1
EXHIBIT 13.1
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
Year ended December 31,
1999 1998 1997
---- ---- ----
Revenue $ 814,077 $ 737,678 $ 716,989
Freight consolidation costs 482,085 435,998 438,945
---------- ---------- ----------
Net revenue 331,992 301,680 278,044
Other costs and expenses:
Salaries and related 173,431 158,382 147,931
Operating, selling and administrative 131,348 119,469 97,740
---------- ---------- ----------
Total other costs and expenses 304,779 277,851 245,671
---------- ---------- ----------
Income from operations 27,213 23,829 32,373
Other income (expense):
Interest income (expense), net (304) 2,475 1,225
Income from affiliates, net 3,922 3,853 5,785
Other, net 5,724 1,288 1,527
---------- ---------- ----------
Total other income, net 9,342 7,616 8,537
---------- ---------- ----------
Income before taxes 36,555 31,445 40,910
Taxes on income 13,343 12,930 14,578
---------- ---------- ----------
Net income $ 23,212 $ 18,515 $ 26,332
========== ========== ==========
Net income per share:
Basic $ 1.35 $ 1.09 $ 1.57
========== ========== ==========
Diluted $ 1.34 $ 1.07 $ 1.53
========== ========== ==========
Weighted average common shares outstanding:
Basic 17,213 17,040 16,823
========== ========== ==========
Diluted 17,365 17,260 17,191
========== ========== ==========
Dividends declared per share $ 0.27 $ 0.27 $ 0.27
========== ========== ==========
See Notes to Consolidated Financial Statements
1
2
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and equivalents $ 40,347 $ 44,586
Short-term investments 14,366 14,213
Trade receivables, less allowance for doubtful
accounts of: 1999, $7,835; 1998, $7,131 284,504 252,615
Other receivables 10,415 7,765
Other current assets 8,402 7,820
---------- ----------
Total current assets 358,034 326,999
Property:
Land 15,258 15,161
Buildings and improvements 75,501 70,632
Equipment and furniture 96,048 78,204
---------- ----------
Total 186,807 163,997
Less accumulated depreciation (83,953) (75,809)
---------- ----------
Property, net 102,854 88,188
Equity securities 770 935
Investments in unconsolidated affiliates 48,207 42,967
Goodwill, net 31,166 30,727
Other assets 4,361 3,913
---------- ----------
Total assets $ 545,392 $ 493,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 7,801 $ 7,869
Trade payables 187,724 175,532
Accrued salaries and related costs 17,008 15,582
Dividends payable 2,349 2,312
Income taxes payable 8,161 7,292
Other liabilities 27,350 24,984
---------- ----------
Total current liabilities 250,393 233,571
Minority interests 5,809 4,546
Deferred income taxes 12,602 14,342
Capital lease obligations 3,369 -
Long-term notes payable 32,244 21,558
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par: shares
authorized, 1,000,000; none issued - -
Common stock, $1 par: shares
authorized, 40,000,000;
shares issued and outstanding
1999, 17,419,001; 1998, 17,131,994 35,612 30,822
Retained earnings 220,437 201,907
Accumulated other comprehensive loss (15,074) (13,017)
---------- ----------
Total stockholders' equity 240,975 219,712
---------- ----------
Total liabilities and stockholders' equity $ 545,392 $ 493,729
========== ==========
See Notes to Consolidated Financial Statements
2
3
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
For the years ended December 31, 1999, 1998 and 1997
Accumulated
Other Total
Common Stock Treasury Stock Retained Comprehensive Comprehensive Stockholders'
------------ --------------
Shares Amount Shares Amount Earnings Income Income (Loss) Equity
----------- --------- --------- --------- ---------- --------- ------------- ------------
Balance December 31, 1996 17,163,490 $ 22,683 (500,000) $ (8,947) $ 174,201 $ (5,160) $ 182,777
Comprehensive income:
Net income - - - - 26,332 $ 26,332 - 26,332
---------
Change in the value of
marketable securities, net - - - - - 398 398 398
Foreign currency translation - - - - - ( 10,736) (10,736) (10,736)
---------
Other comprehensive loss ( 10,338)
---------
Comprehensive income $ 15,994
=========
Cash dividends ($.27 per share) - - - - (4,363) - (4,363)
Issuance of stock for acquisition 32,958 785 - - - - 785
Issuance of restricted stock 24,615 626 - - - - 626
Exercise of stock options,
including tax benefit 283,590 5,153 - - - - 5,153
Retirement of treasury stock (500,000) (791) 500,000 8,947 (8,156) - -
----------- --------- --------- --------- ---------- ----------- ----------
Balance December 31, 1997 17,004,653 $ 28,456 - $ - $ 188,014 $ (15,498) $ 200,972
Comprehensive income:
Net income - - - - 18,515 $ 18,515 - 18,515
---------
Change in the value of
marketable securities, net - - - - - (43) (43) (43)
Foreign currency translation - - - - - 2,524 2,524 2,524
---------
Other comprehensive income 2,481
---------
Comprehensive income $ 20,996
=========
Cash dividends ($.27 per share) - - - - (4,622) - (4,622)
Issuance of restricted stock 13,942 172 - - - - 172
Exercise of stock options,
including tax benefit 113,399 2,194 - - - - 2,194
----------- --------- --------- --------- ---------- ----------- ----------
Balance December 31, 1998 17,131,994 $ 30,822 - $ - $ 201,907 $ (13,017) $ 219,712
Comprehensive income:
