UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-8664
Circle International Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-1740320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
260 Townsend Street,
San Francisco, California 94107
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 978-0600
Inapplicable
(Former name, former address and former fiscal year
if changed from 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 __
At November 12, 1998 the number of shares outstanding of the registrant's common
stock was 17,121,369.
<PAGE>
TABLE OF CONTENTS
Part I. Financial Information Page
- - ------- --------------------- ----
Item 1. Financial Statements:
-------
Condensed Consolidated Operating Statements
for the three and nine months ended
September 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets,
September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
-------
Financial Condition and Results
of Operations 9
Item 3. Quantitative and Qualitative Disclosures
-------
About Market Risk 13
Part II. Other Information
- - -------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders 14
-------
Item 5. Other Information 14
-------
Item 6. Exhibits and Reports on Form 8-K 14
-------
2
<PAGE>
I. FINANCIAL INFORMATION
- - ------------------------
ITEM 1. FINANCIAL STATEMENTS
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED OPERATING STATEMENTS
(unaudited, in thousands, except per share amounts)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 190,998 $ 180,771 $ 532,798 $ 522,545
Freight consolidation costs 113,413 111,041 313,635 319,006
--------- --------- --------- ---------
Net revenue 77,585 69,730 219,163 203,539
Other costs and expenses:
Salaries and related 39,710 36,194 114,214 108,468
Operating, selling and
administrative (Note 5) 38,081 24,438 89,377 71,276
--------- --------- --------- ---------
Total other costs and expenses 77,791 60,632 203,591 179,744
--------- --------- --------- ---------
Income (loss) from operations (206) 9,098 15,572 23,795
Other income:
Interest income, net 317 369 2,155 305
Income from affiliates, net 813 1,525 3,355 3,926
Other, net 404 294 1,225 772
--------- --------- --------- ---------
Total other income, net 1,534 2,188 6,735 5,003
--------- --------- --------- ---------
Income before taxes 1,328 11,286 22,307 28,798
Taxes on income 1,872 3,956 9,549 10,290
--------- --------- --------- ---------
Net income (loss) $ (544) $ 7,330 $ 12,758 $ 18,508
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.03) $ 0.43 $ 0.75 $ 1.10
========= ========= ========= =========
Diluted $ (0.03) $ 0.42 $ 0.74 $ 1.08
========= ========= ========= =========
Weighted average common
shares outstanding:
Basic 17,070 16,862 17,031 16,782
========= ========= ========= =========
Diluted 17,070 17,258 17,351 17,159
========= ========= ========= =========
Dividends declared per share $ -- $ -- $ 0.135 $ 0.135
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
3
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share amounts)
<TABLE>
September 30, December 31,
1998 1997
------------- ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and equivalents $ 37,291 $ 17,998
Short-term investments 14,528 34,494
Trade receivables, less allowance
for doubtful accounts of:
1998, $8,218; 1997, $7,816 247,632 223,367
Other receivables 6,292 5,006
Other current assets 8,660 11,264
--------- ---------
Total current assets 314,403 292,129
Property 158,224 141,518
Less accumulated depreciation (73,177) (67,405)
--------- ---------
Property, net 85,047 74,113
Goodwill 41,273 29,975
Less accumulated amortization (10,257) (7,961)
--------- ---------
Goodwill, net 31,016 22,014
Marketable securities available for sale 1,455 1,284
Investments in unconsolidated affiliates 42,469 40,487
Other assets 3,947 4,372
--------- ---------
Total assets $ 478,337 $ 434,399
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable to banks $ 5,711 2,847
Trade payables 173,599 153,644
Accrued salaries and related costs 12,991 11,217
Dividends payable -- 2,189
Income taxes payable 5,354 6,660
Other liabilities 33,212 15,301
--------- ---------
Total current liabilities 230,867 191,858
Minority interests 4,001 1,462
Deferred income taxes 13,633 12,405
Long-term notes payable 16,654 27,702
