Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION NO. 0-27288
EGL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0094895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15350 VICKERY DRIVE
HOUSTON, TEXAS 77032
(Principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(281) 618-3100
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At February 28, 2001, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $887 million
based on the closing price of such stock on such date of $24.88.
At February 28, 2001, the number of shares outstanding of registrant's
Common Stock was 47,136,011 (net of 1,356,606 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 2001 Annual
Meeting of Shareholders to be held on May 23, 2001 are incorporated by reference
in Part III of this Form 10-K. Such definitive proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days subsequent
to December 31, 2000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
PART I.................................................................. 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 17
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II................................................................. 19
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters..................................................... 19
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 31
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 32
PART III................................................................ 33
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 33
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV................................................................. 33
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 33
i
3
PART I
ITEM 1. BUSINESS
GENERAL
EGL, Inc. is a leading global transportation, supply chain management and
information services company dedicated to providing flexible logistics solutions
on a price competitive basis. Our services include air and ocean freight
forwarding, customs brokerage, local pick up and delivery service, materials
management, warehousing, trade facilitation and procurement and integrated
logistics and supply chain management services. We provide value-added services
in addition to those customarily provided by traditional air freight forwarders,
ocean freight forwarders and customs brokers. These services are designed to
provide global logistics solutions for customers in order to streamline their
supply chain, reduce their inventories, improve their logistics information and
provide them with more efficient and effective domestic and international
distribution strategies in order to enhance their profitability. Our merger with
Circle International Group, Inc. in October 2000 significantly expanded our
international forwarding, customs brokerage and logistics operations. The merger
with Circle was treated as a pooling of interests for accounting and financial
reporting purposes. Accordingly, all of our prior period consolidated financial
statements have been restated to include the results of operations, financial
position and cash flows of Circle. See note 2 of the notes to our consolidated
financial statements.
We believe we are one of the largest forwarders of domestic and
international air freight based in the United States. We now have a network of
over 400 facilities, agents and distribution centers located in over 100
countries on six continents featuring advanced information systems designed to
maximize cargo management efficiency and customer satisfaction. Each of our
facilities is linked by a real-time, online communications network that speeds
the two-way flow of shipment data and related logistics information between
origins and destinations around the world.
We conduct our operations primarily under the name "EGL Eagle Global
Logistics." We were formerly known as Eagle USA Airfreight, Inc. Our name was
changed to EGL, Inc. in February 2000 to reflect our increasing globalization,
broader spectrum of services and long-term growth strategy. Our businesses that
have historically operated under the name "Circle International Group" or a
similar name have changed or are in the process of changing their names, where
possible, to EGL Eagle Global Logistics or a similar name.
We trade on the Nasdaq Stock Market under the symbol "EAGL" and were
incorporated in Texas in 1984.
INDUSTRY OVERVIEW
As business requirements for efficient and cost-effective distribution
services have increased, so have the importance and complexity of effectively
managing freight transportation. Businesses increasingly strive to minimize
inventory levels, perform manufacturing and assembly operations in different
locations and distribute products to numerous destinations. As a result,
companies frequently want expedited or time-definite shipment services.
Time-definite shipments are delivered at a specific time and are typically not
expedited, which results in a lower rate than for an expedited shipment.
Customers have two principal alternatives: an air freight forwarder or a
fully integrated carrier. An air freight forwarder procures shipments from
customers and arranges transportation of the cargo on a carrier. An air freight
forwarder may also arrange pick up from the shipper to the carrier and delivery
of the shipment from the carrier to the recipient. Air freight forwarders often
tailor shipment routing to meet the customer's price and service requirements.
Fully integrated carriers provide pick up and delivery service, primarily
through their own captive fleets of trucks and aircraft. Because air freight
forwarders select from various transportation options in routing customer
shipments, they are often able to serve customers less expensively and with
greater flexibility than integrated carriers. In addition to the high fixed
expenses associated with owning, operating and maintaining fleets of aircraft,
trucks and related equipment, integrated carriers often impose significant
restrictions on delivery schedules and shipment weight, size and type. Air
freight
1
4
forwarders, however, generally handle shipments of any size and can offer a
variety of customized shipping options.
Most air freight forwarders, like EGL, focus on heavier cargo and do not
generally compete with integrated shippers of primarily smaller parcels,
including Federal Express Corporation, Airborne Freight Corporation, DHL
Worldwide Express, Inc. and the United States Postal Service. Several integrated
carriers, like Emery Air Freight Corporation and BAX Global, Inc., do focus on
shipments of heavy cargo in competition with forwarders. On occasion, integrated
shippers serve as a source of cargo space to forwarders. Additionally, most air
freight forwarders do not generally compete with the major commercial airlines,
which, to some extent, depend on forwarders to procure shipments and supply
freight to fill cargo space on their scheduled flights.
The air freight forwarding industry is highly fragmented. Many companies in
the industry are able to meet only a portion of their customers' required
transportation service needs. Some national domestic air freight forwarders rely
on networks of terminals operated by franchisees or agents. We believe that the
development and operation of company-owned terminals and staff under the
supervision of our management have enabled us to maintain a greater degree of
financial and operational control and service quality than franchise-based
networks.
We believe that the most important competitive factors in our industry are
quality of service, including reliability, responsiveness, expertise and
convenience, scope of operations, information technology and price.
AIR FREIGHT FORWARDING SERVICES
Our air freight forwarding operations include expedited domestic forwarding
within the United States and international forwarding. Our total air freight
forwarding revenues in 2000 were $1.5 billion of which 45% were derived from
domestic air freight forwarding within the United States and 55% were derived
from international air freight forwarding. Our air freight forwarding and
related logistics services include the following:
- domestic freight forwarding,
- global freight forwarding,
- inland transportation of freight from point of origin to distribution
center or the carrier's cargo terminal and from our terminal in the
destination city to the recipient (pick up and delivery),
- cargo assembly,
- export packing and vendor shipment consolidation,
- receiving and breaking down consolidated air freight lots and arranging
for distribution of the individual shipments,
- charter arrangement and handling,
- electronic transmittal of logistics documentation,
- electronic purchase order/shipment tracking,
- expedited document delivery to overseas destinations for customs
clearance, and
- procurement of cargo insurance.
We neither own nor operate any aircraft and, consequently, place no
restrictions on delivery schedules or shipment size. We arrange for
transportation of our customers' shipments via commercial airlines and, to a
lesser extent, air cargo carriers. All of our air shipments can be accommodated
by either narrow-body or wide-body aircraft. We select the carrier for a
shipment based on route, departure time, available cargo capacity and cost. We
currently have regularly scheduled dedicated charters of 12 cargo airplanes
under short-term leases to service specific transportation lanes. As needed, we
charter cargo aircraft for use in other transportation
2
5
lanes. The number of these dedicated charters varies from time to time depending
upon seasonality, freight volumes and other factors. In July 2000, we purchased
an equity interest in a privately held domestic and international charter
airline to obtain access to an additional source of reliable freight charter
capacity. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto included elsewhere in this report.
We generate air freight forwarding revenues by acting primarily as an
indirect air carrier and, to a lesser extent, as an authorized cargo sales
agent. As an indirect air carrier, we obtain shipments from our customers,
consolidate shipments bound for a particular destination, determine the best
means to transport the shipment to its destination, select the direct carrier
(an airline) on which the consolidated lot is to move and tender each
consolidated lot as a single shipment to the direct carrier for transportation
to a destination. At the destination, we or our agent receive the consolidated
lot, break it into its component shipments and distribute the individual
shipments to the consignees.
Our rates are based on a charge per pound/kilogram that decreases within a
certain range as the weight of the shipment increases. We ordinarily charge the
shipper a rate less than the rate that the shipper would be charged by an
airline. Due to the high volume of freight we manage, we generally obtain lower
rates per pound/kilogram from airlines than the rates we charge our customers
for individual shipments. This rate differential is the primary source of our
air freight forwarding net revenue. Our practice is to make prompt adjustments
in our rates to match changes in airline rates.
As an authorized cargo sales agent of most airlines worldwide, we also
arrange for the transportation of individual shipments and receive a commission
from the airline for arranging the shipment. In addition, we provide the shipper
with ancillary services, such as export documentation, for which we receive a
separate fee. When acting in this capacity, we do not consolidate shipments or
have responsibility for shipments once they have been tendered to the airline.
We conduct our agency air freight forwarding operations from the same facilities
as our indirect carrier operations and serve the same regions of the world.
Local transportation services are performed either by independent cartage
companies or, in the United States and Canada, primarily by our local pick up
and delivery operations. See "Business -- Domestic Local Delivery Services." If
delivery schedules permit, we will typically use lower-cost, overland truck
transportation services, including those obtained through our domestic truck
brokerage operations. See "Business -- Domestic Truck Brokerage Services."
We draw on our logistical expertise to provide forwarding services that are
tailored to meet customer needs and, in addition to regularly scheduled service,
we offer customized schedules. In addition, our services are customized to
address each client's individual shipping requirements, generally without
restrictions on shipment weight, size or type. Once the customer's requirements
for an individual shipment have been established, we proactively manage the
execution of the shipment to ensure satisfaction of the customer's requirements.
In 2000, our principal air freight forwarding customers included shippers
of:
- computers and other electronic and high-technology equipment,
- printed and publishing materials,
- automotive and aerospace components,
- trade show exhibit materials,
- telecommunications equipment,
- pharmaceuticals,
- machinery and machine parts, and
- apparel and entertainment equipment.
3
6
Our air freight forwarding business is not dependent on any one customer or
industry. We provide services to global or multinational customers as well as
regional customers. In 2000, approximately 66% of our net revenue was
attributable to air freight forwarding.
DOMESTIC LOCAL DELIVERY SERVICES
In the United States and Canada, we provide same-day local pick up and
delivery services, both for shipments for which we are acting as an air freight
forwarder as well as for third-party customers requiring pick up and delivery
within the same metropolitan area. We believe that these services provide an
important complement to our air freight forwarding services by allowing for
quality control over the critical pick up and delivery segments of the
transportation process as well as allowing for prompt, updated information on
the status of a customer's shipment at each step in the shipment process. We
focus on providing local pick up and delivery services to accounts with a
relatively high volume of business, which we believe provides a greater
potential for profitability than a broader base of small, infrequent customers.
During the last several years, we upgraded the information system used by
our local pick up and delivery operations. These improvements included bar code
and signature scanners that allow for enhanced tracking of shipments and access
by shippers of receipt signatures for proof of delivery information. In October
2000, we implemented a new, enhanced system of dispatching for our local pick up
and delivery operations.
Our local pick up and delivery operations commenced service in Houston,
Texas in 1989 and in recent years has rapidly expanded. As of December 31, 2000,
local delivery services were offered in 87 of the 89 cities in the United States
and Canada in which our terminals were located. On-demand pick up and delivery
services are available 24 hours a day, seven days a week. In most locations,
delivery drivers are independent contractors who operate their own vehicles. Our
Houston, Texas operations include a number of company-owned or leased trailers,
trucks and other ground equipment primarily to service specific customer
accounts.
Local pick up and delivery revenues were $221.5 million during 2000 and
$155.8 million during 1999. Approximately $163.4 million of these revenues
during 2000 and $105.7 million of these revenues during 1999 were attributable
to our air freight forwarding operations and were eliminated upon consolidation.
The remaining pick up and delivery revenues were attributable to local delivery
services for third-party, non-forwarding business. A substantial majority of the
total costs of providing for local pick up and delivery of our freight
forwarding shipments in 2000 and 1999 were attributable to our own local pick up
and delivery services. Revenues from domestic local delivery services, net of
intercompany revenues, are included in air freight forwarding revenues.
DOMESTIC TRUCK BROKERAGE SERVICES
We have established truck brokerage operations in the United States to
provide logistical support to our forwarding operations and, to a lesser extent,
provide truckload service to selected customers. Our truck brokerage services
locate and secure capacity when overland transportation is the most efficient
means of meeting customer delivery requirements, especially in cases of air
freight customers choosing the economy delivery option. We use internal truck
brokerage operations to meet delivery requirements without having to rely on
third-party truck brokerage services. Additionally, by providing for our own
truck brokerage, we have been able to achieve greater efficiencies and utilize
purchasing power over transportation providers. We do not own a significant
number of the trucks used in our truck brokerage operations and, instead,
primarily use carriers or independent owner-operators of trucks and trailers on
an as-needed basis. We use our relationships with a number of independent
trucking companies to obtain truck and trailer space.
As with local pick up and delivery services, we view our truck brokerage
services primarily as a means of maintaining quality control and enhancing
customer service of our core air freight forwarding business, as well as a means
of capturing a portion of profits that would otherwise be earned by third
parties. Revenues from domestic truck brokerage, net of intercompany revenues,
are included in air freight forwarding revenues.
4
7
INTERNATIONAL OCEAN FREIGHT FORWARDING
As a global ocean freight forwarder, we arrange for the shipment of freight
by ocean carriers and act as the agent of the shipper or the importer. Our ocean
freight forwarding and related logistics services include inland transportation
from point of origin to distribution facility or port of export, cargo assembly,
packing and consolidation, warehousing, electronic transmittal of documentation
and shipment tracking, expedited document delivery, pre-alert consignee
notification and cargo insurance.
A number of our facilities provide protective cargo packing, crating and
specialized handling services for retail goods, government-specification cargo,
consumer goods, hazardous cargo, heavy machinery and assemblies and perishable
cargo. Other facilities are equipped to handle equipment and material from
multiple origins to overseas "turn-key" projects, such as manufacturing
facilities or government installations. We do not own or operate ships or assume
carrier responsibility, preferring to retain the flexibility to tailor
logistics, services and options to customer requirements.
Our compensation for ocean freight forwarding services is derived
principally from commissions paid by shipping lines and from forwarding and
documentation fees paid by customers, who are either shippers or consignees. In
2000, approximately 2% of our net revenue was attributable to international
ocean freight forwarding, including commissions, forwarding fees and associated
ancillary services.
OCEAN FREIGHT CONSOLIDATION
Our global operations as an indirect ocean carrier or NVOCC (non-vessel
operating common carrier) are similar in some respects to our air freight
consolidation operations. We procure customer freight, consolidate shipments
bound for a particular destination, determine the routing, select the ocean
carrier or charter a ship, and tender each consolidated lot as a single shipment
to the direct carrier for transportation to a distribution point. As a NVOCC, we
generally derive our revenue from the spread between the rate charged to our
customer and the ocean carrier's charge to us for carrying the shipment, in
addition to charging for other ancillary services related to the movement of the
freight. Because of the volume of freight we control and consolidate, we are
generally able to obtain lower rates from ocean carriers than the rate the
shipper would be able to procure. In 2000, ocean freight consolidation and
associated ancillary services contributed approximately 5% of our net revenue.
CUSTOMS BROKERAGE
We function as a customs broker at approximately 53 locations in the United
States and in over 400 international locations through our network of offices
and agents. In our capacity as a customs broker, we prepare and file all formal
documentation required for clearance through customs agencies, obtain customs
bonds, in many cases facilitate the payment of import duties on behalf of the
importer, arrange for payment of collect freight charges and assist the importer
in obtaining the best commodity classifications and in qualifying for duty
drawback refunds. Our customs brokers and support staff have substantial
knowledge of the complex tariff laws and customs regulations governing the
payment of duty, as well as valuation and import restrictions in their
respective countries. Within the United States, we employ a significant number
of personnel holding individual customs broker licenses.
We rely both on company-designed and third-party computer technology for
customs brokerage activities performed on behalf of our clients. We employ the
Automated Brokerage Interface information system, providing an online link with
the United States Customs Service. In several global trading centers, in
addition to the United States, our offices are connected electronically to
customs agencies for expedited preclearance of goods and centralized import
management. Such online interface with customs agencies speeds freight release
and provides nationwide control of clearances at multiple ports and airports of
entry.
We work with importers to design cost-effective import programs that
utilize our distribution and logistics services and computer technology. Such
services include:
- electronic document preparation,
- cargo routing from overseas origins to ports and airports of entry,
5
8
- bonded warehousing,
- distribution of the cleared cargo to inland locations, and
- duty drawback.
In many United States and overseas locations, our bonded warehouses enable
importers to defer payment of customs duties and coordinate release of cargo
with their production or distribution schedules. Goods are stored under customs
service supervision until the importer is ready to withdraw or re-export them.
We receive storage charges for these in-transit goods and fees for related
ancillary services. We also offer Free Trade Zone management and duty drawback
services to provide customers with additional tools to maintain cost-effective
import programs.
As a customs broker operating in the United States, we are licensed by the
U.S. Treasury and regulated by the U.S. Customs Service. Our fees for acting as
a customs broker in the United States are not regulated, and we do not have a
fixed fee schedule for customs brokerage services. Instead, fees are generally
based on the volume of business transacted for a particular customer, and the
type, number and complexity of services provided. In addition to fees, we bill
the importer for amounts that we have paid on the importer's behalf, including
duties, collect freight charges and similar payments. In 2000, approximately 16%
of our net revenue was attributable to customs brokerage services.
LOGISTICS AND OTHER SERVICES
Customers increasingly demand more than the simple movement of freight from
their transportation suppliers. To meet these needs, suppliers seek to customize
their services, by, among other things, providing information on the status of
materials, components and finished goods throughout the logistics pipeline and
performance reports on and proof of delivery for each shipment. We provide a
range of logistics services, distribution and materials management services,
international insurance services, global project management services and trade
facilitation services. In 2000, approximately 11% of our net revenue was
attributable to logistics and other services.
Logistics Services
We use our logistics expertise to maximize the efficiency and performance
of forwarding and other transportation services to our customers. In addition,
we provide transportation consulting services and make our expertise and
resources available to assist customers in balancing their transportation needs
against budgetary constraints by developing logistics plans. We staff and manage
the shipping departments of some of our customers that outsource their
transportation management function and seek to provide outsourcing services to
other customers in the future. We also provide other ancillary services,
including electronic data interchange, customized shipping reports, computerized
tracking of shipments, air charters, cargo assembly and protective packing and
crating.
We have established Eagle Exhibitor Services, an internal group that
focuses on the special needs of exhibitors in the trade show industry. In
addition to air freight forwarding and charter services, this group provides
special exhibit handling, by-appointment delivery, caravan services and
short-term warehousing.
Distribution and Materials Management Services
We offer a full range of customized distribution and materials management
services in connection with the transportation of cargo. These services are
provided in a number of our owned and leased logistics facilities in many
locations throughout the world. During 2000, we continued our program of
improving existing facilities and constructing new warehouse and distribution
facilities to meet customer needs. Our distribution and materials management
services include inventory control, order processing, import and export freight
staging, protective and specialized packing and crating, pick-and-pack
operations, containerization, consolidation and deconsolidation, and special
handling for perishables, hazardous materials and heavy-lift equipment. For
import shipments, we provide bonded warehouse services and, in certain
locations, Free Trade Zone
6
9
services. These warehouse and distribution services complement the other
transportation services, including the information systems tools, that form part
of the integrated logistics solutions we offer to customers.
Insurance
Another service offered to customers is the arrangement of international
insurance in connection with our air freight and ocean freight forwarding
operations. Insurance coverage is frequently tailored to a customer's shipping
program and is procured for the customer as a component of our integrated
logistics. We also arrange for surety bonds for importers as part of our customs
brokerage activities.
Global Projects
We have global project divisions in North America and the United Kingdom to
meet the special requirements of global project management and heavy lift
movements. In addition to logistics advice and traditional ocean and air
transportation services, the project divisions provide on-site assistance,
vessel chartering services and consulting regarding large-scale project
movements.
Trade Facilitation Services
Our EGL Trade Services, Inc. subsidiary specializes in providing
procurement, financial and distribution management services to multinational
customers. EGL Trade Services purchases both raw materials for manufacturing and
finished goods for distribution, then coordinates their global deployment, as
directed by the customer. EGL Trade Services delivers its services through
custom-designed Vendor and Distribution Hub programs. Through EGL Trade
Services, we are able to seamlessly coordinate a customer's procurement,
logistics, transportation and distribution activities within a single supply
chain program. This enables us to optimize customer supply chains by
streamlining the material, information and financial flows through integration
of the specific supply chain processes and elimination of redundant
transactions.
INFORMATION SYSTEMS
A primary component of our business strategy is the continued development
of advanced information systems. We have invested substantial management and
financial resources in the development of our information systems in an effort
to provide accurate and timely information to our management and customers. We
believe that our systems have been instrumental in the productivity of our
personnel and the quality of our operations and service and have resulted in
substantial reductions in paperwork and expedited the entry, processing,
retrieval and internal dissemination of critical information. These systems also
enable us to provide customers with accurate and up-to-date information on the
status of their shipments, through whatever medium they request, which has
become increasingly important. We will continue to develop and upgrade our
information systems. In connection with the acquisition of Circle in October
2000, we began an initiative to upgrade and standardize our operations,
financial and information systems on a global basis. See "Factors That May
Affect Future Results and Financial Condition -- We may face difficulties in
integrating the operations of the Circle International Group, Inc. acquisition."
Worldport
Our integrated information system -- Worldport -- includes logistics
information, management information and accounting systems for our North America
domestic operations. The central computer located at our headquarters in
Houston, Texas is accessible from computer terminals located at all of our North
America facilities and from computer terminals located at the facilities of many
of our customers through the use of a toll-free dial-in program.
The Worldport system provides a comprehensive source of information for
managing the logistics of our sourcing and distribution activities.
Specifically, the Worldport system permits us to track the flow of a particular
shipment from the pick up order through the transportation process to the point
of delivery. Through the system, we can also access daily financial information
for a particular terminal, a particular division, customer or service or a given
shipment. Worldport permits online entry and retrieval of shipment,
7
10
pricing, scheduling and tracking data and integrates with our management
information and accounting systems. Worldport's electronic data interchange also
allows for importing of dispatch information, proof of delivery information,
status updates, electronic invoicing, funds exchange and file exchange.
Worldport also provides our sales force with margin information on customers and
shipments, thereby enhancing our ability to bid aggressively for future
forwarding business and to avoid committing to unprofitable shipments. Worldport
can provide our management and customers with reports customized to meet their
information requirements.
The expansion of our local pick up and delivery service has further
improved our logistics system by enabling shipment data to be input remotely
from pick up through delivery. We have implemented the use of remote handheld
bar code and signature scanners for use by our pick up and delivery operations.
We have implemented the use of handheld bar code dock scanners in our air
freight operations. Worldport is integrated with both of these scanners to
automatically supply the proof of delivery or shipment status information to the
system. This information is then made available to all online locations as well
as customers' dial-in facilities, allowing for enhanced tracking of shipments
and viewing by shippers of receipt signatures. Delivery receipts are
electronically imaged and centrally stored to increase both internal and
customer efficiencies.
Talon
We have focused our efforts on the development and enhancement of "Talon,"
our international operating system. Talon provides enhanced features for
international operations, including document production, electronic customs
filing of shipper export declarations via the U.S. Customs Automated Export
System, agent settlements, real-time global tracking and tracing and
multi-currency accounting. Upon completion of the Circle merger, we decided to
implement enhancements to Talon to improve its operational efficiency. While
Talon is being enhanced, we continue to use the systems that Circle was using
prior to the merger. The Circle systems are robust and will remain as the
systems supporting our international business until the Talon enhancements have
been completed.
Eagle Advisor, EGLNet and Eagle TRAK
Customers and management can obtain shipment information through Eagle
Advisor -- our extranet client/server application software program. Customers
can download this software to their personal computers from our Internet home
page. Through Eagle Advisor, customers can access our password-protected Web
site. Worldport and the Circle systems transmit data every 30 minutes to this
Web site. The customer's shipment data is then automatically transmitted to its
personal computer via the Internet. Eagle Advisor allows customers and
management to track and trace shipments, obtain imaged proof of delivery
information and generate customized shipment reports. Our corporate Intranet,
"EGLNet," contains internal training portals to key airline Internet sites,
sales and marketing information and other tools for our offices. In addition to
Eagle Advisor, the "Eagle TRAK" option on our Internet home page allows
customers to obtain shipment tracing information via the Internet.
