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, 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 November 11, 1999, the number of shares outstanding of the registrant's
Common Stock was 17,308,805.
<PAGE>
TABLE OF CONTENTS
-----------------
Part I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements:
-------
Condensed Consolidated Income
Statements for the three and nine months
ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets,
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 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
-------
Page 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)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue $204,963 $190,799 $583,031 $530,971
Freight consolidation costs 121,381 113,214 341,832 311,808
--------- --------- --------- ---------
Net revenue 83,582 77,585 241,199 219,163
Other costs and expenses:
Salaries and related 42,510 39,710 127,283 114,214
Operating, selling and administrative 32,311 38,081 97,143 89,377
--------- --------- --------- ---------
Total other costs and expenses 74,821 77,791 224,426 203,591
--------- --------- --------- ---------
Income (loss) from operations 8,761 (206) 16,773 15,572
Other income (expense):
Interest income (expense), net (35) 317 138 2,155
Income from affiliates, net 1,338 813 3,044 3,355
Other, net 582 404 1,235 1,225
--------- --------- --------- ---------
Total other income, net 1,885 1,534 4,417 6,735
--------- --------- --------- ---------
Income before taxes 10,646 1,328 21,190 22,307
Taxes on income 3,886 1,872 7,734 9,549
--------- --------- --------- ---------
Net income (loss) $ 6,760 $ (544) $ 13,456 $ 12,758
========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.39 $ (0.03) $ 0.78 $ 0.75
========= ========= ========= =========
Diluted $ 0.39 $ (0.03) $ 0.78 $ 0.74
========= ========= ========= =========
Weighted average common
shares outstanding:
Basic 17,241 17,070 17,168 17,031
========= ========= ========= =========
Diluted 17,502 17,070 17,314 17,351
========= ========= ========= =========
Dividends declared per share $ - $ - $ 0.135 $ 0.135
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
Page 3
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share amounts)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
------
Current assets:
Cash and equivalents $ 38,582 $ 44,586
Short-term investments 14,403 14,213
Trade receivables, less allowance for doubtful
accounts of: 1999, $6,875; 1998, $7,131 269,313 252,615
Other receivables 9,417 7,765
Other current assets 8,937 7,820
---------- ----------
Total current assets 340,652 326,999
Property and equipment 171,917 163,997
Less accumulated depreciation (81,396) (75,809)
---------- ----------
Property and equipment, net 90,521 88,188
Marketable equity securities 734 935
Investments in unconsolidated affiliates 47,319 42,967
Goodwill, net 29,556 30,727
Other assets 4,178 3,913
---------- ----------
Total assets $ 512,960 $ 493,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable to banks $ 12,165 $ 7,869
Trade payables 178,093 175,532
Accrued salaries and related costs 15,262 15,582
Dividends payable - 2,312
Income taxes payable 3,520 7,292
Other liabilities 24,600 24,984
---------- ----------
Total current liabilities 233,640 233,571
Minority interests 5,713 4,546
Deferred income taxes 14,437 14,342
Long-term notes payable 27,406 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, 17,288,030; 1998, 17,131,994 33,405 30,822
Retained earnings 213,030 201,907
Accumulated other comprehensive loss (14,671) (13,017)
---------- ----------
Total stockholders' equity 231,764 219,712
---------- ----------
Total liabilities and stockholders' equity $ 512,960 $ 493,729
========== ==========
See Notes to Condensed Consolidated Financial Statements
Page 4
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended
September 30,
1999 1998
---------- ----------
Operating activities:
Net income $ 13,456 $ 12,758
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,226 9,941
Provision for doubtful accounts 2,958 3,244
Deferred income taxes (74) 1,228
Gains on sales of assets (843) (116)
Equity in earnings of affiliates, net
of dividends received (1,923) (2,511)
Net effect of changes in working capital (22,400) 12,272
---------- ----------
Net cash provided by operating activities 2,400 36,816
---------- ----------
Investing activities:
Proceeds from sales of property 2,998 1,004
Proceeds from sales of marketable
equity securities 500 -
Net proceeds from sales (purchases)
of short-term investments (472) 19,966
Capital expenditures (16,155) (8,757)
Acquisitions of businesses, net (2,565) (12,973)
Other - 44
---------- ----------
Net cash used in investing activities (15,694) (716)
---------- ----------
Financing activities:
Issuance (repayment) of long-term
notes payable 5,848 (16,413)
Issuance of notes payable 4,320 2,864
Dividends (4,645) (4,503)
Proceeds from exercise of stock options 2,386 1,790
---------- ----------
Net cash provided by (used in) financing activities 7,909 (16,262)
Effect of exchange rate changes on cash (619) (545)
---------- ----------
Increase (decrease) in cash and equivalents (6,004) 19,293
Cash and equivalents at beginning of period 44,586 17,998
---------- ----------
Cash and equivalents at end of period $ 38,582 $ 37,291
========== ==========
See Notes to Condensed Consolidated Financial Statements
Page 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,
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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net income (loss) $ 6,760 $ (544) $13,456 $12,758
Other comprehensive income (loss):
Change in cumulative
translation adjustments 1,339 1,377 (1,687) (218)
Unrealized gains (losses)
on marketable securities, net (7) (20) 32 (21)
--------- --------- --------- ---------
Comprehensive income $ 8,092 $ 813 $ 11,801 $12,519
========= ========= ========= =========
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 was
amended by SFAS No. 137, 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.
