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 June 30, 1999
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 August 12, 1999, the number of shares outstanding of the registrant's Common
Stock was 17,250,455.
<PAGE>
TABLE OF CONTENTS
-----------------
Part I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements:
-------
Condensed Consolidated Income
Statements for the three and six months
ended June 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets,
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
-------
Financial Condition and Results of
Operations 8
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 13
-------
Item 5. Other Information 13
-------
Item 6. Exhibits and Reports on Form 8-K 13
-------
2
<PAGE>
I. FINANCIAL INFORMATION
- ------------------------
ITEM 1. FINANCIAL STATEMENTS
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue $195,215 $174,760 $378,068 $340,172
Freight consolidation costs 113,764 101,755 220,451 198,594
--------- --------- --------- ---------
Net revenue 81,451 73,005 157,617 141,578
Other costs and expenses:
Salaries and related 42,516 36,949 84,773 74,504
Operating, selling and administrative 33,172 26,674 64,832 51,296
--------- --------- --------- ---------
Total other costs and expenses 75,688 63,623 149,605 125,800
--------- --------- --------- ---------
Income from operations 5,763 9,382 8,012 15,778
Other income:
Interest income, net 98 1,165 173 1,838
Income from affiliates, net 1,202 1,244 1,706 2,542
Other, net 528 469 652 821
--------- --------- --------- ---------
Total other income, net 1,828 2,878 2,531 5,201
--------- --------- --------- ---------
Income before taxes 7,591 12,260 10,543 20,979
Taxes on income 2,771 4,403 3,848 7,677
--------- --------- --------- ---------
Net income $ 4,820 $ 7,857 $ 6,695 $ 13,302
========= ========= ========= =========
Net income per share:
Basic $ 0.28 $ 0.46 $ 0.39 $ 0.78
========= ========= ========= =========
Diluted $ 0.28 $ 0.45 $ 0.39 $ 0.77
========= ========= ========= =========
Weighted average common
shares outstanding:
Basic 17,148 17,026 17,130 17,011
========= ========= ========= =========
Diluted 17,269 17,383 17,218 17,353
========= ========= ========= =========
Dividends declared per share $ 0.135 $ 0.135 $ 0.135 $ 0.135
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share amounts)
June 30, December 31,
1999 1998
----------- ------------
ASSETS
------
Current assets:
Cash and equivalents $ 33,505 $ 44,586
Short-term investments 14,653 14,213
Trade receivables, less allowance for doubtful
accounts of: 1999, $6,658; 1998, $7,131 256,805 252,615
Other receivables 8,573 7,765
Other current assets 8,316 7,820
---------- ----------
Total current assets 321,852 326,999
Property and equipment 164,158 163,997
Less accumulated depreciation (77,783) (75,809)
---------- ----------
Property and equipment, net 86,375 88,188
Marketable equity securities 777 935
Investments in unconsolidated affiliates 46,080 42,967
Goodwill, net 29,734 30,727
Other assets 3,825 3,913
---------- ----------
Total assets $ 488,643 $ 493,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable to banks 3,187 7,869
Trade payables 174,148 175,532
Accrued salaries and related costs 14,255 15,582
Dividends payable 2,322 2,312
Income taxes payable 4,894 7,292
Other liabilities 19,592 24,984
---------- ----------
Total current liabilities 218,398 233,571
Minority interests 5,986 4,546
Deferred income taxes 14,619 14,342
Long-term notes payable 27,508 21,558
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
1999, 17,196,980; 1998, 17,131,994 31,856 30,822
Retained earnings 206,279 201,907
Accumulated other comprehensive loss (16,003) (13,017)
---------- ----------
Total stockholders' equity 222,132 219,712
---------- ----------
Total liabilities and stockholders' equity $ 488,643 $ 493,729
========== ==========
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months Ended
June 30,
1999 1998
---------- ----------
Operating activities:
Net income $ 6,695 $ 13,302
Cash provided by operating activities:
Depreciation and amortization 7,494 6,436
Provision for doubtful accounts 1,849 2,071
Deferred income taxes 420 1,031
Gains on sales of assets (762) (142)
Equity in earnings of affiliates, net
of dividends received (639) (1,729)
Net effect of changes in working capital (15,524) 7,847
---------- ----------
Net cash provided by (used in) operating activities (467) 28,816
---------- ----------
Investing activities:
Proceeds from sales of property 2,399 588
