<PAGE>
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 JUNE 30, 1998
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-42607
GEOLOGISTICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3438013
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13952 Denver West Parkway
Golden, Colorado 80401
-----------------------
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code:(303) 704-4400
--------------
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 ___
---
On August 10, 1998, the registrant had 2,128,893 outstanding shares of common
stock, par value $.001 per share.
<PAGE>
GEOLOGISTICS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets,
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the three months and six months ended
June 30, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 1998 and 1997 6
Notes to the Condensed Consolidated Financial
Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Changes in Securities 25
ITEM 6. Exhibits and Reports on Form 8-K 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
GEOLOGISTICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,518 $ 37,909
Accounts receivable:
Trade, net 249,175 250,006
Other 11,539 11,139
Deferred income taxes 11,614 6,528
Prepaid expenses 14,910 14,150
--------- ---------
Total current assets 311,756 319,732
--------- ---------
Property and equipment, at cost 91,856 67,433
Accumulated depreciation (12,766) (8,360)
--------- ---------
Net property and equipment 79,090 59,073
--------- ---------
Notes receivable, less current portion 1,772 2,329
Deferred income taxes 19,453 20,861
Goodwill, net 53,455 54,397
Intangible assets, net 10,607 12,213
Other assets 14,973 17,161
--------- ---------
$491,106 $485,766
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
GEOLOGISTICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $106,649 $122,281
Accrued expenses 157,902 165,098
Income taxes payable 5,181 5,993
Current portion of long term debt 13,139 8,437
--------- ---------
Total current liabilities 282,871 301,809
Long-term debt, less current portion 133,453 112,790
Other noncurrent liabilities 51,938 46,647
--------- ---------
Total liabilities 468,262 461,246
--------- ---------
Minority interest 2,018 1,601
Stockholders' equity:
Common stock ($.001 par value 5,000,000
shares authorized, 2,128,893 and
2,074,226 shares issued) 2 2
Additional paid-in-capital 54,667 52,291
Accumulated deficit (34,178) (28,902)
Notes receivable from stockholders (200) (357)
Cumulative translation adjustments 535 (115)
--------- ---------
Total stockholders' equity 20,826 22,919
--------- ---------
$491,106 $485,766
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
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GEOLOGISTICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE-MONTHS SIX-MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $371,211 $185,359 $736,875 $348,101
Transportation and other direct costs 277,854 144,676 554,480 270,552
-------- -------- -------- -------
Net revenues 93,357 40,683 182,395 77,549
Selling, general and administrative expenses 86,725 36,779 174,630 72,071
Depreciation and amortization 3,900 7,287 7,713 14,581
-------- -------- -------- -------
Operating profit (loss) 2,732 (3,383) 52 (9,103)
Interest expense, net (3,903) (2,053) (7,337) (3,827)
Other income 159 64 146 67
-------- -------- -------- -------
Loss before income taxes and minority interest (1,012) (5,372) (7,139) (12,863)
Income tax benefit (279) (2,654) (2,236) (4,701)
-------- -------- -------- -------
Loss before minority interest (733) (2,718) (4,903) (8,162)
Minority interest (215) - (373) -
-------- -------- -------- -------
Net loss $ (948) $ (2,718) $ (5,276) $ (8,162)
-------- -------- -------- -------
-------- -------- -------- -------
Basic loss per common share $ (.45) $ (1.34) $ (2.50) $ (4.01)
-------- -------- -------- -------
Diluted loss per common share $ (.45) $ (1.34) $ (2.50) $ (4.01)
-------- -------- -------- -------
-------- -------- -------- -------
Weighted average number of common and
common equivalent shares outstanding 2,129,318 2,035,046 2,113,126 2,033,097
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
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GEOLOGISTICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTHS
ENDED JUNE 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,276) $ (8,162)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 6,794 13,787
Goodwill amortization 919 794
Deferred income tax benefit (3,678) (5,862)
Changes in current assets and liabilities, net (17,100) (1,827)
Other, net (1,656) (2,431)
-------- ---------
Net cash from operating activities (19,997) (3,701)
Cash flows from investing activities:
Purchases of property, equipment and software (13,823) (3,089)
-------- ---------
Net cash from investing activities (13,823) (3,089)
Cash flows from financing activities:
Proceeds from revolving line of credit 75,000 53,600
Payments on revolving line of credit (58,900) (44,200)
Proceeds from long-term debt/capital leases 10,896 412
Payments on long-term debt/capital leases (8,380) (2,223)
Proceeds from issuance of common stock 1,673 1,639
Repurchase of common stock (18) (491)
Other, net 158 -
-------- ---------
Net cash from financing activities 20,429 8,737
-------- ---------
Net change in cash and cash equivalents (13,391) 1,947
Cash and cash equivalents, beginning of period 37,909 3,424
-------- ---------
Cash and cash equivalents, end of period $ 24,518 $ 5,371
-------- ---------
-------- ---------
Supplemental cash flow information:
Interest paid during the period $ 6,581 $ 3,311
Income taxes paid during the period $ 1,454 $ 703
Noncash common stock transactions $ - $ 158
Noncash warrant transactions $ 720 $ -
New capital leases $ 4,465 $ -
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
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GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in GeoLogistics Corporation's (formerly known as
International Logistics Limited) ("Company") Registration Statement on Form
S-4 as filed with the Securities and Exchange Commission on April 28, 1998
("Form S-4"). The condensed consolidated financial information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
eliminations) which are, in the opinion of management, necessary for a fair
presentation in accordance with generally accepted accounting principles of
the condensed consolidated financial statements for the periods shown.