Note 4 - Special Charges
During the quarter ended September 30, 1998, Circle 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. As of September 30, 1999, $8.2 million has
been utilized and $2.5 million is included in other liabilities.
Page 6
<PAGE>
Note 5 - 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 September 30, 1999:
Total revenue $ 89,685 $ 49,790 $ 72,817 $ - $ (7,329) $ 204,963
Transfers between regions (2,250) (2,214) (2,865) - 7,329 -
---------- ---------- ---------- ---------- ---------- ----------
Revenues from customers $ 87,435 $ 47,576 $ 69,952 $ - $ - $ 204,963
========== ========== ========== ========== ========== ==========
Net revenue $ 40,960 $ 23,393 $ 19,229 $ - $ - $ 83,582
========== ========== ========== ========== ========== ==========
Income (loss) from
operations $ 6,288 $ 4,492 $ 4,462 $ (6,481) $ - $ 8,761
========== ========== ========== ========== ========== ==========
Three months ended September 30, 1998:
Total revenue $ 96,996 $ 44,677 $ 54,030 $ - $ (4,904) $ 190,799
Transfers between regions (1,740) (1,135) (2,029) - 4,904 -
---------- ---------- ---------- ---------- ---------- ----------
Revenues from customers $ 95,256 $ 43,542 $ 52,001 $ - $ - $ 190,799
========== ========== ========== ========== ========== ==========
Net revenue $ 40,621 $ 21,235 $ 15,729 $ - $ - $ 77,585
========== ========== ========== ========== ========== ==========
Income (loss) from
operations $ 2,530 $ 2,827 $ 1,527 $ (7,090) $ - $ (206)
========== ========== ========== ========== ========== ==========
Nine months ended September 30, 1999:
Total revenue $ 270,271 $ 138,304 $ 192,748 $ - $ (18,292) $ 583,031
Transfers between regions (5,601) (5,470) (7,221) - 18,292 -
---------- ---------- ---------- ---------- ---------- ----------
Revenues from customers $ 264,670 $ 132,834 $ 185,527 $ - $ - $ 583,031
========== ========== ========== ========== ========== ==========
Net revenue $ 121,698 $ 65,828 $ 53,673 $ - $ - $ 241,199
========== ========== ========== ========== ========== ==========
Income (loss) from
operations $ 17,813 $ 10,700 $ 10,668 $ (22,408) $ - $ 16,773
========== ========== ========== ========== ========== ==========
Nine months ended September 30, 1998:
Total revenue $ 289,603 $ 119,741 $ 134,340 $ - $ (12,713) $ 530,971
Transfers between regions (4,906) (2,828) (4,979) - 12,713 -
---------- ---------- ---------- ---------- ---------- ----------
Revenues from customers $ 284,697 $ 116,913 $ 129,361 $ - $ - $ 530,971
========== ========== ========== ========== ========== ==========
Net revenue $ 119,744 $ 58,939 $ 40,480 $ - $ - $ 219,163
========== ========== ========== ========== ========== ==========
Income (loss) from
operations $ 17,384 $ 8,578 $ 5,691 $ (16,081) $ - $ 15,572
========== ========== ========== ========== ========== ==========
</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.
