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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION NO. 0-27288
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EGL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0094895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15350 VICKERY DRIVE 77032
HOUSTON, TEXAS (Zip Code)
(Principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(281) 618-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
RIGHTS TO PURCHASE SERIES A PREFERRED STOCK
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At February 28, 2002, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $401 million
based on the closing price of such stock on such date of $10.67.
At February 28, 2002, the number of shares outstanding of registrant's
Common Stock was 47,830,628 (net of 1,117,285 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 2002 Annual
Meeting of Shareholders to be held on May 22, 2002 are incorporated by reference
in Part III of this Form 10-K. Such definitive proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days subsequent
to December 31, 2001.
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TABLE OF CONTENTS
PART I
Item Business....................................................
1. 1
Item Properties..................................................
2. 17
Item Legal Proceedings...........................................
3. 18
Item Submission of Matters To a Vote of Security Holders.........
4. 19
PART II
Item Market for Registrant's Common Stock and Related Shareholder
5. Matters..................................................... 19
Item Selected Financial Data.....................................
6. 21
Item Management's Discussion and Analysis of Financial Condition
7. and Results of Operations................................... 22
Item Quantitative and Qualitative Disclosures about Market
7A. Risk........................................................ 41
Item Financial Statements and Supplementary Data.................
8. 43
Item Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure.................................... 43
PART III
Item Directors and Executive Officers of the Registrant..........
10. 43
Item Executive Compensation......................................
11. 43
Item Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 43
Item Certain Relationships and Related Transactions..............
13. 43
PART IV
Item Exhibits, Financial Statement Schedules, and Reports on Form
14. 8-K......................................................... 43
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PART I
ITEM 1. BUSINESS
GENERAL
EGL, Inc. is a leading global transportation, supply chain management and
information services company dedicated to providing flexible logistics solutions
on a price competitive basis. Our services include air and ocean freight
forwarding, customs brokerage, local pick up and delivery service, materials
management, warehousing, trade facilitation and procurement and integrated
logistics and supply chain management services. We provide value-added services
in addition to those customarily provided by traditional air freight forwarders,
ocean freight forwarders and customs brokers. These services are designed to
provide global logistics solutions for customers in order to streamline their
supply chain, reduce their inventories, improve their logistics information and
provide them with more efficient and effective domestic and international
distribution strategies in order to enhance their profitability. Our merger with
Circle International Group, Inc. in October 2000 significantly expanded our
international forwarding, customs brokerage and logistics operations. The merger
with Circle was treated as a pooling of interests for accounting and financial
reporting purposes. Accordingly, all of our prior period consolidated financial
statements have been restated to include the results of operations, financial
position and cash flows of Circle. See note 2 of the notes to our consolidated
financial statements.
We believe we are one of the largest forwarders of domestic and
international air freight based in the United States. We now have a network of
approximately 400 facilities, agents and distribution centers located in over
100 countries on six continents featuring advanced information systems designed
to maximize cargo management efficiency and customer satisfaction. Each of our
facilities is linked by a real-time, online communications network that speeds
the two-way flow of shipment data and related logistics information between
origins and destinations around the world.
We conduct our operations primarily under the name "EGL Eagle Global
Logistics." We were formerly known as Eagle USA Airfreight, Inc. Our name was
changed to EGL, Inc. in February 2000 to reflect our increasing globalization,
broader spectrum of services and long-term growth strategy. Our businesses that
have historically operated under the name "Circle International Group" or a
similar name have changed or are in the process of changing their names, where
possible, to EGL Eagle Global Logistics or a similar name.
We trade on the Nasdaq Stock Market under the symbol "EAGL" and were
incorporated in Texas in 1984.
INDUSTRY OVERVIEW
As business requirements for efficient and cost-effective distribution
services have increased, so have the importance and complexity of effectively
managing freight transportation. Businesses increasingly strive to minimize
inventory levels, perform manufacturing and assembly operations in different
locations and distribute products to numerous destinations. As a result,
companies frequently want expedited or time-definite shipment services.
Time-definite shipments are delivered at a specific time and are typically not
expedited, which results in a lower rate than for an expedited shipment.
Customers have two principal alternatives: an air freight forwarder or a
fully integrated carrier. An air freight forwarder procures shipments from
customers and arranges transportation of the cargo on a carrier. An air freight
forwarder may also arrange pick up from the shipper to the carrier and delivery
of the shipment from the carrier to the recipient. Air freight forwarders often
tailor shipment routing to meet the customer's price and service requirements.
Fully integrated carriers provide pick up and delivery service, primarily
through their own captive fleets of trucks and aircraft. Because air freight
forwarders select from various transportation options in routing customer
shipments, they are often able to serve customers less expensively and with
greater flexibility than integrated carriers. In addition to the high fixed
expenses associated with owning, operating and maintaining fleets of aircraft,
trucks and related equipment, integrated carriers often impose significant
restrictions on delivery schedules and shipment weight, size and type. Air
freight
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forwarders, however, generally handle shipments of any size and can offer a
variety of customized shipping options.
Most air freight forwarders, like EGL, focus on heavier cargo and do not
generally compete with integrated shippers of primarily smaller parcels,
including Federal Express Corporation, Airborne Freight Corporation, DHL
Worldwide Express, Inc. and the United States Postal Service. Several integrated
carriers, like Emery Air Freight Corporation ("Emery") and BAX Global, Inc.
("BAX"), do focus on shipments of heavy cargo in competition with forwarders. On
occasion, integrated shippers serve as a source of cargo space to forwarders.
Additionally, most air freight forwarders do not generally compete with the
major commercial airlines, which, to some extent, depend on forwarders to
procure shipments and supply freight to fill cargo space on their scheduled
flights.
The air freight forwarding industry is highly fragmented. Many companies in
the industry are able to meet only a portion of their customers' required
transportation service needs. Some national domestic air freight forwarders rely
on networks of terminals operated by franchisees or agents. We believe that the
development and operation of company-owned terminals and staff under the
supervision of our management have enabled us to maintain a greater degree of
financial and operational control and service quality than franchise-based
networks.
We believe that the most important competitive factors in our industry are
quality of service, including reliability, responsiveness, expertise and
convenience, scope of operations, geographic coverage, information technology
and price.
AIR FREIGHT FORWARDING SERVICES
Our air freight forwarding operations include expedited domestic forwarding
within the United States and international forwarding. Our total air freight
forwarding revenues in 2001 were $1.3 billion of which 36.4% were derived from
domestic air freight forwarding within the United States and 63.6% were derived
from international air freight forwarding. Our air freight forwarding and
related logistics services include the following:
- domestic freight forwarding,
- global freight forwarding,
- inland transportation of freight from point of origin to distribution
center or the carrier's cargo terminal and from our terminal in the
destination city to the recipient (pick up and delivery),
- cargo assembly,
- export packing and vendor shipment consolidation,
- receiving and breaking down consolidated air freight lots and arranging
for distribution of the individual shipments,
- charter arrangement and handling,
- electronic transmittal of logistics documentation,
- electronic purchase order/shipment tracking,
- expedited document delivery to overseas destinations for customs
clearance, and
- procurement of cargo insurance.
We neither own nor operate any aircraft and, consequently, place no
restrictions on delivery schedules or shipment size. We arrange for
transportation of our customers' shipments via commercial airlines and air cargo
carriers. All of our air shipments can be accommodated by either narrow-body or
wide-body aircraft. We select the carrier for a shipment based on route,
departure time, available cargo capacity and cost. We currently have regularly
scheduled dedicated charters of three cargo airplanes under a lease agreement to
service specific transportation lanes. During the past year, we have reduced the
number of regularly scheduled
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dedicated charters from 14 to 3. As needed, we charter cargo aircraft for use in
other transportation lanes. The number of these dedicated charters varies from
time to time depending upon seasonality, freight volumes and other factors.
In July 2000, we purchased a 24.5% equity interest in Miami Air
International, Inc., a privately held domestic and international charter
passenger and freight airline, to obtain access to an additional source of
reliable freight charter capacity. In connection with the transaction, Miami Air
and EGL entered into an aircraft charter agreement whereby Miami Air agreed to
provide aircraft charter services to EGL for a three-year term in exchange for a
fee. There are currently three operating aircraft subject to the aircraft
charter agreement. We are negotiating with Miami Air to eliminate or reduce the
costs of operating the three aircraft. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and the notes thereto included elsewhere in this report.
We generate air freight forwarding revenues by acting primarily as an
indirect air carrier and, to a lesser extent, as an authorized cargo sales
agent. As an indirect air carrier, we obtain shipments from our customers,
consolidate shipments bound for a particular destination, determine the best
means to transport the shipment to its destination, select the direct carrier
(an airline) on which the consolidated lot is to move and tender each
consolidated lot as a single shipment to the direct carrier for transportation
to a destination. At the destination, we or our agent receive the consolidated
lot, break it into its component shipments and distribute the individual
shipments to the consignees.
Our rates are based on a charge per pound/kilogram. We ordinarily charge
the shipper a rate less than the rate that the shipper would be charged by an
airline. Due to the high volume of freight we manage, we generally obtain lower
rates per pound/kilogram from airlines than the rates we charge our customers
for individual shipments. This rate differential is the primary source of our
air freight forwarding net revenue. Our practice is to make prompt adjustments
in our rates to match changes in airline rates.
As an authorized cargo sales agent of most airlines worldwide, we also
arrange for the transportation of individual shipments and receive a commission
from the airline for arranging the shipment. In addition, we provide the shipper
with ancillary services, such as export documentation, for which we receive a
separate fee. When acting in this capacity, we do not consolidate shipments or
have responsibility for shipments once they have been tendered to the airline.
We conduct our agency air freight forwarding operations from the same facilities
as our indirect carrier operations and serve the same regions of the world.
Local transportation services are performed either by independent cartage
companies or, in the United States and Canada, primarily by our local pick up
and delivery operations. See "Business -- Domestic Local Delivery Services." If
delivery schedules permit, we will typically use lower-cost, overland truck
transportation services, including those obtained through our domestic truck
brokerage operations. See "Business -- Domestic Truck Brokerage Services."
We draw on our logistical expertise to provide forwarding services that are
tailored to meet customer needs and, in addition to regularly scheduled service,
we offer customized schedules. In addition, our services are customized to
address each client's individual shipping requirements, generally without
restrictions on shipment weight, size or type. Once the customer's requirements
for an individual shipment have been established, we proactively manage the
execution of the shipment to ensure satisfaction of the customer's requirements.
In 2001, our principal air freight forwarding customers included shippers
of:
- computers and other electronic and high-technology equipment,
- automotive and aerospace components,
- trade show exhibit materials,
- telecommunications equipment,
- pharmaceuticals,
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- printed and publishing materials,
- oil and gas equipment,
- machinery and machine parts, and
- apparel and entertainment equipment.