Net income - - - - 23,212 $ 23,212 - 23,212
---------
Change in the value of
marketable securities, net - - - - - 39 39 39
Foreign currency translation - - - - - (2,096) (2,096) (2,096)
---------
Other comprehensive loss (2,057)
---------
Comprehensive income $ 21,155
=========
Cash dividends ($.27 per share) - - - - (4,682) - (4,682)
Exercise of stock options,
including tax benefit 287,007 4,790 - - - - 4,790
----------- --------- --------- --------- ---------- ----------- ----------
Balance December 31, 1999 17,419,001 $ 35,612 - $ - $ 220,437 $ (15,074) $ 240,975
=========== ========= ========= ========= ========== =========== ==========
See Notes to Consolidated Financial Statements
3
4
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
1999 1998 1997
---- ---- ----
Operating activities:
Net income $ 23,212 $ 18,515 $ 26,332
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 16,046 13,604 12,046
Provision for doubtful accounts 5,898 4,232 5,050
Deferred income taxes (2,043) 1,963 6,531
Gains on sales of assets (5,228) (271) (613)
Equity in earnings of affiliates, net of
dividends received (3,156) (2,229) (5,785)
Minority interests, net of dividends paid 338 928 1,286
Other (36) 171 (5)
Net effect of changes in working capital
Trade receivables (39,280) (14,299) (14,475)
Other receivables (938) (2,677) 788
Other current assets (1,425) 3,822 (1,621)
Trade payables 12,634 4,875 4,113
Other liabilities 2,238 9,674 593
--------- --------- ---------
Net cash provided by operating activities 8,260 38,308 34,240
--------- --------- ---------
Investing activities:
Proceeds from sales of assets 4,301 1,527 1,468
Proceeds from sales of equity securities 5,019 495 6,669
Net proceeds from sales (purchases)
of short-term investments (436) 20,281 (27,553)
Capital expenditures (28,473) (12,960) (14,144)
Acquisitions of businesses (2,725) (13,229) (3,731)
Other - (3) (101)
--------- --------- ---------
Net cash used in investing activities (22,314) (3,889) (37,392)
--------- --------- ---------
Financing activities:
Issuance (repayment) of long-term
notes payable 10,686 (11,507) (1,295)
Issuance (repayment) of short-term
notes payable (68) 5,022 (4,936)
Payments on capital lease (634) - -
Dividends (4,645) (4,503) (4,085)
Proceeds from exercise of stock options 4,477 1,980 4,360
--------- --------- ---------
Net cash provided by (used in)
financing activities 9,816 (9,008) (5,956)
Effect of exchange rate changes on cash (1) 1,177 (4,458)
--------- --------- ---------
Increase (decrease) in cash and equivalents (4,239) 26,588 (13,566)
Cash and equivalents at beginning of period 44,586 17,998 31,564
--------- --------- ---------
Cash and equivalents at end of period $ 40,347 $ 44,586 $ 17,998
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 2,951 $ 2,001 $ 2,837
========= ========= =========
Cash paid for income taxes $ 14,607 $ 11,155 $ 6,676
========= ========= =========
Non-cash transactions:
Issuance of stock for acquisitions $ - $ 21,000 $ 785
========= ========= =========
Mortgages assumed in acquisitions $ - $ 5,265 $ -
========= ========= =========
Property acquired under capital lease $ 4,366 $ - $ -
========= ========= =========
See Notes to Consolidated Financial Statements
4
5
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Nature of Operations - Circle International Group, Inc. and subsidiaries
(Circle) is an international transportation and logistics service provider.
Circle's services are provided through its network of over 300 offices,
distribution centers, and agents located in more than 100 countries on six
continents. Circle's principal lines of business are air freight forwarding,
ocean freight forwarding, customs brokerage and other value-added services such
as warehousing, distribution and insurance. The principal markets for all lines
of business are North America, Europe and Asia with significant operations in
the Middle East, Latin America and the South Pacific (see Note 14).
Basis of Presentation - The consolidated financial statements of Circle have
been prepared to give retroactive effect to the merger with Alrod
International, Inc. in August 1998 (See Note 3), which was accounted for under
the pooling of interests method.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Risk Factors - Circle's operations are influenced by many factors, including
economic and political conditions around the world, international laws and
currency exchange rates. The impact of some of these risk factors is reduced by
having customers in a wide range of industries located throughout the world.
Principles of Consolidation - The accompanying consolidated financial
statements include Circle International Group, Inc. and its controlled
majority-owned subsidiaries. Investments in 50% or less owned affiliates, over
which Circle has significant influence, are accounted for by the equity method
(see Note 11). All significant intercompany balances and transactions have been
eliminated.
Foreign Currency Translation - Assets and liabilities of Circle's foreign
subsidiaries are translated into U.S. dollars at year-end rates of exchange,
and income and expenses are translated at average rates during the year.
