SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-42607
GEOLOGISTICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-3438013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13952 Denver West Parkway
GOLDEN, COLORADO 80401
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code:(303) 704-4400
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
----
On November 15, 1999, the registrant had 2,104,893 outstanding shares of common
stock, par value $.001 per share.
GEOLOGISTICS CORPORATION
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets,
September 30, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended
September 30, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and
1998 (unaudited) 6
Notes to the Condensed Consolidated Financial
Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
ITEM 3. Information required for this item has been
included in Management's Discussion and Analysis.
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities 33
ITEM 6. Exhibits and Reports on Form 8-K 33
2
PART I. FINANCIAL INFORMATION
GEOLOGISTICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ----------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 13,719 $ 15,152
Accounts receivable:
Trade, net 258,561 267,047
Other 18,540 11,046
Deferred income taxes 727 7,245
Prepaid expenses 24,613 20,708
-------- --------
Total current assets 316,160 321,198
------- -------
Property and equipment, at cost 98,994 113,618
Accumulated depreciation (21,784) (18,364)
-------- --------
Net property and equipment 77,210 95,254
Notes receivable, less current portion 1,682 1,711
Deferred income taxes 484 19,168
Goodwill, net 46,643 79,347
Intangible assets, net 9,220 11,927
Other assets 18,399 20,573
-------- --------
$469,798 $549,178
-------- --------
-------- --------
See accompanying notes to the condensed consolidated financial statements.
3
GEOLOGISTICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- --------
(UNAUDITED)
Current liabilities:
Current portion of long-term debt $ 19,252 $ 12,549
Accounts payable 140,654 139,696
Accrued expenses 140,876 149,519
Income taxes payable 14,428 7,940
-------- ---------
Total current liabilities 315,210 309,704
Long-term debt, less current portion 130,869 183,177
Other non-current liabilities 49,019 52,400
Minority interest 1,999 2,381
--------- ---------
Total liabilities 497,097 547,662
Stockholders' (deficit) equity:
Preferred stock 15,000 shares authorized,
issued and outstanding 14,550 14,550
Common stock ($.001 par value 5,000,000
shares authorized, 2,118,393 and 2,128,893
shares issued and outstanding) 2 2
Additional paid-in-capital 56,199 55,371
Accumulated deficit (97,357) (67,898)
Notes receivable from stockholders (191) (191)
Cumulative translation adjustment (502) (318)
---------- ----------
Total stockholders' (deficit) equity (27,299) 1,516
--------- ---------
$469,798 $549,178
---------- ----------
---------- ----------
See accompanying notes to the condensed consolidated financial statements.
4
GEOLOGISTICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE-MONTHS NINE-MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ----------------------------
1999 1998 1999 1998
-------- ------ ------ -----
Revenues $ 400,020 $ 387,968 $1,161,119 $ 1,124,843
Transportation and other direct costs 306,145 292,855 880,442 847,335
-------- ------- -------- -------
Net revenues 93,875 95,113 280,677 277,508
Selling, general and administrative expenses 94,693 91,020 284,970 265,650
Restructuring and other non-recurring charges 10,144 - 11,134 -
Asset impairment charges 12,060 - 12,060 -
Depreciation and amortization 5,128 3,847 14,829 11,560
--------- --------- -------- ----------
Operating income (loss) (28,150) 246 (42,316) 298
Interest expense, net (7,316) (4,761) (18,462) (12,098)
Gain on disposition of business 69,760 - 69,760 -
Other income (expense) (197) (32) (647) 114
--------- ----------- --------- ---------
Income (loss) before income taxes and minority interest 34,097 (4,547) 8,335 (11,686)
Income tax provision (benefit) 34,230 (2,267) 35,261 (4,503)
-------- ----------- ------- --------
Loss before minority interest (133) (2,280) (26,926) (7,183)
Minority interest (371) (213) (958) (586)
---------- ---------- -------- ---------- -
Net loss $ (504) $ (2,493) $ (27,884) $ (7,769)
Preferred stock dividend 525 438 1,575 438
----------- ---------- ---------- ------------
Loss applicable to common stock $ (1,029) $ (2,931) $ (29,459) $ (8,207)
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
Basic loss per common share $ (0.49) $ (1.38) $ (13.88) $ (3.88)
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
Diluted loss per common share $ (0.49) $ (1.38) $ (13.88) $ (3.88)
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
Weighted average number of common and
common equivalent shares outstanding 2,118,768 2,128,893 2,121,843 2,117,806
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
See accompanying notes to the condensed consolidated financial statements.
5
GEOLOGISTICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE-MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1999 1998
---------- --------
Cash flows from operating activities:
Net loss $(27,884) $(7,769)
Adjustments to reconcile net loss
to net cash from operating activities:
Cash used for restructuring activities (1,688) -
Asset impairment charges 13,551 -
Depreciation and amortization 14,829 11,560
Gain on disposition of business, net (69,760) -
Amortization of deferred items 1,505 900
Deferred income taxes 25,202 (6,885)
Changes in current assets and liabilities, net (7,112) (38,567)
Other, net (2,074) (4,709)
-------- -------
Net cash used in operating activities (53,431) (45,470)
Cash flows from investing activities:
Purchases of property, equipment and software, net (6,155) (22,885)
Proceeds from disposition of business 102,988 -
Business acquisitions, net of cash acquired - (26,299)
-------- -------
Net cash provided by (used in) investing activities 96,833 (49,184)
Cash flows from financing activities:
(Payments)/Proceeds from revolving line of credit, net (47,288) 36,100
Proceeds from long-term debt 17,036 32,500
Payments on long-term debt (15,411) (14,934)
Proceeds from issuance of preferred stock - 14,550
Proceeds from issuance of common stock 828 2,733
Other, net - 158
-------- --------
Net cash provided by (used in) financing activities (44,835) 71,107
-------- ------
Net decrease in cash and cash equivalents (1,433) (23,547)
Cash and cash equivalents, beginning of period 15,152 37,909
-------- ------
Cash and cash equivalents, end of period $ 13,719 $14,362
-------- --------
-------- --------
Supplemental cash flow information:
Interest paid during the period $ 13,143 $ 8,601
Income taxes paid during the period $ 2,161 $ 2,116
Non-cash warrant transactions $ 828 $ 1,080
New capital leases $ 804 $ 7,541
See accompanying notes to the condensed consolidated financial statements
6
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in GeoLogistics Corporation's ("Company") Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
1998. The condensed consolidated financial information furnished herein reflects
all adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation in accordance with
generally accepted accounting principles of the condensed consolidated financial
statements for the periods shown. Certain amounts for the prior year have been
reclassified to conform with the current year financial statement presentation.
Significant accounting policies followed by the Company are included in Note 2
to the audited consolidated financial statements in the Company's Form 10-K.
Results of operations for the nine months ended September 30, 1999 may not be
indicative of the results to be expected for the full year.
