1
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, 1997
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
EAGLE USA AIRFREIGHT, 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)
3214 LODESTAR, HOUSTON, TEXAS 77032
(281) 821-0300
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices, Including Registrant's Zip Code,
and Telephone Number, Including Area Code)
NONE
- -------------------------------------------------------------------------------
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 8, 1997:
17,973,510 shares.
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EAGLE USA AIRFREIGHT, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of..................................................................... 3
June 30, 1997 (unaudited) and September 30, 1996 (audited)
Condensed Consolidated Statement of Income for the Nine........................................................ 4
Months ended June 30, 1997 and 1996 (unaudited)
Condensed Consolidated Statement of Income for the Three....................................................... 5
Months ended June 30, 1997 and 1996 (unaudited)
Condensed Consolidated Statement of Cash Flows for............................................................. 6
the Nine Months ended June 30, 1997 and 1996 (unaudited)
Condensed Consolidated Statement of Shareholders'.............................................................. 7
Equity for the Nine Months ended June 30, 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)............................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................................. 11
PART II. OTHER INFORMATION..................................................................................... 18
SIGNATURES....................................................................................................... 20
INDEX TO EXHIBITS................................................................................................ 21
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3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
June 30, September 30,
1997 1996
(unaudited) (audited)
---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 23,899 $ 26,696
Short-term investments 10,179 3,409
Accounts receivable - trade, net 41,392 30,379
Prepaid expenses and other 4,673 2,290
---------------- ----------------
Total current assets 80,143 62,774
Property and equipment, net 11,235 8,333
Other assets 667 622
---------------- ----------------
$ 92,045 $ 71,729
================ ================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable - trade $ 2,916 $ 2,459
Accrued transportation costs 10,397 10,818
Other current liabilities 8,228 8,010
---------------- ----------------
Total current liabilities 21,541 21,287
--------------- ----------------
Long-term indebtedness
Shareholders' equity:
Preferred stock, $0.001 par value, 10,000 shares
authorized
Common stock, $0.001 par value, 30,000 shares
authorized, 17,953 and 17,492 shares issued 18 17
Additional paid-in capital 47,619 39,124
Retained earnings 22,867 11,301
---------------- ----------------
70,504 50,442
---------------- ----------------
$ 92,045 $ 71,729
================ ================
See notes to unaudited condensed consolidated financial statements.
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4
EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Ended
June 30,
-------------------------------
1997 1996
------------ --------------
Revenues $ 200,376 $ 127,989
Cost of transportation 112,858 71,402
------------ --------------
87,518 56,587
------------ --------------
Operating expenses:
Personnel costs 46,084 28,930
Other selling, general and administrative expenses 23,859 15,553
------------ --------------
69,943 44,483
------------ --------------
Operating income 17,575 12,104
------------ --------------
Interest and other income 1,348 758
Interest expense (141)
------------ --------------
Nonoperating income 1,348 617
------------ --------------
Income before provision for income taxes 18,923 12,721
Provision for income taxes 7,357 4,013
------------ --------------
Net income $ 11,566 $ 8,708
============ ==============
Pro forma information:
Net income - as reported $ 8,708
Pro forma charge in lieu of income taxes (Note 2) 945
--------------
Pro forma net income $ 7,763
==============
Weighted average common and common equivalent
shares outstanding 18,614 17,872
============ ==============
Net income per share (Note 3) $ 0.62 $ 0.43
============ ==============
See notes to unaudited condensed consolidated financial statements.
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EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
June 30,
-------------------------------
1997 1996
------------ --------------
Revenues $ 71,301 $ 48,240
Cost of transportation 39,981 27,016
------------ --------------
31,320 21,224
------------ --------------
Operating expenses:
Personnel costs 16,911 10,765
Other selling, general and administrative expenses 8,057 5,944
------------ --------------
24,968 16,709
------------ --------------
Operating income 6,352 4,515
------------ --------------
Interest income 374 295
Interest expense (5)
------------ --------------
Nonoperating income 374 290
------------ --------------
Income before provision for income taxes 6,726 4,805
Provision for income taxes 2,622 1,691
------------ --------------
Net income $ 4,104 $ 3,114
============ ==============
Weighted average common and common equivalent
shares outstanding 18,673 18,818
============ ==============
Net income per share (Note 3) $ 0.22 $ 0.17
============ ==============
See notes to unaudited condensed consolidated financial statements.
