<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 2000
------------------
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _______ to _______
COMMISSION FILE NUMBER 0-27288
-------
EGL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 76-0094895
-------------------------------------------------------------- ---------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
</TABLE>
15350 VICKERY DRIVE, HOUSTON, TEXAS 77032
(281) 618-3100
--------------------------------------------------------------------------------
(Address of Principal Executive Offices, Including Registrant's Zip Code,
and Telephone Number, Including Area Code)
N/A
--------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock as of October 31, 2000:
46,733,619 shares (net of 1,391,834 treasury shares).
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EGL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of.................................................................. 3
September 30, 2000 and December 31, 1999
Condensed Consolidated Statement of Income and Comprehensive
Income for the Nine Months ended September 30, 2000 and 1999.............................................. 4
Condensed Consolidated Statement of Income and Comprehensive Income for the Three........................... 5
Months ended September 30, 2000 and 1999
Condensed Consolidated Statement of Cash Flows for.......................................................... 6
the Nine Months ended September 30, 2000 and 1999
Condensed Consolidated Statement of Shareholders'........................................................... 7
Equity for the Nine Months ended September 30, 2000
Notes to Condensed Consolidated Financial Statements........................................................ 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................................. 20
PART II. OTHER INFORMATION.......................................................................................... 21
SIGNATURES........................................................................................................... 25
INDEX TO EXHIBITS.................................................................................................... 26
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUES)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,458 $ 38,338
Short-term investments 5,894
Accounts receivable - trade, net 171,599 129,517
Prepaid expenses and other 5,693 5,431
Deferred income taxes 3,194 2,817
--------- ---------
Total current assets 186,944 181,997
Property and equipment, net 49,616 30,443
Goodwill, net 38,105 12,121
Investments in unconsolidated affiliates 6,219
Other assets 3,207 1,654
--------- ---------
Total assets $ 284,091 $ 226,215
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable - trade $ 25,859 $ 10,224
Accrued transportation costs 22,130 28,855
Accrued compensation and employee benefits 20,632 14,876
Other accrued liabilities 15,999 8,237
--------- ---------
Total current liabilities 84,620 62,192
Long-term debt 15,553
Deferred income taxes 3,104 3,189
--------- ---------
Total liabilities 103,277 65,381
--------- ---------
Minority interest 354
--------- ---------
Shareholders' equity:
Preferred stock, $0.001 par value, 10,000 shares
authorized
Common stock, $0.001 par value, 200,000 shares
authorized, 30,125 and 29,804 shares issued 30 30
Additional paid-in capital 95,790 88,018
Unearned compensation (1,446)
Retained earnings 111,721 87,589
Accumulated other comprehensive loss (1,086) (587)
Treasury stock, 1,392 and 1,022 shares, at cost (24,195) (14,570)
--------- ---------
180,814 160,480
--------- ---------
Commitments and contingencies (Note 7)
--------- ---------
Total liabilities and shareholders' equity $ 284,091 $ 226,215
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues $ 644,278 $ 450,297
Cost of transportation 380,049 258,537
--------- ---------
Net revenues 264,229 191,760
--------- ---------
Operating expenses:
Personnel costs 139,634 97,713
Other selling, general and administrative expenses 85,727 61,225
--------- ---------
225,361 158,938
--------- ---------
Operating income 38,868 32,822
Interest and other income, net 1,321 1,941
--------- ---------
Income before provision for income taxes 40,189 34,763
Provision for income taxes 16,057 14,013
--------- ---------
Net income 24,132 20,750
Other comprehensive income:
Foreign currency translation (499) (580)
--------- ---------
Comprehensive income $ 23,633 $ 20,170
========= =========
Basic earnings per share $ 0.84 $ 0.73
========= =========
Basic weighted-average common shares outstanding 28,693 28,341
========= =========
Diluted earnings per share $ 0.81 $ 0.71
========= =========
Diluted weighted-average common and common equivalent
shares outstanding 29,762 29,341
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues $ 241,788 $ 166,749
Cost of transportation 142,549 96,635
--------- ---------
Net revenues 99,239 70,114
--------- ---------
Operating expenses:
Personnel costs 51,150 34,987
Other selling, general and administrative expenses 30,997 21,738
--------- ---------
82,147 56,725
--------- ---------
Operating income 17,092 13,389
Interest and other income, net 231 539
--------- ---------
Income before provision for income taxes 17,323 13,928
Provision for income taxes 6,930 6,006
--------- ---------
Net income 10,393 7,922
Other comprehensive income:
Foreign currency translation (174) (437)
--------- ---------
Comprehensive income $ 10,219 $ 7,485
========= =========
Basic earnings per share $ 0.36 $ 0.28
========= =========
Basic weighted-average common shares outstanding 28,618 28,506
========= =========
Diluted earnings per share $ 0.35 $ 0.27
========= =========
Diluted weighted-average common and common equivalent
shares outstanding 29,732 29,647
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities $ 12,342 $ 19,889
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (26,441)
Purchase of investments (22,088)
Maturity of investments 5,894 17,766
Acquisition of property and equipment, net (26,115) (8,894)
Payment of contingent consideration for acquisition (2,443) (891)
Other (157) (342)
-------- --------
Net cash used by investing activities (49,262) (14,449)
-------- --------
Cash flows from financing activities:
Issuance of common stock 653
Proceeds from exercises of stock options 3,132 6,834
Purchase of treasury stock (10,478) (9,057)
Borrowings on line of credit, net of repayments 12,232
-------- --------
Net cash provided (used) by financing activities 5,539 (2,223)
-------- --------
Effect of foreign currency translation on cash (499) (580)
-------- --------
Net (decrease) increase in cash and cash equivalents (31,880) 2,637
Cash and cash equivalents, beginning of period 38,338 32,538
-------- --------
Cash and cash equivalents, end of period $ 6,458 $ 35,175
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL UNEARNED OTHER
------------------ PAID-IN COMPEN- RETAINED COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL SATION EARNINGS LOSS STOCK TOTAL
------ --------- ---------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 29,804 $ 30 $ 88,018 $ 87,589 $ (587) $ (14,570) $ 160,480
Shares issued under stock option
plans and restricted stock awards 321 5,037 $ (1,905) 3,132
Purchase of treasury stock (10,478) (10,478)
Issuance of shares under stock
purchase plan 653 653
Shares issued for acquisition related
earnout 200 200
Tax benefit from exercise of stock
options 2,735 2,735
Amortization of unearned
compensation 459 459
Net income 24,132 24,132
Foreign currency translation
adjustments (499) (499)
------ --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2000 30,125 $ 30 $ 95,790 $ (1,446) $ 111,721 $ (1,086) $ (24,195) $ 180,814
====== ========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
7
<PAGE> 8
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited condensed consolidated financial
statements have been prepared by EGL, Inc. (EGL or the Company) in accordance
with the rules and regulations of the Securities and Exchange Commission (the
SEC) for interim financial statements and accordingly do not include all
information and footnotes required under generally accepted accounting
principles for complete financial statements. The financial statements have been
prepared in conformity with the accounting principles and practices disclosed
in, and should be read in conjunction with, the annual financial statements of
the Company included in the Company's Annual Report on Form 10-K (File No.