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $1 par: shares
authorized, 1,000,000 -- --
Common stock, $1 par: shares authorized,
40,000,000; shares issued and outstanding
1998, 17,071,548; 1997, 17,004,653 30,417 28,456
Retained earnings 198,502 188,014
Unrealized loss in value of marketable
securities, net (30) (9)
Cumulative translation adjustments (15,707) (15,489)
--------- ---------
Total stockholders' equity 213,182 200,972
--------- ---------
Total liabilities and stockholders' equity $ 478,337 $ 434,399
========= =========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
4
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
Nine Months Ended
September 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net income $ 12,758 $ 18,508
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,941 8,960
Gains on sales of assets (116) (684)
Deferred income taxes 1,228 6,896
Equity in earnings of affiliates,
net of dividends received (1,731) (3,293)
Net effect of changes in working capital 15,516 1,173
-------- --------
Net cash provided by operating activities 37,596 31,560
-------- --------
Investing activities:
Proceeds from sales of property 1,004 1,461
Proceeds from sales of marketable securities -- 6,660
Proceeds from sales/(purchases) of short-term
investments, net 19,966 (6,926)
Capital expenditures (8,757) (10,272)
Acquisitions of businesses (12,973) (1,942)
Other 44 (62)
-------- --------
Net cash used in investing activities (716) (11,081)
-------- --------
Financing activities:
Repayment of long-term notes payable, net (16,413) (5,918)
Increase (decrease) in notes payable 2,864 (4,877)
Payments of dividends (5,283) (4,399)
Proceeds from exercise of stock options 1,790 4,161
-------- --------
Net cash used in financing activities (17,042) (11,033)
-------- --------
Effect of exchange rate changes on cash (545) (3,032)
-------- --------
Increase in cash and equivalents 19,293 6,414
Cash and equivalents at beginning of period 17,998 31,564
-------- --------
Cash and equivalents at end of period $ 37,291 $ 37,978
======== ========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
Note 1 - General
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments (which include normal recurring
accruals) necessary to present fairly the financial position as of September 30,
1998 and the results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles. It is suggested that
these unaudited condensed consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Circle International Group, Inc. (the Company) 1997 Annual
Report to Stockholders incorporated by reference in the Company's 1997 Form
10-K, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Form 10-Q. All 1998 and 1997
information included in this Form 10-Q has been restated to reflect the
acquisition of Alrod International, Inc. that was accounted for as a pooling of
interests (See Note 4). Certain 1997 amounts have been reclassified to conform
to the 1998 presentation.
Note 2 - New Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". This Statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive income by their
nature in a financial statement. Other comprehensive income for the Company
includes cumulative translation adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale.
The Company's total comprehensive income was as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net Income (loss) $ (544) $ 7,330 $ 12,758 $ 18,508
Other comprehensive income (loss):
Change in cumulative
translation adjustments 1,377 (4,334) (218) (6,607)
Unrealized gains (losses)
on marketable securities, net (20) 78 (21) 385
------- ------- -------- --------
Comprehensive income $ 813 $ 3,074 $ 12,519 $ 12,286
======= ======= ======== ========
</TABLE>
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of this Statement will not impact
the Company's consolidated financial position, results of operations or cash
flows, and any effect will be limited to the form and content of disclosures.
The year-end reporting requirements of this Statement are effective for the
Company's fiscal year ending December 31, 1998, with earlier application
permitted. The interim reporting requirements of SFAS No. 131 are effective in
subsequent fiscal years.
