UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File No. 000-22490
FORWARD AIR CORPORATION
(FORMERLY LANDAIR SERVICES, INC.)
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1120025
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
430 AIRPORT ROAD
GREENEVILLE, TENNESSEE 37745
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 636-7100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
The number of shares outstanding of the registrant's common stock, $.01 par
value, as of November 6, 1998 was 6,293,542.
TABLE OF CONTENTS
FORWARD AIR CORPORATION (FORMERLY LANDAIR SERVICES, INC.)
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements -
September 30, 1998 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Forward Air Corporation
Condensed Consolidated Balance Sheets
September 30, December 31,
1998 1997
------- --------
(Unaudited) (Note)
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 96 $ 895
Accounts receivable, less allowance of $925 in 1998 and $753 in 1997 19,247 17,671
Other current assets 2,337 1,752
------- --------
Total current assets 21,680 20,318
Property and equipment 38,906 19,540
Less accumulated depreciation and amortization 9,219 3,755
------- --------
29,687 15,785
Other assets 3,487 3,290
Deferred income taxes -- 572
Assets of discontinued operations -- 97,208
------- --------
Total assets $54,854 $137,173
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,475 $ 72
Accrued expenses 5,985 1,691
Current portion of long-term debt 4,758 625
Current portion of capital lease obligations 1,003 974
Due to truckload subsidiaries -- 17,447
------- --------
Total current liabilities 14,221 20,809
Long-term debt, less current portion 19,362 3,508
Capital lease obligations, less current portion 5,212 4,746
Deferred income taxes 214 --
Liabilities of discontinued operations -- 57,650
Shareholders' equity:
Preferred stock -- --
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 6,293,542 in 1998 and 6,024,388 in 1997 63 60
Additional paid-in capital 15,592 26,804
Retained earnings 190 23,596
------- --------
Total shareholders' equity 15,845 50,460
------- --------
Total liabilities and shareholders' equity $54,854 $137,173
======= ========
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date, but does not include all of the financial
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to condensed consolidated financial statements.
3
Forward Air Corporation
Condensed Consolidated Statements of Income
(Unaudited)
Three months ended Nine months ended
--------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands, except per share data)
Operating revenue $ 33,354 $ 28,901 $ 92,943 $ 75,357
Operating expenses:
Purchased transportation:
Provided by Landair Corporation 1,339 1,811 4,268 4,386
Provided by others 13,232 10,507 36,096 28,514
Salaries, wages and employee benefits 7,704 6,199 21,876 16,939
Operating leases 1,717 1,516 4,785 4,237
Depreciation and amortization 1,193 746 3,177 1,952
Insurance and claims 700 669 2,360 2,101
Other operating expenses 3,257 2,900 9,675 7,719
-------- -------- -------- --------
29,142 24,348 82,237 65,848
-------- -------- -------- --------
Income from operations 4,212 4,553 10,706 9,509
Other income (expense):
Interest expense (236) (197) (661) (604)
Other, net 2 (2) 13 (60)
-------- -------- -------- --------
(234) (199) (648) (664)
-------- -------- -------- --------
Income from continuing operations
before income taxes 3,978 4,354 10,058 8,845
Income taxes 1,510 1,743 3,858 3,497
-------- -------- -------- --------
Income from continuing operations 2,468 2,611 6,200 5,348
-------- -------- -------- --------
Discontinued operations:
Income from operations (less income taxes
of $--, $269, $850 and $258,
respectively) -- 566 1,345 543
Loss on spin-off (less income taxes of
$--, $--, $380 and $--, respectively) -- -- (380) --
-------- -------- -------- --------
-- 566 965 543
-------- -------- -------- --------
Net income $ 2,468 $ 3,177 $ 7,165 $ 5,891
======== ======== ======== ========
Income per share:
Basic
Income from continuing operations $ .40 $ .44 $ 1.00 $ .90
Income from discontinued operations -- .09 .16 .09
-------- -------- -------- --------
Net income $ .40 $ .53 $ 1.16 $ .99
======== ======== ======== ========
Diluted
Income from continuing operations $ .39 $ .42 $ .97 $ .87
Income from discontinued operations -- .09 .15 .09
-------- -------- -------- --------
Net income $ .39 $ .51 $ 1.12 $ .96
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
Forward Air Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
---------------------------------
September 30, September 30,
1998 1997
-------- -------
(In thousands)
Cash provided by (used in) operations $ (4,708) $ 2,522
Investing activities:
Proceeds from disposal of property and equipment 19 --
Purchases of property and equipment (10,000) (2,331)
Contribution of capital to Landair Corporation (5,000) --
Other (197) (3)
-------- -------
(15,178) (2,334)
Financing activities:
Proceeds from long-term debt 23,996 580
Payments of long-term debt (6,647) --
Payments of capital lease obligations (736) (971)
Common Stock issued under employee stock purchase plan -- 55
Proceeds from exercise of stock options 2,474 78
-------- -------
19,087 (258)
-------- -------
Decrease in cash and cash equivalents $ (799) $ (70)
======== =======
Non-cash transactions:
Distribution of net assets of Landair Corporation $(44,254) $ --
======== =======
Contribution of net assets by Landair Corporation to the
Company $ 2,379 $ --
======== =======
See notes to condensed consolidated financial statements.
