1999
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, 1999
Commission File Number 0-8664
Circle International Group, Inc.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1740320
------------------------------- ----------------
(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
-----------------------------------------------------------
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 27, 2000, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $403,454,315.
At March 27, 2000, the number of shares outstanding of registrant's Common
Stock was 17,597,932.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated April 1, 2000 - Part III of this Form 10-K (Items 10,
11, 12 and 13).
The Exhibit Index is located on pages 17 through 18 hereof.
<PAGE>
PART I
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
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, 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, 1999, is included in Note 14 of the
Notes to Consolidated Financial Statements.
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.
During 1999, 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 1999.
2
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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) on 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 to the consignee. During 1999, Circle
derived approximately 90% 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 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 is 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 1999, Circle derived approximately 10% of its air
freight forwarding net revenue from its services as an airline agent.
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 1999, approximately 36% of Circle's net ocean freight forwarding revenue was
attributable to commissions, forwarding fees and associated ancillary services.
3
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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 an 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 the shipper would be able to procure. In
1999, this service and associated ancillary services contributed approximately
64% of Circle's ocean freight forwarding net revenue.
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.
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.
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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. During 1999, 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),
specializes in providing procurement, financial and distribution management
services to Circle's multinational customers. CTSL purchases both raw materials
for manufacturing and finished goods for distribution, then coordinates their
global deployment, as directed by the customer. CTSL delivers its services
through custom-designed Vendor and Distribution Hub programs. Through CTSL,
Circle is able to seamlessly coordinate a customer's procurement, logistics,
transportation and distribution activities within a single supply chain program.
This enables Circle to optimize customer supply chains by streamlining the
material, information and financial flows through integration of the specific
supply chain processes and elimination of redundant transactions.
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, fuel costs, 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 both 1999 and 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
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, offices in
multiple global locations, a broad array of services and a technology
infrastructure which provides global support to customers' operations.
Globalization has contributed to increased consolidation in the industry
resulting in competition from larger multi-national firms. Further consolidation
in the industry is anticipated.
5
<PAGE>
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.
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 to competitive
pressures which have reduced traditional freight forwarding and customs
brokerage margins.
Marketing
Circle's worldwide services are marketed primarily by senior executives, local
and global sales professionals, and over 450 country, region, division and
branch managers whose responsibilities include business development. This team
generally interacts with 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.
In an effort to accelerate top-line revenue growth, Circle embarked on a
strategic initiative to expand the sales and marketing infrastructure during the
third quarter of 1998. During 1999, Circle successfully completed this
initiative by winning new customers and increasing business with existing
customers, versus growth through acquisitions. In conjunction with the sales and
marketing expansion, Circle continues to invest significant resources in
enhancing its information systems in order meet their customers' changing
business needs and to promote productivity. Many of the information technology
enhancements, such as the use of EDI applications, global shipment tracking,
internet tracking, and document imaging, improve customer connectivity and serve
as important sales tools.
Employees
As of December 31, 1999, Circle had over 4,900 employees.
Executive Officers
Circle's executive officers are as follows:
Name Age Position
---- --- --------
David I. Beatson 52 Chairman of the Board, President and Chief Executive
Officer
Janice Kerti 51 Senior Vice President, Chief Financial Officer and
Treasurer
Cynthia A. Stoddard 43 Senior Vice President and Chief Information Officer
Robert H. Kennis 47 Senior Vice President, Secretary and General Counsel
Stephen J. Russell 47 Senior Vice President, Sales and Marketing
Rae Fawcett 50 Senior Vice President, Human Resources and Quality
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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.
Ms. Kerti joined Circle in September 1996 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 for MSAS Cargo International, Ltd.
and as Managing Director of its South Pacific Operations.
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.
Mr. Kennis joined Circle in 1989. He serves as Senior 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.
Mr. Russell joined Circle in July 1998, following Circle's acquisition of Alrod
International, Inc., where he was a shareholder and Executive Vice President for
18 years. He initially joined Circle as Senior Vice President, Sales, Western
Division and in October 1998 he assumed his current position as Senior Vice
President, Sales and Marketing.
Ms. Fawcett joined Circle in January 1977 and has occupied a number of
management positions. In January 1991 she was appointed Vice President, Quality,
responsible for Circle achieving its ISO 9002 certification. She presently has
responsibility for managing Circle's Human Resources and Quality functions.
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, 1999
concerning Circle's domestic and foreign facilities and freight handling
terminals.
Number of Facilities
Owned Leased Total
Domestic 10 56 66
Foreign 28 162 190
-------- -------- --------
Total 38 218 256
======== ======== ========
Circle owns its headquarters building in San Francisco.
Under many of its leases, Circle is responsible for payment of property taxes,
maintenance and insurance in addition to rental payments. In 1999, the aggregate
rental expense for all of Circle's leased facilities was approximately $21.6
million.
For further information concerning Circle's lease commitments, see Note 6 of the
Notes to Consolidated Financial Statements.
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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.
Certain 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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
---- ---
1999
Fourth Quarter $25.63 $19.00
Third Quarter 26.00 20.00
Second Quarter 22.00 14.50
First Quarter 19.63 14.56
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
As of February 15, 2000, 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 364.
Dividends Declared
Dividends declared per common share during 1999 and 1998 were:
1999 1998
------ ------
June 30 $0.135 June 29 $0.135
December 30 0.135 December 14 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,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Air freight forwarding $ 528,698 65% $ 482,701 66% $ 471,563 66% $ 418,506 65% $ 378,900 65%
Ocean freight forwarding 130,478 16% 111,938 15% 111,200 15% 106,554 16% 96,921 17%
Customs brokerage and other 154,901 19% 143,039 19% 134,226 19% 120,570 19% 104,812 18%
--------------- --------------- --------------- --------------- ---------------
Total $ 814,077 100% $ 737,678 100% $ 716,989 100% $ 645,630 100% $ 580,633 100%
=============== =============== =============== =============== ===============
Net Revenue:
Air freight forwarding $ 130,065 39% $ 118,170 39% $ 106,210 38% $ 102,105 39% $ 94,573 41%
Ocean freight forwarding 47,026 14% 40,471 13% 37,608 14% 35,783 14% 32,238 14%
Customs brokerage and other 154,901 47% 143,039 48% 134,226 48% 120,570 47% 104,812 45%
--------------- --------------- --------------- --------------- ---------------
Total $ 331,992 100% $ 301,680 100% $ 278,044 100% $ 258,458 100% $ 231,623 100%
=============== =============== =============== =============== ===============
Income from
operations (1) $ 27,213 $ 23,829 $ 32,373 $ 29,711 $ 26,496
Net income (1) 23,212 18,515 26,332 21,717 18,159
Net income per share: (1)
Basic 1.35 1.09 1.57 1.30 1.08
Diluted 1.34 1.07 1.53 1.28 1.07
Dividends declared
per share 0.27 0.27 0.27 0.24 0.22
Weighted average shares
outstanding:
Basic 17,213 17,040 16,823 16,671 16,791
Diluted 17,365 17,260 17,191 16,926 17,026
At December 31,
Working capital $ 107,911 $ 93,428 $ 100,271 $ 73,570 $ 73,650
Total assets 545,392 493,729 434,399 409,253 348,256
Long-term obligations 35,883 21,558 27,702 29,014 30,183
Stockholders' equity 240,975 219,712 200,972 182,777 166,387
Number of employees 4,970 4,600 4,160 3,780 3,360
<FN>
(1) 1998 includes special charges of $10.7 million, or $8.1 million, net of tax ($0.47 per diluted share).
</FN>
</TABLE>
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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. 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
1999 versus 1998
Revenue increased 10% to $814.1 million compared to $737.7 million for 1998 due
to increases in air freight forwarding and ocean freight forwarding revenue. Net
revenue, which represents revenue less freight consolidation costs, also
increased 10% to $332.0 million compared to $301.7 million in 1998. Both revenue
and net revenue growth benefited from acquisitions completed during the second
half of 1998.
Air freight forwarding revenue increased 10% or $46.0 million over 1998 as a
result of volume increases in Asia Pacific and Europe. Asia Pacific continues to
be our fastest growing region for this product line and contributed a major
portion of the overall increase. These increases were partially offset by volume
reductions in North America mainly due to decreased export activity to Asia
Pacific. Air freight forwarding net revenue increased 10% or $11.9 million.
