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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended ______________
or
[X] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from OCTOBER 1, 1999 to
DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-27288
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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 Number)
15350 VICKERY DRIVE, HOUSTON, TEXAS 77032
(281) 618-3100
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(Address of Principal Executive Offices, Including Registrant's Zip Code, and
Telephone Number, Including Area Code)
N/A
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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 August 2, 2000:
28,568,680 shares (net of 1,391,834 treasury shares).
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EGL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of
December 31, 1999 and September 30, 1999 ........................................................... 3
Condensed Consolidated Statement of Income and Comprehensive Income for the Three
Months ended December 31, 1999 and 1998 ............................................................ 4
Condensed Consolidated Statement of Cash Flows for
the Three Months ended December 31, 1999 and 1998 ................................................. 5
Condensed Consolidated Statement of Shareholders'
Equity for the Three Months ended December 31, 1999 ................................................ 6
Notes to Condensed Consolidated Financial Statements ................................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........................................... 17
PART II. OTHER INFORMATION ................................................................................... 18
SIGNATURES .................................................................................................... 21
INDEX TO EXHIBITS.............................................................................................. 22
</TABLE>
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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>
December 31, September 30,
1999 1999
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 38,338 $ 35,175
Short-term investments 5,894 17,213
Accounts receivable - trade, net 129,517 109,003
Prepaid expenses and other 5,431 3,712
Deferred income taxes 2,817 2,817
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Total current assets 181,997 167,920
Property and equipment, net 30,443 28,184
Goodwill, net 12,121 11,072
Other assets 1,654 1,815
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Total assets $ 226,215 $ 208,991
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable - trade $ 10,224 $ 12,657
Accrued transportation costs 28,855 21,895
Accrued compensation and employee benefits 14,876 18,677
Other accrued liabilities 8,237 8,855
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Total current liabilities 62,192 62,084
Deferred income taxes 3,189 3,097
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Total liabilities 65,381 65,181
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Minority interest 354 183
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Shareholders' equity:
Preferred stock, $0.001 par value, 10,000 shares
authorized
Common stock, $0.001 par value, 100,000 shares
authorized, 29,804 and 29,453 shares issued 30 29
Additional paid-in capital 88,018 81,310
Retained earnings 87,589 77,629
Accumulated other comprehensive loss (587) (771)
Treasury stock, 1,022 shares, at cost (14,570) (14,570)
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160,480 143,627
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Commitments and contingencies (Note 6)
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Total liabilities and shareholders' equity $ 226,215 $ 208,991
============= =============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues $ 187,365 $ 144,876
Cost of transportation 109,195 81,553
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Net revenues 78,170 63,323
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Operating expenses:
Personnel costs 40,121 31,229
Other selling, general and administrative expenses 22,376 19,924
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62,497 51,153
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Operating income 15,673 12,170
Interest and other income 655 532
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Income before provision for income taxes 16,328 12,702
Provision for income taxes 6,368 4,954
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Net income 9,960 7,748
Other comprehensive income:
Foreign currency translation 184 169
------------- -------------
Comprehensive income $ 10,144 $ 7,917
============= =============
Basic earnings per share $ 0.35 $ 0.28
============= =============
Basic weighted-average common shares outstanding 28,592 28,181
============= =============
Diluted earnings per share $ 0.33 $ 0.27
============= =============
Diluted weighted-average common and common equivalent
shares outstanding 29,953 28,755
============= =============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities $ (5,710) $ 5,674
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Cash flows from investing activities:
Acquisition, net of cash (1,190)
Purchase of investments (2,350)
Maturity of investments 11,319 1,946
Acquisition of property and equipment, net (3,880) (2,751)
Payment of contingent consideration for acquisition (1,250) (1,500)
Other 133 (104)
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Net cash provided (used) by investing activities 5,132 (4,759)
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Cash flows from financing activities:
Proceeds from exercise of stock options 3,557 52
Purchase of treasury stock (5,789)
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Net cash provided (used) by financing activities 3,557 (5,737)
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Effect of foreign currency translation on cash 184 169
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Net increase (decrease) in cash and cash equivalents 3,163 (4,653)
Cash and cash equivalents, beginning of period 35,175 37,191
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Cash and cash equivalents, end of period $ 38,338 $ 32,538
============= =============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
---------------------- PAID-IN RETAINED OTHER COMPRE- TREASURY
SHARES AMOUNT CAPITAL EARNINGS HENSIVE LOSS STOCK TOTAL
--------- --------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 29,453 $ 29 $ 81,310 $ 77,629 $ (771) $ (14,570) $ 143,627
Exercise of stock options 351 1 3,556 3,557
Issuance of shares under stock
purchase plan (2) (2)
Tax benefit from exercise of stock
options 3,154 3,154
Net income 9,960 9,960
Foreign currency translation
adjustments 184 184
--------- --------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 1999 29,804 $ 30 $ 88,018 $ 87,589 $ (587) $ (14,570) $ 160,480
========= ========= =========== =========== =========== =========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 2, 2000, the Board of Directors of EGL, Inc. (EGL or the
Company) determined to change its fiscal year ending 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. This Transition
Report on Form 10-Q is filed for the three-month transition period beginning on
October 1, 1999 and ending on December 31, 1999.
