1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-8664
Circle International Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 94-1740320
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
260 Townsend Street
San Francisco, California 94107-1719
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 978-0600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, $1.00 par value
Rights to Purchase Series A Junior Participating Preferred Stock
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 25, 1999, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $213,770,250.
At March 25, 1998, the number of shares outstanding of registrant's Common
Stock was 17,131,969.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated April 1, 1999 - Part III of this Form 10-K (Items 10,
11, 12 and 13).
The Exhibit Index is located on pages 21 through 22 hereof.
<PAGE>
PART I
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ITEM 1 - BUSINESS
- ------------------
General
Circle International Group, Inc. and subsidiaries ("Circle") is a leader in
providing transportation and integrated logistics services for the international
movement of goods and the furnishing of value-added information, distribution,
and inventory management services to customers worldwide. Circle is principally
engaged in international air and ocean freight forwarding, customs brokerage and
integrated logistics. Circle provides value-added services in addition to those
customarily provided by traditional air freight forwarders, ocean freight
forwarders and customs brokers. These services are designed to provide global
logistics solutions for customers in order to streamline their supply chain,
reduce their inventories, improve their logistics information, enhance their
profitability and provide them with more efficient and effective international
distribution strategies.
Circle's global array of services benefits customers by reducing overall
international logistics costs and increasing the speed and reliability of the
delivery of goods worldwide. These services include: air and ocean export and
import freight transportation; worldwide customs brokerage, duty drawback, Free
Trade Zone management and associated services; global freight tracking; other
information management services such as electronic data interchange ("EDI"),
electronic invoicing and purchase order management; logistics management;
warehousing and distribution services; inventory and materials management;
protective cargo packing; bonded warehousing; project cargo management; global
purchasing and trade finance services; and marine insurance (ocean and air
coverage).
Circle's global services are supplied through its network of over 300 offices,
agents and distribution centers located in over 100 countries on six continents.
These facilities are linked by Circle's real-time, on-line communications
network that speeds the two-way flow of shipment data and related logistics
information between origins and destinations around the world. In addition to
its own operations, Circle utilizes a network of overseas agents for
comprehensive, global coverage of major trade centers.
Circle commenced operations in 1898, and marked its 100 year anniversary in
1998. It was incorporated in California in 1970, and reincorporated in Delaware
in 1987. Unless the context otherwise requires, references to Circle include
Circle International Group, Inc. and its subsidiaries.
Certain information regarding Circle's operations by geographic regions for the
three years in the period ended December 31, 1998, is included in Note 13 of the
Notes to Consolidated Financial Statements.
Recent Developments
- -------------------
Organization and Acquisitions
In July 1998, Circle hired a new President and Chief Executive Officer, David I.
Beatson. Within three months after his arrival, Mr. Beatson hired new executives
to fill the following positions: Chief Information Officer; Chief Operating
Officer, North America; Senior Vice President, Global Sales; and Director of
Corporate Communications. In January 1999, Mr. Beatson was elected Chairman of
Circle's Board of Directors. Circle's former Chairman and Chief Executive
Officer, Peter Gibert, relocated to Spain and operates as a minority owner and
managing director of Circle's subsidiaries in Spain and Portugal. Circle
recently implemented a strategy to strengthen and grow Circle's sales and
marketing efforts, particularly in the United States, and has announced a plan
to invest further in global information technology. Circle anticipates that
there will be more investment in furthering these strategies.
In August 1998, Circle acquired in a transaction accounted for as a pooling of
interests all of the stock of Alrod International, Inc., a full-service
transportation company with operations on the West Coast of the United States
and Mexico. Additionally, in three separate transactions occurring from May to
August 1998, Circle acquired 76% of the stock of Concord Express (Singapore)
Pte. Ltd., and CE Logistics Asia, Pte. Ltd., and all of the assets of Concord
Express (United Kingdom) Ltd. and Concord Express of Texas, Inc. These
operations are primarily based in Singapore with branches in Houston, Texas and
Prestwick, Scotland and specialize in distribution and transportation services
for the high-tech industry. See Note 3 of the Notes to Consolidated Financial
Statements for a further discussion of Circle's acquisitions.
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Information Systems
Circle continuously enhances its information systems capabilities in order to
meet its customers' changing needs and to provide first-class information
transmission, processing, and management services. Circle has been a leader in
providing its customers with shipment tracking and tracing capabilities and with
providing data and reports to better manage the global logistics process.
Circle is devoted to improving the automation of its services in order to
support the logistics needs of its customers, increase efficiency and enhance
employee productivity. Circle's information systems allow its customers to track
shipments, produce variance reports and analyses helpful to managing their
business, and provide an easy-to-use electronic mail communication system.
Circle has invested considerable effort in its EDI capabilities to allow
electronic transmission of shipment documentation according to customer
requirements. Additionally, Circle maintains a web-site through which customers
can track air freight shipments. Circle continues to link future development of
its information systems to the specific requirements of its customers and seeks
to connect its customers to its information systems and Internet tools whenever
possible. New information systems initiatives include implementation of
purchased integrated accounting and operational software within Europe,
implementation of imaging, work-flow and document management technology and
accounting software for the Americas as well as implementation of warehouse
management and sales force automation software worldwide.
Year 2000 remediation efforts present a challenge to Circle because its services
depend on third parties (such as airline or ocean carriers, customs authorities,
truckers, customers and governmental agencies) around the world. Circle is
devoting significant time, effort and expense toward Year 2000 remediation.
There is no assurance that the operations of Circle and its customers will not
be impacted by Year 2000 events. (For a further discussion of Circle's Year 2000
efforts, see "ITEM 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations"; Year 2000.)
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Description of Business
- -----------------------
INTERNATIONAL AIR FREIGHT FORWARDING
Circle believes that it is one of the largest forwarders of international air
freight in the United States. Circle's air freight forwarding and related
logistics services include the following: inland transportation of freight from
point of origin to distribution center or the carrier's cargo terminal;
warehousing and inventory management; cargo assembly; export packing and vendor
shipment consolidation; global freight forwarding; charter arrangement and
handling; electronic transmittal of logistics documentation; electronic purchase
order/shipment tracking; expedited document delivery to overseas destinations
for customs clearance; and procurement of cargo insurance. Circle does not own
or operate aircraft, which management believes gives Circle increased
flexibility to tailor its services to customer requirements.
As a global air freight forwarder, Circle is both a consolidator of air freight
shipments (an indirect air carrier) and an airline cargo agent. The following
table provides certain information concerning Circle's air freight forwarding
business during each of the three years ended December 31, 1998, 1997 and 1996.
Year ended December 31,
1998 (2) 1997 (2) 1996 (2)
------ ------ ------
(in thousands, except per shipment data)
As indirect carrier:
Revenue (1) $ 466,121 $ 452,462 $ 395,968
Revenue net of air freight
consolidation costs (1) $ 101,590 $ 87,109 $ 79,567
Number of shipments 476 466 427
Net revenue per shipment $ 213 $ 187 $ 186
Weight in kilos 183,245 181,893 150,513
Kilos per shipment 385 391 352
As airline agent:
Revenue (1) $ 16,580 $ 19,101 $ 22,538
Number of shipments 109 108 115
Net revenue per shipment $ 152 $ 177 $ 196
Weight in kilos 39,075 31,510 33,050
Kilos per shipment 358 292 287
(1) Management believes that revenue net of air freight consolidation costs
("net revenue") is a better measure for comparison purposes of the above
two types of air freight forwarding services offered by Circle because net
revenue, like revenue earned by Circle as an airline agent, does not
include the carrier's charge to Circle for carrying the shipment.
(2) Previously reported amounts have been restated to reflect the pooling of
interests with Alrod International, Inc. in August 1998.
During 1998, Circle's principal air freight forwarding customers were shippers
of computer, electronic and high technology equipment, automotive products,
machinery and machine parts, consumer goods, clothing, pharmaceuticals,
chemicals and aerospace equipment.
The air freight forwarding business of Circle is not dependent on any one
customer or industry. Circle provides services to global or multinational
customers, as well as regional customers. No customer accounted for more than 5%
of Circle's net air freight forwarding revenue in 1998.
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Indirect Air Carrier
As an indirect air carrier, Circle procures shipments from its customers,
consolidates shipments bound for a particular destination, determines the
routing, selects the direct carrier (an airline) with which the consolidated lot
is to move and tenders each consolidated lot as a single shipment to the direct
carrier for transportation to a destination. At the destination, Circle, or its
agent, receives the consolidated lot, breaks it into its component shipments and
distributes the individual shipments. During 1998, Circle derived approximately
86% of its net air freight forwarding revenue from its services as an indirect
air carrier.
Circle's rates are based on a per kilo charge that generally decreases within a
certain range as the weight of the shipment increases. Circle ordinarily charges
the shipper a rate less than the rate that the shipper would be charged by an
airline. The rates that airlines charge to forwarders and others also generally
decrease as the weight of the shipment increases. As a result of the
consolidation of its customers' shipments, Circle generally obtains lower rates
per kilo from airlines than the rates it charges its customers for individual
shipments. This rate differential is the primary source of Circle's net air
freight forwarding revenue. Circle's practice is to make prompt adjustments in
its rates to match changes in airline rates.
As part of its services, Circle prepares documentation relating to the
international movement of goods; provides handling, packing and containerizing
services; arranges for the routing and tracing of shipments when necessary;
provides physical breakbulk, delivery and inland transportation services; and
arranges for freight insurance. Another source of Circle's net air freight
forwarding revenue is the fees which Circle charges for services related to the
movement of goods, that include computer-prepared shipment documentation;
expedited delivery of air waybills, packing lists, commercial invoices, and
other documents; and electronic shipment tracking and tracing. Circle offers its
customers access to its global on-line computer information system, which acts
as a comprehensive source of vital information for its customers.
Airline Agent
As an authorized cargo sales agent of most airlines worldwide, Circle arranges
for the transportation of individual shipments and receives from the airline a
commission for arranging the shipment. In addition, Circle provides the shipper
with ancillary services such as export documentation for which it receives a
separate fee. When acting in this capacity, Circle does not consolidate
shipments or have responsibility for shipments once they have been tendered to
the airline. Circle conducts its agency air freight forwarding operations from
the same facilities as its indirect carrier operations, and services the same
regions of the world. During 1998, Circle derived approximately 14% of its air
freight forwarding net revenue from its services as an airline agent.
CUSTOMS BROKERAGE
Circle functions as a customs broker with respect to entries of freight into
approximately 55 major destinations in the United States and in over 300
overseas destinations through its network of offices and agents.
In its capacity as a customs broker, Circle prepares and files all formal
documentation required for clearance through customs agencies, obtains customs
bonds, in many cases facilitates the payment of import duties on behalf of the
importer, arranges for payment of collect freight charges, and assists the
importer in obtaining the best commodity classifications and in qualifying for
duty drawback refunds. Circle's customs brokers and support staff have
substantial knowledge of the complex tariff laws and customs regulations
governing the payment of duty, as well as valuation and import restrictions in
their respective countries. Within the U.S., Circle employs a significant number
of personnel holding individual customs broker licenses.
Circle relies both on company-designed and third-party computer technology for
customs brokerage activities performed on behalf of its clients. Circle employs
the Automated Brokerage Interface information system, providing an on-line link
with the United States Customs Service. In several global trading centers in
addition to the United States, Circle's offices are connected electronically to
customs agencies for expedited pre-clearance of goods and centralized import
management. Such on-line interface with customs agencies speeds freight release
and provides nationwide control of clearances at multiple ports and airports of
entry.
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Circle works with importers to design cost-effective import programs that
utilize Circle's distribution and logistics services and computer technology.
Such services include electronic document preparation, routing cargo from
overseas origins to ports and airports of entry, bonded warehousing,
distribution of the cleared cargo to inland locations and duty drawback. For
consolidated shipments, containers are devanned, cargo is segregated according
to final destination, and goods are forwarded to final destinations. In many
U.S. and overseas locations, Circle's bonded warehouses enable importers to
defer payment of customs duties and coordinate release of cargo with their
production or distribution schedules. Goods are stored under Customs Service
supervision until the importer is ready to withdraw or re-export them. Circle
receives storage charges for these in-transit goods and fees for related
ancillary services. Circle also offers Free Trade Zone management and duty
drawback services to provide customers with additional tools to maintain
cost-effective import programs.