Our air freight forwarding business is not dependent on any one customer or
industry. We provide services to global or multinational customers as well as
regional customers. In 2001, approximately 60% of our net revenue was
attributable to air freight forwarding.
In January 2002, we expanded our historical relationship with DHL Airways.
For several years, DHL has provided us with capacity in its system in the United
States. As part of the expanded arrangement, DHL provided additional capacity to
our domestic freight forwarding operations and expanded its use of our ground
network in selected routes. Our expanded arrangement with DHL provides us with
broader coverage in the United States, allowing arrivals in key markets by 7:00
a.m. The expanded arrangement also enhances our ability to pursue market share
aggressively. We believe it is important that our cost of transportation remain
flexible without compromising our capability of providing heavy cargo lift and
service to our customers.
DOMESTIC LOCAL DELIVERY SERVICES
In the United States and Canada, we provide same-day local pick up and
delivery services, both for shipments for which we are acting as an air freight
forwarder as well as for third-party customers requiring pick up and delivery
within the same metropolitan area. We believe that these services provide an
important complement to our air freight forwarding services by allowing for
quality control over the critical pick up and delivery segments of the
transportation process as well as allowing for prompt, updated information on
the status of a customer's shipment at each step in the shipment process. We
focus on providing local pick up and delivery services to accounts with a
relatively high volume of business, which we believe provides a greater
potential for profitability than a broader base of small, infrequent customers.
During the last several years, we upgraded the information system used by
our local pick up and delivery operations. These improvements included bar code
and signature scanners that allow for enhanced tracking of shipments and access
by shippers of receipt signatures for proof of delivery information. In October
2000, we implemented a new, enhanced system of dispatching for our local pick up
and delivery operations.
Our local pick up and delivery operations commenced service in Houston,
Texas in 1989 and in recent years has rapidly expanded. As of December 31, 2001,
local delivery services were offered in 87 of the 90 cities in the United States
and Canada in which our terminals were located. On-demand pick up and delivery
services are available 24 hours a day, seven days a week. In most locations,
delivery drivers are independent contractors who operate their own vehicles. Our
Houston, Texas operations include a number of company-owned or leased trailers,
trucks and other ground equipment primarily to service specific customer
accounts.
Local pick up and delivery revenues were $237.5 million during 2001 and
$221.5 million during 2000. Approximately $160.1 million of these revenues
during 2001 and $163.4 million of these revenues during 2000 were attributable
to our air freight forwarding operations and were eliminated upon consolidation.
The remaining pick up and delivery revenues were attributable to local delivery
services for third-party, non-forwarding business. A substantial majority of the
total costs of providing for local pick up and delivery of our freight
forwarding shipments in 2001 and 2000 were attributable to our own local pick up
and delivery services. Revenues from domestic local delivery services, net of
intercompany revenues, are included in air freight forwarding revenues.
DOMESTIC TRUCK BROKERAGE SERVICES
We have established truck brokerage operations in the United States to
provide logistical support to our forwarding operations and, to a lesser extent,
provide truckload service to selected customers. Our truck brokerage services
locate and secure capacity when overland transportation is the most efficient
means of meeting customer delivery requirements, especially in cases of air
freight customers choosing the economy
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delivery option. We use internal truck brokerage operations to meet delivery
requirements without having to rely on third-party truck brokerage services.
Additionally, by providing for our own truck brokerage, we have been able to
achieve greater efficiencies and utilize purchasing power over transportation
providers. We do not own a significant number of the trucks used in our truck
brokerage operations and, instead, primarily use carriers or independent
owner-operators of trucks and trailers on an as-needed basis. We use our
relationships with a number of independent trucking companies to obtain truck
and trailer space.
As with local pick up and delivery services, we view our truck brokerage
services primarily as a means of maintaining quality control and enhancing
customer service of our core air freight forwarding business, as well as a means
of capturing a portion of profits that would otherwise be earned by third
parties. Revenues from domestic truck brokerage, net of intercompany revenues,
are included in air freight forwarding revenues.
OCEAN FREIGHT FORWARDING AND CONSOLIDATION
As a global ocean freight forwarder, we arrange for the shipment of freight
by ocean carriers and act as the agent of the shipper or the importer. Our ocean
freight forwarding and related logistics services include inland transportation
from point of origin to distribution facility or port of export, cargo assembly,
packing and consolidation, warehousing, electronic transmittal of documentation
and shipment tracking, expedited document delivery, pre-alert consignee
notification and cargo insurance.
A number of our facilities provide protective cargo packing, crating and
specialized handling services for retail goods, government-specification cargo,
consumer goods, hazardous cargo, heavy machinery and assemblies and perishable
cargo. Other facilities are equipped to handle equipment and material from
multiple origins to overseas "turn-key" projects, such as manufacturing
facilities or government installations. We do not own or operate ships or assume
carrier responsibility, preferring to retain the flexibility to tailor
logistics, services and options to customer requirements.
Our compensation for ocean freight forwarding services is derived
principally from commissions paid by shipping lines and from forwarding and
documentation fees paid by customers, who are either shippers or consignees. In
2001, approximately 3% of our net revenue was attributable to international
ocean freight forwarding, including commissions, forwarding fees and associated
ancillary services.
Our global operations as an indirect ocean carrier or NVOCC (non-vessel
operating common carrier) are similar in some respects to our air freight
consolidation operations. We procure customer freight, consolidate shipments
bound for a particular destination, determine the routing, select the ocean
carrier or charter a ship, and tender each consolidated lot as a single shipment
to the direct carrier for transportation to a distribution point. As a NVOCC, we
generally derive our revenue from the spread between the rate charged to our
customer and the ocean carrier's charge to us for carrying the shipment, in
addition to charging for other ancillary services related to the movement of the
freight. Because of the volume of freight we control and consolidate, we are
generally able to obtain lower rates from ocean carriers than the rate the
shipper would be able to procure. In 2001, ocean freight consolidation and
associated ancillary services contributed approximately 6% of our net revenue.
CUSTOMS BROKERAGE
We function as a customs broker at approximately 60 locations in the United
States and in over 300 international locations through our network of offices
and agents. In our capacity as a customs broker, we prepare and file all formal
documentation required for clearance through customs agencies, obtain customs
bonds, in many cases facilitate the payment of import duties on behalf of the
importer, arrange for payment of collect freight charges and assist the importer
in obtaining the best commodity classifications and in qualifying for duty
drawback refunds. Our customs brokers and support staff have substantial
knowledge of the complex tariff laws and customs regulations governing the
payment of duty, as well as valuation and import restrictions in their
respective countries. Within the United States, we employ a significant number
of personnel holding individual customs broker licenses.
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We rely both on company-designed and third-party computer technology for
customs brokerage activities performed on behalf of our clients. We employ the
Automated Brokerage Interface information system, providing an online link with
the United States Customs Service. In several global trading centers, in
addition to the United States, our offices are connected electronically to
customs agencies for expedited preclearance of goods and centralized import
management. Such online interface with customs agencies speeds freight release
and provides nationwide control of clearances at multiple ports and airports of
entry.
We work with importers to design cost-effective import programs that
utilize our distribution and logistics services and computer technology. Such
services include:
- electronic document preparation,
- cargo routing from overseas origins to ports and airports of entry,
- bonded warehousing,
- distribution of the cleared cargo to inland locations, and
- duty drawback.
In many United States and overseas locations, our bonded warehouses enable
importers to defer payment of customs duties and coordinate release of cargo
with their production or distribution schedules. Goods are stored under customs
service supervision until the importer is ready to withdraw or re-export them.
We receive storage charges for these in-transit goods and fees for related
ancillary services. We also offer Free Trade Zone management and duty drawback
services to provide customers with additional tools to maintain cost-effective
import programs.
As a customs broker operating in the United States, we are licensed by the
U.S. Treasury and regulated by the U.S. Customs Service. Our fees for acting as
a customs broker in the United States are not regulated, and we do not have a
fixed fee schedule for customs brokerage services. Instead, fees are generally
based on the volume of business transacted for a particular customer, and the
type, number and complexity of services provided. In addition to fees, we bill
the importer for amounts that we have paid on the importer's behalf, including
duties, collect freight charges and similar payments. In 2001, approximately 17%
of our net revenue was attributable to customs brokerage services.
LOGISTICS AND OTHER SERVICES
Customers increasingly demand more than the simple movement of freight from
their transportation suppliers. To meet these needs, suppliers seek to customize
their services, by, among other things, providing information on the status of
materials, components and finished goods throughout the logistics pipeline and
performance reports on and proof of delivery for each shipment. We provide a
range of logistics services, distribution and materials management services,
international insurance services, global project management services and trade
facilitation services. In 2001, approximately 14% of our net revenue was
attributable to logistics and other services.
Logistics Services
We use our logistics expertise to maximize the efficiency and performance
of forwarding and other transportation services to our customers. In addition,
we provide transportation consulting services and make our expertise and
resources available to assist customers in balancing their transportation needs
against budgetary constraints by developing logistics plans. We staff and manage
the shipping departments of some of our customers that outsource their
transportation management function and seek to provide outsourcing services to
other customers in the future. We also provide other ancillary services,
including electronic data interchange, customized shipping reports, computerized
tracking of shipments, air charters, cargo assembly and protective packing and
crating.
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We have established Eagle Exhibitor Services, an internal group that
focuses on the special needs of exhibitors in the trade show industry. In
addition to air freight forwarding and charter services, this group provides
special exhibit handling, by-appointment delivery, caravan services and
short-term warehousing.
Distribution and Materials Management Services
We offer a full range of customized distribution and materials management
services in connection with the transportation of cargo. These services are
provided in a number of our owned and leased logistics facilities in many
locations throughout the world. During 2001, we continued our program of
improving existing facilities and constructing new warehouse and distribution
facilities to meet customer needs. Our distribution and materials management
services include inventory control, order processing, import and export freight
staging, protective and specialized packing and crating, pick-and-pack
operations, containerization, consolidation and deconsolidation and special
handling for perishables, hazardous materials and heavy-lift equipment. For
import shipments, we provide bonded warehouse services and, in certain
locations, Free Trade Zone services. These warehouse and distribution services
complement the other transportation services, including the information systems
tools, that form part of the integrated logistics solutions we offer to
customers.
Insurance
Another service offered to customers is the arrangement of international
insurance in connection with our air freight and ocean freight forwarding
operations. Insurance coverage is frequently tailored to a customer's shipping
program and is procured for the customer as a component of our integrated
logistics. We also arrange for surety bonds for importers as part of our customs
brokerage activities.
Global Projects
We have global project divisions in North America and the United Kingdom to
meet the special requirements of global project management and heavy lift
movements. In addition to logistics advice and traditional ocean and air
transportation services, the project divisions provide on-site assistance,
vessel chartering services and consulting regarding large-scale project
movements.