Eagle-Ship
Our systems also include Eagle-Ship, which allows customers to automate
their shipping processes and consolidate their shipping systems. For customers
using Eagle-Ship, we provide a dedicated personal computer, printer and bar code
scanner that allow the customer's shipping dock personnel to process and weigh
boxes, record the shipment, produce customized box labels and print an EGL house
airway bill or bill of lading. Eagle-Ship also provides customers with weight
analysis, tariff reporting, assistance in consolidation of like orders and price
comparison among shipping options.
Eagle-Ship enables our customers to process shipments for many carriers
with one personal computer and to compare the cost and service options of
various carriers, consolidate Eagle-Ship label printing and generate reports
that profile the customer's shipping activity. Eagle-Ship is designed to run
shipping systems for UPS, Federal Express and other small parcel carriers and
can be customized to run the systems of up to 99 air and truck carriers. We
believe that Eagle-Ship gives us a competitive advantage among a growing number
of customers that are resistant to the proliferation of dedicated shipper
systems because of the cost, complexity
8
11
and dock space required to maintain a separate personal computer for each
carrier. We also believe that the use of Eagle-Ship should lead to increased use
of our services by helping to ensure that customers will allocate dock space to
Eagle-Ship rather than to multiple systems from other carriers. Although
Eagle-Ship does provide customers with assistance in selecting competitors for
our shipping services, we believe that much of that information, like that
relating to Federal Express, is used in the delivery of documents and small
packages, which constitute a small portion of our cargoes, and that, overall,
Eagle-Ship will demonstrate to customers the advantages of our services in
comparison to our more direct competitors. We believe that Eagle-Ship enhances
our ability to market to national accounts.
MARKETING AND CUSTOMERS
We market services through a global organization consisting of
approximately 450 full-time sales people supported by the sales efforts of
senior management, regional managers, regional operation managers, terminal
managers and our national services center. Managers at each terminal are
responsible for customer service and coordinate reporting of customers'
requirements and expectations with the regional managers and sales staff. In
addition, regional managers are responsible for the financial performance of the
stations in their region. Our employees are available 24 hours a day to respond
to customer inquiries.
We have increased our emphasis on obtaining high-revenue national accounts
with multiple shipping locations. These accounts typically impose numerous
requirements on those competing for their freight business, including electronic
data interchange and proof of delivery capabilities, the ability to generate
customized shipping reports and a nationwide network of terminals. These
requirements often limit the competition for these accounts to integrated
carriers and a very small number of forwarders. We believe that our recent
growth and development has enabled us to more effectively compete for and obtain
these accounts.
Our customers include large manufacturers and distributors of computers and
other electronic and high-technology equipment, printed and publishing
materials, automotive and aerospace components, trade show exhibit materials,
telecommunications equipment, machinery and machine parts, apparel and
entertainment equipment. For the year ended December 31, 2000, no customer
accounted for greater than 10% of our revenues. Adverse conditions in the
industries of our customers could cause us to lose a significant customer or
experience a decrease in the shipment volume. Either of these events could
negatively impact us. We expect that demand for our services, and consequently
results of operations, will continue to be sensitive to domestic and global
economic conditions and other factors beyond our control.
REGULATION
We do not believe that transportation- and customs-related regulatory
compliance have had a material adverse impact on operations to date. However,
failure to comply with the applicable regulations or to maintain required
permits or licenses could result in substantial fines or revocation of our
operating permits or authorities. We cannot give assurance as to the degree or
cost of future regulations on our business. Some of the regulations affecting
our operations are described below.
Air Freight Forwarding
Our air freight forwarding business is subject to regulation, as an
indirect air cargo carrier, under the Federal Aviation Act by the U.S.
Department of Transportation, although air freight forwarders are exempted from
most of the Federal Aviation Act's requirements by the Economic Aviation
Regulations. Our foreign air freight forwarding operations are subject to
similar regulation by the regulatory authorities of the respective foreign
jurisdictions. The air freight forwarding industry is subject to regulatory and
legislative changes that can affect the economics of the industry by requiring
changes in operating practices or influencing the demand for, and the costs of
providing, services to customers.
Domestic Local Delivery Services and Domestic Truck Brokerage Services
Our delivery operations are subject to various state and local regulations
and, in many instances, require permits and licenses from state authorities. In
addition, some of our delivery operations are regulated by the
9
12
Surface Transportation Board. These federal, state and local authorities have
broad powers, including the power to approve specified mergers, consolidations
and acquisitions, and to regulate the delivery of some types of shipments and
operations within particular geographic areas. The Surface Transportation Board
has the power to regulate motor carrier operations, to approve some rates,
charges and accounting systems and to require periodic financial reporting.
Interstate motor carrier operations are also subject to safety requirements
prescribed by the U.S. Department of Transportation. In some potential locations
for our delivery operations, state and local permits and licenses may be
difficult to obtain. Our truck brokerage operations subject us to regulation as
a property broker by the Surface Transportation Board, and we have obtained a
property broker license and surety bond.
Ocean Freight Forwarding
The Federal Maritime Commission, or FMC, regulates our ocean forwarding
operations. The FMC licenses ocean freight forwarders. Indirect ocean carriers
(non-vessel operating common carriers) are subject to FMC regulation, under the
FMC tariff filing and surety bond requirements, and under the Shipping Act of
1984, particularly those terms proscribing rebating practices.
Customs Brokerage
Our United States customs brokerage operations are subject to the licensing
requirements of the U.S. Treasury and are regulated by the U.S. Customs Service.
We have received our customs brokerage license from the U.S. Customs Service and
additional related approvals. Our foreign customs brokerage operations are
licensed in and subject to the regulations of their respective countries.
Logistics and Other Services
Some portions of our warehouse operations require:
- registration under the Gambling Act of 1962 and a license or registration
by the U.S. Department of Justice,
- authorizations and bonds by the U.S. Treasury,
- a license by the Bureau of Alcohol, Tobacco & Firearms of the U.S.
Treasury, and
- approvals by the U.S. Customs Service.
Environmental
In the United States, we are subject to federal, state and local provisions
relating to the discharge of materials into the environment or otherwise for the
protection of the environment. Similar laws apply in many foreign jurisdictions
where we operate or may operate in the future. Although current operations have
not been significantly affected by compliance with these environmental laws,
governments are becoming increasingly sensitive to environmental issues, and we
cannot predict what impact future environmental regulations may have on our
business. We do not anticipate making any material capital expenditures for
environmental control purposes during the remainder of the current or succeeding
years.
EMPLOYEES
We had approximately 9,000 full-time employees at December 31, 2000,
including approximately 450 sales personnel. None of our employees are currently
covered by a collective bargaining agreement. We have experienced no work
stoppages and consider our relations with employees to be good. We also had
contracts with approximately 2,600 independent owner/operators of local delivery
services as of December 31, 2000. The independent owner/operators own, operate
and maintain the vehicles they use in their work for us and may employ qualified
drivers of their choice. Our owned or leased vehicles were driven by
approximately 240 of our employees as of December 31, 2000.
10
13
We pay our entire sales force and most of our operations personnel what we
believe is significantly more than the industry average. We also offer a
broad-based compensation plan to these employees. Sales personnel are paid a
gross commission on shipments sold. Operations personnel and management are paid
bonuses based on the profitability of their terminals as well as on our overall
profitability. To ensure quality control and the profitability of accounts,
terminal managers have final approval on all accounts.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive
officers as of February 28, 2001:
NAME AGE POSITION
- ---- --- --------
James R. Crane............................ 47 Chairman of the Board of Directors,
President and Chief Executive Officer
Elijio V. Serrano......................... 43 Chief Financial Officer
E. Joseph Bento........................... 38 President, North America and Chief
Marketing Officer
John C. McVaney........................... 42 Executive Vice President, Logistics
Ronald E. Talley.......................... 49 Chief Operating Officer, Domestic
James R. Crane. Mr. Crane has served as our President, Chief Executive
Officer and a director since he founded EGL in March 1984.
Elijio V. Serrano. Mr. Serrano joined us as Chief Financial Officer in
October 1999 and has served as a director since 2000. From 1998 to 1999, he
served as Vice President and General Manager for a Geco-Prakla business unit at
Schlumberger Limited, an international oilfield services company. From 1992 to
1998, Mr. Serrano served as controller for various Schlumberger business units.
From 1982 to 1992, he served in various financial management positions within
the Schlumberger organization.
E. Joseph Bento. Mr. Bento was appointed President, North America and
Chief Marketing Officer in September 2000. He joined us in February 1992 as an
account executive. From March 1994 to December 1994, he served as a sales
manager in Los Angeles, and from January 1995 to September 1997, he served as
Regional Sales Manager (West Coast). From June 1994 to May 1995, he also served
as station manager in Los Angeles. Prior to assuming his current position, Mr.
Bento held the position of Executive Vice President of Sales and Marketing from
March 1999 to August 2000 and Vice President of Sales and Marketing from October
1997 to February 1999.
John C. McVaney. Mr. McVaney has served as Executive Vice President,
Logistics since January 1998. Mr. McVaney joined us as a station manager in 1995
and later served as Regional Vice President for the southeast region. From 1992
to 1995, he served as regional manager for Nationsway Transport Service, Inc.
From 1989 to 1992, Mr. McVaney served as National Account Manager for St.
Johnsbury Trucking Company, Inc. During 1989, he was President and sole owner of
B&C of New Orleans, Inc., a transportation company. Mr. McVaney has over 19
years of transportation experience.
Ronald E. Talley. Mr. Talley was appointed Chief Operating Officer,
Domestic in December 1997. He joined us in 1990 as a station manager and later
served as a regional manager. In 1996, he served as a Senior Vice President of
Eagle Freight Services, and our truck brokerage and charter operations, and most
recently, he has served as Senior Vice President of our air and truck
operations. Prior to joining us, Mr. Talley served as a station manager at
Holmes Freight Lines from 1982 to 1990. From 1979 to 1982, Mr. Talley held a
variety of management positions with Trans Con Freight Lines. From 1969 to 1979,
Mr. Talley served in several management positions at Roadway Express.
11
14
FORWARD-LOOKING STATEMENTS
The statements contained in all parts of this document (including the
portion, if any, appended to the Form 10-K) that are not historical facts are,
or may be deemed to be, forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such forward-looking statements include, but are not limited to, those
relating to the following:
- - the integration of EGL's and Circle's information technology systems and the
ease of transition to an integrated system for our customers,
- - the availability of cargo space,
- - our overseas presence and the plans for, effects, results and expansion of
international operations and agreements for international cargo,
- - future international revenue and international market growth,
- - the future expansion and results of our terminal network,
- - plans for local delivery services and truck brokerage,
- - the greater potential for profitability in our local delivery services from
accounts with a relatively high volume of business,
- - future improvements in our information systems and their effects on the
productivity of our personnel and the quality of our operations,
- - future improvements in our logistic systems and services,
- - any competitive advantage generated by Eagle-Ship, any expected increase in
the use of our services as a result of Eagle-Ship and any enhancement of our
ability to market to national accounts attributable to Eagle-Ship,
- - technological advancements,
- - future marketing results, including our ability to compete more effectively
for national accounts due to our recent growth,
- - the sensitivity of demand for our services to domestic and global economic
conditions,
- - the effect of regulatory compliance on our operations,
- - construction of new facilities, including costs and expected completion dates,
- - plans for consolidating domestic and international locations,
- - our relations with employees,
- - the effect of litigation, including matters relating to the Commission's
Charge, the related litigation and our intentions with respect thereto,
- - the status of the independent owner/operators we use in our local delivery
operations as employees for federal and state tax or other applicable laws,
- - future costs of transportation,
- - revenue growth,
- - future operating expenses,
- - future margins,
- - any seasonality of our business,
- - future dividend plans,
- - the expected effects, benefits, results, terms or other aspects of any past,
contemplated or future acquisition, including the Circle acquisition,
- - the timing, terms or completion of any pending acquisition or other
transaction,
- - ISO certification,
- - effect of improvement studies,
- - future consolidation in the industry,
- - future charges and future costs (including timing, amount or effect and the
recoverability of noncash charges),
- - anticipated future recoveries from actual or expected sublease agreements,
- - termination of joint venture/agency agreements,
- - ability to continue growth and implement our growth and business strategy,
- - our ability to remain an industry leader, gain market share and increase our
relationships with existing customers,
- - the ability of expected sources of liquidity to fund our operations and
finance capital expenditures and acquisitions,
- - the tax benefit of any stock option exercises,
- - timing of construction and other projects,
- - cost management efforts, including the expected benefits of the furlough
program and related salary reduction by senior executives on our cost
management efforts,
- - future expectations and outlook, and
- - any other statements regarding future growth, future cash needs, future
terminals, future operations, business plans, future financial results,
financial targets and goals.
12
15
Forward-looking statements in this Form 10-K (including the portion, if
any, appended to the Form 10-K) are identifiable by use of the following words
and other similar expressions, among others:
- "anticipate,"
- "believe,"
- "budget,"
- "could,"
- "estimate,"
- "expect,"
- "forecast,"
- "intend,"
- "may,"
- "might,"
- "plan,"
- "predict,"
- "project," and
- "should."
Our actual results may differ significantly from the results discussed in
the forward-looking statements. Such statements involve risks and uncertainties,
including, but not limited to, the matters discussed in the subsection entitled
"Factors That May Affect Future Results and Financial Condition" below, our
future financial and operating results, financial condition, cash needs and
demand for our services, as well as other factors detailed in this document and
our other filings with the Securities and Exchange Commission. If one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated. We
undertake no responsibility to update for changes related to these or any other
factors that may occur subsequent to this filing.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
You should read carefully the following factors and all other information
contained in this report. If any of the risks and uncertainties described below
or elsewhere in this report actually occur, our business, financial condition or
results of operations could be materially adversely affected. In that case, the
trading price of our common stock could decline, and an investor may lose all or
part of his investment.
We may not be successful in continuing our growth either internally or through
acquisition.
We have experienced significant growth, primarily through increases in
sales at existing terminals and opening new terminals and a limited number of
small acquisitions. In the future, we anticipate that our growth strategy will
primarily focus on internal growth in domestic and international freight
forwarding, local pick up and delivery, customs brokerage and truck brokerage
business and may also include acquisitions. Our ability to continue our growth
will depend on a number of factors, including:
- existing and emerging competition,
- ability to open new terminals,
- ability to maintain profit margins in the face of competitive pressures,
- the continued recruitment, training and retention of operating and
management employees,
- the strength of demand for our services,
- the availability of capital to support our growth, and
- the ability to identify, negotiate and fund acquisitions when
appropriate.
Acquisitions involve risks, including those relating to:
- the integration of acquired businesses, including different information
systems,
- the retention of prior levels of business,
- the retention of employees,
- the diversion of management attention,
- the amortization of acquired intangible assets, and
- unexpected liabilities.
13
16
We cannot assure you that we will be successful in implementing any of our
business strategies or plans for future growth.
Events impacting the volume of international trade and international
operations could adversely affect our international operations.
Our international operations are directly related to and dependent on the
volume of international trade, particularly trade between the United States and
foreign nations. This trade as well as our international operations are
influenced by many factors, including:
- economic and political conditions in the United States and abroad,
- major work stoppages,
- exchange controls, the Euro conversion and currency fluctuations,
- wars and other armed conflicts, and
- United States and foreign laws relating to tariffs, trade restrictions,
foreign investment and taxation.
Trade-related events beyond our control, such as a failure of various
nations to reach or adopt international trade agreements or an increase in
bilateral or multilateral trade restrictions, could have a material adverse
effect on our international operations. Our operations also depend on
availability of carriers that provide cargo space for international operations.
Our business could be adversely impacted by negative conditions in the United
States economy or the industries of our principal customers.
Demand for our services could be adversely impacted by negative conditions
in the United States economy or the industries of our customers. A substantial
number of our principal customers are in the personal computer, electronics,
telecommunications and related industries. These customers collectively account
for a substantial percentage of our revenues. Adverse conditions in the
industries of our customers could cause us to lose a significant customer or
experience a decrease in the shipment volume of our customers. Either of these
events could negatively impact our financial results. We expect that demand for
our services, and consequently our results of operations, will be sensitive to
domestic and global economic conditions and other factors beyond our control.
Our ability to serve our customers depends on the availability of cargo space
from third parties.
Our ability to serve our customers depends on the availability of air and
sea cargo space, including space on passenger and cargo airlines and ocean
carriers that service the transportation lanes that we utilize. Shortages of
cargo space are most likely to develop around holidays and in especially heavy
transportation lanes. In addition, available cargo space could be reduced as a
result of decreases in the number of passenger airlines or ocean carriers
serving particular transportation lanes at particular times. This could occur as
a result of economic conditions, transportation strikes, regulatory changes and
other factors beyond our control. Our future operating results could be
adversely affected by significant shortages of suitable cargo space and
associated increases in rates charged by passenger airlines or ocean carriers
for cargo space.
We may lose business to competitors.
Competition within the freight industry is intense. We compete with fully
integrated carriers, including BAX Global, Inc. and Emery Air Freight
Corporation. We expect to encounter continued competition from those forwarders
that have a predominantly international focus and have established international
networks, including those based in the United States and Europe. We also expect
to continue to encounter competition from other forwarders with nationwide
networks, regional and local forwarders, passenger and cargo air carriers,
trucking companies, cargo sales agents and brokers, and carriers and
associations of shippers organized for the purpose of consolidating their
members' shipments to obtain lower freight rates from carriers. As a customs
broker and ocean freight forwarder, we encounter strong competition in every
port in
14
17
which we do business, often competing with large domestic and foreign firms as
well as local and regional firms. Our inability to compete successfully in our
industry could cause us to lose customers or lower the volume of our shipments.
Our success depends on the efforts of our founder and other key managers and
personnel.
Our founder, James R. Crane, continues to serve as President, Chief
Executive Officer and Chairman of the Board of Directors. We believe that our
success is highly dependent on the continuing efforts of Mr. Crane and other
executive officers and key employees, as well as our ability to attract and
retain other skilled managers and personnel. The loss of the services of any of
our key personnel could have a material adverse effect on us.
We are subject to claims arising from our pick up and delivery operations.
We use the services of approximately 2,600 drivers in connection with our
local pick up and delivery operations. From time to time, these drivers are
involved in accidents. Although most of these drivers are independent
contractors, we could be held liable for their actions. We currently carry, or
require our independent owner/operators to carry, liability insurance of $1.0
million for each accident. However, claims against us may exceed the amount of
coverage. A material increase in the frequency or severity of accidents,
liability claims or workers' compensation claims, or unfavorable resolutions of
claims, could materially adversely affect us. In addition, significant increases
in insurance costs as a result of these claims could reduce our profitability.
We could incur additional expenses or taxes if the independent owner/operators
we use in connection with our local pick up and delivery operations are found
to be "employees" rather than "independent contractors."
The Internal Revenue Service, state authorities and other third parties
have at times successfully asserted that independent owner/operators in the
transportation industry, including those of the type we use in connection with
our local pick up and delivery operations, are "employees" rather than
"independent contractors." Although we believe that the independent
owner/operators we use are not employees, the IRS, state authorities or others
could challenge this position, and federal and state tax or other applicable
laws, or interpretations of applicable laws, could change. If they do, we could
incur additional employee benefit-related expenses and could be liable for
additional taxes, penalties and interest for prior periods and additional taxes
for future periods.
Our failure to comply with governmental permit and licensing requirements
could result in substantial fines or revocation of our operating authorities,
and changes in these requirements could adversely affect us.
Our operations are subject to various state, local, federal and foreign
regulations that in many instances require permits and licenses. Our failure to
maintain required permits or licenses, or to comply with applicable regulations,
could result in substantial fines or revocation of our operating authorities.
Moreover, government deregulation efforts, "modernization" of the regulations
governing customs clearance and changes in the international trade and tariff
environment could require material expenditures or otherwise adversely affect
us.
The U.S. Equal Employment Opportunity Commission charge against us and
purported class action lawsuit could result in the payment of substantial
amounts and subject us to significant non-monetary requirements.
The U.S. Equal Employment Opportunity Commission charge against us and
purported class action lawsuit could result in the payment of substantial
amounts and subject us to significant non-monetary requirements. These payments
and non-monetary requirements could have a material adverse effect on us. For a
description of these matters, see Item 3, "Legal Proceedings."
15
18
We may face difficulties in integrating the operations of the Circle
International Group, Inc. acquisition.
Our management team does not have experience with the combined business and
does not have experience managing international operations of a scope comparable
to that of Circle. We may not be able to integrate the operations of Circle
without a loss of key officers, employees, agents, joint venturers, customers or
suppliers, a loss of revenues, an increase in operating or other costs or other
difficulties. In particular, we may experience difficulties integrating our
information technology systems with Circle's financial and operational
information technology systems. We may also experience difficulties with
obtaining required governmental licenses and approvals. In addition, we may not
be able to realize any operating efficiencies, synergies or other benefits
expected from the merger. Any costs or delays incurred in connection with
integrating the operations of Circle could have an adverse effect on our
business, results of operations or financial condition. In addition, the
combined company may experience the difficulties associated with being a larger
entity, including increased difficulties of coordination, complexities
concerning the integration of information systems, difficulties relating to
increased size and scale and increased risk of unionization of workforce.
Our Chairman owns approximately 24.7% of our outstanding common stock and has
the greatest influence of any of our stockholders.
James R. Crane owns approximately 24.7% of our outstanding common stock.
Based on the ownership positions of our current stockholders, his ability to
influence matters submitted to a vote of stockholders is greater than any other
stockholder.
Provisions of our charter and bylaws and of Texas law may delay or prevent
transactions that would benefit stockholders.
Our articles of incorporation and bylaws and Texas law contain provisions
that may have the effect of delaying, deferring or preventing a change of
control. These provisions, among other things:
- authorize our Board of Directors to set the terms of preferred stock,
- provide that any stockholder who wishes to propose any business or to
nominate a person or persons for the election as director at any meeting
of stockholders may do so only if advance notice is given to our
corporate secretary,
- restrict the ability of stockholders to take action by written consent,
and
- restrict our ability to engage in transactions with some 20%
stockholders.
Because of these provisions, persons considering unsolicited tender offers
or other unilateral takeover proposals may be more likely to negotiate with our
Board of Directors rather than pursue non-negotiated takeover attempts. As a
result, these provisions may make it more difficult for our stockholders to
benefit from transactions that are opposed by an incumbent Board of Directors.
16
19
ITEM 2. PROPERTIES
The properties used in our domestic and foreign operations consist
principally of air and ocean freight forwarding offices, customs brokerage
offices and warehouse and distribution facilities. Our freight forwarding
terminal locations are typically located at or near major metropolitan airports
and occupy between 1,000 and 160,000 square feet of leased or owned space, and
typically consist of offices, warehouse space, bays for loading and unloading
and facilities for packing. Terminals are managed by a station manager, who is
assisted by an operations manager. We also have locations that are limited to
sales and administrative activities. The leased terminals are under
noncancelable leases that expire on various dates through 2025. From time to
time, we may expand or relocate terminals to accommodate growth.