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EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
June 30,
------------------------------
1997 1996
----------- ----------
Cash flows from operating activities $ 1,504 $ 4,397
----------- ----------
Cash flows from investing activities:
Purchase of investments (11,051) (4,991)
Maturity of investments 4,281 6,418
Acquisition of property and equipment, net (4,305) (5,625)
Repayments from affiliates 701
Other, net (100)
------------ --------------
Net cash used by investing activities (11,075) (3,597)
------------ --------------
Cash flows from financing activities:
Payments on indebtedness (2,172)
Proceeds from indebtedness 1,800
Issuance of common stock, net of related costs 6,165 34,559
Offering fee paid by selling shareholder 375
Proceeds from exercise of stock options 869 357
Payments on shareholder distribution notes (635) (8,209)
Distributions to shareholders (2,701)
----------- ----------
Net cash provided by financing activities 6,774 23,634
----------- ----------
Net increase (decrease) in cash and cash equivalents (2,797) 24,434
Cash and cash equivalents, beginning of period 26,696 179
----------- ----------
Cash and cash equivalents, end of period $ 23,899 $ 24,613
============ ==============
See notes to unaudited condensed consolidated financial statements.
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EAGLE USA AIRFREIGHT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
Balance at September 30, 1996 17,492 $ 17 $ 39,124 $ 11,301 $ 50,442
Issuance of Common Stock, net
of related costs (Note 1) 232 6,165 6,165
Exercise of stock options 229 1 868 869
Tax benefit from exercise of stock
options 2,097 2,097
Payments on shareholder distribution
notes (635) (635)
Net income 11,566 11,566
------------- ------------- ------------- ------------- ---------
Balance at June 30, 1997 17,953 $ 18 $ 47,619 $ 22,867 $ 70,504
============= ============= ============= ============= =========
See notes to unaudited condensed consolidated financial statements.
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EAGLE USA AIRFREIGHT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The accompanying unaudited condensed consolidated financial statements
have been prepared by Eagle USA Airfreight, Inc. (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, 1997 and the results of its operations for the nine and
three months ended June 30, 1997 and 1996. Results of operations for the nine
and three months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 1997.
NOTE 1 - ORGANIZATION, OPERATIONS, AND SIGNIFICANT ACCOUNTING POLICIES:
Eagle USA Airfreight, Inc. (the Company) was organized in 1984 to
provide ground and air freight forwarding services. The Company maintains
operating facilities throughout the United States and a recently opened
facility in both Canada and Mexico. The Company operates in one principal
industry segment.
On February 18, 1997, the Company completed an underwritten secondary
public offering (the secondary public offering) of 1,548 shares of its common
stock by Daniel S. Swannie, a former executive officer and director of the
Company, at a price to the public of $28.25 per share. The Company did not
receive any of the proceeds from the sale of shares by Mr. Swannie. Pursuant to
an agreement between the Company and Mr. Swannie entered into in connection
with the offering, Mr. Swannie reimbursed the Company for all of its
out-of-pocket expenses incurred in connection with the offering and made a
payment to the Company of $375 for the Company's estimated internal costs
relating to the offering. The agreement also restricts Mr. Swannie's ability to
compete against the Company for a three-year term and places certain other
limitations on his ability to act against the interests of the Company. In
connection with the secondary public offering on February 21, 1997, the Company
sold 232 shares of common stock to the underwriters pursuant to an
over-allotment option at a price to the public of $28.25 per share. The net
proceeds received by the Company after deducting underwriting discounts and
commissions were $6,165 and will be used for general corporate purposes.
On December 6, 1995, the Company completed an underwritten initial
public offering (the IPO) of 2,000 (pre split) shares of common stock at a
price to the public of $16.50 (pre split) per share. In connection with the
offering, the underwriters fully exercised an over-allotment option of 300 (pre
split) shares. Proceeds to the Company after deducting underwriting discounts,
commissions and offering costs were approximately $34,559. A portion of the
proceeds were used to retire debt and make distributions to shareholders. The
remaining proceeds have and may continue to be used for general corporate
purposes, including acquisitions and working capital.
