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, 1999
Commission File No. 000-22490
FORWARD AIR CORPORATION
(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 5, 1999 was 13,778,377.
TABLE OF CONTENTS
FORWARD AIR CORPORATION
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three months and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements -
September 30, 1999 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities and Use of Proceeds 17
ITEM 3. Defaults Upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Forward Air Corporation
Condensed Consolidated Balance Sheets
September 30, 1999 December 31, 1998
-------------------------------------
(Unaudited) (Note 1)
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 7,779 $ 455
Accounts receivable, less allowance of $918 in
1999 and $952 in 1998 24,178 19,754
Other current assets 3,359 3,207
------------------------
Total current assets 35,316 23,416
Property and equipment 44,707 40,072
Less accumulated depreciation and amortization 13,117 10,152
------------------------
31,590 29,920
Other assets 3,490 3,472
------------------------
Total assets $70,396 $56,808
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,762 $ 4,120
Accrued expenses 7,750 7,056
Current portion of long-term debt 232 4,529
Current portion of capital lease obligations 508 676
------------------------
Total current liabilities 14,252 16,381
Long-term debt, less current portion 18 15,403
Capital lease obligations, less current portion 4,035 4,723
Deferred income taxes 2,932 1,230
Shareholders' equity:
Preferred stock -- --
Common stock, $.01 par value:
Authorized shares - 50,000,000 in 1999 and
20,000,000 in 1998
Issued and outstanding shares -
13,771,736 in 1999 and 12,587,818 in 1998 138 126
Additional paid-in capital 35,189 15,768
Retained earnings 13,832 3,177
------------------------
Total shareholders' equity 49,159 19,071
------------------------
Total liabilities and shareholders' equity $70,396 $56,808
========================
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,
1999 1998 1999 1998
------------------------------ ------------------------------------
(In thousands, except per share data)
Operating revenue $ 42,599 $ 33,354 $ 121,108 $ 92,943
Operating expenses:
Purchased transportation:
Provided by Landair Corporation 992 1,339 2,494 4,268
Provided by others 17,642 13,232 50,145 36,096
Salaries, wages and employee benefits 9,690 7,823 27,564 22,230
Operating leases 2,117 1,717 6,340 4,785
Depreciation and amortization 1,266 1,193 3,720 3,177
Insurance and claims 710 581 1,580 2,006
Other operating expenses 3,622 3,257 11,291 9,675
------------------------------ -------------------------------
36,039 29,142 103,134 82,237
------------------------------ -------------------------------
Income from operations 6,560 4,212 17,974 10,706
Other income (expense):
Interest expense (141) (236) (766) (661)
Other, net 94 2 172 13
------------------------------ -------------------------------
(47) (234) (594) (648)
------------------------------ -------------------------------
Income from continuing operations
before income taxes 6,513 3,978 17,380 10,058
Income taxes 2,508 1,510 6,725 3,858
------------------------------ -------------------------------
Income from continuing operations 4,005 2,468 10,655 6,200
------------------------------ -------------------------------
Discontinued operations:
Income from operations (less income
taxes of $--, $--, $-- and $850,
respectively) -- -- -- 1,345
Loss on Spin-off (less income taxes of
$--, $--, $-- and $380,
respectively) -- -- -- (380)
------------------------------ -------------------------------
-- -- -- 965
------------------------------ -------------------------------
Net income $ 4,005 $ 2,468 $ 10,655 $ 7,165
============================== ===============================
Income per share:
Basic
Income from continuing operations $ .29 $ .20 $ .81 $ .50
Income from discontinued operations -- -- -- .08
----------------------------- -------------------------------
Net income $ .29 $ .20 $ .81 $ .58
============================= ===============================
Diluted
Income from continuing operations $ .28 $ .19 $ .77 $ .48
Income from discontinued operations -- -- -- .08
----------------------------- -------------------------------
Net income $ .28 $ .19 $ .77 $ .56
============================= ===============================
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,
1999 1998
------------- -------------
(In thousands)
Cash provided by (used in) operations $ 14,127 $ (4,708)
Investing activities:
Proceeds from disposal of property and equipment 666 19
Purchases of property and equipment (5,901) (10,000)
Contribution of capital to Landair Corporation -- (5,000)
Other (123) (197)
-------- --------
(5,358) (15,178)
Financing activities:
Proceeds from long-term debt -- 23,996
Payments of long-term debt (19,682) (6,647)
Payments of capital lease obligations (856) (736)
Proceeds from exercise of stock options 1,003 2,474
Common stock issued under employee stock
purchase plan 57 --
Net proceeds from public offering 18,033 --
-------- --------
(1,445) 19,087
-------- --------
Increase (decrease) in cash and cash equivalents $ 7,324 $ (799)
======== ========
See notes to condensed consolidated financial statements.