6
<PAGE>
Note 3 - Business Segment Information
The Company operates in the international logistics services industry, which
encompasses air freight forwarding, ocean freight forwarding, customs brokerage
and other logistics services. Certain information regarding the Company's
operations by region is summarized as follows:
<TABLE>
Europe & Asia &
Middle South Elimi- Consoli-
Americas East Pacific Corporate nations dated
-------- -------- -------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Three months ended
September 30, 1998:
Total revenue $ 96,995 $ 44,679 $ 54,229 $ -- $(4,905) $190,998
Transfers
between regions (1,739) (1,137) (2,029) -- 4,905 --
-------- -------- -------- ------- ------- --------
Revenues from
customers $ 95,256 $ 43,542 $ 52,200 $ -- $ -- $190,998
======== ======== ======== ======= ======= ========
Net revenue $ 40,621 $ 21,235 $ 15,729 $ -- $ -- $ 77,585
======== ======== ======== ======= ======= ========
Income (loss)
from operations $ (1,037) 2,827 $ 1,527 $(3,523) $ -- $ (206)
======== ======== ======== ======= ======= ========
Three months ended
September 30, 1997:
Total revenue $105,016 $ 36,634 $ 44,860 $ -- $(5,739) $180,771
Transfers
between regions (2,618) (948) (2,173) -- 5,739 --
-------- -------- -------- ------- ------- --------
Revenues from
customers $102,398 $ 35,686 $ 42,687 $ -- $ -- $180,771
======== ======== ======== ======= ======= ========
Net revenue $ 39,683 $ 17,523 $ 12,524 $ -- $ -- $ 69,730
======== ======== ======== ======= ======= ========
Income (loss)
from operations $ 6,131 2,230 $ 2,531 $(1,794) $ -- $ 9,098
======== ======== ======== ======= ======= ========
Nine months ended
September 30, 1998:
Total revenue $289,603 $119,741 $136,167 $ -- $(12,713) $532,798
Transfers
between regions (4,906) (2,828) (4,979) -- 12,713 --
-------- -------- -------- ------- ------- --------
Revenues from
customers $284,697 $116,913 $131,188 $ -- $ -- $532,798
======== ======== ======== ======= ======= ========
Net revenue $119,744 $ 58,939 $ 40,480 $ -- $ -- $219,163
======== ======== ======== ======= ======= ========
Income (loss)
from operations $ 8,192 8,579 $ 5,691 $(6,890) $ -- $ 15,572
======== ======== ======== ======= ======= ========
Nine months ended
September 30, 1997:
Total revenue $313,896 $106,593 $116,914 $ -- $(14,858) $522,545
Transfers
between regions (6,080) (3,211) (5,567) -- 14,858 --
-------- -------- -------- ------- ------- --------
Revenues from
customers $307,816 $103,382 $111,347 $ -- $ -- $522,545
======== ======== ======== ======= ======= ========
Net revenue $116,273 $ 51,818 $ 35,448 $ -- $ -- $203,539
======== ======== ======== ======= ======= ========
Income (loss)
from operations $ 15,292 7,344 $ 6,633 $(5,474) $ -- $ 23,795
======== ======== ======== ======= ======= ========
</TABLE>
Revenue from transfers between regions represents approximate amounts that would
be charged if the services were provided by an unaffiliated company. Total
regional revenue is reconciled with total consolidated revenue by eliminating
inter-regional revenue.
7
<PAGE>
Note 4 - Acquisitions
On August 1, 1998, the Company acquired 100% of the outstanding shares of Alrod
International, Inc. (Alrod), a privately owned international freight forwarding
and customs brokerage company based on the West Coast of the U.S. In connection
with the acquisition, the Company issued 770,642 shares of common stock in
exchange for all of the outstanding stock of Alrod. The total purchase
consideration was $21.0 million, of which $1.0 million is to be held in escrow
subject to the resolution of certain pre-acquisition contingencies. The
acquisition was accounted for as a pooling of interests. All financial data for
1998 and 1997 included in this Form 10-Q has been restated to reflect the
acquisition of Alrod.