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EAGLE USA AIRFREIGHT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Also in connection with the IPO, the Company acquired from its Chairman
of the Board the interests in Eagle Freight Services, Inc., C&D Freight
Services of California, Inc., Eagle USA Transportation Services, Inc., Freight
Services Management, Inc., and Eagle USA Import Brokers, Inc. that were
previously owned by the Company's principal shareholder in exchange for 223
(pre split) shares of newly issued common stock of the Company. The accounts of
each subsidiary have been consolidated as if wholly-owned as of the beginning
of each period presented.
NOTE 2 - INCOME TAXES:
Effective October 1, 1992, the Company elected to be treated as an S
Corporation for federal income tax purposes. On December 4, 1995, shortly prior
to the consummation of the initial public offering, the Company's S Corporation
status was terminated and, accordingly, the Company became liable for federal
income taxes on taxable income generated prospectively and for cumulative
temporary differences between income for financial and tax reporting purposes
at the date of the termination. At that time, the Company recorded a net
deferred tax asset and charged additional paid-in capital to recognize the
effect of its conversion to C Corporation status pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS
109).
The pro forma charge in lieu of income taxes for the nine month period
ended June 30, 1996 represents the estimated federal income taxes that would
have been reported under FAS 109 had the Company been a C Corporation prior to
December 4, 1995.
NOTE 3 - NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
On July 8, 1996, the Board authorized a two-for-one stock split,
effected in the form of a stock dividend, payable August 1, 1996 to
shareholders of record on July 24, 1996. All references in the financial
statements to earnings per share information have been retroactively restated
to reflect the split. The stock split resulted in the issuance of 8,673 new
shares of common stock.
Net income per share is computed by using the weighted average number
of common and common stock equivalent shares outstanding during the period.
Common stock equivalents include the number of shares issuable upon exercise of
stock options less the number of shares that could have been repurchased with
the exercise proceeds and related tax benefits using the treasury stock method.
For purposes of the net income per share computation, the two-for-one
stock split and the shares issued to the Company's Chairman of the Board in
connection with the acquisition of his interests in the Company's subsidiaries
have been treated as if they had been effective and outstanding as of the
beginning of each period presented.
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EAGLE USA AIRFREIGHT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The number of shares used in the computation were determined as follows:
NINE MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
------ ------
Weighted average number of common shares outstanding 17,716 15,779
Common stock equivalents 898 1,308
Effect of shares issued to the Company's Chairman of the Board 446
Number of shares sold by the Company to fund pre-IPO
S Corporation distributions 339
------ ------
18,614 17,872
====== ======
THREE MONTHS ENDED
JUNE 30,
------------------------
1997 1996
------ ------
Weighted average number of common shares outstanding 17,906 17,332
Common stock equivalents 767 1,486
------ ------
18,673 18,818
====== ======
For the nine months ended June 30, 1996, net income per share includes
a pro forma charge in lieu of income taxes of $945 which represents the
estimated federal income taxes that would have been reported had Eagle USA been
a C Corporation prior to December 4, 1995.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS:
Effective October 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 121 (FAS 121), "Accounting for
Impairment of Long-Lived Assets and for Assets to be Disposed Of". The adoption
of FAS 121 did not have a material effect on the Company's financial position
or results of operations.
Effective October 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 123 (FAS 123), "Accounting for
Stock-Based Compensation". The adoption of FAS 123 did not have a material
effect on the Company's financial position or results of operations. Upon
adoption of FAS 123, the Company continues to measure compensation expense for
its stock-based employee compensation plan using the intrinsic-value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and will provide pro forma disclosures of net income and earnings per share on
an annual basis as if the fair value-based method prescribed by FAS 123 had
been applied in measuring compensation expense.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard No. 128 (FAS 128), "Earnings Per Share". The
Company will adopt FAS 128 as required effective October 1, 1997. FAS 128 will
require computation of "basic" earnings per share, rather than the current
"primary" earnings per share, using the weighted average common shares
outstanding for a period, but excluding common stock equivalents.
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EAGLE USA AIRFREIGHT, INC.
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.