As a customs broker operating in the United States, Circle is licensed by the
Treasury Department and regulated by the United States Customs Service. Circle's
fees for acting as a customs broker in the United States are not regulated and
Circle does not have a fixed fee schedule for customs brokerage services.
Instead, its fees are generally based on the volume of business transacted for a
particular customer, and the type, number and complexity of services provided.
In addition to its fees, Circle bills the importer for amounts which Circle has
paid on the importer's behalf, including duties, collect freight charges, and
similar payments.
INTERNATIONAL OCEAN FREIGHT FORWARDING
As a global ocean freight forwarder, Circle arranges for the shipment of freight
by ocean carriers and acts as the agent of the shipper or the importer. Circle's
ocean freight forwarding and related logistics services include inland
transportation from point of origin to distribution facility or port of export;
cargo assembly, packing and consolidation; warehousing; electronic transmittal
of documentation and shipment tracking; expedited document delivery; pre-alert
consignee notification; and cargo insurance.
A number of Circle's facilities provide protective cargo packing, crating and
specialized handling services for retail goods, government-specification cargo,
consumer goods, hazardous cargo, heavy machinery and assemblies and perishable
cargo. Other facilities are equipped to handle tons of equipment and material
from multiple origins to overseas "turn-key" projects, such as manufacturing
facilities or government installations. Circle does not own or operate ships or
assume carrier responsibility, preferring to retain the flexibility to tailor
logistics services and options to the customer's requirements.
Circle's compensation for its ocean freight forwarding services is derived
principally from commissions paid by shipping lines and from forwarding and
documentation fees paid by its customers, who are either shippers or consignees.
In 1998, approximately 49% of Circle's net ocean freight forwarding revenue was
attributable to commissions, forwarding fees and associated ancillary services.
Ocean Freight Consolidation
Circle's global operations as an indirect ocean carrier or NVOCC (non-vessel
operating common carrier) are similar in some respects to its air freight
consolidation operations. Circle procures customer freight, consolidates
shipments bound for a particular destination, determines the routing, selects
the ocean carrier or charters a ship, and tenders each consolidated lot as a
single shipment to the direct carrier for transportation to a distribution
point. As a NVOCC, Circle generally derives its revenue from the spread between
the rate charged to its customer and the ocean carrier's charge to Circle for
carrying the shipment, in addition to charging for other ancillary services
related to the movement of the freight. Because of the volume of freight
controlled and consolidated by Circle, Circle is generally able to obtain lower
rates from ocean carriers than the rate that the shipper would be able to
procure. In 1998, this service and associated ancillary services contributed
approximately 51% of Circle's net ocean freight forwarding revenue.
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DISTRIBUTION AND MATERIALS MANAGEMENT SERVICES
Circle offers a full range of customized distribution and materials management
services in connection with the transportation of cargo. These services are
provided in a number of Circle's owned and leased logistics facilities in many
locations throughout the world. In 1998, Circle continued its program of
improving its existing facilities and constructing new warehouse and
distribution facilities to meet its customers' needs. Circle's distribution and
materials management services include inventory control, order processing,
import and export freight staging, protective and specialized packing and
crating, pick-and-pack operations, containerization, consolidation and
deconsolidation and special handling for perishables, hazardous materials and
heavy-lift equipment. For import shipments, Circle provides bonded warehouse
services and, in certain locations, Free Trade Zone services. These warehouse
and distribution services complement the other transportation services,
including the information systems tools provided by Circle that form part of the
integrated logistics solutions Circle offers to its customers.
INSURANCE
Another transportation service offered to customers is the arranging of
international marine insurance in connection with Circle's air freight and ocean
freight forwarding operations. Insurance coverage frequently is tailored to a
customer's shipping program and is procured for the customer as a component of
Circle's integrated logistics. Circle also arranges for surety bonds for
importers as part of its customs brokerage activities.
GLOBAL PROJECTS
Circle has global project divisions in North America and the United Kingdom to
meet the special requirements of global project management and heavy lift
movements. In addition to logistics advice and traditional ocean and air
transportation services, the project divisions provide on-site assistance,
vessel chartering services and consulting regarding large-scale project
movements.
TRADE FACILITATION SERVICES
Circle's wholly-owned subsidiary, Circle Trade Services Ltd. ("CTSL"), offers
purchasing, procurement and trade finance services to companies engaged in
global trade. CTSL's mission is to provide customers requiring the international
transportation of cargo with creative global trade solutions, which enable the
customer to lower its costs or improve its supply chain management in
international transactions. Included among its various trade services, CTSL has
developed programs for customers which entail locating new sourcing
opportunities, coordinating the activities of multiple suppliers and creating
trade finance solutions.
Competition and Business Conditions
Circle's principal businesses are directly related to the volume of
international trade, particularly trade between the United States and other
nations. In general, global trading is expanding as businesses increasingly seek
new sourcing opportunities and penetrate international markets. The extent of
such trade is influenced by many factors, including economic and political
conditions in the United States and abroad, changes in supply or manufacturing
practices, labor conditions, wars and other armed conflicts, currency
fluctuations and United States and foreign laws relating to tariffs, trade
restrictions, foreign investments and taxation. In 1998, Circle's business was
impacted by global economic events, particularly in Asia and Latin America. This
was reflected particularly in reduced exports from the United States.
Additionally, Circle believes that contingencies surrounding the transition to
the Year 2000 might have an adverse impact on business conditions in the market
it serves.
Circle is one of the world's largest international freight forwarders and
integrated logistics providers. In addition to competition from other freight
forwarders and cargo sales agents, Circle encounters competition from direct
carriers which actively solicit freight from shippers and from integrated
transportation companies that operate their own aircraft and also act as
carriers. Other transportation-related businesses, such as trucking and
distribution companies, have also entered the logistics and freight forwarding
market. Significant competition comes from large domestic and foreign firms with
substantial capital resources which have offices in multiple global locations,
offer a broad array of services and provide information technology ("IT")
support.
As a customs broker and ocean freight forwarder, Circle encounters strong
competition in every port in which it does business. Circle has customs
brokerage and ocean freight forwarding offices in most major United States ports
and competes with large domestic and foreign firms, as well as local and
regional firms.
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Circle offers its customers multiple transportation services, in addition to
traditional air and ocean freight forwarding, in order to meet all of the
logistics requirements of its customers. An extension of its array of multiple
services is Circle's integrated transportation logistics program under which
Circle offers a comprehensive program designed to meet the customer's total
door-to-door transportation requirements. This assists the customer in creating
more efficient global sourcing, financing, inventory management and distribution
and warehousing strategies. The value-added logistics capabilities which support
this strategy use the full spectrum of services offered by Circle, including
information management, materials management, protective packing, vendor
coordination and purchase order processing, ocean or air transportation, customs
brokerage, warehouse and distribution and global trade services. Circle's global
transportation logistics program often relies on the integration of its
customers' information systems with Circle's information systems, frequently
using electronic data interchange ("EDI") and assigning Circle employees who are
dedicated exclusively to the customer's shipment management requirements.
Integrated logistics and related value-added services are, in part, a response
to the growing trend toward the outsourcing of key distribution functions by
businesses requiring international logistics services and are a response to
competitive pressures which have reduced traditional freight forwarding and
customs brokerage margins.
Marketing
Circle's worldwide services are marketed primarily by its senior executives, by
its local and global salespeople and by over 450 country, regional, branch and
district managers who divide their time among marketing, administration and
operations. These people generally deal directly with executives in the
transportation, finance, logistics, shipping or purchasing departments of
Circle's existing and potential customers. Their sales efforts are supplemented
by Circle's agents in certain foreign commercial centers in which Circle does
not have an office.
Circle employs a global sales team targeting multinational customers, as well as
regional and local sales professionals. Circle also relies on its foreign agents
to sell its services. In 1998, Circle placed additional emphasis on building a
global sales infrastructure and retained several additional sales professionals
to focus on this effort. In addition, in 1998, Circle started the implementation
of its strategy to increase the number of its salespeople in the United States.
Circle also has Marketing and Global Sales departments designed to strengthen
Circle's sales and marketing activities, including its response to global
requests for bids.
In conjunction with these sales and marketing efforts, Circle continues to
invest significant resources in enhancing its information systems to make these
systems more responsive to customers and other users in managing their
international transportation needs. The use of EDI applications, global tracking
and visibility to a customer's shipments via the Internet as well as customized
Extranets also serve as important sales tools.
Employees
As of December 31, 1998, Circle employed over 4,600 people, of whom
approximately 825 were engaged in managerial and sales activities and the
balance were engaged in operations or were general office employees. Circle
conducts regular training programs for its supervisors, managers, salespeople
and customer service representatives. In 1998, over 1,100 employees attended
Circle conducted training programs.
Executive Officers
Circle's executive officers are as follows:
Name Age Position
---- --- --------
David I. Beatson 51 Chairman of the Board, President and Chief Executive
Officer
Janice Kerti 50 Senior Vice President, Chief Financial Officer and
Treasurer
Cynthia A. Stoddard 42 Senior Vice President and Chief Information Officer
Robert H. Kennis 46 Vice President, Secretary and General Counsel
Kim E. Wertheimer 45 Vice President (and Executive Vice President of
Circle International, Inc.)
Mr. Beatson joined Circle in July 1998 as its President and Chief Executive
Officer. In January 1999, Mr. Beatson assumed the position of Chairman of the
Board of Directors. From July 1994 to July 1998, he served as President and
Chief Executive Officer of the Emery Worldwide subsidiary of CNF Transportation,
Inc. Mr. Beatson was employed by CNF Transportation, Inc. for approximately 16
years.
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Ms. Stoddard joined Circle in September 1998 as its Senior Vice President and
Chief Information Officer, responsible for managing Circle's global information
technology and communications systems. From June 1997 to July 1998, she served
as Vice President, Information Services for the Emery Worldwide subsidiary of
CNF Transportation Inc. Prior to June 1997 she served as Director of Information
Systems for Emery.
In September 1996, Ms. Kerti joined Circle as Senior Vice President, Western
Division. From June 1997 to May 1998, she was Corporate Controller. In May 1998,
Ms. Kerti assumed the position of Chief Financial Officer and Treasurer. Prior
to 1996, Ms. Kerti served as Finance Director and as Managing Director of South
Pacific Operations for MSAS Cargo International, Ltd.
Mr. Wertheimer joined Circle in May 1991, following Circle's acquisition of
Sekin Transport International, where he was Vice President of Planning and
Development. In May 1995, he was elected Vice President of Circle. He presently
has management responsibilities for Circle's North America logistics operations
and Circle Trade Services.
Mr. Kennis joined Circle in 1989. He serves as Vice President, Secretary and
General Counsel and is Circle's Chief Legal Officer. Prior to joining Circle, he
was Vice President and Legal Counsel for The Consolidated Capital Companies for
four years. From 1978 to 1984, he was with the law firm of Bronson, Bronson &
McKinnon as an associate and first-level partner.
ITEM 2 - PROPERTIES
The properties used in Circle's domestic and foreign operations consist
principally of air and ocean freight forwarding offices, customs brokerage
offices and warehouse and distribution facilities. In the United States, freight
forwarding operations and customs brokerage offices are conducted from the same
facility. Circle's foreign offices are principally engaged in customs brokerage
and ocean and air freight forwarding. Additionally, other transportation
management services such as warehousing, distribution, packing,
containerization and other specialized services are offered at many offices.
The following table sets forth certain information as of December 31, 1998
concerning Circle's domestic and foreign facilities and freight handling
terminals.
Number of Facilities
--------------------
Owned Leased Total
----- ------ -----
Domestic 13 59 72
Foreign 26 165 191
--------- --------- -------
Total 39 224 263
========= ========= =======
Circle owns its headquarters building in San Francisco.
Under many of its leases, Circle, in addition to rental payments, is responsible
for payment of property taxes, maintenance and insurance. In 1998, the aggregate
rental expense for all of Circle's leased facilities was approximately $18.8
million.
