-----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, Q+a+yOJk5Z4NAz6vprTG6PK+2dsDdqAa8Rl/13Qle5arvquuucxA0vr51uDyCov2 nLuLldIHN0I2IZsHaaclGg== 0000039273-10-000031.txt : 20100505 0000039273-10-000031.hdr.sgml : 20100505 20100505153907 ACCESSION NUMBER: 0000039273-10-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20100331 FILED AS OF DATE: 20100505 DATE AS OF CHANGE: 20100505 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: 10801651 BUSINESS ADDRESS: STREET 1: 1145 EMPIRE CENTRAL PLACE CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146308090 10-Q 1 form10q_q12010.htm 10Q Q1 2010 form10q_q12010.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
 
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

OR

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

FOR THE TRANSITION PERIOD FROM _____________ TO ______________

Commission File Number:  1-10006

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

Texas
(State or other jurisdiction of
incorporation or organization)
 
75-1301831
(IRS Employer Identification No.)
 
1145 Empire Central Place
Dallas, Texas 75247-4305
(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     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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   o
Non-accelerated filer   ý
Smaller Reporting Company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes      ý No

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
 
Class
 
Number of Shares Outstanding
 
 
Common stock, $1.50 par value
 
17,206,713 at April 30, 2010
 
 

 
 

 

 
INDEX
 
 
PART I  Financial Information
Page No.
     
Item 1
Financial Statements
 
 
Consolidated Condensed Balance Sheets (unaudited)
March 31, 2010 and December 31, 2009
1
     
 
Consolidated Condensed Statements of Operations (unaudited)
Three months ended March 31, 2010 and 2009
2
     
 
Consolidated Condensed Statements of Cash Flows (unaudited)
Three months ended March 31, 2010 and 2009
3
     
 
Consolidated Condensed Statements of Shareholders’ Equity (unaudited)
Three months ended March 31, 2010 and year ended December 31, 2009
4
     
 
Notes to Consolidated Condensed Financial Statements (unaudited)
5
     
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
7
     
Item 3
Quantitative and Qualitative Disclosures about Market Risk
19
     
Item 4
Controls and Procedures
20
     
 
PART IIOther Information
 
     
Item 1
Legal Proceedings
20
     
Item 1A
Risk Factors
21
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
21
     
Item 3
Defaults Upon Senior Securities
21
     
Item 4
Reserved
21
     
Item 5
Other Information
21
     
Item 6
Exhibits
21
     
 
Signatures
22
     
 
Exhibit Index
23

 

 
 

 

PART I.  FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
Frozen Food Express Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited and in thousands, except per-share amounts)
Assets
 
March 31, 2010
   
December 31, 2009
 
Current assets
           
Cash and cash equivalents
 
$
9,310
   
$
3,667
 
Accounts receivable, net
   
38,195
     
41,318
 
Tires on equipment in use, net
   
5,051
     
5,592
 
Deferred income taxes
   
2,170
     
1,532
 
Property held for sale
   
1,019
     
1,019
 
Other current assets
   
7,348
     
12,706
 
Total current assets
   
63,093
     
65,834
 
                 
Property and equipment, net
   
69,682
     
74,845
 
Other assets
   
4,255
     
5,121
 
Total assets
 
$
137,030
   
$
145,800
 
                 
Liabilities and Shareholders' Equity
               
Current liabilities
               
Accounts payable
 
$
21,474
   
$
23,773
 
Insurance and claims accruals
   
8,544
     
10,119
 
Accrued payroll and deferred compensation
   
5,195
     
3,837
 
Accrued liabilities
   
1,610
     
1,953
 
Total current liabilities
   
36,823
     
39,682
 
                 
Deferred income taxes
   
7,492
     
9,009
 
Insurance and claims accruals
   
6,277
     
7,374
 
Total liabilities
   
50,592
     
56,065
 
                 
Shareholders' equity
               
Common stock, $1.50 par value per share; 75,000 shares authorized;
               
     18,572 shares issued
   
27,858
     
27,858
 
Additional paid-in capital
   
3,014
  
   
2,923
 
Retained earnings
   
66,449
     
70,172
 
     
97,321
     
100,953
 
Treasury stock (1,442 and 1,477 shares), at cost
   
(10,883
)
   
(11,218
)
Total shareholders' equity
   
86,438
     
89,735
 
Total liabilities and shareholders’ equity
 
$
137,030
   
$
145,800
 

See accompanying notes to consolidated condensed financial statements.

 
 
 



 
1

 



 

Frozen Food Express Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
 (Unaudited and in thousands, except per-share amounts)

   
Three Months
Ended March 31,
 
   
2010
   
2009
 
Revenue
 
$
85,842
   
$
92,207
 
Operating expenses
               
Salaries, wages and related expenses
   
28,109
     
31,763
 
Purchased transportation
   
18,117
     
20,568
 
Fuel
   
15,844
     
13,769
 
Supplies and maintenance
   
10,613
     
12,253
 
Revenue equipment rent
   
8,781
     
9,783
 
Depreciation
   
3,987
     
4,590
 
Communications and utilities
   
1,174
     
1,268
 
Claims and insurance
   
2,834
     
4,489
 
Operating taxes and licenses
   
1,097
     
1,290
 
Gain on sale of property and equipment
   
(331
)
   
(134
)
Miscellaneous
   
1,179
     
1,089
 
 Total operating expenses
   
91,404
     
100,728
 
Loss from operations
   
(5,562
)
   
(8,521
)
Interest and other (income) expense
               
Interest income
   
(11
)
   
(4
)
Interest expense
   
42
     
4
 
Equity in earnings of limited partnership
   
(40
)
   
(56
)
Life insurance and other
   
146
     
308
 
 Total interest and other expense
   
137
     
252
 
Loss before income taxes
   
(5,699
)
   
(8,773
)
Income tax benefit
   
(1,976
)
   
(2,652
)
Net loss
 
$
(3,723
)
 
$
(6,121
)
                 
Net loss per share of common stock
               
Basic
 
$
(0.22
)
 
$
(0.36
)
Diluted
 
$
(0.22
)
 
$
(0.36
)
Weighted average shares outstanding
               
Basic
   
17,092
     
16,908
 
Diluted
   
17,092
     
16,908
 
Dividends declared per common share
 
$
-
   
$
0.03
 

See accompanying notes to consolidated condensed financial statements.




 
2

 



Frozen Food Express Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
 (Unaudited and in thousands)

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Cash flows from operating activities
               
Net loss
 
$
(3,723
)
 
$
(6,121
)
Non-cash items included in net loss
               
Gain on sale of property and equipment
   
(331
)
   
(134
)
Depreciation and amortization
   
5,220
     
5,765
 
Provision for losses on accounts receivable
   
327
     
199
 
Deferred income taxes
   
(2,155
)
   
(2,726
)
Deferred compensation
   
351
     
(294
)
Investment income
   
(40
)
   
(56
)
Change in operating assets and liabilities
               
Accounts receivable
   
2,796
     
11,966
 
Tires on equipment in use
   
(581
)
   
(916
)
Other current assets
   
5,282
     
(818
)
Accounts payable
   
(1,627
)
   
(894
)
Insurance and claims accruals
   
(2,672
)
   
921
 
Accrued liabilities, payroll and other
   
1,029
     
453
 
Net cash provided by operating activities
   
3,876
     
7,345
 
                 
Cash flows from investing activities
               
Property and equipment purchases
   
(2,098
)
   
(6,694
)
Proceeds from sale of property and equipment
   
3,010
     
4,023
 
Cash distributions from investments
   
718
     
211
 
Other
   
76
     
295
 
Net cash provided by (used in) investing activities
   
1,706
     
(2,165
)
                 
Cash flows from financing activities
               
Proceeds from borrowings
   
10,407
     
10,000
 
Payments against borrowings
   
(10,407
)
   
(10,000
)
Dividends paid
   
0
     
(516
)
Income tax benefit of stock options and restricted stock
   
14
     
5
 
Proceeds from capital stock transactions, net
   
113
     
(139
)
Purchases of treasury stock
   
(66
)
   
94
 
Net cash provided by (used in) financing activities
   
61
     
(556
)
                 
Net increase in cash and cash equivalents
   
5,643
     
4,624
 
Cash and cash equivalents at beginning of period
   
3,667
     
1,308
 
Cash and cash equivalents at end of period
 
$
9,310
   
$
5,932
 
 
See accompanying notes to consolidated condensed financial statements.

