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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended JUNE 30, 2001 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
COMMISSION FILE NUMBER 0-27288
EGL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0094895
------------------------------------- -------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
15350 VICKERY DRIVE, HOUSTON, TEXAS 77032
(281) 618-3100
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(Address of Principal Executive Offices, Including Registrant's Zip Code,
and Telephone Number, Including Area Code)
N/A
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
At August 1, 2001, the number of shares outstanding of the registrant's common
stock was 48,822,986 (net of 1,161,125 treasury shares).
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EGL, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of 1
June 30, 2001 and December 31, 2000
Condensed Consolidated Statement of Operations for the Six 2
Months ended June 30, 2001 and 2000
Condensed Consolidated Statement of Operations for the Three 3
Months ended June 30, 2001 and 2000
Condensed Consolidated Statement of Cash Flows for 4
the Six Months ended June 30, 2001 and 2000
Condensed Consolidated Statement of Stockholders' 5
Equity for the Six Months ended June 30, 2001
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
PART II. OTHER INFORMATION 22
SIGNATURES 27
INDEX TO EXHIBITS 28
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUES)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 51,680 $ 60,001
Short-term investments ..................................................... 5,878 13,056
Trade receivables, net of allowance of $11,525 and $14,115 ................. 418,814 497,461
Other receivables .......................................................... 7,975 7,498
Deferred income taxes ...................................................... 20,426 17,167
Income tax receivable ...................................................... 18,574 2,128
Other current assets ....................................................... 9,945 10,996
--------- ---------
Total current assets ................................................... 533,292 608,307
Property and equipment, net .................................................... 172,255 153,345
Investments in unconsolidated affiliates ....................................... 47,357 52,717
Goodwill, net................................................................... 76,810 76,254
Other assets, net .............................................................. 9,004 9,123
--------- ---------
Total assets ........................................................... $ 838,718 $ 899,746
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable .............................................................. $ 130,628 $ 3,429
Trade payables and accrued transportation costs ............................ 223,364 260,802
Accrued salaries and related costs ......................................... 27,691 29,068
Accrued merger and integration costs (Note 6)............................... 17,651 24,976
Other liabilities .......................................................... 41,925 54,027
--------- ---------
Total current liabilities .............................................. 441,259 372,302
Deferred income taxes .......................................................... 7,648 18,864
Long-term notes payable ........................................................ 5,012 91,051
Other noncurrent liabilities ................................................... 2,616 2,980
--------- ---------
Total liabilities ...................................................... 456,535 485,197
--------- ---------
Minority interests ............................................................. 7,742 10,782
--------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares
issued Common stock, $0.001 par value, 200,000 shares authorized; 49,984
and 49,803 shares issued; 48,823 and 48,411 shares outstanding ............ 49 48
Additional paid-in capital ................................................. 155,907 150,131
Retained earnings .......................................................... 272,666 304,889
Accumulated other comprehensive loss ....................................... (35,191) (27,729)
Unearned compensation ...................................................... (953) (1,300)
Treasury stock, 1,161 and 1,392 shares held ................................ (18,037) (24,195)
Obligation to deliver common stock ......................................... -- 1,923
--------- ---------
Total stockholders' equity ............................................. 374,441 403,767
--------- ---------
Total liabilities and stockholders' equity ............................. $ 838,718 $ 899,746
========= =========
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
JUNE 30,
----------------------
2001 2000
--------- ---------
Revenue ......................................................... $ 831,520 $ 855,691
Cost of transportation .......................................... 526,298 514,913
--------- ---------
Net revenues .............................................. 305,222 340,778
Operating expenses:
Personnel costs ........................................... 195,222 184,068
Other selling, general and administrative expenses ........ 151,364 120,846
Merger related restructuring and integration costs (Note 6) 8,723
--------- ---------
Operating income (loss) ......................................... (50,087) 35,864
Non-operating income (expense), net ............................. (2,556) 2,206
--------- ---------
Income (loss) before provision (benefit) for income taxes ....... (52,643) 38,070
Provision (benefit)for income taxes ............................. (20,420) 14,631
--------- ---------
Net income (loss) ............................................... $ (32,223) $ 23,439
========= =========
Basic earnings (loss) per share ................................. $ (0.68) $ 0.51
Basic weighted-average common shares outstanding ................ 47,564 46,299
Diluted earnings (loss) per share ............................... $ (0.68) $ 0.49
Diluted weighted-average common equivalent
shares outstanding ........................................ 47,564 47,477
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUES)
THREE MONTHS ENDED
JUNE 30,
----------------------
2001 2000
--------- ---------
Revenue .......................................................... $ 409,201 $ 450,779
Cost of transportation ........................................... 263,169 271,703
--------- ---------
Net revenues ............................................... 146,032 179,076
Operating expenses:
Personnel costs ............................................ 100,681 93,551
Other selling, general and administrative expenses ......... 79,951 62,464
Merger related restructuring and integration costs
(Note 6).................................................. 1,178
--------- ---------
Operating income (loss) .......................................... (35,778) 23,061
Non-operating income (expense), net .............................. (1,595) 1,231
--------- ---------
Income (loss) before provision (benefit) for income taxes ........ (37,373) 24,292
Provision (benefit)for income taxes .............................. (14,201) 9,309
--------- ---------
Net income (loss) ................................................ $ (23,172) $ 14,983
========= =========
Basic earnings (loss) per share .................................. $ (0.49) $ 0.32
Basic weighted-average common shares outstanding ................. 47,570 46,292
Diluted earnings (loss) per share ................................ $ (0.49) $ 0.32
Diluted weighted-average common equivalent
shares outstanding ......................................... 47,570 47,241
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) .................................................................. $(32,223) $ 23,439
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization ................................................... 15,526 15,035
Provision for doubtful accounts, net of write-offs .............................. (2,478) 4,358
Amortization of unearned compensation ........................................... 347 313
Deferred income tax benefit ..................................................... (14,475) (311)
Tax benefit of stock options exercised .......................................... 2,577 1,281
Unrealized gain on marketable securities ........................................ (2,299)
Equity in (earnings) losses of affiliates, net of dividends received ............ 1,761 (1,154)
Minority interests, net of dividends paid ....................................... 776 (216)
Net effect of changes in working capital ........................................ 5,138 (3,449)
-------- --------
Net cash (used in) provided by operating activities...................................... (25,350) 39,296
-------- --------
Cash flows from investing activities:
Capital expenditures ............................................................ (31,163) (25,742)
Net proceeds from marketable securities and short-term investments .............. 8,970 10,053
Proceeds from sales of other assets ............................................. 1,957
Acquisitions of businesses, net of cash acquired ................................ (652) (19,850)
Cash received from disposal of affiliates ....................................... 2,243
-------- --------
Net cash used in investing activities ................................................... (20,602) (33,582)
-------- --------
Cash flows from financing activities:
Repayment of notes payable ...................................................... (1,886)
Increase in borrowings on notes payable ......................................... 43,045 (4,169)
Issuance of common stock, net of related costs .................................. 733 5,312
Proceeds from exercise of stock options ......................................... 3,200 1,269
Treasury stock purchases ........................................................ (10,478)
Dividends paid .................................................................. (2,360)
-------- --------
Net cash provided by (used in) financing activities...................................... 45,092 (10,426)
-------- --------
Effect of exchange rate changes on cash ................................................. (7,461) (1,506)
-------- --------
Increase (decrease) in cash and cash equivalents......................................... (8,321) (6,218)
Cash and cash equivalents, beginning of the period ...................................... 60,001 40,347
-------- --------
Cash and cash equivalents, end of the period ............................................ $ 51,680 $ 34,129
======== ========
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED OBLIGATION
OTHER TO
COMMON STOCK ADDITIONAL COMPRE- COMPRE- DELIVER UNEARNED
------------------ PAID-IN RETAINED HENSIVE HENSIVE COMMON COMPEN- TREASURY
SHARES AMOUNT CAPITAL EARNINGS (LOSS) LOSS STOCK SATION STOCK TOTAL
-------- -------- ---------- -------- -------- -------- ----------- ---------- -------- ---------
Balance at
December 31, 2000 ..... 48,411 $ 48 $150,131 $304,889 $(27,729) $ 1,923 $ (1,300) $(24,195) $403,767
------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Comprehensive income:
Net loss .............. (32,223) $(32,223) (32,223)
Change in value of
marketable securities,
net ................... (26) (26) (26)
Change in value of
cash flow hedge ....... (360) (360) (360)
Foreign currency
translation
adjustments ........... (7,076) (7,076) (7,076)
--------
Comprehensive loss .... $(39,685)
========
Issuance of shares
under stock purchase
plan .................. 733 733
Issuance of common
stock for acquisition . (1,923) 5,425 3,502
Exercise of stock
options including
tax benefit ........... 412 1 5,776 5,777
Amortization of
unearned
compensation .......... 347 347
------ -------- -------- -------- -------- -------- -------- -------- --------
Balance at
June 30, 2001.......... 48,823 $ 49 $155,907 $272,666 $(35,191) $ -- $ (953) $(18,037) $374,441
====== ======== ======== ======== ======== ======== ======== ======== ========
Comprehensive income (loss) for the three months ended June 30, 2001 was ($13,422).
See notes to unaudited condensed consolidated financial statements.
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared by EGL, Inc. (EGL or the Company) in accordance with the
rules and regulations of the Securities and Exchange Commission (the SEC) for
interim financial statements and accordingly do not include all information and
footnotes required under generally accepted accounting principles for complete
financial statements. The financial statements have been prepared in conformity
with the accounting principles and practices disclosed in, and should be read in
conjunction with, the annual financial statements of the Company included in the
Company's Annual Report on Form 10-K (File No.0-27288). In the opinion of
management, these interim financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position at June 30, 2001 and the
results of its operations for the six and three months ended June 30, 2001.
Results of operations for the six and three months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for EGL's full fiscal
year. The Company has reclassified certain prior period amounts to conform with
the current period presentation.