PRINCIPLES OF CONSOLIDATION: The accompanying condensed consolidated financial
statements include the accounts of the Company and its majority owned
subsidiaries. The Company records its investment in each unconsolidated
affiliated company (20 to 50 percent ownership) using the equity method of
accounting. Other investments (less than 20 percent ownership) are recorded at
cost. Intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES: The financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts based on
informed estimates and judgments of management. Actual results could differ from
those estimates. Accounts affected by significant estimates include accounts
receivable and accruals for transportation and other direct costs, tax
contingencies, insurance claims, cargo loss and damage claims.
7
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed under the
treasury stock method using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding warrants to
purchase common stock. Incremental shares were not used in the calculation of
diluted loss per common share due to their antidilutive effect.
NOTE 2. LONG-TERM DEBT
In October 1997, the Company issued and sold $110.0 million in aggregate
principal amount of its 9 3/4% senior notes (the "Notes") which are due October
15, 2007, and are general unsecured obligations of the Company. The Notes are
fully and unconditionally guaranteed on a joint and several senior basis by all
existing and future domestic Restricted Subsidiaries (as defined in the
indenture relating to the Notes). Three of the Company's domestic subsidiaries
hold as their sole assets all of the issued and outstanding equity interests of
the Company's direct non-guarantor foreign subsidiaries.
8
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
NOTE 2. LONG-TERM DEBT (CONTINUED)
The following is condensed combined financial information of guarantor and
non-guarantor subsidiaries:
Balance Sheet as of September 30, 1999
----------------------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Combined
-------- ------------- ------------ ------------ -----------
Cash and cash equivalents................... $ 5,270 $ 292 $ 8,157 $ - $ 13,719
Accounts receivable, net.................... 113 97,176 196,689 (35,417) 258,561
Property, net............................... 2,561 19,741 54,908 - 77,210
Intangible assets, net...................... 6,164 46,384 4,279 (964) 55,863
Other assets................................ 79,873 7,369 39,631 (62,428) 64,445
------ ------- ------- ------- ------
Total assets.............................. $ 93,981 $170,962 $303,664 $ (98,809) $469,798
-------- ------------- ------------ ------------ -----------
-------- ------------- ------------ ------------ -----------
Current liabilities......................... $ 6,844 $127,031 $220,285 $ (38,950) $315,210
Long-term debt, less current portion........ 123,637 1,168 6,064 - 130,869
Other non-current liabilities............... (73,364) 58,857 62,956 2,569 51,018
Stockholders' (deficit) equity.............. 36,864 (16,094) 14,359 (62,428) (27,299)
------- -------- ------- -------- --------
Total liabilities and stockholders' deficit $ 93,981 $170,962 $303,664 $ (98,809) $469,798
-------- ------------- ------------ ------------ -----------
-------- ------------- ------------ ------------ -----------
Statement of Operations for the Nine Months Ended September 30, 1999
--------------------------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Combined
-------- ------------ ------------- ------------ --------
Revenues.................................... $ - $ 468,526 $ 802,114 $(109,521) $1,161,119
Transportation and other direct costs....... - 359,368 630,595 (109,521) 880,442
Operating expenses.......................... 10,359 120,015 169,425 - 299,799
Restructuring and other non-recurring charges 1,913 8,335 886 - 11,134
Asset impairment charges.................... 2,167 5,926 3,967 - 12,060
------- --------- -------- ------------- ----------
Operating loss.............................. (14,439) (25,118) (2,759) - (42,316)
Interest, net............................... (5,088) (11,120) (2,254) - (18,462)
Other income (expense) net.................. 2,199 67,138 (224) - 69,113
Income tax provision ....................... 49 33,744 1,468 - 35,261
Minority interest........................... - - (958) - (958)
----------------------- ------- --------------- --------
Net loss.................................. $(17,377) $ (2,844) $ (7,663) $ - $ (27,884)
-------- ------------- ------------ ------------ -----------
-------- ------------- ------------ ------------ -----------
9
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
Statement oF Cash Flows for the Nine Months Ended September 30, 1999
--------------------------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Combined
--------- ------------ -------------- -------------- -----------
Cash flows (used in) provided by:
Operating activities....................... $(22,418) $(22,939) $(6,294) $(1,780) $(53,431)
Investing activities....................... 6,463 94,940 (4,570) - 96,833
Financing activities....................... 21,198 (74,243) 6,430 1,780 (44,835)
-------- -------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................ 5,243 (2,242) (4,434) - (1,433)
Cash and cash equivalents, beginning of
period..................................... 27 2,534 12,591 - 15,152
------- ------- ------- -------- -------
Cash and cash equivalents, end of period..... $ 5,270 $ 292 $ 8,157 $ - $ 13,719
------- ------- ------- -------- -------
------- ------- ------- -------- -------
As a result of the disposition of GeoLogistics Air Services, Inc. ("GLAS")
(see note 6 to financial statements) the Company, together with its guarantor
subsidiaries, entered into an amendment to the revolving credit agreement
(the "September Amendment"). Among other changes, the amendment provides for
(a) reductions in credit availability from $100.0 million to $50.5 million in
the aggregate with a sublimit of $20.0 million in the United Kingdom, (b)
reductions in the percentage of eligible accounts receivable that qualify for
the U.S. and United Kingdom borrowing base which affect the Company's ability
to incur debt under the revolving credit facility, (c) the elimination of the
interest coverage ratio covenant, (d) the change in the maturity date to
March 31, 2000, (e) the reduction of the Supplemental Commitment from $30.0
million to $15.0 million and (f) the amendment of the EBITDA covenant to
provide that EBITDA for the three month period ended December 31, 1999 will
not be less than a deficit of $500,000. Because the maturity date of the
credit facility is March 31, 2000, borrowings under the revolving credit
facility of $1.8 million have been classified as current liabilities in the
September 30, 1999 balance sheet.
NOTE 3. SEGMENT INFORMATION
The Company operates in a single business segment providing worldwide logistics
solutions to meet customers' specific requirements for transportation and
related services by arranging and monitoring all aspects of material flow
activities utilizing advanced information technology systems.
10
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
The Company manages its business primarily on a geographic basis. The Company's
reportable geographic segments are comprised of North America, Europe and
Asia/Pacific. Each geographic segment provides products and services previously
described.
Accounting policies for each geographic segment are the same as those described
in "Summary of Significant Accounting Policies" in Note 2 of the Notes to the
Consolidated Financial Statements included in the Form 10-K filed for the year
ended December 31, 1998. The Company evaluates the performance of each
geographic segment primarily based on operating income. Operating income
represents earnings before interest and taxes. Corporate expenses are excluded
from geographic segment operating income. Corporate expenses are comprised
primarily of marketing costs, incremental information technology costs and other
general and administrative expenses which are separately managed. Geographic
segment assets exclude corporate assets. Corporate assets include cash and cash
equivalents, certain capitalized software development costs and intangible
assets. Information for 1998 has been restated to conform to the 1999
presentation of operating segment information.