 
3

 


 
 Frozen Food Express Industries, Inc. and Subsidiaries
Consolidated Condensed Statement of Shareholders' Equity
 (Unaudited and in thousands)

   
Common Stock
   
Additional
                   
   
Shares
   
Par
   
Paid in
   
Retained
   
Treasury Stock
       
   
Issued
   
Value
   
Capital
   
Earnings
   
Shares
   
Cost
   
Total
 
January 1, 2009
    18,572     $ 27,858     $ 5,412     $ 87,103       1,813     $ (13,922 )   $ 106,451  
    Net loss
    -       -       -       (16,415 )     -       -       (16,415 )
    Treasury stock reacquired
    -       -       -       -       39       (161 )     (161 )
    Retirement plans
    -       -       (15 )     -       4       (25 )     (40 )
    Exercise of stock options
    -       -       (171 )     -       (35 )     267       96  
    Restricted stock
    -       -       (2,270 )     -       (344 )     2,623       353  
    Dividends
    -       -       -       (516 )     -       -       (516 )
    Tax expense of stock options
    -       -       (33 )     -       -       -       (33 )
December 31, 2009
    18,572       27,858       2,923       70,172       1,477       (11,218 )     89,735  
    Net loss
    -       -       -       (3,723 )     -       -       (3,723 )
    Treasury stock reacquired
    -       -       -       -       18       (66 )     (66 )
    Retirement plans
    -       -       (72 )     -       (17 )     126       54  
    Exercise of stock options
    -       -       (192 )     -       (40 )     305       113  
    Restricted stock
    -       -       341       -       4       (30 )     311  
    Dividends
    -       -       -       -       -       -       -  
    Tax benefit of stock options
    -       -       14       -       -       -       14  
March 31, 2010
    18,572     $ 27,858     $ 3,014     $ 66,449       1,442     $ (10,883 )   $ 86,438  

See accompanying notes to consolidated condensed financial statements.

 
4

 


Frozen Food Express Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
Three Months Ended March 31, 2010
  (Unaudited)
 
1.    Basis of Presentation
 
The accompanying unaudited consolidated condensed financial statements include Frozen Food Express Industries, Inc., a Texas corporation, and our subsidiary companies, all of which are wholly-owned (collectively, the “Company”).  Our statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial statements, and therefore do not include all information and disclosures required by US GAAP for complete financial statements.  In the opinion of management, such statements reflect all adjustments consisting of normal recurring adjustments considered necessary to fairly present our consolidated financial position, results of operations, shareholders’ equity and cash flows for the interim periods presented. The results of operation s for any interim period do not necessarily indicate the results for the full year.  The unaudited interim consolidated condensed financial statements should be read with reference to the consolidated financial statements and notes to consolidated financial statements in our 2009 Annual Report on Form 10-K.  All intercompany balances and transactions have been eliminated in consolidation.
 
2.    Revenue Recognition
 
Revenue and associated direct operating expenses are recognized on the date freight is picked up from the shipper.  One of the preferable methods outlined in US GAAP provides for the recognition of revenue and direct costs when the shipment is completed.  Changing to this method would not have a material impact on the quarterly financial statements.

The Company is the sole obligor with respect to the performance of our freight services provided by independent contractors or through our brokerage business and we assume all related credit risk. Accordingly, our revenue and the related direct expenses are recognized on a gross basis on the date the freight is picked up from the shipper.  Revenue from equipment rental is recognized ratably over the term of the associated rental agreements.

3.    Long-term Debt

As of March 31, 2010, the Company had a secured committed credit facility (the “Credit Facility”) that expires in September 2011 for which no amounts were outstanding.  The Company may borrow an amount not to exceed the lesser of (i) $25.0 million or (ii) the approved total accounts receivable borrowing base, as defined by the Credit Facility, both adjusted for letters of credit and other debt (as defined in the agreement), or (iii) a multiple of a measurement of cash flow.  At March 31, 2010, there were no amounts borrowed under the Credit Facility; however, we had $3.2 million of standby letters of credit primarily for our self-insurance programs, which reduced the availability to $21.8 million.   The Credit Facility bears interest at a spread over the London Interbank Offered Rate (“LIBO R”).   

The Credit Facility contains covenants which, among other matters, required the Company to maintain certain financial ratios during the first quarter of 2010, including debt to earnings before interest, taxes, depreciation and rents not to exceed 2.75:1.0, a minimum fixed charge ratio of 1.10:1.0, and minimum tangible net worth of $80.0 million adjusted for earnings and other equity activity.  The ratios adjust during the course of the year, as discussed in Item 2. under “Liquidity and Capital Resources”.  The Credit Facility also places certain restrictions on the payment of dividends and the purchase and sale of assets.  The Credit Facility is secured by substantially all of the assets of the Company and its affiliates.  At March 31, 201 0, our EBITDAR was $38.4 million.  Our fixed charges were $29.1 million, resulting in a fixed charge coverage ratio of 1.32:1.0.  Our funded debt as defined in the agreement was $89.6 million, resulting in funded debt to EBITDAR ratio of 2.33:1.0.   Our tangible net worth as defined by the agreement was $85.0 million keeping in compliance with the agreement.

4.    Income Taxes
 
Our income is taxed in the United States of America and various state jurisdictions. Our federal returns for 2006 and after are presently subject to further examination by the Internal Revenue Service.  State returns are filed in most state jurisdictions, with varying statutes of limitations.

US GAAP requires that, for interim periods, we project full-year income and permanent differences between book income and taxable income in order to calculate an effective tax rate for the entire year.  That projected effective tax rate is used to calculate our income tax provision or benefit for the interim periods’ year-to-date financial results.

 
5

 
For the three months ended March 31, 2010, our effective tax benefit rate (income tax benefit divided by loss before income taxes) was 34.7% compared to 30.2% for the same period a year ago.   The difference between our effective tax rate and the federal statutory rate of 35% is primarily attributable to state income taxes and non-deductible driver related expenses.
 
5.    Loss per common share

Basic and diluted loss per common share were computed as follows:

   
Three Months Ended March 31,
 
   
(in thousands, except per share amounts)
 
   
2010
   
2009
 
Numerator:
           
   Net loss
 
$
(3,723
)
 
$
(6,121
                 
Denominator:
               
   Basic-weighted average shares
   
17,092
     
16,908
 
   Effect of dilutive stock options
   
-
     
-
 
   Diluted-weighted average shares
   
17,092
     
16,908
 
                 
Basic loss per common share
 
$
(0.22
)
 
$
(0.36
)
Diluted loss per common share
 
$
(0.22
)
 
$
(0.36

                Options totaling 556,000 and 616,000 shares were outstanding but were not included in the calculation of diluted weighted average shares for 2010 and 2009, respectively, as their exercise prices were greater than the average market price of the common shares.  The Company excluded all common stock equivalents in 2010 and 2009 as the effect was anti-dilutive due to the net loss.

