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 MARCH 31, 2002
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
(Address of Principal Executive Offices, Including Registrant's Zip Code,
and Telephone Number, Including Area Code)
N/A
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 May 1, 2002 the number of shares outstanding of the registrant's common stock
was 47,890,703 (net of 1,087,285 treasury shares).
EGL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Operations for the Three
Months ended March 31, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows for
the Three Months ended March 31, 2002 and 2001 3
Condensed Consolidated Statement of Stockholders'
Equity for the Three Months ended March 31, 2002 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
PART II. OTHER INFORMATION 25
SIGNATURES 29
INDEX TO EXHIBITS 30
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
MARCH 31 DECEMBER 31
ASSETS 2002 2001
------------- ----------------
Current assets:
Cash and cash equivalents $ 107,021 $ 77,440
Restricted cash 5,522 5,413
Short-term investments and marketable securities 1,169 3,442
Trade receivables, net of allowance of $12,489 and $11,628 341,993 365,505
Other receivables 9,712 10,868
Deferred income taxes 13,549 13,626
Income tax receivable 5,189 3,125
Other current assets 29,976 29,411
------------- ----------------
Total current assets 514,131 508,830
Property and equipment, net 146,313 152,922
Investments in unconsolidated affiliates 40,034 46,018
Goodwill, net 78,935 78,901
Other assets, net 15,783 14,237
------------- ----------------
Total assets $ 795,196 $ 800,908
============= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 7,762 $ 7,950
Trade payables and accrued transportation costs 224,584 216,073
Accrued salaries and related costs 22,009 27,982
Accrued restructuring merger and integration costs 6,906 8,879
Other liabilities 57,454 54,048
------------- ----------------
Total current liabilities 318,715 314,932
Notes payable 101,280 103,774
Deferred income taxes 66 2,884
Other noncurrent liabilities 6,601 6,194
------------- ----------------
Total liabilities 426,662 427,784
------------- ----------------
Minority interests 7,332 7,033
------------- ----------------
Commitments and contingencies
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; 50,050
and 50,065 shares issued; 48,963 and 48,939 shares outstanding 49 49
Additional paid-in capital 158,325 158,317
Retained earnings 260,795 264,712
Accumulated other comprehensive loss (38,849) (37,045)
Unearned compensation (476) (635)
Treasury stock, 1,087 and 1,126 shares held (18,642) (19,307)
------------- ----------------
Total stockholders' equity 361,202 366,091
------------- ----------------
Total liabilities and stockholders' equity $ 795,196 $ 800,908
============= ================
See notes to unaudited condensed consolidated financial statements.
1
EGL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
----------- -----------
Revenues $371,999 $422,319
Cost of transportation 217,879 263,129
----------- -----------
Net revenues 154,120 159,190
Operating expenses:
Personnel costs 85,360 94,541
Other selling, general and administrative expenses 67,300 71,413
Merger related restructuring and integration costs (Note 7) - 7,545
----------- -----------
Operating income (loss) 1,460 (14,309)
Nonoperating expense, net (8,230) (961)
----------- -----------
Loss before benefit for income taxes (6,770) (15,270)
Benefit for income taxes (2,640) (6,219)
----------- -----------
Loss before cumulative effect of change in accounting for
negative goodwill (4,130) (9,051)
Cumulative effect of change in accounting for negative
goodwill (Note 2) 213 -
----------- -----------
Net loss $ (3,917) $ (9,051)
=========== ===========
Basic and diluted loss per share before
cumulative effect of change in accounting for negative goodwill $ (0.09) $ (0.19)
Cumulative effect of change in accounting for negative goodwill $ 0.01 $ -
Basic and diluted net loss per share $ (0.08) $ (0.19)
Basic and diluted weighted-average common shares outstanding 47,859 47,081
See notes to unaudited condensed consolidated financial statements.
2
EGL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
------------ -----------
Cash flows from operating activities:
Net loss $ (3,917) $ (9,051)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,479 7,176
Provision for doubtful accounts, net of write offs 3,171 (1,226)
Amortization of unearned compensation 159 147
Deferred income tax benefit (2,745) (13,919)
Tax benefit of stock options exercised 58 1,284
Equity in (earnings) losses of affiliates, net of
dividends received (669) 287
Minority interests, net of dividends paid 319 149
Transfer to restricted cash (109) -
Cumulative effect of change in accounting for negative
goodwill (Note 2) (213) -
Impairment of investment in an unconsolidated affiliate 6,653 -
Other 73 (674)
Net effect of changes in working capital 21,592 (9,155)
------------ -----------
Net cash provided by (used in) operating activities 31,851 (24,982)
------------ -----------
Cash flows from investing activities:
Capital expenditures (3,705) (17,327)
Proceeds from sales of other assets 2,820 -
Proceeds from sale-lease back transactions 2,462 -
Acquisitions of businesses, net of cash acquired - (639)
Other - (376)
------------ -----------
Net cash provided by (used in) investing activities 1,577 (18,342)
------------ -----------
Cash flows from financing activities:
Repayment of notes payable (2,551) -
Increase in borrowings on notes payable - 39,799
Issuance of common stock, net of related costs 469 717
Proceeds from exercise of stock options 146 1,938
------------ -----------
Net cash provided by (used in) financing activities (1,936) 42,454
------------ -----------
Effect of exchange rate changes on cash (1,911) (4,370)
------------ -----------
Increase (decrease) in cash and cash equivalents 29,581 (5,240)
Cash and cash equivalents, beginning of the period 77,440 60,001
------------ -----------
Cash and cash equivalents, end of the period $ 107,021 $ 54,761
============ ===========
See notes to unaudited condensed consolidated financial statements.
3
EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except per share amounts)
Accumulated
Common stock Additional Unearned Compre- Treasury stock other
-------------- paid-in compen- Retained hensive ------------------- comprehensive
Shares Amount capital sation earnings loss Shares Amount loss Total
------ ------ ---------- -------- --------- --------- ------ --------- ------------- ---------
Balance at December 31, 2001 48,939 $ 49 $158,317 $ (635) $ 264,712 (1,126) $ (19,307) $ (37,045) $ 366,091
Comprehensive loss:
Net loss (3,917) $ (3,917) (3,917)
Change in value of marketable
securities, net 3 3 3
Change in value of cash flow
hedge 380 380 380
Foreign currency translation
adjustments (2,187) (2,187) (2,187)
--------
Comprehensive loss $ (5,721)
========
Issuance of shares under
stock purchase plan (196) 39 665 469
Exercise of stock options,
including tax benefit 24 204 204
Amortization of unearned
compensation 159 159
------ ----- --------- ------ --------- ------ --------- --------- ---------
Balance at March 31, 2002 48,963 $ 49 $ 158,325 $ (476) $ 260,795 (1,087) $ (18,642) $ (38,849) $ 361,202
====== ===== ========= ====== ========= ====== ========= ======== =========
See notes to unaudited condensed consolidated financial statements.
4
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 March 31, 2002 and the
results of its operations for three months ended March 31, 2002. Results of
operations for the three months ended March 31, 2002 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 to 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 to over
100 countries on six continents through offices around the world as well as
through its worldwide network of exclusive and nonexclusive agents. The
principal markets for all lines of business are North America, Europe and Asia
with significant operations in the Middle East, Africa, South America and South
Pacific (Note 11).
The accompanying condensed consolidated financial statements include
EGL and all of its wholly-owned subsidiaries. Investments in 50% or less owned
affiliates, over which the Company has significant influence, are accounted for
by the equity method. All significant intercompany balances and transactions
have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management considers many factors in selecting appropriate
operational and financial accounting policies and controls, and in developing
the estimates and assumptions that are used in the preparation of these
financial statements. Management must apply significant judgment in this
process. Among the factors, but not fully inclusive of all factors that may be
considered by management in these processes are: the range of accounting
policies permitted by U.S. generally accepted accounting principles;
management's understanding of the Company's business - both historical results
and expected future results; the extent to which operational controls exist that
provide high degrees of assurance that all desired information to assist in the
estimation is available and reliable or whether there is greater uncertainty in
the information that is available upon which to base the estimate; expectations
of the future performance of the economy - domestically, globally and within
various sectors that serve as principal customers and suppliers of goods and
services; expected rates of change, sensitivity and volatility associated with
the assumptions used in developing estimates; and whether historical trends are
expected to be representative of future trends. The estimation process often
times may yield a range of potentially reasonable estimates of the ultimate
future outcomes and management must select an amount that lies within that range
of reasonable estimates - which may result in the selection of estimates which
could be viewed as conservative or aggressive by others - based upon the
quantity, quality and risks associated with the variability that might be
expected from the future outcome and the factors considered in developing the
estimate. Management attempts to use its business and financial accounting
judgment in selecting the most appropriate estimate, however, actual results
could and will differ from those estimates.
