<PAGE> 1
Filed Pursuant to Rule 424(a)
Registration No. 333-75853
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES IT SEEK OFFERS TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION
APRIL 13, 1999
3,000,000 Shares
(FORWARD AIR LOGO)
Common Stock
Forward Air Corporation provides scheduled ground transportation of cargo as a
cost effective, reliable alternative to air transportation.
Of the 3,000,000 shares of common stock offered, Forward Air Corporation is
offering 1,000,000 shares and the selling shareholder is offering 2,000,000
shares. Our common stock is traded on The Nasdaq National Market under the
symbol "FWRD." On April 9, 1999, the last reported sale price of our common
stock was $15.875 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. PLEASE READ THE RISK FACTORS
BEGINNING ON PAGE 5 BEFORE MAKING A DECISION TO INVEST IN OUR COMMON STOCK.
<TABLE>
<CAPTION>
PER
SHARE TOTAL
------------ ------------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Forward Air Corporation, before expenses........ $ $
Proceeds to selling shareholder............................. $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
Several of our shareholders have granted the underwriters an option to purchase
up to 450,000 additional shares to cover any over-allotments the underwriters
may make in this offering. The underwriters may exercise this option until 30
days after the date of this prospectus.
------------------------
BT Alex. Brown
Morgan Keegan & Company, Inc.
Scott & Stringfellow, Inc.
APRIL , 1999
<PAGE> 2
Omitted Graphic and Image Material
The following graphic and image material is omitted from the form of the
prospectus filed electronically:
Inside Front Cover:
A picture of the Company's Columbus, Ohio central sorting facility and the
following caption: "The heart of Forward Air's deferred freight operations is
the hub in Columbus, a state-of-the-art 100-door cross dock sorting facility."
Inside Front Cover Fold-out:
A map of the United States depicting the location of the Company's
regional sorting hubs, Company operated terminals and agent stations, and the
Company's overnight, second day direct, and Columbus hub transit routes. The
Company's logo and the caption "North America's Most Complete Road Feeder
Network" accompany the map.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
The Offering................................................ 3
Summary Consolidated Financial and Operating Data........... 4
Risk Factors................................................ 5
Use of Proceeds............................................. 9
Market Price of Our Common Stock............................ 9
Dividend Policy............................................. 9
Capitalization.............................................. 10
Selected Financial and Operating Data....................... 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Business.................................................... 16
Management.................................................. 25
Principal and Selling Shareholders.......................... 27
Underwriting................................................ 29
Legal Matters............................................... 30
Experts..................................................... 30
Where You Can Find More Information......................... 30
Index to Financial Statements............................... F-1
</TABLE>
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information in this prospectus and may not
contain all of the information that is important to you. You should read the
entire prospectus carefully, including "Risk Factors" and our financial
statements and the notes thereto, before making an investment decision. Unless
otherwise indicated, all information in this prospectus (i) assumes no exercise
of the underwriters' over-allotment option and (ii) gives effect to a
two-for-one split of our common stock distributed on March 19, 1999.
OUR BUSINESS
We provide scheduled ground transportation of cargo as a cost effective,
reliable alternative to air transportation. We transport cargo that must be
delivered at a specific time but is less time-sensitive than traditional air
freight. This type of cargo is frequently referred to in the transportation
industry as "deferred air freight." We operate a network of 68 terminals located
on or near airports in the United States and Canada, a central sorting facility
in Columbus, Ohio and regional hubs serving key markets. Rather than owning our
own trucks, we purchase our transportation requirements from owner-operators
and, to a lesser extent, from truckload carriers. Our typical shipment consists
of a pallet load of freight, often computers, telecommunications equipment,
machine parts, trade show exhibit materials or medical equipment. During 1998,
our average shipment weighed over 750 pounds. We have experienced rapid revenue
growth from $31.2 million in 1993 to $130.4 million in 1998, a 33% compound
annual growth rate. Our operating income grew from $2.8 million to $16.0 million
over the same period, a 42% compound annual growth rate.
We focus our services on: air freight forwarders, which are businesses that
arrange transportation of cargo for third parties; integrated air cargo
carriers; and airlines. We serve our customers by locating terminals on or near
airports and maintaining regularly scheduled transportation service between
major cities. We receive shipments at our terminals and transport them by truck
to our central sorting facility or one of our regional hubs, where we unload and
sort them. After sorting, we reload the shipments and deliver them to the
terminals nearest their destinations. We ship freight directly between terminals
when justified by the volume of shipments. In 1998, shipments we handled arrived
within 30 minutes of their scheduled arrival time over 98% of the time, with
only 1.7 incidents of loss or damage per 1,000 shipments. We typically do not
provide local pickup and delivery services and, therefore, do not market our
services directly to shippers. Since we do not place significant size or weight
restrictions on shipments, we do not compete directly with small or overnight
package delivery services such as DHL Worldwide, UPS and Airborne. Approximately
20% of the shipments we handle are for overnight delivery, with the rest for
delivery within two to four days.
Businesses are increasingly requiring expedited delivery services as they
minimize inventory levels, perform manufacturing and assembly operations in
multiple locations and distribute their products through many channels.
Expedited delivery service means freight must be delivered by an established
time and date, usually overnight or within two or three days. The Colography
Group, Inc., an independent industry market research and consulting company,
estimates the domestic air freight market for 1999 to be approximately $6.3
billion, nearly 44% of which is for overnight delivery, with the remaining 56%
for delivery within two to three days. Shippers with expedited delivery
requirements have four principal alternatives to transport freight. They may use
a fully integrated air cargo carrier, an airline, a less-than-truckload carrier
or an air freight forwarder. Shippers are outsourcing more of their
transportation logistics needs to air freight forwarders because of their
reliability and cost effectiveness. We believe that we will benefit from the
expected growth in demand for logistics management by air freight forwarders as
shippers emphasize just-in-time inventory practices and reduce the number of
transportation suppliers with whom they contract.
1
<PAGE> 5
COMPETITIVE ADVANTAGES
We believe that our principal competitive advantages are:
- We focus exclusively on providing ground transportation to the deferred
air freight market. We believe this enables us to provide a higher level
of service in a more cost effective manner than our competitors.
- We concentrate our marketing on air freight forwarders, integrated air
cargo carriers and airlines, and do not market our services directly to
shippers. We generally do not compete with small or overnight package
delivery services.
- Our nationwide network of terminals and sorting facilities would be
difficult to replicate.
- Our low-capital-intensive business model enables us to respond quickly to
changing demands and opportunities in our industry.
- Our enhanced information systems will enable us to increase the volume of
freight we handle in our network and reduce our operating costs and those
of our customers.
- We have a broad customer base, with no single customer accounting for
more than five percent of our operating revenue.
GROWTH STRATEGY
The key elements of our growth strategy are to:
- Increase the volume of freight transported through our network for our
existing customers.
- Improve the efficiency of our transportation network.
- Develop new customers.
- Enhance our information systems.
- Expand our logistics services.
- Pursue selected acquisitions that can increase our penetration of a
geographic area, add customers or freight density or allow us to offer
additional services.
OUR HISTORY
We commenced operating our deferred air freight business in November 1990.
Until September 1998, we operated both this business and a national truckload
carrier business. In September 1998, we spun off our truckload carrier business,
operated as Landair Transport, Inc., to our shareholders. Our historical
financial statements show the financial results of the truckload carrier
business as a discontinued operation.
Our address is 430 Airport Road, Greeneville, Tennessee 37745, and our
telephone number is (423) 636-7100.
2
<PAGE> 6
RECENT DEVELOPMENTS
On April 7, 1999, we announced preliminary results for the quarter ending
March 31, 1999. Preliminary results indicate that operating revenue for the
first quarter was approximately $37 million, compared to $28.9 million in the
first quarter of 1998. Based upon these preliminary results, we believe that
diluted income per share from continuing operations will exceed $0.21 for the
first quarter.
THE OFFERING
Common stock offered by Forward Air
Corporation......................... 1,000,000 shares
Common stock offered by the selling
shareholder......................... 2,000,000 shares
Total................................. 3,000,000 shares
Common stock to be outstanding after
this offering....................... 13,678,480 shares(1)
Use of proceeds....................... We will use the proceeds of this
offering to repay debt.
Nasdaq National Market symbol......... FWRD
- ---------------
(1) Excludes currently outstanding options to acquire 1,387,450 shares of common
stock with a weighted average exercise price of $7.79 per share.
3
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue........................ $57,914 $63,557 $80,737 $105,140 $130,438
Total operating expenses................. 53,392 57,160 72,221 92,076 114,427
------- ------- ------- -------- --------
Operating income......................... 4,522 6,397 8,516 13,064 16,011
Interest expense......................... (365) (694) (743) (796) (1,206)
Other income (expense), net.............. 98 83 2 (84) 37
------- ------- ------- -------- --------
Income from continuing operations before
income taxes.......................... 4,255 5,786 7,775 12,184 14,842
Income taxes............................. 1,642 2,206 2,891 4,740 5,653
------- ------- ------- -------- --------
Income from continuing operations........ $ 2,613 $ 3,580 $ 4,884 $ 7,444 $ 9,189
======= ======= ======= ======== ========
Income from continuing operations per
share:
Basic................................. $ .23 $ .31 $ .41 $ .62 $ .74
Diluted............................... .22 .30 .40 .60 .72
Average common shares and equivalents
outstanding:
Basic................................. 11,534 11,700 11,856 11,936 12,393
Diluted............................... 12,192 12,054 12,098 12,354 12,846
OPERATING DATA:
Operating margin......................... 7.8% 10.1% 10.5% 12.4% 12.3%
Terminal facilities...................... 55 56 60 62 67
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 7,035 $ 8,637
Total assets of continuing operations..................... 56,808 56,808
Long-term obligations of continuing operations, net of
current portion........................................ 20,126 7,326
Shareholders' equity...................................... 19,071 33,473
</TABLE>
- ---------------
(1) Adjusted for the sale of the 1,000,000 shares of common stock we are
offering, at an assumed offering price of $15.875 per share, and our use of
the net proceeds to repay debt.
4
<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before deciding to invest in shares of our common
stock. If any of the following risks actually occurs, our business, financial
condition, and results of operations would likely suffer. This is also likely to
cause the trading price of our common stock to decline.
OUR BUSINESS HAS SUBSTANTIAL FIXED OPERATING COSTS
Our operations, particularly our network of terminals, represent
substantial fixed costs. Therefore, a decline in the volume of freight we handle
would have an adverse effect on our operating margin and our results of
operations. The actual shippers of the freight moved through our network include
various manufacturers and distributors of computers, telecommunications
equipment, machine parts, trade show exhibit materials and medical equipment.
Adverse business conditions affecting these shippers or our loss of a
significant customer would cause a decline in the volume of freight shipped
through our network.
EFFECT OF INCREASES IN OPERATING COSTS
If we are unable to anticipate and react to increases in our operating
costs, including labor and purchased transportation, our profitability will
decline. Many of the factors affecting our operating costs are beyond our
control. We may be unable to anticipate and react to changing operating costs
through higher prices without a material adverse effect on our business, results
of operations and financial condition.
WE MAY HAVE DIFFICULTY EFFECTIVELY MANAGING OUR GROWTH
Our growth plans will place significant demands on our management and
operating personnel. Our ability to manage our future growth effectively will
require us to regularly improve our operating and management information systems
and to continue to attract, retain, train, motivate and manage key employees. If
we are unable to manage our growth effectively, our business, results of
operations and financial condition will be adversely affected.
OUR MARKET IS HIGHLY COMPETITIVE
The air freight transportation industry is highly competitive and very
fragmented. Our competitors include regional trucking companies that specialize
in handling deferred air freight and regional and national less-than-truckload
carriers. To a lesser extent, we compete with integrated air cargo carriers and
airlines. Our competition ranges from small operators that compete within a
limited geographic area to companies with substantially greater financial and
other resources and larger freight capacity. We also face competition from our
air freight forwarder customers who decide to establish their own networks to
transport deferred air freight. We believe competition is based on service,
primarily on-time delivery and reliability, as well as rates. This competition
may cause a decrease in our volume of freight, require us to lower the prices we
charge for our services and adversely affect our growth prospects.
WE MUST CONTINUE TO UPGRADE OUR TECHNOLOGY AND INFORMATION SYSTEMS
We must regularly upgrade our information systems to remain competitive and
handle higher volumes of freight through our network. If our information systems
are unable to handle additional freight volumes, our service levels, operating
efficiency and freight
5
<PAGE> 9
volumes will decline. We expect customers to continue to demand more
sophisticated, fully integrated information systems from their transportation
providers. If we are unable to upgrade our information systems to handle
additional freight volumes and meet the demands of our customers, our business
and results of operations will be adversely affected.
POTENTIAL LIABILITY FOR PROPERTY DAMAGE AND PERSONAL INJURIES
Under United States Department of Transportation regulations, we are liable
for property damage or personal injuries caused by owner-operators while they
are operating on our behalf. We currently maintain liability insurance that we
believe is adequate to cover third-party claims and self-insure for property
damage to our own equipment. We could incur claims in excess of our policy
limits or incur claims not covered by our insurance. Any claims beyond the
limits or scope of our insurance coverage could have a material adverse effect
on us. In addition, we may not be able to obtain sufficient liability insurance
in the future, or if we can, it may become very expensive.
