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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 000-22490
FORWARD AIR CORPORATION
(Exact name of registrant as specified in its charter)
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TENNESSEE 62-1120025
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
430 AIRPORT ROAD
GREENEVILLE, TENNESSEE 37745
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (423) 636-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 29, 1999 was approximately $68,656,225 based on the
closing price of such stock on such date of $22.813.
The number of shares outstanding of the registrant's common stock, $.01 par
value, as of February 25, 1999 was 6,331,583.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1999 annual meeting of
shareholders are incorporated by reference into Part III of this report. Such
definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 1998.
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TABLE OF CONTENTS
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Page Number
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Part I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Executive Officers of the Registrant 16
Part II
Item 5. Market for Registrant's Common Stock and 18
Related Shareholder Matters
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial 20
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on 27
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial 28
Owners and Management
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules and 29
Reports on Form 8-K
Signatures 30
Index to Financial Statements and Financial Statement Schedule F-2
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Forward Air Corporation, through its operating subsidiaries (the
"Company" or "Forward Air"), believes it operates the largest and most
comprehensive network of surface transportation of deferred air freight. The
Company provides scheduled surface transportation through an expansive network
of 67 terminals located on or near airports in the United States and Canada,
including a central sorting facility in Columbus, Ohio, several regional hubs
and direct shuttles. The Company provides these services as a cost effective
alternative to air transportation of shipments that must be delivered at a
specific time but are relatively less time-sensitive than traditional air
freight or when air transportation is not economical. The Company's freight
rates are often 50% lower than air freight rates. The Company has experienced
rapid growth in revenue from $31.2 million in 1993 to $130.4 million in 1998, a
33% compounded annual rate, and in operating income from $2.8 million to $16.0
million over the same period, a 42% compounded annual rate. This growth has
resulted from increased business with existing customers, the addition of new
customers, expansion of the Company's terminal network and expansion of its
service offerings.
The Company focuses its services on freight forwarders, integrators and
airlines by locating terminals on or near all major airports and maintaining
regularly scheduled transportation service between cities. The Company's
operations involve receiving deferred air freight shipments at its terminals and
transporting them by truck to the terminal nearest their destination. Freight is
transported either through the Company's central sorting facility or, where
justified by lane densities, through regional hubs or directly between
terminals. As a largely low-asset based provider, the Company purchases its
transportation requirements primarily from owner-operators and, to a lesser
extent, from truckload carriers. The Company typically does not provide local
pickup and delivery services nor does it place significant size and weight
restrictions on shipments. Consequently, the Company does not market its
services directly to shippers and does not compete directly with small package
or overnight delivery services such as Federal Express Corporation and United
Parcel Service ("UPS").
On July 9, 1998, the Board of Directors of the Company (formerly
Landair Services, Inc.) 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 $.01 par value common stock (the "Common Stock") held.
Subsequent to the Spin-off, the Company has continued as the legal
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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.
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 time-definite delivery services.
Expedited shipments are those time-definite shipments that require overnight or
next day delivery and are generally transported by aircraft. Deferred shipments
are those time-definite shipments that need to be delivered within two or five
days. The additional time available for completion of a deferred freight
shipment makes surface transportation by truck a viable alternative to
transportation by aircraft. According to a survey by the Colography Group, Inc.,
the deferred freight market has grown at an 8% compounded rate from $14.1
billion in 1990 to $24.9 billion in 1997.
Shippers with time-definite handling requirements have three principal
alternatives to transport freight: they may use a freight forwarder, a fully
integrated carrier or a less-than-truckload ("LTL") carrier. Integrated air
cargo carriers, such as Emery Worldwide, BAX Global and Airborne, provide
pick-up and delivery services, primarily through their own fleets of trucks, and
provide transportation services through their own fleets of aircraft. LTL
carriers provide pick-up and delivery services through their own fleets of
trucks. The national LTL carriers operate terminals where freight is unloaded
and reloaded multiple times in a single shipment, which increases transit time,
handling costs and the likelihood of cargo damage. The reduced inventory levels
resulting from an increased emphasis on just-in-time inventory and production
management processes has increased the importance of each individual shipment to
the integrity of the entire supply chain. In this environment, companies are
less able to tolerate late deliveries, freight damage and freight loss which is
often associated with LTL carriers.
A freight forwarder procures shipments from customers, makes
arrangements for transportation of the cargo by a third party carrier and
usually arranges for both pick-up from the shipper to the carrier and for
delivery from the carrier to the recipient. Since freight forwarders can select
from various transportation options, they choose the option that meets their
customers needs thereby serving their customers less expensively than integrated
carriers and LTL carriers which have high fixed costs related to owning their
own equipment and facilities. Furthermore, freight forwarders generally handle
shipments of any size, can offer customized shipping options and are more
frequently able to deliver shipments on time and with less damage than LTL
carriers. Freight forwarders are playing an increasingly important role in
logistics decisions. Historically, companies' transportation decisions such as
the mode of transportation and carrier selection were performed by in-house
traffic managers, typically with minimal analysis. 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
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third-parties. Because of their reliability and cost effectiveness, freight
forwarders are capturing an increasing share of shippers' internal logistics
services.
Prior to deregulation of the airline industry, passenger airlines also
operated all-cargo fleets. Prior to the 1990s, freight forwarders generally had
three alternatives to transport freight: (i) air transport using passenger or
all-cargo airlines; (ii) use of integrated carriers; and (iii) surface transport
by LTL motor carriers. In the 1970s and 1980s, domestic passenger airlines
eliminated their domestic all-cargo fleets, leaving passenger aircraft which
have only limited cargo space and generally accept only packages weighing less
than 150 pounds. Since then, the growth in demand for air cargo services has
generally outpaced the growth of aircraft cargo capacity. As a result, only the
most time critical shipments are transported by aircraft. Faced with limited air
cargo availability and the high costs of air transport, freight forwarders began
to seek effective alternatives to air delivery services. Deferral of delivery
for one or two days allowed freight forwarders to utilize delivery by truck,
thereby substantially reducing transportation costs while retaining the
time-definite quality of air freight. Using sophisticated supply management
tools, freight forwarders began to educate their customers on the benefits of
deferred air freight and helped them develop systems that took advantage of the
cost savings achievable with deferred delivery. Freight forwarders therefore
have been and continue to be a positive influence on demand for deferred air
freight.
COMPETITIVE ADVANTAGES
The Company believes that its principal competitive advantages are:
- Exclusive focus on deferred air freight market. Management
believes that the Company's exclusive focus over the past
eight years on the deferred air freight market and its
commitment to customer service have enabled it to achieve
compounded annual growth rates of 33% in revenue and 42% in
operating income from 1993 through 1998. Approximately 87%
of the Company's business comes from freight forwarders.
Because of this focus, the Company is able to benefit from the
rapid growth in the freight forwarding industry and is able to
provide more reliable service in a cost effective manner.
- Established nationwide network. The Company has built a
network throughout the United States and Canada located on or
near major airports, connected by a central sorting facility
in Columbus, Ohio, several regional hubs and numerous direct
shuttle routes between cities where freight density justifies
direct city-to-city service. This network of 67 terminals
enables the Company to provide regularly scheduled service
between most markets, on-time delivery and minimal freight
damage or loss, all at rates significantly below air freight
rates. The Company believes it would be difficult for a
competitor to duplicate its nationwide network without the
expertise the Company has acquired and without expending
significant management resources and capital.
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- Low-capital intensive business model. The Company purchases
virtually all of its transportation requirements from
owner-operators or truckload carriers rather than acquiring
its own tractors. This allows the Company to focus less on
asset utilization and to generate a higher return on assets
with lower capital expenditures than a typical asset intensive
transportation company.
- Reputation for high-level service. By consistently providing
high quality service, the Company has established a reputation
as a reliable and dependable service provider. In 1998,
shipments handled by the Company arrived within 30 minutes of
their scheduled arrival time over 98% of the time, with
less than 1.7 incidents of loss or damage per 1,000 shipments.
- Broad customer base. The Company has established close
relationships with a broad base of freight forwarders,
domestic and international airlines and integrated air cargo
carriers. The breadth of the customer base is evidenced by the
fact that the Company's 5, 25 and 50 largest customers
accounted for only approximately 17%, 46% and 62% of revenue
in 1998, respectively.
- Enhanced technology. Management is committed to the use of
information technology to provide seamless logistics services
to meet customers' needs and to increase the volume of freight
moved through the Forward Air network. The Company invests
significant management and financial resources to develop and
maintain information systems that allow real-time tracking of
shipments throughout the transportation, billing and
collection processes. The Company's system is being enhanced
to allow Internet-based access to all participants in a
shipment to access real time information that will provide
greater efficiencies and reduce costs throughout the
customers' supply chains.
GROWTH STRATEGY
The key elements of the Company's growth strategy are:
- Increase freight volume through existing network. Many of the
Company's existing customers currently use Forward Air for
only a portion of their shippers' overall transportation
needs. The Company will continue to market directly to these
customers to capture additional freight volume. The majority
of the Company's customers are freight forwarders. To take
advantage of the expected growth of the freight forwarding
industry, the Company actively markets its services to
potential new customers as freight forwarders move away from
integrated air cargo carriers because of their higher costs
and away from LTL carriers because of their less reliable
service. The Company also believes that there is significant
potential for increased freight volume from domestic and
international airlines as well as the integrated air cargo
carriers and intends to continue to market its services
directly to them.
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- Improve efficiency of network. The Company constantly seeks to
add freight volume within its network in ways that can enhance
its profitability and efficiency without changing the
infrastructure of the business or incurring significant
capital expenses. As the volume of freight between key markets
increases, the Company intends to continue to add regional
hubs and direct shuttles as lane densities justify to increase
volumes and reduce transit times more efficiently. Because of
the relatively fixed cost nature of the Company's operations,
increased freight volumes should have a positive influence on
the Company's operating margin. As the Company grows, it will
analyze existing locations and explore more efficient ways to
route the freight.
- Continually enhance information systems. The Company is
committed to continue to enhance its information systems in
ways that can provide both competitive service advantages and
increased productivity. The Company believes that its
customers will increasingly demand more sophisticated
information systems that will track and trace shipments. The
Company believes this technology will enable the Company to
retain existing customers and encourage them to increase the
volume of freight sent through the network, and attract new
customers, particularly freight forwarders, who do not want to
develop their own system.
- Expand logistics services. The Company intends to continue to
expand its national and international logistics services to
increase revenue and improve utilization of its terminal
facilities. The Company has added services in the past few
years such as subletting dock/warehouse or office space,
pickup, delivery and exclusive use vehicles services, excess
valuation, customs brokerage, which includes charging fees for
various customs services, and terminal handling, including
build up and breakdown of airplane pallets and ocean
containers. These services directly benefit customers,
particularly freight forwarders who cannot justify providing
the services for themselves, attract new customers and improve
utilization of the existing network by increasing revenue
without significant increases in costs.
- Pursue strategic acquisitions. The Company intends to pursue
additional acquisitions that can increase the Company's
penetration of a geographic area, add customers or freight
density or allow the Company to offer additional services to
its customers. The Company has acquired the assets of three of
its regional competitors in the past five years that met one
or more of these criteria.
OPERATIONS
The Company receives air freight from freight forwarders, domestic and
international airlines and integrated air cargo carriers at 67 terminals located
on or near airports in the United States and Canada. Shipments received at each
terminal facility are consolidated and transported by truck through the
Company's network to the terminal nearest the freight's ultimate destination.
The Company's network consists of regularly scheduled service to and from each
of its terminals
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through the Columbus, Ohio sorting facility or, where justified by lane
densities, through regional hubs or directly between terminals. The Company also
operates regularly scheduled service directly between city pairs where
sufficient volume of air freight warrants bypassing the Columbus sorting
facility or a regional hub. When the shipment arrives at the terminal nearest
the shipment's destination, the customer arranges for pick-up at the terminal
and for final delivery.
The Company handles a broad range of freight. A typical shipment
consists of a pallet load of high value freight, often computers,
telecommunications equipment and other high-technology equipment, trade show
exhibit materials, machinery and machine parts or apparel. During 1998, the
average shipment weight was approximately 790 pounds, ranging from small boxes
weighing only a few pounds to large shipments of several thousand pounds.
Although the Company imposes no significant size or weight restrictions on
shipments, it focuses its marketing and price structure on shipments of 200
pounds or more. As a result of its focus on larger freight shipments, the
Company does not directly compete for most of its business with overnight
couriers or small package delivery companies.
The Company provides overnight or second day service between most of
its terminal facilities. The Company commits to transport shipments that same
day if delivered to its terminal facilities before specified late evening
cut-off times, which vary by terminal. Departure and arrival times are provided
to customers through a variety of Company-published literature and are expected
to be available on the Internet in February 1999. In 1998, shipments handled by
the Company arrived within 30 minutes of their scheduled arrival time over 98%
of the time, with less than 1.7 incidents of loss or damage per 1,000 shipments.
TERMINALS
The Forward Air network includes 67 terminals in the cities listed
below.
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City Airport Served
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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
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
Milwaukee, WI...................................MKE
Minneapolis, MN.................................MSP
Mobile, AL......................................MOB
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
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
Tulsa, OK.......................................TUL
Washington, DC..................................IAD
Montreal, Canada................................YUL
Ottawa, Canada..................................YOW
Toronto, Canada.................................YYZ
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Eleven of these terminals, which handle relatively lower volumes of
freight, are operated for the Company by independent agents.
SHUTTLE SERVICE AND REGIONAL HUBS
As the Company has built lane density between key markets, it has
enhanced its regional service offerings by establishing direct
terminal-to-terminal shuttles and regional overnight service. Direct service
allows the Company to provide quicker scheduled service to customers at a lower
cost by moving freight over the most direct route and eliminating the added cost
of handling the freight at a central or regional hub sorting facility. Direct
shuttles also reduce the likelihood of damage because of reduced handling of the
freight. As the Company continues to increase volume between various city pairs,
it intends to add direct shuttles. Approximately 90 of the cities served by the
Company have regional overnight service. An example of this regional service is
the Northeast Shuttle. Freight to be transported between Albany, Baltimore,
Boston, Buffalo, Hartford, Newark, Newburgh, New York, Philadelphia, Rochester,
Syracuse and Washington is transported either by overnight direct shuttle, as
from Boston to Newark, or by overnight service routed through Newburgh. Where
sufficient volume in a region warrants it, the Company utilizes larger terminals
as regional sorting hubs, which allow the Company to bypass the Columbus sorting
facility, thereby improving operating efficiency and enhancing customer service.