Proceeds from sales of marketable
equity securities 500 -
Net proceeds from sales (purchases)
of short-term investments (723) 16,001
Capital expenditures (9,526) (4,803)
Acquisitions of businesses, net (1,878) (12,722)
Other - 67
---------- ----------
Net cash used in investing activities (9,228) (869)
---------- ----------
Financing activities:
Issuance (repayment) of long-term
notes payable 5,950 (15,298)
Repayment of notes payable (4,682) (962)
Dividends (2,313) (2,193)
Proceeds from exercise of stock options 1,022 935
---------- ----------
Net cash used in financing activities (23) (17,518)
Effect of exchange rate changes on cash (1,363) (612)
---------- ----------
Increase (decrease) in cash and equivalents (11,081) 9,817
Cash and equivalents at beginning of period 44,586 17,997
---------- ----------
Cash and equivalents at end of period $ 33,505 $ 27,814
========== ==========
See Notes to Condensed Consolidated Financial Statements
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 June 30, 1999
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. (Circle) 1998 Annual Report to
Stockholders incorporated by reference in Circle's 1998 Form 10-K, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Form 10-Q. Certain 1998 amounts have been
reclassified to conform to the 1999 presentation.
Note 2 - Comprehensive Income
Other comprehensive income represents foreign currency translation adjustments
and unrealized gains and losses on marketable securities classified as
available-for-sale incurred during the respective quarters.
Circle's total comprehensive income was as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net income $ 4,820 $ 7,857 $ 6,695 $13,302
Other comprehensive income (loss):
Change in cumulative
translation adjustments (489) (2,055) (3,025) (1,595)
Unrealized gains (losses)
on marketable securities, net (1) (4) 39 (1)
--------- --------- --------- ---------
Comprehensive income $ 4,330 $ 5,798 $ 3,709 $11,706
========= ========= ========= =========
Note 3 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which defines
derivatives, requires that derivatives be carried at fair value and provides for
hedge accounting when certain conditions are met. This statement is effective
for Circle beginning in the year 2001. Circle believes adoption of this
statement will not have a material impact on its consolidated financial
statements.
6
<PAGE>
Note 4 - Business Segment Information
Circle's reportable segments are geographic segments that offer similar products
and services. They are managed separately because each segment requires close
customer contact and each segment is affected by similar economic conditions.
Certain information regarding Circle's operations by region is summarized below.
<TABLE>
<CAPTION>
Europe & Asia &
Middle South Elimi- Consoli-
Americas East Pacific Corporate nations dated
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Three months ended June 30, 1999:
Total revenue $ 90,328 $ 46,813 $ 63,968 $ - $ (5,894) $ 195,215
Transfers between regions (2,138) (1,574) (2,182) - 5,894 -
---------- ---------- ---------- ---------- ---------- ----------
Revenues from customers $ 88,190 $ 45,239 $ 61,786 $ - $ - $ 195,215
========== ========== ========== ========== ========== ==========
Net revenue $ 41,646 $ 21,989 $ 17,816 $ - $ - $ 81,451
========== ========== ========== ========== ========== ==========
Income (loss) from
operations $ 6,360 $ 3,646 $ 3,717 $ (7,960) $ - $ 5,763
========== ========== ========== ========== ========== ==========
Three months ended June 30, 1998:
Total revenue $ 96,414 $ 39,714 $ 42,719 $ - $ (4,087) $ 174,760
Transfers between regions (1,563) (1,037) (1,487) - 4,087 -
---------- ---------- ---------- ---------- ---------- ----------
Revenues from customers $ 94,851 $ 38,677 $ 41,232 $ - $ - $ 174,760
========== ========== ========== ========== ========== ==========
Net revenue $ 40,126 $ 19,718 $ 13,161 $ - $ - $ 73,005
========== ========== ========== ========== ========== ==========
Income (loss) from
operations $ 8,715 $ 3,484 $ 2,148 $ (4,965) $ - $ 9,382
========== ========== ========== ========== ========== ==========
Six months ended June 30, 1999:
Total revenue $ 180,586 $ 88,514 $ 119,931 $ - $ (10,963) $ 378,068
Transfers between regions (3,351) (3,256) (4,356) - 10,963 -
---------- ---------- ---------- ---------- ---------- ----------
Revenues from customers $ 177,235 $ 85,258 $ 115,575 $ - $ - $ 378,068
========== ========== ========== ========== ========== ==========
