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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
COMMISSION FILE NUMBER 0-27288
EGL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0094895
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
15350 VICKERY DRIVE, HOUSTON, TEXAS 77032
(281) 618-3100
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(Address of Principal Executive Offices, Including Registrant's Zip Code,
and Telephone Number, Including Area Code)
FORMER FISCAL YEAR END - SEPTEMBER 30
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's common stock as of August 2, 2000:
28,568,680 shares (net of 1,391,834 treasury shares).
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EGL, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of
June 30, 2000 and September 30, 1999................................................................. 3
Condensed Consolidated Statement of Income and Comprehensive
Income for the Nine Months ended June 30, 2000 and 1999.............................................. 4
Condensed Consolidated Statement of Income and Comprehensive Income for the Three
Months ended June 30, 2000 and 1999.................................................................. 5
Condensed Consolidated Statement of Cash Flows for
the Nine Months ended June 30, 2000 and 1999......................................................... 6
Condensed Consolidated Statement of Shareholders'
Equity for the Nine Months ended June 30, 2000....................................................... 7
Notes to Condensed Consolidated Financial Statements................................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................................. 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................. 19
PART II. OTHER INFORMATION..................................................................................... 20
SIGNATURES...................................................................................................... 23
INDEX TO EXHIBITS............................................................................................... 24
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUES)
June 30, September 30,
2000 1999
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 19,977 $ 35,175
Short-term investments 17,213
Accounts receivable - trade, net 134,447 109,003
Prepaid expenses and other 5,140 3,712
Deferred income taxes 3,447 2,817
------------ ------------
Total current assets 163,011 167,920
Property and equipment, net 38,481 28,184
Goodwill, net 38,624 11,072
Other assets 3,669 1,815
------------ ------------
Total assets $ 243,785 $ 208,991
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable - trade $ 20,102 $ 12,657
Accrued transportation costs 20,197 21,895
Accrued compensation and employee benefits 18,353 18,677
Other accrued liabilities 11,944 8,855
------------ ------------
Total current liabilities 70,596 62,084
Other long-term liabilities 3,321
Deferred income taxes 3,104 3,097
------------ ------------
Total liabilities 77,021 65,181
------------ ------------
Minority interest 183
------------ ------------
Shareholders' equity:
Preferred stock, $0.001 par value, 10,000 shares
authorized
Common stock, $0.001 par value, 100,000 shares
authorized, 29,954 and 29,453 shares issued 30 29
Additional paid-in capital 92,462 81,310
Unearned compensation (1,592)
Retained earnings 101,328 77,629
Accumulated other comprehensive loss (912) (771)
Treasury stock, 1,406 and 1,022 shares, at cost (24,552) (14,570)
------------ ------------
166,764 143,627
------------ ------------
Commitments and contingencies (Note 7)
------------ ------------
Total liabilities and shareholders' equity $ 243,785 $ 208,991
============ ============
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Ended
June 30,
----------------------------
2000 1999
------------ ------------
Revenues $ 589,855 $ 428,424
Cost of transportation 346,695 243,455
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Net revenues 243,160 184,969
------------ ------------
Operating expenses:
Personnel costs 128,605 93,955
Other selling, general and administrative expenses 77,106 59,411
------------ ------------
205,711 153,366
------------ ------------
Operating income 37,449 31,603
Interest and other income 1,745 1,934
------------ ------------
Income before provision for income taxes 39,194 33,537
Provision for income taxes 15,495 12,961
------------ ------------
Net income 23,699 20,576
Other comprehensive income:
Foreign currency translation (141) (40)
------------ ------------
Comprehensive income $ 23,558 $ 20,536
============ ============
Basic earnings per share $ 0.83 $ 0.73
============ ============
Basic weighted-average common shares outstanding 28,676 28,218
============ ============
Diluted earnings per share $ 0.79 $ 0.71
============ ============
Diluted weighted-average common and common equivalent
shares outstanding 29,828 28,925
============ ============
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
June 30,
----------------------------
2000 1999
------------ ------------
Revenues $ 213,739 $ 149,826
Cost of transportation 125,807 86,133
------------ ------------
Net revenues 87,932 63,693
------------ ------------
Operating expenses:
Personnel costs 45,831 32,012
Other selling, general and administrative expenses 28,500 20,609
------------ ------------
74,331 52,621
------------ ------------
Operating income 13,601 11,072
Interest and other income 469 751
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Income before provision for income taxes 14,070 11,823
Provision for income taxes 5,609 4,528
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Net income 8,461 7,295
Other comprehensive income:
Foreign currency translation (1,235) (233)
------------ ------------
Comprehensive income $ 7,226 $ 7,062
============ ============
Basic earnings per share $ 0.30 $ 0.26
============ ============
Basic weighted-average common shares outstanding 28,646 28,401
============ ============
Diluted earnings per share $ 0.29 $ 0.25
============ ============
Diluted weighted-average common and common equivalent
shares outstanding 29,451 29,585
============ ============
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
June 30,
------------------------
2000 1999
---------- ----------
Cash flows from operating activities $ 11,532 $ 23,873
---------- ----------
Cash flows from investing activities:
Acquisitions, net of cash (21,240)
Purchase of investments (12,627)
Maturity of investments 17,213 13,104
Acquisition of property and equipment, net (14,761) (8,687)
Payment of contingent consideration for acquisition (2,443) (2,000)
Other (63)
---------- ----------
Net cash used by investing activities (21,231) (10,273)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 294
Proceeds from exercise of stock options 4,826 5,896
Purchase of treasury stock (10,478) (9,218)
---------- ----------
Net cash used by financing activities (5,358) (3,322)
---------- ----------
Effect of foreign currency translation on cash (141) (66)
---------- ----------
Net increase (decrease) in cash and cash equivalents (15,198) 10,212
Cash and cash equivalents, beginning of period 35,175 37,191
---------- ----------
Cash and cash equivalents, end of period $ 19,977 $ 47,403
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See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL UNEARNED OTHER
-------------------- PAID-IN COMPEN- RETAINED COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL SATION EARNINGS LOSS STOCK TOTAL
--------- --------- ---------- --------- --------- ------------- --------- ---------
Balance at September 30, 1999 29,453 $ 29 $ 81,310 $ 77,629 $ (771) $ (14,570) $ 143,627
Shares issued under stock option
plans and restricted stock awards 501 1 6,730 $ (1,905) 4,826
Purchase of treasury stock (10,478) (10,478)
Issuance of shares under stock
purchase plan (2) 296 294
Shares issued for acquisition related
earnout 200 200
Tax benefit from exercise of stock
options 4,424 4,424
Amortization of unearned
compensation 313 313
Net income 23,699 23,699
Foreign currency translation
adjustments (141) (141)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2000 29,954 $ 30 $ 92,462 $ (1,592) $ 101,328 $ (912) $ (24,552) $ 166,764
========= ========= ========= ========= ========= ========= ========= =========
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited condensed consolidated financial statements
have been prepared by EGL, Inc. (EGL or the Company) in accordance with the
rules and regulations of the Securities and Exchange Commission (the SEC) for
interim financial statements and accordingly do not include all information and
footnotes required under generally accepted accounting principles for complete
financial statements. The financial statements have been prepared in conformity
with the accounting principles and practices disclosed in, and should be read in
conjunction with, the annual financial statements of the Company included in the
Company's Annual Report on Form 10-K (File No. 0-27288). In the opinion of
management, these interim financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position at June 30, 2000 and the
results of its operations for the nine and three months ended June 30, 2000 and
1999. Results of operations for the nine and three months ended June 30, 2000
are not necessarily indicative of the results that may be expected for EGL's
full fiscal year.