WE RELY ON OWNER-OPERATORS AND FREIGHT HANDLERS IN OUR BUSINESS
We depend on owner-operators for most of our transportation needs. In 1998,
owner-operators provided 67.9% of our transportation requirements. Competition
for owner-operators is intense, and sometimes there are shortages of available
owner-operators. In addition, we need a large number of freight handlers to
operate our business efficiently. In periods of low unemployment in the areas
where our terminals are located, we may have difficulty employing a sufficient
number of freight handlers. If we have difficulty attracting and retaining
qualified owner-operators and freight handlers, we may be forced to increase
wages and benefits, which would increase our operating costs. We may also be
unable to maintain our current delivery schedules, which could make our service
less competitive, and we may be forced to curtail our planned growth. If our
labor costs increase, we may not be able to offset the increased cost by
increasing rates without adversely affecting our business.
At times, the Internal Revenue Service, the Department of Labor and state
authorities have asserted that owner-operators are "employees," rather than
"independent contractors." Therefore, one or more governmental authorities may
challenge our position that the owner-operators we use are not employees. There
also may be changes to the applicable federal or state tax or other laws, or
interpretations thereof. If this happens, we are likely to incur additional
taxes, as well as higher workers' compensation and employee benefit costs, and
possibly penalties and interest for prior periods. This could have an adverse
effect on our results of operations.
OUR SUCCESS IS DEPENDENT ON OUR KEY PERSONNEL
We are highly dependent on the continued services and efforts of our senior
management team, especially Scott M. Niswonger, our Chairman and Chief Executive
Officer, and Bruce A. Campbell, our President and Chief Operating Officer. The
loss of the services of any member of our senior management could have a
material adverse effect on our business. Mr. Niswonger, Edward W. Cook, our
Senior Vice President, Chief Financial Officer and Treasurer, and Richard H.
Roberts, our Senior Vice President, General Counsel and Secretary, also serve as
officers of Landair Corporation. Therefore, they do not devote all of their
attention to our business.
6
<PAGE> 10
RISK OF LOSS OF TAX-FREE TREATMENT OF THE SPIN-OFF
We have received a private letter ruling from the IRS that the spin-off of
the truckload carrier business qualifies as a tax-free distribution for federal
income tax purposes under Section 355 of the Internal Revenue Code. This ruling
is based on the accuracy of a number of assumptions and factual representations
we and Landair Corporation made to the IRS. It is possible that some of these
assumptions or representations will turn out to have been incorrect. If this
happened, the IRS may decide that the spin-off was a taxable event. If the
spin-off were determined to be taxable, we would have to pay tax on the
difference between the fair market value of the Landair Corporation common stock
we distributed in the spin-off and our tax basis in the Landair Corporation
common stock at the time of the spin-off. Landair Corporation would be
responsible for reimbursing us for this tax only if we could show that the tax
resulted from an act, misrepresentation or omission by Landair Corporation.
The IRS ruling is dependent, in part, upon our representation that, within
12 months of the date of the spin-off, we would publicly offer newly issued
shares of our common stock representing approximately 15% of the total number of
shares of common stock outstanding at the time of the spin-off. To comply with
this representation, we would have to publicly issue approximately 900,000
shares of our common stock in addition to the 1,000,000 shares we are offering
under this prospectus. We have determined that, as a result of our current
capital requirements and operating performance, we do not need to offer these
additional shares. Therefore, we have requested a supplemental ruling from the
IRS that our failure to offer these additional shares will not affect the
tax-free treatment of the spin-off. If we do not receive this supplemental
ruling, we will increase the number of shares of common stock we are selling in
this offering or offer the additional shares of common stock to the public at
some time after this offering.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE
Revenue and operating results are generally seasonal in the air freight
transportation industry because customers usually reduce shipments during the
winter after the holiday season. Our operating margins have been lower in the
winter months primarily because of lower freight volumes. This seasonal pattern
is likely to continue.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO OUR BUSINESS
We are licensed by the Department of Transportation as a broker and motor
carrier to arrange for the transportation of freight by truck. Our domestic
customs brokerage operations are licensed by the United States Customs Service,
and the Federal Maritime Commission regulates our ocean freight forwarding
operations. We are also subject to federal and state environmental laws and
regulations if we transport hazardous materials. If we do not comply with these
laws and regulations, we could be required to pay substantial fines or have our
licenses revoked. This would limit the services we can provide. The
transportation industry is subject to legislative and regulatory changes that
can affect the economics of our business by requiring changes in operating
practices or influencing the demand for, and the cost of providing,
transportation services. In addition, changes to current environmental laws or
regulations may increase our operating costs and adversely affect our results of
operations.
CONTROL BY MANAGEMENT
After this offering, Scott M. Niswonger, our Chairman and Chief Executive
Officer and the selling shareholder, will own or have voting control over
4,001,200 shares of our
7
<PAGE> 11
common stock. These shares will represent approximately 29.3% of all outstanding
shares of our common stock. Therefore, Mr. Niswonger will continue to be able to
significantly influence the outcome of all matters voted on by shareholders,
such as the election of directors.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
As a Tennessee corporation, we are subject to the Tennessee Business
Combination Act and the Tennessee Greenmail Act, each of which may have
anti-takeover effects. In addition, our Board of Directors is currently
considering adopting a shareholder rights plan that is designed to deter persons
from acquiring us or a significant interest in us unless the acquisition has
first been approved by our Board of Directors. The Tennessee Business
Combination Act, the Tennessee Greenmail Act or, if adopted by the Board of
Directors, the shareholder rights plan could delay, deter or prevent a takeover
attempt that shareholders might consider to be in their best interest.
OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT
We depend upon a significant number of computer software programs and
operating systems to conduct our business. Some of our older software programs
are not year 2000 compliant. We are in the process of replacing most of our key
financial and operating systems as a part of the normal upgrading of our
systems. In addition to our replacement program, we intend to modify some of our
software and hardware so that our computer systems will function properly in and
after the year 2000. We expect to complete this process by June 30, 1999.
We are in the process of obtaining year 2000 compliance letters and reports
from our significant suppliers and customers. We presently do not anticipate any
major interruption in our business as a result of year 2000 issues. Therefore,
we do not expect that year 2000 issues will have a material adverse effect on
our business or operations or that we will incur any material expense associated
with year 2000 compliance. We have not established a contingency plan to address
potential year 2000 noncompliance in our systems or in those of our major
suppliers or customers. We are currently considering whether we need a
contingency plan. Because of our dependence on systems outside our control and
because third parties with whom we have relationships may not have adequately
addressed year 2000 issues, we could face unexpected problems associated with
year 2000 issues. These problems could affect our operations, business or
financial condition.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT MAY NOT PROVE TO BE
ACCURATE
This prospectus contains forward-looking statements relating to future
events and our future financial performance. These forward-looking statements
are within the meaning of that term in Section 27A of the Securities Act and
Section 21E of the Exchange Act and are intended to be covered by the safe
harbors created thereby. These statements include all statements regarding our
intent, belief and expectations such as statements concerning projections of
revenue, income or loss, capital expenditures, plans for growth, future
operations, financing needs and plans relating to acquisitions by us.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which we cannot predict or quantify for many reasons, including the
factors we have discussed in "Risk Factors." Future events and our actual
results may differ materially from what we expect.
8
<PAGE> 12
USE OF PROCEEDS
We estimate that we will receive approximately $14.4 million from the sale
of the 1,000,000 shares of common stock we are offering, assuming a public
offering price of $15.875 per share. We will not receive any proceeds from the
sale of common stock by the selling shareholder.
We will use these net proceeds to repay outstanding debt. We borrowed this
money to purchase operating equipment, to provide working capital and to make a
$5.0 million capital contribution to Landair Corporation at the time of the
spin-off in September 1998. This debt bears interest at LIBOR plus 1.25% (6.2%
at March 31, 1999) and is due between September and December 2000.
MARKET PRICE OF OUR COMMON STOCK
Our common stock trades on The Nasdaq National Market under the symbol
"FWRD." Before September 1998, our business was combined with the truckload
carrier business and traded under the symbol "LAND." Beginning on September 24,
1998, our common stock began to trade separately from the truckload carrier
business. The following table shows the range of high and low sale prices for
our common stock for the periods indicated, as reported by The Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
Third quarter (September 24-30, 1998)....................... $ 8.31 $ 6.25
Fourth quarter.............................................. 10.44 6.56
1999
First quarter............................................... $15.75 $ 9.25
Second quarter (through April 9, 1999)...................... 16.63 13.00
</TABLE>
DIVIDEND POLICY
We have not paid cash dividends on our capital stock since our initial
public offering in November 1993. It is our current policy to retain earnings to
finance the growth of our business. Any future payment of cash dividends will
depend on our financial condition, results of operations, contractual
restrictions and capital requirements and other factors our Board of Directors
considers relevant.
9
<PAGE> 13
CAPITALIZATION
The following table shows our capitalization as of December 31, 1998 (i) on
an actual basis and (ii) as adjusted for our sale of the 1,000,000 shares of
common stock we are offering hereby, at an assumed offering price of $15.875 per
share, and use of the estimated net proceeds to repay debt.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt and capital lease
obligations.............................................. $ 5,205 $ 3,603
======= =======
Long-term debt and capital lease obligations, less current
portion.................................................. $20,126 $ 7,326
------- -------
Shareholders' equity:
Preferred stock, $0.01 par value:
5,000,000 shares authorized, no shares outstanding.... -- --
Common stock, $0.01 par value:
20,000,000 shares authorized; issued and outstanding:
12,587,818 shares actual, and 13,587,818 shares as
adjusted.............................................. 126 136
Additional paid-in capital............................... 15,768 30,160
Retained earnings........................................ 3,177 3,177
------- -------
Total shareholders' equity....................... 19,071 33,473
------- -------
Total capitalization............................. $39,197 $40,799
======= =======
</TABLE>
10
<PAGE> 14
SELECTED FINANCIAL AND OPERATING DATA
We derived the selected financial and operating data shown below from our
financial statements, which have been audited by Ernst & Young LLP. The data
below excludes the truckload carrier business, which has been accounted for as a
discontinued operation, and includes allocations of corporate administrative
expenses between the two businesses. We have not included balance sheet data for
1994 through 1997 because that data does not fully reflect the spin-off of the
truckload carrier business and, therefore, is not representative of the
financial position and capitalization of our deferred air freight business on a
stand-alone basis. During 1997, we estimate that we received $2.3 million of
non-recurring revenue as a result of the UPS strike. We estimate this revenue,
less our variable costs and income taxes but not allocated fixed costs, gave us
additional income from continuing operations of approximately $1.2 million and
an additional $0.06 of diluted earnings per share. Our shareholders' equity at
December 31, 1998 has been reduced for the spin-off of Landair Corporation,
which had net assets of $44.3 million at the date of the spin-off.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenue................ $57,914 $63,557 $80,737 $105,140 $130,438
Total operating expenses......... 53,392 57,160 72,221 92,076 114,427
------- ------- ------- -------- --------
Operating income................. 4,522 6,397 8,516 13,064 16,011
Interest expense................. (365) (694) (743) (796) (1,206)
Other income (expense), net...... 98 83 2 (84) 37
------- ------- ------- -------- --------
Income from continuing operations
before income taxes........... 4,255 5,786 7,775 12,184 14,842
Income taxes..................... 1,642 2,206 2,891 4,740 5,653
------- ------- ------- -------- --------
Income from continuing
operations.................... $ 2,613 $ 3,580 $ 4,884 $ 7,444 $ 9,189
======= ======= ======= ======== ========
Income from continuing operations
per share:
Basic......................... $ .23 $ .31 $ .41 $ .62 $ .74
Diluted....................... .22 .30 .40 .60 .72
Average common shares and
equivalents outstanding:
Basic......................... 11,534 11,700 11,856 11,936 12,393
Diluted....................... 12,192 12,054 12,098 12,354 12,846
OPERATING DATA:
Operating margin................. 7.8% 10.1% 10.5% 12.4% 12.3%
Terminal facilities.............. 55 56 60 62 67
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
BALANCE SHEET DATA: -----------------
(IN THOUSANDS)
<S> <C>
Working capital........................................... $ 7,035
Total assets of continuing operations..................... 56,808
Long-term obligations of continuing operations, net of
current portion........................................ 20,126
Shareholders' equity...................................... 19,071
</TABLE>
11
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
We provide scheduled ground transportation of cargo on a time-definite
basis. As a result of our established transportation schedule and network of
terminals, our operating cost structure includes significant fixed costs. Our
ability to improve our operating margins will depend on our ability to increase
the volume of freight moved through our network. As an example, in the third
quarter of 1997, we estimate that we received $2.3 million of non-recurring
revenue as a result of the UPS strike, which gave us additional income from
continuing operations of approximately $1.2 million.
The following does not include a discussion and analysis of the truckload
carrier business, which has been accounted for as a discontinued operation as a
result of the spin-off.