Summarized results of operations of the separate companies for the six months
ended June 30, 1998 are as follows (in thousands):
<TABLE>
Six Months Ended
June 30, 1998
----------
<S> <C>
Net revenues:
Circle International Group, Inc. $134,166
Alrod International, Inc. 7,412
--------
Combined $141,578
========
Net income:
Circle International Group, Inc. $ 13,043
Alrod International, Inc. 259
--------
Combined $ 13,302
========
</TABLE>
Note 5 - Special Charges
During the quarter ended September 30, 1998, the Company recorded special
charges of $10.7 million related to merger integration costs for Alrod
International, Inc., write-off of certain receivables at Circle Trade Services
as part of repositioning that business, certain charges related to Latin America
operations, facility consolidation, the write down of information technology
assets and employee severance costs. These charges are recorded in operating,
selling and administrative expenses.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained herein, the matters set forth in
this release are forward-looking statements that are dependent on certain risks
and uncertainties including but not limited to such factors as market demand,
risks associated with operations outside of the U.S. including currency
fluctuations, information technology uncertainties, changing economic conditions
including international laws, the concentration of business towards large
accounts, the effect of the Company's accounting policies and other risk factors
detailed in the Company's SEC filings.
Results of Operations
- - ---------------------
The Company's principal services are international air freight forwarding, ocean
freight forwarding, and customs brokerage and other value added logistics
services. The following table shows the revenue and net revenue, in dollars and
percentages, attributable to the Company's principal services during the periods
indicated. Revenue for air freight and ocean freight consolidations (indirect
shipments) includes the cost of such freight, whereas net revenue does not.
Revenue for air freight and ocean freight agency or direct shipments, customs
brokerage and import services, includes only the fees or commissions for these
services. A comparison of net revenue best measures the relative importance of
the Company's principal services.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(dollars in thousands)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
- - -------
Air freight
forwarding $123,900 65% $119,647 66% $345,192 65% $342,238 65%
Ocean freight
forwarding 31,333 16% 27,772 16% 83,434 16% 83,600 16%
Customs brokerage
and other 35,765 19% 33,352 18% 104,172 19% 96,707 19%
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total $190,998 100% $180,771 100% $532,798 100% $522,545 100%
============== ============== ============== ==============
Net Revenue
- - -----------
Air freight
forwarding $ 30,915 40% $ 26,812 38% $ 85,664 39% $ 78,879 39%
Ocean freight
forwarding 10,905 14% 9,566 14% 29,327 13% 27,953 14%
Customs brokerage
and other 35,765 46% 33,352 48% 104,172 48% 96,707 47%
-------------- -------------- -------------- --------------
Total $ 77,585 100% $ 69,730 100% $219,163 100% $203,539 100%
============== ============== ============== ==============
</TABLE>
Three Months ended September 30, 1998 vs 1997:
- - ----------------------------------------------
Revenue for the quarter was $191.0 million compared to $180.8 million for the
same period in 1997. Net revenue, which represents revenue less freight
consolidation costs, was up 11% to $77.6 million compared to $69.7 million in
the third quarter of 1997. Net revenue increased despite a negative effect from
foreign currency translation of approximately 5% resulting from a stronger U.S.
dollar when converting foreign currency net revenues into U.S. dollars for
financial reporting purposes.
Air freight forwarding revenue for the third quarter increased 4% to $123.9
million compared with $119.6 million for the comparable period in 1997. Air
freight forwarding net revenue increased 15% or $4.1 million over the prior
period due primarily to improved margins and shipment volume. In Asia Pacific,
the Company incurred higher shipment volumes. In Europe, the Company handled
higher volumes with higher margins. In North America, decreases in export
activity to Asia Pacific more than offset increases in volume shipped to other
parts of the world, which resulted in an overall reduction in North America air
freight forwarding revenue. This reduction in revenue was offset by lower
carrier costs thereby producing a higher overall margin.
Ocean freight forwarding revenue increased 13% or $3.6 million over the prior
year, while ocean freight forwarding net revenue increased 14% or $1.3 million.
The increases were due primarily to volume increases in Asia Pacific and Europe,
but partially offset by volume decreases in North America.