The Company's current regional hubs are located in Atlanta, Dallas/Ft. Worth,
Denver, Kansas City, Los Angeles, New Orleans, Newburgh, Orlando and San
Francisco.
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SHIPMENTS
Since operations were commenced in November 1990, the weekly volume of
freight handled by the Company has increased from an average of approximately
1.2 million pounds to over 17.3 million pounds per week as shown below:
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AVERAGE
WEEKLY
VOLUME IN
POUNDS
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(IN MILLIONS)
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1990...................................... 1.2
1991...................................... 1.4
1992...................................... 2.3
1993...................................... 3.8
1994...................................... 7.4
1995...................................... 8.5
1996...................................... 10.5
1997...................................... 13.3
1998...................................... 17.3
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CUSTOMERS AND MARKETING
The Company's customers are freight forwarders, domestic and
international airlines and integrated air cargo carriers. The Company's freight
forwarder customers vary in size from small, independent, single facility
companies to large, international logistics companies. The Company's
international airline customers include Virgin Atlantic Airways, Lufthansa, Air
Nippon Airways, Air France, Korean Airlines, KLM and Japan Airlines. Because of
the Company's reputation for dependable service, integrated air cargo carriers
such as Emery Worldwide, Airborne and BAX Global utilize the Company's services
to provide overflow capacity. During 1998, the Company's largest customer
accounted for approximately 5% of the Company's revenue, and the top five
customers accounted for approximately 17% of the revenue.
The Company markets its services through a sales and marketing
department consisting of 19 full-time salespersons located in various regions of
the United States who report to five regional Vice Presidents of Sales. The
Company's senior management also is actively involved in the sales and marketing
function at the national account level and supports local sales activity when
appropriate. Salespersons are offered the opportunity to earn incentive bonuses
that recognize the effectiveness of their marketing efforts. The Company has a
strong commitment to marketing and focuses on freight forwarders, domestic and
international airlines and integrated air cargo carriers that have time
sensitive shipping requirements requiring customized services. The Company also
participates in air cargo trade shows and advertises its services through
extensive direct mail programs and point of sale material.
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LOGISTICS SERVICES
Many customers are increasingly demanding more than the simple movement
of freight from their transportation providers. To meet these needs, the Company
continually seeks ways to customize its existing services and add new services
by utilizing its existing facilities in non- peak hours and expending
incremental labor hours to add value to its product offerings. The Company
provides these services to directly benefit customers, particularly the smaller
freight forwarders who cannot provide the services for themselves, attract new
customers and improve utilization of the existing network by increasing revenue
without corresponding increases in costs.
Many of the Company's terminals sublet dock/warehouse or office space
to appropriate tenants. The Company also provides logistics services, such as
customs brokerage, which includes charging customs validation fees, terminal
services fees, storage fees, customs fees, document handling fees, Canadian
transborder fees, temporary inbound fees, immediate transport fees,
transportation and exportation fees and house air waybill/consolidation fees for
both import and export shipments, and terminal handling, which includes aircraft
pallet buildup/breakdown, ocean container buildup/breakdown and reconsolidation.
Three additional service categories provided to customers are pickup,
delivery and exclusive use vehicles. These services are separate from the
Company's point to point LTL linehaul. Freight is picked up from the freight
forwarder, or other customer, and/or delivered to the customer at the
appropriate destination. Exclusive use vehicles are utilized when the customer
tenders more than 10,000 pounds of freight or requires a more demanding service
level than typical point to point service.
TECHNOLOGY AND INFORMATION SYSTEMS
A primary component of the Company's growth strategy is the regular
enhancement of its information systems. The Company has invested and will
continue to invest significant management and financial resources to the
enhancement of its information systems in an effort to provide accurate and real
time information to its management and customers. The Company believes the
ability to provide accurate real time information on the status of shipments,
both internally (to ensure on-time delivery and efficient operations) and to
customers, will become increasingly important. The Company believes that its
efforts in this area will result in both competitive service advantages and
increased productivity throughout the Forward Air network.
In 1995, the Company began development of a comprehensive freight order
entry, tracking and billing system. The Company initiated roll out of 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 the roll out, the Company implemented a
real time, dedicated communications network that links all of its terminals,
customer service and administrative locations. The system permits the Company to
track and trace a shipment from initial entry through the transportation process
to the point of delivery and through the billing and collection process. Through
the system, management can access daily financial information covering the
entire network, a particular terminal, a particular customer or a given
shipment.
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The Company has recently begun development of the Air Cargo Services
("ACS") system. ACS is designed to seamlessly integrate all of the participants
(shippers, freight forwarders, pick-up and delivery service providers and the
Company) in a time-definite freight shipment. The system will be based on
Internet technology and will offer global access to users that have a web
browser, an Internet connection and the appropriate security authorizations. ACS
support 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, and
each participant will be able to enter data and view the status of the shipment
in real time. Web hosting services, integrated with ACS functions, will allow
freight forwarders to access technology that will allow them to compete more
effectively with integrated air cargo carriers. General availability of the ACS
system is planned for the second quarter of 1999. The Company will first target
a core group of freight forwarders and airlines for beta testing prior to
general availability. Implementation of ACS is scheduled to be completed within
the next two years.
The Company has required that its owner-operators install Qualcomm
two-way satellite communication systems. The Qualcomm system provides the
Company with continuous communications capability in the event a driver
experiences a service delay or disruption. The Qualcomm system also allows the
Company to follow the progress of a vehicle and its adherence to schedule. The
Company can communicate instantly with drivers to improve on-time arrivals and
operating efficiencies. The information received through the Qualcomm
communication system has been integrated into and can be accessed through the
Company's information systems.
PURCHASED TRANSPORTATION
The Company contracts for most of its transportation services through
owner-operators. At December 31, 1998, the Company had exclusive contracts with
owner-operators, who operated a total of 295 trucks. These contracts can be
terminated by either party upon 30 days' notice. The owner-operators own,
operate and maintain their own vehicles and employ qualified drivers of their
choice. The Company also purchases transportation from Landair Corporation and
from other truckload carriers to handle overflow volume. Of the $56.3 million of
purchased transportation in 1998, 67.9% was purchased from owner-operators, 7.9%
was purchased from Landair Corporation and 24.2% was purchased from other
carriers.
The Company seeks to establish long-term relationships with
owner-operators to assure dependable service and availability, and the Company
has experienced turnover of its owner-operators of less than 10% per year
during the past five years. The Company has established its own guidelines
relating to safety records, driving experience and personal evaluations to
select its owner-operators. To enhance its relationship with the owner-operators
and to improve their reliability, the Company pays them at rates per mile above
the prevailing market rate and offers each driver a consistent work schedule,
normally to the same destination.
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COMPETITION
The air freight transportation industry is highly competitive and
heavily fragmented. Competitors of the Company include regional trucking
companies that specialize in handling deferred air freight, as well as a large
number of regional and national LTL carriers, and, to a lesser extent, the
passenger airlines and integrated air cargo carriers, none of whom dominates the
market. The Company's competition ranges from small operators that compete
within a limited geographic area, often with lower overhead, to significantly
larger companies with substantially greater financial and other resources or
larger freight capacity than the Company. The Company may also face competition
from its freight forwarder customers if they decide to establish their own
networks to transport deferred air freight. Competition for the freight
transported by the Company is based on service, primarily on-time delivery and
reliability, as well as, rates. The Company has a price advantage over airlines
and integrated air cargo carriers and offers its services at rates which are as
much as 50% below the charge to transport the same shipment to the same
destination by air. The Company has an advantage over LTL carriers based upon
its reputation for more reliable and often quicker service between many city
pairs.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,300
persons, approximately 750 of whom were freight handlers and customer service
personnel. None of the Company's employees are covered by a collective
bargaining agreement although there have been three unsuccessful unionization
attempts at individual terminals within the past four years. The Company
considers its employee relations to be good. The Company recognizes that its
workforce, including its freight handlers, is one of its most valuable assets.
The recruitment, training and retention of qualified employees is essential to
support the Company's continued growth and to meet the service requirements of
the Company's customers.
RISK MANAGEMENT AND LITIGATION
Under the Department of Transportation's ("DOT") regulations, the
Company is generally liable for personal injuries or property damage caused by
its owner-operators and Company-operated equipment. Claims exposure in the
transportation industry consists primarily of cargo loss and damage, personal
injury, property damage, medical benefits and workers' compensation. The Company
maintains insurance in amounts the Company believes are adequate. The Company
also requires owner-operators to obtain insurance to protect the Company from
any claims arising out of their negligence. The Company is self-insured with
respect to property damage to equipment the Company owns. Management believes
that the Company's insurance coverage is sufficient to adequately protect the
Company from significant claims.
From time to time, the Company is a party to litigation arising in the
normal course of its business, most of which involves claims for personal
injury, property damage related to the transportation and handling of freight or
workers' compensation. Management believes that no pending actions, individually
or in the aggregate, will have a material adverse effect on the Company's
business, financial condition or results of operations.
13
<PAGE> 14
REGULATION
A subsidiary of the Company is licensed by the DOT as a property broker
in arranging for the transportation of general commodities freight by motor
vehicle. The DOT prescribes qualifications for acting in this capacity,
including certain surety bond requirements. The Company's air freight business
is subject to regulation, as an indirect air cargo carrier, under the Federal
Aviation Act by the DOT although property brokers have been exempted from most
of such Act's requirements by the Economic Aviation Regulations promulgated
thereunder. The Company's 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 the Company's ocean freight forwarding operations.
Through another subsidiary, the Company is licensed as an interstate
motor carrier by the Federal Highway Administration ("FHWA"). Interstate motor
carrier operations are subject to safety requirements prescribed by the FHWA,
and other relevant federal and state agencies. Such matters as weight and
dimension of equipment are also subject to federal and state regulations. The
Company's Canadian operations are subject to similar requirements imposed by the
laws and regulations of the Dominion of Canada and various provincial laws and
regulations.
Management believes that the Company is in substantial compliance with
applicable regulatory requirements relating to its operations. Failure of the
Company to comply with the applicable regulations could result in substantial
fines or revocation of the Company's operating permits.
The Company is also subject to federal and state environmental laws and
regulations, including those dealing with the transportation of hazardous
materials and storage of fuel. The Company has above-ground fuel storage tanks
at its Atlanta and Indianapolis facilities and underground fuel storage tanks at
its Columbus facility. Management believes that the Company is in substantial
compliance with applicable environmental laws and regulations. No material
expenditures for compliance with federal, state or local environmental laws and
regulations are anticipated in 1999.
14
<PAGE> 15
ITEM 2. PROPERTIES
PROPERTIES AND EQUIPMENT
The Company leases its headquarters located in Greeneville, Tennessee
from the Greeneville-Greene County Airport Authority. The central sorting
facility located in Columbus, Ohio is a 101-door cross dock sorting facility
constructed in 1994 and leased by the Company from the Director of Development
of the State of Ohio. The Company owns a 46,000 square foot, 68-door cross dock
terminal facility in Atlanta, Georgia. The Company leases a 15,200 square foot
facility in Indianapolis, Indiana.
The Company leases 54 additional terminal facilities, which are
typically leased on a relatively short-term (three to five year) basis.
Management believes that in most of the markets it serves, replacement space
comparable to these terminal facilities is readily obtainable, if necessary.
Management believes that its facilities are adequate to support its current
operations. The remaining eleven terminals are agent stations operated by
independent agents who handle freight for the Company on a commission basis.
The Company acquired 72 over-the-road tractors as part of the Adams Air
Cargo, Inc. acquisition in October 1997. The Company does not plan to operate
these tractors for more than the next 12 months. As of December 31, 1998, the
Company owned or leased 860 trailers, substantially all of which are 53' long
and 116 of which have specialized roller bed equipment required to serve air
cargo industry customers. The average age of the Company-owned trailer fleet was
approximately 1.2 years at December 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1998,
no matters were submitted to a vote of security holders through the solicitation
of proxies or otherwise.
15
<PAGE> 16
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G(3) to Form 10-K, the following information is included in Part I
of this report.
The following are the Company's executive officers:
<TABLE>
<CAPTION>
Name Age Position
------------------- --------- ---------------------------------------
<S> <C> <C>
Scott M. Niswonger (1)................... 51 Chairman of the Board and Chief Executive Officer
Bruce A. Campbell........................ 47 President and Chief Operating Officer
Edward W. Cook (1)....................... 40 Chief Financial Officer, Senior Vice President and
Treasurer
Richard H. Roberts (1)................... 44 Senior Vice President, General Counsel and Secretary
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
</TABLE>
(1) Also serves as an executive officer of Landair Corporation
There are no family relationships between any of the executive officers
of the Company. All officers hold office at the pleasure of the Board of
Directors.
Scott M. Niswonger is a co-founder of the Company, has served as a
director since its founding in October 1981 and as Chairman of the Board and
Chief Executive Officer since February 1988. Mr. Niswonger served as President
of the Company from October 1981 until August 1998. He also serves as a director
of Landair Corporation and of the Regional Advisory Board of First Tennessee
Bank National Association.
Bruce A. Campbell has been Chief Operating Officer of the Company since
April 1990, a director since April 1993 and President since August 1998. Mr.
Campbell served as Executive Vice President of the Company from April 1990 until
August 1998. Prior to joining the Company in 1990, Mr. Campbell served as Vice
President of Ryder-Temperature Controlled Carriage in Nashville, Tennessee from
September 1985 until December 1989.
