at LIBOR plus 1.00% to 1.90% and is unsecured. The facility’s expiration was extended until April 2007 by letter agreement entered into in 2005. At December 31, 2005, we had $1.5 million outstanding and had $14.2 million of available borrowing capacity under the line of credit facility. Additionally, we had utilized $4.3 million of availability for outstanding letters of credit. As of December 31, 2005, we were in compliance with the financial covenants and ratios under the credit facility.
On July 25, 2002, we announced that our Board of Directors approved a stock repurchase program for up to 3.0 million shares of our Common Stock (the “2002 Repurchase Plan”). During the third quarter of 2005, we completed the repurchase of the shares authorized under the 2002 Repurchase Plan. On November 17, 2005, we announced that our Board of Directors approved a stock repurchase program for up to 3.0 million shares of our Common Stock (the “2005 Repurchase Plan”). We expect to fund the repurchases of our Common Stock from our cash, available-for-sale securities and cash generated from operating activities. For the year ended December 31, 2005, we repurchased approximately 1.7 million shares of our Common Stock under both the 2002 Repurchase Plan and the 2005 Repurchase Plan for $52.3 million, or $30.92 per share.
On February 15, 2005, our Board of Directors declared a three-for-two stock split of our Common Stock to be effected in the form of a stock dividend to shareholders of record as of March 18, 2005. Common Stock issued and additional paid-in capital have been restated to reflect the split for all years presented. All common share and per share data included in the consolidated financial statements and notes thereto have been restated to give effect to the stock split.
Prior to February 15, 2005, we had never declared a cash dividend, our policy being to reinvest earnings into our business while retaining adequate cash reserves to fund potential acquisitions. During each quarter of 2005, our Board of Directors declared a cash dividend of $0.06 per share of our Common Stock. On February 13, 2006, our Board of Directors declared a $0.07 per share dividend that will be paid in the first quarter of 2006. We expect to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by our Board of Directors.
At December 31, 2005, we had letters of credit outstanding from a bank totaling $4.3 million required by our workers’ compensation and vehicle liability insurance providers.
Our contractual obligations and other commercial commitments as of December 31, 2005 (in thousands) are summarized below:
We believe that our available cash, available-for-sale securities, cash expected to be generated from future operations and available borrowings under lines of credit, will be sufficient to satisfy anticipated cash needs for at least the next twelve months.
Related Party Transactions
Transactions with Landair Transport, Inc.
Scott M. Niswonger, the Chairman of the Board until May 2005, owns a majority interest in the parent company of Landair Transport, Inc. (“Landair”). We purchase truckload transportation services from Landair. Matthew J. Jewell, our Senior Vice President and General Counsel, served in these same capacities with Landair until May 2004.
Disclosures regarding amounts charged to Landair and amounts charged by Landair to us for various operational and administrative services are set forth in Note 8 to the consolidated financial statements.
We purchased $0, $0.2 million and $0.9 million of truckload transportation services from Landair in 2005, 2004 and 2003, respectively, which have been included in purchased transportation in the consolidated statements of income.
Transactions with Sky Night, LLC
We purchase air transportation services from Sky Night, LLC (“Sky Night”), a limited liability corporation owned by Scott M. Niswonger, Chairman of the Board until May 2005. Air charter expense totaled $105,000, $86,000 and $196,000 in 2005, 2004 and 2003, respectively, and has been included in other operating expenses in the accompanying consolidated statements of income.
During 2001, we entered into an agreement to sublease hangar space at our Greeneville, Tennessee headquarters to Sky Night. The initial term of the sublease was for 12 months and the monthly rental rate was determined based on market prices for similar spaces in the area. The sublease term has been extended through July 25, 2006.
Impact of Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004),Share-Based Payment (“SFAS No. 123R”), which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123Rsupersedes Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an option.
Originally, SFAS No. 123R was to be adopted no later than July 1, 2005, although early adoption was allowable. However, on April 14, 2005, the SEC announced that the effective date of SFAS No. 123R would be suspended until January 1, 2006, for calendar year companies.
As permitted by SFAS No. 123, we, through December 31, 2005, accounted for share-based payments to employees using APB Opinion No. 25’s intrinsic value and, as such, generally recognized no compensation cost for employee stock options. However, effective December 31, 2005, our Board of Directors accelerated the vesting of all our outstanding and unvested stock options awarded to employees, officers and non-employee directors under our stock option award program. As a result of the vesting acceleration, we recorded $1.3 million of stock-based compensation expense in accordance with ABP Opinion No. 25, included in salaries, wages and employee benefits. The primary purpose of the accelerated vesting of these options was to eliminate future compensation expense that we would otherwise have recognized in our statement of operations with respect to these options upon the adoption of SFAS No. 123R. We adopted SFAS No. 123R effective January 1, 2006 and elected the modified-prospective transition method. Under the modified-prospective transition method, awards that are granted, modified, repurchased or canceled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123R. Stock-based awards that are granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123, except that stock option expense for unvested options must be recognized in the statement of operations. As a result of the acceleration of the vesting of our outstanding and unvested options effective December 31, 2005, there is no future compensation of options granted prior to January 1, 2006. The
27
amount of compensation cost that would have been recognized in each period after the adoption of SFAS No. 123R that will not be recognized as a result of the vesting modification is as follows (in thousands):
| Fiscal Year | | | |
| 2006 | | $ | 3,252 |
| 2007 | | | 2,907 |
| 2008 | | | 2,289 |
| 2009 | | | 281 |
| Total | | $ | 8,729 |
The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on, among other things, levels of share-based payments granted in the future, the market value of our Common Stock as well as assumptions regarding a number of complex variables. These variables include, but are not limited to, our stock price, volatility and employee stock option exercise behaviors and the related tax impact. However, had we adopted SFAS No. 123R in prior periods, we believe the impact of that standard would have approximated the impact of SFAS. No. 123 as described in “Employee Stock Options” within Note 1 to our consolidated financial statements.
Forward-Looking Statements
This report contains “forward-looking statements,” as defined in Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are statements other than historical information or statements of current condition and relate to future events or our future financial performance. Some forward-looking statements may be identified by use of such terms as “believes,” “anticipates,” “intends,” “plans,” “estimates,” “projects” or “expects.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The following is a list of factors, among others, that could cause actual results to differ materially from those contemplated by the forward-looking statements: economic factors such as recessions, inflation, higher interest rates and downturns in customer business cycles, our inability to maintain our historical growth rate because of a decreased volume of freight moving through our network or decreased average revenue per pound of freight moving through our network, increasing competition and pricing pressure, surplus inventories, loss of a major customer, the creditworthiness of our customers and their ability to pay for services rendered, our ability to secure terminal facilities in desirable locations at reasonable rates, the inability of our information systems to handle an increased volume of freight moving through our network, changes in fuel prices, claims for property damage, personal injuries or workers’ compensation, employment matters including rising health care costs, enforcement of and changes in governmental regulations, environmental and tax matters, the handling of hazardous materials, the availability and compensation of qualified independent owner-operators and freight handlers needed to serve our transportation needs and our inability to successfully integrate acquisitions. As a result of the foregoing, no assurance can be given as to future financial condition, cash flows or results of operations. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Except for capital lease obligations totaling $0.8 million, we had no long-term debt at December 31, 2005. Accordingly, our exposure to market risk related to remaining outstanding debt is not significant.
We are also exposed to changes in interest rates from our available-for-sale securities. As a result of the regularly reset interest rates to market rates on the available-for-sale securities we own, a material adverse effect to the fair market value of the investments is unlikely.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
28
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that we are able to collect the information required to be disclosed in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by management, with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, management used the framework set forth by the Committee on Sponsoring Organizations of the Treadway Commission inInternal Control — Integrated Framework. Based on our assessment, we believe, as of December 31, 2005, that our internal control over financial reporting was effective based on those criteria.
Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited our consolidated financial statements. Ernst & Young LLP’s attestation report on management’s assessment of our internal control over financial reporting appears below.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
29
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Forward Air Corporation
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Forward Air Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Forward Air Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Forward Air Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Forward Air Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Forward Air Corporation as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 and our report dated March 6, 2006 expressed an unqualified opinion thereon.
Nashville, Tennessee
March 6, 2006
30
Item 9B. Other Information
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to our directors is incorporated herein by reference to our proxy statement for the 2006 Annual Meeting of Shareholders (the “2006 Proxy Statement”). The 2006 Proxy Statement will be filed with the SEC not later than 120 days subsequent to December 31, 2005.
Pursuant to Item 401(b) of Regulation S-K, the information required by this item with respect to our executive officers is set forth in Part I of this report.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the 2006 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item is incorporated herein by reference to the 2006 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the 2006 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the 2006 Proxy Statement.
