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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
Commission File No. 000-22490

FORWARD AIR CORPORATION
(Exact name of registrant as specified in its charter)

     
Tennessee   62-1120025
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
 
430 Airport Road
Greeneville, Tennessee

(Address of principal executive offices)
  37745
(Zip Code)

Registrant’s telephone number, including area code: (423) 636-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]  NO [  ]

The number of shares outstanding of the registrant’s common stock, $.01 par value, as of July 31, 2002 was 21,796,782.

 


TABLE OF CONTENTS

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5.Other Information
Item 6.Exhibits and Reports on Form 8-K
Signatures
EXHIBIT INDEX
Modification Agreement


Table of Contents

Table of Contents

Forward Air Corporation

                 
            Page
            Number
Part I
  Financial Information        
 
Item 1
  Financial Statements (Unaudited)        
 
   
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001
    3  
 
   
Condensed Consolidated Statements of Income - Three and six months ended June 30, 2002 and 2001
    4  
 
   
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001
    5  
 
   
Notes to Condensed Consolidated Financial Statements - June 30, 2002
    6  
 
Item 2  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    10  
 
Item 3  
Quantitative and Qualitative Disclosure of Market Risk
    15  
 
Part II
  Other Information        
 
Item 1
  Legal Proceedings     16  
 
Item 2
  Changes in Securities and Use of Proceeds     16  
 
Item 3
  Defaults Upon Senior Securities     16  
 
Item 4
  Submission of Matters to a Vote of Security Holders     16  
 
Item 5
  Other Information     16  
 
Item 6
  Exhibits and Reports on Form 8-K     17  
 
Signatures
            18  

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Part I.  Financial Information

Item 1. Financial Statements (Unaudited)

Forward Air Corporation
Condensed Consolidated Balance Sheets

                     
        June 30, 2002   December 31, 2001
       
 
        (Unaudited)   (Note 1)
       
 
        (In thousands, except share data)
Assets
               
Current assets:
               
 
Cash and cash equivalents
  $ 28,108     $ 19,364  
 
Short-term investments
    24,968       9,222  
 
Accounts receivable, less allowance of $1,075 in 2002 and $1,067 in 2001
    28,577       28,764  
 
Other current assets
    5,791       5,054  
 
   
     
 
Total current assets
    87,444       62,404  
Property and equipment
    70,409       68,040  
Less accumulated depreciation and amortization
    28,759       25,345  
 
 
   
     
 
 
    41,650       42,695  
Long-term investments
          14,385  
Other assets
    17,229       17,475  
 
 
   
     
 
Total assets
  $ 146,323     $ 136,959  
 
 
   
     
 
Liabilities and Shareholders’ Equity
               
Current liabilities:
               
 
Accounts payable
  $ 5,280     $ 5,086  
 
Accrued expenses
    8,949       12,308  
 
Current portion of long-term debt
    468       452  
 
Current portion of capital lease obligations
    480       464  
 
 
   
     
 
Total current liabilities
    15,177       18,310  
Long-term debt, less current portion
    205       443  
Capital lease obligations, less current portion
    3,775       4,008  
Deferred income taxes
    8,559       7,613  
Shareholders’ equity:
               
 
Preferred stock
           
 
Common stock, $0.01 par value:
               
   
Authorized shares - 50,000,000
   
Issued and outstanding shares - 21,796,782 in 2002 and 21,637,968 in 2001
    218       216  
 
Additional paid-in capital
    45,563       43,796  
 
Accumulated other comprehensive income
    36       29  
 
Retained earnings
    72,790       62,544  
 
 
   
     
 
Total shareholders’ equity
    118,607       106,585  
 
 
   
     
 
Total liabilities and shareholders’ equity
  $ 146,323     $ 136,959  
 
 
   
     
 

The accompanying notes are an integral part of the financial statements.