5
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Forward Air Corporation (formerly Landair Services, Inc.) annual report on Form
10-K for the year ended December 31, 1997 and in the Form 8-K filed on September
4, 1998.
2. ACCOUNTING PRONOUNCEMENT
As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement No. 130 establishes standards for the reporting
and display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. The Company has no items of other comprehensive income to be reported
under the provisions of Statement No. 130.
3. DISCONTINUED OPERATIONS
The accompanying condensed consolidated financial statements include Forward Air
Corporation and its subsidiaries. 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").
6
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS (CONTINUED)
The Spin-off was effected on September 23, 1998 through the distribution to
shareholders of the Company of all the outstanding shares of common stock of a
new truckload holding company, Landair Corporation. Pursuant to the Spin-off,
the common stock of Landair Corporation was distributed on a pro rata basis of
one share of Landair Corporation common stock for every share of the Company's
common stock. Subsequent to the Spin-off, the Company has continued as the legal
entity that owns and operates the deferred air freight operations through its
operating subsidiaries and Landair Corporation is the legal entity that owns and
operates the truckload operations. Additionally, the name Landair Services, Inc.
was changed to Forward Air Corporation on August 26, 1998. As a result of the
Spin-off, the results of operations and cash flows of the truckload operations
have been reported as discontinued operations for all periods presented in the
accompanying condensed consolidated financial statements.
As used in the accompanying condensed consolidated financial statements, the
term "Forward Air" refers to the deferred air freight operations; the term
"truckload" refers to the truckload operations; and the term "the Company"
refers to the entity which, prior to the Spin-off, operated both the deferred
air freight and truckload groups and which, after the Spin-off, operates the
deferred air freight group.
A summary of the net assets distributed to Landair Corporation on September 23,
1998 is as follows (in thousands):
Current assets $ 22,754
Property and equipment, net 62,244
Other assets 39
--------
Assets of discontinued operations 85,037
--------
Current liabilities (21,009)
Long-term debt and capital lease obligations (7,972)
Deferred income taxes (11,802)
--------
Liabilities of discontinued operations (40,783)
--------
Net assets of discontinued operations $ 44,254
========
Prior to the Spin-off, the Company made a $5.0 million contribution of capital
in the form of cash to Landair Corporation. In addition, Landair Corporation
contributed to the Company approximately $2.4 million of net assets related to
the Forward Air operations. The above net assets include these transactions. The
distribution of the net assets of Landair Corporation on September 23, 1998, was
charged to retained earnings, to the extent that the Company had positive
retained earnings, with the remainder to additional paid-in capital.
7
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS (CONTINUED)
Summarized income statement information relating to the truckload operations (as
reported in discontinued operations) is as follows (in thousands):
Three months ended Nine months ended
------------------------------ -----------------------------
September 30, September 30, September 30, September 30,
1998(1) 1997 1998(1) 1997
-------- -------- -------- --------
Operating revenue $ -- $ 23,367 $ 51,543 $ 65,993
Operating expenses -- 22,113 48,450 63,770
-------- -------- -------- --------
Income from operations -- 1,254 3,093 2,223
Interest expense -- (453) (924) (1,386)
Other, net -- 34 26 (36)
-------- -------- -------- --------
Income before income taxes -- 835 2,195 801
Income taxes -- 269 850 258
-------- -------- -------- --------
Income from discontinued
truckload operations $ -- $ 566 $ 1,345 $ 543
======== ======== ======== ========
(1) The fiscal 1998 summarized income statement information above includes
the results of operations only through July 9, 1998 as a result of the
July 9, 1998 Measurement Date.