6.    Related Party Transactions
 
The Company purchases most of the trailers and trailer refrigeration units we use in our operations from W&B Service Company, L.P. ("W&B"), an entity in which we own a 19.9% equity interest, and also relies upon W&B to provide routine maintenance and warranty repair of the trailers and refrigeration units.  The Company accounts for that investment under the equity method of accounting.

During the three-month periods ended March 31, 2010 and 2009, the Company purchased $36,000 and $38,000, respectively, in trailers and refrigeration units from W&B.  During the three-month periods ended March 31, 2010 and 2009, we paid W&B $130,000 and $302,000, respectively, for maintenance and repair services, accessories, and parts.   As of March 31, 2010 and 2009, our accounts payable included amounts owed to W&B of $485,000 and $317,000, respectively, for the purchase of parts and repair services.  Cash distributions to us from W&B’s earnings were $718,000 and $211,000 for the first quarter 2010 compared to 2009.


 
6

 

7.    Commitments and Contingencies
 
The Company is involved in legal actions that arise in the ordinary course of business.  Although the outcomes of any such legal actions cannot be predicted, in the opinion of management, the resolution of any currently pending or threatened actions will not have a material adverse effect upon our financial position or results of operations.  

The Company accrues for costs related to public liability, cargo, employee health insurance and work-related injury claims. When a loss occurs, we record a reserve for the estimated outcome. As additional information becomes available, adjustments are made. Accrued claims liabilities include all such reserves and our estimate for incidents that have been incurred but not reported.

8.    Recent Accounting Pronouncements

None.

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations 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, 2009.  This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those included in our Form 10-K, Part I, Item 1A for the year ended December 31, 2009.  We do not assume, and specifically disclaim, any obligation to update any forward-looking statement contained in this report.

OVERVIEW

Although the U.S. economy has shown some signs of recovery over the past several months, with extremely poor weather adding to the challenges of the transportation sector in January and February of 2010, we continued to be concerned about a lack of traction in the economy.  As a result, we managed our operations for continued economic weakness in the short-term while continuing long-term plans pointed at an eventual recovery.  We have continued to invest in technology upgrades that we anticipate will pay dividends in the coming months, as well as provide long-term benefits through improved operational efficiency and tracking capabilities.  Our equipment replacement continues on schedule, which allows us to maintain an average tractor age of 2.3 years.  We aggressively managed cash, allowing us to f inish the first quarter of 2010 with no debt and appropriate cash reserves.  Our focus has remained on providing excellence in all of our service offerings while remaining diligent to improve our margins through targeted pricing programs and efficient use of our assets.

Despite continued poor weather in March 2010, we began to see some increased demand for our services.  Economic indicators have become more positive and there has been some strain on available trucking capacity.  With increased shipper demand and improving rates, we decided to place previously idled equipment back into service. We are hopeful this increased demand for trucking capacity will continue in the second quarter of 2010, but will remain prudent in our approach.

We generate our revenue from truckload, less-than-truckload (“LTL”), dedicated and brokerage services we provide to our customers.  Generally, we are paid either by the mile, the weight or the number of trucks being utilized by our dedicated service customers.  We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention and other ancillary services.  The main factors that affect our revenue are the rate per mile we receive from our customers, the percentage of miles for which we are compensated and the number of miles we generate with our equipment.  These factors relate to, among other things, the United States economy, inventory levels, the level of truck capacity in the transportation industry and specific customer demand.  We monitor our revenue producti on primarily through average revenue per truck per week, net of fuel surcharges, revenue-per-hundredweight for our LTL services, empty mile ratio, revenue per loaded (and total) miles, the number of linehaul shipments, loaded miles per shipment and the average weight per shipment.  The economic conditions of 2009 had a negative impact on virtually all metrics that reflect profitability, and those conditions generally continued into the first quarter of 2010.  We continue to manage overhead expense, improve capacity utilization and support pricing initiatives.  Such efforts initiated in 2009 provided some benefit in the first quarter of 2010.
             

 
7

 


For the first quarter of 2010, our total operating revenue decreased by $6.4 million, or 6.9%.  Our operating revenue, net of fuel surcharges, decreased $9.7 million, or 11.7%, to $73.3 million from $83.0 million in 2009.  Excluding fuel surcharges, our average revenue per tractor per week increased 0.8%, due to a 12.3% decrease in the average weekly trucks in service, which was partially offset by an increase in our empty mile ratio to 10.7% from 9.6%.  Our truckload revenue decreased $7.5 million, or 14.3%, primarily due to the decline in loaded truckload miles resulting from the ongoing over-capacity in the market and partially due to weather related work stoppage.  Despite the continued capacity challenges in the freight industry, our truckload revenue per loaded mile improved to $1.44 compared to $1.39 in 2009, an increase of 3.6%.  LTL tonnage levels dropped 2.4% as a result of the ongoing economic pressure, while revenue per hundredweight decreased 4.2% to $13.89 in 2010 from $14.50 in 2009 due to aggressive pricing competition for the available tonnage in the market.  Dedicated revenue represented 4.9% of our revenue in 2010 versus 5.7% in 2009, while brokerage revenue decreased to 2.3% of our revenues in 2010 compared to 2.6% in 2009.
                
The impact of operating expense on our profitability is primarily influenced by variable costs associated with transporting freight for our customers, fixed costs, and expenses with both variable and fixed components. Variable costs include fuel expense, driver-related expenses such as wages, benefits, training, and recruitment, other hourly wages related to the production of revenue, and independent contractor costs, which are recorded under purchased transportation.  Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims.  These expenses generally vary with the miles we drive, but also have a controllable component based on safety, fleet age, efficiency and other factors.  Our main fixed costs relate to the acquisition and financing of long-te rm assets, such as revenue equipment and service centers.  Although certain factors affecting our expenses are beyond our control, we monitor them closely and attempt to anticipate changes in these factors in managing our business.  For example, fuel prices fluctuated dramatically and quickly at various times during the last several years. We manage our exposure to changes in fuel prices primarily through fuel surcharge programs with our customers, as well as through volume fuel purchasing arrangements with national fuel centers and bulk purchases of fuel at our service centers.  To help further reduce fuel expense, we manage the maximum rate of speed and purchase certain tractors with opti-idle technology, which monitors the temperature of the cab and allows the engine to operate more efficiently while not on the road. 
 
                Our operating expenses as a percentage of operating revenue, or “operating ratio,” was 106.5% for the first quarter of 2010 compared with 109.2% over the same period in 2009.  Our operating expenses decreased at a higher rate than our revenue mainly due to salaries, wages and related expenses, purchased transportation, lower claims and insurance costs, lower equipment rent and lower supplies and expenses compared to 2009.  Our loss per basic and diluted share improved 38.9% in the first quarter of 2010 to $0.22 compared to $0.36 over the same period in 2009.

                Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At March 31, 2010, we had no outstanding borrowings under our Credit Facility and $86.4 million in shareholders’ equity.  In the first quarter of 2010, we added approximately $2.1 million of new revenue equipment and had $3.0 million of sales proceeds from dispositions, and recognized a gain of $0.3 million on the disposition of used equipment.  These capital expenditures were funded with cash flows from operations.  We estimate capital expenditures, net of proceeds from dispositions, will range from $8-$11 million in 2010< !--EFPlaceholder-->, which would be consistent with our recent activity and the expected mix of capital expenditures and operating leases.

 
8

 

     
The following table summarizes and compares the significant components of revenue and presents our operating ratio and revenue per truck per week for each of the three-month periods ended March 31:   

Revenue from: (a)
 
2010
   
2009
 
Temperature-controlled services
 
$
25,423
   
$
32,586
 
Dry-freight services
   
15,268
     
14,534
 
Total truckload linehaul services
   
40,691
     
47,120
 
Dedicated fleets
   
4,225
     
5,286
 
Total truckload
   
44,916
     
52,406
 
Less-than-truckload linehaul services
   
25,267
     
27,033
 
Fuel surcharges
   
12,534
     
9,157
 
Brokerage
   
2,011
     
2,441
 
Equipment rental  
   
1,114
     
1,170
 
Total revenue
   
85,842
     
92,207
 
                 
Operating expenses
   
91,404
     
100,728
 
Loss from freight operations
 
$
(5,562
)
 
$
(8,521
)
Operating ratio (b)
   
106.5
%
   
109.2
%
                 
Total truckload revenue
 
$
44,916
   
$
52,406
 
Less-than-truckload  revenue
   
25,267
     
27,033
 
Total linehaul and dedicated services revenue 
 
$
70,183
   
$
79,439
 
                 
Weekly average trucks in service
   
1,751
     
1,997
 
Revenue per truck per week (c)
 
$
3,118
   
$
3,094
 
 
  Computational notes:
(a)
Revenue and expense amounts are stated in thousands of dollars.
(b)
Operating expenses divided by total revenue.
(c)
Average daily revenue, times seven, divided by weekly average trucks in service.
 

 
9

 

                The following table summarizes and compares selected statistical data relating to our freight operations for each of the three-month periods ended March 31:
 
Truckload
 
2010
   
2009
 
    Total linehaul miles (a)
   
31,630
     
37,456
 
    Loaded miles (a)
   
28,238
     
33,855
 
    Empty mile ratio (b)
   
10.7
%
   
9.6
%
    Linehaul revenue per total mile (c)
 
$
1.29
   
$
1.26
 
    Linehaul revenue per loaded mile (d)
 
$
1.44
   
$
1.39
 
    Linehaul shipments (a)
   
30.7
     
36.6
 
    Loaded miles per shipment (e)
   
921
     
925
 
LTL
               
    Hundredweight
   
1,819,678
     
1,864,253
 
    Shipments (a)
   
59.1
     
61.6
 
    Linehaul revenue per hundredweight (f)
 
$
13.89
   
$
14.50
 
    Linehaul revenue per shipment (g)
 
$
427
   
$
439
 
    Average weight per shipment (h)
   
3,079
     
3,029
 
 
Computational notes:
(a)
Amounts are stated in thousands.
(b)
Total truckload linehaul miles less truckload loaded miles, divided by total truckload linehaul miles.
(c)
Revenue from truckload linehaul services divided by total truckload linehaul miles.
(d)
Revenue from truckload linehaul services divided by truckload loaded miles.
(e)
Total truckload loaded miles divided by number of truckload linehaul shipments.
(f)
LTL revenue divided by LTL hundredweight.
(g)
LTL revenue divided by number of LTL shipments.
(h)
LTL hundredweight times one hundred divided by number of shipments. 

The following table summarizes and compares the makeup of our fleet between company-provided tractors and tractors provided by independent contractors as of March 31:

   
2010
   
2009
 
Total company tractors available
    1,461       1,551  
Total owner-operator tractors available
    393       415  
Total tractors available
    1,854       1,966  
Total trailers available
    3,493       3,996  




 
10

 

 

Comparison of Three Months Ended March 31, 2010 to Three Months Ended March 31, 2009

The following table sets forth revenue, operating income, operating ratios and revenue per truck per week and the dollar and percentage changes of each:

Revenue from (a)
 
2010
   
2009
   
Dollar Change
2010 vs. 2009
 
Percentage Change
2010 vs. 2009
   
Temperature-controlled services
 
$
25,423
   
$
32,586
   
$
(7,163
)
(22.0
)
%
Dry-freight services
   
15,268
     
14,534
     
734
 
5.0
   
Total truckload linehaul services
   
40,691
     
47,120
     
(6,429
)
(13.6
)
 
Dedicated services
   
4,225
     
5,286
     
(1,061
)
(20.1
)
 
Total truckload
   
44,916
     
52,406
     
(7,490
)
(14.3
)
 
Less-than-truckload linehaul services
   
25,267
     
27,033
     
(1,766
)
(6.5
)
 
Fuel surcharges
   
12,534
     
9,157
     
3,377
 
36.9
   
Brokerage
   
2,011
     
2,441
     
(430
)
(17.6
)
 
Equipment rental  
   
1,114
     
1,170
     
(56
)
(4.8
)
 
Total revenue 
   
85,842
     
92,207
     
(6,365
)
(6.9
)
 
                               
Operating expenses
   
91,404
     
100,728
     
(9,324
)
(9.3
)
 
Loss from operations
 
$
(5,562
 
$
(8,521
)
 
$
2,959
 
34.7
 
%
Operating ratio (b)
   
106.5
%
   
109.2
%
             
                               
Total truckload revenue
 
$
44,916
   
$
52,406
   
$
(7,490
)
(14.3
)
%
Less-than-truckload linehaul revenue
   
25,267
     
27,033
     
(1,766
)
(6.5
)
 
Total linehaul and dedicated services revenue 
 
$
70,183
   
$
79,439
   
$
(9,256
)
(11.7
)
%
                               
Weekly average trucks in service
   
1,751
     
1,997
     
(246
)
(12.3
)
%
Revenue per truck per week (c)
 
$
3,118
   
$
3,094
   
$
24
 
0.8
 
%
  
Computational notes:
(a)
Revenue and expense amounts are stated in thousands of dollars.
(b)
Operating expenses divided by total revenue.
(c)
Average daily revenue, times seven, divided by weekly average trucks in service.

Total revenue decreased $6.4 million, or 6.9%, to $85.8 million in 2010 from $92.2 million in 2009.  Excluding fuel surcharges, our revenue decreased $9.7 million, or 11.7%, to $73.3 million from $83.0 million in 2009.
 
                Truckload revenue, excluding fuel surcharges, decreased $7.5 million, or 14.3%, to $44.9 million from $52.4 million in 2009.  Truckload revenues declined primarily due to excess capacity in the industry and our reluctance to compete on pricing, rather than service.  This resulted in a 16.6% decrease in loaded miles, to 28.2 million from 33.8 million in 2009.  The reduction in loaded miles and poor weather over the first quarter of 2010 combined to produce an increase in our empty mile ratio from 9.6% in 2009 to ­­­­­­­10.7% in 2010.   Despite the challenging truckload environment, as a result of our focus on improving our yield, truckload revenue per loaded mile increase d to $1.44 in 2010 from $1.39 in 2009 as we continued to review lane-specific pricing to optimize margins.
 
 
 

 
11

 


LTL revenue decreased $1.7 million, or 6.5%, to $25.3 million from $27.0 million.  The decline in revenue was primarily driven by a 2.4% decline in tonnage to 182.0 million pounds from 186.4 million in 2009 and the resultant pricing pressure that pushed our revenue per hundredweight to $13.89 in the first quarter of 2010 compared to $14.50 per hundredweight in the first quarter of 2009.  
 