0-27288). In the opinion of management, these interim financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial position at
September 30, 2000 and the results of its operations for the nine and three
months ended September 30, 2000 and 1999. Results of operations for the nine and
three months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for EGL's full fiscal year.
NOTE 1 - ORGANIZATION, OPERATIONS, AND SIGNIFICANT ACCOUNTING POLICIES:
On February 21, 2000, the Company's shareholders approved a proposal
to change the Company's name to EGL, Inc. in recognition of EGL's increasing
globalization, broader spectrum of services and long-term growth strategy.
EGL is a worldwide logistics company. The Company maintains operating
facilities throughout the United States, Mexico, Canada, Hong Kong, the United
Kingdom, Argentina, Brazil, Chile and Peru as well as a worldwide network of
exclusive and nonexclusive agents. With the acquisition of Circle International
Group, Inc. (Circle) as of October 2, 2000 (See Note 8), the Company expanded
its operations to 100 countries on six continents.
The Company operates in one principal industry segment. During the
nine and three months ended September 30, 2000 and 1999, no individual
geographic segment outside the United States exceeded more than 10% of the
revenues, net income or assets of the combined amounts for all geographic
segments.
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 shareholders
of record on August 23, 1999.
On July 2, 2000, the Board of Directors of EGL determined to change
its fiscal year ending on September 30th to a year ending on December 31st. As
a result, EGL's 2000 fiscal year will end on December 31, 2000 and its next
Annual Report on Form 10-K will include audited results for the twelve-month
period ending December 31, 2000. References in this document to the first,
second and third quarters of fiscal 2000 are to the quarters ended March 31,
2000, June 30, 2000 and September 30, 2000, respectively. On August 16, 2000,
the Company filed a report on Form 10-Q with the Securities and Exchange
Commission covering the three-month transition period from October 1, 1999 to
December 31, 1999.
NOTE 2 - 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 securities 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 862,000
and 1.1 million were used in the calculation of diluted earnings per share for
the nine months ended September 30, 2000 and 1999, respectively. Incremental
shares of 742,000 and 1.2 million were used in the calculation of diluted
earnings per share for the three months ended September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000 and 1999, 179,932 and
145,340 options, respectively, were excluded from the diluted earnings per share
computation because their effect was antidilutive. For the three months ended
September 30, 2000, 199,130 options were excluded from the diluted earnings per
share computation because their effect was antidilutive. There were no
antidilutive options for the three months ended September 30, 1999.
8
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company). 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, if it is, the type of hedge transaction. Management is currently reviewing
the provisions of SFAS 133 and does not believe that the Company's financial
statements will be materially impacted by the adoption of SFAS 133.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements", to be effective the fourth
fiscal quarter of fiscal years beginning after December 15, 1999 (EGL's quarter
ending December 31, 2000 based on the change in year end). EGL has evaluated the
provisions of SAB No. 101 and does not believe it will have an impact on its
financial statements.
NOTE 4 - ACQUISITIONS/INVESTMENTS:
On January 7, 2000, the Company completed the acquisitions of two
commonly-controlled freight forwarding companies operating in Canada for an
aggregate purchase price of approximately $21.3 million in cash at closing and a
total of approximately $4.9 million in cash payable in three equal, annual
installments. The agreements also contemplate additional consideration not to
exceed $7.8 million over the next three years payable in cash and Company common
stock if certain earnings-based growth goals are achieved. Each of these
acquisitions was accounted for as a purchase and the results of operations for
the acquired businesses are included in the condensed consolidated statement of
income and comprehensive income from the acquisition date forward.
In June 2000, the Company paid $834,000 to buy out the minority
interest under its joint venture agreement with its Hong Kong subsidiary and
recorded goodwill of $684,000. In addition, during the quarter ended June 30,
2000, the Company paid an aggregate of $1.2 million and issued 8,802 shares of
common stock valued at $200,000 in connection with contingent payments for
acquisitions completed during the fiscal years ended September 30, 1998 and
1997.
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 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 the Company, James R.
Crane, the Company's Chairman and President, and Frank J. Hevrdejs, a member of
the Company's 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. The
Company's Miami Air investment has been accounted for under the equity method.
9
<PAGE> 10
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In connection with the closing of the transaction, (i) Miami Air and
the Company entered into an aircraft charter agreement whereby 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, and (ii) the
Company caused a $7 million standby letter of credit to be issued in favor of
certain creditors of Miami Air to assist Miami Air in financing the conversion
of its aircraft. 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. Miami Air,
each of the private investors and the continuing Miami Air stockholders also
entered into a stockholders agreement under which (i) Mr. Crane and Mr. Hevrdejs
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, (ii) each of the Company and Mr. Crane has the
right to appoint one member of Miami Air's board of directors, and (iii) 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 September 30, 2000, board of directors appointed include
Mr. Crane, Elijio Serrano (EGL's Chief Financial Officer), Ross Fischer and
James Morgan. Appointment of an outside director is pending. The Series A
preferred stock, if issued, (i) will not be convertible, (ii) will have a 15.0%
annual dividend rate and (iii) will be mandatorily redeemable in July 2006 or
upon the prior occurrence of specified events.
NOTE 5 - SHAREHOLDERS' EQUITY:
In January 2000, the Company's Board of Directors authorized the
repurchase of up to one million shares of its outstanding Common Stock. In April
2000, the Company's Board of Directors increased the authorization to three
million shares. On July 2, 2000, the Company's Board of Directors terminated the
remaining share repurchase authorization, at which time the Company had
repurchased an aggregate of 449,500 shares for a total of $10.5 million under
the authorization.
Unearned compensation relates to awards of restricted stock and is
recorded at the date of award based on the market value of the shares and is
amortized to expense over the vesting period of three years.
NOTE 6 - REVOLVING CREDIT FACILITY:
On January 13, 2000, the Company entered into an agreement (the Credit
Agreement) with Bank of America, N.A. (the Bank) as administrative agent. The
Credit Agreement (as amended on May 31, 2000 and September 29, 2000) provides a
$75 million revolving line of credit and includes a $10 million sublimit for the
issuance of letters of credit. The Company is currently in discussion with the
Bank to replace the line of credit with a new line of credit up to $150 million,
although there can be no assurance that this will be effected. $12.2 million was
outstanding under the Credit Agreement as of September 30, 2000. This amount has
been classified as long-term as of September 30, 2000 due to the Company's
present intent and ability to refinance this amount on a long-term basis.