31
Part IV
Item 15. Exhibits, Financial Statement Schedules
| (a)(1) and (2) | List of Financial Statements and Financial Statement Schedules. |
| | The response to this portion of Item 15 is submitted as a separate section of this report. |
| (a)(3) | List of Exhibits. |
| | The response to this portion of Item 15 is submitted as a separate section of this report. |
| (b) | Exhibits. |
| | The response to this portion of Item 15 is submitted as a separate section of this report. |
| (c) | Financial Statement Schedules. |
| | The response to this portion of Item 15 is submitted as a separate section of this report. |
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 22, 2006
| | By: | /s/ Bruce A. Campbell | |
| Bruce A. Campbell |
| President and Chief Executive Officer |
33
Annual Report on Form 10-K/A
Item 8, Item 15(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, 2005
Forward Air Corporation
Greeneville, Tennessee
F-1
Forward Air Corporation
Form 10-K/A — Item 8 and Item 15(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:
| | Page No. |
| Audit Report of Ernst & Young LLP, Independent Registered Public Accounting Firm | F-3 |
| Consolidated Balance Sheets — December 31, 2005 and 2004 | F-4 |
| Consolidated Statements of Income — Years Ended December 31, 2005, 2004 and 2003 | F-6 |
| Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2005, 2004 and 2003 | F-7 |
| Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 and 2003 | F-8 |
| Notes to Consolidated Financial Statements — December 31, 2005 | F-9 |
The following financial statement schedule of Forward Air Corporation is included as a separate section of this report.
| Schedule II — Valuation and Qualifying Accounts | S-1 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
F-2
Report of Independent Registered Public Accounting Firm
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, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(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 the auditing standards of the Public Company Accounting Oversight Board (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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with United States generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Forward Air Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2006 expressed an unqualified opinion thereon.
Nashville, Tennessee
March 6, 2006
F-3
Forward Air Corporation
Consolidated Balance Sheets
| | | | December 31 |
| | | 2005 | | 2004 |
| | | (In thousands, except share data) |
| |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | 332 | | | $ | 78 | |
| Short-term investments | | | 79,000 | | | | 111,600 | |
| Accounts receivable, less allowances of $922 in 2005 and $1,072 | | | | | | |
| in 2004 | | | 45,763 | | | | 38,334 | |
| Income taxes receivable | | | 5,179 | | | | 3,805 | |
| Inventories | | | 567 | | | | 422 | |
| Prepaid expenses and other current assets | | | 4,455 | | | | 3,750 | |
| Deferred income taxes | | | 1,438 | | | | | 1,433 | | |
| Total current assets | | | 136,734 | | | | 159,422 | |
| |
| Property and equipment: | | | | | | |
| Land | | | 2,611 | | | | 2,611 | |
| Buildings | | | 8,051 | | | | 8,051 | |
| Equipment | | | 77,165 | | | | 67,820 | |
| Leasehold improvements | | | 3,259 | | | | | 2,743 | | |
| Total property and equipment | | | 91,086 | | | | 81,225 | |
| Accumulated depreciation and amortization | | | 43,864 | | | | | 43,939 | | |
| Net property and equipment | | | 47,222 | | | | 37,286 | |
| Goodwill and other acquired intangibles: | | | | | | |
| Goodwill, net of accumulated amortization of $1,931 | | | 15,588 | | | | 15,588 | |
| Other acquired intangibles, net of accumulated amortization of | | | | | | |
| $744 | | | 12,007 | | | | | -- | | |
| |
| Total net goodwill and other acquired intangibles | | | 27,595 | | | | 15,588 | |
| Other assets | | | 1,049 | | | | | 2,257 | | |
| Total assets | | $ | 212,600 | | | | $ | 214,553 | | |
F-4
Forward Air Corporation
Consolidated Balance Sheets (continued)
| | December 31 |
| | 2005 | | 2004 |
| | (In thousands, except share data) |
| |
| Liabilities and shareholders’ equity | | | | |
| Current liabilities: | | | | |
| Accounts payable | $ | 12,640 | | $ | 10,026 |
| Accrued payroll and related items | | 3,262 | | 4,611 |
| Insurance and claims accruals | | 4,381 | | 4,424 |
| Other accrued expenses | | 4,139 | | 6,557 |
| Short-term debt | | 1,504 | | -- |
| Current portion of capital lease obligations | | 38 | | | 39 |
| Total current liabilities | | 25,964 | | 25,657 |
| |
| Capital lease obligations, less current portion | | 837 | | 867 |
| Deferred income taxes | | 6,983 | | 7,026 |
| |
| |
| Shareholders’ equity: | | | | |
| Preferred stock, $0.01 par value: | | | | |
| Authorized shares - 5,000,000 | | | | |
| No shares issued | | -- | | -- |
| Common stock, $0.01 par value: | | | | |
| Authorized shares - 50,000,000 | | | | |
Issued and outstanding shares – 31,360,842 in 2005 and
32,397,747 in 2004 | | | | |
| | 314 | | 324 |
| Additional paid-in capital | | -- | | 36,279 |
| Accumulated other comprehensive income | | -- | | 4 |
| Retained earnings | | 178,502 | | | 144,396 |
| Total shareholders’ equity | | 178,816 | | | 181,003 |
| Total liabilities and shareholders’ equity | $ | 212,600 | | $ | 214,553 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Forward Air Corporation
Consolidated Statements of Income
|
|
|
| | Year ended December 31 |
| | 2005 | | 2004 | | 2003 |
| | (In thousands, except per share data) |
| Operating revenue | $ | 320,934 | | | $ | 282,197 | | $ | 241,517 | |
| |
| Operating expenses: | | | | | |
| Purchased transportation | 132,912 | | | | 118,425 | | | 102,063 | |
| Salaries, wages and employee benefits | 68,086 | | | | 62,728 | | | 54,267 | |
| Operating leases | 13,486 | | | | 12,791 | | | 13,102 | |
| Depreciation and amortization | 8,947 | | | | 6,817 | | | 7,263 | |
| Insurance and claims | 5,202 | | | | 5,382 | | | 5,153 | |
| Other operating expenses | | 24,864 | | | | 22,456 | | | 19,487 | |
| Total operating expenses | | 253,497 | | | | 228,599 | | | 201,335 | |
| Income from operations | | 67,437 | | | | 53,598 | | | | 40,182 | |
| |
| Other income (expense): | | | | | |
| Interest expense | | ( 104 | ) | | | ( 55 | ) | | | ( 71 | ) |
| Other, net | | 3,904 | | | | 1,127 | | | | 600 | |
| Total other income | | 3,800 | | | | 1,072 | | | | 529 | |
| Income before income taxes | 71,237 | | | | 54,670 | | | | 40,711 | |
| Income taxes | | 26,328 | | | | 20,249 | | | | 14,896 | |
| Net income | $ | 44,909 | | | $ | 34,421 | | | $ | 25,815 | |
| |
| Income per share: | | | | | |
| Basic | $ | 1.41 | | | $ | 1.07 | | | $ | 0.81 | |
| Diluted | $ | 1.39 | | | $ | 1.05 | | | $ | 0.79 | |
| Dividends declared per share | $ | 0.24 | | | $ | -- | | | $ | -- | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Forward Air Corporation
Consolidated Statements of Shareholders’ Equity
| | | | | | | | | | | | | | Accumulated | | |
| | Common Stock | | Additional | | | | | Other | | Total |
| | | | | | Paid-in | | Retained | | Comprehensive | | Shareholders’ |
| | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Equity |
| | (In thousands) | |
| Balance at December 31, 2002 | 31,827 | | | | $ | 318 | | | | $ | 33,877 | | | | $ | 84,160 | | | | $ | ( 9 | ) | | | $ | 118,346 | |
Net income for 2003 | -- | | | | -- | | | | -- | | | | 25,815 | | | | -- | | | | 25,815 | |
| Unrealized gain on | | | | | | | | | | | | | | | | | | |
| securities available | | | | | | | | | | | | | | | | | | |
| for sale, net of $6 tax | -- | | | | -- | | | | -- | | | | -- | | | | 10 | | | | | 10 | |