RESULTS OF OPERATIONS
The following table shows the percentage relationship of expense items to
operating revenue for the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Operating revenue...................................... 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation............................. 44.5 43.5 43.2
Salaries, wages and employee benefits................ 22.6 23.6 23.9
Operating leases..................................... 6.1 5.6 5.3
Depreciation and amortization........................ 2.6 2.8 3.3
Insurance and claims................................. 2.1 2.0 1.8
Other operating expenses............................. 11.6 10.1 10.2
----- ----- -----
Total operating expenses..................... 89.5 87.6 87.7
----- ----- -----
Income from operations................................. 10.5 12.4 12.3
----- ----- -----
Interest expense....................................... 0.9 0.7 0.9
Other expense, net..................................... -- 0.1 --
----- ----- -----
Income from continuing operations before income
taxes................................................ 9.6 11.6 11.4
Income taxes........................................... 3.6 4.5 4.4
----- ----- -----
Income from continuing operations...................... 6.0% 7.1% 7.0%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Operating revenue increased by $25.3 million, or 24.1%, to $130.4 million
for 1998 from $105.1 million in 1997. This increase resulted primarily from
increased volume from domestic and international air cargo customers, increased
operating terminals and direct shuttles, and enhanced logistics services, which
were offset in part by an increase in the number of shipments during the UPS
strike in the third quarter of 1997.
Purchased transportation was 43.2% of operating revenue in 1998 compared to
43.5% in 1997. This decrease was primarily attributable to operating
efficiencies resulting from
12
<PAGE> 16
increased volumes of freight transported through our network, coupled with an
increase in logistics services revenue, which does not involve the
transportation of freight.
Salaries, wages and employee benefits were 23.9% of operating revenue in
1998 compared to 23.6% in 1997. This increase was due primarily to additional
cargo handling wages and supervisory salaries required to operate
company-operated terminals that were added since the preceding period, coupled
with an increase in labor costs associated with the expansion of our logistics
services.
Operating leases, the largest component of which is terminal rent, were
5.3% of operating revenue in 1998 compared to 5.6% in 1997. This decrease was
attributable to increased operating revenue.
Depreciation and amortization expense as a percentage of operating revenue
was 3.3% in 1998, compared to 2.8% in 1997. This increase was attributable to
the implementation of our integrated freight order entry, tracking and billing
information system during 1997 coupled with additional operating equipment
required to operate company-operated terminals that were added since the
preceding period.
Insurance and claims as a percentage of revenue was 1.8% of operating
revenue in 1998, compared with 2.0% in 1997. This decrease was due primarily to
a decrease in the frequency and severity of accidents and lower premium costs.
Other operating expenses remained relatively constant at 10.2% of operating
revenue in 1998 compared to 10.1% in 1997.
Income from operations increased by $2.9 million, or 22.1%, to $16.0
million for 1998 compared to $13.1 million for 1997. This increase is due
primarily to a lower operating cost structure resulting from an increase in
operating revenue, which allowed us to spread the fixed costs of our network
over a larger revenue base. Income from operations during 1997 benefited from
non-recurring revenue as a result of the UPS strike.
Interest expense was $1.2 million, or 0.9%, of operating revenue in 1998,
compared to $796,000, or 0.7%, in 1997. This increase was due to higher average
net borrowing, primarily as a result of a $5.0 million capital contribution to
Landair Corporation and the settlement of intercompany balances with Landair
Corporation prior to the spin-off.
The combined federal and state effective tax rate for 1998 was 38.1%,
compared to a rate of 38.9% for 1997. For information concerning income taxes,
as well as information regarding differences between effective tax rates and
statutory rates, see note 6 of the notes to our financial statements.
As a result of the foregoing factors, income from continuing operations
increased by $1.8 million, or 24.3%, to $9.2 million for 1998, from $7.4 million
in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Operating revenue increased by $24.4 million, or 30.2%, to $105.1 million
for 1997 from $80.7 million in 1996. This increase resulted primarily from
increased freight volume from domestic and international air cargo customers,
which was attributable in part to an increased number of shipments during the
UPS strike in the third quarter of 1997, increased operating terminals and
direct shuttles and enhanced logistics services.
Purchased transportation was 43.5% of operating revenue in 1997 compared to
44.5% in 1996. This decrease was primarily attributable to operating
efficiencies resulting from increased volumes of freight transported through our
network, coupled with an increase in logistics services revenue, which does not
involve the transportation of freight.
13
<PAGE> 17
Salaries, wages and employee benefits were 23.6% of operating revenue in
1997 compared to 22.6% in 1996. This increase resulted primarily from additional
cargo handling wages and supervisory salaries required to operate
company-operated terminals that were added since the preceding period, coupled
with an increase in labor costs associated with the expansion of our logistics
services.
Operating leases, the largest component of which is terminal rent, were
5.6% of operating revenue in 1997 compared to 6.1% in 1996. This decrease was
attributable to increased operating revenue.
Depreciation and amortization expense as a percentage of operating revenue
was 2.8% in 1997 compared to 2.6% in 1996. This increase was attributable to the
implementation of our integrated freight order entry, tracking and billing
information system during the second half of 1997, coupled with additional
operating equipment required to operate company-operated terminals that were
added since the preceding period.
Insurance and claims as a percentage of operating revenue was 2.0% of
operating revenue in 1997, compared with 2.1% in 1996. This decrease was due
primarily to a decrease in the frequency and severity of accidents and lower
premium costs.
Other operating expenses were 10.1% of operating revenue in 1997 compared
to 11.6% in 1996. This decrease was attributable to a lower operating cost
structure as a result of increased operating revenue and a reduction in
commissions paid to agent terminals.
Income from operations increased by $4.6 million, or 54.1%, to $13.1
million in 1997 compared to $8.5 million for the same period of 1996. This
increase is primarily attributable to a lower operating cost structure resulting
from an increase in operating revenue, which allowed us to spread the fixed cost
of our network over a larger revenue base. Income from operations during 1997
benefited from non-recurring revenue as a result of the UPS strike.
Interest expense was $796,000, or 0.7% of operating revenue in 1997
compared to $743,000, or 0.9%, in 1996. This decrease was the result of lower
average net borrowing.
The combined federal and state effective tax rate for 1997 was 38.9%,
compared to a rate of 37.2% for 1996. For information concerning income taxes,
as well as information regarding differences between effective tax rates and
statutory rates, see note 6 of the notes to our financial statements.
As a result of the foregoing factors, income from continuing operations
increased by $2.5 million, or 51.0%, to $7.4 million for 1997 from $4.9 million
in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the spin-off in September 1998, we operated our business and the
truckload carrier business together. As a result, our statements of cash flows
do not reflect the cash flows of our business as a stand-alone company.
We have historically financed our working capital needs, including capital
purchases, with cash flows from operations and borrowings under our bank lines
of credit. Net cash provided by operating activities totaled approximately $1.9
million for 1998, $6.3 million in 1997 and $3.2 million in 1996.
Net cash used in investing activities was approximately $17.0 million in
1998, $4.8 million in 1997 and $2.6 million in 1996. Our investing activities
consisted primarily of the $5.0 million capital contribution to Landair
Corporation in 1998, the acquisition of the air
14
<PAGE> 18
cargo operating assets of Adams Air Cargo, Inc. in 1997 and the acquisition of a
terminal facility in 1996, along with the purchase of operating equipment and
management information systems during all three years.
Net cash provided by financing activities was $14.6 million in 1998,
compared to cash used in financing activities of $766,000 in 1997 and $518,000
in 1996. Our financing activities included the continued financing of operating
equipment and working capital needs, repayment of long-term debt and capital
leases and the amounts received from the exercise of stock options, and common
stock we issued under our employee stock purchase plan.
We expect net capital expenditures in 1999 for operating equipment and
management information systems to be less than $8.0 million. We expect to fund
these expenditures through cash provided by operating activities and borrowings
under our credit facilities.
Our credit facilities include a working capital line of credit and an
equipment financing facility. As long as we comply with several financial
covenants and ratios, these credit facilities permit us to borrow up to $20.0
million under the working capital line of credit and up to $25.0 million under
equipment financing facilities. Interest rates for advances under the facilities
vary based on covenants related to total indebtedness, cash flows, results of
operations and other ratios. The facilities bear interest at LIBOR plus .80% to
1.90%, expire in September and December 2000 and are secured by accounts
receivable and most of our equipment. The amount we can borrow under the line of
credit is reduced by the amount of any outstanding letters of credit.
We believe that our available cash, together with the amount we will
receive from this offering, expected cash generated from future operations and
borrowings under available lines of credit, will be sufficient to satisfy our
anticipated cash needs for at least the next 12 months.
15
<PAGE> 19
BUSINESS
RECENT SPIN-OFF
We commenced operating our deferred air freight business in November 1990.
Until September 1998, we operated our deferred air freight business and a
national truckload carrier business. In September 1998, we spun off our
truckload carrier business, operated as Landair Transport, Inc., to our
shareholders. In connection with the spin-off, we received a private letter
ruling from the IRS that the spin-off qualifies as a tax-free distribution for
federal income tax purposes.
INDUSTRY OVERVIEW
As businesses minimize inventory levels, perform manufacturing and assembly
operations in multiple locations and distribute their products through many
channels, they more frequently require expedited delivery services. Expedited
shipments are those shipments that the customer requires to be delivered the
next day or within two to three days, usually at a specified time or within a
specified time window. The Colography Group, Inc., an independent industry
market research and consulting company, estimates the domestic air freight
market for 1999 to be approximately $6.3 billion, nearly 44% of which is for
overnight delivery, with the remaining 56% for delivery within two to three
days.
Shippers with expedited delivery requirements have four principal
alternatives to transport freight: they may use a fully integrated air cargo
carrier, an airline, a less-than-truckload carrier or an air freight forwarder.
Integrated air cargo carriers provide pick-up and delivery services primarily
using their own fleet of trucks and provide transportation services using their
own fleet of aircraft. Airlines provide airport to airport service, but have
limited cargo space and generally accept only shipments weighing less than 150
pounds. Less-than-truckload carriers provide pick-up and delivery services
through their own fleet of trucks. The national less-than-truckload carriers
operate terminals where freight is unloaded, sorted and reloaded multiple times
in a single shipment. The additional handling increases transit time, handling
costs and the likelihood of cargo damage. An air freight forwarder obtains
shipments from customers, makes arrangements for transportation of the cargo by
a third party carrier and usually arranges for both delivery from the shipper to
the carrier and from the carrier to the recipient.
Although expedited freight is primarily transported by aircraft,
transportation by truck often is a viable alternative, especially for shipments
requiring deferred delivery. Generally, the cost of shipping freight, especially
heavy freight, by truck is substantially less than shipping by aircraft. We
believe there are several trends that are increasing demand for lower-cost truck
transportation of expedited freight. These trends include:
Increased Outsourcing of Logistics Management to Third Parties. Air
freight forwarders are playing an increasingly important role in logistics
management. As the growing emphasis on just-in-time processes has added to
the complexity of logistics management, companies are finding it more
advantageous to outsource their logistics management functions to third
parties. In contrast to integrated air cargo carriers and
less-than-truckload carriers that are focused on utilizing their own,
fixed-cost assets, air freight forwarders can select from various
transportation modes and suppliers to meet their customers' shipping
requirements, thereby serving their customers less expensively. Air freight
forwarders generally handle shipments of any size and offer customized
shipping options, unlike integrated air cargo carriers and less-than-
truckload carriers.
16
<PAGE> 20
Integrated Air Cargo Carriers' Increased Focus on Expedited
Freight. Integrated air cargo carriers that transport heavy freight, such
as Emery Worldwide and BAX Global, are increasingly targeting their
marketing efforts at higher yielding expedited or overnight freight to
better utilize their high fixed-cost infrastructures. As a result, these
carriers are increasingly outsourcing deferred freight to surface
transportation providers like us.
Reduced Airline Cargo Capacity. Since the 1980's, when the airlines
eliminated many of their all-cargo aircraft, growth in demand for air cargo
services has generally outpaced the growth of aircraft cargo capacity. More
recently, airlines have been modifying their domestic route systems to
provide higher frequency service to more destinations, therefore replacing
many of their wide-body aircraft with narrow-body aircraft that have less
cargo capacity. Federal Aviation Administration mandates have also reduced
air cargo capacity because most all-cargo aircraft are older, and it often
is not economically feasible to modify these older aircraft to meet the
FAA's noise reduction standards.
COMPETITIVE ADVANTAGES
We believe that our competitive advantages are:
- Exclusive focus on the deferred air freight market. We focus exclusively
on providing ground transportation services to the deferred air freight
market. We believe that this exclusive focus and our commitment to
reliable service has enabled us to provide a higher level of service in a
more cost effective manner than our competitors. In 1998, shipments we
handled arrived within 30 minutes of their scheduled arrival times over
98% of the time, with only 1.7 incidents of loss or damage per 1,000
shipments.
- Concentrated marketing strategy. We provide our services to air freight
forwarders, integrated air cargo carriers and airlines rather than
marketing our services directly to shippers. We do not place significant
size or weight restrictions on shipments and, therefore, do not compete
with small or overnight package delivery services such as DHL Worldwide,
UPS and Airborne. We believe that air freight forwarders prefer to
purchase their transportation services from us because we do not market
our services to their shipper customers and are not competing with them
for customers.