NOTE 1 - ORGANIZATION, OPERATIONS, AND SIGNIFICANT ACCOUNTING POLICIES:
EGL is an international transportation and logistics company. The
Company'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 Company provides services through
offices around the world as well as through its worldwide network of exclusive
and nonexclusive agents. In October 2000, the Company acquired Circle
International Group, Inc. (Circle) in a merger transaction and expanded its
operations to over 100 countries on six continents (Note 5). The principal
markets for all lines of business are North America, Europe and Asia with
significant operations in the Middle East, South America and South Pacific (Note
10).
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 supercedes Accounting Principles Board Opinion No. 16,
"Business Combinations." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill arising from
new transactions to be written off immediately as an extraordinary gain, and for
pre-existing transactions to be recognized as the cumulative effect of a change
in accounting principle.
SFAS 142 supercedes Accounting Principles Board Opinion No. 17,
"Intangible Assets." SFAS 142 primarily addresses the accounting for goodwill
and intangible assets subsequent to their acquisition. SFAS 142 requires that
goodwill and indefinite lived intangible assets will no longer be amortized;
goodwill will be tested for impairment at least annually at the reporting unit
level; intangible assets deemed to have an indefinite life will be tested for
impairment at least annually; and the amortization of intangible assets with
finite lives will no longer be limited to forty years. The provisions of SFAS
142 will be effective for fiscal years beginning after December 15, 2001. This
statement is required to be applied at the beginning of an entity's fiscal year
and to be applied to all goodwill and other intangible assets recognized in its
financial statements at that date. The Company will adopt SFAS 142 as of January
1, 2002 and is currently determining the impact it will have on its results of
operations and financial position.
NOTE 3 - ACCOUNTING POLICY FOR DERIVATIVE INSTRUMENTS:
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and
SFAS 138. These statements require the Company to recognize all derivative
instruments on the balance sheet at fair value. The accounting for changes in
the fair value of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and further, on the
type of hedging relationship. For those derivative instruments that are
designated and qualify as
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedging instruments, a company must designate the hedging instrument, based upon
the exposure being hedged, as either a fair value hedge, cash flow hedge or a
hedge of net investment in a foreign operation.
For derivative instruments that are designated and qualify as a fair
value hedge, the gain or loss on the derivative instrument as well as the
offsetting gain or loss on the hedged item attributable to the hedged risk are
recognized in current earnings during the period of the change in fair values.
For derivative instruments that are designated and qualify as a cash flow hedge,
the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change. For derivative instruments that are designated and qualify as a hedge of
a net investment in a foreign currency, the gain or loss is reported in other
comprehensive income as part of the cumulative translation adjustment to the
extent it is effective. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current earnings during the
period of change.
The Company uses derivative financial instruments to reduce its
exposure to fluctuations in interest rates. The Company formally designates
and documents the financial instrument as a hedge of a specific underlying
exposure when it is entered into, as well as the risk, management objectives and
strategies for undertaking the hedge transaction. Derivatives are recorded in
the balance sheet at fair value in either other assets or other liabilities. The
earnings impact resulting from the derivative instruments is recorded in the
same line item within the statement of earnings as the underlying exposure being
hedged. The Company also formally assesses, both at the inception and at least
quarterly thereafter, whether the financial instruments that are used in hedging
transactions are effective at offsetting changes in either the fair value or
cash flows of the related underlying exposures. The ineffective portion of a
financial instrument's change in fair value is immediately recognized in
earnings as non-operating (expense), net.
Cash Flow Hedging Strategy
In April 2001, the Company entered into an interest rate swap
agreement, which has been designated as a cash flow hedge, to reduce its
exposure to fluctuations in interest rates on $70 million of its LIBOR based
revolving credit facility. Accordingly, the change in the fair value of the swap
agreement is recorded in other comprehensive income (loss).
NOTE 4 - EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share excludes dilution and is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
includes potential dilution that could occur if securities to issue common stock
were exercised. Stock options are the only potentially dilutive share
equivalents the Company had outstanding for the periods presented. Incremental
shares of 1.2 million and 949,000 were used in the calculation of diluted
earnings per share for the six and three months ended June 30, 2000,
respectively. No shares related to options were included in diluted earnings per
share for the six and three months ended June 30, 2001 because their effect
would have been antidilutive as the Company incurred a net loss during those
periods.
NOTE 5 - BUSINESS COMBINATIONS:
On October 2, 2000, EGL completed its merger with Circle pursuant to
the terms and conditions of the Agreement and Plan of Merger dated as of July 2,
2000. EGL issued approximately 17.9 million shares of EGL common stock in
exchange for all issued and outstanding shares of Circle common stock and
assumed Circle options exercisable for approximately 1.1 million shares of EGL
common stock. The exchange ratio of one share of
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EGL common stock for each share of Circle common stock was determined by
arms-length negotiations between EGL and Circle. The merger qualified as a
tax-free reorganization for U.S. federal income tax purposes and as a pooling of
interests for accounting and financial reporting purposes as such, the Company's
financial statements have been restated to include the operations of Circle for
all periods presented.
NOTE 6 - MERGER TRANSACTION, RESTRUCTURING AND INTEGRATION COSTS:
Transaction and integration costs
As a result of the merger with Circle, as discussed in Note 5, the
Company paid $1.3 million and $9.1 of transaction and integration costs during
the three and six months ended June 30, 2001, respectively, of which $3.4
million was accrued as of December 31, 2000. Integration costs of approximately
$1.3 million and $5.7 million incurred and expensed during the three and six
months ended June 30, 2001, respectively, included personnel costs for redundant
employees at the former Circle's headquarters, the costs of legal registrations
in various jurisdictions, changing signs and logos at major facilities around
the world, and other integration costs.
Restructuring charges
During the fourth quarter of 2000, the Company established a plan
(the Plan) to integrate the former EGL and Circle operations and to eliminate
duplicate facilities as a result of the merger. The principal components of the
Plan involve the termination of certain employees at the former Circle's
headquarters and various international locations, elimination of duplicate
facilities in the United States and certain international locations, and the
termination of selected joint venture and agency agreements at certain of the
Company's international locations. With the exception of payments to be made for
remaining future lease obligations, it is anticipated that the terms of the Plan
will be substantially completed by the end of the third quarter of 2001.
The charges incurred under the Plan for the six months ended June 30,
2001 and the remaining portion of the unpaid accrued charges as of June 30, 2001
are as follows:
ADDITIONAL INCOME
STATEMENT
CHARGE FOR THE
SIX MONTHS ENDED
JUNE 30, 2001
-----------------------------
ACCRUED ACCRUED
LIABILITY REVISIONS LIABILITY
DECEMBER 31, NEW TO PAYMENTS/ JUNE 30,
(in thousands) 2000 CHARGES ESTIMATES REDUCTIONS 2001
------------ ---------- ----------- ----------- -----------
Severance costs ..................... $ 6,267 $ 3,091 $ (4,552) $ 4,806
Future lease obligations,
net of subleasing ................ 10,063 1,917 (1,138) 10,842
Termination of joint venture/agency
agreements ....................... 5,212 -- (2,000) (1,209) 2,003
------- ------- -------- --------- -------
$21,542 $ 5,008 $ (2,000) $ (6,899) $ 17,651
======= ======= ======== ========= ========
Severance costs
Severance costs have been recorded for certain employees at the former
Circle headquarters and former Circle management at certain international
locations who were terminated or notified of their termination under the Plan
prior to December 31, 2000. At December 31, 2000 approximately 60 of the 150
employees included in the Plan were no longer employed by the Company. The
termination of substantially all of the remaining 90 employees occurred in the
first quarter of 2001 and severance costs of approximately $3.0 million were
recorded.
Also, during January 2001 the Company announced the additional
reduction in the Company's workforce of approximately 125 additional employees.
The charge for this workforce reduction is approximately $0.1 million and was
recorded during the first quarter of 2001.
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future lease obligations
Future lease obligations consist of the Company's remaining lease
obligations under noncancelable operating leases at domestic and international
locations that the Company is in the process of vacating and consolidating due
to excess capacity resulting from the Company having multiple facilities in
certain locations. Amounts recorded for future lease obligations under the Plan
are net of approximately $28.0 million in anticipated future recoveries from
actual or expected sublease agreements. Sublease income has been anticipated
under the Plan only in locations where sublease agreements have been executed or
are likely to be executed during the next six months.
The provisions of the Plan include the consolidation of facilities at
approximately 80 of the Company's operating locations. As of June 30, 2001
consolidation of facilities has been completed at 37 of these locations with the
remaining locations expected to be completed by the end of the first quarter of
2002. During the six months ended June 30, 2001, the Company determined the
estimated consolidation dates for several of the remaining 43 facilities and
recorded an additional charge of $1.9 million. In addition, the Company expects
further consolidation at some of its other locations in the future. Costs for
the consolidation at these locations has not been included in the Plan as of
June 30, 2001 as the Company has not yet been able to determine the estimated
consolidation dates for these facilities. All lease costs for facilities being
consolidated are charged to operations until the date that the Company vacates
each facility. The charges recorded under the Plan include provisions for
closing Circle's logistics facility in Los Angeles, California.
Termination of joint venture/agency agreements
Costs to terminate joint venture/agency agreements represent
contractually obligated costs incurred to terminate selected joint
venture/agency agreements with certain of the Company's former business partners
along with assets that are not expected to be fully recoverable as a result of
the Company's decision to terminate these agreements. In conjunction with the
Company's Plan, the Company is currently terminating certain of its joint
venture/agency agreements in Brazil, Chile, Panama, Venezuela, and Taiwan.
During the second quarter of 2001 the Company completed the termination of its
South African joint venture agreement on more favorable terms than originally
expected and revised its estimate by $2.0 million.
NOTE 7 - REVOLVING CREDIT FACILITY:
On January 5, 2001, the Company entered into an agreement (the Credit
Facility) with various financial institutions, with the Bank of America, N.A.