| Comprehensive income | | | | | | | | | | | | | | | | | 25,825 | |
| Exercise of stock options | 402 | | | | 4 | | | | 2,693 | | | | -- | | | | -- | | | | 2,697 | |
| Common stock issued | | | | | | | | | | | | | | | | | | |
| under employee stock | | | | | | | | | | | | | | | | | | |
| purchase plan | 16 | | | | -- | | | | 210 | | | | -- | | | | -- | | | | 210 | |
| Income tax benefit from | | | | | | | | | | | | | | | | | | |
| stock options exercised | | -- | | | | | -- | | | | | 630 | | | | | -- | | | | | -- | | | | | 630 | |
| Balance at December 31, 2003 | 32,245 | | | | 322 | | | | 37,410 | | | | 109,975 | | | | 1 | | | | 147,708 | |
| Net income for 2004 | -- | | | | -- | | | | -- | | | | 34,421 | | | | -- | | | | 34,421 | |
| Unrealized gain on | | | | | | | | | | | | | | | | | | |
| securities available | | | | | | | | | | | | | | | | | | |
| for sale, net of $2 tax | -- | | | | -- | | | | -- | | | | -- | | | | 3 | | | | | 3 | |
| Comprehensive income | | | | | | | | | | | | | | | | | 34,424 | |
| Exercise of stock options | 588 | | | | 6 | | | | 7,097 | | | | -- | | | | -- | | | | 7,103 | |
| Common stock issued | | | | | | | | | | | | | | | | | | |
| under employee stock | | | | | | | | | | | | | | | | | | |
| purchase plan | 14 | | | | -- | | | | 250 | | | | -- | | | | -- | | | | 250 | |
| Common stock | | | | | | | | | | | | | | | | | | |
| repurchased under stock | | | | | | | | | | | | | | | | | | |
| repurchase plan | ( 449 | ) | | | ( 4 | ) | | | ( 11,384 | ) | | | -- | | | | -- | | | | ( 11,388 | ) |
| Income tax benefit from | | | | | | | | | | | | | | | | | | |
| stock options exercised | | -- | | | | | -- | | | | | 2,906 | | | | | -- | | | | | -- | | | | | 2,906 | |
| Balance at December 31, 2004 | 32,398 | | | | 324 | | | | 36,279 | | | | 144,396 | | | | 4 | | | | 181,003 | |
| Net income for 2005 | -- | | | | -- | | | | -- | | | | 44,909 | | | | -- | | | | 44,909 | |
| Unrealized loss on | | | | | | | | | | | | | | | | | | |
| securities available | | | | | | | | | | | | | | | | | | |
| for sale, net of ($2) tax | -- | | | | -- | | | | -- | | | | -- | | | | ( 4 | ) | | | | ( 4 | ) |
| Comprehensive income | | | | | | | | | | | | | | | | | 44,905 | |
| Exercise of stock options | 643 | | | | 6 | | | | 6,206 | | | | -- | | | | -- | | | | 6,212 | |
| Common stock issued | | | | | | | | | | | | | | | | | | |
| under employee stock | | | | | | | | | | | | | | | | | | |
| purchase plan | 11 | | | | 1 | | | | 293 | | | | -- | | | | -- | | | | 294 | |
| Acceleration of vesting of | | | | | | | | | | | | | | | | | | |
| stock options | -- | | | | -- | | | | 1,300 | | | | -- | | | | -- | | | | 1,300 | |
| Dividends ($0.24 per share) | -- | | | | -- | | | | -- | | | | ( 7,668 ) | | | | -- | | | | ( 7,668 | ) |
| Common stock | | | | | | | | | | | | | | | | | | |
| repurchased under stock | | | | | | | | | | | | | | | | | | |
| repurchase plan | ( 1,690 | ) | | | ( 17 | ) | | | ( 49,108 | ) | | | ( 3,135 ) | | | | -- | | | | ( 52,260 | ) |
| Cash paid for fractional | | | | | | | | | | | | | | | | | | |
| shares in 3-for-2 stock | | | | | | | | | | | | | | | | | | |
| split | ( 1 | ) | | | -- | | | | ( 44 | ) | | | -- | | | | -- | | | | ( 44 | ) |
| Income tax benefit from | | | | | | | | | | | | | | | | | | |
| stock options exercised | | -- | | | | | -- | | | | | 5,074 | | | | | -- | | | | | -- | | | | | 5,074 | |
| Balance at December 31, 2005 | | 31,361 | | | | $ | 314 | | | | $ | -- | | | | $ | 178,502 | | | | $ | -- | | | | $ | 178,816 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Forward Air Corporation
Consolidated Statements of Cash Flows
| | Year ended December 31 |
| | 2005 | | 2004 | | 2003 |
| | (In thousands) |
| Operating activities: | | | | | | | | | | | |
| Net income | $ | 44,909 | | | $ | 34,421 | | | $ | 25,815 | | |
| Adjustments to reconcile net income to net cash provided by | | | | | | | | | | | |
| operatingactivities: | | | | | | | | | | | |
| Depreciation and amortization | | 8,947 | | | 6,817 | | | | 7,263 | | |
| Non-cash charge for acceleration of vesting of stock options | | 1,300 | | | -- | | | | -- | | |
| Atlanta condemnation settlement gain | | ( 1,428 | ) | | -- | | | | -- | | |
| Other non-cash charge | | 274 | | | -- | | | | -- | | |
| Loss (gain) on sale of property and equipment | | ( 728 | ) | | -- | | | | 126 | | |
| Provision for (gains) losses on receivables | | ( 121 | ) | | 161 | | | | 120 | | |
| Provision for revenue adjustments | | 2,100 | | | 1,848 | | | | 1,618 | | |
| Deferred income taxes | | ( 48 | ) | | 1,511 | | | | ( 1,348 | ) | |
| Changes in operating assets and liabilities: | | | | | | | | | | | |
| Accounts receivable | | ( 7,438 | ) | | ( 8,886 | ) | | | ( 4,357 | ) | |
| Inventories | | ( 145 | ) | | (23 | ) | | | 4 | | |
| Prepaid expenses and other current assets | | ( 705 | ) | | ( 1,081 | ) | | | ( 642 | ) | |
| Accounts payable and accrued expenses | | 615 | | | 4,262 | | | | 1,325 | | |
| Income taxes | | ( 1,374 | ) | | ( 4,521 | ) | | | 2,188 | | |
| Tax benefit of stock options exercised | | 5,074 | | | 2,906 | | | | 630 | | |
| Net cash provided by operating activities | | 51,232 | | | 37,415 | | | | 32,742 | | |
| | |
| Investing activities: | | | | | | | | | | | |
| Purchases of property and equipment | | ( 22,077 | ) | | | ( 11,200 | ) | | | ( 2,874 | ) | |
| Proceeds from disposal of property and equipment | | 2,804 | | | 9 | | | | 189 | | |
| Proceeds from sales or maturities of available-for-sale securities | | 229,865 | | | 232,496 | | | | 170,875 | | |
| Purchases of available-for-sale securities | | ( 197,265 | ) | | | ( 273,916 | ) | | | ( 193,263 | ) | |
Proceeds from Atlanta condemnation settlement/release of
amounts held in escrow | | 2,765 | | | 1,260 | | | | -- | | |
| Acquisition of business | | ( 12,750 | ) | | -- | | | | -- | | |
| Other | | ( 242 | ) | | ( 94 | ) | | | 113 | | |
| Net cash provided by (used in) investing activities | | 3,100 | | | | ( 51,445 | ) | | | ( 24,960 | ) | |
| | |
| Financing activities: | | | | | | | | | | |
| Payments of long-term debt | | -- | | | -- | | | ( 443 | ) | |
| Borrowings under line of credit | | 1,504 | | | -- | | | -- | | |
| Payments of capital lease obligations | | ( 31 | ) | | ( 30 | ) | | | ( 26 | ) | |
| Proceeds from exercise of stock options | | 5,938 | | | 7,103 | | | 2,697 | | |
| Repurchase of common stock | | ( 54,071 | ) | | ( 9,577 | ) | | | -- | | |
| Cash paid for fractional shares in 3-for-2 stock split | | ( 44 | ) | | -- | | | -- | | |
| Dividends | | ( 7,668 | ) | | -- | | | -- | | |
Proceeds from common stock issued under employee stock
purchase plan | | 294 | | | 250 | | | 210 | | |
| Net cash (used in) provided by financing activities | | ( 54,078 | ) | | ( 2,254 | ) | | | 2,438 | | |
| Net increase (decrease) in cash | | 254 | | | | ( 16,284 | ) | | | 10,220 | | |
| Cash at beginning of year | | 78 | | | | 16,362 | | | 6,142 | | |
| Cash at end of year | $ | 332 | | | $ | 78 | | $ | 16,362 | | |
| Common stock repurchase liabilities included in accounts payable | $ | -- | | | $ | 1,811 | | $ | -- | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
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.
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 at or near airports in the United States and Canada. The Company’s customers primarily consist 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. These activities constitute a single business segment as defined by the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131,Disclosure about Segments of an Enterprise and Related Information.