Trade Facilitation Services
Our EGL Trade Services, Inc. subsidiary specializes in providing
procurement, financial and distribution management services to multinational
customers. EGL Trade Services purchases both raw materials for manufacturing and
finished goods for distribution, then coordinates their global deployment, as
directed by the customer. EGL Trade Services delivers its services through
custom-designed Vendor and Distribution Hub programs. Through EGL Trade
Services, we are able to seamlessly coordinate a customer's procurement,
logistics, transportation and distribution activities within a single supply
chain program. This enables us to optimize customer supply chains by
streamlining the material, information and financial flows through integration
of the specific supply chain processes and elimination of redundant
transactions.
INFORMATION SYSTEMS
A primary component of our business strategy is the continued development
of advanced information systems. We have invested substantial management and
financial resources in the development of our information systems in an effort
to provide accurate and timely information to our management and customers. We
believe that our systems have been instrumental in the productivity of our
personnel, tracking of revenue and costs and the quality of our operations and
service and have resulted in substantial reductions in paperwork and expedited
the entry, processing, retrieval and internal dissemination of critical
information. These systems also enable us to provide customers with accurate and
up-to-date information on the status of their shipments, through whatever medium
they request, which has become increasingly important. We will continue to
develop and upgrade our information systems. In connection with the acquisition
of Circle in October 2000, we began an initiative to upgrade and standardize our
operations, financial and information
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systems on a global basis. See "Factors That May Affect Future Results and
Financial Condition -- We may face difficulties in integrating the operations of
Circle International Group, Inc."
Worldport
Our integrated information system -- Worldport -- includes logistics
information, management information and accounting systems for our North America
domestic operations. The central computer located at our headquarters in
Houston, Texas is accessible from computer terminals located at all of our North
America facilities. The Worldport system provides a comprehensive source of
information for managing the logistics of our sourcing and distribution
activities. Specifically, the Worldport system permits us to track the flow of a
particular shipment from the pick up order through the transportation process to
the point of delivery. Through the system, we can also access daily financial
information for a particular terminal, a particular division, customer or
service or a given shipment. Worldport permits online entry and retrieval of
shipment, pricing, scheduling and tracking data and integrates with our
management information and accounting systems. Worldport's electronic data
interchange also allows for importing of dispatch information, proof of delivery
information, status updates, electronic invoicing, funds exchange and file
exchange. Worldport also provides our sales force with margin information on
customers and shipments, thereby enhancing our ability to bid aggressively for
future forwarding business and to avoid committing to unprofitable shipments.
Worldport can provide our management with reports customized to meet their
information requirements.
The expansion of our local pick up and delivery service has further
improved our logistics system by enabling shipment data to be input remotely
from pick up through delivery. We have implemented the use of remote handheld
bar code and signature scanners for use by our pick up and delivery operations.
We have implemented the use of handheld bar code dock scanners in our air
freight operations. Worldport is integrated with both of these scanners to
automatically supply the proof of delivery or shipment status information to the
system. This information is then made available to all online locations as well
as customers' dial-in facilities, allowing for enhanced tracking of shipments
and viewing by shippers of receipt signatures. Delivery receipts are
electronically imaged and centrally stored to increase both internal and
customer efficiencies.
Talon
We have focused our efforts on the development and enhancement of "Talon,"
our international operating system. Talon is intended to provide enhanced
features for international operations, including document production, electronic
customs filing of shipper export declarations via the U.S. Customs Automated
Export System, agent settlements, real-time global tracking and tracing and
multi-currency accounting. Upon completion of the Circle merger, we decided to
implement enhancements to Talon to improve its operational efficiency. The Talon
system is intended to replace the multiple operating systems being used by
Circle at the time of the acquisition. Due to the continued weakness in the U.S.
economy, during 2001 we decided to slow the enhancements to the Talon system
and, for the foreseeable future, we will continue to use the international
operating systems that Circle was using prior to the merger.
Eagle Advisor, EGLNet and Eagle TRAK
Customers and management can obtain shipment information through Eagle
Advisor -- our extranet client/server application software program. Customers
can download this software to their personal computers from our Internet home
page. Through Eagle Advisor, customers can access our password-protected Web
site. Worldport and the Circle systems transmit data to this Web site. The
customer's shipment data is then automatically transmitted to its personal
computer via the Internet. Eagle Advisor allows customers and management to
track and trace shipments, obtain imaged proof of delivery information and
generate customized shipment reports. Our corporate Intranet, "EGLNet," contains
internal training portals to key airline Internet sites, sales and marketing
information and other tools for our offices. In addition to Eagle Advisor, the
"Eagle TRAK" option on our Internet home page allows customers to obtain
shipment tracing information via the Internet.
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Eagle-Ship
Our systems also include Eagle-Ship, which allows customers to automate
their shipping processes and consolidate their shipping systems. For customers
using Eagle-Ship, we provide a dedicated personal computer, printer and bar code
scanner that allow the customer's shipping dock personnel to process and weigh
boxes, record the shipment, produce customized box labels and print an EGL house
airway bill or bill of lading. Eagle-Ship also provides customers with weight
analysis, tariff reporting, assistance in consolidation of like orders and price
comparison among shipping options.
Eagle-Ship enables our customers to process shipments for many carriers
with one personal computer and to compare the cost and service options of
various carriers, consolidate Eagle-Ship label printing and generate reports
that profile the customer's shipping activity. Eagle-Ship is designed to run
shipping systems for UPS, Federal Express and other small parcel carriers and
can be customized to run the systems of up to 99 air and truck carriers. We
believe that Eagle-Ship gives us a competitive advantage among a growing number
of customers that are resistant to the proliferation of dedicated shipper
systems because of the cost, complexity and dock space required to maintain a
separate personal computer for each carrier. We also believe that the use of
Eagle-Ship should lead to increased use of our services by helping to ensure
that customers will allocate dock space to Eagle-Ship rather than to multiple
systems from other carriers. Although Eagle-Ship does provide customers with
assistance in selecting competitors for our shipping services, we believe that
much of that information, like that relating to Federal Express, is used in the
delivery of documents and small packages, which constitute a small portion of
our cargoes, and that, overall, Eagle-Ship will demonstrate to customers the
advantages of our services in comparison to our more direct competitors. We
believe that Eagle-Ship enhances our ability to market to national accounts.
MARKETING AND CUSTOMERS
We market services through a global organization consisting of
approximately 640 full-time sales people and customer service representatives
supported by the sales efforts of senior management, regional managers, regional
operation managers, terminal managers and our national services center. Managers
at each terminal are responsible for customer service and coordinate reporting
of customers' requirements and expectations with the regional managers and sales
staff. In addition, regional managers are responsible for the financial
performance of the stations in their region. Our employees are available 24
hours a day to respond to customer inquiries.
In the fourth quarter of 2001, we realigned our North American organization
to provide a more customer-focused approach. Our U.S. operations were
reorganized and the number of regions was reduced from five to three. The
realignment was intended to re-deploy experienced field managers into sales
roles and to create further cost synergies. As part of the realignment, our
major global customers were assigned a dedicated senior sales and operations
manager focused on customizing global solutions and services. Additionally, each
of our seven major industry groups were assigned a dedicated sales manager
intended to develop industry specific solutions. The reductions in the number of
regions enabled senior managers to be redeployed from region positions to the
larger metropolitan areas (or "A" markets) to focus on local accounts.
We have increased our emphasis on obtaining high-revenue national and
international accounts with multiple shipping locations. These accounts
typically impose numerous requirements on those competing for their freight
business, including electronic data interchange and proof of delivery
capabilities, the ability to generate customized shipping reports and a
nationwide network of terminals. These requirements often limit the competition
for these accounts to integrated carriers and a very small number of forwarders.
We believe that our recent growth and development has enabled us to more
effectively compete for and obtain these accounts.
Our customers include large manufacturers and distributors of computers and
other electronic and high-technology equipment, printed and publishing
materials, automotive and aerospace components, trade show exhibit materials,
telecommunications equipment, machinery and machine parts, apparel and
entertainment equipment. For the year ended December 31, 2001, no customer
accounted for greater than 10% of our revenues. Adverse conditions in the
industries of our customers could cause us to lose a significant customer or
experience a decrease in the shipment volume. Either of these events could
negatively impact us. We expect
9
that demand for our services, and consequently results of operations, will
continue to be sensitive to domestic and global economic conditions and other
factors beyond our control.
REGULATION
We do not believe that transportation- and customs-related regulatory
compliance have had a material adverse impact on operations to date. However,
failure to comply with the applicable regulations or to maintain required
permits or licenses could result in substantial fines or revocation of our
operating permits or authorities. We cannot give assurance as to the degree or
cost of future regulations on our business. Some of the regulations affecting
our operations are described below.
Air Freight Forwarding
Our air freight forwarding business is subject to regulation, as an
indirect air cargo carrier, under the Federal Aviation Act by the U.S.
Department of Transportation, although air freight forwarders are exempted from
most of the Federal Aviation Act's requirements by the Economic Aviation
Regulations. Our foreign air freight forwarding operations are subject to
similar regulation by the regulatory authorities of the respective foreign
jurisdictions. The air freight forwarding industry is subject to regulatory and
legislative changes that can affect the economics of the industry by requiring
changes in operating practices or influencing the demand for, and the costs of
providing, services to customers.
Domestic Local Delivery Services and Domestic Truck Brokerage Services
Our delivery operations are subject to various state and local regulations
and, in many instances, require permits and licenses from state authorities. In
addition, some of our delivery operations are regulated by the Surface
Transportation Board. These federal, state and local authorities have broad
powers, including the power to approve specified mergers, consolidations and
acquisitions, and to regulate the delivery of some types of shipments and
operations within particular geographic areas. The Surface Transportation Board
has the power to regulate motor carrier operations, to approve some rates,
charges and accounting systems and to require periodic financial reporting.
Interstate motor carrier operations are also subject to safety requirements
prescribed by the U.S. Department of Transportation. In some potential locations
for our delivery operations, state and local permits and licenses may be
difficult to obtain. Our truck brokerage operations subject us to regulation as
a property broker by the Surface Transportation Board, and we have obtained a
property broker license and surety bond.
Ocean Freight Forwarding
The Federal Maritime Commission, or FMC, regulates our ocean forwarding
operations. The FMC licenses ocean freight forwarders. Indirect ocean carriers
(non-vessel operating common carriers) are subject to FMC regulation, under the
FMC tariff filing and surety bond requirements, and under the Shipping Act of
1984, particularly those terms proscribing rebating practices.
Customs Brokerage
Our United States customs brokerage operations are subject to the licensing
requirements of the U.S. Treasury and are regulated by the U.S. Customs Service.