The accompanying unaudited condensed consolidated financial statements
have been prepared by EGL 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 December 31, 1999 and the results of its operations for
the three months ended December 31, 1999 and 1998. Results of operations for the
three months ended December 31, 1999 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 from Eagle USA Airfreight, Inc. 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.
The Company operates in one principal industry segment. During the
three months ended December 31, 1999 and 1998, the Company's geographic segments
which are outside the United States did not represent, in the aggregate, 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
August 23, 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 1.4 million and
574,000 were used in the calculation of diluted earnings per share for the three
months ended December 31, 1999 and 1998, respectively.
7
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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 currently
recognizes revenues and expenses related to the transportation of freight at the
time the freight departs the terminal of origin. EGL is currently evaluating the
impact of the change to its results of operations.
NOTE 4 - ACQUISITIONS:
On December 15, 1999, the Company completed the acquisition of Compass
Cargo Limitada, a privately held air freight forwarder in Chile with annual net
revenues of approximately $1.5 million, for an aggregate purchase price of $1.2
million in cash at closing. The acquisition was accounted for as a purchase.
On January 7, 2000, the Company completed the acquisition 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 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. The acquisition was
accounted for as a purchase and the results of operations for the acquired
business have been included in the consolidated statement of 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.
On July 2, 2000, EGL entered into an Agreement and Plan of Merger with
Circle International Group, Inc. (Circle). Circle is a leader in international
air and ocean transportation, operating over 300 logistics centers in more than
100 countries. Circle is publicly held and headquartered in San Francisco,
California. As a result of the merger, Circle will be a wholly owned subsidiary
of EGL. The combination is expected to be accounted for as a pooling of
interests, and each share of Circle's common stock issued and outstanding
immediately prior to the effective time of the combination will be converted
into the right to receive one share of EGL's common stock. When complete, EGL's
shareholders will own approximately 62 percent and Circle shareholders will own
approximately 38 percent of the combined company's outstanding shares. The
completion of the merger is subject to shareholder approval which is expected to
occur near September 30, 2000.
8
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - 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) provides a $50 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 increase the
amount of the line of credit up to $100 million, although there can be no
assurance that this increase will be effected. Approximately $6.0 million was
outstanding under the Credit Agreement as of August 14, 2000.
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 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.
NOTE 6 - 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 during the quarter ended December 31, 1997.
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. The lawsuit alleges discrimination
and adopts in their entirety the EEOC's conclusions. Although the four
plaintiffs seek to represent a class of individuals, no class action has yet
been approved by the Court. The lawsuit seeks unspecified damages. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Part II, Item 1. Legal Proceedings."
9
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EGL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AN DANALUSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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" and
the annual financial statements included in the Company's Annual Report on Form
10-K (File No. 0-27288) and the accompanying unaudited condensed consolidated
financial statements.
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 in fiscal 1999
from $291.8 million in fiscal 1997, and its operating income has increased to
$45.0 million in fiscal 1999 from $25.7 million in fiscal 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 35 terminals, increasing
the total to 82 at December 31, 1999. 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 currently 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.
In recent years, the Company has focused on expanding its international
freight forwarding business. On July 2, 2000, EGL entered into an Agreement and
Plan of Merger with Circle International Group, Inc. (Circle). Circle is a
leader in international air and ocean transportation, operating over 300
logistics centers in more than 100 countries. Circle is publicly held and
headquartered in San Francisco, California. As a result of the merger, Circle
will be a wholly owned subsidiary of EGL. The combination is expected to be
accounted for as a pooling of interests, and each share of Circle's common stock
issued and outstanding immediately prior to the effective time of the
combination will be converted into the right to receive one share of EGL's
common stock. When complete, EGL's shareholders will own approximately 62
percent and Circle shareholders will own approximately 38 percent of the
combined company's outstanding shares. The completion of the merger is subject
to shareholder approval which is expected to occur near September 30, 2000.