- Established nationwide network of terminals and sorting facilities. We
have built a network throughout the United States and Canada located on
or near airports. We believe it would be difficult for a competitor to
duplicate our nationwide network without the expertise we have acquired
and without expending significant management resources and capital. Our
network enables us to provide regularly scheduled service between most
markets, on-time delivery with minimal freight damage or loss, all at
rates significantly below air freight rates.
- Low-capital-intensive business model. We purchase virtually all of our
transportation requirements from owner-operators or truckload carriers,
rather than acquiring and operating our own tractors. This allows us to
respond quickly to changing demands and opportunities in our industry and
to generate a higher return on assets with lower capital expenditures.
- Enhanced technology. We are committed to using information technology to
improve our service and reduce our operating costs. Technology allows us
to
17
<PAGE> 21
increase the volume of freight that we can handle in our network and
provides real-time tracking and tracing of shipments throughout the
transportation process. We are currently enhancing our systems to permit
all participants in a shipment to obtain real-time information about that
shipment via the Internet.
- Broad customer base. We have established close relationships with a
large number of air freight forwarders, integrated air cargo carriers and
airlines. Our five largest customers only accounted for approximately 17%
of our operating revenue in 1998, and no single customer accounted for
more than five percent.
GROWTH STRATEGY
The key elements of our growth strategy are to:
- Increase freight volume from existing customers. Many of our customers
currently use us for only a portion of their overall transportation
needs. In addition, many of our air freight forwarder customers are
growing rapidly, and we expect that they will have a greater need for our
services as their businesses grow. We will continue to market directly to
these customers to capture additional freight volume.
- Improve efficiency of our transportation network. We constantly seek to
improve the efficiency of our network without changing our infrastructure
or incurring significant capital expenses. As the volume of freight
between key markets increases, we intend to continue to add regional hubs
and direct shuttles. Additional regional hubs and direct shuttles improve
our efficiency by reducing the number of miles freight must be
transported and reducing the number of times freight must be handled and
sorted. Increased freight volumes should increase our profits and
operating margins because these additional shipments help cover the
substantial fixed costs of our operations.
- Develop new customers. We will actively market our services to potential
new air freight forwarder customers. We believe air freight forwarders
will move away from integrated air cargo carriers because of those
carriers' higher costs and away from less-than-truckload carriers because
of those carriers' less reliable service. We also believe that there is
significant potential for increased freight volume from airlines as well
as from the integrated air cargo carriers.
- Enhance information systems. We are committed to continued enhancement
of our information systems in ways that can provide us both competitive
service advantages and increased productivity. We believe that our
customers will increasingly demand more sophisticated information systems
to track and trace shipments. We believe our enhanced systems will enable
us to retain existing customers and encourage them to increase the volume
of freight they send through our network. We also believe these enhanced
information systems will attract new customers, particularly air freight
forwarders who do not want to develop their own information systems.
- Expand logistics services. We will continue to expand our national and
international logistics services to increase revenue and improve
utilization of our terminal facilities and labor force. We have added a
number of services in the past few years, such as subletting dock,
warehouse or office space and insurance, customs brokerage and terminal
handling services. These services directly benefit our customers,
particularly air freight forwarders who cannot justify providing the
18
<PAGE> 22
services for themselves, attract new customers and improve utilization of
our network by increasing our revenue without significantly increasing
our costs.
- Pursue acquisitions. We intend to pursue acquisitions that can increase
our penetration of a geographic area, add customers or freight density or
allow us to offer additional services.
OPERATIONS
We receive freight from air freight forwarders, airlines and integrated air
cargo carriers at our terminals, which are located on or near airports in the
United States and Canada. We consolidate and transport these shipments by truck
through our network to the terminals nearest the ultimate destinations of the
shipments. We operate regularly scheduled service to and from each of our
terminals through our Columbus, Ohio central sorting facility or through one of
our regional hubs. We also operate regularly scheduled shuttle service directly
between cities where the volume of freight warrants bypassing our Columbus
sorting facility or a regional hub. When a shipment arrives at the terminal
nearest its destination, the customer arranges for the shipment to be picked up
at the terminal and delivered to its final destination.
A typical shipment consists of a pallet load of freight, often computers,
telecommunications equipment, machine parts, trade show exhibit materials or
medical equipment. Since we commenced operations in November 1990, the weekly
volume of freight moving through our network has increased from an average of
approximately 1.2 million pounds to over 15.3 million pounds in the year ended
December 31, 1998. During 1998, our average shipment weighed over 750 pounds.
Shipments range from small boxes weighing only a few pounds to large shipments
of several thousand pounds. Although we impose no significant size or weight
restrictions, we focus our marketing and price structure on shipments of 200
pounds or more. As a result, we do not directly compete for most of our business
with overnight couriers or small package delivery companies.
19
<PAGE> 23
TERMINALS
Our terminals are located in the following cities:
<TABLE>
<CAPTION>
AIRPORT
CITY SERVED
---- -------
<S> <C>
Albany, NY.................... ALB
Atlanta, GA................... ATL
Austin, TX.................... AUS
Baltimore, MD................. BWI
Baton Rouge, LA............... BTR
Birmingham, AL................ BHM
Boston, MA.................... BOS
Buffalo, NY................... BUF
Charleston, SC................ CHS
Charlotte, NC................. CLT
Chicago, IL................... ORD
Cincinnati, OH................ CVG
Cleveland, OH................. CLE
Columbia, SC.................. CAE
Columbus, OH.................. CMH
Dallas/Ft. Worth, TX.......... DFW
Dayton, OH.................... DAY
Denver, CO.................... DEN
Detroit, MI................... DTW
El Paso, TX................... ELP
Greensboro, NC................ GSO
Greenville, SC................ GSP
Hartford, CT.................. BDL
Houston, TX................... IAH
Huntsville, AL................ HSV
Indianapolis, IN.............. IND
Jacksonville, FL.............. JAX
Kansas City, MO............... MCI
Lafayette, LA................. LFT
Las Vegas, NV................. LAS
Los Angeles, CA............... LAX
Louisville, KY................ SDF
Memphis, TN................... MEM
Miami, FL..................... MIA
</TABLE>
<TABLE>
<CAPTION>
AIRPORT
CITY SERVED
---- -------
<S> <C>
Milwaukee, WI................. MKE
Minneapolis, MN............... MSP
Mobile, AL.................... MOB
Montreal, Canada.............. YUL
Nashville, TN................. BNA
Newark, NJ.................... EWR
Newburgh, NY.................. SWF
New Orleans, LA............... MSY
New York, NY.................. JFK
Norfolk, VA................... ORF
Oklahoma City, OK............. OKC
Omaha, NE..................... OMA
Orlando, FL................... MCO
Ottawa, Canada................ YOW
Philadelphia, PA.............. PHL
Phoenix, AZ................... PHX
Pittsburgh, PA................ PIT
Portland, OR.................. PDX
Raleigh, NC................... RDU
Richmond, VA.................. RIC
Rochester, NY................. ROC
Sacramento, CA................ SMF
Salt Lake City, UT............ SLC
San Antonio, TX............... SAT
San Diego, CA................. SAN
San Francisco, CA............. SFO
Seattle, WA................... SEA
St. Louis, MO................. STL
Syracuse, NY.................. SYR
Tampa, FL..................... TPA
Toledo, OH.................... TOL
Toronto, Canada............... YYZ
Tulsa, OK..................... TUL
Washington, DC................ IAD
</TABLE>
Independent agents operate 12 of these terminals, which typically handle
relatively low volumes of freight.
SHUTTLE SERVICE AND REGIONAL HUBS
We operate direct terminal-to-terminal shuttles and regional overnight
service between cities where justified by freight volumes. We currently provide
regional overnight service to many of the markets within our network. Direct
service allows us to provide quicker scheduled service at a lower cost because
we can transport freight over the most direct route and eliminate the added time
and cost of handling the freight at our central or a regional hub sorting
facility. Direct shipments also reduce the likelihood of damage because of
reduced handling and sorting of the freight. As we continue to increase volume
20
<PAGE> 24
between various cities, we intend to continue to add direct shuttles. For
example, our Northeast Shuttle transports freight between Albany, Baltimore,
Boston, Buffalo, Hartford, Newark, Newburgh, New York, Philadelphia, Rochester,
Syracuse and Washington. We accomplished this by direct shipment, as from Boston
to Newark, or by overnight service routed through our Newburgh regional hub.
Where warranted by sufficient volume in a region, we utilize larger terminals as
regional sorting hubs, which allows us to bypass the Columbus sorting facility.
These regional hubs improve our operating efficiency and enhance our customer
service. We currently operate regional hubs in Atlanta, Dallas/Ft. Worth, Kansas
City, Los Angeles, New Orleans, Newburgh, Orlando and San Francisco.
CUSTOMERS AND MARKETING
Our customers are air freight forwarders, airlines and integrated air cargo
carriers. Our air freight forwarder customers vary in size from small,
independent, single facility companies to large, international logistics
companies, such as USF Seko Worldwide, Associated Global Systems, Pilot Air
Freight, AIT Freight Systems, and Eagle USA Air Freight. Our airline customers
include Virgin Atlantic, Lufthansa, Air Nippon, Air France, Korean Airlines, KLM
and Japan Airlines. Because of our reputation for dependable service, integrated
air cargo carriers such as Emery Worldwide, Airborne and BAX Global utilize our
services to provide overflow capacity and other services.
We market our services through a sales and marketing staff located in
various regions of the United States. Our senior management also is actively
involved in sales and marketing at the national account level and supports local
sales activity. We have a strong commitment to marketing and focus on air
freight forwarders, airlines and integrated air cargo carriers that have time
sensitive shipping requirements requiring customized services. We also
participate in air cargo trade shows and advertise our services through direct
mail programs and point of sale material.
LOGISTICS SERVICES
Customers increasingly demand more than the movement of freight from their
transportation providers. To meet these demands, we continually seek ways to
customize our logistics services and add new services. Logistics services
increase our profit margins by increasing our revenue without corresponding
increases in our costs.
Our logistics services include providing:
- dock, warehouse and office space;
- customs brokerage, such as assistance with customs procedures for both
import and export shipments; and
- terminal handling, such as shipment build-up and break-down and
reconsolidation of air or ocean pallets or containers.
TECHNOLOGY AND INFORMATION SYSTEMS
The regular enhancement of our information systems is a key component of
our growth strategy. We have invested and will continue to invest significant
management and financial resources on improving our information systems in an
effort to provide accurate, real-time information to our management and
customers. We believe the ability to provide accurate, real-time information on
the status of shipments will become increasingly important and that our efforts
in this area will result in both competitive service advantages and increased
productivity throughout our network.
21
<PAGE> 25
In 1995, we began development of a comprehensive freight order entry,
tracking and billing system. We began to implement Phase I of the system in the
second quarter of 1997 and completed installation of Phase I in the first
quarter of 1998. As part of Phase I, we implemented a real-time, dedicated
communications network to link all of our terminals, customer service and
administrative locations. The system permits us to track and trace a shipment
from initial entry through the transportation process to the point of delivery.
We can access daily financial information covering the entire network, a
particular terminal, a particular customer or a given shipment.
We have also begun development of our Air Cargo Services or "ACS" system.
ACS is designed to seamlessly integrate all of the participants in a shipment,
including shippers, air freight forwarders and other service providers. The
system is based on Internet technology. Its functions will include:
- shipment data capture;
- transportation service scheduling;
- on-line status tracking;
- service rating;
- consolidated billing;
- EDI communications;
- report generating; and
- customer access to shipment analysis reporting.
ACS will allow all of these functions to be viewed in real-time. Web
hosting services, integrated with ACS functions, will allow air freight
forwarders to use our technology and information systems to help them compete
more effectively with integrated air cargo carriers. During the second quarter
of 1999, we plan to provide the ACS system to a core group of airline customers
for in-service testing. Following that testing, we will target air freight
forwarders. Full implementation of ACS is scheduled to be completed within the
next two years.
The ACS system and our other major information systems are being developed
through Logistics Technology, Inc., one of our wholly-owned subsidiaries.
Logistics Technology provides Internet services and technology support for us
and other companies. John H. Traendly, our Vice President, Information Systems,
is the President and Chief Executive Officer of Logistics Technology. He has an
option to purchase from us up to 20% of the common stock of Logistics
Technology.
Each of our owner-operators has installed a two-way satellite communication
system to provide us with continuous communications capability. This allows us
to locate a truck at any time and to follow its progress while in transit. The
information received through this system has been integrated into and can be
accessed through our other information systems.
PURCHASED TRANSPORTATION
We contract for most of our transportation services from owner-operators.
These contracts can generally be terminated by either party upon 30 days'
notice. The owner-operators own, operate and maintain their own vehicles and
employ their own drivers. We also purchase transportation from Landair
Corporation and from other truckload carriers to
22
<PAGE> 26
handle overflow volume. Of the $56.3 million of purchased transportation in
1998, we purchased 67.9% from owner-operators, 7.9% from Landair Corporation and
24.2% from other common carriers.