The following table sets forth certain information as of December 31, 2000
concerning the number of our domestic and foreign facilities and freight
handling terminals:
OWNED LEASED TOTAL
----- ------ -----
North America............................................... 9 152 161
South America............................................... 0 15 15
Europe and Middle East...................................... 11 109 120
Asia and South Pacific...................................... 10 92 102
Corporate................................................... 1 1 2
-- --- ---
Total............................................. 31 369 400
As of December 31, 2000, our corporate office occupied approximately
135,279 square feet of space in a facility located in Houston, Texas. As a
result of the Circle merger, we acquired Circle's former headquarters building
in San Francisco, California, which is held for sale or lease.
For information regarding the consolidation of facilities at our operating
locations, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Merger -- Future lease obligations" and note 3 of the
notes to our consolidated financial statements. For further information
regarding our lease commitments, see note 11 of the notes to our consolidated
financial statements.
ITEM 3. LEGAL PROCEEDINGS
In December 1997, the U.S. Equal Employment Opportunity Commission ("EEOC")
issued a Commissioner's Charge against us and some of our subsidiaries (the
"Commissioner's Charge") pursuant to Sections 706 and 707 of Title VII of the
Civil Rights Act of 1964, as amended ("Title VII"). In the Commissioner's
Charge, the EEOC charged us and some of our subsidiaries with violations of
Section 703 of Title VII, as amended, the Age Discrimination in Employment Act
of 1967, and the Equal Pay Act of 1963, resulting from (1) engaging in unlawful
discriminatory hiring, recruiting and promotion practices and maintaining a
hostile work environment, based on one or more of race, national origin, age and
gender, (2) failures to investigate, (3) failures to maintain proper records,
and (4) failures to file accurate reports. The Commissioner's Charge states that
the persons aggrieved include all Blacks, Hispanics, Asians and females who are,
have been or might be affected by the alleged unlawful practices.
In May 2000, the Houston District Office of the EEOC provided us with its
"Letter of Determination and Conciliation Proposal" with respect to the
investigation pertaining to the Commissioner's Charge and made a final
determination that there is a sufficient evidentiary basis to sustain all
allegations in the Commissioner's Charge, except as to certain charges relating
to Asian Americans.
The Conciliation Proposal "invites [EGL] to actively engage in conciliation
to resolve this matter," and proposes certain monetary and non-monetary remedies
to "serve to facilitate confidential discussions which, hopefully, will
eventuate in an appropriate settlement." That proposed relief includes (1)
backpay and benefits for a class of minorities in the amount of $6,000,000 (this
is a $950,000 reduction from the amount claimed under the preliminary
assessment), (2) compensation for certain incumbent minorities and women who
were allegedly underpaid relative to white male counterparts in the amount of
$5,000,000, (3) compensation for certain minority and female employees who were
allegedly not promoted at rates comparable to their
17
20
respective employment rates in the amount of $2,950,000, and (4) financial
compensation for certain other employees as a result of alleged "disparate
discipline" in the amount of $745,000, all of which is exclusive of interest,
compensatory and punitive damages and costs.
The specific monetary relief as outlined above is $950,000 less than that
amount proposed in its preliminary assessment. The Conciliation Proposal stated,
however, that "the EEOC agreed that this claim [for monetary relief] could be
resolved for $20,000,000." The EEOC also sought non-monetary relief, including
hiring 244 minority employees, certain upward adjustments to salaries,
reinstatement of up to 15 employees and required promotion of 30 employees. The
Conciliation Proposal also sought other non-monetary relief, including (1)
reformation of our policies and practices with respect to record keeping,
recruiting, hiring and placement, reinstatement, promotion and transfer, and
corporate governance, (2) revision of certain job descriptions, (3) institution
of employee and supervisory training, and (4) the institution of specified
procedures and steps with respect to such matters.
We believe that the Houston District Office's May 2000 Determination
finding systemic discrimination is unsupported by any credible evidence and was
rendered by the agency in part due to agency bias against us and our Chief
Executive Officer because of our vigorous defense of this matter. We accepted
the EEOC's offer to conciliate this matter and have participated in numerous
conciliation conferences with the EEOC during the past few months.
Certain individual employees have brought charges of this nature against us
in the ordinary course of business. Additionally, following the issuance of the
EEOC's Determination in May 2000, a lawsuit was filed on May 12, 2000 in the
U.S. District Court for the Eastern District of Pennsylvania (Civil Action No.
00-CV-2461) by Augustine Dube, Noelle Davis, Kshanti Morris and Ruben Capaletti,
who are former employees or individuals who had unsuccessfully applied for a
position with us. Four additional plaintiffs joined the suit in late July 2000.
The lawsuit alleges discrimination and adopts the EEOC's conclusions in their
entirety. Although the named plaintiffs on this lawsuit seek to represent a
class of individuals, no class action has yet been approved by the court, and
the plaintiff's request for class certification has been preliminarily denied.
In January 2001, the EEOC was allowed to intervene in the case, which could
allow claims to be brought with respect to a class of individuals. At that time,
the court in Philadelphia also granted our request that the case be transferred
to the U.S. District Court for the Southern District of Texas in Houston.
The lawsuit seeks unspecified damages that are not limited by the relief
sought by the EEOC in the Conciliation Proposal. Because the lawsuit is
essentially based upon the contested EEOC allegations described above, we fully
intend to defend ourselves in both matters but would consider a settlement with
both the plaintiffs and the EEOC that we believe is reasonable in both monetary
and non-monetary terms. We initiated a mediation process with both the EEOC and
the plaintiffs in the lawsuit in an effort to resolve this matter but results to
date have been unsuccessful. There can be no assurance as to what will be the
amount of time it will take to resolve the Commissioner's Charge, the other
lawsuits and related issues or the degree of any adverse effect these matters
may have on us and our financial condition and results of operation. A
substantial settlement payment or judgment could result in a significant
decrease in working capital and liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- 2000 Compared to 1999" and note 11 of the notes to our
consolidated financial statements for a discussion of commitments and
contingencies.
From time to time we are a party to various legal proceedings arising in
the ordinary course of business. Except as described above, we are not currently
a party to any material litigation and are not aware of any litigation
threatened against us, which we believe would have a material adverse effect on
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 2000.
18
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our common stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol EAGL. The following table sets forth the quarterly
high and low closing sales prices for each indicated quarter of 2000 and 1999,
as adjusted retroactively for a 3-for-2 stock split that occurred on August 30,
1999:
QUARTER ENDED HIGH LOW
- ------------- ------ ------
March 31, 1999.............................................. $21.67 $14.83
June 30, 1999............................................... 32.33 21.42
September 30, 1999.......................................... 29.94 24.08
December 31,1999............................................ 49.00 28.00
March 31, 2000.............................................. $46.75 $21.25
June 30, 2000............................................... 32.13 20.38
September 30, 2000.......................................... 37.63 26.75
December 31, 2000........................................... 35.63 19.50
The closing price for our common stock was $24.88 on February 28, 2001.
There were approximately 417 stockholders of record (excluding brokerage
firms and other nominees) of our common stock as of February 28, 2001.
Since our initial public offering in November 1995, EGL has not paid cash
dividends on our common stock, although Circle had regularly declared semiannual
dividends prior to the merger of EGL and Circle. It is the current intention of
our management to retain earnings to finance the growth of our business in lieu
of paying dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for a
discussion of our repurchases of our common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data that have been
derived from our consolidated financial statements. The information set forth
below is not necessarily indicative of results of future operations, and should
be read in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes thereto, included elsewhere in this report.
In July 2000, we determined to change our fiscal year end to December 31
beginning with the December 31, 2000 year end. Prior to that determination, our
fiscal years ended on September 30. In October 2000, we completed a merger with
Circle International Group, Inc. accounted for as a pooling of interests. The
statement of operations data below has been prepared by combining our results of
operations for the years ended September 30, 1999, 1998, 1997 and 1996 with
Circle's results of operations for the years ended December 31, 1999, 1998, 1997
and 1996, respectively. The balance sheet data has been prepared by combining
our financial results as of December 31, 1999 and September 30, 1998, 1997 and
1996 with Circle's financial results as of December 31, 1999, 1998, 1997 and
1996. The periods have been labeled year ended December 31 to be more consistent
with our current year-end. The stand-alone results of operations of EGL for the
three months ended December 31, 1999 have been omitted from the information
presented.
19
22
EGL stand-alone revenues, net revenues, operating income, net income and
basic and diluted earnings per share for the period October 1, 1999 through
December 31, 1999 were $187.4 million, $78.2 million, $15.7 million, $9.9
million, $0.35 and $0.33, respectively. Unaudited pro forma revenues, net
revenues, operating income, net income and basic and diluted earnings per share
for the year ended December 31, 1999 depicting the combined results of EGL and
Circle as if EGL had a fiscal year ended December 31, 1999 are $1,451.7 million,
$601.9 million, $75.6 million, $53.9 million, $1.18 and $1.14, respectively.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $1,861,206 $1,409,250 $1,154,761 $1,008,756 $831,075
Net revenues...................... 719,512 587,075 485,506 406,195 340,591
Operating income(1)(2)............ 10,651 72,047 56,306 58,072 47,560
Net income (loss)(3).............. (722) 51,710 39,547 43,130 33,198
Basic earnings (loss) per
share(4)........................ $ (0.02) $ 1.14 $ 0.88 $ 0.99 $ 0.80
Basic weighted average shares
outstanding(4).................. 46,600 45,504 45,141 43,511 41,544
Diluted earnings (loss) per
share(4)........................ $ (0.02) $ 1.11 $ 0.85 $ 0.95 $ 0.77
Diluted weighted average shares
outstanding(4).................. 46,600 46,481 46,321 45,214 43,208
BALANCE SHEET DATA (AT YEAR END):
Working capital................... $ 236,005 $ 231,533 $ 181,336 $ 160,909 $115,057
Total assets...................... 899,746 775,694 651,142 541,270 480,982
Long-term indebtedness, net of
current portion................. 91,051 32,244 21,558 27,702 29,014
Stockholders' equity.............. 403,767 401,455 338,758 281,476 233,219
- ---------------
(1) 2000 includes transaction, integration and restructuring charges related to
the merger with Circle totaling $67.4 million or $49.9 million net of tax
($1.07 per diluted share). See notes 2 and 3 of the notes to our
consolidated financial statements for a discussion of the Circle merger and
other acquisitions made in 2000, 1999 and 1998.
(2) 1998 includes special charges of $10.7 million or $8.1 million, net of tax
($0.17 per diluted share).
(3) Net income for the year ended December 31, 1996 includes a pro forma charge
of $0.9 million, which represents the estimated federal income taxes that
would have been reported had we been a C Corporation prior to December 4,
1995.
(4) Net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period,
adjusted to include the following: (a) the retroactive restatement giving
effect to the 3-for-2 stock split in August 1999, and (b) the weighted
average of common stock equivalents issuable upon exercise of stock options,
less the number of shares that could have been repurchased with the exercise
proceeds using the treasury stock method. The computation for the year ended
December 31, 1996 also includes (a) the retroactive restatement giving
effect to the 2-for-1 stock split in August 1996; (b) the number of shares
that our Chairman of the Board received upon the closing of the initial
public offering in connection with our acquisition of interests in
subsidiaries; and (c) the number of shares that would be required to be sold
by EGL to fund S corporation shareholder distributions upon closing of the
initial public offering. There have been no common stock equivalents
included in the diluted weighted average share calculation for the year
ended December 31, 2000, as their effect is anti-dilutive given our net loss
for the period.
20
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this report.
CHANGE IN YEAR END
On July 2, 2000, we changed our fiscal year end from September 30 to
December 31, effective with the calendar year ended December 31, 2000. A
three-month transition period from October 1, 1999 to December 31, 1999 precedes
the start of the 2000 fiscal year. The financial data set forth below for "1999"
and "1998" have been prepared by combining our financial data for the years
ended September 30, 1999 and 1998 with Circle's financial data for the years
ended December 31, 1999 and 1998, respectively. The financial data set forth
below for "2000" are for the 12 months ended December 31, 2000. Accordingly,
EGL's stand-alone results of operations for the three months ended December 31,
1999 have been omitted from the information presented. EGL's stand-alone
revenues, net revenues, operating income, net income and basic and diluted
earnings per share for the period October 1, 1999 through December 31, 1999 were
$187.4 million, $78.2 million, $15.7 million, $9.9 million, $0.35 and $.033,
respectively. Unaudited pro forma revenues, net revenues, operating income, net
income and basic and diluted earnings per share for the year ended December 31,
1999 depicting the combined results of EGL and Circle as if EGL had a fiscal
year ended December 31, 1999 are $1,451.7 million, $601.9 million, $75.6
million, $53.9 million, $1.18 and $1.14, respectively.
MERGER
On October 2, 2000, we completed a merger with Circle International Group,
Inc. by issuing approximately 17.9 million shares of our common stock for all of
the outstanding common stock of Circle. Each share of Circle common stock was
exchanged for one share of our common stock. Circle is a leader in providing
transportation and integrated logistics services for the international movement
of goods and the furnishing of value-added information, distribution and
inventory management services to customers worldwide. Circle is principally
engaged in international air and ocean freight forwarding, customs brokerage and
logistics.
The merger was accounted for as a pooling of interests and, accordingly,
all of our prior period consolidated financial statements have been restated to
include the results of operations, financial position and cash flows of Circle
as described above under "-- Change in Year End."
In connection with the Circle merger, we recorded merger-related costs of
$67.4 million or $49.9 million after tax during the fourth quarter of 2000. The
categories of costs incurred, the actual cash payments made in 2000 and the
accrued balances at December 31, 2000 are summarized below (in thousands):
ACCRUED BALANCE
AMOUNTS PAID/ AT
WRITTEN OFF IN DECEMBER 31,
TOTAL 2000 2000
------- ------------------- ------------------
Cash costs:
Transaction costs.......................... $ 9,774 $ (9,774) --
Severance costs............................ 8,377 (2,110) $ 6,267
Future lease obligations, net of expected
sublease income.......................... 11,105 (1,042) 10,063
Termination of joint venture/agency
agreements............................... 9,322 (4,110) 5,212
Integration costs.......................... 8,214 (4,780) 3,434
------- -------- -------
Subtotal cash cost......................... 46,792 (21,816) 24,976
------- -------- -------
Noncash.................................... 20,597 (20,597) --
------- -------- -------
Total............................ $67,389 $(42,413) $24,976
======= ======== =======
21
24
Transaction costs
Transaction costs of $9.8 million include investment banking, legal,
accounting and printing fees and other costs directly related to the merger.
Severance costs
Severance costs have been recorded for certain employees at the former
Circle headquarters and former Circle management at certain international
locations who were terminated or notified of their termination prior to December
31, 2000. As of December 31, 2000, approximately 60 of the 150 employees
selected for termination are no longer our employees.
In addition, we expect to terminate an additional 90 employees in the first
quarter of 2001. Severance costs have not been accrued for certain of these
employees since these employees have not met the required conditions in order to
receive severance benefits as of December 31, 2000. We expect to record an
additional charge of approximately $2.4 million in the first quarter of 2001
related to these employees. Substantially all employees to be terminated as a
result of the Circle merger are expected to be terminated prior to the end of
the first quarter of 2001.
Also, during January 2001 we announced an additional reduction in our
workforce of approximately 300 employees. The charge for this workforce
reduction is approximately $0.7 million and will be recorded during the first
quarter of 2001.
Future lease obligations
Future lease obligations consist of our remaining lease obligations under
noncancelable operating leases at domestic and international locations that we
are vacating and consolidating due to excess capacity caused by multiple
facilities in certain locations. Amounts recorded for future lease obligations
are net of $28.0 million in anticipated future recoveries from actual or
expected sublease agreements. Sublease income has been anticipated only in
locations where sublease agreements have been executed as of December 31, 2000
or are deemed probable of execution during the first half of 2001. We have
provided for consolidation of facilities at 80 of our operating locations. As of
December 31, 2000, consolidation of facilities has been completed at 17 of these
locations, with the remaining locations expected to be completed by the fourth
quarter of 2001. In addition, we expect further consolidation at some of our
other locations in the future. Costs for the consolidations at these locations
has not been included in the merger costs as of December 31, 2000 as we have not
yet been able to determine the estimated consolidation dates for these
facilities. It is expected that the plans to consolidate these locations will be
finalized during the first half of 2001. All lease costs for facilities being
consolidated are charged to operations until the date we vacate each facility.
The charges recorded also include provisions for closing Circle's logistics
facility in Los Angeles, California.
Termination of joint venture/agency agreements
Costs to terminate joint venture/agency agreements represent contractually
obligated costs incurred to terminate selected joint venture/agency agreements
with certain of our former business partners. Joint venture/agency agreements in
Brazil, Chile, Panama, Venezuela, Taiwan and South Africa are currently being
terminated.
Integration costs
Integration costs of approximately $8.2 million include the costs of
changing legal registrations in various jurisdictions, changing signs and logos
at our major facilities around the world, and other integration costs and have
been expensed as incurred. Approximately $3.4 million of this amount was unpaid
at December 31, 2000. Other integration costs are expected to be incurred and
expensed in 2001.
22
25
Noncash charge
The noncash charge of $20.6 million consists of assets not expected to be
recoverable, which include: (a) fixed assets at various locations that will no
longer be used in our ongoing operations after we consolidate those locations;
(b) computer hardware and software at the former Circle operations that will no
longer be used as these assets are not compatible with our existing information
technology strategy; and (c) assets not expected to be fully recoverable as a
result of our decision to terminate certain joint venture/agency agreements.
RECENT DEVELOPMENT
As part of our cost management efforts, we implemented a one-week furlough
program for all salaried employees to be taken by the end of March 2001. The
furlough program is in addition to previously announced cost control
initiatives. Our President and Chief Executive Officer, James R. Crane, and the
11 senior team members reporting to him will participate in the furlough program
and will also take a reduction in salary to contribute toward the efforts to
reduce costs in 2001.
RESULTS OF OPERATIONS
The following table presents certain statement of operations data for the
periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
% OF % OF % OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues:
Air freight forwarding............. $1,465,438 78.7 $1,112,280 78.9 $ 899,784 77.9
Ocean freight forwarding........... 184,602 9.9 137,024 9.7 111,938 9.7
Customs brokerage and other........ 211,166 11.4 159,946 11.4 143,039 12.4
---------- ----- ---------- ----- ---------- -----
Revenues............................. $1,861,206 100.0 $1,409,250 100.0 $1,154,761 100.0
========== ===== ========== ===== ========== =====
% OF % OF % OF
NET NET NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
---------- -------- ---------- -------- ---------- --------
Net revenues:
Air freight forwarding............. $ 473,397 65.8 $ 379,602 64.6 $ 301,996 62.2
Ocean freight forwarding........... 53,462 7.4 49,194 8.4 40,471 8.3
Customs brokerage and other........ 192,653 26.8 158,279 27.0 143,039 29.5
---------- ----- ---------- ----- ---------- -----
Net revenues......................... $ 719,512 100.0 $ 587,075 100.0 $ 485,506 100.0
========== ===== ========== ===== ========== =====
Operating expenses:
Personnel costs.................... 378,461 52.6 302,373 51.5 255,966 52.7
Other selling, general and
administrative expenses.......... 263,011 36.5 212,655 36.2 173,234 35.7
Transaction, restructuring and
integration costs.................. 67,389 9.4 -- -- -- --
---------- ----- ---------- ----- ---------- -----
Operating income..................... 10,651 1.5 72,047 12.3 56,306 11.6
Nonoperating income, net............. 1,790 0.2 11,973 2.0 9,135 1.9
Net income (loss).................... $ (722) -- $ 51,710 8.8 $ 39,547 8.1
========== ===== ========== ===== ========== =====
23
26
2000 Compared to 1999
Revenue. Revenue increased $451.9 million, or 32.1%, to $1,861.2 million
in 2000 compared to $1,409.3 million in 1999 primarily due to increases in air
freight forwarding revenue. Net revenue, which represents revenue less freight
transportation costs, increased $132.4 million, or 22.6%, to $719.5 million in
2000 compared to $587.1 million in 1999. Both revenue and net revenue growth
benefited from acquisitions completed during December 1999 and January 2000.
Air freight forwarding revenue. Air freight forwarding revenue increased
$353.1 million, or 31.7%, to $1,465.4 million in 2000 compared to $1,112.3
million in 1999 primarily as a result of volume increases in North America and,
to a lesser extent, Asia Pacific and South America. Air freight forwarding net
revenue increased $93.8 million, or 24.7%, to $473.4 million in 2000 compared to
$379.6 million in 1999.
The increase in North America resulted from the addition of significant
national account customers throughout 2000 and the effect of the acquisitions of
two Canadian freight forwarding companies in January 2000. See "-- CTI and
Fastair." Air freight forwarding revenue and net revenue reported by CTI and
Fastair in 2000 were $57.1 million and $19.0 million, respectively. The increase
in Asia Pacific resulted from the consolidation of a formerly unconsolidated
affiliate in Taiwan. For the twelve months ended December 31, 2000, Taiwan
reported air freight forwarding revenue and net revenue of $66.2 million and
$6.3 million, respectively. South America benefited from our acquisition of
Compass Cargo Limitada, a privately held air freight forwarder in Chile in
December 1999 which contributed air freight forwarding revenue and net revenue
of $20.4 million and $1.5 million, respectively, for the year ended December 31,
2000. The air freight forwarding margin declined to 32.3% in 2000 compared to
34.1% in 1999 due to higher carrier costs, which included fuel surcharges and
start-up costs associated with a new dedicated leased aircraft servicing the
U.S.-Asia market.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
increased $47.6 million, or 34.7%, to $184.6 million in 2000 compared to $137.0
million in 1999, while ocean freight forwarding net revenue increased $4.3
million, or 8.7%, to $53.5 million in 2000 compared to $49.2 million in 1999.
The increases were principally due to volume increases in Asia Pacific and
Europe. The ocean freight forwarding margin declined to 29.0% in 2000 compared
to 35.9% in 1999 primarily due to the conversion of direct shipments to
consolidations and higher carrier costs.
Customs brokerage and other revenue. Customs brokerage and other revenue,
which includes warehousing, distribution and other logistics services, increased
$51.3 million, or 32.1%, to $211.2 million in 2000 compared to $159.9 million in
1999, while net customs brokerage and other revenue increased $34.4 million, or
21.7%, to $192.7 million in 2000 compared to $158.3 million in 1999. Customs
brokerage revenue increased due to increased inbound traffic in North America
and Europe. Warehousing and distribution revenues increased as a result of
expanded warehousing facilities.
Operating expenses. Personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. Personnel costs increased $76.1 million, or
25.2%, to $378.5 million in 2000 compared to $302.4 million in 1999. As a
percentage of net revenue, personnel costs were 52.6% in 2000 compared to 51.5%
in 1999. This increase was due to increased staffing needs associated with the
opening of new terminals, the effect of acquisitions, expanded operations at
existing terminals and increased commissions resulting from higher revenues and
expanded corporate infrastructure.
Other selling, general and administrative expenses, excluding transaction,
restructuring and integration costs, increased $50.3 million, or 23.6%, to
$263.0 million in 2000 compared to $212.7 million in 1999 due to an overall
increase in the level of our activities in 2000 and increased expenses
attributable to acquisitions. In addition, during the fourth quarter of 2000, we
increased the provision for doubtful accounts by approximately $3.4 million to
reserve for certain bad debts associated with the closure of an unprofitable
logistics facility and the termination of foreign agent relationships and
reserved $7.5 million for legal expenses to contest EEOC and related charges.
See Item 3, "Legal Proceedings."
24
27
Operating income. Operating income decreased $61.3 million, or 85.1%, to
$10.7 million in 2000 compared to $72.0 million in 1999 primarily due to $67.4
million of transaction, restructuring and integration costs recorded in the
fourth quarter of 2000 in connection with the Circle merger.