For further information concerning Circle's lease commitments, see Note 6 of the
Notes to Consolidated Financial Statements.
ITEM 3 - LEGAL PROCEEDINGS
Circle is party to routine litigation incident to its business, primarily
relating to claims for goods lost or damaged in transit or improperly shipped.
Many of the lawsuits to which Circle is a party are covered by insurance and are
being defended by Circle's insurance carriers. Circle has established reserves
and it is management's opinion that the resolution of such litigation will not
have a material adverse effect on Circle's consolidated financial statements
taken as a whole.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Circle's common stock is traded over the counter under the symbol CRCL. The
following table sets forth the closing prices in the NASDAQ national market
system for Circle's common stock for the calendar periods indicated, as reported
by NASDAQ.
High Low
------ -----
1998
Fourth Quarter $21.38 $13.50
Third Quarter 28.56 14.00
Second Quarter 29.00 23.13
First Quarter 29.50 21.00
1997
Fourth Quarter $32.38 $22.94
Third Quarter 31.38 24.88
Second Quarter 27.75 21.63
First Quarter 23.50 21.00
As of January 27, 1999, the approximate number of stockholders of record of
Circle's common stock, excluding stockholders whose stock is held as nominee or
in street name by brokers, was 368.
Dividends Declared
Dividends declared per common share during 1998 and 1997 were:
1998 1997
- ---- ----
June 29 $0.135 June 30 $0.135
December 14 0.135 December 15 0.135
The Board of Directors considers payment of cash dividends on a semi-annual
basis subject to the availability of earnings, the financial condition of Circle
and other relevant factors.
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ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
(in thousands except per share and employee amounts)
Year Ended December 31, (1)
1998 (2) 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Air freight forwarding $ 482,701 66% $ 471,563 66% $ 418,506 65% $ 378,900 65% $ 341,283 68%
Ocean freight forwarding 111,938 15% 111,200 15% 106,554 16% 96,921 17% 80,464 16%
Customs brokerage and other 143,039 19% 134,226 19% 120,570 19% 104,812 18% 79,721 16%
--------------- --------------- --------------- --------------- ---------------
Total $ 737,678 100% $ 716,989 100% $ 645,630 100% $ 580,633 100% $ 501,468 100%
=============== =============== =============== =============== ===============
Net Revenue:
Air freight forwarding $ 118,170 39% $ 106,210 38% $ 102,105 39% $ 94,573 41% $ 93,973 46%
Ocean freight forwarding 40,471 13% 37,608 14% 35,783 14% 32,238 14% 29,174 15%
Customs brokerage and other 143,039 48% 134,226 48% 120,570 47% 104,812 45% 79,721 39%
--------------- --------------- --------------- --------------- ---------------
Total $ 301,680 100% $ 278,044 100% $ 258,458 100% $ 231,623 100% $ 202,868 100%
=============== =============== =============== =============== ===============
Income from
operations $ 23,829 $ 32,373 $ 29,711 $ 26,496 $ 24,181
Net income 18,515 26,332 21,717 18,159 17,108
Net income per share:
Basic 1.09 1.57 1.30 1.08 0.99
Diluted 1.07 1.53 1.28 1.07 0.99
Dividends declared
per share 0.27 0.27 0.24 0.22 0.21
Weighted average shares
outstanding:
Basic 17,040 16,823 16,671 16,791 17,198
Diluted 17,260 17,191 16,926 17,026 17,280
At December 31,
Working capital 93,428 100,271 73,570 73,650 44,055
Marketable securities 935 1,284 7,799 36,544 41,660
Total assets 493,729 434,399 409,253 348,256 335,096
Long-term obligations 21,558 27,702 29,014 30,183 32,066
Stockholders' equity 219,712 200,972 182,777 166,387 152,993
Number of employees 4,602 4,160 3,782 3,361 3,262
<FN>
(1) Previously reported amounts have been restated to reflect the pooling of
interests with Alrod International, Inc. in August 1998.
(2) 1998 includes special charges of $10.7 million, or $8.1 million, net of tax
($0.47 per diluted share).
</FN>
</TABLE>
11
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements reflecting
Circle's current expectations that are dependent on certain risks and
uncertainties including but not limited to such factors as economic and
political conditions around the world, international laws, currency exchange
rates, the effect of Circle's accounting policies and other risk factors
detailed herein and the impact Year 2000 may have on information systems. There
can be no assurances that Circle's actual future performance will meet such
expectations. There may also be important, unforeseen risks not described
herein.
Results of Operations
1998 versus 1997
- ----------------
Revenue in 1998 increased by $20.7 million or 3% over 1997:
Air freight forwarding revenue increased by $11.1 million or 2% over 1997 as a
result of revenue increases in Asia Pacific and Europe where Circle handled
higher kilo volumes and an increased number of shipments. These increases were
partially offset by revenue reductions in North America where Circle handled
less kilo volume and a reduced number of shipments due primarily to decreases in
export activity to Asia Pacific.
Ocean freight forwarding revenue increased by $0.7 million or 1% over 1997 as a
result of increased revenue and shipments in Asia Pacific and Europe. Circle'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.
Customs brokerage and other revenue which includes warehousing, distribution and
other logistics services, increased 7%, or $8.8 million over 1997. 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 in Europe, North America, and Asia
Pacific over the same period last year.
The gross revenue increase of $20.7 million included a negative impact from
foreign exchange of approximately $50.9 million resulting from converting
foreign currency into U.S. dollars for financial reporting purposes.
Net Revenue in 1998 increased by $23.6 million or 9% over 1997:
Air freight forwarding net revenue increased by $12.0 million or 11% over 1997
as a result of improved margins in all regions and increased shipment volume in
Europe and Asia Pacific. In North America, net revenue declined due to lower air
freight revenue. This reduction was substantially offset by more effective
purchasing of transportation services. Although the result was lower net
revenue, margins in North America improved by two percentage points.
Ocean freight forwarding net revenue increased by $2.9 million or 8% over 1997
as a result of increased shipments and revenue in Asia Pacific and Europe. Net
revenue grew at a faster rate than revenue due to improved margins.
The net revenue increase of $23.6 million included a negative impact from
foreign exchange of approximately $13.1 million resulting from converting
foreign currency into U.S. dollars for financial reporting purposes.
Salaries and related costs increased 7.1% or $10.5 million principally as a
result of hiring more employees to serve new customers and to accelerate
business growth. Salaries as a percentage of net revenues dropped from 53.2% to
52.5%.
Operating, selling, and administrative expenses increased 22% or $21.7 million.
This increase included $10.7 million of special charges related to merger
integration costs for Alrod International, Inc., the 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. The
remaining $11.0 million increase was mainly 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. In late 1998, Circle
implemented cost reductions to partially offset the increased expenses from the
expansion of its sales force and increased information technology costs. The
benefit of these reductions is expected to occur primarily during 1999.
12
<PAGE>
Other income, net, decreased $0.9 million. Income from affiliates decreased $1.9
million primarily due to the effect of the downturn in the Latin America and
Asia Pacific economies on Circle's automotive logistics affiliate. The increase
in interest, net, of $1.3 million was attributable to income on IRS tax refunds
and to a reduction in Circle's debt levels. Other, net, decreased $0.2 million.
The effective income tax rate for 1998 was 41.1% compared to 35.6% for 1997. The
effective tax benefit from the special charges was only 24.1%. This resulted in
an overall increase in the tax rate for the year. The effective tax rate for
1998 excluding the special charges was 36.8%. The increase from 1997 is a result
of the 1997 favorable resolution of IRS audits of the years 1986 through 1992.
1997 versus 1996
- ----------------
Revenue in 1997 increased by $71.4 million or 11% over 1996:
Air freight forwarding revenue increased by $53.1 million or 13% over 1996 as a
result of revenue increases in Asia and the Americas. Increases were due to
higher kilo volumes and increased number of consolidation export shipments,
offset slightly by lower direct agency shipments. This is due to shifting more
share of the business to consolidations and higher kilo global accounts.
Ocean freight forwarding revenue increased $4.6 million or 4% over 1996 as a
result of an increase in the number of shipments in the Americas.
Customs brokerage and other revenue increased $13.7 million or 11% over 1996.
The improvement was a result of increases in the number of customs entries
processed and in warehousing and distribution services.
Net Revenue in 1997 increased by $19.6 million or 8% over 1996:
Air freight forwarding net revenue increased $4.1 million or 4% over the prior
year due to an increase in the number of shipments in Asia and the Americas.
Significant volume increases in these regions were offset by fewer direct agency
shipments and downward pressure on air freight yields as a result of intense
competition.
Ocean freight forwarding net revenue increased $1.8 million or 5% over the prior
year as a result of an increase in the number of shipments.
The net revenue increase of $19.6 million included a negative impact from
foreign exchange of approximately $6.8 million resulting from converting foreign
currency into U.S. dollars for financial reporting purposes.
Salaries and related costs increased $6.1 million or 4% over the prior year as a
result of an increase in the number of employees due to increased business, but
declined as a percentage of net revenue due to administrative cost controls and
productivity initiatives.
Operating, selling and administrative costs increased $10.8 million or 12% as a
result of costs related to processing higher transaction volumes and increases
in occupancy expense on additional leased facilities.
Other income, net, increased $3.3 million or 62% from prior year primarily due
to strong earnings from our unconsolidated affiliates and higher foreign
exchange gains resulting from U.S. dollar denominated transactions in Asia.
These gains were partially offset by higher minority partner expense associated
with our consolidated joint ventures as well as lower interest income and higher
interest expense due to the sale of marketable securities during 1996 and
additional debt incurred in the third quarter of 1996 to acquire 40% of TDS
Logistics, Inc.
The effective income tax rates for 1997 and 1996 were 35.6% and 37.9%,
respectively. 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.
In 1997, Circle benefited from the favorable resolution of IRS audits of the
years 1986 through 1992, resulting in net refunds in excess of amounts
previously anticipated.
13
<PAGE>
Liquidity and Capital Resources
1998 and 1997
- -------------
Net cash provided by operations increased to $38.3 million for the year ended
December 31, 1998, from $34.2 million in 1997. Cash used in investing activities
decreased to $3.9 million in 1998 compared to $37.4 million in 1997 primarily
due to proceeds from sales of investments of $20.3 million in 1998 compared to
purchases of $27.5 million in 1997. In addition, in 1998 Circle used cash of
$13.2 million to acquire businesses.
Long term notes payable decreased $6.1 million. This is primarily due to a
reduction in commercial paper issued and outstanding by $11.0 million, from
$25.0 million as of December 31, 1997, to $14.0 million as of December 31, 1998.
This reduction was partially offset by acquired mortgage liabilities in
conjunction with Circle's Concord acquisition in Singapore.
Net working capital at December 31, 1998, was $93.4 million compared to $100.3
million at December 31, 1997. The decrease is primarily due to the timing of
receipts and disbursements. The fluctuations in individual components is largely
due to 1998 acquisitions.
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.
Capital expenditures for Circle during 1998 were $13.0 million and were funded
by working capital. Circle expects to increase capital expenditures by 50% to
75% during 1999 as a result of increased investment in information technology.
Notes payable increased $5.0 million during 1998. This is primarily attributable
to a $5.8 million overnight loan at year end to cover Circle's daily cash
position at certain locations.
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.
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 1 of the Notes to Consolidated Financial Statements for a description
of new accounting pronouncements.
14
<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 in advance,
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. 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 $7.0 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.
15
<PAGE>
Actual Costs as of December 31, 1998
As of December 31, 1998, Circle has spent approximately $0.2 million in costs
specifically directed to the Year 2000 remediation. This amount does 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:
Communication plan;
Priority operations and performance thresholds;
Emergency instructions for extended outages (includes activation of a "hot
site");
Special security instructions;
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);
Identification of minimum infrastructure capabilities to operate a
location: computer hardware, network infrastructure, software, physical
facilities, utilities, vendor support, personnel and embedded systems;
Assure on-hand inventories of mission critical supplies;
An assessment of the organization's direct suppliers to determine those
that are "high risk";
Identification of the "weak link" in each critical supply chain.