(the Bank) serving as administrative agent, to replace its previous credit
facility. The Credit Facility (as amended on June 28, 2001) provides a
$150 million revolving line of credit and includes a $30 million sublimit for
the issuance of letters of credit and a $15 million sublimit for a swing line
loan. The Credit Facility matures on January 5, 2004.
For each tranche of principal obtained under the revolving line of
credit, the Company elects an interest rate calculation on either LIBOR plus an
applicable margin based on a ratio of consolidated debt to consolidated EBITDA
(a Libor Tranche) or the greater of the prime rate announced by the Bank or the
federal funds rate plus 50 basis points (a Prime Rate Tranche). The interest for
a LIBOR Tranche is due at the earlier of three months from inception of the
LIBOR Tranche, as selected by the Company, or the expiration of the LIBOR
Tranche, whichever is earlier. The interest for a Prime Rate Tranche is due
quarterly.
The Company is subject to certain covenants under the terms of the new
Credit Facility, including, but not limited to, maintenance at the end of any
fiscal quarter of (a) minimum specified consolidated net worth, (b) a ratio of
consolidated funded debt to total capitalization of no greater than 0.40 to
1.00, (c) a ratio of consolidated funded debt to consolidated EBITDA of no
greater than 3.00 to 1.00, (d) a consolidated fixed charge coverage ratio of no
less than 1.35 to 1.00 and (e) minimum consolidated domestic accounts receivable
coverage ratio not to be less than 1.25 to 1.00. The new Credit Facility also
places restrictions on additional indebtedness, liens, investments, change of
control and other matters and is secured by an interest in substantially all of
the Company's assets.
As of June 30, 2001, our results did not satisfy the requirements of
certain of these covenants. On August 13, 2001, we received a waiver letter from
the banks to waive the event of default until September 30, 2001. The Company
is seeking to refinance the debt under the revolving line of credit with
borrowing under a new secured credit facility described below.
The Company and Bank of America, National Association (the Bank) have
entered into a binding commitment letter pursuant to which the Bank has agreed
to underwrite a secured Credit Facility for the Company consisting of Revolving
Loans and Letters of Credit of up to the lesser of (a) $220 million or (b) an
amount equal to the sum of (i) 85% of eligible accounts of the Company and its
wholly owned Subsidiaries in Canada, the United
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EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Kingdom, the Netherlands, Australia, and Singapore plus (ii) eligible standby
letters of credit in favor of the Bank for the account of the Company or any
Subsidiary plus (iii) eligible cash deposits or short-term investments of the
Company or any Subsidiary. Such Credit Facility, which would have a Letter of
Credit Subfacility of up to $50 million, would bear interest, at the election of
the Company, at the Bank's Base Rate or LIBOR plus 2.50% (subject to performance
pricing adjustments providing for increases of up to 0.25% and decreases of up
to 50%) and would contain customary representations, warranties and covenants
(including financial covenants requiring an agreed tangible net worth, a
leverage ratio (subject to a $40 million minimum availability trigger) of funded
debt (excluding existing synthetic lease arrangements) to adjusted EBITDA of
6.0 at September 30, 2001, 5.5 at December 31, 2001, 5.0 at March 30, 2002, 4.5
at June 30, 2002, and 4.0 at September 30, 2002 and each fiscal quarter
thereafter, and agreed maximum capital expenditures) to be negotiated. The
Commitment Letter will expire on September 30, 2001 unless a definitive Credit
Agreement is executed on or prior to such date. There can be no assurance that
the Company will be able to enter into a definitive Credit Agreement upon the
terms described above or at all; therefore the balance under the existing Credit
Facility has been classified as short-term as of June 30, 2001.
NOTE 8 - SHAREHOLDERS' RIGHTS PLAN:
On May 23, 2001, the Company's Board of Directors declared a dividend
of one Right to purchase preferred stock ("Right") for each outstanding share of
Company common stock to shareholders of record at the close of business on June
4, 2001. Each right initially entitles the registered holder to purchase from
the Company a fractional share consisting of one one-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $.001 per share, at a
purchase price of $120 per fractional share, subject to adjustment. The Rights
generally will not become exercisable until ten days after a public announcement
that a person or group has acquired 15% or more of Company common stock (thereby
becoming an "Acquiring Person") or the commencement of a tender or exchange
offer that would result in an Acquiring Person (the earlier of such dates being
called the "Distribution Date"). James R. Crane will not become an Acquiring
Person, unless and until he and his affiliates become the beneficial owner of
49% or more of the Common Stock. Rights will be issued with all shares of
Company common stock issued from the record date to the Distribution Date. Until
the Distribution Date, the Rights will be evidenced by the certificates
representing Company common stock and will be transferable only with our common
stock. Generally, if any person or group becomes an Acquiring Person, each
right, other than Rights beneficially owned by the Acquiring Person (which will
thereupon become void), will thereafter entitle its holder to purchase, at the
Rights' then current exercise price, shares of the Company's common stock having
a market value of two times the exercise price of the Right. If, after there is
an Acquiring Person, and the Company or a majority of its assets is acquired in
certain transactions, each Right not owned by an Acquiring Person will entitle
its holder to purchase, at a discount, shares of common stock of the acquiring
entity (or its parent) in the transaction. At any time until ten days after a
public announcement that the Rights have been triggered, the Company will
generally be entitled to redeem the Rights for $.01 and to amend the rights in
any manner other than to change the redemption price. Certain subsequent
amendments are also permitted. The Rights expire on June 4, 2011.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
In mid-August 2001 the Company negotiated agreements to reduce its
exposure to future losses on charter aircraft leases. Leases for two of the
aircraft were terminated with no financial penalty and the Company has agreed to
sublease five aircraft to a third party at rates below the Company's current
contractual commitment, which is expected to result in the recognition of a loss
of approximately $3 million (excluding taxes) in the third quarter of 2001. The
Company expects to operate six charter aircraft for its own benefit, with
increased utilization of remaining fixed capacity. The remaining charter
aircraft leases have expiration dates ranging between December 31, 2001 and
2003.
In December 1997, the U.S. Equal Employment Opportunity Commission
(EEOC) issued a Commissioner's Charge pursuant to Sections 706 and 707 of Title
VII of the Civil Rights Act of 1964, as amended (Title VII). The Company
continues to vigorously defend against allegations contained in the
Commissioner's Charge. In the Commissioner's Charge, the EEOC charged the
Company and certain of its subsidiaries with violations of Section 703 of Title
VII, as amended, the Age Discrimination in Employment Act of 1967, and the Equal
Pay Act of 1963, resulting from (i) engaging in unlawful discriminatory hiring,
recruiting and promotion practices and maintaining a hostile work environment,
based on one or more of race, national origin, age and gender, (ii) failures to
investigate, (iii) failures to maintain proper records and (iv) failures to file
accurate reports. The Commissioner's Charge states that the persons aggrieved
include all Blacks, Hispanics, Asians and females who are, have been or might be
affected by the alleged unlawful practices.
On May 12, 2000, four individuals filed suit against EGL alleging
gender, race and national origin discrimination, as well as sexual harassment.
This lawsuit was filed in the United States District Court for the Eastern
District of Pennsylvania in Philadelphia, Pennsylvania. The EEOC was not
initially a party to the Philadelphia litigation. In July 2000, four additional
individual plaintiffs were allowed to join the Philadelphia
10
13
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
litigation. The Company filed an Answer in the Philadelphia case and extensive
discovery is underway. The individual plaintiffs are seeking to certify a class
of approximately 1,000 current and former EGL employees and applicants. The
plaintiff's initial motion for class certification was denied in November 2000.
On December 29, 2000, the EEOC filed a Motion to Intervene in the
Philadelphia litigation. That motion was granted by the Court in Philadelphia on
January 31, 2001 and could allow claims to be brought with respect to a class of
individuals. In addition, the Philadelphia Court also granted EGL's motion that
the case be transferred to the United States District Court for the Southern
District of Texas - Houston Division where EGL had previously initiated
litigation against the EEOC due to what EGL believes to have been inappropriate
practices by the EEOC in the issuance of the Commissioner's Charge and in the
subsequent investigation. EGL intends to continue to vigorously pursue its
lawsuit against the EEOC alleging agency bias and misconduct. EGL is currently
in the midst of active discovery on this matter and will be requesting an
appropriate remedy from the Court.
The Company intends to continue to vigorously defend itself against the
allegations made by the EEOC, as well as the private plaintiffs. The Company has
recognized a pre-tax charge of $7.5 million in its consolidated statement of
operations during the year ended December 31, 2000 for the expected cost of its
litigation efforts related to this matter. The Company currently expects to
prevail in its defense of this matter. There can be no assurance, however, as to
what the amount of time it will take to resolve the Commissioner's Charge, the
other lawsuits and related issues or the degree of any adverse effect these
matters may have on our financial condition and results of operations. A
substantial settlement payment or judgment could result in a significant
decrease in our working capital and liquidity and recognition of a loss in our
consolidated statement of operations. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Part II, Item 1. Legal Proceedings."
NOTE 10 - BUSINESS SEGMENT INFORMATION:
EGL'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 EGL's operations by region is
summarized below.
