ITEM 1. BUSINESS
Introduction
Forward Air Corporation, through its operating subsidiaries (the "Company" or "Forward Air"), offers its customers scheduled ground transportation of cargo as a cost effective, reliable alternative to air transportation. The Company transports cargo that must be delivered at a specific time but is less time-sensitive than traditional air freight. This type of cargo is frequently referred to in the transportation industry as "deferred air freight." Forward Air operates a network of 75 terminals located on or near airports in the United States and Canada, including a central sorting facility in Columbus, Ohio and regional hubs serving key markets. Rather than owning its own trucks, the Company purchases most of its transportation requirements from owner-operators and, to a lesser extent, from truckload carriers. A typical shipment consists of a pallet load of freight, often computers, telecommunications equipment, machine parts, trade show exhibit materials or medical equipment. During 2000, an average shipment weighed over 700 pounds. Forward Air has experienced rapid revenue growth from $63.6 million in 1995 to $214.9 million in 2000, a 28% compound annual growth rate. The Company's operating income grew from $6.4 million to $37.3 million over the same period, a 42% compound annual growth rate.
The Company focuses its services on: air freight forwarders, which are businesses that arrange transportation of cargo for third parties; integrated air cargo carriers; and airlines. The Company serves its customers by locating terminals on or near airports and maintaining regularly scheduled transportation service between major cities. Forward Air receives shipments at its terminals and transports them by truck to its central sorting facility or one of its regional hubs, where they are unloaded and sorted. After sorting, the shipments are reloaded and delivered to the terminals nearest their destinations. The Company ships freight directly between terminals when justified by the volume of shipments. The Company typically does not provide local pickup and delivery services and does not market its services directly to shippers. Since the Company does not place significant size or weight restrictions on shipments, it does not compete directly with small or overnight package delivery services such as DHL Worldwide, UPS and Airborne. Approximately 20% of the shipments the Company handles are for overnight delivery, with the rest for delivery within two to four days.
Industry Overview
As businesses minimize inventory levels, perform manufacturing and assembly operations in multiple locations and distribute their products through many channels, they more frequently require expedited delivery services. Expedited shipments are those shipments that the customer requires to be delivered the next day or within two to three days, usually at a specified time or within a specified time window.
Shippers with expedited delivery requirements have four principal alternatives to transport freight: they may use a fully integrated air cargo carrier, an airline, a less-than-truckload carrier or an air freight forwarder. Integrated air cargo carriers provide pick-up and delivery services primarily using their own fleet of trucks and provide transportation services generally using their own fleet of aircraft. Airlines provide airport to airport service, but have limited cargo space and generally accept only shipments weighing less than 150 pounds. Less-than-truckload carriers provide pick-up and delivery services through their own fleet of trucks. The national less-than- truckload carriers operate terminals where freight is unloaded, sorted and reloaded multiple times in a single shipment. The additional handling increases transit time, handling costs and the likelihood of cargo damage. An air freight forwarder obtains shipments from customers, makes arrangements for transportation of the cargo by a third party carrier and usually arranges for both delivery from the shipper to the carrier and from the carrier to the recipient.
Although expedited freight is primarily transported by aircraft, transportation by truck often is a viable alternative, especially for shipments requiring deferred delivery. Generally, the cost of shipping freight, especially heavy freight, by truck is substantially less than shipping by aircraft. The Company believes there are several trends that are increasing demand for lower-cost truck transportation of expedited freight. These trends include:
Increased Outsourcing of Logistics Management to Third Parties. Air freight forwarders are playing an increasingly important role in logistics management. As the growing emphasis on just-in-time processes has added to the complexity of logistics management, companies are finding it more advantageous to outsource their logistics management functions to third parties. In contrast to integrated air cargo carriers and less-than-truckload carriers that are focused on utilizing their own fixed-cost assets, air freight forwarders can select from various transportation modes and suppliers to meet their customers' shipping requirements, thereby serving their customers less expensively. Air freight forwarders generally handle shipments of any size and offer customized shipping options, unlike integrated air cargo carriers and less- than-truckload carriers.
Integrated Air Cargo Carriers' Increased Focus on Expedited Freight. Integrated air cargo carriers that transport heavy freight, such as Emery Worldwide and BAX Global, are increasingly targeting their marketing efforts at higher yielding expedited or overnight freight to better utilize their high fixed-cost infrastructures. As a result, these carriers are increasingly outsourcing deferred freight to surface transportation providers like Forward Air.
Reduced Airline Cargo Capacity. Since the 1980's, when the airlines eliminated many of their all-cargo aircraft, growth in demand for air cargo services has generally outpaced the growth of aircraft cargo capacity. More recently, airlines have been modifying their domestic route systems to provide higher frequency service to more destinations, therefore replacing many of their wide-body aircraft with narrow-body aircraft that have less cargo capacity. Federal Aviation Administration ("FAA") mandates have also reduced air cargo capacity because most all-cargo aircraft are older, and it often is not economically feasible to modify these older aircraft to meet the FAA's noise reduction standards.
COMPETITIVE ADVANTAGES
The Company believes that its competitive advantages are:
- Focus on the deferred air freight market. Forward Air focuses on providing ground transportation services to the deferred air freight market. The Company believes that this focus and commitment to reliable service has enabled Forward Air to provide a higher level of service in a more cost effective manner than its competitors.
- Concentrated marketing strategy. The Company provides its services to air freight forwarders, integrated air cargo carriers and airlines rather than marketing its services directly to shippers. The Company does not place significant size or weight restrictions on shipments and, therefore, does not compete with small or overnight package delivery services such as DHL Worldwide, UPS and Airborne. The Company believes that air freight forwarders prefer to purchase their transportation services from Forward Air because it does not market its services to their shipper customers and is not competing with them for customers.