EURO CONVERSION
Circle is engaged in various efforts worldwide related to the introduction in
January 1999 of the European single currency known as the euro. Circle does not
believe that the euro will have a material impact on the competitiveness of its
services in Europe. Circle believes that its current accounting systems will
accommodate the euro conversion with minimal intervention and does not expect to
experience material adverse tax consequences as a result of the conversion.
Based on the results of its efforts to date, management believes that the
internal and external costs incurred to address the euro conversion will not
have a material impact on the operations, cash flows or financial condition of
Circle.
16
<PAGE>
ITEM 7A -QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Discussion
Circle's cash flow and net income are subject to fluctuations due to changes in
exchange rates. Circle attempts to limit its exposure to changing foreign
exchange rates through both operational and financial market actions. Circle
provides services to customers in locations throughout the world and, as a
result, has a well diversified range of functional currencies including the key
currencies of North America, Latin America, Asia, the South Pacific and Europe.
This diverse base of local currency costs serves to partially counterbalance the
earnings effect of potential changes in value of Circle's local currency
denominated revenues.
Short-term exposures to changing foreign currency exchange rates are related
primarily to intercompany transactions. The duration of these exposures is
minimized through the use of an intercompany netting and settlement system that
settles the majority of intercompany obligations two times per month. In
addition, certain exposures are managed by financial market transactions in the
form of forward foreign exchange contracts (typically with maturities of twelve
months or less). Forward foreign exchange contracts are denominated in the same
currency as the receivable or payable being covered, and the term of the forward
foreign exchange contract matches the term of the underlying receivable or
payable. Circle covers known and measurable exposed receivables and payables
denominated in currencies that have a liquid, cost-effective forward foreign
exchange market, and that are of sufficient size to warrant such coverage. The
receivables and payables being covered arise from trade and intercompany
transactions of and among Circle's operating units and intercompany loans among
Circle's operating and other business units.
Circle does not hedge its foreign currency exposure in a manner that would
entirely eliminate the effects of changes in foreign exchange rates on Circle's
consolidated net income.
Circle does not have significant exposure to changing interest rates because of
the low levels of marketable securities and the amount and term of debt on
Circle's balance sheet. Circle does not undertake any specific actions to cover
its exposure to interest rate risk and Circle is not a party to any interest
rate risk management transactions.
Circle does not purchase or hold any derivative financial instruments for
trading purposes.
17
<PAGE>
Exchange Rate Sensitivity
Circle's use of derivative financial instruments is limited to forward foreign
exchange contracts. At December 31, 1998, the nominal value of all open forward
foreign exchange contracts was $1.9 million related to seven transactions
denominated in U.S. dollars, Australian dollars, Japanese yen and British
pounds. A 10% appreciation or 10% depreciation against the U.S. dollar of any or
all of the underlying currencies would not have a material effect on Circle's
net income.
The following table provides information about Circle's non-functional currency
components of balance sheet items by currency, and presents such information in
U.S. dollar equivalents. The table summarizes information on transactions that
are sensitive to foreign currency exchange rates, including non-functional
currency-denominated receivables and payables. The net amount that is exposed to
changes in foreign currency rates is then subjected to a 10% change in the value
of the functional currency versus the non-functional currency.
Non-Functional Currency Exposure in U.S. Dollar equivalents
as of December 31, 1998 (in thousands):
Foreign Exchange
Gain/(Loss) if
Functional Currency
-----------------------
Non-Functional Net Exposure Appreciates Depreciates
Currency Asset Liability Long/(Short) by 10% by 10%
- -------------------- --------- ----------- ------------- ----------- -----------
United States dollar $ 58,560 $ 24,061 $ 34,499 $ (3,450) $ 3,450
Swiss franc 99 988 (889) 89 (89)
Singaporean dollar 101 580 (479) 48 (48)
Irish punt 17 422 (405) 41 (41)
German mark 131 530 (399) 40 (40)
Indian rupee 1 358 (357) 36 (36)
British pound 62 390 (328) 33 (33)
Italian lira 29 352 (323) 32 (32)
Dutch guilder 7 217 (210) 21 (21)
All others 887 1,701 (814) 81 (81)
--------- ----------- ------------- ----------- -----------
Totals $ 59,894 $ 29,599 $ 30,295 $ (3,029) $ 3,029
========= =========== ============= =========== ===========
18
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth at the pages indicated
in Item 14(a) of this Annual Report.
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
sections of Circle's Proxy Statement dated April 1, 1999 entitled "Election of
Directors" and "Section 16(a) Information". Also see "Executive Officers" under
Item 1 above.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
sections of Circle's Proxy Statement dated April 1, 1999 entitled "Compensation
of Executive Officers", "Options Granted to Executive Officers", and "Employment
Agreements".
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section of Circle's Proxy Statement dated April 1, 1999 entitled "Ownership of
Management and Principal Stockholders".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections of Circle's Proxy Statement dated April 1, 1999 entitled "Transactions
with the Company" and "Compensation Committee Interlocks and Insider
Participation".
19
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following are filed as part of this report:
PAGE
(1) (2) Consolidated Financial Statements of Circle:
Consolidated Income Statements for the years ended
December 31, 1998, 1997 and 1996 F-1
Consolidated Balance Sheets, December 31, 1998 and 1997 F-2
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997, and 1996 F-3
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997, and 1996 F-4
Notes to Consolidated Financial Statements F-5 - F-15
Independent Auditors' Report F-16
(3) Exhibits: See the attached Exhibit Index on pages 21 and 22.
(b) Form 8-K:
No reports on Form 8-K were filed during the 3 months ended
December 31, 1998.
All other Schedules required by Form 10K Annual Report have been omitted because
they are not applicable, are included in the notes to the consolidated financial
statements, or were otherwise not required under the instructions contained in
Regulation S-X.
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
3.1 Certificate of Incorporation of the Harper Group, Inc.,
a Delaware corporation. (Incorporated by reference to
Exhibit 4.2 to Registration Statement No. 33-40826
filed on May 24, 1991.)
3.1.2 Certificate of Amendment to Certificate of
Incorporation filed May 14, 1997. (Incorporated by
reference to Exhibit 3.1.2 to the Annual Report on
Form 10-K for fiscal year ended December 31, 1997.)
3.2 Registrant's by-laws, as amended. (Incorporated by
reference to Exhibit 3.2.1 to Annual Report on Form
10-K for the fiscal year ended December 31, 1986, filed
on or about March 31, 1987.)
3.2.1 Amendments to Article IV, Sections 2,3,4,5 and 6 of
Registrant's by-laws, effective as of May 23, 1991.
(Incorporated by reference to Exhibit 3.2.1 to Annual
Report on Form 10-K for the fiscal year ended December
31, 1991, filed on or about March 31, 1992.)
3.2.2 Sections 2 and 3 of Registrant's by-laws effective as
of May 31, 1992. (Incorporated by reference to Exhibit
3.2.2 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 filed on or about March 31,
1993.)
4.1 Specimen certificate of Registrant's Common Stock.
(Incorporated by reference to Exhibit 4.1 to
Registration Statement No. 2-59017, filed on May 16,
1977.)
4.2 Rights Agreement, dated as of October 24, 1994, between
The Harper Group, Inc. and Chemical Trust Company of
California, which includes as Exhibit A thereto the
Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock, as
Exhibit B thereto the Form of Rights Certificate and as
Exhibit C thereto a Summary of Rights to Purchase
Common Stock. (Incorporated by reference to the Form
8-A Registration Statement filed on or about October
24, 1994.)
10.1 Agreement of Merger between Registrant and the Harper
Group, a California corporation, providing for the
reincorporation of Registrant in Delaware.
(Incorporated by reference to Exhibit A to Registrant's
Proxy Statement dated April 1, 1987, filed on or about
April 10, 1987.)
10.3 Form of indemnity agreement between Registrant and each
of its directors (Incorporated by reference to Exhibit
10.3 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, filed on or about March 31,
1989.)
10.4 Agreement and Plan of Reorganization dated as of April
23, 1992, with exhibits attached, including
Registration Rights Agreement, Employment Agreement
between Registrant and Peter Gibert and Indemnification
Agreement. (Incorporated by reference to Exhibit 2.1.
to Current Report on Form 8-K, dated May 21, 1991,
filed on or about May 23, 1991.)
21
<PAGE>
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
10.4.1 Amendments to May 1991 Employment Agreement of Peter
Gibert (Incorporated by reference to Exhibit 10.4.1 to
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.) *
10.4.2 Amendment dated October 27, 1997 to Employment
Agreement of Peter Gibert. (Incorporated by reference
to Exhibit 3.1.2 to the Annual Report on Form 10-K for
fiscal year ended December 31, 1997.) *
10.4.3 Consulting Agreement dated January 1, 1000 between Zita
Logistics, Ltd. and Circle International Group, Inc.)* 40
10.5 1990 Stock Option Plan. (Incorporated by reference to
Exhibit 10.5 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, filed on or about
March 31, 1993.) *
10.6 Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 10.6 to Annual
Report on Form 10-K for the fiscal year ended December
31, 1992, filed on or about March 31, 1993.)*
10.8 Credit Agreement dated October 15, 1993 between
Registrant and Bank of America National Trust and
Savings Association. (Incorporated by reference to
Pages 14-103 to Form 10-Q for the nine months ended
September 30, 1993, filed on or about November 10,
1993.)
10.9 1994 Omnibus Equity Incentive Plan (Incorporated by
reference to the Form S-8 Registration Statement filed
on or about May 9, 1994) *
10.9.1 Amendment No. 1 to 1994 Omnibus Equity Incentive Plan
(Incorporated by reference to Exhibit 10.11.1 to Annual
Report on Form 10-K for fiscal year ended December 31,
1995.)
10.10 1995 Stock Option Plan For Non-Employee Directors
(Incorporated by reference to Exhibit 10.12 to Annual
Report on Form 10-K for the fiscal year ended December
31, 1995.) *
10.11 Employment Agreement with Kim Wertheimer (Incorporated
by reference to Exhibit 10.13 to Annual Report on Form
10-K for the fiscal year ended December 31, 1995.) *
10.12 Letter Agreement dated May 4, 1998 between David I.
Beatson and Circle International Group, Inc. * 43
21.1 List of Subsidiaries 46
23.1 Consent of Deloitte & Touche LLP 47
27 Financial Data Schedule 48
- ----------------------------
* Indicates, as required by Item 14(a)(3), a management contract or compensatory
plan required to be filed as an exhibit to this Form 10-K.
22
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 5, 1999
CIRCLE INTERNATIONAL GROUP, INC.
By: /S/ David I. Beatson
----------------------------------------------
David I. Beatson
Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 5, 1999.
Signature Title
/S/ David I. Beatson Chairman of the Board, President and Chief
- ------------------------------------- Executive Officer (Principal Executive
(David I. Beatson) Officer)
/S/ Janice Kerti Senior Vice President, Chief Financial
- ------------------------------------- Officer and Treasurer (Principal Financial
(Janice Kerti) Officer and Principal Accounting Officer)
/S/ Wesley J. Fastiff Director
- -------------------------------------
(Wesley J. Fastiff)
/S/ Peter Gibert Director
- -------------------------------------
(Peter Gibert)
/S/ Edwin J. Holman Director
- -------------------------------------
(Edwin J. Holman)
/S/ John M. Kaiser Director
- -------------------------------------
(John M. Kaiser)
/S/ John M. Lillie Director
- -------------------------------------
(John M. Lillie)
/S/ Ray C. Robinson, Jr. Director
- -------------------------------------
(Ray C. Robinson, Jr.)
