-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JAGE80eSFtZGWk3HHhtad5Tq3VXY6N3nQ7wQiLA1mBInxjzqNU5+eBPK52sg5sPK HUyEMimb2Gr5u5ESnts6fg== 0000039273-06-000059.txt : 20061109 0000039273-06-000059.hdr.sgml : 20061109 20061109104003 ACCESSION NUMBER: 0000039273-06-000059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061109 DATE AS OF CHANGE: 20061109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FROZEN FOOD EXPRESS INDUSTRIES INC CENTRAL INDEX KEY: 0000039273 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 751301831 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10006 FILM NUMBER: 061199984 BUSINESS ADDRESS: STREET 1: 1145 EMPIRE CENTRAL PLACE CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146308090 10-Q 1 form10q_3q2006.htm FFEX FORM 10Q Q3-2006 FFEX Form 10Q Q3-2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[MARK ONE]
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

OR

r TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____________ TO ______________
 

 
FROZEN FOOD EXPRESS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Texas
(State or other jurisdiction of
incorporation or organization)
1-10006
Commission
File Number
75-1301831
(IRS Employer Identification No.)
 
1145 Empire Central Place
Dallas, Texas 75247-4309
(Address of principal executive offices)
 
 
(214) 630-8090
(Registrant's telephone number,
including area code)
 

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.

ý Yes        oNo

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 o    Accelerated Filer  ý  Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

oYes        ýNo

As of November 1, 2006, there were 17,665,542 shares of the registrant's common stock, par value $1.50 per share, outstanding.
 








INDEX
FINANCIAL INFORMATION
Page No.
 
 
 
Financial Statements (Unaudited)
 
 
Consolidated Condensed Balance Sheets
September 30, 2006 and December 31, 2005
1
 
 
  
 
Consolidated Condensed Statements of Income
Three and nine months ended September 30, 2006 and 2005
2
 
 
  
 
Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 2006 and 2005
3
 
 
  
 
Notes to Consolidated Financial Statements
4
 
 
  
Management's Discussion and Analysis of
Financial Condition and Results of Operations
8
 
 
  
Quantitative and Qualitative Disclosures About Market Risk
17
 
 
  
Controls and Procedures
18
 
 
  
OTHER INFORMATION
  
 
 
  
Legal Proceedings
19
 
 
  
Risk Factors
19
 
 
  
Unregistered Sales of Equity Securities and Use of Proceeds
19
 
 
  
Defaults Upon Senior Securities
19
 
 
  
Submission of Matters to a Vote of Security Holders
19
 
 
  
Other Information
19
 
 
  
Exhibits
20
 
 
 


 


-i-




PART I.  FINANCIAL INFORMATION
ITEM 1. Financial Statements

FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)

Assets
 
 
Sept. 30,
2006
(unaudited)
 
 
Dec. 31,
2005
 
 
Current assets
 
 
  
 
 
  
 
Cash and cash equivalents
 
$
2,309
 
$
10,957
 
Accounts receivable, net
 
 
57,248
 
 
68,216
 
Inventories
 
 
2,935
 
 
1,982
 
Tires on equipment in use
 
 
4,884
 
 
4,899
 
Deferred income taxes
 
 
2,351
  
 
4,354
 
Other current assets
 
 
18,078
 
 
7,550
 
Total current assets
 
 
87,805
 
 
97,958
 
 
 
 
  
 
 
  
 
Property and equipment, net
 
 
94,649
 
 
92,110
 
Other assets
 
 
11,475
 
 
10,887
 
Total assets
 
$
193,929
 
$
200,955
 
Liabilities and shareholders' equity
 
 
  
 
 
  
 
Current liabilities
 
 
  
 
 
  
 
Accounts payable
 
$
30,245
 
$
28,292
 
Accrued claims
 
 
12,388
 
 
14,455
 
Accrued payroll
 
 
8,535
 
 
12,661
 
Income taxes payable
 
 
--
  
 
2,932
 
Accrued liabilities
 
 
2,708
 
 
2,947
 
Debt of variable interest entity
 
 
--
 
 
3,622
 
Total current liabilities
 
 
53,876
 
 
64,909
 
 
 
 
  
 
 
  
 
Long-term debt
 
 
1,000
 
 
--
 
Deferred income taxes
 
 
8,193
 
 
7,318
 
Accrued claims and liabilities
 
 
9,383
 
 
9,536
 
Total liabilities
 
 
72,452
 
 
81,763
 
 
 
 
  
 
 
  
 
Shareholders' equity
 
 
  
 
 
  
 
Par value of common stock (18,572 and 18,137 shares outstanding)
 
 
27,858
 
 
27,206
 
Paid-in capital
 
 
7,344
 
 
6,081
 
Unvested restricted stock (80 and 0 shares)
 
 
(803
)
 
--
 
Retained earnings
 
 
95,497
 
 
89,040
 
 
 
 
129,896
 
 
122,327
 
Less - treasury stock (1,032 and 331 shares)
 
 
8,419
 
 
3,135
 
Total shareholders' equity
 
 
121,477
 
 
119,192
 
Total liabilities and shareholders' equity
 
$
193,929
 
$
200,955
 

See accompanying notes to consolidated condensed financial statements.


Page 1 of 22



FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
Three and Nine Months Ended September 30,
(Unaudited and in thousands, except per share amounts)

 
 
Three Months
 
Nine Months
 
 
 
2006
 
2005
 
2006
 
2005
 
Revenue
 
 
  
 
 
  
 
 
  
 
 
  
 
Freight revenue
 
$
124,133
 
$
135,136
 
$
371,285
 
$
374,258
 
Non-freight revenue
 
 
2,844
 
 
2,403
 
 
8,566
 
 
7,990
 
 
 
 
126,977
 
 
137,539
 
 
379,851
 
 
382,248
 
Cost and expenses
 
 
  
 
 
  
 
 
  
 
 
  
 
Salaries, wages and related expenses
 
 
30,813
 
 
33,894
 
 
97,688
 
 
97,152
 
Purchased transportation
 
 
30,335
 
 
32,190
 
 
88,234
 
 
93,361
 
Fuel
 
 
23,499
 
 
22,862
 
 
67,968
 
 
58,671
 
Supplies and expenses
 
 
15,455
 
 
17,004
 
 
44,736
 
 
48,067
 
Revenue equipment rent
 
 
7,537
 
 
7,849
 
 
23,153
 
 
21,303
 
Depreciation
 
 
5,082
 
 
5,094
 
 
15,325
 
 
16,838
 
Communication and utilities
 
 
1,120
 
 
1,087
 
 
3,176
 
 
3,013
 
Claims and insurance
 
 
4,579
 
 
4,293
 
 
13,640
 
 
10,881
 
Operating taxes and licenses
 
 
1,138
 
 
1,218
 
 
3,383
 
 
3,420
 
Gain on disposition of equipment
 
 
(958
)
 
(923
)
 
(2,609
)
 
(3,573
)
Miscellaneous expenses
 
 
154
 
 
1,959
 
 
4,342
 
 
4,844
 
 
 
 
118,754
 
 
126,527
 
 
359,036
 
 
353,977
 
Non-freight costs and operating expenses
 
 
2,894
 
 
2,170
 
 
8,706
 
 
7,750
 
 
 
 
121,648
 
 
128,697
 
 
367,742
 
 
361,727
 
Operating income
 
 
5,329
 
 
8,842
 
 
12,109
 
 
20,521
 
Interest and other expense (income)
 
 
  
 
 
  
 
 
  
 
 
  
 
Interest expense
 
 
105
 
 
92
 
 
259
 
 
278
 
Interest income
 
 
(56
)
 
(13
)
 
(392
)
 
(195
)
Equity in earnings of limited partnership
 
 
(226
)
 
(302
)
 
(478
)
 
(439
)
Life insurance and other
 
 
221
  
 
707
  
 
29
  
 
(2,460
)
 
 
 
44
  
 
484
  
 
(582
)
 
(2,816
)
Income before income tax
 
 
5,285
 
 
8,358
 
 
12,691
 
 
23,337
 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
Income tax provision
 
 
2,423
 
 
3,382
 
 
5,781
 
 
9,255
 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
Net income
 
$
2,862
 
$
4,976
 
$
6,910
 
$
14,082
 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
Net income per share of common stock
 
 
  
 
 
  
 
 
  
 
 
  
 
Basic
 
$
0.16
 
$
0.28
 
$
0.38
 
$
0.79
 
Diluted
 
$
0.16
 
$
0.26
 
$
0.37
 
$
0.75
 
 
 
 
 
 
 
  
 
 
  
 
 
  
 
Basic shares
 
 
17,876
 
 
17,944
 
 
17,971
 
 
17,817
 
Diluted shares
 
 
18,374
 
 
18,873
 
 
18,688
 
 
18,791
 

See accompanying notes to consolidated condensed financial statements.


Page 2 of 22





FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited and in thousands)

 
 
 
2006
 
 
2005
 
Net cash provided by operating activities
 
$
14,108
  
$
15,520
  
 
 
 
    
 
    
Cash flows from investing activities
 
 
    
 
    
Expenditures for property and equipment
 
 
(31,020
)
 
(28,541
)
Proceeds from sale of property and equipment
 
 
13,279
  
 
13,954
  
Net life insurance (expenditures) proceeds
 
 
(582
)
 
5,777
  
Net cash used in investing activities
 
 
(18,323
)
 
(8,810
)
 
 
 
    
 
    
Cash flows from financing activities
 
 
    
 
    
Borrowings under revolving credit agreement
 
 
20,900
  
 
21,600
  
Payments against revolving credit agreement
 
 
(19,900
)
 
(23,600
)
Debt repaid by variable interest entities
 
 
(670
)
 
(640
)
Common stock issued
 
 
2,810
  
 
2,887
  
Treasury stock re-issued
 
 
--
  
 
153
  
Treasury stock reacquired  
 
 
(8,863
)
 
(3,244
)
Income tax benefit from stock options exercised
 
 
1,193
  
 
--
  
Other
 
 
97
 
 
799
  
Net cash used in financing activities
 
 
(4,433
)
 
(2,045
)
 
 
 
    
 
    
Net (decrease) increase  in cash and cash equivalents
 
 
(8,648
)
 
4,665
  
Cash and cash equivalents at January 1
 
 
10,957
  
 
3,142
  
 
 
 
    
 
    
Cash and cash equivalents at September 30
 
$
2,309
  
$
7,807
  
 
 
 
  
 
 
  
 
 

See accompanying notes to consolidated condensed financial statements.


Page 3 of 22





FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 30, 2006 and 2005
(Unaudited)

1. BASIS OF PRESENTATION 
These consolidated condensed financial statements include Frozen Food Express Industries, Inc. and its subsidiary companies, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (which consisted only of normal recurring entries) necessary to present fairly our financial position, cash flows and results of operations have been made. Pursuant to SEC rules and regulations, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted from these statements unless significant changes have taken place since the end of the most recent fiscal year. We believe that the disclosures contained herein, when read in conjunction with the audited financial statements and notes included in our Annual Report on Form 10-K, filed with the SEC on June 14, 2006, are adequate to make the information presented not misleading. It is suggested, therefore, that these statements be read in conjunction with the statements and notes included in our most recent Annual Report on Form 10-K.
These consolidated condensed financial statements also reflect two variable interest entities that we do not own, but which we are required by GAAP to consolidate. AirPro Mobile Air, LLC (“AMA”) is a distributor of after-market parts and supplies for motor vehicle air conditioning systems. Until early 2005, the business of AMA was conducted by our wholly-owned subsidiary, AirPro Holdings, Inc. (“AHI”). During 2005, we sold the primary operating assets (excluding real estate) of AHI to AMA. Among the consideration we received from AMA in exchange for the assets were cash, a 20% equity interest in AMA and a note payable to us from AMA.  Two individuals whom we employed at AHI own 80% of AMA.  After the sale, AHI changed its name to FX Holdings, Inc.  Associated non-freight revenue during the first nine months of 2006 was $8.6 million and the maximum amount of our potential exposure associated with AMA was approximately $1.0 million at September 30, 2006. 
The second variable interest entity that we do not own but which is consolidated into these financial statements until September 30, 2006 is a family partnership from which we leased 68 tractors until the end of September, 2006. The family partnership is under the control of our Chairman and Chief Executive Officer.  Our Senior Vice President and Chief Operating Officer also owns an interest in the family partnership. Effective September 30, 2006, we terminated the leases with the family partnership and, hereafter, this entity is no longer a variable interest entity. A more detailed discussion of that transaction appears at Note 4 to these financial statements.
Because we have determined that we are the principal beneficiary of each of these variable interest entities, both have been included in these consolidated condensed financial statements.
Prior to our January 1, 2006 adoption of Financial Accounting Standards Board (“FASB”) Statement No. 123R, “Share-Based Payment” (“SFAS 123R”), we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations.  Accordingly, because the stock option grant price equaled the market price on the date of grant, no compensation expense has been recognized for company-issued stock options issued prior to January 1, 2006.  As permitted by SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), stock-based compensation was included as a pro forma disclosure in the financial statements we have previously filed with the SEC. 
On January 1, 2006, we adopted SFAS 123R using the modified prospective transition method and, as a result, did not retroactively adjust results from prior periods.  Under this transition method, stock-based compensation is recognized for: (i) expense related to the remaining unvested portion of all stock-based awards granted prior to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and (ii) expense related to all stock-based awards granted on or subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.  We apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which is then amortized on a straight-line basis over the appropriate service period.  See Note 3 of these Notes to Consolidated Condensed Financial Statements for further discussion of stock-based compensation.
Certain prior period amounts have been reclassified to conform to the current period's presentation.