North America's volume reductions were offset by an increase in the yield, due
to lower carrier costs.
Ocean freight forwarding revenue increased 17% or $18.5 million over 1998, while
ocean freight forwarding net revenue increased 16% or $6.6 million. The
increases were principally due to volume increases in Asia Pacific and Europe.
Customs brokerage and other net revenue, which includes warehousing,
distribution and other logistics services, increased 8% or $11.9 million.
Customs brokerage revenues increased due to increased inbound traffic in Asia
Pacific and North America. Warehousing and distribution revenues increased in
Europe and Asia Pacific, and were partially offset by declines in North America
due to volume decreases from certain customers.
Salaries and related costs increased 10% or $15.0 million. As a percentage of
net revenue, salaries and related costs were 52.2% in 1999 compared to 52.5% in
1998. Operating, selling and administrative expenses increased 10% or $11.9
million. During 1999, salaries and related costs as well as operating, selling
and administrative expenses were affected by Y2K preparedness expenses and the
impact of two strategic initiatives that Circle embarked on during the later
part of 1998. These initiatives, which took the form of sales and marketing
expansion activities and information technology enhancements, amounted to $5.2
million or 35% of the $15.0 million salary and related cost increase and $3.1
million of the increase in operating, selling and administrative expenses. Also
during 1999, Y2K expenses totaled $8.8 million.
Total other income, net, increased $1.7 million due primarily to a $4.5 million
gain on the sale of securities further discussed in Note 4 to the consolidated
financial statements and a $0.8 million gain on the sale of our New Zealand
perishables business. These gains were offset primarily by $2.8 million of lower
interest income, net. The decrease in interest income, net, resulted from
reduced short-term investments that were liquidated to fuel expansion activity
in 1998 and higher interest expense from increased borrowings in 1999.
The effective income tax rate for 1999 was 36.5% compared to 41.1% for the
comparable period in 1998. The 1998 effective tax rate was adversely impacted by
the special charges discussed in Note 2 to the consolidated financial
statements. The effective tax rate for 1998 excluding special charges was 36.8%.
Circle's effective tax rate fluctuates primarily due to changes in the level of
pre-tax income in foreign countries which have different rates.
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1998 versus 1997
Revenue in 1998 increased by $20.7 million or 3% over 1997. This increase
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 and included a negative impact from foreign exchange of approximately $13.1
million.
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. 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 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. 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.
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.
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, 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.
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.
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 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.
11
<PAGE>
Liquidity and Capital Resources
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; rather, they are reflected in Circle's trade receivables and
trade payables.
1999 versus 1998
Net cash provided by operating activities was $8.3 million for 1999, compared to
$38.3 million in 1998. The decrease in 1999 was primarily due to an increase in
net working capital. Net working capital increased $26.8 million during 1999,
principally due to expansion activities and the timing of receipts and
disbursements. During 1999, a substantial portion of the revenue growth was
generated in Europe and Asia where credit terms are traditionally longer than
those customarily granted in the US.
Cash used in investing activities for 1999, was $22.3 million compared to $3.9
million in 1998. Circle incurred capital expenditures of $28.5 million during
1999. These expenditures were mainly due to information technology initiatives
and general facilities expansion in Europe and Asia Pacific. Proceeds from the
sale of equity securities includes the $4.5 million gain on sale of Equant N. V.
securities further discussed in Note 4 to the consolidated financial statements.
During 1998, Circle liquidated approximately $20.3 million of short-term
investments to fund acquisitions.
Cash provided by financing activities for 1999 was $9.8 million versus $9.0
million used in financing activities last year. Long-term notes payable
increased $10.7 million due primarily to a $11.0 million increase of commercial
paper issued and outstanding. Commercial paper outstanding as of December 31,
1999 was $25.0 million compared to $14.0 million as of December 31, 1998. The
semi-annual dividends of $0.135 per share declared in December 1998 and June
1999 totaling $4.6 million were paid in 1999. A semi-annual dividend of $0.135
per share was also declared in December 1999 and will be paid during the first
quarter of 2000. Proceeds from the exercise of stock options amounted to $4.5
million in 1999 compared to $2.0 million in 1998.
At December 31, 1999, Circle had available borrowing capacity of $19.0 million.
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.
1998 versus 1997
Net cash provided by operations increased to $38.3 million for the year ended
December 31, 1998, from $34.2 million in 1997. 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 are largely due to 1998 acquisitions.
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 $27.6 million in 1997. Capital
expenditures during 1998 were $13.0 million. In addition, in 1998 Circle used
cash of $13.2 million to acquire businesses.
Cash used in financing activities for 1998 was $9.0 million versus $6.0 million
last year. Commercial paper decreased by $11.0 million, from $25.0 million as of
December 31, 1997, to $14.0 million as of December 31, 1998. Short-term notes
payable increased $5.0 million during 1998 compared to a $4.9 million decrease
in 1997. The increase in 1998 was primarily attributable to a $5.8 million
overnight loan at year-end 1998 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 on August 14, 1998. Proceeds from the exercise of stock
options amounted to $2.0 million in 1998 compared to $4.4 million in 1997.
12
<PAGE>
New Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements for a description
of new accounting pronouncements.
YEAR 2000
Circle did not encounter any material problems associated with the Year 2000
rollover with any of its internally developed or vendor-supplied mission
critical systems, services or products. Mission critical systems, services and
products are defined as those systems, services and products critical to the
ongoing operation of the business. Data exchanges and communications between
Circle offices and business partners, government agencies and customers were
initiated successfully following the century change.
Circle funded all Year 2000 related costs through operating cash flows from
operations and all Year 2000 expenditures were expensed as incurred. For the
three and twelve months ended December 31, 1999, Circle spent $0.8 million and
$8.8 million, respectively, in costs specifically directed to the Year 2000
remediation. An additional $0.7 million is estimated to be spent during the
first half of 2000 for staffing the Year 2000 project management office and for
finalizing system remediation not completed at year-end.
The Year 2000 project management office will continue to monitor and validate
its mission critical systems, finalize Year 2000 non-mission critical related
issues and resolve any other Year 2000 related business problems that may arise.
However, Circle does not anticipate encountering any material Year 2000
problems.
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. The euro
conversion did not have a material impact on the competitiveness of its services
in Europe. Circle's current accounting systems handled the euro conversion with
minimal intervention and did not experience material adverse consequences as a
result of the conversion. The internal and external costs incurred to address
the euro conversion did not have a material impact on the operations, cash flows
or financial condition of Circle.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Discussion
Circle's cash flows 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, operates with many 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 effect of
potential changes in the value of Circle's local currency denominated revenues
and expenses.
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
loans and transactions of and 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.
13
<PAGE>
Circle is subject to changing interest rates because its debt consists primarily
of short-term commercial paper. 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.
Exchange Rate Sensitivity
Circle's use of derivative financial instruments is limited to forward foreign
exchange contracts. At December 31, 1999, the nominal value of all open forward
foreign exchange contracts was $0.6 million related to one transaction
denominated in 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 tables provide comparable information about Circle's
non-functional currency components of balance sheet items by currency, and
presents such information in U.S. dollar equivalents at December 31, 1999 and
1998. These tables summarize 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, 1999 (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 $ 51,704 $ 35,934 $ 15,770 $ 1,577 $ (1,577)
European Union euro 215 3,092 (2,877) (288) 288
Singaporean dollar 34 1,654 (1,620) (162) 162
Japanese yen 13 1,518 (1,505) (150) 150
Hong Kong dollar - 412 (412) (41) 41
Canadian dollar 13 400 (387) (39) 39
Australian dollar 159 296 (137) (14) 14
British pound 36 232 (196) (20) 20
Taiwanese dollar - 191 (191) (19) 19
All others 78 703 (625) (62) 62
--------- ----------- ------------- ----------- -----------
TOTALS $ 52,252 $ 44,432 $ 7,820 $ 782 $ (782)
========= =========== ============= =========== ===========
14
<PAGE>
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
========= =========== ============= =========== ===========
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 Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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, 2000 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, 2000 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, 2000 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, 2000 entitled "Transactions
with the Company" and "Compensation Committee Interlocks and Insider
Participation".