General
The Company's revenues have increased to $185.4 million in the fiscal
year ended September 30, 1996 from $83.3 million in the fiscal year ended
September 30, 1994, and its operating income has increased to $17.8 million in
fiscal 1996 from $5.9 million in fiscal 1994. The Company's recent growth has
been generated almost exclusively by increasing the number of terminals
operated by the Company and growth in revenue produced by existing terminals.
The opening of a new terminal generally has an initial negative impact on
profitability due to operating losses of the new terminal. 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. Historically, the Company's operating results have
been subject to a limited degree to seasonal trends when measured on a
quarterly basis. The second quarter has traditionally been the weakest and the
fourth quarter has traditionally been the strongest.
The Company intends to continue to expand its international freight
forwarding business. International shipments typically generate higher revenues
per shipment than domestic shipments. The Company anticipates that the costs of
transportation for international freight will be higher than for domestic
freight as a percentage of such revenues, resulting in lower gross margins than
domestic shipments; however, the Company does not expect its operating expenses
to increase in proportion to such revenues. The Company also intends to
continue the growth of its local pick-up and delivery operations. By providing
local pick-up and delivery services with respect to shipments for which it is
the freight forwarder, the Company has been able to increase its gross margin
with respect to such shipments because its costs to provide such services are
less than the third-party charges it previously paid. However, the Company's
local pick-up 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.
Nine Months Ended June 30, 1997 compared to the Nine Months Ended June 30, 1996
Revenues increased 56.6% to $200.4 million for the nine months ended
June 30, 1997 from $128.0 million for the nine months ended June 30, 1996
primarily due to increases in the number of shipments and the total weight of
cargo shipped, which in turn resulted from an increase in the number of
terminals open during such period, an increase in penetration in existing
markets and the addition of significant national account customers.
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EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating data for the period were as follows:
NINE MONTHS ENDED JUNE 30,
--------------------------
1997 1996
-------- --------
Freight forwarding terminals at end of period 57 44
Local delivery locations at end of period 43 24
Freight forwarding shipments 541,960 363,252
Average weight per freight forwarding shipment 568 588
For those freight forwarding terminals open as of the beginning of fiscal
1996 (37 terminals), revenues increased 44.3% to $166.9 million for the nine
months ended June 30, 1997 from $115.7 million for the nine months ended June
30, 1996.
Revenues for the nine months ended June 30, 1997 were comprised of $188.4
million of forwarding revenues, $11.5 million of local pick-up and delivery
revenues and $523,000 of other freight forwarding service revenues, as compared
to $119.8 million, $7.9 million and $302,000, respectively, for the
corresponding period in 1996.
Cost of transportation increased as a percentage of revenues to 56.3% in
the first nine months of fiscal 1997 from 55.8% in the comparable period in
fiscal 1996, as a result of several factors. For the period October 1996 to May
1997, several of the Company's transportation providers implemented a fuel
surcharge (which was not in effect during the fiscal 1996 period). Increased
revenues from international freight, which were $14.2 million for the nine
months ended June 30,1997 as compared to $6.7 million for the same period in
fiscal 1996, also contributed to the higher cost of transportation as a
percentage of revenues. Additionally, the reinstatement on March 7, 1997 of the
Federal Air Cargo Transportation Excise Tax (the Federal Excise Tax), which had
previously expired January 1, 1997, negatively impacted cost of transportation
as a percentage of revenues for the period. In fiscal 1996, the Federal Excise
Tax expired January 1, 1996, and was not reinstated until August 27, 1996. The
increase of cost of transportation as a percentage of revenues that resulted
from these factors was largely offset by increases in airfreight shipping
volumes, as the number of shipments increased 49.2% and the total weight of
cargo shipped increased 44.1% over the nine months ended June 30, 1996, and the
continued expansion of the Company's local pick-up and delivery operations,
which enabled the Company to capture margins previously paid to third parties.
Cost of transportation increased in absolute terms by 58.1% to $112.9 million
for the nine months ended June 30, 1997 from $71.4 million in the same period
in fiscal 1996 as a result of increases in air freight shipped. Gross margins
decreased to 43.7% in the nine months ended June 30, 1997 from 44.2% in the
same period in fiscal 1996. Gross profit increased 54.7% to $87.5 million for
the nine months ended June 30, 1997 from $56.6 million in the same period in
fiscal 1996.