11
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
Information regarding the Company's operations by geographic region is
summarized below.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- ------ ------ -------
North America:
Total revenues $191,561 $196,599 $550,249 $557,294
Transactions between regions 14,567 16,212 42,271 43,933
Revenues from customers 176,994 180,387 507,978 513,361
Net revenues 40,939 44,629 122,274 125,028
Restructuring and other non-recurring charges 7,345 - 8,335 -
Asset impairment charges 8,285 - 8,285 -
Depreciation and amortization 3,676 2,455 10,481 8,065
Operating income/(loss) (19,477) 1,865 (26,856) 2,293
Interest expense, net (4,199) (2,306) (11,648) (6,498)
Europe:
Total revenues $173,621 $176,482 $524,105 $533,076
Transactions between regions 19,646 25,041 64,122 75,411
Revenues from customers 153,975 151,441 459,983 457,665
Net revenues 36,465 37,405 112,004 115,230
Restructuring and other non-recurring charges 886 - 886 -
Asset impairment charges 1,608 - 1,608 -
Depreciation and amortization 918 919 2,575 2,262
Operating income/(loss) (3,938) (398) (5,820) 2,751
Interest expense (121) (251) (301) (284)
Asia/Pacific:
Total revenues 91,049 72,965 $254,913 $201,153
Transactions between regions 21,998 16,825 61,755 47,336
Revenues from customers 69,051 56,140 193,158 153,817
Net revenues 16,471 13,079 46,399 37,250
Depreciation and amortization 443 328 1,317 846
Operating income 2,173 1,271 5,296 3,311
Interest expense, net (57) (83) (177) (90)
Information regarding the Company's long lived assets by geographic region is
summarized below.
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
Long lived assets:
North America $23,614 $27,358
Europe 42,516 48,628
Asia/Pacific 6,506 6,244
Corporate 4,574 13,024
------- -------
Consolidated $77,210 $95,254
------- -------
------- -------
12
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
A reconciliation of the Company's geographic segment revenues, net revenues,
operating income and assets to the corresponding consolidated amounts as of and
for the three and nine months ended September 30, 1999 and 1998 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
1999 1998 1999 1998
------ ------ ------ ------
Revenues:
North America $191,561 $196,599 $550,249 $557,294
Europe 173,621 176,482 524,105 533,076
Asia/Pacific 91,049 72,965 254,913 201,153
Eliminations (56,211) (58,078) (168,148) (166,680)
-------- -------- --------- ----------
Consolidated $400,020 $387,968 $1,161,119 $1,124,843
-------- -------- --------- ----------
-------- -------- --------- ----------
Net revenues:
North America $40,939 $44,629 $122,274 $125,028
Europe 36,465 37,405 112,004 115,230
Asia/Pacific 16,471 13,079 46,399 37,250
------- ------ -------- --------
Consolidated $93,875 $95,113 $280,677 $277,508
-------- -------- --------- ----------
-------- -------- --------- ----------
Operating income (loss):
North America $(19,477) $ 1,865 $(26,856) $ 2,293
Europe (3,938) (398) (5,820) 2,751
Asia/Pacific 2,173 1,271 5,296 3,311
Corporate (6,908) (2,492) (14,936) (8,057)
-------- ------- -------- -------
Consolidated $(28,150) $ 246 $(42,316) $ 298
-------- -------- --------- ----------
-------- -------- --------- ----------
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
Assets:
North America $193,644 $260,694
Europe 247,009 263,481
Asia/Pacific 91,461 86,119
Corporate 410,073 482,429
Eliminations (472,389) (543,545)
-------- --------
Consolidated $469,798 $549,178
-------- --------
-------- --------
13
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
Revenue from transfers between regions represents approximate amounts that would
be charged if the service were provided by an unaffiliated company. Total
regional revenue is reconciled with total consolidated revenue by eliminating
inter-regional revenue.
NOTE 4. OTHER COMPREHENSIVE INCOME
Comprehensive income loss for the three and nine months ended September 30, 1999
and 1998 is as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------------
1999 1998 1999 1998
------ ----- ------ -----
Net loss $ (504) $(2,493) $(27,884) $(7,769)
Foreign currency translation adjustment 491 (1,369) (184) (719)
------ ------ --------- -------
Comprehensive loss $ (13) $(3,862) $(28,068) $(8,488)
------ ------ --------- -------
------ ------ --------- -------
NOTE 5. RESTRUCTURING AND OTHER NON-RECURRING CHARGES / ASSET IMPAIRMENT CHARGES
On March 5, 1999 the Company announced its intended restructuring of its
GeoLogistics Americas ("Americas") business as a result of a difficult domestic
freight forwarding environment. In light of lower volumes in the European
region, the Company initiated a process to reevaluate the operations of its
other business units to determine what initiatives could be taken to reduce
costs and streamline administrative operations. As part of this restructuring
process a new management team was put in place in an effort to improve the
global operating results.
In connection with this effort, the Company (a) has exited the domestic
freight forwarding portion of Americas business as of the end of the third
quarter of 1999, (b) is rationalizing personnel such that their numbers and
skill sets are suited to the ongoing services and volumes of the business,
(c) closed, or will close, unnecessary facilities in the United States and
Europe, (d) arranged for the settlement of remaining obligations to the
selling shareholders of the project forwarding and international household
goods relocation services business (GeoLogistics Services, Inc.) and
integrated the project forwarding business into the GeoLogistics Americas
business and the international household goods relocation services into the
Bekins Van Lines business and (e) revalued certain assets and deferred costs
to reflect net realizable values. The aggregate charge
14
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
for these actions is expected to be approximately $33.2 million of which $1.0
million was recorded in the first half of this year, $22.2 million has been
recorded in the third quarter of 1999, $7.1 million is expected to be
recorded in the fourth quarter of 1999, and the $2.9 million balance is
expected to be recorded in the first two quarters of 2000. The restructuring
charges include provisions for the termination of approximately 600 sales,
administrative and warehouse employees globally at a cost of approximately
$14.9 million. Of these costs $7.9, million, representing the termination of
350 employees, were recorded in the first nine months of 1999 and $7.0
million related to the termination of the remaining approximately 250
employees are expected to be recorded in the fourth quarter of 1999 and the
first half of 2000. Accrued liabilities at September 30, 1999 include
approximately $6.6 million of future severance payments related to employees
terminated prior to September 30, 1999 and approximately $1.4 million related
to future payments for the shutdown of facilities. The third quarter cash
cost of $8.7 million and non cash costs of $13.5 million have been recorded
in the accompanying financial statements as restructuring and other
non-recurring charges. The non cash costs for asset impairment charges relate
to goodwill, capitalized software and property as a result of exiting the
domestic freight forwarding portion of Americas' business, a reevaluation of
the capitalized software costs and the pending sale of certain property of
its Italian subsidiary. In addition to actions for which immediate financial
recognition is required, many additional actions have been taken including
revised incentive plans for the sales and management staffs (including the
employees who will continue to operate the international freight forwarding
operations in the United States), expansion of logistics facilities in
Thailand and expansion of facilities and logistics capabilities in China.