Adjustments resulting from translating financial statements into U.S. dollars
are reported as cumulative translation adjustments and are shown as a separate
component of other comprehensive income in the statements of stockholders'
equity. Gains and losses from foreign exchange transactions are included in net
income.
Cash and Equivalents include demand deposits and investments with original
maturities of three months or less.
Short-term Investments include deposits of cash in interest-bearing securities
that have original maturities of greater than 90 days and less than one year.
Such investments are classified as available for sale and the carrying value
approximates fair value.
Marketable securities consist of preferred stock and common stock. Marketable
securities are stated at market value as determined by the most recently traded
price of each security at the balance sheet date. By policy, Circle invests
primarily in high-grade marketable securities. All marketable securities are
defined as available-for-sale securities under the provisions of Statement of
Financial Accounting Standards No. ("SFAS") 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Trade Receivables include disbursements made by Circle on behalf of its
customers for transportation costs and customs duties. The billings to
customers for these disbursements, which are several times the amount of
revenue and fees derived from these transactions, are not recorded as revenue
and expense on Circle's income statements. Management establishes reserves
based on the expected ultimate recovery of these receivables. Changes in
reserves for 1999, 1998 and 1997 are as follows (in thousands):
Allowance for doubtful accounts Balance at Charged to Balance at
the beginning costs and Deductions the end
Year Ended December 31, of year expenses /Write-offs of year
- ----------------------- ------------- ---------- ----------- ----------
1999 $ 7,131 $ 4,705 $ (4,001) $ 7,835
1998 7,816 4,232 (4,917) 7,131
1997 5,237 5,050 (2,471) 7,816
5
6
Property is stated at cost. The cost of property held under capital leases is
equal to the lower of the net present value of the minimum lease payments or
the fair value of the leased property at the inception of the lease.
Depreciation is computed principally by the straight-line method at rates based
on the estimated useful lives of the various classes of property as follows:
buildings, 20-50 years; leasehold improvements, life of the lease or estimated
useful life if shorter; equipment and furniture, 3-10 years.
Goodwill, representing the excess of purchase price over the fair value of net
assets acquired, is amortized on a straight-line basis over the period of
expected benefit, not exceeding 40 years. Accumulated amortization as of
December 31, 1999 and 1998, was $14.2 million and $12.2 million, respectively.
Impairment of Long Lived Assets - The carrying value of long lived assets,
including goodwill, is reviewed periodically based on the projected
undiscounted cash flows of the related business unit over the remaining
amortization period. If the cash flow analysis indicates that the carrying
amount of an asset is not recoverable, the carrying value will be reduced to
the estimated fair value of the assets or the present value of the future cash
flows.
Revenue Recognition - Revenue and freight consolidation costs are recognized at
the time the freight departs the terminal of origin. Customs brokerage and
other revenue are recognized upon completing the documents necessary for
customs clearance or completing other fee-based services. Revenue realized as
an indirect air carrier or an ocean freight consolidator includes the direct
carrier's charges to Circle for carrying the shipment. Revenue realized in
other capacities includes only the commissions and fees received.
Net Income per Share - Basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. The difference between weighted average shares outstanding for basic
and diluted is the dilutive effect of outstanding stock options and restricted
stock. Diluted net income per share is computed by dividing net income by the
weighted average number of common shares outstanding, including the dilutive
effect of outstanding stock options and restricted stock.
Taxes on Income - Circle provides a deferred tax expense or benefit equal to
the change in the deferred tax assets and liabilities during the year. Deferred
income taxes represent tax credit carry forwards and future tax effects
resulting from temporary differences between the financial statement and the
tax basis of assets and liabilities using current or enacted tax rates in
effect for the year in which the differences are expected to reverse.
Foreign Currency Forward Contracts - Circle uses foreign currency forward
contracts to hedge foreign currency exposure on certain trade and intercompany
transactions. These contracts do not subject Circle to risk due to exchange
rate movements because gains and losses on these contracts offset gains and
losses on the payable or receivable being hedged. Gains and losses on such
contracts are recognized currently in the carrying amount of the related
payable. At December 31, 1999 and 1998, the notional amount of the foreign
currency forward contracts outstanding amounted to $0.6 million and $1.9
million, respectively. The fair value of the contracts at December 31, 1999 and
1998, respectively, were insignificant. Realized gains and losses on the
contracts for 1999, 1998 and 1997 were insignificant.
Fair Value of Financial Instruments - The fair values presented throughout
these financial statements have been estimated using appropriate valuation
methodologies and market information available at December 31, 1999 and 1998.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value and the estimates presented are not necessarily
indicative of the amounts that Circle could realize in a current market
exchange. The use of different market assumptions or estimation methodologies
could have a material effect on the estimated fair values. Additionally, the
fair values presented throughout these financial statements have not been
estimated since December 31, 1999. Current estimates of fair value may differ
significantly from the amounts presented.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and equivalents, receivables and payables, short-term investments and
notes payable to banks - The carrying amount approximates fair value.
Equity securities - The fair value is based on quoted market prices. As
discussed in Note 4 to the consolidated financial statements, these
securities are recorded at fair value.
6
7
Borrowings - The fair value of Circle's long-term debt is estimated based
on quoted market prices for the same or similar issues or on the current
rates offered to Circle for debt of the same remaining maturities. The
carrying amounts approximate their fair value. The carrying value of the
capital lease obligation approximates fair value.