The revolving line of credit matures on January 11, 2001. For each
tranche of principal, the Company elects an interest rate calculation based on
either LIBOR (a LIBOR Tranche) or either the prime rate announced by the Bank or
the federal funds rate plus 50 basis points (a Prime Rate Tranche), plus an
applicable margin based on a ratio of consolidated debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization). The interest
for a LIBOR Tranche is due at periods of one, two, three or six months, as the
Company may select at the time it requests the funds. The interest for a Prime
Rate Tranche is due quarterly. The weighted average interest rate for the line
of credit balance outstanding at September 30, 2000 was 8.03%.
The revolving line of credit includes unused commitment fees and letter
of credit fees, each of which is calculated on the basis of a ratio of
consolidated debt to consolidated EBITDA. The Company is subject to certain
covenants under the terms of the Credit Agreement, 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 .50 to 1.00, (c) a ratio of consolidated
funded debt to consolidated EBITDA of no greater than 2.50 to 1.00 and (d) a
consolidated fixed charge coverage ratio of no less than 2.00 to 1.00. The
Credit Agreement also places restrictions on additional indebtedness, liens,
investments, change of control and other matters.
10
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
In May 2000, the Company received a Letter of Determination and
Conciliation Proposal from the Equal Employment Opportunity Commission relating
to a Commissioner's Charge issued in the first quarter of fiscal 1998. Following
the issuance of the EEOC's Determination a lawsuit was filed in Philadelphia,
Pennsylvania by three former EGL employees and one individual who had
unsuccessfully applied for a position. Four additional plaintiffs joined the
suit in late July 2000. The lawsuit alleges discrimination and adopts in their
entirety the EEOC's conclusions. Although the named plaintiffs seek to represent
a class of individuals, no class action has yet been approved by the Court. The
lawsuit seeks unspecified damages. The Company initiated a mediation process
with both the EEOC and the plaintiffs in the Philadelphia lawsuit in an effort
to resolve this matter. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Part II, Item 1. Legal
Proceedings."
NOTE 8 - SUBSEQUENT EVENT:
On October 2, 2000, EGL completed the acquisition of Circle pursuant to
the terms and conditions of the Agreement and Plan of Merger dated as of July 2,
2000 (the Merger Agreement) among EGL, EGL Delaware I, Inc., a wholly owned
subsidiary of EGL (Merger Sub) and Circle. Pursuant to the Merger Agreement,
Merger Sub was merged with and into Circle, with Circle surviving as a wholly
owned subsidiary of EGL. 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 financial reporting purposes.
As a result of the Merger, each share of Circle's common stock, par
value $1.00 per share (Circle Common Stock), issued and outstanding immediately
prior to the effective time of the Merger (other than shares owned by Circle,
EGL or Merger Sub) has been converted to the right to receive one validly
issued, fully paid and nonassessable share of EGL's common stock, par value
$0.001 per share (EGL Common Stock). In the aggregate, EGL issued approximately
17,933,160 shares of EGL Common Stock in exchange for issued and outstanding
shares of Circle Common Stock and assumed options exercisable for 1,094,052
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.
Circle, the common stock of which was previously publicly traded, is a
leader in providing transportation and integrated logistics services for
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. Circle's global services are supplied through its
network of over 300 offices, agents and distribution centers located in over 100
countries on six continents.
As the merger was completed subsequent to September 30, 2000, Circle's
results of operations have not been reflected in these financial statements. The
following unaudited pro forma condensed combined financial information has been
included for informational purposes only to reflect the combination of EGL and
Circle and excludes the effects of transaction and merger-related costs. The
Company expects to incur a significant restructuring charge in the fourth
quarter of 2000 in connection with the acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues ........................................ $1,346,407 $1,033,259 $ 490,716 $ 371,644
Net revenues .................................... 532,673 432,959 191,895 153,697
Net income ...................................... 41,750 34,206 18,311 14,682
Basic earnings per share ......................... $ 0.52 $ 0.46 $ 0.22 $ 0.17
Diluted earnings per share ...................... $ 0.88 $ 0.73 $ 0.38 $ 0.31
September 30, December 31,
2000 1999
------------- ------------
(in thousands)
BALANCE SHEET DATA:
Current assets ............................. $550,473 $540,031
Total assets ............................... 840,060 771,607
Current liabilities ........................ 322,337 312,585
Total liabilities .......................... 390,686 363,989
Shareholders' equity ....................... 439,787 401,455
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected certain aspects of the Company's
financial position and operating results during the periods included in the
accompanying unaudited condensed consolidated financial statements. This
discussion should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
annual financial statements included in the Company's Annual Report on Form 10-K
(File No. 0-27288), the accompanying unaudited condensed consolidated financial
statements and the notes thereto and the pro forma financial information of the
Company giving effect to the merger with Circle, which was included as Exhibit
20.1 to the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 11, 2000.
11
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EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
OVERVIEW
On February 21, 2000, the Company's shareholders approved a proposal to
change the Company's name to EGL, Inc. in recognition of the Company's
increasing globalization, broader spectrum of services and long-term growth
strategy.
The Company's revenues have increased to $595.2 million for the twelve
months ended September 30, 1999 from $291.8 million for the twelve months ended
September 30, 1997, and its operating income has increased to $45.0 million for
the twelve months ended September 30, 1999 from $25.7 million for the twelve
months ended September 30, 1997. Historically, the Company has grown primarily
through internal expansion, including developing its terminal network, expanding
its service offerings and sales force and increasing its customer base. The
Company has also made acquisitions on a limited basis.
Since October 1, 1996, the Company has added 47 terminals, increasing
the total to 94 at September 30, 2000. The opening of a new terminal generally
has an initial short-term negative impact on profitability due to operating
losses of the new terminal. However, the opening of a new terminal generally
does not require significant capital expenditures. Additionally, personnel costs
are contained at the time of the opening of a new terminal because commissions
are generally not paid until salesmen achieve minimum sales levels and until
managers achieve terminal profitability.
Although future new terminals may be opened in cities smaller than
those in which the Company's more mature terminals are located, the Company
believes the results of new terminals should benefit from a ready base of
business provided by its existing customers.
The Company maintains international operating facilities in Mexico,
Canada, Hong Kong, the United Kingdom, Argentina, Brazil, Chile and Peru as well
as a worldwide network of exclusive and nonexclusive agents. With the
acquisition of Circle, as discussed below, the Company expanded its operations
to 100 countries on six continents.