Certain amounts for prior years have been reclassified to conform with
current year financial statement presentations. Significant accounting
policies followed by the Company are included in Note 1 to the audited
consolidated financial statements in the Company's Form S-4. Results of
operations for the six months ended June 30, 1998 may not be indicative of
the results to be expected for the full year.
PRINCIPLES OF CONSOLIDATION: The accompanying condensed consolidated
financial statements include the accounts of the Company and its majority
owned subsidiaries. The Company records its investment in each
unconsolidated affiliated company (20 to 50 percent ownership) using the
equity method of accounting. Other investments (less than 20 percent
ownership) are recorded at cost. Intercompany accounts and transactions have
been eliminated. The financial statements reflect minority interests in
foreign affiliates acquired in connection with the acquisition of LEP
International Worldwide Limited ("LIW").
USE OF ESTIMATES: The financial statements have been prepared in conformity
with generally accepted accounting principles and, as such, include amounts
based on informed estimates and judgments of management. Actual results
could differ from those estimates. Accounts affected by significant
estimates include accounts receivable, accruals for transportation and other
direct costs, tax contingencies, cargo loss and damage claims, and insurance
claims.
7
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GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
During the six months ended June 30, 1998 the Company sold 55,267 shares of its
Common stock to employees, pursuant to an employee stock purchase plan for an
aggregate purchase price of $1.7 million or $30 per share. The proceeds of the
sales were used for general corporate purposes. These shares were not required
to be registered with the Securities and Exchange Commission pursuant to Rule
701 promulgated under the Securities Act of 1933.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128 ("FAS
128"), "Earnings Per Share" at December 31, 1997. All prior period earnings per
common share data have been restated to conform to the provisions of this
statement. Basic earnings per common share is computed using the weighted
average number of shares outstanding. Diluted earnings per common share is
computed under the treasury stock method using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to outstanding
warrants to purchase common stock. Incremental shares were not used in the
calculation of diluted loss per common share due to their antidilutive effect.
NOTE 2. ACQUISITIONS
In January 1998, the Company purchased additional shares in its Italian
affiliate which increased its investment to 51%. As a result the Company
consolidated the financial statements of Italy (which include approximately $13
million in property and equipment and $2.0 million of long term debt) in the
first quarter of 1998 and recorded a liability related to the minority interest
it does not own. It is the Company's intention to complete the purchase of the
remaining 49% of the Italian operations over the next two years.
8
<PAGE>
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
On September 30, 1997, the Company increased its holdings of LIW's common stock,
a United Kingdom based international freight forwarder with operations primarily
in Europe and Asia, to 75.2% from 33.3%. In December 1997, the Company acquired
LIW's remaining outstanding common stock and acquired and retired LIW's
outstanding preferred stock the "LIW Acquisition." The transaction has been
accounted for under the purchase method of accounting and the operating results
of LIW have been included in the consolidated statements of operations since
September 30, 1997.
NOTE 3. LONG-TERM DEBT
In October 1997, the Company issued and sold $110.0 million in aggregate
principal amount of its 9 3/4% senior notes (the "Old" notes) which are due
October 15, 2007, and are general unsecured obligations of the Company. The
Notes are fully and unconditionally guaranteed on a joint and several senior
basis by all existing and future domestic Restricted Subsidiaries (as defined in
the indenture relating to the Notes). Three of the Company's domestic
subsidiaries hold as their sole assets all of the issued and outstanding equity
interests of the Company's direct non-guarantor foreign subsidiaries.
On April 28, 1998 the Company filed a Registration Statement on Form S-4 with
the Securities and Exchange Commission to exchange the Old notes for an equal
amount of newly issued and registered 9 3/4 % Senior Notes due 2007 ("New"
notes). The exchange offer was completed on June 1, 1998. The form and term of
the New notes is substantially identical to those of the Old notes except that
the New notes will have been registered under the Securities Act of 1933.
