<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 4, 1998 (July 9, 1998)
FORWARD AIR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 000-22490 62-1120025
- ------------------------------- ------------------------ ----------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification No.)
430 Airport Road, Greeneville, Tennessee 37745
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 636-7100
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
- --------------------------------------------------------------------------------
Forward Air Corporation (the "Company") has prepared this Current
Report on Form 8-K to provide certain financial information (including restated
historical financial statements) in connection with the proposed separation of
the Company into two publicly-held corporations (the "Spin-off"), one owning and
operating the Company's deferred air freight operations (the "Forward Air
Business") and the other owning and operating the Company's truckload operations
(the "Truckload Business"). Subsequent to the Spin-off, the Company will own and
operate the Forward Air Business, and Landair Corporation, the Company's current
truckload subsidiary, will own and operate the Truckload Business. The Spin-off
was approved by the Company's Board of Directors on July 9, 1998 and is expected
to be consummated on or about September 23, 1998 through the distribution by the
Company of all of the issued and outstanding common stock, $.01 par value per
share, of Landair Corporation (the "Landair Corporation Common Stock"). The
distribution will be made on the basis of one share of Landair Corporation
Common Stock for each share of the Company's common stock, $.01 par value per
share, held on the close of business on September 16, 1998.
The financial information contained in this Current Report includes:
(i) audited consolidated financial statements of the Company, including the
notes thereto, which have been restated to report the results of operations and
cash flows of the Truckload Business as discontinued operations; and (ii)
unaudited pro forma condensed financial statements of the Company, including the
related notes thereto, which assume the Spin-off had occurred on June 30, 1998
as to the balance sheet or on January 1, 1997 as to the statements of income.
<PAGE> 3
PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma condensed consolidated balance sheet of the
Company as of June 30, 1998, presents the financial position of the Company
assuming the anticipated Spin-off had occurred on June 30, 1998. The unaudited
pro forma condensed consolidated statements of income of the Company for the
year ended December 31, 1997 and six months ended June 30, 1998 present the
results of operations of the Company assuming the anticipated Spin-off had
occurred on January 1, 1997.
The unaudited pro forma condensed consolidated financial statements of
the Company should be read in conjunction with the historical consolidated
financial statements of the Company contained in this Current Report on Form
8-K. Significant changes could have occurred in the funding and operations of
the Forward Air Business had it been operated as an independent stand-alone
entity during those periods. The pro forma condensed consolidated statements are
for informational purposes only and do not purport to represent what the results
of operations or financial position of the Company would have been had the
Spin-off actually occurred on June 30, 1998 as to the balance sheet or on
January 1, 1997 as to the statements of income, or to project the results of
operations of the Company in any future period.
<PAGE> 4
FORWARD AIR CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
--------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 900 $ -- $ 900
Accounts receivable 17,602 -- 17,602
Other current assets 1,869 292 (b) 2,161
--------------------------------------------
Total current assets 20,371 292 20,663
Property and equipment, net 18,164 1,070 (a) 24,855
5,621 (b)
Other assets 3,401 -- 3,401
Assets of discontinued operations 98,356 (98,356)(e) --
--------------------------------------------
Total assets $ 140,292 $ (91,373) $48,919
============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 244 $ -- $ 244
Accrued expenses 2,092 -- 2,092
Current portion of long-term debt 1,989 991 (b) 2,980
Current portion of capital lease obligations 769 373 (a) 1,142
Due to Truckload Business subsidiaries 12,393 (12,393)(c) --
--------------------------------------------
Total current liabilities 17,487 (11,029) 6,458
Long-term debt, less current portion 3,319 1,936 (b) 22,648
12,393 (c)
5,000 (d)
Capital lease obligations, less current portion 4,472 951 (a) 5,423
Deferred income taxes 608 1,049 (b) 1,657
Liabilities of discontinued operations 57,833 (57,833)(e) --
Shareholders' equity:
Preferred stock -- -- --
Common stock 62 -- 62
Additional paid-in capital 28,218 (254)(a) 12,671
1,937 (b)
(5,000)(d)
(12,230)(e)
Retained earnings 28,293 (28,293)(e) --
--------------------------------------------
Total shareholders' equity 56,573 (43,840) 12,733
--------------------------------------------
Total liabilities and shareholders' equity $ 140,292 $ (91,373) $48,919
============================================
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
<PAGE> 5
FORWARD AIR CORPORATION
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Operating revenue $ 105,140 $ -- $ 105,140
Operating expenses 92,076(j) -- 92,076
-------------------------------------------
Income from operations 13,064 -- 13,064
Other income (expense):
Interest expense (796) (1,451)(f) (2,247)
Other, net (84) -- (84)
-------------------------------------------
(880) (1,451) (2,331)
-------------------------------------------
Income from continuing operations before
income taxes 12,184 (1,451) 10,733
Income taxes 4,740 (566)(g) 4,174
-------------------------------------------
Income from continuing operations $ 7,444 $ (885) $ 6,559
===========================================
Income from continuing operations per share:
Basic $ 1.25 $ (.15) $ 1.10
Diluted $ 1.20 $ (.13) $ 1.07
Weighted average number of common and
common equivalent shares outstanding:
Basic 5,968 -- 5,968
Diluted 6,177 (29)(h) 6,148
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
<PAGE> 6
FORWARD AIR CORPORATION
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Operating revenue $ 59,589 $-- $ 59,589
Operating expenses 53,095(j) -- 53,095
-------------------------------------------
Income from operations 6,494 -- 6,494
Other income (expense):
Interest expense (425) (771)(f) (1,196)
Other, net 11 -- 11
-------------------------------------------
(414) (771) (1,185)
-------------------------------------------
Income from continuing operations before
income taxes 6,080 (771) 5,309
Income taxes 2,348 (301)(g) 2,047
-------------------------------------------
Income from continuing operations $ 3,732 $ (470) $ 3,262
===========================================
Income from continuing operations per share:
Basic $ .61 $ (.08) $ .53
Diluted $ .58 $ (.07) $ .51
Weighted average number of common and
common equivalent shares outstanding:
Basic 6,127 -- 6,127
Diluted 6,420 (29)(h) 6,391
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
<PAGE> 7
FORWARD AIR CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)
(a) Reflects the contribution from the Truckload Business to the Company of
property and equipment under capital leases related to the Forward Air
Business as follows:
<TABLE>
<S> <C>
Property and equipment, net $ 1,070
Current portion of capital lease obligations (373)
Capital lease obligations, less current portion (951)
Additional paid-in capital 254
--------
$ --
========
</TABLE>
(b) Reflects the contribution by the Truckload Business to the Company of
property and equipment and certain assets used in the Forward Air Business
along with the related debt as follows:
<TABLE>
<S> <C>
Property and equipment, net $ 5,621
Other current assets 292
Deferred income taxes (1,049)
Current portion of long-term debt (991)
Long-term debt, less current portion (1,936)
Additional paid-in capital (1,937)
--------
$ --
========
</TABLE>
(c) Reflects the payment by the Company to the Truckload Business of
intercompany indebtedness, as of June 30, 1998, in the amount of $12,393
through borrowings under credit facilities.