2. REVENUE AND EXPENSE RECOGNITION
Freight revenue and associated direct operating expenses are recognized on the date the freight is picked up from the shipper in accordance with the FASB’s Emerging Issues Task Force’s Issue No. 91-9 “Revenue and Expense Recognition for Freight Services In Progress” (“EITF No. 91-9”).
One of the preferable methods outlined in EITF No. 91-9 provides for the allocation of revenue between reporting periods based on relative transit time in each reporting period with expense recognized as incurred. Changing to this method would not have a material impact on our quarterly or annual financial statements.
We are the sole obligor with respect to the performance of our freight services, and we assume all of the related credit risk. Accordingly, our freight revenue and our related direct expenses are recognized on a gross basis. Payments we make to independent contractors for the use of their trucks in transporting freight are typically calculated based on the gross revenue generated by their trucks. Such payments to independent contractors are recorded as purchased transportation expense.

Page 4 of 22
3. STOCK-BASED COMPENSATION
On January 1, 2006, we adopted Financial Accounting Standards Board (“FASB”) Statement No. 123R, “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method, and as a result, did not retroactively adjust results from prior periods.  Under this transition method, stock-based compensation must be recognized for: (i) any expense related to the remaining unvested portion of all stock-based awards granted prior to January 1, 2006, based on the grant date fair value, determined in accordance with the original provisions of SFAS 123; and (ii) any expense related to all stock option awards granted on or subsequent to January 1, 2006, based on the fair value determined in accordance with the provisions of SFAS 123R.  Because we had no material expenses that were required to be recognized upon the adoption of SFAS 123R, the adoption of SFAS 123R did not impact our financial statements for 2006 with regard to share-based payments issued to employees prior to January 1, 2006. During the nine-month period ended September 30, 2006, we granted 93 thousand shares of restricted stock to officers and employees and 13 thousand of those shares were forfeited during the three months ended June 30, 2006. The expense associated with restricted stock awards during the first nine months of 2006 was $107 thousand, none of which was capitalized.
Pursuant to our Employee Stock Option Plan (the "Employee Plan"), we issued non-qualified stock options to substantially all of our employees (except officers) in 1997, 1998 and 1999. All grants issued under the Employee Plan were at the market value of our common stock on the date of the grant.  Employee Plan stock options became 100% vested seven years after the date of grant. As of September 30, 2006, there were 332 thousand options outstanding under the Employee Plan, all of which were exercisable. Because our officers did not participate in the Employee Plan, no shareholder approval of the Employee Plan was required. As of September 30, 2006, the weighted average exercise price of options outstanding under the Employee Plan was $8.87. The Employee Plan terminated during 2001 and no additional grants are permitted under the Employee Plan.
Our shareholders approved the Frozen Food Express Industries, Inc. 2005 Stock Incentive Plan (the "2005 Plan") at their annual meeting on May 5, 2005. The 2005 Plan amended and restated the Frozen Food Express Industries, Inc. 2002 Incentive and Nonstatutory Option Plan (the "2002 Plan"). The 2005 Plan authorizes the award of shares of Restricted Stock, stock appreciation rights, stock units and performance shares, in addition to stock options which were authorized under the 2002 Plan.  Awards under the 2005 Plan may be made to key persons, including officers and directors who may be employees, and non-employee consultants or advisors. No individual may be granted options under the 2005 Plan in any single year if the total number of options granted to such an individual exceeds 100 thousand shares.
During the first nine months of 2006, we granted 93 thousand shares (13 thousand of which were subsequently forfeited) of restricted stock to officers and key employees and no stock options under the 2005 Plan. During the first nine months of 2005, options for 74 thousand shares of our common stock were granted to officers and key employees under the 2005 Plan. Stock options were granted at the market price on the date of grant during 2005 and vested immediately upon grant.  Stock options expire ten years from the date of grant.  We issue new shares of common stock or reissue treasury shares upon exercise of stock options.
We use the Black-Scholes valuation model to determine the fair value of stock options issued to employees.  As permitted by SFAS 123, prior to January 1, 2006, no compensation expense was recorded for such issuances. If any options are issued to employees on or after January 1, 2006, the resulting compensation expense will be recognized over the appropriate service period, which is generally equal to the vesting period. For options granted in 2005, vesting was immediate upon grant. Because the vesting period for such options did not extend into 2006, no expense from options granted during 2005 was recorded in 2006. No stock options were issued during the nine months ended September 30, 2006, and accordingly, no expense associated with stock options has been recorded in our consolidated condensed financial statements.
The table below presents net income and basic and diluted net income per share for the three- and nine-month periods ended September 30, 2005, had we applied the fair value recognition provisions of SFAS 123:
 
Pro Forma Impact on
  
 Three Months
  
 Nine Months
  
Net Income (in millions)
  
2005 
  
2005 
  
As reported
  
$
5.0
  
$
14.1
  
Impact of SFAS No. 123, net of tax
    
(0.2
)
  
(0.5
)
 
  
$
4.8
  
$
13.6
  

Pro Forma Impact on
  
 Three Months
  
 Nine Months
  
Basic Net Income Per Share
  
2005 
  
2005 
  
As reported
  
$
0.28
  
$
0.79
  
Impact of SFAS No. 123, net of tax
    
(0.01
)
  
(0.03
)
 
  
$
0.27
  
$
0.76
  


Pro Forma Impact on
  
 Three Months
  
 Nine Months
  
Diluted Net Income Per Share
  
2005 
  
2005 
  
As reported
  
$
0.26
  
$
0.75
  
Impact of SFAS No. 123, net of tax
    
(0.01
)
  
(0.03
)
 
  
$
0.25
  
$
0.72
  

In calculating the amounts in the preceding table, the weighted average fair value at the grant date for stock options issued during the first nine months of fiscal 2005 was $4.88 per option.  We utilized and will continue to utilize, the Black-Scholes valuation model to determine the fair value of stock options granted, if any are granted in the future.  The fair value of stock options at date of grant was estimated using the following weighted average assumptions for the nine months ended September 30, 2005: (a) no dividend yield on our common stock, (b) expected stock price volatility of 42.1%, (c) a risk-free interest rate of 3.56% and (d) an expected option term of 4 years.
The expected term of the options represented the estimated period of time until exercise. It was based on our previous experience regarding similar options, giving consideration to the contractual terms, vesting schedules and our expectations of future employee behavior regarding the exercise and forfeiture of stock options.  Expected stock price volatility was based solely on historical price volatility of our common stock over a period commensurate with the expected term of the underlying stock options. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of grant for Treasury issues with a maturity corresponding to the remaining term of the options. We have not paid cash dividends since 1999.
Under SFAS 123R, compensation expense will be recognized only for those awards expected to vest, with forfeitures estimated based on our historical experience and future expectations.  Prior to the adoption of SFAS 123R, the effect of forfeitures on the pro forma expense amounts was recognized as forfeitures occurred. 

Page 5 of 22


Stock option activity during the nine-month period ended September 30, 2006 was as follows:
Options
  
Shares
(in thousands)
  
Weighted-Average
Exercise Price
  
Weighted-Average
Remaining Contractual Term
(Years)
  
Aggregate Intrinsic Value
(in thousands)
  
Outstanding at January 1, 2006
    
2,988
  
$
5.89
          
Granted
    
--
    
--
          
Exercised
    
(673
)
  
4.17
          
Forfeited or expired
    
(131
)
  
10.60
          
Outstanding at September 30, 2006
    
2,184
  
$
6.14
    
5.6
  
$
5,212
  
Exercisable at September 30, 2006
    
1,718
  
$
4.97
    
4.7
  
$
5,169
  

The aggregate intrinsic value in the table above represents the total pre-tax value (the difference between our closing stock price on September 30, 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by all option holders had all option holders exercised all such options on September 30, 2006.  This amount will fluctuate over time with the fair market value of our stock.  During the quarters ended September 2006 and 2005, respectively, the intrinsic value of options exercised was approximately $2.5 million and $2.2 million. As of September 30, 2006, we had no stock options that were not yet vested and no unrecognized stock-based compensation expense related to stock options.  Cash received from option exercises for the nine-month periods ended September 30, 2006 and 2005, respectively, was approximately $2.8 million and $2.9 million. The actual tax benefit we realized for the options exercised for the nine-month periods ended September 30, 2006 and 2005, was approximately $1.2 million and $0.8 million, respectively. 
The fair value of restricted stock granted is equal to the fair market value of our common stock on the date of grant. The weighted average fair value of restricted stock granted in the first nine months of fiscal 2006 was $10.06. No restricted stock was granted in the first nine months of fiscal 2005.  Restricted stock awards become 33%, 67% and 100% vested on a cumulative basis on the first, second and third anniversaries of such awards, respectively.
Restricted stock activity during the nine-month period ended September 30, 2006 was as follows:

Restricted Stock
  
Shares
(in thousands)
  
Weighted-Average
Grant-Date
Fair Value
  
Nonvested at January 1, 2006
    
--
  
$
--
  
Granted
    
93
    
10.20
  
Vested
    
--
        
Forfeited
    
(13
)
  