We establish long-term relationships with owner-operators to assure
dependable service and availability, and we have experienced turnover of less
than 10% per year during the past five years. We have established guidelines
relating to safety records, driving experience and personal evaluations that we
use to select our owner-operators. To enhance our relationship with the
owner-operators, we pay per mile rates above prevailing market rates and offer
each driver a consistent work schedule, typically to the same destination.
COMPETITION
The air freight transportation industry is highly competitive and very
fragmented. Our competitors include regional trucking companies that specialize
in handling deferred air freight and regional and national less-than-truckload
carriers. To a lesser extent, we compete with integrated air cargo carriers and
airlines. Our competition ranges from small operators that compete within a
limited geographic area to companies with substantially greater financial and
other resources and larger freight capacity. We also face competition from our
air freight forwarder customers who decide to establish their own networks to
transport deferred air freight. We believe competition is based on service,
primarily on-time delivery and reliability, as well as rates. We believe we
offer our services at rates that are substantially below the charge to transport
the same shipment to the same destination by air. We believe we have an
advantage over less-than-truckload carriers based upon our reputation for
faster, more reliable service between many cities.
EMPLOYEES
As of December 31, 1998, we employed approximately 1,300 persons, 750 of
whom were freight handlers and customer service personnel. None of our employees
is covered by a collective bargaining agreement. We recognize that our
workforce, including our freight handlers, is one of our most valuable assets.
The recruitment, training and retention of qualified employees are essential to
support our continued growth and to meet the service requirements of our
customers.
RISK MANAGEMENT AND LITIGATION
Under Department of Transportation regulations, we are liable for property
damage or personal injuries caused by owner-operators while they are
transporting freight on our behalf. We currently maintain liability insurance
that we believe is adequate. We are self-insured for property damage to our own
equipment. We believe that our insurance coverage is sufficient to adequately
protect us from significant claims.
From time to time, we are a party to litigation arising in the normal
course of our business, most of which involves claims for personal injury,
property damage related to the transportation and handling of freight or
workers' compensation. We do not believe that any pending actions, individually
or in the aggregate, will have a material adverse effect on our business,
financial condition or results of operations.
REGULATION
We are licensed by the Department of Transportation as a broker and motor
carrier to arrange for the transportation of freight by truck. Our air freight
business is subject to regulation as an indirect air cargo carrier under the
Federal Aviation Act, although freight
23
<PAGE> 27
brokers have been exempted from most of the requirements of the Federal Aviation
Act by the Economic Aviation Regulations promulgated thereunder. In addition,
our domestic customs brokerage operations are subject to the licensing
requirements of the United States Department of the Treasury and are regulated
by the United States Customs Service. The Federal Maritime Commission regulates
our ocean freight forwarding operations.
We are also licensed as an interstate motor carrier by the Federal Highway
Administration. Interstate motor carriers are subject to safety requirements
prescribed by the FHA and state agencies. Matters such as weight and dimensions
of equipment are also subject to federal and state regulations. Our Canadian
operations are subject to similar requirements.
We believe that we are in substantial compliance with applicable regulatory
requirements relating to our operations. If we do not comply with applicable
laws and regulations, we could be required to pay substantial fines and could
have our licenses revoked.
We are also subject to federal and state environmental laws and
regulations, including those dealing with the transportation of hazardous
materials and storage of fuel. We believe that we are in substantial compliance
with applicable environmental laws and regulations. We do not expect any
material expenditures for compliance with federal, state or local environmental
laws and regulations in 1999.
PROPERTIES AND EQUIPMENT
Our headquarters are located in a facility we share with Landair
Corporation in Greeneville, Tennessee. We lease this building from the
Greenville-Greene County Airport Authority. We constructed our central sorting
facility in Columbus, Ohio in 1994. We own our facility in Atlanta.
We lease 54 additional terminal facilities for terms typically ranging from
three to five years. We share four of our terminals with Landair Corporation. We
believe that in most of the markets we serve, replacement space comparable to
these terminal facilities is readily obtainable. We believe that our facilities
are adequate to support our current operations. Our remaining 12 terminals are
agent stations operated by independent agents who handle freight for us on a
commission basis.
We own or lease the trailers we use to move freight through our network.
Substantially all of our trailers are 53' long, and many have specialized roller
bed equipment required to serve air cargo industry customers. The average age of
our company-owned trailer fleet was approximately 1.2 years at December 31,
1998.
24
<PAGE> 28
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following are our executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Scott M. Niswonger............. 51 Chairman of the Board and Chief Executive Officer
Bruce A. Campbell.............. 47 President, Chief Operating Officer and Director
Edward W. Cook................. 40 Senior Vice President, Chief Financial Officer,
Treasurer and Director
Richard H. Roberts............. 44 Senior Vice President, General Counsel,
Secretary and Director
David E. Queen................. 52 Senior Vice President, Operations
Michael A. Roberts............. 54 Senior Vice President, Sales and Marketing
James R. Weiland............... 54 Senior Vice President, Sales
John H. Traendly............... 53 Vice President, Information Systems
James A. Cronin, III........... 44 Director
Hon. Robert Keith Gray......... 73 Director
</TABLE>
There are no family relationships between any of our executive officers or
directors. All officers serve at the pleasure of the Board of Directors.
Scott M. Niswonger is a co-founder of Forward Air Corporation, has served
as a director since its founding in 1981 and as our Chairman of the Board and
Chief Executive Officer since February 1988. Mr. Niswonger also served as our
President from 1981 until August 1998. Mr. Niswonger serves as Chairman, Chief
Executive Officer and a director of Landair Corporation and on the Regional
Advisory Board of First Tennessee Bank National Association.
Bruce A. Campbell has served as our Chief Operating Officer since April
1990, a director since April 1993 and our President since August 1998. Mr.
Campbell was our Executive Vice President from April 1990 until August 1998.
Prior to joining us, Mr. Campbell served as Vice President of Ryder-Temperature
Controlled Carriage in Nashville, Tennessee from September 1985 until December
1989.
Edward W. Cook has served as our Senior Vice President, Chief Financial
Officer and a director since September 1994 and as our Treasurer since May 1995.
Prior to joining us, Mr. Cook was employed as a certified public accountant by
Ernst & Young LLP for 11 years, most recently as a senior manager in the
Nashville, Tennessee office. Mr. Cook also serves as Senior Vice President,
Chief Financial Officer and Treasurer of Landair Corporation.
Richard H. Roberts has served as our Senior Vice President and General
Counsel since July 1994 and as Secretary and a director since May 1995. Prior to
joining us, Mr. Roberts was a partner with the Baker, Worthington, Crossley &
Stansberry law firm from January 1991 until July 1994. Mr. Roberts also serves
as a director of Miller Industries, Inc. and as Senior Vice President, General
Counsel, Secretary and a director of Landair Corporation.
25
<PAGE> 29
David E. Queen has served as our Senior Vice President, Operations since
October 1997. He served as our Vice President of Operations and General Manager
from November 1987 until October 1997. From 1984 to November 1987, Mr. Queen was
Manager of the Columbus, Ohio hub for The Flying Tiger Line.
Michael A. Roberts has served as our Senior Vice President, Sales and
Marketing since April 1990. He served as our Vice President of Marketing from
November 1987 until April 1990. Mr. Roberts served as a consultant to our
company from 1982 to 1987.
James R. Weiland has served as our Senior Vice President, Sales since
October 1997. He served as our Vice President, Sales from November 1990 until
October 1997. From May 1984 to October 1990, Mr. Weiland served us in a number
of capacities, including Regional Operations Manager and Director of Sales and
Marketing.
John H. Traendly has served as our Vice President, Information Systems
since March 1998. Since July 1998, Mr. Traendly has also served as President and
Chief Executive Officer of Logistics Technology, Inc., our wholly-owned
subsidiary that provides Internet services and technology support for us and
other companies. From November 1994 to February 1998, Mr. Traendly was Managing
Director, Air, Ground, Terminals and Transportation, Surface Movement Systems,
for Federal Express Corporation. From May 1994 to November 1994, Mr. Traendly
served as a consultant for Federal Express Corporation.
James A. Cronin, III has served as a director since 1993. Since June 1996,
Mr. Cronin has served as Chief Operating Officer, Executive Vice President,
Finance and a director of Ascent Entertainment Group, Inc., and a director of On
Command Corp., both multimedia entertainment companies. From June 1992 until
June 1996, he was a private investor. Mr. Cronin was a partner in Alfred Checchi
Associates, a private investment firm in Los Angeles, California, from 1989 to
1992. Mr. Cronin served as President and Chief Executive Officer of Tiger
International, Inc. and The Flying Tiger Line from 1987 to 1989.
Robert Keith Gray has served as a director since 1993. Mr. Gray has been
Chairman and Chief Executive Officer of Gray and Company II, a public relations
company, since November 1992. Since 1981, Mr. Gray has also been Chairman of
Gray Investment Companies and Powerhouse Leasing Corp. From 1991 to 1992, Mr.
Gray was Chairman of Hill & Knowlton Public Affairs Worldwide/USA and was its
Chief Executive Officer from 1986 to 1991. Mr. Gray has served in various
government positions, including Special Assistant to the Secretary of the Navy,
Secretary of the Cabinet and Special Assistant to President Eisenhower.
26
<PAGE> 30
PRINCIPAL AND SELLING SHAREHOLDERS
The following table shows ownership of our common stock by (i) each
director, (ii) our chief executive officer and our four other highest paid
executive officers, (iii) all directors and executive officers as a group and
(iv) each other person known to own more than five percent of our common stock.
The rules of the Securities and Exchange Commission require that every person
who has or shares the power to vote or dispose of shares of stock be reported as
the owner of those shares. As a result, more than one person may be deemed to be
the owner of the same shares. The SEC rules also consider shares of stock that a
person has the right to acquire within 60 days upon the exercise of stock
options to be outstanding for the purpose of calculating that person's
ownership, but those shares are not deemed outstanding for the purpose of
calculating the ownership of any other person. Except as otherwise indicated,
each shareholder listed in the table has sole voting and investment power over
the capital stock owned by them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THIS AFTER
OFFERING THIS OFFERING
--------------------- NUMBER OF ---------------------
NUMBER OF SHARES NUMBER OF
NAME SHARES PERCENT OFFERED(1) SHARES PERCENT
---- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Scott M. Niswonger(2)............ 6,001,200 47.3% 2,000,000 4,001,200 29.3%
Merrill Lynch & Co., Inc.(3)..... 1,288,200 10.2 -- 1,288,200 9.4
Wellington Management Company,
LLP(4)......................... 1,046,800 8.3 -- 1,046,800 7.7
Bruce A. Campbell(5)............. 166,068 1.3 -- 166,068 1.2
Hon. Robert Keith Gray(6)........ 141,450 1.1 -- 141,450 1.0
Michael A. Roberts(7)............ 124,386 * -- 124,386 *
Richard H. Roberts(8)............ 110,884 * -- 110,884 *
Edward W. Cook(9)................ 94,760 * -- 94,760 *
James A. Cronin, III(6).......... 78,050 * -- 78,050 *
David E. Queen(10)............... 45,938 * -- 45,938 *
John Traendly(11)................ -- -- -- -- --
All directors and executive
officers as a group (10
persons)(12)................... 6,816,174 53.8% 2,000,000 4,816,174 35.2%
</TABLE>
- ---------------
* Less than one percent.
(1) Several shareholders, including some of our executive officers listed
above, have granted the underwriters an option to purchase up to an
aggregate of 450,000 shares to cover over-allotments. No officer will sell
more than one-third of the aggregate of his shares and the shares that
underlie the options granted to him.
(2) Includes 600 shares held by Mr. Niswonger as custodian for his grandson and
600 shares that are held by Mr. Niswonger's spouse as custodian for one of
her children. Address: c/o Forward Air Corporation, 430 Airport Road,
Greeneville, Tennessee 37745.
(3) Merrill Lynch is a parent holding company. Two of Merrill Lynch's
indirectly-owned asset management subsidiaries reported shared voting and
dispositive power over all shares. Address: World Financial Center, North
Tower, 250 Vesey Street, New York, New York 10381.
27
<PAGE> 31
(4) Wellington is an investment adviser registered under the Investment
Advisers Act of 1940, as amended. Wellington reported shared voting power
over 625,200 shares and shared dispositive power over all shares. Address:
75 State Street, Boston, Massachusetts 02109.
(5) Mr. Campbell holds options to purchase 289,592 shares, 58,340 of which are
exercisable and included above.
(6) Messrs. Gray and Cronin each hold options to purchase 75,000 shares, 56,250
of which are exercisable and included above.
(7) Includes 2,370 shares held by Mr. Roberts' spouse. Mr. Roberts holds
options to purchase 87,688 shares, 45,188 of which are exercisable and
included above.
(8) Mr. Roberts holds options to purchase 142,500 shares, 93,750 of which are
exercisable and included above.
(9) Includes 2,000 shares held by Mr. Cook's spouse. Mr. Cook holds options to
purchase 108,200 shares, 59,450 of which are exercisable and included
above.