5
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 supersedes 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. The Company adopted FAS 141 effective January 1, 2002
and recognized approximately $213,000 of negative goodwill as the cumulative
effect of a change in accounting principle.
SFAS 142 supersedes 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 provision of SFAS 142
is effective for fiscal years beginning after December 15, 2001. The Company is
in the process of adopting SFAS 142. (See Note 4)
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred and that the
associated long-lived asset retirement costs are capitalized. This statement is
effective for fiscal years beginning after June 15, 2002. The Company will adopt
SFAS 143 beginning January 1, 2003 and does not believe that it will have any
material impact on its results of operations, financial position or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes FASB Statement No. 121, Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS
144 requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
broadens the presentation of discontinued operations to include more disposal
transactions. The Company adopted SFAS 144 as of January 1, 2002 with no impact
on results of operations, financial condition, or cash flows.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. SFAS 145 eliminates the requirement that
gains and loss from the extinguishments of debt be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Further,
SFAS 145 amends paragraph 14(a) of SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. The amendment requires that a lease
modification results in recognition of the gain or loss in the financial
statements, is subject to SFAS No. 66, Accounting for Sales of Real Estate, if
the leased asset is real estate (including integral equipment), and is subject
in its entirety to the sale-leaseback rules of SFAS No. 98, Accounting for
Leases: Sales-Leaseback Transactions involving Real Estate, Sales-Type Leases of
Real Estate, Definition of the Lease Term, and Initial Direct costs of Direct
Financing Leases. Generally, SFAS 145 is effective for transactions occurring
after May 15, 2002.
6
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 -DERIVATIVE INSTRUMENTS:
In April 2001, the Company entered into an interest rate swap
agreement, which had 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 or any substitutive debt agreements the Company enters
into. Accordingly, the change in the fair value of the swap agreement was
recorded in other comprehensive income (loss). In December 2001, the Company
issued $100 million of 5% convertible subordinated notes due December 15, 2006.
The proceeds from the notes substantially retired the LIBOR based debt
outstanding under the then-existing revolving credit agreement. The interest
rate on the convertible subordinated notes is fixed; therefore, the variability
of the future interest payments has been eliminated. The swap agreement no
longer qualifies for cash flow hedge accounting and was undesignated as of
December 7, 2001. The net loss on the swap agreement included in other
comprehensive income (loss) as of December 7, 2001 was $2.0 million and is being
amortized to interest expense over the remaining life of the swap agreement and
subsequent changes in the fair value of the swap agreement will be recorded in
interest expense. During the three months ended March 31, 2002, the Company
recorded $149,000, net interest expense relating to amortization and changes in
fair value of the swap agreement.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS:
As discussed in Note 2, the Company is in the process of adopting SFAS
142 which requires the suspension of the amortization of goodwill and certain
intangible assets with an indefinite useful life. The Company has suspended its
amortization of goodwill and does not have any intangible assets that have an
indefinite useful life.
The Company is in the process of performing the required analysis under
SFAS 142 to test for impairment, if any, of the carrying value of the Company's
goodwill. The Company's preliminary assessment indicates no material impact to
the Company's financial statements when this standard is fully adopted.
The following table shows the unaudited pro forma effects of SFAS 142
for historical results had goodwill not been amortized during that period:
THREE MONTHS ENDED
MARCH 31, 2001
---------------------
Reported net loss $ (9,051)
Adjustments:
Amortization of goodwill 1,174
-------------
Adjusted net loss $ (7,877)
Reported net loss per share - basic $ (0.19)
Adjusted net loss per share - basic $ (0.17)
Reported net loss per share - diluted $ (0.19)
Adjusted net loss per share - diluted $ (0.17)
NOTE 5 - IMPAIRMENT OF INVESTMENT IN AN UNCONSOLIDATED AFFILIATE:
In July 2000, the Company purchased 24.5% of the outstanding common
stock of Miami Air, a privately held domestic and international passenger and
freight charter airline headquartered in Miami, Florida for approximately $6.3
million in cash. The Company's primary objective for engaging in the transaction
was to develop a business relationship with Miami Air in order to obtain access
to an additional source of reliable freight charter capacity.
In connection with the Company's investment in Miami Air, the two
parties entered into an aircraft charter agreement whereby Miami Air agreed to
convert certain of its passenger aircraft to cargo aircraft and to provide
aircraft
7
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
charter services to the Company for a three-year term. The Company caused a $7
million standby letter of credit to be issued in favor of certain creditors of
Miami Air to assist Miami Air in financing the conversion of its aircraft. Miami
Air agreed to pay the Company an annual fee equal to 3.0% of the face amount of
the letter of credit and to reimburse the Company for any payments owed by the
Company in respect of the letter of credit. As of March 31, 2002, Miami Air had
no funded debt under the line of credit that is supported by the $7 million
standby letter of credit. However, Miami Air had outstanding $2.3 million in
letters of credit supported by the $7 million standby letter of credit.
During the first quarter of 2002, there were three aircraft subject to
the aircraft charter agreement for which the Company paid Miami Air $4.9
million. In May 2002, the Company and Miami Air agreed to cancel the aircraft
charter agreement for the three planes as of May 9, 2002 and the Company agreed
to pay $450,000 for services rendered in May 2002 and aircraft repositioning
costs.
The weak economy and events of September 11 significantly reduced the
demand for cargo plane services, particularly 727 cargo planes. As a result, the
market value of these planes declined dramatically. Miami Air informed EGL that
the amount due their bank (which are secured by seven 727 planes) is
significantly higher than the market value of those planes. In addition, Miami
Air has outstanding operating leases for 727 and 737 airplanes at above current
market rates, including two planes that are expected to be delivered in 2002.
Throughout the fourth quarter of 2001 and the first quarter of 2002, Miami Air
was in discussions with their bank and lessors to obtain debt concessions on the
seven 727 planes, to buy out the lease on a 727 cargo plane and to reduce the
rates on the 737 passenger planes and had informed the Company that its
creditors had indicated a willingness to make concessions. In May 2002, the
Company was informed that Miami Air's creditors were no longer willing to make
concessions and that negotiations with creditors had reached an impasse and no
agreement appeared feasible. Accordingly, the Company recognized an other than
temporary impairment of the carrying value of its $6.7 million common stock
investment in Miami Air, which carrying value includes a $509,000 increase in
value attributable to EGL's 24.5% share of Miami Air's first quarter 2002
results of operations. In addition, the Company recorded a reserve of $1.3
million for its estimated exposure on the outstanding letters of credit
supported by the $7 million standby letter of credit. There can be no assurance
that such expense will not exceed such estimate.
NOTE 6 - 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 and convertible notes (see Note 8) are the only
potentially dilutive share equivalents the Company had outstanding for the
periods presented. No shares related to options or convertible notes were
included in diluted earnings per share for the three months ended March 31, 2002
and 2001, respectively, because their effect would have been antidilutive as the
Company incurred a net loss during those periods.
NOTE 7 - MERGER TRANSACTION, RESTRUCTURING AND INTEGRATION COSTS:
During the three months ended March 31, 2001, the Company incurred $7.5
million of merger related restructuring and integration costs related to its
acquisition of Circle in 2000. During the three months ended March 31, 2002, the
Company did not incur any such additional merger related costs.
The Company maintains a reserve for charges established under its plan
to integrate the former EGL and Circle operations and to eliminate duplicate
facilities resulting from the merger. The principal components of the plan
involved 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, the terms of the plan were completed in
2001. The remaining unpaid accrued charges as of March 31, 2002 are as follows:
8
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ACCRUED ACCRUED
LIABILITY LIABILITY
DECEMBER 31, PAYMENTS/ MARCH 31,
(in thousands) 2001 REDUCTIONS 2002
-------------- ------------ -------------
Severance costs $ 913 $ -- $ 913
Future lease obligations, net of subleasing 6,963 (1,621) 5,342
Termination of joint venture/agency agreements 1,003 (352) 651
-------------- ------------ -------------
$ 8,879 $ (1,973) $ 6,906
============== ============ =============
The payments to be made for remaining future lease obligations is net
of approximately $22.4 million in anticipated future recoveries from actual or
expected sublease agreements. There is a risk that subleasing transactions will
not occur within the same timing or pricing assumptions made by the Company, or
at all, which could result in future revisions to these estimates.