9
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GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3. LONG-TERM DEBT (CONTINUED)
The following is condensed combined financial information of guarantor and
non-guarantor subsidiaries:
<TABLE>
<CAPTION>
Balance Sheet as of June 30, 1998
--------------------------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Combined
-------- ------------ -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . $ 220 $ 2,684 $ 21,614 - $ 24,518
Accounts receivable--trade, net. . . . . . . . . . . . - 108,069 150,844 $ (9,738) 249,175
Property, net. . . . . . . . . . . . . . . . . . . . . 11,144 12,475 55,471 - 79,090
Intangible assets, net . . . . . . . . . . . . . . . . 8,399 53,165 3,450 (952) 64,062
Other assets . . . . . . . . . . . . . . . . . . . . . 4,008 30,711 39,542 - 74,261
Investments in subsidiaries. . . . . . . . . . . . . . 62,088 - - (62,088) -
--------- --------- ---------- ----------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . $ 85,859 $ 207,104 $ 270,921 $ (72,778) $ 491,106
--------- --------- ---------- ----------- ---------
--------- --------- ---------- ----------- ---------
Current liabilities. . . . . . . . . . . . . . . . . . $ 4,351 $ 104,615 $ 184,869 $ (10,964) $ 282,871
Long-term debt . . . . . . . . . . . . . . . . . . . . 126,584 1,438 5,431 - 133,453
Other noncurrent liabilities . . . . . . . . . . . . . - 5,955 48,001 - 53,956
Intercompany accounts. . . . . . . . . . . . . . . . . (91,180) 80,510 10,396 274 -
Stockholders' equity . . . . . . . . . . . . . . . . . 46,104 14,586 22,224 (62,088) 20,826
--------- --------- ---------- ----------- ---------
Total liabilities and stockholders' equity . . . . . $ 85,859 $ 207,104 $ 270,921 $ (72,778) $ 491,106
--------- --------- ---------- ----------- ---------
--------- --------- ---------- ----------- ---------
Statement of Operations for the Six Months Ended June 30, 1998
--------------------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Combined
--------- ------------ ------------ ------------ ---------
Revenues . . . . . . . . . . . . . . . . . . . . . . . - $ 315,177 $ 530,300 $(108,602) $ 736,875
Transportation and other direct costs. . . . . . . . . - 242,841 420,241 (108,602) 554,480
Operating expenses . . . . . . . . . . . . . . . . . . $ 5,295 73,519 103,529 - 182,343
--------- ------------ ------------ ------------ ---------
Operating profit (loss). . . . . . . . . . . . . . . (5,295) (1,183) 6,530 - 52
Interest and other, net. . . . . . . . . . . . . . . . (910) (5,454) (827) - (7,191)
Income tax provision (benefit) . . . . . . . . . . . . (2,520) (2,059) 2,343 - (2,236)
Minority interest. . . . . . . . . . . . . . . . . . . - - (373) - (373)
--------- ------------ ------------ ------------ ---------
Net (loss) income. . . . . . . . . . . . . . . . . . $ (3,685) $ (4,578) $ 2,987 $ - $ (5,276)
--------- ------------ ------------ ------------ ---------
--------- ------------ ------------ ------------ ---------
</TABLE>
10
<PAGE>
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Statement of Cash Flows for the Six Months Ended June 30, 1998
--------------------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Combined
--------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Cash flows from:
Operating activities . . . . . . . . . . . . . . . . $(8,513) $(8,734) $(4,120) $1,370 $(19,997)
Investing activities . . . . . . . . . . . . . . . . (5,571) (4,609) (3,904) 261 (13,823)
Financing activities . . . . . . . . . . . . . . . . 6,726 13,751 1,583 (1,631) 20,429
--------- ------------ ------------ ------------ ---------
Net change in cash and cash equivalents. . . . . . . . (7,358) 408 (6,441) - (13,391)
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . 7,578 2,276 28,055 - 37,909
--------- ------------ ------------ ------------ ---------
Cash and cash equivalents, end of period . . . . . . . $ 220 $ 2,684 $21,614 $ - $ 24,518
--------- ------------ ------------ ------------ ---------
--------- ------------ ------------ ------------ ---------
</TABLE>
NOTE 4. SEGMENT INFORMATION
The Company operates in a single business segment providing worldwide logistics
solutions to meet customers' specific requirements for transportation and
related services by arranging and monitoring all aspects of material flow
activities utilizing advanced information technology systems.
Information regarding the Company's operations by geographic region is
summarized below.
<TABLE>
<CAPTION>
U.S and
Canada Europe Asia Corporate Eliminations Consolidated
--------- ---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Total revenue. . . . . . . . . . . . . . $360,695 $356,594 $128,188 - $(108,602) $736,875
Transactions between regions . . . . . . 27,721 50,370 30,511 - (108,602) -
Revenues from customers. . . . . . . . . 332,974 306,224 97,677 - - 736,875
Net revenues . . . . . . . . . . . . . . 80,399 77,825 24,171 - - 182,395
Operating profit (loss). . . . . . . . . 428 3,149 2,040 $ (5,565) - 52
Long-lived assets. . . . . . . . . . . . 15,051 47,033 4,071 12,935 - 79,090
SIX MONTHS ENDED JUNE 30, 1997
Total revenue. . . . . . . . . . . . . . $348,101 - - - - $348,101
Transactions between regions . . . . . . - - - - - -
Revenues from customers. . . . . . . . . 348,101 - - - - 348,101
Net revenues . . . . . . . . . . . . . . 77,549 - - - - 77,549
Operating profit (loss). . . . . . . . . (7,491) - - $ (1,612) - (9,103)
Long-lived assets. . . . . . . . . . . . 20,254 - - 50 - 20,304
</TABLE>
11
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GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenue from transfers between regions represents approximate amounts that would
be charged if the service were provided by an unaffiliated company. Total
regional revenue is reconciled with total consolidated revenue by eliminating
inter-regional revenue.