NOTE 6. SALE OF BUSINESS
On September 10, 1999 the Company sold substantially all of the assets of its
GLAS business unit ("GLAS Assets") to a subsidiary of FDX Corporation, for
aggregate cash consideration of approximately $116 million. The $70 million
gain on this sale has been reflected in the Condensed Consolidated Statements
of Operations for the three and nine months ended September 30, 1999 and the
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999.
The proceeds of such disposition were applied by the Company to fund a $10
million escrow account in connection with certain warranties to the purchaser,
pay fees and expenses associated with the transaction and reduce revolving debt
that was secured by the GLAS Assets.
15
GEOLOGISTICS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
For the three and nine months ended September 30, 1999, revenues from the GLAS
operations contributed approximately $18.6 million and $66.8 million,
respectively, to the Company's revenues and $2.5 million and $10.5 million,
respectively, of operating income to the Company's operating losses of $28.2
million and $42.3 million, respectively.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY INCLUDED ELSEWHERE IN
THIS REPORT. THIS QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE
MATERIAL SET FORTH HEREIN, IN THE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS WELL AS WITHIN THIS QUARTERLY REPORT GENERALLY. ALSO, DOCUMENTS
SUBSEQUENTLY FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION
MAY CONTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE PROJECTIONS IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE
CHALLENGES AND UNCERTAINTIES INHERENT IN SUCCESSFULLY IMPLEMENTING THE CLOSURE
OF THE COMPANY'S U.S. DOMESTIC FREIGHT FORWARDING BUSINESS, THE RESTRUCTURING OF
THE COMPANY'S EUROPEAN AND OTHER BUSINESSES, OPERATING CHALLENGES FACING THE
COMPANY'S REMAINING BUSINESSES, MEETING LIQUIDITY NEEDS FOR CONTINUED OPERATION,
REFINANCING DEBT THAT MATURES IN MARCH 2000, IMPLEMENTING THE COMPANY'S
BRANDING, INFORMATION TECHNOLOGY AND COST REDUCTION STRATEGIES AND THE OTHER
RISK FACTORS AND MATTERS IDENTIFIED HEREIN OR IN OTHER PUBLIC FILINGS BY THE
COMPANY, INCLUDING BUT NOT LIMITED TO THE COMPANY'S REGISTRATION STATEMENT ON
FORM S-4 (FILE NO. 333-42607), ANNUAL REPORT ON FORM 10-K (FILED ON MARCH 31,
1999) AND QUARTERLY REPORTS ON FORM 10-Q (FILED MAY 14, 1999 AND AUGUST 16,
1999), SUCH AS RISKS RELATING TO THE COMPANY'S LEVERAGE AND ABILITY TO SERVICE
ITS DEBT OBLIGATIONS, CHALLENGES PRESENTED BY INTEGRATION OF RECENT ACQUISITIONS
AND IN THE AMERICAS BUSINESS, RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND
CURRENCY FLUCTUATIONS AND RISKS RELATED TO INFORMATION TECHNOLOGY IMPLEMENTATION
AND INTEGRATION.
GENERAL
The Company commenced operations on May 2, 1996 in connection with its
acquisition of The Bekins Company ("Bekins"). On October 31, 1996, the Company
acquired GeoLogistics Americas ("Americas") and GeoLogistics Company ("Canada")
and securities representing 33.3%, in the aggregate, of the common equity of LEP
International Worldwide Limited ("LIW"). On November 7, 1996, the Company
acquired GeoLogistics Services ("Services"). On September 30, 1997, the Company
acquired an additional 41.9% of the common equity of LIW and on December 15,
1997, the Company completed the acquisition of all of the remaining equity
securities of LIW. On July 13, 1998, the Company purchased substantially all of
the
17
operating assets and assumed certain of the liabilities ("Air Services
Acquisition") of Caribbean Air Services, Inc. and on September 10, 1999 the
Company sold the assets purchased in the Air Services Acquisition and certain
other assets. All acquisitions were accounted for by the purchase method of
accounting, and accordingly, the book values of the assets and liabilities of
the acquired companies were adjusted to reflect their fair values at the dates
of acquisition.
The portion of the Company's business that is focused on traditional
transportation and logistics services normally experiences a higher percentage
of its revenues and operating income in the fourth calendar quarter as volumes
increase for the holiday season. Conversely, the Company's domestic household
goods relocation business experiences approximately half of its revenue between
June and September. In addition, Services has a significant project logistics
business which is cyclical due to its dependence upon the timing of shipment
volumes for large, one-time projects.
On March 5, 1999 the Company announced its intended restructuring of
its GeoLogistics Americas ("Americas") business as a result of a difficult
domestic freight forwarding environment. In light of lower volumes in the
European region, the Company initiated a process to reevaluate the operations of
its other business units to determine what initiatives could be taken to reduce
costs and streamline administrative operations. As part of this restructuring
process a new management team was put in place in an effort to improve the
global operating results.
In connection with this effort, the Company (a) has exited the domestic
freight forwarding portion of Americas business as of the end of the third
quarter of 1999, (b) is rationalizing personnel such that their numbers and
skill sets are suited to the ongoing services and volumes of the business, (c)
closed, or will close, unnecessary facilities in the United States and Europe,
(d) arranged for the settlement of remaining obligations to the selling
shareholders of the project forwarding and international household goods
relocation services business (GeoLogistics Services, Inc.) and integrated the
project forwarding business into the GeoLogistics Americas business and the
household goods relocation services into the Bekins Van Lines business and (e)
revalued certain assets and deferred costs to reflect net realizable values. The
aggregate charge for these actions is expected to be approximately $33.2 million
of which $1.0 million was recorded in the first half of this year, $22.2 million
has been recorded in the third quarter of 1999, $7.1 million is expected to be
recorded in the fourth quarter of 1999, and the $2.9 million balance is expected
to be recorded in the first two quarters of 2000. The restructuring charges
include provisions for the termination of approximately 600 sales,
18
administrative and warehouse employees globally at a cost of approximately $14.9
million. Of these costs, $7.9 million, representing the termination of 350
employees, were recorded in the first nine months of 1999 and $7.0 million
related to the termination of the remaining approximately 250 employees are
expected to be recorded in the fourth quarter of 1999 and the first half of
2000. Accrued liabilities at September 30, 1999 include approximately $6.6
million of future severance payments related to employees terminated prior to
September 30, 1999 and approximately $1.4 million related to future payments for
the shutdown of facilities. The third quarter cash cost of $8.7 million and non
cash costs of $13.5 million have been recorded in the accompanying financial
statements as restructuring and other non-recurring charges. The non cash costs
for asset impairment charges relate to goodwill, capitalized software and
property as a result of exiting the domestic freight forwarding portion of
Americas' business, a reevaluation of the capitalized software costs and the
pending sale of certain property of its Italian subsidiary. In addition to
actions for which immediate financial recognition is required, many additional
actions have been taken including revised incentive plans for the sales and
management staffs (including the employees who will continue to operate the
international freight forwarding operations in the United States), expansion of
logistics facilities in Thailand and expansion of facilities and logistics
capabilities in China.