Foreign currency forward contracts - The fair value is estimated based on
the U.S. dollar equivalent at the contract exchange rate. Any gain or loss
is largely offset by a change in the value of the underlying transaction,
and is recorded as an unrealized foreign exchange gain or loss until the
contract maturity date.
Stock-Based Compensation - Circle accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees." ("APB No. 25"). The
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," are set forth in Note 8.
New Accounting Standards - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS 137. SFAS No. 133 defines derivatives, requires that
derivatives be carried at fair value and provides for hedge accounting when
certain conditions are met. This statement is effective for Circle beginning in
2001. Circle has not assessed the impact of this new statement.
Reclassifications - Certain 1998 and 1997 amounts have been reclassified to
conform with the 1999 presentation.
Note 2 - Special Charges
During the quarter ended September 30, 1998, Circle recorded special charges of
$10.7 million related to merger integration costs for Alrod International, Inc.
(Alrod), the write-off of certain receivables at Circle Trade Services Ltd.
(CTSL), certain charges related to Latin America operations, facility
consolidation, the write-down of information technology assets and employee
severance costs. These charges were recorded in operating, selling and
administrative expenses. As of December 31, 1998, $6.0 million had been
utilized and $4.7 million was included in other liabilities. As of December 31,
1999, $9.0 million has been utilized and $1.7 million is included in other
liabilities.
Note 3 - Acquisitions
In August 1998, Circle acquired 100% of the outstanding shares of Alrod, a
privately owned international freight forwarding and customs brokerage company
based on the West Coast of the U.S. In connection with the acquisition, Circle
issued 770,642 shares of common stock in exchange for all of the outstanding
stock of Alrod. The total purchase consideration was $21.0 million, of which
$1.0 million continues to be held in escrow subject to the resolution of
certain pre-acquisition contingencies. The acquisition was accounted for as a
pooling of interests.
Summarized results of operations of the separate companies prior to the
combination are as follows (in thousands):
6 Months Ended Year ended
June 30, December 31,
1998 1997
----------- -----------
Net revenues:
Circle $ 134,166 $ 262,753
Alrod 7,412 15,291
----------- -----------
Combined $ 141,578 $ 278,044
=========== ===========
Net income:
Circle $ 13,043 $ 25,871
Alrod 259 461
----------- -----------
Combined $ 13,302 $ 26,332
=========== ===========
7
8
During 1998, Circle also acquired interests in other transportation and
logistics providers located primarily in Singapore and the United Kingdom. In
connection with these acquisitions, the seller retained a minority interest,
for which Circle has buyout options. These acquisitions were accounted for
using the purchase method. The aggregate purchase price for these acquisitions,
net of cash acquired, was $13.2 million, resulting in $9.8 million of goodwill
that is being amortized over estimated useful lives of up to 20 years.
During 1997, Circle acquired the assets of various freight forwarders and
customs brokers for an aggregate purchase price of $4.9 million, including $0.8
million in Circle's common stock. These acquisitions were accounted for using
the purchase method. In connection with these acquisitions, Circle recorded
$3.4 million of goodwill, which is being amortized over estimated useful lives
of up to 20 years.
If all of the purchase method acquisitions in 1998 and 1997 occurred on January
1 of the respective years, the effect on revenues and net income would have
been immaterial. The results of these acquisitions are included in Circle's
results as of the date of the acquisitions.
Note 4 - Equity Securities
Management has designated equity securities as available for sale. Changes in
the fair value of available for sale securities, net of deferred taxes, are
excluded from income and presented in the stockholders' equity section of the
balance sheet under the caption "Accumulated other comprehensive loss." In 1998
and 1997, Circle sold debt and equity securities and realized losses of $13,000
and $20,000, respectively. Total unrealized losses on equity securities as of
December 31, 1999, 1998 and 1997 were immaterial.
During the fourth quarter of 1999, Circle sold approximately 30% of its
investment in the equity securities of Equant N.V., an international data
network service provider, for net proceeds and a pre-tax gain of approximately
$4.5 million and an after-tax gain of approximately $2.7 million or $.16 per
diluted share. The pre-tax gain is recorded as Other, net in the Consolidated
Income Statements. The remaining shares are held in a trust, are not currently
marketable and have a zero cost basis. No other gains or losses on the sale of
equity securities occurred during 1999.
Note 5 - Borrowings
Included in the $7.8 million notes payable to banks are $5.9 million of
overnight borrowing at 6.5%.
Long-term notes payable included commercial paper of $25.0 million and $14.0
million at December 31, 1999 and 1998. The commercial paper is supported by a
$40.0 million backup facility line of credit which expires on June 30, 2000, at
which time Circle can convert any outstanding borrowings into a one-year term
loan. The backup facility line of credit requires Circle to comply with certain
financial covenants. Although the commercial paper is issued on a short-term
basis, it is classified as long-term because Circle intends to reissue such
paper as it matures and has the ability to refinance on a long-term basis. At
December 31, 1999 and 1998, the weighted average interest rate of outstanding
commercial paper was 6.5% and 5.6%, respectively.