(d) Reflects a $5,000 capital contribution to the Truckload Business by the
Company through borrowings under credit facilities.
<TABLE>
<S> <C>
Long-term debt, less current portion $ (5,000)
Additional paid-in capital 5,000
--------
$ --
========
</TABLE>
(e) Reflects the distribution to the Truckload Business of the stock of the
Truckload Business' subsidiaries as follows:
<TABLE>
<S> <C>
Assets of discontinued operations $(98,356)
Liabilities of discontinued operations 57,833
Additional paid-in capital 12,230
Retained earnings 28,293
--------
$ --
========
</TABLE>
<PAGE> 8
(f) Reflects the inclusion of interest expense related to: (i) the capital
leases and long-term debt assumed from the Truckload Business; (ii) the
long-term debt used to finance the repayment of the $12,393 of
intercompany indebtedness to the Truckload Business; and (iii) the
long-term debt used to finance the $5,000 capital contribution to the
Truckload Business.
(g) Reflects the inclusion of income tax expense based on the combined federal
and state statutory rate of 39% applied to adjusted pre-tax income.
(h) Reflects the decrease in 29 diluted weighted average common shares
outstanding for the year ended December 31, 1997 and six months ended June
30, 1998, relating to the options held by employees of the Truckload
Business that are eligible for conversion into options of Landair
Corporation, as if such conversion had occurred on January 1, 1997.
(i) Historically, certain working capital accounts relating to the Forward Air
Business, principally consisting of certain accounts payable, accrued
payroll and related items and accrued liabilities, have been maintained by
the Truckload Business as a result of Forward Air Business' participation
in the Company's central cash management program. Accordingly, management
of the Company estimates that approximately $5 million of net working
capital liabilities will be continuing obligations of the Company after
such liabilities are paid by the Truckload Business subsequent to the
Spin-off. The impact of the settlement of the working capital accounts is
not reflected in the unaudited pro forma condensed consolidated balance
sheet of the Company as of June 30, 1998.
(j) Certain administrative expenses, consisting of payroll, legal, accounting,
rent and depreciation for shared facilities, and other common expenses
which could not be specifically identified to either the deferred air
freight operations or the truckload operations have been allocated between
the historical income statements of the Forward Air Business and the
Truckload Business based on their relative percentages of operating
revenue. These administrative expenses, which would have been incurred by
the Forward Air Business and the Truckload Business if each had been
operated as an independent stand-alone entity, totaled $5,039,000 and
$2,384,000 for the Forward Air Business and $4,420,000 and $1,710,000 for
the Truckload Business for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively. Management believes this
allocation method is reasonable.
<PAGE> 9
FORWARD AIR CORPORATION
Index to Financial Statements
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................................F-2
Consolidated Balance Sheets - December 31, 1996 and 1997 .......................................F-3
Consolidated Statements of Income - Years Ended December 31, 1995,
1996 and 1997...............................................................................F-5
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1995, 1996 and 1997............................................................F-6
Consolidated Statements of Cash Flows - Years Ended December 31, 1995,
1996 and 1997...............................................................................F-7
Notes to Consolidated Financial Statements - December 31, 1997...................................F-8
</TABLE>
F-1
<PAGE> 10
Report of Independent Auditors
The Board of Directors and Shareholders
Forward Air Corporation
We have audited the accompanying consolidated balance sheets of Forward Air
Corporation (formerly known as Landair Services, Inc.) as of December 31, 1996
and 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Forward Air
Corporation at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Nashville, Tennessee
January 30, 1998, except with respect to
the planned Spin-off of the Truckload
Business which is accounted for as
discontinued operations, as to which the
date is September 3, 1998
F-2
<PAGE> 11
Forward Air Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1997
---------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 158 $ 895
Accounts receivable, less allowance of
$337 in 1996 and $753 in 1997 13,997 17,671
Inventories 212 300
Prepaid expenses 306 1,088
Deferred income taxes 198 364
---------------------------
Total current assets 14,871 20,318
Property and equipment:
Land 3,199 3,477
Buildings 6,280 6,497
Other equipment 6,012 8,998
Leasehold improvements 443 568
---------------------------
15,934 19,540
Accumulated depreciation and amortization 1,984 3,755
---------------------------
13,950 15,785
Other assets 581 3,290
Deferred income taxes 2,485 572
Assets of discontinued operations 89,292 97,208
---------------------------
Total assets $121,179 $137,173
===========================
</TABLE>
F-3
<PAGE> 12
<TABLE>
<CAPTION>
December 31
1996 1997
---------------------------
(In thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3 $ 72
Accrued payroll and related items 36 --
Insurance and claims accruals 208 1,329
Income taxes payable 203 150
Other accrued expenses 700 212
Current portion of long-term debt -- 625
Current portion of capital lease obligations 1,131 974
Due to Truckload Business subsidiaries 19,427 17,447
---------------------------
Total current liabilities 21,708 20,809
Long-term debt, less current portion 1,508 3,508
Capital lease obligations, less current portion 5,815 4,746
Liabilities of discontinued operations 50,884 57,650
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 5,000,000 -- --
No shares issued
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 5,952,880 in
1996 and 6,024,388 in 1997 60 60
Additional paid-in capital 26,202 26,804
Retained earnings 15,002 23,596
---------------------------
Total shareholders' equity 41,264 50,460
---------------------------
Total liabilities and shareholders' equity $121,179 $137,173
===========================
</TABLE>
See accompanying notes.