8
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three months ended Nine months ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
Numerator:
Numerator for basic and diluted income per share:
Income from continuing operations $2,468 $2,611 $6,200 $5,348
Income from discontinued operations -- 566 965 543
------ ------
Net income $2,468 $3,177 $7,165 $5,891
====== ====== ====== ======
Denominator:
Denominator for basic income per share-
weighted-average shares 6,239 5,966 6,164 5,957
Effect of dilutive stock options 158 245 249 161
------ ------ ------ ------
Denominator for diluted income per share-
adjusted weighted-average shares 6,397 6,211 6,413 6,118
====== ====== ====== ======
Income per share - basic:
Income from continuing operations $ .40 $ .44 $ 1.00 $ 90
Income from discontinued operations -- .09 .16 .09
------ ------ ------ ------
Net income $ .40 $ .53 $ 1.16 $ .99
====== ====== ====== ======
Income per share - diluted:
Income from continuing operations $ .39 $ .42 $ .97 $ .87
Income from discontinued operations -- .09 .15 .09
------ ------ ------ ------
Net income $ .39 $ .51 $ 1.12 $ .96
====== ====== ====== ======
Securities that could potentially dilute basic
income per share in the future that
were not included in the computation of
diluted income per share because to do
so would have been antidilutive for the
periods presented 15 60 15 60
====== ====== ====== ======
5. LONG-TERM DEBT
Effective with the Spin-off of Landair Corporation on September 23, 1998, the
Company entered into a $20.0 million working capital line of credit facility and
a $15.0 million equipment financing facility with a Tennessee bank which expires
in August 2000. Interest rates for advances under the facilities vary from LIBOR
plus 1.0% to 1.9% based on covenants related to total indebtedness, cash flows,
results of operations and other ratios. Accounts receivable and certain revenue
equipment secure the facilities. Outstanding letters of credit reduce
availability under the working capital line of credit. As of September 30, 1998,
the Company had no borrowings and
9
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
$3.2 million of letters of credit outstanding under the working capital line of
credit facility and $15.0 million outstanding under the equipment financing
facility.
The facilities contain, among other things, restrictions that require the
Company to maintain certain levels of net worth and other financial ratios. The
Company was in compliance with these covenants at September 30, 1998.
6. INCOME TAXES
For the three and nine months ended September 30, 1998 and 1997, the effective
income tax rate varied from the statutory federal income tax rate of 34%
primarily as a result of the effect of state income taxes, net of the federal
benefit, and permanent differences.
7. CONTINGENCIES
The Company is, from time to time, a party to litigation arising in the normal
course of its business, most of which involve claims for personal injury and
property damage incurred in connection with the transportation of freight.
Management believes none of these actions, individually or in the aggregate,
will have a material adverse effect on the financial condition or results of
operations of the Company.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
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 the outstanding shares of common stock of a
new truckload holding company, Landair Corporation. Pursuant to the Spin-off,
the common stock of Landair Corporation was distributed on a pro rata basis of
one share of Landair Corporation common stock for every share of the Company's
common stock. Subsequent to the Spin-off, the Company has continued as the legal
entity that owns and operates the deferred air freight operations through its
operating subsidiaries and Landair Corporation is the legal entity that owns and
operates the truckload operations. Additionally, the name Landair Services, Inc.
was changed to Forward Air Corporation on August 26, 1998. As a result of the
Spin-off, the results of operations and cash flows of the truckload operations
have been reported as discontinued operations for all periods presented in the
accompanying condensed consolidated financial statements. The following does not
include a discussion and analysis of the discontinued truckload operations.
11
The following table sets forth the percentage relationship of expense items to
operating revenue from continuing operations for the periods indicated.