11.03
  
Nonvested at September 30, 2006
    
80
  
$
10.06
  
 
4. RELATED PARTY TRANSACTIONS
Effective September 30, 2006, upon the recommendation of our Audit Committee and Board of Directors, we terminated all existing tractor and trailer lease arrangements with entities affiliated with our Chief Executive Officer, Stoney M. Stubbs, Jr., our current (since May 2006) Chief Operating Officer, S. Russell Stubbs and members of their immediate family, (collectively referred to herein as the “Stubbs Lessors”).
These lease arrangements had been in place for a number of years among the Stubbs Lessors, our former (until May 2006) Chief Operating Officer and us. As of the beginning of 2006, the assets that were the subject of the lease agreements involved 118 trailers which were leased on a month-to-month basis and 111 tractors that were leased for longer terms subject to written lease agreements. Of the 118 trailers, 36 were personally leased to us by our former Chief Operating Officer, and 82 were personally leased to us by various Stubbs Lessors.
Of the 111 tractors, 38 were leased from the former Chief Operating Officer and 73 were leased from the Stubbs Lessors, consisting of 68 leased from a family partnership and 5 leased personally from Stoney M. Stubbs, Jr. Our current COO is the son of our CEO and beneficially owns 42.1% of the family partnership. The remaining 57.9% of the family partnership is beneficially owned by other family members, including 2.6% beneficially owned by Stoney M. Stubbs, Jr., who serves as the family partnership’s managing general partner.  
Effective September 30, 2006, we purchased from the Stubbs Lessors the 73 tractors at their fair market value ("FMV") as determined by an independent third party and approved by our Audit Committee and Board of Directors.  
The FMV purchase price for all tractors leased from the Stubbs Lessors was approximately $3.5 million, which includes $275 thousand paid to Stoney M. Stubbs, Jr. for 5 leased trucks owned personally by him. In addition, because the tractor leases with the Stubbs Lessors were, by their terms, not subject to cancellation, we paid the Stubbs Lessors early tractor lease termination fees totaling $275 thousand, which the Audit Committee determined to be (i) reasonable relative to termination fees that would likely be assessed under similar leases with unrelated parties; (ii) more favorable to us than allowing the leases to continue until their normal termination dates; and (iii) more favorable to us than terminating the leases and replacing the tractors.
Leases for the 82 trailers rented from Stubbs Lessors were also terminated effective September 30, 2006. In connection with that termination, we purchased those trailers for their fair market value. We subsequently sold those trailers and realized no significant loss or gain on the sales.
Until the effective date of the lease terminations (September 30, 2006), the family partnership had been treated as a variable interest entity (see Note 1, “Basis of Presentation”) which we included in our consolidated condensed financial statements. Upon the September termination of the leases, the consolidation of the family partnership ceased. Accordingly, these financial statements reflect the expenses (depreciation and interest expense) associated with the 68 tractors leased from the family partnership during the nine months ended September 30, 2006, but no longer reflect the assets or liabilities of the family partnership. The termination of the family partnership leases resulted in the family partnership no longer being considered as a variable interest entity. These consolidated condensed financial statements for all periods presented also reflect as equipment rental expense the rentals we paid for all of the tractors and trailers we leased from related parties (other than the 68 tractors we leased from the family partnership).
Because the family partnership was a variable interest entity until September 30, 2006, these consolidated condensed financial statements reflect the operating expenses of the family partnership.  Accordingly, the net book value of the 68 tractors and the debt that the family partnership owed to a bank for loans collateralized by the 68 tractors were reflected in our consolidated financial statements for all periods prior to September 30, 2006. The amount of the debt was equal to the net book value of the 68 tractors. Therefore, when we paid the family partnership for the purchase of the 68 tractors, the funds that were paid were used by the family partnership to pay off the debt owed to the bank. The FMV of the 68 tractors that we paid to the family partnership exceeded net book value as of September 30, 2006 by approximately $175 thousand.
 
Page 6 of 22
The termination fee and the excess of FMV over the net book value that was paid was accounted for as a dividend to a related party. Accordingly, the total $450 thousand that we paid for cancellation fees and excess FMV over net book value of the 68 tractors was accounted for as a dividend in these consolidated condensed financial statements, and were therefore charged directly to retained earnings.
Eight of our former Chief Operating Officer's tractor leases expired during June of 2006.  Pursuant to the former Chief Operating Officer’s tractor leases, those eight tractors were returned to him when those leases expired. All of the trailers that were rented from our former Chief Operating Officer were cancelled during June 2006. Upon cancellation, we purchased those 36 trailers from our former Chief Operating Officer at their fair market value.  We subsequently sold those trailers and realized no significant loss or gain on the sales.
Aside from the 68 tractors we leased from the family partnership, we accounted for all of the other leases as operating lease agreements.
The following discussion of the amounts we paid to the related parties for rentals under the leasing arrangements during each of the nine-month periods ended September 30, 2005 and 2006 includes all 111 tractors and 118 trailers.
We paid the officers a premium over the tractor rentals we pay to unaffiliated lessors. During each of the nine-month periods ended September 30, 2005 and 2006, the average monthly rent per tractor leased from related parties was about 10% higher than the rentals for tractors we leased from unrelated parties. During the nine-month periods ended September 30, 2005 and 2006, payments to officers (including payments to the family partnership) under these leases were approximately $1.5 million and $1.3 million, respectively. During the nine-month periods ended September 30, 2005 and 2006, the cost for related-party tractor leases was approximately $150 thousand and $130 thousand, respectively, more than it would have been had the tractors been leased from unrelated parties.
During the first nine months of 2005 and 2006, we also rented from the same officers up to 118 trailers on a month-to-month basis. The rentals we paid for the 118 trailers leased from related parties were approximately $370 thousand during the nine-month periods ended September 30, 2005 and $280 thousand during the comparable period of 2006. Per reference to similar rental agreements in effect between ourselves and unrelated third party trailer rental companies, during each of the nine-month periods ended September 30, 2005 and 2006, the amount we paid to the related-party lessors was about $120 thousand more than the trailers' fair rental value.
Related-party tractor leases were documented by formal lease contracts between us and the lessors, but there was no written agreement between us and our related parties for the trailer leases.  Because of the absence of such a trailer rental agreement, the leases did not qualify as long term leases.  In Texas, long term leases are exempted from rental tax, but short term rentals are subject to such taxes.  The State of Texas determined that the related-party lessors had failed to pay such rental tax and assessed the related-party lessors for such taxes in the amount of approximately $200 thousand, a negotiated settlement for all such taxes due through March 31, 2006. 
In the normal course of our business with unrelated-party lessors for short-term trailer rentals, we agree by the terms of the underlying written rental contracts that similar rental taxes will be our responsibility.  Unrelated-party rental companies add the taxes to their invoices to us and we remit the rental fee and the associated tax to the rental companies, who subsequently remit the taxes collected from us to the state where the rental transaction occurred.
In the case of our short-term related-party trailer rentals, we were not legally obligated by contract to reimburse the lessors for the taxes that the State of Texas assessed against them because there was no formal rental contract.  As previously reported, the Audit Committee of our Board of Directors commenced an investigation into certain billing and other operational matters during February 2006.  The investigation was completed during May of 2006.  When the investigation began, the related-party lessors had requested reimbursement for their rental tax liability, but the Audit Committee had not yet acted on their request, pending the conclusion of the investigation.  Transactions with related parties require the approval in advance by the Audit Committee in all cases and the full Board of Directors in certain cases.  In June 2006, the Audit Committee approved the related-party lessor's requests for reimbursement of the rental tax assessment described above. They further approved payment of rental taxes of about $3 thousand per month on trailers rented during the third quarter of 2006 as well as for subsequent future trailer rentals until such time as the related-party trailer lease cancellations are negotiated and finalized, which occurred effective September 30, 2006.
A member of our finance staff devotes a significant portion of his time rendering tax and other professional services for the personal benefit of our CEO and former COO. We have determined that $30 thousand of the finance staff member’s salary was related to the provision of such services during each of the nine-month periods ended September 30, 2005 and 2006.
Prior to 2003, we entered into split dollar agreements for the benefit of our CEO and former COO. Under the agreements, we had agreed to pay certain premiums for split dollar insurance policies which we owned on the lives of the CEO and former COO. The CEO and former COO had agreed to repay such premiums to us on the earlier of each policy's surrender or cancellation or upon payment of any death benefit.
During 2003, we amended the split-dollar agreements. The amendments (i) transferred ownership of the polices to the CEO and former COO, (ii) transferred the obligation to pay premiums to the CEO and former COO and (iii) provided us with assurance that our right to be repaid for the premiums that we had paid before the date of the amendment would be retained. No payments were made between us, the CEO or the COO directly in connection with the amendment. The expected discounted present value of such premiums to be repaid to the company is included in other non-current assets on our consolidated balance sheets.
During the nine-month period ended September 30, 2006, most of the trailers and trailer refrigeration units we purchased for use in our operations were purchased from W&B Refrigeration, LLP ("W&B"), an entity in which we own a 20% equity interest. We account for our investment using the equity method of accounting. As of September 30, 2005 and 2006, the total investment in W&B, which is included in "Other Assets" on our consolidated condensed balance sheets, was $4.8 million and $4.9 million, respectively.  All of our trailer purchase orders are awarded after a competitive bidding process to ensure that we are getting the best possible product quality, price, warranty and terms. We also rely on W&B to provide routine maintenance and warranty repair of the trailers and refrigeration units. During the nine-month period ended September 30, 2006, we purchased trailers and refrigeration units aggregating $3.1 million from W&B. We made $1.4 million of such purchases in the first nine months of 2005. During each of the nine-month periods ended September 30, 2006 and 2005, respectively, we paid W&B $1.4 million and $1.2 million for maintenance and repair services and parts.   As of September 30, 2006 and 2005, respectively, included in our accounts payable were amounts owed to W&B of $0.3 million and $1.9 million for the purchase of trailers, parts and repair services.
  
5. LONG-TERM DEBT
As of September 30, 2006, we had a $50 million secured line of credit pursuant to a revolving credit agreement with two commercial banks. In October of 2006, we negotiated a new agreement, with the same two banks, which will expire in 2010. As with the old agreement, borrowings under the new agreement are secured by the company’s accounts receivable. In addition, we have the option to provide the banks with liens on a portion of our truck and trailer fleets to cover borrowings and letters of credit in excess of the amount that can be borrowed against accounts receivable.
Interest is paid monthly. We may elect to borrow at a daily interest rate based on the bank’s prime rate or for specified periods of time at fixed interest rates which are based on the London Interbank Offered Rate in effect at the time of a fixed rate borrowing. Pricing under the new agreement is more favorable than under the old agreement. At September 30, 2006, $1.0 million was borrowed against this facility and $5.1 million was being used as collateral for letters of credit. Accordingly, at September 30, 2006 approximately $43.9 million was available under the agreement. To the extent that the line of credit is not used for borrowing or letters of credit, we pay a commitment fee to the banks.
The agreement contains a pricing “grid” where increased levels of profitability and cash flows or reduced levels of indebtedness can reduce the rates of interest expense we incur. The new agreement permits, with certain limits, payments of cash dividends, repurchases of our stock and increased levels of capital expenditures. The amount we may borrow under the facility may not exceed the lesser of $50 million, as adjusted for letters of credit and other debt as defined in the agreement, a borrowing base or a multiple of a measure of cash flow as described in the agreement. Loans and letters of credit will become due upon the expiration of the agreement. As of September 30, 2006, we were in compliance with the terms of the agreement.
 
6. COMMITMENTS AND CONTINGENCIES
We have accrued for costs related to public liability, cargo, employee health insurance and work-related injury claims. When an incident occurs, we record a reserve for the incident’s estimated outcome. As additional information becomes available, adjustments are made. Accrued claims liabilities include all such reserves and our estimate for incidents which have been incurred but not reported.
 
7. NET INCOME PER SHARE OF COMMON STOCK
Basic income per share was computed by dividing our net income by the weighted average number of shares of common stock outstanding during the period. The table below sets forth information regarding weighted average basic and diluted shares for each of the three- and nine-month periods ended September 30, 2006 and 2005 (in thousands):

 
  
Three Months
  
Nine Months
  
 
  
2006 
  
2005 
  
2006 
  
2005 
  
Basic shares
    
17,876
    
17,944
    
17,971
    
17,817
  
Common stock equivalents
    
498
    
929
    
717
    
974
  
Diluted shares
    
18,374
    
18,873
    
18,688
    
18,791
  
 
For the three and nine months ended September 30, 2006, we excluded 823 thousand and 606 thousand stock options, respectively, from our calculation of common stock equivalents because their exercise prices exceeded the market price of our stock, which would have been anti-dilutive.  For the three- and nine-month periods ended September 30, 2005, respectively, 63 thousand and 14 thousand such stock options were excluded.