NOTE 1 - ORGANIZATION, OPERATIONS, AND SIGNIFICANT ACCOUNTING POLICIES:
On February 21, 2000, the Company's shareholders approved a proposal to
change the Company's name to EGL, Inc. in recognition of EGL's increasing
globalization, broader spectrum of services and long-term growth strategy.
EGL is a worldwide logistics company. The Company maintains operating
facilities throughout the United States, Mexico, Canada, Hong Kong, the United
Kingdom, Argentina, Brazil, Chile and Peru as well as a worldwide network of
exclusive and nonexclusive agents.
The Company operates in one principal industry segment. During the nine
and three months ended June 30, 2000 and 1999, no individual geographic segment
outside the United States exceeded more than 10% of the revenues, net income or
assets of the combined amounts for all geographic segments.
On July 12, 1999, the Board of Directors declared a three-for-two stock
split of the Company's common stock, effected in the form of a stock dividend.
All shares and per-share amounts have been restated retroactively to reflect the
stock split, which was distributed August 30, 1999 to shareholders of record on
August 23, 1999.
On July 2, 2000, the Board of Directors of EGL determined to change its
fiscal year ending on September 30th to a year ending on December 31st. As a
result, EGL's 2000 fiscal year will end on December 31, 2000 and its next Annual
Report on Form 10-K will include audited results for the twelve-month period
ending December 31, 2000. References in this document to the first, second and
third quarters of fiscal 2000 are to the quarters ended December 31, 1999, March
31, 2000 and June 30, 2000, respectively.
NOTE 2 - EARNINGS PER SHARE:
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share includes potential
dilution that could occur if securities to issue common stock were exercised.
Stock options are the only potentially dilutive share equivalents the Company
has outstanding for the periods presented. Incremental shares of 1.2 million and
707,000 were used in the calculation of diluted earnings per share for the nine
months ended June 30, 2000 and 1999, respectively. Incremental shares of 805,000
and 1.2 million were used in the calculation of diluted earnings per share for
the three months ended June 30, 2000 and 1999, respectively. For the nine months
ended June 30, 2000 and 1999, 113,071 and 1,731,075 options, respectively, were
excluded from the diluted earnings per share computation because their effect
was antidilutive. For the three months ended June 30, 2000, 501,225 options were
excluded from the dilutive earnings per share computation because their effect
was antidilutive. There were no antidilutive options for the three months ended
June 30, 1999.
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for
the Company). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management is currently reviewing
the provisions of SFAS 133 and does not believe that the Company's financial
statements will be materially impacted by the adoption of SFAS 133.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements", to be effective the fourth
fiscal quarter of fiscal years beginning after December 15, 1999 (EGL's quarter
ending December 31, 2000 based on the change in year end). EGL currently
recognizes revenues and expenses related to the transportation of freight at the
time the freight departs the terminal of origin. In accordance with the guidance
established in SAB No. 101, EGL will change its policy effective as of the
beginning of fiscal 2000 to recognize revenues and expenses related to the
transportation of freight at the time the freight arrives at its final
destination. This will result in the deferral of certain revenues and expenses
into a later period. EGL is currently evaluating the impact of the change on its
results of operations. The effect of this change will first be reflected in
the Company's Annual Report on Form 10-K for the year ending December 31, 2000.
NOTE 4 - ACQUISITIONS:
On December 15, 1999, the Company completed the acquisition of Compass
Cargo Limitada, a privately held air freight forwarder in Chile with annual net
revenues of approximately $1.5 million for an aggregate purchase price of $1.2
million in cash at closing.
On January 7, 2000, the Company completed the acquisition of two
commonly-controlled freight forwarding companies operating in Canada for an
aggregate purchase price of approximately $21.3 million in cash at closing and a
total of approximately $4.9 million in cash payable in three equal, annual
installments. The agreement also contemplates additional consideration not to
exceed $7.8 million over the next three years payable in cash and Company common
stock if certain earnings-based growth goals are achieved.
Each of these acquisitions was accounted for as a purchase and the
results of operations for the acquired businesses are included in the condensed
consolidated statement of income and comprehensive income from the acquisition
date forward.
In June 2000, the Company paid $834,000 to buy out the minority
interest under its joint venture agreement with its Hong Kong subsidiary and
recorded goodwill of $684,000. In addition, during the third quarter of fiscal
2000 the Company paid an aggregate of $1.2 million and issued 8,802 shares of
common stock valued at $200,000 in connection with contingent payments for
acquisitions completed in fiscal 1998 and 1997.
On July 2, 2000, EGL entered into an Agreement and Plan of Merger with
Circle International Group, Inc. (Circle). Circle is a leader in international
air and ocean transportation, operating over 300 logistics centers in more than
100 countries. Circle is publicly held and headquartered in San Francisco,
California. As a result of the merger, Circle will be a wholly owned subsidiary
of EGL. The combination is expected to be accounted for as a pooling of
interests, and each share of Circle's common stock issued and outstanding
immediately prior to the effective time of the combination will be converted
into the right to receive one share of EGL's common stock. When complete, EGL's
shareholders will own approximately 62 percent and Circle shareholders will own
approximately 38 percent of the combined company's outstanding shares. The
completion of the merger is subject to shareholder approval which is expected
to occur in September 2000.
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - SHAREHOLDERS' EQUITY:
In January 2000, the Company's Board of Directors authorized the
repurchase of up to one million shares of its outstanding Common Stock. In April
2000, the Company's Board of Directors increased the authorization to three
million shares. As of June 30, 2000, the Company had repurchased 449,500 shares
for a total of $10.5 million under this authorization. On July 2, 2000, the
Company's Board of Directors terminated the remaining share repurchase
authorization.
Unearned compensation relates to awards of restricted stock and is
recorded at the date of award based on the market value of the shares and is
amortized to expense over the vesting period of three years.