Fuel surcharges represent the cost of fuel that we are able to pass along to our customers based upon changes in the Department of Energy’s weekly indices.  The cost of fuel has increased from the first quarter of 2009, resulting in increased fuel surcharges of $3.4 million, or 36.9%, for the quarter.  The higher fuel surcharge is offset by increased fuel costs to the Company within fuel and purchased transportation expenses.
 
                The following table sets forth for the periods indicated the dollar and percentage increase or decrease of the items in our consolidated statements of operations and those items as a percentage of revenue:

   
(in thousands)
Dollar Change
 
Percentage Change
 
Percentage of Revenue
 
   
2010 vs 2009
 
2010 vs 2009
 
  2010 
 
  2009 
 
Revenue
 
$
(6,365
)
(6.9
)%
100.0
%
100.0
%
                     
Operating Expenses
                   
     Salaries, wages and related expenses
   
(3,654
)
(11.5
)
32.7
 
34.4
 
     Purchased transportation
   
(2,451
)
(11.9
)
21.1
 
22.3
 
     Fuel
   
2,075
 
15.1
 
18.5
 
14.9
 
     Supplies and maintenance
   
(1,640
)
(13.4
)
12.4
 
13.3
 
     Revenue equipment rent
   
(1,002
)
(10.2
)
10.2
 
10.6
 
     Depreciation
   
(603
)
(13.1
)
4.6
 
5.0
 
     Communications and utilities
   
(94
)
(7.4
)
1.4
 
1.4
 
     Claims and insurance
   
(1,655
)
(36.9
)
3.3
 
4.9
 
     Operating taxes and licenses
   
(193
)
(15.0
)
1.3
 
1.4
 
     Gain on sale of property and equipment
   
(197
)
147.0
 
(0.4
)
(0.1
)
     Miscellaneous
   
90
 
8.3
 
1.4
 
1.1
 
Total Operating Expenses
 
$
(9,324
)
(9.3
)%
106.5
%
109.2

Total operating expenses for the first quarter of 2010 decreased $9.3 million, or 9.3%, to $91.4 million from $100.7 million in 2009.  The operating ratio decreased to 106.5% from 109.2% in 2009 reflecting the continued emphasis on both variable and fixed cost reductions.

Salaries, wages and related expenses consist of compensation for our employees, including drivers and non-drivers.  It also includes employee-related costs, including the costs of payroll taxes, work-related injuries, group health insurance and other fringe benefits.  The most variable of the salary, wage and related expenses is driver pay, which is affected by the mix of company drivers and owner-operators in our fleet as well as in the efficiency of our over-the-road operations.  Driver salaries including per diem costs decreased $2.1 million, or 11.8%, primarily due to a decrease in total miles.  Non-driver salaries decreased $0.6 million as a result of cost containment initiatives implemented in 2009.  Group health insurance costs decreased by $0.9 million due to a decrease in quantit y and severity of claims incurred in the quarter.
 

 
12

 

Purchased transportation expense consists of payments to independent contractors for the equipment and services they provide, payments to other motor carriers who handle our brokerage services and to various railroads for intermodal services.  It also includes fuel surcharges paid to our independent contractors for which we charge our customers.  These expenses are highly variable with revenue and/or the mix of Company drivers versus independent contractors.  Purchased transportation expense decreased $2.5 million, or 11.9%, in 2010 from 2009.  Purchased transportation expense related to our intermodal service decreased by $­­­­0.2 million excluding fuel surcharges, or 5.9%, compared to 2009 as our intermodal movements declined.  The portion of our purchased transporta tion connected with our truckload and LTL services decreased $2.5 million, excluding fuel surcharges, primarily reflecting a decrease in the number of independent contractors utilized during the first quarter of 2010.  Purchased transportation associated with our brokerage services decreased $0.3 million, or 17.1%, compared to 2009, as the result of a similar decrease in brokerage revenue.  Fuel payments to our independent contractors increased from $2.0 million in the first quarter of 2009 to $2.6 million in the first quarter of 2010 due to an increase in fuel surcharges driven by higher fuel prices.
 
Fuel expense and fuel taxes increased by $2.0 million, or 15.1%, to $15.8 million from $13.8 million in 2009.   The increase was primarily due to a 29.9% increase in fuel prices as reflected in the Department of Energy’s Fuel Index.  A 2.3% improvement in miles per gallon to 6.23 in 2010 from 6.09 in 2009 helped to offset the increase.  The increase in fuel economy is attributable to reduced idling and other efficiency improvements. We have fuel surcharge provisions in substantially all of our transportation contracts and attempt to recover a portion of increasing fuel prices through fuel surcharges and rates to our customers.  
 
Supplies and maintenance expenses primarily consist of repairs, maintenance and tires along with load specific expenses including loading/unloading, tolls, pallets, pickup and delivery and recruiting.  Supplies and maintenance costs decreased $1.6 million, or 13.4%, from 2009 and also declined as a percentage of total revenue to 12.4% from 13.3%.  This decrease was primarily driven by reductions in various miscellaneous operating expenses of approximately $0.5 million and lower fleet repairs and maintenance costs of approximately $0.8 million, as fewer trucks were in service.  Significant repairs to our equipment are generally covered by manufacturers’ warranties.
 
Total revenue equipment rent decreased $1.0 million, or 10.2%, to $8.8 million from $9.8 million in 2009.  The decrease is primarily due to a decrease in the average number of tractors under lease during the first quarter of 2010 to 1,157 compared to 1,290 during the first quarter of 2009.   The average cost of equipment will increase as we replace older equipment with new equipment.  We expect equipment rent expense to increase in future periods as a result of higher prices of new equipment as our leased versus owned ratio increases.
 
Depreciation relates to owned tractors, trailers, communications units, service centers and other assets. Gains or losses on dispositions of revenue equipment are set forth in a separate line item within our statements of operations. Depreciation expense decreased $0.6 million, or 13.1%, as older equipment was disposed and replaced with newer leased equipment.  Depreciation expense is also dependent upon the mix of Company-owned equipment versus leased equipment.  Future depreciation expense will also be impacted by our leasing decisions.
 
Claims and insurance expenses consist of the costs of premiums for insurance accruals we make within our self-insured retention amounts, primarily for personal injury, property damage, physical damage and cargo claims.  These expenses will vary and are dependent on the frequency and severity of accidents, our self-insured retention amounts and the insurance market. Claims and insurance costs decreased by $1.7 million, or 36.9%, to $2.8 million from $4.5 million in 2009.  The decrease was primarily due to a decrease in both the quantity and severity of claims incurred.  The Company is responsible for the first $4.0 million on personal injury and property damage liability claims and 25% of the claim amount between $4.0 million and $10.0 million.  The Company has excess coverage from $10.0 millio n to $50.0 million.  Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods depending on the frequency, severity and timing of claims and to adverse financial results if we incur large or numerous losses.  In the event of an uninsured claim above our insurance coverage, a claim that approaches the maximum self-insured retention level, or an increase in the frequency or severity of claims within our self-insured retention, our financial condition and results of operations could be materially and adversely affected.
 

 
13

 


The Company’s effective tax benefit rate increased to 34.7% in 2010 from 30.2% in 2009 primarily due to reductions in permanent differences between book and taxable income.  We pay our drivers a per-diem allowance for travel related expenses for which we are only able to deduct 80% for tax purposes.  This, along with other non-deductible items for tax, impacted the change in our tax rate from 2009.
 