10
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EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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>
Three Months Ended December 31,
-------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of transportation 58.3 56.3
---------- ----------
Net revenues 41.7 43.7
Personnel costs 21.4 21.6
Other selling, general and administrative expenses 11.9 13.7
---------- ----------
Operating expenses 33.3 35.3
---------- ----------
Operating income 8.4% 8.4%
========== ==========
Net income 5.3% 5.3%
Freight forwarding terminals at end of period 82 72
Local delivery locations at end of period 68 66
Freight forwarding shipments 438,503 319,364
Average weight (lbs.) per freight forwarding shipment 719 700
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
Revenues increased 29.3% to $187.4 million in the first three months of
fiscal 2000 from $144.9 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 after December 31, 1998.
For those freight forwarding terminals opened prior to October 1, 1998
(71 terminals), revenues increased 29.3% to $166.2 million for the three months
ended December 31, 1999 from $128.6 million for the three months ended December
31, 1998.
11
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EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Revenues for the three months ended December 31, 1999 were comprised of
$174.2 million of forwarding revenues and $13.2 million of local pickup and
delivery revenues, as compared to $133.3 million and $11.6 million,
respectively, for the three months ended December 31, 1998. Of the Company's
forwarding revenues for the three months ended December 31, 1999, $35.8 million
were attributable to international shipments (defined as shipments that cross a
national border) compared to $25.8 million for the same three months in 1998.
The Company's total local pickup and delivery revenues for the three
months ended December 31, 1999 were $49.1 million. This amount includes $35.9
million of intercompany sales that were eliminated upon consolidation and $13.2
million in services to third-party (non-forwarding) customers.
Cost of transportation increased during the three months ended December
31, 1999 as a percentage of revenues to 58.3% from 56.3% in the comparable
period in 1998. 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 33.9% to $109.2 million for the three months
ended December 31, 1999 from $81.6 million for the same three months in 1998 as
a result of increases in freight shipped. Net revenue margin decreased to 41.7%
for the three months ended December 31, 1999 from 43.7% for the same period in
1998. 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 23.4% to $78.2 million
for the three months ended December 31, 1999 from $63.3 million for the same
period in 1998.
Operating expenses decreased as a percentage of revenues to 33.3% for
the three months ended December 31, 1999 from 35.3% for the same period in 1998.
The $11.3 million increased costs in absolute terms was attributable primarily
to continued growth in the level of operations from additional terminals and
expansion of local delivery operations. Personnel costs decreased as a
percentage of revenues to 21.4% for the three months ended December 31, 1999
from 21.6% for the same period in 1998 due primarily to controlled headcount
growth, and increased in absolute terms by 28.5% to $40.1 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, to keep pace with its recent significant
growth, to deepen the staff at its terminals and to prepare for expected growth.
Other selling, general and administrative expenses decreased as a percentage of
revenues to 11.9% for the three months ended December 31, 1999 from 13.7% for
the same period in 1998, and increased in absolute terms by 12.3% to $22.4
million for the three months ended December 31, 1999 from $19.9 million for the
same period in 1998. In the three months ended December 31, 1999, selling
expenses as a percentage of revenues decreased by 0.1% and other general and
administrative expenses as a percentage of revenues decreased by 1.7% compared
to the same period in 1998. The absolute increases in selling, general and
administrative expenses were due to overall increases in the level of the
Company's activities for the three months ended December 31, 1999, increased
expenses attributable to the Company's acquisitions, the Company's new
headquarters facility and increased professional and technical fees.
Operating income increased 28.8% to $15.7 million for the three months
ended December 31, 1999 from $12.2 million for the comparable period in 1998.
Operating margin remained constant at 8.4% for the three months ended December
31, 1999 and 1998. Interest and other income increased to $655,000 from $532,000
as a result of increased levels of investments during the three months ended
December 31, 1999 compared to the three months ended December 31, 1998.
Income before provision for income taxes increased 28.5% to $16.3
million for the three months ended December 31, 1999 from $12.7 million for the
comparable period of 1998. Provision for income taxes increased 28.5% to $6.4
million for the three months ended December 31, 1999 from $5.0 million for the
three months ended December 31, 1998. Net income increased 28.6% to $10.0
million for the three months ended December 31, 1999 from net income of $7.7
12
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EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
million for the same period in 1998. Diluted earnings per share increased 22.2%
to $0.33 per share for the three months ended December 31, 1999 from $0.27 for
the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments decreased $8.2 million to
$44.2 million at December 31, 1999 from $52.4 million at September 30, 1999. At
December 31, 1999, the Company had working capital of $119.8 million and a
current ratio of 2.93 compared to working capital of $105.8 million and a
current ratio of 2.70 at September 30, 1999. The Company's working capital has
increased during this period primarily as a result of profitable growth
associated with the expansion of the Company's operations and the resultant
increase in accounts receivable and payable. Capital expenditures for the three
months ended December 31, 1999 were approximately $3.9 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 limited 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. As of
February 11, 2000, the Company had repurchased 25,000 shares for a total of
$814,000 under this authorization. The Company's intention has been that future
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.