Operating expenses remained relatively constant as a percentage of
revenues at 34.9% and 34.8%, respectively in the first nine months of fiscal
1997 and 1996. The $25.5 million of increased costs in absolute terms was
attributable primarily to continued growth in the level of operations from
existing and additional terminals and expansion of local delivery operations.
Personnel costs increased as a percentage of revenues to 23.0% for the nine
months ended June 30, 1997 from 22.6% in the same period in fiscal 1996, and
increased in absolute terms by 59.3% to $46.1 million due to increased staffing
needs associated with the opening of 13 new terminals, expanded operations at
existing terminals and increased revenues, which resulted in increased
commissions. Such costs include all compensation expenses, including those
relating to sales commission and salaries and to headquarters employees and
executive officers. The Company has recently added personnel to build
infrastructure, to keep pace with its recent significant growth and to prepare
for expected growth in fiscal 1998. Other selling, general and administrative
expenses decreased slightly as a percentage of revenues to 11.9% for the nine
months ended June 30, 1997 from 12.2% in the same period in fiscal 1996, and
increased in absolute terms by 53.4% to $23.9 million in the first nine months
ended June 30, 1997 from $15.6 million in the same period in fiscal 1996.
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EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
For the nine months ended June 30, 1997, selling expenses as a
percentage of revenues decreased by 0.2% and other general and administrative
expenses as a percentage of revenue decreased 0.1% compared to the same period
in fiscal 1996. The increases in selling, general and administrative expenses
were due to overall increases in the level of the Company's activities in the
fiscal 1997 period.
Operating income increased 45.2% to $17.6 million in the first nine
months of fiscal 1997 from $12.1 million in the comparable period in fiscal
1996. Operating margin for the first nine months of fiscal 1997 was 8.8%, down
from 9.5% for the same period in fiscal 1996 primarily due to the higher
transportation costs as a percentage of revenues during the nine months ended
June 30, 1997.
Interest and other income increased to $1.3 million in the first nine
months of fiscal 1997 from $758,000 in the comparable period in fiscal 1996 as
a result of increased levels of investments resulting from the initial and
secondary public offering proceeds. Interest expense was zero for the first
nine months of fiscal 1997 as compared to $141,000 in the same period in fiscal
1996. The interest expense was associated with the promissory notes distributed
to the Company's S Corporation shareholders and short-term borrowings on the
Company's revolving line of credit. A portion of the net proceeds from the
initial public offering was used to retire the full amount of these debts with
the final payment being made in June 1997. Interest and other income for the
fiscal 1997 period included a one-time payment of $375,000 by Mr. Daniel S.
Swannie, a former executive officer and director of the Company, in connection
with the reimbursement of the Company's internal costs related to the February
1997 secondary public offering.
Income before provision for income taxes increased 48.8% to $18.9
million for the first nine months of fiscal 1997 from $12.7 million in the
comparable period of fiscal 1996. Provision for income taxes increased 83.3% to
$7.4 million for the nine months ended June 30, 1997 from $4.0 million for nine
months ended June 30, 1996. A portion of the increase in provision for income
taxes was from the termination of the S Corporation status shortly prior to the
initial public offering on December 6, 1995, at which time Eagle USA
Airfreight, Inc. began accruing federal income taxes. Federal income taxes had
previously been paid by the Company's subsidiaries. Net income increased 32.8%
to $11.6 million for the nine months ended June 30, 1997 from net income of
$8.7 million in the same period in fiscal 1996 and increased 49.0% from pro
forma net income of $7.8 million in the same period in fiscal 1996, which
reflects a charge for federal income taxes during the S Corporation period. Net
income per share increased 44.2% to $0.62 for the nine months ended June 30,
1997 from $0.43 in the same period in fiscal 1996 even with the increase in
shares outstanding as a result of the initial public offering and the secondary
offering.
Three Months Ended June 30, 1997 compared to the Three Months Ended June 30,
1996
Revenues increased 47.8% to $71.3 million for the three months ended
June 30, 1997 from $48.2 million in the same period of fiscal 1996 primarily
due to increases in the number of shipments and the total weight of cargo
shipped, which in turn resulted primarily from an increase in the number of
terminals open during such period, an increase in penetration in existing
markets and the addition of significant national account customers.