Edward W. Cook joined the Company as Chief Financial Officer, Senior
Vice President and director in September 1994. Since May 1995, he has also
served as Treasurer. Prior to joining the Company, Mr. Cook was employed by
Ernst & Young LLP for eleven years, most recently as a senior manager in the
Nashville, Tennessee office. From March 1986 to February 1988, Mr. Cook served
as Controller and Assistant Secretary of Ryder-Temperature Controlled Carriage
in Nashville, Tennessee.
Richard H. Roberts has served as Senior Vice President and General
Counsel of the Company since July 1994 and as Secretary and a director since May
1995. Prior to joining the Company, Mr. Roberts was a partner with the Baker,
Worthington, Crossley & Stansberry law
16
<PAGE> 17
firm from January 1991 until July 1994. Mr. Roberts also serves as a director of
Landair Corporation and Miller Industries, Inc.
David E. Queen became Senior Vice President, Operations in October 1997
after serving as Vice President of Operations and General Manager from November
1987. From 1984 to November 1987, Mr. Queen was Manager of the hub in Columbus,
Ohio for The Flying Tiger Line.
Michael A. Roberts has been Senior Vice President, Sales and Marketing
of the Company since April 1990 after serving as Vice President of Marketing
from November 1987. Mr. Roberts served as a consultant to the Company from 1982
to 1987.
James R. Weiland became Senior Vice President, Sales in October 1997
after serving as Vice President from November 1990. From May 1984 to October
1990, Mr. Weiland served the Company in various capacities, including Regional
Operations Manager and Director of Sales and Marketing.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Common Stock of the Company trades on The Nasdaq Stock Market under
the symbol "FWRD." The following table sets forth the high and low sales prices
for the Common Stock as reported by The Nasdaq Stock Market for each full
quarterly period within the two most recent fiscal years through June 30, 1998,
and from July 1, 1998 until the pro rata distribution to the shareholders of the
Company of all of the outstanding common stock of Landair Corporation on
September 23, 1998. All prices have been restated to reflect a two-for-one
stock split declared in February 1999.
<TABLE>
<CAPTION>
1998 High Low
---- ---- ---
<S> <C> <C>
First Quarter ................... $16.688 $11.188
Second Quarter .................. $18.75 $12.75
July 1, 1998 - September 23, 1998 $15.75 $ 7.75
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
First Quarter ................... $ 6.00 $ 4.875
Second Quarter .................. $ 7.375 $ 5.50
Third Quarter ................... $11.00 $ 7.188
Fourth Quarter .................. $15.00 $ 9.75
</TABLE>
The following table sets forth the high and low sales prices for the
Common Stock as reported by The Nasdaq Stock Market from September 24-30, 1998,
and for the entire fourth quarter of 1998:
<TABLE>
<CAPTION>
1998 High Low
---- ---- ---
<S> <C> <C>
September 24-30, 1998............ $ 8.313 $ 6.25
Fourth Quarter................... $10.438 $ 6.563
</TABLE>
There were approximately 1,300 shareholders of record (including
brokerage firms and other nominees) of the Common Stock as of December 31, 1998.
The Company has not paid cash dividends on its Common Stock in the two
preceding fiscal years, and it is the current intention of management to retain
earnings to finance the growth of the Company's business. Future payment of
dividends will depend upon the financial condition, results of operations,
contractual restrictions and capital requirements of the Company, as well as
other factors deemed relevant by the Board of Directors.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company.
The selected financial data should be read in conjunction with the Company's
financial statements and notes thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------
1998 1997 (4) 1996 1995 1994
---- -------- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (1), (2)
Operating revenue $130,438 $105,140 $80,737 $63,557 $57,914
Income from operations 16,011 13,064 8,516 6,397 4,522
Operating margin (3) 12.3% 12.4% 10.5% 10.1% 7.8%
Income from continuing operations 9,189 7,444 4,884 3,580 2,613
Income from continuing operations
per share (5):
Basic .74 .62 .41 .31 .23
Diluted .72 .60 .40 .30 .22
Cash dividends declared per
common share (5) -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets of continuing operations $ 56,808 $ 39,965 $31,887 $22,779 $19,912
Long-term obligations of continuing
operations, net of current portion 20,126 8,254 7,323 5,865 6,592
Shareholders' equity (6) 19,071 50,460 41,264 36,644 31,778
</TABLE>
(1) Reflects the Truckload Business as a discontinued operation.
(2) Includes certain allocations of corporate administrative expenses by
the Company (see Note 1 of Notes to Consolidated Financial Statements).
(3) Income from operations as a percentage of operating revenue.
(4) 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 additional approximately $2.3
million of operating revenue, $1.2 million of income from operations
and $.06 of diluted earnings per share.
(5) Restated to reflect a two-for-one stock split declared in February
1999.
(6) Shareholders' equity at December 31, 1998 reflects the Spin-off of
$44.3 million of net assets of Landair Corporation.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The selected financial and operating data of the Company set forth
certain information with respect to the Company's financial position and results
of operations that should be read in conjunction with the following discussion
and analysis. The following does not include a discussion and analysis of the
Truckload operations, which have been accounted for as discontinued operations
as a result of the Spin-off.
INTRODUCTION
In November 1990, the Company commenced the operations of Forward Air.
From its first full year of operations in 1991 to 1998, Forward Air experienced
rapid growth in revenue from $12.3 million to $130.4 million, and in income from
operations from $250,000 to $16.0 million. The Company expanded into the
deferred air freight business because of its generally higher margins and growth
potential than its Truckload operations with fewer ongoing capital expenditures.
The Company provides service on a time-definite, scheduled basis, and,
therefore, the Company's operating cost structure includes significant fixed
costs, such as terminal facilities, owner-operators to provide scheduled
transportation between cities within the network and equipment, primarily
forklifts, trailers and computer systems. As a result, the Company's ability to
improve its operating margins will depend on its ability to increase volumes of
freight moving through its network, thereby leveraging its fixed cost operating
structure. As an example of this leverage, in the third quarter of 1997, the UPS
strike generated an estimated incremental $1.2 million of operating income from
an estimated $2.3 million of additional operating revenue attributable to the
strike.
20
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of expense
items to operating revenue for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation 43.2 43.5 44.5
Salaries, wages and employee benefits 23.9 23.6 22.6
Operating leases 5.3 5.6 6.1
Depreciation and amortization 3.3 2.8 2.6
Insurance and claims 1.8 2.0 2.1
Other operating expenses 10.2 10.1 11.6
------ ------ ------
Total operating expenses 87.7 87.6 89.5
------ ------ ------
Income from operations 12.3 12.4 10.5
------ ------ ------
Interest expense (0.9) (0.7) (0.9)
Other income (expense), net -- (0.1) --
------ ------ ------
Income from continuing operations before
income taxes 11.4 11.6 9.6
Income taxes 4.4 4.5 3.6
------ ------ ------
Income from continuing operations 7.0% 7.1% 6.0%
====== ====== ======
</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. The operating revenue 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 increased 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. The decrease in purchased transportation as a
percentage of operating revenue was primarily attributable to operating
efficiencies resulting from increased volumes of freight through the Forward Air
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. The increase in salaries, wages and employee
benefits as a percentage of operating revenue in 1998 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 associated with logistics services revenue as the
Company continues to expand in this area.
21
<PAGE> 22
Operating leases, the largest component of which is terminal rent, were
5.3% of operating revenue in 1998 compared to 5.6% in 1997. The decrease in
operating leases as a percentage of operating revenue was attributable to
greater revenue through the Forward Air network and the growth of logistics
services revenue.
Depreciation and amortization expense as a percentage of operating
revenue was 3.3% in 1998, compared to 2.8% in 1997. The increase in depreciation
and amortization expense as a percentage of operating revenue was attributable
to the implementation of the Company's integrated freight order entry, tracking
and billing information system during 1997 coupled with additional operating
equipment (e.g., forklifts, trailers, scales, etc.) required to operate Company-
operated terminals that were added from 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. The decrease in insurance and
claims expense as a percentage of operating revenue 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. The improvement in income
from operations is due primarily to a lower operating cost structure resulting
from an increase in operating revenue which allowed the Company to spread the
fixed costs of the network over a larger base. Income from operations during
1997 also benefited from non-recurring revenue that resulted from the UPS strike
as discussed below.
Interest expense was $1.2 million, or 0.9%, of operating revenue in
1998, compared to $796,000, or 0.7%, in 1997. The increase in interest expense
as a percentage of operating revenue during 1998 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 Consolidated Financial Statements.
As a result of the foregoing factors, income from continuing operations
increased by $1.7 million, or 23.0%, to $9.1 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. The operating revenue increase
resulted primarily from increased volume
22
<PAGE> 23
from domestic and international air cargo customers (in part attributable 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. The decrease in purchased transportation as a
percentage of operating revenue was primarily attributable to operating
efficiencies resulting from increased volumes of freight through the Forward Air
network coupled with an increase in logistics services revenue which does not
involve the transportation of freight.
Salaries, wages and employee benefits were 23.6% of operating revenue
in 1997 compared to 22.6% in 1996. The increase in salaries, wages and employee
benefits as a percentage of operating revenue in 1997 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 associated with logistics services revenue as the
Company continues to expand in this area.
Operating leases, the largest component of which is terminal rent, were
5.6% of operating revenue in 1997 compared to 6.1% in 1996. The decrease in
operating leases as a percentage of operating revenue was attributable to
greater revenue through the Forward Air network and the growth of logistics
services revenue.
Depreciation and amortization expense as a percentage of operating
revenue was 2.8% in 1997, compared to 2.6% in 1996. The increase in depreciation
and amortization expense as a percentage of operating revenue was attributable
to the implementation of the Company's integrated freight order entry, tracking
and billing information system during 1997 coupled with additional operating
equipment (e.g., forklifts, trailers, scales, etc.) required to operate Company-
operated terminals that were added from 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. The decrease in insurance
and claims expense as a percentage of operating revenue was due primarily to a
decrease in the frequency and severity of accidents and lower premium costs.
Other operating expenses were 10.1% as a percentage of operating
revenue in 1997 compared to 11.6% in 1996. The decrease in other operating
expenses as a percentage of operating revenue was attributable to a lower
operating cost structure due to 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 for 1997 compared to $8.5 million for 1996. The improvement in income
from operations is due primarily to a lower operating cost structure resulting
from an increase in operating revenue which allowed the Company to spread the
fixed costs of the network over a larger base. Income from operations during
1997 also benefited from non-recurring revenue that resulted from the UPS strike
as discussed below.
23
<PAGE> 24
Interest expense was $796,000, or 0.7%, of operating revenue in 1997,
compared to $743,000, or 0.9%, in 1996. The decrease in interest expense as a
percentage of operating revenue during 1997 was due to 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 Consolidated 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.
The Company's fiscal 1997 results were affected by the UPS strike
occurring during a two-week period in the third quarter of fiscal 1997 as the
Company shipped freight that would have ordinarily been shipped by UPS. The
Company estimates that the UPS strike resulted in approximately $2.3 million in
incremental revenue which generated an estimated $1.2 million of income from
operations or $.06 per diluted share. The Company believes it did not retain a
significant amount of the business it gained through the UPS strike, as the two
companies generally occupy separate niches within the freight transportation
marketplace.
Liquidity and Capital Resources
The Company has historically financed working capital needs with cash
flows from operations and borrowings under lines of credit. The Company has
historically financed capital purchases with cash flows from operations and
through borrowings under credit agreements with financial institutions. 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. Investing activities
consisted primarily of a $5.0 million capital contribution to Landair
Corporation in 1998, the acquisition of Adams Air Cargo, Inc. in 1997 and a
terminal facility in 1996, along with operating equipment and enhanced
management information systems during 1998, 1997 and 1996.
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. These financing activities included the continued financing of
operating equipment and working capital needs, the repayment of long-term debt
and capital leases and proceeds received from the exercise of stock options, and
Common Stock issued under an employee stock purchase plan.
The Company expects net capital expenditures in 1999 for operating
equipment and management information systems, excluding acquisitions, to be less
than $8.0 million. The Company expects to fund these expenditures through cash
provided by operating activities and borrowings under credit facilities.
24
<PAGE> 25
The Company's credit facilities include a working capital line of
credit and an equipment financing facility. Subject to maintenance of financial
covenants and ratios, these credit facilities permit the Company to borrow up to
$20.0 million under the working capital line of credit and $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 .8% to
1.9%, expire in September and December 2000, and are secured by accounts
receivable and certain revenue equipment. Availability under the line of credit
is reduced by the amount of outstanding letters of credit. Among other
restrictions, the terms of the line of credit require maintenance of certain
levels of net worth and other financial ratios.
Management believes that the Company's available cash, expected future
cash generated from operations and available borrowings under the Company's
existing line of credit, will be sufficient to satisfy its anticipated cash
needs through at least the fourth quarter of 1999. Additional funds may be
required to fund acquisitions. If funds are not available to finance
acquisitions, the Company expects to be able to borrow funds to finance such
acquisitions. No assurance can be given that such financings can be completed on
terms satisfactory to the Company.
Subsequent to the end of the year, the Board of Directors approved a
two-for-one stock split to be distributed on March 19, 1999. All share,
earnings per share, dividends per share, and quarterly stock price data
included herein and in the consolidated financial statements and notes thereto
have been restated to give effect to the stock split.
Impact of Year 2000
Some of the Company's older computer programs and systems were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company is in the process of replacing the majority of its key
financial and operational systems as a part of upgrading its systems in the
normal course of business. Management believes that this program will
substantially meet or address its Year 2000 issues. In addition to its
replacement program, the Company will modify some of its software and hardware
so that its computer systems will function properly with respect to dates in the
Year 2000 and thereafter. The Company has spent less than $100,000 to date to
address the Year 2000 issues. The cost of the remaining replacement and
modification for the Year 2000 issue is estimated to be less than $50,000.