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) provides a $50 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 increase the amount of the
line of credit up to $100 million, although there can be no assurance that this
increase will be effected. Approximately $6.0 million was outstanding under the
Credit Agreement as of August 14, 2000.
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 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
December 31, 1999, the Company was contingently liable for approximately $2.6
million under outstanding letters of credit and guarantees related to these
obligations.
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<PAGE> 14
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
As of December 31, 1999, the Company had outstanding non-qualified
stock options to purchase an aggregate of 4,436,244 shares of common stock at
exercise prices ranging from $0.83 to $29.63, 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 three months ended December
31, 1999 of non-qualified stock options to purchase an aggregate of 351,067
shares of common stock, the Company is entitled to a federal income tax
deduction of approximately $8.1 million. The Company has recognized a reduction
of its federal and state income tax liability of approximately $3.2 million with
respect to the three months ended December 31, 1999. 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 December 31, 1999, the
lease balance was approximately $8.2 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 1999 on five terminal
facilities. As of December 31, 1999, the aggregate lease balance was
approximately $11.9 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 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 $50
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 August 14, 2000, the Company has entered into commitments to
construct office, warehouse and terminal facilities for an aggregate cost of
approximately $8.0 million. Payment for the construction of the facilities is
being from cash balances. Construction of the facilities is estimated to be
completed during fiscal 2001.
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<PAGE> 15
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
ACQUISITIONS
On January 7, 2000, the Company completed the acquisition 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.
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 $6.1 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 will be 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 $7.0 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. 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. The lawsuit alleges discrimination
and adopts in their entirety the EEOC's conclusions. Although the four
plaintiffs 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. During the quarter ended March 31, 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 of these matters
on the Company and its financial condition and results of operations.
15
<PAGE> 16
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RELATED PARTY TRANSACTIONS
In May 1999, the Company began subleasing a portion of its warehouse
space in Houston, Texas 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 $160,000 during the three months
ended December 31, 1999 and $143,000 during the year ended September 30, 1999.
In addition, the Company billed the customer approximately $920,000 for freight
forwarding services during the three months ended December 31, 1999 and $356,000
during the year ended September 30, 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> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, Company did not have any outstanding
short-term or long-term debt instruments. Accordingly, the Company does not have
market risk related to interest rates. However, the Company's lease payments on
certain financed facilities are tied to market interest rates. At December 31,
1999, 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 December 31, 1999, 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 did not purchase any futures contracts nor did it purchase
or hold any derivative financial instruments for trading purposes during the
three months ended December 31, 1999.
In the second quarter of fiscal 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 second quarter of fiscal 2000.
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<PAGE> 18
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 states, however, that "the EEOC agrees
that this claim can be resolved for $20,000,000. The EEOC also seeks
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 Houston District Office also seeks (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 recently accepted the EEOC's offer to
conciliate this matter and has participated in three conciliation conferences
with the EEOC thus far in an effort to resolve this matter. The conciliation
process is continuing, although there can be no assurance as to its outcome or
effect. If the Company is unable to effect what it considers to be a reasonable
settlement of this matter during the conciliation process, the Company will
continue its vigorous defense of this matter. 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. The lawsuit alleges discrimination and
adopts in their entirety the EEOC's
18
<PAGE> 19
conclusions. Although the four plaintiffs 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 unless a reasonable
settlement can be reached with these plaintiffs in connection with the
conciliation efforts currently underway with the EEOC.
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<PAGE> 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS, NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES, NONE
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS, NONE
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 timing, 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;
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 proposed Circle
merger; failure of the parties to satisfy closing conditions; 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.
*3(i) Second Amended and Restated Articles of Incorporation of the
Company, as amended (Exhibit 3(i) to the Company's Form 10-Q
for the fiscal quarter ended March 31, 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).
27 Financial Data Schedule.
----------
* Incorporated by reference as indicated.
(B) NO REPORTS ON FORM 8-K WERE FILED DURING THE QUARTER ENDED DECEMBER 31,
1999.
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SIGNATURES
Pursuant to the requirements of the Securities and 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: August 16, 2000 BY: /s/ James R. Crane
----------------- ------------------------------
James R. Crane
President
Date: August 16, 2000 BY: /s/ Elijio V. Serrano
----------------- ------------------------------
Elijio V. Serrano
Chief Financial Officer
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
*3(i) Second Amended and Restated Articles of Incorporation of the
Company, as amended (Exhibit 3(i) to the Company's Form 10-Q for
the fiscal quarter ended March 31, 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).
27 Financial Data Schedule
</TABLE>
----------
*Incorporated by reference as indicated.
22