We have received our customs brokerage license from the U.S. Customs Service and
additional related approvals. Our foreign customs brokerage operations are
licensed in and subject to the regulations of their respective countries.
Logistics and Other Services
Some portions of our warehouse operations require:
- registration under the Gambling Act of 1962 and a license or registration
by the U.S. Department of Justice,
- authorizations and bonds by the U.S. Treasury,
- a license by the Bureau of Alcohol, Tobacco & Firearms of the U.S.
Treasury, and
- approvals by the U.S. Customs Service.
10
Environmental
In the United States, we are subject to federal, state and local provisions
relating to the discharge of materials into the environment or otherwise for the
protection of the environment. Similar laws apply in many foreign jurisdictions
where we operate or may operate in the future. Although current operations have
not been significantly affected by compliance with these environmental laws,
governments are becoming increasingly sensitive to environmental issues, and we
cannot predict what impact future environmental regulations may have on our
business. We do not anticipate making any material capital expenditures for
environmental control purposes during the remainder of the current or succeeding
years.
EMPLOYEES
We had approximately 8,600 employees at December 31, 2001, including
approximately 640 sales personnel and customer service representatives. None of
our employees are currently covered by a collective bargaining agreement. We
have experienced no work stoppages and consider our relations with employees to
be good. We also had contracts with approximately 1,200 independent
owner/operators of local delivery services (many with multiple trucks and
drivers) as of December 31, 2001. The independent owner/operators own, operate
and maintain the vehicles they use in their work for us and may employ qualified
drivers of their choice. Our owned or leased vehicles were driven by
approximately 230 of our employees as of December 31, 2001.
We pay our entire sales force and most of our operations personnel what we
believe is significantly more than the industry average through the use of
incentive and commission programs. We offer a broad-based compensation plan to
these employees. Sales personnel are paid a gross commission based on the net
revenue of shipments sold. Operations personnel and management are paid bonuses
based on the profitability of their locations as well as on our overall
profitability.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive
officers as of March 31, 2002:
NAME AGE POSITION
---- --- --------
James R. Crane........................ 48 Chairman of the Board of Directors,
President and Chief Executive Officer
Elijio V. Serrano..................... 44 Chief Financial Officer
E. Joseph Bento....................... 39 Chief Marketing Officer
John C. McVaney....................... 43 Executive Vice President, Logistics
Ronald E. Talley...................... 50 Chief Operating Officer, Domestic
James R. Crane. Mr. Crane has served as our President, Chief Executive
Officer and a director since he founded EGL in March 1984.
Elijio V. Serrano. Mr. Serrano joined us as Chief Financial Officer in
October 1999 and has served as a director since 2000. From 1998 to 1999, he
served as Vice President and General Manager for a Geco-Prakla business unit at
Schlumberger Limited, an international oilfield services company. From 1992 to
1998, Mr. Serrano served as controller for various Schlumberger business units.
From 1982 to 1992, he served in various financial management positions within
the Schlumberger organization.
E. Joseph Bento. Mr. Bento was appointed Chief Marketing Officer in
September 2000. Mr. Bento also served as President -- North America from
September 2000 to November 2001. He joined us in February 1992 as an account
executive. From March 1994 to December 1994, he served as a sales manager in Los
Angeles, and from January 1995 to September 1997, he served as Regional Sales
Manager (West Coast). From June 1994 to May 1995, he also served as station
manager in Los Angeles. Prior to assuming his current position, Mr. Bento held
the position of Executive Vice President of Sales and Marketing from March 1999
to August 2000 and Vice President of Sales and Marketing from October 1997 to
February 1999.
11
John C. McVaney. Mr. McVaney has served as Executive Vice President,
Logistics since January 1998. Mr. McVaney joined us as a station manager in 1995
and later served as Regional Vice President for the southeast region. From 1992
to 1995, he served as regional manager for Nationsway Transport Service, Inc.
From 1989 to 1992, Mr. McVaney served as National Account Manager for St.
Johnsbury Trucking Company, Inc. During 1989, he was President and sole owner of
B&C of New Orleans, Inc., a transportation company. Mr. McVaney has over 20
years of transportation experience.
Ronald E. Talley. Mr. Talley was appointed Chief Operating Officer,
Domestic in December 1997. He joined us in 1990 as a station manager and later
served as a regional manager. In 1996, he served as a Senior Vice President of
Eagle Freight Services, and our truck brokerage and charter operations, and most
recently, he has served as Senior Vice President of our air and truck
operations. Prior to joining us, Mr. Talley served as a station manager at
Holmes Freight Lines from 1982 to 1990. From 1979 to 1982, Mr. Talley held a
variety of management positions with Trans Con Freight Lines. From 1969 to 1979,
Mr. Talley served in several management positions at Roadway Express.
FORWARD-LOOKING STATEMENTS
The statements contained in all parts of this document (including the
portion, if any, appended to this Form 10-K) 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 realignment of sales organization including its effects and cost
synergies,
- the DHL arrangement (including its effect, timing, DHL's use of our
ground network, time of arrival in markets and cost savings),
- our ability to enter into alternative financing arrangements with respect
to certain terminal and warehouse facilities, or to obtain alternative
financing for those facilities, prior to November 2002;
- the effect and benefits of the Circle merger,
- our asset based credit facility,
- expectations or arrangements for our leased planes and the effects
thereof,
- the expected completion and/or effects of the integration plan,
- the termination of joint venture/agency agreements and our ability to
recover assets in connection therewith,
- our plan to reduce costs (including the scope, timing, impact and effects
thereof), cost management efforts and potential annualized costs savings,
- past and planned headcount reductions (including the scope, timing,
impact and effects thereof),
- consolidation of field offices (including the scope, timing and effects
thereof),
- anticipated future recoveries from actual or expected sublease
agreements,
- the sensitivity of demand for our services to domestic and global
economic conditions,
- ability to fund operations,
- expectations regarding an economic recovery in the U.S. and general
economic conditions,
- expected growth,
- construction of new facilities,
- the development, implementation and integration of any of our information
systems,
- 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,
12
- fluctuations in currency valuations,
- fluctuations in interest rates,
- our Miami Air investment and credit support, including any future results
or plans relating to Miami Air or its planes,
- 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, and
- 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.
Forward-looking statements in this Form 10-K (including the portion, if
any, appended to the Form 10-K) are also identifiable by use of the following
words and other similar expressions, among others:
- "anticipate," - "intend,"
- "believe," - "may,"
- "budget," - "might,"
- "could," - "plan,"
- "estimate," - "predict,"
- "expect," - "project," and
- "forecast," - "should."
Our actual results may differ significantly from the results discussed in
the forward-looking statements. Such statements involve risks and uncertainties,
including, but not limited to, the matters discussed in the subsection entitled
"Factors That May Affect Future Results and Financial Condition" below, our
accounting policies, our future financial and operating results, financial
condition, cash needs and demand for our services, actions by customers,
suppliers and other third parties, success in plans with respect to information
systems, success of cost reduction efforts, as well as other factors detailed in
this document and our other filings with the Securities and Exchange Commission.
If one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated. We undertake no responsibility to update for changes related to these
or any other factors that may occur subsequent to this filing.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
You should read carefully the following factors and all other information
contained in this report. If any of the risks and uncertainties described below
or elsewhere in this report actually occur, our business, financial condition or
results of operations could be materially adversely affected. In that case, the
trading price of our common stock could decline, and an investor may lose all or
part of his investment.
We may not be successful in growing either internally or through acquisitions.
Our growth strategy primarily focuses on internal growth in domestic and
international freight forwarding, local pick up and delivery, customs brokerage
and truck brokerage business and, to a lesser extent, on acquisitions. Our
ability to grow will depend on a number of factors, including:
- existing and emerging competition,
- ability to open new terminals,
- ability to operate profitably in the face of competitive pressures,
- the recruitment, training and retention of operating and management
employees,
13
- the strength of demand for our services,
- the availability of capital to support our growth, and
- the ability to identify, negotiate and fund acquisitions when
appropriate.
Acquisitions involve risks, including those relating to:
- the integration of acquired businesses, including different information
systems,
- the retention of prior levels of business,
- the retention of employees,
- the diversion of management attention,
- the amortization of acquired intangible assets, and
- unexpected liabilities.
We cannot assure you that we will be successful in implementing any of our
business strategies or plans for future growth.
Events impacting the volume of international trade and international
operations could adversely affect our international operations.
Our international operations are directly related to and dependent on the
volume of international trade, particularly trade between the United States and
foreign nations. This trade as well as our international operations are
influenced by many factors, including:
- economic and political conditions in the United States and abroad,
- major work stoppages,
- exchange controls, the Euro conversion and currency fluctuations,
- wars, other armed conflicts and terrorism, and
- United States and foreign laws relating to tariffs, trade restrictions,
foreign investment and taxation.
Trade-related events beyond our control, such as a failure of various
nations to reach or adopt international trade agreements or an increase in
bilateral or multilateral trade restrictions, could have a material adverse
effect on our international operations. Our operations also depend on
availability of carriers that provide cargo space for international operations.
Our business has been and could continue to be adversely impacted by negative
conditions in the United States economy or the industries of our principal
customers.
Demand for our services has been adversely impacted by negative conditions
in the United States economy or the industries of our customers. A substantial
number of our principal customers are in the automotive, personal computer,
electronics, telecommunications and related industries and their business has
been adversely affected, particularly during the past year. These customers
collectively account for a substantial percentage of our revenues. Continued
adverse conditions or worsening conditions in the industries of our customers
could cause us to lose a significant customer or experience a decrease in the
shipment volume and business levels of our customers. Either of these events
could negatively impact our financial results. Adverse economic conditions
outside the United States can also have an adverse effect on our customers and
our business. We expect that demand for our services, and consequently our
results of operations, will be sensitive to domestic and global economic
conditions and other factors beyond our control.
14
The terrorist attacks on September 11, 2001 have created economic, political
and regulatory uncertainties, some of which may materially harm our business
and prospects and our ability to conduct business in the ordinary course.
The terrorist attacks that took place in the United States on September 11,
2001 have adversely affected many businesses, including our business. The
national and global responses to these terrorist attacks, many of which are
still being formulated, may materially adversely affect us in ways we cannot
currently predict. Some of the possible future effects include reduced business
activity by our customers, changes in security measures or regulatory
requirements for air travel and reductions in available commercial flights that
may make it more difficult for us to arrange for the transport of our customers'
freight and increased credit and business risk for customers in industries that
were severely impacted by the attacks.
Our ability to serve our customers depends on the availability of cargo space
from third parties.