Nonoperating income, net. Nonoperating income, net decreased $10.1
million, or 84.9%, to $1.8 million in 2000 compared to $11.9 million in 1999.
Our 1999 nonoperating income, net included a $4.5 million gain on the sale of
securities further discussed in note 10 of the notes to our consolidated
financial statements. During 2000, income from unconsolidated affiliates
declined $2.3 million due primarily to the change in reporting of Taiwan from an
unconsolidated affiliate where we owned 50% in prior years to a consolidated
subsidiary with a minority interest of 49%. In addition, nonoperating income,
net decreased due to a lower level of interest income resulting from reduced
short-term investments that were liquidated to fuel expansion activity and
higher interest expense from increased borrowings.
Effective tax rate. The effective income tax rate for 2000 was 105.8%
compared to 38.5% for 1999. The 2000 effective tax rate was adversely impacted
by the transaction, restructuring and integration charges discussed in note 3 of
the notes to our consolidated financial statements. The effective tax rate for
2000 excluding these charges was 38.4%. Our effective tax rate fluctuates
primarily due to changes in the level of pre-tax income in foreign countries
that have different rates.
1999 Compared to 1998
Revenue. Revenue in 1999 increased $254.5 million, or 22.0%, to $1,409.3
million in 1999 compared to $1,154.8 million in 1998 due to increases in air
freight forwarding and ocean freight forwarding revenue. Net revenue in 1999
increased $101.6 million, or 20.9%, to $587.1 million in 1999 compared to $485.5
million in 1998. Both revenue and net revenue benefited from acquisitions
completed during the second half of 1998.
Air freight forwarding revenue. Air freight forwarding revenue increased
$212.5 million, or 23.6%, to $1,112.3 million in 1999 compared to $899.8 million
in 1998 primarily as a result of volume increases in North America and Asia
Pacific. Air freight forwarding net revenue increased $77.6 million, or 25.7%,
to $379.6 million in 1999 compared to $302.0 million in 1998. The increase in
North America resulted from an increase in the number of domestic terminals open
during 1999, an increase in the penetration of the domestic air freight and pick
up and delivery markets and the addition of significant national customer
accounts. The air freight forwarding margin for 1999 improved to 34.1% in 1999
compared to 33.6% in 1998 due to lower carrier costs.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
increased $25.1 million, or 22.4%, to $137.0 million in 1999 compared to $111.9
million in 1998, while ocean freight forwarding net revenue increased $8.7
million, or 21.5%, to $49.2 million in 1999 compared to $40.5 million in 1998.
The increases were primarily due to volume increases in Asia Pacific and Europe.
The ocean freight forwarding margin declined to 35.9% in 1999 compared to 36.2%
in 1998 primarily due to the conversion of direct shipments to consolidations
and higher carrier costs.
Customers brokerage and other revenue. Customs brokerage and other
revenue, which includes warehousing, distribution and other logistics services,
increased $16.9 million, or 11.8%, to $159.9 million in 1999 compared to $143.0
million in 1998, while net customs brokerage and other revenue increased $15.3
million, or 10.7%, to $158.3 million in 1999 compared to $143.0 million in 1998.
Customs brokerage revenues increased due to increased inbound traffic in Asia
Pacific and North America. Warehousing, distribution and other logistics
services revenue increased in Europe, North America and Asia Pacific.
Operating expenses. Personnel costs increased $46.4 million, or 18.1%, to
$302.4 million in 1999 compared to $256.0 million in 1998 principally as a
result of hiring more employees to serve new customers and to accelerate
business growth. Personnel costs as a percentage of net revenues dropped to
51.5% in 1999 from 52.7% in 1998. Other selling, general and administrative
expenses increased $39.5 million, or 22.8%, to $212.7 million in 1999 compared
to $173.2 million in 1998 due to overall increases in the level of activity in
1999, increased expenses attributable to acquisitions, our new headquarters
facilities and increased professional fees. During 1999, personnel costs and
other selling, general and administrative expenses were affected
25
28
by Year 2000 preparedness expenses and the impact of sales and marketing
expansion activities and information technology enhancements.
Operating income. Operating income increased $15.8 million, or 28.1%, to
$72.1 million in 1999 compared to $56.3 million in 1998 primarily due to revenue
growth and increased leverage on personnel costs.
Nonoperating income, net. Nonoperating income, net increased $2.8 million,
or 30.8%, to $11.9 million in 1999 compared to $9.1 million in 1998 due
primarily to a $4.5 million gain on the sale of securities further discussed in
note 10 of the notes to our consolidated financial statements and a $0.8 million
gain on the sale of our New Zealand perishables business. These gains were
offset primarily by $2.3 million of lower interest income, net of interest
expense. The decrease in interest income, net resulted from reduced short-term
investments that were liquidated to fuel expansion activity in 1998 and higher
interest expense from increased borrowings in 1999.
Effective income tax rate. The effective income tax rate for 1999 was
38.5% compared to 39.6% for 1998. The 1998 effective tax rate was adversely
impacted by the special charges discussed in note 3 of the notes to our
consolidated financial statements. The effective tax rate for 1998 excluding
special charges was 37.4%. Our effective tax rate fluctuates primarily due to
changes in the level of pre-tax income in foreign countries that have different
rates.
LIQUIDITY AND CAPITAL RESOURCES
General
We make significant disbursements on behalf of our customers for
transportation costs and customs duties. The billings to customers for these
disbursements, which are several times the amount of revenue and fees derived
from these transactions, are not recorded as revenue and expense on our
statement of operations; rather, they are reflected in our trade receivables and
trade payables. Growth in the level of this activity or lengthening of the
period of time between incurring these costs and being reimbursed by our
customers for these costs may negatively affect our liquidity.
2000 Compared to 1999
Cash provided by operating activities. Net cash provided by operating
activities was $33.4 million in 2000 compared to $33.6 million in 1999. The
decrease in 2000 was primarily due to an increase in net working capital. Net
working capital increased $4.5 million during 2000 principally due to expansion
activities and the timing of receipts and disbursements.
Cash used in investing activities. Cash used in investing activities in
2000 was $94.8 million compared to $41.3 million in 1999. We incurred capital
expenditures of $70.4 million during 2000. These expenditures were mainly due to
information technology initiatives and general facilities expansion in North
America. Cash paid for acquisitions in 2000, net of cash acquired, was $28.7
million. See note 2 of the notes to our consolidated financial statements for a
discussion of business combinations.
Cash provided by financing activities. Cash provided by financing
activities in 2000 was $48.3 million compared to $1.9 million in 1999. Long-term
notes payable increased $58.8 million due primarily to a $56.0 million increase
in the revolving line of credit, which had a balance of $81.0 million at
December 31, 2000 compared to a $25.0 million balance in commercial paper at
December 31, 1999. Proceeds from the exercise of stock options were $18.9
million in 2000 compared to $11.1 million in 1999.
1999 Compared to 1998
Cash provided by operating activities. Net cash provided by operating
activities decreased to $33.6 million in 1999 compared to $63.6 million in 1998.
The decrease is primarily due to an increase in net working capital. Net working
capital at December 31, 1999 was $231.5 million compared to $181.3 million at
December 31, 1998. The increase in working capital is primarily due to the
timing of receipts and disbursements. The fluctuations in individual components
are largely due to 1998 acquisitions.
26
29
Cash used by investing activities. Cash used by investing activities
increased to $41.3 million in 1999 compared to $29.2 million in 1998. Capital
expenditures in 1999 were $41.9 million compared to $24.8 million in 1998.
Cash provided by financing activities. Cash provided by financing
activities for 1999 was $1.9 million compared to $3.4 million in 1998. The
decrease is due to $14.8 million used to purchase treasury stock, which was
offset by an increase in long-term notes payable of $10.7 million due to an
$11.0 million increase in commercial paper issued and outstanding and an
increase in proceeds from the exercise of stock options of $3.3 million.
Other factors affecting our liquidity and capital resources
Share repurchase. In January 2000, our board of directors authorized the
repurchase of up to one million shares of our outstanding common stock. In April
2000, our board of directors increased the authorization to three million
shares. Our intention has been that repurchase would help to offset increases in
the number of shares outstanding resulting form previous and future stock option
exercises. On July 2, 2000, our board of directors terminated the share
repurchase authorization, at which time we had repurchased an aggregate of
449,500 shares for a total of $10.5 million under the authorization.
Credit agreements. On January 13, 2000, we entered into a credit agreement
with Bank of America, N.A. as administrative agent. The credit agreement, as
amended, provided a $120 million revolving line of credit and included a $10
million sublimit for the issuance of letters of credit. This credit agreement
was terminated in January 2001.
In January 2001, we entered into a new credit agreement with several banks
with respect to a $150 million revolving line of credit. The revolving line of
credit provides a $150 million revolving line and includes a $30 million
sublimit for the issuance of letters of credit. The revolving line of credit
terminates in January 2004. For each tranche of principal obtained under the
revolving line of credit, we elect an interest rate based on either LIBOR plus
an applicable margin based on a ratio of consolidated debt to consolidated
earnings before interest, taxes, depreciation and amortization, known as EBITDA
(a LIBOR Tranche) or the greater of the prime rate announced by Bank of America,
N.A. or the federal funds rate plus 50 basis points (a Prime Rate Tranche). The
interest for a LIBOR Tranche is due at the earlier of three months from
inception of the LIBOR Tranche, as selected by us, or the expiration of the
LIBOR Tranche, whichever is earlier. The interest for a Prime Rate Tranche is
due quarterly.
We are subject to certain covenants under the terms of the revolving line
of credit, including, but not limited to, maintenance at the end of any fiscal
quarter of (a) minimum specified consolidated net worth, (b) a ratio of
consolidated funded debt to total capitalization of no greater than 0.40 to
1.00, (c) a ratio of consolidated funded debt to consolidated EBITDA of no
greater than 2.00 to 1.00 and (d) a consolidated fixed charge coverage ratio of
no less than 2.00 to 1.00. In addition, the revolving line of credit generally
prohibits additional indebtedness, except pursuant to the following: (a) the
revolving line of credit, (b) interest hedge agreements not entered into for
speculative purposes, (c) off balance sheet synthetic leases up to $35.0 million
in the aggregate, (d) any other agreement or agreements up to an aggregate of
$40.0 million, and (e) reimbursement obligations to sureties issuing payment and
performance bonds in the ordinary and usual course of our business. The
revolving line of credit also limits our ability to make distributions to our
shareholders, whether through the repurchase of stock, in cash or in kind, for
any rolling four fiscal quarter period to an amount not in excess of 50% of our
consolidated net income over such period. The revolving line of credit also
places restrictions on liens, investments, changes of control and other matters
and is secured by an interest in substantially all of our assets.
As of February 28, 2001, $118.5 million was outstanding under the revolving
line of credit. The terms of the revolving credit facility would permit
borrowings thereunder to be used to finance future acquisitions, joint venture
operations or capital expenditures or for other corporate purposes. We believe
that operating cash flows, our current financial structure and borrowing
capacity will be adequate to fund our operations and finance capital
expenditures and acquisitions over the coming year.
27
30
Bank lines of credit and letters of credit. We maintain a $10 million bank
line of credit to secure customs bonds and bank letters of credit to guarantee
certain transportation expenses in foreign locations. At December 31, 2000 and
1999, we were contingently liable for approximately $8.9 million and $7.8
million, respectively, under outstanding letters of credit and guarantees
related to these obligations. Our ability to borrow under bank lines of credit
and to maintain bank letters of credit is subject to the limitations on
additional indebtedness contained in our revolving line of credit discussed
above.
Agreements with charter airlines. We currently have agreements with
certain charter airlines which provide us with full access to regularly
scheduled chartered aircraft on a monthly basis. These agreements contain
guaranteed monthly minimum use requirements of the aircraft by us. Certain of
these agreements contain provisions which allow for early termination or
modification of the agreements to provide for an increase in or reduction of the
amount of aircraft available for our use at our discretion. One of these charter
agreements is with Miami Air International, Inc., a related party. Based on the
charter agreements presently in place and aircraft presently being used, we
expect to incur average minimum guaranteed charges of approximately $6.4
million, $3.0 million and $0.4 million on a monthly basis under these charter
agreements during the years ended December 31, 2001, 2002 and 2003,
respectively. These charter agreements are generally cancelable with a minimum
notice period.
Operating lease agreements. On January 10, 1997, we entered into a
five-year operating lease agreement with two unrelated parties for financing the
construction of our Houston terminal, warehouse and headquarters facility (the
"Houston facility"). The cost of the Houston facility was approximately $8.5
million. Under the terms of the lease agreement, average monthly lease payments
are approximately $59,000, which includes monthly interest costs based upon
LIBOR plus 145 basis points beginning on July 1, 1998 through January 2, 2002. A
balloon payment equal to the outstanding lease balance, which was initially
equal to the cost of the facility, is due on January 2, 2002. As of December 31,
2000, the lease balance was approximately $7.8 million.
On April 3, 1998, we entered into a five-year $20 million master operating
lease agreement with two unrelated parties for financing the construction of
terminal and warehouse facilities throughout the United States designated by us.
Under the terms of the master operating lease agreement, average monthly lease
payments, including monthly interest costs based upon LIBOR plus 145 basis
points, begin upon the completion of the construction of each financed facility.
The monthly lease obligations continue for a term of 52 months and currently
approximate $150,000 per month. A balloon payment equal to the outstanding lease
balances, which were initially equal to the cost of the facility, is due at the
end of each lease term. Construction began during 1999 on five terminal
facilities. As of December 31, 2000, the aggregate lease balance was
approximately $13.6 million under the master operating lease agreement.
The operating lease agreements contain restrictive financial covenants
requiring the maintenance of a fixed charge coverage ratio of at least 1.5 to
1.0 and specified amounts of consolidated net worth and consolidated tangible
net worth. In addition, the master operating lease agreement as amended on
October 20, 2000 restricts us from incurring debt in an amount greater than $30
million, except pursuant to a single credit facility involving a commitment of
not more than $150 million.
We have an option, exercisable at anytime during the lease term, and under
particular circumstances may be obligated, to acquire the Houston terminal and
each of our other financed facilities for an amount equal to the outstanding
lease balance. If we do not exercise the purchase option, and do not otherwise
meet our obligations, we are subject to a deficiency payment computed as the
amount equal to the outstanding lease balance minus the then current fair market
value of each financed facility within limits. We expect that the amount of any
deficiency payment would be expensed.
Commitments to construct warehouse and terminal facilities. As of December
31, 2000, we had entered into commitments to construct warehouse and terminal
facilities for an aggregate cost of approximately $18.6 million. Payment for the
construction of the facilities is being made from cash balances. Construction of
the facilities is estimated to be completed during 2001.
28
31
Stock options. As of December 31, 2000, we had outstanding non-qualified
stock options to purchase an aggregate of 6.0 million shares of common stock at
exercise prices equal to the fair market value of the underlying common stock on
the dates of grant (prices ranging from $0.83 to $33.81). At the time a non-
qualified stock option is exercised, we will generally be entitled to a
deduction for federal and state income tax purposes equal to the difference
between the fair market value of the common stock on the date of exercise and
the option price. As a result of exercises for the fiscal years ended December
31, 2000 and December 31, 1999 of non-qualified stock options to purchase an
aggregate of 1.2 million and 1.0 million shares of common stock, we are entitled
to a federal income tax deduction of approximately $17.0 million and $17.5
million, respectively. We have recognized a reduction of our federal and state
income tax liability of approximately $5.0 million and $4.5 million in 2000 and
1999. Accordingly, we recorded an increase to additional paid-in capital and a
reduction to current taxes payable pursuant to the provisions of SFAS No. 109,
"Accounting for Income Taxes." Any exercises of non-qualified stock options in
the future at exercise prices below the then fair market value of the common
stock may also result in tax deductions equal to the difference between those
amounts. There is uncertainty as to whether the exercises will occur, the amount
of any deductions, and our ability to fully utilize any tax deductions.
ACQUISITIONS
Eagle Transfer, Inc. and S. Boardman (Air Services) Limited
On April 3, 1998, we acquired substantially all of the operating assets and
assumed some liabilities of Eagle Transfer, Inc., a privately held international
freight forwarder/consolidator based in Miami, Florida. Despite the similarity
in names, EGL and Eagle Transfer had no prior affiliation. On April 14, 1998, we
acquired all of the outstanding stock of S. Boardman (Air Services) Limited, a
privately held full services forwarder based in London, England. The aggregate
purchase price for the two 1998 acquisitions was approximately $5.4 million,
including $4.3 million in cash plus 41,999 shares of common stock valued at
$750,000. The agreements also specify maximum contingent earnout payments in the
aggregate of $2.0 million in cash plus $2.3 million in common stock, if
specified performance benchmarks are met during the three-year period following
the acquisitions. The acquisitions were accounted for as purchases. Accordingly,
in each case the purchase price was allocated based upon the estimated fair
market value of the net assets acquired with the excess being recorded as
goodwill. The results of operations for the acquired operations were included in
the consolidated statement of operations from the acquisition date forward.
Through December 31, 2000, contingent payments of $1.4 million in cash and our
common stock had been recorded and recognized as additional goodwill in
connection with the 1998 acquisitions.
Alrod International, Inc.
In August 1998, Circle acquired 100% of the outstanding shares of Alrod
International, Inc., a privately owned international freight forwarding and
customs brokerage company based on the West Coast of the United States. In
connection with the acquisition, Circle issued 770,642 shares of its common
stock in exchange for all of the outstanding stock of Alrod. The total purchase
consideration was $21.0 million. The acquisition was accounted for as a pooling
of interests, with Alrod's financial data retroactively combined with our
financial data for all periods presented.
Compass Cargo Limitada
On December 15, 1999, we completed the acquisition of Compass Cargo
Limitada, a privately held air freight forwarder in Chile for an aggregate
purchase price of $1.2 million in cash at closing. The results of operations for
Compass Cargo Limitada were included in the consolidated statement of operations
from the acquisition date forward.
CTI and Fastair
On January 7, 2000, we completed the acquisitions of two commonly
controlled freight forwarding companies in Canada, Commercial Transport
International (Canada) Ltd. and Fastair Cargo Systems Ltd.,
29
32
for an aggregate purchase price of approximately $21.3 million in cash paid at
closing and approximately $4.9 million to be paid in cash in three annual
installments beginning in 2001. The agreement also provided for an earnout. The
agreement was amended in December 2000 to provide that the remaining earnout
payments will consist of (a) shares of our common stock with a value of $3.5
million, which shares will be issued in 2001, and (b) eight quarterly
installments of $125,000 beginning in December 2000 if CTI and Fastair achieve
certain budgeted results for the previous quarter. Through December 31, 2000,
contingent payments of $2.6 million had been recorded and recognized as
additional goodwill in connection with this acquisition. If CTI and Fastair
achieve only a portion of the budgeted results for a particular quarter, then
the related quarterly installment will be reduced pro rata; provided, that if
CTI and Fastair thereafter achieve the annual budgeted results, the last
quarterly installment for the fiscal year in question will be increased by the
amount of any previous decreases during the fiscal year in question. Each of
these acquisitions were accounted for as a purchase and the results of
operations for the acquired businesses are included in consolidated statement of
operations from the acquisition date forward.
Miami Air International, Inc.
In July 2000, we purchased 24.5% of the outstanding common stock of Miami
Air International, Inc., a privately held domestic and international charter
airline headquartered in Miami, Florida, for approximately $6.3 million in cash
in a stock purchase transaction. Our primary objective for engaging in the
transaction was to develop a business relationship with Miami Air in order to
obtain access to an additional source of reliable freight charter capacity. In
the transaction, certain stockholders of Miami Air sold 82% of the aggregate
number of outstanding shares of Miami Air common stock to private investors,
including EGL, James R. Crane, our Chairman and President, and Frank J.
Hevrdejs, a member of our Board of Directors. Mr. Crane purchased 19.2% of the
outstanding common stock for approximately $4.7 million in cash and Mr. Hevrdejs
purchased 6.0% of the outstanding common stock for approximately $1.5 million in
cash. Our Miami Air investment has been accounted for under the equity method.
In connection with the closing of the transaction, Miami Air and EGL
entered into an aircraft charter agreement whereby Miami Air agreed to convert
certain of Miami Air's passenger aircraft to cargo aircraft and to provide
aircraft charter services to us for a three-year term, and we caused a $7
million standby letter of credit to be issued in favor of certain creditors for
Miami Air to assist Miami Air in financing the conversion of its aircraft.
Miami Air has agreed to pay us an annual fee equal to 3.0% of the face
amount of the letter of credit and to reimburse us for any payments owed by us
in respect of the letter of credit. Miami Air, each of the private investors and
the continuing Miami Air stockholders also entered into a stockholders agreement
under which:
- Mr. Crane and Mr. Hevrdejs are obligated to purchase up to approximately
$1.7 million and $0.5 million, respectively, worth of Miami Air's Series
A preferred stock upon demand by the board of directors of Miami Air,
- each of EGL and Mr. Crane has the right to appoint one member of Miami
Air's board of directors, and
- the other private investors in the stock purchase transaction, including
Mr. Hevrdejs, collectively have the right to appoint one member of Miami
Air's board of directors.
As of December 31, 2000, directors appointed to Miami Air's board include
Mr. Crane, Mr. Elijio Serrano (our Chief Financial Officer) and two others. The
Series A preferred stock, if issued, (a) will not be convertible, (b) will have
a 15.0% annual dividend rate, and (c) will be subject to mandatory redemption in
July 2006 or upon the prior occurrence of specified events.
Circle International Group, Inc.
On October 2, 2000, we completed the acquisition of Circle. The merger is
intended to qualify as a tax-free reorganization for U.S. federal income tax
purposes and as a pooling of interests for accounting and
30
33
financial reporting purposes. As a result of the merger, each share of Circle's
common stock issued and outstanding immediately prior to the effective time of
the merger (other than shares owned by Circle, EGL or the special purpose merger
subsidiary) has been converted to the right to receive one validly issued, fully
paid and nonassessable share of our common stock. In the aggregate, we issued
17,933,910 shares of our common stock in exchange for issued and outstanding
shares of Circle common stock and assumed options exercisable for 1,094,052
shares of our common stock. The exchange ratio of one share of our common stock
for each share of Circle common stock was determined by arms-length negotiations
between us and Circle. See note 2 of the notes to our consolidated financial
statements.
SEASONALITY
Historically, our operating results have been subject to a limited degree
to seasonal trends when measured on a quarterly basis. The first quarter, ending
March 31, has traditionally been the weakest, and the third quarter, ending
September 30, has traditionally been the strongest. This pattern is the result
of, or is influenced by, numerous factors, including climate, national holidays,
consumer demand, economic conditions and a myriad of other similar and subtle
forces. In addition, this historical quarterly trend has been influenced by the
growth and diversification of our terminal network. We cannot accurately
forecast many of these factors, nor can we estimate accurately the relative
influence of any particular factor. As a result, there can be no assurance that
historical patterns, if any, will continue in future periods.
NEW ACCOUNTING PRONOUNCEMENTS
See note 1 of the notes to our consolidated financial statements for a
description of new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flows and net income are subject to fluctuations due to changes in
exchange rates. We attempt to limit our exposure to changing foreign exchange
rates through operational actions. We provide services to customers in locations
throughout the world and, as a result, operate with many functional currencies
including the key currencies of North America, Latin America, Asia, the South
Pacific and Europe. This diverse base of local currency costs serves to
partially counterbalance the effect of potential changes in the value of our
local currency denominated revenues and expenses. Short-term exposures to
changing foreign currency exchange rates are related primarily to intercompany
transactions. The duration of these exposures is minimized through the use of an
intercompany netting and settlement system that settles the majority of
intercompany obligations two times per month.