15
<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, 1999, 1998 and 1997 F-1
Consolidated Balance Sheets, December 31, 1999 and 1998 F-2
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999,1998, and 1997 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 F-4
Notes to Consolidated Financial Statements F-5 - F-16
Independent Auditors' Report F-17
(3) Exhibits: See the attached Exhibit Index on pages 17 and 18.
(b) Form 8-K:
No reports on Form 8-K were filed during the 3 months ended
December 31, 1999.
All other Schedules required by Form 10K 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 requirements of Regulation S-X.
16
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
- - ------ ------- ------
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.)
10.2 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.)
10.3 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.)
10.3.1 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.)*
10.3.2 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.)*
17
<PAGE>
10.3.3 Consulting Agreement dated January 1, 1999 between Zita
Logistics, Ltd. and Circle International Group, Inc.
(Incorporated by reference to Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and filed on or
about March 31, 1999.)*
10.4 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.)*
10.5 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.)*
10.6 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.)
10.7 1994 Omnibus Equity Incentive Plan (Incorporated by
reference to the Form S-8 Registration Statement filed on or
about May 9, 1994.)*
10.7.1 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.)
10.8 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.)*
10.9 Letter Agreement dated May 4, 1998 between David I. Beatson
and Circle International Group, Inc. (Incorporated by
reference to Exhibit 10.12 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.)*
10.10 Letter Agreement dated July 31, 1998 between Stephen J. 37
Russell, Circle International Group, Inc. and Alrod
International, Inc.*
10.11 Circle International Group Savings Plan (Incorporated by
reference to the Form S-8 Registration Statement filed on or
about September 24, 1998.)*
10.12 1999 Stock Option Plan (Incorporated by reference to the
Form S-8 Registration Statement filed on or about May 19,
1999.)*
10.13 Circle International Group, Inc. Employee Stock Purchase
Plan (Incorporated by reference to the Form S-8 Registration
Statement filed on or about May 19, 1999.)*
21.1 List of Subsidiaries 47
23.1 Consent of Deloitte & Touche LLP 48
27 Financial Data Schedule 49
* 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.
18
<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 29, 2000
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 29, 2000.
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/ Ray C. Robinson, Jr. Director
- - -------------------------------------
(Ray C. Robinson, Jr.)
19
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
Year ended December 31,
1999 1998 1997
---- ---- ----
Revenue $ 814,077 $ 737,678 $ 716,989
Freight consolidation costs 482,085 435,998 438,945
---------- ---------- ----------
Net revenue 331,992 301,680 278,044
Other costs and expenses:
Salaries and related 173,431 158,382 147,931
Operating, selling and administrative 31,348 119,469 97,740
---------- ---------- ----------
Total other costs and expenses 304,779 277,851 245,671
---------- ---------- ----------
Income from operations 27,213 23,829 32,373
Other income (expense):
Interest income (expense), net (304) 2,475 1,225
Income from affiliates, net 3,922 3,853 5,785
Other, net 5,724 1,288 1,527
---------- ---------- ----------
Total other income, net 9,342 7,616 8,537
---------- ---------- ----------
Income before taxes 36,555 31,445 40,910
Taxes on income 13,343 12,930 14,578
---------- ---------- ----------
Net income $ 23,212 $ 18,515 $ 26,332
========== ========== ==========
Net income per share:
Basic $ 1.35 $ 1.09 $ 1.57
========== ========== ==========
Diluted $ 1.34 $ 1.07 $ 1.53
========== ========== ==========
Weighted average common
shares outstanding:
Basic 17,213 17,040 16,823
========== ========== ==========
Diluted 17,365 17,260 17,191
========== ========== ==========
Dividends declared per share $ 0.27 $ 0.27 $ 0.27
========== ========== ==========
See Notes to Consolidated Financial Statements
F-1
20
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and equivalents $ 40,347 $ 44,586
Short-term investments 14,366 14,213
Trade receivables, less allowance for doubtful
accounts of: 1999, $7,835; 1998, $7,131 284,504 252,615
Other receivables 10,415 7,765
Other current assets 8,402 7,820
---------- ----------
Total current assets 358,034 326,999
Property:
Land 15,258 15,161
Buildings and improvements 75,501 70,632
Equipment and furniture 96,048 78,204
---------- ----------
Total 186,807 163,997
Less accumulated depreciation (83,953) (75,809)
---------- ----------
Property, net 102,854 88,188
Equity securities 770 935
Investments in unconsolidated affiliates 48,207 42,967
Goodwill, net 31,166 30,727
Other assets 4,361 3,913
---------- ----------
Total assets $ 545,392 $ 493,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 7,801 $ 7,869
Trade payables 187,724 175,532
Accrued salaries and related costs 17,008 15,582
Dividends payable 2,349 2,312
Income taxes payable 8,161 7,292
Other liabilities 27,350 24,984
---------- ----------
Total current liabilities 250,393 233,571
Minority interests 5,809 4,546
Deferred income taxes 12,602 14,342
Capital lease obligation 3,369 -
Long-term notes payable 32,244 21,558
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par: shares
authorized, 1,000,000; none issued - -
Common stock, $1 par: shares
authorized, 40,000,000;
shares issued and outstanding
1999, 17,419,001; 1998, 17,131,994 35,612 30,822
Retained earnings 220,437 201,907
Accumulated other comprehensive loss (15,074) (13,017)
---------- ----------
Total stockholders' equity 240,975 219,712
---------- ----------
Total liabilities and stockholders' equity $ 545,392 $ 493,729
========== ==========
See Notes to Consolidated Financial Statements
F-2
21
<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, 1999, 1998 and 1997
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, 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 loss ( 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
Comprehensive income:
Net income - - - - 23,212 $ 23,212 - 23,212
---------
Change in the value of
marketable securities, net - - - - - 39 39 39
Foreign currency translation - - - - - (2,096) (2,096) (2,096)
---------
Other comprehensive loss (2,057)
---------
Comprehensive income $ 21,155
=========
Cash dividends ($.27 per share) - - - - (4,682) - (4,682)
Exercise of stock options,
including tax benefit 287,007 4,790 - - - - 4,790
----------- --------- --------- --------- ---------- ----------- ----------
Balance December 31, 1999 17,419,001 $ 35,612 - $ - $ 220,437 $ (15,074) $ 240,975
=========== ========= ========= ========= ========== =========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
F-3
22
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
1999 1998 1997
---- ---- ----
Operating activities:
Net income $ 23,212 $ 18,515 $ 26,332
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 16,046 13,604 12,046
Provision for doubtful accounts 5,898 4,232 5,050
Deferred income taxes (2,043) 1,963 6,531
Gains on sales of assets (5,228) (271) (613)
Equity in earnings of affiliates, net of
dividends received (3,156) (2,229) (5,785)
Minority interests, net of dividends paid 338 928 1,286
Other (36) 171 (5)
Net effect of changes in working capital
Trade receivables (39,280) (14,299) (14,475)
Other receivables (938) (2,677) 788
Other current assets (1,425) 3,822 (1,621)
Trade payables 12,634 4,875 4,113
Other liabilities 2,238 9,674 593
--------- --------- ---------
Net cash provided by operating activities 8,260 38,308 34,240
--------- --------- ---------
Investing activities:
Proceeds from sales of assets 4,301 1,527 1,468
Proceeds from sales of equity securities 5,019 495 6,669
Net proceeds from sales (purchases)
of short-term investments (436) 20,281 (27,553)
Capital expenditures (28,473) (12,960) (14,144)
Acquisitions of businesses (2,725) (13,229) (3,731)
Other - (3) (101)
--------- --------- ---------
Net cash used in investing activities (22,314) (3,889) (37,392)
--------- --------- ---------
Financing activities:
Issuance (repayment) of long-term
notes payable 10,686 (11,507) (1,295)
Issuance (repayment) of short-term
notes payable (68) 5,022 (4,936)
Payments on capital lease (634) - -
Dividends (4,645) (4,503) (4,085)
Proceeds from exercise of stock options 4,477 1,980 4,360
--------- --------- ---------
Net cash provided by (used in)
financing activities 9,816 (9,008) (5,956)
Effect of exchange rate changes on cash (1) 1,177 (4,458)
--------- --------- ---------
Increase (decrease) in cash and equivalents (4,239) 26,588 (13,566)
Cash and equivalents at beginning of period 44,586 17,998 31,564
--------- --------- ---------
Cash and equivalents at end of period $ 40,347 $ 44,586 $ 17,998
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 2,951 $ 2,001 $ 2,837
========= ========= =========
Cash paid for income taxes $ 14,607 $ 11,155 $ 6,676
========= ========= =========
Non-cash transactions:
Issuance of stock for acquisitions $ - $ 21,000 $ 785
========= ========= =========
Mortgages assumed in acquisitions $ - $ 5,265 $ -
========= ========= =========
Property acquired under capital lease $ 4,366 $ - $ -
========= ========= =========
See Notes to Consolidated Financial Statements
F-4
23
<PAGE>
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Nature of Operations - Circle International Group, Inc. and subsidiaries
(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 14).