NOTE 8 - BORROWINGS
Convertible subordinated notes
In December 2001, the Company issued $100 million aggregate principal
amount of 5% convertible subordinated notes. The notes bear interest at an
annual rate of 5%. Interest is payable on June 15 and December 15 of each year,
beginning June 15, 2002. The notes mature on December 15, 2006. Deferred
financing fees incurred in connection with the transaction totaled $3.2 million
and are being amortized over five years as a component of interest expense.
The notes are convertible at any time up to four trading days prior to
maturity into shares of our common stock at a conversion price of approximately
$17.43 per share, subject to certain adjustments, which was a premium of 20.6%
of the stock price at the issuance date. This is equivalent to a conversion rate
of 57.3608 shares per $1,000 principal amount of notes. Upon conversion, a
noteholder will not receive any cash representing accrued interest, other than
in the case of a conversion, in connection with an optional redemption. The
shares that are potentially issuable may impact the Company's diluted earnings
per share calculation in future periods by approximately 5.7 million shares. As
of March 31, 2002, the fair market value of these notes was $90.9 million.
The Company may redeem the notes on or after December 20, 2004 at
specified redemption prices, plus accrued and unpaid interest to, but excluding,
the redemption date. Upon a change in control, a noteholder may require the
Company to purchase its notes at 100% of the principal amount of the notes, plus
accrued and unpaid interest to, but excluding, the purchase date.
The notes are general unsecured obligations of the Company. The notes
are subordinated in right of payment to all of the Company's existing and future
senior indebtedness as defined in the indenture. The Company and its
subsidiaries are not prohibited from incurring senior indebtedness or other debt
under the indenture. The notes impose some restrictions on mergers and sales of
substantially all of the Company's assets.
Credit agreements
On January 5, 2001, the Company entered into an agreement (the Credit
Facility) with various financial institutions, with Bank of America, N.A. (the
Bank) serving as administrative agent, to replace its previous credit facility.
9
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Credit Facility provided a $150 million revolving line of credit and
included a $30 million sublimit for the issuance of letters of credit and a $15
million sublimit for a swing line loan. The Credit Facility was scheduled to
mature on January 5, 2004. The Company was subject to certain covenants under
the terms of the Credit Facility. The Company was in violation of several of
these covenants at various times during 2001. As a result, the Credit Facility
was amended on June 28, 2001 and again on November 9, 2001. In connection with
the November 9, 2001 amendment, the borrowing capacity of the Credit Facility
was reduced and the Company wrote off approximately $694,000 of deferred debt
costs associated with the Credit Facility.
Effective December 20, 2001, the Company amended and restated the
Credit Facility. The amended and restated credit facility (Restated Credit
Facility), which was amended effective as of March 7, 2002, is with a syndicate
of three financial institutions, with the Bank as collateral and administrative
agent for the lenders, and matures on December 20, 2004. The Restated Credit
Facility provides a revolving line of credit of up to the lesser of:
o $75 million, which will be increased to $100 million if an additional
$25 million of the revolving line of credit commitment is syndicated to
other financial institutions, or
o an amount equal to:
o up to 85% of the net amount of the Company's billed and posted
eligible accounts receivable and the billed and posted eligible
accounts receivable of its wholly owned domestic subsidiaries and
its operating subsidiary in Canada, subject to some exceptions and
limitations, plus
o up to 85% of the net amount of the Company's billed and unposted
eligible accounts receivable and billed and unposted eligible
accounts receivable of its wholly owned domestic subsidiaries owing
by account debtors located in the United States, subject to a
maximum aggregate availability cap of $10 million, plus
o up to 50% of the net amount of the Company's unbilled, fully earned
and unposted eligible accounts receivable and unbilled, fully
earned and unposted eligible accounts receivable of its wholly
owned domestic subsidiaries owing by account debtors located in the
United States, subject to a maximum aggregate availability cap of
$10 million, minus
o reserves from time to time established by the Bank in its
reasonable credit judgment.
The aggregate of the last four sub-bullet points above is referred to
as the Company's eligible borrowing base. The Restated Credit Facility includes
a $50 million letter of credit subfacility. The Company had $19.0 million in
standby letters of credit outstanding as of March 31, 2002 under this facility.
The maximum amount that the Company can borrow at any particular time
may be less than the amount of its revolving credit line because the Company is
required to maintain a specified amount of borrowing availability under the
Restated Credit Facility based on the Company's eligible borrowing base. The
required amount of borrowing availability is currently $40 million, which amount
is subject to adjustment to $25 million if certain post-closing conditions are
satisfied. The required amount of borrowing availability is subject to further
adjustment to $15 million if the Company's EBITDA is (1) $9.7 million for the
fiscal quarter ended December 31, 2001, (2) $9.8 million for the fiscal quarter
ending March 31, 2002 or (3) $13.2 million for the fiscal quarter ending June
30, 2002. The amount of borrowing availability is determined by subtracting the
following from the Company's eligible borrowing base: (a) the Company's
borrowings under the Restated Credit Facility; and (b) the Company's accounts
payable and the accounts payable of all of its domestic subsidiaries and its
Canadian operating subsidiary that remain unpaid more than the longer of (i)
sixty days from their respective invoice dates or (ii) thirty days from their
respective due dates.
For each tranche of principal borrowed under the revolving line of
credit, the Company may elect an interest rate of either LIBOR plus an
applicable margin of 2.50%, which is subject to adjustment after June 30, 2002
to 2.00% to 2.75%, which varies based upon availability under the line, or the
prime rate announced by the Bank, plus, if the borrowing availability is less
than $25 million, an applicable margin of 0.25%.
The Company refers to borrowings bearing interest based on LIBOR as a
LIBOR tranche and to other borrowings as a prime rate tranche. The interest on a
LIBOR tranche is payable on the last day of the interest period (one, two or
three months, as selected by the Company) for such LIBOR tranche. The interest
on a prime rate tranche is payable monthly.
A termination fee would be payable upon termination of the Restated
Credit Facility during the first two years after the closing thereof, in the
amount of 0.50% of the total revolving line commitment if the termination occurs
on or before the first anniversary of the closing and 0.25% of the total
revolving line commitment if the termination occurs
10
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
after the first anniversary, but on or before the second anniversary of such
closing (unless terminated in connection with a refinancing arranged or
underwritten by the Bank or its affiliates).
The Company is subject to certain covenants under the terms of the
Restated Credit Facility, including, but not limited to, (a) maintenance at the
end of each fiscal quarter of a minimum specified adjusted tangible net worth
and (b) quarterly and annual limitations on capital expenditures of $12 million
per quarter or $48 million cumulative per year.
The Restated Credit Facility also places restrictions on additional
indebtedness, dividends, liens, investments, acquisitions, asset dispositions,
change of control and other matters, is secured by substantially all of the
Company's assets, and is guaranteed by all domestic subsidiaries and the
Company's Canadian operating subsidiary. In addition, the Company will be
subject to additional restrictions, including restrictions with respect to
distributions and asset dispositions if the Company's eligible borrowing base
falls below $40 million. Events of default under the Restated Credit Facility
include, but are not limited to, the occurrence of a material adverse change in
the Company's operations, assets or financial condition or its ability to
perform under the Restated Credit Facility or that any of the Company's domestic
subsidiaries or its Canadian operating subsidiary.
As of March 31, 2002, the Company had available, unused borrowing
capacity of $50.1 million.
Other bank lines of credit and guarantees
The Company maintains a $10 million bank line of credit, in addition to
the $50 million subfacility under the Restated Credit Facility, to secure
customs bonds and bank letters of credit to guarantee certain transportation
expenses in foreign locations. At March 31, 2002, the Company was contingently
liable for approximately $5.9 million under outstanding letters of credit and
guarantees related to its $10 million line of credit obligations. The Company's
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 the
Restated Credit Facility discussed above. Additionally, several of the Company's
foreign operations guarantee amounts associated with the Company's custom
brokerage services. As of March 31, 2002 these outstanding guarantees
approximated $12.6 million.
NOTE 9 - OFF BALANCE SHEET FINANCING:
Sale/leaseback agreement
On March 31, 2002, the Company entered into a transaction whereby it
sold its San Antonio, Texas property with a net book value of $2.5 million to an
unrelated third party for $2.5 million, net of closing costs. One of the
Company's subsidiaries then leased the property for a term of 10 years, with
options to extend the initial term for up to 23 years. Under the terms of the
new lease agreement, the quarterly lease payment is approximately $84,750, which
amount is subject to escalation after the first year based on increases in the
Consumer Price Index. A loss of $42,000 on the sale of this property was
recognized in the three months ended March 31, 2002.