Page 7 of 22


ITEM 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations
 
GENERAL
The following management's discussion and analysis describes the principal factors affecting our results of operations, liquidity, and capital resources. This discussion should be read in conjunction with the accompanying unaudited consolidated condensed financial statements and our Annual Report on Form 10-K for the year ended December 31, 2005, which include additional information about our business, our significant accounting policies and other relevant information that underlies our financial results. Without limiting the foregoing, the “Overview” and “Critical Accounting Policies and Estimates” sections under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our last Annual Report on Form 10-K should be read in conjunction with this Quarterly Report.
During the first quarter of 2006, the Audit Committee of our Board of Directors initiated an investigation into alleged improprieties involving certain of our billing practices and other operational matters.  The investigation was completed during the second quarter of 2006.  No adjustment to our previously reported financial results was indicated by the investigation, but the investigation did result in the realignment of certain billing and planning processes.  Such processes had previously been aligned under the supervision of our former Chief Operating Officer.  In order to improve our internal controls over our billing and planning activities, those activities were realigned during the second quarter of 2006 to be under the supervision of the Chief Financial Officer. 
Our operating expenses for 2006 include approximately $2.1 million in professional fees and other expenses that we incurred relative to the investigation.  We anticipate no further significant expenses associated with the investigation will be incurred during the final three months of 2006.
The professional fees we incurred relating to the investigation accounted for approximately 20% of the decrease in our pre-tax income during the first nine months of 2006, as compared to the same period of 2005.  Other factors that impacted our results are summarized in the remaining parts of this discussion.
During the second quarter of 2005, we sold a life insurance investment.  In connection with the sale, we received cash of $6.1 million and realized a gain of $3.8 million.  No such transaction occurred during the first nine months of 2006.  The absence of such a gain from our 2005 results represents 35% of the $10.6 million decline in our pre-tax income between the nine-month periods ended September 30, 2005 and 2006.
During 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, which owns 20% of AMA, changed its name to FX Holdings, Inc. ("FX").  Because FFE 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.  As of September 30, 2005 and 2006, the total assets of AirPro, which are included in our consolidated condensed financial statements, were $3.2 million and $3.7 million, respectively.
A second variable interest entity that we do not own but which is consolidated into these financial statements until September 30, 2006, is a family partnership from which we leased 68 tractors.  The family partnership is under the control of our Chairman and Chief Executive Officer. Our Senior Vice President and Chief Operating Officer also owns an interest in the family partnership. Effective September 30, 2006, we terminated these leases and thereafter the entity is no longer a variable interest entity. A more detailed discussion of that transaction is summarized in Note 4 to the accompanying condensed consolidated financial statements.
Our Internet address is www.ffex.net. All of our filings with the Securities and Exchange Commission ("SEC") are available free of charge through our website as soon as reasonably practicable after we file them with the SEC.

RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2006 and 2005

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 truckload and less-than-truckload (“LTL”) 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” LTL shipments, truckload temperature-controlled shipments and truckload non-refrigerated, or “dry”, shipments. Our freight brokerage provides freight transportation services to customers using third-party trucking companies.
Our dedicated fleet operation consists of tractors and trailers that haul freight for a specific customer only. Dedicated fleet revenue is asset based. Customers typically pay us weekly for trucks assigned to their service.
Income from equipment rental represents amounts we charge to independent contractors for the use of trucks which we own and lease to the owner-operator, as well as income for special-use equipment rentals. Since the third quarter of 2005, we have continued to provide trailers in the aftermaths of Hurricanes Katrina and Rita. During the first nine months of 2006, revenue from the rental of refrigerated trailers being used by governmental agencies in ongoing hurricane relief efforts was $2.2 million.  There was no such revenue during the comparable nine months of 2005.
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 add fuel surcharges in an effort to recover this increase from our customers.

Page 8 of 22


The following table summarizes and compares the significant components of freight revenue for each of the three- and nine-month periods ended September 30, 2006 and 2005:  
 
 
  
Three Months
  
Nine Months
  
Freight revenue from (a):
  
 2006
  
 2005(d)
  
 2006
  
 2005(d)
  
Temperature-controlled fleet
  
$
37.7
  
$
46.0
  
$
121.6
  
$
134.6
  
Dry-freight fleet
    
19.7
    
21.9
    
60.5
    
66.0
  
Total truckload linehaul services
    
57.4
    
67.9
    
182.1
    
200.6
  
Dedicated fleets
    
5.2
    
7.7
    
16.5
    
18.7
  
Total full-truckload
    
62.6
    
75.6
    
198.6
    
219.3
  
Less-than truckload linehaul services
    
34.0
    
35.5
    
97.1
    
95.6
  
Fuel surcharges
    
22.2
    
18.7
    
59.4
    
43.5
  
Freight brokerage
    
3.7
    
3.8
    
9.7
    
11.6
  
Equipment rental  
    
1.6
    
1.5
    
6.5
    
4.3
  
Total freight revenue
  
$
124.1
  
$
135.1
  
$
371.3
  
$
374.3
  
Freight operating expenses(a)
  
$
118.8
  
$
126.5
  
$
359.0
  
$
354.0
  
Income from freight operations (a)
  
$
5.3
  
$
8.6
  
$
12.3
  
$
20.3
  
Freight operating ratio (b)
    
95.7
%
  
93.6
%
  
96.7
%
  
94.6
%
Total full-truckload revenue
  
$
62.6
  
$
75.6
  
$
198.6
  
$
219.3
  
Less-than-truckload linehaul revenue
    
34.0
    
35.5
    
97.1
    
95.6
  
Total linehaul and dedicated fleet revenue 
  
$
96.6
  
$
111.1
  
$
295.7
  
$
314.9
  
Weekly average trucks in service
    
2,175
    
2,281
    
2,239
    
2,282
  
Revenue per truck per week (c)
  
$
3,379
  
$
3,706
  
$
3,386
  
$
3,537
  
 
Computational notes:
(a)
Revenue and expense amounts are stated in millions of dollars.  The amounts presented in the table may not agree to the amounts shown in the accompanying statements of income due to rounding.
(b)
Freight operating expenses divided by total freight revenue.
(c)
Average daily revenue times seven, divided by weekly average trucks in service.
(d)
Due to changes in the way we tabulated the underlying data for 2006 and in order to provide a valid comparison to the 2006 statistical data, amounts reported for 2005 may differ from amounts previously reported.
  

Page 9 of 22


Excluding fuel surcharges, revenue from our freight operations decreased by $14.5 million (12.5%) and $18.9 million (5.7%) between the three- and nine-month periods ended September 30, 2005 and 2006, respectively.  Dedicated fleet revenue decreased by $2.2 million (11.8%) between the nine-month periods. The following table summarizes and compares our revenue-related data from full-truckload and LTL linehaul services for each of the three- and nine-month periods ended September 30, 2006 and 2005:

 
  
Three Months 
  
Nine Months 
  
Truckload
  
2006
  
2005(j)
  
2006
  
2005(j)
  
    Total linehaul miles (a)
    
42.5
    
48.8
    
136.1
    
147.2
  
    Loaded miles (a)
    
38.5
    
43.7
    
123.2
    
132.3
  
    Empty mile ratio (b)
    
9.4
%
  
10.5
%
  
9.5
%
  
10.1
%
    Linehaul revenue per total mile (c)
  
$
1.35
  
$
1.39
  
$
1.34
  
$
1.36
  
    Linehaul revenue per loaded mile (d)
  
$
1.49
  
$
1.55
  
$
1.48
  
$
1.52
  
    Linehaul shipments (e)
    
40.8
    
46.0
    
128.9
    
139.5
  
    Loaded miles per shipment (f)
    
944
    
950
    
956
    
948
  
Less-than-truckload 
                          
    Hundredweight (e)
    
2,172
    
2,352
    
6,315
    
6,502
  
    Shipments (e)
    
69.8
    
75.3
    
201.9
    
209.4
  
    Linehaul revenue per hundredweight (g)
  
$
15.65
  
$
15.09
  
$
15.38
  
$
14.70
  
    Linehaul revenue per shipment (h)
  
$
487
  
$
471
  
$
481
  
$
457
  
    Average weight per shipment (i)
    
3,112
    
3,124
    
3,128
    
3,105
  
 
Computational notes:
(a)
In millions.
(b)
Total linehaul miles minus loaded miles, divided by total linehaul miles.
(c)
Revenue from linehaul services divided by total linehaul miles.
(d)
Revenue from linehaul services divided by loaded miles.
(e)
In thousands.
(f)
Total loaded miles divided by number of linehaul shipments.
(g)
LTL revenue divided by hundredweight.
(h)
LTL revenue divided by number of shipments.
(i)
LTL hundredweight times one hundred divided by number of shipments. 
(j)
Due to changes in the way we tabulated the underlying data for 2006 and in order to provide a valid comparison to the 2006 statistical data, amounts reported for 2005 may differ from amounts previously reported.
 
Full-truckload revenue declined by $13.0 million (17.2%) and $20.7 million (9.4%) during the three- and nine-month periods ended September 30, 2006, as compared to the same periods of 2005. Linehaul revenue per loaded mile declined by 3.9% to $1.49 and by 2.6%, to $1.48 for the 2006 three- and nine-month periods, respectively, as compared to the same periods of 2005. During the nine-month period ended September 30, 2006 as compared to the same period of 2005, the average full truckload length of haul improved to 956 miles (0.8%), helping to offset the reduction in revenue per loaded mile, and our empty mile ratio improved from 10.1% to 9.5%. The number of full-truckload linehaul shipments we transported during the third quarter of 2006 declined 11.3% to 40,800 shipments, as compared to 46,000 during the year-ago quarter.
The loss of 84 owner-operator-provided tractors between September 30, 2005 and September 30, 2006 has impaired our ability to expand our full-truckload linehaul service. Despite the redeployment of trucks from our linehaul service to dedicated fleets, which negatively impacted full-truckload linehaul revenue during the first nine months of 2006, we also experienced an 11.8% decrease in dedicated fleet revenue between the nine-month periods. Of the year-to-date decline in dedicated revenue, 73% was from the disaster-related revenue earned in 2005, but not in 2006. We have recently designated an employee to focus on the development of our dedicated service offerings.
Included in our truckload revenue (and LTL revenue to a lesser extent) is revenue generated from our intermodal operations. Early in the third quarter of 2006, we also expanded our intermodal initiative, and have seen a 5% increase in intermodal revenue, comparing the third quarter of 2006 to the same period of 2005. This initiative provides an opportunity for revenue growth without depending on either the limited availability of owner-operators or further investments in company-operated fleets.
Since the third quarter of 2005, we have redeployed certain tractors and trailers from our full-truckload linehaul fleets to provide relief services in the aftermaths of Hurricanes Katrina and Rita. Relief efforts generated revenue of approximately $0.5 million during the third quarter of 2006 and $2.5 million for the nine months ended September 30, 2006, compared to $1.9 million for both the quarter and the nine months year-to-date of 2005.
 Freight brokerage revenue declined by $1.9 million (16.4%) between the nine-month periods ended September 30, 2005 and 2006, but did not vary significantly when comparing the third quarters of 2006 and 2005. Our freight brokerage provides transportation services to our customers by using equipment belonging to third-party trucking companies. Payments to these trucking companies are negotiated for each load and are recorded as purchased transportation expense.
In our freight brokerage operation, we employ specialists knowledgeable in our freight network. During the third quarter of 2005, we made personnel changes in our freight brokerage operation and continue to explore ways to improve the level and quality of our freight brokerage revenue.
Page 10 of 22
Our linehaul rates are typically related to providing service between an origin and a destination. Often, it is necessary for trucks to run empty, or “deadhead” long distances from the city of their last delivery to the city of their next load. Historically, the expenses we incurred for deadhead miles could not be passed through to the customer. Our trucks currently average between five and seven miles per gallon. Between the third quarter of 2004 and the third quarter of 2005, the average per-gallon price we incurred for fuel rose by 40%, to $2.42.  Due to this rapid increase, we have determined that we should no longer bear 100% of the costs of deadhead miles, and last year many of our customers agreed to absorb at least some of our incremental deadhead expense. Demand for trucking services in general has declined during 2006 from levels a year ago. Due to this shift from a sellers market to a buyers market in the trucking industry, fewer shippers are compensating us for deadheads during 2006 than did so last year.
LTL linehaul revenue decreased by $1.5 million (4.2%) during the three months ended September 30, 2006, but improved by $1.5 million (1.6%) during the nine months ended September 30, 2006, as compared to the same periods of 2005, respectively. The number of LTL shipments transported dropped by 7.3% between the third quarters of 2005 and 2006, the average weight of the shipments transported decreased by 0.4% and average linehaul revenue per LTL shipment improved by 3.4%, to $487.  Corresponding year-to-date comparisons between 2006 and 2005 show a 3.6% drop in the number of shipments, an increase of 0.7% in the weight per shipment, and an improvement in the revenue per shipment of 5.3%, to $481.
The following table summarizes and compares the makeup of our fleets between truckload and LTL and between company-provided tractors and tractors provided by owner-operators as of September 30, 2006 and 2005:
 
  
 2006
  
 2005
  
Truckload tractors
            
Company-provided
    
1,477
    
1,526
  
Owner-operator
    
456
    
536
  
Total truckload
    
1,933
    
2,062
  
LTL tractors
              
Company-provided
    
110
    
105
  
Owner-operator
    
143
    
147
  
Total LTL
    
253
    
252
  
 
              
Total company-provided
    
1,587
    
1,631
  
Total owner-operator
    
599
    
683
  
Tractors in service
    
2,186
    
2,314
  
Trailers in service
    
3,940
    
4,378
  
 
Recent high operating expenses in the trucking industry, particularly for maintenance and fuel, have contributed to a decline in the number of independent contractors providing equipment to the industry. Our ability to mitigate this industry-wide trend by expanding our company-operated fleets has been constrained by a lack of drivers qualified to operate the equipment.