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Forward Air Corporation

Condensed Consolidated Statements of Income
(Unaudited)

                                   
      Three months ended   Six months ended
     
 
      June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001
     
 
 
 
      (In thousands, except per share data)
Operating revenue
  $ 56,355     $ 56,965     $ 109,252     $ 117,688  
Operating expenses:
                               
 
Purchased transportation
    24,418       24,147       46,783       50,177  
 
Salaries, wages and employee benefits
    12,226       12,468       24,181       26,637  
 
Operating leases
    2,977       2,939       5,989       5,571  
 
Depreciation and amortization
    1,881       2,197       3,766       3,997  
 
Insurance and claims
    1,445       1,785       2,790       3,052  
 
Other operating expenses
    4,916       5,373       9,461       10,404  
 
   
     
     
     
 
 
    47,863       48,909       92,970       99,838  
 
   
     
     
     
 
Income from operations
    8,492       8,056       16,282       17,850  
Other income (expense):
                               
 
Interest expense
    (94 )     (120 )     (196 )     (117 )
 
Other, net
    229       190       439       381  
 
   
     
     
     
 
 
    135       70       243       264  
 
   
     
     
     
 
Income before income taxes
    8,627       8,126       16,525       18,114  
Income taxes
    3,278       3,108       6,280       6,934  
 
   
     
     
     
 
Net income
  $ 5,349     $ 5,018     $ 10,245     $ 11,180  
 
   
     
     
     
 
Income per share:
                               
 
Basic
  $ 0.25     $ 0.23     $ 0.47     $ 0.52  
 
   
     
     
     
 
 
Diluted
  $ 0.24     $ 0.23     $ 0.46     $ 0.50  
 
   
     
     
     
 

The accompanying notes are an integral part of the financial statements.

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Forward Air Corporation

Condensed Consolidated Statements of Cash Flows
(Unaudited)

                     
        Six months ended
       
        June 30, 2002   June 30, 2001
       
 
        (In thousands)
Operating activities:
               
Net income
  $ 10,245     $ 11,180  
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
Depreciation and amortization
    3,766       3,997  
 
(Gain) loss on sale of property and equipment
    45       (35 )
 
Deferred income taxes
    946       1,040  
 
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
               
   
Accounts receivable
    189       5,403  
   
Inventories
    (19 )     (25 )
   
Prepaid expenses and other assets
    (718 )     (710 )
   
Accounts payable and accrued expenses
    (1,582 )     (4,052 )
   
Income taxes
    (799 )     1,889  
 
   
     
 
Net cash provided by operating activities
    12,073       18,687  
Investing activities:
               
Proceeds from disposal of property and equipment
    41       328  
Purchases of property and equipment
    (2,585 )     (3,179 )
Acquisition of business
          (2,833 )
Proceeds from sales or maturities of available-for-sale securities
    1,454        
Purchases of available-for-sale securities
    (2,806 )      
Other
    24       (200 )
 
   
     
 
Net cash used in investing activities
    (3,872 )     (5,884 )
Financing activities:
               
Payments of long-term debt
    (222 )     (2,170 )
Payments of capital lease obligations
    (217 )     (184 )
Proceeds from exercise of stock options
    924       1,618  
Common stock issued under employee stock purchase plan
    58       71  
 
   
     
 
Net cash provided by (used in) financing activities
    543       (665 )
 
   
     
 
Net increase in cash and cash equivalents
    8,744       12,138  
Cash and cash equivalents at beginning of period
    19,364       15,589  
 
   
     
 
Cash and cash equivalents at end of period
  $ 28,108     $ 27,727  
 
   
     
 

The accompanying notes are an integral part of the financial statements.

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Forward Air Corporation

Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2002

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Forward Air Corporation Annual Report on Form 10-K for the year ended December 31, 2001.

The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date, but does not include all of the financial information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

2.  Comprehensive Income

Comprehensive income includes any changes in the equity of the Company from transactions and other events and circumstances from non-owner sources. Comprehensive income for the quarter ended June 30, 2002 was $5.4 million which includes $36,000 in unrealized gains on available-for-sale securities. The Company had no items of other comprehensive income in the second quarter of 2001 and, accordingly, comprehensive income is equivalent to income in that quarter.

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Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

3.  Net Income Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

                                   
      Three months ended   Six months ended
     
 
      June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001
     
 
 
 
Numerator:
                               
 
Numerator for basic and diluted income per share — net income
  $ 5,349     $ 5,018     $ 10,245     $ 11,180  
Denominator:
                               
 
Denominator for basic income per share — weighted-average shares
    21,762       21,558       21,725       21,494  
 
Effect of dilutive stock options
    533       716       565       786  
 
 
   
     
     
     
 
 
Denominator for diluted income per share — adjusted weighted-average shares
    22,295       22,274       22,290       22,280  
 
 
   
     
     
     
 
Basic income per share
  $ 0.25     $ 0.23     $ 0.47     $ 0.52  
 
 
   
     
     
     
 
Diluted income per share
  $ 0.24     $ 0.23     $ 0.46     $ 0.50  
 
 
   
     
     
     
 

4.  Income Taxes

For the three and six months ended June 30, 2002 and 2001, the effective income tax rate varied from the statutory federal income tax rate of 35% primarily as a result of the effect of state income taxes, net of the federal benefit, and permanent differences.