F-4
<PAGE> 13
Forward Air Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996 1997
-------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Operating revenue $ 63,557 $ 80,737 $ 105,140
Operating expenses:
Purchased transportation:
Provided by non-affiliated entities 26,084 30,041 39,647
Provided by Truckload Business 3,238 5,881 6,137
Salaries, wages and employee benefits 13,277 17,756 24,086
Operating leases 3,653 4,889 5,867
Insurance and claims 1,784 2,165 2,811
Depreciation and amortization 1,482 2,085 2,902
Other operating expenses 7,642 9,404 10,626
-------------------------------------
57,160 72,221 92,076
-------------------------------------
Income from operations 6,397 8,516 13,064
Other income (expense):
Interest expense (694) (743) (796)
Other, net 83 2 (84)
-------------------------------------
(611) (741) (880)
-------------------------------------
Income from continuing operations before income taxes 5,786 7,775 12,184
Income taxes 2,206 2,891 4,740
-------------------------------------
Income from continuing operations 3,580 4,884 7,444
-------------------------------------
Income (loss) from discontinued operations (less
income taxes (benefit) of $1,067, $(432) and
$751, respectively) 937 (905) 1,150
-------------------------------------
Net income $ 4,517 $ 3,979 $ 8,594
=====================================
Income per share:
Basic:
Income from continuing operations $ .61 $ .82 $ 1.25
Income (loss) from discontinued operations .16 (.15) .19
-------------------------------------
Net income $ .77 $ .67 $ 1.44
=====================================
Diluted:
Income from continuing operations $ .59 $ .81 $ 1.20
Income (loss) from discontinued operations .16 (.15) .19
-------------------------------------
Net income $ .75 $ .66 $ 1.39
=====================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 14
Forward Air Corporation
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------- Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 5,811 $58 $25,214 $ 6,506 $31,778
Net income for 1995 -- -- -- 4,517 4,517
Exercise of stock options 53 1 348 -- 349
-------------------------------------------------
Balance at December 31, 1995 5,864 59 25,562 11,023 36,644
Net income for 1996 -- -- -- 3,979 3,979
Exercise of stock options 83 1 580 -- 581
Common stock issued under
employee stock purchase plan 6 -- 60 -- 60
-------------------------------------------------
Balance at December 31, 1996 5,953 60 26,202 15,002 41,264
Net income for 1997 -- -- -- 8,594 8,594
Exercise of stock options 61 -- 490 -- 490
Common stock issued under
employee stock purchase plan 10 -- 112 -- 112
-------------------------------------------------
Balance at December 31, 1997 6,024 $60 $26,804 $23,596 $50,460
=================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 15
Forward Air Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996 1997
-------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,517 $ 3,979 $ 8,594
Adjustments to reconcile net income to
net cash provided by operating activities
(Income) loss from discontinued operations (937) 905 (1,150)
Depreciation and amortization 1,482 2,085 2,902
Gain on sale of property and equipment -- (321) --
Provision for losses on receivables 385 495 515
Deferred income taxes (1,909) (251) 1,747
Changes in operating assets and liabilities,
net of effects from acquisition of business:
Accounts receivable (1,505) (5,977) (4,189)
Inventories (26) 2 (88)
Prepaid expenses (100) (84) (644)
Accounts payable and accrued expenses 513 77 666
Income taxes 281 204 (53)
Due to Truckload Business subsidiaries (1,795) 2,044 (1,980)
-------------------------------------
Net cash provided by operating activities 906 3,158 6,320
INVESTING ACTIVITIES
Purchases of property and equipment (1,600) (4,086) (3,602)
Proceeds from disposal of property and equipment -- 1,654 --
Acquisition of business -- -- (1,209)
Other (81) (197) (6)
-------------------------------------
Net cash used in investing activities (1,681) (2,629) (4,817)
FINANCING ACTIVITIES
Proceeds from long-term debt 611 897 812
Payments of long-term debt (135) (1,054) (954)
Payments of capital lease obligations (255) (1,002) (1,226)
Proceeds from exercise of stock options 349 581 490
Proceeds from common stock issued under
employee stock purchase plan -- 60 112
-------------------------------------
Net cash provided by (used in) financing activities 570 (518) (766)
-------------------------------------
Net increase (decrease) in cash and cash equivalents (205) 11 737
Cash and cash equivalents at beginning of year 352 147 158
-------------------------------------
Cash and cash equivalents at end of year $ 147 $ 158 $ 895
=====================================
</TABLE>
See accompanying notes.
F-7
<PAGE> 16
Forward Air Corporation
Notes to Consolidated Financial Statements
December 31, 1997
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
Forward Air Corporation (formerly Landair Services, Inc. until August 26, 1998)
and its subsidiaries. On July 9, 1998, (the "Measurement Date") the Board of
Directors of the Company authorized management to proceed with the separation of
the Company into two publicly-held corporations, one owning and operating the
deferred air freight operations and the other owning and operating the truckload
operations (the "Spin-off"). Management anticipates the Spin-off will be
effected in September 1998.
The Spin-off will be effected through the distribution to shareholders of the
Company of all of the outstanding shares of common stock of a new truckload
holding company, Landair Corporation. Pursuant to the Spin-off plans, the common
stock of Landair Corporation will be distributed to the shareholders of the
Company on a pro rata basis of one share of Landair Corporation common stock for
every one share of the Company's common stock held. Subsequent to the Spin-off,
the Company will be the legal entity that will own and operate the deferred air
freight operations through its operating subsidiaries, and Landair Corporation
will be the legal entity that will own and operate the truckload operations
through its operating subsidiaries. Additionally, the name Landair Services,
Inc. was changed to Forward Air Corporation. As a result of the anticipated
Spin-off, the operations of the Truckload Business are reported as discontinued
operations in the accompanying consolidated financial statements of the Company.
As used in the accompanying consolidated financial statements, the term "Forward
Air Business" refers to the deferred air freight operations; the term "Truckload
Business" refers to the truckload operations; and the "Company" refers to the
entity which, prior to the Spin-off, has operated both the Forward Air Business
and the Truckload Business and which, after the Spin-off, will operate the
Forward Air Business.
The continuing operations of the Company included in these financial statements
include the assets and liabilities and results of operations directly related to
the Forward Air Business for all periods presented. Significant changes could
have occurred in the funding and operations of the Forward Air Business had it
been operated as an independent stand-alone entity during those periods, which
could have had a significant impact on its financial position and results of
operations. As a result,
F-8
<PAGE> 17
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION (CONTINUED)
the financial information included in these financial statements is not
necessarily indicative of the financial position and results of operations of
the Forward Air Business which might have occurred had it been a stand-alone
entity.
The Company operates a comprehensive national network for the time-definite
surface transportation of deferred freight. The Company provides its
transportation services through a network of terminals located on or near
airports in the United States and Canada. The Company's customers consist of
domestic freight forwarders, domestic and international airlines, and integrated
air cargo carriers. The Company's operations involve receiving deferred freight
shipments at its terminals and transporting them by truck to the terminal
nearest their destination.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
OWNERSHIP
Scott M. Niswonger (Chairman and Chief Executive Officer) was the majority
shareholder of the Company during all periods presented.