Three months ended Nine months ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
Operating revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation 43.7 42.6 43.4 43.7
Salaries, wages and employee
benefits 23.1 21.4 23.6 22.5
Operating leases 5.1 5.3 5.2 5.6
Depreciation and amortization 3.6 2.6 3.4 2.6
Insurance and claims 2.1 2.3 2.5 2.8
Other operating expenses 9.8 10.0 10.4 10.2
------ ------ ------ ------
87.4 84.2 88.5 87.4
Income from operations 12.6 15.8 11.5 12.6
Other income (expense):
Interest expense (0.7) (0.7) (0.7) (0.8)
Other, net -- -- -- (0.1)
------ ------ ------ ------
(0.7) (0.7) (0.7) (0.9)
------ ------ ------ ------
Income before income taxes 11.9 15.1 10.8 11.7
Income taxes 4.5 6.1 4.1 4.6
------ ------ ------ ------
Income from continuing operations 7.4 9.0 6.7 7.1
------ ------ ------ ------
Discontinued operations:
Income from operations -- 2.0 1.4 0.7
Loss on spin-off -- -- (0.4) --
------ ------ ------ ------
Net income 7.4% 11.0% 7.7% 7.8%
====== ====== ====== ======
Three Months Ended September 30, 1998 compared to Three Months Ended September
30, 1997
Operating revenue increased by $4.5 million, or 15.6%, to $33.4 million in the
three months of 1998 from $28.9 million in the same period of 1997. The
operating revenue increase resulted primarily from increased volume from
domestic and international air cargo customers, increased operating terminals
and direct shuttles and enhanced logistics services. The operating revenue
increase in 1998 was also partially attributable to the acquisition on October
27, 1997, of the air cargo operating assets of Adams Air Cargo, Inc. In
addition, the Company benefited in the third quarter of 1997 from the United
Parcel Service ("UPS") strike which contributed an estimated approximately $2.3
million of additional revenue during the prior-year period as further discussed
below.
Purchased transportation represented 43.7% of operating revenue in the third
quarter of 1998 compared to 42.6% in the same period of 1997. The increase in
purchased transportation as a percentage of operating revenue between periods
was primarily attributable to operating
12
efficiencies resulting from increased volumes of freight through the Forward Air
network in the prior year as a result of the UPS strike.
Salaries, wages and employee benefits were 23.1% of operating revenue in the
third quarter of 1998 compared to 21.4% in the same period of 1997. The increase
in salaries, wages and employee benefits as a percentage of operating revenue
between periods was due primarily to operating efficiencies resulting from
increased volumes of freight through the Forward Air network in the prior year
as a result of the UPS strike. In addition, additional cargo handling wages and
supervisory salaries were necessary in the 1998 period to operate
Company-staffed terminals added since the preceding period coupled with an
increase in labor costs associated with logistics services revenue as the
Company continues to expand in this area.
Operating leases, the largest component of which is terminal rent, were 5.1% of
operating revenue in the third quarter of 1998 compared to 5.3% in the same
period of 1997. The decrease in operating leases as a percentage of operating
revenue between periods was attributable to greater operating revenue through
the Forward Air network and the growth of logistics services revenue.
Depreciation and amortization expense as a percentage of operating revenue was
3.6% in the third quarter of 1998, compared to 2.6% in the same period of 1997.
The increase in depreciation and amortization expense as a percentage of
operating revenue was attributable to the implementation of the Company's
integrated freight order entry, tracking and billing information system during
1997 coupled with additional operating equipment (e.g., forklifts, trailers,
scales, etc.) required to operate Company-operated terminals that were added
from the preceding period.
Insurance and claims were 2.1% of operating revenue in the third quarter of
1998, compared with 2.3% in the same period of 1997. The decrease in insurance
and claims as a percentage of operating revenue was due primarily to a decrease
in the frequency and severity of accidents and lower premium costs.
Other operating expenses were 9.8% of operating revenue in the third quarter of
1998 compared to 10.0% in the same period of 1997. 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 which were
partially offset by higher equipment maintenance costs associated with
Company-operated transportation equipment acquired in the acquisition on October
27, 1997 of the air cargo operating assets of Adams Air Cargo, Inc.
Income from operations decreased by $341,000, or 7.4%, to $4.2 million for the
third quarter of 1998 compared to $4.6 million for the same period in 1997. The
decrease in income from operations is due primarily to the benefit during the
third quarter of 1997 from non-recurring revenue that resulted from the UPS
strike as discussed below. This benefit was partially offset by a lower
operating cost structure in the current year resulting from an increase in
operating revenue which allowed the Company to spread the fixed costs of the
network over a larger base.
13
Interest expense was $236,000, or 0.7%, of operating revenue in the third
quarter of 1998, compared to $197,000, or 0.7%, for the same period in 1997.