11
Synthetic lease agreements
The Company has entered into two operating lease arrangements that
involve a special purpose entity that acquired title to properties, paid for the
construction costs and leased to the Company, real estate at some of the
Company's terminal and warehouse facilities. This kind of leveraged financing
structure is commonly referred to as a "synthetic lease."
A synthetic lease is a form of lease financing that qualifies for
operating lease accounting treatment and under generally accepted accounting
principles is not reflected in the Company's balance sheet. Thus, the
obligations are not recorded as debt and the underlying properties are not
recorded as assets on the Company's balance sheet. Under a synthetic lease, the
Company's rental payments (which approximate interest amounts under the
synthetic lease financing) are treated as operating rent commitments and are
excluded from the Company's aggregate debt maturities. A synthetic lease is
generally preferable to a conventional real estate lease since the lessee
benefits from attractive interest rates, the ability to claim depreciation under
tax laws and the ability to participate in the development process.
Master operating synthetic lease
On April 3, 1998, the Company entered into a five-year $20 million
master operating synthetic lease agreement with two unrelated parties for
financing the acquisition, construction and development of terminal and
warehouse facilities throughout the United States as designated by the Company.
The lease facility was funded by a financial institution and is secured by the
properties to which it relates. Construction was completed during 2000 on five
terminal facilities.
Under the terms of the master operating synthetic 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 currently approximate
$112,000 per month. A balloon payment equal to the outstanding lease balances,
which were initially equal to the cost of the facility, is due in November 2002.
As of March 31, 2002, the aggregate lease balance was approximately $13.9
million.
The master operating synthetic lease agreement contains 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 synthetic
lease agreement, as amended on February 11, 2002, restricts the Company from
incurring debt in an amount greater than $30 million, except pursuant to a
single credit facility involving a commitment of not more than $110 million and
$100 million of 5% convertible subordinated notes.
The Company has an option, exercisable at anytime during the lease
term, and under particular circumstances may be obligated, to acquire the
financed facilities for an amount equal to the outstanding lease balance. If the
Company does not exercise the purchase option, and does not otherwise meet its
obligations, the Company is subject to a deficiency payment computed as the
amount equal to the outstanding lease balance minus the then current fair market
value of each financed facility within limits, up to a maximum of $13.7 million.
The Company expects that the amount of any deficiency payment would be expensed.
The Company may also have to find other suitable facilities to operate in or
potentially be subject to a reduction in revenues and other operating
activities.
Other synthetic lease and related capital lease
During 1998, Circle entered into two lease agreements related to one of
its domestic terminal facilities. One of the lease agreements relates to land
and is currently being accounted for as a synthetic operating lease. The Company
is required to make bi-annual payments of $139,000 for 10 years. At March 31,
2002, the lease balance was approximately $9.5 million.
A second agreement relates to the building and improvements and is
accounted for as capital lease rather than as a synthetic lease. Therefore, the
fixed asset and related liability for the second lease are included in the
accompanying condensed consolidated balance sheet. Property under the capital
lease is amortized over the lease term. As of March 31, 2002, the carrying value
of property held under the building and improvements lease was $3.5 million,
which is net of $2.1 million of accumulated amortization.
12
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - LITIGATION:
EEOC Settlement
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). 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 litigation. The
Company filed an Answer in the Philadelphia case and extensive discovery was
conducted. The individual plaintiffs sought 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, which was granted by the Court in Philadelphia on
January 31, 2001. 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. Subsequent to the settlement of the EEOC
action described below, the claims of one of the eight named plaintiffs were
ordered to binding arbitration at EGL's request. The Company recognized a charge
of $7.5 million in the fourth quarter of 2000 for its estimated cost of
defending and settling the asserted claims.
On October 2, 2001, the EEOC and EGL announced the filing of a Consent
Decree settlement. This settlement resolves all claims of discrimination and/or
harassment raised by the EEOC's Commissioner's Charge mentioned above. Under the
Consent Decree, EGL has agreed to pay $8.5 million into a fund (the Class Fund)
that will compensate individuals who claim to have experienced discrimination.
The settlement covers (1) claims by applicants arising between December 1, 1995
and December 31, 2000; (2) disparate pay claims arising between January 1, 1995
and April 30, 2000; (3) promotion claims arising between December 1, 1995 and
December 31, 1998; and (4) all other adverse treatment claims arising between
December 31, 1995 and December 31, 2000. In addition, EGL will contribute
$500,000 to establish a Leadership Development Program (the Leadership
Development Fund). This Program will provide training and educational
opportunities for women and minorities already employed at EGL and will also
establish scholarships and work study opportunities at educational institutions.
In entering the Consent Decree, EGL has not made any admission of liability or
wrongdoing. The Consent Decree was approved by the District Court in Houston on
October 1, 2001. It will become effective following the exhaustion of any
appeals by any individual plaintiffs or potential claimants. There is currently
one appeal pending before the United States Court of Appeals for the Fifth
Circuit which challenges the entry of the Consent Decree. We do not expect a
ruling on this appeal for the next four to six months. During the quarter ended
September 30, 2001, the Company accrued $10.1 million related to the settlement,
which includes the $8.5 million payment into the fund and $500,000 into the
leadership development program described above, administrative, legal fees and
other costs associated with the EEOC litigation and settlement.
The Consent Decree settlement provides that the Company establish and
maintain segregated accounts for the Class Fund and Leadership Development Fund.
The Company is required to make an initial deposit of $2.5 million to the Class
Fund within 30 days after the Consent Decree has been approved and fund the
remaining $6.0 million of the Class Fund in equal installments of $2.0 million
each on or before the fifth day of the first month of the calendar quarter
(January 5th, April 5th, and October 5th) which will occur immediately after the
effective date of the Consent Decree. The
13
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Leadership Development Fund will be funded fully at the time of the first
quarterly payment as discussed above. As of March 31, 2002 and December 31,
2001, the Company had funded $2.5 million into the Class Fund and $500,000 into
the Leadership Development Fund. This amount is included as restricted cash in
the accompanying condensed consolidated balance sheet. Total related accrued
liabilities included in the accompanying condensed consolidated balance sheet at
March 31, 2002 and December 31, 2001 were $14.2 million and $14.3 million,
respectively.
It is unclear whether some or all of the seven remaining individual
plaintiffs will attempt to participate under the Consent Decree or whether they
will elect to continue to pursue their claims on their own. To the extent any of
the individual plaintiffs or any other persons who might otherwise be covered by
the settlement opt out of the settlement, the Company intends to continue to
vigorously defend itself against their allegations. The Company currently
expects to prevail in its defense of any remaining individual claims. There can
be no assurance as to what the amount of time it will take to resolve the appeal
relating to the settlement of the Commissioner's Charge and 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.
Other
In addition to the EEOC matter, the Company is party to routine
litigation incidental to its business, which primarily involve other employment
matters or claims for goods lost or damaged in transit or improperly shipped.
Many of the other lawsuits to which the Company is a party are covered by
insurance and are being defended by Company's insurance carriers. The Company
has established reserves for these other matters and it is management's opinion
that the resolution of such litigation will not have a material adverse effect
on the Company's consolidated financial position.
NOTE 11 - 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 &
Middle East South
North America South America & Africa Pacific Eliminations Consolidated
------------- ------------- ------------ ------------ -------------- --------------
Three months ended March 31, 2002:
Total revenues $ 229,339 $ 16,881 $ 61,730 $ 75,694 $ (11,645) $ 371,999
Transfers between regions (3,501) (1,205) (3,497) (3,442) 11,645 -
------------- ------------ ------------- -------------- ------------- --------------
Revenues from customers $ 225,838 $ 15,676 $ 58,233 $ 72,252 $ - $ 371,999
============= ============ ============= ============== ============= ==============
Net revenues $ 103,000 $ 3,804 $ 28,189 $ 19,127 $ 154,120
============= ============ ============= ============== ==============
Income (loss) from operations $ (5,353) $ 332 $ 2,036 $ 4,445 $ 1,460
============= ============ ============= ============== ==============
Three months ended March 31, 2001:
Total revenues $ 272,775 $ 16,125 $ 59,084 $ 87,536 $ (13,201) $ 422,319
Transfers between regions (5,969) (1,154) (3,429) (2,649) 13,201 -
------------- ------------ ------------- -------------- ------------- --------------
Revenues from customers $ 266,806 $ 14,971 $ 55,655 $ 84,887 $ - $ 422,319
============= ============ ============= ============== ============= ==============
Net revenues $ 108,662 $ 3,475 $ 26,441 $ 20,612 $ 159,190
============= ============ ============= ============== ==============
Income (loss) from operations $ (23,380) $ (257) $ 2,633 $ 6,695 $ (14,309)
============= ============ ============= ============== ==============
Revenue from transfers between regions represents approximate amounts
that would be charged if an unaffiliated company provided the services. Total
regional revenue is reconciled with total consolidated revenue by eliminating
inter-regional revenue.