On September 10, 1999 the Company sold substantially all of the
assets of its GLAS business unit ("GLAS" Assets") to a subsidiary of FDX
Corporation, for aggregate cash consideration of approximately $116 million.
The $70 million gain on this sale has been reflected in the Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and the Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999.
The proceeds of such disposition were applied by the Company to fund a
$10 million escrow account in connection with certain warranties to the
purchaser, pay fees and expenses associated with the transaction and reduce
revolving debt that was secured by the GLAS Assets.
For the three and nine months ended September 30, 1999, revenues from
the GLAS operations contributed approximately $18.6 million and $66.8 million,
respectively, to the
19
Company's revenues and $2.5 million and $10.5 million,
respectively, of operating income to the Company's operating losses of $28.2
million and $42.3 million, respectively.
The following discussion and analysis relates to the results of
operations for the Company as reported for the nine months ended September 30,
1999 and 1998, and should be read in conjunction with the consolidated financial
statements of the Company included elsewhere in this Form 10-Q.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1999 1998 1999 1998
---- ---- ---- ----
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues $400,020 $387,968 $1,161,119 $1,124,843
Net revenues 93,875 95,113 280,677 277,508
Selling, general and administrative expenses 94,693 91,020 284,970 265,650
Restructuring and other non-recurring charges 10,144 - 11,134 -
Asset impairment charges 12,060 - 12,060 -
Depreciation and amortization 5,128 3,847 14,829 11,560
Operating income (loss) (28,150) 246 (42,316) 298
Interest expense, net (7,316) (4,761) (18,462) (12,098)
Gain on disposition of business 69,760 - 69,760 -
Other income (expense), net (197) (32) (647) 114
Income tax provision (benefit) 34,230 (2,267) 35,261 (4,503)
Minority interest (371) (213) (958) (586)
Net loss $ (504) $(2,493) $(27,884) $(7,769)
THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES. The Company's revenues increased approximately $12.0 million
to $400.0 million for the three months ended September 30, 1999 from $388.0
million for the three months ended September 30, 1998. Asia/Pacific region
revenues increased $18.1 million, due primarily to increased export volumes from
new and existing customers. Also contributing additional revenue of $0.9 million
in the period was Americas and Canada which contributed $0.4 million more
revenue than the prior period. These increases were offset by a decline in the
GLAS business unit of $3.6 million, due to the sale of this operating unit in
mid-September 1999 and Europe as a result of diminished international forwarding
volumes due to regional softness. GeoLogistics Network Solutions ("GNS")
revenues declined $1.8 million primarily due to lower volumes as a result of
customer industry consolidations. Services business unit revenues decreased $1.8
million, on lower volume in both international relocation and project cargo
20
product lines as a result of declining international relocations and softness in
the oil and gas industries.
NET REVENUES. Net revenues, which represent gross profit after
deducting transportation and other direct costs, decreased by approximately $1.2
million, to $93.9 million for the three months ended September 30, 1999 from
$95.1 million for the same period in 1998. Net revenues as a percentage of
revenues decreased to 23.5% in 1999 from 24.5% for the same period in 1998.
Asia/Pacific region contributed an increase of $3.4 million to net
revenues on the strength of higher volumes. This increase was offset by declines
in all other business units of the Company. The sale of GLAS in September 1999
resulted in a $1.5 million decrease in net revenues for the quarter relative to
the same period of 1998 while the softness in Europe's economy contributed an
additional $1.0 million to the decrease. GNS and Services net revenue decreased
$0.7 million and $0.6 million, respectively, as a result of lower volumes, as
previously discussed, and margin erosion. Bekins Household Goods ("Bekins HHG")
and Americas also experienced lower net revenues of $0.3 million and $0.7
million, respectively, as a result of lower margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $3.7 million, to $94.7
million for the three months ended September 30, 1999 from $91.0 million for
the three months ended September 30, 1998. These expenses as a percentage of
net revenues increased to 100.9% in 1999 from 95.7% for the same period in
1998. The increase in selling, general and administrative expenses occurred
partially as a result of higher expenses in Americas of approximately $1.1
million. Asia/Pacific operating expenses increased $2.6 million as well due
to the growth in the business in this region which required additional
support. Canada and Europe also experienced increases in expenses of $0.8
million each as a result of increased revenues related to new and existing
customers. The increases were partially offset by lower expenses related to
GLAS due to the sale, and Bekins HHG and Services as a result of cost control
efforts initiated in the quarter.
RESTRUCTURING, NON-RECURRING AND ASSET IMPAIRMENT CHARGES. As
previously discussed, the Company has implemented its restructuring and
reorganization plans in the third quarter which has resulted in recording $10.1
million of restructuring and non-recurring charges related to the shut down of
the domestic freight forwarding business and the streamlining of other corporate
and administrative functions. In addition, the Company has recorded asset
impairment charges of approximately $12.1 million relating to goodwill,
capitalized software and property as
21
a result of exiting the domestic freight forwarding portion of Americas
business, a reevaluation of capitalized software costs and the pending sale
of certain property of its Italian subsidiary. These charges have all been
reflected in the results of operations of the Company for the three months
ended September 30, 1999. No such items existed during the same period of the
previous year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.3 million for the three months ended September 30, 1999 compared to
the prior year period primarily as the result of an increase in fixed assets
related to information technology.
OPERATING LOSS. The Company recorded a $28.2 million operating loss for
the three months ended September 30, 1999 compared to $0.2 million of operating
income for the three months ended September 30, 1998. The significant decrease
in operating loss is due primarily to the restructuring, non-recurring and asset
impairment charges of $22.2 million recorded in the third quarter of 1999,
higher depreciation and amortization expense, and lower operating results in all
operating units of the Company with the exception of Asia/Pacific (up $0.8
million) and Bekins HHG (up $0.1 million).
INTEREST EXPENSE, NET. Interest expense, net, increased by
approximately $2.5 million, to $7.3 million for the third quarter of 1999 from
$4.8 million for the same period of 1998. The increase resulted from the write
off of $1.5 million of deferred finance fees resulting from the amendment of the
Company's revolving line of credit in September 1999, interest associated with
borrowings incurred to finance the Air Services Acquisition in July 1998 and
higher levels of working capital-related borrowings required as a result of
lower operating results at GNS, Services and Americas.