As a result of factors described above, our net loss decreased to $3.7 million compared to a net loss of $6.1 million in 2009.  Our net loss per share in the first quarter of 2010 improved to $0.22 per diluted share from a loss of $0.36 per diluted share in the first quarter of 2009.

LIQUIDITY AND CAPITAL RESOURCES
 
Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. Our primary sources of liquidity are funds provided by operations, our Credit Facility and our ability to enter into equipment leases with various financing institutions.  A portion of our tractor fleet is provided by independent contractors who own and operate their own equipment.  We have no capital expenditure requirements relating to those drivers who own their tractors or obtain financing through third parties. However, to the extent we purchase tractors and extend financing to the independent contractors through our tractor purchase program, we have an associated capital expenditure requirement.
 
                In November 2007, our Board of Directors approved a share repurchase program to repurchase up to one million shares of our common stock.  This program is intended to be implemented through purchases made in either the open market or through private transactions.  The timing and extent to which we will repurchase shares depends on market conditions and other corporate considerations.  We made no open market purchases in 2010 or 2009 and have available approximately 917,900 shares that can be repurchased from that and previous authorizations. The repurchase program does not have an expiration date.
 
The table below reflects our net cash flows provided by (used in) operating activities, investing activities and financing activities and outstanding debt, including current maturities, for the periods indicated.

   
(in thousands)
 
   
Three Months Ended March 31,
 
   
2010
   
2009
 
Net cash flows provided by operating activities
 
$
3,876
   
$
7,345
 
Net cash flows provided by (used in) investing activities
   
1,706
     
(2,165
)
Net cash flows provided by (used in) financing activities
   
61
     
(556
)
Debt at March 31
   
-
     
-
 

For the three months ended March 31, 2010, we purchased $2.1 million of new revenue and service equipment, and recognized a gain of $0.3 million on the disposition of used equipment.  We generated $3.9 million of cash flows from operating activities primarily driven by a $4.7 million tax refund, aided by a decrease in our accounts receivable and other current asset balances, but partially offset by a decrease in accounts payable balances as compared to our total expenditures.  Our net capital expenditures were primarily funded with cash flows from operations.  We believe our sources of liquidity are adequate to meet our current and anticipated needs for at least the next twelve months.  Based upon anticipated cash flows, current borrowing availability and sources of financing we expect to be available to us, we d o not anticipate any significant liquidity constraints in the foreseeable future.  We estimate that capital expenditures, net of proceeds from dispositions, will range from $8-$11 million in 2010, which would be consistent with our recent activity and the expected mix of capital expenditures and operating leases.

        

 
14

 

We establish credit terms with our customers based upon their financial strength and their historical payment pattern.   Many of our largest customers under contract are Fortune 500 companies.  Given the current economic conditions, we have placed additional emphasis on our review of significant outstanding receivable balances.  Accounts receivable are recorded at the invoiced amounts, net of an allowance for doubtful accounts.  A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes.  In order to assess the collectability of these receivables, we perform ongoing credit evaluations of our customers’ financial condition.   Through these evaluations, we may become aware of a situation in which a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy.  Our allowance for doubtful accounts is based on the best information available to us and is reevaluated and adjusted as additional information is received.  We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy.  Invoice balances over 30 days after the contractual due date are considered past due per our policy and are reviewed individually for collectability.  During the first quarter of 2010, we increased our reserve for doubtful accounts by $318,000 from December 31, 2009 due to an increase in our aged receivables.  Initial payments by new customers are monitored for compliance with contractual terms.  Account balances are charged off against the a llowance after all means of collection have been exhausted and the potential recovery is considered remote.

The Credit Facility provides for a secured, committed credit facility maturing in September 2011, with an aggregate availability of $25.0 million.  We may borrow an amount not to exceed the lesser of $25.0 million, the approved total accounts receivable borrowing base, as defined by the Credit Facility, adjusted for letters of credit and other debt (as defined in the agreement), or a multiple of a measurement of cash flow.  Per the Credit Facility, the borrowing base is limited to 85% of the eligible accounts receivable balance, which excludes amounts past due beyond 90 days, undelivered revenue, and the current portion of freight claims.  At March 31, 2010, there were no amounts borrowed under the Credit Facility; however, we had $3.2 million of standby letters of credit primarily for our self-insurance pro grams, which reduced the availability to $21.8 million.   The Credit Facility bears interest at a spread over the London Interbank Offered Rate (“LIBOR”).   

The Credit Facility contains several covenants, which include the following:

·  
The ratio of our annual earnings before interest, taxes, depreciation, amortization and lease and rental (as defined in the Credit Facility, “EBITDAR”) to the amount of our annual fixed charges, also referred to as the fixed charge coverage ratio, may not be less than 1.10:1.0 at March 31, 2010.  This ratio adjusts through the year per the schedule below.  Fixed charges generally include interest payments, rental expense, taxes paid, dividends paid and payments due on outstanding debt.
·  
The ratio of our funded debt to EBITDAR may not exceed 2.75:1.0. This ratio will also adjust per the schedule below.  Funded debt generally includes the amount borrowed under the Credit Facility or similar arrangements, letters of credit and the aggregate minimum amount of operating lease payments we are obligated to pay in the future.
·  
Our tangible net worth must be no less than $80.0 million at March 31, 2010 and remain an amount no less than $75.0 million according to the schedule below. Tangible net worth is generally defined as our net shareholders' equity minus intangible and certain other assets plus 100% of any cash we receive from the issuance of equity securities.
·  
The annual amount of our net expenditures for property and equipment during any twelve month period may not be more than $12.5 million.
·  
The amount available for acquisitions may not exceed $3.5 million in any fiscal year.
·  
The interest rate spread over LIBOR changes based upon achieving various EBITDAR to fixed charge ratios.
·  
Payments of dividends are generally limited by the ratio of our EBITDAR to fixed charges and the profitability of the previous quarter.


 
15

 



Periods Ending
EBITDAR to
Fixed Charges
Funded Debt to
EBITDAR
 
(in thousands)
Minimum Tangible
Net Worth
 
March 2010 – May 2010
1.10:1.0
2.75:1.0
 
 $
80,000
 
June 2010 – August 2010
1.20:1.0
2.75:1.0
   
75,000
 
Subsequent to August 2010
1.25:1.0
2.50:1.0
   
75,000
 


At March 31, 2010, our EBITDAR was $38.4 million.  Our fixed charges were $29.1 million, resulting in a fixed charge coverage ratio of 1.32.  Our funded debt as defined in the agreement was $89.6 million, resulting in funded debt to EBITDAR ratio of 2.33.   Our tangible net worth as defined by the agreement was $85.0 million keeping in compliance with the agreement.   Maintaining a credit facility is imperative for us to continue our operations by allowing us to manage our working capital and acquire revenue equipment that is essential to our operations.  Should we not be able to meet these covenants, amounts outstanding may become payable immediately and our ability to make future draws on the Credit Facility may be limited.  We are in compliance with all of the coven ants under the Credit Facility as of March 31, 2010 and anticipate our compliance will continue.