The combined federal and state effective tax rate for the three months of 1998
was 38.0%, compared to a rate of 40.0%, for the same period in 1997.
As a result of the foregoing factors, income from continuing operations
decreased by $143,000, or 5.5%, to $2.5 million for the third quarter of 1998,
compared to $2.6 million for the same period of 1997.
The Company's fiscal 1997 results were affected by the UPS strike occurring
during a two-week period in the third quarter of fiscal 1997 as the Company
shipped freight that would have ordinarily been shipped by UPS. The Company
estimates that the UPS strike resulted in approximately $2.5 million in
incremental revenue which generated an estimated $1.2 million of income from
operations or $0.12 per diluted share. The Company believes it did not retain a
significant amount of the business it gained through the UPS strike, as the two
companies generally occupy separate niches within the freight transportation
marketplace.
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
1997
Operating revenue increased by $17.5 million, or 23.2%, to $92.9 million in the
first nine months of 1998 from $75.4 million in the same period of 1997. The
operating revenue increase resulted primarily from increased volume from
domestic and international air cargo customers, increased operating terminals
and direct shuttles and enhanced logistics services. The operating revenue
increase was also partially attributable to the acquisition on October 27, 1997,
of the air cargo operating assets of Adams Air Cargo, Inc. The Company's 1997
results were also affected by the aforementioned UPS strike.
Purchased transportation represented 43.4% of operating revenue in the first
nine months of 1998 compared to 43.7% in the same period of 1997. The decrease
in purchased transportation as a percentage of operating revenue between periods
was primarily attributable to operating efficiencies resulting from increased
volumes of freight through the Forward Air network coupled with an increase in
logistics services revenue which does not involve the transportation of freight.
Salaries, wages and employee benefits were 23.6% of operating revenue in the
first nine months of 1998 compared to 22.5% in the same period of 1997. The
increase in salaries, wages and employee benefits as a percentage of operating
revenue between periods was due primarily to additional cargo handling wages and
supervisory salaries required to operate Company-operated terminals that were
added since the preceding period coupled with an increase in labor associated
with logistics services revenue as the Company continues to expand in this area.
Operating leases, the largest component of which is terminal rent, were 5.2% of
operating revenue in the first nine months of 1998 compared to 5.6% in the same
period of 1997. The decrease in operating leases as a percentage of operating
revenue between periods was attributable to greater operating revenue through
the Forward Air network and the growth of logistics services revenue.
14
Depreciation and amortization expense as a percentage of operating revenue was
3.4% in the first nine months of 1998, compared to 2.6% in the same period of
1997. The increase in depreciation and amortization expense as a percentage of
operating revenue was attributable to the implementation of the Company's
integrated freight order entry, tracking and billing information system during
1997 coupled with additional operating equipment (e.g., forklifts, trailers,
scales, etc.) required to operate Company-operated terminals that were added
from the preceding period.
Insurance and claims were 2.5% of operating revenue for the first nine months of
1998, compared with 2.8% in the same period of 1997. The decrease in insurance
and claims as a percentage of operating revenue was due primarily to a decrease
in the frequency and severity of accidents and lower premium costs.
Other operating expenses were 10.4% of operating revenue in the first nine
months of 1998 compared to 10.2% in the same period of 1997. The increase in
other operating expenses as a percentage of operating revenue was primarily
attributable to higher equipment maintenance costs associated with
Company-operated transportation equipment acquired in the acquisition on October
27, 1997 of the air cargo operating assets of Adams Air Cargo, Inc. which were
partially offset by a lower operating cost structure due to increased operating
revenue and a reduction in commissions paid to agent terminals.
Income from operations increased by $1.2 million, or 12.6%, to $10.7 million for
the first nine months of 1998 compared to $9.5 million for the same period in
1997. The improvement in income from operations is due primarily to a lower
operating cost structure resulting from an increase in operating revenue which
allowed the Company to spread the fixed costs of the network over a larger base.
In addition, income from operations during 1997 benefited from non-recurring
revenue that resulted from the aforementioned UPS strike.
Interest expense was $661,000, or 0.7%, of operating revenue in the first nine
months of 1998, compared to $604,000, or 0.8%, for the same period in 1997.
The combined federal and state effective tax rate for the first nine months of
1998 was 38.4%, compared to a rate of 39.5%, for the same period in 1997.