Page 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 Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
- -------
Air freight forwarding $131,486 64% $123,900 65% $376,532 65% $345,192 65%
Ocean freight forwarding 34,424 17% 31,134 16% 93,828 16% 81,607 15%
Customs brokerage and other 39,053 19% 35,765 19% 112,671 19% 104,172 20%
--------------- --------------- --------------- ---------------
Total $204,963 100% $190,799 100% $583,031 100% $530,971 100%
=============== =============== =============== ===============
Net Revenue
- -----------
Air freight forwarding $ 32,067 38% $ 30,915 40% $ 93,682 39% $ 85,664 39%
Ocean freight forwarding 12,462 15% 10,905 14% 34,846 14% 29,327 13%
Customs brokerage and other 39,053 47% 35,765 46% 112,671 47% 104,172 48%
--------------- --------------- --------------- ---------------
Total $ 83,582 100% $ 77,585 100% $241,199 100% $219,163 100%
=============== =============== =============== ===============
</TABLE>
Three Months ended September 30, 1999 vs 1998:
- ----------------------------------------------
Revenue for the quarter increased 7% to $205.0 million compared to $190.8
million for the same period in 1998. Net revenue, which represents revenue less
freight consolidation costs, increased 8% to $83.6 million compared to $77.6
million in the third quarter of 1998. The results of this quarter and the same
quarter last year include the acquisitions of Concord Express in Singapore and
F.J. Tytherleigh in the U.K., which occurred in June and July of 1998,
respectively. The 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 activity declined primarily due to the effects of the
economic crisis in Asia.
Air freight forwarding revenue for the quarter increased 6% or $7.6 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 4% or $1.2 million. Europe and Asia
Pacific increases were primarily due to an increased number of shipments, but
were partially offset by shipment volume decreases in North America.
Ocean freight forwarding revenue increased 11% or $3.3 million over the same
quarter last year, while ocean freight forwarding net revenue increased 14% or
$1.6 million. The increases were due primarily to significant volume increases
in Asia Pacific, but partially offset by shipment volume decreases in North
America. Europe remained relatively unchanged from the same quarter last year.
Page 8
<PAGE>
Customs brokerage and other net revenue, which includes warehousing,
distribution and other logistics services, increased 9%, or $3.3 million.
Customs brokerage revenues increased 8%, or $1.4 million due to increased
inbound traffic in Europe, Asia Pacific and North America. 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 7% or $2.8 million. Operating, selling and
administrative expenses decreased 15% or $5.8 million due to special charges
amounting to $10.7 million taken in the third quarter 1998-discussed in Note 4.
Operating, selling and administrative expenses compared to the third quarter,
1998, without the special charges increased $5.0 million due primarily to
strategic management initiatives. The strategic management initiatives include
creating a sales development program, 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. Circle's information technology initiatives include
offering customers Extranet applications, including document imaging and EDI
capabilities, that will improve customer connectivity. Other initiatives include
upgrades to our operations and accounting applications. The strategic management
initiatives amounted to $1.9 million or 68% of the $2.8 million salary and
related cost increase and $2.3 million or 46% of the $5.0 million operating,
selling and administrative increase.
Total other income, net, increased $0.4 million due to $0.5 million higher
income from affiliates, a $0.2 million increase in other income, offset by a
$0.3 million reduction in interest income, net. The increase in income from
affiliates was due to higher income from our automotive logistics affiliate
compared to last year. The decrease in interest income, net, was due primarily
to higher interest expense from increased borrowings in 1999.
The effective income tax rate for the third quarter was 36.5% compared to 141.0%
for the same period in 1998. The effective tax benefit from the special charges
previously discussed in Note 4 was 24.1% resulting in an overall increase in the
tax expense for the three months ended September 1998. The effective tax rate
for the third quarter 1998 excluding the special charges was 37.0%. Circle's
effective tax rate fluctuates due to changes in foreign tax rates and
regulations and the level of pre-tax profit in foreign countries.
Nine Months ended September 30, 1999 vs 1998:
- ---------------------------------------------
Revenue for the first nine months increased 10% to $583.0 million compared to
$531.0 million for the same period in 1998. Net revenue, which represents
revenue less freight consolidation costs, increased 10% to $241.2 million
compared to $219.2 million in the first nine months of 1998. 34% 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 activity declined primarily due to the effects
of the economic crisis in Asia.
Air freight forwarding revenue for the first nine months increased 9% or $31.3
million as a result of 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 9% or $8.0 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 15% or $12.2 million over the first
nine months of last year, while ocean freight forwarding net revenue increased
19% or $5.5 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 $8.5 million.
Customs brokerage revenues increased 4%, or $2.0 million due to increased
inbound traffic in Asia Pacific and North America. Warehousing and distribution
revenues increased in Europe and Asia Pacific, but declined in North America due
to some customers moving logistics services in-house.
Page 9
<PAGE>
Salaries and related costs increased 11% or $13.1 million. Salaries as a
percentage of net revenue increased from 52% to 53%. Operating, selling and
administrative expenses increased 9% or $7.8 million. Operating, selling and
administrative expenses compared to 1998, without the special charges discussed
in Note 4, increased $18.5 million due to acquisitions that included F.J.