Use of Estimates
The preparation of the consolidated 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas requiring management estimates include the following key financial areas:
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances in which management is aware of a specific customer’s inability to meet its financial obligations to the Company (for example, bankruptcy filings, accounts turned over for collection or litigation), the Company records a specific reserve for these bad debts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes reserves for these bad debts based on the length of time the receivables are past due. Specifically, amounts that are 90 days or more past due are reserved at 50.0%. If circumstances change (i.e., the Company experiences higher than expected defaults or an unexpected material adverse change in a customer’s ability to meet its financial obligations to the Company), the estimates of the recoverability of amounts due to the Company could be reduced by a material amount. Accounts are written off after all means of collection, including legal action, have been exhausted.
Allowance for Revenue Adjustments
The Company’s allowance for revenue adjustments consists of amounts reserved for billing rate changes that are not captured upon load initiation. These adjustments generally arise: (1) when the sales department contemporaneously grants small rate changes (“spot quotes”) to customers that differ from the standard rates in the system; (2) when freight requires dimensionalization or is reweighed resulting in a different required rate; (3) when billing errors occur; and (4) when data entry errors occur. When appropriate, permanent rate changes are initiated and reflected in the system. The Company monitors the manual revenue adjustments closely through the employment of various controls that are in place to ensure that revenue recognition is not compromised and that fraud does not occur. During 2005, average revenue adjustments per month were approximately $175,000, on average revenue per month of approximately $26.7 million (less than 0.7% of monthly revenue). In order to estimate the allowance for revenue adjustments related to ending accounts receivable, the Company prepares an analysis that considers average monthly revenue adjustments and the average lag for identifying and quantifying these revenue adjustments. Based on this analysis, the Company establishes an allowance for approximately 40-80 days (dependent upon experience in the last twelve months) of average revenue adjustments, adjusted for rebates and billing errors. The lag is periodically adjusted based on actual historical experience. Additionally, the average amount of revenue adjustments per month can vary in relation to the level of sales or based on other factors (such as personnel issues that could result in excessive manual errors or in excessive spot quotes being granted). Both of these significant assumptions are continually evaluated for validity.
F-9
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
1. Accounting Policies (Continued)
Self-Insurance Loss Reserves
Given the nature of the Company’s operating environment, the Company is subject to vehicle and general liability, workers’ compensation and health insurance claims. To mitigate a portion of these risks, the Company maintains insurance for individual vehicle and general liability claims exceeding $500,000 and workers’ compensation claims and health insurance claims exceeding $250,000, except in Ohio, where for workers’ compensation we are a qualified self-insured with a $350,000 self-insured retention. The amount of self-insurance loss reserves and loss adjustment expenses is determined based on an estimation process that uses information obtained from both company-specific and industry data, as well as general economic information. The estimation process for self-insurance loss exposure requires management to continuously monitor and evaluate the life cycle of claims. Using data obtained from this monitoring and the Company’s assumptions about the emerging trends, management develops information about the size of ultimate claims based on its historical experience and other available market information. The most significant assumptions used in the estimation process include determining the trend in loss costs, the expected consistency in the frequency and severity of claims incurred but not yet reported to prior year claims, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. Management also monitors the reasonableness of the judgments made in the prior year’s estimation process (referred to as a hindsight analysis) and adjusts current year assumptions based on the hindsight analysis. Additionally, beginning in 2003, the Company utilizes an actuary to evaluate open claims and estimate the ongoing development exposure.
Revenue Recognition
Operating revenue and related costs are recognized as of the date shipments are completed. No single customer accounted for more than 10.0% of operating revenue in 2005, 2004 or 2003.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents.
Available-For-Sale Securities
Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in other comprehensive income. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization is included in other income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in other income in the consolidated statements of income.
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. Inventories of tires and replacement parts are not material in the aggregate. Replacement parts are expensed when placed in service, while tires are capitalized and amortized over their expected life. Replacement parts and tires are included as a component of other operating expenses in the consolidated statements of income.
F-10
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
1. Accounting Policies (Continued)
Property and Equipment
Property and equipment are stated at cost. Expenditures for normal repair and maintenance are expensed as incurred. 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:
| Buildings | 30-40 years |
| Equipment | 3-10 years |
| Leasehold improvements | Lesser of Useful Life or Initial Lease Term |
Depreciation expense for each of the three years ended December 31, 2005, 2004 and 2003 was $8.2 million, $6.8 million and $6.8 million, respectively.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is recognized on assets classified as held and used when the sum of undiscounted estimated cash flows expected to result from the use of the asset is less than the carrying value. If such measurement indicates a possible impairment, the estimated fair value of the asset is compared to its net book value to measure the impairment charge, if any. When the criteria have been met for long-lived assets to be classified as held for sale, the assets are recorded at the lower of carrying value or fair market value (less selling costs).
Operating Leases
Certain operating leases include rent increases during the initial lease term. For these leases, the Company recognizes the related rental expenses on a straight-line basis over the term of the lease, which includes any rent holiday period, and records the difference between the amounts charged to operations and amount paid as rent as a rent liability.
Goodwill and Other Intangible Assets
Goodwill is recorded at cost based on the excess of purchase price over the fair value of assets acquired. Under the provisions of SFAS No. 142,Goodwill and Other Intangible Assets, goodwill and intangible assets with indefinite lives are not amortized but are subject to annual impairment tests in accordance with the statement. Other intangible assets are amortized over their useful lives. The Company completed the required impairment test of goodwill during each of the second quarters of 2005, 2004and 2003, and determined that goodwill had not been impaired. Any subsequent impairment losses will be reflected in income from operations in the consolidated statements of income.
The definite-lived intangible assets of the Company resulting from the acquisition of certain assets of U.S. Express Enterprises, Inc. (“USX”) and the related amortization are described in Note 2, Acquisition of Business.
Software Development
Costs related to software developed or acquired for internal use are expensed or capitalized and then amortized in accordance with the American Institute of Certified Public Accountants Statement Of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company uses a five-year straight line amortization for the capitalized amounts of software development costs.
Income Taxes
The Company accounts for income taxes using the liability method, whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled.
F-11
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
1. Accounting Policies (Continued)
Income Per Share
The Company calculates income per share in accordance with SFAS No. 128,Earnings Per Share. Under SFAS No. 128, basic income per share excludes any dilutive effects of options, warrants and convertible securities. Diluted income per share includes any dilutive effects of options, warrants and convertible securities, and uses the treasury stock method in calculating dilution. All income 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 declared in February 2005 (see Note 5).
Comprehensive Income
Comprehensive income includes any changes in the equity of the Company from transactions and other events and circumstances from non-operational sources. Unrealized gains and losses on available-for-sale securities are included in other comprehensive income for all years presented.
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 (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. The Company adopted the disclosure option of SFAS No. 123, Accounting for Stock-Based Compensation (as amended by SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure), which requires that the information be determined as if the Company accounted for its stock options granted subsequent to December 31, 1994 under the fair value method.
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):
| | 2005 | | 2004 | | 2003 |
| Net income, as reported | | $ | 44,909 | | | $ | 34,421 | | | $ | 25,815 | |
| Pro forma compensation expense, net of tax | | | (12,579 | ) | | | (2,658 | ) | | | (2,969 | ) |
| Pro forma net income | | $ | 32,330 | | | $ | 31,763 | | | $ | 22,846 | |
| Pro forma net income per share: | | | | | | | | | | | | |
| | Basic | | $ | 1.02 | | | $ | 0.98 | | | $ | 0.71 | |
| Diluted | | $ | 1.00 | | | $ | 0.96 | | | $ | 0.70 | |
On December 31, 2005, the Company accelerated the vesting of all outstanding stock options. This resulted in an approximately $8.7 million increase in the pro forma amount disclosed above. Had the Company not accelerated the vesting, the pro forma expense would have been approximately $3.8 million.
Recently Issued Accounting Pronouncements
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004),Share-Based Payment (“SFAS No. 123R”), which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123R supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an option.
F-12
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
1. Accounting Policies (Continued)
Originally, SFAS No. 123R was to be adopted no later than July 1, 2005, although early adoption was allowable. However, on April 14, 2005, the Securities and Exchange Commission (“SEC”) announced that the effective date of SFAS No. 123R would be suspended until January 1, 2006, for calendar year companies.