5
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1999
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, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Forward Air Corporation annual report on Form 10-K for the year ended December
31, 1998.
The balance sheet at December 31, 1998 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.
2. 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").
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 common
stock of the Company. 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 in the
accompanying condensed consolidated financial statements.
6
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
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 business and truckload business and which, after the Spin-off,
operates the deferred air freight business.
Summarized income statement information relating to the truckload operations (as
reported in discontinued operations) for the period presented prior to the
Spin-off is as follows (in thousands):
Three months ended Nine months ended
September 30, 1998 September 30, 1998
------------------ ------------------
Operating revenue $ -- $ 51,543
Operating expenses -- 48,450
--------- ---------
Income from operations -- 3,093
Interest expense -- (924)
Other, net -- 26
--------- ---------
Income before income taxes -- 2,195
Income taxes -- 850
--------- ---------
Income from discontinued
truckload operations $ -- $ 1,345
========= =========
The estimated loss on Spin-off in the amount of $380,000 recorded in 1998
includes an estimate of the net of the after-tax income of the discontinued
operations from the Measurement Date through the date of the Spin-off and the
estimated costs associated with the Spin-off. The costs associated with the
Spin-off represent the cost of separating the two businesses which are
non-deductible for income tax purposes. Upon effecting the Spin-off in September
1998, the actual loss on Spin-off approximated the $380,000 estimated amount.
3. COMPREHENSIVE INCOME
The Company had no items of other comprehensive income in 1999 or 1998 and,
accordingly, comprehensive income is equivalent to net income.
4. NET INCOME PER SHARE
On February 24, 1999, the Board of Directors approved a two-for-one split of the
common stock of the Company 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 this split for all periods
presented. All common share and per share data included in the condensed
7
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
4. NET INCOME PER SHARE (CONTINUED)
consolidated financial statements and notes thereto have been restated to give
effect to the stock split.
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,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Numerator:
Numerator for basic and diluted income per share:
Income from continuing operations $ 4,005 $ 2,468 $10,655 $ 6,200
Income from discontinued operations -- -- -- 965
------- ------- ------- -------
Net income $ 4,005 $ 2,468 $10,655 $ 7,165
======= ======= ======= =======
Denominator:
Denominator for basic income per share -
weighted-average shares 13,757 12,478 13,110 12,328
Effect of dilutive stock options 786 316 692 498
------- ------- ------- -------
Denominator for diluted income per share -
adjusted weighted-average shares 14,543 12,794 13,802 12,826
======= ======= ======= =======
Income per share - basic:
Income from continuing operations $ .29 $ .20 $ .81 $ .50
Income from discontinued operations -- -- -- .08
------- ------- ------- -------
Net income $ .29 $ .20 $ .81 $ .58
======= ======= ======= =======
Income per share - diluted:
Income from continuing operations $ .28 $ .19 $ .77 $ .48
Income from discontinued operations -- -- -- .08
------- ------- ------- -------
Net income $ .28 $ .19 $ .77 $ .56
======= ======= ======= =======
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 25 30 25 30
======= ======= ======= =======
5. SHAREHOLDERS' EQUITY
On May 4, 1999, 1.0 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.
8
Forward Air Corporation
Notes to Condensed Consolidated Financial Statements (continued)
6. INCOME TAXES
For the three and nine months ended September 30, 1999 and 1998, the effective
income tax rate varied from the statutory federal income tax rate of 35%
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.
8. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial statements
to conform to the 1999 presentation. These reclassifications had no effect on
net income as previously reported.