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14
EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating data for the period were as follows:
Three Months Ended June 30,
---------------------------
1997 1996
-------- --------
Freight forwarding terminals at end of period 57 44
Local delivery locations at end of period 43 24
Freight forwarding shipments 183,085 136,327
Average weight per freight forwarding shipment 598 555
For those freight forwarding terminals open as of the beginning of
fiscal 1996 (37 terminals), revenues increased 36.5% to $58.3 million for the
three months ended June 30, 1997 from $42.7 million for the three months ended
June 30, 1996.
Revenues for the three months ended June 30, 1997 were comprised of
$66.8 million of forwarding revenues, $4.3 million of local pick-up and
delivery revenues and $196,000 of other freight forwarding service revenues, as
compared to $45.4 million, $2.7 million and $94,000, respectively, for the
three months ended June 30, 1996.
Cost of transportation increased during the quarter ended June 30, 1997
as a percentage of revenues to 56.1% from 56.0% in the comparable period in
fiscal 1996, as a result of several factors. For the period October 1996 to May
1997, several of the Company's transportation providers implemented a fuel
surcharge (which was not in effect during the fiscal 1996 period). Increased
revenues from international freight, which were $5.9 million for the three
months ended June 30, 1997 as compared to $3.0 million for the same period in
fiscal 1996, also contributed to the higher cost of transportation as a
percentage of revenues. Additionally, the reinstatement on March 7, 1997 of the
Federal Excise Tax, which had previously expired January 1, 1997, negatively
impacted cost of transportation as a percentage of revenues for the quarter. In
fiscal 1996, the Federal Excise Tax expired January 1, 1996 and was not
reinstated until August 27, 1996. The increase of cost of transportation as
percentage of revenues that resulted from these factors was largely offset by
increases in airfreight shipping volumes, as the number of shipments increased
34.3% and the total weight of cargo shipped increased 44.7% over third quarter
1996, and the continued expansion of the Company's local pick-up and delivery
operations, which enabled the Company to capture margins previously paid to
third parties. Cost of transportation increased in absolute terms by 48.0% to
$39.9 million in the fiscal 1997 quarter from $27.0 million in the fiscal 1996
quarter as a result of increases in air freight shipped. Gross margins
decreased to 43.9% in the third quarter of fiscal 1997 from 44.0% in the same
period in fiscal 1996. Gross profit increased 47.6% to $31.3 million in the
third quarter of fiscal 1997 from $21.2 million in the same period in fiscal
1996.
Operating expenses increased as a percentage of revenues to 35.0% in
the three months ended June 30, 1997 from 34.6% for the same period in fiscal
1996. The $8.3 million of increased costs in absolute terms was attributable
primarily to continued growth in the level of operations from additional
terminals and expansion of local delivery operations. Personnel costs increased
as a percentage of revenues to 23.7% in the three months ended June 30, 1997
from 22.3% in the same period in fiscal 1996, and increased in absolute terms
by 57.1% to $16.9 million due to increased staffing needs associated with the
opening of 13 new terminals, expanded operations at existing terminals and
increased revenues, which resulted in an increase in commissions. Such costs
include all compensation expenses, including those relating to sales
commissions and salaries and to headquarters employees and executive officers.
The Company has recently added personnel to build infrastructure, to keep pace
with its recent significant growth and to prepare for expected growth in fiscal
1998. These additions could have the effect of increasing personnel costs as a
percentage of revenue for at least the near term. Other selling, general and
administrative expenses decreased as a percentage of revenues to 11.3% in the
third quarter of fiscal 1997 from 12.3% in the third quarter of fiscal 1996,
and increased in absolute terms by 35.5% to $8.1 million in the fiscal 1997
period from $5.9 million in the fiscal 1996 period. In the third quarter of
fiscal 1997, selling expenses as a percentage of revenues decreased by 0.2% and
other general and administrative expenses as a percentage of revenues decreased
by 0.8% compared to the third quarter of fiscal 1996. The
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15
EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
increases in selling, general and administrative expenses were due to overall
increases in the level of the Company's activities in the fiscal 1997 period.