(in thousands)
Europe & Asia &
North South Middle South
America America East Pacific Eliminations Consolidated
--------- --------- --------- --------- ------------ ------------
Six months ended June 30, 2001:
Total revenue ............... $ 531,508 $ 29,054 $ 118,443 $ 175,090 $ (22,575) $ 831,520
Transfers between regions ... (7,235) (2,890) (7,172) (5,278) 22,575 --
--------- --------- --------- --------- --------- ---------
Revenues from customers ..... $ 524,273 $ 26,164 $ 111,271 $ 169,812 $ -- $ 831,520
========= ========= ========= ========= ========= =========
Net revenue ................. $ 200,440 $ 6,911 $ 54,422 $ 43,449 $ 305,222
========= ========= ========= ========= =========
Income (loss) from operations $ (66,301) $ (1,305) $ 5,801 $ 11,718 $ (50,087)
========= ========= ========= ========= =========
Six months ended June 30, 2000:
Total revenue ............... $ 559,372 $ 22,338 $ 108,697 $ 182,608 $ (17,324) $ 855,691
Transfers between regions ... (4,421) (2,364) (4,895) (5,644) 17,324 --
--------- --------- --------- --------- --------- ---------
Revenues from customers ..... $ 554,951 $ 19,974 $ 103,802 $ 176,964 $ -- $ 855,691
========= ========= ========= ========= ========= =========
Net revenue ................. $ 244,150 $ 7,905 $ 48,319 $ 40,404 $ 340,778
========= ========= ========= ========= =========
Income (loss) from operations $ 21,854 $ (505) $ 8,500 $ 6,015 $ 35,864
========= ========= ========= ========= =========
11
14
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands)
Europe & Asia &
North South Middle South
America America East Pacific Eliminations Consolidated
--------- --------- --------- --------- ------------ ------------
Three months ended June 30, 2001:
Total revenue ............... $ 258,733 $ 12,929 $ 59,359 $ 87,554 $ (9,374) $ 409,201
Transfers between regions ... (1,266) (1,736) (3,743) (2,629) 9,374 --
--------- --------- --------- --------- --------- ---------
Revenues from customers ..... $ 257,467 $ 11,193 $ 55,616 $ 84,925 $ -- $ 409,201
========= ========= ========= ========= ========= =========
Net revenue ................. $ 91,778 $ 3,436 $ 27,981 $ 22,837 $ 146,032
========= ========= ========= ========= =========
Income (loss) from operations $ (42,921) $ (1,048) $ 3,168 $ 5,023 $ (35,778)
========= ========= ========= ========= =========
Three months ended June 30, 2000:
Total revenue ............... $ 293,091 $ 12,301 $ 56,880 $ 98,110 $ (9,603) $ 450,779
Transfers between regions ... (2,434) (1,443) (2,677) (3,049) 9,603 --
--------- --------- --------- --------- --------- ---------
Revenues from customers ..... $ 290,657 $ 10,858 $ 54,203 $ 95,061 $ -- $ 450,779
========= ========= ========= ========= ========= =========
Net revenue ................. $ 128,357 $ 4,298 $ 25,080 $ 21,341 $ 179,076
========= ========= ========= ========= =========
Income (loss) from operations $ 14,249 $ 93 $ 5,269 $ 3,450 $ 23,061
========= ========= ========= ========= =========
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.
12
15
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 for the year ended December 31, 2000 (File No. 0-27288).
RESULTS OF OPERATIONS
EGL's principal services are international air freight forwarding,
ocean freight forwarding, and customs brokerage and other value-added logistics
services. The following table provides the revenue and net revenue attributable
to EGL's principal services during the periods indicated. Revenue for air
freight and ocean freight consolidations (indirect shipments) includes the cost
of transporting such freight, whereas net revenue does not. Revenue for air
freight and ocean freight agency or direct shipments, customs brokerage and
import services, includes only the fees or commissions for these services. A
comparison of net revenue best measures the relative importance of EGL's
principal services.
The following table presents certain statement of operations data for
the periods indicated.
Six Months Ended June 30,
---------------------------------------------
2001 2000
--------------------- ---------------------
% of % of
Amount Revenues Amount Revenues
--------- --------- --------- ---------
(in thousands, except percentages)
Revenues:
Air freight forwarding .......... $643,140 77.3 $668,100 78.1
Ocean freight forwarding ........ 87,911 10.6 86,689 10.1
Customs brokerage and other ..... 100,469 12.1 100,902 11.8
-------- ----- -------- -----
Revenues ............................. $831,520 100.0 $855,691 100.0
======== ===== ======== =====
% of Net % of Net
Amount Revenues Amount Revenues
--------- --------- --------- ---------
Net revenues:
Air freight forwarding .......... $ 177,427 58.1 $ 222,552 65.3
Ocean freight forwarding ........ 27,326 9.0 25,509 7.5
Customs brokerage and other ..... 100,469 32.9 92,717 27.2
--------- ----- --------- -----
Net revenues ......................... $ 305,222 100.0 $ 340,778 100.0
========= ===== ========= =====
Operating expenses:
Personnel costs ................. 195,222 64.0 184,068 54
Other selling, general and
administrative expenses ....... 151,364 49.6 120,846 35.5
Merger related, restructuring
and integration costs ......... 8,723 2.9 -- --
Operating income (loss) .............. (50,087) (16.5) 35,864 10.5
Nonoperating income (expense), net ... (2,556) (0.8) 2,206 0.6
--------- ----- --------- -----
Net income (loss) .................... $ (32,223) (10.6) $ 23,439 6.9
========= ===== ========= =====
13
16
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000.
Revenue. Revenue decreased $24.2 million, or 2.8%, to $831.5 million in
the six months ended June 30, 2001 compared to $855.7 million in the six months
ended June 30, 2000 primarily due to decreases in air freight forwarding
revenue. Net revenue, which represents revenue less freight transportation
costs, decreased $35.6 million, or 10.4%, to $305.2 million in the six months
ended June 30, 2001 compared to $340.8 million in the six months ended June 30,
2000 due to a decrease in air freight forwarding net revenue.
Air freight forwarding revenue. Air freight forwarding revenue
decreased $25.0 million, or 3.7%, to $643.1 million in the six months ended June
30, 2001 compared to $668.1 million in the six months ended June 30, 2000
primarily as a result of volume decreases in North America offset by volume
increases in Europe and South America. Air freight forwarding net revenue
decreased $45.2 million, or 20.3%, to $177.4 million in the six months ended
June 30, 2001 compared to $222.6 million in the six months ended June 30, 2000.
The air freight forwarding margin declined to 27.6% for the six months ended
June 30, 2001 compared to 33.3% for the six months ended June 30, 2000 primarily
due to a softening of the U.S. economy, primarily in the technology,
telecommunications and automotive industries and the resulting shift from air
expedited shipments to economy ground deferred shipments which generate lower
revenue at lower margins. The Company's airfreight forwarding margin was also
adversely impacted in 2001 by the fixed costs of transportation related to 13
charter jet leases, which were carrying less freight than targeted operating
levels as a result of the factors discussed in the previous sentence. In
addition, the Company paid $2.0 million in June 2001 to terminate one of its air
charter lease agreements. In mid-August 2001 the Company negotiated agreements
to reduce its exposure to future losses on charter aircraft leases. Leases for
two of the aircraft were terminated with no financial penalty and the Company
has agreed to sublease five aircraft to a third party at rates below the
Company's current contractual commitment, which is expected to result in the
recognition of a loss of approximately $3 million (excluding taxes) in the third
quarter of 2001. The Company expects to operate six charter aircraft for its own
benefit, with increased utilization of remaining fixed capacity. The remaining
charter aircraft leases have expiration dates ranging between December 31, 2001
and 2003.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
increased $1.2 million, or 1.4%, to $87.9 million in the six months ended June
30, 2001 compared to $86.7 million in the six months ended June 30, 2000, while
ocean freight forwarding net revenue increased $1.8 million, or 7.1%, to $27.3
million in the six months ended June 30, 2001 compared to $25.5 million in the
six months ended June 30, 2000. The increases were principally due to volume
increases in South America and Europe. The ocean freight forwarding margin
increased to 31.1% in the six months ended June 30, 2001 compared to 29.4% in
the six months ended June 30, 2000 primarily due to better buying opportunities
of purchased transportation mainly in North America and Europe.
Customs brokerage and other revenue. Customs brokerage and other
revenue, which includes warehousing, distribution and other logistics services,
decreased $0.4 million, or 0.4%, to $100.5 million in the six months ended June
30, 2001 compared to $100.9 million in the six months ended June 30, 2000. Net
customs brokerage and other revenue increased $7.8 million, or 8.4%, to $100.5
million in the six months ended June 30, 2001 compared to $92.7 million in the
six months ended June 30, 2000 mainly due to an increase in logistics services
provided to customers in North America and Europe offset by a decline in
services in Asia.
Operating expenses. Personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. Personnel costs increased $11.2 million, or
6.1%, to $195.2 million in the six months ended June 30, 2001 compared to $184.1
million in the six months ended June 30, 2001. As a percentage of net revenue,
personnel costs were 64.0% in the six months ended June 30, 2001 compared to
54.0% in the six months ended June 30, 2000.
Our history of rapid revenue growth has historically required us to
increase our headcount at a fast pace to prepare for increased levels of
activity to maintain our high level of customer service. As a result, employee
headcount increased throughout 2000. When freight shipments began to slow during
the first quarter of 2001, we attempted to alleviate the impact of the slowdown
by implementing a furlough program in March 2001. With no strong signs of a
near-term economic rebound, we reduced our headcount during the first six months
of 2001 to bring it in line with current activity levels. During the six months
ended June 30, 2001, over 700 regular full-time and contract employees were
released, including the former Circle headquarters employees. The majority of
these reductions were in the United States and, in total, represented
approximately 13% of EGL's U.S. workforce.
14
17
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Other selling, general and administrative expenses, excluding
transaction, restructuring and integration costs, increased $30.6 million, or
25.3%, to $151.4 million in the six months ended June 30, 2001 compared to
$120.8 million in the six months ended June 30, 2000. As a percentage of net
revenue, other selling, general and administrative expenses, excluding
transaction, restructuring and integration costs, were 49.6% in the six months
ended June 30, 2001 compared to 35.5% in the six months ended June 30, 2000.
This increase is due to an overall increase in the level of our activities
during 2000 and the six months ended June 30, 2001 without the corresponding net
revenue growth in the six months ended June 30, 2001 due to the reduced shipping
volumes and the shift from air expedited shipments to economy ground deferred
shipments which generate lower revenue at lower margins, but with a similar cost
structure.
Merger related transaction, restructuring and integration costs. During
the six months ended June 30, 2001 the Company recorded $3.0 million of merger
restructuring costs related to its EGL/Circle Plan. This amount included a $1.9
million reduction to future lease obligations, net of expected sublease income,
an additional charge of $3.1 in severance costs and a $2.0 million revision in
the reserve related to the termination of a South African joint venture on more
favorable terms than originally expected. Integration costs of $5.7 million were
incurred during the six months ended June 30, 2001 and included personnel costs
for redundant employees at the former Circle headquarters, the costs of legal
registrations in various jurisdictions, changing signs and logos at major
facilities around the world, and other integration costs.