- Established nationwide network of terminals and sorting facilities. The Company has built a network throughout the United States and Canada located on or near airports. The Company believes it would be difficult for a competitor to duplicate its nationwide network without the expertise it has acquired and without expending significant management resources and capital. Forward Air's network enables it to provide regularly scheduled service between most markets, on-time delivery with minimal freight damage or loss, all at rates significantly below air freight rates.
- Low-capital-intensive business model. The Company purchases virtually all of its transportation requirements from owner-operators or truckload carriers, rather than acquiring and operating its own tractors. This allows the Company to respond quickly to changing demands and opportunities in its industry and to generate a higher return on assets with lower capital expenditures.
- Enhanced technology. The Company is committed to using information technology to improve its service and reduce its operating costs. Technology allows the Company to increase the volume of freight that it can handle in its network and provides real-time tracking and tracing of shipments throughout the transportation process. Forward Air is currently enhancing its systems to permit its customers to obtain real-time information about that shipment via the Internet.
- Broad customer base. The Company has established close relationships with a large number of air freight forwarders, integrated air cargo carriers and airlines. The Company's five largest customers only accounted for approximately 18.0% of its operating revenue in 2000, and no single customer accounted for more than ten percent.
GROWTH STRATEGY
The key elements of Forward Air's growth strategy are to:
- Increase freight volume from existing customers. Many of the Company's customers currently use Forward Air for only a portion of their overall transportation needs. In addition, many of the Company's air freight forwarder customers are growing rapidly, and the Company expects that they will have a greater need for its services as their businesses grow. The Company will continue to market directly to these customers to capture additional freight volume.
- Improve efficiency of its transportation network. The Company constantly seeks to improve the efficiency of its network without changing its infrastructure or incurring significant capital expenditures. As the volume of freight between key markets increases, the Company intends to continue to add regional hubs and direct shuttles. Additional regional hubs and direct shuttles improve Forward Air's efficiency by reducing the number of miles freight must be transported and reducing the number of times freight must be handled and sorted. Increased freight volumes should increase the Company's profits and operating margins because these additional shipments help cover the substantial fixed costs of its operations.
- Develop new customers. The Company will actively market its services to potential new air freight forwarder customers. The Company believes air freight forwarders will move away from integrated air cargo carriers because of those carriers' higher costs and away from less-than-truckload carriers because of those carriers' less reliable service. The Company also believes that there is significant potential for increased freight volume from airlines as well as from the integrated air cargo carriers.
- Enhance information systems. The Company is committed to continued enhancement of its information systems in ways that can provide it both competitive service advantages and increased productivity. Management believes that Forward Air's customers will increasingly demand more sophisticated information systems to track and trace shipments. Forward Air believes its enhanced systems will enable it to retain existing customers and encourage them to increase the volume of freight they send through its network. The Company also believes these enhanced information systems will attract new customers.
- Expand logistics services. The Company will continue to expand its national and international logistics services to increase revenue and improve utilization of its terminal facilities and labor force. The Company has added a number of services in the past few years, such as exclusive-use transportation services, and insurance, customs brokerage and terminal handling services. These services directly benefit Forward Air's customers, particularly air freight forwarders who cannot justify providing the services for themselves, attract new customers and improve utilization of the Forward Air network by increasing its revenue without significantly increasing the Company's costs.
- Pursue acquisitions. The Company intends to continue to evaluate acquisitions that can increase its penetration of a geographic area, add customers or freight density or allow it to offer additional services. Since its inception, the Company has acquired the assets of eight of its regional competitors that met one or more of these criteria.
OPERATIONS
The Company receives freight from air freight forwarders, airlines and integrated air cargo carriers at its terminals, which are located on or near airports in the United States and Canada. The Company consolidates and transports these shipments by truck through the Forward Air network to the terminals nearest the ultimate destinations of the shipments. The Company operates regularly scheduled service to and from each of its terminals through its Columbus, Ohio central sorting facility or through one of its regional hubs. The Company also operates regularly scheduled shuttle service directly between cities where the volume of freight warrants bypassing the Columbus sorting facility or a regional hub. When a shipment arrives at the terminal nearest its destination, the customer arranges for the shipment to be picked up at the terminal and delivered to its final destination.
A typical shipment consists of a pallet load of freight, often computers, telecommunications equipment, machine parts, trade show exhibit materials or medical equipment. Since Forward Air commenced operations in November 1990, the weekly volume of freight moving through its network has increased from an average of approximately 1.2 million pounds to over 24.0 million pounds in 2000. During 2000, an average shipment weighed over 700 pounds. Shipments range 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, it focuses its marketing and price structure on shipments of 200 pounds or more. As a result, the Company does not directly compete for most of its business with overnight couriers or small package delivery companies.
TERMINALS
The Forward Air network includes 75 terminals located in the following cities:
Independent agents operate twelve of these locations, which typically handle relatively low volumes of freight.
SHUTTLE SERVICE AND REGIONAL HUBS
The Company operates direct terminal-to-terminal shuttles and regional overnight service between cities where justified by freight volumes. The Company currently provides regional overnight service to many of the markets within its network. Direct service allows the Company to provide quicker scheduled service at a lower cost because it can transport freight over the most direct route and eliminate the added time and cost of handling the freight at its central or a regional hub sorting facility. Direct shipments also reduce the likelihood of damage because of reduced handling and sorting of the freight. As Forward Air continues to increase volume between various cities, it intends to continue to add direct shuttles. For example, the Northeast Shuttle transports freight between Albany, Baltimore, Boston, Buffalo, Hartford, Newark, Newburgh, New York, Philadelphia, Rochester, Syracuse and Washington. The Company accomplishes this by direct shipment, as from Boston to Newark, or by overnight service routed through the Newburgh regional hub. Where warranted by sufficient volume in a region, the Company utilizes larger terminals as regional sorting hubs, which allows it to bypass the Columbus sorting facility. These regional hubs improve the Company's operating efficiency and enhance customer service. The Company currently operates regional hubs in Atlanta, Dallas/Ft. Worth, Kansas City, Los Angeles, New Orleans, Newburgh, Orlando and San Francisco.