5.  Commitments and Contingencies

The primary claims in the Company’s business are workers’ compensation, property damage, auto liability and medical benefits. Most of the Company’s insurance coverage provides for self-insurance levels with primary and excess coverage which management believes is sufficient to adequately protect the Company from catastrophic claims. In the opinion of management, adequate provision has been made for all incurred claims up to the self-insured limits, including provision for estimated claims incurred but not reported.

The Company estimates its self-insurance loss exposure by evaluating the merits and circumstances surrounding individual known claims, and by performing hindsight analysis to determine an estimate of probable losses on claims incurred but not reported. Such losses could be realized immediately as the events underlying the claims have already occurred as of the balance sheet dates.

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Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

5.  Commitments and Contingencies (continued)

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.

6.  Acquisition of Business

In January 2001, the Company acquired certain assets of Expedited Delivery Services, Inc. (“Expedited”), a deferred air freight contractor to the air cargo industry based in Dallas, Texas. The Company paid approximately $3.0 million in cash for certain assets of Expedited, including approximately $1.0 million of direct and/or out-of-pocket costs related to the acquisition. The acquisition was accounted for as a purchase and the $3.0 million excess cost over fair value of the net assets acquired was amortized on a straight-line basis over a fifteen-year period prior to December 31, 2001. The results of operations for the acquired business are included in the consolidated statements of income from the acquisition date forward.

7.  Impact of Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS or Statement) No. 141, Business Combinations, effective July 1, 2002, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules in SFAS No. 142, goodwill is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company adopted SFAS No. 142 effective January 1, 2002. The Company completed the initial step of the transitional impairment test of goodwill during the second quarter of 2002 and determined that goodwill had not been impaired. Any subsequent impairment losses will be reflected in operating income in the income statement. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company’s net income and earnings per share would have been as follows:

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Forward Air Corporation

Notes to Condensed Consolidated Financial Statements

7.  Impact of Recently Issued Accounting Standards (continued)

                                   
      Three Months Ended   Six Months Ended
     
 
      June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001
     
 
 
 
Reported net income
  $ 5,349     $ 5,018     $ 10,245     $ 11,180  
Add back goodwill amortization net of tax
          168             307  
 
   
     
     
     
 
 
  $ 5,349     $ 5,186     $ 10,245     $ 11,487  
 
   
     
     
     
 
Basic earnings per share:
                               
 
Reported net income
  $ 0.25     $ 0.23     $ 0.47     $ 0.52  
 
Goodwill amortization net of tax
          0.01             0.01  
 
   
     
     
     
 
 
Adjusted net income
  $ 0.25     $ 0.24     $ 0.47     $ 0.53  
 
   
     
     
     
 
Diluted earnings per share:
                               
 
Reported net income
  $ 0.24     $ 0.23     $ 0.46     $ 0.50  
 
Goodwill amortization net of tax
          0.01             0.01  
 
   
     
     
     
 
 
Adjusted net income
  $ 0.24     $ 0.24     $ 0.46     $ 0.51  
 
   
     
     
     
 

SFAS No. 143, Accounting for Asset Retirement Obligations, issued in August 2001, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated retirement costs. SFAS No. 143, which applies to all entities that have a legal obligation associated with the retirement of tangible long-lived assets, is effective for fiscal years beginning after June 15, 2001. The adoption of SFAS No. 143 had no impact on the Company’s financial condition or results of operations.

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, issued in October 2001, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144, which applies to all entities, is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 had no impact on the Company’s financial condition or results of operations.

8.  Subsequent Event

On July 25, 2002, the Company announced that its Board of Directors approved a stock repurchase program for up to 2,000,000 shares of the Company’s common stock.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The Company provides scheduled ground transportation of cargo on a time-definite basis. As a result of the Company’s established transportation schedule and network of terminals, its operating cost structure includes significant fixed costs. The Company’s ability to improve its operating margins will depend, in part, on its ability to increase the volume of freight moving through its network.

Results of Operations

The following table shows the percentage relationship of expense items to operating revenue for the periods indicated.