9. SUBSEQUENT EVENTS
Acquisition of Businesses
On October 4, 1999, the Company acquired certain air cargo operating assets of
Quick Delivery Service, Inc. ("Quick"), a surface transportation contractor to
the air cargo industry based in Mobile, Alabama. Annual revenue from Quick's air
cargo operations was approximately $13.0 million. On October 25, 1999, the
Company acquired certain air cargo operating assets of LTD Air Cargo, Inc.
("LTD"), a surface transportation contractor to the air cargo industry based in
Nashville, Tennessee. Annual revenue from LTD's air cargo operations was
approximately $11.0 million. The acquisitions will be accounted for as a
purchase. The results of operations for the acquired businesses will be included
in the consolidated statements of income from the acquisition dates forward.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We provide scheduled ground transportation of cargo on a time-definite basis. As
a result of our established transportation schedule and network of terminals,
our operating cost structure includes significant fixed costs. Our ability to
improve our operating margins will depend on our ability to increase the volume
of freight moved through our network.
The following does not include a discussion and analysis of the truckload
business, which has been accounted for as a discontinued operation as a result
of the Spin-off effected on September 23, 1998. (See Note 2 to the Condensed
Consolidated Financial Statements.)
RESULTS OF OPERATIONS
The following table shows the percentage relationship of expense items to
operating revenue for the periods indicated.
Three months ended Nine months ended
--------------------------------- -----------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------------------------- -----------------------------------
Operating revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation 43.7 43.7 43.5 43.4
Salaries, wages and employee
benefits 22.7 23.5 22.8 23.9
Operating leases 5.0 5.1 5.2 5.2
Depreciation and amortization 3.0 3.6 3.1 3.4
Insurance and claims 1.7 1.7 1.3 2.2
Other operating expenses 8.5 9.8 9.3 10.4
---------------------------- ------------------------------
84.6 87.4 85.2 88.5
Income from operations 15.4 12.6 14.8 11.5
Other income (expense):
Interest expense (0.3) (0.7) (0.6) (0.7)
Other, net 0.2 -- 0.1 --
---------------------------- ------------------------------
(0.1) (0.7) (0.5) (0.7)
---------------------------- ------------------------------
Income before income taxes 15.3 11.9 14.3 10.8
Income taxes 5.9 4.5 5.5 4.1
---------------------------- ------------------------------
Income from continuing operations 9.4 7.4 8.8 6.7
============================ ==============================
10
Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998
Operating revenue increased by $9.2 million, or 27.5%, to $42.6 million in the
third quarter of 1999 from $33.4 million in the same period of 1998. The
increase resulted primarily from increased volume of freight shipments from
domestic and international air cargo customers, increased operating terminals
and direct shuttles and enhanced logistics services.
Purchased transportation represented 43.7% of operating revenue in the third
quarter of 1999 compared to 43.7% in the same period of 1998.
Salaries, wages and employee benefits were 22.7% of operating revenue in the
third quarter of 1999 compared to 23.5% in the same period of 1998. The decrease
in salaries, wages and employee benefits as a percentage of operating revenue
was due primarily to operating efficiencies resulting from increased volume of
freight transported through our network coupled with a reduction in Company
linehaul 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 5.0% of
operating revenue in the third quarter of 1999 compared to 5.1% in the same
period of 1998. The decrease in operating leases as a percentage of operating
revenue between periods was attributable to increased leverage of leased
facilities.
Depreciation and amortization expense as a percentage of operating revenue was
3.0% in the third quarter of 1999, compared to 3.6% in the same period of 1998.
The decrease in depreciation and amortization expense as a percentage of revenue
was attributable to increased utilization of operating equipment.
Insurance and claims were 1.7% of operating revenue in the third quarter of
1999, compared with 1.7% in the same period of 1998.
Other operating expenses were 8.5% of operating revenue in the third quarter of
1999 compared to 9.8% in the same period of 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 $2.4 million, or 57.1%, to $6.6 million for
the third quarter of 1999 compared to $4.2 million for the same period in 1998.
The improvement in income from operations is due primarily to 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 revenue base.
Interest expense was $141,000, or 0.3%, of operating revenue in the third
quarter of 1999, compared to $236,000, or 0.7%, for the same period in 1998. The
decrease in interest expense was due to lower average net borrowings during
1999.
11
The combined federal and state effective tax rate for the third quarter of 1999
was 38.5% compared to a rate of 38.0% for the same period in 1998.