14
EGL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors, which have affected certain aspects of the Company's
financial position, and operating results during the periods included in the
accompanying unaudited condensed consolidated financial statements. This
discussion should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the annual financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001 (File No. 0-27288).
Three Months Ended March 31,
-----------------------------------------------------------
2002 2001
---------------------------- ----------------------------
% of % of
Amount Revenues Amount Revenues
------------- ------------ ------------- ------------
(in thousands, except percentages)
Revenues:
Air freight forwarding $279,787 75.2 $327,289 77.5
Ocean freight forwarding 43,608 11.7 44,021 10.4
Customs brokerage and other 48,604 13.1 51,009 12.1
------------- ------------ ------------- ------------
Revenues $371,999 100.0 $422,319 100.0
============= ============ ============= ============
% of % of
Amount Revenues Amount Revenues
------------- ------------ ------------- ------------
Net revenues:
Air freight forwarding $91,629 59.5 $95,317 59.9
Ocean freight forwarding 13,887 9.0 12,864 8.1
Customs brokerage and other 48,604 31.5 51,009 32.0
------------- ------------ ------------- ------------
Net revenues $154,120 100.0 $159,190 100.0
============= ============ ============= ============
Operating expenses:
Personnel costs 85,360 55.4 94,541 59.4
Other selling, general and
administrative expenses 67,300 43.7 71,413 44.9
Restructuring
and integration costs - 0.0 7,545 4.7
------------- ------------ ------------- ------------
Operating income (loss) 1,460 0.9 (14,309) (9.0)
Nonoperating expense, net (8,230) (5.3) (961) (0.6)
------------- ------------ ------------- ------------
Loss before benefit for income taxes (6,770) (4.4) (15,270) (9.6)
Benefit for income taxes (2,640) (1.7) (6,219) (3.9)
------------- ------------ ------------- ------------
Loss before change in accounting
for negative goodwill (4,130) (2.7) (9,051) (5.7)
Cumulative effect of change in
accounting for negative
goodwill (Note 2) 213 0.1 - 0.0
------------- ------------ ------------- ------------
Net loss $ (3,917) (2.6) $ (9,051) (5.7)
============= ============ ============= ============
15
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenue. Revenue decreased $50.3 million, or 11.9%, to $372.0 million
in the three months ended March 31, 2002 compared to $422.3 million in the three
months ended March 31, 2001 primarily due to decreases in air freight forwarding
revenue. Net revenue, which represents revenue less freight transportation
costs, decreased $5.1 million, or 3.2%, to $154.1 million in the three months
ended March 31, 2002 compared to $159.2 million in the three months ended March
31, 2001 due to a decrease in both air freight forwarding and customs brokerage
and other net revenues.
Air freight forwarding revenue. Air freight forwarding revenue
decreased $47.5 million, or 14.5%, to $279.8 million in the three months ended
March 31, 2002 compared to $327.3 million in the three months ended March 31,
2001 primarily as a result of volume decreases in North America and Asia
Pacific. The volume decreases are primarily due to the weakened U.S. economy.
North America was also adversely affected by the shift from air expedited
shipments (next flight out, next day or second day time definite shipments) to
economy ground deferred shipments (third and fourth day).
Air freight forwarding net revenue decreased $3.7 million, or 3.9%, to
$91.6 million in the three months ended March 31, 2002 compared to $95.3 million
in the three months ended March 31, 2001. The air freight forwarding margin
increased to 32.7% for the three months ended March 31, 2002 compared to 29.1%
for the three months ended March 31, 2001 reflecting the continuing actions
taken to reduce the dependence on the U.S. dedicated charter network and better
yield management, both consolidation mix and buying opportunities, on the
international freight forwarding service.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
decreased $0.4 million, or 0.9%, to $43.6 million in the three months ended
March 31, 2002 compared to $44.0 million in the three months ended March 31,
2001, while ocean freight forwarding net revenue increased $1.0 million, or
7.8%, to $13.9 million in the three months ended March 31, 2002 compared to
$12.9 million in the three months ended March 31, 2001. The decrease in revenues
was principally due to a reduction in consolidation activity in North America
offset by improved trading levels in Europe and Asia. The increase in net
revenues was primarily due to lower transportation costs mainly in Asia. This
resulted in improved ocean forwarding margins which increased to 31.8% in the
three months ended March 31, 2002 compared to 29.2% in the three months ended
March 31, 2001.
Customs brokerage and other revenue. Customs brokerage and other
revenue, which includes warehousing, distribution and other logistics services,
decreased $2.4 million, or 4.7%, to $48.6 million in the three months ended
March 31, 2002 compared to $51.0 million in the three months ended March 31,
2001 due to a decrease in import activity in North America attributable to the
general weakness in the business environment.
Personnel costs. Personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. Personnel costs decreased $9.1 million, or
9.6%, to $ 85.4 million in the three months ended March 31, 2002 compared to
$94.5 million in the three months ended March 31, 2001. As a percentage of net
revenue, personnel costs were 55.4% in the three months ended March 31, 2002
compared to 59.4% in the three months ended March 31, 2001. The reduction in
personnel costs is a result of headcount reductions throughout 2001 which
eliminated approximately 1,100 regular full-time employees, controls in the use
of contract labor and a temporary salary reduction for five pay periods
implemented in the U.S. during the first quarter of 2002.
Other selling, general and administrative expenses. Other selling,
general and administrative expenses, excluding transaction, restructuring and
integration costs, decreased $4.1 million, or 5.7%, to $67.3 million in the
three months ended March 31, 2002 compared to $71.4 million in the three months
ended March 31, 2001. As a percentage of net revenue, other selling, general and
administrative expenses, excluding transaction, restructuring and integration
costs,
16
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
were 43.7% in the three months ended March 31, 2002 compared to 44.9% in the
three months ended March 31, 2001. This decrease is primarily due to a
management focus on cost savings, realization of merger related cost synergies,
and a decrease in goodwill amortization expense due to the implementation of
SFAS 142. The lower expenses were offset by an increase primarily in facility
costs and depreciation expense. Although we completed the consolidation of many
of our facilities, our facility costs increased by approximately $1.2 million as
we are leasing more space than in the previous year for our expanded warehousing
and logistics services. The increase in depreciation expense was largely related
to increases in computer software and office equipment depreciation.
Transaction, restructuring and integration costs. During the three
months ended March 31, 2002, the Company did not record any additional
transaction, restructuring and integration costs as compared to $3.1 million of
restructuring costs and integration costs of $4.4 million recorded during the
three months ended March 31, 2001.
Nonoperating expense, net. For the three months ended March 31, 2002,
the Company had nonoperating expense, net, of $8.2 million compared to
nonoperating expense, net of $1.0 million for the three months ended March 31,
2001. The $7.2 million change is primarily due to an impairment charge of
approximately $6.7 million for the Company's investment in Miami Air which
carrying amount includes $509,000 of an increase in value attributable to EGL's
24.5% share of Miami Air's first quarter 2002 results of operations. In addition
the Company recorded a reserve of $1.3 million for outstanding letters of credit
guaranteed by the Company. See Note 5 of the notes to the condensed consolidated
financial statements.
Effective tax rate. The effective income tax rate for the three months
ended March 31, 2002 was 39.0% compared to 40.7% for the three months ended
March 31, 2001. 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
The Company's ability to satisfy its debt obligations, fund working
capital and make capital expenditures depends upon the Company's future
performance, which is subject to general economic conditions and other factors,
some of which are beyond the control of the Company. The Company has
substantially reduced operating costs and has worked to diversify its customer
base. Additionally, the Company has made significant efforts to collect
outstanding customer accounts receivable amounts and was able to use the cash
from these collections to avoid additional new borrowings on its line of credit
during the first quarter of 2002. Should the Company achieve significant
near-term revenue growth, the Company may experience a need for increased
working capital financing as a result of the difference between its collection
cycles and the timing of its payments to vendors.