At December 31, 1999 and 1998, Circle had long-term notes payable of
approximately $7.2 million and $7.6 million, respectively (excluding current
portion and commercial paper), with a weighted average interest rate of 5.8%
and 6.0%, respectively. These notes are secured by real property.
Principal payments on long-term notes that mature in 2000 amounting to $1.9
million are classified as notes payable to banks. Principal payments for 2001
through 2004 are approximately $1.1 million, $0.4 million, $0.1 million and
$0.1 million, respectively. Principal repayments thereafter are approximately
$5.5 million. At December 31, 1999, Circle had unused borrowing capacity from
its commercial paper program and lines of credit totaling $19 million.
8
9
Note 6 - Lease Commitments
At December 31, 1999, commitments on capital leases and long-term operating
leases with remaining terms greater than one year require the following minimum
annual payment obligations (in thousands):
Capital Operating
Lease Leases
--------- ----------
2000 $ 608 $ 22,530
2001 608 15,581
2002 608 11,967
2003 608 9,494
2004 608 8,399
2005 and thereafter 1,823 56,207
--------- ----------
Total minimum lease payments 4,863 $ 124,178
==========
Less amounts representing interest (1,131)
---------
Present value of net minimum
lease payments 3,732
Less current obligations (363)
---------
Long-term obligations $ 3,369
=========
The carrying value of property held under the capital lease was $4.4 million at
December 31, 1999, and the accumulated amortization was $0.5 million. Rental
expense under operating leases was $21.6 million in 1999, $18.8 million in 1998
and $17.2 million in 1997, net of rents from subleases of $1.6 million, $3.2
million and $1.0 million, respectively. Total rental expense (including leases
on equipment) was $24.1 million in 1999, $22.3 million in 1998 and $19.1
million in 1997.
Note 7 - Contingencies
Circle is party to routine litigation incidental to its business, which
primarily involves claims for goods lost or damaged in transit or improperly
shipped. Many of the lawsuits to which Circle is a party are covered by
insurance and are being defended by Circle's insurance carriers. Circle has
established reserves for these matters and it is management's opinion that the
resolution of such litigation will not have a material adverse effect on
Circle's consolidated financial statements taken as a whole.
Note 8 - Common Stock
Shareholder Rights Plan
In October 1994, Circle adopted a Shareholder Rights Plan and declared a
dividend distribution of one preferred share purchase Right for each
outstanding share of Circle's common stock. Each Right will entitle
stockholders to buy one one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $53.00.
The Rights will become exercisable if, without approval of the Board of
Directors, a person or group acquires 20% or more of Circle's common stock (or
a lesser percentage set by the Board in the case of a person determined to
present certain specific risks to Circle and its stockholders, as defined in
the plan) or announces a tender offer the consummation of which would result in
ownership of 20% or more of the common stock. If a person or group does acquire
20% or more of Circle's stock (or such lesser percentage as has been set with
respect to a specific person) each Right unless redeemed will entitle its
holder to purchase, at the Right's then current exercise price, a number of the
common shares of Circle having a market value at that time of twice the Right's
exercise price.
Circle will be entitled to redeem the Rights at .01 cents per Right at any time
before a 20% position (or such lesser percentage as has been set with respect
to a specific person) has been acquired. Until the Rights become exercisable,
Rights certificates will not be sent to stockholders and the Rights will
automatically trade with the common stock.
9
10
Employee Stock Purchase Plan
In May 1999, Circle adopted an Employee Stock Purchases Plan in order to
provide eligible employees of Circle and its participating subsidiaries
(including subsidiaries based outside the United States) with the opportunity
to purchase common stock through payroll deductions. The employees may purchase
Circle stock during a six-month accumulation period at 85% of the lower of (1)
the average of the stock's market value on the three consecutive trading days
ending with the first day of the accumulation period, or (2) the average of the
stock's market value on the three consecutive trading days ending with last day
of the accumulation period. However, if the average is lower than the stock's
market value on the first day or last day of the accumulation period, the
stock's market value on the applicable day shall govern. A maximum of 250,000
shares are authorized for employee purchase under this plan. On January 10,
2000, Circle issued 17,495 shares at an average price of $18.81 per share for
the July 1, 1999 to December 31, 1999 accumulation period.
Stock Option Plans
The 1982 Stock Option Plan and the 1990 Stock Option Plan provide for the
granting of non-qualified or incentive stock options to officers and key
employees for a maximum of 956,250 common shares at not less than fair market
value on the date of grant. The Human Resources, Compensation and Nominating
Committee of the Board of Directors determine the exercise periods for the
options. Under these plans, Stock Options are generally issued with the
restriction that no option may be exercised before three years from date of
grant nor later than eight years from date of grant.
The 1994 Omnibus Equity Incentive Plan provides for the granting of stock
options, stock appreciation rights, restricted stock awards, performance unit
awards and performance share awards to key employees and consultants of Circle
and its subsidiaries. The plan was originally authorized for a maximum of
2,000,000 common shares, and was amended in May 1998 to increase the maximum to
2,500,000 common shares. Stock options under this plan are generally issued at
an option price at not less than fair market value on the date of grant. (To
date, no incentive or non-qualifying stock options have been granted below fair
market value.) Stock options under this plan are generally issued with the
restriction that no option may be exercised before one year from the date of
grant nor later than ten years from the date of grant.