9
<PAGE>
Customs brokerage and other net revenue increased 7%, or $2.4 million for the
quarter. In Europe there was higher import activity which was partially offset
by lower import activity in Asia Pacific due to weakened local currencies.
Warehousing and distribution, and other revenue increased over the same period
last year.
Salaries and related costs increased 10% or $3.5 million principally as a result
of hiring more employees to serve new customers and to handle business growth.
However, salaries as a percentage of net revenues dropped one percentage point,
from 52% to 51%.
Operating, selling and administrative expenses increased 56% or $13.6 million
primarily due to $10.7 million of special charges previously discussed in Note
5. The remaining $2.9 million increase was due to an increase in occupancy costs
related to additional warehousing and distribution facilities as well as an
increase in professional fees and depreciation related to the upgrading of
computer systems and relocation of the information technology group supporting
the North America operations. There were also higher communication costs across
all regions, due to a higher volume of transactions.
Total other income, net, decreased $0.7 million due to lower income from
affiliates during the quarter. This decrease was due primarily to the effect of
the downturn in the Latin America and Asia Pacific economies on the Company's
automotive logistics affiliate.
The effective income tax rate for the third quarter was 141.0% compared to 35.1%
for the comparable period of 1997. The effective tax benefit from the special
charges previously discussed in Note 5 was 24.1% resulting in an overall
increase in the tax expense for the quarter. The effective tax rate for the
third quarter 1998 excluding the special charges was 37.0% and the change from
35.1% last year is the result of increasing our estimated tax rate on our
unconsolidated affiliates. The effective tax rate for 1998 is estimated based on
the geographic mix of taxable income and the tax effects of the special charges.
The third quarter 1998 net loss was $0.5 million, or $0.03 per share, compared
to $7.3 million, or $0.42 per share earned in the same period last year
principally due to the $10.7 million special charges as previously discussed in
Note 5.
Nine Months ended September 30, 1998 vs 1997:
- - ---------------------------------------------
Revenue for the first nine months was up 2% to $532.8 million compared to $522.5
million for the same period in 1997. Net revenue was up 8% to $219.2 million,
compared with $203.5 million in the first nine months of last year. Net revenue
increased despite a negative foreign exchange effect of approximately 6%
resulting from a stronger U.S. dollar when converting foreign currency net
revenues into U.S. dollars for financial reporting purposes.
Air freight forwarding revenue for the first nine months increased 1% to $345.2
million compared with $342.2 million for the comparable period in 1997. Air
freight forwarding net revenue increased 9% or $6.8 million over the prior
period due primarily to improved margins and increased shipment volume. In Asia
Pacific, the Company incurred higher shipment volumes. In Europe, the Company
handled higher volumes with higher margins. In North America, decreases in
export activity to Asia Pacific more than offset increases in volume shipped to
other parts of the world, which resulted in an overall reduction in air freight
forwarding revenue and net revenue for the region.
Ocean freight forwarding revenue decreased $0.2 million from the prior year,
while ocean freight forwarding net revenue increased $1.4 million or 5%. The
Company's North America operations experienced lower volumes as well as a shift
of export activity from Asia Pacific to other parts of the world, resulting in a
revenue decrease. The overall revenue decrease was offset by improved margins
from effective management of carrier costs resulting in an increase in ocean
freight net revenue.
Customs brokerage and other net revenue increased 8%, or $7.5 million for the
first nine months. In Europe there was higher import activity which was
partially offset by lower import activity in Asia Pacific due to weakened local
currencies. Warehousing and distribution, and other revenue increased over the
same period last year.
Salaries and related costs increased 5% or $5.7 million as a result of hiring
more employees to serve new customers and to handle business growth. However,
salaries as a percentage of net revenues dropped one percentage point from 53%
to 52%.