SHIPMENTS
Since operations were commenced in November 1990, the weekly volume of freight moving through the Company's network has increased from an average of approximately 1.2 million pounds to over 24.0 million pounds per week as shown below:
CUSTOMERS AND MARKETING
The Company's customers are air freight forwarders, airlines and integrated air cargo carriers. Air freight forwarder customers vary in size from small, independent, single facility companies to large, international logistics companies, such as USF Worldwide, Associated Global Systems, Pilot Air Freight, AIT Freight Systems and Eagle Global Logistics. Airline customers include Virgin Atlantic, Delta, Northwest Airlines, Continental, United Airlines, British Airways, Air Nippon, Air France, Korean Airlines, KLM and Japan Airlines. Because of Forward Air's reputation for dependable service, integrated air cargo carriers such as Emery Worldwide, Airborne, BAX Global and UPS utilize its services to provide overflow capacity and other services.
The Company markets its services through a sales and marketing staff located in various regions of the United States. Senior management also is actively involved in sales and marketing at the national account level and supports local sales activity. The Company has a strong commitment to marketing and focuses on air freight forwarders, 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 direct mail programs and through the Internet via www.forwardair.com.
LOGISTICS SERVICES
Customers increasingly demand more than the movement of freight from their transportation providers. To meet these demands, the Company continually seeks ways to customize its logistics services and add new services. Logistics services increase the Company's profit margins by increasing its revenue without corresponding increases in its fixed costs.
Forward Air logistics services include providing:
- exclusive-use transportation services;
- dock, warehouse and office space;
- customs brokerage, such as assistance with customs procedures for both import and export shipments; and
- terminal handling, such as shipment build-up and break-down and reconsolidation of air or ocean pallets or containers.
TECHNOLOGY AND INFORMATION SYSTEMS
The regular enhancement of the Company's information systems is a key component of its growth strategy. The Company has invested and will continue to invest significant management and financial resources on improving its information systems in an effort to provide accurate, real-
time information to its management and customers. Management believes the ability to provide accurate, real-time information on the status of shipments will become increasingly important and that its efforts in this area will result in both competitive service advantages and increased productivity throughout the Forward Air network.
PURCHASED TRANSPORTATION
The Company contracts for most of its transportation services from owner-operators. The owner-operators own, operate and maintain their own vehicles and employ their own drivers. The Company also purchases transportation from Landair Corporation and from other truckload carriers to handle overflow volume. Of the $91.4 million of purchased transportation in 2000, the Company purchased 70.9% from owner-operators, 2.4% from Landair Corporation and 26.7% from other common carriers.
The Company seeks to establish long-term relationships with owner-operators to assure dependable service and availability, and the Company has consistently experienced a low turnover of owner-operators. The Company has established guidelines relating to safety records, driving experience and personal evaluations that it uses to select its owner-operators. To enhance the Company's relationship with the owner-operators, it pays per mile rates above prevailing market rates and offers each driver a consistent work schedule, typically to the same destination.
COMPETITION
The air freight transportation industry is highly competitive and very fragmented. The Company's competitors include regional trucking companies that specialize in handling deferred air freight and regional and national less-than-truckload carriers. To a lesser extent, the Company competes with integrated air cargo carriers and airlines. The Company's competition ranges from small operators that compete within a limited geographic area to companies with substantially greater financial and other resources and larger freight capacity. The Company also faces competition from its air freight forwarder customers who decide to establish their own networks to transport deferred air freight. The Company believes competition is based on service, primarily on-time delivery and reliability, as well as rates. The Company believes it offers its services at rates that are substantially below the charge to transport the same shipment to the same destination by air. The Company believes it has an advantage over less-than-truckload carriers based upon its reputation for faster, more reliable service between many cities.
EMPLOYEES
As of December 31, 2000, the Company employed 1,820 persons, 930 of whom were freight handlers and customer service personnel. None of the Company's employees is covered by a collective bargaining agreement. 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 are essential to support the Company's continued growth and to meet the service requirements of its customers.
RISK MANAGEMENT AND LITIGATION
Under Department of Transportation regulations, the Company may be liable for property damage or personal injuries caused by owner-operators while they are transporting freight on its behalf. The Company is self-insured for property damage to its own equipment. The Company believes that its insurance coverage is sufficient to adequately protect it 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 involve claims for personal injury, property damage related to the transportation and handling of freight or workers' compensation. The Company does not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on its business, financial condition or results of operations.
REGULATION
The Company, through its Forward Air, Inc. subsidiary, is a licensed property broker holding authority issued by the Federal Motor Carrier Safety Administration ("FMCSA") at Docket No. MC-249708. The Company, through its FAF, Inc. subsidiary, is an interstate motor carrier licensed by the FMCSA at Docket No. MC-333604. The Company's air freight business is subject to regulation as an indirect air cargo carrier under the Federal Aviation Act, although freight brokers have been exempted from most of the requirements of the Federal Aviation Act by the Economic Aviation Regulations promulgated thereunder. In addition, 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.
The Company believes that it is in substantial compliance with applicable regulatory requirements relating to its operations. If the Company does not comply with applicable laws and regulations, it could be required to pay substantial fines and could have its licenses revoked.
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 believes that it is in substantial compliance with applicable environmental laws and regulations. The Company does not expect any material expenditures for compliance with federal, state or local environmental laws and regulations in 2001.
ITEM 2.