NOTE 5. OTHER COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted FAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and display of comprehensive
income and its components in the financial statements. Comprehensive income is
comprised of all changes to stockholders' equity, including net income, except
those changes resulting from investments by owners and distributions to owners.
Other comprehensive income in the financial statements of the Company represents
foreign currency translation adjustments resulting from the conversion of the
financial statements of foreign subsidiaries from local currency to U.S.
dollars.
NOTE 6. SUBSEQUENT EVENT
On July 13, 1998, the Company purchased substantially all of the operating
assets and assumed certain of the liabilities of Caribbean Air Services, Inc.,
a Delaware corporation ("CAS"), a wholly-owned subsidiary of Amertranz
Worldwide Holding Corp., a Delaware corporation ("Holding"), for aggregate cash
consideration of $27 million. CAS is a provider of air logistics services
between the United States, Puerto Rico, and the Dominican Republic. The purchase
price, which was determined by the parties through arm's length negotiations,
was funded by a combination of borrowings under a newly-executed $15 million
credit agreement (the "New Credit Facility") and proceeds from the $15 million
private placement of the Company's Series A Participating Preferred Stock (the
"Preferred Stock").
12
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GEOLOGISTICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
On July 13, 1998 the Company borrowed $15 million pursuant to the New Credit
Facility executed July 10, 1998 by and among the Company and ING (U.S.) Capital
Corporation and the lenders party thereto. The loan is unsecured and is
evidenced by promissory notes in aggregate principal amount of $15 million due
October 15, 2007. Borrowings under the facility are guaranteed by certain
direct and indirect subsidiaries of the Company, each of which is either a
borrower or guarantor under the Company's existing loan agreement or its 9 3/4%
Senior Notes due 2007. At the Company's option, interest will accrue on the
loan with reference to either the average of prime commercial lending (or
equivalent) rates publicly announced by certain banks plus 1.75% or the offered
rate for deposits in dollars in the London interbank eurodollar market ("LIBOR")
plus 3.75%. With the exception of mandatory prepayments in connection with
certain change of control events, certain sales of equity interests of the
Company and certain asset dispositions, the New Credit Facility does not contain
any mandatory prepayment provisions. The New Credit Facility provides that the
Company may prepay this loan in whole or in part without penalty, subject to
reimbursement of the lender's breakage and redeployment costs in the case of
prepayment of LIBOR loans. The credit facility contains certain covenants and
restrictions on actions by the Company including, without limitation,
restrictions on indebtedness, liens, guarantee obligations, mergers, creation or
dissolution of restricted subsidiaries, investments, loans, advances, dividends
and other restricted payments, transactions with affiliates, sale and leaseback
transactions, prepayment of or amendments to junior obligations, entering other
lines of business and amendments of other indebtedness.
On July 13, 1998, the Company sold 11,000 and 4,000 shares of Preferred Stock
to OCM Principal Opportunities Fund L.P., and Logistical Simon, L.L.C.,
respectively (the "Investors"), for aggregate consideration of $14.6 million.
The Preferred Stock has a liquidation value of $1,000 per share and was sold to
the Investors for $970 per share. The holders of the Preferred Stock are
entitled to payment of quarterly dividends when, as and if declared by the board
of directors of the Company in amounts ranging from $30.00 per share per quarter
to $45.00 per share per quarter, which amount shall be determined based upon the
occurrence of certain events that are specified in the Certificate of
Designation relating to the Preferred Stock. Dividends on the Preferred Stock
will accrue and be fully cumulative (whether or not declared) and will bear
13
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GEOLOGISTICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
interest at rates ranging from 14% per annum to 18% per annum, depending upon
the occurrence of certain events that are specified in the Certificate of
Designation. Upon redemption of the Preferred Stock or liquidation of the
Company, the holders of Preferred Stock will be entitled to receive the
following for each share of Preferred Stock held by such holder: (i) (a)
$1,000, representing the liquidation preference of the Preferred Stock plus (b)
all accrued and unpaid dividends, whether or not declared multiplied by (c) the
applicable liquidation or redemption premium, and (ii) either ten shares of
common stock of the Company or the amount of the fair market value of ten shares
of common stock of the Company. The Preferred Stock has no mandatory redemption
feature and ranks senior to the Common Stock of the Company for payment of
dividends and upon liquidation. The Company intends to make a preemptive rights
offering of the preferred stock during the third quarter to its existing
security holders in accordance with the terms of the certificate of
incorporation.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis relates to the results of operations of
the Company for the three months and six months ended June 30, 1998 and 1997,
and should be read in conjunction with the condensed consolidated financial
statements of the Company included elsewhere in this report.