On October 2, 2000, EGL completed and the acquisition of Circle pursuant
to the terms and conditions of the Agreement and Plan of Merger dated as of July
2, 2000 (the Merger Agreement) among EGL, EGL Delaware I, Inc., a wholly owned
subsidiary of EGL (Merger Sub) and Circle. Pursuant to the Merger Agreement,
Merger Sub was merged with and into Circle, with Circle surviving as a wholly
owned subsidiary of EGL. 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 financial reporting purposes. The results of Circle
are not included in this discussion of financial condition and results of
operations as the merger was not completed at September 30, 2000. Trends,
results of operations and financial condition of the combined company may differ
from those described herein. Additionally, the Company expects to incur a
significant restructuring charge in the fourth quarter of 2000 in connection
with the acquisition.
As a result of the Merger, each share of Circle's common stock, par
value $1.00 per share (Circle Common Stock), issued and outstanding immediately
prior to the effective time of the Merger (other than shares owned by Circle,
EGL or Merger Sub) has been converted to the right to receive one validly
issued, fully paid and nonassessable share of EGL's common stock, par value
$0.001 per share (EGL Common Stock). In the aggregate, EGL is issuing
approximately 17,933,160 shares of EGL Common Stock in exchange for issued and
outstanding shares of Circle Common Stock and assumed options exercisable for
1,094,052 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.
Circle, the common stock of which was previously publicly traded, is a
leader in providing transportation and integrated logistics services for
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.
12
<PAGE> 13
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In May 2000, as a result of recent industry consolidation, the Company
announced plans to accelerate its international expansion efforts beginning in
the quarter ended June 30, 2000 with the addition of seasoned international
airfreight employees worldwide. The new staff and related infrastructure costs
was expected to increase international operating expenses over the next two
quarters by approximately $4.0 to $5.0 million, or $0.08 to $0.10 cents per
diluted shares, net of tax. The Company's merger with Circle effectively ends
the Company's previously announced $4.0 to $5.0 million expenditure for
international staff and infrastructure costs. The Company expects to utilize the
staff and infrastructure acquired prior to the merger in connection with its
international operations.
On January 7, 2000, the Company completed the acquisition of Commercial
Transport International (Canada) Ltd. (CTI) and Fastair Cargo System Ltd.
(Fastair) for an aggregate purchase price of approximately $21.3 million in cash
at closing and a total of approximately $4.9 million in cash payable in three
equal annual installments. The acquisition agreement also contemplates
additional consideration not to exceed $7.8 million over the next three years
payable in cash and Company common stock if certain earnings-based growth goals
are achieved. Fastair is a leading forwarder in the intra-Canada freight
forwarding market. CTI, its sister company, primarily serves the international
freight forwarding market with offices coast-to-coast throughout Canada. CTI and
Fastair were privately-held and under common control and have eight locations in
Canada. Both companies are based in Toronto, Canada. The acquisitions were
accounted for as a purchase and the acquired operations were integrated with the
Company's existing Canadian operations.
The Company also intends to continue the growth of its local pickup and
delivery operations. By providing local pickup and delivery services for its
freight forwarding shipments, the Company has been able to increase its gross
margin for these shipments because it captures margins that were previously paid
to third parties. However, the Company's local pickup and delivery services
provided to other non-forwarding customers generate a lower gross margin than
the Company's domestic forwarding operations due to their higher transportation
costs as a percentage of revenues.
Historically, the Company's operating results have been subject, to a
limited degree, to seasonal trends when measured on a quarterly basis. The
quarter ending March 31st has traditionally been the weakest and the quarter
ending September 30th has traditionally been the strongest.
RESULTS OF OPERATIONS
The following table presents certain statement of income data as a percentage of
revenues and operating data for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of transportation 59.0 57.4 59.0 58.0
----------- ----------- ----------- -----------
Net revenues 41.0 42.6 41.0 42.0
Personnel costs 21.7 21.7 21.2 21.0
Other selling, general and administrative expenses 13.3 13.6 12.8 13.0
----------- ----------- ----------- -----------
Operating expenses 35.0 35.3 34.0 34.0
----------- ----------- ----------- -----------
Operating income 6.0% 7.3% 7.1% 8.0%
----------- ----------- ----------- -----------
Net income 3.7% 4.6% 4.3% 4.8%
=========== =========== =========== ===========
Freight forwarding terminals at end of period 94 78 94 78
Local delivery locations at end of period 73 67 73 67
Freight forwarding shipments 1,929,108 1,088,553 686,283 401,823
Average weight (lbs.) per freight forwarding 771 678 643 704
shipment
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues increased 43.1% to $644.3 million in the first nine months of
fiscal 2000 from $450.3 million in the same period of fiscal 1999 primarily due
to increases in the number of shipments and the total weight of cargo shipped.
These
13
<PAGE> 14
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
increases primarily resulted from an increase in the number of terminals open
during such period, an increase in penetration in existing airfreight and pickup
and delivery markets, the addition of significant national account customers and
the effect of acquisitions completed after the quarter ended September 30, 1999.
Revenues for the nine months ended September 30, 2000 were comprised of
$603.0 million of forwarding revenues and $41.3 million of local pickup and
delivery revenues, as compared to $411.8 million and $38.5 million,
respectively, for the nine months ended September 30, 1999. Of the Company's
forwarding revenues for the nine months ended September 30, 2000, $162.8 million
were attributable to international shipments (defined as shipments that cross a
U.S. national border or originated outside the U.S.) compared to $84.4 million
for the nine months ended September 30, 1999. The acquisitions completed in
Canada, as described in Note 4, added approximately $40.4 million in
international revenue during the nine months ended September 30, 2000.
The Company's total local pickup and delivery revenues for the nine
months ended September 30, 2000 were $161.7 million. This amount includes $120.4
million of intercompany sales that were eliminated upon consolidation and $41.3
million in services to third-party (non-forwarding) customers.
Cost of transportation increased during the first nine months of fiscal
2000 as a percentage of revenues to 59.0% from 57.4% in the comparable period in
fiscal 1999. The increase was primarily attributable to increased international
freight shipping volumes, which carry a higher cost of transportation per
shipment than domestic freight. Cost of transportation increased in absolute
terms by 47.0% to $380.0 million for the nine months ended September 30, 2000
from $258.5 million in the same period in fiscal 1999 as a result of increases
in freight shipped. Net revenue margin decreased to 41.0% in the first nine
months of fiscal 2000 from 42.6% in the same period in fiscal 1999. The primary
reason for the margin decline was increased international freight shipping
volumes which carry a higher cost of transportation per shipment than domestic
freight and a temporary shift in January and February 2000 from overnight air
shipments to lower-margin economy ground shipments by the technology and
manufacturing sectors as a result of the Year 2000 transition. Net revenues
increased 37.8% to $264.2 million in the first nine months of fiscal 2000 from
$191.8 million in the same period in fiscal 1999.