The Company makes significant disbursements and in turn bills its
customers for customs duties and other expenses. Due to the timing of the
billings to customers for these disbursements, which are reflected in our trade
receivables and trade payables, any 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 flows from operating activities. Net cash provided by operating
activities was $31.9 million in the three months ended March 31, 2002 compared
to net cash used in operating activities of $25.0 million in the three months
ended March 31, 2001. The increase in the three months ended March 31, 2002 was
primarily due to a positive change in the net effect of changes in working
capital and production of operating income in 2002 as compared to operating
losses in 2001. Additionally, in the three months ended March 31, 2002 the
adjustments to reconcile net loss to net cash provided by operating activities
included an impairment charge of approximately $6.7 million related to our
investment in Miami Air.
17
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cash flows from investing activities. Net cash provided by investing
activities in the three months ended March 31, 2002 was $1.6 million compared to
net cash used in investing activities of $18.3 million in the three months ended
March 31, 2001. The Company incurred capital expenditures of $3.7 million during
the three months ended March 31, 2002 as compared $17.3 million during the three
months ended March 31,2002.
Cash flows from financing activities. Net cash used in financing
activities in the three months ended March 31, 2002 was $1.9 million compared to
net cash provided by financing activities of $42.5 million in the three months
ended March 31, 2001. Net borrowings on notes payable were $39.8 million for the
three months ended March 31, 2001 and net repayments of notes payable were $2.6
million in the three months ended March 31, 2002. Proceeds from the exercise of
stock options were $0.2 million in the three months ended March 31, 2002
compared to $1.9 million in the three months ended March 31, 2001.
Convertible subordinated notes. In December 2001, the Company issued
$100 million aggregate principal amount of 5% convertible subordinated notes.
The notes bear interest at an annual rate of 5%. Interest is payable on June 15
and December 15 of each year, beginning June 15, 2002. The notes mature on
December 15, 2006. Deferred financing fees incurred in connection with the
transaction totaled $3.2 million and are being amortized over five years as a
component of interest expense.
The notes are convertible at any time up to four trading days prior to
maturity into shares of our common stock at a conversion price of approximately
$17.4335 per share, subject to certain adjustments, which was a premium of 20.6%
of the stock price at the issuance date. This is equivalent to a conversion rate
of 57.3608 shares per $1,000 principal amount of notes. Upon conversion, a
noteholder will not receive any cash representing accrued interest, other than
in the case of a conversion in connection with an optional redemption. The
shares that are potentially issuable will impact the Company's diluted earning
per share calculation in future periods by approximately 5.7 million shares. As
of March 31, 2002, the fair market value of the notes was $90.9 million.
The Company may redeem the notes on or after December 20, 2004 at
specified redemption prices, plus accrued and unpaid interest to, but excluding,
the redemption date. Upon a change in control, a noteholder may require the
Company to purchase its notes at 100% of the principal amount of the notes, plus
accrued and unpaid interest to, but excluding, the purchase date.
The notes are general unsecured obligations of the Company. The notes
are subordinated in right of payment to all of the Company's existing and future
senior indebtedness as defined in the indenture. The Company and its
subsidiaries are not prohibited from incurring senior indebtedness or other debt
under the indenture. The notes impose some restrictions on mergers and sales of
substantially all of the Company's assets.
Credit agreements. On January 5, 2001, the Company entered into an
agreement (the Credit Facility) with various financial institutions, with Bank
of America, N.A. (the Bank) serving as administrative agent, to replace its
previous credit facility. The Credit Facility provided a $150 million revolving
line of credit and included a $30 million sublimit for the issuance of letters
of credit and a $15 million sublimit for a swing line loan. The Credit Facility
was scheduled to mature on January 5, 2004. The Company was subject to certain
covenants under the terms of the Credit Facility. The Company was in violation
of several of these covenants at various times during 2001. As a result, the
Credit Facility was amended on June 28, 2001 and again on November 9, 2001. In
connection with the November 9, 2001 amendment, the borrowing capacity of the
Credit Facility was reduced and the Company wrote off approximately $694,000 of
deferred debt costs associated with the Credit Facility.
Effective December 20, 2001, the Company amended and restated the
Credit Facility. The amended and restated credit facility (Restated Credit
Facility), which was amended effective as of March 7, 2002, is with a syndicate
18
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
of three financial institutions, with the Bank as collateral and administrative
agent for the lenders, and matures on December 20, 2004. The Restated Credit
Facility provides a revolving line of credit of up to the lesser of:
o $75 million, which will be increased to $100 million if an additional
$25 million of the revolving line of credit commitment is syndicated to
other financial institutions,
o or an amount equal to:
o up to 85% of the net amount of the Company's billed and posted eligible
accounts receivable and the billed and posted eligible accounts
receivable of its wholly owned domestic subsidiaries and its operating
subsidiary in Canada, subject to some exceptions and limitations, plus
o up to 85% of the net amount of the Company's billed and unposted
eligible accounts receivable and billed and unposted eligible accounts
receivable of its wholly owned domestic subsidiaries owing by account
debtors located in the United States, subject to a maximum aggregate
availability cap of $10 million, plus
o up to 50% of the net amount of the Company's unbilled, fully earned and
unposted eligible accounts receivable and unbilled, fully earned and
unposted eligible accounts receivable of its wholly owned domestic
subsidiaries owing by account debtors located in the United States,
subject to a maximum aggregate availability cap of $10 million, minus
o reserves from time to time established by the Bank in its reasonable
credit judgment.
The aggregate of the last four sub-bullet points above is referred to
as the Company's eligible borrowing base. The Restated Credit Facility includes
a $50 million letter of credit subfacility. The Company had $19.0 million in
standby letters of credit outstanding as of March 31, 2002 under this facility.
The maximum amount that the Company can borrow at any particular time
may be less than the amount of its revolving credit line because the Company
is required to maintain a specified amount of borrowing availability under
the Restated Credit Facility based on the Company's eligible borrowing base.
The required amount of borrowing availability is currently $40 million,
which amount is subject to adjustment to $25 million if certain post-closing
conditions are satisfied. The required amount of borrowing availability is
subject to further adjustment to $15 million if the Company's EBITDA is
(1) 9.7 million for the fiscal quarter ended December 31, 2001,
(2) $9.8 million for the fiscal quarter ending March 31, 2002, or
(3) $13.2 million for the fiscal quarter ending June 30, 2002. The amount
of borrowing availability is determined by subtracting the following from
the Company's eligible borrowing base: (a) the Company's borrowings under
the Restated Credit Facility; and (b) the Company's accounts payable and
the accounts payable of all of its domestic subsidiaries and its
Canadian operating subsidiary that remain unpaid more than the longer
of (i) sixty days from their respective invoice dates or (ii) thirty days
from their respective due dates.
For each tranche of principal borrowed under the revolving line of
credit, the Company may elect an interest rate of either LIBOR plus an
applicable margin of 2.50%, which is subject to adjustment after June 30, 2002
to 2.00% to 2.75%, which varies based upon availability under the line, or the
prime rate announced by the Bank, plus, if the borrowing availability is less
than $25 million, an applicable margin of 0.25%.
The Company refers to borrowings bearing interest based on LIBOR as a
LIBOR tranche and to other borrowings as a prime rate tranche. The interest on a
LIBOR tranche is payable on the last day of the interest period (one, two or
three months, as selected by the Company) for such LIBOR tranche. The interest
on a prime rate tranche is payable monthly.
A termination fee would be payable upon termination of the Restated
Credit Facility during the first two years after the closing thereof, in the
amount of 0.50% of the total revolving line commitment if the termination occurs
on or before the first anniversary of the closing and 0.25% of the total
revolving line commitment if the termination occurs after the first anniversary,
but on or before the second anniversary of such closing (unless terminated in
connection with a refinancing arranged or underwritten by the Bank or its
affiliates).
The Company is subject to certain covenants under the terms of the
Restated Credit Facility, including, but not limited to, (a) maintenance at the
end of each fiscal quarter of a minimum specified adjusted tangible net worth
and (b) quarterly and annual limitations on capital expenditures of $12 million
per quarter or $48 million cumulative per year.