The Company is one of the largest non-asset-based providers of global logistics
and transportation services headquartered in the United States based on revenues
for 1997 and after giving pro forma effect to the LIW Acquisition. The
Company's primary business operations involve obtaining shipment or material
orders from customers, creating and delivering a wide range of logistics
solutions to meet customers' specific requirements for transportation and
related services, and arranging and monitoring all aspects of material flow
activity utilizing advanced information technology systems. The logistics
solutions include domestic and international freight forwarding and door-to-door
delivery services using a wide range of transportation modes, including air,
ocean, truck and rail. The Company also provides value-added services such as
warehousing, inventory management, assembly, customs brokerage, distribution and
installation for manufacturers and retailers of commercial and consumer products
such as copiers, computers, pharmaceutical supplies, medical equipment, consumer
durables and aviation products. The Company also specializes in arranging for
the worldwide transportation of goods for major infrastructure projects, such as
power plants, oil refineries, oil fields and mines, to lesser developed
countries and remote geographic locations. In addition, the Company provides
international and domestic relocation services through the Household Goods
divisions ("HHG") of Bekins and Matrix.
In February 1998, the Company announced its new brand name: GeoLogistics. The
corporation changed its identity March 1, 1998 and the business units will adopt
the new name during the next eighteen months. Costs associated with the
branding strategy include registration expenses and legal fees, collateral
material and advertising and promotional expense. A Logistics Consulting Team
has also been established in conjunction with the branding strategy to design,
plan and implement supply chain programs for our customers and other strategic
business opportunities. This team of supply chain technicians and project
managers, has already had a positive impact on the development of logistics
services contracts which are expected to materialize into additional revenue in
the second half of 1998. An integral component of the
15
<PAGE>
Company's strategic plan is to provide improved information technology to its
customers as well as improved systems for its own operational and financial
management purposes. Accordingly, the Company has committed to spend
approximately $30 million to achieve this objective through 1999. Costs
aggregating approximately $14.5 million related to these initiatives have
been incurred from the fourth quarter of 1997 following the LIW Acquisition
through June of 1998. The Company expects to spend approximately $15.5
million (which will be funded through a combination of cash provided from
operations and borrowings under the existing bank credit facility) over the
next one and one half years to conclude the implementation and integration of
these systems. Related to these projects, the Company will also incur
incremental expense for maintenance fees and additional systems programmers
and technicians. Costs related to these three initiatives (branding,
consulting and information technology) were initially incurred in the fourth
quarter of 1997 following the LIW Acquisition, but further expansion, and
expenditures, of all three initiatives were increased in 1998. These costs
will be reported within the Selling, General and Administrative Expenses line
on the Statement of Operations.
This Quarterly Report on Form 10-Q may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.
Discussions containing such forward-looking statements may be found in the
material set forth herein as well as within this Quarterly Report generally
(including any document incorporated by reference herein). Also, documents
subsequently filed by the Company with the Securities and Exchange Commission
may contain forward-looking statements. Actual results could differ
materially from those projections in the forward-looking statements as a
result of the risk factors identified herein or in other public filings by
the Company, including but not limited to, the Company's Registration
Statement on Form S-4 (File No. 333-42607).
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES. The Company's revenues increased by approximately $185.8
million, to $371.2 million for the three months ended June 30, 1998 from
$185.4 million for the three months ended June 30, 1997. Approximately $191.6
million of the increase related to the LIW Acquisition whose revenues have
been impacted in 1998 by the temporary negative effect of strategically
shifting to "owned" operations from agent representation in India and South
Africa. In addition, Bekins High Value Product ("HVP")/Logistics revenues
increased $6.1 million, or 25.2%, which was due primarily to increased volume
from new customers as well as moderately higher prices. Matrix revenues also
increased $1.9 million, or 12.1%, on higher volume in both project cargo
16
<PAGE>
and international relocation product lines. LEP Profit revenues declined
$11.1 million, or 11.4% during this period primarily as a result of lower
international forwarding volume as well as continued softness in domestic
forwarding volume.
NET REVENUES. Net revenues, which represent gross profit after
deducting transportation and other direct costs, increased by approximately
$52.7 million, to $93.4 million for the three months ended June 30, 1998 from
$40.7 million for the same period in 1997. Net revenues as a percentage of
revenues increased to 25.1% in 1998 from 21.9% for the same period in 1997
primarily due to a shift in product offerings to higher margin value-added
services resulting from the acquisition of LIW. Net revenue increases are
primarily the result of the LIW Acquisition ($52.9 million) and an increase
in Bekins HVP/Logistics net revenues of $1.0 million, or 17.8%, due to higher
revenue and improved capacity utilization on its Timelok logistics
distribution system partially offset by a decline in net revenues at LEP
Profit of $.9 million, or 4.2%, due to lower forwarding revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $49.9 million, to $86.7
million for the three months ended June 30, 1998 from $36.8 million for the
three months ended June 30, 1997. These expenses as a percentage of net
revenues in 1998 increased to 92.9% from 90.4% for the same period in 1997
due to higher expenses for general corporate purposes in addition to specific
corporate initiatives relating to the new branding strategy, the planned
logistics consulting infrastructure team and strategic information technology
projects. These corporate initiatives are in support of the new strategic
focus of global branded integrated logistics solutions. Excluding the $1.3
million of costs related to the strategic corporate initiatives in 1998,
other selling, general and administrative expenses as a percentage of net
revenues increased in the period to 91.5% from 90.4%. Selling, general and
administrative expenses relating to LIW operations amounted to $48.0 million
of the increase from 1997. The remaining $1.9 million increase was primarily
due to the strategic corporate initiatives previously discussed, sales and
administrative infrastructure improvements and additions at Bekins
HVP/Logistics, and start-up costs of approximately $.6 million for new
company-owned operations in India and the Caspian Sea area of the
Commonwealth of Independent States ("CIS").
