipments, miles and hundredweight in our LTL operation. Drivers hauling LTL typically earn a higher wage than do their full-truckload counterparts. LTL wages are based on a number of factors including the amount of on-duty time, miles driven, hundredweight hauled and in-route stops to load and unload freight. During 2005 and 2004, respectively, LTL miles increased, each as compared to the immediately preceding year. At the same time, hundredweight transported also increased. The number of LTL shipments did not change appreciably during 2004 but declined by 3.7% during 2005. To the extent that LTL freight is hauled by employee drivers, as opposed to owner-operators, the aforementioned changes served to increase LTL driver salaries, wages and per-diem expenses during 2005 and 2004, respectively, each as compared to the immediately preceding year.
    We sponsor bonus and incentive programs for our employees and management. Bonus payments are based on the operating profitability of our company. No bonuses were paid based on our 2003 results. For 2005 and 2004 due to improved performance, our employees and management earned bonuses aggregating approximately $5.0 million and $1.3 million, respectively, which resulted in the increases in non-driver salaries expense.
    We also sponsor a 401(k) wrap plan which enables employees to defer a portion of their current salaries to their post-retirement years. Because the wrap plan’s assets are held by a grantor or “rabbi” trust, we are required to include the wrap plan’s assets and liabilities in our consolidated financial statements. As of December 31, 2005, such assets included approximately 141,000 shares of our common stock, which are classified as treasury stock in our consolidated balance sheets.  The trust also holds assets other than our common stock.  Such investments are included in "other non-current assets" in our consolidated balance sheets.
    We are required to value the assets and liabilities of the wrap plan at market value on our periodic balance sheets, but we are precluded from reflecting the treasury stock portion of the wrap plan’s assets at market value. When the market value of our common stock rises, this results in upward pressure on non-driver salaries and wage expense. The opposite is true when our common stock price falls. The price of our common stock rose during 2004, but fell during 2005. The effect of those changes resulted in salaries, wages and related expenses being $800,000 higher during 2004 and $220,000 lower during 2005. Also, during 2005 and 2004, our Executive Bonus and Phantom Stock Plan was partially denominated in approximately 170,000 and 150,000, respectively, “phantom” shares of our stock, the liability for which is also determined by the value of our stock. That resulted in an additional $940,000 of non-driver salaries and wage expense during 2004, but served to reduce such expenses by $320,000 during 2005.
 

 
    Costs associated with work-related injuries rose by 34.4% during 2005 as compared to 2004 and diminished by 33.3% in 2004 as compared to 2003. Self-insured work-related injuries incurred by drivers were the primary contributors to this expense. The number of our employee-drivers did not change appreciably during 2005.
    We share the cost of health insurance with our employees. For the past several years, we have experienced double digit percentage health insurance cost increases. During mid-2003, we increased both the amounts employees pay to participate and the amount of medical costs that must be borne by our employees. This helped us mitigate the rate at which our costs have increased.
    During non-recessionary economic periods, we typically have difficulty attracting qualified employee-drivers for our full-truckload operations. Such shortages increase costs of employee-driver compensation, training and recruiting. Significant resources are continually devoted to recruiting and retaining qualified employee-drivers and to improving their job satisfaction. During 2004 and 2005, the supply of qualified drivers continued to tighten. With increasing frequency and magnitude, our competitors often increase their employee-driver pay scales. We monitor such events and consider increases should the need arise. The last such increase we implemented was during 2000.
    Purchased Transportation: Purchased transportation expense declined by $713,000 (0.6%) during 2005 and increased by $18.6 million (17.4%) during 2004, each as compared to the immediately preceding year. The following table summarizes our purchased transportation expense for each of the years in the three-year period ended December 31, 2005, by type of service (in millions):