19
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Restated Credit Facility also places restrictions on additional
indebtedness, dividends, liens, investments, acquisitions, asset dispositions,
change of control and other matters, is secured by substantially all of the
Company's assets, and is guaranteed by all domestic subsidiaries and the
Company's Canadian operating subsidiary. In addition, the Company will be
subject to additional restrictions, including restrictions with respect to
distributions and asset dispositions if the Company's eligible borrowing base
falls below $40 million. Events of default under the Restated Credit Facility
include, but are not limited to, the occurrence of a material adverse change in
the Company's operations, assets or financial condition or its ability to
perform under the Restated Credit Facility or that any of the Company's domestic
subsidiaries or its Canadian operating subsidiary. As of March 31, 2002, the
Company had available, unused borrowing capacity of $50.1 million.
Other bank lines of credit and guarantees. The Company maintains a $10
million bank line of credit, in addition to the $50 million subfacility under
the Restated Credit Facility, to secure customs bonds and bank letters of credit
to guarantee certain transportation expenses in foreign locations. At March 31,
2002, we were contingently liable for approximately $5.9 million, under
outstanding letters of credit and guarantees related to its $10 million line of
credit obligations. The Company's 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 the Restated Credit Facility discussed
above. Additionally, several of the Company's foreign operations guarantee
amounts associated with the Company's custom brokerage services. As of March 31,
2002 these outstanding guarantees approximated $12.6 million.
Agreements with charter airlines. As of March 31, 2002, the Company
was obligated under one lease agreement for three aircraft with Miami Air
International, Inc., a related party. In May 2002, the Company and Miami Air
mutually agreed to cancel the aircraft charter agreement as of May 9, 2002 and
the Company agreed to pay $450,000 for services rendered in May 2002 and
aircraft repositioning costs. The Company leases other cargo aircraft for
utilization in its domestic and international heavy-cargo overnight air network
based on actual utilization.
Litigation. In addition to the EEOC matter (Note 10), the Company is
party to routine litigation incidental to its business, which primarily involve
other employment matters or claims for goods lost or damaged in transit or
improperly shipped. Many of the other lawsuits to which the Company is a party
are covered by insurance and are being defended by Company's insurance carriers.
The Company has established reserves for these other matters and it is
management's opinion that the resolution of such litigation will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
Sale/leaseback agreement. On March 31, 2002, the Company entered into
a transaction whereby it sold its San Antonio, Texas property with a net book
value of $2.5 million to an unrelated third party for $2.5 million, net of
closing costs. One of the Company's subsidiaries then leased the property for a
term of 10 years, with options to extend the initial term for up to 23 years.
Under the terms
20
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
of the new lease agreement, the quarterly lease payment is approximately
$84,750, which amount is subject to escalation after the first year based on
increases in the Consumer Price Index. A loss of $42,000 on the sale of this
property was recognized in the three months ended March 31, 2002.
Synthetic lease agreements. The Company has entered into two operating
lease arrangements that involves a special purpose entity that has acquired
title to properties, paid for the construction costs and leased to the Company
real estate at some of its terminal and warehouse facilities. This kind of
leveraged financing structure is commonly referred to as a "synthetic lease."
A synthetic lease is a form of lease financing that qualifies for
operating lease accounting treatment and under generally accepted accounting
principles is not reflected in the Company's balance sheet. Thus, the
obligations are not recorded as debt and the underlying properties are not
recorded as assets on the Company's balance sheet. Under a synthetic lease, the
Company's rental payments (which approximate interest amounts under the
synthetic lease financing) are treated as operating rent commitments and are
excluded from our aggregate debt maturities. A synthetic lease is generally
preferable to a conventional real estate lease since the lessee benefits from
attractive interest rates, the ability to claim depreciation under tax laws and
the ability to participate in the development process.
Master operating synthetic lease agreement. On April 3, 1998, the
Company entered into a five-year $20 million master operating synthetic lease
agreement with two unrelated parties for financing the construction of terminal
and warehouse facilities throughout the United States as designated by the
Company. The lease facility was funded by a financial institution and is secured
by the properties to which it relates. Construction was completed during 2000 on
five terminal facilities.
Under the terms of the master operating synthetic 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 currently approximate
$112,000 per month. A balloon payment equal to the outstanding lease balances,
which were initially equal to the cost of the facility, is due in November 2002.
As of March 31, 2002, the aggregate lease balance was approximately $13.9
million.
The master operating synthetic lease agreement contains 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 synthetic
lease agreement, as amended on February 11, 2002, restricts the Company from
incurring debt in an amount greater than $30 million, except pursuant to a
single credit facility involving a commitment of not more than $110 million and
$100 million of 5% convertible subordinated notes.
The Company has an option, exercisable at anytime during the lease
term, and under particular circumstances may be obligated, to acquire the
financed facilities for an amount equal to the outstanding lease balance. If the
Company does not exercise the purchase option, and does not otherwise meet its
obligations, the Company is subject to a deficiency payment computed as the
amount equal to the outstanding lease balance minus the then current fair market
value of each financed facility within limits up to a maximum of $13.7 million.
The Company expects that the amount of any deficiency payment would be expensed.
The Company may also have to find other suitable facilities to operate in or
potentially be subject to a reduction in revenues and other operating
activities.
21
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other synthetic lease and related capital lease. During 1998, Circle entered
into two lease agreements related to one of its domestic terminal facilities.
One of the lease agreements relates to land and is currently being accounted for
as a synthetic operating lease. The Company is required to make bi-annual
payments of $139,000 for 10 years which are included in the table of future
lease commitments in Note 13. At March 31, 2002, the lease balance was
approximately $9.5 million.
A second agreement relates to the building and improvements and is
accounted for as capital lease rather than as a synthetic lease. Therefore, the
fixed asset and related liability for the second lease are included in the
accompanying condensed consolidated balance sheet. Property under the capital
lease is amortized over the lease term. As of March 31, 2002, the carrying value
of property held under the building and improvements lease was $3.5 million,
which is net of $2.1 million of accumulated amortization.
Stock options. As of March 31, 2002, we had outstanding non-qualified
stock options to purchase an aggregate of 5.5 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 $5.50 to $33.81). 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 three months ended March 31,
2002, of non-qualified stock options to purchase an aggregate of 24,000 shares
of common stock, we are entitled to a federal income tax deduction of
approximately $58,000. 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. 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
reached a Consent Decree settlement with the EEOC which resolves the EEOC's
allegations contained in the Commissioners Charge. This Consent Decree was
approved by the District Court on October 1, 2001. The consent decree becomes
effective following exhaustion of certain objectives and appeals.
RELATED PARTY TRANSACTIONS
In connection with the Company's investment in Miami Air, the two
parties entered into an aircraft charter agreement whereby Miami Air agreed to
convert certain of its passenger aircraft to cargo aircraft and to provide
aircraft charter services to the Company for a three-year term. The Company
caused a $7 million standby letter of credit to be issued in favor of certain
creditors for Miami Air to assist Miami Air in financing the conversion of its
aircraft. Miami Air agreed to pay the Company an annual fee equal to 3.0% of the
face amount of the letter of credit and to reimburse the Company for any
payments owed by the Company in respect of the letter of credit. As of March 31,
2002, Miami Air had no funded debt under the line of credit that is supported by
the $7 million standby letter of credit. However, Miami Air had outstanding $2.3
million in letters of credit supported by the $7 million standby letter of
credit.
During the first quarter of 2002, there were three aircraft subject to
the aircraft charter agreement and the Company paid approximately $4.9 million
related to this agreement. In May 2002, the Company and Miami Air
22
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
mutually agreed to cancel the Aircraft charter agreement for the three planes as
of May 9, 2002 and the Company agreed to pay $450,000 for services rendered in
May 2002 and aircraft repositioning costs.
The weak economy and events of September 11 significantly reduced the
demand for cargo plane services, particularly 727 cargo planes. As a result, the
market value of these planes declined dramatically. Miami Air made EGL aware
that the amounts due their bank (which are secured by seven 727 planes) is
significantly higher than the market value of those planes. In addition, Miami
Air has outstanding operating leases for 727 and 737 airplanes at above current
market rates, including two planes that are expected to be delivered in 2002.
Throughout the fourth quarter of 2001 and the first quarter of 2002, Miami Air
was in discussions with the bank to obtain debt concessions on the seven 727
planes, to buy out the lease on a 727 cargo plane and to reduce the rates on the
737 passenger planes and had informed the Company that its creditors had
indicated a willingness to make concessions. In May 2002, the Company was
informed that Miami Air's negotiations with its creditors had reached an impasse
and no agreement appeared feasible. As such, the Company recognized an other
than temporary impairment of the carrying value of its $6.7 million investment
in Miami Air, which carrying value includes a $509,000 increase in value
attributable to EGL's 24.5% share of Miami Air's first quarter 2002 results of
operations. In addition, the Company recorded a reserve of $1.3 million for its
estimated exposure on the outstanding letters of credit supported by the $7
million standby letter of credit. There can be no assurance that such expense
will not exceed such estimate.