ITEM 2. PROPERTIES
PROPERTIES AND EQUIPMENT
The Company's headquarters are located in Greeneville, Tennessee. The Company leases this building from the Greeneville-Greene County Airport Authority. The Company's central sorting facility in Columbus, Ohio was constructed in 1994. During the third quarter of 2000, the Company entered into a ten-year lease with the Rickenbacker Port Authority for a 50,000 square foot building on the Rickenbacker Airport in Columbus near the hub. The Company owns a terminal facility in Atlanta.
The Company leases 61 additional terminal facilities for terms typically ranging from three to five years. The Company shares its Indianapolis terminal with Landair Corporation. The Company believes that, in most of the markets it serves, replacement space comparable to these terminal facilities is obtainable. The Company believes that its facilities are adequate to support its current operations. The remaining twelve terminals are agent stations operated by independent agents who handle freight for the Company on a commission basis.
The Company owns or leases the trailers it uses to move freight through the Forward Air network. Substantially all of the Company's trailers are 53' long, and many have specialized roller bed equipment required to serve air cargo industry customers. The average age of the Company's owned trailer fleet was approximately 2.9 years at December 31, 2000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation arising in the normal course of its business, most of which involve claims for personal injury and property damage related to the transportation and handling of freight or workers' compensation. The Company does not believe that any of these pending actions, individually or in the aggregate, will have a material adverse effect on its business, financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 2000, no matters were submitted to a vote of security holders through the solicitation of proxies or otherwise.
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:
- --------------- (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 on the Regional Advisory Board of First Tennessee Bank National Association.
Bruce A. Campbell has served as 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, Mr. Campbell served as Vice President of Ryder-Temperature Controlled Carriage in Nashville, Tennessee from September 1985 until December 1989. Mr. Campbell also serves as a director of Greene County Bancshares.
Edward W. Cook has served the Company as Chief Financial Officer, Senior Vice President and director since September 1994 and as Treasurer since May 1995. Prior to joining the Company, Mr. Cook was employed as a certified public accountant by Ernst & Young LLP for eleven years, most recently as a senior manager in the Nashville, Tennessee office.
David E. Queen has served as Senior Vice President, Operations, since October 1997. He served as Vice President of Operations and General Manager from November 1987 until October 1997. From December 1984 to November 1987, Mr. Queen was Manager of the Columbus, Ohio hub for The Flying Tiger Line.
Michael A. Roberts has served as Senior Vice President, Marketing, of the Company since April 1990. He served as Vice President of Marketing from November 1987 until April 1990. Mr. Roberts served as a consultant to the Company from 1982 to 1987.
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 firm from January 1991 until July 1994. Mr. Roberts also serves as a director of Landair Corporation and Miller Industries, Inc.
James R. Weiland has served as Senior Vice President, Sales, since October 1997. He served as Vice President, Sales from November 1990 until October 1997. From May 1984 to October 1990, Mr. Weiland served the Company in various capacities, including Regional Operations Manager and Director of Sales and Marketing.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The $.01 par value common stock of the Company (the "Common Stock") trades on The Nasdaq National Market tier of The Nasdaq Stock Market(R) under the symbol "FWRD." The following table sets forth the high and low sale prices for the Common Stock as reported by The Nasdaq National Market for each full quarterly period within the two most recent fiscal years. All prices have been restated to reflect a three-for-two stock split distributed in January 2000.
There were approximately 3,700 shareholders of record (including brokerage firms and other nominees) of the Common Stock as of December 31, 2000.
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.
ITEM 6.
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.
(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 approximately $2.3 million of additional operating revenue, $1.2 million of income from operations and $.06 of diluted earnings per share.
(5) Restated to reflect a three-for-two stock split distributed in January 2000 and a two-for-one stock split distributed in March 1999.
(6) Shareholders' equity at December 31, 1998 reflects the Spin-off of $44.3 million of net assets of Landair Corporation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company provides scheduled ground transportation of cargo on a time-definite basis. As a result of the Company's established transportation schedule and network of terminals, its operating cost structure includes significant fixed costs. The Company's ability to improve its operating margins will depend on its ability to increase the volume of freight moved through its network.
The following does not include a discussion and analysis of the truckload carrier business, which has been accounted for as a discontinued operation as a result of the Spin-off.
Results of Operations
The following table sets forth the percentage relationship of expense items to operating revenue for the periods indicated.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Operating revenue increased by $44.1 million, or 25.8%, to $214.9 million for 2000 from $170.8 million in 1999. This increase resulted primarily from increased volume from domestic and international air cargo customers, an increased number of operating terminals and direct shuttles, and enhanced logistics services.
Purchased transportation was 42.5% of operating revenue in 2000 compared to 43.8% in 1999. The decrease in purchased transportation was primarily attributable to operating efficiencies resulting from increased volumes of freight transported through the Forward Air network.
Salaries, wages and employee benefits were 22.0% of operating revenue in 2000 compared to 22.4% in 1999. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was due primarily to operating efficiencies resulting from increased volumes of freight transported through the Forward Air network.
Operating leases, the largest component of which is terminal rent, were 4.7% of operating revenue in 2000 compared to 5.2% in 1999. This decrease in operating leases as a percentage of revenue was attributable to increased leverage resulting from increased operating revenue.
Depreciation and amortization expense as a percentage of operating revenue was 2.7% in 2000, compared to 2.9% in 1999. The decrease in depreciation and amortization expense as a percentage of revenue was attributable to increased utilization of operating equipment during 2000 as a result of increased operating revenue.
Insurance and claims as a percentage of revenue was 1.7% of operating revenue in 2000, compared with 1.2% in 1999. This increase in insurance and claims expense as a percentage of revenue was due primarily to an increase in the frequency and severity of accidents and higher premium costs during 2000.
Other operating expenses were 9.0% of operating revenue in 2000 and 1999.