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased 46.5% to $3.9 million for the three months ended June 30, 1998
compared to $7.3 million for the three
17
<PAGE>
months ended June 30, 1997. This decrease was despite an additional $1.0
million of depreciation and amortization from the LIW Acquisition. The
remaining $4.4 million decrease was due to amortization of intangible assets
(acquired in the 1996 acquisitions) that was completed by the end of 1997.
OPERATING PROFIT. The Company recorded a $2.7 million operating profit for
the three months ended June 30, 1998 compared to a $3.4 million operating loss
for the three months ended June 30, 1997. These improved results were primarily
due to lower amortization expense ($3.4 million) and the addition of operating
results from LIW ($4.9 million), partially offset by increased corporate
operating expenses ($2.4 million) in support of the strategic initiatives
previously discussed.
Operating profit, excluding depreciation and amortization, and corporate
expenses, improved $5.2 million to profit of $9.9 million for the three months
ended June 30, 1998 compared to $4.7 million for the three months ended June 30,
1997. This improvement was primarily due to the LIW Acquisition and improved
Bekins HVP/Logistics results.
INTEREST EXPENSE, NET. Interest expense, net, increased by approximately
$1.8 million, to $3.9 million for 1998 from $2.1 million for the three months
ended June 30, 1997. The increase was associated with the issuance of the notes
in October 1997 and higher levels of working capital-related borrowings.
INCOME TAX BENEFIT. Income tax benefit was $0.3 million for the three
months ended June 30, 1998 versus $2.7 million for the three months ended June
30, 1997. This decrease in benefit was the result of improved profitability in
1998 versus 1997.
MINORITY INTERESTS. Interests held by minority shareholders in certain
subsidiaries of LIW were $.2 million for the three months ended June 30, 1998,
the period of LIW ownership by the Company.
NET LOSS. Net loss improved by $1.8 million to $.9 million for the three
months ended June 30, 1998 compared to $2.7 million for the same period of 1997.
This improvement is due to operating profits resulting from the LIW Acquisition
and lower amortization expense, partially offset by higher corporate expenses
and increased interest expense.
18
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES. The Company's revenues increased by approximately $388.8
million, to $736.9 million for the six months ended June 30, 1998 from $348.1
million for the six months ended June 30, 1997. Approximately $383.3 million of
the increase related to the LIW Acquisition whose revenues have been impacted in
1998 by the temporary negative effect of strategically shifting to "owned"
operations from agent representation in India and South Africa. In addition,
Bekins HVP/Logistics revenues increased $13.7 million, or 30.0% due primarily to
increased volume from new customers. Matrix revenues also increased $4.6
million, or 14.5% on higher volume in both project cargo and international
relocation product lines. Revenues at LEP Profit declined $11.7 million, or
6.3% due to lower domestic and international forwarding volumes.
NET REVENUES. Net revenues, which represent gross profit after deducting
transportation and other direct costs, increased by approximately $104.9
million, to $182.4 million for the six months ended June 30, 1998 from $77.5
million for the same period in 1997. Net revenues as a percentage of revenues
increased to 24.8% in 1998 from 22.3% for the same period in 1997 primarily due
to a shift in product offerings to higher margin value-added services resulting
from the acquisition of LIW. Net revenue increases are primarily the result of
the LIW Acquisition ($102.0 million). In addition, Bekins HVP/Logistics net
revenues increased $2.9 million, or 29.5%, due to higher revenue and improved
capacity utilization on its Timelok logistics distribution system.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $102.5 million, to $174.6
million for the six months ended June 30, 1998 from $72.1 million for the six
months ended June 30, 1997. These expenses as a percentage of net revenues
increased to 95.7% in 1998 from 92.9% for the same period in 1997 due to the
higher expenses at LEP Profit and for general corporate purposes in addition to
specific corporate initiatives relating to the new branding strategy, the
planned logistics consulting infrastructure team and strategic information
technology projects. These corporate initiatives are in support of the new
strategic focus of global branded integrated logistics solutions. Excluding the
$2.0 million of costs related to the strategic corporate initiatives, other
selling, general and administrative expenses as a percentage of net revenues
increased in the period to 94.6% from 92.9%. Selling, general and administrative
expenses relating to the LIW
19
<PAGE>
operations amounted to $94.9 million of the increase from 1997. The remaining
$7.6 million increase was primarily due to the strategic corporate
initiatives previously discussed, sales and administrative infrastructure
improvements and additions at LEP Profit and Bekins HVP/Logistics, and
start-up costs of approximately $.6 million for new company owned operations
in India and the Caspian Sea area of the CIS.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased 47.1% to $7.7 million for the six months ended June 30, 1998 compared
to $14.6 million for the six months ended June 30, 1997 primarily as the result
of a $8.7 million decrease that was due to amortization of intangible assets
(acquired in the 1996 acquisitions) that was completed by the end of 1997. The
decrease was partially offset by an additional $1.8 million of depreciation and
amortization resulting from the LIW Acquisition.