As of December 31, 2000, we had $81.0 million outstanding under a line of
credit. Our lease payments on certain financed facilities are tied to market
interest rates. At December 31, 2000, a 10% rise in the base rate for these
financing arrangements would not have a material impact on operating income in
2000.
We have not purchased any material futures contracts nor have we purchased
or held any material derivative financial instruments for trading purposes
during 2000.
In the second quarter of 2000, we entered into contracts for the purpose of
hedging the costs of a portion of anticipated jet fuel purchases for chartered
aircraft during the following twelve months. These contracts mature in the
second quarter of 2001. Such contracts are nominally insignificant.
EXCHANGE RATE SENSITIVITY
The following tables provide comparable information about our
non-functional currency components of balance sheet items by currency, and
presents such information in U.S. dollar equivalents at December 31, 2000 and
1999. These tables summarize information on transactions that are sensitive to
foreign currency exchange rates, including non-functional currency-denominated
receivables and payables. The net amount
31
34
that is exposed to changes in foreign currency rates is then subjected to a 10%
change in the value of the functional currency versus the non-functional
currency.
NON-FUNCTIONAL CURRENCY EXPOSURE IN U.S. DOLLAR EQUIVALENTS AS OF DECEMBER 31,
2000
(IN THOUSANDS)
FOREIGN EXCHANGE
GAIN/(LOSS) IF
FUNCTIONAL CURRENCY
NET EXPOSURE -------------------------
---------------------------------- APPRECIATES DEPRECIATES
NON-FUNCTIONAL CURRENCY ASSET LIABILITY LONG/(SHORT) BY 10% BY 10%
- ----------------------- ------- --------- ------------ ----------- -----------
United States dollar................... $18,322 $18,727 $ (405) $ (40) $ 40
Singaporean dollar..................... 2,250 1,442 808 81 (81)
Japanese yen........................... 1,061 396 665 66 (66)
British pound.......................... 1,584 6,995 (5,411) (541) 541
German mark............................ (854) 1,341 (2,195) (220) 220
French Franc........................... 852 160 692 69 (69)
Australian dollar...................... 417 118 299 30 (30)
All others............................. 3,591 1,231 2,360 236 (236)
------- ------- ------- ----- -----
Totals....................... $27,223 $30,410 $(3,187) $(319) $ 319
======= ======= ======= ===== =====
NON-FUNCTIONAL CURRENCY EXPOSURE IN U.S. DOLLAR EQUIVALENTS AS OF DECEMBER 31,
1999
(IN THOUSANDS)
FOREIGN EXCHANGE
GAIN/(LOSS) IF
FUNCTIONAL CURRENCY
NET EXPOSURE -------------------------
---------------------------------- APPRECIATES DEPRECIATES
NON-FUNCTIONAL CURRENCY ASSET LIABILITY LONG/(SHORT) BY 10% BY 10%
- ----------------------- ------- --------- ------------ ----------- -----------
United States dollar................... $51,704 $35,934 $15,770 $1,577 $(1,577)
European Union euro.................... 215 3,092 (2,877) (288) 288
Singaporean dollar..................... 34 1,654 (1,620) (162) 162
Japanese yen........................... 13 1,519 (1,506) (150) 150
Hong Kong dollar....................... -- 412 (412) (41) 41
Canadian dollar........................ 13 400 (387) (39) 39
Australian dollar...................... 159 296 (137) (14) 14
British pound.......................... 42 235 (193) (19) 19
Taiwanese dollar....................... -- 191 (191) (19) 19
All others............................. 84 706 (622) (62) 62
------- ------- ------- ------ -------
Totals....................... $52,264 $44,439 $ 7,825 $ 783 $ (783)
======= ======= ======= ====== =======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
information under the caption "Proposal 1 -- Election of Directors" and to the
information under the caption "Section 16(a) Reporting Delinquencies" in our
definitive Proxy Statement (the "2001 Proxy Statement") for our annual meeting
of shareholders to be held on May 23, 2001. The 2001 Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days
subsequent to December 31, 2000.
Pursuant to Item 401(b) of Regulation S-K, the information required by this
item with respect to 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 2001 Proxy Statement, which will be filed with the SEC not later than 120
days subsequent to December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the 2001 Proxy Statement, which will be filed with the SEC not later than 120
days subsequent to December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the 2001 Proxy Statement, which will be filed with the SEC not later than 120
days subsequent to December 31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
ITEM PAGE
- ---- ----
Report of Independent Accountants........................... F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheet as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statement of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-6
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998.................... F-7
Notes to Consolidated Financial Statements.................. F-8
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable regulations of
the Commission have been omitted because they are not required under the
relevant instructions or because the required information is given in the
consolidated financial statements or notes thereto.
33
36
(a)(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*2(i) -- Agreement and Plan of Merger, dated as of July 2, 2000
among EGL, Inc., EGL Delaware I, Inc. and Circle
International Group, Inc. (Exhibit 2.1 to EGL's Current
Report on Form 8-K filed on July 5, 2000 and incorporated
herein by reference).
*3(i) -- Second Amended and Restated Articles of Incorporation of
EGL, as amended (filed as Exhibit 3(i) to EGL's Form
8-A/A filed with the Securities and Exchange Commission
on September 29, 2000 and incorporated herein by
reference).
*3(ii) -- Amended and Restated Bylaws of EGL, as amended (Exhibit
3(ii) to EGL's Form 10-Q for the fiscal quarter ended
June 30, 2000 and incorporated herein by reference).
+*10.1 -- Long-Term Incentive Plan, as amended and restated
effective July 26, 2000 (filed as Exhibit 10(ii) to EGL's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
+*10.2 -- 1995 Non-employee Director Stock Option Plan (filed as
Exhibit 10.2 to EGL's Registration Statement on Form S-1,
Registration No. 33-97606 and incorporated herein by
reference).
+*10.3 -- 401(k) Profit Sharing Plan (filed as Exhibit 10.3 to
EGL's Registration Statement on Form S-1, Registration
No. 33-97606 and incorporated herein by reference).
+*10.4 -- Circle International Group, Inc. 1994 Omnibus Equity
Incentive Plan (filed as Exhibit 10.11 to Annual Report
on Form 10-K of Circle (SEC File No. 0-8664) for the
fiscal year ended December 31, 1993 and incorporated
herein by reference).
+*10.5 -- Amendment No. 1 to Circle International Group, Inc. 1994
Omnibus Equity Incentive Plan (filed as Exhibit 10.11.1
to Annual Report on Form 10-K of Circle (SEC File No.
9-8664) for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
+*10.6 -- Circle International Group, Inc. Employee Stock Purchase
Plan (filed as Exhibit 99.1 to the Registration Statement
on Form S-8 of Circle (SEC Registration No. 333-78747)
filed on May 19, 1999 and incorporated herein by
reference).
+*10.7 -- Circle International Group, Inc. 1999 Stock Option Plan
(filed as Exhibit 99.1 to the Form S-8 Registration
Statement of Circle (SEC Registration No. 333-85807)
filed on August 24, 1999 and incorporated herein by
reference).
+*10.8 -- Form of Nonqualified Stock Option Agreement for Circle
International Group, Inc. 2000 Stock Option Plan (filed
as Exhibit 4.8 to Post-Effective Amendment No. 1 on Form
S-8 to Registration Statement on Form S-4 (SEC
Registration No. 333-42310) filed on October 2, 2000 and
incorporated herein by reference).
*10.9 -- Shareholders' Agreement dated as of October 1, 1994 among
EGL and Messrs. Crane, Swannie, Seckel and Roberts (filed
as Exhibit 10.4 to EGL's Registration Statement on Form
S-1, Registration No. 33-97606 and incorporated herein by
reference).
*10.10 -- Form of Indemnification Agreement (filed as Exhibit 10.6
to EGL's Registration Statement on Form S-1, Registration
No. 33-97606 and incorporated herein by reference).
34
37
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.11 -- Credit Agreement dated January 5, 2001 between EGL, Bank
of America, N.A., SouthTrust Bank, The Bank of
Tokyo-Mitsubishi, Ltd. and the other financial
institutions named therein.
+*10.12 -- Employment Agreement dated as of October 1, 1996 between
EGL and James R. Crane (filed as Exhibit 10.7 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 and incorporated herein by reference).
+*10.13 -- Employment Agreement dated as of October 1, 1996 between
EGL and Douglas A. Seckel (filed as Exhibit 10.8 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 and incorporated herein by reference).
+*10.14 -- Employment Agreement dated as of September 24, 1998
between EGL and John C. McVaney (filed as Exhibit 10.9 to
EGL's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998 and incorporated herein by
reference).
+*10.15 -- Employment Agreement dated as of May 19, 1998 between EGL
and Ronald E. Talley (filed as Exhibit 10.10 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
+*10.16 -- Employment Agreement dated as of October 19, 1999 between
EGL and Elijio Serrano (filed as Exhibit 10.11 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 and incorporated herein by reference).
+*10.17 -- Employee Stock Purchase Plan, as amended and restated
effective July 26, 2000 (filed as Exhibit 10(iii) to
EGL's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
*10.18A -- Lease and Development Agreement dated as of January 10,
1997 between Asset XI Holdings Company, L.L.C. and EGL
(filed as Exhibit 10 to EGL's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and
incorporated herein by reference).
*10.18B -- Participation Agreement dated as of January 10, 1997
among Asset XI Holdings Company, L.L.C., EGL and Bank
One, Texas, N.A. (filed as Exhibit 10.10B to EGL's Annual
Report on Form 10-K for the fiscal year ended September
30, 1997 and incorporated herein by reference).
*10.18C -- Loan Agreement dated as of January 10, 1997 between Asset
XI Holdings Company, L.L.C. and Bank One, Texas, N.A.
(filed as Exhibit 10.10C to EGL's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 and
incorporated herein by reference).
10.18D -- First Amendment to Participation Agreement, Lease and
Development Agreement, and Loan Agreement dated as of May
15, 1998 among Asset XI Holdings Company, L.L.C., Eagle
USA Airfreight, Inc. and Bank One, Texas, N.A.
*10.19A -- Master Lease and Development Agreement dated as of April
3, 1998 between Asset XVI Holdings Company, L.L.C. and
Eagle USA Airfreight, Inc. (filed as Exhibit 10(iii) A to
EGL's Quarterly Report on Form 10-Q to the quarter ended
June 30, 1998 and incorporated herein by reference).
*10.19B -- Master Participation Agreement dated as of April 3, 1998
among Asset XVI Holdings Company, L.L.C., Eagle USA
Airfreight, Inc. and Bank One, Texas, N.A. (filed as
Exhibit 10(iii) B to EGL's Quarterly Report on Form 10-Q
to the quarter ended June 30, 1998 and incorporated
herein by reference).
35
38
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.19C -- Loan Agreement dated as of April 3, 1998 between Asset
Holdings Company, L.L.C. and Bank One, Texas, N.A. (filed
as Exhibit 10(iii) C to EGL's Quarterly Report on Form
10-Q to the quarter ended June 30, 1998 and incorporated
herein by reference).
*10.19D -- Appendix I to Master Participation Agreement, Master
Lease and Development Agreement and Loan Agreement (filed
as Exhibit 10(iii) D to EGL's Quarterly Report on Form
10-Q to the quarter ended June 30, 1998 and incorporated
herein by reference).
10.19E -- First Amendment to Master Participation Agreement, Master
Lease and Development Agreement, and Loan Agreement dated
as of April 3, 1998 among Asset XVI Holdings Company,
L.L.C., Eagle USA Airfreight, Inc. and Bank One, Texas,
NA.
10.19F -- Amendment to Master Participation Agreement dated as of
April 1, 1999 among Asset XVI Holdings Company, L.L.C.,
Eagle USA Airfreight, Inc. and Bank One, Texas, N.A.
10.19G -- Second Amendment to Participation Agreement, Lease
Agreement and Loan Agreement dated as of October 20, 2000
among Asset XVI Holdings Company, L.L.C., EGL and Bank
One, NA.
+*10.20 -- Consulting Agreement dated as of January 1, 1999 between
Zita Logistics, Ltd. and Circle International European
Holdings Limited (filed as Exhibit 10.4.3 to Circle's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and incorporated herein by reference).
21 -- Subsidiaries of EGL
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Deloitte & Touche LLP
- ---------------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
(b) Reports on Form 8-K
EGL filed a report on Form 8-K on October 11, 2000 in connection with the
acquisition and merger of Circle and the filing of Articles of Amendment to
EGL's Second Amended and Restated Articles of Incorporation with the Texas
Secretary of State.
36
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on our
behalf by the undersigned, thereunto duly authorized.
EGL, INC.
By: /s/ JAMES R. CRANE
----------------------------------
James R. Crane
Chairman, President
and Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME CAPACITY DATE
---- -------- ----
/s/ JAMES R. CRANE Chairman, President and March 30, 2001
- ----------------------------------------------------------- Chief Executive
James R. Crane Officer (Principal
Executive Officer)
/s/ ELIJIO V. SERRANO Chief Financial Officer March 30, 2001
- ----------------------------------------------------------- (Principal Financial
Elijio V. Serrano and Accounting
Officer)
/s/ FRANK J. HEVRDEJS Director March 30, 2001
- -----------------------------------------------------------
Frank J. Hevrdejs
/s/ NEIL E. KELLEY Director March 30, 2001
- -----------------------------------------------------------
Neil E. Kelley
/s/ NORWOOD W. KNIGHT-RICHARDSON Director March 30, 2001
- -----------------------------------------------------------
Norwood W. Knight-Richardson
/s/ REBECCA A. MCDONALD Director March 30, 2001
- -----------------------------------------------------------
Rebecca A. McDonald
/s/ WILLIAM P. O'CONNELL Director March 30, 2001
- -----------------------------------------------------------
William P. O'Connell
/s/ PETER GIBERT Director March 30, 2001
- -----------------------------------------------------------
Peter Gibert
37
40
EGL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheet as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statement of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-6
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2000, 1999
and 1998.................................................. F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
EGL, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of EGL, Inc. and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of the Company and Circle International Group,
Inc. on October 2, 2000 in a transaction accounted for as a pooling of
interests, as described in Note 2 to the consolidated financial statements. We
did not audit the financial statements of Circle International Group, Inc.,
which statements reflect total assets of 70 percent of the related consolidated
total as of December 31, 1999 and total revenues of 58 percent and 64 percent
and net income of 45 percent and 47 percent of the related consolidated totals
for each of the two years in the period ended December 31, 1999. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Circle International Group, Inc., is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Houston, Texas
March 29, 2001
F-2
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders,
EGL, Inc.:
We have audited the consolidated balance sheet of Circle International
Group, Inc. and subsidiaries ("Circle") as of December 31, 1999 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two years in the period ended December 31, 1999 (not presented herein).
These financial statements are the responsibility of Circle's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Circle
International Group, Inc. and subsidiaries at December 31, 1999 and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Francisco, California
March 29, 2000
F-3
43
EGL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000 AND 1999
2000 1999
-------- --------
(IN THOUSANDS,
EXCEPT PAR VALUES)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 60,001 $ 78,685
Short-term investments.................................... 13,056 20,260
Trade receivables, net of allowance of $14,115 and
$10,172................................................ 497,461 414,021
Other receivables......................................... 7,498 15,846
Deferred income taxes..................................... 17,167 6,904
Income tax receivable..................................... 2,128 --
Other current assets...................................... 10,996 8,402
-------- --------
Total current assets.............................. 608,307 544,118
Property and equipment, net................................. 153,345 133,297
Investments in unconsolidated affiliates.................... 52,717 48,977
Goodwill, net............................................... 76,254 43,287
Other assets, net........................................... 9,123 6,015
-------- --------
Total assets...................................... $899,746 $775,694
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 3,429 $ 7,801
Trade payables and accrued transportation costs........... 260,802 226,803
Accrued salaries and related costs........................ 29,068 31,884
Accrued merger and integration costs...................... 24,976 --
Income taxes payable...................................... -- 8,161
Other liabilities......................................... 54,027 37,936
-------- --------
Total current liabilities......................... 372,302 312,585
Deferred income taxes....................................... 18,864 19,878
Long-term notes payable..................................... 91,051 32,244
Other noncurrent liabilities................................ 2,980 3,369
-------- --------
Total liabilities................................. 485,197 368,076
-------- --------
Minority interests.......................................... 10,782 6,163
-------- --------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares
authorized, no shares issued...........................
Common stock, $0.001 par value, 200,000 shares authorized;
49,803 and 48,245 shares issued; 48,411 and 47,223
shares outstanding..................................... 48 47
Additional paid-in capital................................ 150,131 123,613
Retained earnings......................................... 304,889 308,026
Accumulated other comprehensive loss...................... (27,729) (15,661)
Unearned compensation..................................... (1,300) --
Treasury stock, 1,392 and 1,022 shares held............... (24,195) (14,570)
Obligation to deliver common stock........................ 1,923 --
-------- --------
Total stockholders' equity........................ 403,767 401,455
-------- --------
Total liabilities and stockholders' equity........ $899,746 $775,694
======== ========
The accompanying notes are an integral part of these financial statements.
F-4
44
EGL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues................................................. $1,861,206 $1,409,250 $1,154,761
Cost of transportation................................... 1,141,694 822,175 669,255
---------- ---------- ----------
Net revenues............................................. 719,512 587,075 485,506
Operating expenses:
Personnel costs........................................ 378,461 302,373 255,966
Other selling, general and administrative expenses..... 263,011 212,655 173,234
Merger related transaction, restructuring and integration
costs (Note 3)......................................... 67,389 -- --
---------- ---------- ----------
Operating income......................................... 10,651 72,047 56,306
Nonoperating income, net................................. 1,790 11,973 9,135
---------- ---------- ----------
Income before provision for income taxes................. 12,441 84,020 65,441
Provision for income taxes............................... 13,163 32,310 25,894
---------- ---------- ----------
Net income (loss)........................................ $ (722) $ 51,710 $ 39,547
========== ========== ==========
Net income (loss) per share:
Basic.................................................. $ (0.02) $ 1.14 $ 0.88
Diluted................................................ (0.02) 1.11 0.85
Weighted average common shares outstanding:
Basic.................................................. 46,600 45,504 45,141
Diluted................................................ 46,600 46,481 46,321
The accompanying notes are an integral part of these financial statements.
F-5
45
EGL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
--------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $ (722) $ 51,710 $ 39,547
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 30,009 22,334 17,875
Impairment of assets due to merger...................... 20,597 -- --
Provision for doubtful accounts, net of write offs...... 9,060 10,091 6,268
Amortization of unearned compensation................... 605
Deferred income tax expense (benefit)................... (11,259) (2,725) 2,999
Tax effect of stock options exercised................... 4,991 4,454 4,693
Gain on sales of assets................................. (755) (5,228) (271)
Equity in earnings of affiliates, net of dividends
received.............................................. (1,714) (3,156) (2,229)
Minority interests, net of dividends paid............... 146 338 928
Other................................................... (5,545) 2,202 9,845
Changes in assets and liabilities:
Increase in trade receivables........................... (89,179) (82,900) (28,609)
(Increase) decrease in other receivables................ 10,790 (938) (2,677)
(Increase) decrease in other assets..................... 1,189 (2,736) 5,016
Increase in payables and other accrued liabilities...... 40,172 40,134 10,243
Accrual for restructuring and integration costs......... 24,976 -- --
--------- -------- --------
Net cash provided by operating activities.......... 33,361 33,580 63,628
--------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (70,449) (41,906) (24,823)
Purchases of marketable securities........................ -- (24,438) (20,304)
Proceeds from sales/maturities of marketable securities... 7 24,731 10,991
Proceeds from sales of other assets....................... 2,710 5,868 1,514
Net proceeds from sales (purchases) of short-term
investments............................................. 8,383 (436) 20,281
Acquisitions of businesses, net of cash acquired.......... (28,664) (5,098) (16,848)
Investment in equity method investee...................... (6,300) -- --
Other..................................................... (452) -- (3)
--------- -------- --------
Net cash used in investing activities.............. (94,765) (41,279) (29,192)
--------- -------- --------
Cash flows from financing activities:
Issuance (repayment) of notes payable..................... 43,634 10,618 (6,485)
Issuance of common stock, net of related costs............ -- 256 6,621
Proceeds from exercise of stock options................... 18,942 11,106 7,786
Treasury stock purchases.................................. (10,478) (14,845) --
Dividends paid............................................ (4,764) (4,645) (4,503)
Other..................................................... 972 (634) --
--------- -------- --------
Net cash provided by financing activities.......... 48,306 1,856 3,419
--------- -------- --------
Effect of exchange rate changes on cash..................... (5,586) (412) 817
--------- -------- --------
Cash flow from EGL on a stand-alone basis for the three
months ended December 31, 1999 (Note 15).................. 3,163 --
--------- -------- --------
Increase (decrease) in cash and cash equivalents............ (18,684) (3,092) 38,672
Cash and cash equivalents, beginning of the year............ 78,685 81,777 43,105
--------- -------- --------
Cash and cash equivalents, end of the year.................. $ 60,001 $ 78,685 $ 81,777
========= ======== ========
Supplemental cash flow information:
Cash paid for interest.................................... $ 4,891 $ 2,951 $ 2,001
Cash paid for income taxes................................ 29,934 28,301 19,006
Noncash transactions:
Issuance of stock for acquisitions...................... 200 -- 21,000
Mortgages assumed in acquisitions....................... 5,818 -- 5,265
Property acquired under capital lease................... -- 4,366 --
Issuance of notes payable for acquisition............... 5,939 -- --
Obligation to deliver common stock...................... 1,923 -- --
The accompanying notes are an integral part of these financial statements.
F-6
46
EGL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMU-
LATED
COMPRE- OTHER
COMMON STOCK ADDITIONAL HENSIVE COMPRE- UNEARNED TREASURY STOCK
--------------- PAID-IN RETAINED INCOME HENSIVE COMPENSA- -------------------
SHARES AMOUNT CAPITAL EARNINGS (LOSS) LOSS TION SHARES AMOUNT
------ ------ ---------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1997......................... 44,321 $44 $ 80,817 $216,113 $(15,498) $ -- $ --
Comprehensive income:
Net income................... -- -- -- 39,547 $39,547 -- -- --
Change in value of marketable
securities, net............ -- -- -- -- (43) (43) -- --
Foreign currency translation
adjustments................ -- -- -- -- 2,164 2,164 -- --
--------
Comprehensive income......... -- -- -- -- $41,668 -- -- --
========
Issuance of common stock, net
of related costs............. 394 1 6,620 -- -- -- --
Issuance of common stock for
acquisition.................. 42 -- 750 -- -- -- --
Exercise of stock options and
restricted stock awards with
related tax benefit.......... 1,063 1 12,864 -- -- -- --
Cash dividends................ -- -- -- (4,622) -- -- --
------ --- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31,
1998......................... 45,820 46 101,051 251,038 (13,377) -- --
Comprehensive income:
Net income................... -- -- -- 51,710 $51,710 -- -- --
Change in value of marketable
securities, net............ -- -- -- -- 39 39 -- --
Foreign currency
translation................ -- -- -- -- (2,507) (2,507) -- --
--------
Comprehensive income.......... -- -- -- -- $49,242 -- -- --
========
Exercise of stock options with
related tax benefit.......... 1,052 1 15,853 -- -- -- --
Purchase of treasury stock.... -- -- -- -- -- (1,045) (14,845)
Issuance of shares under stock
purchase plan................ -- -- -- -- -- 23 275
Cash dividends................ -- -- -- (4,682) -- -- --
EGL stand-alone activity for
the three months ended
December 31, 1999
(Note 15).................... 351 -- 6,709 9,960 184 -- --
------ --- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31,
1999......................... 47,223 47 123,613 308,026 (15,661) (1,022) (14,570)
Comprehensive loss:
Net loss..................... -- -- -- (722) $ (722) -- -- -- --
Change in value of marketable
securities, net............ -- -- -- -- 2 2 -- -- --
Foreign currency
translation................ -- -- -- -- (12,070) (12,070) -- -- --
--------
Comprehensive loss........... -- -- -- -- $(12,790) -- -- -- --
========
Issuance of shares under
employee stock purchase
plan......................... 26 -- 681 -- -- -- 26 653
Issuance of common stock for
other acquisitions........... -- -- -- -- -- -- 9 200
Exercise of stock options and
restricted stock awards with
related tax benefit.......... 1,162 1 25,837 -- -- (1,905) 45 --
Purchase of treasury stock.... -- -- -- -- -- -- (450) (10,478)
Cash dividends................ -- -- -- (2,415) -- -- -- --
Amortization of unearned
compensation................. -- -- -- -- -- 605 -- --
------ --- -------- -------- -------- ------- -------- --------
BALANCE AT DECEMBER 31,
2000......................... 48,411 $48 $150,131 $304,889 $(27,729) $(1,300) (1,392) $(24,195)
====== === ======== ======== ======== ======= ======== ========
OBLIGATION
TO DELIVER
COMMON
STOCK TOTAL
---------- --------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1997......................... $ $281,476
Comprehensive income:
Net income................... 39,547
Change in value of marketable
securities, net............ (43)
Foreign currency translation
adjustments................ 2,164
Comprehensive income.........