Freight Operating Expenses: The following table sets forth, as a percentage of freight revenue, certain major operating expenses for each of the three- and nine-month periods ended September 30, 2006 and 2005:

 
  
Three Months
  
Nine Months
  
 
  
2006
  
2005
  
2006
  
2005
  
Salaries, wages and related expenses
    
24.8
%
  
25.1
%
  
26.3
%
  
26.0
%
Purchased transportation
    
24.4
    
23.8
    
23.8
    
24.9
  
Fuel
    
18.9
    
16.9
    
18.3
    
15.7
  
Supplies and expenses
    
12.5
    
12.6
    
12.0
    
12.8
  
Revenue equipment rent and depreciation
    
10.2
    
9.6
    
10.4
    
10.2
  
Claims and insurance
    
3.7
    
3.2
    
3.7
    
2.9
  
Other
    
1.2
    
2.4
    
2.2
    
2.1
  
Total freight operating expenses
    
95.7
%
  
93.6
%
  
96.7
%
  
94.6
%
 
Page 11 of 22
     Salaries, Wages and Related Expenses: Salaries, wages and related expenses decreased by $3.1 million (9.1%) and increased by $536 thousand (0.6%), respectively, during the three- and nine-month periods ended September 30, 2006 as compared to the same periods of 2005. The following table summarizes and compares the major components of these expenses for each of the three- and nine-month periods ended September 30, 2006 and 2005 (in millions):
 
 
  
Three Months
  
Nine Months
  
Amount of Salaries, Wages and Related Expenses Incurred for
  
2006
  
 2005
  
 2006
  
 2005
  
Driver salaries and per diem expenses
  
$
18.7
  
$
19.0
  
$
57.2
  
$
55.2
  
Non-driver salaries
    
9.2
    
10.7
    
28.4
    
28.6
  
Payroll taxes
    
1.9
    
2.1
    
6.4
    
6.5
  
Work-related injuries
    
(0.1
)
  
0.6
    
1.9
    
2.7
  
Health insurance and other
    
1.1
    
1.5
    
3.8
    
4.2
  
 
  
$
30.8
  
$
33.9
  
$
97.7
  
$
97.2
  
 
 
Driver salaries and per diem expenses fell by $0.3 million (1.6%) and rose by $2.0 million (3.6%) between the three- and nine-month periods ended September 30, 2005 and 2006, respectively.  Employee-drivers are typically paid wages and per diem expense allowances calculated on a per-linehaul-mile basis while employee-drivers in our dedicated fleets are typically paid by the day.  In April of 2006, we increased our linehaul driver per diem rate-per-mile by $0.02 in an effort to improve our ability to attract and retain qualified employee-drivers.  Driver turnover has improved from 100% and 95% for the three- and twelve-month periods ended September 30, 2005 to 84% and 87% for the three- and twelve-month periods ended September 30, 2006.  The 2006 increase in driver pay is primarily due to the higher proportion of our freight handled by company drivers rather than owner-operators and the per diem rate increase.
Between the three- and nine-month periods ended September 30, 2005 and 2006, non-driver salaries and wages decreased $1.5 million (14.0%) and $200 thousand (0.7%), respectively.
We sponsor a 401(k) wrap plan which enables certain highly-compensated 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 condensed financial statements. As of September 30, 2005 and 2006, respectively, such assets included approximately 141 thousand and 119 thousand shares of our common stock, which are classified as treasury stock in our consolidated condensed balance sheets.
We are required to value the assets and liabilities of the wrap plan at market value on our periodic balance sheets, but accounting principles generally accepted in the United States preclude us 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 causes upward pressure on non-driver salaries and wage expense. The opposite is true when the market value of our common stock falls. During the first nine months of 2005 and 2006, respectively, the per-share market price of our stock declined by $2.41 and $3.44. That resulted in reductions of approximately $277 thousand in salaries and wage expense for the first nine months of 2005 and $435 thousand for the same period of 2006. Also, during the nine-month periods ended September 30, 2005 and 2006, respectively, our executive bonus and phantom stock plan was partially denominated in approximately 171 thousand and 166 thousand “phantom” shares of our stock, the liability for which is also determined by the value of our stock. That resulted in additional $411 thousand and $570 thousand reductions, respectively, in non-driver salaries and wage expense during the first nine months of 2005 and 2006.
Because non-driver salaries and wage expense was reduced by approximately $688 thousand during the first nine months of 2005 as compared to approximately $1.0 million during the comparable period of 2006, the net effect of stock market fluctuations in the market value of our common stock was that such expenses during the first nine months of 2006 were approximately $317 thousand less than such expenses were during the comparable nine months of 2005.
Salaries and wage expense associated with work-related injuries decreased by $700 thousand (116.7%) and by $800 thousand (29.6%) for the three-and nine-month periods ended September 30, 2005 and 2006. Such expenses principally relate to injuries sustained by employees during the course of their employment. Large fluctuations can be caused by the occurrence of just one serious injury in a quarter compared to a quarter with lesser experience in the frequency and severity of injuries or the settlement of claims for less money than the initial analysis had indicated. 
Expenses associated with employee health insurance and other salaries, wages, and related expense decreased by $400 thousand (26.7%) and by $400 thousand (9.5%) for the three- and nine-month periods ended September 30, 2005 and 2006. Expenses associated with payroll taxes did not change appreciably between the three- and nine-month periods ended September 30, 2005 and 2006.
 
Purchased Transportation: Purchased transportation expense declined by $1.9 million (5.8%) and $5.1 million (5.5%) during the three- and nine-month periods ended September 30, 2006 as compared to the comparable periods of 2005. The following table summarizes and compares the major components of our purchased transportation expense for each of those periods by type of service (in millions):
 
 
  
Three Months
  
Nine Months
  
Amount of Purchased Transportation Expense Incurred for
  
2006
  
2005
  
2006
  
2005
  
Linehaul service
  
$
22.9
  
$
24.8
  
$
67.8
  
$
73.6
  
Fuel adjustments
    
4.4
    
4.2
    
12.4
    
10.2
  
Freight brokerage and other
    
3.0
    
3.2
    
8.0
    
9.6
  
 
  
$
30.3
  
$
32.2
  
$
88.2
  
$
93.4
  
 
Purchased transportation for linehaul service primarily represents payments to owner-operators in exchange for our use of their vehicles to transport shipments. The  $5.2 million decrease in such expenses during the first nine months of 2006, as compared to the same period of 2005, is primarily a result of a decrease in the average number of owner-operator-provided tractors in our fleets, from 717 during the nine-month period ended September 30, 2005 to 640 during the comparable period of 2006.
Purchased transportation for fuel adjustments represents incremental payments to owner-operators to compensate them for currently high fuel costs. Owner-operators are responsible for all expenses associated with the operation of their tractors, including labor, maintenance and fuel. The per-gallon price of fuel we incurred during the nine months ended September 30, 2006 was 21% more than the same period of 2005. 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. When retail fuel prices rise, we charge our customers incremental fuel adjustment charges to defray such higher costs. To the extent that shipments are transported by owner-operators, we pass the amount of these fuel surcharges through to the owner-operators, in order to offset their incremental fuel expense.
Purchased transportation expenses associated with our freight brokerage and other service offerings declined by $1.6 million between the 2005 and 2006 nine-month periods. Nearly the entire year-to-date decline occurred during the three months ended March 31, 2006 as compared to the same period of 2005. Freight brokerage purchased transportation expense is highly correlated to freight brokerage revenue, which declined by $1.9 million between the nine-month periods.
Intermodal purchased transportation (included in “linehaul service” in the above table) declined 13% when comparing the third quarter of 2006 to the same period of 2005, in spite of a 5% increase in intermodal revenue. Management hired to develop our intermodal revenue growth initiative has been successful in negotiating directly with the railroads, avoiding the cost of fees associated with third-party brokers, thus reducing our costs while increasing our revenue.

Page 12 of 22
Fuel: Fuel expense increased by $637 thousand (2.8%) and $9.3 million (15.8%), respectively, during the three- and nine-month periods ended September 30, 2006 as compared to the same periods of 2005. The following table summarizes and compares the relationship between fuel expense and total linehaul and dedicated fleet revenue during each of the three- and nine-month periods ended September 30, 2006 and 2005:
 
 
  
Three Months    
  
Nine Months   
  
 
  
2006
  
2005
  
2006
  
2005
  
Total linehaul and dedicated fleet revenue
  
$
96.6
  
$
111.1
  
$
295.7
  
$
314.9
  
Fuel expense
    
23.5
    
22.9
    
68.0
    
58.7
  
Fuel expense as a percent of total linehaul
and dedicated fleet revenue
    
24.3
%
  
20.6
%
  
23.0
%
  
18.6
%
 
The average price per gallon of fuel we paid during the first nine months of 2006 was 21% more than during the comparable year-ago period. Fuel adjustment charges do not always fully compensate us or our independent contractors for increased fuel costs. Accordingly, fuel price volatility can impact 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, most of those rates automatically fluctuate as diesel fuel prices rise and fall.
Factors that might 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, so 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 prior 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.
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 our 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. Also, 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, but to the extent such fuel adjustment charges are passed through by us to owner-operators, fuel price volatility may impact purchased transportation expenses. Furthermore, our fuel expenses are impacted by the loss of owner-operators, so that as more of our freight volume is moved by company equipment, the related cost of fuel is transferred to fuel expense from purchased transportation expense.
New federal environmental regulations over diesel engine exhaust cleanliness are slated to come into effect during the first quarter of 2007. Tractors provided under the new regulations will be powered by engines with more extensive exhaust filtering systems. The new engines will also be designed to more completely burn diesel fuel, thereby reducing the level of particulates such engines discharge into the air. We expect to begin using tractors with the new engines during the latter half of 2007.
Beginning in October, 2006, the new regulations also require new standards in the composition of diesel fuel. New ultra-low sulfur diesel ("USLD") fuel will be designed to contain fewer particulates, and is expected to be as much as ten cents per gallon more expensive than the fuel we presently use. USLD fuel is also expected to result in lower miles per gallon (“mpg”) than the fuel that is presently in use. Had the USLD fuel been in use in all of our company-operated tractors and trailer refrigeration units during the first nine months of 2006, had such fuel been ten cents per gallon more than what we incurred during that period and had our mpg dropped by .5 mpg, our fuel expense would have been about $8.5 million higher than what we incurred during the nine months ended September 30, 2006. Consequently, we have planned our tractor orders to maximize delivery of the 2006-model tractors and will not have to accept delivery of the 2007-model tractors until the fall of 2007. That plan will delay the impact of the mpg decline, but will not avoid the increase in fuel prices.  Approximately one-third of the aforementioned $8.5 million is fuel-price related. Our tractor fleet should be fully converted to the new engines by the end of 2011. We intend to continue to pass our increases in fuel expenses to our customers but there can be no assurance that we will succeed in those efforts.  