Amount of Purchased Transportation Expense Incurred for
 
2005
 
2004
 
2003
 
Full-truckload linehaul service
 
$
49.4
 
$
51.3
 
$
49.1
 
LTL linehaul service
   
39.0
   
37.9
   
38.5
 
Intermodal
   
7.5
   
4.2
   
1.9
 
Total linehaul service
   
95.9
   
93.4
   
89.5
 
Fuel adjustments
   
14.5
   
9.0
   
4.6
 
Freight brokerage and other
   
14.7
   
23.5
   
13.1
 
   
$
125.1
 
$
125.9
 
$
107.2
 
 
    Purchased transportation expense related to linehaul services increased by $2.5 million (2.7%) during 2005 and $3.9 million (4.4%) during 2004, each as compared to the immediately preceding year.
    Independent-contractor provided equipment generated 26%, 29% and 31% of our full-truckload linehaul revenue during 2005, 2004 and 2003, respectively. Independent contractors provide a tractor that they own to transport freight on our behalf. Contractors pay for the cost of operating their tractors, including but not limited to the expense of fuel, labor, taxes and maintenance. We pay independent contractors amounts generally determined by reference to the revenue associated with their activities. At the beginning of 2003, there were 543 such tractors in the full-truckload fleet. By the end of 2003, there were 568 such tractors. At December 31, 2005 and 2004, there were 515 and 565, respectively. As the number of these trucks fluctuates, so does the amount of revenue generated by such units.
    Purchased transportation expense related to LTL linehaul services fell during 2004 but rose by a nearly equal amount during 2005. This resulted from fluctuations in the amount of LTL freight transported by company provided equipment relative to equipment provided by independent contractors.
    In providing our full-truckload linehaul service, we often engage railroads to transport shipments between major cities. In such an arrangement (called "intermodal" service), loaded trailers are transported to a rail facility and placed on flat cars for transport to their destination. On arrival, we will pick up the trailer and deliver the freight to the consignee. Intermodal service is generally less costly than using one of our own trucks for such movements, but other factors also influence our decision to utilize intermodal services. During 2005 and 2004, the number of intermodal full-truckload shipments increased by 9% and 10%, each as compared to the immediately preceding year, as many of our normally full-truckload trucks were occupied in providing other services such as LTL and dedicated fleet activities. These factors contributed to our increase of intermodal services in the transport of full-truckload freight.
    Purchased transportation expenses related to our intermodal services providers continued to increase during 2005, having expanded by $2.3 million (121%) and $3.3 million (78.6%) during 2004 and 2005, respectively. Purchased transportation expense for full-truckload linehaul service has remained substantially unchanged since 2003. This reflects an industry-wide shortage of trucks provided by independent contractors. Due in part to that shortage, we have increased our reliance on intermodal providers to transport freight that might otherwise have been hauled by independent contractor provided equipment.
    When fuel prices escalate, as they have during 2003 through 2005, we add fuel adjustment charges to the rates we bill to our customers. Independent contractors are responsible for payment for the fuel used by their trucks in transporting freight for our customers. For shipments that are transported by independent contractors, we pass through to the contractor any fuel adjustment charges that are to be paid to us by the customer. This practice added $14.5 million, $9.0 million and $4.6 million, respectively, to our purchased transportation expense during 2005, 2004 and 2003.
    When we book an order in our brokerage, we arrange for an unaffiliated licensed trucking company to haul the freight. We set the price to be paid by the customer and bear the risk should the customer fail to pay us for the shipment. We determine which trucking company will haul the load and negotiate with them the fee we will pay, which represents freight brokerage purchased transportation expenses. Purchased transportation expense associated with our freight brokerage increased by $10.4 million (79.4%) and declined by $8.8 million (37.4%) during 2004 and 2005, each as compared to the immediately preceding year. Those changes resulted from corresponding changes in the amounts of freight brokerage revenue.
    Fuel: Fuel expense increased by $21.0 million (35%) during 2005 and $12.7 million (26.7%) during 2004, each as compared to the immediately preceding year. Fuel expenses represent purchases of fuel we make in connection with company-operated equipment. Independent contractors (see “Purchased Transportation”) are responsible for all of their own operating expenses, including fuel. During 2005, 2004 and 2003, our fuel expenses were $81.2 million, $60.1 million and $47.5 million, respectively. The following table summarizes and compares the relationship between fuel expense and freight linehaul revenue during each of the years in the three year period ended December 31, 2005 (dollar amounts in millions):