Miami Air, each of the private investors and the continuing Miami Air
stockholders also entered into a stockholders agreement under which Mr. Crane
(Chairman and CEO of the Company) and Mr. Hevrdejs (a director of the Company)
are obligated to purchase up to approximately $1.7 million and $500,000,
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. As of March 31, 2002, directors appointed to Miami Air's board
include a designee of Mr. Crane, Mr. Elijio Serrano (the Company's Chief
Financial Officer) and two others. The Series A preferred stock, if issued, (1)
will not be convertible, (2) will have a 15.0% annual dividend rate and (3) will
be subject to mandatory redemption in July 2006 or upon the prior occurrence of
specified events. The original charter transactions between Miami Air and the
Company were negotiated with Miami Air's management at arms length at the time
of the Company's original investment in Miami Air. Miami Air's pre-transaction
Chief Executive Officer has remained in that position and as a director
following the transaction and together with other original Miami Air investors,
remained as substantial shareholders of Miami Air. Other private investors in
Miami Air have participated with the Company's directors in other business
transactions unrelated to Miami Air.
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. During the three months ended
March 31, 2001, the Company reimbursed Mr. Crane $400,000 in lease payments and
related costs on the aircraft. In August 2001, Mr. Crane and the Company revised
their agreement whereby the Company is now charged for actual usage of the plane
on an hourly basis and is billed on a periodic basis. During the three months
ended March 31, 2002, the Company reimbursed Mr. Crane $346,000 for hourly usage
of the plane.
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
$21,000 for the three months ended March 31, 2002. In addition the Company
billed this customer approximately $35,000 for freight forwarding services for
the three months ended March 31, 2002.
NEW ACCOUNTING PRONOUNCEMENTS AND CRITICAL ACCOUNTING POLICIES
During the first quarter the Company changed its critical accounting
policy for goodwill due to two new accounting pronouncements. See Notes 2 and 4
of the notes to condensed consolidated financial statements.
23
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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, 2001. See Note 3 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 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 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 litigation. The
Company filed an Answer in the Philadelphia case and extensive discovery was
conducted. The individual plaintiffs sought 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, which was granted by the Court in Philadelphia on
January 31, 2001. 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. Subsequent to the settlement of the EEOC
action described below, the claims of one of the eight named plaintiffs were
ordered to binding arbitration at EGL's request. The Company recognized a charge
of $7.5 million in the fourth quarter of 2000 for its estimated cost of
defending and settling the asserted claims.
On October 2, 2001, the EEOC and EGL announced the filing of a Consent
Decree settlement. This settlement resolves all claims of discrimination and/or
harassment raised by the EEOC's Commissioner's Charge mentioned above. Under the
Consent Decree, EGL has agreed to pay $8.5 million into a fund (the Class Fund)
that will compensate individuals who claim to have experienced discrimination.
The settlement covers (1) claims by applicants arising between December 1, 1995
and December 31, 2000; (2) disparate pay claims arising between January 1, 1995
and April 30, 2000; (3) promotion claims arising between December 1, 1995 and
December 31, 1998; and (4) all other adverse treatment claims arising between
December 31, 1995 and December 31, 2000. In addition, EGL will contribute
$500,000 to establish a Leadership Development Program (the Leadership
Development Fund). This Program will provide training and educational
opportunities for women and minorities already employed at EGL and will also
establish scholarships and work study opportunities at educational institutions.
In entering the Consent Decree, EGL has not made any admission of liability or
wrongdoing. The Consent Decree was approved by the District Court in Houston
24
EGL, INC.
on October 1, 2001. It will become effective following the exhaustion of any
appeals by any individual plaintiffs or potential claimants. There is currently
one appeal pending before the United States Court of Appeals for the Fifth
Circuit which challenges the entry of the Consent Decree. We do not expect a
ruling on this appeal for the next four to six months. During the quarter ended
September 30, 2001, the Company accrued $10.1 million related to the settlement,
which includes the $8.5 million payment into the fund and $500,000 into the
leadership development program described above, administrative, legal fees and
other costs associated with the EEOC litigation and settlement.
The Consent Decree settlement provides that the Company establish and
maintain segregated accounts for the Class Fund and Leadership Development Fund.
The Company is required to make an initial deposit of $2.5 million to the Class
Fund within 30 days after the Consent Decree has been approved and fund the
remaining $6.0 million of the Class Fund in equal installments of $2.0 million
each on or before the fifth day of the first month of the calendar quarter
(January 5th, April 5th, and October 5th) which will occur immediately after the
effective date of the Consent Decree. The Leadership Development Fund will be
funded fully at the time of the first quarterly payment as discussed above. As
of March 31, 2002 and December 31, 2001, the Company had funded $2.5 million
into the Class Fund and $500,000 into the Leadership Development Fund. This
amount is included as restricted cash in the accompanying consolidated balance
sheet. Total related accrued liabilities included in the accompanying
consolidated balance sheet at March 31, 2002 and December 31, 2001 were $14.2
million and $14.3 million, respectively.
It is unclear whether some or all of the seven remaining individual
plaintiffs will attempt to participate under the Consent Decree or whether they
will elect to continue to pursue their claims on their own. To the extent any of
the individual plaintiffs or any other persons who might otherwise be covered by
the settlement opt out of the settlement, the Company intends to continue to
vigorously defend itself against their allegations. The Company currently
expects to prevail in its defense of any remaining individual claims. There can
be no assurance as to what the amount of time it will take to resolve the appeal
relating to the settlement of the Commissioner's Charge and 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.
In addition to the EEOC matter, the Company is party to routine
litigation incidental to its business, which primarily involve other employment
matters or claims for goods lost or damaged in transit or improperly shipped.
Many of the other lawsuits to which the Company is a party are covered by
insurance and are being defended by Company's insurance carriers. The Company
has established reserves for these other matters and it is management's opinion
that the resolution of such litigation will not have a material adverse effect
on the Company's consolidated financial position.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS
NONE
25
EGL, INC.
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 restructured and asset based credit facilities;
expectations or arrangements for the Company's leased planes and the effects
thereof; effects of and exposure relating to Miami Air the expected completion
and/or effects of the Reorganization 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 (including the settlement
thereof) 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; the finalization of the EEOC
settlement (including the timing and terms thereof and the results of any
appeals or challenges thereto) and the results of related or other litigation;
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,
responses of customers to the Company's actions by the Company's principal
shareholder; actions by Miami Air and its creditors; accuracy of accounting and
other estimates; 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,
2001. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially from
those
26
EGL, INC.
indicated. The Company undertakes no responsibility to update for changes
related to these or any other factors that may occur subsequent to this filing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS.
*3.1 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 and incorporated herein by
reference.)
*3.2 Statement of Resolutions Establishing the Series A Junior
Participating Preferred Stock of the Company (Filed as Exhibit
3 (ii) to the Company's Form 10-Q for the fiscal quarter ended
June 30, 2001 and incorporated herein by reference.)
*3.3 Amended and Restated Bylaws of the Company, as amended.
(Filed as Exhibit 3 (ii) to the Company's Form 10-Q for the
fiscal quarter ended June 30, 2000 and incorporated herein by
reference.)
*4.1 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.
(Filed as Exhibit 4.1 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 2001 and incorporated
herein by reference.)
* Incorporated by reference as indicated.
(b) REPORTS ON FORM 8-K.
NONE
27
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: May 15, 2002 BY: /s/ James R. Crane
------------ -----------------------
James R. Crane
Chairman, President and Chief
Executive Officer
Date: May 15, 2002 BY: /s/ Elijio V. Serrano
------------ -----------------------
Elijio V. Serrano
Chief Financial Officer
28
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
-------- -----------
*3.1 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 and incorporated herein by
reference.)
*3.2 Statement of Resolutions Establishing the Series A Junior
Participating Preferred Stock of the Company (Filed as Exhibit
3 (ii) to the Company's Form 10-Q for the fiscal quarter ended
June 30, 2001 and incorporated herein by reference.)
*3.3 Amended and Restated Bylaws of the Company, as amended.
(Filed as Exhibit 3 (ii) to the Company's Form 10-Q for the
fiscal quarter ended June 30, 2000 and incorporated herein by
reference.)
*4.1 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.
(Filed as Exhibit 4.1 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 2001 and incorporated
herein by reference.)
* Incorporated by reference as indicated.
29