(10) Mr. Queen holds options to purchase 87,688, 45,188 of which are exercisable
and included above.
(11) Mr. Traendly holds options to purchase 20,000 shares.
(12) Includes 467,854 options that are exercisable and included above.
28
<PAGE> 32
UNDERWRITING
We and the selling shareholder have entered into an underwriting agreement
with the underwriters named below in which they have severally agreed to
purchase from us and the selling shareholder the number of shares of common
stock set forth beside their names below. BT Alex. Brown Incorporated, Morgan
Keegan & Company, Inc. and Scott & Stringfellow, Inc. are the representatives of
the underwriters.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
BT Alex. Brown Incorporated.................................
Morgan Keegan & Company, Inc................................
Scott & Stringfellow, Inc...................................
---------
Total............................................. 3,000,000
=========
</TABLE>
The obligation of the underwriters to purchase the common stock is subject
to the terms and conditions set forth in the underwriting agreement. The
underwriting agreement requires the underwriters to purchase all of the shares
of the common stock offered by this prospectus, if any are purchased. The shares
of common stock offered by the underwriters pursuant to this prospectus are
subject to prior sale, when, as and if delivered to and accepted by the
underwriters, and subject to the underwriters' right to reject any order in
whole or in part.
The underwriters have advised us and the selling shareholder that they
propose to offer the shares of common stock to the public at the public offering
price of $ per share. Any shares sold by the underwriters to securities
dealers may be sold at a discount of up to $ per share from the public
offering price. Any such securities dealers may resell any shares purchased from
the underwriters to certain other brokers or dealers at a discount of up to
$ per share from the public offering price. The underwriters may change the
public offering price after the common stock is released for sale to the public.
The underwriters may sell more shares than the total number set forth in
the table above. To cover these sales, several of our shareholders have granted
the underwriters an option to purchase up to an aggregate of 450,000 additional
shares of common stock at the public offering price, less the underwriting
discounts and commissions. The underwriters may exercise this option for 30 days
after the date of this prospectus only to cover these sales. To the extent the
underwriters exercise this option, each of the underwriters will purchase shares
in approximately the same proportion as the number of shares of common stock to
be purchased by it shown in the above table bears to 3,000,000, and the selling
shareholders will be obligated, pursuant to the option, to sell those shares to
the underwriters. If purchased, the underwriters will offer the additional
shares on the same terms as those on which the 3,000,000 shares are being
offered.
We and the selling shareholders have agreed to indemnify the underwriters
with respect to certain liabilities, including liabilities under the Securities
Act of 1933, as amended.
29
<PAGE> 33
To facilitate the offering of the common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the common stock. Specifically, the underwriters may over-allot shares of the
common stock in connection with this offering, thereby creating a short position
in the underwriters' account. A short position results when an underwriter sells
more shares of common stock than such underwriter is committed to purchase.
Additionally, to cover over-allotments or to stabilize the market price of the
common stock, the underwriters may bid for, and purchase, shares of the common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities, and, if they
do, they may discontinue doing so at any time. The underwriters also may reclaim
selling concessions allowed to an underwriter or dealer, if the underwriters
repurchase shares distributed by the underwriter or dealer.
We have agreed not to offer, sell or make any other disposition of any
shares of our common stock or other securities convertible into or exchangeable
or exercisable for shares of our common stock or derivatives of our common stock
for a period of 90 days after the date of this prospectus, directly or
indirectly, without the prior written consent of BT Alex. Brown Incorporated. We
may, however, without this consent, issue options granted under our stock option
plan and issue shares (1) upon exercise of options granted under the stock
option plan, (2) in connection with acquisitions of businesses and (3) to the
extent necessary to comply with the IRS letter ruling related to the spin-off.
Our executive officers and directors and the selling shareholders have
agreed not to offer, sell, contract to sell, transfer, hypothecate, pledge, or
otherwise dispose of any shares of common stock or any of our other securities
in any manner or request the registration of any of our securities for a period
of 90 days from the date of this prospectus without the prior written consent of
BT Alex. Brown Incorporated. These restrictions will be applicable to any shares
acquired by any of those persons during the applicable restricted period.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us and the selling shareholders by Bass, Berry & Sims PLC, Nashville,
Tennessee. Various legal matters relating to this offering will be passed upon
for the underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1997 and 1998, and for each of
the three years in the period ended December 31, 1998, as set forth in their
reports. We have included and incorporated by reference our financial statements
and schedule in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information we file with the SEC at the SEC's public reference room located at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the SEC: Chicago Regional Office, Citicorp Center, Suite 1400, 500
West Madison Street, Chicago,
30
<PAGE> 34
Illinois 60661; and New York Regional office, Seven World Trade Center, Suite
1300, New York, New York 10048. You may obtain information on the operation of
the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet web site (www.sec.gov) that contains periodic reports,
proxy statements and other information regarding registrants, including us.
We have filed a Registration Statement on Form S-3 to register the common
stock offered by this prospectus. This prospectus is a part of the registration
statement. This prospectus does not contain all of the information you can find
in the registration statement or the exhibits and schedules to the registration
statement.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered part of this prospectus, except for any
information superseded by information contained directly in this prospectus or
in later filed documents incorporated by reference in this prospectus.
This prospectus incorporates by reference the documents set forth below
that we have previously filed with the SEC. These documents contain important
information about us.
1. Our Annual Report on Form 10-K for the year ended December 31, 1998; and
2. The description of our common stock contained in our registration
statement on Form 8-A, including all amendments and reports filed for
the purpose of updating such description prior to the termination of
this offering.
We also incorporate by reference additional documents that may be filed
with the SEC between the date of this prospectus and the completion of the
offering contemplated by this prospectus. These include periodic reports, such
as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
If you are a shareholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them from us, the SEC, or
the SEC's Internet web site as described above. Documents incorporated by
reference are available from us without charge, excluding all exhibits, except
that if we have specifically incorporated by reference an exhibit in this
prospectus, the exhibit will also be available without charge. You may obtain
documents incorporated by reference in this prospectus by requesting them in
writing or by telephone from Richard H. Roberts, Senior Vice President, General
Counsel, and Secretary, at our principal executive offices located at 430
Airport Road, Greeneville, Tennessee 37745, (423) 636-7100.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different from, or in addition to, what is contained in this
prospectus. This prospectus is dated April , 1999. You should not assume that
the information contained in this prospectus is accurate as of any date other
than that date.
31
<PAGE> 35
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets -- December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Income -- Years Ended December
31, 1996, 1997 and 1998................................... F-4
Consolidated Statements of Shareholders' Equity -- Years
Ended December 31, 1996, 1997 and 1998.................... F-5
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements -- December 31,
1998...................................................... F-7
</TABLE>
F-1
<PAGE> 36
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 Landair Services, Inc.) as of December 31, 1997 and 1998,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Nashville, Tennessee
February 2, 1999, except for
Note 13, as to which the
date is February 24, 1999
F-2
<PAGE> 37
FORWARD AIR CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
-------- -------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 895 $ 455
Accounts receivable, less allowance of $753 in 1997 and
$952 in 1998........................................... 17,671 19,754
Inventories............................................... 300 389
Prepaid expenses.......................................... 1,088 2,545
Deferred income taxes..................................... 364 273
-------- -------
Total current assets.............................. 20,318 23,416
Property and equipment:
Land...................................................... 3,477 3,368
Buildings................................................. 6,497 6,883
Equipment................................................. 8,998 28,818
Leasehold improvements.................................... 568 1,003
-------- -------
19,540 40,072
Accumulated depreciation and amortization................. 3,755 10,152
-------- -------
15,785 29,920
Other assets................................................ 3,290 3,472
Deferred income taxes....................................... 572 --
Assets of discontinued operations........................... 97,208 --
-------- -------
Total assets...................................... $137,173 $56,808
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 72 $ 4,120
Accrued payroll and related items......................... -- 1,769
Insurance and claims accruals............................. 1,329 1,568
Income taxes payable...................................... 150 1,249
Other accrued expenses.................................... 212 2,470
Current portion of long-term debt......................... 625 4,529
Current portion of capital lease obligations.............. 974 676
Due to Truckload Business subsidiaries.................... 17,447 --
-------- -------
Total current liabilities......................... 20,809 16,381
Long-term debt, less current portion........................ 3,508 15,403
Capital lease obligations, less current portion............. 4,746 4,723
Deferred income taxes....................................... -- 1,230
Liabilities of discontinued operations...................... 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 -- 12,048,776 in 1997 and
12,587,818 in 1998.................................... 120 126
Additional paid-in capital................................ 26,744 15,768
Retained earnings......................................... 23,596 3,177
-------- -------
Total shareholders' equity........................ 50,460 19,071
-------- -------
Total liabilities and shareholders' equity........ $137,173 $56,808
======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 38
FORWARD AIR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Operating revenue........................................... $80,737 $105,140 $130,438
Operating expenses:
Purchased transportation:
Provided by non-affiliated entities.................... 30,041 39,647 51,914
Provided by Truckload Business......................... 5,881 6,137 4,431
Salaries, wages and employee benefits..................... 18,211 24,808 31,191
Operating leases.......................................... 4,889 5,867 6,876
Depreciation and amortization............................. 2,085 2,902 4,346
Insurance and claims...................................... 1,710 2,089 2,402
Other operating expenses.................................. 9,404 10,626 13,267
------- -------- --------
72,221 92,076 114,427
------- -------- --------
Income from operations...................................... 8,516 13,064 16,011
Other income (expense):
Interest expense.......................................... (743) (796) (1,206)
Other, net................................................ 2 (84) 37
------- -------- --------
(741) (880) (1,169)
------- -------- --------
Income from continuing operations before income taxes....... 7,775 12,184 14,842
Income taxes................................................ 2,891 4,740 5,653
------- -------- --------
Income from continuing operations........................... 4,884 7,444 9,189
------- -------- --------
Discontinued operations:
Income (loss) from operations (less income taxes (benefit)
of $(432), $751 and $850, respectively)................ (905) 1,150 1,345
Loss on Spin-off (less income taxes of $-0-, $-0- and
$440, respectively).................................... -- -- (380)
------- -------- --------
(905) 1,150 965
------- -------- --------
Net income.................................................. $ 3,979 $ 8,594 $ 10,154
======= ======== ========
Income per share:
Basic:
Income from continuing operations...................... $ .41 $ .62 $ .74
Income (loss) from discontinued operations............. (.07) .10 .08
------- -------- --------
Net income........................................ $ .34 $ .72 $ .82
======= ======== ========
Diluted:
Income from continuing operations...................... $ .40 $ .60 $ .72
Income (loss) from discontinued operations............. (.07) .10 .07
------- -------- --------
Net income........................................ $ .33 $ .70 $ .79
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 39
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, 1995............. 5,864 $ 59 $ 25,562 $ 11,023 $ 36,644
Stock split effected in the form of a
stock dividend...................... 5,864 59 (59) -- --
Net income for 1996.................... -- -- -- 3,979 3,979
Exercise of stock options.............. 166 1 580 -- 581
Common Stock issued under employee
stock purchase plan................. 12 -- 60 -- 60
------ ---- -------- -------- --------
Balance at December 31, 1996............. 11,906 119 26,143 15,002 41,264
Net income for 1997.................... -- -- -- 8,594 8,594
Exercise of stock options.............. 122 1 489 -- 490
Common Stock issued under employee
stock purchase plan................. 21 -- 112 -- 112
------ ---- -------- -------- --------
Balance at December 31, 1997............. 12,049 120 26,744 23,596 50,460
Net income for 1998.................... -- -- -- 10,154 10,154
Exercise of stock options.............. 532 6 2,404 -- 2,410
Common Stock issued under employee
stock purchase plan................. 7 -- 69 -- 69
Income tax benefit from stock options
exercised........................... -- -- 232 -- 232
Spin-off of Landair Corporation........ -- -- (13,681) (30,573) (44,254)
------ ---- -------- -------- --------
Balance at December 31, 1998............. 12,588 $126 $ 15,768 $ 3,177 $ 19,071
====== ==== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 40
FORWARD AIR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities
Net income.................................................. $ 3,979 $ 8,594 $ 10,154
Adjustments to reconcile net income to net cash provided by
operating activities:
(Income) loss from discontinued operations................ 905 (1,150) (2,075)
Depreciation and amortization............................. 2,085 2,902 4,346
Gain on sale of property and equipment.................... (321) -- (128)
Provision for losses on receivables....................... 495 515 438
Provision for revenue adjustments......................... 760 1,488 1,641
Deferred income taxes..................................... (251) 1,747 1,893
Changes in operating assets and liabilities, net of
effects from acquisition of business:
Accounts receivable.................................... (6,737) (5,677) (4,162)
Inventories............................................ 2 (88) (89)
Prepaid expenses....................................... (84) (644) (1,191)
Accounts payable and accrued expenses.................. 77 666 8,314
Income taxes........................................... 204 (53) 203
Due to Truckload Business subsidiaries................. 2,044 (1,980) (17,447)
------- ------- --------
Net cash provided by operating activities................... 3,158 6,320 1,897
Investing Activities
Purchases of property and equipment......................... (4,086) (3,602) (11,764)
Proceeds from disposal of property and equipment............ 1,654 -- 117
Acquisition of business..................................... -- (1,209) --
Contribution of capital to discontinued operation........... -- -- (5,000)
Other....................................................... (197) (6) (335)
------- ------- --------
Net cash used in investing activities....................... (2,629) (4,817) (16,982)
Financing Activities
Proceeds from long-term debt................................ 897 812 21,792
Payments of long-term debt.................................. (1,054) (954) (8,631)
Payments of capital lease obligations....................... (1,002) (1,226) (995)
Proceeds from exercise of stock options..................... 581 490 2,410
Proceeds from Common Stock issued under employee stock
purchase plan............................................. 60 112 69
------- ------- --------
Net cash provided by (used in) financing activities......... (518) (766) 14,645
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 11 737 (440)
Cash and cash equivalents at beginning of year.............. 147 158 895
------- ------- --------
Cash and cash equivalents at end of year.................... $ 158 $ 895 $ 455
======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 41
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. Significant intercompany accounts and transactions have
been eliminated in consolidation.