Operating expenses decreased as a percentage of revenues to 35.0% in
the first nine months of fiscal 2000 from 35.3% for the same period in fiscal
1999. The $66.4 million increased costs in absolute terms was attributable
primarily to continued growth in the level of operations, costs from additional
terminals, acquisitions and expansion of local delivery operations. Personnel
costs as a percentage of revenues remained constant at 21.7% in the first nine
months of fiscal 2000 as compared to the same period in fiscal 1999 and
increased in absolute terms by 42.9% to $139.6 million in the fiscal 2000 period
from $97.7 million in the fiscal 1999 period. This increase was due to increased
staffing needs associated with the opening of new terminals and local delivery
locations, the effect of acquisitions, expanded operations at existing terminals
and increased commissions resulting from higher revenues and expanded corporate
infrastructure. Such personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. The Company has added personnel to build
corporate infrastructure particularly in international operations, to keep pace
with its recent significant growth, to deepen the staff at its terminals and to
prepare for growth during fiscal 2000 and beyond. Other selling, general and
administrative expenses decreased as a percentage of revenues to 13.3% in the
first nine months of fiscal 2000 from 13.6% in the first nine months of fiscal
1999, and increased in absolute terms by 40.0% to $85.7 million in the fiscal
2000 period from $61.2 million in the fiscal 1999 period. The absolute increases
in selling, general and administrative expenses were due to overall increases in
the level of the Company's activities in the fiscal 2000 period, increased
expenses attributable to the Company's acquisitions, the Company's headquarters
facility and a $1.1 million charge for legal fees recorded in the quarter ended
March 31, 2000.
Operating income increased 18.4% to $38.9 million in the first nine
months of fiscal 2000 from $32.8 million in the comparable period in fiscal
1999. Operating margin decreased to 6.0% for nine months ended September 30,
2000 compared to 7.3% for the nine months ended September 30, 1999. Interest and
other income decreased to $1.3 million from $1.9 million as a result of a
decline in interest income from decreased levels of investments during the nine
months ended
14
<PAGE> 15
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
September 30, 2000 compared to the nine months ended September 30, 1999,
partially offset by rental income of $546,000 from a sublease that began in May
1999.
Income before provision for income taxes increased 15.6% to $40.2
million in the first nine months of fiscal 2000 from $34.8 million in the
comparable period of fiscal 1999. Provision for income taxes increased 14.6% to
$16.1 million for the nine months ended September 30, 2000 from $14.0 million
for the nine months ended September 30, 1999. Net income increased 16.3% to
$24.1 million in the first nine months of fiscal 2000 from net income of $20.8
million in the same period in fiscal 1999. Diluted earnings per share increased
14.1% to $0.81 per share for the nine months ended September 30, 2000 from $0.71
in the same period in fiscal 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues increased 45.0% to $241.8 million in the third quarter of
fiscal 2000 from $166.7 million in the same period of fiscal 1999 primarily due
to increases in the number of shipments and the total weight of cargo shipped.
These increases resulted from an increase in the number of terminals open during
such period, an increase in penetration in existing airfreight and pickup and
delivery markets, the addition of significant national account customers and the
effect of acquisitions completed during the after the quarter ended September
30, 1999.
Revenues for the three months ended September 30, 2000 were comprised
of $226.7 million of forwarding revenues and $15.1 million of local pickup and
delivery revenues, as compared to $154.2 million and $12.5 million,
respectively, for the three months ended September 30, 1999. Of the Company's
forwarding revenues for the third quarter of fiscal 2000, $65.0 million were
attributable to international shipments (defined as shipments that cross a U.S.
national border or originated outside the U.S.) compared to $34.8 million for
the third quarter of fiscal 1999. The acquisitions completed in Canada, as
described in Note 4, added approximately $14.6 million in international revenue
during the third quarter of fiscal 2000.
The Company's total local pickup and delivery revenues for the third
quarter of fiscal 2000 were $45.9 million. This amount includes $30.8 million of
intercompany sales that were eliminated upon consolidation and $15.1 million in
services to third-party (non-forwarding) customers.
Cost of transportation increased during the third quarter of fiscal
2000 as a percentage of revenues to 59.0% from 58.0% in the comparable period in
fiscal 1999. The increase was primarily attributable to increased international
freight shipping volumes, which carry a higher cost of transportation per
shipment than domestic freight. Cost of transportation increased in absolute
terms by 47.5% to $142.5 million in the third quarter of fiscal 2000 from $96.6
million in the third quarter of fiscal 1999 as a result of increases in freight
shipped. Net revenue margin decreased to 41.0% in the third quarter of fiscal
2000 from 42.0% in the same period in fiscal 1999. The primary reason for the
margin decline was increased international freight shipping volumes which carry
a higher cost of transportation per shipment than domestic freight. Net revenues
increased 41.5% to $99.2 million in the third quarter of fiscal 2000 from $70.1
million in the same period in fiscal 1999.
Operating expenses as a percentage of revenues remained constant at 34%
in the third quarter of fiscal 2000 as compared to the same period in fiscal
1999. The $25.4 million increased costs in absolute terms for the third quarter
of fiscal 2000 was attributable primarily to continued growth in the level of
operations, costs from additional terminals, acquisitions and expansion of local
delivery operations. Personnel costs increased as a percentage of revenues to
21.2% in the third quarter of fiscal 2000 from 21.0% in the same period in
fiscal 1999 and increased in absolute terms by 46.2% to $51.1 million. This
increase was due to increased staffing needs associated with the opening of new
terminals and local delivery locations, the effect of acquisitions, expanded
operations at existing terminals and increased commissions resulting from higher
revenues and expanded corporate infrastructure. Such personnel costs include all
compensation expenses, including those relating to sales commissions and
salaries and to headquarters employees and executive officers. The Company has
added personnel to build corporate infrastructure particularly in international
operations, to keep pace with its recent significant growth, to deepen the staff
at its terminals and to prepare for growth during fiscal 2000 and beyond. Other
15
<PAGE> 16
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
selling, general and administrative expenses decreased as a percentage of
revenues to 12.8% in the third quarter of fiscal 2000 from 13.0% in the third
quarter of fiscal 1999, and increased in absolute terms by 42.6% to $31.0
million in the fiscal 2000 period from $21.7 million in the fiscal 1999 period.
The absolute increases in selling, general and administrative expenses were due
to overall increases in the level of the Company's activities in the fiscal 2000
period, increased expenses attributable to the Company's acquisitions and the
Company's headquarters facility.
Operating income increased 27.7% to $17.1 million in the third quarter
of fiscal 2000 from $13.4 million in the comparable period in fiscal 1999.