Income from operations increased by $10.9 million, or 41.3%, to $37.3 million for 2000 compared to $26.4 million for 1999. This increase 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 its network over a larger revenue base. The increase in income from operations during 2000 was partially offset by operating losses of approximately $1.6 million relating to the Company's information technology subsidiary, LogTech Corporation. In 2001, the Company plans to wind-down the LogTech operations and begin offering its information technology services to its existing customer base. The wind-down of LogTech operations will result in an additional estimated $350,000, or $.01 per share, of operating losses during the first quarter of 2001.
Interest expense was $107,000 in 2000 compared to $787,000, or 0.5% of revenue, in 1999. The decrease in interest expense was due to lower average net borrowings during 2000 coupled with the capitalization of interest costs totaling $301,000 during 2000 relating to the development of internal-use software.
The combined federal and state effective tax rate for 2000 was 38.2%, compared to a rate of 38.3% for 1999. 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 $7.4 million, or 46.3%, to $23.4 million for 2000, from $16.0 million in 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Operating revenue increased by $40.4 million, or 31.0%, to $170.8 million for 1999 from $130.4 million in 1998. This increase resulted primarily from increased volume from domestic and international air cargo customers, an increased number of operating terminals and direct shuttles, and enhanced logistics services.
Purchased transportation was 43.8% of operating revenue in 1999 compared to 43.2% in 1998. This increase was primarily attributable to an increase in revenue from exclusive use transportation services which have a higher purchased transportation percentage than freight transported through the Forward Air network. The increase in purchased transportation was partially offset by operating efficiencies resulting from increased volumes of freight transported through the Forward Air network.
Salaries, wages and employee benefits were 22.4% of operating revenue in 1999 compared to 23.9% in 1998. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was due primarily to operating efficiencies resulting from increased volumes of freight transported through the Forward Air network coupled with a reduction in the number of Company drivers which were hired initially as a part of the acquisition of certain of the assets of Adams Air Cargo, Inc. in October 1997.
Operating leases, the largest component of which is terminal rent, were 5.2% of operating revenue in 1999 compared to 5.3% in 1998. This decrease was attributable to increased leverage resulting from increased operating revenue.
Depreciation and amortization expense as a percentage of operating revenue was 2.9% in 1999, compared to 3.3% in 1998. The decrease in depreciation and amortization expense as a percentage of revenue was attributable to increased utilization of operating equipment during 1999 as a result of increased operating revenue.
Insurance and claims as a percentage of revenue was 1.2% of operating revenue in 1999, compared with 1.8% in 1998. This decrease was due primarily to a decrease in the frequency and severity of accidents and lower premium costs during 1999.
Other operating expenses were 9.0% of operating revenue in 1999 compared to 10.2% in 1998. The decrease in other operating expenses as a percentage of operating revenue was primarily 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 $10.4 million, or 65.0%, to $26.4 million for 1999 compared to $16.0 million for 1998. This increase 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 its network over a larger revenue base.
Interest expense was $787,000, or 0.5%, of operating revenue in 1999, compared to $1.2 million, or 0.9%, in 1998. The decrease in interest expense was due to lower average net borrowing during 1999 coupled with the capitalization of interest costs totaling $71,000 during 1999 relating to the development of internal-use software.
The combined federal and state effective tax rate for 1999 was 38.3%, compared to a rate of 38.1% for 1998. 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 $6.8 million, or 73.9%, to $16.0 million for 1999, from $9.2 million in 1998.
Liquidity and Capital Resources
Prior to the Spin-off in September 1998, the Company operated its business and the truckload carrier business of Landair Corporation. As a result, the Company's statement of cash flows for 1998 does not reflect the cash flows of its business on a stand-alone basis.
The Company has historically financed its working capital needs, including capital purchases, with cash flows from operations and borrowings under its bank lines of credit. Net cash provided by operating activities totaled approximately $33.8 million for 2000, $20.1 million for 1999 and $1.9 million for 1998. The increases in net cash provided by operating activities in 2000 and 1999 are mainly attributable to growth and improvements in results of operations.
Net cash used in investing activities was approximately $26.9 million in 2000, $13.4 million in 1999 and $17.0 million in 1998. Investing activities consisted primarily of acquisitions in 2000 and 1999 and the $5.0 million capital contribution to Landair Corporation in 1998, along with the purchase of operating equipment and management information systems during all three years.
Net cash provided by financing activities was $2.6 million and $14.6 million in 2000 and 1998, respectively, compared to cash used in financing activities of $1.2 million in 1999. Financing activities included the continued financing of operating equipment and working capital needs, repayment of long-term debt and capital leases, proceeds received from the exercise of stock options, Common Stock issued under the Company's employee stock purchase plan, and Common Stock issued from a public offering.
On May 4, 1999, 1.5 million shares of the Common Stock of the Company were sold under a Form S-3 Registration Statement dated April 23, 1999. The net proceeds of the offering were $18.0 million and were used principally to repay outstanding debt.
The Company expects net capital expenditures in 2001 for operating equipment and management information systems, excluding acquisitions, to be less than $5 million. The Company expects to fund these expenditures through cash provided by operating activities and borrowings under its credit facility.
The credit facility consists of a working capital line of credit. As long as the Company complies with several financial covenants and ratios, the credit facility permits it to borrow up to $20.0 million. Interest rates for advances under the facilities vary based on covenants related to total indebtedness, cash flows, results of operations and other ratios. The facility bears interest at LIBOR plus 1.00% to 1.90%, expires in April 2002 and is secured by accounts receivable. The amount the Company can borrow under the line of credit is reduced by the amount of any outstanding letters of credit.
Management believes that the Company's available cash, expected cash generated from future operations and borrowings under available lines of credit, will be sufficient to satisfy anticipated cash needs for at least the next twelve months.