 
2005
 
2004
 
2003
Total linehaul and dedicated fleet revenue
 
$
425.9
 
$
402.2
 
$
369.8
 
Fuel expense
   
81.2
   
60.1
   
47.5
 
Fuel expense as a percent of total linehaul and dedicated fleet revenue
   
19.1
%
 
14.9
%
 
12.8
%
 
    Fuel expense depicts the cost of purchasing fuel to transport freight with company-operated equipment. A significant percentage of our freight is transported with equipment provided by independent contractors. The cost of independent contractors' fuel is not included in our fuel expense. The amounts we pay independent contractors are classified as purchased transportation expense. In times when fuel prices are high, to the extent we are able to obtain fuel surcharges from our customers, we compensate independent contractors on a load by load basis for their increased fuel expense. Such additional compensation is also classified as purchased transportation expense. Accordingly our fuel expenses exclude the fuel expense incurred by our independent contractor-provided fleets.
    Most of the increases in our fuel expense were related to the price of diesel fuel for our company-operated fleet of tractors and trailers. During 2003, our average price per gallon of diesel fuel increased by about 15%, as compared to 2002. During 2004 and 2005, the average price of diesel fuel increased by an additional 26% and 47%, respectively, over the 2002 level, for a cumulative three-year increase of 88%.
    Because fuel adjustment charges do not fully compensate us or our independent contractors for the increased fuel costs, fuel price volatility impacts our profitability. We have in place a number of strategies that mitigate, but do not eliminate, the impact of such volatility. Pursuant to the contracts and tariffs by which our freight rates are determined, those rates in most cases automatically fluctuate as diesel fuel prices rise and fall because of the fuel adjustment charges.
    Factors that prevent us from fully recovering fuel cost increases include the presence of deadhead (empty) miles, tractor engine idling and fuel to power our trailer refrigeration units. Such fuel consumption often cannot be attributable to a particular load and, therefore, there is no revenue to which a fuel adjustment may be applied. Also, our fuel adjustment charges are computed by reference to federal government indices that are released weekly for the preceding week. When prices are rising, the price we incur in a given week is more than the price the government reports for the preceding week. Accordingly, we are unable to recover the excess of the current week’s actual price over the preceding week’s indexed price.
    With regard to fuel expenses for company-operated equipment, we attempt to further mitigate the impact of fluctuating fuel costs by operating more fuel-efficient tractors and aggressively managing fuel purchasing. We use computer software to optimize our routing and fuel purchasing. The software enables us to select the most efficient route for a trip. It also assists us in deciding on a real-time basis how much fuel to buy at a particular fueling station.
 
    Supplies and Expenses: Supplies and expenses increased by $6.5 million (11.6%) during 2005 and $8.8 million (18.5%) during 2004, each as compared to the immediately preceding year. The following table summarizes and compares the major components of supplies and expenses for each of the years in the three-year period ended December 31, 2005 (in millions):

Amount of Supplies and Expenses
Incurred for
    2005     2004     2003  
Fleet repairs and maintenance
 