The Company has initiated a formal communication process with all its
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to the failure of any third party to
remediate its own Year 2000 issues, and expects to complete such process during
the second quarter of 1999. Once the Company has completed the process mentioned
above and has determined the extent to which the Company's interface systems are
vulnerable to the failure of any third party to remediate its own Year 2000
issues, the Company expects to develop its plans (including contingency plans)
and budgets to perform any
25
<PAGE> 26
necessary remediation actions. There is no guarantee that the systems of such
other companies will be timely converted and would not have an adverse effect on
the Company.
The system replacements and upgrades are estimated to be completed not
later than June 30, 1999, which is prior to any anticipated impact of Year 2000
issues on the Company's operating systems. The Company believes that with the
completion of such replacements and upgrades, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
replacements and upgrades are not made, or are not completed timely, or if third
parties with which the Company's systems interface are not replaced or upgraded,
the Year 2000 issue could have a material impact on the operations of the
Company.
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement 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.
Forward-Looking Statements
The Company, or its executive officers and directors on behalf of the
Company, may from time to time make written or oral "forward-looking
statements." Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission (the "Commission"), in press
releases and in reports to shareholders. Oral forward-looking statements may be
made by the Company's executive officers and directors on behalf of the Company
to the press, potential investors, securities analysts and others. The Private
Securities Litigation Reform Act of 1995 contains a safe harbor for
forward-looking statements. The Company relies on this safe harbor in making
such disclosures. In connection with this safe harbor provision, the Company is
hereby identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company. Without limitation, factors that might cause such a
difference include economic factors such as recessions, inflation, higher
interest rates and downturns in customer business cycles, the Company's
inability to maintain its historical growth rate due to a decreased volume of
freight moving through the Company's network, competition, surplus inventories,
loss of a major customer, the Company's lack of prior operating history as an
entity independent of the truckload operations, the ability of the Company's
information systems to handle increased volume of freight moving through its
network, and the availability and compensation of qualified independent
owner-operators to serve the Company's transportation needs. The Company
disclaims any intent or obligation to update these forward-looking statements.
26
<PAGE> 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to market risk from changes in interest rates.
At December 31, 1998, the fair value of the Company's total debt and capital
lease obligations was estimated to be $25.3 million, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements,
which approximated carrying value. Market risk is estimated as the potential
change in fair value resulting from a hypothetical change in interest rates.
Using a yield to maturity analysis and assuming an increase in interest rates of
10% (from December 31, 1998), the potential decrease in fair value of total debt
and capital leases would be $145,000.
The Company had $18.5 million of variable rate debt outstanding at
December 31, 1998. At this borrowing level, a hypothetical 10% adverse change in
interest rates on the debt would increase interest expense and decrease income
before income taxes by approximately $123,000. This amount was determined by
considering the impact of the hypothetical interest rate increase on the
Company's borrowing cost at the December 31, 1998 borrowing level.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
27
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors of the
Company is incorporated herein by reference to the Company's definitive proxy
statement for its 1999 Annual Meeting of Shareholders (the "1999 Proxy
Statement"). The 1999 Proxy Statement will be filed with the Commission not
later than 120 days subsequent to December 31, 1998.
Pursuant to Item 401(b) of Regulation S-K, the information required by
this item with respect to executive officers of the Company is set forth in Part
I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the 1999 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated herein by
reference to the 1999 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the 1999 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 1998.
28
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) List of Financial Statements and Financial
Statement Schedules.
The response to this portion of Item 14 is
submitted as a separate section of this report.
(a)(3) List of Exhibits.
The response to this portion of Item 14 is
submitted as a separate section of this report.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the
fourth quarter of 1998.
(c) Exhibits.
The response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is
submitted as a separate section of this report.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Forward Air Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FORWARD AIR CORPORATION
By: /s/ Scott M. Niswonger
----------------------------------------
Scott M. Niswonger, Chairman
and Chief Executive Officer
Date: February 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
<S> <C> <C>
/s/ Scott M. Niswonger Chairman and February 28, 1999
- ----------------------------------- Chief Executive Officer
Scott M. Niswonger (Principal Executive Officer)
/s/ Edward W. Cook Chief Financial Officer, February 28, 1999
- -------------------------------- Senior Vice President, Treasurer
Edward W. Cook and Director (Principal Financial
and Accounting Officer)
/s/ Bruce A. Campbell President, Chief Operating February 28, 1999
- -------------------------------- Officer and Director
Bruce A. Campbell
/s/ Richard H. Roberts Senior Vice President, General February 28, 1999
- ------------------------------------ Counsel, Secretary and Director
Richard H. Roberts
/s/ James A. Cronin, III Director February 28, 1999
- ------------------------------------
James A. Cronin, III
/s/ Robert K. Gray Director February 28, 1999
- ------------------------------------
Hon. Robert K. Gray
</TABLE>
30
<PAGE> 31
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedule
Financial Statements and Supplementary Data
Certain Exhibits
Financial Statement Schedule
Year Ended December 31, 1998
Forward Air Corporation
Greeneville, Tennessee
<PAGE> 32
Forward Air Corporation (formerly Landair Services, Inc.)
Form 10-K -- Item 8 and Item 14(a)(1) and (2)
Index to Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Forward Air Corporation are
included as a separate section of this report:
<TABLE>
<CAPTION>
Page No.
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................................................F-3
Consolidated Balance Sheets - December 31, 1998 and 1997.....................................................F-4
Consolidated Statements of Income - Years Ended December 31, 1998,
1997 and 1996.............................................................................................F-6
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1998, 1997 and 1996..........................................................................F-7
Consolidated Statements of Cash Flows - Years Ended December 31, 1998,
1997 and 1996.............................................................................................F-8
Notes to Consolidated Financial Statements - December 31, 1998...............................................F-9
The following financial statement schedule of Forward Air Corporation is
included as a separate section of this report.
Schedule II - Valuation and Qualifying Accounts..............................................................S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-2
<PAGE> 33
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, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Nashville, Tennessee
February 2, 1999, except for
Note 13, as to which the
date is February 24, 1999
F-3
<PAGE> 34
Forward Air Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
----------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 455 $ 895
Accounts receivable, less allowance of $952 in
1998 and $753 in 1997 19,754 17,671
Inventories 389 300
Prepaid expenses 2,545 1,088
Deferred income taxes 273 364
----------------------
Total current assets 23,416 20,318
Property and equipment:
Land 3,368 3,477
Buildings 6,883 6,497
Equipment 28,818 8,998
Leasehold improvements 1,003 568
----------------------
40,072 19,540
Accumulated depreciation and amortization 10,152 3,755
----------------------
29,920 15,785
Other assets 3,472 3,290
Deferred income taxes -- 572
Assets of discontinued operations -- 97,208
----------------------
Total assets $56,808 $137,173
======================
</TABLE>
F-4
<PAGE> 35
<TABLE>
<CAPTION>
December 31
1998 1997
----------------------
(In thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,120 $ 72
Accrued payroll and related items 1,769 --
Insurance and claims accruals 1,568 1,329
Income taxes payable 1,249 150
Other accrued expenses 2,470 212
Current portion of long-term debt 4,529 625
Current portion of capital lease obligations 676 974
Due to Truckload Business subsidiaries -- 17,447
----------------------
Total current liabilities 16,381 20,809
Long-term debt, less current portion 15,403 3,508
Capital lease obligations, less current portion 4,723 4,746
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 - 40,000,000
Issued and outstanding shares - 12,587,818 in
1998 and 12,048,776 in 1997 126 120
Additional paid-in capital 15,768 26,744
Retained earnings 3,177 23,596
----------------------
Total shareholders' equity 19,071 50,460
----------------------
Total liabilities and shareholders' equity $56,808 $137,173
======================
</TABLE>
See accompanying notes.
F-5
<PAGE> 36
Forward Air Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Operating revenue $ 130,438 $ 105,140 $ 80,737
Operating expenses:
Purchased transportation:
Provided by non-affiliated entities 51,914 39,647 30,041
Provided by Truckload Business 4,431 6,137 5,881
Salaries, wages and employee benefits 31,191 24,808 18,211
Operating leases 6,876 5,867 4,889
Depreciation and amortization 4,346 2,902 2,085
Insurance and claims 2,402 2,089 1,710
Other operating expenses 13,267 10,626 9,404
----------------------------------------
114,427 92,076 72,221
----------------------------------------
Income from operations 16,011 13,064 8,516
Other income (expense):
Interest expense (1,206) (796) (743)
Other, net 37 (84) 2
----------------------------------------
(1,169) (880) (741)
----------------------------------------
Income from continuing operations before
income taxes 14,842 12,184 7,775
Income taxes 5,653 4,740 2,891
----------------------------------------
Income from continuing operations 9,189 7,444 4,884
----------------------------------------
Discontinued operations:
Income (loss) from operations
(less income taxes (benefit) of $850,
$751 and $(432), respectively) 1,345 1,150 (905)
Loss on Spin-off (less income taxes of $440,
$-0- and $-0-, respectively) (380) -- --
----------------------------------------
965 1,150 (905)
----------------------------------------
Net income $ 10,154 $ 8,594 $ 3,979
========================================
Income per share:
Basic:
Income from continuing operations $ .74 $ .62 $ .41
Income (loss) from discontinued
operations .08 .10 (.07)
----------------------------------------
Net income $ .82 $ .72 $ .34
========================================
Diluted:
Income from continuing operations $ .72 $ .60 $ .40
Income (loss) from discontinued
operations .07 .10 (.07)
----------------------------------------
Net income $ .79 $ .70 $ .33
========================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 37
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-7
<PAGE> 38
Forward Air Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,154 $ 8,594 $ 3,979
Adjustments to reconcile net income to
net cash provided by operating activities:
(Income) loss from discontinued operations (2,075) (1,150) 905
Depreciation and amortization 4,346 2,902 2,085
Gain on sale of property and equipment (128) -- (321)
Provision for losses on receivables 438 515 495
Provision for revenue adjustments 1,641 1,488 760
Deferred income taxes 1,893 1,747 (251)
Changes in operating assets and liabilities,
net of effects from acquisition of business:
Accounts receivable (4,162) (5,677) (6,737)
Inventories (89) (88) 2
Prepaid expenses (1,191) (644) (84)
Accounts payable and accrued expenses 8,314 666 77
Income taxes 203 (53) 204
Due to Truckload Business subsidiaries (17,447) (1,980) 2,044
------------------------------------
Net cash provided by operating activities 1,897 6,320 3,158
INVESTING ACTIVITIES
Purchases of property and equipment (11,764) (3,602) (4,086)
Proceeds from disposal of property and equipment 117 -- 1,654
Acquisition of business -- (1,209) --
Contribution of capital to discontinued operation (5,000) -- --
Other (335) (6) (197)
------------------------------------
Net cash used in investing activities (16,982) (4,817) (2,629)
FINANCING ACTIVITIES
Proceeds from long-term debt 21,792 812 897
Payments of long-term debt (8,631) (954) (1,054)
Payments of capital lease obligations (995) (1,226) (1,002)
Proceeds from exercise of stock options 2,410 490 581
Proceeds from Common Stock issued under
employee stock purchase plan 69 112 60
------------------------------------
Net cash provided by (used in) financing activities 14,645 (766) (518)
------------------------------------
Net increase (decrease) in cash and cash equivalents (440) 737 11
Cash and cash equivalents at beginning of year 895 158 147
------------------------------------
Cash and cash equivalents at end of year $ 455 $ 895 $ 158
====================================
</TABLE>
See accompanying notes.
F-8
<PAGE> 39
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.
F-9
<PAGE> 40
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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.
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 1998, 1997 or 1996.
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.
F-10
<PAGE> 41
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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 1998, 1997 and 1996 were $1,154,000, $825,000 and
$746,000, respectively. No interest was capitalized during the three years ended
December 31, 1998. During 1998, 1997 and 1996, the Company added equipment of
$-0-, $-0- and $2,417,000, 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.
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).
F-11
<PAGE> 42
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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 $2,794,000, $5,039,000 and $3,157,000 for the
Forward Air Business and $3,208,000, $4,420,000 and $3,225,000 for the Truckload
Business for the period January 1, 1998 through September 23, 1998, and 1997 and
1996, respectively.
Interest expense of $661,000, $796,000 and $743,000 for the Forward Air Business
and $1,382,000, $1,826,000 and $2,221,000 for the Truckload Business for the
period from January 1, 1998 through September 23, 1998, and 1997 and 1996,
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.
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.
F-12
<PAGE> 43
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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 1998 and 1997, the Company capitalized approximately $451,000
and $402,000 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.
F-13
<PAGE> 44
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
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.
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>
1998(1) 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating revenue $ 51,543 $ 91,398 $ 82,242
Operating expenses 48,450 87,659 81,417
--------- --------- ---------
Income from operations 3,093 3,739 825
Interest expense (924) (1,826) (2,221)
Other income (expense) 26 (12) 59
--------- --------- ---------
Income (loss) before income taxes 2,195 1,901 (1,337)
Income taxes (benefit) 850 751 (432)
--------- --------- ---------
Income (loss) from discontinued
operations $ 1,345 $ 1,150 $ (905)
========= ========= =========
</TABLE>
F-14
<PAGE> 45
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
(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:
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
F-15
<PAGE> 46
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
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.
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 $161,000 and $23,000 at December 31, 1998
and 1997, 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 1997 and 1996 would not differ
materially from the Company's historical results.
F-16
<PAGE> 47
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------
(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% 1,392 1,970
-------------------
19,932 4,133
Less current portion 4,529 625
-------------------
$15,403 $3,508
===================
</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 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
F-17
<PAGE> 48
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
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, 1998, 1997 and 1996, 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 1998, 1997 and 1996, respectively: risk-free
interest rates of 4.7%, 5.8% and 6.4%; 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.
F-18
<PAGE> 49
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
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.