Our ability to serve our customers depends on the availability of air and
sea cargo space, including space on passenger and cargo airlines and ocean
carriers that service the transportation lanes that we use. Shortages of cargo
space are most likely to develop around holidays and in especially heavy
transportation lanes. In addition, available cargo space could be reduced as a
result of decreases in the number of passenger airlines or ocean carriers
serving particular transportation lanes at particular times. This could occur as
a result of economic conditions, transportation strikes, regulatory changes and
other factors beyond our control. Our future operating results could be
adversely affected by significant shortages of suitable cargo space and
associated increases in rates charged by passenger airlines or ocean carriers
for cargo space.
We may lose business to competitors.
Competition within the freight industry is intense. We compete in North
America primarily with fully integrated carriers, including BAX, Emery and
smaller freight-forwarders. Internationally, we compete primarily with the major
European based freight forwarders, Expeditors International, BAX, Emery and
other freight forwarders. We expect to encounter continued competition from
those forwarders that have a predominantly international focus and have
established international networks, including those based in the United States
and Europe. We also expect to continue to encounter competition from other
forwarders with nationwide networks, regional and local forwarders, passenger
and cargo air carriers, trucking companies, cargo sales agents and brokers, and
carriers and associations of shippers organized for the purpose of consolidating
their members' shipments to obtain lower freight rates from carriers. As a
customs broker and ocean freight forwarder, we encounter strong competition in
every port in which we do business, often competing with large domestic and
foreign firms as well as local and regional firms. Our inability to compete
successfully in our industry could cause us to lose customers or lower the
volume of our shipments.
Our success depends on the efforts of our founder and other key managers and
personnel.
Our founder, James R. Crane, continues to serve as President, Chief
Executive Officer and Chairman of the board of directors. We believe that our
success is highly dependent on the continuing efforts of Mr. Crane and other
executive officers and key employees, as well as our ability to attract and
retain other skilled managers and personnel. The loss of the services of any of
our key personnel could have a material adverse effect on us.
We are subject to claims arising from our pick up and delivery operations.
We use the services of thousands of drivers in connection with our local
pick up and delivery operations. From time to time, these drivers are involved
in accidents. Although most of these drivers are independent contractors, we
could be held liable for their actions. Claims against us may exceed the amount
of insurance coverage. A material increase in the frequency or severity of
accidents, liability claims or workers' compensation claims, or unfavorable
resolutions of claims, could materially adversely affect us. In addition,
significant increases in insurance costs as a result of these claims could
reduce our profitability.
15
We could incur additional expenses or taxes if the independent owner/operators
we use in connection with our local pick up and delivery operations are found
to be "employees" rather than "independent contractors."
The Internal Revenue Service, state authorities and other third parties
have at times successfully asserted that independent owner/operators in the
transportation industry, including those of the type we use in connection with
our local pick up and delivery operations, are "employees" rather than
"independent contractors." Although we believe that the independent
owner/operators we use are not employees, the IRS, state authorities or others
could challenge this position, and federal and state tax or other applicable
laws, or interpretations of applicable laws, could change. If they do, we could
incur additional employee benefit-related expenses and could be liable for
additional taxes, penalties and interest for prior periods and additional taxes
for future periods.
Our failure to comply with governmental permit and licensing requirements
could result in substantial fines or revocation of our operating authorities,
and changes in these requirements could adversely affect us.
Our operations are subject to various state, local, federal and foreign
regulations that in many instances require permits and licenses. Our failure to
maintain required permits or licenses, or to comply with applicable regulations,
could result in substantial fines or revocation of our operating authorities.
Moreover, government deregulation efforts, "modernization" of the regulations
governing customs clearance and changes in the international trade and tariff
environment could require material expenditures or otherwise adversely affect
us.
Our settlement with the U.S. Equal Employment Opportunity Commission relating
to discrimination allegations is subject to challenge and does not affect the
claims asserted in the purported class action lawsuit.
Our settlement with the U.S. Equal Employment Opportunity Commission
relating to discrimination allegations is subject to challenge and appeal. If a
challenge or appeal is successful, any modifications to the settlement or the
reassertion of the original charges could have a material adverse effect on us.
In addition, the purported class action lawsuit relating to discrimination
allegations could result in the payment of substantial amounts and subject us to
significant non-monetary requirements which could have a material adverse effect
on us.
We may face difficulties in integrating the operations of Circle International
Group, Inc.
We have incurred significant charges in connection with our acquisition of
Circle during 2000 and 2001. Our management team does not have experience with
the combined business and does not have experience managing international
operations of a scope comparable to that of Circle. We may not be able to
integrate the operations of Circle without a loss of key officers, employees,
agents, joint venturers, customers or suppliers, a loss of revenues, an increase
in operating or other costs or other difficulties. In particular, we may
experience difficulties integrating our information technology systems with
Circle's financial and operational information technology systems. We may also
experience difficulties with obtaining required governmental licenses and
approvals. In addition, we may not be able to realize any operating
efficiencies, synergies or other benefits expected from the merger. Any costs or
delays incurred in connection with integrating the operations of Circle could
have an adverse effect on our business, results of operations or financial
condition. In addition, the combined company may experience the difficulties
associated with being a larger entity, including increased difficulties of
coordination, complexities concerning the integration of information systems,
difficulties relating to increased size and scale and increased risk of
unionization of workforce.
16
Our chairman beneficially owns approximately 22.5% of our outstanding common
stock and has the greatest influence of any of our stockholders.
James R. Crane beneficially owns approximately 22.5% of our outstanding
common stock. Based on the ownership positions of our current stockholders, his
ability to influence matters submitted to a vote of stockholders is greater than
any other stockholder.
Provisions of our charter, bylaws and shareholder rights plan and of Texas law
may delay or prevent transactions that would benefit stockholders.
Our articles of incorporation and bylaws and Texas law contain provisions
that may have the effect of delaying, deferring or preventing a change of
control. These provisions, among other things:
- authorize our board of directors to set the terms of preferred stock,
- provide that any stockholder who wishes to propose any business or to
nominate a person or persons for the election as director at any meeting
of stockholders may do so only if advance notice is given to our
corporate secretary,
- restrict the ability of stockholders to take action by written consent,
and
- restrict our ability to engage in transactions with some 20%
stockholders.
Because of these provisions, persons considering unsolicited tender offers
or other unilateral takeover proposals may be more likely to negotiate with our
board of directors rather than pursue non-negotiated takeover attempts. In
addition, we have adopted a shareholder rights plan that will cause substantial
dilution to any person or group that attempts to acquire us without the approval
of our board of directors. The provisions of our charter, bylaws and shareholder
rights plan may make it more difficult for our stockholders to benefit from
transactions that are opposed by an incumbent board of directors.
Our Miami Air investment and credit support exposure are subject to
uncertainties.
The impact of the events of September 11 on the airline industry and the
weak economy have resulted in a decline in Miami Air's business and led Miami
Air to attempt to renegotiate its loan obligations and lease commitments with
its creditors. Uncertainties with respect to Miami Air, including those relating
to Miami Air's business and negotiation with its creditors, may affect the
carrying value of our $6.1 million common stock investment in Miami Air (the
result of which may be an impairment charge). In addition, we may be required to
perform on our outstanding credit support under the $7 million standby letter of
credit on behalf of Miami Air (the result of which may be the recognition of a
related loss). The status of our lease obligations for Miami Air cargo planes is
also uncertain.
ITEM 2. PROPERTIES
The properties used in our domestic and foreign operations consist
principally of air and ocean freight forwarding offices, customs brokerage
offices and warehouse and distribution facilities. Our freight forwarding
terminal locations are typically located at or near major metropolitan airports
and occupy between 1,000 and 160,000 square feet of leased or owned space and
typically consist of offices, warehouse space, bays for loading and unloading
and facilities for packing. Terminals are managed by a station manager who is
assisted by operation managers. We also have locations that are limited to sales
and administrative activities. The leased terminals are under noncancelable
leases that expire on various dates through 2025. From time to time, we may
expand or relocate terminals to accommodate growth.
17
The following table sets forth certain information as of December 31, 2001
concerning the number of our domestic and foreign facilities and freight
handling terminals:
OWNED LEASED TOTAL
----- ------ -----
North America............................................... 4 153 157
South America............................................... -- 15 15
Europe and Middle East...................................... 11 116 127
Asia and South Pacific...................................... 13 76 89
Corporate................................................... -- 1 1
-- --- ---
Total............................................. 28 361 389
As of December 31, 2001, our corporate office occupied approximately
166,000 square feet of space in a facility located in Houston, Texas. During the
fourth quarter of 2001, we sold the former Circle headquarters building in San
Francisco, California.
For information regarding the consolidation of facilities at our operating
locations, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Transaction, restructuring and
integration costs -- Future lease obligations" and note 3 of the notes to our
consolidated financial statements. For further information regarding our lease
commitments, see notes 13 and 14 of the notes to our consolidated financial
statements.
ITEM 3. 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 us and certain of our subsidiaries with violations of
Section 703 of Title VII, as amended, the Age Discrimination in Employment Act
of 1967, and the Equal Pay Act of 1963, resulting from (1) engaging in unlawful
discriminatory hiring, recruiting and promotion practices and maintaining a
hostile work environment, based on one or more of race, national origin, age and
gender, (2) failures to investigate, (3) failures to maintain proper records and
(4) failures to file accurate reports. The Commissioner's Charge states that the
persons aggrieved include all Blacks, Hispanics, Asians and females who are,
have been or might be affected by the alleged unlawful practices.
On May 12, 2000, four individuals filed suit against us 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. We filed an Answer
in the Philadelphia case and extensive discovery was conducted. The individual
plaintiffs sought to certify a class of approximately 1,000 of our current and
former 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 our motion
that the case be transferred to the United States District Court for the
Southern District of Texas -- Houston Division where we had previously initiated
litigation against the EEOC due to what we believed 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 our request. We recognized a charge of $7.5 million in
the fourth quarter of 2000 as an estimated cost of defending and settling the
asserted claims.
On October 2, 2001, we and the EEOC 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, we agreed to pay $8.5 million into a 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
18
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, we
agreed to contribute $0.5 million to establish a Leadership Development Program.
The Program will provide training and educational opportunities for women and
minorities already employed by us and will also establish scholarships and work
study opportunities at educational institutions. In entering the Consent Decree,
we have 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, we accrued $10.1
million related to the settlement, which includes the $8.5 million payment into
the fund and $0.5 million to the leadership development program described above,
administrative costs, legal fees and other costs associated with the EEOC
litigation and settlement.
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, we intend to continue to vigorously
defend against their allegations. We currently expect to prevail in our 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. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and note 12 of the notes to our consolidated financial statements
for a discussion of commitments and contingencies.
From time to time we are a party to various legal proceedings arising in
the ordinary course of business. Except as described above, we are not currently
a party to any material litigation and are not aware of any litigation
threatened against us, which we believe would have a material adverse effect on
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our common stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol EAGL. The following table sets forth the quarterly
high and low closing sales prices for each indicated quarter of 2001 and 2000.