$
22.9
 
$
17.5
 
$
15.2
 
Freight handling
   
11.8
   
11.6
   
9.9
 
Driver travel expense
   
3.0
   
3.1
   
2.7
 
Tires
   
5.3
   
6.9
   
6.3
 
Terminal and warehouse expenses
   
6.9
   
6.1
   
5.1
 
Driver recruiting
   
4.6
   
3.3
   
3.1
 
Other
   
8.5
   
8.0
   
5.4
 
   
$
63.0
 
$
56.5
 
$
47.7
 

    Fleet repair and maintenance expenses represented approximately 80% and 25%, respectively, of the total increase in our total supplies and expenses during 2005 and 2004, each as compared to the immediately preceding year. During 2005, expenses for tractor repair and maintenance increased by $3.5 million, and trailer repair expenses increased by $1.9 million, each as compared to 2004.
    With regard to tractor repairs, during 2002 we agreed with our primary tractor manufacturer to extend our tractor replacement cycle from 36 months to up to 48 months thereby causing our tractor fleet to consist of older vehicles. Older, high mileage vehicles typically are more expensive to maintain than newer, low mileage vehicles. As of December 31, 2005, 2004 and 2003, respectively, 17%, 11% and 9% of the tractors in our company-operated fleets were more than three years old. During the two years ended December 31, 2005, the number of trucks in our company operated fleets increased by 4.8% to 1,607, and the number of such trucks that are more than three years old doubled to 279.
    During the two years ended December 31, 2005, the number of trailers in our fleets increased by 13% to 4,282 and the number of such trailers that are more than five years old increased by 70% to 1,583. Older tractors and trailers are more costly to maintain.
    With regard to our newer tractors, during 2005 we have incurred significantly higher expenses to maintain tractor engines than was the case in prior years. Such engines use anti-pollution devices that cause the engine to run at higher temperatures, which creates more stress and results in higher maintenance expenses. We are working with the manufacturers of the engines and the tractors to find a solution to these problems.
    Tire expense increased by $0.6 million during 2004 and declined by $1.6 million during 2005, each as compared to the immediately preceding year. We have changed certain of our tire management and purchasing practices in order to reduce such expenses.
    Driver recruiting expenses rose by $1.3 million during 2005, as compared to 2004. This was related to our continuing efforts to recruit qualified employee-drivers and engage qualified owner-operators. In an improving economy, the number of persons available to work in our industry typically declines, which usually results in more intensive recruiting efforts.
    Rentals and Depreciation: The total of revenue equipment rent expense and depreciation expense increased by $245,000 (0.5%) during 2005 and $4.2 million (9.1%) during 2004, each as compared to the immediately preceding year. These fluctuations were due in part to changes in the use of leasing to finance our fleet. Equipment rental includes a component of interest-related expense that is classified as non-operating expense when we incur debt to acquire equipment. Equipment rent and depreciation also are affected by the replacement of less expensive, older model company-operated tractors and trailers with more expensive new equipment.
 
    Claims and Insurance: Claims and insurance expenses increased by $1.9 million (10.3%) during 2005 and increased by $3.3 million (22.5%) during 2004, each as compared to the immediately preceding year. Losses related to work-related injuries are included in salaries, wages and related expenses. The following table summarizes and compares the major components of claims and insurance expenses for each of the years in the three-year period ended December 31, 2005 (in millions):