Operating margin decreased to 7.1% for the quarter ended September 30, 2000 from
8.0% for the quarter ended September 30, 1999. Interest and other income
decreased to $231,000 from $539,000 as a result of decreased levels of
investments during the quarter ended September 30, 2000 compared to the quarter
ended September 30, 1999.
Income before provision for income taxes increased 24.4% to $17.3
million in the third quarter of fiscal 2000 from $13.9 million in the comparable
period of fiscal 1999. Provision for income taxes increased 15.4% to $6.9
million for the three months ended September 30, 2000 from $6.0 million for the
three months ended September 30, 1999. Net income increased 31.2% to $10.4
million in the third quarter of fiscal 2000 from net income of $7.9 million in
the same period in fiscal 1999. Diluted earnings per share increased 29.6% to
$0.35 per share for the quarter ended September 30, 2000 from $0.27 in the same
period in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments decreased $37.8 million
to $6.4 million at September 30, 2000 from $44.2 million at December 31, 1999.
At September 30, 2000, the Company had working capital of $102.3 million and a
current ratio of 2.21 compared to working capital of $119.8 million and a
current ratio of 2.93 at December 31, 1999. The Company's working capital
decreased during this period primarily as a result of cash used for business
acquisitions and share repurchases. The combined pro forma working capital and
current ratio of EGL and Circle was $228.1 million and 1.71, respectively, at
September 30, 2000 compared to combined pro forma working capital and current
ratio of $227.4 million and 1.73, respectively, at December 31, 1999. Capital
expenditures for the nine months ended September 30, 2000 were approximately
$26.6 million.
Other than its public offerings, the Company's cash generated from
operations has been its primary source of liquidity, although it has from time
to time made use of bank borrowing and lease or purchase arrangements.
The Company does not anticipate paying any cash dividends on its common stock in
the foreseeable future.
In January 2000, the Company's Board of Directors authorized the
repurchase of up to one million shares of its outstanding Common Stock. In April
2000, the Company's Board of Directors increased the authorization to three
million shares. The Company's intention has been that repurchases would help to
offset increases in the number of shares outstanding resulting from previous and
future stock option exercises. On July 2, 2000, the Company's Board of Directors
terminated the share repurchase authorization, at which time the Company had
repurchased an aggregate of 449,500 shares for a total of $10.5 million under
the authorization.
On January 13, 2000, the Company entered into the Credit Agreement with
Bank of America, N.A. (the Bank), as administrative agent. The Credit Agreement
(as amended on May 31, 2000 and September 29, 2000) provides a $75 million
revolving line of credit and includes a $10 million sublimit for the issuance of
letters of credit. The Company is currently in discussion with the Bank to
replace the line of credit with a new line of credit up to $150 million,
although there can be no assurance that this will be effected. $66.0 million was
outstanding under the Credit Agreement as of November 10, 2000. In connection
with the completion of the acquisition of Circle, the Company utilized proceeds
from borrowings under its revolving line of credit to repay $27.0 million of
Circle's outstanding debt and to fund working capital needs.
The revolving line of credit matures on January 11, 2001. For each
tranche of principal, the Company elects an interest rate calculation based on
either LIBOR (a LIBOR Tranche) or either the prime rate announced by the Bank or
the federal funds rate plus 50 basis points (a Prime Rate Tranche), plus an
applicable margin based on a ratio of consolidated debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization). The interest
for a LIBOR
16
<PAGE> 17
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Tranche is due at periods of one, two, three or nine months, as the Company may
select at the time it requests the funds. The interest for a Prime Rate Tranche
is due quarterly. The weighted average interest rate for the line of credit
balance outstanding at September 30, 2000 was 8.03%.
The revolving line of credit includes unused commitment fees and
letters of credit fees, each of which is calculated on the basis of a ratio of
consolidated debt to consolidated EBITDA. The Company is subject to certain
covenants under the terms of the Credit Agreement, 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 .50 to 1.00, (c) a ratio of consolidated
funded debt to consolidated EBITDA of no greater than 2.50 to 1.00 and (d) a
consolidated fixed charge coverage ratio of no less than 2.00 to 1.00. The
Credit Agreement also places certain restrictions on additional indebtedness,
liens, investments, change of control and other matters.
The Company and certain of its subsidiaries maintain bank lines of
credit for purposes of securing customs bonds and bank letters of credit for
purposes of guaranteeing some transportation expenses. These credit lines and
letters of credit are supported by standby letters of credit issued by a United
States bank or guarantees issued by the Company to the foreign banks. At
September 30, 2000, the Company was contingently liable for approximately $10.4
million under outstanding letters of credit and guarantees related to these
obligations.
As of September 30, 2000, the Company had outstanding non-qualified
stock options to purchase an aggregate of 4,222,617 shares of common stock at
exercise prices ranging from $0.83 to $32.69, which equaled the fair market
value of the underlying common stock on the dates of grant. At the time a
non-qualified stock option is exercised, the Company 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 nine months ended September
30, 2000 of non-qualified stock options to purchase an aggregate of 320,827
shares of common stock, the Company is entitled to a federal income tax
deduction of approximately $6.8 million. The Company has recognized a reduction
of its federal and state income tax liability of approximately $2.7 million with
respect to the nine months ended September 30, 2000. Accordingly, the Company
recorded an increase in 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 or not the exercises will occur, the amount of any
deductions or the Company's ability to fully utilize any deductions.
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
$59,000, which includes monthly interest costs based upon LIBOR rate plus 145
basis points, beginning on July 1, 1998 through October 2, 2002. A balloon
payment equal to the outstanding lease balance, which was initially equal to the
cost of the facility, is due on October 2, 2002. As of September 30, 2000, the
lease balance was approximately $8.1 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. Under the terms of the master operating lease
agreement, average monthly lease payments, including monthly interest costs
based upon LIBOR rate plus 145 basis points, begin upon the completion of the
construction of each financed facility. The monthly lease obligation will
continue for a term of 52 months. A balloon payment equal to the outstanding
lease balances, which were initially equal to the cost of each facility, is due
at the end of each lease term. Construction began during fiscal 1999 on five
terminal facilities. As of September 30, 2000, the aggregate lease balance was
approximately $15.4 million under the master operating lease agreement.
17
<PAGE> 18
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 restricts the
Company from incurring debt in an amount greater than $10 million, except
pursuant to a single credit facility involving a commitment of not more than $75
million.
The Company has an option, exercisable at anytime during the lease
term, and under particular circumstances may be obligated, to acquire the
Houston terminal and each of its other financed facilities for an amount equal
to the outstanding lease balance. If 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 current fair market value of each financed facility within
limits. The Company expects that the amount of any deficiency payment would be
expensed.
As of September 30, 2000, the Company has entered into commitments to
construct office, warehouse and terminal facilities for an aggregate cost of
approximately $2.0 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.