Net revenue $ 80,738 $ 42,435 $ 34,444 $ - $ - $ 157,617
========== ========== ========== ========== ========== ==========
Income (loss) from
operations $ 11,525 $ 6,208 $ 6,206 $ (15,927) $ - $ 8,012
========== ========== ========== ========== ========== ==========
Six months ended June 30, 1998:
Total revenue $ 192,607 $ 75,063 $ 80,311 $ - $ (7,809) $ 340,172
Transfers between regions (3,126) (1,694) (2,989) - 7,809 -
---------- ---------- ---------- ---------- ---------- ----------
Revenues from customers $ 189,481 $ 73,369 $ 77,322 $ - $ - $ 340,172
========== ========== ========== ========== ========== ==========
Net revenue $ 79,123 $ 37,704 $ 24,751 $ - $ - $ 141,578
========== ========== ========== ========== ========== ==========
Income (loss) from
operations $ 14,854 $ 5,751 $ 4,164 $ (8,991) $ - $ 15,778
========== ========== ========== ========== ========== ==========
</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>
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 report 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, and other risk factors detailed in this and other of Circle's SEC
filings.
Results of Operations
- ---------------------
Circle's principal services are international air freight forwarding, ocean
freight forwarding, and customs brokerage and other value added logistics
services. The following table provides the revenue and net revenue, in thousands
of dollars and percentages, attributable to Circle'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 Circle's principal services.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Air freight forwarding $125,829 64% $113,757 65% $245,046 65% $221,292 65%
Ocean freight forwarding 32,009 17% 25,948 15% 59,404 16% 50,473 15%
Customs brokerage and other 37,377 19% 35,055 20% 73,618 19% 68,407 20%
--------------- --------------- --------------- ---------------
Total $195,215 100% $174,760 100% $378,068 100% $340,172 100%
=============== =============== =============== ===============
Net Revenue
Air freight forwarding $ 31,980 39% $ 28,439 39% $ 61,615 39% $ 54,749 39%
Ocean freight forwarding 12,094 15% 9,511 13% 22,384 14% 18,422 13%
Customs brokerage and other 37,377 46% 35,055 48% 73,618 47% 68,407 48%
--------------- --------------- --------------- ---------------
Total $ 81,451 100% $ 73,005 100% $157,617 100% $141,578 100%
=============== =============== =============== ===============
</TABLE>
Three Months ended June 30, 1999 vs 1998:
- -----------------------------------------
Revenue for the quarter increased 12% to $195.2 million compared to $174.8
million for the same period in 1998. Net revenue, which represents revenue less
freight consolidation costs, increased 12% to $81.5 million compared to $73.0
million in the second quarter of 1998. 45% of the net revenue increase was due
to acquisitions that included Concord Express in Singapore and F.J. Tytherleigh
in the U.K., which occurred in June and July of 1998, respectively. The
remaining increase in net revenue occurred primarily due to growth in Asia
Pacific and Europe. These increases were partially offset by decreases in North
America where revenues declined 6% primarily due to the effects of the economic
crisis in Asia.
Air freight forwarding revenue for the quarter increased 11% or $12.1 million as
a result of shipment volume increases in Europe and Asia Pacific. These
increases were partially offset by volume reductions in North America where
Circle handled fewer shipments due primarily to decreased export activity to
Asia Pacific. Air freight forwarding net revenue increased 12% or $3.5 million.
Europe and Asia Pacific increases were primarily due to an increased number of
shipments while North America increases were provided by higher margins due to
lower carrier costs, which was partially offset by lower shipment volume.
8
<PAGE>
Ocean freight forwarding revenue increased 23% or $6.1 million over the same
quarter last year, while ocean freight forwarding net revenue increased 27% or
$2.6 million. The increases were due primarily to volume increases in Asia
Pacific and Europe, but partially offset by shipment volume decreases in North
America.
Customs brokerage and other net revenue, which includes warehousing,
distribution and other logistics services, increased 7%, or $2.3 million.
Warehousing and distribution revenues increased in Europe and Asia Pacific, but
declined in North America due to some customers moving logistics services in
house.