As permitted by SFAS No. 123, the Company, through December 31, 2005, accounted for share-based payments to employees using APB Opinion No. 25’s intrinsic value and, as such, generally recognized no compensation cost for employee stock options. However, effective December 31, 2005, the Company’s Board of Directors accelerated the vesting of all the Company’s outstanding and unvested stock options awarded to employees, officers and non-employee directors under the Company’s stock option award program. As a result of the vesting acceleration, the Company recorded $1.3 million of stock-based compensation expense in accordance with ABP Opinion No. 25, included in salaries, wages and employee benefits. The primary purpose of the accelerated vesting of these options was to eliminate future compensation expense that the Company would otherwise have recognized in its statement of operations with respect to these options upon the adoption of SFAS No. 123R. The Company adopted SFAS No. 123R effective January 1, 2006 and elected the modified-prospective transition method. Under the modified-prospective transition method, awards that are granted, modified, repurchased or canceled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123R. Stock-based awards that are granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123, except that stock option expense for unvested options must be recognized in the statement of operations. As a result of the Company’s acceleration of the vesting of its outstanding and unvested options effective December 31, 2005, there is no future compensation of options granted prior to January 1, 2006. The amount of compensation cost that would have been recognized in each period after the adoption of SFAS No. 123R that will not be recognized as a result of the vesting modification is as follows:
| Fiscal Year | | | | |
| 2006 | | | | $ | 3,252 | |
| 2007 | | | 2,907 | |
| 2008 | | | 2,289 | |
| 2009 | | | | | 281 | |
| Total | | | | $ | 8,729 | |
The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on, among other things, levels of share-based payments granted in the future, the market value of the Company’s common stock as well as assumptions regarding a number of complex variables. These variables include, but are not limited to, the Company’s stock price, volatility and employee stock option exercise behaviors and the related tax impact. However, had the Company adopted SFAS No. 123R in prior periods, the Company believes the impact of that standard would have approximated the impact of SFAS. No. 123 as described in the above “Employee Stock Options” disclosure of pro forma net income and earnings per share.
2. Acquisition of Business
On May 28, 2005, the Company acquired certain assets of the airport-to-airport operations of USX for $12.75 million in cash. In connection with the purchase, the Company acquired the airport-to-airport customer list of USX and USX agreed not to compete in the airport-to-airport market for a period of ten years. The purchase price allocation in accordance with SFAS No 141,Business Combinations, is acquired intangible assets with a total value of $12.75 million (majority of the allocation to the non-compete agreement). The acquired intangible assets will be amortized over a period of ten years. The Company began amortizing the assets on a straight-line basis during the last month of the second quarter and recorded amortization expense of approximately $744,000 for the year ended December 31, 2005. Ongoing annual amortization expense will be approximately $1.3 million for the next five years and throughout the life of the assets. The results of operations of the USX airport-to-airport operations are included in the consolidated income statement from May 28, 2005 through December 31, 2005.
F-13
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
2. Acquisition of Business (Continued)
The airport-to-airport business had been reported by USX as a part of the Xpress Global Systems (“XGS”) business segment. XGS had total revenue for the year ended December 31, 2004 of approximately $159.0 million, of which an estimated $57.0 million was attributable to the airport-to-airport operations. The XGS segment reported an operating loss of $5.0 million for the year ended December 31, 2004. USX did not account for the related expenses of the airport-to-airport operations separately within the XGS segment and, accordingly, the USX operating profit or loss attributable to the airport-to-airport operations is not known.
3. Investments
The Company had a total of $79.0 and $111.6 million in available-for-sale securities as of December 31, 2005 and 2004, respectively. The Company’s investments consist of state municipal bonds (often referred to as auction rate securities). The Company has the option to go to auction every 7-35 days with the auction rate securities, but the stated maturities of the investments are longer-term. The Company had interest income of $2.5 million, $1.1 million and $0.6 million for each of the years ended December 31, 2005, 2004 and 2003, respectively, on its investments.
Securities are classified as available for sale when the Company does not intend to hold the securities to maturity nor regularly trade the securities.
The following is a summary of available-for-sale securities at December 31, 2005 and 2004 (in thousands):
|
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | |
FairValue |
|
|
| December 31, 2005 | | | | | | | | | | | | | |
| Available-for-sale securities | $ | 78,999 | | | $1 | | $-- | | | $ | 79,000 | |
| | | | | | | | | | | | | |
| December 31, 2004 | | | | | | | | | | | | | |
| Available-for-sale securities | $ | 111,594 | | | $6 | | $-- | | | $ | 111,600 | |
The gross realized gains (losses) on sales of available-for-sale securities totaled $0 for each of the years ended December 31, 2005, 2004, and 2003, respectively. The net adjustments to unrealized holding gains (losses) on available-for-sale securities included in other comprehensive income totaled ($4,000), $3,000 and $10,000 in 2005, 2004, and 2003, respectively, Realized gains and losses are recorded based on the specific identification of securities sold.
The net carrying value and estimated fair value of debt securities at December 31, 2005 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the Company has the intent and ability to sell prior to stated maturity without penalty (via auction).
| Cost | | FairValue |
|
|
| Debt securities: | | | | | | | | | |
| | Contractual maturity within one year | | $ | 5,000 | | | | $ | 5,000 | |
| | Contractual maturity after one year through five years | | | 1,300 | | | | | 1,300 | |
| Contractual maturity after five years through ten years | | | 4,300 | | | | | 4,300 | |
| Contractual maturity after ten years | | | 68,399 | | | | | 68,400 | |
| Total debt securities with contractual maturities | | $ | 78,999 | | | | $ | 79,000 | |
F-14
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
4. Credit Facilities and Long-Term Debt
The Company has a $20.0 million unsecured working capital line of credit facility, which expires in April 2007, with a Tennessee bank. The Company, though, has the intent and ability to repay the line of credit facility during 2006 and has therefore classified it as a current liability. Interest rates for advances under the facility vary from LIBOR plus 1.0% to 1.9% based upon covenants related to total indebtedness and cash flows, (5.3% and 3.3% at December 31, 2005 and 2004, respectively). The agreement contains certain covenants and restrictions, none of which are expected to significantly affect our operations or ability to pay dividends. As of December 31, 2005, the Company had $1.5 million outstanding under the line of credit facility. At December 31, 2005, the Company had $14.2 million of available borrowing capacity outstanding under the line and had utilized $4.3 million of availability for outstanding letters of credit. As of December 31, 2004, the Company had no borrowings outstanding under the line of credit.
Interest payments during 2005, 2004 and 2003 were $104,000, $55,000 and $71,000, respectively, none of which were 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 $0.01. The terms and conditions of the preferred shares are to be determined by the Board of Directors. No shares have been issued to date.
Common Stock Split — On February 15, 2005, the Board of Directors declared a three-for-two stock split of the common stock to be effected in the form of a stock dividend to shareholders of record as of March 18, 2005. Common stock issued and additional paid-in capital have been restated to reflect the split for all years presented. All common share and per share data included in the consolidated financial statements and notes thereto have been restated to give effect to the stock split.
Cash Dividend —Prior to February 15, 2005, the Company had never declared a cash dividend. During each quarter of 2005, the Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock. On February 13, 2006, the Company’s Board of Directors declared a $0.07 per share dividend that will be paid in the first quarter of 2006. The Company expects to continue to pay regular quarterly cash dividends, though each subsequent quarterly dividend is subject to review and approval by the Board of Directors.
Repurchase of Common Stock — On July 25, 2002, the Company announced that its Board of Directors approved a stock repurchase program for up to 3.0 million shares of common stock (the “2002 Repurchase Plan”). During the third quarter of 2005, the Company completed the repurchase of the shares authorized under the 2002 Repurchase Plan. On November 17, 2005, the Company announced that its Board of Directors approved a stock repurchase program for up to 3.0 million shares of common stock (the “2005 Repurchase Plan”). For the year ended December 31, 2005, the Company repurchased approximately 1.7 million shares of common stock under both the 2002 Repurchase Plan and the 2005 Repurchase Plan for $52.3 million, or $30.92 per share.
Employee Stock Option and Incentive Plan — The Company follows APB 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 4.5 million shares of common stock under the 1992 Amended and Restated Stock Option and Incentive Plan (the “1992 Plan”). As of February 2004, the Company had reserved 4.5 million common shares under the 1999 Stock Option and Incentive Plan, resulting in a total of 9.0 million shares being reserved under the Plans. Options issued under the Plans have eight to ten-year terms and vest over a one to five year period. As of November 12, 2002, no additional options may be granted under the 1992 Plan resulting in the cancellation of 57,000 options available for grant under the 1992 Plan.
Pro forma information regarding net income and income 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 SFAS No. 123. The fair value
F-15
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
5. Shareholders’ Equity and Stock Options (Continued)
for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2005, 2004 and 2003, respectively: risk-free interest rates of 4.0%, 3.7% and 3.7%; dividend yields of 0.8%, 0.0% and 0.0%; volatility factors of the expected market price of the common stock of 0.4, 0.4 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. Refer to Note 1 for the pro forma disclosures under SFAS No. 123 (as amended by SFAS No. 148).