Nonoperating income (expense), net. For the six months ended June 30,
2001, we had nonoperating expense, net, of $2.6 million compared to nonoperating
income, net, of $2.2 million for the six months ended June 30, 2000. The $4.7
million change is due to a lower level of interest income resulting from reduced
short-term investments that were liquidated to fund expansion activity and
higher interest expense from increased borrowings, partially offset by a gain
recognized on recording the market value of an investment held by the Company,
which is classified as available for sale, that became marketable during the
second quarter of 2001.
Effective tax rate. The effective income tax rate for the six months
ended June 30, 2001 was 38.8% compared to 38.5% for the six months ended June
30, 2000. Our effective tax rate fluctuates primarily due to changes in the
level of pre-tax income in foreign countries that have different tax rates.
Three Months Ended June 30,
---------------------------------------------
2001 2000
--------------------- ---------------------
% of % of
Amount Revenues Amount Revenues
--------- --------- --------- ---------
(in thousands, except percentages)
Revenues:
Air freight forwarding .......... $315,851 77.2 $352,184 78.1
Ocean freight forwarding ........ 43,890 10.7 46,240 10.3
Customs brokerage and other ..... 49,460 12.1 52,355 11.6
-------- ----- -------- -----
Revenues ............................. $409,201 100.0 $450,779 100.0
======== ===== ======== =====
% of Net % of Net
Amount Revenues Amount Revenues
--------- --------- --------- ---------
Net revenues:
Air freight forwarding .......... $ 82,110 56.2 $ 117,499 65.6
Ocean freight forwarding ........ 14,462 10.0 13,333 7.5
Customs brokerage and other ..... 49,460 33.8 48,244 26.9
--------- ----- --------- -----
Net revenues ......................... $ 146,032 100.0 $ 179,076 100.0
========= ===== ========= =====
Operating expenses:
Personnel costs ................. 100,681 68.9 93,551 52.2
Other selling, general and
administrative expenses ....... 79,951 54.7 62,464 34.9
Merger related, restructuring
and integration costs ......... 1,178 (0.8) -- --
--------- ----- --------- -----
Operating income (loss) .............. (35,778) (24.4) 23,061 12.9
Nonoperating income (expense), net ... (1,595) (1.1) 1,231 0.7
--------- ----- --------- -----
Net income (loss) .................... $ (23,172) (15.9) $ 14,983 8.4
========= ===== ========= =====
15
18
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Revenue. Revenue decreased $41.6 million, or 9.2%, to $409.2 million in
the three months ended June 30, 2001 compared to $450.8 million in the three
months ended June 30, 2000 primarily due to decreases in air freight forwarding
revenue. Net revenue, which represents revenue less freight transportation
costs, decreased $33.1 million, or 18.5%, to $146.0 million in the three months
ended June 30, 2001 compared to $179.1 million in the three months ended June
30, 2000 due to a decrease in air freight forwarding net revenue.
Air freight forwarding revenue. Air freight forwarding revenue
decreased $36.3 million, or 10.3%, to $315.9 million in the three months ended
June 30, 2001 compared to $352.2 million in the three months ended June 30, 2000
primarily as a result of volume decreases in North America and Asia Pacific. Air
freight forwarding net revenue decreased $35.4 million, or 30.1%, to $82.1
million in the three months ended June 30, 2001 compared to $117.5 million in
the three months ended June 30, 2000. The air freight forwarding margin declined
to 26.0% for the three months ended June 30, 2001 compared to 33.4% for the
three months ended June 30, 2000 primarily due to a softening of the U.S.
economy, primarily in the technology, telecommunications and automotive
industries and the resulting shift from air expedited shipments to economy
ground deferred shipments which generate lower revenue at lower margins. The
Company's airfreight forwarding margin was also adversely impacted in 2001 by
the fixed costs of transportation related to 13 charter jet leases, which were
carrying less freight than targeted operating levels as a result of the factors
discussed in the previous sentence. In addition, the Company paid $2.0 million
in June 2001 to terminate on of its air charter lease agreements. In mid-August
2001 the Company negotiated agreements to reduce its exposure to future losses
on charter aircraft leases. Leases for two of the aircraft were terminated with
no financial penalty and the Company has agreed to sublease five aircraft to a
third party at rates below the Company's current contractual commitment, which
is expected to result in the recognition of a loss of approximately $3 million
(excluding taxes) in the third quarter of 2001. The Company expects to operate
six charter aircraft for its own benefit, with increased utilization of
remaining fixed capacity. The remaining charter aircraft leases have expiration
dates ranging between December 31, 2001 and 2003.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
decreased $2.3 million, or 5.0%, to $43.9 million in the three months ended June
30, 2001 compared to $46.2 million in the three months ended June 30, 2000,
while ocean freight forwarding net revenue increased $1.2 million, or 9.0%, to
$14.5 million in the three months ended June 30, 2001 compared to $13.3 million
in the three months ended June 30, 2000. The decrease in revenues was
principally due to volume decreases in North America and Asia. The ocean freight
forwarding margin increased to 33.0% in the three months ended June 30, 2001
compared to 28.8% in the three months ended June 30, 2000 primarily due to lower
cost of purchased transportation mainly in Europe and North America combined
with a higher percentage of activity handled through ocean forwarding services.
Customs brokerage and other revenue. Customs brokerage and other
revenue, which includes warehousing, distribution and other logistics services,
decreased $2.9 million, or 5.5%, to $49.5 million in the three months ended June
30, 2001 compared to $52.4 million in the three months ended June 30, 2000. Net
customs brokerage and other revenue increased $1.3 million, or 2.7%, to $49.5
million in the three months ended June 30, 2001 compared to $48.2 million in the
three months ended June 30, 2000 mainly due to an increase in logistics services
provided to customers in North America and Europe offset by a decline in
services in Asia.
Operating expenses. Personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. Personnel costs increased $7.1 million, or
7.6%, to $100.7 million in the three months ended June 30, 2001 compared to
$93.6 million in the three months ended June 30, 2001. As a percentage of net
revenue, personnel costs were 68.9% in the three months ended June 30, 2001
compared to 52.2% in the three months ended June 30, 2000.
Our history of rapid revenue growth has historically required us to
increase our headcount at a fast pace to prepare for increased levels of
activity to maintain our high level of customer service. As a result, employee
headcount increased throughout 2000. When freight shipments began to slow during
the first quarter of 2001, we attempted to alleviate the impact of the slowdown
by implementing a furlough program in March 2001. With no strong signs of a
near-term economic rebound, we reduced our headcount by approximately 400 during
the second quarter, with the majority occurring toward the end of the quarter,
to bring it in line with current activity levels.
16
19
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Other selling, general and administrative expenses, excluding
transaction, restructuring and integration costs, increased $17.5 million, or
28.0%, to $80.0 million in the three months ended June 30, 2001 compared to
$62.5 million in the three months ended June 30, 2000. As a percentage of net
revenue, other selling, general and administrative expenses, excluding
transaction, restructuring and integration costs, were 54.7% in the three months
ended June 30, 2001 compared to 34.9% in the three months ended June 30, 2000.
This increase is due to an overall increase in the level of our activities
during 2000 and the first quarter of 2001 without the corresponding net revenue
growth in the first quarter of 2001 due to reduced shipping volumes and the
shift from air expedited shipments to economy ground deferred shipments which
generate lower revenue at lower margins, but with a similar cost structure.
Merger related transaction, restructuring and integration costs. During
the three months ended June 30, 2001 the Company recorded a reduction of $83,000
in merger restructuring costs related to its EGL/Circle Plan. This amount
included an additional $1.9 million related to future lease obligations, net of
expected sublease income, net of a $2.0 million revision in the reserve related
to the termination of the South African joint venture on more favorable terms
than originally expected. Integration costs of $1.3 million were incurred during
the three months ended June 30, 2001 and included personnel costs for redundant
employees at the former Circle headquarters, the costs of legal registrations in
various jurisdictions, changing signs and logos at major facilities around the
world, and other integration costs.
Nonoperating income (expense), net. For the three months ended June 30,
2001, we had nonoperating expense, net, of $1.6 million compared to nonoperating
income, net of $1.2 million for the three months ended June 30, 2000. The $2.8
million change is due to a lower level of interest income resulting from reduced
short-term investments that were liquidated to fund expansion activity and
higher interest expense from increased borrowings, offset by a gain recognized
on recording the market value of an investment held by the Company, which is
classified as available for sale, that became marketable during the second
quarter of 2001.
Effective tax rate. The effective income tax rate for the three months
ended June 30, 2001 was 38.0% compared to 38.3% for the three months ended June
30, 2000. Our effective tax rate fluctuates primarily due to changes in the
level of pre-tax income in foreign countries that have different rates.
LIQUIDITY AND CAPITAL RESOURCES
General
We make significant disbursements on behalf of our customers for
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 our statement of operations; rather,
they are reflected in our trade receivables and trade payables. Growth in the
level of this activity or lengthening of the period of time between incurring
these costs and being reimbursed by our customers for these costs may negatively
affect our liquidity.
Cash used in operating activities. Net cash used in operating
activities was $25.4 million in the six months ended June 30, 2001 compared to
cash provided by operating activities of $39.3 million in the six months ended
June 30, 2000. The decrease in the six months ended June 30, 2001 was primarily
due to the loss incurred in the six months ended June 30, 2001 and transaction,
integration and restructuring costs paid during the six months ended June 30,
2001 as compared to income and corresponding cash flows that were produced in
2000.
Cash used in investing activities. Cash used in investing activities in
the six months ended June 30, 2001 was $20.6 million compared to $33.6 million
in the six months ended June 30, 2000. We incurred an increase in capital
expenditures of $5.4 million during the six months ended June 30, 2001 as
compared to the 2000 period. These expenditures were mainly due to information
technology initiatives and general facilities expansion in North America.