As a result of the foregoing factors, income from continuing operations
increased by $1.5 million, or 60.0%, to $4.0 million for the third quarter of
1999, compared to $2.5 million for the same period of 1998.
Nine Months Ended September 30, 1999 compared to Nine Months Ended September
30, 1998
Operating revenue increased by $28.2 million, or 30.4%, to $121.1 million in the
first nine months of 1999 from $92.9 million in the same period of 1998. The
increase resulted primarily from increased volume of freight shipments from
domestic and international air cargo customers, increased operating terminals
and direct shuttles and enhanced logistics services.
Purchased transportation represented 43.5% of operating revenue in the first
nine months of 1999 compared to 43.4% in the same period of 1998.
Salaries, wages and employee benefits were 22.8% of operating revenue in the
first nine months of 1999 compared to 23.9% in the same period of 1998. The
decrease in salaries, wages and employee benefits as a percentage of operating
revenue was due primarily to operating efficiencies resulting from increased
volume of freight transported through our network coupled with a reduction in
Company linehaul 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 the first nine months of 1999 compared to 5.2% in the same
period of 1998.
Depreciation and amortization expense as a percentage of operating revenue was
3.1% in the first nine months of 1999, compared to 3.4% in the same period of
1998. The decrease in depreciation and amortization expense as a percentage of
revenue was attributable to increased utilization of operating equipment.
Insurance and claims were 1.3% of operating revenue in the first nine months of
1999, compared with 2.2% in the same period of 1998. 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 9.3% of operating revenue in the first nine months
of 1999 compared to 10.4% in the same period of 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 $7.3 million, or 68.2%, to $18.0 million for
the first nine months of 1999 compared to $10.7 million for the same period in
1998. The improvement in
12
income from operations is due primarily to 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 revenue base.
Interest expense was $766,000, or 0.6%, of operating revenue in the first nine
months of 1999, compared to $661,000, or 0.7%, for the same period in 1998. The
increase was due to higher average net borrowings.
The combined federal and state effective tax rate for the first nine months of
1999 was 38.7% compared to a rate of 38.4% for the same period in 1998.
As a result of the foregoing factors, income from continuing operations
increased by $4.5 million, or 72.6%, to $10.7 million for the first nine months
of 1999, compared to $6.2 million for the same period of 1998.
Liquidity and Capital Resources
Prior to the Spin-off in September 1998, we operated our business and the
truckload business together. As a result, our statement of cash flows for 1998
does not fully reflect the cash flows of our business as a stand-alone company.
We have historically financed working capital needs, including capital
purchases, with cash flows from operations and borrowings under our bank lines
of credit. Net cash provided by operating activities totaled approximately $14.1
million for the nine months ended September 30, 1999 compared with cash used in
operating activities of approximately $4.7 million in the same period of 1998.
Accounts receivable increased $4.4 million over 1998 levels primarily as a
result of increased revenue.
Net cash used in investing activities was approximately $5.4 million in the nine
months ended September 30, 1999 compared with $15.2 million in the same period
of 1998. Our investing activities consisted primarily of the purchase of
operating equipment and management information systems during these periods.
Net cash used in financing activities totalled approximately $1.4 million in the
nine months ended September 30, 1999 compared with net cash provided by
financing activities of $19.1 million in the same period of 1998. Our 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, common stock issued under an
employee stock purchase plan and common stock issued from a public offering.
On May 4, 1999, 1.0 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.
13
Our credit facilities include a working capital line of credit and an equipment
financing facility. As long as we comply with the financial covenants and ratios
established in the credit facility agreements, these credit facilities permit us
to borrow up to $20.0 million under the working capital line of credit and up to
$25.0 million under equipment financing facilities. Interest rates for advances
under the facilities vary based on covenants related to total indebtedness, cash
flows, results of operations and other ratios. The facilities bear interest at
LIBOR plus .80% to 1.90%, expire in September and December 2000 and are secured
by accounts receivable and most of our equipment. The amount we can borrow under
the line of credit is reduced by the amount of any outstanding letters of
credit.
We believe that our available cash, together with proceeds from the recent
public offering of the common stock of the Company, expected cash generated from
future operations and borrowings under available lines of credit, will be
sufficient to satisfy our anticipated cash needs for at least the next 12
months.