The following table summarizes the Company’s employee stock option activity and related information for the years ended December 31, 2005, 2004 and 2003:
| | 2005 | | 2004 | | 2003 |
| | | Options
(000) | | Weighted-
Average
Exercise
Price | | Options
(000) | | Weighted-
Average
Exercise
Price | | Options
(000) | | Weighted-
Average
Exercise
Price |
|
|
|
| Outstanding at beginning of year | | | 1,443 | | | | $ | 15 | | | 1,476 | | | $ | 15 | | | 1,595 | | | | $ | 13 | |
| Granted/converted | | | 985 | | | | | 29 | | | 326 | | | | 19 | | | 337 | | | | | 14 | |
| Exercised | | | (443 | ) | | | | 9 | | | (333 | ) | | | 17 | | | (402 | ) | | | | 7 | |
| Forfeited | | | (28 | ) | | | | 22 | | | (26 | ) | | | 19 | | | (54 | ) | | | | 18 | |
| Outstanding at end of year | | | 1,957 | | | | $ | 23 | | | 1,443 | | | $ | 15 | | | 1,476 | | | | $ | 15 | |
| Exercisable at end of year | | | 1,957 | | | | $ | 23 | | | 783 | | | $ | 12 | | | 753 | | | | $ | 12 | |
| Options available for grant | | | 1,315 | | | | | | | | 2,273 | | | | | | | 323 | | | | | | |
| Weighted-average fair value of | | | | | | | | | | | | | | | | | | | | | | | | |
| | options granted during the year | | $ | 12.79 | | | | | | | | $ 9.49 | | | | | | | $ 8.07 | | | | | |
The following table summarizes information about stock options outstanding as of December 31, 2005:
Range of
Exercise Price | |
Number
Outstanding
(000) | | Weighted-
Average
Remaining
Contractual
Life | | Weighted-
Average
Exercise Price | |
Number
Exercisable
(000) | |
Weighted-
Average
Exercise Price |
|
|
|
|
| | $ | 2.55 | – | 4.95 | | | 75 | | | 3.0 years | | $ | 4.33 | | | 75 | | | $ | 4.33 | |
| | 4.96 | – | 17.79 | | | 338 | | | 6.6 years | | | 14.22 | | | 338 | | | | 14.22 | |
| | | 17.80 | – | 36.84 | | | 1,544 | | | 8.3 years | | | 25.99 | | | 1,544 | | | | 25.99 | |
| | $ | 2.55 | – | 36.84 | | | 1,957 | | | 7.8 years | | $ | 23.13 | | | 1,957 | | | $ | 23.13 | |
F-16
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
5. Shareholders’ Equity and Stock Options (Continued)
Non-Employee Director Options — In May 2005, 2004 and 2003, options to purchase 30,000, 56,250 and 33,750 shares of common stock, respectively, were granted to the non-employee directors of the Company at option prices of $25.87, $20.20 and $15.57 per share, respectively.
The options have terms of ten years and are fully exercisable. At December 31, 2005, 114,375 options were outstanding and will expire in July 2010 through May 2015, 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 May 26, 2005 (the “ESPP”) at which time participating employees became entitled to purchase common stock through payroll deduction of up to 10.0% of the employee’s annual compensation. Under the ESPP, each eligible employee may purchase up to 2,000 shares of common stock at semi-annual intervals each year at an issue price equal to the lesser of (1) 90.0% of market price on the first trading day of the semi-annual option period or (2) 90.0% of market price on the last trading day of the semi-annual option period. The Company has reserved 500,000 shares of common stock for issuance pursuant to the ESPP. At December 31, 2005, 11,496 shares had been issued under the ESPP.
Income Per Share — The following table sets forth the computation of basic and diluted income per share (in thousands, except per share data):
| | 2005 | | 2004 | | 2003 |
| Numerator: | | | | | | |
| | Numerator for basic and diluted income per share – net | | | | |
| | income | | $ | 44,909 | | | | $ | 34,421 | | | $ | 25,815 | |
| | |
| Denominator: | | | | | | | | | | |
| Denominator for basic income per share –weighted- | | | | | | | | | | |
| | average shares | | 31,847 | | | | 32,310 | | | | 31,991 | |
| Effect of dilutive stock options | | 572 | | | | 630 | | | 570 | |
| Denominator for diluted income per share – adjusted | | | | | | | | | | |
| | weighted-average shares | | 32,419 | | | | 32,940 | | | 32,561 | |
| Basic income per share | | $ | 1.41 | | | | $ | 1.07 | | | $ | 0.81 | |
| Diluted income per share | | $ | 1.39 | | | | $ | 1.05 | | | $ | 0.79 | |
The number of options that could potentially dilute basic income per share in the future, but that were not included in the computation of diluted income per share because to do so would have been anti-dilutive for the periods presented, were approximately 3,000, 30,000 and 636,000 in 2005, 2004 and 2003, respectively.
F-17
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
6. Income Taxes
The provision for income taxes consists of the following:
| 2005 | | | 2004 | | 2003 | |
| | | (In thousands) | |
| Current: | | | | | | | | | | | | | |
| | Federal | | $ | 22,706 | | | | $ | 16,598 | | | $ | 14,333 | |
| State | | | 3,670 | | | | | 2,140 | | | | 1,911 | |
| | | | 26,376 | | | | | 18,738 | | | | 16,244 | |
| Deferred: | | | | | | | | | | | | | |
| Federal | | | (50 | ) | | | | 1,224 | | | | (1,253 | ) |
| State | | | 2 | | | | | 287 | | | | (95 | ) |
| | | | (48 | ) | | | | 1,511 | | | | (1,348 | ) |
| | | $ | 26,328 | | | | $ | 20,249 | | | $ | 14,896 | |
The tax benefits associated with the exercise of stock options during the years ended December 31, 2005, 2004 and 2003 were $5.1 million, $2.9 million and $0.6 million, respectively, and are reflected as an increase in additional paid-in capital in the accompanying consolidated statements of shareholders’ equity.
In addition to the provision for income taxes included in the accompanying consolidated statements of income, a deferred tax provision (benefit) of approximately ($2,000), $2,000 and $6,000 is included in other comprehensive income for the years ended December 31, 2005, 2004 and 2003, respectively.
The historical income tax expense differs from the amounts computed by applying the federal statutory rate of 35.0% to income before income taxes as follows:
| | 2005 | | 2004 | | 2003 | |
| | | (In thousands) |
| Tax expense at the statutory rate | | $ | 24,933 | | $ | 19,134 | | $ | 14,249 | |
| State income taxes, net of federal benefit | | | 2,386 | | | 1,578 | | | 1,180 | |
| Meals and entertainment | | | 207 | | | 195 | | | 156 | |
| Penalties | | | 9 | | | 5 | | | 10 | |
| Tax-exempt interest income | | | (872 | ) | | (419 | ) | | (231 | ) |
| Other | | | (335 | ) | | (244 | ) | | (468 | ) |
| | | $ | 26,328 | | $ | 20,249 | | $ | 14,896 | |
F-18
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
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:
| | | December 31 | |
| | | 2005 | | | | 2004 | |
| | | (In thousands) | |
| Deferred tax assets: | | | | | | | |
| Accrued expenses | | $ | 2,032 | | | | $ | 1,859 | |
| Allowance for doubtful accounts | | 353 | | | | 406 | |
| Non-compete agreements | | 95 | | | | -- | |
| Acceleration of option vesting | | 476 | | | | -- | |
| Net operating loss carryforwards | | 530 | | | | 480 | |
| Total deferred tax assets | | 3,486 | | | | 2,745 | |
| Valuation allowance | | (408 | ) | | | (480 | ) |
| Total deferred tax assets, net of valuation allowance | | 3,078 | | | | 2,265 | |
| |
| Deferred tax liabilities: | | | | | | | |
| Tax over book depreciation | | 6,054 | | | | 5,290 | |
| Research and development expenses | | 180 | | | | 766 | |
| Prepaid expenses deductible when paid | | 948 | | | | 833 | |
| Other | | 1,441 | | | | 969 | |
| Total deferred tax liabilities | | 8,623 | | | | 7,858 | |
| Net deferred tax liabilities | | $ | (5,545 | ) | | | $ | (5,593 | ) |
The balance sheet classification of deferred income taxes is as follows:
| | December 31 |
| | | 2005 | | | | 2004 | |
| | (In thousands) | |
| Current assets | | $ | 1,438 | | | | $ | 1,433 | |
| Noncurrent liabilities | | | ( 6,983 | ) | | | | ( 7,026 | ) |
| | | $ | ( 5,545 | ) | | | $ | ( 5,593 | ) |
Total income tax payments, net of refunds, during fiscal years 2005, 2004 and 2003 were $22.5 million, $20.4 million and $13.7 million, respectively.