INCOME TAXES. The income tax provision for the three months ended
September 30, 1999 increased $36.5 million to a $34.2 million provision versus a
$2.3 million tax benefit for the same period of 1998 as a result of the sale of
GLAS assets.
MINORITY INTERESTS. Interests held by minority shareholders in the
earnings of certain foreign subsidiaries were $0.4 million and $0.2 million for
the three months ended September 30, 1999 and 1998, respectively.
NET LOSS. Net loss decreased by $2.0 million to $0.5 million for the
three months ended September 30, 1999 compared to $2.5 million for the same
period of 1998. This decrease is due
22
primarily to the after tax gain attributable to the sale of the GLAS assets
offset by restructuring and other non-recurring charges and operating losses
attributable to the Americas, Europe and Services, as previously discussed
and increased interest expense.
NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES. The Company's revenues increased by approximately $36.3
million to $1,161.1 million for the nine months ended September 30, 1999 from
$1,124.8 million for the nine months ended September 30, 1998. Contributing
additional revenue of $24.2 million in the period was GLAS. In addition, the
Asia/Pacific region revenues increased $53.8 million, due primarily to increased
export volumes and new customers. These increases were offset by a decline in
the Americas business unit of $18.1 million, due to lower volumes as a result of
a difficult freight forwarding environment. GNS revenues declined $7.4 million
primarily due to lower volumes resulting from customer industry consolidations.
Europe's revenues declined $9.0 million primarily as a result of market softness
in the region. Services' revenues decreased $8.5 million, on lower volume in
both international relocation and project cargo product lines as a result of
declining international relocations and continued delays in the commencement of
several large overseas projects, particularly by companies engaged in the oil
and gas industry. Had foreign exchange rates remained constant from 1998 to
1999, consolidated revenues would have been $2.4 million less than the actual
1999 results.
NET REVENUES. Net revenues increased by approximately $3.2 million, to
$280.7 million for the nine months ended September 30, 1999 from $277.5 million
for the same period in 1998. Net revenues as a percentage of revenues decreased
to 24.2% in 1999 from 24.7% for the same period in 1998. GLAS accounted for $6.7
million of the increase as a result of the acquisition of Caribbean Air Services
in July 1998.
The Asia/Pacific region contributed an increase of $9.1 million to net
revenues on the strength of higher volumes. These increases were offset by
declines in all other business units of the Company except Canada which
increased $0.9 million. Americas posted a decrease in net revenues of $5.1
million from the previous year as a result of the competitive freight forwarding
environment in the U.S. which has led to the planned exit from the domestic
freight forwarding market by the Company during the third quarter of 1999. The
softness in Europe's economy contributed $3.2 million to the decrease. GNS and
Services net revenues decreased $2.8 million and $2.1 million, respectively, as
a result of lower volumes as previously discussed, and margin
23
erosion. Bekins HHG also experienced lower net revenues of $0.3 million a
result of lower margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $19.3 million, to $285.0
million for the nine months ended September 30, 1999 from $265.7 million for the
nine months ended September 30, 1998. These expenses as a percentage of net
revenues increased to 101.5% in 1999 from 95.7% for the same period in 1998.
Selling, general and administrative expenses increased over the prior year
period in all operating units of the Company. Asia/Pacific expenses increased
$7.5 million due to higher warehousing and employee costs required to support
the 26.7% increase in revenues. Selling, general and administrative expenses in
Europe increased $4.6 million as a result of initiatives to increase revenue
growth. Selling, general and administrative expenses in Canada increased $2.2
million due to additional warehousing costs required to support new business.
Expenses also include an additional $1.7 million for eight and one half months
of GLAS operations in 1999 versus two and one half months of operations in 1998
from the date of the Air Services Acquisition. Americas expenses increased by
$1.4 million as cost control initiatives implemented in early 1999 began to take
effect during the third quarter. All other operating units as a whole had a
modest combined increase of $1.9 million from the previous year.
RESTRUCTURING, NON-RECURRING AND ASSET IMPAIRMENT CHARGES. As
previously discussed, the Company has implemented its restructuring and
reorganization plans which has resulted in recording $11.1 million of
restructuring and non-recurring charges related to the shut down of the domestic
freight forwarding business and the streamlining of other corporate and
administrative functions. In addition, the Company has recorded asset impairment
charges of approximately $12.1 million relating to goodwill, capitalized
software and property as a result of exiting the domestic freight forwarding
portion of Americas business, a reevaluation of capitalized software costs and
the pending sale of certain property of its Italian subsidiary. These charges
have all been reflected in the results of operations of the Company for the nine
months ended September 30, 1999. No such items existed during the same period of
the previous year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $3.2 million for the nine months ended September 30, 1999 compared to
the prior year period primarily as the result of the Air Services Acquisition
and an increase in fixed assets related to information
technology.
24
OPERATING LOSS. The Company recorded a $42.3 million operating loss for
the nine months ended September 30, 1999 compared to a $0.3 million operating
profit for the nine months ended September 30, 1998. Increased profits in
Asia/Pacific and GLAS were offset by restructuring charges and higher operating
losses in all other operating units as previously discussed.
INTEREST EXPENSE, NET. Interest expense, net, increased by
approximately $6.4 million, to $18.5 million for the first nine months of 1999
from $12.1 million for the same period of 1998. The increase was associated with
interest related to borrowings incurred to finance the Air Services Acquisition
in July 1998, higher levels of working capital-related borrowings required as a
result of the losses incurred at GNS, Services and the Americas operating units
and the write off of $1.5 million of deferred financing fees related to the
revolving credit agreement which was amended in September 1999.
INCOME TAXES. The income tax provision for the nine months ended
September 30, 1999 increased $39.8 million to a $35.3 million provision versus a
$4.5 million tax benefit for the same period of 1998. The increase for 1999
relates primarily to gains associated with the sale of the GLAS assets. No
income tax benefit has been recorded for business units incurring operating
losses in 1999.
MINORITY INTERESTS. Interests held by minority shareholders in the
earnings of certain foreign subsidiaries were $1.0 million and $0.6 million for
the nine months ended September 30, 1999 and 1998, respectively.
NET LOSS. Net loss increased by $20.1 million to $27.9 million for the
nine months ended September 30, 1999 compared to $7.8 million for the same
period of 1998. This increase is due primarily to operating losses attributable
to the Americas, GNS, Europe and Services, increased interest expense, income
taxes and restructuring charges offset in part by the gain attributable to the
sale of the GLAS assets and improved operating results in Asia/Pacific and
Bekins HHG.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, net cash used by
operating activities was $53.4 million versus $45.5 million in the first nine
months of 1998. The increase was primarily due to a decrease in earnings. During
the first nine months of 1999 cash provided by investing activities was $96.8
million while cash used in investing activities was $49.2 million in
25
the first nine months of 1998. This increase is primarily due to the sale of
GLAS in 1999. Cash used in investing activities in 1998 included $26.3
million related to the purchase of Caribbean Air Services. During the first
nine months of 1999 capital expenditures were $6.2 million as compared to
$22.9 million in the same period of 1998. Cash used in financing activities
in the first nine months of 1999 was $44.8 million while cash provided from
financing activities in the first nine months of 1998 was $71.1 million,
primarily as a result of repayment of revolving debt with the proceeds from
the sale of GLAS.