Operating, selling and administrative expenses increased 25% or $18.1 million
primarily due to $10.7 million of special charges previously discussed in Note
5. The remaining increase was due to an increase in occupancy costs related to
additional warehousing and distribution facilities as well as an increase in
professional fees and depreciation related to the upgrading of computer systems
and relocation of the information technology group supporting the North America
operations. There were also higher communication costs across all regions, due
to a higher volume of transactions.
10
<PAGE>
Total other income, net, increased $1.7 million. The Company reported interest
income, net, of $2.2 million for the first nine months of this year compared to
interest income, net of $0.3 million for the same period last year. The increase
in interest, net was attributable to interest income on IRS tax refunds and to a
reduction in the Company's debt levels. Income from affiliates for the first
nine months was 15% lower than the same period last year due in part to the
impact of the General Motors strike and the downturn in the Latin American and
Asian economies on the Company's automotive logistics affiliate. Other, net,
increased $0.5 million due primarily to overall foreign currency exchange net
gains in Asia Pacific.
The effective income tax rate for the nine months ended September 30, 1998 was
42.8% compared to 35.7% for the comparable period of 1997. The effective tax
benefit from the special charges previously discussed in Note 5 was 24.1%
resulting in an overall increase in the tax expense for the year. The effective
tax rate for the nine months ended 1998 excluding the special charges was 37.0%
and the change from 35.7% last year is the result of increasing our estimated
tax rate on our unconsolidated affiliates. The effective tax rate for 1998 is
estimated based on the geographic mix of taxable income and the tax effects of
the special charges.
Net income was $12.8 million, or $0.74 per share, down from $18.5 million, or
$1.08 per share in the comparable period last year principally due to the $10.7
million special charges as previously discussed in Note 5.
Liquidity and Capital Resources
- - -------------------------------
Net cash provided by operations increased to $37.6 million for the nine months
ended September 30, 1998, from $31.6 million during the same period last year.
The Company received $20.0 million from the sale of short-term investments for
the nine months ended September 30, 1998. The Company used cash of $13.0 million
to acquire businesses for the nine months ended September 30, 1998. The Company
reduced commercial paper issued and outstanding by $16.0 million, from $25.0
million as of December 31, 1997, to $9.0 million as of September 30, 1998.
Working capital decreased $15.5 million during the nine months ended September
30, 1998. This is primarily attributable to a reduction in other liabilities.
Capital expenditures for the Company for the nine months ended September 30,
1998, were $8.8 million and were funded by working capital. Capital expenditures
for the year are expected to be comparable to 1997, depending on lease vs. buy
opportunities.
Notes payable increased $2.9 million during the nine months ended September 30,
1998. This is primarily attributable to a $3.8 million overnight loan at quarter
end to cover the Company's daily cash position offset by the ongoing pay down of
current commercial paper obligations.
The semi-annual dividend of $0.135 per share declared in December 1997 was paid
in the first quarter of 1998 for a total of $2.2 million. The Board of Directors
declared a semi-annual cash dividend of $0.135 per share on June 29, 1998. This
dividend of $2.3 million was paid on September 15, 1998, to shareholders of
record August 14, 1998. Total dividends paid, including amounts to minority
interest shareholders, for the nine months ended September 30, 1998, was $5.3
million.
The Company makes significant disbursements on behalf of its customers for
transportation costs and customs duties. The billings to customers for these
disbursements, which are several times the amount of revenue and fees derived
from these transactions, are not recorded as revenue and expense on the
Company's operating statement, but are reflected in the Company's Trade
Receivables and Trade Payables.
Management believes that operating cash flows, the Company's current financial
structure and borrowing capacity will be adequate to fund its operations,
finance capital expenditures and acquisitions, and pay dividends to stockholders
over the coming year.
11
<PAGE>
Year 2000
- - ---------
General Discussion
- - ------------------
The following discussion of the implications of the Year 2000 problem for the
Company contains forward-looking statements based on inherently uncertain
information. The cost of Year 2000 compliance and the date on which the Company
plans to complete its Year 2000 modifications are based on the Company's best
estimates, which were derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ. Moreover,
although the Company believes it will be able to make the necessary
modifications in advance, there is no assurance that failure to modify the
systems would not have a material adverse effect on the Company.