OPERATING REVENUE
Operating revenue and related costs are recognized as of the date shipments are
completed. No single customer accounted for more than 10% of operating revenue
from continuing operations in 1995, 1996 or 1997.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-9
<PAGE> 18
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories of tires, replacement parts, supplies, and fuel for revenue
equipment are stated at the lower of cost or market utilizing the FIFO
(first-in, first-out) method of determining cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated based upon the cost of the asset, reduced by its
estimated salvage value, using the straight-line method over the estimated
useful lives as follows:
Buildings 30-40 years
Other equipment 3-10 years
Leasehold improvements 1-15 years
Interest payments during 1995, 1996 and 1997 were $691,000, $746,000 and
$825,000, respectively. No interest was capitalized during the three years ended
December 31, 1997. During 1995, 1996 and 1997, the Company added other equipment
of $-0-, $2,417,000 and $-0- through capital leases, respectively.
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. The measurement of possible impairment is based upon determining
whether projected undiscounted future cash flow from the use of the asset over
the remaining depreciation or amortization period is less than the carrying
value of the asset. As of December 31, 1997, in the opinion of management, there
has been no such impairment.
INSURANCE AND CLAIMS ACCRUALS
The primary claims in the Company's business are workers' compensation, property
damage, auto liability and medical benefits. Most of the Company's insurance
coverage provides for self-insurance levels with primary and excess coverage
which management believes is sufficient to adequately protect the Company from
catastrophic claims. In the opinion of management, adequate provision has been
made for all incurred claims up to the self-insured limits.
F-10
<PAGE> 19
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share, and uses the treasury stock method in calculating dilution. All earnings
per share amounts for all periods have been presented and restated to conform to
Statement 128 requirements.
STOCK OPTIONS
The Company grants options for a fixed number of shares to employees and outside
directors with an exercise price equal to the fair value of the shares at the
grant date. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. The Statement is effective for the Company
beginning in 1998, and establishes standards for the reporting and display of
comprehensive income and its components. The Statement requires that all items
that are income be reported in a financial statement that is displayed with the
same prominence as other financial statements. The Company does not expect the
effect of adoption of Statement 130 to be material to the consolidated financial
statements.
F-11
<PAGE> 20
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
COMMON EXPENSES
Certain administrative expenses, consisting of payroll, legal, accounting, rent
and depreciation for shared facilities, and other common expenses which could
not be specifically identified to either the deferred air freight operations or
the truckload operations have been allocated between the Forward Air Business
and the Truckload Business based on their relative percentages of operating
revenue. These administrative expenses, which would have been incurred by the
Forward Air Business and the Truckload Business if each had been operated as an
independent stand-alone entity, totaled $2,714,000, $3,157,000 and $5,039,000
for the Forward Air Business and $3,778,000, $3,225,000 and $4,420,000 for the
Truckload Business in 1995, 1996 and 1997, respectively.
Interest expense of $694,000, $743,000 and $796,000 for the Forward Air Business
and $2,327,000, $2,221,000 and $1,826,000 for the Truckload Business in 1995,
1996 and 1997, respectively, has been allocated by the Company on an annual
basis based upon the pro rata share of average operating assets of the Truckload
Business and the Forward Air Business.
Management believes these allocation methods are reasonable.
2. DISCONTINUED OPERATIONS
As discussed in Note 1, on July 9, 1998, the Board of Directors authorized the
pro rata distribution to its shareholders of all of the outstanding shares of
common stock of a new truckload holding company, Landair Corporation, which will
result in the separation of the Company into two publicly-held corporations, one
owning and operating the Forward Air Business and the other owning and operating
the Truckload Business. Accordingly, results of operations and cash flows of the
Truckload Business operations have been reported as discontinued operations for
all periods presented in the accompanying financial statements. Subsequent to
the Spin-off, Landair Corporation will be the legal entity that will continue to
own and operate the truckload operations through its operating subsidiaries. The
Spin-off is expected to reduce the Company's shareholders' equity on the date of
the Spin-off by approximately $40 million as a result of the distribution of the
stock of Landair Corporation.
F-12
<PAGE> 21
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
Summarized financial information of the discontinued operations is presented in
the following tables:
Net assets of the discontinued Truckload Business operations as of
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Current assets $32,953 $33,781
Property and equipment, net 56,329 63,412
Other assets 10 15
------- -------
Assets of discontinued operations 89,292 97,208
------- -------
Current liabilities 20,326 31,361
Long-term debt and capital lease obligations,
net of current portion 19,771 14,151
Deferred income taxes 10,787 12,138
------- -------
Liabilities of discontinued operations 50,884 57,650
------- -------
Net assets of discontinued truckload operations $38,408 $39,558
======= =======
</TABLE>
Earnings from the discontinued Truckload Business operations for the years
ending December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Operating revenue $ 87,764 $ 82,242 $ 91,398
Operating expenses 83,660 81,417 87,659
-------- -------- --------
Income from operations 4,104 825 3,739
Interest expense (2,327) (2,221) (1,826)
Other income (expense) 227 59 (12)
-------- -------- --------
Income (loss) before income taxes 2,004 (1,337) 1,901
Income taxes (benefit) 1,067 (432) 751
-------- -------- --------
Income (loss) from discontinued truckload
operations $ 937 $ (905) $ 1,150
======== ======== ========
</TABLE>
In connection with the Spin-off, the Company and Landair Corporation will enter
into certain agreements which will be effective upon the actual separation of
the two companies. The agreements are intended to facilitate orderly changes
from an integrated transportation company to separate deferred air freight and
truckload operating companies in a way which is minimally disruptive to each
entity. Following are summaries of the principal agreements:
F-13
<PAGE> 22
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
DISTRIBUTION AGREEMENT
The Distribution Agreement will provide for, among other things, the
principal corporate transactions required to effect the Spin-off and the
allocation of certain assets and liabilities between the Company and
Landair Corporation. The Distribution Agreement will provide that the
Company and Landair Corporation will each have sole responsibility for
claims arising out of their respective activities after the Spin-off. It
also will provide that each party will indemnify the other in the event of
certain liabilities arising under the federal securities laws, and that,
for a period of three years after the Spin-off, neither the Company nor
Landair Corporation will directly solicit the employment of any employee
of the other company or its affiliates without the prior written consent
of such other company.
TRANSITION SERVICES AGREEMENT
The Transition Services Agreement will describe the services which the
Company and Landair Corporation will provide to each other following the
Spin-off. Services performed under the Transition Services Agreement will
be negotiated and paid for on an arm's-length basis. The Transition
Services Agreement will have an eighteen-month term, except that
information technology services to be provided by the Company to Landair
Corporation will have a thirty-six month term. Notwithstanding the stated
term of the Transition Services Agreement, the Company or Landair
Corporation, as recipient of the services, will be able to terminate any
or all such services at any time on thirty days' irrevocable written
notice, and the Company or Landair Corporation, as providers of the
services, may at any time after the first anniversary of the Spin-off,
terminate any or all of the services, other than the information
technology services, on six months' irrevocable notice.