Amount of Claims and
Insurance Expense Incurred for
 
2005
 
2004
 
2003
 
Liability
 
$
15.1
 
$
13.3
 
$
11.8
 
Cargo
   
2.8
   
2.3
   
1.4
 
Physical damage, property and other
   
2.0
   
2.5
   
1.5
 
   
$
19.9
 
$
18.1
 
$
14.7
 
 
    In 2004, the Truckload Carriers Association, an industry association, announced that we had been awarded second place among dozens of companies of size comparable to us in their 2003 annual safety recognition award program.
    During 2004 and 2005, we engaged the services of independent actuaries to help us improve the process by which we estimate the amount of our work-related and public liability claims reserves. Such estimates address the amount of the claims’ settlements as well as legal and other fees associated with attaining such settlements. As a result of the actuarial studies, during 2004, we increased our reserves for such claims by approximately $1.5 million. About half of 2004's increase in per-mile insurance costs was due to this study. The 2005 study did not significantly add to our insurance costs.
    During 2003 and the first several months of 2004, we retained the risk for liability claims up to $5 million. From June 1, 2004 through May 2005, we retained the first $3 million of our liability risk, our insurance company assumed the risk in full above our $3 million deductible to $5 million, and the insurance company and we shared the risk equally between $5 million and $10 million for each occurrence. As of December 31, 2005, our deductible was $3 million for each occurrence. Losses between $3 million and $5 million are shared 25% by us and 75% by the insurer. We are fully insured for losses for each occurrence between $10 million and $25 million.
    We have accrued for our estimated costs related to our liability claims. When an incident occurs, we record a reserve for the estimated outcome. As additional information becomes available, adjustments are made.
    Accrued claims liabilities include all reserves for over the road accidents, work-related injuries, self-insured employee medical expenses and cargo losses. Employee-related insurance costs are included in salaries, wages and related expenses in our statements of income. The actuarial reports issued to us during 2005 provided us with factors we will continue to use to estimate expected costs associated with claims development and claims handling expenses. It is probable that the estimates we have accrued for at any point in time will change in the future.
    Claims and insurance expenses can vary significantly from year to year. The amount of open claims is significant. There can be no assurance that these claims will be settled without a material adverse effect on our financial position or our results of operations.
    Other and Miscellaneous ExpenseGains on the disposition of equipment were $1.3 million in the year ended December 31, 2003. Such gains were $2.2 million during 2004 and $4.7 million during 2005. The periodic amount of such gains depends primarily upon conditions in the market for previously-owned equipment and on the quantity of retired equipment sold.
    We usually pre-arrange the retirement sales value when we accept delivery of a new tractor. Fluctuations in the market value of our leased equipment do not impact the pre-arranged retirement value of tractors presently in our fleet, but softness in the market for used equipment could diminish future pre-arranged retirement values. That may require us to increase the amount of depreciation and rental expense we incur in 2006 and beyond.
    We do not expect used equipment market prices to alter our current depreciation or rental expense related to trailers, but changes in the trailer market values could impact the amount of gains on sale of trailers in future periods.
    Miscellaneous expenses were $6.1 million, $7.2 million and $5.9 million during 2005, 2004 and 2003, respectively.
    During 2005 and 2004, respectively, we incurred approximately $1.2 million and $2.3 million in expenses and professional fees associated with our efforts to comply with the internal control provisions of the Sarbanes-Oxley Act of 2002.
    Non-Freight OperationDuring 2005, we sold the principal operating assets of our former non-freight business to the management of that business. In connection with that transaction, we provided financial assistance to the buyers and we retained 20% ownership in the buyer’s entity. Accounting principles generally accepted in the United States require that we continue to consolidate the financial statements of the buyer. The business we sold is a distributor of after market vehicle air conditioning parts and supplies. During 2005, this business comprised 1.9% of our consolidated revenue and 1.1 % of our consolidated income from operations.
    Operating Income:  Income from operations increased by $12.8 million during 2005 and $10.6 million during 2004, each as compared to the immediately preceding year. The following table summarizes and compares our operating results from our freight and non-freight operations for each of the years in the three-year period ended December 31, 2005 (in thousands):

Operating Income (Loss) from
 
2005
 
2004
 
2003
 
Freight operations
 
$
29,665
 
$
16,367
 
$
11,928
 
Non-freight operations (a)
   
345
   
810
   
(5,381
)
   
$
30,010
 
$
17,177
 
$
6,547
 
 
(a)
During April of 2005, we sold certain operating assets of our remaining non-freight subsidiary, AirPro Holdings, Inc. (“AHI”). The buyer was a newly-formed entity, AIRPRO Mobile Air, LLC (“AMA”). After the sale, AHI owns 20% of AMA. Because AHI remains the primary beneficiary of AMA, we are required by Financial Accounting Standards Board Interpretation No. 46 (revised) to consolidate the financial statements of AMA.
 