Basis of Presentation - The consolidated financial statements of Circle have
been prepared to give retroactive effect to the merger with Alrod International,
Inc. in August 1998 (See Note 3), which was accounted for under the pooling of
interests method.
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 and
currency exchange rates. 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 controlled 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.
Marketable securities consist of preferred stock and common stock. Marketable
securities are stated at market value as determined by the most recently traded
price of each security at the balance sheet date. By policy, Circle invests
primarily in high-grade marketable securities. All marketable securities are
defined as available-for-sale securities under the provisions of Statement of
Financial Accounting Standards No. ("SFAS") 115, "Accounting for Certain
Investments in Debt and Equity Securities."
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 statements. Management establishes reserves based on the
expected ultimate recovery of these receivables. Changes in reserves for 1999,
1998 and 1997 are as follows (in thousands):
Allowance for doubtful accounts Balance at Charged to Balance at
the beginning costs and Deductions the end
Year Ended December 31, of year expenses /Write-offs of year
- - ----------------------- ------------- ---------- ----------- ----------
1999 $ 7,131 $ 4,705 $ (4,001) $ 7,835
1998 7,816 4,232 (4,917) 7,131
1997 5,237 5,050 (2,471) 7,816
F-5
24
<PAGE>
Property is stated at cost. The cost of property held under capital leases is
equal to the lower of the net present value of the minimum lease payments or the
fair value of the leased property at the inception of the lease. 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 amortized on a straight-line basis over the period of
expected benefit, not exceeding 40 years. Accumulated amortization as of
December 31, 1999 and 1998, was $14.2 million and $12.2 million, respectively.
Impairment of Long Lived Assets - 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 carrying amount of an asset is not
recoverable, the carrying value will be reduced to the estimated 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, 1999 and 1998, the notional amount of the foreign currency forward contracts
outstanding amounted to $0.6 million and $1.9 million, respectively. The fair
value of the contracts at December 31, 1999 and 1998, respectively, were
insignificant. Realized gains and losses on the contracts for 1999, 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, 1999 and 1998.
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, 1999. 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.
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.
F-6
25
<PAGE>
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. The carrying value of the
capital lease obligation approximates fair value.
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"). The
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," are set forth in Note 8.
New Accounting Standards - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS 137. SFAS No. 133 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 2001.
Circle has not assessed the impact of this new statement.
Reclassifications - Certain 1998 and 1997 amounts have been reclassified to
conform with the 1999 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.
(Alrod), the write-off of certain receivables at Circle Trade Services Ltd.
(CTSL), certain charges related to Latin America operations, facility
consolidation, the write-down of information technology assets and employee
severance costs. These charges were recorded in operating, selling and
administrative expenses. As of December 31, 1998, $6.0 million had been utilized
and $4.7 million was included in other liabilities. As of December 31, 1999,
$9.0 million has been utilized and $1.7 million is included in other
liabilities.
Note 3 - Acquisitions
In August 1998, Circle acquired 100% of the outstanding shares of 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 continues to be 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 prior to the
combination are as follows (in thousands):
6 Months Ended Years ended
June 30, December 31,
1998 1997
----------- -----------
Net revenues:
Circle $ 134,166 $ 262,753
Alrod 7,412 15,291
----------- -----------
Combined $ 141,578 $ 278,044
=========== ===========
Net income:
Circle $ 13,043 $ 25,871
Alrod 259 461
----------- -----------
Combined $ 13,302 $ 26,332
=========== ===========
F-7
26
<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 using
the purchase method. 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.
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 - Equity Securities
Management has designated 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 losses on equity securities as of
December 31, 1999, 1998 and 1997 were immaterial.
During the fourth quarter of 1999, Circle sold approximately 30% of its
investment in the equity securities of Equant N.V., an international data
network service provider, for net proceeds and a pre-tax gain of approximately
$4.5 million and an after-tax gain of approximately $2.7 million or $.16 per
diluted share. The pre-tax gain is recorded as Other, net in the Consolidated
Income Statements. The remaining shares are held in a trust, are not currently
marketable and have a zero cost basis. No other gains or losses on the sale of
equity securities occurred during 1999.
Note 5 - Borrowings
Included in the $7.8 million notes payable to banks are $5.9 million of
overnight borrowing at 6.5%.
Long-term notes payable included commercial paper of $25.0 million and $14.0
million at December 31, 1999 and 1998. The commercial paper is supported by a
$40.0 million backup facility line of credit which expires on June 30, 2000, 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 to reissue such
paper as it matures and has the ability to refinance on a long-term basis. At
December 31, 1999 and 1998, the weighted average interest rate of outstanding
commercial paper was 6.5% and 5.6%, respectively.
At December 31, 1999 and 1998, Circle had long-term notes payable of
approximately $7.2 million and $7.6 million, respectively (excluding current
portion and commercial paper), with a weighted average interest rate of 5.8% and
6.0%, respectively. These notes are secured by real property.
Principal payments on long-term notes that mature in 2000 amounting to $1.9
million are classified as notes payable to banks. Principal payments for 2001
through 2004 are approximately $1.1 million, $0.4 million, $0.1 million and $0.1
million, respectively. Principal repayments thereafter are approximately $5.5
million. At December 31, 1999, Circle had unused borrowing capacity from its
commercial paper program and lines of credit totaling $19 million.
F-8
27
<PAGE>
Note 6 - Lease Commitments
At December 31, 1999, commitments on capital leases and long-term operating
leases with remaining terms greater than one year require the following minimum
annual payment obligations (in thousands):
Capital Operating
Lease Leases
--------- ----------
2000 $ 608 $ 22,530
2001 608 15,581
2002 608 11,967
2003 608 9,494
2004 608 8,399
2005 and thereafter 1,823 56,207
--------- ----------
Total minimum lease payments 4,863 $ 124,178
==========
Less amounts representing interest (1,131)
---------
Present value of net minimum
lease payments 3,732
Less current obligations (363)
---------
Long-term obligations $ 3,369
=========
The carrying value of property held under the capital lease was $4.4 million at
December 31, 1999, and the accumulated amortization was $0.5 million. Rental
expense under operating leases was $21.6 million in 1999, $18.8 million in 1998
and $17.2 million in 1997, net of rents from subleases of $1.6 million, $3.2
million and $1.0 million, respectively. Total rental expense (including leases
on equipment) was $24.1 million in 1999, $22.3 million in 1998 and $19.1 million
in 1997.
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
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 .01 cents 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
28
<PAGE>
Employee Stock Purchase Plan
In May 1999, Circle adopted an Employee Stock Purchases Plan in order to provide
eligible employees of Circle and its participating subsidiaries (including
subsidiaries based outside the United States) with the opportunity to purchase
common stock through payroll deductions. The employees may purchase Circle stock
during a six-month accumulation period at 85% of the lower of (1) the average of
the stock's market value on the three consecutive trading days ending with the
first day of the accumulation period, or (2) the average of the stock's market
value on the three consecutive trading days ending with last day of the
accumulation period. However, if the average is lower than the stock's market
value on the first day or last day of the accumulation period, the stock's
market value on the applicable day shall govern. A maximum of 250,000 shares are
authorized for employee purchase under this plan. On January 10, 2000, Circle
issued 17,495 shares at an average price of $18.81 per share for the July 1,
1999 to December 31, 1999 accumulation period.