NOTE 6 - REVOLVING CREDIT FACILITY:
On January 13, 2000, the Company entered into an agreement (the Credit
Agreement) with Bank of America, N.A. (the Bank) as administrative agent. The
Credit Agreement (as amended on May 31, 2000) provides a $50 million revolving
line of credit and includes a $10 million sublimit for the issuance of letters
of credit. The Company is currently in discussion with the Bank to increase the
amount of the line of credit up to $100 million, although there can be no
assurance that this increase will be effected. No amounts were outstanding under
the Credit Agreement as of June 30, 2000.
The revolving line of credit matures on January 11, 2001. For each
tranche of principal, the Company elects an interest rate calculation based on
either LIBOR (a LIBOR Tranche) or either the prime rate announced by the Bank or
the federal funds rate plus 50 basis points (a Prime Rate Tranche), plus an
applicable margin based on a ratio of consolidated debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization). The interest
for a LIBOR Tranche is due at periods of one, two, three or six months, as the
Company may select at the time it requests the funds. The interest for a Prime
Rate Tranche is due quarterly.
The revolving line of credit includes unused commitment fees and letter
of credit fees, each of which is calculated on the basis of a ratio of
consolidated debt to consolidated EBITDA. The Company is subject to certain
covenants under the terms of the Credit Agreement, including, but not limited
to, maintenance at the end of any fiscal quarter of (a) minimum specified
consolidated net worth, (b) a ratio of consolidated funded debt to total
capitalization of no greater than .50 to 1.00, (c) a ratio of consolidated
funded debt to consolidated EBITDA of no greater than 2.50 to 1.00 and (d) a
consolidated fixed charge coverage ratio of no less than 2.00 to 1.00. The
Credit Agreement also places restrictions on additional indebtedness, liens,
investments, change of control and other matters.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
In May 2000, the Company received a Letter of Determination and
Conciliation Proposal from the Equal Employment Opportunity Commission relating
to a Commissioner's Charge issued in the first quarter of fiscal 1998. Following
the issuance of the EEOC's Determination a lawsuit was filed in Philadelphia,
Pennsylvania by three former EGL employees and one individual who had
unsuccessfully applied for a position. The lawsuit alleges discrimination and
adopts in their entirety the EEOC's conclusions. Although the four plaintiffs
seek to represent a class of individuals, no class action has yet been approved
by the Court. The lawsuit seeks unspecified damages. See "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Part II, Item 1. Legal Proceedings."
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected certain aspects of the Company's
financial position and operating results during the periods included in the
accompanying unaudited condensed consolidated financial statements. This
discussion should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the annual financial statements included in the Company's Annual Report on Form
10-K (File No. 0-27288) and the accompanying unaudited condensed consolidated
financial statements.
OVERVIEW
On February 21, 2000, the Company's shareholders approved a proposal to
change the Company's name to EGL, Inc. in recognition of the Company's
increasing globalization, broader spectrum of services and long-term growth
strategy.
The Company's revenues have increased to $595.2 million in fiscal 1999
from $291.8 million in fiscal 1997, and its operating income has increased to
$45.0 million in fiscal 1999 from $25.7 million in fiscal 1997. Historically,
the Company has grown primarily through internal expansion, including developing
its terminal network, expanding its service offerings and sales force and
increasing its customer base. The Company has also made acquisitions on a
limited basis.
Since October 1, 1996, the Company has added 45 terminals, increasing
the total to 92 at June 30, 2000. The opening of a new terminal generally has an
initial short-term negative impact on profitability due to operating losses of
the new terminal. However, the opening of a new terminal generally does not
require significant capital expenditures. Additionally, personnel costs are
contained at the time of the opening of a new terminal because commissions are
generally not paid until salesmen achieve minimum sales levels and until
managers achieve terminal profitability.
Although future new terminals may be opened in cities smaller than
those in which the Company's more mature terminals are located, the Company
believes the results of new terminals should benefit from a ready base of
business provided by its existing customers.
The Company currently maintains international operating facilities in
Mexico, Canada, Hong Kong, the United Kingdom, Argentina, Brazil, Chile and Peru
as well as a worldwide network of exclusive and nonexclusive agents.
In recent years, the Company has focused on expanding its international
freight forwarding business. On July 2, 2000, EGL entered into an Agreement and
Plan of Merger with Circle International Group, Inc. (Circle). Circle is a
leader in international air and ocean transportation, operating over 300
logistics centers in more than 100 countries. Circle is publicly held and
headquartered in San Francisco, California. As a result of the merger, Circle
will be a wholly owned subsidiary of EGL. The combination is expected to be
accounted for as a pooling of interests, and each share of Circle's common stock
issued and outstanding immediately prior to the effective time of the
combination will be converted into the right to receive one share of EGL's
common stock. When complete, EGL's shareholders will own approximately 62
percent and Circle shareholders will own approximately 38 percent of the
combined company's outstanding shares. The completion of the merger is subject
to shareholder approval which is expected to occur in September 2000.
In May 2000, as a result of recent industry consolidation, the Company
announced plans to accelerate its international expansion efforts beginning in
the third quarter of fiscal 2000 with the addition of seasoned international
airfreight employees worldwide. The new staff and related infrastructure costs
was expected to increase international operating expenses over the next two
quarters by approximately $4.0 to $5.0 million, or $0.08 to $0.10 cents per
diluted shares, net of tax. The Company's proposed merger with Circle
effectively ends the Company's previously announced $4.0 to $5.0 million
expenditure for international staff and infrastructure costs. The Company
incurred approximately 60 percent of its total planned expenditure, or
approximately $0.05 cents per diluted share, net of tax. The Company expects to
utilize the staff and infrastructure related to these costs subsequent to the
completion of the merger.
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EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On January 7, 2000, the Company completed the acquisition of Commercial
Transport International (Canada) Ltd. (CTI) and Fastair Cargo System Ltd.
(Fastair) for an aggregate purchase price of approximately $21.3 million in cash
at closing and a total of approximately $4.9 million in cash payable in three
equal annual installments. The acquisition agreement also contemplates
additional consideration not to exceed $7.8 million over the next three years
payable in cash and Company common stock if certain earnings-based growth goals
are achieved. Fastair is a leading forwarder in the intra-Canada freight
forwarding market. CTI, its sister company, primarily serves the international
freight forwarding market with offices coast-to-coast throughout Canada. CTI and
Fastair were privately-held, under common control and have eight locations in
Canada. Both companies are based in Toronto, Canada. The acquisitions were
accounted for as a purchase and the acquired operations were integrated with the
Company's existing Canadian operations.
The Company also intends to continue the growth of its local pickup and
delivery operations. By providing local pickup and delivery services for its
freight forwarding shipments, the Company has been able to increase its gross
margin for these shipments because it captures margins that were previously paid
to third parties. However, the Company's local pickup and delivery services
provided to other non-forwarding customers generate a lower gross margin than
the Company's domestic forwarding operations due to their higher transportation
costs as a percentage of revenues.