As a result of the foregoing factors, income from continuing operations
increased by $852,000, or 16.1%, to $6.2 million for the first nine months of
1998, compared to $5.3 million for the same period of 1997.
Liquidity and Capital Resources
The Company has historically financed working capital needs with cash flows from
operations and borrowings under lines of credit. The Company has historically
financed capital purchases with cash flows from operations and through
borrowings under credit agreements with financial institutions. Net cash used in
operating activities was $4.7 million for the first nine months of 1998 compared
with net cash provided by operating activities of $2.5 million in the same
period of 1997.
15
Net cash used in investing activities was approximately $15.2 million in the
first nine months of 1998 compared with $2.3 million in the same period of 1997.
Investing activities consisted primarily of a $5.0 million capital contribution
to Landair Corporation in 1998 and the acquisition of operating equipment and
enhanced management information systems during the first nine months of 1998 and
1997.
Net cash provided by financing activities was $19.1 million in the first nine
months of 1998 compared with net cash used in financing activities of $258,000
in the same period of 1997. These financing activities included the continued
financing of operating equipment and working capital needs, the repayment of
long-term debt and capital leases and proceeds received from the exercise of
stock options and common stock issued under an employee stock purchase plan.
Effective with the Spin-off of Landair Corporation on September 23, 1998, the
Company entered into a $20.0 million working capital line of credit facility and
a $15.0 million equipment financing facility with a Tennessee bank which expires
in August 2000. Interest rates for advances under the facilities vary from LIBOR
plus 1.0% to 1.9% based on covenants related to total indebtedness, cash flows,
results of operations and other ratios. Accounts receivable and certain revenue
equipment secure the facilities. Outstanding letters of credit reduce
availability under the working capital line of credit. As of September 30, 1998,
the Company had no borrowings outstanding and $3.2 million of letters of credit
outstanding under the working capital line of credit facility and $15.0 million
outstanding under the equipment financing facility.
Management believes available borrowing under existing lines of credit, future
borrowings under installment notes for revenue equipment, and cash generated by
operations will be sufficient to fund the Company's cash needs and anticipated
capital expenditures through at least the next twelve months.
Impact of Year 2000
Some of the Company's older computer programs and systems were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company is in the process of replacing the majority of its key financial and
operational systems as a part of upgrading its systems in the normal course of
business. Management believes that this program will substantially meet or
address its Year 2000 issues. In addition to its replacement program, the
Company will require modifying some of its software and hardware so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. The estimated cost of the Company's completed and remaining
replacement and modification for the Year 2000 issue is expected to be less than
$250,000.
16
The Company also plans to initiate a formal communication process with all its
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to the failure of any third party to
remediate its own Year 2000 issues, and expects to complete such process during
the first quarter of 1999. Once the Company has completed the process mentioned
above and has determined the extent to which the Company's interface systems are
vulnerable to the failure of any third party to remediate its own Year 2000
issues, the Company expects to develop its plans (including contingency plans)
and budgets to perform any necessary remediation actions. There is no guarantee
that the systems of such other companies will be timely converted and would not
have an adverse effect on the Company.
The system replacements and upgrades are estimated to be completed not later
than June 30, 1999, which is prior to any anticipated impact of Year 2000 issues
on the Company's operating systems. The Company believes that with the
completion of such replacements and upgrades, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
replacements and upgrades are not made, or are not completed timely, or if third
parties with which the Company's systems interface are not replaced or upgraded,
the Year 2000 issue could have a material impact on the operations of the
Company.
Forward-Looking Statements
The Company, or its executive officers and directors on behalf of the Company,
may from time to time make written or oral "forward-looking statements." Written
forward-looking statements may appear in documents filed with the Securities and
Exchange Commission, in press releases and in reports to shareholders. Oral
forward-looking statements may be made by the Company's executive officers and
directors on behalf of the Company to the press, potential investors, securities
analysts and others. The Private Securities Litigation Reform Act of 1995
contains a safe harbor for forward-looking statements. The Company relies on
this safe harbor in making such disclosures. In connection with this safe harbor
provision, the Company is hereby identifying important factors that could cause
actual results to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company. Without limitation, factors that
might cause such a difference include economic factors such as recessions,
inflation, higher interest rates and downturns in customer business cycles, the
Company's inability to maintain its historical growth rate due to a decreased
volume of freight moving through the Company's network, competition, surplus
inventories, loss of a major customer, the Company's lack of prior operating
history as an entity independent of the truckload operations, the ability of the
Company's information systems to handle increased volume of freight moving
through its network, and the availability and compensation of qualified
independent owner-operators to serve the Company's transportation needs. The
Company disclaims any intent or obligation to update these forward-looking
statements.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the normal
course of its business, most of which involve claims for personal injury and
property damage incurred in connection with the transportation of freight.