On February 24, 1999, the Board of Directors approved a two-for-one stock split which was distributed on March 19, 1999. On January 10, 2000, the Board of Directors approved a three-for-two stock split which was distributed on January 28, 2000. 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 splits.
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. SFAS No. 133, as amended, is required to be adopted by the Company in 2001. 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 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 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 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On May 4, 1999, the Company sold 1.5 million shares of Common Stock in a public offering. The net proceeds of $18.0 million were used principally to repay outstanding debt. With this repayment, the Company's exposure to market risk related to its remaining outstanding debt is not significant.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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 2001 Annual Meeting of Shareholders (the "2001 Proxy Statement"). The 2001 Proxy Statement will be filed with the Commission not later than 120 days subsequent to December 31, 2000.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the 2001 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the 2001 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the 2001 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 2000.
PART IV
ITEM 14.
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.
The Company filed a report on Form 8-K on December 13, 2000 in connection with the December 3, 2000 purchase by Forward Air, Inc. of the assets of DTSI, Inc. from SouthTrust Bank.
(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.
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: March 30, 2001
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.
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, 2000
Forward Air Corporation
Greeneville, Tennessee
Forward Air Corporation
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:
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.
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 as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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 7, 2001
Forward Air Corporation
Consolidated Balance Sheets
See accompanying notes.
Forward Air Corporation
Consolidated Statements of Income
See accompanying notes.
Forward Air Corporation
Consolidated Statements of Shareholders' Equity
See accompanying notes.
Forward Air Corporation
Consolidated Statements of Cash Flows
Forward Air Corporation
Consolidated Statements of Cash Flows (continued)
See accompanying notes.
Forward Air Corporation
Notes to Consolidated Financial Statements
December 31, 2000
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include Forward Air Corporation 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 (formerly "the Truckload Business"), 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 as of the record date. 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. 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; Landair Corporation, or the term "Truckload Business," refers to the truckload operations; and the "Company" refers to the entity which, prior to the Spin-off, through its subsidiaries operated both the Forward Air Business and the Truckload Business and which, after the Spin-off, continues to operate the Forward Air Business.
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 air 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.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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.
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 2000, 1999 or 1998.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories of tires, replacement parts, supplies, and fuel for equipment are stated at the lower of cost or market utilizing the FIFO (first-in, first-out) method of determining cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and equipment is calculated based upon the cost of the asset, reduced by its estimated salvage value, using the straight-line method over the estimated useful lives as follows:
The Company reviews its long-lived assets, including goodwill and other intangibles, 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
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
projected undiscounted future cash flows from the use of the asset over its remaining useful life are less than the carrying value of the asset. As of December 31, 2000, in the opinion of management, there has been no such impairment.
RISK MANAGEMENT
The Company is self-insured for certain of its workers' compensation, property damage, auto liability and medical benefit claims. The Company has entered into agreements with independent insurance companies to limit its losses with respect to these claims.
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 exclude 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 three-for-two stock split and a two-for-one stock split (see Note 5).
COMPREHENSIVE INCOME
The Company had no items of other comprehensive income in 2000, 1999 and 1998 and, accordingly, comprehensive income is equivalent to net income.
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 the Spin-off, certain administrative and back office functions were 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
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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 $2.8 million for the Forward Air Business and $3.2 million for the Truckload Business for the period January 1, 1998 through September 23, 1998.
Interest expense of $661,000 for the Forward Air Business and $1.4 million for the Truckload Business for the period from January 1, 1998 through September 23, 1998 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued and was required to be adopted in years beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, deferring the effective date of SFAS No. 133 for one year. This Statement requires all derivatives to be recorded on the balance sheet at fair value. This results in the offsetting changes in fair values or cash flows of both the hedge and the hedged item being recognized in earnings or other comprehensive income, as appropriate, in the same period. Changes in fair value of derivatives not meeting the Statement's hedge criteria are included in income. The Company adopted the new Statement as of January 1, 2001. The Company does not expect the adoption of this Statement to have a significant effect on its results of operations or financial position.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial statements to conform to the 2000 presentation. These reclassifications had no effect on net income as previously reported.
2. DISCONTINUED OPERATIONS
As discussed in Note 1, on July 9, 1998, the Board of Directors of the Company authorized the separation of the Company into two publicly-held corporations, one owning and operating the Forward Air Business and the other owning and operating the Truckload Business. The Spin-off was effected on September 23, 1998.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
Summarized income statement information relating to the Truckload Business (as reported in discontinued operations) is as follows (in thousands):
(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 ($1.2 million on a pre-tax basis), and costs associated with the Spin-off of $1.1 million. 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.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
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 Company or Landair Corporation, as recipients of the services, may terminate any or all such services at any time on thirty days' irrevocable written notice, and the Company or Landair Corporation, as providers of the services, may terminate any or all of the services, other than information technology services, on three months' irrevocable notice. Information technology services to be provided by the Company to Landair Corporation have a thirty-six month term.
EMPLOYEE BENEFIT MATTERS AGREEMENT
The Employee Benefit Matters Agreement provided 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 continued 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 established such similar plans 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 BUSINESSES
In December 2000, the Company acquired the assets of Dedicated Transportation Services, Inc. ("DTSI"), a deferred air freight contractor to the air cargo industry based in Santa Ana, California. The Company paid approximately $10.7 million in cash for certain assets of DTSI (including approximately $700,000 of capitalized direct and/or out-of-pocket expenses related to
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
3. ACQUISITION OF BUSINESSES (CONTINUED)
the acquisition), which included accounts receivable, net of estimated costs to collect such receivables, in the amount of approximately $5.4 million. As of December 31, 2000, the Company has collected approximately $1.3 million in DTSI accounts receivable and the remaining $4.1 million is included in accounts receivable in the accompanying balance sheet. The acquisition was accounted for as a purchase and the excess cost over fair value of the net assets acquired is being amortized on a straight-line basis over a fifteen-year period. The allocation of the purchase price resulted in a tentative allocation of $5.1 million to goodwill. This allocation may change upon the completion of the collection of DTSI accounts receivable. The Company also entered into non-compete agreements with the former owners of DTSI, which provide for a total of $500,000 to be paid annually by the Company over a three-year period. Non-compete agreements are being amortized over the terms of the agreements.