/S/ Frank J. Wezniak Director
- -------------------------------------
(Frank J. Wezniak)
23
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
Year ended December 31,
1998 1997 1996
---- ---- ----
Revenue $ 737,678 $ 716,989 $ 645,630
Freight consolidation costs 435,998 438,945 387,172
----------- ----------- -----------
Net revenue 301,680 278,044 258,458
Other costs and expenses:
Salaries and related 158,382 147,931 141,828
Operating, selling and administrative 119,469 97,740 86,919
----------- ----------- -----------
Total other costs and expenses 277,851 245,671 228,747
----------- ----------- -----------
Income from operations 23,829 32,373 29,711
Other income:
Interest, net 2,475 1,225 2,036
Income from affiliates, net 3,853 5,785 1,563
Other, net 1,288 1,527 1,679
----------- ----------- -----------
Total other income, net 7,616 8,537 5,278
----------- ----------- -----------
Income before taxes 31,445 40,910 34,989
Taxes on income 12,930 14,578 13,272
----------- ----------- -----------
Net income $ 18,515 $ 26,332 $ 21,717
=========== =========== ===========
Net income per share:
Basic $ 1.09 $ 1.57 $ 1.30
=========== =========== ===========
Diluted $ 1.07 $ 1.53 $ 1.28
=========== =========== ===========
Weighted average shares outstanding:
Basic 17,040 16,823 16,671
=========== =========== ===========
Diluted 17,260 17,191 16,926
=========== =========== ===========
See Notes to Consolidated Financial Statements
F-1
24
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and equivalents $ 44,586 $ 17,998
Short-term investments 14,213 34,494
Trade receivables, less allowance for doubtful
accounts of: 1998, $7,131; 1997, $7,816 252,615 223,367
Other receivables 7,765 5,006
Other current assets 7,820 11,264
----------- -----------
Total current assets 326,999 292,129
Property:
Land 15,161 14,021
Buildings and improvements 70,632 56,615
Equipment and furniture 78,204 70,882
----------- -----------
Total 163,997 141,518
Less accumulated depreciation (75,809) (67,405)
----------- -----------
Property, net 88,188 74,113
Marketable equity securities 935 1,284
Investments in unconsolidated affiliates 42,967 40,487
Goodwill, net 30,727 22,014
Other assets 3,913 4,372
----------- -----------
Total assets $ 493,729 $ 434,399
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 7,869 $ 2,847
Trade payables 175,532 153,644
Accrued salaries and related costs 15,582 11,217
Dividends payable 2,312 2,189
Income taxes payable 7,292 6,660
Other liabilities 24,984 15,301
----------- -----------
Total current liabilities 233,571 191,858
Minority interests 4,546 1,462
Deferred income taxes 14,342 12,405
Long-term notes payable 21,558 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, 17,131,994; 1997, 17,004,653 30,822 28,456
Retained earnings 201,907 188,014
Accumulated other comprehensive loss (13,017) (15,498)
----------- -----------
Total stockholders' equity 219,712 200,972
----------- -----------
Total liabilities and stockholders' equity $ 493,729 $ 434,399
=========== ===========
See Notes to Consolidated Financial Statements
F-2
25
<PAGE>
<TABLE>
<CAPTION>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
For the years ended December 31, 1998, 1997 and 1996
Accumulated
Other Total
Common Stock Treasury Stock Retained Comprehensive Comprehensive Stockholders'
------------ --------------
Shares Amount Shares Amount Earnings Income Income (Loss) Equity
----------- --------- --------- --------- ---------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 17,021,311 $ 20,012 (287,000) $ (4,890) $ 156,302 $ (5,037) $ 166,387
Comprehensive income:
Net income - - - - 21,717 21,717 - 21,717
--------
Change in the value of
marketable securities, net - - - - - 399 399 399
Foreign currency translation - - - - - (522) (522) (522)
--------
Other comprehensive income (123)
--------
Comprehensive income 21,594
========
Cash dividends ($.24 per share) - - - - (3,818) - (3,818)
Issuance of stock for acquisition 20,469 496 - - - - 496
Exercise of stock options,
including tax benefit 121,710 2,175 - - - - 2,175
Purchase of treasury stock - - (213,000) (4,057) - - (4,057)
----------- --------- --------- --------- ---------- ---------- ----------
Balance December 31, 1996 17,163,490 $ 22,683 (500,000) $ (8,947) $ 174,201 $ (5,160) $ 182,777
Comprehensive income:
Net income - - - - 26,332 26,332 - 26,332
--------
Change in the value of
marketable securities, net - - - - - 398 398 398
Foreign currency translation - - - - - (10,736) (10,736) (10,736)
--------
Other comprehensive income (10,338)
--------
Comprehensive income 15,994
========
Cash dividends ($.27 per share) - - - - (4,363) - (4,363)
Issuance of stock for acquisition 32,958 785 - - - - 785
Issuance of restricted stock 24,615 626 - - - - 626
Exercise of stock options,
including tax benefit 283,590 5,153 - - - - 5,153
Retirement of treasury stock (500,000) (791) 500,000 8,947 (8,156) - -
----------- --------- --------- --------- ---------- ---------- ----------
Balance December 31, 1997 17,004,653 $ 28,456 - - $ 188,014 $ (15,498) $ 200,972
Comprehensive income:
Net income - - - - 18,515 18,515 - 18,515
--------
Change in the value of
marketable securities, net - - - - - (43) (43) (43)
Foreign currency translation - - - - - 2,524 2,524 2,524
--------
Other comprehensive income 2,481
--------
Comprehensive income 20,996
========
Cash dividends ($.27 per share) - - - - (4,622) - (4,622)
Issuance of restricted stock 13,942 172 - - - - 172
Exercise of stock options,
including tax benefit 113,399 2,194 - - - - 2,194
----------- --------- --------- --------- ---------- ---------- ----------
Balance December 31, 1998 17,131,994 $ 30,822 - - $ 201,907 $ (13,017) $ 219,712
=========== ========= ========= ========= ========== ========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
F-3
26
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
1998 1997 1996
---- ---- ----
Operating activities:
Net income $ 18,515 $ 26,332 $ 21,717
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,604 12,046 11,943
Provision for doubtful accounts 4,232 5,050 3,029
Deferred income taxes 1,963 6,531 (1,527)
Gains on sales of real property,
investments and equipment (271) (613) (1,153)
Equity in earnings of affiliates,
net of dividends received (2,229) (5,785) (1,062)
Minority interests 928 1,286 456
Other 171 (5) 387
Net effect of changes in:
Trade receivables (14,299) (14,475) (36,620)
Other receivables (2,677) 788 (1,168)
Other current assets 3,822 (1,621) (1,935)
Trade payables 4,875 4,113 32,661
Other liabilities 9,674 593 4,124
--------- --------- ---------
Net cash provided by operating activities 38,308 34,240 30,852
--------- --------- ---------
Investing activities:
Proceeds from sales of property 1,527 1,468 9,231
Proceeds from sales of marketable securities 495 6,669 29,225
Purchases of marketable securities - (26) (655)
Net proceeds from sales (purchases) of
short-term investments 20,281 (27,527) 5,327
Capital expenditures (12,960) (14,144) (21,019)
Acquisitions of businesses (13,229) (3,731) (41,276)
Other (3) (101) (205)
--------- --------- ---------
Net cash used in investing activities (3,889) (37,392) (19,372)
--------- --------- ---------
Financing activities:
Repayment of long-term notes payable, net (11,507) (1,295) (1,064)
Increase (decrease) in notes payable 5,022 (4,936) 4,755
Dividends (4,503) (4,085) (3,729)
Proceeds from exercise of stock options 1,980 4,360 1,679
Common stock repurchase - - (4,057)
--------- --------- ---------
Net cash used in financing activities (9,008) (5,956) (2,416)
Effect of exchange rate changes on cash 1,177 (4,458) (24)
--------- --------- ---------
Increase (decrease) in cash and equivalents 26,588 (13,566) 9,040
Cash and equivalents at beginning of period 17,998 31,564 22,524
--------- --------- ---------
Cash and equivalents at end of period $ 44,586 $ 17,998 $ 31,564
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 2,001 $ 2,837 $ 2,650
========= ========= =========
Cash paid for income taxes $ 11,155 $ 6,676 $ 12,845
========= ========= =========
Non-cash transactions:
Issuance of stock for acquisitions $ 21,000 $ 785 $ 496
========= ========= =========
Mortgages assumed in acquisitions $ 5,265 $ - $ -
========= ========= =========
See Notes to Consolidated Financial Statements
F-4
27
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Basis of Presentation - The consolidated financial statements of Circle
International Group, Inc. and subsidiaries (Circle) have been prepared to give
retroactive effect to the merger with Alrod International, Inc. in August 1998
(See Note 3).
Nature of Operations - Circle is an international transportation and logistics
service provider. Circle's services are provided through its network of over 300
offices, distribution centers, and agents located in more than 100 countries on
six continents. Circle's principal lines of business are air freight forwarding,
ocean freight forwarding, customs brokerage and other value-added services such
as warehousing, distribution and insurance. The principal markets for all lines
of business are North America, Europe and Asia with significant operations in
the Middle East, Latin America and the South Pacific (see Note 13).
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Risk Factors - Circle's operations are influenced by many factors, including
economic and political conditions around the world, international laws, currency
exchange rates, and the impact Year 2000 may have on information systems. The
impact of some of these risk factors is reduced by having customers in a wide
range of industries located throughout the world.
Principles of Consolidation - The accompanying consolidated financial statements
include Circle International Group, Inc. and its majority-owned subsidiaries.
Investments in 50% or less owned affiliates over which Circle has significant
influence are accounted for by the equity method (see Note 11). All significant
intercompany balances and transactions have been eliminated.
Foreign Currency Translation - Assets and liabilities of Circle's foreign
subsidiaries are translated into U.S. dollars at year-end rates of exchange, and
income and expenses are translated at average rates during the year. Adjustments
resulting from translating financial statements into U.S. dollars are reported
as cumulative translation adjustments and are shown as a separate component of
other comprehensive income in the statements of stockholders' equity. Gains and
losses from foreign exchange transactions are included in net income.
Cash and Equivalents include demand deposits and investments with original
maturities of three months or less.
Short-term Investments include deposits of cash in interest-bearing securities
that have original maturities of greater than 90 days and less than one year.
Such investments are classified as available for sale and the carrying value
approximates fair value.
Trade Receivables include disbursements made by Circle 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. Management establishes reserves based on the expected
ultimate recovery of these receivables.
Property is stated at cost. Depreciation is computed principally by the
straight-line method at rates based on the estimated useful lives of the various
classes of property as follows: buildings, 20-50 years; leasehold improvements,
life of the lease or estimated useful life if shorter; equipment and furniture,
3-10 years.
Goodwill, representing the excess of purchase price over the fair value of net
assets acquired, is being amortized on a straight-line basis over the period of
expected benefit not exceeding 40 years. Accumulated amortization as of December
31, 1998 and 1997, is $12.2 million and $10.6 million, respectively.
F-5
28
<PAGE>
Impairment of Long Lived Assets - Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long Lived Assets," requires
that long lived assets, and certain identifiable intangibles related to those
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
carrying value of long lived assets, including goodwill, is reviewed
periodically based on the projected undiscounted cash flows of the related
business unit over the remaining amortization period. If the cash flow analysis
indicates that the asset is not recoverable, the carrying value will be reduced
to the fair value of the assets or the present value of the future cash flows.
Revenue Recognition - Revenue and freight consolidation costs are recognized at
the time the freight departs the terminal of origin. Customs brokerage and other
revenue are recognized upon completing the documents necessary for customs
clearance or completing other fee-based services.
Revenue realized as an indirect air carrier or an ocean freight consolidator
includes the direct carrier's charges to Circle for carrying the shipment.
Revenue realized in other capacities includes only the commissions and fees
received.
Net Income per Share - Basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. The difference between weighted average shares outstanding for basic and
diluted is the dilutive effect of outstanding stock options and restricted
stock. Diluted net income per share is computed by dividing net income by the
weighted average number of common shares outstanding including the dilutive
effect of outstanding stock options and restricted stock.
Taxes on Income - Circle provides a deferred tax expense or benefit equal to the
change in the deferred tax assets and liabilities during the year. Deferred
income taxes represent tax credit carry forwards and future tax effects
resulting from temporary differences between the financial statement and the tax
basis of assets and liabilities using current or enacted tax rates in effect for
the year in which the differences are expected to reverse.
Foreign Currency Forward Contracts - Circle uses foreign currency forward
contracts to hedge foreign currency exposure on certain trade and intercompany
transactions. These contracts do not subject Circle to risk due to exchange rate
movements because gains and losses on these contracts offset gains and losses on
the payable or receivable being hedged. Gains and losses on such contracts are
recognized currently in the carrying amount of the related payable. At December
31, 1998, foreign currency forward contracts were outstanding, in the amount of
$1.9 million, which approximates fair value. Realized gains and losses on the
contracts for 1998 and 1997 were insignificant.