Management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders of the Company was held in lieu of an annual
meeting on August 24, 1998. Directors were elected at the meeting for a one (1)
year term until the annual meeting of shareholders to be held in 1999 following
the year ending December 31, 1998, or until successors are duly elected and
qualified. The nominees and votes cast with respect to each are as follows:
Name For Withheld
---- --- --------
Bruce A. Campbell 3,871,142 18,520
Edward W. Cook 3,871,142 18,520
James A. Cronin, III 3,887,142 2,520
Robert K. Gray 3,887,142 2,520
Scott M. Niswonger 3,871,142 18,520
Richard H. Roberts 3,871,142 18,520
A majority of the shareholders also voted to amend the Charter of the Company to
change the name of the Company to Forward Air Corporation. The votes as cast are
as follows:
For Against Abstain
--- ------- -------
3,887,342 1,320 1,000
18
In addition, the shareholders voted in favor of ratification of the appointment
of Ernst & Young LLP as the independent auditors of the Company for the year
ending December 31, 1998, and the votes as cast are as follows:
For Against Abstain
--- ------- -------
3,888,442 600 620
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(a) Exhibits - The response to this portion of Item 6 is submitted as a
separate section of this report.
(b) Reports on Form 8-K - The Company filed two reports on Form 8-K during
the three months ended September 30, 1998. The Form 8-K filed on
September 3, 1998 reported the filing of Articles of Amendment to the
Charter of the Company to change its name to Forward Air Corporation.
The Form 8-K filed on September 4, 1998 provided certain financial
information including (i) audited consolidated financial statements of
the Company, including the notes thereto, which were restated to report
the results of operations and cash flows of the truckload operations as
discontinued operations; and (ii) unaudited pro forma condensed
financial statements of the Company, including the related notes
thereto, which assumed the Spin-off had occurred on June 30, 1998 as to
the balance sheet or on January 1, 1997 as to the statements of income.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Forward Air Corporation
Date: November 13, 1998 By: /s/ Edward W. Cook
----------------------------------------
Edward W. Cook
Chief Financial Officer
and Senior Vice President
20
EXHIBIT INDEX
Exhibit No. in
Exhibit No. Under Document Where
Item 601 of Incorporated by
Regulation S-K Reference
-------------- ---------
*2.1 Distribution Agreement between the registrant and Landair
Corporation 2.1
3.1 Bylaws of the registrant, as amended --
4.1 Form of Forward Air Corporation Common Stock Certificate --
*10.1 Transition Services Agreement between the registrant and
Landair Corporation 10.1
*10.2 Employee Benefit Matters Agreement between the registrant and
Landair Corporation 10.2
*10.3 Tax Sharing Agreement between the registrant and Landair
Corporation 10.3
10.4 Air Carrier Certificate, effective September 9, 1993, reissued
September 21, 1998 --
10.5 Amended and Restated Loan and Security Agreement, dated as of
September 10, 1998, between First Tennessee Bank National
Association and the registrant --
10.6 $20.0 million Amended and Restated Master Secured Promissory
Note (Line of Credit), dated as of September 10, 1998, to
First Tennessee Bank National Association --
10.7 $15.0 million Amended and Restated Secured Promissory Note
(Equipment Loan), dated as of September 10, 1998, to First
Tennessee Bank National Association --
10.8 Security Agreement, dated August 11, 1998, between SunTrust
Bank, Nashville, N.A. and FAF, Inc. --
10.9 $8,022,000 Promissory Note, dated August 11, 1998, to
SunTrust Bank, Nashville, N.A. --
27.1 Financial Data Schedule - Period Ended September 30, 1998
(Electronic Filing Only) --
27.2 Financial Data Schedule (Restated) - Period Ended September
30, 1997 (Electronic Filing Only) --
*Filed as an exhibit to the Quarterly Report on Form 10-Q of Landair Corporation
for the quarterly period ended September 30, 1998, filed with the Commission on
November 16, 1998.