OPERATING PROFIT. The Company recorded a $.1 million operating profit for
the six months ended June 30, 1998 compared to a $9.1 million operating loss for
the six months ended June 30, 1997. These improved results were due primarily
to the operating profits of LIW ($5.3 million), lower amortization expense ($6.9
million) and increased operating profits at Bekins HVP/Logistics ($1.2 million),
offset by increased Corporate operating expenses ($4.1 million) in support of
the strategic initiatives previously discussed.
Operating profit, excluding depreciation and amortization, and corporate
expenses, improved $6.3 million to operating profit of $13.2 million for the six
months ended June 30, 1998 compared to $6.9 million for the six months ended
June 30, 1997. This improvement was primarily due to the LIW Acquisition and
improved Bekins HVP/Logistics results, partially offset by higher operating
losses at LEP Profit. Improvement in operating results of LEP Profit has
proved to require a longer timeframe than anticipated. A strategic review is
now underway to identify initiatives to improve profitability.
INTEREST EXPENSE, NET. Interest expense, net, increased by
approximately $3.5 million, to $7.3 million for 1998 from $3.8 million for
the six months ended June 30, 1997. The increase was associated with the
issuance of the notes in October 1997 and higher levels of working
capital-related borrowings.
20
<PAGE>
INCOME TAX BENEFIT. Income tax benefit for the six months ended June 30,
1998 decreased $2.5 million to $2.2 million versus $4.7 million for the first
six months of 1997 as a result of improved profitability in 1998 versus 1997.
MINORITY INTERESTS. Interests held by minority shareholders in certain
subsidiaries of LIW of $.4 million for the six months ended June 30, 1998, the
period of LIW ownership by the Company.
NET LOSS. Net loss improved by $2.9 million to $5.3 million for the first
six months of 1998 compared to $8.2 million for the same period of 1997. This
improvement is due primarily to operating profits resulting primarily from the
LIW Acquisition and lower amortization expense, partially offset by increased
interest expense and slightly higher operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, net cash used by operating
activities was $20.0 million. Cash used in investing activities was $13.8
million, which primarily consisted of strategic information technology
related capital expenditures including the new Peoplesoft financial systems
introduced to replace the multiple legacy systems at LEP Profit. Cash
provided by financing activities was $20.4 million which primarily consisted
of additional borrowings under the U.S. revolving line of credit and by
certain foreign subsidiaries.
Within North America, the Company has utilized cash flows from operations and
borrowings under its credit facilities to meet working capital requirements
and to fund capital expenditures principally related to the improvement of
information systems in support of the strategic information technology plan.
At June 30, 1998, the Company had a working capital borrowing base under its
credit facility of $84.4 million, $16.1 million outstanding working capital
related borrowings and $30.3 million outstanding letter of credit
commitments.
Total borrowings of LIW at June 30, 1998 were approximately $16.3 million,
representing a combination of short and long-term borrowings and capital
leases in local currencies in countries where LIW operates. Funding
requirements have historically been satisfied by cash generated from
operations and borrowings under various bank credit facilities. In connection
with the LIW
21
<PAGE>
Acquisition and the Company's existing credit facility, a certain amount of
borrowing capacity is provided to LIW based upon the level of accounts
receivable in the United Kingdom.
The Company expects to spend an additional $15.5 million over the next one
and one half years to provide improved information technology to its
customers as well as improved systems for its own operational and financial
management purposes. Additionally, the Company will be required to pay
approximately $1.1 million to complete the acquisition of the Italy
operations during the same period. These initiatives are expected to be
funded through bank borrowings under the existing credit facility and cash
provided from operations. The Company believes that its current borrowing
ability and cash from operations will be sufficient to meet the liquidity
needs in the future.