Stock Option Plans
The 1982 Stock Option Plan and the 1990 Stock Option Plan 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 periods 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 ten years from the date of grant.
The 1999 Stock Option Plan permits the grant of Nonqualified Stock Options in
order to promote the success, and enhance the value, of Circle by linking the
personal interests of Participants to those of Circle shareholders, and by
providing Participants with an incentive for outstanding performance. The plan
was authorized for a maximum of 125,000 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 ten years from the date of grant.
A summary of stock option transactions for each of the three years ended
December 31, 1999, follows:
F-10
29
<PAGE>
Shares Weighted Average
Under Option Exercise Price
------------ --------------
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
Granted 343,653 18.58
Exercised (287,007) 15.42
Canceled (206,589) 20.75
----------
Outstanding at December 31, 1999 1,663,487 $21.03
==========
December 31,
1999 1998 1997
---- ---- ----
Options available for grant 583,662 844,903 841,718
Options exercisable 785,278 730,974 441,567
Weighted average fair value of options
granted during the year $ 6.35 $ 7.20 $ 8.37
The following table summarizes information about stock options outstanding at
December 31, 1999:
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 - 17.19 421,640 6.76 $ 16.11 147,270 $ 15.16
17.25 - 20.75 334,249 4.06 18.66 252,525 18.35
21.00 - 22.75 383,849 6.38 21.93 144,032 22.08
22.94 - 26.63 435,149 6.15 25.56 219,299 25.89
26.75 - 27.50 88,600 6.30 27.28 22,152 27.28
---------- ---------
$12.75 - 27.50 1,663,487 5.95 $ 21.03 785,278 $ 20.79
========== =========
F-11
30
<PAGE>
SFAS No. 123 Pro Forma Disclosures
Circle applies APB No. 25 and related interpretations in accounting for its
Stock Options Plan described above. Accordingly, since all options are granted
at fair market value, 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 suggested in SFAS No. 123, "Accounting for Stock Based Compensation",
Circle's net income and net income per share would have been reduced to the pro
forma amounts indicated below (in thousands except per share amounts):
Year ended December 31,
1999 1998 1997
---- ---- ----
Net Income: As Reported $ 23,212 $ 18,515 $ 26,332
Pro Forma 21,454 16,674 25,142
Net Income per share:
Basic - As Reported $ 1.35 $ 1.09 $ 1.57
Pro Forma 1.25 0.98 1.49
Diluted - As Reported $ 1.34 $ 1.07 $ 1.53
Pro Forma 1.24 0.97 1.46
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 unvested stock options granted prior to 1995 has been
excluded from the pro forma calculation. The 1997, 1998 and 1999 pro forma
adjustments are not indicative of future period pro forma adjustments. The
following weighted-average assumptions were used:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Expected dividend yield 1.10% 1.00% 1.00%
Expected volatility 46% 43% 37%
Risk-free interest rate 5.84% 4.67% 5.62%
Expected lives (years from vesting) 0.7 0.5 0.7
Note 9 - Taxes on Income
Taxes on income include the following (in thousands):
1999 1998 1997
--------- --------- ---------
Federal: Current $ 2,782 $ 2,711 $ (637)
Deferred (1,910) 1,199 6,535
State: Current 817 426 1,370
Deferred - 481 (363)
Foreign: Current 11,787 7,830 7,315
Deferred (133) 283 358
--------- --------- ---------
Total $ 13,343 $ 12,930 $ 14,578
========= ========= =========
F-12
31
<PAGE>
Significant components of Circle's net deferred tax liability are as follows (in
thousands):
1999 1998
-------- --------
Deferred tax liabilities:
Undistributed earnings of subsidiaries $ 9,043 $ 9,459
Accelerated depreciation 4,693 5,025
Gain on sale of property 2,680 2,533
Incentive compensation - 16
Investment in subsidiary 273 273
-------- --------
$16,689 $17,306
======== ========
Deferred tax assets:
Bad debts $ 1,774 $ 1,292
Vacation pay 930 836
Incentive compensation 75 -
Insurance claims reserves 979 523
Other 329 313
-------- --------
$ 4,087 $ 2,964
-------- --------
Net deferred tax liability $12,602 $14,342
======== ========
Taxes on income were different than the amount computed by applying the
statutory income tax rate. Such differences are summarized as follows (in
thousands):
1999 1998 1997
--------- --------- ---------
Income before taxes $ 36,555 $ 31,445 $ 40,910
Tax computed at 35% statutory rate 12,794 11,006 14,319
Increases (decreases) resulting from:
Foreign taxes lower than federal rate (1,495) (1,347) (1,184)
Non-deductible items 1,643 2,273 1,212
State taxes on income,
net of federal income tax effect 531 590 654
Deferred tax adjustment for foreign earnings (1,800) - -
Accrual adjustments 1,415 413 (661)
Other 255 (5) 238
--------- --------- ---------
Total $ 13,343 $ 12,930 $ 14,578
========= ========= =========
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, 1999, cumulative earnings of consolidated
foreign subsidiaries designated as permanently invested were approximately $15.6
million. Deferred income taxes are not provided on permanently invested
earnings.
Sources of pretax income are summarized as follows (in thousands):
1999 1998 1997
--------- --------- ---------
Domestic $ 9,456 $ 7,790 $ 18,944
Foreign 27,099 23,655 21,966
--------- --------- ---------
Total $ 36,555 $ 31,445 $ 40,910
========= ========= =========
F-13
32
<PAGE>
Note 10 - Other Income-Net
Other income-net includes the following (in thousands):
1999 1998 1997
--------- --------- ---------
Interest income $ 2,682 $ 4,416 $ 4,163
Interest expense (2,986) (1,941) (2,938)
Income from affiliates, net 3,922 3,853 5,785
Gains on sales of assets 815 257 633
Gains (losses) on sales of
equity securities 4,519 (13) (20)
Minority interests (1,092) (928) (1,286)
Net foreign exchange gains 1,151 1,365 2,162
Other 331 607 38
--------- --------- ---------
Total $ 9,342 $ 7,616 $ 8,537
========= ========= =========
Note 11 - Investments in Unconsolidated Affiliates
Investments in net assets of affiliated companies amounted to $48.2 million and
$43.0 million at December 31, 1999 and 1998, respectively. This includes
Circle's 40% investment in TDS Logistics Inc. (TDS) of $40.8 million and $38.0
million as of December 31, 1999 and 1998, respectively. TDS is primarily
involved in providing specialty packaging and services for automotive exports.
The TDS investment balance includes the excess of purchase price over net assets
of $25.6 million and $26.4 million as of December 31, 1999 and 1998,
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 for the year ended December 31:
1999 1998 1997
--------- --------- ---------
Revenue $ 63,486 $ 77,521 $ 95,981
Income from operations 13,884 15,348 23,929
Net income 8,947 8,682 12,983
Condensed Balance Sheet Information:
December 31,
1999 1998
--------- ---------
Current assets $ 15,881 $ 15,815
Non-current assets 33,134 31,626
Current liabilities 9,402 8,807
Non-current liabilities 439 9,613
Stockholders' equity 39,174 29,021
Note 12 - Employee Benefit Plans
Circle has a 401(k) Savings Plan in the U.S. under which employees 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, 1999, 1998
and 1997 were $1.2 million, $1.0 million and $0.9 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 - Related Party Transaction
In April 1999, Circle sold a 49% interest in its subsidiaries in Spain and
Portugal to a Director and Former Chief Executive Officer for $1.3 million. The
purchase price was paid one-third at closing and the balance will be in equal
installments in October 2000 and April 2002 with interest at 6%. Under the terms
of the agreement, the buyer has the right to require Circle to purchase his
interest at the then fair value. Circle also has the right to purchase his
interest after December 31, 2005. Circle deferred the recognition of the gain of
the sale of $866,000 and has recorded this amount in minority interest.