Historically, the Company's operating results have been subject, to a
limited degree, to seasonal trends when measured on a quarterly basis. The
quarter ending March 31st has traditionally been the weakest and the quarter
ending September 30th has traditionally been the strongest.
RESULTS OF OPERATIONS
The following table presents certain statement of income data as a percentage of
revenues and operating data for the periods indicated.
Nine Months Ended June 30, Three Months Ended June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of transportation 58.8 56.8 58.9 57.5
----------- ----------- ----------- -----------
Net revenues 41.2 43.2 41.1 42.5
Personnel costs 21.8 21.9 21.4 21.3
Other selling, general and administrative expense 13.1 13.9 13.3 13.8
----------- ----------- ----------- -----------
Operating expenses 34.9 35.8 34.7 35.1
----------- ----------- ----------- -----------
Operating income 6.3% 7.4% 6.4% 7.4%
----------- ----------- ----------- -----------
Net income 4.0% 4.8% 4.0% 4.9%
=========== =========== =========== ===========
Freight forwarding terminals at end of period 92 78 92 78
Local delivery locations at end of period 77 67 77 67
Freight forwarding shipments 1,681,328 1,006,094 653,792 362,331
Average weight (lbs.) per freight forwarding
shipment 604 675 576 689
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
Revenues increased 37.7% to $589.9 million in the first nine months of
fiscal 2000 from $428.4 million in the same period of fiscal 1999 primarily due
to increases in the number of shipments and the total weight of cargo shipped.
These increases primarily resulted from an increase in the number of terminals
open during such period, an increase in penetration in existing airfreight and
pickup and delivery markets, the addition of significant national account
customers and the effect of acquisitions completed after the third quarter of
fiscal 1999.
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EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
For those freight forwarding terminals opened prior to the beginning of
fiscal 1999 (71 terminals), revenues increased 33.7% to $518.3 million for the
nine months ended June 30, 2000 from $387.7 million for the nine months ended
June 30, 1999.
Revenues for the nine months ended June 30, 2000 were comprised of
$550.6 million of forwarding revenues and $39.3 million of local pickup and
delivery revenues, as compared to $391.3 million and $37.1 million,
respectively, for the nine months ended June 30, 1999. Of the Company's
forwarding revenues for the nine months ended June 30, 2000, $133.6 million were
attributable to international shipments (defined as shipments that cross a U.S.
national border or originated outside the U.S.) compared to $75.4 million for
the nine months ended June 30, 1999. The acquisitions completed in Canada and
Chile, as described in Note 4, added approximately $33.9 million in
international revenue during the nine months ended June 30, 2000.
The Company's total local pickup and delivery revenues for the nine
months ended June 30, 2000 were $147.1 million. This amount includes $107.8
million of intercompany sales that were eliminated upon consolidation and $39.3
million in services to third-party (non-forwarding) customers.
Cost of transportation increased during the first nine months of fiscal
2000 as a percentage of revenues to 58.8% from 56.8% in the comparable period in
fiscal 1999. The increase was primarily attributable to increased international
freight shipping volumes, which carry a higher cost of transportation per
shipment than domestic freight. Cost of transportation increased in absolute
terms by 42.4% to $346.7 million for the nine months ended June 30, 2000 from
$243.5 million in the same period in fiscal 1999 as a result of increases in
freight shipped. Net revenue margin decreased to 41.2% in the first nine months
of fiscal 2000 from 43.2% in the same period in fiscal 1999. The primary reason
for the margin decline was increased international freight shipping volumes
which carry a higher cost of transportation per shipment than domestic freight
and a temporary shift in January and February 2000 from overnight air shipments
to lower-margin economy ground shipments by the technology and manufacturing
sectors as a result of the Year 2000 transition. Net revenues increased 31.5% to
$243.2 million in the first nine months of fiscal 2000 from $185.0 million in
the same period in fiscal 1999.
Operating expenses decreased as a percentage of revenues to 34.9% in
the first nine months of fiscal 2000 from 35.8% for the same period in fiscal
1999. The $52.3 million increased costs in absolute terms was attributable
primarily to continued growth in the level of operations, costs from additional
terminals, acquisitions and expansion of local delivery operations. Personnel
costs decreased as a percentage of revenues to 21.8% in the first nine months of
fiscal 2000 from 21.9% in the same period in fiscal 1999 and increased in
absolute terms by 36.9% to $128.6 million in the fiscal 2000 period from $94.0
million in the fiscal 1999 period. This increase was due to increased staffing
needs associated with the opening of new terminals and local delivery locations,
the effect of acquisitions, expanded operations at existing terminals and
increased commissions resulting from higher revenues and expanded corporate
infrastructure. Such personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. The Company has added personnel to build
corporate infrastructure particularly in international operations, to keep pace
with its recent significant growth, to deepen the staff at its terminals and to
prepare for growth during fiscal 2000. Other selling, general and administrative
expenses decreased as a percentage of revenues to 13.1% in the first nine months
of fiscal 2000 from 13.9% in the first nine months of fiscal 1999, and increased
in absolute terms by 29.8% to $77.1 million in the fiscal 2000 period from $59.4
million in the fiscal 1999 period. In the first nine months of fiscal 2000,
selling expenses as a percentage of revenues remained constant at 1.2% and other
general and administrative expenses as a percentage of revenues decreased by
0.8% compared to the first nine months of fiscal 1999. The absolute increases in
selling, general and administrative expenses were due to overall increases in
the level of the Company's activities in the fiscal 2000 period, increased
expenses attributable to the Company's acquisitions, the Company's headquarters
facility and a $1.1 million charge for legal fees recorded in the second quarter
of fiscal 2000.
13
14
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating income increased 18.5% to $37.4 million in the first nine
months of fiscal 2000 from $31.6 million in the comparable period in fiscal
1999. Operating margin decreased to 6.3% for nine months ended June 30, 2000
compared to 7.4% for the nine months ended June 30, 1999. Interest and other
income decreased to $1.7 million from $1.9 million as a result of a decline in
interest income from decreased levels of investments during the nine months
ended June 30, 2000 compared to the nine months ended June 30, 1999, partially
offset by rental income of $545,000 from a sublease that began in May 1999.
Income before provision for income taxes increased 16.9% to $39.2
million in the first nine months of fiscal 2000 from $33.5 million in the
comparable period of fiscal 1999. Provision for income taxes increased 19.6% to
$15.5 million for the nine months ended June 30, 2000 from $13.0 million for the
nine months ended June 30, 1999. Net income increased 15.2% to $23.7 million in
the first nine months of fiscal 2000 from net income of $20.6 million in the
same period in fiscal 1999. Diluted earnings per share increased 11.3% to $0.79
per share for the nine months ended June 30, 2000 from $0.71 in the same period
in fiscal 1999.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues increased 42.7% to $213.7 million in the third quarter of
fiscal 2000 from $149.8 million in the same period of fiscal 1999 primarily due
to increases in the number of shipments and the total weight of cargo shipped.