Fair Value of Financial Instruments - The fair values presented throughout these
financial statements have been estimated using appropriate valuation
methodologies and market information available at December 31, 1998 and 1997.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value and the estimates presented are not necessarily
indicative of the amounts that Circle could realize in a current market
exchange. The use of different market assumptions or estimation methodologies
could have a material effect on the estimated fair values. Additionally, the
fair values presented throughout these financial statements have not been
estimated since December 31, 1998. Current estimates of fair value may differ
significantly from the amounts presented.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and equivalents, receivables and payables, short-term investments and
notes payable to banks - The carrying amount approximates fair value.
Marketable equity securities - The fair value is based on quoted market
prices. As discussed in Note 4 to the Consolidated Financial Statements,
these securities are recorded at fair value.
Borrowings - The fair value of Circle's long-term debt is estimated based on
quoted market prices for the same or similar issues or on the current rates
offered to Circle for debt of the same remaining maturities. The carrying
amounts approximate their fair value.
F-6
29
<PAGE>
Foreign Currency Forward Contracts - The fair value is estimated based on the
U.S. dollar equivalent at the contract exchange rate. Any gain or loss is
largely offset by a change in the value of the underlying transaction, and is
recorded as an unrealized foreign exchange gain or loss until the contract
maturity date.
Stock-Based Compensation - Circle accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees." ("APB No. 25")
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 2000. Although
Circle has not fully assessed the implications of this new statement, Circle
believes adoption of this statement will not have a material impact on its
consolidated financial statements.
Reclassifications - Certain 1997 and 1996 amounts have been reclassified to
conform with the 1998 presentation.
Note 2 - 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.,
the 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 December 31, 1998, $6.0 million has
been utilized and $4.7 is included in other liabilities. Circle expects to
utilize substantially all of the special charge reserves during 1999. Of the
$10.7 million, $4.5 million was cash related and $6.2 million was non-cash
related.
Note 3 - Acquisitions
In August 1998, Circle 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, Circle 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 held in escrow subject to the resolution
of certain pre-acquisition contingencies. The acquisition was accounted for as a
pooling of interests.
Summarized results of operations of the separate companies are as follows (in
thousands):
6 Months Ended Years ended
June 30, December 31,
1998 1997 1996
----------- ----------- -----------
Net revenues:
Circle $ 134,166 $ 262,753 $ 245,618
Alrod 7,412 15,291 12,840
----------- ----------- -----------
Combined $ 141,578 $ 278,044 $ 258,458
=========== =========== ===========
Net income:
Circle $ 13,043 $ 25,871 $ 21,615
Alrod 259 461 102
----------- ----------- -----------
Combined $ 13,302 $ 26,332 $ 21,717
=========== =========== ===========
F-7
30
<PAGE>
During 1998, Circle also acquired interests in other transportation and
logistics providers located primarily in Singapore and the United Kingdom. In
connection with these acquisitions, the seller retained a minority interest, for
which Circle has buyout options. These acquisitions were accounted for using the
purchase method. The aggregate purchase price for these acquisitions, net of
cash acquired was $13.2 million resulting in $9.8 million of goodwill that is
being amortized over estimated useful lives of up to 20 years.
During 1997, Circle acquired the assets of various freight forwarders and
customs brokers for an aggregate purchase price of $4.9 million, including $0.8
million in Circle's common stock. These acquisitions were accounted for as
purchases. In connection with these acquisitions, Circle recorded $3.4 million
of goodwill, which is being amortized over estimated useful lives of up to 20
years.
In August 1996, Circle acquired a 40% interest in TDS Logistics Inc. (TDS) for
$30 million. TDS is primarily involved in providing specialty packaging and
services for automotive exports. The investment in TDS is recorded in
investments in unconsolidated affiliates and as of the acquisition date included
$28.1 million of excess purchase price over net assets, which is being amortized
over 37 years. Circle has an option to purchase the other 60% interest in TDS at
a price to be determined when the option is exercised. The option is exercisable
between October 1, 1999, and December 31, 1999. If Circle elects not to exercise
its option, other TDS shareholders have the right to sell their shares and can
require Circle to sell its shares in the same manner. (See Note 11, "Investments
in Unconsolidated Affiliates".)
If all of the purchase method acquisitions in 1998 and 1997 occurred on January
1 of the respective years, the effect on revenues and net income would have been
immaterial. The results of these acquisitions are included in Circle's results
as of the date of the acquisitions.
Note 4 - Marketable Equity Securities
Management has designated marketable equity securities as available for sale.
Changes in the fair value of available for sale securities, net of deferred
taxes, are excluded from income and presented in the stockholders' equity
section of the balance sheet under the caption "Accumulated other comprehensive
loss." In 1998 and 1997, Circle sold debt and equity securities and realized
losses of $13,000 and $20,000, respectively. Total unrealized loss on marketable
equity securities before deferred taxes was $83,000 and $15,000, as of December
31, 1998 and 1997, respectively.
Note 5 - Borrowings
Long-term notes payable included commercial paper of $14 million and $25 million
at December 31, 1998 and 1997, respectively. The commercial paper is supported
by a $40 million backup facility line of credit which expires on June 30, 1999,
at which time Circle can convert any outstanding borrowings into a one-year term
loan. The backup facility line of credit requires Circle to comply with certain
financial covenants. Although the commercial paper is issued on a short-term
basis, it is classified as long-term because Circle intends, and has the
ability, to reissue such paper as it matures. At December 31, 1998 and 1997, the
weighted average interest rate of outstanding commercial paper was 5.6% and
6.1%, respectively.
At December 31, 1998 and 1997, Circle had long-term notes payable of
approximately $7.6 and $2.7 million, respectively (excluding current portion and
commercial paper), with a weighted average interest rate of 6.0% and 7.1%,
respectively. These notes are secured by real property.
Principal payments on long-term notes that mature in 1999 ($2.1 million) are
classified as notes payable to banks. Principal payments for 2000 through 2003
are approximately $0.6 million, $1.2 million, $0.4 million, and $0.1 million,
respectively. Principal repayments thereafter are approximately $5.3 million.
Also included in notes payable to banks is $5.8 million of short-term borrowings
at 6.0%.
At December 31, 1998, Circle had unused borrowing capacity from its commercial
paper program and other lines of credit totaling $30 million.
F-8
31
<PAGE>
Note 6 - Lease Commitments
At December 31, 1998, commitments on long-term operating lease agreements for
facilities require the following minimum annual rentals (in thousands):
1999 $ 19,051
2000 16,012
2001 12,568
2002 9,843
2003 8,382
2004 and thereafter 63,684
-----------
Total $ 129,540
===========
Rental expense under such leases was $18.8 million in 1998, $17.2 million in
1997 and $10.9 million in 1996, net of rents from subleases of $3.2 million,
$1.0 million and $0.8 million, respectively. Total rental expense (including
leases on equipment) was $22.3 million in 1998, $19.1 million in 1997 and $12.9
million in 1996.
Note 7 - Contingencies
Circle is party to routine litigation incidental to its business, which
primarily involves claims for goods lost or damaged in transit or improperly
shipped. Many of the lawsuits to which Circle is a party are covered by
insurance and are being defended by Circle's insurance carriers. Circle has
established reserves for these matters and it is management's opinion that the
resolution of such litigation will not have a material adverse effect on
Circle's consolidated financial statements taken as a whole.
Note 8 - Common Stock
Stock Repurchase Programs
Stock repurchase programs totaling one million shares were approved by the Board
of Directors prior to 1997. During 1996, 213,000 shares were acquired at an
average purchase price of $19.05 per share. These shares were held as treasury
stock until July 29, 1997, when they were retired along with previously issued
shares. In February 1997, the Board of Directors approved the repurchase of an
additional 100,000 shares, however no shares were repurchased during 1997. This
authorization was cancelled in 1998.
Shareholder Rights Plan
In October 1994, Circle adopted a Shareholder Rights Plan and declared a
dividend distribution of one preferred share purchase Right for each outstanding
share of Circle's common stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of a new series of junior participating preferred stock
at an exercise price of $53.00.
The Rights will become exercisable if, without approval of the Board of
Directors, a person or group acquires 20% or more of Circle's common stock (or a
lesser percentage set by the Board in the case of a person determined to present
certain specific risks to Circle and its stockholders, as defined in the plan)
or announces a tender offer the consummation of which would result in ownership
of 20% or more of the common stock. If a person or group does acquire 20% or
more of Circle's stock (or such lesser percentage as has been set with respect
to a specific person) each Right unless redeemed will entitle its holder to
purchase, at the Right's then current exercise price, a number of the common
shares of Circle having a market value at that time of twice the Right's
exercise price.
Circle will be entitled to redeem the Rights at one one-hundredth of a cent per
Right at any time before a 20% position (or such lesser percentage as has been
set with respect to a specific person) has been acquired. Until the Rights
become exercisable, Rights certificates will not be sent to stockholders and the
Rights will automatically trade with the common stock.
F-9
32
<PAGE>
Stock Option Plans
The 1982 and the 1990 Stock Option Plans provide for the granting of
non-qualified or incentive stock options to officers and key employees for a
maximum of 956,250 common shares at not less than fair market value on the date
of grant. The Human Resources, Compensation and Nominating Committee of the
Board of Directors determine the exercise period for the options. Under these
plans, Stock Options are generally issued with the restriction that no option
may be exercised before three years from date of grant nor later than eight
years from date of grant.
The 1994 Omnibus Equity Incentive Plan provides for the granting of stock
options, stock appreciation rights, restricted stock awards, performance unit
awards and performance share awards to key employees and consultants of Circle
and its subsidiaries. The plan was originally authorized for a maximum of
2,000,000 common shares, and was amended in May 1998 to increase the maximum to
2,500,000 common shares. Stock options under this plan are generally issued at
an option price at not less than fair market value on the date of grant. To
date, no incentive or non-qualifying stock options have been granted below fair
market value. Stock options under this plan are generally issued with the
restriction that no option may be exercised before one year from the date of
grant nor later than eight years from the date of grant. During 1998 and 1997,
13,942 and 24,615 restricted shares were granted, respectively. These share
grants generally vest within one to three years.
A summary of stock option transactions for the three years ended December 31,
1998, follows:
Shares Weighted
Under Average
Option Exercise Price
----------- --------------
Outstanding at December 31, 1995 988,713 $ 14.89
Granted 570,589 19.67
Exercised (121,710) 13.76
Canceled (35,750) 14.85
-----------
Outstanding at December 31, 1996 1,401,842 16.60
Granted 422,950 23.29
Exercised (283,590) 15.40
Canceled (143,923) 16.73
-----------
Outstanding at December 31, 1997 1,397,279 18.93
Granted 796,250 23.95
Exercised (113,399) 15.95
Canceled (266,700) 25.58
-----------
Outstanding at December 31, 1998 1,813,430 $ 20.64
===========
December 31,
1998 1997 1996
------- ------- ---------
Options available for grant 844,903 841,718 1,123,570
Options exercisable 730,974 441,567 354,683
Weighted average fair value of options
granted during the year $ 7.20 $ 8.37 $ 5.41
F-10
33
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercisable Number Remaining Exercise Number Exercise
Prices of Shares Life (in years) Price of Shares Price
- --------------- ----------- --------------- --------- ---------- ---------
$12.75 - 16.38 399,455 3.88 $ 14.51 313,455 $ 14.11
16.75 - 20.63 375,875 4.41 17.79 211,174 17.55
20.75 - 21.88 388,500 6.92 21.50 52,623 20.99
22.00 - 26.63 557,100 6.77 25.27 153,722 24.97
26.75 - 27.50 92,500 7.30 27.26 - -
----------- ----------
12.75 - 27.50 1,813,430 5.71 20.64 730,974 17.88
=========== ==========
In 1998, 200,000 options granted to Chief Executive Officer, David I. Beatson,
were repriced from $28.00 per share to $21.688 per share.