    Interest and Other: The following table summarizes and compares our interest and other expenses for each of the years in the three-year period ended December 31, 2005 (in thousands):

Amount of Interest and
Other (Income) Expense from
 
2005
 
2004
 
2003
 
Interest expense
 
$
89
 
$
486
 
$
636
 
Interest income
   
(329
)
 
(56
)
 
(99
)
Equity in earnings of limited partnership
   
(686
)
 
(357
)
 
(288
)
Life insurance and other
   
(2,437
)
 
12
 
 
(101
)
   
$
(3,363
)
$
85
 
$
148
 
 
    The decline in interest expense and the increase in interest income between 2004 and 2005 are primarily related to the receipt and investment of the cash from the sale of the life insurance investment, which was used to pay down our debt to zero and provided surplus cash, which was invested as permitted by our credit agreement.  The sale of a life insurance investment for $6.1 million resulted in a gain of $3.8 million during 2005.
    Equity in earnings of limited partnership for 2004 and 2005 was from our 20% equity interest in W&B Refrigeration Services, LLP. We account for that investment by the equity method of accounting.
    Pre-Tax and Net Income: For 2005, we earned pre-tax income of $33.4 million as compared to $17.1 million for 2004 and of $6.4 million for 2003. During 2005, 2004 and 2003, we incurred income tax expense of $12.9 million, $6.3 million and $2.1 million, respectively. During 2005, 2004, and 2003 we reported net income of $20.4 million, $10.8 million and $4.3 million, respectively.
    Our marginal tax rate for federal and state taxes has been about 37% since 2003, but our effective income tax rate (provision for income taxes as a percent of pre-tax income) was 38.8%, 37.1% and 33.3% for 2005, 2004 and 2003, respectively.   This rate is impacted by the presence of non-taxable income and non-tax deductible costs in our pre-tax income.  Non-taxable income reduces the effective tax rate and non-deductible costs will increase the effective rate.
    During 2005, we had a non-taxable gain from the sale of a life insurance policy of nearly $3.8 million, but the downward impact of that gain on our effective tax rate was more than offset by the upward impact of non-deductible expenses.  The largest of our non-deductible expenses are associated with travel expenses and per-diem travel allowances for our employee-drivers.
    
LIQUIDITY AND CAPITAL RESOURCES     
    Certain amounts for 2004 have been restated or reclassified from the amounts previously reported.  For a complete description of the amounts that were restated or reclassified, please see Note 2 to the financial statements included as Item 8 to this report. 
    Debt and Working Capital: Cash from our freight revenue is typically collected between 30 and 50 days after the service has been provided. We continually seek to accelerate our collection of accounts receivable to enhance our liquidity and minimize our debt. Our freight business is highly dependent on the use of fuel, labor, operating supplies and equipment provided by owner-operators. We are typically obligated to pay for these resources within seven to fifteen days after we use them, so our payment cycle is a significantly shorter interval compared to our collection cycle. This disparity between cash payments to our suppliers and cash receipts from our customers can create significant needs for borrowed funds to finance our working capital, especially during the peak time of our fiscal year.
    Our primary needs for capital resources are to finance working capital, expenditures for property and equipment and, from time to time, acquisitions. Working capital investment typically increases during periods of sales expansion when higher levels of receivables occur.
    During 2002, we entered into a new credit agreement with two banks. The credit agreement was amended during December 2003, June 2004, August 2004, April 2005, March 2006 and May 2006. It expires on June 1, 2007. We expect to renew or replace the agreement and extend the expiration date during 2006.  Debt may be secured by our revenue equipment, trade accounts receivable and inventories.
    As of December 31, 2005, we were using none of the credit facility for borrowed funds, but were using $4.8 million of the facility as security for letters of credit, for a total utilization of $4.8 million of the $50 million available to us. Accordingly, our remaining availability was $45.2 million at the end of 2005.
    As amended, the credit agreement contains several restrictive covenants, including:
-
The ratio of our annual earnings before interest, taxes, depreciation, amortization, rental and any non-cash expenses from stock option activity ("EBITDAR") to the amount of our annual fixed charges may not be less than 1.2:1.0. Fixed charges generally include interest payments, rental expense, taxes paid and any portion of long-term debt presently due but not paid.
-
The ratio of our funded debt to EBITDAR may not exceed 2.5:1.0. Funded debt generally includes the amount borrowed under the credit agreement or similar arrangements, letters of credit secured by the credit agreement and the aggregate minimum amount of operating lease payments we are obligated to pay in the future.
-
The yearly sum of our income plus taxes and non-recurring or extraordinary expense (as defined in the credit agreement) must be a positive amount.
-
Our tangible net worth ("TNW") must remain an amount greater than $70 million plus 50% of the positive amounts of our quarterly net income for each fiscal quarter which ends after June 30, 2004. TNW is generally defined as our net shareholders' equity, minus intangible and certain other assets plus 100% of any cash we receive from the issuance of equity securities.
-
We may not enter into a merger or acquire another entity without the prior consent of our banks.
-
The annual amount of our net expenditures for property and equipment may not be more than $35 million after taking into account the amounts we receive from the sale of such assets.
    As of December 31, 2005, we were in compliance with all of our restrictive covenants and we project that our compliance will remain intact during 2006.  Such terms include a provision that we provide the banks with audited financial statements within 90 days of the end of each year.  December 31, 2005 statements would have been due by March 31, 2006.  During March of 2006, it became apparent that we would be unable to meet that requirement. The banks extended the due date for 2005's audited financials until June 16, 2006.
 