   Supplies and Expenses: Supplies and expenses decreased by $1.5 million (9.1%) and $3.3 million  (6.9%), respectively, between the three- and nine-month periods ended September 30, 2005 and 2006. The following table summarizes and compares the major components of supplies and expenses for each of the three- and nine-month periods ended September 30, 2005 and 2006 (in millions):
 
 
  
Three Months
  
Nine Months
  
Amount of Supplies and Expenses Incurred for
  
2006 
  
2005 
  
2006 
  
2005 
  
Fleet repairs and maintenance
  
$
5.2
  
$
6.0
  
$
14.5
  
$
17.9
  
Freight handling
    
2.9
    
3.3
    
8.4
    
8.7
  
Driver travel expenses
    
0.8
    
0.8
    
2.4
    
2.2
  
Tires
    
1.4
    
1.7
    
4.6
    
4.4
  
Terminal and warehouse expenses
    
1.6
    
1.7
    
4.5
    
5.3
  
Driver recruiting
    
1.5
    
1.2
    
4.1
    
3.2
  
Other
    
2.0
    
2.3
    
6.2
    
6.4
  
 
  
$
15.4
  
$
17.0
  
$
44.7
  
$
48.1
  
  
Fleet repairs and maintenance declined by $0.8 million (13.3%) during the third quarter of 2006 and by $3.4 million (19.0%) for the first nine months of 2006, as compared to the same periods of 2005. By way of comparison, the $17.9 million we incurred for such activities in the first nine months of 2005 was 32.6% more than during the comparable period of 2004. Prior to 2005, we had been replacing our tractors on a 42- to 48-month cycle. Late in 2005, we began to shorten the cycle to 42 months. Older tractors are more costly to maintain and most repairs to newer tractors are covered by manufacturers’ warranties. We plan to continue phasing out older tractors during the remainder of 2006.
Part of the increased maintenance expenses we incurred during 2005 was related to a group of our assets that had experienced an unusually high failure rate. When such failures occur, we incur expenses for repairs, and we also experience additional expenses for downtime and customer service. During the second quarter of 2006, we reached an agreement with the vendor who provided the assets to us.  Pursuant to the agreement, we received assets valued at approximately $0.5 million in September of 2006, which we had credited against fleet repairs and maintenance expense during the second quarter of 2006.
Driver recruiting expenses increased by $0.9 million between the nine-month periods ended September 30, 2006 and 2005. The lack of availability of qualified truck drivers has been a problem for our industry for many years, and trucking companies usually recruit drivers from other trucking companies. Also, inexperienced driver candidates often must be properly trained before qualifying to be “solo” drivers. As qualified drivers have become harder to find, we have increased the amount we spend to advertise and solicit for such drivers. Improved retention of drivers currently in service is expected to mitigate the need to recruit drivers to replace those who leave. In order to improve such retention, we implemented a pay-rate increase for our employee-drivers in April 2006. We will continue to explore and implement other strategies in an effort to reduce recruiting costs through improved retention of employee-drivers currently in service. We have seen improvement in our driver turnover, from 100% for the quarter ended September 30, 2005 to 84% for the quarter ended September 30, 2006.
Page 13 of 22
 
Claims and Insurance: Claims and insurance expenses increased by $286 thousand  (6.7%) and $2.8 million (25.4%) for the three- and nine-month periods ended September 30, 2006, respectively, as compared to the same periods of 2005. The following table summarizes and compares the major components of claims and insurance expenses for each of the three- and nine-month periods ended September 30, 2006 and 2005 (in millions):
 
 
  
Three Months
  
Nine Months
  
Amount of Claims and Insurance Expenses Incurred for
  
2006 
  
2005 
  
2006 
  
2005 
  
Liability
  
$
3.0
  
$
3.4
  
$
9.5
  
$
8.5
  
Cargo
    
1.2
    
0.4
    
2.6
    
1.1
  
Physical damage
    
0.3
    
0.5
    
1.5
    
1.3
  
 
  
$
4.5
  
$
4.3
  
$
13.6
  
$
10.9
  

Claims and insurance expenses can vary significantly from year to year. When an incident occurs we reserve for the incident’s estimated outcome. The number and amount of open claims is significant. We have accrued for our estimated costs related to all open claims. 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. As additional information becomes available, adjustments are made.
Under our current policies for liability incidents, we retain all of the risk for losses up to $3 million per incident. Between $3 million and $10 million, we retain 25% of the risk. We are fully insured for losses for each occurrence between $10 million and $25 million. Our existing policies for liability insurance will expire on June 1, 2007. 
The changes in the amounts of liability and physical damage expense we incurred between the first nine months of 2006 and 2005 resulted from differences in the number and severity of incidents which occurred during the periods involved. During 2006, we have improved our manner of accounting for cargo claims by establishing procedures to ensure that losses are timely identified and communicated to management. Based on that, and historical trends, we are better able to estimate the outcomes of known losses and also estimate what our losses for events that have been incurred but not reported.
Accrued claims and liabilities on our balance sheets include 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. It is probable that the estimates we have accrued at any point in time will change in the future.
 
Gains on Disposition of Equipment:  Gains on the disposition of equipment were $2.6 million during the first nine months of 2006, as compared to $3.6 million during the same period of 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.
 
Miscellaneous Expenses: Miscellaneous operating expenses decreased by $1.8 million (92.1%) and $502 thousand (10.4%) for the three- and nine-month periods ended September 30, 2006, respectively, as compared to the same periods of 2005. Miscellaneous expenses include fees for routine legal services, auditing fees, rentals associated with freight terminals, costs associated with compliance with the Sarbanes-Oxley Act of 2002 and our provisions for uncollectible accounts receivable. The largest component of miscellaneous expenses for the nine months ended September 30, 2006 was approximately $2.1 million for professional fees associated with the investigation commissioned by the Audit Committee of the Board of Directors, which was concluded during the second quarter of 2006.  Reductions of $0.9 million in professional fees that were unrelated to the investigation served to mitigate the expense of the investigation.
When comparing nine months year-to-date 2006 to the same period of 2005, the provision for uncollectible accounts receivable was down $1.1 million.
During the three months ended September 30, 2006, we recorded, as a reduction of miscellaneous expense, an approximate $500 thousand recovery of professional fees we had earned from providing certain materials to a plaintiff in a legal action to which we were not a party. We developed the material in pursuing a claim against equipment providers during 2003-2005. We settled our claim during 2005, and incurred significant legal fees in connection with that action. We have accounted for our $500 thousand recovery during 2006 as a reduction in the legal fees we incurred in prior years.

Operating Income: Income from operations decreased by $3.5 million (39.7%) and $8.4 million (41.0%), respectively, between the three- and nine-month periods ended September 30, 2005 and 2006. The following table summarizes and compares our operating results from our freight and non-freight operations for each of the three- and nine-month periods ended September 30, 2006 and 2005 (in millions):
 
 
  
Three Months    
  
Nine Months   
  
Operating Income (Loss) from
  
2006
  
2005
  
2006
  
2005
  
Freight operations
  
$
5.4
  
$
8.6
  
$
12.2
  
$
20.3
  
Non-freight operations
    
(0.1
)
  
0.2
    
(0.1
)
  
0.2
  
 
  
$
5.3
  
$
8.8
  
$
12.1
  
$
20.5
  

During 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, which owns 20% of AMA, changed its name to FX Holdings, Inc. ("FX"). Because FFE 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.
 

Page 14 of 22


 Interest and Other: The following table summarizes and compares our interest and other income for each of the three- and nine-month periods ended September 30, 2006 and 2005 (in thousands):

 
  
Three Months
  
Nine Months
  
Amount of Interest and Other Expense (Income) from
  
2006
  
2005
  
2006
  
2005
  
Interest expense
  
$
105
  
$
92
  
$
259
  
$
278
  
Interest income
    
(56
)
  
(13
)
  
(392
)
  
(195
)
Equity in earnings of former subsidiaries
    
(226
)
  
(302
)
  
(478
)
  
(439
)
Life insurance and other
    
221
    
707
    
29
    
(2,460
)
 
  
$
44
  
$
484
  
$
(582
)
$
(2,816
)
 
During April of 2005, we sold a 50% interest in one of our life insurance investments.  The book value at March 31, 2005 of the asset we sold in April was approximately $2.3 million.  As consideration for the sale of the policy, we received $6.1 million in cash.  The resulting non-operating gain of $3.8 million is reflected above in "Life insurance and other" for the nine months of 2005.
 
Pre-Tax and Net Income: Pre-tax income declined by $3.1 million and by $10.6 million between the three- and nine-month periods ended September 30, 2005 and 2006, respectively. Net income decreased by $2.1 million (42.5%) and by $7.2 million (50.9%) between the three- and nine-month periods ended September 30, 2006 and 2005, respectively.
Nondeductible per diem expenses from employee-drivers have increased our effective tax rate (income tax provision divided by pre-tax income) for fiscal 2006 by almost 10 percentage points over the statutory federal rate of 35%.  As a result of the nondeductible expenses and state income taxes, the effective tax rate for the nine-month period ended September 30, 2006 was 45.5%, which includes 2% for state income tax, net of federal benefit. Our effective tax rate during the first nine months of 2005 was 39.7%.  The principal factor that contributed to the lower rate in 2005 was the presence of a nontaxable $3.8 million gain from the sale of a life insurance investment. 
As of September 30, 2006, we continue to hold a life insurance investment of a similar size and type as we sold last year. We have not yet decided whether to sell our remaining investment during 2006. If we do, and if we do not incur a taxable loss for the remainder of the year, our effective tax rate for 2006 will be lower than the 45.5% we incurred during the first nine months of 2006.
Our remaining life insurance investment is carried at its cash surrender value of $2.0 million and is included in “Other assets” in our balance sheet.
 
LIQUIDITY AND CAPITAL RESOURCES
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 or reduce any 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 than 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 our busiest time of year.
As of September 30, 2006, our working capital (current assets minus current liabilities) was $33.9 million, as compared to $27.8 million as of September 30, 2005. Accounts receivable decreased by $6.0 million (9.5%) between September 30, 2005 and 2006, primarily due to an improvement of 2.1 days in our days sales outstanding.
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.
We had $1.0 million in long-term debt as of September 30, 2006, and the unused portion of the company's $50.0 million revolving credit facility was $43.9 million. The credit agreement expires on June 1, 2010.
We believe that the funds available to us from our working capital, future operating cash flows and our credit and leasing facilities will be sufficient to finance our operation during the next twelve months.
Cash Flows: During the nine-month period ended September 30, 2006, cash provided by operating activities was $14.1 million as compared to $15.5 million during the same period of 2005.  Operating cash flows were positively impacted during the first nine months of 2006 as compared to the same period of 2005 by, among other things, changes in accounts receivable and accounts payable. During 2006, the most significant of these was the collection of approximately $10 million of accounts receivable for hurricane-relief-related revenue generated in the fourth quarter of 2005.  The impact of these positive factors was negatively impacted by changes in accrued payroll, income taxes currently due, other current assets and lower net income.
Cash used in investing activities increased from $8.8 million during the first nine months of 2005 to $18.3 million during the comparable period of 2006. Increased expenditures for property and equipment net of proceeds from the sale of retired assets accounted for 33% of this change.
Cash used in financing activities increased from $2.0 million for the nine months ended September 30, 2005 to $4.4 million for the nine months ended September 30, 2006. In the third quarter of 2006, and subsequent to approval from the Board of Directors, the company purchased 667,900 shares of our common stock on the open market and 416,700 shares of common stock from our former Executive VP and Chief Operating Officer as a simultaneous transaction with his exercise of the same number of options. These stock transactions required the use of $8.9 million of cash during the three and nine months ended September 30, 2006, compared to $3.2 million in similar transactions during the same nine-month period of 2005. Other significant changes in the use of cash in financing activities was the net borrowing of $1.0 million during the nine-month period of 2006 compared to the net repayment of borrowings of $2.0 million during the same time period of 2005. Cash flows from financing activities included $1.2 million of an income tax benefit related to the exercise of stock options in 2006.
We terminated our leases with the Stubbs Lessors (see Note 4 to the accompanying consolidated condensed financial statements) effective September 30, 2006. All of the terms and conditions of the termination were definitively agreed to between us and the Stubbs Lessors prior to September 30, 2006, but the payments we agreed to make in connection with the termination were not made until October 2, 2006.
We accounted for the termination in our consolidated condensed financial statements as of September 30, 2006. Accordingly, accounts payable as of that date included all of the payments due to the Stubbs Lessors in connection with the termination of the leases. Of the total we paid, $2.6 million was for the portion of the payments due that were for assets that remained in service after the termination. Because the assets we purchased from the Stubbs Lessors were previously included in our consolidated condensed financial statements, that amount was not accounted for as a capital expenditure in our statement of cash flows for the nine months ended September 30, 2006.
Also related to the termination of the leases with the Stubbs Lessors and as discussed at Note 4 to the accompanying consolidated condensed financial statements, $450 thousand of the amount we paid during October 2006 was accounted for as dividends during the three months ended September 30, 2006. Of that amount $275 thousand was in the form of a cash payment that was in fact a termination fee.
The remainder of the $450 thousand represented the excess of the fair market value of the tractors we purchased from the Stubbs Lessors over the amount at which one Stubbs Lessor (a family partnership) had carried the assets in its financial statements. Because the family partnership was included in our consolidated condensed financial statements until September 30, 2006, we are precluded from increasing the net book value of those tractors to fair market value, because GAAP requires that such assets be carried at the net book value (historical cost minus accumulated depreciation) for the entire consolidated entity. Accordingly, the $175 thousand by which fair market value exceeded net book value was accounted for as a dividend in our consolidated condensed financial statements as of September 30, 2006, and payment was made on October 2, 2006.
As discussed at Note 4 to the accompanying consolidated condensed financial statements, the agreement to terminate the leases between us and the Stubbs Lessors was an event that resulted in the family partnership no longer being included in our consolidated condensed financial statements as of September 30, 2006. Accordingly, all of the amounts we paid to the Stubbs Lessors on October 2, 2006 are classified as accounts payable as of September 30, 2006.
The total of depreciation and amortization expense for the nine-month periods ended September 30, 2005 and 2006 was $20.6 million and $19.3 million, respectively.
 