SFAS No. 123 Pro Forma Disclosures
Circle applies APB No. 25 and related interpretations in accounting for its
Stock Option Plans described above. Accordingly, no compensation cost has been
recognized for its options granted. Had compensation cost for Circle's stock
option plans been determined based on the fair value at the grant dates of the
stock options, consistent with the method in SFAS No. 123, "Accounting for Stock
Based Compensation", Circle's net income and earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
Year ended
1998 1997 1996
------ ------ ------
Net Income: As Reported $ 18,515 $ 26,332 $ 21,717
Pro Forma 16,674 25,142 20,980
Net Income per share:
Basic - As Reported $ 1.09 $ 1.57 $ 1.30
Pro Forma 0.98 1.49 1.26
Diluted - As Reported $ 1.07 $ 1.53 $ 1.28
Pro Forma 0.97 1.46 1.24
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model which requires subjective assumptions
such as future stock price volatility and expected time to exercise. These
assumptions greatly affect the calculated values.
Circle's calculations are based on a multiple option valuation approach and
cancellations are estimated based on a historical pattern. However, in
accordance with SFAS No. 123, the impact of outstanding stock options granted
prior to 1995 has been excluded from the pro forma calculation; accordingly, the
1998, 1997 and 1996 pro forma adjustments are not indicative of future period
pro forma adjustments. The following weighted-average assumptions were used:
1998 1997 1996
------ ------ ------
Expected dividend yield 1.00% 1.00% 1.00%
Expected volatility 43% 37% 36%
Risk-free interest rate 4.67% 5.62% 5.67%
Expected lives (years from vesting) 0.5 0.7 0.5
F-11
34
<PAGE>
Note 9 - Taxes on Income
Taxes on income include the following (in thousands):
1998 1997 1996
------ ------ ------
Federal: Current $ 2,711 $ (637) $ 6,546
Deferred 1,199 6,535 (1,237)
State: Current 426 1,370 1,167
Deferred 481 (363) -
Foreign: Current 7,830 7,315 7,073
Deferred 283 358 (277)
========== ========== ==========
Total $ 12,930 $ 14,578 $ 13,272
========== ========== ==========
Significant components of Circle's net deferred tax liability are as follows (in
thousands):
1998 1997
---- ----
Deferred tax liabilities:
Undistributed earnings of subsidiaries $ 9,459 $ 9,714
Accelerated depreciation 5,025 5,131
Gain on sale of property 2,533 2,250
Incentive compensation 16 -
Investment in subsidiary 273 273
========== ==========
$ 17,306 $ 17,368
========== ==========
Deferred tax assets:
Intercompany billings $ - $ 1,596
Bad debts 1,292 1,613
Vacation pay 836 608
Incentive compensation - 57
Insurance claims reserves 523 882
Valuation of marketable securities 31 6
Other 282 201
========== ==========
$ 2,964 $ 4,963
========== ==========
Net deferred tax liability $ 14,342 $ 12,405
========== ==========
Taxes on income were different than the amount computed by applying the
statutory income tax rate. Such differences are summarized as follows (in
thousands):
1998 1997 1996
------ ------ ------
Tax computed at 35% statutory rate $ 11,006 $ 14,319 $ 12,247
Increases (decreases) resulting from:
Foreign taxes lower than federal rate (1,347) (1,184) (861)
Non-deductible items 2,273 1,212 775
State taxes on income,
net of federal income tax effect 590 654 758
Other 408 (423) 353
========== ========== ==========
Total $ 12,930 $ 14,578 $ 13,272
========== ========== ==========
F-12
35
<PAGE>
Taxes on income include deferred income taxes on undistributed earnings (not
considered permanently invested) of consolidated subsidiaries, net of applicable
foreign tax credits. At December 31, 1998, cumulative earnings of consolidated
foreign subsidiaries designated as permanently invested were approximately $69
million. Deferred income taxes are not provided on permanently invested
earnings.
Sources of pretax income are summarized as follows (in thousands):
1998 1997 1996
------ ------ ------
Domestic $ 7,790 $ 18,944 $ 16,404
Foreign 23,655 21,966 18,585
---------- ---------- -----------
Total $ 31,445 $ 40,910 $ 34,989
========== ========== ===========
Note 10 - Other Income-Net
Other income-net includes the following (in thousands):
1998 1997 1996
------ ------ ------
Interest income $ 4,416 $ 4,163 $ 4,695
Interest expense (1,941) (2,938) (2,659)
Income from affiliates, net 3,853 5,785 1,563
Gains on sales of assets 257 633 1,061
Minority interests (928) (1,286) (456)
Net foreign exchange gains 1,365 2,162 1,258
Other 594 18 (184)
--------- --------- ---------
Total $ 7,616 $ 8,537 $ 5,278
========= ========= =========
Note 11 - Investments in Unconsolidated Affiliates
Investments in net assets of affiliated companies amounted to $43.0 million and
$40.5 million at December 31, 1998 and 1997, respectively. This includes
Circle's 40% investment in TDS Logistics Inc. (TDS) of $38.0 million and $35.3
million as of December 31, 1998 and 1997, respectively. The TDS investment
balance includes the excess of purchase price over net assets of $26.4 million
and $27.1 million as of December 31, 1998 and 1997, respectively, which is being
amortized over 37 years. The results of operations and financial position of TDS
are summarized below (in thousands):
Condensed Income Statement Information: 1998 1997 1996
--------- --------- ---------
Revenue $ 77,521 $ 95,981 $ 50,115
Income from operations 15,348 23,929 6,438
Net income 8,682 12,983 3,297
Condensed Balance Sheet Information: December 31,
1998 1997
--------- ---------
Current assets $ 15,815 $ 25,035
Non-current assets 31,626 34,695
Current liabilities 8,807 13,216
Non-current liabilities 9,613 25,418
Stockholders' equity 29,021 21,096
F-13
36
<PAGE>
Note 12 - Employee Benefit Plans
Circle has a 401(k) Savings Plan in the U.S. under which an employee generally
may contribute up to 15% of compensation to the plan. For every dollar
contributed to the plan, Circle will match 50 cents, up to a maximum of 6% of
the employee's compensation. Circle's contributions for the years ended December
31, 1998, 1997 and 1996 were $1.0 million, $0.9 million and $0.8 million,
respectively. Circle's contributions vest over a four year period. Circle has
various other employee benefit plans outside of the U.S.
Note 13 - 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>
Year ended December 31, 1998:
Total revenue $ 390,877 $ 167,173 $ 197,330 $ - $ (17,702) $ 737,678
Transfers between regions (6,492) (3,935) (7,275) - 17,702 -
---------- ---------- ---------- ---------- ----------- ----------
Revenues from customers $ 384,385 $ 163,238 $ 190,055 $ - $ - $ 737,678
========== ========== ========== ========== =========== ==========
Net revenue $ 161,095 $ 81,361 $ 59,224 $ - $ - $ 301,680
========== ========== ========== ========== =========== ==========
Income (loss) from operations $ 11,298 $ 12,268 $ 9,809 $ (9,546) $ - $ 23,829
========== ========== ========== ========== =========== ==========
Identifiable assets $ 191,021 $ 139,300 $ 153,311 $ 118,358 $ (108,261) $ 493,729
========== ========== ========== ========== =========== ==========
Year ended December 31, 1997:
Total revenue $ 422,151 $ 147,628 $ 167,053 $ - $ (19,843) $ 716,989
Transfers between regions (7,442) (3,613) (8,788) - 19,843 -
---------- ---------- ---------- ---------- ----------- ----------
Revenues from customers $ 414,709 $ 144,015 $ 158,265 $ - $ - $ 716,989
========== ========== ========== ========== =========== ==========
Net revenue $ 159,055 $ 71,065 $ 47,924 $ - $ - $ 278,044
========== ========== ========== ========== =========== ==========
Income (loss) from operations $ 20,110 $ 10,408 $ 9,169 $ (7,314) $ - $ 32,373
========== ========== ========== ========== =========== ==========
Identifiable assets $ 214,520 $ 117,432 $ 102,098 $ 123,914 $ (123,565) $ 434,399
========== ========== ========== ========== =========== ==========
Year ended December 31, 1996:
Total revenue $ 403,300 $ 142,405 $ 114,332 $ - $ (14,407) $ 645,630
Transfers between regions (6,091) (3,396) (4,920) - 14,407 -
---------- ---------- ---------- ---------- ----------- ----------
Revenues from customers $ 397,209 $ 139,009 $ 109,412 $ - $ - $ 645,630
========== ========== ========== ========== =========== ==========
Net revenue $ 146,910 $ 70,465 $ 41,083 $ - $ - $ 258,458
========== ========== ========== ========== =========== ==========
Income (loss) from operations $ 17,510 $ 11,077 $ 7,644 $ (6,520) $ - $ 29,711
========== ========== ========== ========== =========== ==========
Identifiable assets $ 179,315 $ 118,287 $ 96,041 $ 123,835 $ (108,225) $ 409,253
========== ========== ========== ========== =========== ==========
</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.
Circle is domiciled in the U.S. The U.S. had revenues from external customers of
$356 million in 1998, $382 million in 1997 and $367 million in 1996. The U.S.
had long lived assets of $41 million and $44 million at the end of 1998 and
1997, respectively.
F-14
37
<PAGE>
The following tables show the approximate amounts of revenue and net revenue,
expressed in dollars and as a percentage, attributable to Circle's principal
services during each of the three years in the period ended December 31, 1998
(in thousands).
1998 1997 1996
------ ------ ------
Revenue:
Air freight forwarding $ 482,701 66% $ 471,563 66% $ 418,506 65%
Ocean freight forwarding 111,938 15% 111,200 15% 106,554 16%
Customs brokerage and other 143,039 19% 134,226 19% 120,570 19%
---------------- ---------------- ----------------
Total $ 737,678 100% $ 716,989 100% $ 645,630 100%
================ ================ ================
Net Revenue:
Air freight forwarding $ 118,170 39% $ 106,210 38% $ 102,105 39%
Ocean freight forwarding 40,471 13% 37,608 14% 35,783 14%
Customs brokerage and other 143,039 48% 134,226 48% 120,570 47%
---------------- ---------------- ----------------
Total $ 301,680 100% $ 278,044 100% $ 258,458 100%
================ ================ ================
Note 14 - Quarterly Data (unaudited)
(in thousands, except per share amounts)
Net Net Income (Loss)
Net Income per share Dividends
Revenue Revenue (Loss) Basic Diluted per share
------- ------- ------- ------------------ ---------
1998 Quarters
4th Quarter $ 206,706 $ 82,517 $ 5,757 $ 0.34 $ 0.34 $ 0.135
3rd Quarter* 190,799 77,585 (544) (0.03) (0.03) -
2nd Quarter 174,760 73,005 7,857 0.46 0.45 0.135
1st Quarter 165,413 68,573 5,445 0.32 0.31 -
1997 Quarters
4th Quarter $ 194,444 $ 74,506 $ 7,824 $ 0.46 $ 0.45 $ 0.135
3rd Quarter 180,771 69,730 7,330 0.43 0.42 -
2nd Quarter 179,593 69,299 6,506 0.39 0.38 0.135
1st Quarter 162,181 64,509 4,672 0.28 0.27 -
* 1998 includes special charges of $10.7 million or $8.1 million, net of tax
($0.47 per diluted share).
F-15
38
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders of Circle International Group, Inc.:
We have audited the accompanying consolidated balance sheets of Circle
International Group, Inc. and subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated income statements, statements of
stockholders' equity and statements of cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The accompanying
consolidated financial statements give retroactive effect to the 1998
acquisition of Alrod International, Inc., which has been accounted for as a
pooling of interests as described in Note 3 to the consolidated financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Circle International Group, Inc.
and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
San Francisco, California
March 5, 1999
F-16
39
<PAGE>
EXHIBIT 10.4.3
Consulting Agreement
This Consulting Agreement ("Agreement") is entered into as of the first day
of January 1999 by and between Zita Logistics, Ltd. ("Zita") and Circle
International Group, Inc.'s ("CIG") wholly owned subsidiary Circle International
European Holdings Limited ("the Company").