RECENT ACCOUNTING PRONOUNCEMENTS: In January 1998, the American
Institute of Certified Public Accountants (AICPA) issued SOP-98-1 (SOP)
"Accounting for the Costs of Computer Software Developed or Planned for
Internal Use" which sets forth standards for the capitalization of computer
software costs as they relate to the development of internal systems. The
SOP requires capitalization of computer software costs relating to direct
costs of materials purchased and services consumed in developing internal use
computer software and payroll and payroll related costs for employees who are
directly associated with these projects. As part of the Company's strategic
plan it expects to spend approximately $30 million on such internal systems
related to the implementation and integration of its proprietary system for
real time management of shipments and purchase of additional information
systems hardware and software to enhance financial reporting and other
operational activities. As a result, the Company has capitalized
approximately $10.7 million of such costs through June 30, 1998. Capitalized
costs of these projects will be amortized over their useful lives in
accordance with the pronouncement.
FOREIGN CURRENCY RISK MANAGEMENT. The Company's objective in managing
the exposure to foreign currency fluctuations is to reduce earnings and cash
flow volatility associated with foreign exchange rate changes and allow
management to focus its attention on its core business issues and challenges.
Accordingly, the Company enters into various contracts which change in value
as foreign exchange rates change to minimize the impact of currency movements
on certain existing commitments and anticipated foreign earnings. The Company
may use a combination of financial instruments to manage these risks,
including forward contracts or option related instruments. The principal
currencies hedged are the British pound, German mark, Canadian
22
<PAGE>
dollar and some Asian currencies such as the Hong Kong dollar and Singapore
dollar. By policy, the Company maintains hedge coverage between minimum and
maximum percentages of its anticipated foreign exchange exposures for the
next year. The gains and losses on these contracts are offset by changes in
the value of the related exposures. At June 30, 1998 the Company had
approximately $9.1 million in notional amounts of forward contracts and
options outstanding. The credit and market risks under these agreements are
not considered to be significant since the counterparties have high credit
ratings. In addition, the net investment position in these forward contracts
and options is not material.
It is the Company's policy to enter into foreign currency transactions only to
the extent considered necessary to meet its objectives as stated above. The
Company does not enter into foreign currency transactions for speculative
purposes.
YEAR 2000. In addition to the Company's strategic information
technology projects previously discussed, the Company, as most other
companies using computers in their operations, is in the process of
addressing the Year 2000 problem. The Company is currently engaged in a
comprehensive project to upgrade its information technology including
hardware and software that will consistently and properly recognize the Year
2000. Many of the Company's systems include new hardware and packaged
software recently purchased from large vendors who have represented that
these systems are already Year 2000 compliant. The Company is in the process
of obtaining assurances from vendors that timely updates will be made
available to make all remaining purchased software Year 2000 compliant.
The Company will utilize both internal and external resources to reprogram or
replace and test all of its software for Year 2000 compliance, and expects to
complete the project in late 1999. The estimated cost for this project is
approximately $1.1 million excluding the cost of new systems which will be
capitalized. This cost is being funded through a combination of cash provided
from operations and borrowings under the existing bank credit facilities and
will be expensed in the period incurred. Failure by the company and/or
vendors and customers to complete Year 2000 compliance work in a timely
manner could have a material adverse effect on the Company's operations.
RECENT EVENTS. Problems associated with the opening of the new Hong
Kong airport in early July are having a significant negative impact on the air
export volume of our Hong Kong
23
<PAGE>
subsidiary, our largest in Asia. Computer problems at the monopoly cargo
handling company that controls all air cargo operations at the new Check Lap
Kok airport have resulted in only minimal cargo volumes moving through the
new airport by manual means. Our volumes, and those of other freight
forwarders, were down approximately 50% in July. Customers are re-directing
their sourcing to other countries so this lost shipping volume is not
expected to be recovered. The computer problem is expected to be fixed by
late August, however, air freight volumes will be reduced by 50% in August
also, the start of the "peak season" in Hong Kong. While we anticipate the
financial impact of this operational problem to be approximately $1 million
in operating profits for the third quarter, it is expected to be completely
offset by the operating profits of the Caribbean Air Services operation,
acquired July 13, 1998.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings generally incidental to
its business. While the result of any litigation contains an element of
uncertainty, the Company presently believes that the outcome of any known
pending or threatened legal proceeding or claim, or all of them combined,
will not have a material adverse effect on its results of operations or
consolidated financial position.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (Filed electronically only).
(b) Reports on Form 8-K
On June 15, 1998 the Company filed a current report on Form 8-K
disclosing its intent to purchase substantially all of the assets and
assume certain liabilities of Caribbean Air Services, Inc. ("CAS"), a
wholly owned subsidiary of Amertranz Worldwide Holding Corporation.
On July 22, 1998 the Company filed a current report on Form 8-K
disclosing the consummation of the CAS purchase and the details of the
related transaction.
25
<PAGE>
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.
GEOLOGISTICS CORPORATION
Date: August 14, 1998 By: /s/ Roger E. Payton
------------------------------
Roger E. Payton
President, Chief Executive Officer and Director
Date: August 14, 1998 By: /s/ Gary S. Holter
------------------------------
Gary S. Holter
Chief Financial Officer
26
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUND ON PAGES 3 THROUGH 5
OF THE COMPANY'S FORM 10 Q FOR THE PERIOD ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> GEOLOGISTICS CORPORATION
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