                                   
      Three months ended   Six months ended
     
 
      June 30, 2002   June 30, 2001   June 30, 2002   June 30, 2001
     
 
 
 
Operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
Operating expenses:
                               
 
Purchased transportation
    43.3       42.4       42.8       42.6  
 
Salaries, wages and employee benefits
    21.7       21.9       22.1       22.6  
 
Operating leases
    5.3       5.2       5.5       4.7  
 
Depreciation and amortization
    3.3       3.9       3.4       3.4  
 
Insurance and claims
    2.6       3.1       2.6       2.6  
 
Other operating expenses
    8.7       9.4       8.7       8.9  
 
   
     
     
     
 
 
    84.9       85.9       85.1       84.8  
Income from operations
    15.1       14.1       14.9       15.2  
Other income (expense):
                               
 
Interest expense
    (0.2 )     (0.2 )     (0.2 )     (0.1 )
 
Other, net
    0.4       0.4       0.4       0.3  
 
   
     
     
     
 
 
    0.2       0.2       0.2       0.2  
 
   
     
     
     
 
Income before income taxes
    15.3       14.3       15.1       15.4  
Income taxes
    5.8       5.5       5.7       5.9  
 
   
     
     
     
 
Net income
    9.5 %     8.8 %     9.4 %     9.5 %
 
   
     
     
     
 

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Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001

Operating revenue decreased by $0.6 million, or 1.1%, to $56.4 million for 2002 from $57.0 million in 2001. This decrease resulted primarily from a decrease in traditional linehaul revenue of $1.7 million, which was offset by an increase in logistics revenue of $1.0 million and an increase in other accessorial revenue of $0.1 million.

Purchased transportation represented 43.3% of operating revenue in the second quarter of 2002 compared to 42.4% in the same period of 2001. The increase in purchased transportation as a percentage of operating revenue was primarily the result of an increase in logistics revenue where purchased transportation costs are higher as a percent of operating revenue than traditional linehaul purchased transportation costs. The increases in linehaul costs associated with logistics revenue were offset by a decrease in the miles and costs associated with operating the traditional linehaul system.

Salaries, wages and employee benefits were 21.7% of operating revenue in the second quarter of 2002 compared to 21.9% for the same period of 2001. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was attributed to a 0.6% decrease in amounts paid for salaries and wages as the Company better managed labor costs. These decreases, however, were offset by an 0.4% increase in group insurance expenses.

Operating leases, the largest component of which is facility rent, were 5.3% of operating revenue in the second quarter of 2002 compared to 5.2% in the same period of 2001. The increase in operating leases as a percentage of operating revenue between periods was primarily attributable to a decrease in operating revenue.

Depreciation and amortization expense as a percentage of operating revenue was 3.3% in the second quarter of 2002, compared to 3.9% in the same period of 2001. The decrease in depreciation and amortization expense as a percentage of operating revenue was attributable to a 0.5% decrease in amortization expense as the Company is no longer amortizing goodwill from acquisitions. The decrease was offset by a 0.1% increase in depreciation associated with operating equipment and information systems.

Insurance and claims were 2.6% of operating revenue in the second quarter of 2002, compared to 3.1% in the same period of 2001. The decrease in insurance and claims as a percentage of operating revenue resulted primarily from a 0.5% decrease in claims expense versus the second quarter of 2001.

Other operating expenses were 8.7% of operating revenue in the second quarter of 2002 compared to 9.4% in the same period of 2001. The decrease in other operating expenses as a percentage of operating revenue was primarily attributable to a 1.0% decrease in fuel costs which was offset by a 0.3% increase in miscellaneous expenses.

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Income from operations increased by $0.4 million, or 4.9%, to $8.5 million for the second quarter of 2002 compared to $8.1 million for the same period in 2001. The increase in income from operations was primarily a result of the decrease in operating costs associated with operating the network.

Interest expense was $94,000, or 0.2% of operating revenue, in the second quarter of 2002, compared to $120,000 or 0.2%, for the same period in 2001. The decrease in interest expense was due to lower average net borrowings during the period.

Other income, net was $229,000, or 0.4% of operating revenue, in the second quarter of 2002, compared to $190,000, or 0.4%, for the same period in 2001. The increase in other income, net resulted from higher interest income attributed to higher balances in both cash and cash equivalents and available-for-sale securities during the second quarter of 2002 which were offset by lower yields on those balances.

The combined federal and state effective tax rate for the second quarter of 2002 was 38.0% compared to a rate of 38.2% for the same period in 2001.