Issuance of common stock, net
of related costs............. 6,621
Issuance of common stock for
acquisition.................. 750
Exercise of stock options and
restricted stock awards with
related tax benefit.......... 12,865
Cash dividends................ (4,622)
--------
BALANCE AT DECEMBER 31,
1998......................... 338,758
Comprehensive income:
Net income................... 51,710
Change in value of marketable
securities, net............ 39
Foreign currency
translation................ (2,507)
Comprehensive income..........
Exercise of stock options with
related tax benefit.......... 15,854
Purchase of treasury stock.... (14,845)
Issuance of shares under stock
purchase plan................ 275
Cash dividends................ (4,682)
EGL stand-alone activity for
the three months ended
December 31, 1999
(Note 15).................... 16,853
--------
BALANCE AT DECEMBER 31,
1999......................... 401,455
Comprehensive loss:
Net loss..................... -- (722)
Change in value of marketable
securities, net............ -- 2
Foreign currency
translation................ -- (12,070)
Comprehensive loss........... --
Issuance of shares under
employee stock purchase
plan......................... -- 1,334
Issuance of common stock for
other acquisitions........... 1,923 2,123
Exercise of stock options and
restricted stock awards with
related tax benefit.......... -- 23,933
Purchase of treasury stock.... -- (10,478)
Cash dividends................ -- (2,415)
Amortization of unearned
compensation................. -- 605
------ --------
BALANCE AT DECEMBER 31,
2000......................... $1,923 $403,767
====== ========
The accompanying notes are an integral part of these financial statements.
F-7
47
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1 -- ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
On February 21, 2000, the Company's stockholders approved changing the
Company's name to EGL, Inc. (EGL or the Company) from Eagle USA Airfreight, Inc.
in recognition of EGL's increasing globalization, broader spectrum of services
and long-term growth strategy.
EGL is an international transportation and logistics company. The Company's
principal lines of business are air freight forwarding, ocean freight
forwarding, customs brokerage and other value-added services such as
warehousing, distribution and insurance. The Company provides services through
offices around the world as well as through its worldwide network of exclusive
and nonexclusive agents. In October 2000, the Company merged with Circle
International Group, Inc. (Circle) and expanded its operations to over 100
countries on six continents (Note 2). The principal markets for all lines of
business are North America, Europe and Asia with significant operations in the
Middle East, South America and South Pacific (Note 13).
On July 12, 1999, the Board of Directors declared a three-for-two stock
split of the Company's common stock, effected in the form of a stock dividend.
All shares and per-share amounts have been restated retroactively to reflect the
stock split, which was distributed August 30, 1999 to stockholders of record on
August 23, 1999.
Change in fiscal year end
On July 2, 2000, the Company changed its fiscal year end from a
twelve-month period ending September 30 to a twelve-month period ending December
31 beginning with the December 31, 2000 year end.
Basis of presentation and principles of consolidation
The consolidated financial statements of EGL and have been prepared to give
retroactive effect to the merger with Circle in October 2000 which was accounted
for as a pooling of interests. The companies had differing year ends prior to
2000. Therefore, the Company's statement of operations, cash flows and
stockholders' equity reflects the combination of EGL's former fiscal years ended
September 30, 1999 and 1998 with Circle's years ended December 31, 1999 and
1998, respectively. The Company's balance sheet reflects the combined companies
as of December 31, 2000 and 1999. The periods have been labeled year ended
December 31 to be more consistent with our current year-end. EGL's results for
the three months ended December 31, 1999 have been omitted from the accompanying
consolidated statement of operations and presented as summary adjusting items in
the statement of cash flows and stockholders' equity. EGL's results of
operations, cash flows and stockholders' equity activity for the three months
ended December 31, 1999 are presented on a stand-alone basis in Note 15.
The accompanying consolidated financial statements include EGL and Circle
and all of their wholly-owned subsidiaries. Investments in 50% or less owned
affiliates, over which the Company has significant influence, are accounted for
by the equity method. All significant intercompany balances and transactions
have been eliminated in consolidation. All dollar amounts and share data in the
notes are presented in thousands except for par values and per share data,
unless otherwise noted. The Company has reclassified certain prior year amounts
to conform with the current year presentation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
48
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Short-term investments and marketable securities
At December 31, 2000 and 1999, the Company had short-term investments in
commercial paper, certificates of deposits, U.S. Treasury Bills and Tax Exempt
Municipal Bonds with a carrying value of $13,056 and $20,260, respectively. All
outstanding securities at December 31, 2000 mature in less than one year. These
investments are stated at amortized cost, which approximates fair market value.
By policy, the Company invests primarily in high-grade marketable securities.
All marketable securities are defined as available-for-sale securities under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Unrealized
holding gains or losses have been recorded by the Company as a component of
other comprehensive income and loss at each balance sheet date. As such, changes
in the fair value of available for sale securities, net of deferred taxes, are
excluded from income and presented in the stockholders' equity section of the
balance sheet under the caption "Accumulated other comprehensive loss".
Trade receivables
Management establishes reserves on trade receivables based on the expected
ultimate recovery of these receivables. Trade receivables include disbursements
made by EGL on behalf of its customers for transportation costs and customs
duties. The billings to customers for these disbursements, which are several
times the amount of revenue and fees derived from these transactions, are not
recorded as revenue and expense on the Company's statement of operations.
Property and equipment
Property is stated at cost. The cost of property held under capital leases
is equal to the lower of the net present value of the minimum lease payments or
the fair value of the leased property at the inception of the lease.
Depreciation is computed principally by the straight-line method at rates based
on the estimated useful lives of the various classes of property. Expenditures
for maintenance and repairs are expensed as incurred. Major improvements are
capitalized. Costs of internally-developed software are capitalized in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". On retirement or sale
of assets, the cost of such assets and accumulated depreciation are removed from
the accounts and the gain or loss, if any, is credited or charged to income.
Goodwill and other intangibles
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired, and other intangible assets are amortized on a
straight-line basis over the period of expected benefit, not exceeding 40 years.
Accumulated amortization as of December 31, 2000 and 1999, was $19.0 million and
$15.2 million, respectively.
Impairment of assets
The carrying value of long-lived assets, including goodwill, is reviewed
periodically based on the projected undiscounted cash flows of the related asset
or the business unit over the remaining amortization period. If the cash flow
analysis indicates that the carrying amount of an asset is not recoverable, the
carrying value will be reduced to the estimated fair value of the asset or the
present value of the expected future cash flows.
F-9
49
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign currency translation
Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at year-end rates of exchange and income and expenses are
translated at average rates during the year. Adjustments resulting from
translating financial statements into U.S. dollars are reported as cumulative
translation adjustments and are shown as a separate component of comprehensive
income (loss) in the accompanying consolidated statement of stockholders'
equity. Gains and losses from foreign currency transactions are included in net
income at the time of the transaction.
Revenue recognition
Revenue and freight consolidation costs are recognized at the time the
freight departs the terminal of origin in accordance with Emerging Issues Task
Force Issue No. 91-9 "Revenue and Expense Recognition for Freight Services in
Process". Customs brokerage and other revenues are recognized upon completing
the documents necessary for customs clearance or completing other fee-based
services. Revenue recognized as an indirect air carrier or an ocean freight
consolidator includes the direct carrier's charges to EGL for carrying the
shipment. Revenue recognized in other capacities includes only the commission
and fees received. In December 1999, the SEC issued Staff Accounting Bulleting
(SAB) No. 101, "Revenue Recognition in Financial Statements", and related
interpretative guidelines in November 2000. The provisions of SAB No. 101 had no
material impact on the Company's financial statements.
Stock-based compensation
The Company accounts for stock-based awards to employees and non-employee
directors using the intrinsic value method proscribed in Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees" and its interpretations
as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation". The
disclosure requirements of SFAS 123 are set forth in Note 9.
Taxes on income
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred tax liabilities and assets are
determined based on temporary differences between the bases of certain assets
and liabilities for income tax and financial reporting purposes. The deferred
tax assets and liabilities are classified according to the financial statement
classification of the assets and liabilities generating the differences.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Earnings per share
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share includes potential
dilution that could occur if options to issue common stock were exercised. Stock
options are the only potentially dilutive share equivalents the Company has
outstanding for the periods presented. Incremental shares of 977 and 1,180 were
used in the calculation of diluted earnings per share for the years ended
December 31, 1999 and 1998, respectively. No shares related to options were
included in diluted earnings per share for the year ended December 31, 2000 as
their effect would have been antidilutive as the Company incurred a net loss
during that period. For the years ended December 31, 1999 and 1998, options for
1,442 and 1,882 shares, respectively, were excluded from the diluted earnings
per share computation because their effect was antidilutive.
F-10
50
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive income (loss)
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". Under SFAS No. 130, companies are required to report in the financial
statements, in addition to net income, comprehensive income, including, as
applicable, foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. The Company's components of other comprehensive income (loss) are
foreign currency translation adjustments and any change in the value of
marketable securities.
Statement of cash flows
In conjunction with the Company's pooling of interests with Circle during
the year ended December 31, 2000 (see Note 2), the Company changed its method of
presentation in the accompanying consolidated statement of cash flows from the
direct method to the indirect method in order to be comparable with the
presentation method previously used by Circle.
Fair value of financial instruments
The fair values presented throughout these financial statements have been
estimated using appropriate valuation methodologies and market information
available at December 31, 2000 and 1999. However, considerable judgment is
required in interpreting market data to develop estimates of fair value and the
estimates presented are not necessarily indicative of the amounts that EGL could
realize in a current market exchange. The use of different market assumptions or
estimation methodologies could have a material effect on the estimated fair
values. Additionally, the fair values presented throughout these financial
statements have not been estimated since December 31, 2000. Current estimates of
fair value may differ significantly from the amounts presented.
The following method and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents, receivables and payables and short-term
investments -- The carrying amount approximates fair value.
Equity securities -- The fair value is based on quoted market prices and
these securities are recorded at fair value.
Borrowings -- The fair value of EGL's borrowing is estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to EGL for debt of the same remaining maturities. The carrying amounts
approximate their fair value.
Foreign currency forward contracts -- The fair value is estimated based on
the U.S. dollar equivalent at the contract exchange rate. Any gain or loss is
largely offset by a change in the value of the underlying transaction, and is
recorded as an unrealized foreign exchange gain or loss until the contract
maturity date. Such amounts are insignificant.
Risks and uncertainties
The Company's operations are influenced by many factors, including the
global economy, international laws and currency exchange rates. The impact of
some of these risk factors is reduced by having customers in a wide range of
industries located throughout the world. However, contractions in the more
significant economies of the world (either countries or industrial sectors)
could have a substantial negative impact on the rate of the Company's growth and
its profitability.
F-11
51
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Doing business in foreign locations subjects the Company to various risks
and considerations typical to foreign enterprises including, but not limited to,
economic and political conditions in the United States and abroad, currency
exchange rates, tax laws and other laws and trade restrictions.
Concentration of credit risk
The Company's customers include retailing, wholesaling, manufacturing,
electronics and telecommunications companies, as well as international agents
throughout the world. Management believes that concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base and their dispersion across
many different industries and geographic regions. The Company performs ongoing
credit evaluations of its customers to minimize credit risk. The Company's
investment policies restrict investments to low-risk, highly-liquid securities
and the Company performs periodic evaluations of the relative credit standing of
the financial institutions with which it deals.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the effective date of FASB Statement No. 133". SFAS
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and on the type of hedge transaction. The ineffective portion of all hedges will
be recognized in earnings. The Company does not believe the impact of adopting
SFAS 133 will be material to its results of operations and financial position.
NOTE 2 -- BUSINESS COMBINATIONS
On October 2, 2000, EGL completed its merger with Circle pursuant to the
terms and conditions of the Agreement and Plan of Merger dated as of July 2,
2000 (the Merger Agreement). EGL issued 17,933 shares of EGL common stock in
exchange for all issued and outstanding shares of Circle common stock and
assumed options exercisable for 1,094 shares of EGL common stock. The exchange
ratio of one share of EGL common stock for each share of Circle common stock was
determined by arms-length negotiations between EGL and Circle. The Merger
qualified as a tax-free reorganization for U.S. federal income tax purposes and
as a pooling of interests for accounting and financial reporting purposes.
The Company's financial statements have been restated to include the
operations of Circle for all periods presented. The presentation of the years
ended December 31, 1999 and 1998 reflect the consolidation of EGL's years ended
September 30, 1999 and 1998 with Circle's years ended December 31, 1999 and
1998, respectively. EGL's results for the three months ended December 31, 1999
have been omitted from the accompanying consolidated statement of operations and
presented as summary adjusting items in the statement of cash flows and
stockholders' equity. EGL's results of operations, cash flows and stockholders'
equity activity for the three months ended December 31, 1999 are presented on a
stand-alone basis in Note 15. EGL and Circle had no significant intercompany
transactions prior to the merger and no material adjustments were necessary to
conform the accounting policies of EGL and Circle.
F-12
52
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized results of operations for the nine months ended September 30,
2000 and the twelve months ended December 31, 1999 and 1998 of the separate
companies prior to the merger are as follows:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------- ------------ ------------
(UNAUDITED)
Net revenues:
EGL.......................................... $264,229 $255,083 $183,826
Circle....................................... 268,444 331,992 301,680
Combined..................................... 532,673 587,075 485,506
Net income:
EGL.......................................... 24,132 28,498 21,032
Circle....................................... 17,618 23,212 18,515
Combined..................................... 41,750 51,710 39,547
In August 1998, Circle acquired 100% of the outstanding shares of Alrod
International, Inc. (Alrod), a privately owned international freight forwarding
and customs brokerage company. This merger qualified as a tax-free
reorganization for U.S. federal income tax purposes and as a pooling of
interests for accounting and financial reporting purposes. In connection with
the merger, Circle issued 771 shares of common stock in exchange for all of the
outstanding stock of Alrod. The total purchase consideration was valued at $21.0
million. Revenues and net income of Alrod for the six months ended June 30, 1998
were $7,412 and $259, respectively.
The Company entered into eight business combination transactions between
January 1, 1998 and December 31, 2000 which have been accounted for using the
purchase method of accounting, with the related results of operations being
included in the Company's consolidated financial statements from the date of
acquisition forward. The aggregate consideration paid for these acquisitions
approximated $53,345, comprised of $46,656 in cash, $5,939 in notes payable and
42 shares of the Company's common stock with a value at the acquisition dates of
$750. The Company has recognized $44,384 in goodwill in connection with these
acquisitions, and is amortizing those amounts over the related estimated useful
lives ranging between 20 and 40 years. Three of the acquisitions provided for
the payment of additional contingent acquisition consideration if certain
post-acquisition performance criteria are satisfied for periods as long as three
years which could aggregate as much as $12,100 in cash and Company common stock.
All contingent payments on acquisitions made by the Company are accounted for as
adjustments to goodwill and are recorded at the time that the amounts of the
payments are determinable by the Company. Through December 31, 2000, the Company
had recognized $4,312 in additional contingent consideration on these
acquisitions ($200 of which was attributable to the issuance of 9 shares of
Company common stock and $1,923 is an obligation to deliver 55 shares of common
stock at December 31, 2000). The Company also paid $3,700 in contingent
consideration on an acquisition completed prior to 1998. Certain of the
transactions resulted in the sellers retaining a minority interest, for which
the Company has a buyout option. The pro forma effect on revenues and net income
of the Company assuming each of these acquisitions were consummated at the
beginning of the year of acquisition would have been immaterial.
F-13
53
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- MERGER TRANSACTION, RESTRUCTURING AND INTEGRATION COSTS
Transaction and integration costs
As a result of the merger with Circle, as discussed in Note 2, the Company
incurred and expensed transaction and integration costs during the year ended
December 31, 2000. Merger related transaction costs of $9.8 million, included
investment banking, legal, accounting, printing fees and other costs directly
related to the merger. Integration costs of approximately $8.2 million included
the costs of legal registrations in various jurisdictions, changing signs and
logos at major facilities around the world, and other integration costs.
Approximately $3.4 million of this amount was unpaid at December 31, 2000.
Restructuring charges
During the quarter ended December 31, 2000, the Company recorded $49.4
million of restructuring charges as result of the Company's plan (the
Reorganization Plan or the Plan) to integrate the former EGL and Circle
operations and to eliminate duplicate facilities as a result of the merger. The
principal components of the reorganization plan involve the termination of
certain employees at the former Circle's headquarters and various international
locations, elimination of duplicate facilities in the United States and certain
international locations, and the termination of selected joint venture and
agency agreements at certain of the Company's international locations. With the
exception of payments to be made for remaining future lease obligations, it is
anticipated that the terms of the Plan will be substantially completed by the
third quarter of 2001.
The charges incurred under the Reorganization Plan for the year ended
December 31, 2000 and the remaining portion of the unpaid charges as of December
31, 2000 are as follows:
INCOME ACCRUED
STATEMENT LIABILITY
CHARGE ASSET DECEMBER 31,
Q4 2000 PAYMENTS WRITE-DOWNS 2000
--------- -------- ----------- ------------
Severance costs........................... $ 8,377 $(2,110) $ -- $ 6,267
Future lease obligations.................. 11,105 (1,042) -- 10,063
Assets not expected to be recoverable..... 18,284 -- (18,284) --
Termination of joint venture/agency
agreements.............................. 11,635 (4,110) (2,313) 5,212
------- ------- -------- -------
$49,401 $(7,262) $(20,597) $21,542
======= ======= ======== =======
Severance costs
Severance costs have been recorded for certain employees at the former
Circle headquarters and former Circle management at certain international
locations who were terminated or notified of their termination under the Plan
prior to December 31, 2000. As of December 31, 2000 approximately 60 of the 150
employees included in the Reorganization Plan are no longer employed by the
Company. In addition, the termination of the remaining approximately 90
employees under the Plan will occur in the first quarter of 2001. Severance
costs have not been accrued for certain of these employees under the Plan since
these employees have not met the required conditions in order to receive
severance benefits under the Plan as of December 31, 2000. Management expects to
record an additional charge of approximately $2.4 million in the first quarter
of 2001 related to these employees.
Also, during January 2001 the Company announced an additional reduction in
the Company's workforce of approximately 300 additional employees. The charge
for this workforce reduction is approximately $660 and will be recorded during
the first quarter of 2001.
F-14
54
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future lease obligations
Future lease obligations consist of the Company's remaining lease
obligations under noncancelable operating leases at domestic and international
locations that the Company is in the process of vacating and consolidating due
to excess capacity resulting from the Company having multiple facilities in
certain locations. Amounts recorded for future lease obligations under the Plan
are net of approximately $28.0 million in anticipated future recoveries from
actual or expected sublease agreements. Sublease income has been anticipated
under the Plan only in locations where sublease agreements have been executed as
of December 31, 2000 or are deemed probable of execution during the first half
of 2001. The provisions of the Plan include the consolidation of facilities at
approximately 80 of the Company's operating locations. As of December 31, 2000,
consolidation of facilities has been completed at 17 of these locations with the
remaining locations expected to be completed by the fourth quarter of 2001. In
addition, the Company expects further consolidation at some of its other
locations in the future. Costs for the consolidation at these locations has not
been included in the Plan as of December 31, 2000 as the Company has not yet
been able to determine the estimated consolidation dates for these facilities.
It is expected that the plans to consolidate these locations will be finalized
during the first half of 2001. All lease costs for facilities being consolidated
are charged to operations until the date that the Company vacates each facility.
The charges recorded under the Plan include provisions for closing Circle's
logistics facility in Los Angeles, California.
Assets not expected to be recoverable
Assets not expected to be recoverable primarily consist of fixed assets at
the various locations that are being consolidated under the Plan and will no
longer be used in the Company's ongoing operations. Depreciation and
amortization of these assets are being charged to operations until the date that
the Company vacates each facility. Included in the Plan is computer hardware and
software used by the former Circle operations which will no longer be used by
the Company as these assets are not compatible with the Company's existing
information technology strategy.
Termination of joint venture/agency agreements
Costs to terminate joint venture/agency agreements represents contractually
obligated costs incurred to terminate selected joint venture and agency
agreements with certain of the Company's former business partners along with
assets that are not expected to be fully recoverable as a result of the
Company's decision to terminate these agreements. In conjunction with the
Company's Reorganization Plan. The Company is currently terminating certain of
its joint venture and agency agreements in Brazil, Chile, Panama, Venezuela,
Taiwan and South Africa.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
ESTIMATED
USEFUL LIVES 2000 1999
------------- -------- --------
Land.............................................. $ 17,115 $ 16,818
Buildings and improvements........................ 5 to 50 years 104,841 85,004
Equipment and furniture........................... 3 to 10 years 132,249 130,152
-------- --------
254,205 231,974
Less -- accumulated depreciation.................. 100,860 98,677
-------- --------
$153,345 $133,297
======== ========
F-15
55
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is pursuing the sale of duplicate buildings in two locations.
NOTE 5 -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in net assets of unconsolidated affiliated companies amounted
to $52.7 million and $49.0 million at December 31, 2000 and 1999, respectively.
This includes a 40% investment in TDS Logistics Inc. (TDS) of $42.7 million and
$40.8 million as of December 31, 2000 and 1999, respectively, and a 24.5%
investment in Miami Air International, Inc. (Miami Air). The TDS investment
balance includes the excess of purchase price over net assets of $24.9 million
and $25.6 million as of December 31, 2000 and 1999, respectively, which is being
amortized over 37 years. The Miami Air investment balance includes the excess of
purchase price over net assets of $5.5 million as of December 31, 2000, which is
being amortized over 25 years. The unaudited results of operations and financial
position of TDS and Miami Air are summarized below:
TDS
Condensed Statement of Operations information for the Year Ended December 31:
2000 1999 1998
------- ------- -------
Revenue................................................. $82,244 $63,486 $77,521
Income from operations.................................. 6,624 13,884 15,348
Net income.............................................. 6,115 8,947 8,682
Condensed Balance Sheet information at December 31:
2000 1999
------- -------
Current assets.............................................. $41,943 $15,881
Noncurrent assets........................................... 60,136 33,134
Current liabilities......................................... 27,230 9,402
Noncurrent liabilities...................................... 30,429 439
Stockholders' equity........................................ 44,420 39,174
Miami Air
In July 2000, the Company purchased 24.5% of the outstanding common stock
of Miami Air International Inc. (Miami Air), a privately held domestic and
international charter airline headquartered in Miami, Florida, for approximately
$6.3 million in cash in a stock purchase transaction. The Company's investment
balance at December 31, 2000 was approximately $6.1 million. The Company's
primary objective for engaging in the transaction was to develop a business
relationship with Miami Air in order to obtain access to an additional source of
reliable freight charter capacity. The Company's Chairman and President, and a
member of EGL's board of directors also purchased 19.2% and 6% of Miami Air,
respectively. (See Note 12 for additional agreements associated with Miami Air.)