Operating income increased 40.7% to $6.4 million in the third quarter
of fiscal 1997 from $4.5 million in the comparable period in fiscal 1996.
Operating margin for the quarter ended June 30, 1997 was 8.9%, down from 9.4%
for the three months ended June 30, 1996 primarily due to the higher
transportation costs as a percentage of revenues during the three months ended
June 30, 1997.
Interest income increased to $374,000 from $295,000 as a result of
increased levels of investments resulting from the public offering proceeds
received during the fiscal 1997 quarter. Interest expense was zero for the
third quarter of fiscal 1997 as compared to $5,000 in the same period in fiscal
1996.
Income before provision for income taxes increased 40.0% to $6.7
million for the third quarter of fiscal 1997 from $4.8 million in the
comparable period of fiscal 1996. Provision for income taxes increased 55.1% to
$2.6 million for the three months ended June 30, 1997 from $1.7 million for the
three months ended June 30, 1996. Net income increased 31.8% to $4.1 million in
the third quarter of fiscal 1997 from net income of $3.1 million in the same
period in fiscal 1996. Net income per share increased 29.4% to $0.22 per share
for the quarter ended June 30, 1997 from $0.17 in the same period in fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments increased $4.0 million to
$34.1 million at June 30, 1997 from $30.1 million at September 30, 1996. At
June 30, 1997, the Company had working capital of $58.6 million and a current
ratio of 3.72 compared to working capital of $41.5 million and a current ratio
of 2.95 at September 30, 1996. The Company's working capital has increased
during the period primarily as a result of the proceeds from the Company's
secondary public offering, profitable growth associated with the expansion of
the Company's operations and the resultant increase in accounts receivable and
payable. Capital expenditures for the nine months ended June 30, 1997 were
approximately $4.3 million. The Company believes that cash flow from
operations, its $10 million credit facility and the remaining proceeds from its
public offerings will be adequate to support its normal working capital and
capital expenditures requirements for at least the next 12 months.
On February 18, 1997, the Company completed an underwritten secondary
public offering of 1,547,758 shares of its common stock by Daniel S. Swannie, a
former executive officer and director of the Company, at a price to the public
of $28.25 per share. The Company did not receive any of the proceeds from the
sale of the shares by Mr. Swannie. Pursuant to an agreement between the Company
and Mr. Swannie entered into in connection with the offering, Mr. Swannie
reimbursed the Company for all of its out-of-pocket expenses incurred in
connection with the offering and made a payment to the Company of $375,000 for
the Company's estimated internal costs relating to the offering. The agreement
also restricts Mr. Swannie's ability to compete against the Company for a
three-year term and places certain other limitations on his ability to act
against the interests of the Company. In connection with the secondary offering
on February 21, 1997, the Company sold 232,164 shares of common stock to the
underwriters pursuant to an over-allotment option at a price to the public of
$28.25 per share. The net proceeds received by the Company after deducting
underwriting discounts and commissions were $6,165,115 and will be used for
general corporate purposes.
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16
EAGLE USA AIRFREIGHT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Other than its initial and secondary 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
purchase arrangements. The Company has a $10 million revolving credit facility
with NationsBank of Texas, N.A. As of June 30, 1997, no amounts were
outstanding under this credit facility. The borrowing base under the credit
facility is equal to 80% of eligible accounts receivable and was approximately
$29.3 million as of June 30, 1997. Borrowings under the credit facility bear
interest, at the Company's option, at the bank's prime rate or LIBOR plus an
interest margin based on leverage ratios. The credit facility expires and
borrowings under the credit facility are due in January 1998. Borrowings under
the credit facility are collateralized by substantially all of the Company's
inventory and accounts receivable. The credit facility's covenants restrict the
incurrence of other debt in an amount exceeding $1 million, include
restrictions on liens, investments and acquisitions, require the maintenance of
minimum net worth, a fixed charge coverage ratio and a leverage ratio and
restrict the payment of dividends to 25% of the Company's cumulative net worth
generated after the date of the initial public offering. The Company expects to
retain all available earnings generated by its operations for the development
and growth of its business and does not anticipate paying any cash dividends on
its common stock in the foreseeable future.