Salaries and related costs increased 15% or $5.6 million. Salaries as a
percentage of net revenue increased from 51% to 52%. Operating, selling, and
administrative expenses increased 24% or $6.5 million. These increases were due
to acquisitions that included F.J. Tytherleigh and Concord Express and strategic
management initiatives. The strategic management initiatives include developing
sales, upgrading our information technology and ensuring Year 2000 compliance.
Under the new sales development program, Circle has expanded its sales force,
and implemented a structured sales administration and management program, which
have doubled the corporate-level bid volume over the same period last year.
Circle's information technology initiatives include offering customers Extranet
applications, including document imaging and EDI capabilities, that will improve
customer connectivity as well as upgrades to our operations and accounting
applications. The strategic management initiatives amounted to $1.6 million or
29% of the $5.6 million salary and related cost increase and $3.3 million or 51%
of the $6.5 million operating, selling, and administrative increase. The
acquisitions accounted for 23% of the $5.6 million salary and related cost
increase and 19% of the $6.5 million operating, selling, and administrative
increase.
Total other income, net, decreased $1.1 million during the quarter due to a
decrease in foreign exchange gains resulting from a stabilization of Asia
Pacific currencies, a $0.8 million gain on the sale of the perishables
distribution business in New Zealand, and a reduction in interest income, net.
The decrease in interest income, net, resulted from reduced short-term
investments that were liquidated to fund acquisitions in 1998, IRS tax refund
interest received in 1998 and higher interest expense from increased average
borrowing in 1999. Income from our automotive logistics affiliate was
substantially unchanged from the second quarter of 1998 and has improved
compared to the first three months of 1999.
The effective income tax rate for the second quarter was 36.5% compared to 35.9%
for the comparable period in 1998. Circle's effective tax rate fluctuates due to
changes in foreign tax rates and regulations and level of pre-tax profit in
foreign countries.
Six Months ended June 30, 1999 vs 1998:
- ---------------------------------------
Revenue for the first six months increased 11% to $378.1 million compared to
$340.2 million for the same period in 1998. Net revenue, which represents
revenue less freight consolidation costs, increased 11% to $157.6 million
compared to $141.6 million in the first six months of 1998. 45% of the net
revenue increase was due to acquisitions that included Concord Express in
Singapore and F.J. Tytherleigh in the U.K., which occurred in June and July of
1998, respectively. The remaining increase in net revenue occurred primarily due
to growth in Asia Pacific and Europe. These increases were partially offset by
decreases in North America where revenues declined 5% primarily due to the
effects of the economic crisis in Asia.
Air freight forwarding revenue for the first six months increased 11% or $23.8
million as a result of shipment volume increases in Europe and Asia Pacific.
These increases were partially offset by volume reductions in North America
where Circle handled fewer shipments due primarily to decreased export activity
to Asia Pacific. Air freight forwarding net revenue increased 13% or $6.9
million, consisting of increases in Europe and Asia Pacific primarily due to an
increased number of shipments, and increases in North America as a result of
higher margins due to lower carrier costs, which was partially offset by lower
shipment volume.
Ocean freight forwarding revenue increased 18% or $8.9 million over the first
six months of last year, while ocean freight forwarding net revenue increased
22% or $4.0 million. The increases were due primarily to volume increases in
Asia Pacific and Europe, partially offset by shipment volume decreases in North
America.
Customs brokerage and other net revenue which includes warehousing, distribution
and other logistics services increased 8%, or $5.2 million. Warehousing and
distribution revenues increased in Europe and Asia Pacific, but declined in
North America due to some customers moving logistics services in house.
9
<PAGE>
Salaries and related costs increased 14% or $10.3 million. Salaries as a
percentage of net revenue increased from 53% to 54%. Operating, selling, and
administrative expenses increased 26% or $13.5 million. These increases were due
to acquisitions that included F.J. Tytherleigh and Concord Express and strategic
management initiatives. The strategic management initiatives include developing
sales, upgrading our information technology and ensuring Year 2000 compliance.
Under the new sales development program, Circle has expanded its sales force,
and implemented a structured sales administration and management program, which
have doubled the corporate-level bid volume over the same period last year.