In October 1999, the Company acquired certain air cargo operating assets of Quick Delivery Service, Inc. ("Quick"), a deferred air freight contractor to the air cargo industry based in Mobile, Alabama and certain air cargo operating assets of LTD Air Cargo, Inc. ("LTD"), a deferred air freight contractor to the air cargo industry based in Franklin, Tennessee. The Company paid approximately $6.8 million in cash and issued notes payable totaling $1.0 million for the above two acquisitions. The acquisitions were accounted for as purchases. The Company also entered into non-compete agreements with the former owners of Quick and LTD for a total of $400,000 to be paid in installments by the Company over the terms of the agreements. Non-compete agreements are being amortized over the terms of the agreements. Goodwill relating to the Quick and LTD acquisitions totaled approximately $6.4 million and is being amortized on a straight-line basis over a life of fifteen years.
The results of operations for the acquired businesses are included in the consolidated statements of income from the respective acquisition dates forward.
Goodwill and other intangible assets totaled $16.2 million and $9.8 million at December 31, 2000 and 1999, respectively. Accumulated amortization of goodwill and other intangible assets totaled approximately $1.1 million and $300,000 at each year end, respectively. The net present value of payments required under the non-compete agreements are included as obligations in long-term debt (see Note 4).
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT
Long-term debt consists of the following:
Effective with the Spin-off, the Company entered into a $20.0 million working capital line of credit facility with a Tennessee bank which expires in April 2002. 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 (7.8% and 6.8% at December 31, 2000 and 1999, respectively). 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, 2000, the Company had $1.9 million outstanding under the line and had utilized $4.3 million of availability for outstanding letters of credit.
Maturities of long-term debt are as follows (in thousands):
Interest payments during 2000, 1999 and 1998 were $409,000, $911,000 and $1.2 million, respectively, of which $301,000, $71,000 and $-0- was capitalized.
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS
Preferred Stock -- The Board of Directors is authorized to issue, at its discretion, up to 5.0 million 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.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Common Stock Splits -- On January 10, 2000, the Board of Directors approved a three-for-two split of the common shares which was distributed on January 28, 2000 to shareholders of record as of January 21, 2000. On February 24, 1999, the Board of Directors approved a two-for-one split of the common shares which was 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 these splits 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 splits.
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, the Company had reserved 3.0 million shares of common stock under a Stock Option and Incentive Plan. In February 1999, the Company reserved an additional 1.5 million common shares under the 1999 Stock Option and Incentive Plan, resulting in a total of 4.5 million shares being reserved at December 31, 2000 and 1999. Options issued under the Plans 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 2000, 1999 and 1998, respectively: risk-free interest rates of 6.5%, 5.2% and 4.7%; dividend ratio of zero; volatility factors of the expected market price of the common stock of 0.7, 0.7 and 0.5; and a weighted-average expected life of the option of seven years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the stock options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share data):
A summary of the Company's employee stock option activity and related information for the years ended December 31 follows:
Exercise prices for options outstanding as of December 31, 2000 ranged from $2.67 to $37.41.
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 297,000 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 153,000 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
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
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 225,000 additional shares during the year ended December 31, 1998.
Non-Employee Director Options -- In July 2000, May 2000, May 1999 and August 1998, options to purchase 7,500, 15,000, 22,500 and 56,250 shares of common stock, respectively, were granted to the non-employee directors of the Company at option prices of $36.38, $33.75, $17.83 and $6.13 per share, respectively. All options held by directors of the Company as 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 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, 2000, 270,000 options are outstanding and will expire in May 2005 through July 2010, unless a non-employee director resigns or is not re-elected, in which event the options expire 90 days after the option holder is no longer a non-employee director.
Employee Stock Purchase Plan -- The Company implemented an employee stock purchase plan effective January 1, 1996 at which time participating employees became entitled to purchase common stock through payroll deduction of up to 10% of the employee's annual compensation. The issue price of the common stock is equal to the lesser of (1) 85% of market price on the first trading day of the semi-annual option period or (2) 85% of market price on the last trading day of the semi-annual option period. The Company has reserved 900,000 shares of common stock for issuance pursuant to the plan. At December 31, 2000, approximately 81,000 shares had been issued under the Plan.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Earnings Per Share -- The following table sets forth the computation of basic and diluted income per share (in thousands, except per share data):
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:
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:
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:
The balance sheet classification of deferred income taxes is as follows:
Total income tax payments, net of refunds, during fiscal 2000, 1999 and 1998 were $12.3 million, $8.1 million and $3.4 million, respectively.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
7. LEASES
In September 2000, the Company entered into an agreement with the Rickenbacker Port Authority ("Rickenbacker") to lease a building located near the Company's Columbus hub facility in Columbus, Ohio. At the inception of the lease, the Company made a $2.0 million payment to Rickenbacker. The lease agreement has a ten year initial term, with two five-year renewal options. The present value of the future minimum lease payments of $1.0 million (at December 31, 2000) is included in capital lease obligations in the accompanying consolidated balance sheet. The leased building was recorded in property and equipment at $3.0 million (which represents the present value of minimum lease payments, including the $2.0 million initial payment, as it is less than the fair value at the inception date). The building is being depreciated over the initial lease term, which is less than the estimated useful life of the building.
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 assets are being amortized over the estimated useful lives of the assets under the assumption that the bargain purchase option will be exercised.
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:
Amortization of leased assets is included in depreciation and amortization expense.