These increases resulted from an increase in the number of terminals open during
such period, an increase in penetration in existing airfreight and pickup and
delivery markets, the addition of significant national account customers and the
effect of acquisitions completed after the third quarter of fiscal 1999.
For those freight forwarding terminals opened prior to the beginning of
fiscal 1999 (71 terminals), revenues increased 34.4% to $182.8 million for the
three months ended June 30, 2000 from $136.0 million for the three months ended
June 30, 1999.
Revenues for the three months ended June 30, 2000 were comprised of
$200.0 million of forwarding revenues and $13.7 million of local pickup and
delivery revenues, as compared to $136.5 million and $13.3 million,
respectively, for the three months ended June 30, 1999. Of the Company's
forwarding revenues for the third quarter of fiscal 2000, $51.2 million were
attributable to international shipments (defined as shipments that cross a U.S.
national border or originated outside the U.S.) compared to $29.1 million for
the third quarter of fiscal 1999. The acquisitions completed in Canada and
Chile, as described in Note 4, added approximately $17.1 million in
international revenue during the third quarter of fiscal 2000.
The Company's total local pickup and delivery revenues for the third
quarter of fiscal 2000 were $52.5 million. This amount includes $38.8 million of
intercompany sales that were eliminated upon consolidation and $13.7 million in
services to third-party (non-forwarding) customers.
Cost of transportation increased during the third quarter of fiscal
2000 as a percentage of revenues to 58.9% from 57.5% in the comparable period in
fiscal 1999. The increase was primarily attributable to increased international
freight shipping volumes, which carry a higher cost of transportation per
shipment than domestic freight. Cost of transportation increased in absolute
terms by 46.1% to $125.8 million in the third quarter of fiscal 2000 from $86.1
million in the third quarter of fiscal 1999 as a result of increases in freight
shipped. Net revenue margin decreased to 41.1% in the third quarter of fiscal
2000 from 42.5% in the same period in fiscal 1999. The primary reason for the
margin decline was increased international freight shipping volumes which carry
a higher cost of transportation per shipment than domestic freight. Net revenues
increased 38.1% to $87.9 million in the third quarter of fiscal 2000 from $63.7
million in the same period in fiscal 1999.
14
15
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses decreased as a percentage of revenues to 34.7% in
the third quarter of fiscal 2000 from 35.1% for the same period in fiscal 1999.
The $21.7 million increased costs in absolute terms for the third quarter of
fiscal 2000 was attributable primarily to continued growth in the level of
operations, costs from additional terminals, acquisitions and expansion of local
delivery operations. Personnel costs increased as a percentage of revenues to
21.4% in the third quarter of fiscal 2000 from 21.3% in the same period in
fiscal 1999 and increased in absolute terms by 43.2% to $45.8 million. This
increase was due to increased staffing needs associated with the opening of new
terminals and local delivery locations, the effect of acquisitions, expanded
operations at existing terminals and increased commissions resulting from higher
revenues and expanded corporate infrastructure. Such personnel costs include all
compensation expenses, including those relating to sales commissions and
salaries and to headquarters employees and executive officers. The Company has
added personnel to build corporate infrastructure particularly in international
operations, to keep pace with its recent significant growth, to deepen the staff
at its terminals and to prepare for growth during fiscal 2000. Other selling,
general and administrative expenses decreased as a percentage of revenues to
13.3% in the third quarter of fiscal 2000 from 13.8% in the third quarter of
fiscal 1999, and increased in absolute terms by 38.3% to $28.5 million in the
fiscal 2000 period from $20.6 million in the fiscal 1999 period. In the third
quarter of fiscal 2000, selling expenses as a percentage of revenues increased
by 0.2% and other general and administrative expenses as a percentage of
revenues decreased by 0.7% compared to the third quarter of fiscal 1999. The
absolute increases in selling, general and administrative expenses were due to
overall increases in the level of the Company's activities in the fiscal 2000
period, increased expenses attributable to the Company's acquisitions and the
Company's headquarters facility.
Operating income increased 22.8% to $13.6 million in the third quarter
of fiscal 2000 from $11.1 million in the comparable period in fiscal 1999.
Operating margin decreased to 6.4% for the quarter ended June 30, 2000 from 7.4%
for the quarter ended June 30, 1999. Interest and other income decreased to
$469,000 from $751,000 as a result of decreased levels of investments during the
quarter ended June 30, 2000 compared to the quarter ended June 30, 1999,
partially offset by rental income of $193,000 from a sublease that began in May
1999.
Income before provision for income taxes decreased 19.0% to $14.1
million in the third quarter of fiscal 2000 from $11.8 million in the comparable
period of fiscal 1999. Provision for income taxes increased 23.9% to $5.6
million for the three months ended June 30, 2000 from $4.5 million for the three
months ended June 30, 1999. Net income increased 16.0% to $8.5 million in the
third quarter of fiscal 2000 from net income of $7.3 million in the same period
in fiscal 1999. Diluted earnings per share increased 16.0% to $0.29 per share
for the quarter ended June 30, 2000 from $0.25 in the same period in fiscal
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments decreased $32.4 million
to $20.0 million at June 30, 2000 from $52.4 million at September 30, 1999. At
June 30, 2000, the Company had working capital of $92.4 million and a current
ratio of 2.31 compared to working capital of $105.8 million and a current ratio
of 2.70 at September 30, 1999. The Company's working capital decreased during
this period primarily as a result of cash used for business acquisitions and
share repurchases. Capital expenditures for the nine months ended June 30, 2000
were approximately $14.8 million.
Other than its public offerings, the Company's cash generated from
operations has been its primary source of liquidity, although it has from time
to time made limited use of bank borrowing and lease or purchase arrangements.
The Company does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future.
15
16
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In January 2000, the Company's Board of Directors authorized the
repurchase of up to one million shares of its outstanding Common Stock. In April
2000, the Company's Board of Directors increased the authorization to three
million shares. As of June 30, 2000, the Company had repurchased 449,500 shares
for a total of $10.5 million under this authorization. The Company's intention
has been that repurchases would help to offset increases in the number of shares
outstanding resulting from previous and future stock option exercises. On July
2, 2000, the Company's Board of Directors terminated the share repurchase
authorization.
On January 13, 2000, the Company entered into the Credit Agreement with
Bank of America, N.A. (the Bank), as administrative agent. The Credit Agreement
(as amended on May 31, 2000) provides a $50 million revolving line of credit and
includes a $10 million sublimit for the issuance of letters of credit. The
Company is currently in discussion with the Bank to increase the amount of the
line of credit up to $100 million, although there can be no assurance that this
increase will be effected.