Cash provided by financing activities. Cash provided by financing
activities in the six months ended June 30, 2001 was $45.1 million compared to
$10.4 million used in financing activities in the six months ended June 30,
2000. Notes payable increased $43.0 million due primarily to a $47.0 million
increase in the revolving line of credit, which had a balance of $128.0 million
at June 30, 2001 compared to $81.0 million at December 31, 2000.
17
20
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Proceeds from the exercise of stock options were $3.2 million in the six months
ended June 30, 2001 compared to $1.3 million in the six months ended June 30,
2000. The Company expended $0 and $10.5 million to purchase treasury stock in
the six months ended June 30, 2001 and 2000, respectively.
Other factors affecting our liquidity and capital resources
Treasury stock repurchase authorization. In May 2001, the Company's
Board of Directors authorized the repurchase of up to 3 million shares of its
outstanding Common Stock subject to certain financial conditions. As of August
14, 2001, the Company had made no repurchases under this authorization. This
authorization expires on September 18, 2001, unless extended. The Company's bank
agreements place restrictions on the amount of stock that may be repurchased.
There can be no assurance as to what amount, if any, of shares will be
repurchased by the Company.
Credit agreements. In January 2001, we entered into a new credit
agreement with several banks with respect to a $150 million revolving line of
credit. The revolving line of credit (as amended on June 28, 2001) provides a
$150 million revolving line and includes a $30 million sublimit for the issuance
of letters of credit and a $15 million sublimit for a swing line loan. The
revolving line of credit terminates in January 2004.
For each tranche of principal obtained under the revolving line of
credit, we elect an interest rate based on either LIBOR plus an applicable
margin based on a ratio of consolidated debt to consolidated earnings before
interest, taxes, depreciation and amortization, known as EBITDA (a LIBOR
Tranche) or the greater of the prime rate announced by Bank of America, N.A. or
the federal funds rate plus 50 basis points (a Prime Rate Tranche). The interest
for a LIBOR Tranche is due at the earlier of three months from inception of the
LIBOR Tranche, as selected by us, or the expiration of the LIBOR Tranche,
whichever is earlier. The interest for a Prime Rate Tranche is due quarterly.
We are subject to certain covenants under the terms of the revolving
line of credit, including, but not limited to, maintenance at the end of any
fiscal quarter of (a) minimum specified consolidated net worth, (b) a ratio of
consolidated funded debt to total capitalization of no greater than 0.40 to
1.00, (c) a ratio of consolidated funded debt to consolidated EBITDA of no
greater than 3.00 to 1.00, (d) a consolidated fixed charge coverage ratio of no
less than 1.35 to 1.00 and (e) minimum consolidated domestic accounts receivable
coverage ratio not to be less than 1.25 to 1.00. In addition, the revolving line
of credit generally prohibits additional indebtedness, except pursuant to the
following: (a) the revolving line of credit, (b) interest hedge agreements not
entered into for speculative purposes, (c) off balance sheet synthetic leases up
to $35.0 million in the aggregate, (d) any other
18
21
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
agreement or agreements up to an aggregate of $40.0 million, and (e)
reimbursement obligations to sureties issuing payment and performance bonds in
the ordinary and usual course of our business. The revolving line of credit also
limits our ability to make distributions to our shareholders, whether through
the repurchase of stock, in cash or in kind, for any rolling four fiscal quarter
period to an amount not in excess of 50% of our consolidated net income over
such period. The revolving line of credit also places restrictions on liens,
investments, changes of control and other matters and is secured by an interest
in substantially all of our assets.
As of June 30, 2001, our results did not satisfy the requirements of
certain of these covenants. On August 13, 2001, we received a waiver letter from
the banks to waive the event of default until September 30, 2001. The Company
is seeking to refinance the debt under the revolving line of credit with
borrowing under a new secured credit facility described below.
As of July 31, 2001, $126.6 million was outstanding under the revolving
line of credit. The terms of the revolving credit facility would permit
borrowings thereunder to be used to finance future acquisitions, joint venture
operations or capital expenditures or for other corporate purposes. We believe
that operating cash flows, our financial structure and borrowing capacity under
either our existing facility or our expected new credit facility will be
adequate to fund our operations and finance capital expenditures and
acquisitions over the coming year.
The Company and Bank of America, National Association (the "Bank") have
entered into a binding commitment letter pursuant to which the Bank has agreed
to underwrite a secured Credit Facility for the Company consisting of Revolving
Loans and Letters of Credit of up to the lesser of (a) $220 million or (b) an
amount equal to the sum of (i) 85% of eligible accounts of the Company and its
wholly owned Subsidiaries in Canada, the United Kingdom, the Netherlands,
Australia, and Singapore plus (ii) eligible standby letters of credit in favor
of the Bank for the account of the Company or any Subsidiary plus (iii) eligible
cash deposits or short-term investments of the Company or any Subsidiary. Such
Credit Facility, which would have a Letter of Credit Subfacility of up to $50
million, would bear interest, at the election of the Company, at the Bank's Base
Rate or LIBOR plus 2.50% (subject to performance pricing adjustments providing
for increases of up to .025% and decreases of up to 0.50%) and would contain
customary representations, warranties and covenants (including financial
covenants requiring an agreed tangible net worth, a leverage ratio (subject to
be a $40 million minimum availability trigger) of funded debt (excluding
existing synthetic lease arrangements) to adjusted EBITDA of 6.0 at September
30, 2001, 5.5 at December 31, 2001, 5.0 at March 30, 2002, 4.5 at June 30, 2002,
and 4.0 at September 30, 2002 and each fiscal quarter thereafter, and agreed
maximum capital expenditures). to be negotiated. The Commitment Letter will
expire on September 30, 2001 unless a definitive Credit Agreement is executed on
or prior to such date. There can be no assurance that the Company will be able
to enter into a definitive Credit Agreement upon the terms described above or at
all; therefore, the balance under the existing Credit Agreement has been
classified as short-term as of June 30, 2001.
Bank lines of credit and letters of credit. We maintain a $10 million
bank line of credit, in addition to the $30 million sublimit under our revolving
line of credit, to secure customs bonds and bank letters of credit to guarantee
certain transportation expenses in foreign locations. At June 30, 2001, we were
contingently liable for approximately $7.2 million, under outstanding letters of
credit and guarantees related to these obligations. Our ability to borrow under
bank lines of credit and to maintain bank letters of credit is subject to the
limitations on additional indebtedness contained in our revolving line of credit
discussed above.
Agreement with charter airlines. We currently have agreements with
certain charter airlines which provide us with full access to regularly
scheduled chartered aircraft on a monthly basis. These agreements contain
guaranteed monthly minimum use requirements of the aircraft by us. Certain of
these agreements contain provisions which allow for early termination or
modification of the agreements to provide for an increase in or reduction of the
amount of aircraft available for our use at our discretion. One of these charter
agreements is for capacity on five aircraft with Miami Air International, Inc.,
a related party. Based on the charter agreements presently in place and aircraft
presently being used, we expect to incur average minimum guaranteed charges of
approximately $4.3 million, $1.5 million and $1.5 million on a monthly basis
under these charter agreements during
19
22
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
the years ended December 31, 2001, 2002 and 2003, respectively, before
subleasing receipts. These charter agreements are generally cancelable with a
minimum notice period. In mid-August 2001 the Company negotiated agreements to
reduce its exposure to future losses on charter aircraft leases. Leases for two
of the aircraft were terminated with no financial penalty and the Company has
agreed to sublease five aircraft at rates below the Company's current
contractual commitment, which is expected to result in the recognition of a loss
of approximately $3 million (excluding taxes) in the third quarter of 2001. The
Company expects to operate six charter aircraft for its own benefit, with
increased utilization of remaining fixed capacity. The remaining charter
aircraft leases have expiration dates ranging between December 31, 2001 and
2003.
Operating lease agreements. On January 10, 1997, we entered into a
five-year operating lease agreement with two unrelated parties for financing the
construction of our Houston terminal, warehouse and headquarters facility (the
"Houston facility"). The cost of the Houston facility was approximately $8.5
million. Under the terms of the lease agreement, average monthly lease payments
are approximately $59,000, which includes monthly interest costs based upon
LIBOR plus 145 basis points beginning on July 1, 1998 through January 2, 2002. A
balloon payment equal to the outstanding lease balance, which was initially
equal to the cost of the facility, is due on January 2, 2002. As of June 30,
2001, the lease balance was approximately $8.1 million.
On April 3, 1998, we entered into a five-year $20 million master
operating lease agreement with two unrelated parties for financing the
construction of terminal and warehouse facilities throughout the United States
designated by us. Under the terms of the master operating lease agreement,
average monthly lease payments, including monthly interest costs based upon
LIBOR plus 145 basis points, begin upon the completion of the construction of
each financed facility. The monthly lease obligations continue for a term of 52
months and currently approximate $150,000 per month. A balloon payment equal to
the outstanding lease balances, which were initially equal to the cost of the
facility, is due at the end of each lease term. Construction began during 1999
on five terminal facilities. As of June 30, 2001, the aggregate lease balance
was approximately $15.0 million under the master operating lease agreement.
The operating lease agreements contain restrictive financial covenants
requiring the maintenance of a fixed charge coverage ratio of at least 1.5 to
1.0 and specified amounts of consolidated net worth and consolidated tangible
net worth. In addition, the master operating lease agreement as amended on
October 20, 2000 restricts us from incurring debt in an amount greater than $30
million, except pursuant to a single credit facility involving a commitment of
not more than $150 million. The Company expects to seek an increase in this
limit in connection with its plans to enter into the proposed $220 million
secured facility.
We have an option, exercisable at anytime during the lease term, and
under particular circumstances may be obligated, to acquire the Houston terminal
and each of our other financed facilities for an amount equal to the outstanding
lease balance. If we do not exercise the purchase option, and do not otherwise
meet our obligations, we are subject to a deficiency payment computed as the
amount equal to the outstanding lease balance minus the then current fair market
value of each financed facility within limits. We expect that the amount of any
deficiency payment would be expensed.