    Cash FlowsDuring 2005, 2004 and 2003 cash provided by operating activities was $30.0 million, $41.6 million and $14.3 million, respectively. As compared to 2003, factors contributing to the improvement in operating cash flows included 2005's higher net income, higher depreciation and amortization expense, higher deferred income tax expense, higher liability for accounts payable and 2005’s higher accrued payroll liability.
    The decline in operating cash flows between 2004 and 2005 was primarily due to higher accounts receivable and lower accounts payable, which were offset by an improvement in net income and other components of cash flows from operating activities.
    As of December 31, 2005, our working capital (current assets minus current liabilities) was $33.0 million, as compared to $19.2 million as of December 31, 2004. This change, which was mostly related to higher accounts receivable at December 31, 2005, is the principal reason behind 2005’s lower year-to-date cash flows provided by operating activities. Accounts receivable increased by $10.3 million (17.7%) between December 31, 2004 and 2005, due to a 14.2% increase in revenue between the quarters ended on those dates.    
    Regarding cash flows from investing activities, expenditures for property and equipment totaled $42.0 million in 2005, $40.5 million in 2004 and $31.1 million during 2003. Cash proceeds from the sale of retired equipment were $15.5 million, $10.2 million and $9.3 million during 2005, 2004 and 2003, respectively. In addition, we financed, through operating leases, the addition of revenue equipment valued at approximately $26 million in 2005, $36 million in 2004 and $57 million during 2003.
    During 2004, much of our cash flow from operating activities was used to pay down our debt, from $14 million to $2 million. That resulted in 2004's net cash used in financing activities to be $10.9 million, as compared to 2005’s $1.8 million.  Proceeds from the issuance of common stock or re-issuance of treasury stock (both in connection with the exercise of stock options) also served to reduce net cash used in financing activities during the twelve months of 2005. During 2005, we expended $3.9 million for repurchases of our common stock, as compared to $1.1 million during 2004.
    Obligations and CommitmentsThe table below sets forth information as to the amounts of our obligations and commitments as well as the year in which they will become due (in millions):
 
Payments Due by Year
 
Total
 
 
2006
 
 
2007
 
 
2008
 
 
2009
 
 
2010
 
 
After
2010
 
Long-term debt and letters of credit
 
$
4.8
 
$
--
 
$
4.8
 
$
--
 
$
--
 
$
--
 
$
--
 
Purchase obligations
   
7.8
   
7.8
   
--
   
--
   
--
   
--
   
--
 
Operating leases for
                                           
Rentals(1)
   
80.6
   
26.6
   
19.8
   
15.7
   
9.4
   
5.2
   
3.9
 
Residual guarantees
   
8.7
   
5.5
   
1.1
   
1.0
   
1.1
   
--
   
--
 
Accounts payable
   
28.3
   
28.3
   
--
   
--
   
--
   
--
   
--
 
Accrued payroll
   
8.9