ACQUISITIONS
On January 7, 2000, the Company completed the acquisitions of CTI and
Fastair for an aggregate purchase price of approximately $21.3 million paid at
closing from cash and cash equivalents on hand. Additionally, a total of
approximately $4.9 million will be paid in cash over the next three years in
annual installments. The agreements also contemplate additional consideration
not to exceed $7.8 million over the next three years payable in cash and Company
common stock if certain earnings-based growth goals are achieved.
In June 2000, the Company paid $834,000 to buy out the minority
interest under its joint venture agreement with its Hong Kong subsidiary and
recorded goodwill of $684,000. In addition, during the second quarter of fiscal
2000 the Company paid an aggregate of $1.2 million and issued 8,802 shares of
common stock valued at $200,000 in connection with contingent payments for
acquisitions completed during the years ended September 30, 1998 and 1997.
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 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 the Company, James R.
Crane, the Company's Chairman and President, and Frank J. Hevrdejs, a member of
the Company's 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. The
Company's Miami Air investment has been accounted for under the equity method.
In connection with the closing of the transaction, (i) Miami Air and
the Company entered into an aircraft charter agreement whereby 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, and (ii) the
Company caused a $7 million standby letter of credit to be issued in favor of
certain creditors of Miami Air to assist Miami Air in financing the conversion
of its aircraft. 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. Miami Air,
each of the private investors and the continuing Miami Air stockholders also
entered into a stockholders agreement under which (i) Mr. Crane and Mr. Hevrdejs
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, (ii) each of the Company and Mr. Crane has the
right to appoint one member of Miami Air's board of directors, and (iii) the
other private investors in the stock purchase
18
<PAGE> 19
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
transaction, including Mr. Hevrdejs, collectively have the right to appoint one
member of Miami Air's board of directors. As of September 30, 2000, board of
directors appointed include Mr. Crane, Elijio Serrano (EGL's Chief Financial
Officer), Ross Fischer and James Morgan. Appointment of an outside director is
pending. The Series A preferred stock, if issued, will (i) not be convertible,
(ii) have a 15.0% annual dividend rate and (iii) will be mandatorily redeemable
in July 2006 or upon the prior occurrence of specified events.
COMMISSIONER'S CHARGE
As discussed in "Part II, Item 1. Legal Proceedings", the Company has
received a Letter of Determination and Conciliation Proposal from the EEOC
relating to the Commissioner's Charge described in that section. Following the
issuance of the EEOC's Determination in May 2000, a lawsuit was filed in
Philadelphia, Pennsylvania by three former EGL employees and one individual who
had unsuccessfully applied for a position. Four additional plaintiffs joined the
suit in late July 2000. The lawsuit alleges discrimination and adopts in their
entirety the EEOC's conclusions. Although the named plaintiffs on the
Philadelphia lawsuit seek to represent a class of individuals, no class action
has yet been approved by the Court. The lawsuit seeks unspecified damages. Any
relief sought in these lawsuits would be in addition to and not limited by the
relief sought by the EEOC. In the first quarter of fiscal 2000, the Company
accrued a $1.1 million charge ($700,000 after-tax) for its estimated future
litigation expenses to defend this matter. 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 the Company and its financial condition and results of
operation. A substantial settlement payment or judgment could result in a
significant decrease in the Company's working capital and liquidity.
RELATED PARTY TRANSACTIONS
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 James R. Crane, the
Company's Chairman and President. Rental income was approximately $546,000
during the first nine months of fiscal 2000 and $303,000 during fiscal 1999. In
addition, the Company billed the customer approximately $298,000 for freight
forwarding services during the first nine months of fiscal 2000 and $281,000
during fiscal 1999. The Company believes the rental rates set forth in the
sublease agreement approximate market rates.
See also the discussion regarding the Miami Air acquisition above.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 3 of the Notes to Condensed Consolidated Financial Statements
for a description and management's discussion and analysis of new accounting
pronouncements.
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<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, Company has $12.2 million outstanding under
its line of credit. The Company's lease payments on certain financed facilities
are tied to market interest rates. At September 30, 2000, a 10% rise in the base
rate for these financing arrangements would not have a material impact on
operating income for fiscal 2000.
The Company's earnings are affected by fluctuations in the value of the
U.S. dollar as it relates to the earnings of its United Kingdom, Canada, Mexico,
Hong Kong and Latin America operations, as a result of transactions in foreign
markets. At September 30, 2000, the result of a uniform 10% strengthening in the
value of the dollar relative to the currencies in which these operations are
denominated would not have a material impact on operating income for fiscal
2000.
The Company has not purchased any futures contracts nor has it
purchased or held any derivative financial instruments for trading purposes
during fiscal 2000.
In the quarter ended March 1999, the Company 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
matured during the quarter ended March 2000. In May 2000, the Company entered
into two additional contracts to hedge the cost of jet fuel purchases during the
following twelve months. Such contracts are nominally insignificant.
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal claims and
proceedings arising in the ordinary course of business. Except as described
below, the Company is not currently a party to any material litigation and is
not aware of any litigation threatened against it, which it believes would have
a material adverse effect on its business.
In December 1997, the U.S. Equal Employment Opportunity Commission
(EEOC) issued a Commissioner's Charge against the Company and certain of its
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). 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 African-Americans, 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 to the
Company 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 [the Company] 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, the following: (i) 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); (ii) compensation for certain incumbent
minorities and women who were allegedly underpaid relative to white male
counterparts in the amount of $5,000,000; (iii) compensation for certain
minority and female employees who were allegedly not promoted at rates
comparable to their respective employment rates in the amount of $2,950,000; and
(iv) financial compensation for certain other employees as a result of alleged
"disparate discipline" in the amount of $745,000, all 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 minorities, 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 (a) reformation of the Company's policies and
practices with respect to record keeping, recruiting, hiring and placement,
reinstatement, promotion and transfer, and corporate governance, (b) revision of
certain job descriptions, (c) institution of employee and supervisory training,
and (d) the institution of specified procedures and steps with respect to such
matters.
The Company believes 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 the
Company and its Chief Executive Officer because of the Company's vigorous
defense of this matter. The Company accepted the EEOC's offer to conciliate this
matter and has participated in numerous conciliation conferences with the EEOC
during the past few months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Certain individual employees have brought charges of this nature
against the Company 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 United States 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 EGL employees or had
unsuccessfully applied for a position. Four additional plaintiffs joined the
suit in late July 2000. The lawsuit alleges discrimination and adopts in their
entirety the EEOC's conclusions. Although the named plaintiffs on the
Philadelphia lawsuit seek to represent a class of individuals, no class action
has yet been approved by the Court. The lawsuit seeks unspecified damages that
are not limited by the relief sought by the EEOC. Because the lawsuit is
essentially based upon the contested EEOC allegations described above, the
Company fully intends to defend itself in both matters but would consider a
settlement with both the plaintiffs and the EEOC that the Company believes is
reasonable in both monetary and non-monetary terms. The Company initiated a
mediation process with both the EEOC and the plaintiffs in the Philadelphia
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 the
Company and its financial condition and results of operation. A substantial
settlement payment or judgment could result in a significant decrease in the
Company's working capital and liquidity.