Zita is an independent consulting company engaged in providing consulting
services to businesses.
The Company is engaged in the provision of air freight and related services
worldwide.
The Company desires to use the consulting services of Zita for the term of
this Agreement and Zita desires to provide said services to the Company.
For and in consideration of the mutual promises set forth below, the
parties agree as follows:
1. Services To Be Provided. Zita shall provide the Company and CIG's
global network of offices, except those located in the United States,
Spain and Portugal, with consulting services consisting of:
(a) Identifying, analyzing and reporting on potential strategic
partners;
(b) Selling services offered by Company, including calling on
existing and potential customers;
(c) Assisting in developing responses to global bids and proposals;
(d) Providing training seminars; and
(e) Providing customer satisfaction reviews and surveys.
2. Level Of Service. Zita agrees to provide the services set forth above
in a competent, professional manner and to the reasonable satisfaction
of the Company and its customers.
3. Independent Contractor Status. It is the intent of the parties that
Zita shall be and is an independent contractor, and at no time shall
Zita, its officers or employees be the agent(s) or employee(s) of the
Company or any of its related entities. Zita shall have full and
direct control and supervision over the services provided under this
Agreement and shall determine the method, means and manner of
performance.
40
<PAGE>
4. Responsibility For Employees. Zita shall furnish at its own
discretion, selection and expense any labor required to perform
services under this Agreement. Zita shall be solely responsible for
the direction and control of its employees, including the selection,
hiring, firing, supervision, assignment and direction of employees,
the setting of wages, hours and working conditions, and the adjustment
of grievances. Zita shall determine the method, means and manner of
the performance of the work of its employees and their performance of
this Agreement. Zita assumes full and sole responsibility for the
payment of all wages, benefits and expenses of its employees and for
all income tax withholding, unemployment insurance, social security
taxes and other taxes for its employees. The Company shall neither
have nor exercise disciplinary authority or control over Zita's
employees and shall have no authority to supervise or direct Zita's
employees in the performance of their work. All pay, benefits and
working conditions of Zita and its employees are a matter of agreement
solely between Zita and its employees. Zita and Zita's officers and
employees shall not participate in any benefits enjoyed by the
Company's employees. Zita shall hold the Company and its related
entities harmless for any failure by Zita to comply with any
obligation or right pertaining Zita's employees, including those
arising from statute or regulation.
5. Limitation On Authority. As an independent contractor acting as a
consultant to the Company, Zita and its employees do not have the
authority to make any contract or create any obligation or liability
on behalf of the Company or its related entities. Zita shall pay any
and all taxes which might arise as a result of the services provided
hereunder and shall indemnify and hold harmless the Company and CIG
and their related entities from and against any and all loss or
liability arising from the failure of consultant or its officers or
employees to comply with the provisions of this Agreement.
6. Office Space And Equipment. Zita shall provide its own office space
and office equipment at its own expense.
7. Compensation. During 1999, Zita shall be paid by the Company a
quarterly service fee of U.S. $77,500. Thereafter, for the term of the
Agreement, Zita shall be paid a quarterly service fee of U.S. $68,750.
Additionally, Zita's reasonable business expenses incurred in the
provision of services under this Agreement will be reimbursed by the
Company. Payment shall be made by wire transfer as instructed by Zita
within ten (10) calendar days of receipt of Zita's invoice. Such
invoices shall be sent by Zita to the Company following each calendar
quarter during which Zita performed services under this Agreement.
41
<PAGE>
8. Non-competition. Zita and its officers and employees agree to the
provisions of the attached Non-competition and Non-disclosure
Agreement. Further, Zita and its officers and employees agree that
their services shall be exclusive to the Company and shall not be
offered to third parties without the written consent of the Company.
9. Arbitration. Any and all disputes concerning this Agreement shall be
subject to binding arbitration in London, England, under the
Commercial Arbitration Rules of the American Arbitration Association.
The cost of the arbitration will be divided equally between the
parties and each side shall bear its own legal fees incurred in
connection with the arbitration.
10. Term. The term of this Agreement shall be from January 1, 1999,
through December 31, 2001.
11. Termination. This Agreement may be terminated before its expiration
for reasons constituting cause, which shall include, but not be
limited to, breach of this Agreement or breach of CIG's written
policies (however, such written policies shall not be created for the
purpose of establishing a termination of this Agreement) or any act by
Zita or its officers or employees which constitutes fraud, dishonesty
or illegality. In the event this Agreement is terminated for cause,
all further obligations under this Agreement will cease as of the date
of termination. Once the term of this Agreement expires, or the
Agreement is terminated, the Company, CIG and their related entities
will owe no further obligation to Zita or its officers or employees
other than amounts then accrued and unpaid hereunder, unless there is
an express written agreement to continue an obligation.
12. Entire Agreement. This Agreement supersedes any prior agreement
between the parties, whether oral, written or implied, constitutes the
entire agreement between the parties and may be modified only by a
written agreement signed by both parties hereto.
CIRCLE INTERNATIONAL EUROPEAN HOLDINGS LIMITED
Dated: __________________ BY: _________________________________________
ZITA LOGISTICS, LTD.
Dated: __________________ BY: _________________________________________
42
<PAGE>
EXHIBIT 10.12
World Headquarters
260 Townsend Street
San Francisco
California 94107-1719
Phone: 415-978-0600
May 4, 1998 Fax: 415-978-0558
Mr. David Beatson
260 Townsend Street
San Francisco, CA 94107
Re: Offer of Employment
Dear David:
It is with pleasure that I offer you on behalf of Circle International Group the
position of Chief Executive Officer under the following conditions:
Starting Date: July 1st, 1998 or sooner
Salary: $450,000, annually to be reviewed by the Board
annually for merit and cost of living increases.
Share Options*:
Amount Date Price
------ ---- -----
200,000 Hiring Date Market Price
50,000 Anniversary Hiring Market Price
Date Year 1999
50,000 Anniversary Hiring Market Price
Date Year 2000
50,000 Anniversary Hiring Market Price
Date Year 2001
*The options will vest in one-third increments after 12 months waiting
period.
Signing Bonus: $150,000. Payable January 1st, 1999 plus 1,000
restricted shares which fully vest in one year from
starting date.
Incentive: 1) For period July 1st or sooner through December 31st,
1999: $150,000 guaranteed (any amount above that at the
Board's discretion).
43
<PAGE>
Mr. David Beatson
May 4, 1998
Page 2
Incentive, cont'd: 2) See attachment A) C.E.O. incentive methodology for
subsequent years (i.e., 1999 and beyond).
Agreement Terms: 5 years, subject to a 12-month pay-out for termination
without cause.
Change in Control: Options vest, change in control is 20%+
Other: You will be nominated to the position of Director
effective August 1998. As you know, the Board
understands that for personal reasons, I will
relinquish the position of Chairman prior to the
expiration of my December 31, 1999 term. When this
occurs, I will recommend to the Board that you succeed
me in this position.
Benefits: You will be entitled to a monthly car allowance of $750
per month. Additionally, you will have use of the
Company limousine and part-time driver for business
purposes. Our standard health and medical benefits,
401(k) plan and executive non-qualified deferred
compensation plan will apply in short waiting periods
whenever possible. Additionally, the Company will pay
your monthly dues associated with a local health club,
such as the nearby San Francisco Tennis Club.
This is a tremendous opportunity with unlimited upside potential. We have a
great deal of pride in the excellent Company we have developed and earnestly
believe that you are the right person for the Company.
During our Saturday, May 2nd, conversation, we agreed to Friday, May 15th, as
the date of your acceptance or otherwise. However, after subsequent discussions
with the members of the Board, they have requested that you provide me with your
response (at the latest) by Monday, May 11th, the day of our Board meeting.
Everyone understands the need for confidentiality and your wish to stay through
June 30th with your present company in order to protect certain stock options.
I look forward to hearing from you.
Best regards,
/S/ Peter Gibert
--------------------
Peter Gibert
Chairman of the Board
44
<PAGE>
Mr. David Beatson
May 4, 1998
Page 3
Attachment A: C.E.O. incentive methodology for subsequent years (i.e. 1999 and
beyond)
C.E.O. (Pool is 1% of EBT) ***
Net Revenue Growth
EPS <0% 0 to<10% 10 to<15% 15 to <20% >=20%
- ----- --- -------- --------- ---------- -----
>=25% 25% 60% 100% 120% 150%
>=20% 20% 50% 80% 100% 120%
>=15% 10% 40% 60% 80% 100%
>=10% 3% 20% 30% 60% 80%
Under 10% E.P.S. at Board's discretion.
Minimum incentive 1998 and 1999 = $150,000 each
*** Note: E.B.T. - 1997: $40 Million
E.B.T. - 1998: $49 Million
45
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
The following table sets forth certain information concerning the principal
subsidiaries of Circle as of December 31, 1998.
State or other jurisdiction
Name of incorporation
- ---- ----------------
Alrod International, Inc. California
Circle Airfreight Japan, Ltd. California
Circle Espana, S.A. Spain
Circle Freight International
Speditionsgesellschaft GmbH Germany
Circle Fretes Internacionais do
Brasil Ltda. Brazil
Circle Freight International (Argentina) S.A Argentina
Circle Freight International Belgium S.A. Belgium
Circle Freight International (Canada) Ltd. Canada
Circle Freight International (Netherlands) BV Netherlands
Circle Freight International (India) Pvt. Ltd. India
Circle Freight International (Italia) S.R.L. Italy
Circle Freight International Japan, Inc. Japan
Circle International Korea Co. Limited Korea
Circle Freight International (NZ) Ltd. New Zealand
Circle Freight International
Philippines Ltd., Inc. Philippines
Circle International (Australia) Pty., Ltd. Australia
Circle International (Hong Kong) Ltd. Hong Kong
Circle International, Inc. Delaware
Circle International Limited United Kingdom
Circle International (Singapore) Pte. Ltd. Singapore
Circle International (Sweden) AB Sweden
Circle Worldbridge International (Thailand) Ltd. Thailand
CE Logistics (Asia) Pte. Ltd. Singapore
Concord Express (Singapore) Pte. Ltd. Singapore
Darrell J. Sekin & Co., Inc. Texas
F.J. Tytherleigh & Co. Ltd. United Kingdom
Harper Logistics International S.A. France
J.R. Michels Incorporated Texas
Max Gruenhut B.V. Netherlands
Max Gruenhut GmbH Germany
Regga Holdings Limited Bermuda
Regga Insurance Limited Bermuda
The names of certain subsidiaries have been omitted because such unnamed
subsidiaries, considered in the aggregate, would not constitute a significant
subsidiary as that term is defined in Regulation S-X.
46
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-44357, No. 33-35272, No. 33-53557, No. 33-17601, No. 333-04139, No.
333-04141, No. 333-64147 and No. 333-68127 of Circle International Group, Inc.
and subsidiaries of our report dated March 5, 1999, appearing in this Annual
Report on Form 10-K of Circle International Group, Inc. and subsidiaries for the
year ended December 31, 1998.
/S/ DELOITTE & TOUCHE LLP
San Francisco, California
March 30, 1999
47
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
Circle International Group, Inc., and Subsidiaries
(in thousands)
This schedule contains summary financial information extracted from the
consolidated financial statements from Circle's Annual Report to Stockholders
for the fiscal year ending December 31, 1998, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 44,586
<SECURITIES> 14,213
<RECEIVABLES> 252,615
<ALLOWANCES> 7,131
<INVENTORY> 0
<CURRENT-ASSETS> 326,999
<PP&E> 163,997
<DEPRECIATION> 75,809
<TOTAL-ASSETS> 493,729
<CURRENT-LIABILITIES> 233,571
<BONDS> 0
0
0
<COMMON> 30,822
<OTHER-SE> 188,890
<TOTAL-LIABILITY-AND-EQUITY> 493,729
<SALES> 0
<TOTAL-REVENUES> 737,678
<CGS> 0
<TOTAL-COSTS> 435,998
<OTHER-EXPENSES> 277,851
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,941
<INCOME-PRETAX> 31,445
<INCOME-TAX> 12,930
<INCOME-CONTINUING> 18,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,515
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.07
</TABLE>