The following is a summary of our contractual obligations as of March 31, 2010:

   
(in thousands)
 
   
Total
   
2010
     
2011-2012
     
2013-2014
   
After 2014
 
Letters of credit
 
$
3,235
   
$
2,661
   
$
574
   
$
-
   
$
-
 
Purchase obligations
   
40,250
     
40,250
     
-
     
-
     
-
 
Operating leases obligations
                                       
Rentals
   
86,338
     
23,445
     
41,967
     
12,322
     
8,604
 
Residual guarantees
   
10,243
     
724
     
7,142
     
2,377
     
-
 
   
140,066
   
$
67,080
   
$
49,683
   
$
14,699
   
$
8,604
 

The purchase obligations are commitments primarily for replacement tractors that will be received ratably over the course of the year.  Financing has been secured for operating leases on all tractors under these commitments.

Off-Balance Sheet Arrangements

As of March 31, 2010, we had 1,137 tractors and 2,023 trailers under operating leases with varying termination dates ranging from April 2010 through October 2015 with rental obligations of $86.3 million.  Rent expense related to operating leases involving vehicles during the first quarters of 2010 and 2009 was $8.8 million and $9.8 million, respectively.  We maintain standby letters of credit related to self-insured programs in the amount of $3.2 million.  These standby letters of credit allow the Company to self-insure a portion of its insurance exposure.

Inflation and Fuel Costs
 
                Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices, accident claims, health insurance, employee compensation and fuel.  We attempt to limit the effects of inflation through increases in freight rates and cost control efforts.
 
                In addition to inflation, fluctuations in fuel prices can affect our profitability. We require substantial amounts of fuel to operate our tractors and power the temperature-control units on our trailers. Substantially all of our contracts with customers contain fuel surcharge provisions. Although we historically have been able to pass through most long-term increases in fuel prices and related taxes to our customers in the form of surcharges and higher rates, such increases usually are not fully recovered.  We do not currently hedge our exposure to fuel prices through financial derivatives.

 
16

 



Seasonality
 
                Our temperature-controlled truckload operations are affected by seasonal changes. The growing seasons for fruits and vegetables in Florida, California and Texas typically create increased demand for trailers equipped to transport cargo requiring refrigeration. Our LTL operations are also impacted by the seasonality of certain commodities. LTL shipment volume during the winter months is normally lower than other months. Shipping volumes of LTL freight are usually highest from July through October.  LTL volumes also tend to increase in the weeks before holidays such as Easter, Thanksgiving and Christmas when significant volumes of food and candy are transported. 

Our tractor productivity generally decreases during the winter season as inclement weather impedes operations and some shippers typically reduce their shipments as there is less need for temperature control during colder months than warmer months. At the same time, operating expenses generally increase with harsh weather creating higher accident frequency, increased claims and more equipment repairs.  To the extent that extreme weather patterns increase in severity or frequency due to climate changes, we would expect to see an increase in the effect of inclement or extreme weather patterns.  We do not have the ability to forecast these potential changes or impact of these changes.

Effects of Climate Change and Climate Change Regulation

Greenhouse gas emissions have increasingly become the subject of a large amount of international, national, regional, state and local attention. Cap and trade initiatives to limit greenhouse gas emissions have been introduced in the EU (“European Union”). Similarly, numerous bills related to climate change have been introduced in the United States Congress, which could adversely impact all industries. In addition, future regulation of greenhouse gases could occur pursuant to future U.S. treaty obligations, statutory or regulatory changes under the Clean Air Act or new climate change legislation.  It is uncertain whether any of these initiatives will be implemented, although, based on published media reports, we believe it is not reasonably likely the current proposed i nitiatives will be implemented without substantial modification. If such initiatives are implemented, restrictions, caps, taxes, or other controls on emissions of greenhouse gases, including diesel exhaust, could significantly increase our operating costs. Restrictions on emissions could also affect our customers that use significant amounts of energy or burn fossil fuels in producing or delivering the products we carry including, but not limited to, food producers and distributors. Although significant cost increases, government regulation, and changes of consumer needs or preferences for goods or services relating to alternative sources of energy or emissions reductions or changes in our customers' shipping needs could materially affect the markets for the products we carry, which in turn could have a material adverse effect on our results of operations, financial condition, and liquidity, or, in the alternative, could result in increased demand for our transportation services, we are currently unable to p redict the manner or extent of such effect.

CRITICAL ACCOUNTING POLICIES

                The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our consolidated financial statements and related notes.  We base our estimates, assumptions and judgments on historical experience, current trends and other factors believed to be relevant at the time our consolidated financial statements are prepared.  However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and suc h differences could be material.  We believe the following critical accounting policies affect our more significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements.
 

 
17

 



Accounts Receivable.  We are dependent upon contracts with significant customers that generate a large portion of our revenue.  Accounts receivable are recorded at the invoiced amounts, net of an allowance for doubtful accounts.  A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes.  In order to assess the collectability of these receivables, we perform ongoing credit evaluations of our customers’ financial condition.  Through these evaluations, we may become aware of a situation in which a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy.  The allowance for doubtful accounts is based on the best information available to us and is reevaluated and adjusted as additional information is received.  We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy.  We perform ongoing reviews of the adequacy of our allowance for doubtful accounts.  Invoice balances past the contractual due date are considered past due per our policy and the customer balances are reviewed for collectability.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential recovery is considered remote.

Revenue Recognition.  The Company recognizes revenue and the related direct costs on the date the freight is picked up from the shipper.  One of the preferable methods under US GAAP provides the recognition of revenue and direct costs when the shipment is completed.  Changing to this method would not have a material impact on the quarterly financial results or operations of the Company.

Property and Equipment.  The transportation industry is capital intensive. Our net property and equipment, including property held for sale, was $70.7 million as of March 31, 2010 and $75.9 million as of December 31, 2009. Our depreciation expense was $4.0 million for the first quarter of 2010 and $4.6 million for the first quarter of 2009. Depreciation is computed based on the cost of the asset, reduced by its estimated residual value, using the straight-line method for financial reporting purposes.  Accelerated methods are used for income tax reporting purposes. Additions and improvements to property and equipment are capitalized at cost.  Maintenance and repair expenditures are charged to operations as incurred.  Gains and losses on disposals o f revenue equipment are included in operations as they are a normal, recurring component of our operations.  We have minimal risk to the used equipment market as the majority of our tractors have a pre-arranged trade-in value at the end of 42 months, which is utilized as the residual value in computing depreciation expense.
 
Impairment of Assets.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell.
 
Insurance and claims.  We are self-insured for a portion of losses relating to workers’ compensation, auto liability, general liability, cargo and property damage claims, along with employees’ health insurance with varying risk retention levels.  We maintain insurance coverage for per-incident occurrences and in excess of these risk retention levels in amounts we consider adequate based upon historical experience and our ongoing review.  We reserve currently for the estimated cost of the uninsured portion of pending claims. These reserves are periodically evaluated and adjusted based on our evaluation of the nature and severity of outstanding individual claims and an estimate of future claims development based on historical claims development factors .  The Company accrues for the anticipated legal and other costs to settle the claims currently.  The Company is responsible for the first $4.0 million on each personal injury and property damage claim and 25% of the claim amount between $4.0 million and $10.0 million.  The Company has excess coverage from $10.0 million to $50.0 million.  The Company utilizes an independent actuary to assist in establishing its accruals.  Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods depending on the frequency, severity and timing of claims and to adverse financial results if we incur large or numerous losses.  In the event of an uninsured claim above our insurance coverage, a claim that approaches the maximum self-insured retention level, or an increase in the frequency or severity of claims within our self-insured retention, our financial condition and results of operations could be ma terially and adversely affected.
 