At December 31, 2005 and 2004, the Company had state net operating loss carryforwards of $12.1 million and $8.0 million, respectively, that will expire between 2013 and 2024. The use of these state net operating losses is limited to the future taxable income of separate legal entities. As a result, the valuation allowance has been provided for certain state loss carryforwards. The change in the valuation allowance was a decrease of $0.1 million during 2005. Based on expectations of future taxable income, management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the deferred tax assets after giving consideration to the valuation allowance.
F-19
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
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, Ohio hub facility. At the inception of the lease, the Company made a $2.0 million loan 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 $0.9 million (at December 31, 2005) is included in capital lease obligations in the accompanying consolidated balance sheet. Because the lease met the criteria for classification as a capital lease, 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.
SFAS No. 13,Accounting for Leases, requires that a lease meet one or more of four specified criteria in order to be classified as a capital lease. With respect to the Rickenbacker lease, it was classified as a capital lease since the present value of the minimum lease payments, including the initial $2.0 million payment, exceeded 90.0% of the fair value of the property at lease inception.
Property and equipment include the following amounts for assets under capital leases:
| | December 31 |
| | 2005 | | 2004 |
| | (In thousands) |
| Buildings | $ | 3,015 | | $ | 3,015 |
| Less accumulated amortization | | 888 | | | 711 |
| | $ | 2,127 | | $ | 2,304 |
Amortization of assets under capital leases is included in depreciation and amortization expense.
The Company leases certain facilities under noncancellable operating leases that expire in various years through 2011. Certain of these leases may be renewed for periods varying from one to ten years.
Sublease rental income, including amounts from related parties (see Note 8), was $447,000, $323,000 and $457,000 in 2005, 2004 and 2003, respectively, and was included in operating revenue in the accompanying consolidated statements of income. The Company expects to receive aggregate future minimum rental payments under noncancellable subleases of approximately $364,000.
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, 2005:
| | Capital
Leases | | Operating
Leases |
| | (In thousands) | |
| Fiscal Year | | | | |
| 2006 | $ | 89 | | | $ | 11,858 | |
| 2007 | | 89 | | | 9,652 | |
| 2008 | | 89 | | | 6,547 | |
| 2009 | | 89 | | | 3,568 | |
| 2010 | | 89 | | | 1,699 | |
| Thereafter | | 861 | | | 182 | |
| Total minimum lease payments | $ | 1,306 | | | $ | 33,506 | |
| Amounts representing interest | | 431 | | | | |
| Present value of net minimum lease payments | | | | | | |
| (including current portion of $38) | $ | 875 | | | | |
F-20
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
8. Transactions With Related Parties
Transactions with Landair Transport, Inc.
Scott M. Niswonger, the Chairman of the Board of the Company until May 26, 2005, owns a majority interest in the parent company of Landair Transport, Inc. (“Landair”). The Company purchases truckload transportation services from Landair. Matthew J. Jewell, Senior Vice President and General Counsel, also served in these same capacities with Landair until May 2004.
During 2004 and 2003, the Company provided various operational and administrative services to Landair. The Company charged Landair $0.2 million and $0.2 million, respectively, during the years ended December 31, 2004 and 2003 for these services. These amounts have been included as a reduction of salaries, wages and employee benefits in the accompanying consolidated statements of income. Landair provided various operational and administrative services to the Company and charged it approximately $93,000 and $58,000, respectively, during the years ended December 31, 2004 and 2003 for these services. These charges have been included in salaries, wages and employee benefits in the accompanying consolidated statements of income. No operational and administrative services were provided during 2005.
The Company purchased approximately $0.2 million and $0.9 million of truckload transportation services from Landair in 2004 and 2003, respectively, which are included in purchased transportation in the accompanying consolidated statements of income. No truckload transportation services were purchased during 2005.
Until September 2005, the Company had a sublease with Landair pursuant to which the Company sublet to Landair a portion of the headquarters of the Company in Greeneville, Tennessee that is leased from the Greeneville-Greene County Airport Authority. The Company sublet the facility to Landair for consideration based upon the cost of such facility to the Company and an agreed-upon percentage of usage. Sublease rental income charged to Landair in 2005, 2004 and 2003 was approximately $17,000, $25,000 and $28,000, respectively. These amounts are included in sublease rental income disclosed in Note 7.
Transactions With Sky Night, LLC
The Company purchases air transportation services from Sky Night, LLC (“Sky Night”), a limited liability corporation owned by Scott M. Niswonger, the former Chairman of the Board. The air charter expense totaled approximately $105,000, $86,000 and $196,000 in 2005, 2004 and 2003, respectively, and is included in other operating expenses in the accompanying consolidated statements of income.
During 2001, the Company entered into an agreement to sublease hangar space at its Greeneville, Tennessee headquarters to Sky Night. The initial term of the sublease was for 12 months and the monthly rental rate was determined based on market prices for similar spaces in the area. The sublease term has been extended through July 25, 2006. Sublease rental income charged to Sky Night in 2005, 2004 and 2003 was approximately $35,000, $35,000 and $35,000, respectively.
9. Commitments and Contingencies
The primary claims in the Company’s business are workers’ compensation, property damage, vehicle 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.
F-21
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
9. Commitments and Contingencies (Continued)
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.
Atlanta Terminal Condemnation
During the fourth quarter of 2002, the City of Atlanta filed a Petition for Condemnation and Declaration of Taking for a terminal facility owned by Transportation Properties, Inc. and leased by Forward Air, Inc., two of the Company’s wholly owned subsidiaries. The condemnation was filed in connection with the fifth runway airport expansion project at Atlanta Hartsfield-Jackson International Airport. According to the 2002 condemnation petition, the City of Atlanta took ownership of the property and building and deposited $2.6 million into the Registry of the Superior Court of Clayton County, Georgia (the “Court”) as compensation to Transportation Properties, Inc. The Company filed a protest to the City of Atlanta’s evaluation of the property and building and also challenged the method of condemnation it utilized. Prior to December 2003, the City of Atlanta destroyed the condemned building in conjunction with the runway expansion project. On or about December 30, 2003, the Court ruled that the City of Atlanta’s method of condemnation was improper and returned ownership of the land to the Company.
During January 2004, the City of Atlanta filed a second condemnation petition to obtain title to the land. In connection with this second petition, the City of Atlanta deposited an additional $1.3 million into the Registry of the Court, which was the City of Atlanta’s estimated fair market value of the land. The City of Atlanta petitioned the Court and was granted the right to withdraw the original $2.6 million escrow balance it paid into the Court as part of the first petition for condemnation. The Company and its outside counsel believed that the December 30, 2003 ruling by the Court and the City of Atlanta’s actions subsequent to the first condemnation gave rise to additional theories of recovery. The Company challenged the method of condemnation set forth in the second petition and the withdrawal of the original $2.6 million escrow balance. Additionally, the Company had claims for damages arising from the City of Atlanta’s destruction of the Company’s building during the wrongful possession of the property by the City of Atlanta. As of December 31, 2004, the Company had received the $1.3 million escrow into cash and had a $1.3 million receivable for the difference in the original $2.6 million escrow and actual $1.3 million in escrow received.
In the second quarter of 2005, an agreement was reached with the City of Atlanta to settle the dispute. In the settlement, the City of Atlanta paid the Company approximately $2.7 million, which represents payment of the receivable of $1.3 million along with additional pre-tax gain of approximately $1.4 million, included in other income, net. The cash received is net of attorney’s fees.
Contractual Obligations and Commercial Commitments
At December 31, 2005, the Company had no outstanding purchase commitments.
F-22
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
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 90 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 2.0% to 80.0% of their annual compensation. Employer contributions were made at 25.0% during 2005, 2004 and 2003 of the employee’s contribution up to a maximum of 6.0% for all periods presented of total annual compensation except where government limitations prohibit.
Employer contributions vest 20.0% after two years of service and continue vesting 20.0% per year until fully vested. The Company’s matching contributions included in operations for 2005, 2004 and 2003 were approximately $256,000, $203,000 and $158,000, respectively.
11. Financial Instruments
Off Balance Sheet Risk
At December 31, 2005, the Company had letters of credit outstanding totaling $4.3 million as required by its workers’ compensation and vehicle liability insurance providers.
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:
Investments: The carrying amount for investments in available-for-sale securities was reported in the consolidated balance sheet at fair market 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 fair value of the Company’s 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, and does not differ materially from the carrying amount.