F-14
33
<PAGE>
Note 14 - 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
(in thousands):
<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, 1999:
Total revenue $ 364,087 $ 197,620 $ 279,642 $ - $ (27,272) $ 814,077
Transfers between regions (8,362) (8,031) (10,879) - 27,272 -
---------- ---------- ---------- ---------- ----------- ----------
Revenues from customers $ 355,725 $ 189,589 $ 268,763 $ - $ - $ 814,077
========== ========== ========== ========== =========== ==========
Net revenue $ 164,964 $ 92,006 $ 75,022 $ - $ - $ 331,992
========== ========== ========== ========== =========== ==========
Income (loss) from operations $ 22,486 $ 14,414 $ 18,043 $ (27,730) $ - $ 27,213
========== ========== ========== ========== =========== ==========
Identifiable assets $ 211,222 $ 150,432 $ 140,070 $ 60,960 $ (17,292) $ 545,392
========== ========== ========== ========== =========== ==========
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 $ 24,541 $ 12,268 $ 9,809 $ (22,789) $ - $ 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 $ 32,037 $ 10,408 $ 9,169 $ (19,241) $ - $ 32,373
========== ========== ========== ========== =========== ==========
Identifiable assets $ 214,520 $ 117,432 $ 102,098 $ 123,914 $ (123,565) $ 434,399
========== ========== ========== ========== =========== ==========
</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.
F-15
34
<PAGE>
Circle is domiciled in the U.S. The U.S. had revenues from external
customers of $329 million in 1999, $356 million in 1998, and $382 million
in 1997. The U.S. had long lived assets of $57 million and $41 million at
the end of 1999 and 1998, respectively.
The following tables show the approximate amounts of revenue and net revenue
attributable to Circle's principal services during each of the three years in
the period ended December 31, 1999 (in thousands):
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
Revenue:
Air freight forwarding $ 528,698 $ 482,701 $ 471,563
Ocean freight forwarding 130,478 111,938 111,200
Customs brokerage and other 154,901 143,039 134,226
---------- ---------- ----------
Total $ 814,077 $ 737,678 $ 716,989
========== ========== ==========
Net Revenue:
Air freight forwarding $ 130,065 $ 118,170 $ 106,210
Ocean freight forwarding 47,026 40,471 37,608
Customs brokerage and other 154,901 143,039 134,226
---------- ---------- ----------
Total $ 331,992 $ 301,680 $ 278,044
========== ========== ==========
Note 15 - 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
-------- -------- -------- ------------------- ---------
1999 Quarters
4th Quarter $ 231,046 $ 90,793 $ 9,757 $ 0.56 $ 0.56 $ 0.135
3rd Quarter 204,963 83,582 6,760 0.39 0.39 -
2nd Quarter 195,215 81,451 4,820 0.28 0.28 0.135
1st Quarter 182,853 76,166 1,875 0.11 0.11 -
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 -
* Net loss includes special charges of $8.1 million, ($0.47 per diluted share).
F-16
35
<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,
1999 and 1998, 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, 1999. 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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Circle International
Group, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
/S/ DELOITTE & TOUCHE LLP
San Francisco, California
March 29, 2000
F-17
36
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into between Steve
Russell (the "Employee" or "Shareholder") and Circle International Group, Inc.
("Circle " or "Purchaser") and Alrod International, Inc. ("Alrod" or
"Employer").
WHEREAS, Circle contracted with the Shareholder for the sale of
Shareholder's stock in Alrod and in connection with such sale Circle wishes
Alrod to employ Employee under the terms and conditions set forth below, Alrod
wishes to employ Employee under such conditions, and Employee wishes to accept
employment under the terms and conditions set forth below;
NOW, THEREFORE, for and in consideration of the above stated premises, and
the mutual promises and agreements set forth herein, the parties agree as
follows:
1. Terms and Duties.
----------------
(a) Term of Employment The employment of Employee under this Agreement
shall be for five (5) years and is terminable as more particularly set forth in
Paragraph 2. Before the end of the third year of Employee's employment, either
Employee or Employer may notify the other upon sixty (60) days written notice of
termination of the Agreement for any reason. Renewal of the agreement will be
reviewed sixty (60) days before the five (5) year expiration and will be subject
to the mutual agreement of Employee and Employer.
(b) Location. Employee's location of employment shall be in the San
Francisco Bay Area. Employee's location of employment may be changed only upon
the mutual consent of Employee and Employer.
(c) Position and Primary Responsibility. Employee shall serve in the
position of Executive Vice President, Alrod and Senior Vice President, Circle
International, Inc.. In such capacity, he shall be responsible for all areas
reasonably requested by the Chief Executive Officer, North America. Employee's
responsibilities and objectives are detailed in Exhibit A attached hereto.
(d) Exclusivity. During the employment term, Employee shall devote his
full time, attention, energies, and best efforts exclusively to the performance
of his duties for and on behalf of Employer.
37
<PAGE>
2. Termination.
-----------
(a) Immediate Termination of Employment by Employer. Employer may
---------------------------------------------------
immediately terminate this Employment Agreement at any time under the following
conditions:
(i) Upon the Employee's death or incapacity. In such case,
Employee's compensation shall be calculated through the last day of the
month in which said death or incapacity occurred, and paid to Employee, his
heirs or estate;
(ii) The conviction of any felony or of a misdemeanor
involving fraud or dishonesty, and/or the commission or omission of acts
deemed to be fraudulent or materially dishonest. In such case,
compensation shall be calculated through the last day actually worked by
Employee.
(b) Termination of Employment for Cause. Employer may terminate
--------------------------------------
Employee's employment for cause, which shall include, without limitation, a
breach of any of the material terms of this Agreement, a material and repeated
failure to follow either general corporate policies or the reasonable
instructions of the Board of Directors of Employer or of the Chief Operating
Officer, North America, a material failure to substantially perform Employee's
duties, a material conflict of interest, or fraud or dishonesty. Employee shall
be given reasonable notice of any of the grounds for termination of employment
for cause, and shall be given the opportunity to discuss and address such notice
with the Chief Executive Officer of Circle.
(c) Termination of Employment Without Cause. In the event of
--------------------------------------------
termination without cause, Employee's sole remedy shall be an entitlement to
receive his then base monthly salary throughout the remaining term of this
Agreement. During which time Employee shall accept no other employment without
the consent of Employer, which consent shall not be unreasonably withheld. Any
amounts received from a subsequent employer shall be in mitigation of Employer's
responsibilities to make payment hereunder, and shall be offset against amounts
due by Employer.
3. Compensation. Employee shall be provided the following compensation
------------
for his services to Employer:
(a) Base Salary. Employee shall receive a base salary of $14,500.00
-----------
per month.
(b) Bonus. Employee's bonus shall be governed by the standard Circle
-----
incentive plan in effect for key employees.
(c) Payment. All compensation to Employee hereunder shall be paid in
-------
accordance with all relevant Employer directives, rules, and regulations and
cost accounting policies in effect from time-to-time and shall be subject to all
applicable employment and withholding taxes.
38
<PAGE>
4. Other Employment Benefits.
-------------------------
Employer's insurance and benefit plans will be available to Employee and
his dependents on the same basis as it is currently provided to comparably
situated employees.
Employee will accrue each year three-weeks of paid vacation. All vacation
accrued for Employee on the books of Alrod will be carried on the books of
Alrod.
Employee also will be entitled to participate in the Employer's 401-K plan,
executive deferred compensation plan, and other plans offered to comparably
situated employees.
Employee will be entitled to maintain the automobile, which the Employer
currently leases on behalf of the Employee, during the term of this Agreement.
All expenses associated with the personal use of the automobile will be paid by
Employee. Following expiration of the current automobile lease, the Employer
shall have no further obligation to lease an automobile for Employee, but shall
pay Employee a $700 monthly automobile allowance.
5. Business Interests. This Agreement is ancillary to the sale of
-------------------
Shareholder's stock in Alrod covered in a separate written agreement hereinafter
referred to as the "Purchase and Sale Agreement." The date of the execution of
the Purchase and Sale Agreement is the "Closing Date" referred to hereafter. In
connection with the purchase and sale of Shareholder's stock in Alrod, Circle is
acquiring an interest in Alrod's' trade secrets, confidential information,
proprietary information and goodwill. Employee is being employed pursuant to
agreements made in the purchase and sale of Shareholder's stock in Alrod. The
following are the parties' agreements concerning legitimate protectable
"Business Interests" of Circle and Alrod:
(a) Trade Secrets. Alrod and Circle agree that Employee will be given
-------------
access to and allowed to become familiar with trade secrets of Alrod and Circle
to the extent applicable to Employee's position. Employee agrees that Employee
will preserve the value of these trade secrets for Alrod and Circle and will
only use them as required in the ordinary course of Employee's employment for
the exclusive benefit of Alrod and Circle.