EMPLOYEE BENEFIT MATTERS AGREEMENT
The Employee Benefit Matters Agreement will provide for the treatment of
employee benefit matters and other compensation arrangements for the
employees of the Company and Landair Corporation after the Spin-off.
Pursuant to this agreement, the Company will continue sponsorship of the
various employee benefit plans and welfare plans of the Company with
respect to employees of the Company after the Spin-off, and Landair
Corporation will be required to establish such similar plans which will
allow Landair Corporation to provide to its employees after the Spin-off
substantially the same benefits currently provided to them as employees of
the Company. This Employee Benefit Matters Agreement will also provide for
F-14
<PAGE> 23
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
the adjustment and conversion of the existing non-exercisable stock
options of the Company into options of Landair Corporation for those
employees that continue employment with Landair Corporation after the
Spin-off. (See Note 5.)
TAX SHARING AGREEMENT
The Tax Sharing Agreement will describe the responsibilities of the
Company and Landair Corporation with respect to all tax matters occurring
prior to and after the Spin-off. The Tax Sharing Agreement will provide
for the allocation of tax expense, assessments, refunds and other tax
benefits. The Agreement will also set forth the responsibility for filing
tax returns and provide for reasonable cooperation in the event of any
audit, litigation or other proceeding with respect to any federal, state
or local tax.
Prior to the Spin-off, the Truckload Business is expected to contribute to the
Company certain assets (consisting principally of revenue equipment) associated
with the Forward Air Business operations held by the Truckload Business. The net
book value of these assets at December 31, 1997 was $6.4 million. The Company is
expected to also assume the debt and capital lease obligations related to these
assets. No gain or loss is expected on this transaction for financial statement
or income tax reporting purposes. The operating revenue and expenses associated
with the transportation of the Company's deferred air freight using these assets
have been included in income from continuing operations in the accompanying
statements of income of the Company.
As of December 31, 1997, the Company had a net intercompany liability to the
Truckload Business in the amount of $17.4 million. To separate the financing of
the two operations and to eliminate the guarantees of certain Truckload Business
obligations by the Company, the Company expects to settle for cash, prior to the
Spin-off, all intercompany obligations and to replace the consolidated line of
credit, and capital and operating lease and debt obligations on revenue
equipment (see Note 4). In addition, the Company expects to make a $5 million
capital contribution to the Truckload Business prior to the Spin-off.
F-15
<PAGE> 24
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
3. ACQUISITION OF BUSINESS
On October 27, 1997, the Company acquired the air cargo operating assets of
Adams Air Cargo, Inc., a surface transportation contractor to the air cargo
industry based in Arbuckle, California. The Company paid approximately
$1,209,000 in cash, issued a note payable of $1,800,000, and assumed debt and
capital lease obligations of $967,000 and $1,563,000, respectively. The
acquisition was accounted for as a purchase. Accordingly, the purchase price was
allocated on the basis of the estimated fair value of the net assets acquired,
resulting in goodwill of approximately $2,764,000. The goodwill is being
amortized on a straight-line basis over a life of 20 years. Accumulated
amortization of the goodwill totaled $23,000 at December 31, 1997. The results
of operations for the acquired business have been included in the consolidated
statement of income from the acquisition date forward. Pro forma results of
operations for 1997 and 1996 would not differ materially from the Company's
historical results.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
1996 1997
---------------------------
(In thousands)
<S> <C> <C>
Line of credit $ 1,508 $ 2,163
Installment Equipment Loan Agreements -- --
Other notes payable, including interest ranging from
6.9% to 7.9% -- 1,970
---------------------------
1,508 4,133
Less current portion -- 625
---------------------------
$ 1,508 $ 3,508
===========================
</TABLE>
The Company has a $15.0 million line of credit agreement with a Tennessee bank
which expires in May 1999. Advances outstanding under the line bear interest at
the bank's base rate less 1.0% (7.3% and 7.5% at December 31, 1996 and 1997,
respectively) and are collateralized primarily by accounts receivable. The
agreement contains, among other things, restrictions that do not allow the
payment of dividends, and requires the maintenance of certain levels of net
worth and other financial ratios. At December 31, 1997, the Company had
$2,163,000 outstanding under
F-16
<PAGE> 25
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
the line applicable to the Forward Air Business, and had utilized $2,922,000 and
$5,182,000 of availability for outstanding letters of credit for the Forward Air
Business and the Truckload Business, respectively.
The Company has equipment loan agreements (the "Equipment Loan Agreements") with
two Tennessee banks which permit the Company to borrow up to $30 million for the
purchase of revenue equipment. Advances outstanding under the Equipment Loan
Agreements bear interest at the 30-day LIBOR rate plus 1.0% to 1.6% (6.4% to
7.0% and 6.7% to 7.3% at December 31, 1996 and 1997, respectively). The advances
are collateralized by revenue equipment purchased with the proceeds from the
Equipment Loan Agreements, and contain restrictions and covenants similar to the
line of credit agreement described above. At December 31, 1997, $13,457,000 of
borrowings were outstanding under the Equipment Loan Agreements, all of which is
applicable to the Truckload Business discontinued operations and is included in
the accompanying balance sheet in long-term liabilities of discontinued
operations.
Maturities of long-term debt, before replacing the line of credit and equipment
loan agreements as discussed below, are as follows (in thousands):
1998 $ 625
1999 2,843
2000 665
--------
$ 4,133
========
In connection with the Spin-off, the Company is negotiating with its present
lenders to obtain separate credit facilities for each of the Company and Landair
Corporation. In addition, the Company expects to eliminate guarantees of
indebtedness and cross-collateralization between the Company and Landair
Corporation. The Company's proposed new credit facilities are to include a
working capital line of credit and an equipment financing facility. These credit
facilities are expected to permit the Company to borrow up to $20 million under
the working capital line of credit and $15 million under the equipment financing
facility. Interest rates for advances under the facilities are expected to vary
based on various covenants related to total indebtedness, cash flows, results of
operations and other ratios. The facilities are expected to bear interest at
LIBOR plus 1.00% to 1.85%, expire in August 2000, and are expected to be secured
by accounts receivable and certain revenue equipment. Availability under the
line of credit is expected to be reduced by the amount of outstanding letters of
credit. Among other restrictions, the terms of the line of credit are expected
to require maintenance of certain levels of net worth and other financial
ratios.
F-17
<PAGE> 26
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS
Preferred Stock -- The Board of Directors is authorized to issue, at its
discretion, up to 5,000,000 shares of preferred stock, par value $.01. The terms
and conditions of the preferred shares are to be determined by the Board of
Directors. No shares have been issued to date.