Tytherleigh and Concord Express and the strategic management initiatives. The
strategic management initiatives include creating a sales development program,
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. Circle's
information technology initiatives include offering customers Extranet
applications, including document imaging and EDI capabilities, that will improve
customer connectivity. Other initiatives include upgrades to our operations and
accounting applications. The strategic management initiatives amounted to $4.9
million, or 38% of the $13.1 million salary and related cost increase and $9.5
million or 51% of the $18.5 million operating, selling and administrative
increase (excluding the special charges discussed in Note 4). The acquisitions
amounted to $2.9 million, or 22% of the $13.1 million salary and related cost
increase and $2.6 million, or 14% of the $18.5 million operating, selling and
administrative increase.
Total other income, net, decreased $2.3 million due to $0.3 million lower income
from affiliates, $2.0 million less interest income, net, a $0.8 million gain on
the sale of our New Zealand perishables business, lower foreign exchange gains,
and higher minority interest expense. 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 trend reversed itself
in the third quarter of 1999 when the automotive logistics income increased
compared to 1998. The decrease in interest income, net, resulted in 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
borrowings in 1999.
The effective income tax rate for the first nine months of 1999 was 36.5%
compared to 42.8% for the comparable period in 1998. The effective tax benefit
from the special charges previously discussed in Note 4 was 24.1% resulting in a
substantial overall increase in the tax expense for the first nine months of
1998. The effective tax rate for the nine months ended 1998 excluding the
special charges was 37.0%. Circle's effective tax rate fluctuates due to changes
in foreign tax rates and regulations and the level of pre-tax profit in foreign
countries.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $2.4 million for the nine months
ended September 30, 1999, compared to $36.8 million during the same period in
1998. This decrease was primarily caused by an increase in net working capital.
Net working capital increased $22.4 million during the nine months ended
September 30, 1999. The increase is primarily due to growth of the business and
the timing of receipts and disbursements.
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.
Cash used in investing activities for the nine months ended September 30, 1999,
was $15.7 million compared to $0.7 million during the same period last year.
Capital expenditures for Circle during the period were $16.2 million. Circle
expects capital expenditures to increase throughout 1999 mainly due to our
information technology initiatives. During 1998, Circle liquidated approximately
$20.0 million of short-term investment to fund acquisitions.
Cash provided by financing activities for the nine months ended September 30,
1999, was $7.9 million compared to $16.3 million used in financing activities
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 September 30, 1999.
Notes payable increased $4.3 million during the first nine 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. The semi-annual dividend of $0.135
per share declared in June 1999 for a total of $2.3 million was paid in
September 1999.
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.
Page 10
<PAGE>
New Accounting Pronouncements
- -----------------------------
See Note 3 of the Notes to Condensed Consolidated Financial Statements for a
description of new accounting pronouncements that includes management's
discussion and analysis of new accounting pronouncements.
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 have been upgraded, tested and certified to be Year 2000
compliant.
Vendors and service providers are continuing to publish Year 2000 certification
and readiness statements for a wide variety of hardware, software and non-IT
devices. Circle is monitoring these readiness disclosure statements. If a vendor
or service provider identifies a Year 2000 non-compliance issue, Circle intends
to make the appropriate adjustments to minimize the risk of any significant
disruption.
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.
Page 11
<PAGE>
Total Year 2000 costs are estimated to be approximately $9.0 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.
Actual Costs as of September 30, 1999
- -------------------------------------
For the three and nine months ended September 30, 1999, Circle has incurred $1.8
million and $8.0 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 resulted 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 has prepared 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.
Page 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
-------
None
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 September 30, 1999.
Page 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: November 15, 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
Page 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 nine
month period ending September 30, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 38,582
<SECURITIES> 14,403
<RECEIVABLES> 269,313
<ALLOWANCES> 6,875
<INVENTORY> 0
<CURRENT-ASSETS> 340,652
<PP&E> 171,917
<DEPRECIATION> 81,396
<TOTAL-ASSETS> 512,960
<CURRENT-LIABILITIES> 233,640
<BONDS> 0
0
0
<COMMON> 33,405
<OTHER-SE> 198,359
<TOTAL-LIABILITY-AND-EQUITY> 512,960
<SALES> 0
<TOTAL-REVENUES> 583,031
<CGS> 0
<TOTAL-COSTS> 341,832
<OTHER-EXPENSES> 224,426
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,858
<INCOME-PRETAX> 21,190
<INCOME-TAX> 7,734
<INCOME-CONTINUING> 13,456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,456
<EPS-BASIC> 0.78
<EPS-DILUTED> 0.78
</TABLE>