The revolving line of credit matures on January 11, 2001. For each
tranche of principal, the Company elects an interest rate calculation based on
either LIBOR (a LIBOR Tranche) or either the prime rate announced by the Bank or
the federal funds rate plus 50 basis points (a Prime Rate Tranche), plus an
applicable margin based on a ratio of consolidated debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization). The interest
for a LIBOR Tranche is due at periods of one, two, three or nine months, as the
Company may select at the time it requests the funds. The interest for a Prime
Rate Tranche is due quarterly.
The revolving line of credit includes unused commitment fees and
letters of credit fees, each of which is calculated on the basis of a ratio of
consolidated debt to consolidated EBITDA. The Company is subject to certain
covenants under the terms of the Credit Agreement, including, but not limited
to, maintenance at the end of any fiscal quarter of (a) minimum specified
consolidated net worth, (b) a ratio of consolidated funded debt to total
capitalization of no greater than .50 to 1.00, (c) a ratio of consolidated
funded debt to consolidated EBITDA of no greater than 2.50 to 1.00 and (d) a
consolidated fixed charge coverage ratio of no less than 2.00 to 1.00. The
Credit Agreement also places certain restrictions on additional indebtedness,
liens, investments, change of control and other matters.
The Company and certain of its subsidiaries maintain bank lines of
credit for purposes of securing customs bonds and bank letters of credit for
purposes of guaranteeing some transportation expenses. These credit lines and
letters of credit are supported by standby letters of credit issued by a United
States bank or guarantees issued by the Company to the foreign banks. At June
30, 2000, the Company was contingently liable for approximately $10.5 million
under outstanding letters of credit and guarantees related to these obligations.
As of June 30, 2000, the Company had outstanding non-qualified stock
options to purchase an aggregate of 4,540,422 shares of common stock at exercise
prices ranging from $0.83 to $32.69, which equaled the fair market value of the
underlying common stock on the dates of grant. At the time a non-qualified stock
option is exercised, the Company will generally be entitled to a deduction for
federal and state income tax purposes equal to the difference between the fair
market value of the common stock on the date of exercise and the option price.
As a result of exercises for the nine months ended June 30, 2000 of
non-qualified stock options to purchase an aggregate of 500,539 shares of common
stock, the Company is entitled to a federal income tax deduction of
approximately $11.0 million. The Company has recognized a reduction of its
federal and state income tax liability of approximately $4.4 million with
respect to the nine months ended June 30, 2000. Accordingly, the Company
recorded an increase in additional paid-in capital and a reduction to current
taxes payable pursuant to the provisions of SFAS No. 109, "Accounting for Income
Taxes." Any exercises of non-qualified stock options in the future at exercise
prices below the then fair market value of the common stock may also result in
tax deductions equal to the difference between those amounts. There is
uncertainty as to whether or not the exercises will occur, the amount of any
deductions or the Company's ability to fully utilize any deductions.
16
17
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On January 10, 1997, the Company entered into a five-year operating
lease agreement with two unrelated parties for financing the construction of its
Houston terminal, warehouse and headquarters facility (the Houston Facility).
The cost of the Houston Facility was approximately $8.5 million. Under the terms
of the lease agreement, average monthly lease payments are approximately
$59,000, which includes monthly interest costs based upon LIBOR rate plus 145
basis points, beginning on July 1, 1998 through October 2, 2002. A balloon
payment equal to the outstanding lease balance, which was initially equal to the
cost of the facility, is due on October 2, 2002. As of June 30, 2000, the lease
balance was approximately $8.2 million.
On April 3, 1998, the Company entered into a five-year $20 million
master operating lease agreement with two unrelated parties for financing the
construction of terminal and warehouse facilities throughout the United States
designated by the Company. Under the terms of the master operating lease
agreement, average monthly lease payments, including monthly interest costs
based upon LIBOR rate plus 145 basis points, begin upon the completion of the
construction of each financed facility. The monthly lease obligation will
continue for a term of 52 months. A balloon payment equal to the outstanding
lease balances, which were initially equal to the cost of each facility, is due
at the end of each lease term. Construction began during fiscal 1999 on five
terminal facilities. As of June 30, 2000, the aggregate lease balance was
approximately $15.5 million under the master operating lease agreement.
The operating lease agreements contain restrictive financial covenants
requiring the maintenance of a fixed charge coverage ratio of at least 1.5 to
1.0 and specified amounts of consolidated net worth and consolidated tangible
net worth. In addition, the master operating lease agreement restricts the
Company from incurring debt in an amount greater than $10 million, except
pursuant to a single credit facility involving a commitment of not more than $50
million.
The Company has an option, exercisable at anytime during the lease
term, and under particular circumstances may be obligated, to acquire the
Houston terminal and each of its other financed facilities for an amount equal
to the outstanding lease balance. If the Company does not exercise the purchase
option, and does not otherwise meet its obligations, it is subject to a
deficiency payment computed as the amount equal to the outstanding lease balance
minus the then current fair market value of each financed facility within
limits. The Company expects that the amount of any deficiency payment would be
expensed.
As of June 30, 2000, the Company has entered into commitments to
construct office, warehouse and terminal facilities for an aggregate cost of
approximately $8.0 million. Payment for the construction of the facilities is
being made from cash balances. Construction of the facilities is estimated to be
completed during fiscal 2001.
ACQUISITIONS
On January 7, 2000, the Company completed the acquisition of CTI and
Fastair for an aggregate purchase price of approximately $21.3 million paid at
closing from cash and cash equivalents on hand. Additionally, a total of
approximately $4.9 million will be paid in cash over the next three years in
annual installments.
In June 2000, the Company paid $834,000 to buy out the minority
interest under its joint venture agreement with its Hong Kong subsidiary and
recorded goodwill of $684,000. In addition, during the third quarter of fiscal
2000 the Company paid an aggregate of $1.2 million and issued 8,802 shares of
common stock valued at $200,000 in connection with contingent payments for
acquisitions completed in fiscal 1998 and 1997.
17
18
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In July 2000, the Company purchased 24.5% of the outstanding common
stock of Miami Air International, Inc. (Miami Air), a privately held domestic
and international charter airline headquartered in Miami, Florida, for
approximately $6.1 million in cash in a stock purchase transaction. The
Company's primary objective for engaging in the transaction was to develop a
business relationship with Miami Air in order to obtain access to an additional
source of reliable freight charter capacity. In the transaction, certain
stockholders of Miami Air sold 82% of the aggregate number of outstanding shares
of Miami Air common stock to private investors, including the Company, James R.