Condensed Statement of Operations information for the Year Ended December 31:
2000
--------
Revenue................................................... $107,939
Loss from operations...................................... (113)
Net loss.................................................. (3,359)
F-16
56
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed Balance Sheet Information at December 31:
2000
-------
Current assets............................................. $13,844
Noncurrent assets.......................................... 40,045
Current liabilities........................................ 26,817
Noncurrent liabilities..................................... 23,803
Stockholder's equity....................................... 3,268
The Company recognized a loss of $187 during the year ended December 31,
2000 related to its investment in Miami Air.
NOTE 6 -- BORROWINGS
Borrowings as of December 31, 2000 and 1999 consist of the following
amounts:
2000 1999
------- -------
Revolving line of credit.................................... $81,000 $ --
Notes payable............................................... 13,480 9,144
Commercial paper............................................ -- 25,000
Overnight borrowings........................................ -- 5,901
------- -------
94,480 40,045
Less -- current portion..................................... 3,429 7,801
------- -------
Long-term borrowings........................................ $91,051 $32,244
======= =======
In conjunction with the merger between EGL and Circle, the Company repaid
all outstanding commercial paper borrowings of approximately $27.0 million.
Prior to the aforementioned repayment, all commercial paper was classified as
long-term borrowings as Circle had previously intended to reissue such paper as
it matured and Circle had the ability to refinance these amounts on a long-term
basis.
On January 13, 2000, the Company entered into an agreement (the Credit
Agreement) with Bank of America, N.A. (the Bank) as administrative agency. The
Credit Agreement (as amended) provided a $120 million revolving line of credit
and included a $10 million sublimit for the issuance of letters of credit. As of
December 31, 2000, $8.3 million of the outstanding balance on the revolving line
of credit was attributable to outstanding letters of credit. The revolving line
of credit was scheduled to mature on January 11, 2001. The weighted average
interest rate on borrowings under this agreement, as of December 31, 2000, was
approximately 8.1%. During 2000, the Company incurred $1,105 of interest expense
and $117 of commitment and letter of credit fees under this agreement. In
connection with this agreement, the Company incurred approximately $50 of debt
issue costs which were written off prior to December 31, 2000 due to the planned
refinancing of this debt.
All outstanding borrowings under the Credit Agreement at December 31, 2000
were classified as long-term due to the Company's ability and intent to
refinance these borrowings on a long-term basis.
On January 5, 2001, the Company entered into an agreement (the new Credit
Facility) with various financial institutions with the Bank serving as
administrative agent to replace the aforementioned Credit Agreement. The new
Credit Facility provides a $150 million revolving line of credit and includes a
$30 million sublimit for the issuance of letters of credit and a $15 million
sublimit for a swing line loan. The new Credit Facility matures on January 5,
2004.
F-17
57
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For each tranche of principal obtained under the revolving line of credit,
the Company elects an interest rate calculation on either LIBOR plus an
applicable margin based on a ratio of consolidated debt to consolidated EBITDA
(a Libor Tranche) or the greater of the prime rate announced by the Bank or the
federal funds rate plus 50 basis points (a Prime Rate Tranche). The interest for
a LIBOR Tranche is due at the earlier of three months from inception of the
LIBOR Tranche, as selected by the Company, or the expiration of the LIBOR
Tranche, whichever is earlier. The interest for a Prime Rate Tranche is due
quarterly.
The revolving line of credit includes unused commitment fees and letter of
credit fees, which are calculated on the basis of consolidated debt to
consolidated EBITDA and are due quarterly.
The Company is subject to certain covenants under the terms of the new
Credit Facility, including, but not limited to, maintenance at the end of any
fiscal quarter of (a) minimum specified consolidated net worth, (b) a ratio of
consolidated funded debt to total capitalization of no greater than 0.40 to
1.00, (c) a ratio of consolidated funded debt to consolidated EBITDA of no
greater than 2.00 to 1.00 and (d) a consolidated fixed charge coverage ratio of
no less than 2.00 to 1.00. The new Credit Facility also places restrictions on
additional indebtedness, liens, investments, change of control and other matters
and is secured by an interest in substantially all of the Company's assets.
As of December 31, 2000, the Company had available, unused borrowing
capacity of $30.7 million.
The Company maintains a $10 million dollar bank line of credit to secure
customs bonds and bank letters of credit to guarantee certain transportation
expenses in foreign locations. At December 31, 2000 and 1999, the Company was
contingently liable for approximately $8.9 million and $7.8 million,
respectively, under outstanding letters of credit and guarantees related to
these obligations.
Future scheduled principal payments on notes payable are as follows:
2001....................................................... $ 3,429
2002....................................................... 2,971
2003....................................................... 2,167
2004....................................................... 81,326
2005....................................................... 326
2006 and beyond............................................ 4,261
-------
Total............................................ $94,480
=======
NOTE 7 -- TAXES ON INCOME
Taxes on income include the following for the year ended December 31:
2000 1999 1998
------- ------- -------
Federal:
Current............................................... $10,612 $19,344 $12,950
Deferred.............................................. (9,689) (2,394) 2,135
State:
Current............................................... 1,488 3,638 2,096
Deferred.............................................. (1,284) (83) 646
Foreign:
Current............................................... 12,340 12,053 7,849
Deferred.............................................. (304) (248) 218
------- ------- -------
Total......................................... $13,163 $32,310 $25,894
======= ======= =======
F-18
58
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's net deferred tax liability are as
follows at December 31:
2000 1999
------- -------
Deferred tax liabilities:
Undistributed earnings of subsidiaries.................... $ 9,125 $ 9,043
Depreciation/amortization................................. 9,739 10,835
------- -------
$18,864 $19,878
======= =======
Deferred tax assets:
Bad debts................................................. $ 3,244 $ 2,594
Accrued liabilities....................................... 12,454 3,597
Other..................................................... 1,469 713
------- -------
17,167 6,904
------- -------
Net deferred tax liability........................ $ 1,697 $12,974
======= =======
Taxes on income were different than the amount computed by applying the
statutory income tax rate. Such differences are summarized as follows for the
year ended December 31:
2000 1999 1998
------- ------- -------
Tax computed at statutory rate.......................... $ 4,354 $29,407 $22,643
Increases (decreases) resulting from:
Foreign taxes......................................... 275 (3,114) (1,270)
Nondeductible merger related costs.................... 5,015
Other nondeductible items............................. 1,481 2,215 2,628
State taxes on income, net of federal income tax
effect............................................. 511 2,311 1,783
Other................................................. 1,527 1,491 110
------- ------- -------
Total......................................... $13,163 $32,310 $25,894
======= ======= =======
Taxes on income include deferred income taxes on undistributed earnings
(not considered permanently invested) of consolidated subsidiaries, net of
applicable foreign tax credits. The Company does not provide for United States
income taxes on foreign subsidiaries' undistributed earnings intended to be
permanently reinvested in foreign operations. At December 31, 2000, cumulative
earnings of consolidated foreign subsidiaries designated as permanently invested
were approximately $11.0 million for which the related tax impact would
approximate $4.0 million.
Sources of pretax income are summarized as follows for the year ended
December 31:
2000 1999 1998
-------- ------- -------
Domestic............................................... $(20,804) $56,968 $41,873
Foreign................................................ 33,245 27,052 23,568
-------- ------- -------
Total........................................ $ 12,441 $84,020 $65,441
======== ======= =======
As a result of stock option exercises for the years ended December 31,
2000, 1999 and 1998 of nonqualified stock options to purchase an aggregate of
1,162, 1,052 and 1,049 shares of common stock, respectively, the Company is
entitled to a federal income tax deduction of approximately $17,029, $17,504 and
$13,381, respectively, with a related reduction in its tax obligations of
approximately $4,991, $4,454 and $4,693; respectively. Accordingly, the Company
recorded an increase to additional paid-in capital and a reduction in current
taxes payable pursuant to the provisions of SFAS 109, "Accounting for Income
Taxes". Any exercises of nonqualified stock options in the future at exercise
prices below the then fair market value of
F-19
59
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the common stock may also result in tax deductions equal to the difference
between such amounts, although there can be no assurance as to whether or not
such exercises will occur, the amount of any deductions or the Company's ability
to fully utilize such tax deductions.
NOTE 8 -- STOCKHOLDERS' EQUITY
On January 30, 1998, the Company completed an underwritten secondary public
offering of 3,018 shares of its common stock at a price to the public of $18.50
per share. The Company did not receive any of the proceeds from the sale of
2,625 of these shares sold by James R. Crane, the Company's Chairman of the
Board of Directors, President and Chief Executive Officer. The Company sold 394
of the offered shares and the net proceeds received by the Company after
deducting underwriting discounts and commissions and offering expenses were $6.6
million and were used for general corporate purposes.
During the year ended December 31, 1999, the Company's Board of Directors
authorized the repurchase of up to 1,750 shares of the Company's common stock in
the open market. This authorization expired during December 1999. During the
year ended December 31, 2000 the Board of Directors authorized a repurchase of
up to an additional 3,000 shares. The Company terminated this authorization on
July 2, 2000. During the years ended December 31, 2000 and 1999, the Company
purchased 450 and 1,045 shares of common stock for $10,478 and $14,845,
respectively, under these plans. During the years ended December 31, 2000 and
1999, 80 and 23 shares, respectively, were reissued to satisfy purchases under
the Company's Stock Purchase Plan (Note 9), payment of additional consideration
for previous acquisitions (Note 2) and restricted stock awards. As of December
31, 2000 and 1999, 1,392 and 1,022 shares were held in treasury, respectively.
The Company accounts for treasury stock using the cost method.
In January 2000, the Company agreed to issue 45 shares of restricted common
stock to an employee. The Company recorded these shares as unearned compensation
of $1,905 at the date of the award based on the quoted fair market value of the
shares at the time the award was granted. This amount is being amortized over
the three-year vesting period of the award. As of December 31, 2000, 15 shares
outstanding under this award were vested.
Prior to the merger as discussed in Note 2, Circle historically paid cash
dividends of $0.27 per common share with cash dividends of $0.135 per share
declared on a semi-annual basis in June and December of each year. As of
December 31, 1999, dividends of $2,349 were declared and paid in March 2000. In
June 2000, Circle declared an additional cash dividend of $0.135 per share
totaling $2,415 which was paid in September 2000. Since the completion of the
merger, the Company has not declared any additional dividends.
As of December 31, 2000, the Company has an outstanding obligation to issue
approximately 55 shares of common stock in connection with the Fastair and CTI
acquisitions as discussed in Note 2. These shares were issued during March 2001.
NOTE 9 -- EMPLOYEE BENEFIT AND STOCK OPTION PLANS
Defined contribution benefit plans
The Company has a 401(k) savings plan pursuant to which the Company
provides dollar for dollar discretionary matching of employee tax-deferred
savings, up to a maximum of 5% of eligible compensation with a vesting period of
five years on the portion contributed by the Company. During the years ended
December 31, 2000, 1999 and 1998 the Company recorded charges of $4.0 million,
$4.9 million and $3.3 million, respectively, related to the discretionary
contributions to this plan. Prior to the Circle acquisition, as discussed in
Note 2, Circle offered various defined contribution employee benefit plans.
Effective January 1, 2001, the plans previously maintained by Circle were merged
into the EGL plan.
F-20
60
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock purchase plans
During the year ended December 31, 1999, the Company initiated an employee
stock purchase plan in order to provide eligible employees of the Company and
its participating subsidiaries, including subsidiaries based outside of the
United States, with the opportunity to purchase the Company's common stock
through payroll deductions. Employees may purchase common stock under this plan
during a six-month offering period based on a formula provided in the plan
document, which generally allows the Company's employees to purchase common
stock at 85% of quoted fair market value. Under this plan, 300 shares are
authorized for purchase. During the years ended December 31, 2000 and 1999, 52
and 23 shares of common stock were purchased under this plan at an average price
of $25.65 and $11.96 per share, respectively.
Stock option plans
The Company has five option plans whereby certain officers, directors, and
employees may be granted options, appreciation rights or awards related to the
Company's common stock.
The 1982 Stock Option Plan and 1990 Stock Option Plan provide for the
granting of non-qualified or incentive stock options to officers and key
employees for a maximum of 956 common shares at not less than fair market value
on the date of the grant. Under these plans, stock options are generally issued
with the restriction that no option may be exercised before three years from
date of grant or later than eight years from date of grant.
The 1994 Omnibus Equity Incentive Plan provides for the granting of stock
options, stock appreciation rights, restricted stock awards, performance unit
awards and performance share awards to key employees and consultants of the
Company. The plan was originally authorized for a maximum of 2,000 common
shares, and was amended in May 1998 to increase the maximum to 2,500 common
shares. Stock options under this plan are generally issued at an option price at
not less than fair market value on the date of the grant. To date, no incentive
or non-qualifying stock options were granted below fair market value. Under this
plan, stock options are generally issued with the restriction that no option may
be exercised before one year from date of grant nor later than ten years from
date of grant.
The 1994 Plan permits the grant of stock options at an exercise price equal
to the fair market value of the common stock on the date of grant. The plan was
authorized for a maximum of 9,150 shares. The options generally vest ratably
over a five-year or seven-year period from date of grant (or 100% upon death).
The Company has no obligation to repurchase options granted. Vested options
terminate seven years from date of grant.
Additional awards may be granted under the 1994 Plan in the form of cash,
stock, or stock appreciation rights. The stock appreciation right awards may
consist of the right to receive payment in cash or common stock. Any award may
be subject to certain conditions, including continuous service with the Company
or achievement of certain business objectives. There have been no awards of this
kind under the 1994 Plan.
The 1999 Stock Option Plan permits the grant of nonqualified stock options
in order to promote the success and enhance the value of the Company by linking
the personal interests of the participants to those of the Company's
stockholders, and by providing participants with an incentive for outstanding
performance. The plan was authorized for a maximum of 125 common shares. Stock
options under this plan are generally issued at an option price at not less than
fair market value on the date of the grant. To date, no incentive or non-
qualifying stock options were granted below fair market value. Under this plan,
stock options are generally issued with the restriction that no option may be
exercised before one year from date of grant nor later than ten years from date
of grant.
The Director Plan permits stock option grants that vest within one year
from the date of grant and terminate ten years from date of grant. The plan was
authorized for a maximum of 300 shares.
F-21
61
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1982 Stock Option Plan, 1990 Stock Option Plan, 1994 Omnibus Equity
Incentive Plan and the 1999 Stock Option Plan were plans created by Circle prior
to the merger with EGL. Options outstanding pursuant to these plans are
exercisable in shares of EGL common stock and were automatically accelerated
upon consummation of the merger with EGL.
A summary of stock option transactions for each of the three years ended
December 31, 2000 follows:
WEIGHTED
AVERAGE
OPTIONS OPTION PRICE
------- ------------
Outstanding at December 31, 1997............................ 4,563 $10.74
Granted................................................... 3,559 20.53
Exercised................................................. (412) 14.17
Cancelled................................................. (1,203) 10.51
------
Outstanding at December 31, 1998............................ 6,507 16.01
Granted................................................... 1,504 21.58
Exercised................................................. (908) 13.45
Cancelled................................................. (1,004) 11.56
------
Outstanding at December 31, 1999............................ 6,099 17.77
Granted................................................... 1,975 24.75
Exercised................................................. (1,162) 16.57
Cancelled................................................. (875) 21.59
------
Outstanding at December 31, 2000............................ 6,037 20.45
======
Options vested at December 31, 2000, 1999 and 1998 totaled 2,482 shares,
2,105 shares and 1,556 shares, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2000:
OUTSTANDING EXERCISABLE
----------------------------- -----------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- --------------- ------ --------- -------- ------ --------
$ 0.83-$19.29.......................... 1,659 4.02 $12.54 1,215 $11.49
$19.38-$19.42.......................... 1,430 4.17 19.42 486 19.42
$19.83-$25.06.......................... 2,205 6.52 24.13 449 22.51
$25.25-$33.81.......................... 743 5.85 29.21 332 27.08
----- ---- ------ ----- ------
$ 0.83-$33.81.......................... 6,037 5.19 $20.45 2,482 $17.12
===== ==== ====== ===== ======
As discussed in Note 1, the Company applies APB No. 25 and related
interpretations in accounting for its stock option plans. No compensation cost
has been recognized for these plans. The weighted-average fair values of options
granted during 2000, 1999, and 1998 were $13.26, $10.45 and $10.24,
respectively. Had compensation cost for the Company's option plans been
determined based upon the fair value at the grant dates for awards under these
plans consistent with the method set forth under SFAS No. 123, the Company's net
income/(loss) for the years ended December 31, 2000, 1999 and 1998 would have
been reduced/(increased) by $9,631 (includes expenses associated with the
acceleration of Circle options upon the completion of the merger with EGL),
$6,695 and $4,942, respectively. Diluted earnings (loss) per share for fiscal
2000, 1999 and 1998 would have been reduced/(increased) by $0.21, $0.14 and
$0.11, respectively.
F-22
62
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes options-repricing model with the following weighted
average assumptions used for grants:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
----- ----- -----
Expected volatility....................................... 55.00% 57.00% 54.00%
Risk-free interest rate................................... 6.08% 5.44% 5.13%
Dividend yield............................................ 0.19% 0.41% 0.37%
Expected life of option (years)........................... 4.80 4.60 4.70
NOTE 10 -- NONOPERATING INCOME, NET
Interest income and other, net, includes the following for the year ended
December 31:
2000 1999 1998
------- ------- -------
Interest income......................................... $ 3,427 $ 4,982 $ 6,192
Interest expense........................................ (5,197) (2,986) (1,941)
Income from unconsolidated affiliates, net.............. 1,599 3,922 3,853
Rental income........................................... 685 143 --
Gain (loss) on sales of assets.......................... (759) 815 257
Gains (losses) on sales of equity securities............ -- 4,519 (13)
Minority interests...................................... (1,654) (920) (928)
Net foreign exchange gains.............................. 2,801 1,151 1,365
Other................................................... 888 347 350
------- ------- -------
Total......................................... $ 1,790 $11,973 $ 9,135
======= ======= =======
During the quarter ended December 31, 1999, the Company sold approximately
30% of its investment in the equity securities of Equant N.V., an international
data network service provider, for net proceeds and a pre-tax gain of
approximately $4,519. The remaining shares are held in a trust, are not
currently marketable and have a zero cost basis.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
In December 1997, the U.S. Equal Employment Opportunity Commission (EEOC)
issued a Commissioner's Charge pursuant to Sections 706 and 707 of Title VII of
the Civil Rights Act of 1964, as amended (Title VII). The Company continues to
vigorously defend against allegations contained in the Commissioner's Charge. In
the Commissioner's Charge, the EEOC charged the Company and certain of its
subsidiaries with violations of Section 703 of Title VII, as amended, the Age
Discrimination in Employment Act of 1967, and the Equal Pay Act of 1963,
resulting from (i) engaging in unlawful discriminatory hiring, recruiting and
promotion practices and maintaining a hostile work environment, based on one or
more of race, national origin, age and gender, (ii) failures to investigate,
(iii) failures to maintain proper records and (iv) failures to file accurate
reports. The Commissioner's Charge states that the persons aggrieved include all
Blacks, Hispanics, Asians and females who are, have been or might be affected by
the alleged unlawful practices.
On May 12, 2000, four individuals filed suit against EGL alleging gender,
race and national origin discrimination, as well as sexual harassment. This
lawsuit was filed in the United States District Court for the Eastern District
of Pennsylvania in Philadelphia, Pennsylvania. The EEOC was not initially a
party to the Philadelphia litigation. In July 2000, four additional individual
plaintiffs were allowed to join the Philadelphia litigation. The Company filed
an Answer in the Philadelphia case and extensive discovery is underway. The
individual plaintiffs are seeking to certify a class of approximately 1,000
current and former EGL employees and applicants. The plaintiff's initial motion
for class certification was denied in November 2000.
F-23
63
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 29, 2000, the EEOC filed a Motion to Intervene in the
Philadelphia litigation. That motion was granted by the Court in Philadelphia on
January 31, 2001. In addition, the Philadelphia Court also granted EGL's motion
that the case be transferred to the United States District Court for the
Southern District of Texas -- Houston Division where EGL had previously
initiated litigation against the EEOC due to what EGL believes to have been
inappropriate practices by the EEOC in the issuance of the Commissioner's Charge
and in the subsequent investigation. EGL intends to continue to vigorously
pursue its lawsuit against the EEOC alleging agency bias and misconduct. EGL is
currently in the midst of active discovery on this matter and will be requesting
an appropriate remedy from the Court.
The Company intends to continue to vigorously defend itself against the
allegations made by the EEOC, as well as the private plaintiffs. The Company has
recognized a pre-tax charge of $7,500 in its consolidated statement of
operations during the year ended December 31, 2000 for the expected cost of its
litigation efforts related to this matter. The Company currently expects to
prevail in its defense of this matter.
In addition, the Company is also party to routine litigation incidental to
its business, which primarily involves other employment matters or claims for
goods lost or damaged in transit or improperly shipped. Many of the lawsuits to
which the Company is a party are covered by insurance and are being defended by
the Company's insurance carriers. The Company has established reserves for these
matters and it is management's opinion that the resolution of such litigation
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In addition to property at one of its freight operations facilities
acquired under a capital lease, the Company has a number of operating lease
agreements, principally for freight operation facilities and office space. These
leases are noncancelable and expire on various dates through 2025. The following
is a summary of future minimum payment obligations under noncancelable leases
with remaining lease terms in excess of one year as of December 31, 2000. Not
included in the summary are any leases that the Company may have on computer
equipment.
CAPITAL OPERATING
LEASES LEASES
------- ---------
2001........................................................ $ 608 $ 40,830
2002........................................................ 608 33,854
2003........................................................ 608 29,747
2004........................................................ 608 25,560
2005 and thereafter......................................... 1,824 94,130
------ --------
Total minimum lease payments...................... 4,256 $224,121
========
Less -- amounts representing interest....................... (886)
------
Present value of net minimum lease payments................. 3,370
Less -- current obligations................................. (390)
------
Noncurrent obligations...................................... $2,980
======
Included in the above summary of minimum future lease payment obligations
are 353 leases on freight operations facilities and office space. The
obligations related to approximately 80 of these facilities have been accrued in
the Company's restructuring charge for the year ended December 31, 2000. As of
December 31, 2000, approximately seven of these leases with an aggregate
remaining lease liability of $40.9 million have been subleased to third parties
with aggregate future sublease payments due to the Company under these
agreements of $4.1 million.
As of December 31, 2000, the Company has commitments to construct office,
warehouse and terminal facilities for $18.6 million. Construction of these
assets is expected to be completed during 2001.
F-24
64
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense under noncancelable operating leases was $40.6 million, $32.6
million and $25.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively, which is net of sublease income of $.7 million, $1.6 million and
$3.2 million, respectively.
The carrying value of property held under the capital leases as of December
31, 2000 was $3.4 million, which is net of $1.8 million of accumulated
amortization.
On January 10, 1997, the Company entered into a five-year operating lease
agreement with two unrelated parties for financing the construction of its
Houston terminal, warehouse and headquarters facility (the Houston facility).
