1. Summary of Significant Accounting Policies

Nature of business: Frozen Food Express Industries, Inc. is one of the leading temperature-controlled truckload and less-than-truckload carriers in the United States with core operations in the transport of temperature-controlled products and perishable goods, which include food, health care and confectionary products. The Company operates in one business segment, motor carrier operations qualified by the aggregation criteria under accounting principles generally accepted in the United States of America ("US GAAP") Accounting Standards Codification ("ASC") 280, Segment Reporting. Truckload, LTL and dedicated services are offered utilizing similar equipment under similar economic characteristics and servicing similar type of customers. The Company also provides brokerage logistics services to our customers which include our water transportation service.

Principles of consolidation: The accompanying consolidated financial statements include Frozen Food Express Industries, Inc., a Texas corporation, and our subsidiary companies, all of which are wholly-owned (collectively, the "Company"). Intercompany balances and transactions have been eliminated in consolidation.

Cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The carrying amount reported on the consolidated balance sheets approximate fair value. The Company's cash and cash equivalents at commercial banking institutions normally exceed federally insured limits.

Accounts receivable: 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 credit worthiness 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 outstanding 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.

Tires on equipment in use, net: The Company capitalizes the original cost of tires purchased with vehicles and replacement tires as a current asset. Amortization is calculated on a per-mile basis, less an estimated residual value. Amortization of tires, which was $2.8 million, $4.3 million and $3.6 million in 2012, 2011 and 2010, respectively, is included in the consolidated statements of operations as a component of supplies and maintenance. It is computed on a per-mile basis based upon the expected life of the tires. The number of miles over which a tire is amortized depends on a variety of factors, including but not limited to the type of tire involved (recap or original tread) and the position of the tire (steering, tractor drive, axle or trailer). Steering tires tend to be shorter-lived (75,000 to 100,000 miles) than original tread drive-axle (100,000 to 150,000 miles) or original tread trailer tires (125,000 to 150,000 miles). Recaps generally have a service life of about two-thirds as many miles as the similarly-positioned original tread tires. For safety reasons, we do not utilize recaps as steering tires.

Property and equipment, net: 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 of revenue equipment are included in operations as they are a normal, recurring component of our operations. 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. Following is a summary of estimated useful lives utilized for the majority of our property and equipment for financial reporting purposes:

			Years
	Revenue equipment		6-10
	Buildings and improvements		10-39
	Service equipment		5-15
	Computers, software and related equipment		3-5

Frozen Food Express Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

Our typical replacement cycles are 42 months for tractors and 84 months for refrigerated trailers, with an estimated residual value. The residual values for the majority of the tractors are based upon an estimated trade-in value of the equipment with the original vendor.

We periodically evaluate whether the remaining useful lives of our long-lived assets may require revision or whether the remaining unamortized balance is recoverable. When factors indicate an asset should be evaluated for possible impairment, we use an estimate of the asset's projected undiscounted cash flow in evaluating whether an impairment exists. If an impairment exists, the asset is written down to net realizable value.

Insurance and claims accruals: 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. For claims incurred prior to June 1, 2012, the Company is responsible for the first $4.0 million on personal injury and property damage liability claims and has excess coverage from $4.0 million to $75.0 million. The Company is self-insured for the first $1 million of all losses. On June 1, 2012, the Company purchased insurance policies to cover almost all losses greater than $1 million up to $75 million. The policy purchased to cover the $2 million to $10 million layer of losses contains a self-insured corridor of $1 million, which essentially limits total losses, within the $2 million to $10 million layer, to $1 million in aggregate for any insurance year and means any loss amounts in excess of $3 million on any claims incurred after May 31, 2012, are fully covered for the amount in excess of $3 million up to $75 million. The reserves also include an estimate for claims incurred but not reported. We accrue for the anticipated legal and other costs to settle the claims. Under agreements with our insurance carriers and regulatory authorities, we had $5.0 million at December 31, 2012, in standby letters of credit to guarantee settlement of claims. In 2012, the Company recorded adjustments decreasing the loss from operations by $567,000 for the year ended December 31, 2012. These adjustments related to correcting certain self-insurance reserve calculations during prior periods. Management does not believe that the adjustments were material to the Company's financial statements for any period.

Income taxes: Income taxes are accounted for in accordance with US GAAP. The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carry forwards. 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 the tax rates enacted by certain tax laws and published guidance expected to apply to taxable income in effect to those years in which the temporary differences are expected to reverse. To the extent it is determined it is more likely than not that our deferred tax assets will not be recovered, a valuation allowance must be established for the amount of the deferred tax assets determined not to be realizable. The determination of whether a deferred tax asset is realizable is based on weighing all available evidence, including both positive and negative evidence. We believe that our assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income. We will apply judgment to determine the amount of valuation allowance, if any, that would be required in any given period. We will continue to assess whether we will realize all, part, or none of the deferred tax assets. Due to our operating results for the year ended December 31, 2012, our valuation allowance, which relates to federal and state deferred tax assets, was increased to $17.1 million as of December 31, 2012 compared to $12.0 million at December 31, 2011. The Company's federal net operating loss carry forward balance is approximately $49.9 million at December 31, 2012 and does not begin to expire until 2028.

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 accounting principles generally accepted in the United States of America ("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 or annual financial statements.

Frozen Food Express Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

We are the sole obligor with respect to the performance of our freight services provided by owner-operators 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.

Gain on sale of property and equipment: The Company recorded gains on sale of property and equipment of $5.9 million, $5.7 million and $1.1 million in the years, 2012, 2011 and 2010, respectively. The Company realized higher gains on sale of property and equipment in 2011 due to the sale of 421 tractors and 447 trailers in the fourth quarter of 2011 as it chose to cease providing dry van service to its customers. This accounted for $4.5 million of the 2011 gain on sale. In 2012 the Company realized higher gains on sale of property and equipment due to an improved overall market for used equipment when it sold its tractors and trailers as a normal course of business and due to the sale of an owned facility in Avenel, New Jersey in the first quarter of 2012 which accounted for $678,000 in gain on sale. Additionally, in 2012, the Company recorded adjustments that increased the gain on sale and decreased the loss from operations by $428,000 for the year ended December 31, 2012. These adjustments related to correcting the calculations of the gains on sale of equipment for tire salvage values during prior periods. Management does not believe that the adjustments were material to the Company's financial statements for any period.

Net loss per common share: Net loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the quarter or year. Diluted earnings per common share is computed by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares related to stock options and other dilutive securities had been issued using the treasury stock method.

Use of estimates: The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the consolidated financial statements. A significant degree of judgment is required in the estimates related to the collectability of accounts receivable, impairment of assets and reserves for risk-related items such as workers' injury claims, auto liability, general liability, cargo and property damage claims and employees' health insurance. Ultimate results could differ from those estimates.