39
<PAGE>
(b) Confidential Information. Alrod and Circle agree that they will
-------------------------
provide Employee with access to Confidential Information applicable to
Employee's position. The parties agree that, for purposes of this Agreement,
"Confidential Information" is any information that has been or will be acquired
by the Employee in the course and scope of his activities for Employer that is
designated by Alrod or Circle as "confidential" or that they indicate through
their policies, procedures or other instructions should not be disclosed to a
third party except through controlled means regardless whether it qualifies as a
trade secret or not. The disclosure of Confidential Information to customers or
vendors for legitimate business purposes and the availability of the
Confidential Information to others outside of Alrod or Circle through
independent investigation and effort will not remove it from protected status
under this Agreement if Employee acquired the Confidential Information while
employed with Employer or in connection with the Purchase and Sale Agreement.
Employee agrees to use such Confidential Information for the exclusive benefit
of Circle and Alrod and will not (during employment or thereafter), directly or
indirectly, use Confidential Information for any other purpose. General examples
of covered Confidential Information are as follows: customer pricing, the names
and phone numbers of customer contacts, customer contracts, information and
communication systems, the menus of services provided to the customers, and the
transaction files maintained by Employer on its customers.
(c) Proprietary Information. Alrod and Circle agree that Employee
------------------------
will be allowed to use proprietary information and materials applicable to
Employee's position. Proprietary information includes trade secrets,
confidential information, and other information or materials such as books,
drawings, notes, plans, research, and other items compiled or created at the
expense of Circle or Alrod or through the labor of their employees. Employee
agrees to use this proprietary information and material for the exclusive
benefit of Circle and Alrod.
(d) Goodwill. Employer agrees to provide Employee with compensation,
--------
confidential information, contact with customers, contractors, vendors and
co-workers, and other assistance in developing a working relationship with the
business associates of Circle and Alrod in order to help Employee develop
goodwill for the benefit of Circle and Alrod, to the extent applicable to
Employee's position. Employee agrees to use the goodwill developed with these
customers, contractors, vendors and co-workers for the exclusive benefit of
Circle and Alrod.
(e) Business Opportunities. Circle and Alrod agree that Employee will
----------------------
be placed in a position to have knowledge of special confidences, business
opportunities and strategies of Circle and Alrod. Employee agrees to inform
Circle and Alrod of any potential business opportunities or ventures that
Employee learns of during the term of this Agreement irrespective of how or when
the knowledge is acquired if the opportunity relates to the type of business
Employer is engaged in or is considering engaging in. Employee also agrees not
to pursue independently, divert away, or inform any other person or entity of
such opportunities without first getting verification from Employer that it does
not intend to pursue the opportunity.
6. Protective Covenants. Employee agrees that the following covenants are
--------------------
reasonable and necessary protective covenants for the protection of the Business
Interests identified above and do not unreasonably impede Employee's ability to
earn a living:
40
<PAGE>
(a) Restrictions on Diverting Employees. Employee covenants that
-------------------------------------
until the later of (a) ten years from the Closing Date, or (b) five years from
the date of termination of such Employee's employment with Employer or its
affiliates for any reason whatsoever, Employee will not, either directly or
indirectly, call on, solicit, or induce any of the other employees or officers
of Alrod or Circle that Employee had contact with, knowledge of, or association
with in the course of employment with Employer to terminate their association
with Alrod or Circle.
(b) Restrictions on Diverting Vendors or Contractors. Employee
-----------------------------------------------------
covenants that until the later of (a) ten years from the Closing Date, or (b)
five years from the date of termination of such Employee's employment with
Employer or its affiliates for any reason whatsoever Employee will not, either
directly or indirectly, call on, solicit, or induce any of the vendors or
contractors of Alrod or Circle that Employee had contact with, knowledge of, or
association with in the course of employment with Employer to terminate their
association with Alrod or Circle.
(c) Restrictions on Soliciting Customers. Until the later of (a) ten
------------------------------------
years from the Closing Date, or (b) five years from the date of termination of
such Employee's employment with Employer or its affiliates for any reason
whatsoever, Employee will not call on, service, or solicit competing business
from Customers of Alrod or Circle that Employee had (i) contact with or (ii)
access to information and files about within the previous twenty-four (24)
months. These restrictions are limited, by geography, to the specific places,
addresses, or locations where a covered customer is present and available for
solicitation or servicing.
(d) Noncompetition. Employee agrees that until the later of (a) ten
--------------
years from the Closing Date, or (b) five years from the date of termination of
such Employee's employment with Employer or its affiliates for any reason
whatsoever, he will not directly or indirectly, either through any form of
ownership or as a director, officer, principal, agent, employee, employer,
adviser, consultant, Employee, partner or in any other individual or
representative capacity whatsoever, either for his own behalf or for the benefit
of any other person, firm, corporation, governmental or private entity, or any
other entity of whatever kind, compete with Alrod or Circle or their affiliates
in the customs brokerage, freight forwarding and/or warehouse and distribution
business California or Tijuana, Mexico.
(e) Survival of Covenants. Each covenant of Employee set forth in
----------------------
Paragraph 6 hereof shall survive the termination of Employee's employment. The
existence of any claim or cause of action by Employee against Alrod or Circle,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement of Paragraph 6's covenants. In the event Employee
violates the restrictions of Paragraph 6 and an enforcement remedy is necessary
under Paragraph 6(f), the restricted time periods provided for in Paragraph 6
shall be calculated from the date enforcement is ordered and complied with by
Employee so as to give Employer the full benefit of the length of time bargained
for.
41
<PAGE>
(f) Remedies. In the event of breach or threatened breach by Employee
--------
of any provision of Paragraph 6 hereof, Alrod or Circle shall be entitled to (i)
relief by temporary restraining order, temporary injunction, and/or permanent
injunction, (ii) recovery of all attorneys' fees and costs incurred by them in
obtaining such relief, and (iii) any other legal and equitable relief to which
they may be entitled, including any and all monetary damages. Alrod and Circle
have the right to pursue partial enforcement and/or to seek declaratory relief
regarding the enforceable scope of this Agreement without penalty and without
waiving their right to pursue any other applicable remedy thereafter, including
arbitration.
(g) Acknowledgement of Ancillary Agreements and Consideration.
----------------------------------------------------------------
Employee acknowledges that his agreement to be bound by the protective covenants
set forth in Paragraph 6 is a concurrent and material inducement for (i) all
parties to enter into the ancillary terms of this Agreement (ii) for Circle to
contract for the purchase and sale of Shareholder's interest in Alrod and (iii)
to initiate the employment of Employee in connection with the purchase and sale
of Shareholder's interest in Alrod. Without such agreements and covenants,
Circle would not have entered into the Purchase and Sale Agreement and would not
have agreed to pay the purchase price nor would Employer have agreed to employ
Employee under the terms provided for in this Agreement.
(h) Continuing Effect of Restrictions. The agreements described in
----------------------------------
Paragraphs 5 and 6 will continue in full effect throughout Employee's employment
with Employer without regard to any change in compensation or other terms of the
Agreement between the parties unless otherwise agreed in writing, or unless
modified pursuant to Paragraph 6(i) below.
(i) Modifications of Restrictions. Circle or Alrod may make a
-------------------------------
reasonable change in the restrictions in Paragraph 6 as a condition of a
reassignment, promotion, or other change in duties for Employee through a
written addendum. In such event, Circle or Alrod will provide Employee with
fourteen (14) calendar days written notice of the change in terms to allow
Employee an opportunity to object and challenge the reasonableness of the
change. Employee's action in remaining employed with Employer after the notice
period for the change has elapsed will be deemed a contractual acceptance of the
change in terms.
7. Written Policies and Procedures. Employee agrees to adhere to policies
-------------------------------
and procedures of Alrod and Circle, where not in contradiction to or superseded
by this Agreement, as from time-to-time may be amended by Alrod or Circle (and
called to the Employee's attention), and agrees that these policies and
procedures shall be binding upon Employee. Employee acknowledges the duty to
examine these policies and procedures in advance of any action in any action in
any case of doubt as to the Employee's conduct, right or obligation.