The 1999 Stock Option Plan permits the grant of Nonqualified Stock Options in
order to promote the success, and enhance the value, of Circle by linking the
personal interests of Participants to those of Circle shareholders, and by
providing Participants with an incentive for outstanding performance. The plan
was authorized for a maximum of 125,000 common shares. Stock options under this
plan are generally issued at an option price at not less than fair market value
on the date of grant. (To date, no incentive or non-qualifying stock options
have been granted below fair market value.) Stock options under this plan are
generally issued with the restriction that no option may be exercised before
one year from the date of grant nor later than ten years from the date of
grant.
A summary of stock option transactions for each of the three years ended
December 31, 1999, follows:
10
11
Shares Weighted Average
Under Option Exercise Price
------------ --------------
Outstanding at December 31, 1996 1,401,842 $16.60
Granted 422,950 23.29
Exercised (283,590) 15.40
Canceled (143,923) 16.73
----------
Outstanding at December 31, 1997 1,397,279 18.93
Granted 796,250 23.95
Exercised (113,399) 15.95
Canceled (266,700) 25.58
----------
Outstanding at December 31, 1998 1,813,430 20.64
Granted 343,653 18.58
Exercised (287,007) 15.42
Canceled (206,589) 20.75
----------
Outstanding at December 31, 1999 1,663,487 $21.03
==========
December 31,
1999 1998 1997
---- ---- ----
Options available for grant 583,662 844,903 841,718
Options exercisable 785,278 730,974 441,567
Weighted average fair value of options
granted during the year $ 6.35 $ 7.20 $ 8.37
The following table summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercisable Number Remaining Exercise Number Exercise
Prices of Shares Life (in years) Price of Shares Price
- --------------- ----------- --------------- --------- ---------- ---------
$12.75 - 17.19 421,640 6.76 $ 16.11 147,270 $ 15.16
17.25 - 20.75 334,249 4.06 18.66 252,525 18.35
21.00 - 22.75 383,849 6.38 21.93 144,032 22.08
22.94 - 26.63 435,149 6.15 25.56 219,299 25.89
26.75 - 27.50 88,600 6.30 27.28 22,152 27.28
---------- ---------
$12.75 - 27.50 1,663,487 5.95 $ 21.03 785,278 $ 20.79
========== =========
11
12
SFAS No. 123 Pro Forma Disclosures
Circle applies APB No. 25 and related interpretations in accounting for its
Stock Options Plan described above. Accordingly, since all options are granted
at fair market value, no compensation cost has been recognized for its options
granted. Had compensation cost for Circle's stock option plans been determined
based on the fair value at the grant dates of the stock options, consistent
with the method suggested in SFAS No. 123, "Accounting for Stock Based
Compensation", Circle's net income and net income per share would have been
reduced to the pro forma amounts indicated below (in thousands except per share
amounts):
Year ended December 31,
1999 1998 1997
---- ---- ----
Net Income: As Reported $ 23,212 $ 18,515 $ 26,332
Pro Forma 21,454 16,674 25,142
Net Income per share:
Basic - As Reported $ 1.35 $ 1.09 $ 1.57
Pro Forma 1.25 0.98 1.49
Diluted - As Reported $ 1.34 $ 1.07 $ 1.53
Pro Forma 1.24 0.97 1.46
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model which requires subjective assumptions
such as future stock price volatility and expected time to exercise. These
assumptions greatly affect the calculated values. Circle's calculations are
based on a multiple option valuation approach and cancellations are estimated
based on a historical pattern. However, in accordance with SFAS No. 123, the
impact of outstanding unvested stock options granted prior to 1995 has been
excluded from the pro forma calculation. The 1997, 1998 and 1999 pro forma
adjustments are not indicative of future period pro forma adjustments. The
following weighted-average assumptions were used:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Expected dividend yield 1.10% 1.00% 1.00%
Expected volatility 46% 43% 37%
Risk-free interest rate 5.84% 4.67% 5.62%
Expected lives (years from vesting) 0.7 0.5 0.7
Note 9 - Taxes on Income
Taxes on income include the following (in thousands):
1999 1998 1997
--------- --------- ---------
Federal: Current $ 2,782 $ 2,711 $ (637)
Deferred (1,910) 1,199 6,535
State: Current 817 426 1,370
Deferred - 481 (363)
Foreign: Current 11,787 7,830 7,315
Deferred (133) 283 358
--------- --------- ---------
Total $ 13,343 $ 12,930 $ 14,578
========= ========= =========
12
13
Significant components of Circle's net deferred tax liability are as follows
(in thousands):
1999 1998
-------- --------
Deferred tax liabilities:
Undistributed earnings of subsidiaries $ 9,043 $ 9,459
Accelerated depreciation 4,693 5,025
Gain on sale of property 2,680 2,533
Incentive compensation - 16
Investment in subsidiary 273 273
-------- --------
$16,689 $17,306
======== ========
Deferred tax assets:
Bad debts $ 1,774 $ 1,292
Vacation pay 930 836
Incentive compensation 75 -
Insurance claims reserves 979 523
Other 329 313
-------- --------
$ 4,087 $ 2,964
-------- --------
Net deferred tax liability $12,602 $14,342
======== ========
Taxes on income were different than the amount computed by applying the
statutory income tax rate. Such differences are summarized as follows (in
thousands):
1999 1998 1997
--------- --------- ---------
Income before taxes $ 36,555 $ 31,445 $ 40,910
Tax computed at 35% statutory rate 12,794 11,006 14,319
Increases (decreases) resulting from:
Foreign taxes lower than federal rate (1,495) (1,347) (1,184)
Non-deductible items 1,643 2,273 1,212
State taxes on income,
net of federal income tax effect 531 590 654
Deferred tax adjustment for foreign earnings (1,800) - -
Accrual adjustments 1,415 413 (661)
Other 255 (5) 238
--------- --------- ---------
Total $ 13,343 $ 12,930 $ 14,578
========= ========= =========
Taxes on income include deferred income taxes on undistributed earnings (not
considered permanently invested) of consolidated subsidiaries, net of
applicable foreign tax credits. At December 31, 1999, cumulative earnings of
consolidated foreign subsidiaries designated as permanently invested were
approximately $15.6 million. Deferred income taxes are not provided on
permanently invested earnings.