The Company relies on several internal systems to support its freight
forwarding, custom brokerage, logistics management and warehouse management
systems worldwide. The Company is also reliant upon system capabilities of
customs offices, business partners, trading partners, customers, suppliers and
governmental agencies in many countries around the world.
The Company places a high degree of reliance on computer systems of such third
parties. Although the Company is assessing the readiness of these third parties
and preparing contingency plans, there can be no guarantee that the failure of
these third parties to modify their systems in advance of December 31, 1999,
would not have a material adverse effect on the Company.
Readiness
- - ---------
A Year 2000 Program Management Office has been established to provide overall
direction of the Company's Year 2000 efforts worldwide. Internal management
reporting requirements have been established. Plans and progress against those
plans are reviewed by the Year 2000 Program Management Office and are reported
to the Chief Information Officer and the Board of Directors. The core business
systems that support the Company in each geographic region have been assessed
for Year 2000 compliance and are undergoing upgrades to become Year 2000
compliant. These upgrades to core business systems, including testing and
certification, are expected to be completed by September 1999.
The Company has plans for an independent site validation that will result in a
Year 2000 Readiness Health Check of all computing resources and non-IT devices
located in branch offices worldwide. Mission critical branch office systems and
mission critical devices are expected to be renovated or replaced by September
1999.
The Company has accelerated its communication with third parties to determine
the extent to which the Company's systems are vulnerable to the non-compliance
of these third party systems. Contact information for various customs offices
will be gathered and Year 2000 efforts of customs offices will be closely
monitored. The Company plans to conduct systems testing with business partners,
trading partners, suppliers and key governmental agencies during calendar year
1999. Additionally, the Company is participating with software vendor's user
groups in Year 2000 testing of the three core business systems used by the
Company. Despite written assurances there is no certainty that the systems of
various third parties will be compliant.
Costs
- - -----
Because of the potential overall impact of Year 2000 on the Company, the Company
has adopted a centralized corporate strategy to address the Year 2000 problem.
This corporate strategy is budgeted and managed from headquarters and is the
responsibility of the Chief Information Officer.
Year 2000 costs are estimated to be $5.8 million through the end of 1999 with an
additional $1.4 million estimated for post-Year 2000 work that is deemed
non-mission critical. Approximately $3.0 million of this estimate is allocated
to testing, including end-to-end testing with business partners, trading
partners, critical suppliers and governmental agencies. Approximately $1.0
million is allocated to business contingency planning. The expected funding of
all Year 2000 costs is through operational cash flows.
Included in the estimated costs for Year 2000 readiness are the costs of the
Year 2000 Health Check to assess branch office systems and non-IT devices, the
replacement of mission critical devices, the replacement or modification of
application software and the implementation of contingency plans.
12
<PAGE>
Risks
- - -----
Because of the significant reliance on the systems of third parties unaffiliated
with the Company, there can be no assurance that the Company will not experience
some disruption in its systems. In the event the Company's systems or the
systems of third parties that are critical to the Company's business are not
Year 2000 compliant by January 1, 2000, the Company's business performance may
be adversely affected.
Certain of the Company's systems may need to operate in a manual mode for some
limited time. The Company will work closely with customers and business partners
to minimize the impact of manual operations on service levels. The Company
believes the greater risk is with the potential non-compliance of third party
systems, a risk which is inherent to the industry. The Company is unable to
estimate the financial impact of the risks stated above. However, the Company
believes that its initiatives to solve the Year 2000 problem, and a
comprehensive business contingency plan, should reduce the possibility of a
material adverse effect on business operations.