Crane, the Company's Chairman and President, and Frank J. Hevrdejs, a member of
the Company's board of directors. Mr. Crane purchased 19.2% of the outstanding
common stock for approximately $4.7 million in cash and Mr. Hevrdejs purchased
6.0% of the outstanding common stock for approximately $1.5 million in cash. The
Company's Miami Air investment will be accounted for under the equity method.
In connection with the closing of the transaction, (i) Miami Air and
the Company entered into an aircraft charter agreement whereby Miami Air agreed
to convert certain of its passenger aircraft to cargo aircraft and to provide
aircraft charter services to the Company for a three-year term, and (ii) the
Company caused a $7 million standby letter of credit to be issued in favor of
certain creditors of Miami Air to assist Miami Air in financing the conversion
of its aircraft. Miami Air has agreed to pay the Company an annual fee equal to
3.0% of the face amount of the letter of credit and to reimburse the Company for
any payments owed by the Company in respect of the letter of credit. Miami Air,
each of the private investors and the continuing Miami Air stockholders also
entered into a stockholders agreement under which (i) Mr. Crane and Mr. Hevrdejs
are obligated to purchase up to approximately $1.7 million and $.5 million,
respectively, worth of Miami Air's Series A preferred stock upon demand by the
board of directors of Miami Air, (ii) each of the Company and Mr. Crane has the
right to appoint one member of Miami Air's board of directors, and (iii) the
other private investors in the stock purchase transaction, including Mr.
Hevrdejs, collectively have the right to appoint one member of Miami Air's board
of directors. The Series A preferred stock, if issued, will (i) not be
convertible, (ii) have a 15.0% annual dividend rate and (iii) will be
mandatorily redeemable in July 2006 or upon the prior occurrence of specified
events.
COMMISSIONER'S CHARGE
As discussed in "Part II, Item 1. Legal Proceedings", the Company has
received a Letter of Determination and Conciliation Proposal from the EEOC
relating to the Commissioner's Charge described in that section. Following the
issuance of the EEOC's Determination in May 2000, a lawsuit was filed in
Philadelphia, Pennsylvania by three former EGL employees and one individual who
had unsuccessfully applied for a position. The lawsuit alleges discrimination
and adopts in their entirety the EEOC's conclusions. Although the four
plaintiffs seek to represent a class of individuals, no class action has yet
been approved by the Court. The lawsuit seeks unspecified damages. Any relief
sought in these lawsuits would be in addition to and not limited by the relief
sought by the EEOC. In the second quarter of fiscal 2000, the Company accrued a
$1.1 million charge ($700,000 after-tax) for its estimated future litigation
expenses to defend this matter. There can be no assurance as to what will be the
amount of time it will take to resolve the Commissioner's Charge, the other
lawsuits and related issues or the degree of any adverse effect of these matters
on the Company and its financial condition and results of operations.
RELATED PARTY TRANSACTIONS
In May 1999, the Company began subleasing a portion of its warehouse
space in Houston, Texas and London, England to a customer pursuant to a
five-year sublease. The customer is partially owned by James R. Crane, the
Company's Chairman and President. Rental income was approximately $545,000
during the first nine months of fiscal 2000 and $143,000 during fiscal 1999. In
addition, the Company billed the customer approximately $1.2 million for freight
forwarding services during the first nine months of fiscal 2000 and $356,000
during fiscal 1999. The Company believes the rental rates set forth in the
sublease agreement approximate market rates.
18
19
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
See also the discussion regarding the Miami Air acquisition above.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 3 of the Notes to Condensed Consolidated Financial Statements
for a description and management's discussion and analysis of new accounting
pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, Company did not have any outstanding short-term or
long-term debt instruments. Accordingly, the Company does not have market risk
related to interest rates. However, the Company's lease payments on certain
financed facilities are tied to market interest rates. At June 30, 2000, a 10%
rise in the base rate for these financing arrangements would not have a material
impact on operating income for fiscal 2000.
The Company's earnings are affected by fluctuations in the value of the
U.S. dollar as it relates to the earnings of its United Kingdom, Canada, Mexico,
Hong Kong and Latin America operations, as a result of transactions in foreign
markets. At June 30, 2000, the result of a uniform 10% strengthening in the
value of the dollar relative to the currencies in which these operations are
denominated would not have a material impact on operating income for fiscal
2000.
The Company has not purchased any futures contracts nor has it
purchased or held any derivative financial instruments for trading purposes
during the third quarter of fiscal 2000.
In the second quarter of fiscal 1999, the Company entered into
contracts for the purpose of hedging the costs of a portion of anticipated jet
fuel purchases for chartered aircraft during the following twelve months. These
contracts matured during the second quarter of fiscal 2000.
In May 2000, the Company entered into two additional contracts to hedge
the cost of jet fuel purchases during the following twelve months. Such
contracts are nominally insignificant.
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20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal claims and
proceedings arising in the ordinary course of business. Except as described
below, the Company is not currently a party to any material litigation and is
not aware of any litigation threatened against it, which it believes would have
a material adverse effect on its business.
In December 1997, the U.S. Equal Employment Opportunity Commission
(EEOC) issued a Commissioner's Charge against the Company and certain of its
subsidiaries (the Commissioner's Charge) pursuant to Sections 706 and 707 of
Title VII of the Civil Rights Act of 1964, as amended (Title VII). The Company
continues to vigorously defend against allegations contained in the
Commissioner's Charge. In the Commissioner's Charge, the EEOC charged the
Company and certain of its subsidiaries with violations of Section 703 of Title
VII, as amended, the Age Discrimination in Employment Act of 1967, and the Equal
Pay Act of 1963, resulting from (i) engaging in unlawful discriminatory hiring,
recruiting and promotion practices and maintaining a hostile work environment,
based on one or more of race, national origin, age and gender, (ii) failures to
investigate, (iii) failures to maintain proper records and (iv) failures to file
accurate reports. The Commissioner's Charge states that the persons aggrieved
include all African-Americans, Hispanics, Asians and females who are, have been
or might be affected by the alleged unlawful practices.
In May 2000, the Houston District Office of the EEOC provided to the
Company its "Letter of Determination and Conciliation Proposal" with respect to
the investigation pertaining to the Commissioner's Charge and made a final
determination that there is a sufficient evidentiary basis to sustain all
allegations in the Commissioner's Charge, except as to certain charges relating
to Asian Americans.