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income $9,839 $7,980 $3,506
Pro forma net income per share:
Basic $ .79 $ .67 $ .30
Diluted $ .77 $ .65 $ .29
</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>
1998 1997 1996
---- ---- ----
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 1,209 $ 6 1,150 $ 6 842 $ 5
Granted/converted 170 7 222 6 570 7
Exercised (472) 4 (122) 4 (166) 4
Forfeited (142) 5 (41) 7 (96) 5
----- ---- ----- --- ----- ---
Outstanding - end of year 765 $ 6 1,209 $ 6 1,150 $ 6
===== ==== ===== === ===== ===
Exercisable at end of year 403 $ 6 536 $ 6 398 $ 5
===== ==== ===== === ===== ===
Options available for
grant 209 236 418
===== ===== =====
Weighted-average fair
value of options
granted during the
year $5.06 $3.07 $3.00
===== ===== =====
</TABLE>
F-19
<PAGE> 50
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Exercise prices for options outstanding, as of December 31, 1998, 1997 and 1996
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 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 August 1998 and May 1997 and 1996, options
to purchase 30,000, 30,000 and 45,000 shares of common stock, respectively, were
granted to the non-employee directors of the Company at option prices of $11.50,
$7.00 and $7.50 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
F-20
<PAGE> 51
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
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.
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>
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted income per share:
Income from continuing operations $ 9,189 $7,444 $4,884
Income (loss) from discontinued
operations 965 1,150 (905)
-------------------------------
Net income $10,154 $8,594 $3,979
===============================
Denominator:
Denominator for basic income per share-
weighted-average shares 12,393 11,936 11,856
Effect of dilutive stock options 453 418 242
-------------------------------
Denominator for diluted income per share-
adjusted weighted-average shares 12,846 12,354 12,098
===============================
Income per share - basic:
Income from continuing operations $ .74 $ .62 $ .41
Income (loss) from discontinued
operations .08 .10 (.07)
-------------------------------
Net income $ .82 $ .72 $ .34
===============================
Income per share - diluted:
Income from continuing operations $ .72 $ .60 $ .40
Income (loss) from discontinued
operations .07 .10 (.07)
-------------------------------
Net income $ .79 $ .70 $ .33
===============================
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 -- 38 902
===============================
</TABLE>
F-21
<PAGE> 52
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The Company and Landair Corporation entered into a Tax Sharing Agreement in
connection with the Spin-off (see Note 2).
The provision for income taxes from continuing operations consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $3,246 $ 2,368 $ 2,708
State 514 625 434
---------------------------------
3,760 2,993 3,142
Deferred:
Federal 1,807 1,510 (221)
State 86 237 (30)
---------------------------------
1,893 1,747 (251)
---------------------------------
$5,653 $ 4,740 $ 2,891
=================================
</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>
1998 1997 1996
--------------------------------
(In thousands)
<S> <C> <C> <C>
Tax expense at the statutory rate $5,195 $4,142 $2,644
State income taxes, net of federal benefit 397 547 209
Meals and entertainment 61 51 38
--------------------------------
$5,653 $4,740 $2,891
==============================
</TABLE>
F-22
<PAGE> 53
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 713 $ 483
Alternative minimum tax credits -- 1,020
Allowance for doubtful accounts 358 276
Other 198 --
-----------------------
Total deferred tax assets 1,269 1,779
Deferred tax liabilities:
Tax over book depreciation 1,346 263
Prepaid expenses deductible when paid 586 396
Other 294 184
-----------------------
Total deferred tax liabilities 2,226 843
-----------------------
Net deferred tax assets (liabilities) $ (957) $ 936
=======================
</TABLE>
The balance sheet classification of deferred income taxes is as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------
(In thousands)
<S> <C> <C>
Current assets $ 273 $364
Noncurrent assets (liabilities) (1,230) 572
------- ----
$ (957) $936
======= ====
</TABLE>
Total income tax payments, net of refunds, during fiscal 1998, 1997 and 1996
were $3,388,000, $3,046,000 and $2,939,000, respectively.
F-23
<PAGE> 54
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
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
1998 1997
---------------------
(In thousands)
<S> <C> <C>
Land $2,605 $2,605
Buildings 3,675 3,675
Equipment 3,611 2,417
---------------------
9,891 8,697
Less accumulated amortization 1,995 973
---------------------
$7,896 $7,724
=====================
</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 usage
guarantee. The total net amount of rent expense for this lease was $423,000,
$280,000 and $120,000 in 1998, 1997 and 1996, respectively.
F-24
<PAGE> 55
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
7. LEASES (CONTINUED)
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
Leases Leases
------ ------
Fiscal Year (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.
F-25
<PAGE> 56
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
8. TRANSACTIONS WITH THE TRUCKLOAD BUSINESS (CONTINUED)
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
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.
F-26
<PAGE> 57
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
8. TRANSACTIONS WITH THE TRUCKLOAD BUSINESS (CONTINUED)
An analysis of transactions in the Due to Truckload Business subsidiaries
account follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $(17,447) $(19,427) $(17,383)
Net cash remitted to the Truckload Business 17,366 2,065 1,492
Net intercompany freight transactions (4,431) (6,137) (5,881)
Current federal income tax benefit provided
by the Truckload Business (78) (194) (3,101)
Net administrative expenses and interest
allocated to the Truckload Business 4,590 6,246 5,446
-------- -------- --------
Balance at end of year $ -- $(17,447) $(19,427)
======== ======== ========
</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 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 1998, 1997 and
1996 was approximately $71,000, $69,000 and $53,000, 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.
F-27
<PAGE> 58
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
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>
1998 1997
---------------------- -----------------------
Carrying Fair Value Carrying Fair Value
Amount Amount
---------------------- -----------------------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 455 $ 455 $ 895 $ 895
Accounts receivable 19,754 19,754 17,671 17,671
Accounts payable 4,120 4,120 72 72
Long-term debt and capital lease
obligations 25,331 25,331 9,853 9,853
</TABLE>
F-28
<PAGE> 59
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, 1998 and 1997:
<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>
<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>
F-29
<PAGE> 60
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
During the third quarter of 1997, the Company benefited from non-recurring
revenue that resulted from the 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.
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-30
<PAGE> 61
Forward Air Corporation
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------------
(1) (2)
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- Deductions- End of
Description of Period Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $440 $ 438 $-- $ 301(2) $577
Allowance for revenue adjustments(1) 313 1,641 -- 1,579(3) 375
--------------------------------------------------------------------------------
753 2,079 -- 1,880 952
Year ended December 31, 1997:
Allowance for doubtful accounts $187 $ 515 $-- $ 262(2) $440
Allowance for revenue adjustments(1) 150 1,488 -- 1,325(3) 313
--------------------------------------------------------------------------------
337 2,003 -- 1,587 753
Year ended December 31, 1996:
Allowance for doubtful accounts $117 $ 495 $-- $ 425(2) $187
Allowance for revenue adjustments(1) 122 760 -- 732(3) 150
--------------------------------------------------------------------------------
239 1,255 -- 1,157 337
</TABLE>
(1) Represents an allowance for adjustments to accounts receivable due to
disputed rates, accessorial charges and other aspects of previously billed
shipments.
(2) Uncollectible accounts written off, net of recoveries.
(3) Adjustments to billed accounts receivable.
S-1
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. in
Exhibit No. Under Document Where
Item 601 of Incorporated by
Regulation S-K Reference
-------------- ---------
<S> <C> <C> <C>
2.1(g) - Distribution Agreement between the 2.1
Registrant and Landair Corporation
3.1(a) - Restated Charter of the registrant --
3.2(g) - Bylaws of the registrant, as amended 3.1
4.1(b) - Form of Landair Services, Inc. Common 4.1
Stock Certificate
4.2(g) - Form of Forward Air Corporation 4.1
Common Stock Certificate
10.1(f) - Registrant's Restated Employee Stock 10
Purchase Plan
10.2(e) - Registrant's Amended and Restated 10.1
Stock Option and Incentive Plan
10.3(b) - Lease Agreement, dated July 27, 1981, 10.18
between the Greeneville-Greene County
Airport Authority and General Aviation of
Tennessee, Inc., as assumed by the
registrant by agreement, dated May 10, 1988
10.4(b) - Assignment, Assumption and Release 10.19
Agreement, dated May 10, 1988,
between Greeneville-Greene County
Airport, General Aviation, Inc., and
the registrant
10.5(g) - Air Carrier Certificate, effective 10.4
September 9, 1993, reissued September
21, 1998
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10.6(c) - Lease between the Director of 10.24
Development of the State of Ohio and
the registrant dated as of October 1, 1993
10.7(e) - Registrant's Non-Employee Director 10.2
Stock Option Plan
10.8(g) - Transition Services Agreement between the 10.1
registrant and Landair Corporation
10.9(g) - Employee Benefit Matters Agreement 10.2
between the registrant and Landair Corporation
10.10(g) - Tax Sharing Agreement between the registrant 10.3
and Landair Corporation
10.11(g) - Amended and Restated Loan and Security 10.5
Agreement, dated as of September 10, 1998,
between First Tennessee Bank National
Association and the registrant
10.12(g) - $20.0 million Amended and Restated Master 10.6
Secured Promissory Note (Line of Credit),
dated as of September 10, 1998, to First
Tennessee Bank National Association
10.13(g) - $15.0 million Amended and Restated 10.7
Secured Promissory Note (Equipment
Loan), dated as of September 10, 1998,
to First Tennessee Bank National Association
10.14(g) - Security Agreement, dated August 11, 1998, 10.8
between SunTrust Bank, Nashville, N.A.
and FAF, Inc.
10.15(g) - $8,022,000 Promissory Note, dated 10.9
August 11, 1998, to SunTrust Bank,
Nashville, N.A.
10.16(a) - Employment Agreement between the registrant --
and Bruce A. Campbell
21.1(a) - Subsidiaries of the registrant --
23.1(a) - Consent of Ernst & Young LLP --
</TABLE>
<PAGE> 64
<TABLE>
<S> <C> <C> <C>
27.1(a) - Financial Data Schedule - Period Ended --
December 31, 1998 (Electronic Filing Only)
27.2(a) - Financial Data Schedule (Restated) - Period --
Ended December 31, 1997 (Electronic
Filing Only)
27.3(a) - Financial Data Schedule (Restated) - Period --
Ended December 31, 1996 (Electronic
Filing Only)
</TABLE>
(a) Filed herewith.
(b) Filed as an exhibit to the registrant's Registration Statement
of Form S-1, filed with the Commission on September 27, 1993.
(c) Filed as an exhibit to the registrant's Annual Report on Form
10-K for the fiscal year ended December 25, 1993, filed with the Commission on
March 25, 1994.
(d) Filed as an exhibit to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994, filed with the Commission on
March 31, 1995.
(e) Filed as an exhibit to the registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1995, filed with the
Commission on August 14, 1995.
(f) Filed as an exhibit to the registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1995, filed with the
Commission on November 14, 1995.
(g) Filed as an exhibit to the registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998, filed with the
Commission on November 16, 1998.
<PAGE> 1
Exhibit 3.1
RESTATED CHARTER
OF
FORWARD AIR CORPORATION
Pursuant to the provisions of Section 48-20-107 of the Tennessee
Business Corporation Act (the "Act"), Forward Air Corporation (the
"Corporation") adopts the following Restated Charter:
1. The name of the Corporation is:
Forward Air Corporation
2. (a) The street address and zip code of the registered office of the
Corporation is:
430 Airport Road
Greeneville, Tennessee 37745
(b) The registered office of the Corporation is located in Greene
County, Tennessee.
(c) The registered agent in the registered office is:
Richard H. Roberts
3. The street address and zip code of the principal office of the
Corporation in the State of Tennessee is:
430 Airport Road
Greeneville, Tennessee 37745
4. The duration of the Corporation shall be perpetual.
5. The Corporation is for profit.
6. The purpose or purposes for which the Corporation is organized are:
<PAGE> 2
(a) To engage in the business of moving, conveying, and delivering
merchandise and commodities of all kinds via either land transportation or air
transportation; to lease, own and/or operate equipment for the transportation of
commodities and portable goods of every description from one location to
another; to qualify as a common carrier and to act as a contractor or as a
private carrier; and to act as agent for other transportation companies;
(b) To hold and manage real estate under lease or by ownership in
fee or otherwise for use by itself or by other corporations or persons for
industrial purposes or otherwise; to lease, sublease, convey, transfer, sell and
buy such real estate;
(c) To generally, and without limitation of the foregoing, carry on,
conduct and engage in any and all businesses, occupations or operations that may
from time to time be deemed to be necessary, required or conducive to the
carrying out of any of the objects or purposes of the Corporation; and
(d) To engage in any other activity permitted by the laws of the
State of Tennessee and the United States.
7. The maximum number of shares of capital stock which the Corporation
shall have the authority to issue is twenty-five million (25,000,000) shares, of
which twenty million (20,000,000) shares are designated Common Stock with a par
value of one cent ($.01) per share, and five million (5,000,000) shares are
designated Preferred Stock with a par value of one cent ($.01) per share.
The designations, preferences, privileges and powers and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions of the above classes of capital stock shall be as follows:
(a) Preferred Stock.
(1) Shares of Preferred Stock may be divided into and issued in
one or more series at such time or times and for such consideration as the Board
of Directors may determine.
2
<PAGE> 3
All shares of any one series shall be of equal rank and identical in all
respects.
(2) Authority is hereby expressly granted to the Board of
Directors to fix and determine from time to time, by resolution or resolutions
providing for the establishment and/or issuance of any series of Preferred
Stock, the designation of such series and the powers, preferences, and rights of
the shares of such series, and the qualifications, limitations or restrictions
thereof, as the Board of Directors may deem advisable and to the full extent now
or hereafter permitted by the laws of the State of Tennessee. The resolution or
resolutions providing for the establishment and/or issuance of such series of
Preferred Stock shall set forth: (i) the designation and number of shares
comprising each series; (ii) the rate of dividends, if any, and whether such
dividends shall be noncumulative, cumulative to the extent earned, or cumulative
and, if cumulative, from which date or dates; (iii) whether the shares shall be
redeemable and, if so, the terms and conditions of such redemption; (iv) whether
there shall be a sinking fund for the redemption; (v) the rights to which the
holders of the shares shall be entitled in the event of voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, and the priority of
payment of shares in any such event; (vi) whether the shares shall be
convertible into or exchangeable for shares of any other class or any other
series and the terms thereof; and (vii) all other preferences, privileges and
powers and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of such series.