QUARTER ENDED HIGH LOW
------------- ------ ------
March 31, 2000.............................................. $46.75 $21.25
June 30, 2000............................................... 32.13 20.38
September 30, 2000.......................................... 37.63 26.75
December 31,2000............................................ 35.63 19.50
March 31, 2001.............................................. $31.38 $22.00
June 30, 2001............................................... 25.71 14.56
September 30, 2001.......................................... 16.00 7.45
December 31, 2001........................................... 17.50 8.40
19
The closing price for our common stock was $10.67 on February 28, 2002.
There were approximately 391 stockholders of record (excluding brokerage firms
and other nominees) of our common stock as of February 28, 2002.
Since our initial public offering in November 1995, EGL has not paid cash
dividends on our common stock, although Circle had regularly declared semiannual
dividends prior to the merger of EGL and Circle. It is the current intention of
our management to retain earnings to finance the growth of our business in lieu
of paying dividends. Our bank credit agreement prohibits us from declaring or
paying any cash dividends without the bank's consent. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Other factors affecting our
liquidity and capital resources" for a discussion of our repurchases of our
common stock.
In December 2001, we issued $100 million aggregate principal amount of 5%
convertible subordinated notes to Credit Suisse First Boston Corporation, as
initial purchaser, in a "Rule 144A Offering," pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933. Our net proceeds
from the issuance and sale of the notes were approximately $96.7 million after
deducting the discount to the initial purchaser and estimated expenses of the
offering. We used all of the net proceeds to repay a portion of our borrowings
under our then existing amended and restated credit facility.
The notes bear interest at an annual rate of 5%, payable on June 15 and
December 15 of each year beginning June 15, 2002. The notes mature on December
15, 2006. The notes are convertible at any time 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. 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. We 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 us to
purchase its notes at 100% of the principal amount of the notes, plus accrued
and unpaid interest to, but excluding, the purchase date.
20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data that have been
derived from our consolidated financial statements. The information set forth
below is not necessarily indicative of results of future operations, and should
be read in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes thereto, included elsewhere in this report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999(1) 1998(1) 1997(1)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues......................... $1,671,994 $1,861,206 $1,409,250 $1,154,761 $1,008,756
Net revenues..................... 644,183 719,512 587,075 485,506 406,195
Operating income
(loss)(2)(3)(4)................ (57,569) 9,892 72,862 56,306 58,072
Net income (loss)................ (40,177) (722) 51,710 39,547 43,130
Basic earnings (loss) per
share(5)....................... $ (0.84) $ (0.02) $ 1.14 $ 0.88 $ 0.99
Basic weighted average shares
outstanding(5)................. 47,558 46,600 45,504 45,141 43,511
Diluted earnings (loss) per
share(5)....................... $ (0.84) $ (0.02) $ 1.11 $ 0.85 $ 0.95
Diluted weighted average shares
outstanding(5)................. 47,558 46,600 46,481 46,321 45,214
BALANCE SHEET DATA (at year end):
Working capital.................. $ 210,169 $ 240,484 $ 231,533 $ 181,336 $ 160,909
Total assets..................... 817,179 904,225 775,694 651,142 541,270
Long-term indebtedness, net of
current portion................ 103,774 91,051 32,244 21,558 27,702
Stockholders' equity............. 366,091 403,767 401,455 338,758 281,476
Revenue. Revenue decreased $189.2 million, or 10.2%, to $1,672.0 million
in 2001 compared to $1,861.2 million in 2000 primarily due to decreases in air
freight forwarding revenue. Net revenue, which represents revenue less freight
transportation costs, decreased $75.3 million, or 10.5%, to $644.2 million in
2001 compared to $719.5 million in 2000.
Operating expenses. Total operating expenses (personnel and other selling,
general and administrative expenses) were not reduced commensurate with the
decline in revenue during the early part of 2001 in anticipation of improved
activity levels. Additionally, actions taken during 2000 to add additional
warehouse and dock space in anticipation of continued market share gains and
growth in activity resulted in higher occupancy related expenses that came on
line during 2001. We also added significant information technology ("IT")
related consultant expenses during 2001 to develop an integration plan and to
begin the integration of the EGL and Circle IT systems. The combination of a
delay in implementing reductions in personnel related expenses consistent with
the lower activity levels, the addition of warehouse and dock space that started
in 2000, and higher IT related expenses contributed toward our losses in 2001.
---------------
(1) In July 2000, we decided to change our fiscal year end to December 31
beginning with the December 31, 2000 year end. Prior to 2000, our fiscal
years ended on September 30. In October 2000, we completed a merger with
Circle International Group, Inc. accounted for as a pooling of interests.
The statement of operations data has been prepared by combining our results
of operations for the years ended September 30, 1999, 1998 and 1997 with
Circle's results of operations for the years ended December 31, 1999, 1998
and 1997. The balance sheet data has been prepared by combining our
financial results as of September 30, 1999, 1998 and 1997 with Circle's
financial results as of December 31, 1999, 1998 and
21
1997. The periods have been labeled year ended December 31 to be more
consistent with our current year-end. The stand-alone results of operations
of EGL for the three months ended December 31, 1999 have been omitted from
the information presented.
EGL stand-alone revenues, net revenues, operating income, net income and
basic and diluted earnings per share for the period October 1, 1999 through
December 31, 1999 were $187.4 million, $78.2 million, $15.7 million, $9.9
million, $0.35 and $0.33, respectively. Unaudited pro forma revenues, net
revenues, operating income, net income and basic and diluted earnings per
share for the year ended December 31, 1999 depicting the combined results of
EGL and Circle as if EGL had a fiscal year ended December 31, 1999 are
$1,451.7 million, $601.9 million, $75.6 million, $53.9 million, $1.18 and
$1.14, respectively.
(2) 2001 and 2000 include transaction, integration and restructuring charges
related to the merger with Circle totaling $14.0 million or $8.5 million net
of tax ($0.18 per diluted share) and $67.4 million or $49.9 million net of
tax ($1.07 per diluted share), respectively. See notes 2 and 3 of the notes
to our consolidated financial statements for a discussion of the Circle
merger and other acquisitions made in 2000 and 1999.
(3) 1998 includes special charges of $10.7 million or $8.1 million net of tax
($0.17 per diluted share) recorded by the former Circle entity.
(4) 2001 includes a charge of $10.1 million or $6.2 million net of tax ($0.13
per diluted share) related to the EEOC legal settlement. See note 12 of the
notes to our consolidated financial statements.
(5) Net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period,
adjusted to include the following: (a) the retroactive restatement giving
effect to the 3-for-2 stock split in August 1999, and (b) the weighted
average of common stock equivalents issuable upon exercise of stock options,
less the number of shares that could have been repurchased with the exercise
proceeds using the treasury stock method. There were no common stock
equivalents included in the diluted weighted average share calculation for
the years ended December 31, 2001 and 2000, as their effect is anti-dilutive
given our net loss for those periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this report. In
addition, for information on our critical accounting policies and the judgment
made in their application, please read "Critical Accounting Polices" beginning
on page 38.
MERGER
On October 2, 2000, we completed a merger with Circle International Group,
Inc. by issuing approximately 17.9 million shares of our common stock for all of
the outstanding common stock of Circle. Each share of Circle common stock was
exchanged for one share of our common stock. Circle is a leader in providing
transportation and integrated logistics services for the international movement
of goods and the furnishing of value-added information, distribution and
inventory management services to customers worldwide. Circle is principally
engaged in international air and ocean freight forwarding, customs brokerage and
logistics. The merger was accounted for as a pooling of interests and,
accordingly, all of our prior period consolidated financial statements have been
restated to include the results of operations, financial position and cash flows
of Circle. No goodwill or other fair value adjustments to assets and liabilities
were recorded in connection with the merger.
RESULTS OF OPERATIONS
Our principal services are air freight forwarding, ocean freight
forwarding, and customs brokerage and other value-added logistics services. The
following table provides certain statement of operations data attributable to
EGL's principal services during the periods indicated. Revenue for air freight
and ocean freight consolidations (indirect shipments) includes the cost of
transporting such freight, whereas net revenue does not. Revenue for air freight
and ocean freight agency or direct shipments, customs brokerage and import
22
services, includes only the fees or commissions for these services. A comparison
of net revenue best measures the relative importance of our principal services.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2001 2000 1999(1)
--------------------- --------------------- ---------------------
% OF % OF % OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues:
Air freight forwarding....... $1,296,026 77.5 $1,465,438 78.7 $1,112,280 78.9
Ocean freight forwarding..... 176,470 10.6 184,602 9.9 137,024 9.7
Customs brokerage and
other..................... 199,498 11.9 211,166 11.4 159,946 11.4
---------- ----- ---------- ----- ---------- -----
Revenues....................... $1,671,994 100.0 $1,861,206 100.0 $1,409,250 100.0
========== ===== ========== ===== ========== =====
% OF NET % OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
---------- -------- ---------- -------- ---------- --------
Net revenues:
Air freight forwarding....... $ 386,171 59.9 $ 473,397 65.8 $ 379,602 64.6
Ocean freight forwarding..... 58,514 9.1 53,462 7.4 49,194 8.4
Customs brokerage and
other..................... 199,498 31.0 192,653 26.8 158,279 27.0
---------- ----- ---------- ----- ---------- -----
Net revenues................... $ 644,183 100.0 $ 719,512 100.0 $ 587,075 100.0
========== ===== ========== ===== ========== =====
Operating expenses:
Personnel costs.............. 383,211 59.5 378,461 52.6 302,373 51.5
Other selling, general and
administrative expenses... 294,488 45.7 256,270 35.6 211,840 36.1
EEOC legal settlement.......... 10,089 1.5 7,500 1.0 -- --
Transaction, restructuring and
integration costs............ 13,964 2.2 67,389 9.4 -- --
---------- ----- ---------- ----- ---------- -----
Operating income (loss)........ (57,569) (8.9) 9,892 1.4 72,862 12.4
Nonoperating income (expense),
net.......................... (8,442) (1.3) 2,549 0.3 11,158 1.9
---------- ----- ---------- ----- ---------- -----
Income (loss) before provision
(benefit) for income taxes... (66,011) (10.2) 12,441 1.7 84,020 14.3
Provision (benefit) for income
taxes........................ (25,834) (4.0) 13,163 1.8 32,310 5.5
---------- ----- ---------- ----- ---------- -----
Net income (loss).............. $ (40,177) (6.2) $ (722) (0.1) $ 51,710 8.8
========== ===== ========== ===== ========== =====
---------------
(1) On July 2, 2000, we changed our fiscal year end from September 30 to
December 31, effective with the calendar year ended December 31, 2000. A
three-month transition period from October 1, 1999 to December 31, 1999
precedes the start of the 2000 fiscal year. The financial data set forth for
"1999" have been prepared by combining our financial data for the year ended
September 30, 1999 with Circle's financial data for the year ended December
31, 1999. The financial data set forth for "2000" are for the 12 months
ended December 31, 2000. Accordingly, EGL's stand-alone results of
operations for the three months ended December 31, 1999 were $187.4 million,
$78.2 million, $15.7 million, $9.9 million, $0.35 and $0.33, respectively.