Commitments to construct warehouse and terminal facilities. As of June
30, 2001, we had entered into commitments to construct warehouse and terminal
facilities for an aggregate cost of approximately $18.6 million. Payment for the
construction of the facilities is being made from cash balances. Construction of
the facilities is estimated to be completed during 2001.
Stock options. As of June 30, 2001, we had outstanding non-qualified
stock options to purchase an aggregate of 5.4 million 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 0.83 to $33.82). At the time a
non-qualified stock option is exercised, we 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 six months ended June 30,
2001, of non-qualified stock options to purchase an aggregate of 0.4 million
shares of common stock, we are entitled to a federal income tax deduction of
approximately $1.5 million. Accordingly, we recorded an increase to additional
paid-in capital and a reduction to current taxes payable pursuant to the
provisions of SFAS No. 109, "Accounting for Income Taxes."
20
23
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Any exercises of non-qualified stock options in the future at exercise prices
below the then fair market value of the common stock may also result in tax
deductions equal to the difference between those amounts. There is uncertainty
as to whether the exercises will occur, the amount of any deductions, and our
ability to fully utilize any tax deductions.
COMMISSIONER'S CHARGE
As discussed in "Part II, Item 1. Legal Proceedings", the Company has
received a Letter of Determination and Conciliation Proposal from the EEOC
relating to the Commissioner's Charge described in that section. Following the
issuance of the EEOC's Determination in May 2000, a lawsuit was filed in
Philadelphia, Pennsylvania by three former EGL employees and one individual who
had unsuccessfully applied for a position. Four additional plaintiffs joined the
suit in late July 2000. The lawsuit alleges discrimination and adopts in their
entirety the EEOC's conclusions. Although the named plaintiffs on the
Philadelphia lawsuit seek to represent a class of individuals, no class action
has yet been approved by the Court, although the EEOC has been allowed to
intervene, which could allow claims to be brought with respect to a class of
individuals. The lawsuit seeks unspecified damages. Any relief sought in these
lawsuits would be in addition to and not limited by the relief sought by the
EEOC. There can be no assurance as to what will be the amount of time it will
take to resolve the Commissioner's Charge, the other lawsuits and related issues
or the degree of any adverse effect these matters may have on our financial
condition and results of operations. A substantial settlement payment or
judgment could result in a significant decrease in our working capital and
liquidity, and recognition of a loss in our consolidated statement of
operations.
RELATED PARTY TRANSACTIONS
In connection with the Miami Air investment, we entered into an
aircraft charter agreement with Miami Air. Under this agreement Miami Air agreed
to convert certain of its passenger aircraft to cargo aircraft and to provide
aircraft charter services to us for a three-year term. We issued a $7.0 million
standby letter of credit in favor of certain creditors of Miami Air to enhance
Miami Air's borrowing capacity to assist in this aircraft conversion. Miami Air
has agreed to pay us an annual fee equal to 3.0% of the face amount of the
letter of credit and to reimburse us for any payments owed by us in respect of
the letter of credit.
Additionally, during the three and six months ended June 30, 2001, we
paid Miami Air $3.9 million and $6.1 million, respectively, under the aircraft
charter agreement. There were no unpaid balances related to this agreement as of
June 30, 2001. Additionally, Miami Air, each of the private investors and the
continuing Miami Air stockholders also entered into a stockholders agreement
under which Mr. Crane (Chairman, President and CEO) and Mr. Hevrdejs (a director
of the Company) are obligated to purchase up to approximately $1.7 million and
$.5 million, respectively, worth of Miami Air's Series A preferred stock upon
demand by the board of directors of Miami Air. The Company and Mr. Crane both
have the right to appoint one member of Miami Air's board of directors.
Additionally, the other private investors in the stock purchase transaction,
including Mr. Hevrdejs, collectively have the right to appoint one member of
Miami Air's board of directors. The Series A preferred stock, if issued, will
not be convertible, will have a 15.0% annual dividend rate and will be
mandatorily redeemable in July 2006 or upon the prior occurrence of specified
events.
In conjunction with our business activities, we periodically utilize
aircraft owned by entities controlled by Mr. Crane. On October 30, 2000, our
Board of Directors approved a change in this arrangement whereby we would
reimburse Mr. Crane for the $112,000 monthly lease obligation and other related
costs on this aircraft and we would bill Mr. Crane for any use of this aircraft
unrelated to company business on an hourly basis. For the three and six months
ended June 30, 2001, we reimbursed Mr. Crane for $0.3 million and $0.7 million,
respectively, in monthly lease payments and related costs on the aircraft.
21
24
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The Company subleases a portion of its warehouse space in Houston,
Texas and London, England to a customer pursuant to a five-year sublease. The
customer is partially owned by Mr. Crane. Rental income was approximately
$31,000 and $131,000 for the three and six months ended June 30, 2001,
respectively. In addition the Company billed this customer approximately $59,000
and $134,000 for freight forwarding services for the three and six months ended
June 30, 2001, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
See Notes 2 and 3 of the notes to condensed consolidated financial
statements and management's discussion and analysis of new accounting
pronouncements for a description.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in exposure to market risk from
that discussed in EGL's Annual Report on Form 10-K for the year ended December
31, 2000 other than the cash flow hedge entered into by the Company in April
2001. See Note 4 of the notes to condensed consolidated financial statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1997, the U.S. Equal Employment Opportunity Commission
("EEOC") issued a Commissioner's Charge against us and some of our subsidiaries
(the "Commissioner's Charge") pursuant to Sections 706 and 707 of Title VII of
the Civil Rights Act of 1964, as amended (Title VII). In the Commissioner's
Charge, the EEOC charged us and some of our subsidiaries with violations of
Section 703 of Title VII, as amended, the Age Discrimination in Employment Act
of 1967, and the Equal Pay Act of 1963, resulting from (1) engaging in unlawful
discriminatory hiring, recruiting and promotion practices and maintaining a
hostile work environment, based on one or more of race, national origin, age and
gender, (2) failures to investigate, (3) failures to maintain proper records and
(4) failures to file accurate reports. The Commissioner's Charge states that the
persons aggrieved include all Blacks, Hispanics, Asians and females who are,
have been or might be affected by the alleged unlawful practices.
In May 2000, the Houston District Office of the EEOC provided us with
its "Letter of Determination and Conciliation Proposal" with respect to the
investigation pertaining to the Commissioner's Charge and made a final
determination that there is a sufficient evidentiary basis to sustain all
allegations in the Commissioner's Charge, except as to certain charges relating
to Asian Americans.
The Conciliation Proposal "invites [EGL] to actively engage in
conciliation to resolve this matter," and proposes certain monetary and
non-monetary remedies to "serve to facilitate confidential discussions which,
hopefully, will eventuate in an appropriate settlement." That proposed relief
includes (1) backpay and benefits for a class of minorities in the amount of
$6,000,000 (this is a $950,000 reduction from the amount claimed under the
preliminary assessment), (2) compensation for certain incumbent minorities and
women who were allegedly underpaid relative to white male counterparts in the
amount of $5,000,000, (3) compensation for certain minority and female employees
who were allegedly not promoted at rates comparable to their respective
employment rates in the amount of $2,950, 000, and (4) financial compensation
for certain other employees as a result of alleged "disparate discipline" in the
amount of $745, 000, all of which is exclusive of interest, compensatory and
punitive damages and costs.
The specific monetary relief as outlined above is $950,000 less than
that amount proposed in its preliminary assessment. The Conciliation Proposal
stated, however, that "the EEOC agreed that its claim [for monetary relief]
could be resolved for $20,000,000." The EEOC also sought non-monetary relief,
including hiring 244 minority employees, certain upward adjustments to salaries,
reinstatement of up to 15 employees and required
22
25
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
promotion of 30 employees. The Conciliation Proposal also sought other
non-monetary relief, including (1) reformation of our policies and practices
with respect to record keeping, recruiting, hiring and placement, reinstatement,
promotion and transfer, and corporate governance, (2) revision of certain job
descriptions, (3) institution of employee and supervisory training, and (4) the
institution of specified procedures and steps with respect to such matters.
We believe that the Houston District Office's May 2000 Determination
finding systemic discrimination is unsupported by any credible evidence and was
rendered by the agency in part due to agency bias against us and our Chief
Executive Officer because of our vigorous defense of this matter. We accepted
the EEOC's offer to conciliate this matter and have participated in numerous
conciliation conferences with the EEOC during the past few months.
Certain individual employees have brought charges of this nature
against us in the ordinary course of business. Additionally, following the
issuance of the EEOC's Determination in May 2000, a lawsuit was filed on May 12,
2000 in the U.S. District Court for the Eastern District of Pennsylvania (Civil
Action No. 00-CV-2461) by Augustine Dube, Noelle Davis, Kshanti Morris and Ruben
Capaletti, who are former employees or individuals who had unsuccessfully
applied for a position with us. Four additional plaintiffs joined the suit in
late July 2000. The lawsuit alleges discrimination and adopts the EEOC's
conclusions in their entirety. Although the named plaintiffs on this lawsuit
seek to represent a class of individuals, no class action has yet been approved
by the court, and the plaintiff's request for class certification has been
preliminarily denied. In January 2001, the EEOC was allowed to intervene in the
case, which could allow claims to be brought with respect to a class of
individuals. At that time, the court in Philadelphia also granted our request
that the case be transferred to the U.S. District Court for the Southern
District of Texas in Houston.
The lawsuit seeks unspecified damages that are not limited by the
relief sought by the EEOC in the Conciliation Proposal. Because the lawsuit is
essentially based upon the contested EEOC allegations described above, we fully
intend to defend ourselves in both matters but would consider a settlement with
both the plaintiffs and the EEOC that we believe is reasonable in both monetary
and non-monetary terms. We initiated a mediation process with both the EEOC and
the plaintiffs in the lawsuit in a effort to resolve this matter but results to
date have been unsuccessful. There can be no assurance as to what will be the
amount of time it will take to resolve the Commissioner's Charge, the other
lawsuits and related issues or the degree of any adverse effect these matters
may have on us and our financial condition and results of operation. A
substantial settlement payment or judgment could result in a significant
decrease in working capital and liquidity. See Item 2. "Management's Discussion
and Analysis of Financial Condition and Results of Operations " and Note 9 of
the notes to condensed consolidated financial statements for a discussion of
commitments and contingencies.