(3) The shares of Preferred Stock shall have no voting power or
voting rights with respect to any matter whatsoever, except as may be otherwise
required by law or may be provided in the resolution or resolutions of the Board
of Directors creating the series of which such shares are a part.
(4) Authority is hereby expressly granted to the Board of
Directors to make any change in the designations, terms, limitations or relative
rights or preferences of any series of Preferred Stock in the same manner as
provided for in the issuance of Preferred Stock, so long as no shares of such
series are outstanding at such time.
3
<PAGE> 4
(b) Common Stock.
(1) After the requirements with respect to preferential
dividends, if any, on any series of Preferred Stock (fixed pursuant to
resolutions as provided in Article 7(a) above) shall have been met, and after
the Corporation shall have complied with all requirements, if any, with respect
to the setting aside of sums in a sinking fund for the purchase or redemption of
shares of any series of Preferred Stock (fixed pursuant to resolutions as
provided in Article 7(a) above), then, and not otherwise, the holders of Common
Stock shall receive, to the extent permitted by law and to the extent the Board
of Directors shall determine, such dividends as may be declared from time to
time by the Board of Directors.
(2) After distribution in full of the preferential amount, if
any (fixed pursuant to resolutions as provided in Article 7(a) above), to be
distributed to the holders of any series of Preferred Stock in the event of the
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation, the holders of the Common Stock shall be entitled to receive such
of the remaining assets of the Corporation of whatever kind available for
distribution to the extent the Board of Directors shall determine.
(3) Except as may be otherwise required by law or by the Charter
of the Corporation, as amended, each holder of Common Stock shall have one vote
in respect of each share of such stock held by him on all matters voted upon by
the shareholders.
(c) Preemptive Rights. No holder of shares of the Corporation of any
class, now or hereafter authorized, shall have any preferential or preemptive
right to subscribe for, purchase or receive any shares of stock of the
Corporation of any class, now or hereafter authorized, or any options or
warrants for such shares, or any rights to subscribe to or purchase such shares,
or any securities convertible into or exchangeable for such shares, which may at
any time or from time to time be issued, sold or offered for sale by the
Corporation.
4
<PAGE> 5
8. The Corporation shall have and exercise all powers necessary or
convenient to effect any or all of the purposes for which the Corporation is
organized and shall likewise have the powers provided by the Act, or as the same
shall hereafter be amended.
9. (a) To the fullest extent permitted by the laws of the State of
Tennessee, including without limitation, the Act, as it exists on the date
hereof or as it may hereafter be amended, no director of the Corporation shall
be personally liable for monetary damages to the Corporation or its shareholders
for any breach of fiduciary duty as a director. If the laws of the State of
Tennessee, including, without limitation, the Act, are amended after approval of
this Charter to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Act, as so amended.
(b) The Corporation shall have the power to indemnify any director,
officer, employee, agent of the Corporation, or any other person who is serving
at the request of the Corporation in any such capacity with another corporation,
partnership, joint venture, trust, or other enterprise to the fullest extent
permitted by the law of the State of Tennessee as it exists on the date hereof
or as it may hereafter be amended, and any such indemnification may continue as
to any person who has ceased to be a director, officer, employee, or agent and
may inure to the benefit of the heirs, executors, and administrators of such
person.
10. The shareholders and directors of the Corporation shall have the
right to take any action required or permitted by vote without a meeting on
written consent to the fullest extent permitted by the Act, or as the same shall
hereafter be amended.
11. Any or all of the directors of the Corporation may be removed at
any time for cause by a vote of a majority of the entire Board of Directors and
at any time with or without cause by a proper vote of the shareholders of the
Corporation. "Cause" shall include, but not be limited to, a director willfully
or without reasonable cause being absent from any
5
<PAGE> 6
regular or special meeting for the purpose of obstructing or hindering the
business of the Corporation.
12. The Corporation shall enjoy and be subject to such benefits,
privileges and immunities and such restrictions, liabilities and obligations as
are provided with respect to corporations for profit generally by the laws of
the land and which are held applicable to corporations for profit organized
under the Act, or as the same shall hereafter be amended.
Dated this 14th day of December, 1998.
FORWARD AIR CORPORATION
By: /s/ Bruce A. Campbell
--------------------------------
Bruce A. Campbell
President
6
<PAGE> 7
CERTIFICATE
The undersigned hereby certifies: (a) that he is the President of
Forward Air Corporation (the "Corporation") and (b) that the foregoing Restated
Charter (i) restates the Charter of the Corporation as previously amended; (ii)
does not contain an amendment requiring shareholder or director approval; and
(iii) was duly adopted by the directors of the Corporation in the manner
prescribed by the Act on December 9, 1998, all in compliance with the
requirements of the Tennessee Business Corporation Act, as amended.
Dated this 14th day of December, 1998.
FORWARD AIR CORPORATION
By: /s/ Bruce A. Campbell
-----------------------------
Bruce A. Campbell
President
7
<PAGE> 1
Exhibit 10.16
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
effective as of January 1, 1999 (the "Effective Date"), by and between Forward
Air Corporation, a corporation organized under the laws of the State of
Tennessee (the "Company"), and Bruce A. Campbell (the "Executive").
For and in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT. Subject to the terms and conditions of this Agreement,
Executive shall be employed by the Company as President and Chief Operating
Officer of the Company and shall perform such duties and functions for the
Company and any company controlling, controlled by or under common control with
the Company (such companies hereinafter collectively called "Affiliates") as
shall be specified from time to time by the Board of Directors of the Company.
Executive hereby accepts such employment and agrees to perform such executive
duties as may be assigned to him.
2. DUTIES. Executive shall devote his full business related time and
best efforts to accomplishing such executive duties at such locations as may be
requested by the Board of Directors of the Company. While employed by the
Company, Executive shall not serve as a principal, partner, employee, officer or
director of, or consultant to, any other business or entity conducting business
for profit without the prior written approval of the Board of Directors of the
Company. In addition, under no circumstances will Executive have any financial
interest in any competitor of the Company; provided, however, that Executive my
invest in no more than 2% of the outstanding stock or securities of any
competitor whose stock or securities are traded on a national stock exchange of
any country.
3. TERM. The term of this Agreement shall be for a three (3) year term
commencing on the date hereof, and beginning on the second anniversary of the
Effective Date shall be deemed automatically (without further action by either
the Company or the Executive) to extend each day for an additional day such that
the remaining term of this Agreement shall continue to be one (1) year;
provided, however, that the Company may, by notice to the Executive, cause this
Agreement to cease to extend automatically and, upon such notice, the "Term" of
this Agreement shall be equal to a term which is the greater of (i) the balance
of the original term of this Agreement as of the date of such notice or (ii) one
year.
<PAGE> 2
4. COMPENSATION AND BENEFITS. As compensation for his services during
the Term of this Agreement, Executive shall be paid and receive the amounts and
benefits set forth in subsections (a), (b), (c), and (d) below:
(a) BASE SALARY. An annual base salary ("Base Salary") of $200,000
for the year beginning January 1, 1999, increased to $225,000 for the year
beginning January 1, 2000 and $250,000 for the year beginning January 1, 2001.
For periods subsequent to December 31, 2001, if any, Executive's Base Salary
shall be subject to annual review, at such time as the Board of Directors of the
Company conducts salary reviews for its executive officers generally.
Executive's salary shall be payable in accordance with the Company's regular
payroll practices in effect from time to time for executive officers of the
Company.
(b) BONUS. In addition to the Base Salary, the Executive shall be
entitled to participate in any of the Company's present and future stock or cash
based plans that are generally available to its executive officers, as such
plans may exist or be changed from time to time at the discretion of the
Company.
(c) OTHER BENEFITS. Executive shall be entitled to vacation with
pay, health insurance, fringe benefits, and such other employee benefits
generally made available by the Company to its executive officers, in accordance
with the established plans and policies of the Company, as in effect from time
to time.
(d) STOCK OPTIONS. As of the Effective Date of this Agreement,
Executive shall be granted 100,000 options under Forward Air Corporation Stock
Option and Incentive Plan (the "Stock Option Plan"). The exercise price of the
options will be the fair market value of a share of stock on the Effective Date,
as determined under the Stock Option Plan. The terms and conditions of the
options will be set forth in the Stock Option Agreement attached as Exhibit A to
this Agreement and, such grant shall be made in accordance with the Stock Option
Plan.
5. TERMINATION.
(a) BY EXECUTIVE. Executive may voluntarily terminate his employment
hereunder at any time, to be effective 30 days after delivery to the Company of
his signed, written resignation; Company may accept said resignation and pay
Executive in lieu of waiting for passage of the notice period.
(b) BY COMPANY. Subject to the terms of this Paragraph and
Paragraph 5(c) below, the Company may terminate Executive's employment
hereunder, in its sole discretion, whether with or without just cause (as
defined in Paragraph 5(b)(vii) below and subject to the notice periods described
therein), at any time upon written notice to Executive. If, prior to the end of
the Term of this
- 2 -
<PAGE> 3
Agreement, the Company terminates Executive's employment without just cause (as
defined below), the Executive shall be entitled to receive, as damages payable
as a result of, and arising from, a breach of this Agreement, the compensation
and benefits set forth in (i) through (iv) below. Executive shall not be
required to mitigate damages by reducing the amounts he is entitled to receive
hereunder by earnings from subsequent employment. The time periods in (i)
through (iii) below shall be equal to the time period remaining from the date of
Executive's termination to the end of the Term of this Agreement.
(i) Base Salary. The Executive will continue to receive his
current salary (subject to withholding of all applicable taxes and any
amounts referred to in paragraph (iii) below) for a period equal to the
remainder of the term of this Agreement, such payments to be made in
the same manner as it was being paid as of the date of termination. For
purposes hereof, the Executive's "current salary" shall be the highest
rate in effect during the twelve-month period prior to the Executive's
termination.
(ii) Bonus. Any bonus amounts that the Executive had previously
earned from the Company but which may not yet have been paid as of the
date of termination shall not be affected by termination of Executive
by the Company. Executive shall also receive a prorated bonus for any
uncompleted fiscal year at the date of termination based on the number
of days he worked in such year divided by 365 days, such bonus to be
paid at the time other participants are paid under such bonus program
or plan.
(iii) Health Insurance Coverage. Any health insurance benefits
coverage (including any executive medical plan, if any) provided to the
Executive at his date of termination shall be continued by the Company
at its expense at the same level and in the same manner as if his
employment had not terminated beginning on the date of such termination
and ending on the date twelve (12) months from the date of such
termination. Any additional coverages the Executive had at termination,
including dependent coverage, will also be continued for such period on
the same terms. Any costs the Executive was paying for such coverages
at the time of termination shall be paid by the Executive by separate
check payable to the Company each month in advance. If the terms of any
benefit plan referred to in this paragraph do not permit continued
participation by the Executive, then the Company will arrange for other
coverage at its expense providing substantially similar benefits. The
coverages provided for in this paragraph shall be applied against and
reduce the period for which COBRA will be provided.
- 3 -
<PAGE> 4
(iv) Stock Options. As of Executive's date of termination, all
outstanding stock options granted to Executive under the Stock Option
and Incentive Plan and any other Company stock option plan shall become
100% vested and immediately exercisable. To the extent necessary, the
provisions of this paragraph (iv) shall constitute an amendment of the
Executive's stock option agreements under the Stock Option Plans.
(v) Effect of Death. In the event of the Executive's death after
his termination of employment by the Company under this Paragraph 5(b),
the benefits payable under (i) and (ii) of this Paragraph 5(b) shall
continue for a period of twelve (12) months, or, if shorter, until the
end of the Term of this Agreement; provided, however, such payments
will be paid in a lump sum payment within 60 days following the
Executive's death, to the Executive's surviving spouse, or, if none, to
the Executive's estate. In addition, in the event of Executive's death,
any dependent coverage in effect under (iii) of this Paragraph 5(b)
shall continue at the Company's expense, for a period of 12 months, or,
if shorter, until the end of the Term of this Agreement.
(vi) Executive hereby agrees and acknowledges that if he
voluntarily resigns from his employment, or is terminated for just
cause, prior to the end of the Term of this Agreement, then he shall be
entitled to no payment or compensation whatsoever (including without
limitation, acceleration of option exercise) from the Company under
this Agreement, other than as may be due him through his last day of
employment.
(vii) For purposes of this Agreement, the phrase "for just cause"
shall mean: (A) Executive's material fraud, malfeasance, gross
negligence, or willful misconduct with respect to business affairs of
the Company which is directly or materially harmful to the business or
reputation of the Company or any subsidiary of the Company; (B)
Executive's conviction of or failure to contest prosecution for a
felony or a crime involving moral turpitude; or (C) Executive's
material breach of this Agreement. A termination of Executive for just
cause based on clause (A) or (C) of the preceding sentence shall take
effect 30 days after the Executive receives from Company written notice
of intent to terminate and Company's description of the alleged cause,
unless Executive shall, during such 30-day period, remedy the events or
circumstances constituting cause; provided, however, that such
termination shall take effect immediately upon the giving of written
notice of termination of just cause under any clause if the Company
shall have determined in good faith that such events or circumstances
are not remediable (which determination shall be stated in such
notice).
- 4 -
<PAGE> 5
(c) BY DEATH OR DISABILITY. If Executive's employment is terminated
due to Executive's death, the Executive's surviving spouse, or if none, his
estate, shall receive the benefits payable under (i) and (ii) of Paragraph 5(b)
above; provided, however, such payments shall be for a period of 12 months and
such payments shall be made in a lump sum payment within 60 days of the
Executive's death. In addition, if the Executive's dependents are eligible to
and actually elect to continue under COBRA any coverages provided under
Paragraph 5(b)(iii), the Company shall pay the cost of such COBRA coverage for a
period of 12 months following the date of Executive's death. If Executive's
employment is terminated due to Executive's disability (as defined in the
Company's long-term disability plan or insurance policy, or if no such plan or
policy, as determined in good faith by the Company), Executive shall be entitled
to the benefits payable or to be provided under (i), (ii), (iii), and (iv) of
Paragraph 5(b); provided, however, the benefits under (i), (ii), or (iii) of
Paragraph 5(b) shall be payable or to be provided for a period of 24 months.