Sources of pretax income are summarized as follows (in thousands):
1999 1998 1997
--------- --------- ---------
Domestic $ 9,456 $ 7,790 $ 18,944
Foreign 27,099 23,655 21,966
--------- --------- ---------
Total $ 36,555 $ 31,445 $ 40,910
========= ========= =========
13
14
Note 10 - Other Income-Net
Other income-net includes the following (in thousands):
1999 1998 1997
--------- --------- ---------
Interest income $ 2,682 $ 4,416 $ 4,163
Interest expense (2,986) (1,941) (2,938)
Income from affiliates, net 3,922 3,853 5,785
Gains on sales of assets 815 257 633
Gains (losses) on sales of
equity securities 4,519 (13) (20)
Minority interests (1,092) (928) (1,286)
Net foreign exchange gains 1,151 1,365 2,162
Other 331 607 38
--------- --------- ---------
Total $ 9,342 $ 7,616 $ 8,537
========= ========= =========
Note 11 - Investments in Unconsolidated Affiliates
Investments in net assets of affiliated companies amounted to $48.2 million and
$43.0 million at December 31, 1999 and 1998, respectively. This includes
Circle's 40% investment in TDS Logistics Inc. (TDS) of $40.8 million and $38.0
million as of December 31, 1999 and 1998, respectively. TDS is primarily
involved in providing specialty packaging and services for automotive exports.
The TDS investment balance includes the excess of purchase price over net
assets of $25.6 million and $26.4 million as of December 31, 1999 and 1998,
respectively, which is being amortized over 37 years. The results of operations
and financial position of TDS are summarized below (in thousands):
Condensed Income Statement Information for the year ended December 31:
1999 1998 1997
--------- --------- ---------
Revenue $ 63,486 $ 77,521 $ 95,981
Income from operations 13,884 15,348 23,929
Net income 8,947 8,682 12,983
Condensed Balance Sheet Information:
December 31,
1999 1998
--------- ---------
Current assets $ 15,881 $ 15,815
Non-current assets 33,134 31,626
Current liabilities 9,402 8,807
Non-current liabilities 439 9,613
Stockholders' equity 39,174 29,021
Note 12 - Employee Benefit Plans
Circle has a 401(k) Savings Plan in the U.S. under which employees generally
may contribute up to 15% of compensation to the plan. For every dollar
contributed to the plan, Circle will match 50 cents, up to a maximum of 6% of
the employee's compensation. Circle's contributions for the years ended
December 31, 1999, 1998 and 1997 were $1.2 million, $1.0 million and $0.9
million, respectively. Circle's contributions vest over a four year period.
Circle has various other employee benefit plans outside of the U.S.
Note 13 - Related Party Transaction
In April 1999, Circle sold a 49% interest in its subsidiaries in Spain and
Portugal to a Director and Former Chief Executive Officer for $1.3 million. The
purchase price was paid one-third at closing and the balance will be in equal
installments in October 2000 and April 2002 with interest at 6%. Under the
terms of the agreement, the buyer has the right to require Circle to purchase
his interest at the then fair value. Circle also has the right to purchase his
interest after December 31, 2005. Circle deferred the recognition of the gain
of the sale of $866,000 and has recorded this amount in minority interest.