Employee Stock Option and Incentive Plan -- The Company has elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its employee stock
options because the alternative fair value accounting provided for under
Statement No. 123, Accounting for Stock-Based Compensation, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under Opinion No. 25, when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
At December 31, 1995, 1996 and 1997, the Company had reserved 1,000,000 shares
of common stock under a Stock Option and Incentive Plan. Options issued under
the Plan have eight to ten year terms and vest over a four to five year period.
Pro forma information regarding net income and earnings per share is required by
Statement No. 123, which also requires that the information be determined as if
the Company has accounted for its employee and non-employee director stock
options granted subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995, 1996 and 1997, respectively: risk-free
interest rates of 5.5%, 6.4% and 5.8%; dividend ratio of zero; volatility
factors of the expected market price of the Company's common stock of .5; and a
weighted-average expected life of the option of seven years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee and non-employee director stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and non-employee director stock options.
F-18
<PAGE> 27
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures as required by Statement No. 123, the
estimated fair value of the employee and non-employee director options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Pro forma net income $ 4,464 $ 3,506 $ 7,980
Pro forma net income per share:
Basic 0.76 0.59 1.34
Diluted 0.74 0.58 1.29
</TABLE>
Because Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not fully reflected above.
A summary of the Company's employee stock option activity and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------- --------------------------- --------------------------
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
----------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 507 $ 9 421 $ 9 575 $12
Granted -- -- 285 14 111 11
Exercised (53) 7 (83) 7 (61) 8
Forfeited (33) 10 (48) 11 (21) 14
----- ---- ----- --- ----- ---
Outstanding - end of year 421 $ 9 575 $12 604 $12
===== ==== ===== === ===== ===
Exercisable at end of year 185 $ 9 199 $10 268 $11
===== ==== ===== === ===== ===
Options available for
grant 445 209 118
===== ===== =====
Weighted-average fair
value of options
granted during the
year $ -- $6.00 $6.14
===== ===== =====
</TABLE>
Exercise prices for options outstanding, as of December 31, 1995, 1996 and 1997
ranged from $5.00 to $25.625.
Under the provisions of the Company's stock option plan, options to purchase
shares of the Company's common stock that are exercisable at the time of the
Distribution, and that are held by those employees who will terminate employment
with the Company and become employees of Landair Corporation upon the Spin-off
will be canceled if not exercised prior to such employees' termination of
employment with the Company. Accordingly, employees leaving the
F-19
<PAGE> 28
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Company and continuing as employees of Landair Corporation are expected to
exercise their vested options prior to the Spin-off. Unexercisable options held
by employees of the Company who remain or become employees of Landair
Corporation upon consummation of the Spin-off will be converted into options to
purchase Landair Corporation common stock under Landair Corporation's Stock
Option and Incentive Plan. Such conversion will be on the basis of a formula
designed to preserve the fair market value of such converted options on the date
of the Distribution. All options held by employees of the Company who remain or
become employees of the Company upon consummation of the Spin-off will be
adjusted on the basis of a formula designed to preserve the fair market value of
such options on the date of the Distribution.
Of the 604,000 options outstanding to purchase the Company's common stock at
December 31, 1997, 72,000 options were held by Truckload Business employees and
were exercisable; 82,000 options were held by Truckload Business employees that
are eligible for conversion into options of Landair Corporation; and 450,000
options were held by Forward Air Business employees.
Pro Forma Diluted Income From Continuing Operations per Share -- For the year
ended December 31, 1997, pro forma diluted income from continuing operations per
share would have been $1.21 after removing from the diluted per share
computation, the options held by Truckload Business employees that will be
converted into Landair Corporation options, as if such conversion had occurred
on January 1,1997.
Non-Employee Director Options -- In May 1995, 1996 and 1997, options to purchase
30,000, 22,500 and 15,000 shares of common stock, respectively, were granted to
the non-employee directors of the Company at option prices of $13.625, $15.00
and $14.00 per share, respectively. The options have terms of five to ten years
and are exercisable in installments which vest over two-year periods from the
date of grant. At December 31, 1997, 75,000 options are outstanding and will
expire on September 1, 1998 through May 1, 2007, unless a non-employee director
resigns or is not re-elected, in which event the options expire 90 days after
the option holder is no longer a non-employee director. Such options are
eligible for adjustment on the basis of a formula designed to preserve the fair
market value of such options on the date of the Distribution.
Employee Stock Purchase Plan -- The Company implemented an employee stock
purchase plan effective January 1, 1996 at which time participating employees
became entitled to purchase common stock through payroll deduction of up to 10%
of the employee's annual compensation. The issue price of the common stock is
equal to the lesser of (1) 85% of market price on the first trading day of the
semi-annual enrollment period or (2) 85% of market price on the last trading day
of the semi-annual enrollment period. The Company has reserved 300,000 shares of
common stock for issuance pursuant to the plan. At December 31, 1997,
approximately 16,000 shares had been issued under the Plan.
F-20
<PAGE> 29
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Earnings Per Share -- The following table sets forth the computation of basic
and diluted income per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted income per share:
Income from continuing operations $ 3,580 $ 4,884 $ 7,444
Income (loss) from discontinued
operations 937 (905) 1,150
-------------------------------------
Net income $ 4,517 $ 3,979 $ 8,594
=====================================
Denominator:
Denominator for basic income per share-
weighted-average shares 5,850 5,928 5,968
Effect of dilutive stock options 177 121 209
-------------------------------------
Denominator for diluted income per share-
adjusted weighted-average shares 6,027 6,049 6,177
=====================================
Income per share - basic:
Income from continuing operations $ 0.61 $ 0.82 $ 1.25
Income (loss) from discontinued operations 0.16 (0.15) 0.19
-------------------------------------
Net income $ 0.77 $ 0.67 $ 1.44
=====================================
Income per share - diluted:
Income from continuing operations $ 0.59 $ 0.81 $ 1.20
Income (loss) from discontinued operations 0.16 (0.15) 0.19
-------------------------------------
Net income $ 0.75 $ 0.66 $ 1.39
=====================================
Securities that could potentially dilute basic income
per share in the future that were not included in
the computation of diluted income per share
because to do so would have been antidilutive for
the periods presented 249 451 19
=====================================
</TABLE>
F-21
<PAGE> 30
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The provision for income taxes on income from continuing operations consists of
the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 3,403 $ 2,708 $ 2,368
State 712 434 625
-------------------------------------
4,115 3,142 2,993
Deferred:
Federal (1,671) (221) 1,510
State (238) (30) 237
-------------------------------------
(1,909) (251) 1,747
-------------------------------------
$ 2,206 $ 2,891 $ 4,740
=====================================
</TABLE>
The historical income tax expense differs from the amounts computed by applying
the federal statutory rate of 34% to income from continuing operations before
income taxes as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax expense at the statutory rate $ 1,968 $ 2,644 $ 4,142
State income taxes, net of federal benefit 159 209 547
Meals and entertainment 1 38 51
Other 78 -- --
-------------------------------------
$ 2,206 $ 2,891 $ 4,740
=====================================
</TABLE>
F-22
<PAGE> 31
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1997
---------------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 225 $ 263
Prepaid expenses deductible when paid 110 396
Other 158 184
---------------------
Total deferred tax liabilities 493 843
Deferred tax assets:
Accrued expenses 185 483
Alternative minimum tax credits 1,708 1,020
Net operating loss carryforwards 1,134 --
Allowance for doubtful accounts 124 276
Other 25 --
---------------------
Total deferred tax assets 3,176 1,779
---------------------
Net deferred tax assets $2,683 $ 936
=====================
</TABLE>
Management believes that the deferred tax assets will ultimately be realized.