Circle's information technology initiatives include offering customers Extranet
applications, including document imaging and EDI capabilities, that will improve
customer connectivity as well as upgrades to our operations and accounting
applications. The strategic management initiatives amounted to $3.0 million or
29% of the $10.3 million salary and related cost increase and $7.2 million or
53% of the $13.5 million operating, selling, and administrative increase. The
acquisitions accounted for 27% of the $10.3 million salary and related cost
increase and 19% of the $13.5 million operating, selling, and administrative
increase.
Total other income, net, decreased $2.7 million during the first six months of
1999 due to lower income from affiliates, a reduction in interest income, net,
and a $0.8 million gain on the sale of the perishables distribution business in
New Zealand. The decrease in income from affiliates primarily occurred in the
first quarter of 1999 when compared to 1998 and was due primarily to the effect
of the downturn in the Latin America and Asia economies on Circle's automotive
logistics affiliate. This downturn started in the third quarter of 1998. The
decrease in interest income, net, resulted from reduced short-term investments
that were liquidated to fund acquisitions in 1998, IRS tax refund interest
received in 1998 and higher interest expense from increased average borrowing in
1999.
The effective income tax rate for the first six months of 1999 was 36.5%
compared to 36.6% for the comparable period in 1998. Circle's effective tax rate
fluctuates due to changes in foreign tax rates and regulations and level of
pre-tax profit in foreign countries.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $0.5 million for the six months ended
June 30, 1999, compared to $28.8 million provided by operating activities during
the same period in 1998. This was primarily caused by lower net income and an
increase in net working capital. Net working capital increased $15.5 million
during the six months ended June 30, 1999. The increase is primarily due to the
timing of receipts and disbursements and a reduction in tax provisions due to
lower taxable income.
Cash used in investing activities for the six months ended June 30, 1999, was
$9.2 million compared to $0.9 million during the same period last year. Capital
expenditures for Circle during the period were $9.5 million. Circle expects
capital expenditures to increase throughout 1999 in line with our information
technology initiatives.
Cash used in financing activities for the six months ended June 30, 1999, was
$23,000 compared to $17.5 million during the same period last year. Long-term
notes payable increased $6.0 million due to the increase of commercial paper
issued and outstanding from $14.0 million as of December 31, 1998, to $20.0
million as of June 30, 1999. Notes payable decreased $4.7 million during the
first six months of this year. This is primarily attributable to fluctuations in
overnight loan balances used to cover Circle's daily cash position at certain
locations. The semi-annual dividend of $0.135 per share declared in December
1998 was paid in the first quarter of 1999 for a total of $2.3 million. A
semi-annual dividend of $0.135 per share declared in June 1999 for a total of
$2.3 million will be paid in September 1999.
Circle 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 Circle's
income statement, but are reflected in Circle's trade receivables and trade
payables.
Management believes that operating cash flows, Circle'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.
New Accounting Pronouncements
- -----------------------------
See Note 3 of the Notes to Condensed Consolidated Financial Statements for a
description of new accounting pronouncements which includes management's
discussion and analysis of new accounting pronouncements.
10
<PAGE>
YEAR 2000
- ---------
General Discussion
- ------------------
The following discussion of the implications of the Year 2000 problem for Circle
contains forward-looking statements based on inherently uncertain information.
The cost of Year 2000 compliance and the date on which Circle plans to complete
its Year 2000 modifications are based on Circle'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
Circle believes it will be able to make the necessary modifications, there is no
assurance that failure to modify the systems would not have a material adverse
effect on Circle. Circle relies on several internal systems to support its
freight forwarding, customs brokerage, logistics management and warehouse
management systems worldwide.
Circle is also reliant upon system capabilities of customs offices, business
partners, trading partners, customers, suppliers and governmental agencies in
many countries around the world. Circle places a high degree of reliance on
computer systems of such third parties. Although Circle 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
Circle.
Readiness
- ---------
A Year 2000 Program Management Office has been established to provide overall
direction of Circle'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 Circle 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.
Circle has plans for a comprehensive 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.
Circle has accelerated its communication with third parties to determine the
extent to which Circle'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.
Circle plans to conduct systems testing with business partners, trading
partners, suppliers and key governmental agencies during calendar year 1999.