The Company leases certain facilities and equipment under noncancellable operating leases that expire in various years through 2008. Certain of these leases may be renewed for periods varying
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
7. LEASES (CONTINUED)
from one to ten years. Landair Corporation 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. Sublease rental income was $465,000, $773,000 and $653,000 in 2000, 1999 and 1998, respectively, and was included in operating revenue in the accompanying consolidated statements of income.
Included in operating leases is an aircraft leased under a dry lease arrangement from a limited liability corporation owned by the Company's Chairman and Chief Executive Officer which expired in July 1999. Under the terms of the lease agreement, the Company paid 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 $107,000 and $423,000 in 1999 and 1998, respectively. Upon expiration of the lease agreement, the Company commenced chartering the aircraft on an as-needed hourly basis. The air charter expense totaled $185,000 and $106,000 in 2000 and 1999, respectively. In addition, during 2000, the Company paid salaries and benefits of $130,000 for two pilots of the limited liability corporation.
On or prior to the date of the Spin-off, the Company entered into subleases with Landair Corporation pursuant to which the Company sublet to Landair Corporation (i) a portion of its terminal facility in Atlanta, Georgia; (ii) a portion of its terminal facility in Chicago, Illinois; (iii) a portion of its terminal facility in Detroit, Michigan; and (iv) 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 terminal facilities to Landair Corporation for consideration based upon the cost of such facilities to the Company and an agreed-upon percentage of usage. The Company subleases a portion of Landair Corporation's facility in Indianapolis for consideration based upon an agreed-upon percentage of usage. The Company expects to receive aggregate future minimum rental payments under noncancelable subleases of approximately $950,000.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
7. LEASES (CONTINUED)
Future minimum rental payments under capital leases and noncancellable operating leases with initial or remaining terms in excess of one year consisted of the following at December 31, 2000:
8. TRANSACTIONS WITH LANDAIR CORPORATION
The Company and Landair Corporation routinely engage in operating transactions as Landair Corporation hauls a portion of the deferred air freight shipments for the Company which are in excess of the Company's scheduled capacity. During 2000, 1999 and 1998, Landair Corporation provided $2.1 million, $3.3 million and $4.4 million, respectively, of transportation services for the Company which were included in the accompanying statements of income in purchased transportation.
In accordance with the terms included in the Transition Services Agreement, subsequent to the Spin-off 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 Landair Corporation. The Company charged Landair Corporation $1.5 million, $2.4 million and $797,000, respectively, during the years ended December 31, 2000 and 1999 and the period September 24, 1998 through December 31, 1998 for these services. In addition, Landair Corporation provided the Company safety, licensing, permitting and fuel tax, recruiting and retention, and driver training center services subsequent to the Spin-off. Landair Corporation charged the Company $230,000, $455,000 and $193,000, respectively, during the years ended December 31, 2000 and 1999 and the period September 24, 1998 through December 31, 1998 for these services.
In connection with the Spin-off, the Company settled all intercompany balances for cash as of September 23, 1998. At December 31, 2000, accounts receivable included $315,000 of amounts
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
8. TRANSACTIONS WITH LANDAIR CORPORATION (CONTINUED)
due from Landair Corporation related to services covered under the Transition Services Agreement and various other transactions between both entities. At December 31, 1999, accounts payable included $707,000 of amounts due to Landair Corporation related to services covered under the Transition Services Agreement and various transactions between both entities.
As discussed in Note 7, the Company subleases a portion of certain facilities to Landair Corporation.
9. COMMITMENTS AND CONTINGENCIES
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, including provision for estimated claims incurred but not reported.
The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims, and by performing hindsight analysis to determine an estimate of probable losses on claims incurred but not reported. Such losses could be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates.
Because of the uncertainty of the ultimate resolution of outstanding claims, as well as uncertainty regarding claims incurred but not reported, it is possible that management's provision for these losses could change materially in the near term. However, no estimate can currently be made of the range of additional loss that is at least reasonably possible.
The estimated cost to complete software development in progress at December 31, 2000 is approximately $500,000.
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 ninety days 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 15% of their annual compensation. Employer contributions are made at 25% during 2000, 1999 and 1998 of the employee's contribution up to a maximum of 6% during 2000 and 1999 and 4% during 1998 of total annual compensation.
Forward Air Corporation
Notes to Consolidated Financial Statements (continued)
10. EMPLOYEE BENEFIT PLAN (CONTINUED)
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 2000, 1999 and 1998 was approximately $190,000, $146,000 and $71,000, respectively. In connection with the Spin-off, the account balances of Truckload employees were transferred to a Landair Corporation plan in a trust-to-trust transfer during 1999.
11. FINANCIAL INSTRUMENTS
Off Balance Sheet Risk
At December 31, 2000, the Company had letters of credit outstanding totaling $4.3 million, 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.
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, 2000 and 1999:
13. SUBSEQUENT EVENT
In January 2001, the Company completed an asset purchase transaction in which it acquired certain assets of Expedited Delivery Services, Inc. ("Expedited"). Expedited is a provider of transportation services to the air cargo industry. The aggregate consideration paid to Expedited consisted of approximately $2.0 million in cash. The acquisition will be accounted for using the purchase method of accounting.
Forward Air Corporation
Schedule II -- Valuation and Qualifying Accounts
(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
EXHIBIT INDEX
(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.
(h) Filed as an exhibit to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the Commission on March 11, 1999.
(i) Filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999, filed with the Commission on May 17, 1999.
(j) Filed as an exhibit to the registrant's Current Report on Form 8-K filed with the Commission on May 28, 1999.
(k) Filed as an exhibit to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the Commission on March 7, 2000.
(l) Filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, filed with the Commission on May 5, 2000.
(m) Filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, filed with the Commission on November 6, 2000.