From time to time we are a party to various legal proceedings arising
in the ordinary course of business. Except as described above, we are not
currently a party to any material litigation and are not aware of any litigation
threatened against us, which we believe would have a material adverse effect on
our business.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
(b) Adoption of Shareholder Rights Plan. On May 23, 2001, the Company's
Board of Directors declared a dividend of one right (Right) for each
outstanding share of the Company's Common Stock, par value $.001 per
share, to shareholders of record at the close of business on June 4,
2001. The Rights will have certain anti-takeover effects. The Rights
will cause substantial dilution to any person or group that attempts to
acquire the Company without the approval of the Company's Board of
Directors. As a result, the overall effect of the Rights may be to
render more difficult or discourage any attempt to acquire the Company
even if such acquisition may be favorable to the interests of the
Company's shareholders. Because the Company's Board of Directors can
redeem the Rights or approve a permitted offer under the
23
26
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
plan, the Rights should not interfere with a merger or other business
combination approved by the Board of Directors of the Company. The
Rights are described in Note 8 of the notes to condensed consolidated
financial statements and in our Form 8-K filed on May 24, 2001.
(c) As previously reported, included under Management's Discussion and
Analysis of Financial Condition and Results of Operations Overview," in
the Company's Form 10-K for the fiscal year ended December 31, 2000,
the Company agreed to issue shares of Company common stock as
additional partial consideration for the January 7, 2000 acquisition of
Commercial Transport International (Canada) Ltd. and Fastair Cargo
Systems Ltd. Earlier this year, 195,481 shares of Common Stock were
issued in respect of the Company's $3.5 million obligation in
connection with this acquisition. Such transaction is exempt from the
registration requirements of the Securities Act by virtue of Section
4(2) thereof as a transaction not involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS
(a) ANNUAL MEETING OF SHAREHOLDERS ON MAY 23, 2001
(b) ELECTION OF DIRECTORS FOR AGAINST WITHHELD ABSTAIN BROKER NONVOTES
--------------------- ---------- ------- -------- ------- ---------------
James R.Crane 44,605,122 * 87,784 -- *
Peter Gibert 44,602,907 * 89,999 -- *
Frank J. Hevrdejs 44,604,130 * 88,776 -- *
Neil E. Kelley 44,604,823 * 88,083 -- *
Norwood W. Knight-Richardson 44,605,678 * 87,228 -- *
Rebecca A. McDonald 44,603,169 * 89,737 -- *
Elijio V. Serrano 44,603,587 * 89,319 -- *
(c) PROPOSALS
---------
Approval of Appointment of
PricewaterhouseCoopers LLP as
Independent Accountants 44,618,631 66,813 * 7,462 *
* Not Applicable
24
27
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
ITEM 5. OTHER INFORMATION
FORWARDING LOOKING STATEMENTS
The statements contained in all parts of this document that are not
historical facts are, or may be deemed to be, forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements include, but
are not limited to, those relating to the following: the effect and benefits of
the Circle merger; the proposed new credit facility; expectations or
arrangements for the Company's leased planes and the effects thereof; the
expected completion and/or effects of the Plan; the termination of joint
venture/agency agreements and the Company's ability to recover assets in
connection therewith; the Company's plan to reduce costs (including the scope,
timing, impact and effects thereof); past and planned headcount reductions
(including the scope, timing, impact and effects thereof); potential annualized
cost savings; changes in the Company's dedicated charter fleet strategy
(including the scope, timing, impact and effects thereof); the Company's plans
to outsource leased planes, the Company's ability to improve its cost structure;
consolidation of field offices (including the scope, timing and effects
thereof), the Company's ability to restructure the debt covenants in its credit
facility, if at all; anticipated future recoveries from actual or expected
sublease agreements; the sensitivity of demand for the Company's services to
domestic and global economic conditions; cost management efforts; expected
growth; construction of new facilities; the results, timing, outcome or effect
of matters relating to the Commissioner's Charge or other litigation and our
intentions or expectations of prevailing with respect thereto; future operating
expenses; future margins; use of credit facility proceeds; fluctuations in
currency valuations; fluctuations in interest rates; future acquisitions and any
effects, benefits, results, terms or other aspects of such acquisitions; 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; future expectations
and outlook and any other statements regarding future growth, cash needs,
terminals, operations, business plans and financial results and any other
statements which are not historical facts. When used in this document, the words
"anticipate," "estimate," "expect," "may," "plans," "project," and similar
expressions are intended to be among the statements that identify
forward-looking statements.
The Company's results may differ significantly from the results
discussed in the forward-looking statements. Such statements involve risks and
uncertainties, including, but not limited to, those relating to costs, delays
and difficulties related to the Circle merger, including the integration of its
systems, operations and other businesses, termination of joint ventures, charter
aircraft arrangements (including expected losses, increased utilization and
other effects), the Company's dependence on its ability to attract and retain
skilled managers and other personnel; the intense competition within the freight
industry; the uncertainty of the Company's ability to manage and continue its
growth and implement its business strategy; the Company's dependence on the
availability of cargo space to serve its customers; the potential for
liabilities if certain independent owner/operators that serve the Company are
determined to be employees; effects of regulation; results of litigation
(including the results and outcome of the Commissioner's Charge); the Company's
vulnerability to general economic conditions and dependence on its principal
customers; the timing, success and effects of the Company's restructuring and
other changes to its leased aircraft arrangements, whether the Company enters
into arrangements with third parties relating to such leased aircraft and the
terms of such arrangements, the results of the new air network, whether the
Company enters into definitive agreements for either new lift capacity or for a
new credit facility and the terms of any such agreements, the ability of the
Company's lead bank to syndicate such a facility and the market for such
syndications, responses of customers to the Company's actions by the Company's
principal shareholder; the Company's potential exposure to claims involving its
local pickup and delivery operations; risk of international operations; risks
relating to acquisitions; the Company's future financial and operating results,
cash needs and demand for its services; and the Company's ability to maintain
and comply with permits and licenses; as well as other factors detailed in the
Company's filings with the Securities and Exchange Commission including those
detailed in the subsection entitled "Factors That May Affect Future Results and
Financial Condition" in the Company's Form 10-K for the year ended December 31,
2000. 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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EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS.
*2(i) Agreement and Plan of Merger, dated as of July 2, 2000 among EGL,
Inc., EGL Delaware I, Inc. and Circle International Group, Inc.
(Exhibit 2.1 to the Company's Current Report on Form 8-K filed on
July 5, 2000).
*3(i) Second Amended and Restated Articles of Incorporation of the
Company, as amended. (Filed as Exhibit 3(i) to the Company's Form
8-A/A filed with the Securities and Exchange Commission on
September 29, 2000).
3(ii) Statement of Resolutions Establishing the Series A Junior
Participating Preferred Stock of the Company.
*3(iii) Amended and Restated Bylaws of the Company, as amended (Exhibit
3(ii) to the Company's Form 10-Q for the fiscal quarter ended June
30, 2000).
*4 Rights Agreement dated as of May 23, 2001 between EGL, Inc. and
Computershare Investor Services, L.L.C., as Rights Agent, which
includes as Exhibit B the form of Rights Certificate and as
Exhibit C the Summary of Rights to Purchase Common Stock. (Exhibit
1 to the Company's Current Report on Form 8-K dated May 23, 2001).
10(i) First Amendment dated June 28, 2001 to Credit Agreement dated
January 5, 2001 between EGL, Bank of America, N.A., SouthTrust
Bank, The Bank of Tokyo-Mitsubishi, Ltd. and the other financial
institutions named therein.
------------
* Incorporated by reference as indicated.
(b) REPORTS ON FORM 8-K.
The Company filed a report of Form 8-K on May 24, 2001 related to
the Rights Agreement dated as of May 23, 2001 between EGL, Inc.
and Computershare Investor Services, L.L.C., as Rights Agent.
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EGL, INC.
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.
EGL, INC.
----------------------------------------
(Registrant)
Date: August 14, 2001 BY: /s/ James R. Crane
----------------------------------------
James R. Crane
Chairman, President and Chief
Executive Officer
Date: August 14, 2001 BY: /s/ Elijio V. Serrano
----------------------------------------
Elijio V. Serrano
Chief Financial Officer
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EGL, INC.
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
-------- -----------
*2(i) Agreement and Plan of Merger, dated as of July 2, 2000 among EGL, Inc.,
EGL Delaware I, Inc. and Circle International Group, Inc. (Exhibit 2.1
to the Company's Current Report on Form 8-K filed on July 5, 2000).
*3(i) Second Amended and Restated Articles of Incorporation of the Company,
as amended. (Filed as Exhibit 3(i) to the Company's Form 8-A/A filed
with the Securities and Exchange Commission on September 29, 2000).
3(ii) Statement of Resolutions Establishing the Series A Junior Participating
Preferred Stock of the Company.
*3(iii) Amended and Restated Bylaws of the Company, as amended (Exhibit 3(ii)
to the Company's Form 10-Q for the fiscal quarter ended June 30, 2000).
*4 Rights Agreement dated as of May 23, 2001 between EGL, Inc. and
Computershare Investor Services, L.L.C., as Rights Agent, which
includes as Exhibit B the form of Rights Certificate and as Exhibit C
the Summary of Rights to Purchase Common Stock. (Exhibit 1 to the
Company's Current Report on Form 8-K dated May 23, 2001).
10(i) First Amendment dated June 28, 2001 to Credit Agreement dated January
5, 2001 between EGL, Bank of America, N.A., SouthTrust Bank, The Bank
of Tokyo-Mitsubishi, Ltd. and the other financial institutions named
therein.
------------
* Incorporated by reference as indicated.
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