On July 9, 1998 (the "Measurement Date"), the Board of Directors of the
Company authorized 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").
The Spin-off was effected on September 23, 1998 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,
the common stock of Landair Corporation was distributed 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 has
continued as the legal entity that owns and operates the deferred air freight
operations through its operating subsidiaries and Landair Corporation is the
legal entity that owns and operates the truckload operations. Additionally, the
name Landair Services, Inc. was changed to Forward Air Corporation on August 26,
1998. As a result of the Spin-off, the results of operations and cash flows of
the Truckload Business have been reported as discontinued operations for all
periods presented in the accompanying consolidated financial statements (see
Note 2).
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, operated both the Forward Air
Business and the Truckload Business and which, after the Spin-off, continues to
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, 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
primarily of 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.
F-7
<PAGE> 42
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996, 1997 or 1998.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
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:
<TABLE>
<S> <C>
Buildings................................................... 30-40 years
Equipment................................................... 3-10 years
Leasehold improvements...................................... 1-15 years
</TABLE>
Interest payments during 1996, 1997 and 1998 were $746,000, $825,000 and
$1,154,000, respectively. No interest was capitalized during the three years
ended December 31, 1998. During 1996, 1997 and 1998, the Company added equipment
of $2,417,000, $-0- 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 flows from the use of the asset over
the remaining depreciation or amortization period are less than the carrying
value of the asset. As of December 31, 1998, in the opinion of management, there
has been no such impairment.
F-8
<PAGE> 43
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
INCOME PER SHARE
The Company calculates income per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Under SFAS
No. 128, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share includes any
dilutive effects of options, warrants and convertible securities, and uses the
treasury stock method in calculating dilution. All earnings per share data
included in the consolidated financial statements and notes thereto have been
restated to give effect to a two-for-one stock split (see Note 13).
EMPLOYEE STOCK OPTIONS
The Company grants options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the grant date. The
Company accounts for employee 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.
COMMON EXPENSES
Prior to 1998, 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. In 1998, certain administrative and back
office functions continue to be shared by both the Forward Air Business and the
Truckload Business. The expenses related to these services were allocated to the
Forward Air Business and the Truckload Business in accordance with the
provisions of a Transition Services Agreement as discussed in Note 2. 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 $3,157,000, $5,039,000 and $2,794,000 for the
Forward Air Business and $3,225,000, $4,420,000 and $3,208,000 for the Truckload
Business in 1996, 1997, and for the period January 1, 1998 through September 23,
1998, respectively.
Interest expense of $743,000, $796,000 and $661,000 for the Forward Air
Business and $2,221,000, $1,826,000 and $1,382,000 for the Truckload Business in
1996, 1997, and for the period from January 1, 1998 through September 23, 1998,
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.
F-9
<PAGE> 44
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted a new disclosure pronouncement, SFAS No. 130,
Reporting Comprehensive Income. The Company had no items of other comprehensive
income and, accordingly, adoption of the Statement had no effect on the
consolidated financial statements.
In 1998, the Company also adopted another new disclosure pronouncement,
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 131 requires companies to report selected segment
information when certain size tests are met. Management has determined that the
Company operates in only one segment meeting the applicable tests.
In 1998, the Company early-adopted Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 requires capitalization of certain costs to purchase or develop
internal-use software, and amortization of these costs over their estimated
useful life. The adoption of SOP 98-1 did not materially change the accounting
for internal-use software development costs from that previously followed by the
Company. During 1997 and 1998, the Company capitalized approximately $402,000
and $451,000 of internal-use software development costs. In 1998, the Company
also capitalized in accordance with SFAS No. 86, Accounting for Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed, approximately
$234,000 of costs related to software being developed for both internal and
external use. In years prior to 1998, the Company did not incur significant
external-use software development costs.
Costs related to software developed for internal use are amortized using
the straight-line method over an estimated five year life. Costs related to
software developed for both internal and external use will be amortized using
either a revenue-based method or the straight-line method, whichever provides
the greater amortization amount. No amortization of capitalized external-use
software development costs was recorded in 1998 since the projects were under
development throughout the period.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
required to be adopted by the Company in 2000. Management does not anticipate
that the adoption of the Statement will have a significant effect on the
financial position or results of operations of the Company.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the 1998 presentation. These reclassifications had no
effect on net income as previously reported.
2. DISCONTINUED OPERATIONS
As discussed in Note 1, on July 9, 1998, the Board of Directors of the
Company authorized 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. The Spin-off was effected on
September 23, 1998.
F-10
<PAGE> 45
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the net assets distributed to Landair Corporation on September
23, 1998 is as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 22,754
Property and equipment, net................................. 62,244
Other assets................................................ 39
--------
Assets of discontinued operations......................... 85,037
--------
Current liabilities......................................... (21,009)
Long-term debt and capital lease obligations................ (7,972)
Deferred income taxes....................................... (11,802)
--------
Liabilities of discontinued operations.................... (40,783)
--------
Net assets of discontinued operations..................... $ 44,254
========
</TABLE>
Prior to the Spin-off, the Company made a $5.0 million contribution of
capital in the form of cash to Landair Corporation. In addition, Landair
Corporation contributed to the Company approximately $2.4 million of net assets
related to the Forward Air Business. The above net assets include these
transactions. The distribution of the net assets of Landair Corporation on
September 23, 1998,was charged to retained earnings, to the extent that the
Company had positive retained earnings, with the remainder to additional paid-in
capital.
Summarized income statement information relating to the Truckload Business
(as reported in discontinued operations) is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998(1)
------- ------- -------
<S> <C> <C> <C>
Operating revenue..................................... $82,242 $91,398 $51,543
Operating expenses.................................... 81,417 87,659 48,450
------- ------- -------
Income from operations................................ 825 3,739 3,093
Interest expense...................................... (2,221) (1,826) (924)
Other income (expense)................................ 59 (12) 26
------- ------- -------
Income (loss) before income taxes..................... (1,337) 1,901 2,195
Income taxes (benefit)................................ (432) 751 850
------- ------- -------
Income (loss) from discontinued operations............ $ (905) $ 1,150 $ 1,345
======= ======= =======
</TABLE>
- ---------------
(1) The fiscal 1998 summarized income statement information above includes the
results of operations only through the July 9, 1998 Measurement Date.
The loss on Spin-off in the amount of $380,000 recorded in 1998 includes
the net of the after-tax income of the discontinued operations from the
Measurement Date through the date of the Spin-off of $730,000 ($1,170,000 on a
pre-tax basis), and costs associated with the Spin-off of $1,110,000. The costs
associated with the Spin-off represent the cost of separating the two businesses
which are non-deductible for income tax purposes.
In connection with the Spin-off, the Company and Landair Corporation
entered into certain agreements which were effective upon the actual separation
of the two companies. The agreements were entered into 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-11
<PAGE> 46
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISTRIBUTION AGREEMENT
The Distribution Agreement provided 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 provides that the Company and Landair Corporation each
have sole responsibility for claims arising out of their respective activities
after the Spin-off. It also provides 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 describes the services which the Company
and Landair Corporation provide to each other following the Spin-off. Services
performed under the Transition Services Agreement are negotiated and paid for on
an arm's-length basis. The Transition Services Agreement has an eighteen-month
term, except that information technology services to be provided by the Company
to Landair Corporation have a thirty-six month term. Notwithstanding the stated
term of the Transition Services Agreement, the Company or Landair Corporation,
as recipients of the services, may 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 three months' irrevocable notice.
EMPLOYEE BENEFIT MATTERS AGREEMENT
The Employee Benefit Matters Agreement provides 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 is continuing 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 is required to establish such
similar plans which will allow Landair Corporation to provide to its employees
after the Spin-off substantially the same benefits previously provided to them
as employees of the Company. This Employee Benefit Matters Agreement also
provided for the adjustment and conversion of the existing non-exercisable stock
options of the Company into options of Landair Corporation for those employees
that continued employment with Landair Corporation after the Spin-off. (See Note
5).
TAX SHARING AGREEMENT
The Tax Sharing Agreement describes 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 provides for the allocation of tax
expense, assessments, refunds and other tax benefits. The Agreement also sets
forth the responsibility for filing tax returns and provides for reasonable
cooperation in the event of any audit, litigation or other proceeding with
respect to any federal, state or local tax.
F-12
<PAGE> 47
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 $2,922,000. The goodwill is being
amortized on a straight-line basis over a life of 20 years. Accumulated
amortization of the goodwill totaled $23,000 and $161,000 at December 31, 1997
and 1998, respectively. The results of operations for the acquired business have
been included in the consolidated statements of income from the acquisition date
forward. Pro forma results of operations for 1996 and 1997 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,
----------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit.............................................. $2,163 $ --
Installment Equipment Loan Agreements....................... -- 18,540
Other notes payable, including interest ranging from 6.9% to
7.9%...................................................... 1,970 1,392
------ -------
4,133 19,932
Less current portion........................................ 625 4,529
------ -------
$3,508 $15,403
====== =======
</TABLE>
Effective with the Spin-off of Landair Corporation on September 23, 1998,
the Company entered into a $20.0 million working capital line of credit facility
with a Tennessee bank which expires in September 2000. Interest rates for
advances under the facility vary from LIBOR plus 1.0% to 1.9% based upon
covenants related to total indebtedness, cash flows, results of operations and
other ratios (6.9% at December 31, 1998). Advances 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, 1998,
the Company had no borrowings outstanding under the line and had utilized $3.6
million of availability for outstanding letters of credit.
Prior to the Spin-off, the Company had a $15.0 million line of credit
agreement with the same Tennessee bank. Advances outstanding under the line
carried interest at the bank's base rate less 1.0% (7.5% at December 31, 1997)
and were collateralized primarily by accounts receivable. The agreement
contained restrictive financial covenants similar to those contained in the
current agreement. At December 31, 1997, the Company had $2.2 million
outstanding under the line and had utilized $2.9 million of availability for
outstanding letters of credit.
The Company has equipment loan agreements (the "Equipment Loan Agreements")
with two Tennessee banks which permit the Company to borrow up to $25.0 million
for the purchase of operating equipment. Interest rates for advances under the
facilities vary from LIBOR plus .8% to 1.9% based upon covenants related to
total indebtedness, cash flows, results of operations and other
F-13
<PAGE> 48
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ratios (5.9% to 7.0% at December 31, 1998). The advances are collateralized by
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, 1998, the Company had additional borrowing
capacity available of $6.5 million under the Equipment Loan Agreements.
Equipment collateralizing these agreements has a carrying value of approximately
$14,091,000 at December 31, 1998.
Maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 4,529
2000........................................................ 5,508
2001........................................................ 5,414
2002........................................................ 2,308
2003........................................................ 2,173
Thereafter.................................................. --
-------
$19,932
=======
</TABLE>
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 follows Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for its employee stock options. Under
Opinion No. 25, because 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, 1996, 1997 and 1998, the Company had reserved 2,000,000
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 SFAS No. 123, Accounting for Stock Based Compensation, which also
requires that the information be determined as if the Company has accounted for
its 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 1996, 1997 and 1998, respectively: risk-free
interest rates of 6.4%, 5.8% and 4.7%; dividend ratio of zero; volatility
factors of the expected market price of the common stock of 0.5; 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 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 stock options.
F-14
<PAGE> 49
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
stock 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>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Pro forma net income..................................... $3,506 $7,980 $9,839
Pro forma net income per share:
Basic.................................................. $ .30 $ .67 $ .79
Diluted................................................ $ .29 $ .65 $ .77
</TABLE>
Because SFAS 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>
1996 1997 1998
-------------------------- -------------------------- --------------------------
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........................ 842 $5 1,150 $6 1,209 $6
Granted/converted........... 570 7 222 6 170 7
Exercised................... (166) 4 (122) 4 (472) 4
Forfeited................... (96) 5 (41) 7 (142) 5
----- -- ------ -- ------ --
Outstanding -- end of year.... 1,150 $6 1,209 $6 765 $6
===== == ====== == ====== ==
Exercisable at end of year.... 398 $5 536 $6 403 $6
===== == ====== == ====== ==
Options available for grant... 418 236 209
===== ====== ======
Weighted-average fair value of
options granted during the
year........................ $3.00 $ 3.07 $ 5.06
===== ====== ======
</TABLE>
Exercise prices for options outstanding, as of December 31, 1996, 1997 and
1998 ranged from $2.50 to $12.813.