 

 
18

 

Income Taxes.  As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes.  These temporary differences result in deferred tax assets and liabilities, which are included in our accompanying consolidated balance sheets.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled.  To the extent it is determined it is not l ikely that our deferred tax assets will be recovered, a valuation allowance must be established for the amount of the deferred tax assets determined not to be realizable.  We believe the deferred tax assets will be principally realized through future reversals of existing temporary differences (deferred tax liabilities) and future taxable income.  However, if the facts or our financial results were to change, thereby impacting the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine the amount of any increase to the valuation allowance that would be required in any given period.
 
RECENT ACCOUNTING PRONOUNCEMENTS

Codification and the Hierarchy of Generally Accepted Accounting Principles.   Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“ASC 105”), (formerly SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles). This standard establishes only two levels of US GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) became the sole source of authoritative, nongovernmental US GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative US GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. The Company began using the new guidelines and numbering system prescribed by the Codification when referring to US GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing US GAAP, it did not have an impact on the Company’s consolidated financial statements.

 Item 3.   Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to a variety of market risks, primarily from fuel prices and interest rates. These risks have not materially changed between December 31, 2009 and the first quarter of 2010.
 
Commodity Price Risk
 
Our operations are heavily dependent upon fuel prices.  The price and availability can vary and are subject to political, economic and market factors that are beyond our control.  Significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition; however, historically, we’ve been able to recover the majority of diesel fuel price increases from customers in the form of fuel surcharges.  Fuel prices have fluctuated greatly in recent years. In some periods, our operating performance was adversely affected because we were not able to fully offset the impact of higher diesel fuel prices through increased freight rates and fuel surcharges. We cannot predict the extent to which high fuel price levels will continue in the future or the extent to which fuel surcharges could be collected to offset such increases. We do not currently enter into derivative hedging arrangements that protect us against fuel price increases.  A 5% increase in the average fuel cost per gallon would result in annual increased fuel costs of approximately $3.2 million that would be substantially offset by fuel surcharges.
 

 
19

 

Interest Rate Risk
 
Our market risk is also affected by changes in interest rates.  We have historically maintained a combination of fixed rate and variable rate obligations to manage our interest rate exposure.  Fixed rates are generally maintained within our lease obligations while variable rates are contained within our amended and restated credit agreement.
 
We are exposed to interest rate risk primarily from our amended and restated credit agreement.  Our credit agreement, as amended, provides for borrowings that bear interest based on the LIBOR, plus a certain percentage.  At March 31, 2010 and December 31, 2009, there were no borrowings outstanding under our Credit Facility.
 
As of March 31, 2010, we held no market-risk-sensitive instruments for trading purposes.  For purposes other than trading, we held approximately 68,000 shares of our common stock at a value of $264,000 in a Rabbi Trust investment. Our consolidated financial statements include the assets and liabilities of the 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.  To the extent the trust assets are invested in our stock, our future compensation expense and income will be impacted by fluctuations in the market price of our stock.

 Item 4.    Controls and Procedures
 
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report.  This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Interim Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and our Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2010.  There were no changes in our internal con trol over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.  We intend to periodically evaluate our disclosure controls and procedures as required by the Exchange Act Rules.

PART II.  OTHER INFORMATION
 
 Item 1.    Legal Proceedings

We are involved in litigation incidental to our operations, primarily involving claims for personal injury, property damage, work-related injuries and cargo losses incurred in the ordinary and routine transportation of freight.


 
20

 

   
 Item 1A.    Risk Factors
 
Certain risks associated with our operations are discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, under the heading “Risk Factors” in Item 1A of that report.  We do not believe there have been any material changes in these risks during the three months ended March 31, 2010.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
On November 9, 2007, our Board of Directors renewed our authorization to purchase up to 1,263,900 shares of our common stock.  At March 31, 2010, there were a total of 917,900 remaining authorized shares that could be repurchased.  No shares were repurchased during the first quarter of 2010.  The authorization did not specify an expiration date.  Shares may be purchased from time to time on the open market or through private transactions at such times as management deems appropriate.  Purchases may be discontinued by our Board of Directors at any time.
 
Item 3.    Defaults Upon Senior Securities
 
None.
 
Item 4.    Reserved
 
Item 5.    Other Information
 
None.
 
Item 6.    Exhibits
3.1
Restated Articles of Incorporation of Frozen Food Express Industries, Inc. (filed as Exhibit 3(i) to Registrant Current Report on Form 8-K filed on May 29, 2007 and incorporated herein by reference).
   
3.2
Amended and Restated Bylaws of the Registrant, as amended (filed as Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on March 3, 2009 and incorporated herein by reference).
   
4.1
First Amendment to the Rights Agreement between the Registrant and Fleet National Bank, dated February 24, 2010 (filed as Exhibit 4.1(a) to the Company's Annual Report on Form 10-K on February 26, 2010 and incorporated herein by reference).
   
4.2
Second Amendment to the Rights Agreement between the Registrant and Registrar and Transfer Company, dated April 14, 2010  (filed as Exhibit 4.3 to the Company's Amendment No. 1 to Form 8-A on April 15, 2010 and incorporated herein by reference).
   
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).


 
21

 

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: May 5, 2010
 
By
 
/s/ Stoney M. Stubbs, Jr.
   
Stoney M. Stubbs, Jr.
Chairman of the Board  and
Chief Executive Officer
(Principal Executive Officer)
 
Dated: May 5, 2010
 
By
 
/s/ John McManama
   
John McManama
Vice President and
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)


 
22

 



 
EXHIBIT INDEX
 
3.1
Restated Articles of Incorporation of Frozen Food Express Industries, Inc. (filed as Exhibit 3(i) to Registrant Current Report on Form 8-K filed on May 29, 2007 and incorporated herein by reference).
   
3.2
Amended and Restated Bylaws of the Registrant, as amended (filed as Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on March 3, 2009 and incorporated herein by reference).
   
4.1
First Amendment to the Rights Agreement between the Registrant and Fleet National Bank, dated February 24, 2010 (filed as Exhibit 4.1(a) to the Company's Annual Report on Form 10-K on February 26, 2010 and incorporated herein by reference).
   
4.2
Second Amendment to the Rights Agreement between the Registrant and Registrar and Transfer Company, dated April 14, 2010 (filed as Exhibit 4.3 to the Company's Amendment No. 1 to Form 8-A on April 15, 2010 and incorporated herein by reference).
   
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
 
 
23
 
 
 
 
 

 
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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 for the period ended March 31, 2010 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 principles;
     
  
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: May 5, 2010
 
 
/s/ Stoney M. Stubbs, Jr.
   
Stoney M. Stubbs, Jr.
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
 
 
EX-31.2 4 exh31_2.htm SEC 302 JRM exh31_2.htm
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, John McManama, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2010 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 principles;
     
 
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: May 5, 2010
 
/s/ John McManama
   
John McManama
Vice President and Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
 

 
 

 

EX-32.1 5 exh32_1.htm SEC 905 SMS AND JRM exh32_1.htm
EXHIBIT 32.1
 
FROZEN FOOD EXPRESS INDUSTRIES, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND 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 period ended March 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned certifies, pursuant to 18 U.S.C. Section §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best knowledge of the undersigned:

 
(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: May 5, 2010
 
/s/ Stoney M. Stubbs, Jr.
   
Stoney M. Stubbs, Jr.
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
     
Dated: May 5, 2010
 
/s/ John McManama
   
John McManama
Vice President and Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
 

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