The Conciliation Proposal "invites [the Company] to actively engage in
conciliation to resolve this matter," and proposes certain monetary and
non-monetary remedies to "serve to facilitate confidential discussions which,
hopefully, will eventuate in an appropriate settlement." That proposed relief
includes, the following: (i) backpay and benefits for a class of minorities in
the amount of $6,000,000 (this is a $950,000 reduction from the amount claimed
under the preliminary assessment); (ii) compensation for certain incumbent
minorities and women who were allegedly underpaid relative to white male
counterparts in the amount of $5,000,000; (iii) compensation for certain
minority and female employees who were allegedly not promoted at rates
comparable to their respective employment rates in the amount of $2,950,000; and
(iv) financial compensation for certain other employees as a result of alleged
"disparate discipline" in the amount of $745,000, all exclusive of interest,
compensatory and punitive damages and costs. The specific monetary relief as
outlined above is $950,000 less than that amount proposed in its preliminary
assessment. The Conciliation Proposal states, however, that "the EEOC agrees
that this claim can be resolved for $20,000,000. The EEOC also seeks
non-monetary relief, including hiring 244 minorities, certain upward adjustments
to salaries, reinstatement of up to 15 employees and required promotion of 30
employees. The Houston District Office also seeks (a) reformation of the
Company's policies and practices with respect to record keeping, recruiting,
hiring and placement, reinstatement, promotion and transfer, and corporate
governance, (b) revision of certain job descriptions, (c) institution of
employee and supervisory training, and (d) the institution of specified
procedures and steps with respect to such matters.
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21
The Company believes that the Houston District Office's May 2000
Determination finding systemic discrimination is unsupported by any credible
evidence and was rendered by the agency in part due to agency bias against the
Company and its Chief Executive Officer because of the Company's vigorous
defense of this matter. The Company recently accepted the EEOC's offer to
conciliate this matter and has participated in three conciliation conferences
with the EEOC thus far in an effort to resolve this matter. The conciliation
process is continuing, although there can be no assurance as to its outcome or
effect. If the Company is unable to effect what it considers to be a reasonable
settlement of this matter during the conciliation process, the Company will
continue its vigorous defense of this matter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Certain individual employees have brought charges of this nature
against the Company in the ordinary course of business. Additionally, following
the issuance of the EEOC's Determination in May 2000, a lawsuit was filed on May
12, 2000 in the United States District Court for the Eastern District of
Pennsylvania (Civil Action No. 00-CV-2461) by Augustine Dube, Noelle Davis,
Kshanti Morris and Ruben Capaletti who are former EGL employees or had
unsuccessfully applied for a position. The lawsuit alleges discrimination and
adopts in their entirety the EEOC's conclusions. Although the four plaintiffs
seek to represent a class of individuals, no class action has yet been approved
by the Court. The lawsuit seeks unspecified damages that are not limited by the
relief sought by the EEOC. Because the lawsuit is essentially based upon the
contested EEOC allegations described above, the Company fully intends to defend
itself unless a reasonable settlement can be reached with these plaintiffs in
connection with the conciliation efforts currently underway with the EEOC.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview," the Company issued
8,802 shares of Company common stock as additional partial consideration
for acquisitions completed in fiscal 1998 and 1997. Such transaction is
exempt from the registration requirements of the Securities Act by
virtue of Section 4(2) thereof as a transaction not involving any public
offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES, NONE
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS, NONE
ITEM 5. OTHER INFORMATION
FORWARDING LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, those relating to the timing, effect and benefits of the Circle
merger, accounting treatment of the merger, the Company's plans for
international air freight forwarding services; the future expansion and results
of the Company's terminal network; plans for local delivery services; expected
growth; future marketing; construction of new facilities; the results, timing,
outcome or effect of matters relating to the Commissioner's Charge or other
litigation; future operating expenses; any seasonality of the Company's
business; future margins; future dividend plans; use of Revolver proceeds;
fluctuations in currency valuations; fluctuations in interest rates; future
acquisitions and any effects, benefits, results, terms or other aspects of such
acquisitions; fluctuations in the price of jet fuel; ability to continue growth
and implement growth and business strategy; the ability of expected sources of
liquidity to support working capital and capital expenditure requirements; the
tax benefit of any stock option exercises; and any other statements regarding
future growth, cash needs, terminals, operations, business plans and financial
results and any other statements which are not historical facts are
forward-looking statements. When used in this document, the words
"anticipate, " "estimate," "expect, " "may," "plans," "project," and similar
expressions are intended to be among the statements that identify
forward-looking statements. Such statements involve risks and uncertainties,
including, but not limited to, those relating to costs, delays and difficulties
related to the proposed Circle merger; failure of the parties to satisfy closing
conditions; the Company's dependence on its ability to attract and retain
skilled managers and other personnel; the intense competition within the freight
industry; the uncertainty of the Company's ability to manage and continue its
growth and implement its business strategy; the Company's dependence on the
availability of cargo space to serve its customers; the potential for
liabilities if certain independent owner/operators that serve the Company are
determined to be employees; effects of regulation; results of litigation
(including the results and outcome of the Commissioner's Charge); the Company's
vulnerability to general economic conditions and dependence on its principal
customers; the control by the Company's principal shareholder; the Company's
potential exposure to claims involving its local pickup and delivery operations;
risk of international operations; risks relating to acquisitions; the Company's
future financial and operating results, cash needs and demand for its services;
and the Company's ability to maintain and comply with permits and licenses; as
well as other factors
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detailed in the Company's filings with the Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially from
those indicated. The Company undertakes no responsibility to update for changes
related to these or any other factors that may occur subsequent to this filing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(A) EXHIBITS.
*2(i) Agreement and Plan of Merger, dated as of July 2, 2000, among
EGL, Inc., EGL Delaware I, Inc. and Circle International Group,
Inc. (Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on July 5, 2000).
*3(i) Second Amended and Restated Articles of Incorporation of the
Company, as amended. (Exhibit 3(i) to the Company's Form 10-Q
for the fiscal quarter ended March 31, 2000).
3(ii) Amended and Restated Bylaws of the Company, as amended.
10(i) First Amendment to Credit Agreement dated May 31, 2000 among
the Company, the financial institutions named therein and Bank
of America, N.A.
27 Financial Data Schedule.
- ----------
* Incorporated by reference as indicated.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EGL, INC.
------------------------------
(Registrant)
Date: August 8, 2000 BY: /s/ James R. Crane
----------------- -------------------------------
James R. Crane
President
Date: August 8, 2000 BY: /s/ Elijio V. Serrano
---------------- -------------------------------
Elijio V. Serrano
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*2(i) Agreement and Plan of Merger, dated as of July 2, 2000, among
EGL, Inc., EGL Delaware I, Inc. and Circle International
Group, Inc. (Exhibit 2.1 to the Company's Current Report on
Form 8-K filed on July 5, 2000).
*3(i) Second Amended and Restated Articles of Incorporation of the
Company, as amended. (Exhibit 3(i) to the Company's Form 10-Q for
the fiscal quarter ended March 31, 2000).
3(ii) Amended and Restated Bylaws of the Company, as amended.
10(i) First Amendment to Credit Agreement dated May 31, 2000 among the
Company, the financial institutions named therein and Bank of
America, N.A.
27 Financial Data Schedule
- -----------
*Incorporated by reference as indicated.