Additionally, Circle is participating with software vendors' user groups in Year
2000 testing of the three core business systems used by Circle. We have done
independent validation of third party software vendors to further demonstrate
Year 2000 readiness. As an additional measure, we have identified multiple
solutions to provide Year 2000 readiness in areas where third party software is
used. There is no certainty that the systems of various third parties will be
compliant, and there is some likelihood that the systems of third parties such
as overseas governmental agencies will not be Year 2000 ready.
Costs
- -----
Because of the potential overall impact of Year 2000 on Circle, Circle 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 between $8.0 and $10.0 million through the
end of 1999 with an additional $1.0 to $2.0 million estimated for post-Year 2000
work that is deemed non-mission critical. Approximately $3.8 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 cash flows from operations.
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.
11
<PAGE>
Actual Costs as of June 30, 1999
- --------------------------------
For the three and six months ended June 30, 1999, Circle has incurred $3.0
million and $6.2 million, respectively, in costs specifically directed to the
Year 2000 remediation. These amounts do not include costs incurred in the
development of new systems or systems replacement that assisted in the
retirement of non-compliant code.
Risks
- -----
Because of the significant reliance on the systems of third parties unaffiliated
with Circle, there can be no assurance that Circle will not experience some
disruption in its systems. In Circle's opinion, there is likely to be some
interruption in services as a result of non-compliance by third parties. In the
event Circle's systems or the systems of third parties that are critical to
Circle's business are not Year 2000 compliant by January 1, 2000, Circle's
business performance may be adversely affected.
Certain of Circle's systems may need to operate in a manual mode for some
limited time. Circle will work closely with customers and business partners to
minimize the impact of manual operations on service levels. Circle believes the
greater risk is with the potential non-compliance of third party systems, a risk
which is inherent to the industry. Circle is unable to estimate the financial
impact of the risks stated above. However, Circle 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, Circle 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, Circle is
dependent upon data and voice communications to receive, process, track and bill
customer orders. Based on Circle's information regarding the readiness of
communication carriers, as well as Circle's contingency plans, Circle expects
that any such disruption would be localized and of short duration.
Contingency Planning
- --------------------
Contingency planning for business continuity is 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;
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 Assurance of 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.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in exposure to market risk from that
discussed in Circle's 1998 annual report.
II. OTHER INFORMATION
- ----------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on May 11, 1999.
David I. Beatson and Wesley J. Fastiff were elected as directors,
as tabulated below:
Against or
Election of Directors For Withheld
--------------------- --- ----------
David I. Beatson 12,759,662 725,178
Wesley J. Fastiff 12,758,047 726,793
In addition, Peter Gibert, Edwin J. Holman, John M. Kaiser, John
M. Lillie and Ray C. Robinson Jr. will continue as directors.
Additionally, the voting results of a proposal to approve the
adoption of the Employee Stock Purchase Plan were as follows:
Against or
For Withheld
--- ----------
Approve issuance of up to 250,000
shares of Common Stock for the purpose
of an Employee Stock Purchase Plan 13,598,674 419,028
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27, Financial Data Schedule, EDGAR filing only.
(b) Form 8-K:
Circle did not file any reports on Form 8-K during the three
months ended June 30, 1999.
13
<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: August 16, 1999
/S/ David I. Beatson
---------------------------------------
David I. Beatson, President
and Chief Executive Officer
/S/ Janice Kerti
---------------------------------------
Janice Kerti, Senior Vice President
and Chief Financial Officer
14
<PAGE>
<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 Circle's form 10-Q for the six
month period ending June 30, 1999, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 33,505
<SECURITIES> 14,653
<RECEIVABLES> 256,805
<ALLOWANCES> 6,658
<INVENTORY> 0
<CURRENT-ASSETS> 321,852
<PP&E> 164,158
<DEPRECIATION> 77,783
<TOTAL-ASSETS> 488,643
<CURRENT-LIABILITIES> 218,398
<BONDS> 0
0
0
<COMMON> 31,856
<OTHER-SE> 190,276
<TOTAL-LIABILITY-AND-EQUITY> 488,643
<SALES> 0
<TOTAL-REVENUES> 378,068
<CGS> 0
<TOTAL-COSTS> 220,451
<OTHER-EXPENSES> 149,605
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,206
<INCOME-PRETAX> 10,543
<INCOME-TAX> 3,848
<INCOME-CONTINUING> 6,695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,695
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
</TABLE>