The Company made distributions of cash and/or notes to its pre-IPO
shareholders in an estimated amount of $14.6 million and $2.7 million during
the fiscal years ended September 30, 1995 and 1996, respectively. Prior to the
closing of the IPO, the Company paid a series of distributions of cash and
notes in an amount estimated to equal to all of its previously undistributed S
Corporation earnings. A final payment on the notes of $634,855 was made during
the quarter ended June 30, 1997.
As of June 30, 1997, the Company had outstanding non-qualified stock
options to purchase an aggregate of 2,319,270 shares of Common Stock at
exercise prices equal to the fair market value of the underlying Common Stock
on the dates of grant (prices ranging from $1.25 to $30.63). 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, 1997 of non-qualified stock options to purchase an aggregate of
228,857 shares of Common Stock, the Company is entitled to a federal income tax
deduction of approximately $5.2 million. Assuming an effective tax rate of 40%,
the Company expects to recognize a tax benefit of approximately $2.1 million
with respect to the nine months ended June 30, 1997, accordingly, the Company
recorded such an increase in additional paid-in capital and a decrease in
current income taxes payable pursuant to the provisions of FAS No. 109,
"Accounting for Income Taxes." Any exercises for 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 benefits for the difference between such amounts,
although there can be no assurance as to whether or not such exercises will
occur, the amount of any deductions or the Company's ability to fully utilize
such tax deductions.
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17
EAGLE USA AIRFREIGHT, 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). Estimated costs of the Houston facility are $8.0 million. Under the
terms of the lease agreement, average monthly lease payments are approximately
$59,000 (including monthly interest costs based upon LIBOR rate plus 200 basis
points) beginning October 1, 1997 through January 2, 2002 with a balloon
payment equal to the outstanding lease balance (initially equal to the cost of
the facility) due on January 2, 2002. The Company has an option, exercisable at
anytime during the lease term, and under certain circumstances may be
obligated, to acquire the facility for an amount equal to the outstanding lease
balance. In the event the Company does not exercise the purchase option, 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 the Houston facility.
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18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS, NONE
ITEM 2. CHANGES IN SECURITIES, NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES, NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS, NONE
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, those relating to 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; construction of new facilities;
future operating expenses; any seasonality of the Company's business;
future margins; future dividend plans; use of offering proceeds;
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 other statements which are not historical facts
are forward-looking statements. When used in this document, the words
"anticipate," "estimate," "expect," "may," "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 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; 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 pick-up and delivery operations; 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 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(A) EXHIBITS.
*3(i) Second Amended and Restated Articles of
Incorporation of the Company (Exhibit 3.1 to the
Company's Registration Statement on Form S-1
(Registration No. 33-97606)).
*3(ii) Amended and Restated Bylaws of the Company, as
amended (Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration
No. 33-97606)).
11(i) Computation of Per Share Earnings for the Nine
Months ended June 30, 1997 and 1996.
11(ii) Computation of Per Share Earnings for the Three
Months ended June 30, 1997 and 1996.
27 Financial Data Schedule.
------------------
* Incorporated by reference as indicated.
(B) No reports on Form 8-K were filed during the quarter ended
June 30, 1997.
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20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EAGLE USA AIRFREIGHT, INC.
--------------------------------------
(Registrant)
Date: August 13, 1997 BY: /s/ JAMES R. CRANE
------------------------- ---------------------------------
James R. Crane
President
Date: August 13, 1997 BY: /s/ DOUGLAS A. SECKEL
------------------------- ---------------------------------
Douglas A. Seckel
Chief Financial Officer
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21
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
- -------- -----------
*3(i) Second Amended and Restated Articles of Incorporation of the
Company (Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (Registration No. 33-97606)).
*3(ii) Amended and Restated Bylaws of the Company, as amended (Exhibit 3.2
to the Company's Registration Statement on Form S-1 (Registration
No. 33-97606)).
11(i) Computation of Per Share Earnings for the Nine Months ended June
30, 1997 and 1996.
11(ii) Computation of Per Share Earnings for the Three Months ended June
30, 1997 and 1996.
27 Financial Data Schedule.
- ------------------
*Incorporated by reference as indicated.
21