Unaudited pro forma revenues, net revenues, operating income, net income and
basic and diluted earnings per share for the year ended December 31, 1999
depicting the combined results of EGL and Circle as if EGL had a fiscal year
ended December 31, 1999 are $1,451.7 million, $601.9 million, $75.6 million,
$53.9 million, $1.18 and $1.14, respectively.
23
2001 Compared to 2000
Revenue. Revenue decreased $189.2 million, or 10.2%, to $1,672.0 million
in 2001 compared to $1,861.2 million in 2000 primarily due to decreases in air
freight forwarding revenue. Net revenue, which represents revenue less freight
transportation costs, decreased $75.3 million, or 10.5%, to $644.2 million in
2001 compared to $719.5 million in 2000.
Air freight forwarding revenue. Air freight forwarding revenue decreased
$169.4 million, or 11.6%, to $1,296.0 million in 2001 compared to $1,465.4
million in 2000 primarily as a result of volume decreases in North America and
Asia. The volume decreases in North America were primarily attributable 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 $87.2 million, or 18.4%, to
$386.2 million in 2001 compared to $473.4 million in 2000. The air freight
forwarding margin (net revenue as a percentage of revenue) declined to 29.8% in
2001 as compared to 32.3% for 2000 due to a softening of the U.S. economy,
primarily in the technology, telecommunications and automotive industries, and
the resulting shift from air expedited shipments to economy ground deferred
shipments which generate lower revenue and lower margins. The air freight
forwarding margin was also adversely impacted in 2001 by the fixed costs of
transportation related to 14 charter aircraft leases mainly utilized in North
America which were carrying less freight than targeted operating levels as a
result of the factors discussed in the previous sentence. In June 2001, we paid
$2.0 million to terminate one of our air charter lease agreements. In mid-August
2001, we negotiated agreements to reduce our exposure to future losses on leased
aircraft. A lease for two of the aircraft was terminated with no financial
penalty, and we agreed to sublease five aircraft on another lease to a third
party at rates below our contractual commitment, which resulted in a charge in
2001 of approximately $2.3 million. As of December 31, 2001, we were obligated
under one lease agreement for four aircraft that expires during 2003. Although
Asia experienced lower revenues from lower activity, the air freight forwarding
net revenue margin for Asia improved due to better buying opportunities from
carriers.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
decreased $8.1 million, or 4.4%, to $176.5 million in 2001 compared to $184.6
million in 2000 primarily as a result of volume decreases in North America and
Asia. Ocean freight forwarding net revenue increased $5.0 million, or 9.4%, to
$58.5 million in 2001 compared to $53.5 million in 2000 due to increased direct
activity volumes in Europe, coupled with lower transportation costs in Asia,
North America and Europe for consolidation services. Activity from expanded
operations in France resulting from a joint venture with the Mory Group
contributed to the improved results in Europe. The ocean freight forwarding
margin increased to 33.2% in 2001 compared to 29.0% in 2000 primarily due to an
increase in the number of shipments moving on a direct basis rather than through
consolidation services and, to a lesser extent, better buying opportunities on
consolidation activity.
Customs brokerage and other revenue. Customs brokerage and other revenue,
which includes warehousing, distribution and other logistics services, decreased
$11.7 million, or 5.5%, to $199.5 million in 2001 compared to $211.2 million in
2000, while net customs brokerage and other revenue increased $6.8 million, or
3.5%, to $199.5 million in 2001 compared to $192.7 million in 2000. Customs
brokerage revenue was lower in 2001 due to a decrease in inbound traffic in all
geographic segments except Europe and Middle East. Activity from substantially
expanded operations in France and Ireland and the opening of a wholly owned
subsidiary in South Africa significantly contributed to the higher revenues in
the Europe and Middle East segment. Warehousing and distribution revenue
increased as a result of new and expanded warehousing customers mainly in North
America partially offset by a decline in activity in Asia.
Operating expenses. Total operating expenses (personnel and other selling,
general and administrative expenses, excluding EEOC legal costs and transaction,
restructuring and integration costs) were not reduced commensurate with the
decline in revenue during the early part of 2001 in anticipation of improved
activity levels. Additionally, actions taken during 2000 to add additional
warehouse and dock space in anticipation of continued market share gains and
growth in activity resulted in higher occupancy related expenses that came on
line during 2001. We also added significant IT related consultant expenses
during 2001 to develop an
24
integration plan and to begin the integration of the EGL and Circle IT systems.
The combination of a delay in implementing reductions in personnel related
expenses consistent with the lower activity levels, the addition of warehouse
and dock space that started in 2000 and higher IT related expenses contributed
to our losses in 2001.
Personnel costs include all compensation expenses, including those relating
to sales commissions and salaries and to headquarters employees and executive
officers. Personnel costs increased $4.7 million, or 1.2%, to $383.2 million in
2001 compared to $378.5 million in 2000. As a percentage of net revenue,
personnel costs were 59.5%, in 2001 compared to 52.6% in 2000. Our history of
rapid revenue growth has historically required us to increase our headcount at a
fast pace to prepare for increased levels of activity to maintain our high level
of customer service. As a result, employee headcount increased throughout 2000
and into early 2001 in anticipation of efforts to integrate and grow in
connection with the EGL/Circle merger. When freight shipments began to slow
toward the end of the first quarter of 2001, we attempted to alleviate the
impact of the slowdown by implementing a furlough program in March 2001. With no
strong signs of a near-term economic rebound, we reduced our headcount during
the remainder of 2001 to bring it in line with then current activity levels.
During 2001, approximately 980 regular full-time and contract employees were
released, including the former Circle headquarters employees. These reductions
represented approximately 17% of our U.S. workforce. In the Europe and Middle
East region, headcount was increased by 11% due to new and expanded operations
in France, Ireland and South Africa. The associated compensation expenses were
the main cause of the increase in our total personnel costs. We implemented a
temporary salary reduction for five pay periods during the first quarter of 2002
for salaried personnel in the U.S. in an effort to decrease personnel costs
during our seasonally slow first quarter.
Other selling, general and administrative expenses, excluding EEOC legal
costs and transaction, restructuring and integration costs, increased $38.2
million, or 14.9%, to $294.5 million in 2001 compared to $256.3 million in 2000.
As a percentage of net revenue, other selling, general and administrative
expenses, excluding EEOC legal costs and transaction, restructuring and
integration costs, were 45.7% in 2001 compared to 35.6% in 2000. This increase
is due to an overall increase in the level of our activities during 2000 and the
first nine months of 2001 without the corresponding net revenue growth in 2001
due to the reduced shipping volumes and the shift from air expedited shipments
to economy ground deferred shipments which generate lower revenue at lower
margins, but with a similar cost structure.
EEOC legal settlement. In 2001, we entered into an agreement to settle a
claim with the EEOC and recorded a charge of $10.1 million during the third
quarter, which included $8.5 million placed into a settlement fund, $0.5 million
to establish a leadership development program, legal fees, administrative costs
and other costs associated with the litigation and settlement. The $10.1 million
charge was in addition to the $7.5 million charge we recognized in 2000 for the
estimated costs of defending against these claims.
Transaction, restructuring and integration costs. Primarily in connection
with the Circle merger, we recorded merger-related costs of $14.0 million, or
$8.5 million after tax, during 2001 and $67.4 million, or
25
$49.9 million after tax, during 2000. The categories of costs incurred, the
actual cash payments made in 2001 and 2000 and the accrued balances at December
31, 2001 and 2000 are summarized below (in thousands):
AMOUNTS PAID/ ACCRUED BALANCE REVISIONS TO AMOUNTS PAID/ ACCRUED BALANCE
WRITTEN OFF IN AT DECEMBER 31, NEW CHARGES ESTIMATES WRITTEN OFF IN AT DECEMBER 31,
TOTAL 2000 2000 2001 2001 2001 2001
------- -------------- --------------- ----------- ------------ -------------- ---------------
Cash costs:
Transaction costs... $ 9,774 $ (9,774) $ -- $ -- $ -- $ -- $ --
Severance costs..... 8,377 (2,110) 6,267 3,345 (398) (8,301) 913
Future lease
obligations, net
of expected
sublease income... 11,105 (1,042) 10,063 1,917 2,746 (7,763) 6,963
Termination of joint
venture/agency
agreements........ 9,322 (4,110) 5,212 (3,000) (1,209) 1,003
Charter lease
obligation, net of
sublease income... -- -- -- 2,287 -- (2,287) --
Integration costs... 8,214 (4,780) 3,434 7,564 -- (10,998) --
------- -------- ------- ------- ------- -------- ------
Subtotal cash
cost.............. 46,792 (21,816) 24,976 15,113 (652) (30,558) 8,879
------- -------- ------- ------- ------- -------- ------
Noncash............... 20,597 (20,597) -- -- (497) 497 --
------- -------- ------- ------- ------- -------- ------
Total........ $67,389 $(42,413) $24,976 $15,113 $(1,149) $(30,061) $8,879
======= ======== ======= ======= ======= ======== ======
Transaction costs. Transaction costs of $9.8 million incurred in 2000
include investment banking, legal, accounting and printing fees and other costs
directly related to the merger.
Severance costs. Severance costs were recorded for certain employees at
the former Circle headquarters and former Circle management at certain
international locations who were terminated or notified of their termination
under our integration plan prior to December 31, 2000. As of December 31, 2000,
we no longer employed approximately 60 of the 150 employees included in the
integration plan we established in connection with the Circle acquisition. The
termination of substantially all of the remaining 90 employees occurred in the
first quarter of 2001. Additional severance costs of approximately $3.2 million
were recorded during the year ended December 31, 2001.
Also, during January 2001, we announced an additional reduction in our
workforce of approximately 125 additional employees. The charge for this
workforce reduction is approximately $0.1 million and was recorded during the
first quarter of 2001.
Future lease obligations. Future lease obligations consist of our
remaining lease obligations under noncancelable operating leases at domestic and
international locations that we are in the process of vacating and consolidating
due to excess capacity resulting from having multiple facilities in certain
locations. The provisions of our integration plan include the consolidation of
facilities of approximately 80 of our operating locations. As of December 31,
2001, consolidation of facilities has been completed at substantially all of
these locations with the remaining locations expected to be completed by the end
of the first quarter of 2002. During the second half of 2001, we determined the
estimated consolidation dates for several of the remaining facilities and
recorded an additional charge of $1.9 million. All lease costs for facilities
being consolidated are charged to operations until the date that we vacate each
facility.