Executive or his estate, as the case may be, shall not by operation of this
paragraph forfeit any rights in which he is vested at the time of his death or
disability.
(d) Upon termination of Executive's employment for any reason
whatsoever (whether voluntary on the part of Executive, for just cause, or other
reasons), the obligations of Executive pursuant to paragraphs 6 and 7 hereof
shall survive and remain in effect for the periods described in Paragraph 6.
6. COMPETITION, CONFIDENTIALITY, AND NONSOLICITATION. Executive agrees to
execute and be bound by the terms and conditions of the Noncompetition Agreement
attached hereto as Exhibit B, which is hereby made a part of this Agreement. The
Company and Executive understand and agree that the time periods under the Non
Competition Agreement shall be equal to a period equal to the longer of (i)
twelve months or (ii) the remaining term of this Agreement.
7. INJUNCTIVE RELIEF. The Executive acknowledges that his services to
be rendered to the Company are of a special and unusual character which have a
unique value to the Company, the loss of which cannot adequately be compensated
by damages in an action at law. Executive further acknowledges that any breach
of the terms of Paragraph 6, including Exhibit B, would result in material
damage to the Company, although it might be difficult to establish the monetary
value of the damage. Executive therefore agrees that the Company, in addition to
any other rights and remedies available to it, shall be entitled to obtain an
immediate injunction (whether temporary or permanent) from any court of
appropriate jurisdiction in the event of any such breach thereof by Executive,
or threatened breach which the Company in good faith believes will or is likely
to result in irreparable harm to the Company. The existence of any claim or
cause of action by Executive against the Company, whether predicated on this
Agreement or otherwise, shall not constitute a
- 5 -
<PAGE> 6
defense to the enforcement by the Company of Executive's agreement under this
Paragraph and Paragraph 6 above.
8. MISCELLANEOUS.
(a) NOTICE. Any notice or other communication required or permitted
under this Agreement shall be effective only if it is in writing and
shall be deemed to have been duly given when delivered personally or seven days
after mailing if mailed first class by registered or certified mail, postage
prepaid, addressed as follows:
If to the Company: Forward Air Corporation
430 Airport Road
Greeneville, TN 37745
Attention: Legal Department
If to the Executive: Bruce A. Campbell
141 Pinestraw Ridge
Greeneville, TN 37745
or to such other address as any party may designate by notice to the others.
(b) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto with respect to the Executive's employment
by the Company, and superseded and is in full substitution for any and all prior
understandings or agreements with respect to the Executive's employment.
(c) AMENDMENT. This Agreement may be amended only by an instrument in
writing signed by the parties hereto, and any provision hereof may be waived
only by an instrument in writing signed by the party or parties against whom or
which enforcement of such waiver is sought. The failure of either party hereto
to comply with any provision hereof shall in no way affect the full right to
require such performance at any time thereafter, nor shall the waiver by either
party hereto of a breach of any provision hereof be taken or held to be a waiver
of any succeeding breach of such provision, or a waiver of the provision itself,
or a waiver of any other provision of this Agreement.
(d) BINDING EFFECT. This Agreement is binding on and is for the
benefit of the parties hereto and their respective successors, heirs, executors,
administrators and other legal representatives. Neither this Agreement nor any
right or obligation hereunder may be assigned by the Executive or the Company,
except for assignment by the Company to any wholly owned subsidiary.
- 6 -
<PAGE> 7
(e) SEVERABILITY AND MODIFICATION. If any provision of this Agreement
or portion thereof is so broad, in scope or duration, so as to be unenforceable,
such provision or portion thereof shall be interpreted to be only so broad as is
enforceable. In addition, to the extent that any provision of this Agreement as
applied to either party or to any circumstances shall be adjudged by a court of
competent jurisdiction to be void or unenforceable, the same shall in no way
affect any other provision of this Agreement or the validity or enforceability
of this Agreement.
(f) INTERPRETATION. This Agreement shall be interpreted, construed and
governed by and under the laws of the State of Tennessee. Each party irrevocably
(i) consents to the exclusive jurisdiction and venue of the courts of Greene
County, State of Tennessee and federal courts in the Eastern District of
Tennessee, in any action arising under or relating to this Agreement (including
Exhibit B hereto), and (ii) waives any jurisdictional defenses (including
personal jurisdiction and venue) to any such action. If any provision of this
Agreement is deemed or held to be illegal, invalid, or unenforceable under
present or future laws effective during the term hereof, this Agreement shall be
considered divisible and inoperative as to such provision to the extent it is
deemed to be illegal, invalid or unenforceable, and in all other respects this
Agreement shall remain in full force and effect; provided, however, that if any
provision of this Agreement is deemed or held to be illegal, invalid or
unenforceable there shall be added hereto automatically a provision as similar
as possible to such illegal, invalid or unenforceable provision as shall be
legal, valid or enforceable. Further, should any provision contained in this
Agreement ever be reformed or rewritten by any judicial body of competent
jurisdiction, such provision as so reformed or rewritten shall be binding upon
the Executive and the Company.
(g) FAILURE TO ENFORCE. The failure of either party hereto at any
time, or for any period of time, to enforce any of the provisions of this
Agreement shall not be construed as a waiver of such provision(s) or of the
right of such party hereafter to enforce each and every such provision.
(h) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
(i) NO CONFLICTING AGREEMENT. The Executive represents and warrants
that he is not party to any agreement, contract or understanding which would
prohibit him from entering into this Agreement or performing fully his
obligations hereunder.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the Company and the Executive have
executed this Agreement as of the date first written above.
/s/ Bruce A. Campbell
-------------------------------------
Bruce A. Campbell
FORWARD AIR CORPORATION
By: /s/ Scott M. Niswonger
---------------------------------
Its Chief Executive Officer
---------------------------------
- 8 -
<PAGE> 9
EXHIBIT A
January 1, 1999
Incentive Stock Option Agreement
To the Optionee (the "Optionee") executing the reference and signature page(s)
(the "Signature Page") to this Incentive Stock Option Agreement (this
"Agreement").
Dear Fellow Employee:
This Agreement sets forth the terms under which Forward Air
Corporation, a Tennessee corporation (the "Company"), has awarded you options to
purchase shares of the $0.01 par value common stock of the Company (the "Common
Stock"). This Agreement, along with the Company's Stock Option and Incentive
Plan (the "Plan"), Plan Prospectus, Insider Trading Policy and such additional
documents as are approved by the Company constitute the terms and conditions
governing the grant of options hereunder.
This will confirm the Agreement between the Company and the Optionee as
follows:
1. Grant of Option. Pursuant to the Plan, the Company grants to the
Optionee the right and option (the "Option") to purchase all or any part of the
number of shares of Common Stock set forth on the Signature Page (the "Shares").
The Option granted herein is an incentive stock option and is subject to the
provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Option Price. The option price per Share shall be the "Option Price
per Share" as set forth on the Signature Page (the "Option Price"), representing
one hundred percent (100%) of the Fair Market Value of a share of Common Stock
as
- 9 -
<PAGE> 10
determined pursuant to the Plan as of the Grant Date set forth on the Signature
Page.
3. Term of Option. The term of the Option shall commence on the Grant
Date and all rights to purchase Shares hereunder shall cease at 11:59 p.m. on
the Expiration Date set forth on the Signature Page, subject to earlier
termination as provided in the Plan and this Agreement. Except as may otherwise
be provided in the Plan or this Agreement, Options granted hereunder may be
cumulative and exercised as follows:
(a) Subject to the terms and conditions of the Plan and this
Agreement, the Option shall become exercisable on the dates set forth on the
Signature Page, provided that the Optionee remains continually employed by the
Company throughout such period; provided further, that the Option shall expire
on the Expiration Date and must be exercised, if at all, on or before the
Expiration Date. The Vesting Schedule for the Option is set forth on the
Signature Page.
(b) For the purpose of this Agreement, the Optionee shall be deemed
to be an eligible employee of the Company for so long as the Optionee is
employed by the Company or a parent or subsidiary of the Company. A leave of
absence (regardless of the reason therefor) shall be deemed to constitute the
cessation of eligible employee status as of the commencement date of the leave.
Accordingly, the Option shall be fully exercisable in accordance with this
Section 3, provided the Optionee continues to be an employee of the Company or a
parent or subsidiary thereof throughout such period to such extent that the
Shares are vested.
(c) The Option Price of the Shares as to which the Option shall be
exercised shall be paid in full at the time of exercise (i) in cash or by
certified check or by bank draft; (ii) by the delivery of previously owned
unrestricted shares of Common Stock which shall have an aggregate Fair Market
Value determined in accordance with the Plan equal to the Option Price; (iii)
with the prior written consent and approval of the Company, by the execution and
delivery of the Optionee's promissory note in the principal amount of the Option
Price, with such term, interest rate and other terms and provisions, including,
without limitation, requiring the Shares acquired upon exercise to be pledged to
the Company to secure payment of the note, as the Compensation Committee of
- 10 -
<PAGE> 11
Board of Directors of the Company (the "Compensation Committee") may specify;
(iv) by cancellation of indebtedness of the Company to the Optionee; (v) by
waiver of compensation due or accrued to the Optionee for services rendered;
(vi) provided that a public market for the Common Stock exists, through a "same
day sale" commitment from the Optionee and a broker-dealer that is a member of
the National Association of Securities Dealers (a "NASD" Dealer) whereby the
Optionee irrevocably elects to exercise his Option and to sell a portion of the
Shares so purchased to pay for the Option Price and whereby the NASD Dealer
irrevocably commits to forward the Option Price directly to the Company in
exchange for receipt of such Shares; (vii) provided that a public market for the
Common Stock exists, through a "margin" commitment from the Optionee and a NASD
Dealer whereby the Optionee irrevocably elects to exercise the Option and pledge
the Shares so purchased to the NASD Dealer in a margin account as security for a
loan from the NASD Dealer in the amount of the Option Price, and whereby the
NASD Dealer irrevocably commits upon receipt of such Shares to forward the
Option Price directly to the Company, or (viii) any combination of the
preceding. Except as provided in Section 5 hereof, the Option may not be
exercised at any time unless the Optionee shall have been continuously, from the
Grant Date to the date of the exercise of the Option, an employee of the Company
or a parent or subsidiary of the Company. The holder of the Option shall not
have any of the rights of a shareholder with respect to Shares covered by the
Option until such time, if ever, as such Shares of Common Stock are actually
issued and delivered to the Optionee.
4. Nontransferability. The Option shall not be transferable otherwise
than by will or the laws of descent and distribution, and the Option may be
exercised, during the lifetime of the Optionee, only by the Optionee. More
particularly (but without limiting the generality of the foregoing), the Option
may not be assigned, transferred (except as provided in Section 6 hereof),
pledged or hypothecated in any way, shall not be assignable by operation of law
and shall not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition of
the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
- 11 -
<PAGE> 12
5. Termination of Option. Except as provided in the Plan, this Option
shall terminate on the date the Optionee ceases to be an employee of the Company
or a parent or subsidiary of the Company (the "Termination Date"). The Optionee
shall be considered to be an employee of the Company for all purposes under this
Section 5 if the Compensation Committee determines that the Optionee is
rendering substantial services as a part-time employee to the Company or any
parent or subsidiary of the Company.
6. Other Terminations or Expirations. In addition to any other event
causing an expiration or termination of the Option, the Option shall expire and
all rights to purchase Shares shall cease (to the extent not theretofore
terminated or expired as herein provided) upon the effective date of the
dissolution or liquidation of the Company or upon a merger, consolidation,
acquisition of property or shares, separation or reorganization of the Company
with one or more entities, corporate or otherwise, as a result of which the
Company is not the surviving entity, or if the Company is the surviving entity
and the ownership of the outstanding Common Stock following the transaction
changes by 80% or more as a result of such transaction, or of a sale of
substantially all of the property or shares of the Company to another entity,
corporate or otherwise (collectively, a "Transaction"); provided, however, that
the Company may, in its discretion, and immediately prior to any such
Transaction, cause a new option to be substituted for the Option or cause the
Option to be assumed by an employer entity or a parent or subsidiary of such
entity; and, subject to the terms of the Plan, the terms and conditions of any
such new option shall apply to all Shares issued in addition to or in
substitution, replacement or modification of the Shares covered by any Option
canceled or replaced.
7. Adjustments. The number and class of Shares subject to the Option,
and the Option Price per Share (but not the total purchase price), and the
minimum number of Shares as to which the Option may be exercised at any one
time, shall all be proportionately adjusted in the event of any change or
increase or decrease in the number of issued shares of Common Stock, without
receipt of consideration by the Company, which result from a split-up or
consolidation of shares, payment of a share dividend (in excess of two percent
(2%)), a recapitalization, combination of shares or other like capital
adjustment, so that, upon exercise of the Option, the
- 12 -
<PAGE> 13
Optionee shall receive the number and class of shares the Optionee would have
received had the Optionee been the holder of the number of shares of Common
Stock, for which the Option is being exercised, on the date of such change or
increase or decrease in the number of issued shares of Common Stock. Subject to
reorganization, merger or consolidation, the Option shall be proportionately
adjusted so as to apply to the securities to which the holder of the number of
Shares of Common Stock subject to the Option would have been entitled.
Adjustments under this Section 7 shall be made by the Compensation Committee
whose determination with respect thereto shall be final and conclusive. No
fractional share shall be issued under the Option or upon any such adjustment.
8. Notice. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or mailed, by United States certified or registered mail, prepaid, to
the parties or their assignees, if to the Company, addressed to Forward Air
Corporation, Attention: Legal Department, P.O. Box 1058, Greeneville, Tennessee
37744, and if to the Optionee, at the address set forth on the Signature Page
(or such other address as shall be given in writing by either party to the
other).