As a result of the foregoing factors, net income increased by $0.3 million, or 6.0%, to $5.3 million for the second quarter of 2002, compared to $5.0 million for the same period in 2001.

Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001

Operating revenue decreased by $8.4 million, or 7.1%, to $109.3 million in the first six months of 2002 from $117.7 million in the same period of 2001. This decrease resulted primarily from a decrease in traditional linehaul revenue of $9.9 million, which was offset by an increase in logistics revenue of $1.4 million and an increase in other accessorial revenue of $0.1 million.

Purchased transportation represented 42.8% of operating revenue in the first six months of 2002 compared to 42.6% in the same period of 2001. The increase in purchased transportation costs as a percentage of operating revenue is attributed to an increase in logistics revenue during the first six months of 2002 versus 2001 where purchased transportation is a higher cost component of revenue. These increases were offset by a decrease during the first six months of 2002 versus 2001 of both the miles and costs associated with operating the traditional linehaul network.

Salaries, wages and employee benefits were 22.1% of operating revenue in the first six months of 2002 compared to 22.6% in the same period of 2001. The decrease in salaries, wages and employee benefits as a percentage of operating revenue was attributed to a 0.7% decrease in amounts paid for salaries and wages and incentive payments during the first six months of 2002 which was offset by a 0.2% increase in group insurance expense.

Operating leases, the largest component of which is facility rent, were 5.5% of operating revenue in the first six months of 2002 compared to 4.7% in the same period of 2001. The increase in

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operating leases as a percentage of operating revenue between periods was attributable to an increase in the number and size of terminals in addition to the decrease in operating revenue.

Depreciation and amortization expense as a percentage of operating revenue was 3.4% in the first six months of 2002, compared to 3.4% in the same period of 2001. Depreciation and amortization expense as a percentage of operating revenue decreased by 0.5% as the Company is no longer amortizing goodwill from acquisitions. This decrease was offset by a 0.5% increase in depreciation expense from operating equipment and the depreciation of the capitalized costs associated with the development of internal-use software.

Insurance and claims were 2.6% of operating revenue in the first six months of 2002, compared with 2.6% in the same period of 2001. Insurance and claims as a percentage of operating revenue increased by 0.5% as a result of higher premium costs but were offset by a 0.5% decrease in claims expense during the first six months of 2002.

Other operating expenses were 8.7% of operating revenue in the first six months of 2002 compared to 8.9% in the same period of 2001. The decrease in other operating expenses as a percentage of operating revenue was primarily attributed to a 0.5% decrease in fuel expense which was offset by a 0.2% increase in maintenance and repairs.

Income from operations decreased by approximately $1.6 million, or 8.9%, to $16.3 million for the first six months of 2002 compared with $17.9 million for the same period in 2001. The decrease in income from operations was primarily a result of a decrease in operating revenue which was offset by a decrease in operating expenses.

Interest expense was $196,000, or 0.2% of operating revenue, in the first six months of 2002, compared to $117,000, or 0.1%, for the same period in 2001. The increase in interest expense was a result of the discontinuation of the capitalization of interest costs relating to the completion of the development of internal-use software which was offset by a decrease in average net borrowings during the first six months of 2002.

Other income, net was $439,000, or 0.4% of operating revenue, in the first six months of 2002, compared to $381,000, or 0.3%, for the same period in 2001. The increase in other income, net resulted from higher interest income attributed to higher average cash and cash equivalent balances during the first six months of 2002 which was offset by lower yields on these balances.

The combined federal and state effective tax rate for the first six months of 2002 was 38.0% compared to a rate of 38.3% for the same period in 2001.

As a result of the foregoing factors, net income decreased by approximately $1.0 million, or 8.9%, to $10.2 million for the first six months of 2002, compared with $11.2 million for the same period in 2001.

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Liquidity and Capital Resources

The Company has historically financed its working capital needs, including capital purchases, with cash flows from operations and borrowings under the Company’s bank lines of credit. Net cash provided by operating activities totaled approximately $12.1 million for the six months ended June 30, 2002, compared with $18.7 million in the same period of 2001.

Net cash used in investing activities was approximately $3.9 million for the six months ended June 30, 2002 compared with $5.9 million in the same period of 2001. Investing activities consisted primarily of purchases of available-for-sale securities, and the purchase of operating equipment and management information systems during the six months ended June 30, 2002.

Net cash provided by financing activities totaled approximately $543,000 for the six months ended June 30, 2002 compared to net cash used in financing activities of approximately $665,000 for the same period of 2001. Financing activities included the repayment of long-term debt and capital leases and proceeds received from the exercise of stock options.