Page 15 of 22


Obligations and Commitments:  The 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 (1)
  
2007
  
2008
  
2009
  
2010
  
After 2010
  
Long-term debt and letters of credit
  
$
6.1
   $ --  
$
6.1
   $ --   $ --   $  --   $ --  
Purchase obligations
    
37.5
    
37.5
    
--
    
--
    
--
    
--
    
--
  
Operating leases for
                                            
Rentals
   
76.9
    
6.8
    
23.0
    
19.2
    
13.3
    
7.2
    
7.4
  
Residual guarantees
    
4.5
    
--
    
1.1
    
1.0
    
1.1
    
1.3
    
--
  
Accounts payable
    
30.2
    
30.2
    
--
    
--
    
--
    
--
    
--
  
Accrued payroll
    
5.9
    
5.9
    
--
    
--
    
--
    
--
    
--
  
 
    
161.1
  
$
80.4
  
$
30.2
  
$
20.2
  
$
14.4
  
$
8.5
  
$
7.4
  
Deferred compensation
                                
Phantom stock (2)
    
1.3
                          
Rabbi trust (3)
    
1.3
                          
Total
  
$
163.7
                          
 
(1) 
Represents amounts due between October 1, 2006 and December 31, 2006.
(2) 
Represents the current value of approximately 166,000 phantom stock units awarded pursuant to our Executive Bonus and Phantom Stock Plan and a Supplemental Executive Retirement Plan. An officer may elect to cash out any number of the phantom stock units between December 1 and December 15 of any year selected by the officer with the payout amount with respect to each phantom stock unit being generally equal to the greater of (i) the actual price of our common stock on December 31 of the year of an officer’s election to cash out the unit, or (ii) the average of the 12 month-end values of our stock during the year in which an officer elects to cash out. Accordingly, we are unable to anticipate the year this currently unfunded obligation will be paid in cash or the amount of cash ultimately payable.
(3) 
Includes the obligations of a "grantor" (or "rabbi") trust established in connection with our 401(k) wrap plan to hold company assets to satisfy obligations under the wrap plan. The trust obligations include approximately 119,000 shares of our common stock that will be cashed out either upon the eligibility of the obligations to be transferred to our 401(k) Savings Plan or upon the retirement of individual wrap plan participants. Accordingly, we are unable to anticipate the year this amount will be paid in cash or the amount of cash ultimately payable.
 
As of September 30, 2006, we had $1.0 million in debt and we had issued letters of credit for insurance purposes in the amount of $5.1 million.
As of September 30, 2006, we had contracts to purchase tractors and trailers totaling $37.5 million during the remainder of 2006. We expect to lease many of the tractor and trailer assets when they are placed into service. 
We lease equipment and real estate. Rentals are due under noncancelable operating leases for facilities, tractors and trailers. Our minimum lease payments and residual guarantees do not exceed 90% of the leased asset’s cost, the lease terms are for fewer years than 75% of the leased asset’s economic life, the leases do not convey ownership to us at the end of the term of the lease and the leases do not contain bargain purchase arrangements. Accordingly, the leases are accounted for as operating leases and rentals are recorded as rent expense over the term of the leases. 
Facility and trailer leases do not contain guaranteed residual values in favor of the lessors. Most of the tractors we leased prior to 2003 and a minority of the tractors we leased since 2002 are leased pursuant to agreements under which we have partially guaranteed the assets end-of-lease-term residual value. Tractor leases entered into before 2003 typically have 36-month terms, and tractor leases entered into after 2002 have either 42- or 48-month terms. The portions of the residuals we have guaranteed vary from lessor to lessor. Gross residuals are about 40% of the leased asset’s historical cost, of which we have guaranteed the first 25% to 30%. The lessors remain at risk for up to 13% of the remainder of such leased asset’s historical cost. Because our lease payments and residual guarantees do not exceed 90% of the tractor’s cost, the leases are accounted for as operating leases and rentals are recorded as rent expense over the terms of the leases.
Offsetting our lease residual guarantees, when our tractors were originally leased, the tractor manufacturer conditionally agreed to repurchase the tractors at the end of the terms of the leases. Factors which may limit our ability to recover the amount of the residual guarantee from the manufacturer include specifications as to the physical condition of each tractor, their mechanical performance, each vehicle’s accumulated mileage, and whether or not we order replacement and additional vehicles from the same manufacturer. The price to be paid by the manufacturer is generally equal to the full amount of the lessor's residual. In addition to residual values, our tractor leases contain fair value purchase options. Our agreement with the tractor manufacturer enables, but does not require, us to sell the tractors back to the manufacturer at a future date, should we own them at such time, at a predetermined price. In order to avoid the administrative efforts necessary to return leased tractors to the lessor, we typically purchase such tractors from the lessor by paying the residual value and then sell the tractors to the manufacturer. There is no material gain or loss on these transactions because the residual value we pay to the lessor is generally equal to the manufacturer’s purchase price.
At September 30, 2006, the amount of our obligations to lessors for residual guarantees did not exceed the amount we expect to recover from the manufacturer.
Approximately 250 of our oldest company-operated tractors are expected to be replaced during the remainder of 2006. These expenditures will be financed with internally generated funds, borrowings under available credit agreements and leasing. We expect these sources of capital to be sufficient to finance our operations.


Page 16 of 22

NEW ACCOUNTING PRONOUNCEMENTS
In June 2003, The Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109.  This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  This Interpretation is effective for fiscal years beginning after December 15, 2006.  We are currently assessing whether this Interpretation will affect our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently assessing whether SFAS 157 will affect our financial statements.
In September 2006, the Securities and Exchange Commission staff issued Staff Accounting Bulletin, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year unadjusted errors in quantifying current year misstatements for the purpose of a materiality assessment. The guidance in SAB 108 is effective for fiscal years ending after November 15, 2006. We are currently assessing whether SAB 108 will affect our financial statements.

OUTLOOK
This report contains information and forward-looking statements that are based on our current beliefs and expectations and assumptions which are 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 current expectations and are subject to uncertainty and change.
Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will be realized. 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 expected.
Among the key factors that are not within our control and that may cause actual results to differ materially from those projected in such forward-looking statements are demand for our services and products, and our ability to meet that demand, which may be affected by, among other things, competition, weather conditions, highway and port congestion, the general economy, the availability and cost of labor, the 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 used and the other risks and uncertainties described in our filings with the Securities and Exchange Commission.
 
OFF-BALANCE SHEET ARRANGEMENTS 
We utilize noncancelable operating leases to finance a portion of our revenue equipment acquisitions. As of September 30, 2006, we leased 1,000 tractors and 2,167 trailers under operating leases with varying termination dates ranging from 2006 to 2012. Vehicles held under operating leases are not carried on our balance sheet, and lease payments for such vehicles are reflected in our income statements in the line item “Revenue equipment rent”.  Our rental expense related to operating leases involving vehicles during the three months ended September 30, 2006 and 2005 was $7.5 million and $7.8 million, respectively. During the nine months ended September 30, such expenses were $23.2 million and $21.3 million for 2006 and 2005, respectively.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
We held no market risk sensitive instruments for trading purposes as of September 30, 2006.  For purposes other than trading, we held the following market risk sensitive instruments as of September 30, 2006:
Description
 
Discussion
 
Rabbi Trust investment ($1.3 million) including 119,000 shares of our stock, and liabilities for stock-based deferred compensation arrangements, $1.3 million.
 
 
Our consolidated condensed financial statements include the assets and liabilities of a Rabbi Trust established to hold the investments of participants in our 401(k) Wrap Plan and for deferred compensation liabilities under our Executive Bonus and Phantom Stock Plan. Such liabilities are adjusted from time to time to reflect changes in the market price of our Common Stock. Accordingly, our future compensation expense and income will be impacted by fluctuations in the market price of our Common Stock.
 Cash surrender value of life insurance policies, $4.9 million.
 
The cash surrender value of our life insurance policies is a function of the amounts we pay to the insurance companies, the insurance charges taken by the insurance companies and the investment returns earned, or losses incurred, by the insurance company. Changes in any of these factors will impact the cash surrender value of our life insurance policies. Insurance charges and investment performance have a proximate effect on the value of our life insurance assets and on our net income.
 
We had no other material market risk sensitive instruments (for trading or non-trading purposes) that would involve significant relevant market risks, such as equity price risk. Accordingly, the potential loss in our future earnings resulting from changes in such market rates or prices is not significant.


Page 17 of 22

ITEM 4. Controls and Procedures
(a) Disclosure Controls and Procedures:  As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and the operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2006, because of the material weaknesses discussed below.
 
(b) Management’s Report on Internal Control over Financial Reporting:  Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934.  Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, our management used criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control - Integrated Framework.
As a result of this assessment, management identified the following material weaknesses, as defined by the Public Company Accounting Oversight Board’s Auditing Standard No. 2, as of December 31, 2005:
i)  
The Company lacked sufficient personnel resources with adequate expertise to identify and account for complex or nonroutine transactions. Specifically, the Company lacked sufficient personnel resources with adequate expertise to identify and account for the consolidation of a related party entity under the control of its Chairman and Chief Executive Officer as required by Financial Accounting Standards Board’s Financial Interpretation No. 46 (revised) Consolidation of Variable Interest Entities. As a result of this deficiency, material errors in accounting for this variable interest entity were identified in the Company’s interim consolidated financial statements for 2004 and 2005, as well as in the annual consolidated financial statements contained in its Annual Form 10-K for the year ended December 31, 2004. Those financial statements were restated. Also as a result of the deficiency, material errors in accounting for the variable interest entity also were identified in the 2005 annual consolidated financial statements. These errors were corrected prior to the issuance of the 2005 annual consolidated financial statements.
ii)  
The Company lacked adequately designed controls to ensure the completeness and accuracy of the reserve for cargo claims. Specifically, the Company lacked (a) adequate policies and procedures to ensure the timely reporting of unasserted cargo claims by personnel responsible for the daily management of those claims, and (b) adequate policies and procedures to provide for management’s review of all open and incurred but not reported claims. This deficiency resulted in material errors in the reserve for cargo claims and related expenses in the 2005 annual consolidated financial statements. These errors were corrected prior to the issuance of the 2005 annual consolidated financial statements.
iii)
The Company lacked adequately designed controls to ensure the accuracy of accrued revenues.  Specifically, the review control (a) was not properly designed with a sufficient level of precision to adequately examine revenue accruals, and (b) did not provide for validation of the source data. This deficiency resulted in material errors in accrued revenues in the 2005 annual consolidated financial statements. These errors were corrected prior to the issuance of the 2005 annual consolidated financial statements.
iv)
The Company’s controls to ensure the accuracy of the allowances for doubtful accounts were not adequately designed.  Specifically, the management review control of the calculation of the allowances for doubtful accounts did not provide for the tracing of the inputs of the calculation to the source records. This deficiency resulted in material errors in the estimated allowances for doubtful accounts in the 2005 interim and annual consolidated financial statements. These errors were corrected prior to the issuance of the 2005 interim and annual consolidated financial statements.
             v)                      
The procedures related to the Company’s manually billed revenue were not adequate to ensure the revenues were properly reflected in the general ledger. Specifically, the Company had not designed or implemented procedures related to manually billed revenue to ensure that: (a) manually billed revenue is invoiced in a timely manner; (b) manually billed revenue is reconciled to the general ledger; and (c) supporting documentation for manually billed revenue exists. These deficiencies resulted in material errors in revenue in the 2005 annual consolidated financial statements. These errors were corrected prior to the issuance of the 2005 annual consolidated financial statements.
    