Under the provisions of the Company's stock option plan, options to
purchase shares of the Company's common stock that were exercisable at the time
of the Spin-off, and that were held by those employees who terminated employment
with the Company and became employees of Landair Corporation upon the Spin-off,
were canceled if not exercised prior to such employees' termination of
employment with the Company. Accordingly, employees that were leaving the
Company and continuing as employees of Landair Corporation exercised 198,000
vested options during 1998 prior to the Spin-off. Unexercisable options held by
employees of the Company who remained or became employees of Landair Corporation
upon consummation of the Spin-off which totaled 102,000 were converted into
options to purchase Landair Corporation common stock under Landair Corporation's
Stock Option and Incentive Plan. Such conversion was on the basis of a formula
designed to preserve the fair market value of such converted options on the date
of the Spin-off. All options held by employees of the Company who remained or
became employees of the Company upon consummation of the Spin-off were adjusted
on the basis of a formula designed to preserve the fair market value of
F-15
<PAGE> 50
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such options on the date of the Spin-off. The adjustment of these options
resulted in the grant of options to purchase 150,000 additional shares during
the year ended December 31, 1998.
Non-Employee Director Options -- In May 1996 and 1997 and August 1998,
options to purchase 45,000, 30,000 and 30,000 shares of common stock,
respectively, were granted to the non-employee directors of the Company at
option prices of $7.50, $7.00 and $11.50 per share, respectively. All options
held by directors of the Company were adjusted on the basis of a formula
designed to preserve the fair market value of such options on the date of the
Spin-off. The adjustment of these options resulted in the grant of options to
purchase 30,000 additional shares during the year ended December 31, 1998.
The options have terms of ten years and are exercisable in installments
which vest over two-year periods from the date of grant. At December 31, 1998,
150,000 options are outstanding and will expire in May 2005 through July 2008,
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.
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 600,000 shares of
common stock for issuance pursuant to the plan. At December 31, 1998,
approximately 40,000 shares had been issued under the Plan.
F-16
<PAGE> 51
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted income per share:
Income from continuing operations.................. $4,884 $7,444 $ 9,189
Income (loss) from discontinued operations......... (905) 1,150 965
------ ------ -------
Net income......................................... $3,979 $8,594 $10,154
====== ====== =======
Denominator:
Denominator for basic income per
share-weighted-average shares...................... 11,856 11,936 12,393
Effect of dilutive stock options...................... 242 418 453
------ ------ -------
Denominator for diluted income per share-adjusted
weighted-average shares............................ 12,098 12,354 12,846
====== ====== =======
Income per share -- basic:
Income from continuing operations.................. $ .41 $ .62 $ .74
Income (loss) from discontinued operations......... (.07) .10 .08
------ ------ -------
Net income......................................... $ .34 $ .72 $ .82
====== ====== =======
Income per share -- diluted:
Income from continuing operations.................. $ .40 $ .60 $ .72
Income (loss) from discontinued operations......... (.07) .10 .07
------ ------ -------
Net income......................................... $ .33 $ .70 $ .79
====== ====== =======
Securities that could potentially dilute basic net
income per share in the future that were not included
in the computation of diluted net income per share
because to do so would have been antidilutive for the
periods presented..................................... 902 38 --
====== ====== =======
</TABLE>
6. INCOME TAXES
The Company and Landair Corporation entered into a Tax Sharing Agreement in
connection with the Spin-off (see Note 2).
F-17
<PAGE> 52
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes from continuing operations consists of the
following:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $2,708 $2,368 $3,246
State.................................................. 434 625 514
------ ------ ------
3,142 2,993 3,760
Deferred:
Federal................................................ (221) 1,510 1,807
State.................................................. (30) 237 86
------ ------ ------
(251) 1,747 1,893
------ ------ ------
$2,891 $4,740 $5,653
====== ====== ======
</TABLE>
The historical income tax expense differs from the amounts computed by
applying the federal statutory rate of 35% to income before income taxes as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at the statutory rate........................ $2,644 $4,142 $5,195
State income taxes, net of federal benefit............... 209 547 397
Meals and entertainment.................................. 38 51 61
------ ------ ------
$2,891 $4,740 $5,653
====== ====== ======
</TABLE>
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,
---------------
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued expenses.......................................... $ 483 $ 713
Alternative minimum tax credits........................... 1,020 --
Allowance for doubtful accounts........................... 276 358
Other..................................................... -- 198
------ ------
Total deferred tax assets................................. 1,779 1,269
Deferred tax liabilities:
Tax over book depreciation................................ 263 1,346
Prepaid expenses deductible when paid..................... 396 586
Other..................................................... 184 294
------ ------
Total deferred tax liabilities............................ 843 2,226
------ ------
Net deferred tax assets (liabilities)....................... $ 936 $ (957)
====== ======
</TABLE>
F-18
<PAGE> 53
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The balance sheet classification of deferred income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
---- -------
(IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $364 $ 273
Noncurrent assets (liabilities)............................. 572 (1,230)
---- -------
$936 $ (957)
==== =======
</TABLE>
Total income tax payments, net of refunds, during fiscal 1996, 1997 and
1998 were $2,939,000, $3,046,000 and $3,388,000, respectively.
7. LEASES
The Company has a capital lease agreement (with a bargain purchase option)
extending to 2008 with the Director of Development of the State of Ohio for a
terminal facility located in Columbus, Ohio. 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 leases certain equipment under capital leases. These equipment
leases expire in various years through 2001.
Property and equipment include the following amounts for leases that have
been capitalized:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $2,605 $2,605
Buildings................................................... 3,675 3,675
Equipment................................................... 2,417 3,611
------ ------
8,697 9,891
Less accumulated amortization............................... 973 1,995
------ ------
$7,724 $7,896
====== ======
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
The Company also leases certain facilities and equipment under
noncancellable 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 entered 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 under a dry lease
arrangement 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. Under the terms of the lease agreement, the Company pays the
limited liability corporation $700 per hour of usage subject to a 400 hour per
year minimum
F-19
<PAGE> 54
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
usage guarantee. The total net amount of rent expense for this lease was
$120,000, $280,000 and $423,000 in 1996, 1997 and 1998, respectively.
On or prior to the date of the Spin-off, the Company entered into subleases
with Landair Corporation pursuant to which the Company is subleasing to Landair
Corporation (i) a portion of its terminal facility in Columbus, Ohio that is
leased by the Company from the Director of Development of the State of Ohio;
(ii) a portion of its terminal facility in Atlanta, Georgia; (iii) a portion of
its facility in Indianapolis, Indiana; (iv) a portion of its terminal facility
in Chicago, Illinois; (v) a portion of its terminal facility in Detroit,
Michigan; and (vi) a portion of the headquarters of the Company in Greeneville,
Tennessee that is leased from the Greeneville-Greene County Airport Authority.
The Company subleases the Columbus and Atlanta terminal facilities for
consideration based upon the cost of such facilities to the Company and an
agreed upon percentage of usage. The Company subleases the Indianapolis,
Chicago, Detroit and Greeneville facilities for consideration based upon an
agreed upon percentage of usage.
Future minimum rental payments under capital leases and noncancellable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999................................................... $1,059 $ 7,085
2000................................................... 1,076 4,490
2001................................................... 741 2,644
2002................................................... 701 1,511
2003................................................... 710 560
Thereafter................................................ 3,212 151
------ -------
Total minimum lease payments.............................. 7,499 $16,441
====== =======
Amounts representing interest............................. 2,100
------
Present value of net minimum lease payments (including
current portion of $676)............................... $5,399
======
</TABLE>
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 the Truckload Business.
In accordance with the terms included in the Transition Services Agreement,
subsequent to the Spin-off in 1998 the Company provided accounts payable,
payroll, human resources, employee benefit plan administration, owner-operator
settlement, central purchasing, accounting and legal, general administrative,
and information technology services to the Truckload Business. The Company
charged the Truckload Business $797,000 during the period September 24, 1998
through December 31, 1998 for these services. In addition, the Truckload
Business provided the Company safety, licensing, permitting and fuel tax,
recruiting and retention, and driver training center services subsequent to the
F-20
<PAGE> 55
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Spin-off in 1998. The Truckload Business charged the Company $193,000 during the
period September 24, 1998 through December 31, 1998 for these services.
At December 31, 1998, accounts payable included $687,000 of amounts due to
Landair Corporation related to services covered under the Transition Services
Agreement and various other transactions between both entities.
As discussed in Note 7, the Company subleases a portion of certain
facilities to Landair Corporation.
The Due to Truckload Business subsidiaries in the accompanying December 31,
1997 balance sheet represented the net balance resulting from various
intercompany transactions between the Company and the Truckload Business. There
were no terms of settlement or interest charges associated with the account
balance. The balance was primarily the result of Truckload's participation in
the Company's central cash management program, wherein all of the Company's cash
receipts were remitted to a Truckload Business subsidiary and all cash
disbursements were funded by a Truckload Business subsidiary. Other transactions
included 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 settled all intercompany balances for cash.
An analysis of transactions in the Due to Truckload Business subsidiaries
account follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year....................... $(17,383) $(19,427) $(17,447)
Net cash remitted to the Truckload Business........ 1,492 2,065 17,366
Net intercompany freight transactions.............. (5,881) (6,137) (4,431)
Current federal income tax benefit provided by the
Truckload Business............................... (3,101) (194) (78)
Net administrative expenses and interest allocated
to the Truckload Business........................ 5,446 6,246 4,590
-------- -------- --------
Balance at end of year............................. $(19,427) $(17,447) $ --
======== ======== ========
</TABLE>
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
The Company has 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
F-21
<PAGE> 56
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996, 1997 and
1998 was approximately $53,000, $69,000 and $71,000, respectively. In connection
with the Spin-off, the account balances of Truckload employees will be
transferred to a Landair Corporation plan in a trust-to-trust transfer during
1999.
11. FINANCIAL INSTRUMENTS
OFF BALANCE SHEET RISK
At December 31, 1998, the Company had letters of credit outstanding
totaling $3,572,000, all of which guarantee 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 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:
Cash and cash equivalents: The carrying amount reported in the
balance sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts
reported in the balance sheet 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
at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 895 $ 895 $ 455 $ 455
Accounts receivable.......................... 17,671 17,671 19,754 19,754
Accounts payable............................. 72 72 4,120 4,120
Long-term debt and capital lease
obligations................................ 9,853 9,853 25,331 25,331
</TABLE>
F-22
<PAGE> 57
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, 1997 and 1998:
<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........ $ .08 $ .15 $ .22 $ .17
Income (loss) from discontinued
operations............................. $ (.01) $ .01 $ .05 $ .05
Net income............................... $ .07 $ .16 $ .27 $ .22
Diluted:
Income from continuing operations........ $ .08 $ .14 $ .21 $ .17
Income (loss) from discontinued
operations............................. $ (.01) $ .02 $ .05 $ .04
Net income............................... $ .07 $ .16 $ .26 $ .21
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenue............................. $28,850 $30,739 $ 33,354 $37,495
Income from operations........................ 2,785 3,709 4,212 5,305
Income from continuing operations............. 1,565 2,167 2,468 2,989
Income from discontinued operations........... 676 289 -- --
Net income.................................... 2,241 2,456 2,468 2,989
Income per share:
Basic:
Income from continuing operations........ $ .13 $ .17 $ .20 $ .24
Income from discontinued operations...... $ .06 $ .03 $ -- $ --
Net income............................... $ .19 $ .20 $ .20 $ .24
Diluted:
Income from continuing operations........ $ .12 $ .17 $ .20 $ .23
Income from discontinued operations...... $ .06 $ .02 $ -- $ --
Net income............................... $ .18 $ .19 $ .20 $ .23
</TABLE>
During the third quarter of 1997, the Company benefited from non-recurring
revenue that resulted from the UPS 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 $.06 of diluted income from continuing operations per share during the
quarter.
F-23
<PAGE> 58
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENT
On February 24, 1999, the Board of Directors approved a two-for-one split
of the common shares which will be distributed on March 19, 1999 to shareholders
of record as of March 12, 1999. Common stock issued and additional paid-in
capital have been restated to reflect this split for all years presented. All
common share and per share data included in the consolidated financial
statements and notes thereto have been restated to give effect to the stock
split.
F-24
<PAGE> 59
Omitted Graphic and Image Material
The following graphic and image material is omitted from the form of
prospectus filed electronically:
Inside Back Cover:
The title "Overnight Shuttles" and maps depicting the routes of the
Company's "West Coast Shuttle," "Northeast Shuttle," "Atlanta Shuttle," "Dallas
Shuttle," and "Grain Train Shuttle."
<PAGE> 60
3,000,000 Shares
(FORWARD AIR LOGO)
Common Stock
-----------------------
PROSPECTUS
-----------------------
BT Alex. Brown
Morgan Keegan & Company, Inc.
Scott & Stringfellow, Inc.
April , 1999