F-23
FORWARD AIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2005
12. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2005 and 2004:
| | 2005 |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | (In thousands, except per share data) |
| Operating revenue | $ | 69,533 | | | $ | 77,488 | | | $ | 84,841 | | | $ | 89,072 | |
| Income from operations | | 13,381 | | | | 16,791 | | | | 18,669 | | | | 18,595 | |
| Net income | | 8,693 | | | | 11,954 | | | | 12,065 | | | | 12,197 | |
| |
| Net income per share: | |
| Basic | $ | 0.27 | | | $ | 0.37 | | | $ | 0.38 | | | $ | 0.39 | |
| Diluted | $ | 0.27 | | | $ | 0.37 | | | $ | 0.38 | | | $ | 0.38 | |
| |
| | 2004 |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | (In thousands, except per share data) |
| Operating revenue | $ | 64,303 | | | $ | 68,410 | | | $ | 71,905 | | | $ | 77,579 | |
| Income from operations | | 10,735 | | | | 13,404 | | | | 13,807 | | | | 15,652 | |
| Net income | | 6,808 | | | | 8,508 | | | | 9,012 | | | | 10,093 | |
| |
| Net income per share: | | | | | | | |
| Basic | $ | 0.21 | | | $ | 0.27 | | | $ | 0.28 | | | $ | 0.31 | |
| Diluted | $ | 0.21 | | | $ | 0.26 | | | $ | 0.27 | | | $ | 0.31 | |
F-24
Forward Air Corporation
Schedule II — Valuation and Qualifying Accounts
| Col. A | Col. B | | Col. C | | Col. D | | Col. E | |
| | | Additions | | | | | | |
| Description | Balance at
Beginning
of Period | | (1)
Charged to Costs and Expenses | | (2)
Charged
to Other Accounts- Describe | | | Deductions-Describe | | Balance
atEnd of Period | |
| | (In thousands) |
| Year ended December 31, 2005: | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 826 | | $ | (121 | ) | $ | -- | | $ | 68(2) | | $ | 637 | |
| Allowance for revenue adjustments(1) | | 246 | | | 2,100 | | | -- | | | 2,061(3) | | | 285 | |
| | | 1,072 | | | 1,979 | | | -- | | | 2,129 | | | 922 | |
| Year ended December 31, 2004: | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 943 | | $ | 161 | | $ | -- | | $ | 278(2) | | $ | 826 | |
| Allowance for revenue adjustments(2) | | 320 | | | 1,848 | | | -- | | | 1,922(3) | | | 246 | |
| | | 1,263 | | | 2,009 | | | -- | | | 2,200 | | | 1,072 | |
| Year ended December 31, 2003: | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 898 | | $ | 120 | | $ | -- | | $ | 75(3) | | $ | 943 | |
| Allowance for revenue adjustments(1) | | 398 | | | 1,618 | | | -- | | | 1,696(3) | | | 320 | |
| | | 1,296 | | | 1,738 | | | -- | | | 1,771 | | | 1,263 | |
_______________________
| (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
| No. | | Exhibit |
| 3.1 | | Restated Charter of the registrant (incorporated herein by reference to Exhibit 3 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 28, 1999 (File No. 0-22490))
|
| | |
| 3.2 | | Amended and Restated Bylaws of the registrant (incorporated herein by reference to Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, filed with the Securities and Exchange Commission on November 2, 2004 (File No. 0-22490))
|
| |
| 4.1 | | Form of Landair Services, Inc. Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on September 27, 1993 (File No. 0-22490))
|
| | |
| 4.2 | | Form of Forward Air Corporation Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, filed with the Securities and Exchange Commission on November 16, 1998 (File No. 0-22490))
|
| | |
| 4.3 | | Rights Agreement, dated May 18, 1999, between the registrant and SunTrust Bank, Atlanta, N.A., including the Form of Rights Certificate (Exhibit A) and the Form of Summary of Rights (Exhibit B) (incorporated herein by reference to Exhibit 4 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 28, 1999 (File No. 0-22490))
|
| |
| |
| 10.1* | | Forward Air Corporation 2005 Employee Stock Purchase Plan (incorporated herein by reference to theregistrant’s Proxy Statement filed with the Securities and Exchange Commission on April 20, 2005 (File No. 0-22490))
|
| | |
| 10.2* | | Registrant’s Amended and Restated Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 1995, filed with the Securities and Exchange Commission on August 14, 1995 (File No. 0-22490))
|
| | |
| 10.3 | | Lease Agreement, dated July 27, 1981, between the Greeneville-Greene County Airport Authority and General Aviation of Tennessee, Inc., as assumed by the registrant by agreement, dated May 10, 1988 (incorporated herein by reference to Exhibit 10.18 to the registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on September 27, 1993 (File No. 0-22490)
|
| |
| |
| 10.4 | | Assignment, Assumption and Release Agreement, dated May 10, 1988, between Greeneville-Greene County Airport, General Aviation, Inc., and the registrant (incorporated herein by reference to Exhibit 10.19 to the registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on September 27, 1993 (File No. 0-22490))
|
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| 10.5 | | Air Carrier Certificate, effective August 28, 2003 (incorporated herein by reference to Exhibit 10.5 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on March 11, 2004 (File No. 0-22490))
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| 10.6* | | Registrant’s Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 1995, filed with the Securities and Exchange Commission on August 14, 1995 (File No. 0-22490))
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| 10.7* | | Amendment to the Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.7 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on March 11, 2004 (File No. 0-22490))
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| 10.8 | | Amended and Restated Loan and Security Agreement, dated as of September 10, 1998, between First Tennessee Bank National Association and the registrant (incorporated herein by reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 1998, filed with the Securities and Exchange Commission on November 16, 1998 (File No. 0-22490))
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10.9
| | Modification Agreement (to Amended and Restated Loan and Security Agreement), dated as of June 18, 2002, among the registrant, First Tennessee Bank National Association, FAF, Inc., Forward Air, Inc. and Transportation Properties, Inc. (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Securities and Exchange Commission on August 14, 2002 (File No. 0-22490)) |
| 10.10 | | Letter Agreement, dated May 17, 2005, between the registrant and First Tennessee Bank National Association extending the maturity date of the registrant’s $20.0 million Master Secured Promissory Note under the Amended and Restated Loan and Security Agreement, dated as of September 10, 1998, as modified by Modification Agreement, dated as of June 18, 2002 (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2005, filed with the Securities and Exchange Commission on August 9, 2005 (File No. 0-22490))
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| 10.11* | | Employment Agreement dated January 24, 2006, between Forward Air Corporation and Bruce A. Campbell, including Exhibit A, Restrictive Covenants Agreement entered into contemporaneously with and as part of the Employment Agreement (incorporated herein by reference to Exhibit 99.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2006 (File No. 0-22490))
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| 10.12* | | Form of Incentive Stock Option Agreement under the registrant’s Amended and Restated Stock Option and Incentive Plan, as amended, and 1999 Stock Option and Incentive Plan, as amended, for grants prior to February 12, 2006
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| 10.13* | | Form of Non-Qualified Stock Option Agreement under the registrant’s Non-Employee Director Stock Option Plan, as amended, for grants prior to February 12, 2006
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| 10.14* | | 1999 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 1999, filed with the Securities and Exchange Commission on May 17, 1999 (File No. 0-22490))
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| 10.15* | | Amendment to the 1999 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on March 11, 2004 (File No. 0-22490))
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10.16*
| | Non-Qualified Stock Option Agreement dated August 21, 2000 between the registrant and Ray A. Mundy (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2000, filed with the Securities and Exchange Commission on November 6, 2000 (File No. 0-22490))
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10.17
| | Forward Air Corporation Section 125 Plan (incorporated herein by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the Securities and Exchange Commission on March 15, 2002 (File No. 0-22490))
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| 10.18* | | Form of Option Restriction Agreement between the registrant and each executive officer regarding certain restrictions on transferability of accelerated stock options granted under the registrant’s 1999 Stock Option and Incentive Plan, as amended
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| 10.19* | | Form of Restricted Stock Agreement for an award of restricted stock under the registrant’s 1999 Stock Option and Incentive Plan, as amended, granted on or after February 12, 2006
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| 14.1 | | Code of Ethics (incorporated herein by reference to Exhibit 14.1 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on March 11, 2004 (File No. 0-22490))
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| 21.1 | | Subsidiaries of the registrant (incorporated herein by reference to Exhibit 21.1 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed with the Securities and Exchange Commission on April 2, 2001 (File No. 0-22490))
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| 23.1 | | Consent of Ernst & Young LLP
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| 31.1 | | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) (17 CFR 240.13a-14(a))
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| 31.2 | | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) (17 CFR 240.13a-14(a))
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| 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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| 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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* Management contract or compensatory plan or arrangement.