         As the material weaknesses in internal control over financial reporting described in the preceding paragraphs have not been corrected, management has concluded that as of September 30, 2006, the Company’s internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
 
(c) Changes in Internal Control over Financial Reporting: There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2006 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
(d) Remediation Efforts: Since the first quarter of 2006, the Company has been developing and implementing improved controls to remediate the conditions described in Item 4 (b) above.   
i)  
Upon the restatement for the variable interest entity, the Company implemented disclosure controls to ensure that such relationships are properly identified, analyzed and correctly reported in its periodic reports on Forms 10-Q and 10-K.  Additionally, controls over the identification of non-routine transactions are being designed and implemented throughout the Company to ensure that all appropriate personnel are trained to identify variable interest entities and are held accountable for reporting these items to the appropriate parties so that proper analysis can be conducted.
ii)        
The Company has developed stricter policies on the timely identification of events that may lead to the eventual assertion of claims for loss of, and damage to, customer freight in order to assure the proper and timely matching and recording of such claims in the period in which the revenue associated with the loss was recognized. Management has also implemented procedures where the personnel responsible for the daily management of such claims, as of the end of each quarterly period, review the calculation of the reserve in detail and certify to management that they agree with that calculation.  Management’s review of such claims and the associated accrual is also being improved through better visibility into open and incurred but not yet reported claims and associated changes in reserves.
iii)       
The components of accrued revenue and related accounts receivable represent the Company’s estimates of the amounts that customers owe the Company for revenue transactions and the Company owes to its employees and vendors for revenue-related expense transactions that have occurred but which have not yet been invoiced to customers. These components have been documented and management’s review control for these accruals now include tracing these components to their source records. Additionally, management instituted a review process to ensure that the components of revenue are reasonable, based on the comparison of the accrual to previous periods, expectations as to revenue per mile, expectations of revenue per truck per week and reviews to ensure manual bills are recorded in an accurate and timely fashion. Furthermore, the alignment of the billing function within the organization has been modified so that the finance organization has better insight into these types of revenue transactions and to ensure that the appropriate information is available at period end.
iv)       
The allowance for doubtful accounts from customers represents the Company’s estimate of amounts that will not ultimately be collected from customers. The components of this allowance and management’s review control for this reserve includes tracing the components of the reserve to their source records.  Additionally, the calculation as of the end of each reporting period will be documented and tested to ensure that it conforms with management’s objectives.
v)        
The Company is improving its controls over manually billed revenue.  Specifically, the Company is redefining its processes to ensure that all significant revenue transactions are processed through its computerized information systems ensuring that they are properly reflected in the Company’s consolidated financial statements.  Furthermore, the Company is redefining its policies and procedures for authorizing and documenting all such revenue to ensure that it is complete, accurate and timely. These procedures include: (a) review of key performance indicators measuring the timeliness of the invoicing process; (b) monthly reconciliations of manually billed revenue to the general ledger; and (c) more stringent requirements in obtaining supporting documentation as evidence that a revenue transaction occurred. Additionally, the alignment of the billing function within the organization has been modified to ensure an increased level of segregation of duties between the sales and marketing functions that arrange such non-standard transactions and the billing function that is required to approve the supporting documentation, in order to invoice these transactions in a timely and accurate fashion.
 
Page 18 of 22
PART II. OTHER INFORMATION
ITEM 1.    Legal Proceedings
We are party to routine litigation incidental to our business, primarily involving claims for personal injury, property damage, work-related injuries of employees and cargo losses incurred in the ordinary and routine highway transportation of freight. We also primarily self-insure for employee health care claims.  As of September 30, 2006, the aggregate amount of reserves for such claims on our Consolidated Condensed Balance Sheet was $21.8 million. We maintain excess insurance programs and accrue for expected losses in amounts designed to cover liability resulting from such 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 January 4, 2002 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, and the parties are engaged in discovery concerning class certification issues.  The plaintiffs submitted a motion for class certification on September 15, 2006, the subsidiary's response will be due in December 2006, and the Court is expected to rule on the motion sometime after February 1, 2007.  Due to the early stage of this litigation, we do not believe we are 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 1A. Risk Factors
There are many factors that affect our business and the results of our operations, many of which are beyond our control. In this regard, "Item 1A. Risk Factors" of Part I of our Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the SEC on June 14, 2006, contains a description of significant factors and risks that may affect our business.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities for the Quarter Ended September 30, 2006
 
Total Number of Shares Purchased
(a)
 
Average Price Paid per Share
(b)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(c)
 
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs(1)
(d)
 
July 1 to July 31, 2006
 
 
416,653
(2) 
 
9.41
 
 
--
 
 
236,300
 
August 1 to August 31, 2006 
 
 
500,200
 
 
7.37
 
 
500,200
 
 
486,100
 
September 1 to September 30, 2006
 
 
167,700
 
 
7.49
 
 
167,700
 
 
318,400
 
Total
 
 
1,084,553
 
 
8.17
 
 
667,900
 
 
 
 
 
(1)   
On August 11, 2004, the Board of Directors authorized the purchase of up to 750,000 shares of the company's 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 the Board of Directors at any time without prior notice.  On August 10, 2006, the Board of Directors authorized the purchase of an additional 750,000 shares of the company’s 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 the Board of Directors at any time without prior notice.
(2)
In July, 2006, our former (until May 2006) Executive Vice President exercised stock options to acquire 416,653 shares of our common stock. Simultaneously with the exercise, we repurchased from him all 416,653 shares at their fair market value of $9.41 per share.  Such transactions are not deemed as having been repurchased as part of our publicly announced plans or programs.
 
ITEM 3.    Defaults Upon Senior Securities
None.

ITEM 4.    Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on September 28, 2006. Of the 18,059,901 shares eligible to vote, 16,821,787 shares were represented at the meeting. The following table summarizes the results of voting held during the Annual Meeting.
Proposal
Number
 
 Subject of Proposal
 
 Votes For
 
 Votes Withheld
 
 Results
 
1.
 
 
To elect one Class I directors:
--S. Russell Stubbs
 
 
13,579,583
 
 
3,242,204
 
 
Approved
 
2.
 
 
To elect three Class II directors:
--Brian Blackmarr
--W. Mike Baggett
--Thomas G. Yetter
 
 
15,719,604
15,591,888
13,458,005
 
 
1,102,183
1,229,899
3,363,782
 
 
Approved
Approved
Approved
 


ITEM 5.    Other Information
None.

Page 19 of 22
ITEM 6. Exhibits

Exhibits

3.1
Articles of Incorporation of the Registrant and all amendments to date (filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).   
 
 
3.2
Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and incorporated herein by reference).
 
 
10.1
Form of Amended and Restated Change in Control Agreement (filed with the Securities and Exchange Commission on August 11, 2006 as Exhibit 10.1 to the Registrant's Form 8-K and incorporated herein by reference).
   
10.2
Amended and Restated Credit Agreement among Comerica Bank, as Administrative Agent for itself and other Banks, LaSalle Bank National Association, as Collateral Agent and Syndication Agent for itself and other Banks, and FFE Transportation Services, Inc., as Borrower, and certain of its affiliates as of October 12, 2006 (filed as Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by reference).
   
31.1
Certification of Chief Executive Officer Required by Rule 13a-14(a)(17 CFR 240.13a-14(a)). (filed herewith)
 
 
31.2
Certification of Chief Financial Officer Required by Rule 13a-14(a)(17 CFR 240.13a-14(a)). (filed herewith)
 
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
 
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
 
 

 


Page 20 of 22

 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
FROZEN FOOD EXPRESS INDUSTRIES, INC.
 
 
 (Registrant)
 
 
 
 
 
 
Dated: November 9, 2006
 
By
 
/s/ Stoney M. Stubbs, Jr.
 
 
 
Stoney M. Stubbs, Jr.
Chairman of the Board of Directors and President
(Principal Executive Officer)
 
 



 
 
FROZEN FOOD EXPRESS INDUSTRIES, INC.
 
 
 (Registrant) 
 
 
Dated: November 9, 2006
 
By
 
/s/ Thomas G. Yetter
 
 
 
Thomas G. Yetter
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 






Page 21 of 22

 

 
EXHIBIT INDEX
 
3.1
Articles of Incorporation of the Registrant and all amendments to date (filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference).   
 
 
3.2
Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and incorporated herein by reference).
 
 
10.1
Form of Amended and Restated Change in Control Agreement (filed with the Securities and Exchange Commission on August 11, 2006 as Exhibit 10.1 to the Registrant's Form 8-K and incorporated herein by reference).
   
10.2
Amended and Restated Credit Agreement among Comerica Bank, as Administrative Agent for itself and other Banks, LaSalle Bank National Association, as Collateral Agent and Syndication Agent for itself and other Banks, and FFE Transportation Services, Inc., as Borrower, and certain of its affiliates as of October 12, 2006 (filed as Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by reference).
   
31.1
Certification of Chief Executive Officer Required by Rule 13a-14(a)(17 CFR 240.13a-14(a)). (filed herewith)
 
 
31.2
Certification of Chief Financial Officer Required by Rule 13a-14(a)(17 CFR 240.13a-14(a)). (filed herewith)
 
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
 
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
 
 

 

Page 22 of 22
 
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EXHIBIT 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Stoney M. Stubbs, Jr., certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Frozen Food Express Industries, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
 
 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
Dated: November 9, 2006
 
 
/s/ Stoney M. Stubbs, Jr.
 
 
 
Stoney M. Stubbs, Jr.
Chairman of the Board and Chief Executive Officer
 
 
 
See also the certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is filed as Exhibit 32.1 with this report.
 

 EX-31.2 4 exhibit31_2.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER SECTION 302 Certification of Chief Financial Officer Section 302

EXHIBIT 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Thomas G. Yetter, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Frozen Food Express Industries, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
 
 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
Dated: November 9, 2006
  
/s/ Thomas G. Yetter
  
 
 
Thomas G. Yetter
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
See also the certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is filed as Exhibit 32.2 with this report.
 
 EX-32.1 5 exhibit32_1.htm CERTIFICATION OF CEO ON SECTION 906 Certification of CEO on Section 906
 
EXHIBIT 32.1
 
FROZEN FOOD EXPRESS INDUSTRIES, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Frozen Food Express Industries, Inc. (the "company") on Form 10-Q for the fiscal quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stoney M. Stubbs, Jr., Chief Executive Officer of the company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that (a) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
 
 
 
 
 
Dated: November 9, 2006
 
/s/ Stoney M. Stubbs, Jr.
 
 
 
Stoney M. Stubbs, Jr.
Chairman of the Board and Chief Executive Officer
 
 

 
 EX-32.2 6 exhibit32_2.htm CERTIFICATION OF CFO ON SECTION 906 Certification of CFO on Section 906
 
 
EXHIBIT 32.2
 
FROZEN FOOD EXPRESS INDUSTRIES, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Frozen Food Express Industries, Inc. (the "company") on Form 10-Q for the fiscal quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas G. Yetter, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that (a) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
 
 
 
 
 
Dated: November 9, 2006
 
/s/ Thomas G. Yetter
 
 
 
Thomas G. Yetter
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 

 

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