On February 26, 1999, the Company executed an amendment to its bank
credit facility (the "February Amendment"). The February Amendment, among other
things, (a) included covenants that were required due to pending results of the
Company, (b) provided for an additional $30.5 million commitment ("Supplemental
Commitment") by one of the Company's existing lenders, (c) required the obligors
under the bank credit facility to grant a security interest in all of their
personal property, including all trademarks and other intangibles, to the extent
not already included in the collateral, and one item of real property to secure
the loans under the bank credit facility and (d) increased the margins
applicable to Eurodollar and base rate loans based on specified funded debt
ratios.
As a result of the disposition of GLAS (see note 6 to financial
statements) the Company, together with its guarantor subsidiaries entered
into an amendment to the revolving credit agreement. Among other changes, the
amendment provides for (a) reductions in credit availability from $100.0
million to $50.5 million in the aggregate with a sublimit of $20.0 million in
the United Kingdom, (b) reductions in the percentage of eligible accounts
receivable that qualify for the U.S. and United Kingdom borrowing base which
affect the Company's ability to incur debt under the revolving credit
facility, (c) the elimination of the interest coverage ratio covenant, (d)
the change in the maturity date to March 31, 2000, (e) the reduction of the
Supplemental Commitment from $30.0 million to $15.0 million and (f) the
amendment of the EBITDA covenant to provide that EBITDA for the three month
period ended December 31, 1999 will not be less than a deficit of $500,000.
Because the maturity date of the credit facility is March 31, 2000,
borrowings under the revolving credit facility of $1.8 million have been
classified as current liabilities in the September 30, 1999 balance sheet.
Because of the restructuring of certain of the Company's businesses and
uncertainties surrounding earnings performance the Company may have to seek
additional amendments or waivers of covenants in the credit facility.
26
As a result of the change of the maturity date of the bank credit
facility to March 31, 2000 the Company does not have sufficient cash on hand
and will not generate sufficient cash from operations to repay amounts
outstanding under the bank credit facility. Accordingly, the Company will be
required to seek financing from alternative sources to repay amounts
outstanding under the bank credit facility on March 31, 2000 and to finance
working capital needs following maturity of the bank credit facility. The
Company is currently engaged in discussions with lenders regarding
alternative financing, but it has not received a commitment from any lender
to provide such financing and there can be no assurances that the Company
will be able to secure such financing on terms that are acceptable to the
Company, if at all. Failure to obtain such financing would cause an event of
default under the bank credit facility and would result in an event of
default under the indenture governing the Notes. If the Company is unable to
obtain such financing, it could be required to adopt one or more
alternatives, such as selling or leasing assets or restructuring debt. There
can be no assurances that the Company could effect these alternatives on
satisfactory terms, if at all. In addition, if the Company defaults on the
payment of amounts outstanding under the credit facility on maturity the
lenders under the credit facility may initiate their remedies under the
facility for such default, including foreclosure on the assets securing
borrowings under the facility.
Within North America, the Company has utilized borrowings under its
credit facilities to meet working capital requirements and to fund capital
expenditures principally related to information technology. At October 31, 1999,
the Company had a working capital borrowing base under its bank credit facility
of $50.5 million, $17.5 million of outstanding working capital related
borrowings and $9.9 million of outstanding letter of credit commitments, leaving
$23.1 of additional borrowing capacity. In addition, at October 31, 1999, the
Company had borrowings outstanding of $15.0 million pursuant to the Supplemental
Commitment. Total borrowings of foreign operations at September 30, 1999 were
approximately $19.4 million, representing a combination of short and long-term
borrowings and capital leases. The Company anticipates that it will pay
approximately $12.3 million in cash for restructuring charges during the fourth
quarter of 1999 and the first quarter of 2000. The Company expects that it will
finance such cash payments with borrowings under its credit facility. The
Company cannot, however, be certain that it will have sufficient availability
under its existing facility to finance such restructuring costs and its working
capital needs because of the limited borrowing capacity of such facility.
The indenture relating to the Company's Notes generally provides that,
subject to certain exceptions, the Company not incur indebtedness unless on the
date of such incurrence the consolidated coverage ratio of the Company exceeds
2.25 to 1.0 and that the restricted
27
subsidiaries of the Company may not incur indebtedness unless on the date of
such incurrence the consolidated coverage ratio of the Company exceeds 2.5 to
1.0. The indenture permits the Company to incur up to $115.0 million of total
indebtedness (consisting of $100.0 million of bank debt and $15.0 million of
other debt) notwithstanding the Company's inability to meet the consolidated
coverage ratio test. As of October 31, 1999, the Company had incurred $32.5
million of indebtedness under its United States and United Kingdom bank
credit facilities and, as of such date, the Company would have been able to
incur an additional $23.1 million of indebtedness pursuant to the terms of
such facilities. As of September 30, 1999, the Company had incurred $3.9
million of other debt and would have been able to incur an additional $11.1
million of other debt pursuant to the terms of the indenture. In addition,
the indenture permits the Company to incur up to $30.0 million under its
foreign credit facilities notwithstanding the Company's inability to meet the
consolidated coverage ratio test. As of September 30, 1999, the Company had
incurred $19.4 million of indebtedness under its foreign credit facilities
and as of such date, would have been able to incur an additional $10.6
million of indebtedness under such facilities in compliance with the terms of
the indenture.
The Company is highly leveraged and has significant interest expense
obligations under its bank credit facility and Notes. The Company's bank credit
facility and the indenture related to the Notes contain certain restrictive
covenants. These restrictive covenants include covenants related to the
maintenance of EBITDA, limitations on indebtedness, limitations on restricted
payments, limitations on sales of assets and subsidiary stock, limitations on
transactions with affiliates, provisions relating to changes of control,
limitations on liens, sale or issuance of capital stock of restricted
subsidiaries, sale/leaseback transactions, and restrictions on mergers,
consolidation and sales of assets. It is anticipated that any replacement
financing for the Company's existing credit facility will include restrictive
covenants, some or all of which may be substantially more restrictive than the
covenants contained in the Company's existing bank credit facility. The ability
of the Company to comply with such covenants will be dependent upon the
Company's future performance, which is subject to financial, economic,
competitive, regulatory and other factors affecting the Company and its
subsidiaries, many of which are beyond their control. In addition, the Company
has recently financed operations from borrowing under its credit facilities. The
Company's ability to borrow additional funds is significantly restricted because
the Company's borrowing capacity under its existing bank credit facility is
limited to $16.0 million in North America and $7.1 million in the U.K. as of
September 30, 1999. The Company's ability to borrow additional funds and finance
its operations will be significantly affected by its ability to obtain
refinancing for the existing bank credit facility and additional financing,
which may be limited by the terms of the indenture and agreements governing the
28
refinancing indebtedness. There can be no assurances that the Company will be
able to obtain any such financing on acceptable terms or at all. If the Company
is unable to generate sufficient cash flow, or refinance the bank credit
facility upon maturity, it could be required to adopt one or more alternatives,
such as reducing or delaying planned expansions or capital expenditures, selling
or leasing assets, restructuring debt or obtaining additional debt or equity
capital. The Company will continue to investigate strategic alternatives to
finance future operations, including the sale of other non-core assets. There
can be no assurance that any of these alternatives could be effected on
satisfactory terms or at all. In addition, if the Company defaults on the
payment of amounts outstanding under the credit facility on maturity the lenders
under the credit facility may initiate their remedies under the facility for
such default, including foreclosure on the assets securing borrowings under the
facility.