Of all the external risks, the Company believes the most reasonably likely worst
case scenario would be a business disruption resulting from an extended
communications failure. With its extensive use of technology, the Company is
dependent upon data and voice communications to receive, process, track and bill
customer orders. Based on the Company's information regarding the readiness of
communication carriers, as well as the Company's contingency plans, the Company
expects that any such disruption would be localized and of short duration.
Contingency Planning
- - --------------------
Contingency planning for business continuity will be led by a member of
corporate senior management. Each geographic region's contingency plans will
reflect the areas of risk that are unique to a particular region or country.
Each branch, country and region will be required to prepare a detailed
Contingency Plan and procedures that address the following:
o Communication plan (or "telephone tree");
o Priority operations and performance thresholds;
o Emergency instructions for extended outages (includes activation of a
"hot site");
o Special security instructions;
o Identification of responsibilities: recovery team director, recovery
team command center, command center coordinator, recovery team
leaders, recovery team members, damage assessment teams, plan
activation process (notification and activation authority);
o Identification of minimum infrastructure capabilities to operate a
location: computer hardware, network infrastructure, software,
physical facilities, utilities, vendor support, personnel and embedded
systems;
o Assure on-hand inventories of mission critical supplies;
o An assessment of the organization's direct suppliers to determine
those that are "high risk";
o Identification of the "weak link" in each critical supply chain.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet applicable.
13
<PAGE>
II. OTHER INFORMATION
- - ----------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11.1, Computation of Earnings Per Share, EDGAR
filing only.
Exhibit 27, Financial Data Schedule, EDGAR filing only.
(b) Form 8-K:
The Company did not file any reports on Form 8-K during the
three months ended September 30, 1998.
14
<PAGE>
S I G N A T U R E S
-------------------
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.
CIRCLE INTERNATIONAL GROUP, INC.
--------------------------------
Registrant
Dated: November 16, 1998
/S/ David I. Beatson
------------------------------------
David I. Beatson,
President and Chief Executive Officer
/S/ Janice Kerti
------------------------------------
Janice Kerti, Senior Vice President
and Chief Financial Officer
15
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (544) $ 7,330 $ 12,758 $ 18,508
-------- -------- -------- --------
Weighted average common shares
outstanding during the period 17,070 16,862 17,031 16,782
-------- -------- -------- --------
Net income (loss) per share - basic $ (0.03) $ 0.43 $ 0.75 $ 1.10
======== ======== ======== ========
Weighted average common shares
outstanding during the period 17,070 16,862 17,031 16,782
Incremental number of shares
from assumed exercise of
stock options (1) -- 396 320 377
-------- -------- -------- --------
17,070 17,258 17,351 17,159
Net income (loss) per
share - diluted $ (0.03) $ 0.42 $ 0.74 $ 1.08
======== ======== ======== ========
(1) In loss periods, stock options are antidilutive and therefore are excluded
from earnings per share calculations.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
Circle International Group, Inc. and Subsidiaries
(in thousands, except per share amounts)
This schedule contains summary financial information extracted from the
condensed consolidated financial statements from the Company's Form 10-Q for the
nine month period ending September 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000045674
<NAME> Circle International Group, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 37,291
<SECURITIES> 14,528
<RECEIVABLES> 247,632
<ALLOWANCES> 8,218
<INVENTORY> 0
<CURRENT-ASSETS> 314,403
<PP&E> 158,224
<DEPRECIATION> 73,177
<TOTAL-ASSETS> 478,337
<CURRENT-LIABILITIES> 230,867
<BONDS> 0
0
0
<COMMON> 30,417
<OTHER-SE> 182,765
<TOTAL-LIABILITY-AND-EQUITY> 478,337
<SALES> 0
<TOTAL-REVENUES> 532,798
<CGS> 0
<TOTAL-COSTS> 313,635
<OTHER-EXPENSES> 203,591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,371
<INCOME-PRETAX> 22,307
<INCOME-TAX> 9,549
<INCOME-CONTINUING> 12,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,758
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.74
</TABLE>