Management's conclusion is based on future taxable income that will result from
the reversal of the existing temporary differences and the expectation of future
taxable income from operations, exclusive of the reversal of temporary
differences.
The balance sheet classification of deferred income taxes is as follows:
<TABLE>
<CAPTION>
December 31
1996 1997
---------------------
(In thousands)
<S> <C> <C>
Current assets $ 198 $ 364
Noncurrent assets 2,485 572
---------------------
$2,683 $ 936
=====================
</TABLE>
F-23
<PAGE> 32
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
As of December 31, 1997, alternative minimum tax credits of approximately
$1,020,000 were available to reduce future federal income taxes payable. Such
credits may be carried forward indefinitely to reduce regular federal income
taxes payable to the extent it exceeds the computed alternative minimum tax for
such years.
Total income tax payments, net of refunds, during 1995, 1996 and 1997 were
$3,834,000, $2,939,000 and $3,046,000, respectively.
7. LEASES
During October 1993, the Company entered into a capital lease agreement (with a
bargain purchase option) with the Director of Development of the State of Ohio
for the construction of a terminal facility located in Columbus, Ohio. To fund
the construction of the new facility, the State of Ohio sold revenue bonds in
the amount of $6,280,000. The amounts due under the lease have been included in
capital lease obligations. The Company is responsible for all taxes, assessments
and other costs of ownership under the lease agreement. The lease also requires,
among other things, restrictions on the payment of dividends and the maintenance
of certain levels of net worth and other financial ratios.
The Company also leases certain other equipment under capital leases. These
leases expire in various years through 2001.
Property and equipment include the following amounts for leases that have been
capitalized:
<TABLE>
<CAPTION>
December 31
1996 1997
---------------------
(In thousands)
<S> <C> <C>
Land $2,605 $2,605
Building 3,675 3,675
Other equipment 2,417 2,417
---------------------
8,697 8,697
Less accumulated amortization 438 973
---------------------
$8,259 $7,724
=====================
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
F-24
<PAGE> 33
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
7. LEASES (CONTINUED)
The Company also leases certain facilities and revenue equipment under
noncancelable operating leases that expire in various years through 2006.
Certain of these leases may be renewed for periods varying from one to ten
years. The Truckload Business shares certain facilities leased by the Company,
and has been allocated a portion of the rent expense related thereto (see Note 1
Common Expenses). As discussed below, the Company will enter into lease or
sublease agreements with Landair Corporation related to certain facilities on or
prior to the date of the Spin-off.
Included in operating leases is an aircraft leased from a limited liability
corporation owned by the Company's majority shareholder which expired in July
1998 and was renewed for an additional one year period. The total net amount of
rent expense for this lease was $-0-, $120,000 and $280,000 in 1995, 1996 and
1997, respectively.
Future minimum rental payments under capital leases and noncancelable operating
leases with initial terms of one year or more consisted of the following at
December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- ------ ------
(In thousands)
<S> <C> <C>
1998 $ 1,369 $ 6,056
1999 806 4,292
2000 699 2,338
2001 699 922
2002 731 252
Thereafter 3,846 179
------- -------
Total minimum lease payments 8,150 $14,039
=======
Amounts representing interest (2,430)
-------
Present value of net minimum lease payments
(including current portion of $974) $ 5,720
=======
</TABLE>
The Company, through a wholly-owned subsidiary, currently leases to a
wholly-owned subsidiary of Landair Corporation a portion of its terminal
facility in Atlanta, Georgia. Rental payments under the lease agreement are
based upon the cost of such facility and an agreed upon percentage of usage. In
addition, on or prior to the date of the Spin-off, the Company will enter into
subleases with Landair Corporation pursuant to which the Company will sublease
to Landair Corporation (i) a portion of its terminal facility in Columbus, Ohio
that is leased by the Company
F-25
<PAGE> 34
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
7. LEASES (CONTINUED)
from the Director of Development of the State of Ohio; (ii) a portion of the
facility leased by the Company in Indianapolis, Indiana; (iii) a portion of its
terminal facility in Chicago, Illinois that is leased by a subsidiary of the
Company; (iv) a portion of its terminal facility in Detroit, Michigan that is
leased by a subsidiary of the Company; and (v) a portion of the headquarters of
the Company in Greeneville, Tennessee that is leased by the Company from the
Greeneville-Greene County Airport Authority. The Company expects to sublease
the Columbus terminal facility for consideration based upon the cost of such
facility to the Company and an agreed upon percentage of usage. The Company
expects to sublease the Indianapolis, Chicago, Detroit and Greeneville
facilities for consideration based upon an agreed upon percentage of usage.
8. TRANSACTIONS WITH THE TRUCKLOAD BUSINESS
The Company and the Truckload Business routinely engage in intercompany
transactions as the Truckload Business hauls a portion of the deferred air
freight shipments for the Company which are in excess of the Company's scheduled
capacity. The cost of the shipments hauled by the Truckload Business is shown
separately in the accompanying statements of income as purchased transportation
provided by Truckload Business.
The Due to Truckload Business subsidiaries in the accompanying balance sheets
represents the net balance resulting from various intercompany transactions
between the Company and the Truckload Business. There are no terms of settlement
or interest charges associated with the account balance. The balance is
primarily the result of the Truckload Business' participation in the Company's
central cash management program, wherein all of the Company's cash receipts are
remitted to a Truckload Business subsidiary and all cash disbursements are
funded by a Truckload Business subsidiary. Other transactions include
intercompany freight transactions as discussed above, the federal income tax
liability (benefit) provided by the Truckload Business to the consolidated tax
liability, and miscellaneous other common expenses incurred between the Company
and the Truckload Business. In connection with the Spin-off, the Company expects
to settle all intercompany balances for cash.