14
15
Note 14 - Business Segment Information
Circle's reportable segments are geographic segments that offer similar
products and services. They are managed separately because each segment
requires close customer contact and each segment is affected by similar
economic conditions. Certain information regarding Circle's operations by
region is summarized below (in thousands):
Europe & Asia &
Middle South Elimi- Consoli-
Americas East Pacific Corporate nations dated
---------- ---------- ---------- ---------- ----------- ----------
(in thousands)
Year ended December 31, 1999:
Total revenue $ 364,087 $ 197,620 $ 279,642 $ - $ (27,272) $ 814,077
Transfers between regions (8,362) (8,031) (10,879) - 27,272 -
---------- ---------- ---------- ---------- ----------- ----------
Revenues from customers $ 355,725 $ 189,589 $ 268,763 $ - $ - $ 814,077
========== ========== ========== ========== =========== ==========
Net revenue $ 164,964 $ 92,006 $ 75,022 $ - $ - $ 331,992
========== ========== ========== ========== =========== ==========
Income (loss) from operations $ 22,486 $ 14,414 $ 18,043 $ (27,730) $ - $ 27,213
========== ========== ========== ========== =========== ==========
Identifiable assets $ 211,222 $ 150,432 $ 140,070 $ 60,960 $ (17,292) $ 545,392
========== ========== ========== ========== =========== ==========
Year ended December 31, 1998:
Total revenue $ 390,877 $ 167,173 $ 197,330 $ - $ (17,702) $ 737,678
Transfers between regions (6,492) (3,935) (7,275) - 17,702 -
---------- ---------- ---------- ---------- ----------- ----------
Revenues from customers $ 384,385 $ 163,238 $ 190,055 $ - $ - $ 737,678
========== ========== ========== ========== =========== ==========
Net revenue $ 161,095 $ 81,361 $ 59,224 $ - $ - $ 301,680
========== ========== ========== ========== =========== ==========
Income (loss) from operations $ 24,541 $ 12,268 $ 9,809 $ (22,789) $ - $ 23,829
========== ========== ========== ========== =========== ==========
Identifiable assets $ 191,021 $ 139,300 $ 153,311 $ 118,358 $ (108,261) $ 493,729
========== ========== ========== ========== =========== ==========
Year ended December 31, 1997:
Total revenue $ 422,151 $ 147,628 $ 167,053 $ - $ (19,843) $ 716,989
Transfers between regions (7,442) (3,613) (8,788) - 19,843 -
---------- ---------- ---------- ---------- ----------- ----------
Revenues from customers $ 414,709 $ 144,015 $ 158,265 $ - $ - $ 716,989
========== ========== ========== ========== =========== ==========
Net revenue $ 159,055 $ 71,065 $ 47,924 $ - $ - $ 278,044
========== ========== ========== ========== =========== ==========
Income (loss) from operations $ 32,037 $ 10,408 $ 9,169 $ (19,241) $ - $ 32,373
========== ========== ========== ========== =========== ==========
Identifiable assets $ 214,520 $ 117,432 $ 102,098 $ 123,914 $ (123,565) $ 434,399
========== ========== ========== ========== =========== ==========
Revenue from transfers between regions represents approximate amounts that
would be charged if the services were provided by an unaffiliated company.
Total regional revenue is reconciled with total consolidated revenue by
eliminating inter-regional revenue.
15
16
Circle is domiciled in the U.S. The U.S. had revenues from external
customers of $329 million in 1999, $356 million in 1998, and $382 million
in 1997. The U.S. had long lived assets of $57 million and $41 million at
the end of 1999 and 1998, respectively.
The following tables show the approximate amounts of revenue and net revenue
attributable to Circle's principal services during each of the three years in
the period ended December 31, 1999 (in thousands):
Year Ended December 31,
1999 1998 1997
---------- ---------- ----------
Revenue:
Air freight forwarding $ 528,698 $ 482,701 $ 471,563
Ocean freight forwarding 130,478 111,938 111,200
Customs brokerage and other 154,901 143,039 134,226
---------- ---------- ----------
Total $ 814,077 $ 737,678 $ 716,989
========== ========== ==========
Net Revenue:
Air freight forwarding $ 130,065 $ 118,170 $ 106,210
Ocean freight forwarding 47,026 40,471 37,608
Customs brokerage and other 154,901 143,039 134,226
---------- ---------- ----------
Total $ 331,992 $ 301,680 $ 278,044
========== ========== ==========
Note 15 - Quarterly Data (unaudited)
(in thousands, except per share amounts)
Net Net Income (Loss)
Net Income per share Dividends
Revenue Revenue (Loss) Basic Diluted per share
-------- -------- -------- ------------------- ---------
1999 Quarters
4th Quarter $ 231,046 $ 90,793 $ 9,757 $ 0.56 $ 0.56 $ 0.135
3rd Quarter 204,963 83,582 6,760 0.39 0.39 -
2nd Quarter 195,215 81,451 4,820 0.28 0.28 0.135
1st Quarter 182,853 76,166 1,875 0.11 0.11 -
1998 Quarters
4th Quarter $ 206,706 $ 82,517 $ 5,757 $ 0.34 $ 0.34 $ 0.135
3rd Quarter* 190,799 77,585 (544) (0.03) (0.03) -
2nd Quarter 174,760 73,005 7,857 0.46 0.45 0.135
1st Quarter 165,413 68,573 5,445 0.32 0.31 -
* Net loss includes special charges of $8.1 million, ($0.47 per diluted share).
16
17
Independent Auditors' Report
The Board of Directors and Stockholders of Circle International Group, Inc.:
We have audited the accompanying consolidated balance sheets of Circle
International Group, Inc. and subsidiaries (the "Company") as of December 31,
1999 and 1998, and the related consolidated income statements, statements of
stockholders' equity and statements of cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Circle International
Group, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
/S/ DELOITTE & TOUCHE LLP
San Francisco, California
March 29, 2000
17