9. Method of Exercising Option. Subject to the terms and conditions of
this Agreement, the Option may be exercised by written notice to the Company, at
its principal office in the State of Tennessee, which is set forth in Section 8
hereof. Such notice shall state the election to exercise the Option and the
number of Shares in respect of which it is being exercised and by payment in
full of the Option Price pursuant to Section 3 above, and the Company shall
deliver a certificate or certificates representing the Shares subject to such
exercise as soon as practicable after the notice shall be received. The
certificate or certificates for the Shares as to which the Option shall have
been so exercised shall be registered in the name of the person so exercising
the Option and shall be delivered as provided above to or upon the written order
of the person exercising the Option. In the event the Option shall be exercised
by any person other than the Optionee in accordance with the terms hereof, such
notice shall be accompanied by appropriate proof of right of such person to
exercise the Option. All Shares that shall be purchased upon the exercise of the
Option as provided herein shall be fully paid and nonassessable. The
- 13 -
<PAGE> 14
holder of the Option shall not be entitled to the privileges or share ownership
as to any shares of Common Stock not actually issued and delivered to the
Optionee.
10. No Agreement to Employ. Nothing in this Agreement shall be
construed to constitute or be evidence of any agreement or understanding,
express or implied, on the part of the Company to employ or retain the Optionee
for any specific period of time.
11. Market Standoff Agreement. The Optionee agrees in connection with
any registration of the Company's securities that, upon the request of the
Company or the underwriters managing any public offering of the Company's
securities, the Optionee will not sell or otherwise dispose of any Shares
without the prior written consent of the Company or such underwriters, as the
case may be, for a period of time (not to exceed 120 days) from the effective
date of such registration as the Company or the underwriters may specify.
12. Stop-Transfer Notices. The Optionee understands and agrees that, in
order to ensure compliance with the restrictions referred to herein, the Company
may issue appropriate "stop-transfer" instructions to its transfer agent, if
any, and that, if the Company transfers its own securities, it may make
appropriate notations to the same effect in its own records.
13. General. The Company shall at all times during the term of the
Option reserve and keep available such number of shares of Common Stock as will
be sufficient to satisfy the requirements of this Agreement, shall pay all
original issue and transfer taxes with respect to the issue and transfer of
shares pursuant hereto and all other fees and expenses necessarily incurred by
the Company in connection therewith, and will from time to time use its best
efforts to comply with all laws and regulations, which, in the opinion of
counsel for the Company, shall be applicable thereto. To the extent that this
Agreement differs from the terms of the Plan, the terms of the Plan shall
control.
If the foregoing correctly sets forth your understanding of the terms
and conditions governing the subject matter of this Agreement, please sign the
enclosed Signature Page to
- 14 -
<PAGE> 15
this Agreement in the place indicated and return it to the corporate office.
Very truly yours,
FORWARD AIR CORPORATION
By: /s/ Scott M. Niswonger
--------------------------------
Scott M. Niswonger
Chairman and
Chief Executive Officer
- 15 -
<PAGE> 16
EXHIBIT B
NONCOMPETITION AGREEMENT
This NONCOMPETITION AGREEMENT (this "Noncompetition Agreement") is
entered into as of January 1, 1999 between Forward Air Corporation (the
"Company") and Bruce A. Campbell (the "Executive") contemporaneously with and as
part of the Employment Agreement between the parties to which this
Noncompetition Agreement is attached.
REASONS FOR THIS NONCOMPETITION AGREEMENT: During Executive's
relationship with the Company, Executive has learned, will learn, or has or will
have access to, important proprietary information related to the operations and
business of Forward Air Corporation and its subsidiaries and affiliates
(collectively, the "Company's Business"). Executive acknowledges that the
proprietary customer, operations, financial, and business information that has
been or will be learned or accessible has been and will be developed through the
Company's expenditure of substantial effort, time and money; and together with
relationships developed with customers and employees, could be used to compete
unfairly with the Company. The Company's ability to sell its products on a
competitive basis depends, in part, on its proprietary information and customer
relationships, and the Company would not share this information, provide
training or promote Executive's relationship with customers if the Company
believed that it would be used in competition with the Company, which
non-disclosure would cause Executive's performance and opportunities to suffer.
In consideration of employment or continued employment and other
valuable consideration, the receipt and sufficiency of which are acknowledged,
the Company and Executive agree:
1. DEFINITIONS: - For this Noncompetition Agreement, the following
terms shall have the meaning specified below:
(a) PERSON: - any individual, corporation, limited liability
company, partnership, joint venture, association, unincorporated organization
or other entity.
(b) TERMINATION DATE: - the date of Executive's termination of
employment from the Company, whether such termination is voluntary or
involuntary, whether with or without cause, and whether before or after the
expiration of the Term of the Executive's Employment Agreement.
- 16 -
<PAGE> 17
(c) CUSTOMERS: - all Persons (i) that Executive solicited or
contacted on behalf of the Company; (ii) whose dealings with the Company were
coordinated or supervised, in whole or in part, by Executive; or (iii) about
whom Executive possessed Confidential Information, in each case during the
one-year period immediately prior to the Executive's Termination Date.
(d) CONFIDENTIAL INFORMATION: - information, without regard to
form, relating to the Company's customers, operation, finances, and business
that derives value, actual or potential, from not being generally known to other
Persons, including, but not limited to, technical or nontechnical data,
formulas, patterns, compilations (including compilations of customer
information), programs (including fulfillment and marketing programs), devices,
methods (including fulfillment methods), techniques, processes, financial data
(including sales forecasts), or lists of actual or potential customers or
suppliers (including identifying information about those customers), whether or
not reduced to writing. Confidential Information includes information disclosed
to the Company by third parties that the Company is obligated to maintain as
confidential. Confidential Information subject to this Noncompetition Agreement
may include information that is not a trade secret under applicable law, but
information not constituting a trade secret only shall be treated as
Confidential Information under this Noncompetition Agreement for a two year
period after the Termination Date.
(e) TERRITORY: - the term "Territory" as used in this Noncompetition
Agreement means the continental United States. Executive acknowledges that
Executive will provide services to Company and will have a substantial impact on
the Company's Business throughout the Territory.
(f) COMPETING BUSINESS: - any Person (other than the Company)
providing or offering goods or services identical to or reasonably substitutable
for the Company's Business.
2. CONFIDENTIAL INFORMATION: - Executive shall use best efforts to
protect Confidential Information. During or after association with the Company,
Executive will not use or disclose any of the Company's Confidential Information
except in connection with his duties performed in accordance with his Employment
Agreement or except with the prior written consent of the Chairman of the Board
of the Company; provided, however, Executive may make disclosures required by a
valid order or subpoena issued by a court or administrative agency of competent
jurisdiction, in which event Executive will promptly notify the Company of such
order or subpoena to provide the Company an opportunity to protect its
interests.
- 17 -
<PAGE> 18
3. RETURN OF MATERIALS: - On the Termination Date or for any reason or
at any time at the Company's request, Executive will deliver promptly to the
Company all materials, documents, plans, records, notes, or other papers and any
copies in Executive's possession or control relating in any way to the Company's
Business, which at all times shall be the property of the Company.
4. SOLICITATION OF EMPLOYEES: - During employment and for a period
equal to the longer of (i) 12 months following his Termination Date or (ii) the
period during which Executive is paid pursuant to the terms of his Employment
Agreement, Executive will not solicit or induce or in any manner attempt to
solicit or induce, any person employed by the Company to leave such employment,
whether or not such employment is pursuant to a written contract with the
Company or at will.
5. SOLICITATION OF CUSTOMERS: - During employment and for a period
equal to the longer of (i) 12 months following his Termination Date or (ii) the
period during which Executive is paid pursuant to the terms of his Employment
Agreement, Executive will not solicit Customers for the purpose of providing or
offering products or services identical to or reasonably substitutable for the
Company's Business.
6. LIMITATIONS ON POST-TERMINATION COMPETITION: - During employment
and for a period equal to the longer of (i) 12 months following his Termination
date or (ii) the period during which Executive is paid pursuant to the terms of
his Employment Agreement, Executive will not, within the Territory, be employed
or engaged by a Competing Business as a director, executive, officer, manager,
consultant or equivalent position.
7. FURTHER LIMITATIONS: - Notwithstanding any provision of this
Noncompetition Agreement to the contrary, if Executive's employment is
terminated (whether by the Company or by Executive) under circumstances that
would entitle him to receive benefits under his agreement with the Company
providing compensation and benefits for terminations following a "change in
control" of the Company (as defined in such agreement), then the time periods in
Paragraphs 5 and 6 above shall be reduced to 12 months.
8. DISPARAGEMENT: - Executive shall not at any time make false,
misleading or disparaging statements about the Company, including its products,
management, employees, and customers.
9. OWNERSHIP OF CONFIDENTIAL INFORMATION: - The Executive hereby
agrees that any and all improvements, inventions, discoveries, formulas,
processes, methods, know-how, confidential data, trade secrets and other
proprietary information (collectively "Work Product") within the scope of any
business of the
- 18 -
<PAGE> 19
Company or any affiliate which the Executive may conceive or make or has
conceived or made during his employment with the Company shall be and are the
sole and exclusive property of the Company, and that the Executive shall,
wherever requested to do so by the Company, at its expense, execute and sign any
and all applications, assignments or other instruments and do all other things
which the Company may deem necessary or appropriate (i) in order to apply for,
obtain, maintain, enforce or defend letters patent of the United States or any
foreign country for any Work Product, or (ii) in order to assign, transfer,
convey or otherwise make available to the Company the sole and exclusive right,
title and interest in and to any Work Product.
10. INTERPRETATION; SEVERABILITY: - Rights and restrictions in this
Noncompetition Agreement may be exercised and are applicable only to the extent
they do not violate any applicable laws, and are intended to be limited to the
extent necessary so they will not render this Noncompetition Agreement illegal,
invalid, or unenforceable. If any term shall be held illegal, invalid, or
unenforceable by a court of competent jurisdiction, the remaining terms shall
remain in full force and effect. This Noncompetition Agreement does not in any
way limit the Company's rights under the laws of unfair competition, trade
secret, copyright, patent, trademark or any other applicable laws(s), which are
in addition to rights under this Noncompetition Agreement. The existence of a
claim by Executive, whether predicated on this Noncompetition Agreement or
otherwise, shall not constitute a defense to the Company's enforcement of this
Noncompetition Agreement.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Noncompetition Agreement as of the date first written above.
/s/ Bruce A. Campbell
------------------------------------
Bruce A. Campbell
FORWARD AIR CORPORATION
By: /s/ Scott M. Niswonger
---------------------------------
Its: Chief Executive Officer
-------------------------------
- 19 -
<PAGE> 1
Exhibit 21.1
FORWARD AIR CORPORATION SUBSIDIARIES
<TABLE>
<CAPTION>
State of Incorporation
----------------------
<S> <C>
FAF, Inc. Tennessee
Forward Air, Inc. Tennessee
Forward Air International Airlines, Inc. Tennessee
Forward Air Royalty Company Delaware
Forward Air Licensing Company Delaware
Logistics Technology, Inc. Tennessee
Transportation Properties, Inc. Tennessee
Transportation Properties (Texas), Inc. Tennessee
</TABLE>
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in: (1) the Registration Statement
(Form S-8 No. 33-77944) pertaining to the Forward Air Corporation Stock Option
and Incentive Plan and the Employee Stock Purchase Plan, (2) the Registration
Statement on Form S-8 (No. 333-03891) pertaining to the Forward Air Corporation
Amended and Restated Stock Option and Incentive Plan, and (3) the Registration
Statement on Form S-8 (No. 333-03893) pertaining to the Forward Air Corporation
Non-Employee Director Stock Option Award and Non-Employee Director Stock Option
Plan, of our report dated February 2, 1999 except for Note 13 as to which the
date is February 24, 1999, with respect to the consolidated financial statements
and schedule of Forward Air Corporation included in its Annual Report (Form
10-K) for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
Ernst & Young LLP
Nashville, Tennessee
March 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FORWARD AIR CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 455
<SECURITIES> 0
<RECEIVABLES> 20,706
<ALLOWANCES> 952
<INVENTORY> 0
<CURRENT-ASSETS> 23,416
<PP&E> 40,072
<DEPRECIATION> 10,152
<TOTAL-ASSETS> 56,808
<CURRENT-LIABILITIES> 16,381
<BONDS> 0
0
0
<COMMON> 126
<OTHER-SE> 18,945
<TOTAL-LIABILITY-AND-EQUITY> 56,808
<SALES> 0
<TOTAL-REVENUES> 130,438
<CGS> 0
<TOTAL-COSTS> 114,427
<OTHER-EXPENSES> (37)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,206
<INCOME-PRETAX> 14,842
<INCOME-TAX> 5,653
<INCOME-CONTINUING> 9,189
<DISCONTINUED> 965
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,154
<EPS-PRIMARY> .82
<EPS-DILUTED> .79
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FORWARD AIR CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 895
<SECURITIES> 0
<RECEIVABLES> 18,424
<ALLOWANCES> 753
<INVENTORY> 0
<CURRENT-ASSETS> 20,318
<PP&E> 19,540
<DEPRECIATION> 3,755
<TOTAL-ASSETS> 137,173
<CURRENT-LIABILITIES> 20,809
<BONDS> 0
0
0
<COMMON> 120
<OTHER-SE> 50,340
<TOTAL-LIABILITY-AND-EQUITY> 137,173
<SALES> 0
<TOTAL-REVENUES> 105,140
<CGS> 0
<TOTAL-COSTS> 92,076
<OTHER-EXPENSES> 84
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 796
<INCOME-PRETAX> 12,184
<INCOME-TAX> 4,740
<INCOME-CONTINUING> 7,444
<DISCONTINUED> 1,150
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,594
<EPS-PRIMARY> .72
<EPS-DILUTED> .70
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FORWARD AIR CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 80,737
<CGS> 0
<TOTAL-COSTS> 72,221
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 743
<INCOME-PRETAX> 7,775
<INCOME-TAX> 2,891
<INCOME-CONTINUING> 4,884
<DISCONTINUED> (905)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,979
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
</TABLE>