Year 2000 Issues
The Company continues to assess the potential impact of the Year 2000 on our
internal information technology ("IT") systems and operations. The Company's
Year 2000 initiatives include (i) testing and upgrading internal systems; (ii)
contacting technology vendors to determine their Year 2000 compliance status;
(iii) interface testing of the Company's internal systems with the systems of
its principal technology vendors; and (iv) contingency planning. The scope of
these efforts includes business systems, systems software, computer hardware,
local networking and external telecommunications services.
The Company's State of Readiness
The Company has completed its assessment of its IT systems for Year 2000
compliance. During this assessment, the Company identified certain software
applications that required modifications or updates for IT systems to be Year
2000 compliant. The Company has obtained or will obtain such modifications and
updates. Based upon its assessment, the Company believes that substantially all
of its critical IT systems are Year 2000 compliant or can be made Year 2000
compliant with minor modifications. The Company anticipates all critical IT
systems will be Year 2000 compliant by November 15, 1999.
As an integral part of its Year 2000 compliance effort, the Company has been
testing the interfacing of its IT systems with the systems of certain of its IT
vendors with whom the Company has material relationships. The Company will
continue this testing in an effort to minimize operations disruptions due to
Year 2000 issues. At present, the Company has not identified any material IT
vendor which will not be Year 2000 compliant.
14
Estimated Cost to Address Year 2000 Issues
To date, costs incurred in connection with Year 2000 issues have not been
material. Management estimates that the total Year 2000 project costs will not
have a material impact on the Company's results of operations, liquidity, or
financial condition. Except for expenditures for capital items, Year 2000
project costs are being expensed and are funded through cash from operations.
The Company has not yet deferred any IT project due to its Year 2000 efforts.
Risks of the Company's Year 2000 Issues
Virtually every aspect of the Company's operations might be disrupted if our
systems or the systems of our material vendors are not Year 2000 compliant.
While the Company is attempting to minimize any negative consequences arising
from Year 2000 issues, there can be no assurance that Year 2000 issues will not
have a material adverse impact on our business, operations or financial
condition. Moreover, while the Company expects that upgrades to its IT systems
will be completed in a timely manner, there can be no assurances that the
Company will not encounter unexpected costs or delays.
Moreover, if any of the Company's significant vendors or customers experience
business disruptions due to Year 2000 issues, the Company might be adversely
affected. In certain instances, primarily telecommunications vendors or vendors
materially dependent on telecommunications, the Company is limited in its
ability to verify Year 2000 compliance and must rely on vendor representations
which may not provide unqualified Year 2000 compliance assurances. The Company's
efforts with respect to its customers have been focused on electronic data
interface ("EDI") support. The Company is contacting each customer with whom
there is an EDI relationship to offer conversion to the Year 2000 compliant
version of EDI standards. In certain cases, customers have elected not to
upgrade.
At present, the Company is not able to determine whether there would be a
material impact on the Company's results of operations, liquidity or financial
condition if the Company's material systems, vendors and customers are not Year
2000 compliant. A worst-case scenario would result in the short-term inability
of the Company to transport freight for its customers. This would result in lost
revenue; however, the amount would be dependent on the length and nature of the
disruption which cannot be predicted or estimated.
Contingency Plans
The Company will formulate detailed contingency plans at that point in time when
the Company believes that a material vendor will not be Year 2000 compliant. As
the Company anticipates that all its material vendors will be Year 2000
compliant, the Company has not yet established detailed contingency plans.
However, as a general precaution, the Company will document manual procedures to
be implemented if the IT systems of certain of its material vendors, primarily
telecommunications vendors, fail. It is recognized that these procedures would
provide limited
15
support in the event of a material vendor failure and would only partially
mitigate the impact of the failure on Company operations.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
On May 4, 1999, the Company sold 1.0 million shares of its 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.
16
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 AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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 did not file any reports on Form 8-K
during the three months ended September 30, 1999.
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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 12, 1999 By: /s/ Edward W. Cook
--------------------------------------
Edward W. Cook
Chief Financial Officer
and Senior Vice President
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EXHIBIT INDEX
Exhibit No.
-----------
27.1 Financial Data Schedule - Period Ended September
30, 1999 (Electronic Filing Only)
19