YEAR 2000
The Company is currently engaged in a comprehensive project to upgrade
its information technology including hardware and software that will
consistently and properly recognize the Year 2000 ("Year 2000 Plan"). As a
provider of global logistics and transportation services, the Company is reliant
on its computer systems and applications to conduct its business. In addition to
these systems, the Company is also reliant upon the system capabilities of its
business partners. Many of the Company's systems include new hardware and
packaged software recently purchased from large vendors who have represented
that these systems are already Year 2000 compliant. As a result, a majority of
the Company's financial systems are already in compliance with the Company's
objectives and all key computing hardware of the Company is Year 2000 compliant.
An extensive review has also been made of all remaining internal systems. All of
the operational systems in Europe, Asia, and North America are in compliance.
Financial systems in all of Asia, all of Europe, except Italy, and the United
States are also in compliance. The financial systems for Italy and Canada are
expected to be compliant by the end of November 1999. As part of this process
the Company is also surveying embedded systems to ensure Year 2000 compliance
with scheduled completion by December 1999.
The Company has conducted a survey of its business partners most of
whom have certified Year 2000 compliance. The Company, however, is still
gathering information from the airlines. The Company is also working with major
customers to gain Year 2000 certification with them in response to customer
inquiries and surveys.
29
The Company estimates total costs of the compliance process to be
approximately $2.0 million of which $1.9 million has been spent through October
31, 1999. This does not include the costs associated with the Company's
strategic information plan much of which addresses the Year 2000 project as well
as strategic initiatives.
The Year 2000 Plan prepared by the Company has been designed to
identify points of failure and corrective actions to avoid systems failures.
Procedures have been designed and systems implemented to prevent invalid dates
from customers and suppliers from impacting Company systems. The Company
believes the risk of operational failure from internal systems is minimal. The
Company also believes that there are sufficient transportation providers who can
meet the Company's contractual commitments even if some carriers are impaired by
the Year 2000 problem. For those parties for which the Company has identified to
be non-Year 2000 compliant, the Company intends to secure the option of
alternate carriers who are Year 2000 ready in order to continue to provide basic
business services.
The Company has already prepared manual operational procedures which
are in place should disruption from a Company system or third party system
occur. In addition, all system development will be stopped and all technical
resources will be available if any unexpected system problems occur during the
first quarter of 2000.
CONVERSION TO THE EURO CURRENCY
In January 1999 certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency ("Euro"). The Company conducts business in
member countries. The transition period for the introduction of the Euro will be
between January 1, 1999 and June 30, 2002. The Company is addressing the issues
involved with the introduction of the Euro. The more important issues facing the
Company include: converting information technology systems; reassessing currency
risk; negotiating and amending contracts; and processing tax and accounting
records.
Based upon progress to date the Company believes that use of the Euro
will not have a significant impact on the manner in which it conducts its
business affairs and processes its business and accounting records. Accordingly,
conversion to the Euro is not expected to have a material effect on the
Company's financial condition or results of operations.
30
RISK MANAGEMENT AND MARKET RISK SENSITIVE INSTRUMENTS
The Company is exposed to certain market risks, including changes in
interest rates and currency exchange rates. In the normal course of business,
the Company employs established policies and procedures to manage its exposure
to changes in interest rates and fluctuations in the value of foreign currencies
using a variety of financial instruments.
In order to mitigate the impact on fluctuations in the general level of
interest rates, the Company generally maintains a large portion of its debt as
fixed rate in nature by borrowing on a long term basis.
The Company's objectives in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes and allow management to focus its attention on its
core business issues and challenges. Accordingly, the Company enters into
various contracts which change in value as foreign exchange rates change to
minimize the impact of currency movements on certain existing commitments and
anticipated foreign earnings. The Company may use a combination of financial
instruments to manage these risks, including forward contact or option related
instruments.
It is the Company's policy to enter into foreign currency transactions
only to the extent considered necessary to meet its objectives as stated above.
The Company does not enter into foreign currency transactions for speculative
purposes.
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board Issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which was originally required to be adopted in years beginning after June
15, 1999. This new accounting standard will require that all derivatives be
recorded on the balance sheet at fair value. If the derivative is a hedge,
depending on the nature of the hedge, changes in fair value of the derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. Management
is currently assessing the impact that the adoption of SFAS No. 133 will have on
the Company's financial position, results of operations, and cash flows.
31
The FASB recently issued Statement No. 137 which delays the effective
date of this Statement until fiscal years beginning after June 15, 2000. In
addition, the Statement requires that all derivatives that are expected to be
hedges must be designated as such on the first day of the period in which the
statement becomes effective. The Company, which utilizes fundamental derivatives
to hedge changes in interest rates and foreign currencies, expects to adopt SFAS
No. 133 effective January 1, 2001.
32
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.5 Employment Agreement dated as of June 15, 1999 between
the Company and Robert Arovas.
27 Financial Data Schedule (Filed electronically only).
(b) Reports on Form 8-K
On September 17, 1999 the Company filed a current report on
Form 8-K disclosing the consummation of the sale of its
GeoLogistics Air Services, Inc. business unit to FDX Global
Logistics, Inc.
On September 27, 1999 the Company filed a current report on
Form 8-K/A disclosing the pro forma financial statements of
the Company reflecting the disposition of its GeoLogistics Air
Services, Inc. business.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GEOLOGISTICS CORPORATION
Date: November 15, 1999 By: /s/ Robert Arovas
----------------- -------------------------------
Robert Arovas
President, Chief Executive Officer
Date: November 15, 1999 By: /s/ Janet D. Helvey
----------------- ------------------------------
Janet D. Helvey
Senior Vice President, Finance
Date: November 15, 1999 By: /s/ Kenneth R. Batko
----------------- -------------------------------
Kenneth R. Batko
Chief Accounting Officer
34