The cost of the Houston facility was approximately $8.5 million. Under the terms
of the lease agreement, average monthly lease payments are approximately $59,
which includes interest costs based upon LIBOR rate plus 145 basis points, with
a balloon payment equal to the outstanding lease balance (initially equal to the
cost of the facility) due on January 2, 2002. The Company has an option,
exercisable at any time during the lease term, to acquire the facility for an
amount equal to the outstanding lease balance. In the event the Company does not
exercise the purchase option, it is subject to a deficiency payment, computed as
the amount equal to the outstanding lease balance minus the then current fair
market value of the Houston facility. As of December 31, 2000, the lease balance
was approximately $7.8 million.
On April 3, 1998, the Company entered into a five-year $20 million master
operating lease agreement with two unrelated parties for financing the
construction of terminal and warehouse facilities throughout the United States,
designated by the Company (each, a financed facility). Under the terms of the
master operating lease agreement, average monthly lease payments, which include
monthly interest costs based upon LIBOR rate plus 145 basis points, begin upon
the completion of the construction of each Financed Facility and will continue
for terms ranging from 24 to 36 months with a balloon payment equal to the
outstanding lease balances (initially equal to the costs of each financed
facility) due at the end of each lease term, and the Company has an option,
exercisable at any time during the lease term and under certain circumstances
may be obligated, to acquire each Financed Facility for an amount equal to the
outstanding lease balance. In the event the Company does not exercise the
purchase option, and does not otherwise meet its obligations, it is subject to a
deficiency payment, computed as the amount equal to the outstanding lease
balance minus the then fair market value of each financed facility within
certain limits. The Company began construction of each of its five financed
facilities during 1999, with all leases terminating on May 15, 2003. Average
monthly payments under the master operating lease agreement are approximately
$150. As of December 31, 2000, the aggregate lease balance was approximately
$13.6 million under the master operating leases.
The operating lease agreements contain restrictive financial covenants
requiring the maintenance of a fixed charge coverage ratio of at least 1.50 to
1.0 and specified amounts of consolidated net worth and consolidated tangible
net worth. In addition, the master operating lease agreement restricts the
Company from incurring debt in an amount greater than $30 million, except
pursuant to a single credit facility involving a commitment of not more than
$150 million.
The Company presently has agreements with certain charter airlines to
provide the Company with full access to regularly scheduled chartered aircrafts
on a monthly basis. These agreements contain guaranteed monthly minimum use
requirements of the aircrafts by the Company. Certain of these agreements
contain provisions which allow for early termination or modification of the
agreements to provide for an increase in or reduction of the amount of aircrafts
available for the Company's use at the Company's discretion. One of these
charter agreements is with Miami Air International, Inc., a related party. Based
on the charter agreements presently in place and aircraft presently being used,
the Company expects to incur average minimum guaranteed charges of approximately
$6,393, $2,998 and $428 on a monthly basis under these charter agreements during
the years ended December 31, 2001, 2002 and 2003, respectively. These charter
arrangements are generally cancellable with a minimum notice period. Therefore,
these obligations were excluded from the Company's minimum five year lease
obligation table.
F-25
65
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- RELATED PARTY TRANSACTIONS
In connection with the Miami Air acquisition (Note 5) Miami Air and the
Company entered into an aircraft charter agreement. Under this agreement Miami
Air agreed to convert certain of its passenger aircraft to cargo aircraft and to
provide aircraft charter services to the Company for a three-year term. The
Company issued a $7.0 million standby letter of credit in favor of certain
creditors of Miami Air to enhance Miami Air's borrowing capacity to assist in
this aircraft conversion. Miami Air has agreed to pay the Company an annual fee
equal to 3.0% of the face amount of the letter of credit and to reimburse the
Company for any payments owed by the Company in respect of the letter of credit.
As of December 31, 2000, Miami Air had borrowed approximately $2,126 from its
lender. There have been no draws against the standby letter of credit, issued by
the Company as of December 31, 2000. Additionally, during the year, the Company
paid Miami Air $1,422 under the aircraft charter agreement. There were no unpaid
balances related to this agreement as of December 31, 2000.
Additionally, Miami Air, each of the private investors and the continuing
Miami Air stockholders also entered into a stockholders agreement under which
Mr. Crane (Chairman, President and CEO) and Mr. Hevrdejs (a director of the
Company) are obligated to purchase up to approximately $1.7 million and $.5
million, respectively, worth of Miami Air's Series A preferred stock upon demand
by the board of directors of Miami Air. The Company and Mr. Crane both have the
right to appoint one member of Miami Air's board of directors. Additionally, the
other private investors in the stock purchase transaction, including Mr.
Hevrdejs, collectively have the right to appoint one member of Miami Air's board
of directors. The Series A preferred stock, if issued, will (i) not be
convertible, will have a 15.0% annual dividend rate and will be mandatorily
redeemable in July 2006 or upon the prior occurrence of specified events.
In May 1999, the Company began subleasing a portion of its warehouse space
in Houston, Texas and London, England to a customer pursuant to a five-year
sublease. The customer is partially owned by Mr. Crane. Rental income was
approximately $685 and $143 for the years ended December 31, 2000 and 1999,
respectively. In addition, the Company billed this customer approximately $515
and $1,201 for freight forwarding services during the years ended December 31,
2000 and 1999, respectively.
In conjunction with its business activities, the Company periodically
utilizes an aircraft owned by an entity that is controlled by Mr. Crane. Prior
to November 1, 2000, the Company was charged for its actual usage on an hourly
basis. Total amounts paid by the Company under this arrangement for the
ten-month period ended October 31, 2000 and the years ended December 31, 1999
and 1998 was approximately $1,417, $695 and $424, respectively. On October 30,
2000, the Company's Board of Directors approved a change in this arrangement
whereby the Company would reimburse Mr. Crane for the $112 monthly lease
obligation on this aircraft and the Company would bill Mr. Crane for any use of
this aircraft unrelated to the Company's business on an hourly basis. During the
period from November 1, 2000 to December 31, 2000, the Company reimbursed Mr.
Crane for $224 in monthly lease payments on the aircraft and billed Mr. Crane
for $53 for use of the aircraft which was unrelated to the Company's operations.
In April 1999, the Company sold a 49% interest in its previously wholly
owned subsidiaries in Spain and Portugal to a Director of the Company who was
the former Chief Executive Officer of Circle for $1.3 million. The purchase
price was paid one-third at closing, with the balance due in equal installments
in October 2000 and April 2002 and interest accruing on the unpaid balance at
6%. Under the terms of the sale agreement, the buyer has the option to require
the Company to purchase this interest at the fair value of these entities at the
time the option is exercised and the Company has the option to repurchase these
interests after December 31, 2005. The Company has deferred the recognition of
the gain of this transaction of $866 and has recorded this amount in minority
interest.
F-26
66
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- BUSINESS SEGMENT INFORMATION
Segment Reporting
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", establishes standards for the way that public companies report
selected information about segments in their financial statements.
The Company is organized functionally in geographic operating segments.
Accordingly, management focuses its attention on revenues, net revenues, income
from operations and identifiable assets associated with each of these
geographical areas when evaluating effectiveness of geographic management.
EUROPE & ASIA &
NORTH SOUTH MIDDLE SOUTH
AMERICA AMERICA EAST PACIFIC ELIMINATIONS CONSOLIDATED
---------- ------- -------- -------- ------------ ------------
Year ended December 31, 2000:
Total revenue.............. $1,205,261 $49,058 $226,463 $416,497 $(36,073) $1,861,206
Transfers between
regions................. (9,241) (4,481) (10,290) (12,061) 36,073
---------- ------- -------- -------- -------- ----------
Revenues from customers.... $1,196,020 $44,577 $216,173 $404,436 $ -- $1,861,206
========== ======= ======== ======== ======== ==========
Net revenue................ $ 518,638 $15,561 $ 99,676 $ 85,637 $ 719,512
========== ======= ======== ======== ==========
Income (loss) from
operations.............. $ (14,207) $(5,553) $ 13,401 $ 17,010 $ 10,651
========== ======= ======== ======== ==========
Identifiable assets........ $ 526,199 $41,000 $173,294 $159,253 $ 899,746
========== ======= ======== ======== ==========
Year ended December 31, 1999:
Total revenue.............. $ 921,608 $19,134 $200,909 $295,306 $(27,707) $1,409,250
Transfers between
regions................. (4,895) (3,523) (7,839) (11,450) 27,707
---------- ------- -------- -------- -------- ----------
Revenues from customers.... $ 916,713 $15,611 $193,070 $283,856 $ -- $1,409,250
========== ======= ======== ======== ======== ==========
Net revenue................ $ 403,779 $11,900 $ 92,808 $ 78,588 $ 587,075
========== ======= ======== ======== ==========
Income (loss) from
operations.............. $ 41,113 $(1,735) $ 14,224 $ 18,445 $ 72,047
========== ======= ======== ======== ==========
Identifiable assets........ $ 454,142 $21,150 $152,104 $148,298 $ 775,694
========== ======= ======== ======== ==========
Year ended December 31, 1998:
Total revenue.............. $ 782,969 $21,537 $165,172 $203,257 $(18,174) $1,154,761
Transfers between
regions................. (3,078) (3,352) (3,265) (8,479) 18,174
---------- ------- -------- -------- -------- ----------
Revenues from customers.... $ 779,891 $18,185 $161,907 $194,778 $ -- $1,154,761
========== ======= ======== ======== ======== ==========
Net revenues............... $ 332,170 $11,530 $ 79,359 $ 62,447 $ 485,506
========== ======= ======== ======== ==========
Income (loss) from
operations.............. $ 35,474 $ (140) $ 9,391 $ 11,581 $ 56,306
========== ======= ======== ======== ==========
Identifiable assets........ $ 331,956 $21,418 $134,435 $163,333 $ 651,142
========== ======= ======== ======== ==========
Revenue from transfers between regions represents approximate amounts that
would be charged if the services were provided by an unaffiliated company. Total
regional revenue is reconciled with total consolidated revenue by eliminating
inter-regional revenue.
F-27
67
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is domiciled in the U.S. and had revenues from external
customers in the U.S. of $1,099 million in 2000, $890 million in 1999 and $763
million 1998. The U.S. had long lived assets of $123 million, $100 million and
$62 million at the end of 2000, 1999 and 1998, respectively.
The Company charges its subsidiaries and affiliates for management and
overhead services rendered in the United States on a cost recovery basis.
The following tables show the approximate amounts of revenue and net
revenue attributable to the Company's principal services during each of the
three years in the period ended December 31, 2000.
2000 1999 1998
---------- ---------- ----------
Revenue:
Air freight forwarding......................... $1,465,438 $1,112,280 $ 899,784
Ocean freight forwarding....................... 184,602 137,024 111,938
Customs brokerage and other.................... 211,166 159,946 143,039
---------- ---------- ----------
Total.................................. $1,861,206 $1,409,250 $1,154,761
========== ========== ==========
Net revenue:
Air freight forwarding......................... $ 473,397 $ 379,602 $ 301,996
Ocean freight forwarding....................... 53,462 49,194 40,471
Customs brokerage and other.................... 192,653 158,279 143,039
---------- ---------- ----------
Total.................................. $ 719,512 $ 587,075 $ 485,506
========== ========== ==========
NOTE 14 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED(*)
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
Revenues............................... $404,912 $450,779 $490,716 $514,799
Net revenues........................... 161,702 179,076 191,895 186,839
Operating income....................... 12,803 23,061 29,050 (54,265)
Income before provision for income
taxes................................ 13,778 24,292 29,733 (55,362)
Net income (loss)...................... 8,456 14,983 18,311 (42,472)
Basic earnings (loss) per share........ 0.18 0.32 0.39 (0.91)
Diluted earnings (loss) per share...... 0.18 0.32 0.38 (0.91)
Dividends per share.................... 0.135
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
Revenues............................... $327,729 $328,937 $354,789 $397,795
Net revenues........................... 139,489 139,404 147,275 160,907
Operating income....................... 14,419 14,124 19,833 23,671
Income before provision for income
taxes................................ 15,655 16,603 22,469 29,293
Net income............................. 9,623 10,353 14,055 17,679
Basic earnings per share............... 0.21 0.23 0.31 0.39
Diluted earnings per share............. 0.21 0.22 0.30 0.37
Dividends per share.................... 0.135 0.135
- ---------------
* As discussed in Note 1, amounts for the 1999 quarters reflect the
consolidation of EGL's fiscal year ended September 30, 1999 with Circle's year
ended December 31, 1999. EGL's stand-alone results for the three months ended
December 31, 1999 are reflected in Note 15. The quarter ended December 31,
2000 includes
F-28
68
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction, integration and restructuring charges related to the merger with
Circle totaling $67.4 million (Note 3).
NOTE 15 -- FINANCIAL INFORMATION FOR EGL STAND-ALONE QUARTER ENDED DECEMBER 31,
1999
As previously discussed in Note 1, the consolidated statement of operations
does not include EGL's stand-alone results for the three months ended December
31, 1999. Cashflow and stockholders' equity activity for the three months ended
December 31, 1999 are presented as summary adjusting items to the accompanying
consolidated financial statements. The consolidated results of operations and
cash flows for EGL, Inc. and its subsidiaries (excluding Circle) for the three
months ended December 31, 1999 are as follows:
THREE MONTHS
ENDED
DECEMBER 31,
1999
------------
Revenues.................................................... $187,365
Cost of transportation...................................... 109,195
--------
Net revenues...................................... 78,170
--------
Operating expenses:
Personnel costs........................................... 40,121
Other selling, general and administrative expenses........ 22,376
--------
62,497
--------
Operating income............................................ 15,673
Interest and other income, net.............................. 655
--------
Income before provision for income taxes.................... 16,328
Provision for income taxes.................................. 6,368
--------
Net income.................................................. 9,960
Other comprehensive income:
Foreign currency translation.............................. 184
--------
Comprehensive income........................................ $ 10,144
========
Basic earnings per share.................................... $ 0.35
========
Basic weighted-average common shares outstanding............ 28,592
========
Diluted earnings per share.................................. $ 0.33
========
Diluted weighted-average common and common equivalent shares
outstanding............................................... 29,953
========
F-29
69
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no significant unusual items, charges or adjustments recorded by
EGL in the above statement of operations for the three months ended December 31,
1999.
THREE MONTHS
ENDED
DECEMBER 31,
1999
------------
Cash flows from operating activities:
Net income................................................ $ 9,960
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 1,785
Provision for doubtful accounts........................ 1,141
Deferred income tax expense............................ 18
Tax effect of stock options exercised.................. 3,143
Changes in assets and liabilities:
Increase in trade accounts receivable.................. (21,654)
Increase in other assets............................... (2,103)
Increase in accounts payable and accrued liabilities... 1,829
Minority interest...................................... 171
--------
Net cash used in operating activities............. (5,710)
--------
Cash flows from investing activities:
Acquisition of business, net of cash acquired............. (1,190)
Maturity of investments................................... 11,319
Capital expenditures...................................... (3,880)
Payment of contingent consideration for acquisition....... (1,250)
Other..................................................... 133
--------
Net cash provided by investing activities......... 5,132
--------
Cash flows form financing activities:
Proceeds from exercise of stock options................... 3,557
--------
Net cash provided by financing activities......... 3,557
--------
Effect of exchange rate changes on cash..................... 184
--------
Net increase in cash and cash equivalents................... 3,163
Cash and cash equivalents, beginning of period.............. 35,175
--------
Cash and cash equivalents, end of period.................... $ 38,338
========
In addition, due to the method of combination of prior period financial
statements, the accompanying consolidated statement of stockholders' equity for
the year ended December 31, 1999 includes an adjustment to record all activity
effecting stockholders' equity for EGL, Inc. for the quarter ended December 31,
1999. In addition to net income and effects of foreign currency translation of
$9,960 and $184, respectively, which are described above, the adjustments for
the quarter ended December 31, 1999 include:
Common stock:
Exercise of stock options (351 shares)
Additional paid-in capital:
Exercise of stock options................................. $3,557
Issuance of shares under stock purchase plan.............. (2)
Tax benefit from exercise of stock options................ 3,154
------
Total............................................. $6,709
======
F-30
70
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*2(i) -- Agreement and Plan of Merger, dated as of July 2, 2000
among EGL, Inc., EGL Delaware I, Inc. and Circle
International Group, Inc. (Exhibit 2.1 to EGL's Current
Report on Form 8-K filed on July 5, 2000 and incorporated
herein by reference).
*3(i) -- Second Amended and Restated Articles of Incorporation of
EGL, as amended (filed as Exhibit 3(i) to EGL's Form
8-A/A filed with the Securities and Exchange Commission
on September 29, 2000 and incorporated herein by
reference).
*3(ii) -- Amended and Restated Bylaws of EGL, as amended (Exhibit
3(ii) to EGL's Form 10-Q for the fiscal quarter ended
June 30, 2000 and incorporated herein by reference).
+*10.1 -- Long-Term Incentive Plan, as amended and restated
effective July 26, 2000 (filed as Exhibit 10(ii) to EGL's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
+*10.2 -- 1995 Non-employee Director Stock Option Plan (filed as
Exhibit 10.2 to EGL's Registration Statement on Form S-1,
Registration No. 33-97606 and incorporated herein by
reference).
+*10.3 -- 401(k) Profit Sharing Plan (filed as Exhibit 10.3 to
EGL's Registration Statement on Form S-1, Registration
No. 33-97606 and incorporated herein by reference).
+*10.4 -- Circle International Group, Inc. 1994 Omnibus Equity
Incentive Plan (filed as Exhibit 10.11 to Annual Report
on Form 10-K of Circle (SEC File No. 0-8664) for the
fiscal year ended December 31, 1993 and incorporated
herein by reference).
+*10.5 -- Amendment No. 1 to Circle International Group, Inc. 1994
Omnibus Equity Incentive Plan (filed as Exhibit 10.11.1
to Annual Report on Form 10-K of Circle (SEC File No.
9-8664) for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
+*10.6 -- Circle International Group, Inc. Employee Stock Purchase
Plan (filed as Exhibit 99.1 to the Registration Statement
on Form S-8 of Circle (SEC Registration No. 333-78747)
filed on May 19, 1999 and incorporated herein by
reference).
+*10.7 -- Circle International Group, Inc. 1999 Stock Option Plan
(filed as Exhibit 99.1 to the Form S-8 Registration
Statement of Circle (SEC Registration No. 333-85807)
filed on August 24, 1999 and incorporated herein by
reference).
+*10.8 -- Form of Nonqualified Stock Option Agreement for Circle
International Group, Inc. 2000 Stock Option Plan (filed
as Exhibit 4.8 to Post-Effective Amendment No. 1 on Form
S-8 to Registration Statement on Form S-4 (SEC
Registration No. 333-42310) filed on October 2, 2000 and
incorporated herein by reference).
*10.9 -- Shareholders' Agreement dated as of October 1, 1994 among
EGL and Messrs. Crane, Swannie, Seckel and Roberts (filed
as Exhibit 10.4 to EGL's Registration Statement on Form
S-1, Registration No. 33-97606 and incorporated herein by
reference).
*10.10 -- Form of Indemnification Agreement (filed as Exhibit 10.6
to EGL's Registration Statement on Form S-1, Registration
No. 33-97606 and incorporated herein by reference).
71
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.11 -- Credit Agreement dated January 5, 2001 between EGL, Bank
of America, N.A., SouthTrust Bank, The Bank of
Tokyo-Mitsubishi, Ltd. and the other financial
institutions named therein.
+*10.12 -- Employment Agreement dated as of October 1, 1996 between
EGL and James R. Crane (filed as Exhibit 10.7 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 and incorporated herein by reference).
+*10.13 -- Employment Agreement dated as of October 1, 1996 between
EGL and Douglas A. Seckel (filed as Exhibit 10.8 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 and incorporated herein by reference).
+*10.14 -- Employment Agreement dated as of September 24, 1998
between EGL and John C. McVaney (filed as Exhibit 10.9 to
EGL's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998 and incorporated herein by
reference).
+*10.15 -- Employment Agreement dated as of May 19, 1998 between EGL
and Ronald E. Talley (filed as Exhibit 10.10 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
+*10.16 -- Employment Agreement dated as of October 19, 1999 between
EGL and Elijio Serrano (filed as Exhibit 10.11 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 and incorporated herein by reference).
+*10.17 -- Employee Stock Purchase Plan, as amended and restated
effective July 26, 2000 (filed as Exhibit 10(iii) to
EGL's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
*10.18A -- Lease and Development Agreement dated as of January 10,
1997 between Asset XI Holdings Company, L.L.C. and EGL
(filed as Exhibit 10 to EGL's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and
incorporated herein by reference).
*10.18B -- Participation Agreement dated as of January 10, 1997
among Asset XI Holdings Company, L.L.C., EGL and Bank
One, Texas, N.A. (filed as Exhibit 10.10B to EGL's Annual
Report on Form 10-K for the fiscal year ended September
30, 1997 and incorporated herein by reference).
*10.18C -- Loan Agreement dated as of January 10, 1997 between Asset
XI Holdings Company, L.L.C. and Bank One, Texas, N.A.
(filed as Exhibit 10.10C to EGL's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 and
incorporated herein by reference).
10.18D -- First Amendment to Participation Agreement, Lease and
Development Agreement, and Loan Agreement dated as of May
15, 1998 among Asset XI Holdings Company, L.L.C., Eagle
USA Airfreight, Inc. and Bank One, Texas, N.A.
*10.19A -- Master Lease and Development Agreement dated as of April
3, 1998 between Asset XVI Holdings Company, L.L.C. and
Eagle USA Airfreight, Inc. (filed as Exhibit 10(iii) A to
EGL's Quarterly Report on Form 10-Q to the quarter ended
June 30, 1998 and incorporated herein by reference).
*10.19B -- Master Participation Agreement dated as of April 3, 1998
among Asset XVI Holdings Company, L.L.C., Eagle USA
Airfreight, Inc. and Bank One, Texas, N.A. (filed as
Exhibit 10(iii) B to EGL's Quarterly Report on Form 10-Q
to the quarter ended June 30, 1998 and incorporated
herein by reference).
72
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.19C -- Loan Agreement dated as of April 3, 1998 between Asset
Holdings Company, L.L.C. and Bank One, Texas, N.A. (filed
as Exhibit 10(iii) C to EGL's Quarterly Report on Form
10-Q to the quarter ended June 30, 1998 and incorporated
herein by reference).
*10.19D -- Appendix I to Master Participation Agreement, Master
Lease and Development Agreement and Loan Agreement (filed
as Exhibit 10(iii) D to EGL's Quarterly Report on Form
10-Q to the quarter ended June 30, 1998 and incorporated
herein by reference).
10.19E -- First Amendment to Master Participation Agreement, Master
Lease and Development Agreement, and Loan Agreement dated
as of April 3, 1998 among Asset XVI Holdings Company,
L.L.C., Eagle USA Airfreight, Inc. and Bank One, Texas,
NA.
10.19F -- Amendment to Master Participation Agreement dated as of
April 1, 1999 among Asset XVI Holdings Company, L.L.C.,
Eagle USA Airfreight, Inc. and Bank One, Texas, N.A.
10.19G -- Second Amendment to Participation Agreement, Lease
Agreement and Loan Agreement dated as of October 20, 2000
among Asset XVI Holdings Company, L.L.C., EGL and Bank
One, NA.
+*10.20 -- Consulting Agreement dated as of January 1, 1999 between
Zita Logistics, Ltd. and Circle International European
Holdings Limited (filed as Exhibit 10.4.3 to Circle's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and incorporated herein by reference).
21 -- Subsidiaries of EGL
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Deloitte & Touche LLP
- ---------------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.