8. Notices. All notices, requests, consents, and other communications
-------
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date deposited in a
receptacle maintained by the United States Postal Service for such purpose,
postage prepaid, by certified mail, return receipt requested, addressed to the
address set forth on the signature page. Either party may designate a different
address by providing written notice of the new address to the other party.
42
<PAGE>
8. Severability. If any provision contained in this Agreement is
------------
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein. The parties further expressly agree to authorize any
applicable court of law to modify the protective restrictions contained in
Paragraph 6 of this Agreement to the extent necessary to make them fully
enforceable with such modification to include the modification or addition of
any missing terms necessary to enforce the intent of the parties.
9. Modification and Integration. This Instrument contains the entire
------------------------------
agreement of the parties concerning the obligations of the parties and any prior
agreements between the parties to the contrary are replaced and extinguished.
Except as provided for in Paragraph (i) above, this Agreement may not be
modified, altered or amended except by written agreement of all the parties
hereto.
10. Waiver, Notice and Opportunity to Cure. The waiver by any party hereto
--------------------------------------
of a breach of any provision of this Agreement or a comparable agreement with
another employee prohibiting unfair competition shall not operate or be
construed as a waiver of any subsequent breach by any party to this Agreement.
In the event Employee becomes aware of any breach of any material term of this
Agreement by Circle or Alrod, Employee will give that party written notice of
the alleged breach within thirty (30) days and an opportunity to cure such
alleged breach within thirty (30) days. Failure to provide this notice and
opportunity to cure will waive any right to assert that alleged breach as a
defense to the enforcement of this Agreement by Alrod or Circle at a later time.
11. Arbitration. The parties agree to arbitrate any and all disputes that
-----------
may arise from the relationships created by this agreement including any and all
contract claims, tort claims, or statutory claims pursuant to the rules of the
American Arbitration Association (AAA) in San Francisco, California. One
arbitrator shall be used unless otherwise agreed. Workers compensation insurance
claims and unemployment compensation insurance claims will not be covered by
this provision. Alrod and/or Circle may seek temporary injunctive relief for a
violation of Paragraph 6 from an applicable court of law before pursuing or
compelling arbitration in order to maintain the status quo pending a resolution
through arbitration. One arbitrator shall be a licensed attorney and will be
selected by mutual agreement or by alternative strikes from a panel of at least
five (5) arbitrators provided by the AAA. Employee shall have the first strike.
The arbitrator's decision will be supported by findings of fact and conclusions
of law sufficient to support the decision made. The decision shall be final and
binding upon the parties. The arbitrator's authority is limited to applying
those rights and remedies that have been expressly authorized by applicable
state and federal law. The arbitrator is authorized to order injunctive relief
and other equitable remedies. The parties agree that if there is any dispute
over whether the arbitrator has exceeded his authority or has otherwise rendered
a decision that contradicts applicable state or federal law, the parties will
agree to submit the matter to a court of law for deposition by summary judgment
based on the arbitration record. In all other respects the arbitration will be
conducted pursuant to the AAA Employment Dispute Resolution Rules. Each party
will bear its own costs and attorney's fees.
43
<PAGE>
12. Counterpart Execution and Headings. This Agreement may be executed in
----------------------------------
two or more identical counterparts, each of which shall be deemed an original,
but all of which together shall constitute but one and the same instrument.
Headings in this document are not intended to affect the content or meaning of
any provisions of this Agreement and should not be construed to do so.
44
<PAGE>
IN WITNESS WHEREOF, the parties have fully completed and executed this Agreement
on the last date indicated below.
EMPLOYEE:
--------------------------------------
Printed Name:
-------------------------
Date:
---------------------------------
Address:
------------------------------
CIRCLE:
--------------------------------------
By:
-----------------------------------
Printed Name and Position:
------------
--------------------------------------
Date:
---------------------------------
Address:
------------------------------
ALROD:
By:
-----------------------------------
Printed Name and Position:
------------
--------------------------------------
Date:
---------------------------------
Address:
------------------------------
45
<PAGE>
Exhibit A
Position Description - Mr. Stephen Russell
The following is the position description for Mr. Stephen Russell
Title Senior Vice President, Strategic & Business Development,
- - -----
California Region
Location The position will be located at either the Alrod facility
- - --------
or the Circle facility in South San Francisco
Effective Date August 1, 1998, however, this is subject to change if the
- - --------------
proposed merger of Circle and Alrod is postponed
Compensation As per employment agreement
- - ----------
Reporting This position will report to the C.O.O., North America
- - ---------
with a strong dotted line to the C.O.O., California Region
Tasks The tasks for this position are as follows:
- - -----
Assist with the integration of Alrod's customers into the
combined Circle/Alrod company
Managing the sales group in California
Developing new business for C.I.I./Alrod California and the
rest of Circle's global organization
Developing strategic opportunities in California and
globally
Retention of current customers
The performance of other tasks and duties consistent with
the position, as and when directed by the person to
whom the Executive reports
46
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
The following table sets forth certain information concerning the principal
subsidiaries of Circle as of December 31, 1999.
State or other
Name jurisdiction of incorporation
---- -----------------------------
Alrod International, Inc. California
CE Logistics (Asia) Pte. Ltd. Singapore
Circle Airfreight Japan, Ltd. California
Circle Concord International (Singapore) Pte. Ltd. Singapore
Circle International (Argentina) S.A Argentina
Circle International (Espana) S.R.L. Spain
Circle International, Inc. Delaware
Circle International Asia Pacific Holdings Pte. Ltd. Singapore
Circle International (Australia) Pty., Ltd. Australia
Circle International Belgium N.V. Belgium
Circle International (Canada) Ltd. Canada
Circle International European Holdings, Ltd. United Kingdom
Circle International Holdings, Inc. Delaware
Circle International (Hong Kong) Ltd. Hong Kong
Circle International Japan, Inc. Japan
Circle International Korea Co. Limited Korea
Circle International Latin America Holdings S.A. Uruguay
Circle International Limited United Kingdom
Circle International (Netherlands) BV Netherlands
Circle International (Portugal) Ltda. Portugal
Circle International Speditionsgesellschaft GmbH Germany
Circle International (Sweden) AB Sweden
Circle Freight International (India) Pvt. Ltd. India
Circle Freight International (Italia) S.R.L. Italy
CFS New Zealand Ltd. New Zealand
Circle Freight International Philippines Ltd., Inc. Philippines
Circle Fretes Internacionais do Brasil Ltda. Brazil
Circle Worldbridge International (Thailand) Ltd. Thailand
C.I.H. (Belgium) BVBA Belgium
Darrell J. Sekin & Co., Inc. Texas
F.J. Tytherleigh & Co. Ltd. United Kingdom
Harper Logistics International S.A. France
J.R. Michels Inc. 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.
47
<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. 333-17601, No. 33-04139, No.
333-04141, No. 333-64147, No. 333-78747 and No. 333-85807 of Circle
International Group, Inc. and subsidiaries of our report dated March 29, 2000,
appearing in this Annual Report on Form 10-K of Circle International Group, Inc.
and subsidiaries for the year ended December 31, 1999.
/S/ DELOITTE & TOUCHE LLP
San Francisco, California
March 29, 2000
48
<PAGE>
<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, 1999, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000045674
<NAME> Circle International Group, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 40,347
<SECURITIES> 14,366
<RECEIVABLES> 284,504
<ALLOWANCES> 7,835
<INVENTORY> 0
<CURRENT-ASSETS> 358,034
<PP&E> 186,807
<DEPRECIATION> 83,953
<TOTAL-ASSETS> 545,392
<CURRENT-LIABILITIES> 250,393
<BONDS> 0
0
0
<COMMON> 35,612
<OTHER-SE> 205,363
<TOTAL-LIABILITY-AND-EQUITY> 545,392
<SALES> 0
<TOTAL-REVENUES> 814,077
<CGS> 0
<TOTAL-COSTS> 482,085
<OTHER-EXPENSES> 304,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,986
<INCOME-PRETAX> 36,555
<INCOME-TAX> 13,343
<INCOME-CONTINUING> 23,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,212
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.34
</TABLE>