21
<PAGE> 22
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
At a meeting held on September 18, 2000, the Company's
stockholders approved an amendment to the Company's Second
Amended and Restated Articles of Incorporation to increase the
authorized number of shares of EGL Common Stock from
100,000,000 to 200,000,000, a proposal to amend the Company's
long-term incentive plan to increase the number of shares
authorized for issuance under the plan by 3,000,000 shares and
a proposal to amend the Company's employees stock purchase plan
to increase the number of shares authorized for issuance under
the plan by 250,000. On September 18, 2000, the Company filed
Articles of Amendment to its Second Amended and Restated
Articles of Incorporation with the Secretary of the State of
Texas. The Second Amended and Restated Articles of
Incorporation, as so amended, are filed as an exhibit to this
report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES, NONE
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS
(a) SPECIAL MEETING OF SHAREHOLDERS ON SEPTEMBER 18, 2000
<TABLE>
<CAPTION>
(c) PROPOSALS FOR AGAINST WITHHELD ABSTAIN BROKER NONVOTES
--------- --- -------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Approval of the issuance of EGL 23,557,661 7,386 -- 1,717 1,193,200
Common shares pursuant to the
proposed merger.
Approval of an amendment to EGL's 23,766,967 989,132 -- 3,865 --
second amended and restated articles
of incorporation to increase the
authorized number of EGL common shares
from 100,000,000 to 200,000,000.
Approval of an amendment to EGL's 16,435,256 7,124,882 -- 6,626 1,193,200
long-term incentive plan to increase
the number of EGL common shares
authorized for issuance under the plan
by 3,000,000 shares.
Approval of an amendment to EGL's 23,526,434 17,708 -- 22,622 1,193,200
employee stock purchase plan to
increase the number of EGL common
shares authorized for issuance under
the plan by 250,000 shares.
</TABLE>
22
<PAGE> 23
ITEM 5. OTHER INFORMATION
FORWARDING LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, those relating to the effect and benefits of the Circle merger,
accounting treatment of the merger, the Company's plans for international air
freight forwarding services; the future expansion and results of the Company's
terminal network; plans for local delivery services; expected growth; future
marketing; construction of new facilities; the results, timing, outcome or
effect of matters relating to the Commissioner's Charge or other litigation;
future operating expenses; any seasonality of the Company's business; future
margins; future dividend plans; use of Revolver proceeds; new credit facilities;
fluctuations in currency valuations; fluctuations in interest rates; future
acquisitions and any effects, benefits, results, terms or other aspects of such
acquisitions; fluctuations in the price of jet fuel; ability to continue growth
and implement growth and business strategy; the ability of expected sources of
liquidity to support working capital and capital expenditure requirements; the
tax benefit of any stock option exercises; and any other statements regarding
future growth, cash needs, terminals, operations, business plans and financial
results and any other statements which are not historical facts are
forward-looking statements. When used in this document, the words *anticipate,*
*estimate,* *expect,* *may,* *plans,* *project,* and similar expressions are
intended to be among the statements that identify forward-looking statements.
Such statements involve risks and uncertainties, including, but not limited to,
those relating to costs, delays and difficulties related to the Circle merger,
including the integration of its systems, operations and other businesses; the
Company's dependence on its ability to attract and retain skilled managers and
other personnel; the intense competition within the freight industry; the
uncertainty of the Company's ability to manage and continue its growth and
implement its business strategy; the Company's dependence on the availability of
cargo space to serve its customers; the potential for liabilities if certain
independent owner/operators that serve the Company are determined to be
employees; effects of regulation; results of litigation (including the results
and outcome of the Commissioner's Charge); the Company's vulnerability to
general economic conditions and dependence on its principal customers; the
control by the Company's principal shareholder; the Company's potential exposure
to claims involving its local pickup and delivery operations; risk of
international operations; risks relating to acquisitions; the Company's future
financial and operating results, cash needs and demand for its services; and the
Company's ability to maintain and comply with permits and licenses; as well as
other factors detailed in the Company's filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. The Company undertakes no responsibility to
update for changes related to these or any other factors that may occur
subsequent to this filing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS.
*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 the
Company's Current Report on Form 8-K filed on July 5,
2000).
*3(i) Second Amended and Restated Articles of Incorporation
of the Company, as amended. (Filed as Exhibit 3(i) to
the Company's Form 8-A/A filed with the Securities
and Exchange Commission on September 29, 2000).
*3(ii) Amended and Restated Bylaws of the Company, as
amended (Exhibit 3(ii) to the Company's Form 10-Q for
the fiscal quarter ended June 30, 2000).
10(i) Second Amendment to Credit Agreement dated September
29, 2000 among the Company, the financial
institutions named therein and Bank of America, N.A.
+10(ii) EGL, Inc. Long-Term Incentive Plan.
+10(iii) EGL, Inc. Employee Stock Purchase Plan.
27 Financial Data Schedule.
23
<PAGE> 24
----------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K on July 5, 2000 related to the
merger with Circle.
The Company filed a report on Form 8-K dated July 17, 2000 related to a
change in fiscal year.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EGL, INC.
---------------------------------
(Registrant)
Date: November 14, 2000 BY: /s/ James R. Crane
--------------------------- ---------------------------------
James R. Crane
President
Date: November 14, 2000 BY: /s/ Elijio V. Serrano
--------------------------- ---------------------------------
Elijio V. Serrano
Chief Financial Officer
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
*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 the Company's Current Report on Form 8-K filed on July 5, 2000).
*3(i) Second Amended and Restated Articles of Incorporation of the Company,
as amended. (Filed as Exhibit 3(i) to the Company's Form 8-A/A filed
with the Securities and Exchange Commission on September 29, 2000).
*3(ii) Amended and Restated Bylaws of the Company, as amended (Exhibit 3(ii)
to the Company's Form 10-Q for the fiscal quarter ended June 30, 2000).
10(i) Second Amendment to Credit Agreement dated September 29, 2000 among the
Company, the financial institutions named therein and Bank of America,
N.A.
+10(ii) EGL, Inc. Long-Term Incentive Plan.
+10(iii) EGL, Inc. Employee Stock Purchase Plan.
27 Financial Data Schedule.
</TABLE>
----------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement.
26