An analysis of transactions in the Due to Truckload Business subsidiaries
account follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $(19,178) $(17,383) $ (19,427)
Net cash remitted to the Truckload Business 1,864 1,492 2,065
Net intercompany freight transactions (3,238) (5,881) (6,137)
Current federal income tax
benefit provided by the Truckload Business (2,936) (3,101) (194)
Net administrative expenses and interest
allocated to the Truckload Business 6,105 5,446 6,246
-------- -------- ---------
Balance at end of year $(17,383) $(19,427) $ (17,447)
======== ======== =========
</TABLE>
F-26
<PAGE> 35
9. COMMITMENTS AND CONTINGENCIES
The Company is, from time to time, a party to litigation arising in the normal
course of its business, most of which involve claims for personal injury and
property damage incurred in connection with the transportation of freight.
Management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on the financial condition or
results of operations of the Company.
10. EMPLOYEE BENEFIT PLAN
Effective July 1, 1994, the Company adopted a retirement savings plan (the
"401(k) Plan"). The 401(k) Plan is a defined contribution plan whereby employees
who have completed one year of service, a minimum of 1,000 hours of service and
are age 21 or older are eligible to participate. The 401(k) Plan allows eligible
employees to make contributions of 2% to 10% of their annual compensation.
Employer contributions are made at 25% of the employee's contribution up to a
maximum of 4% of total annual compensation. Employer contributions vest 20%
after two years of service and continue vesting 20% per year until fully vested.
The Company's matching contribution included in income from continuing
operations for 1995, 1996 and 1997 was approximately $46,000, $53,000 and
$69,000, respectively. In connection with the Distribution, the account balances
of Truckload employees are expected to be transferred to a Landair Corporation
plan in a trust-to-trust transfer.
11. FINANCIAL INSTRUMENTS
Off Balance Sheet Risk
At December 31, 1997, the Company had letters of credit outstanding totaling
$2,922,000 and $5,182,000 for the Forward Air Business and the Truckload
Business, respectively, all of which relate to obligations carried on the
balance sheet.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable. The Company does not
F-27
<PAGE> 36
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
11. FINANCIAL INSTRUMENTS (CONTINUED)
generally require collateral from its customers. Concentrations of credit risk
with respect to trade accounts receivable are limited due to the large number of
entities comprising the Company's customer base and their dispersion across many
different industries.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments with third parties:
Cash and cash equivalents: The carrying amount reported in the balance
sheets for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts
reported in the balance sheets for accounts receivable and accounts
payable approximate their fair value.
Long-and short-term debt: The carrying amounts of the Company's
borrowings under its revolving credit arrangement approximate fair
value. The fair value of the Company's long-term debt and capital
lease obligations is estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments with
third parties are as follows:
<TABLE>
<CAPTION>
1996 1997
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 158 $ 158 $ 895 $ 895
Accounts receivable 13,997 13,997 17,671 17,671
Accounts payable 3 3 72 72
Long-term debt and capital lease
obligations 8,454 8,454 9,853 9,853
</TABLE>
F-28
<PAGE> 37
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Operating revenue $ 17,245 $ 19,704 $ 20,662 $ 23,126
Income from operations 1,428 2,229 2,095 2,764
Income from continuing operations 776 1,267 1,217 1,624
Loss from discontinued
operations (245) (67) (330) (263)
Net income 531 1,200 887 1,361
Income per share:
Basic:
Income from continuing
operations $ 0.13 $ 0.21 $ 0.20 $ 0.27
Loss from discontinued
operations $ (0.04) $ (0.01) $ (0.05) $ (0.04)
Net income $ 0.09 $ 0.20 $ 0.15 $ 0.23
Diluted:
Income from continuing
operations $ 0.13 $ 0.21 $ 0.20 $ 0.27
Loss from discontinued
operations $ (0.04) $ (0.01) $ (0.05) $ (0.04)
Net income $ 0.09 $ 0.20 $ 0.15 $ 0.23
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Operating revenue $ 21,611 $ 24,845 $ 28,901 $ 29,783
Income from operations 1,766 3,190 4,553 3,555
Income from continuing operations 964 1,773 2,611 2,096
Income (loss) from discontinued
operations (194) 171 566 607
Net income 770 1,944 3,177 2,703
Income per share:
Basic:
Income from continuing
operations $ 0.16 $ 0.30 $ 0.44 $ 0.35
Income (loss) from discontinued
operations $ (0.03) $ 0.03 $ 0.09 $ 0.10
Net income $ 0.13 $ 0.33 $ 0.53 $ 0.45
Diluted:
Income from continuing
operations $ 0.16 $ 0.29 $ 0.42 $ 0.33
Income (loss) from discontinued
operations $ (0.03) $ 0.03 $ 0.09 $ 0.10
Net income $ 0.13 $ 0.32 $ 0.51 $ 0.43
</TABLE>
F-29
<PAGE> 38
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
During the third quarter of 1997, the Company benefited from non-recurring
revenue that resulted from the United Parcel Service strike. This additional
revenue net of variable costs and income taxes, but not allocated fixed costs,
resulted in an estimated additional $1.2 million of pre-tax income from
continuing operations and $0.12 of diluted income from continuing operations per
share during the quarter.
The 1996 and first three quarters of 1997 income per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share.
F-30
<PAGE> 39
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- --------------------------------------------------------------------------------
(c) Exhibits:
23.1 Consent of Ernst & Young LLP
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FORWARD AIR CORPORATION
Date: September 4, 1998 By: /s/ Edward W. Cook
-------------------
Edward W. Cook
Chief Financial Officer, Senior Vice
President and Treasurer
<PAGE> 41
EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in: (1) the Registration Statement
on Form S-8 (No. 33-77944) pertaining to the Landair Services, Inc. Stock Option
and Incentive Plan and the Employee Stock Purchase Plan, (2) the Registration
Statement on Form S-8 (No. 333-03891) pertaining to the Landair Services, Inc.
Amended and Restated Stock Option and Incentive Plan, and (3) the Registration
Statement on Form S-8 (No. 333-03893) pertaining to the Landair Services, Inc.
Non-Employee Director Stock Option Award and Non-Employee Director Stock Option
Plan, of our report dated January 30, 1998, except with respect to the planned
Spin-off of the Truckload Business, which is accounted for as discontinued
operations, as to which the date is September 3, 1998, with respect to the
consolidated financial statements of Forward Air Corporation (formerly Landair
Services, Inc.) included in its Current Report on Form 8-K dated September 4,
1998, filed with the Securities and Exchange Commission.
Nashville, Tennessee /s/ ERNST & YOUNG LLP
September 3, 1998