The Company’s credit facility consists of a working capital line of credit. As long as the Company complies with the financial covenants and ratios, the credit facility permits it to borrow up to $20.0 million less the amount of any outstanding letters of credit. Interest rates for advances under the facility vary based on how the Company’s performance measures against covenants related to total indebtedness, cash flows, results of operations and other ratios. The facility bears interest at LIBOR plus 1.00% to 1.90%, expires in April 2004 and is unsecured. At June 30, 2002, the Company had $-0- outstanding under the line of credit facility and had utilized $5.2 million of availability for outstanding letters of credit. Accordingly, the Company was in compliance with the financial covenants and ratios under the credit facility at June 30, 2002.

On July 25, 2002, the Company announced that its Board of Directors approved a stock repurchase program for up to 2,000,000 shares of the Company’s common stock. The Company expects to fund the repurchases of its common stock through its cash and cash equivalents and available-for-sale securities and cash generated from operating activities.

Management believes that its available cash and cash equivalents and available-for-sale securities, expected cash generated from future operations and borrowing capacity under available credit facilities will be sufficient to satisfy the Company’s anticipated cash needs on both a short-term and long-term basis.

Forward-Looking Statements

This report contains statements with respect to the Company’s beliefs and expectations of the outcomes of future events that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases and in reports to shareholders. Oral forward-looking statements may be made by the Company’s executive officers

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and directors on behalf of the Company to the press, potential investors, securities analysts and others. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. The Company relies on this safe harbor in making such disclosures. In connection with this safe harbor provision, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company in this report. Without limitation, factors that might cause such a difference include economic factors such as recessions, inflation, higher interest rates and downturns in customer business cycles, the Company’s inability to maintain its historical growth rate because of a decreased volume of freight moving through the Company’s network, increasing competition and pricing pressure, surplus inventories, loss of a major customer, the creditworthiness of the Company’s customers and their ability to pay for services rendered, the inability of the Company’s information systems to handle an increased volume of freight moving through its network, changes in fuel prices, employment matters including rising health care costs, enforcement of and changes in governmental regulations, environmental and tax matters, the handling of hazardous materials, and the availability and compensation of qualified independent owner-operators needed to serve the Company’s transportation needs. As a result of the foregoing, no assurance can be given as to future financial condition, cash flows, or results of operations. Forward-looking statements can be identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “projects,” and similar expressions. The Company does not undertake any obligation to update or to release publicly any revisions to forward-looking statements contained in this report to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Item 3.  Quantitative and Qualitative Disclosure of Market Risk

The Company’s exposure to market risk related to its remaining outstanding debt is not significant.

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Part II.  Other Information

Item 1.  Legal Proceedings

The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involve claims for personal injury and property damage incurred in connection with the transportation of freight. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company.

Item 2.  Changes in Securities and Use of Proceeds

Not Applicable

Item 3.  Defaults Upon Senior Securities

Not Applicable

Item 4.  Submission of Matters to a Vote of Security Holders

The annual meeting of shareholders of the Company was held on May 20, 2002 for the purpose of electing six directors and approving the appointment of independent auditors for 2002.

Shareholders elected each director nominee for a one-year term expiring at the 2003 annual meeting. The vote for each director was as follows:

                 
    For   Against
   
 
Bruce A. Campbell
    18,049,846       2,418,217  
Andrew C. Clarke
    20,187,129       280,934  
James A. Cronin, III
    20,316,705       151,358  
Hon. Robert K. Gray
    20,316,855       151,208  
Ray A. Mundy
    20,317,055       151,008  
Scott M. Niswonger
    17,215,756       3,252,307  

The appointment of Ernst & Young LLP as independent auditors for 2002 was ratified and approved as follows:

                 
    For   Against   Abstain
   
 
 
    20,012,715     453,138     2,210  

Item 5.  Other Information

Not Applicable

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Item 6.  Exhibits and Reports on Form 8-K

(1)   Exhibits — See Index to Exhibits following signature page.
 
(2)   Reports on Form 8-K — The Company did not file any reports on Form 8-K during the three months ended June 30, 2002.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
  Forward Air Corporation
 
Date: August 14, 2002 By: /s/ Andrew C. Clarke
Andrew C. Clarke
Chief Financial Officer
and Senior Vice President

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EXHIBIT INDEX

     
Exhibit No.

10.1   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.

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