Amounts recorded for future lease obligations under our integration plan
are net of approximately $31.3 million in anticipated future recoveries from
actual or expected sublease agreements. Sublease income has been anticipated
under the integration plan only in locations where sublease agreements have been
executed as of December 31, 2001 or are deemed probable of execution during the
first half of 2002. There is a risk that subleasing transactions will not occur
within the same timing or pricing assumptions made by us or at all, which could
result in future revisions to these estimates. During the year ended December
31, 2001, we
26
recorded an additional charge of $4.7 million based on revised estimates for
future recoveries from actual or expected sublease agreements that were or are
expected to be less favorable than anticipated due to the weakened U.S. economy.
In addition, during the fourth quarter of 2001, we decided to utilize two of the
facilities in our logistics operations as we determined the expected return on
operations was greater than the sublease income we expected to obtain in these
two markets. Therefore, we reversed the $2.0 million reserve established for
these facilities.
Termination of joint venture/agency agreements. Costs to terminate joint
venture/agency agreements represents contractually obligated costs incurred to
terminate selected joint venture and agency agreements with certain of our
former business partners along with assets that are not expected to be fully
recoverable as a result of our decision to terminate these agreements. In
conjunction with our integration plan, during the year ended December 31, 2001,
we completed the termination of joint venture and agency agreements in Brazil,
Chile, Panama, Venezuela, Taiwan and South Africa. We completed the termination
of joint venture agreements in South Africa and Taiwan on more favorable terms
than originally expected and revised the related estimate by reducing the
expected charge by $3.0 million.
Charter lease obligation. In August 2001, we negotiated agreements to
reduce our exposure to future losses on leased aircraft. A lease for two of the
aircraft was terminated with no financial penalty. We subleased five aircraft to
a third party at rates below our contractual commitment and recorded a charge of
approximately $2.3 million in the third quarter of 2001 for the excess of our
commitment over the sublease income through the end of the lease term. As of
December 31, 2001, we are obligated under one lease agreement with Miami Air
(one of our equity method investees) for four aircraft. This agreement expires
during 2003.
Integration costs. Integration costs of approximately $7.6 million and
$8.2 million were incurred during 2001 and 2000, respectively, and include the
costs of changing legal registrations in various jurisdictions, changing signs
and logos at our major facilities around the world, and other integration costs.
These costs have been expensed as incurred. Approximately $3.4 million of this
amount was unpaid at December 31, 2000.
Noncash charge. The noncash charge of $20.6 million in 2000 consists of
assets not expected to be recoverable, which include: (a) fixed assets at
various locations that will no longer be used in our ongoing operations after we
consolidate those locations; (b) computer hardware and software at the former
Circle operations that will no longer be used as these assets are not compatible
with our existing information technology strategy; and (c) assets not expected
to be fully recoverable as a result of our decision to terminate certain joint
venture/agency agreements. In 2001, we revised these estimates by approximately
$0.5 million for assets that were determined to be recoverable since they will
continue to be used in operations.
Operating income (loss). An operating loss of $57.6 million was incurred
in 2001 as compared to operating income of $9.9 million for 2000. The decrease
in operating income was primarily due to the 2001 decline in net revenues of
$75.3 million and the $38.2 million increase in other selling general and
administrative expenses, offset by a $53.4 million reduction in transaction,
restructuring and integration costs.
Nonoperating income (expense), net. Nonoperating expense, net of $8.4
million was incurred in 2001 as compared to nonoperating income, net of $2.5
million in 2000. During 2001, nonoperating expense, net resulted from a lower
level of interest income resulting from reduced short-term investments that were
liquidated to fund expansion activities and support operations, higher interest
expense from increased borrowings, losses from unconsolidated affiliates and no
benefit of net foreign exchange gains. These were partially offset by a $2.3
million gain recognized on recording the market value of an investment that
became marketable during the second quarter of 2001 and a lower expense for
recognition of minority interests.
Effective tax rate. The effective income tax rate for 2001 was 39.1%
compared to 105.8% for 2000. The 2000 effective tax rate was adversely impacted
by the transaction, restructuring and integration charges discussed in note 3 of
the notes to our consolidated financial statements. The effective tax rate for
2000 excluding these charges was 38.4%. Our effective tax rate fluctuates
primarily due to changes in the level of pre-tax income in foreign countries
that have different rates.
27
2000 Compared to 1999
Revenue. Revenue increased $451.9 million, or 32.1%, to $1,861.2 million
in 2000 compared to $1,409.3 million in 1999 primarily due to increases in air
freight forwarding revenue. Net revenue, which represents revenue less freight
transportation costs, increased $132.4 million, or 22.6%, to $719.5 million in
2000 compared to $587.1 million in 1999. Both revenue and net revenue growth
benefited from acquisitions completed during December 1999 and January 2000.
Air freight forwarding revenue. Air freight forwarding revenue increased
$353.1 million, or 31.7%, to $1,465.4 million in 2000 compared to $1,112.3
million in 1999 primarily as a result of volume increases in North America and,
to a lesser extent, Asia Pacific and South America. Air freight forwarding net
revenue increased $93.8 million, or 24.7%, to $473.4 million in 2000 compared to
$379.6 million in 1999.
The increase in North America resulted from the addition of significant
national account customers throughout 2000, substantial increases in activity
levels and expedited shipments for technology and telecommunications customers
and the effect of the acquisitions of two Canadian freight forwarding companies
in January 2000. See "-- Acquisitions -- CTI and Fastair." Air freight
forwarding revenue and net revenue reported by CTI and Fastair in 2000 were
$57.1 million and $19.0 million, respectively. The increase in Asia Pacific
resulted from the consolidation of a formerly unconsolidated affiliate in
Taiwan. For the twelve months ended December 31, 2000, Taiwan reported air
freight forwarding revenue and net revenue of $66.2 million and $6.3 million,
respectively. South America benefited from our acquisition of Compass Cargo
Limitada, a privately held air freight forwarder in Chile in December 1999 which
contributed air freight forwarding revenue and net revenue of $20.4 million and
$1.5 million, respectively, for the year ended December 31, 2000. The air
freight forwarding margin declined to 32.3% in 2000 compared to 34.1% in 1999
due to higher carrier costs, which included fuel surcharges and start-up costs
associated with a new dedicated leased aircraft servicing the U.S.-Asia market.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
increased $47.6 million, or 34.7%, to $184.6 million in 2000 compared to $137.0
million in 1999, while ocean freight forwarding net revenue increased $4.3
million, or 8.7%, to $53.5 million in 2000 compared to $49.2 million in 1999.
The increases were principally due to volume increases in Asia Pacific and
Europe. The ocean freight forwarding margin declined to 29.0% in 2000 compared
to 35.9% in 1999 primarily due to the conversion of direct shipments to
consolidations and higher carrier costs.
Customs brokerage and other revenue. Customs brokerage and other revenue,
which includes warehousing, distribution and other logistics services, increased
$51.3 million, or 32.1%, to $211.2 million in 2000 compared to $159.9 million in
1999, while net customs brokerage and other revenue increased $34.4 million, or
21.7%, to $192.7 million in 2000 compared to $158.3 million in 1999. Customs
brokerage revenue increased due to increased inbound traffic in North America
and Europe. Warehousing and distribution revenue increased as a result of
expanded warehousing facilities.
Operating expenses. Personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. Personnel costs increased $76.1 million, or
25.2%, to $378.5 million in 2000 compared to $302.4 million in 1999. As a
percentage of net revenue, personnel costs were 52.6% in 2000 compared to 51.5%
in 1999. This increase was due to increased staffing needs associated with the
opening of new terminals, the effect of acquisitions, expanded operations at
existing terminals and increased commissions resulting from higher revenues and
expanded corporate infrastructure.
Other selling, general and administrative expenses, excluding EEOC legal
costs and transaction, restructuring and integration costs, increased $44.5
million, or 21.0%, to $256.3 million in 2000 compared to $211.8 million in 1999
due to an overall increase in the level of our activities in 2000 and increased
expenses attributable to acquisitions. In addition, during the fourth quarter of
2000, we increased the provision for doubtful accounts by approximately $3.4
million to reserve for certain bad debts associated with the closure of an
unprofitable logistics facility and the termination of foreign agent
relationships.
28
EEOC legal settlement. During 2000 we reserved $7.5 million for legal
expenses to contest EEOC and related charges. See Item 3, "Legal Proceedings."
Operating income. Operating income decreased $63.0 million, or 86.4%, to
$9.9 million in 2000 compared to $72.9 million in 1999 primarily due to $67.4
million of transaction, restructuring and integration costs recorded in the
fourth quarter of 2000 in connection with the Circle merger.
Nonoperating income, net. Nonoperating income, net decreased $8.7 million,
or 77.7%, to $2.5 million in 2000 compared to $11.2 million in 1999. Our 1999
nonoperating income, net included a $4.5 million gain on the sale of securities
further discussed in note 11 of the notes to our consolidated financial
statements. During 2000, income from unconsolidated affiliates declined $2.3
million due primarily to the change in reporting of Taiwan from an
unconsolidated affiliate where we owned 50% in prior years to a consolidated
subsidiary with a minority interest of 49%. In addition, nonoperating income,
net decreased due to a lower level of interest income resulting from reduced
short-term investments that were liquidated to fuel expansion activity and
higher interest expense from increased borrowings.
Effective tax rate. The effective income tax rate for 2000 was 105.8%
compared to 38.5% for 1999. The 2000 effective tax rate was adversely impacted
by the transaction, restructuring and integration charges discussed in note 3 of
the notes to our consolidated financial statements. The effective tax rate for
2000 excluding these charges was 38.4%. 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
Our ability to satisfy our debt obligations, fund working capital and make
capital expenditures depends upon our future performance, which is subject to
general economic conditions and other factors, some of which are beyond our
control. We substantially reduced operating costs between the second and third
quarter of 2001 and worked to diversify our customer base. Additionally, we made
significant efforts to collect outstanding customer accounts receivable amounts
and were able to use the cash from these collections to avoid additional net
borrowings on our line of credit during the latter part of 2001. If we achieve
significant near-term revenue growth, we may experience a need for increased
working capital financing as a result of the difference between our collection
cycles and the timing of our payments to vendors.
We make significant disbursements on behalf of our customers for
transportation costs (primarily ocean) and customs duties. The billings to
customers for these disbursements, which are several times the amount of revenue
and fees derived from these transactions, are not recorded as revenue and
expense on our statement of operations; rather, they are reflected in our trade
receivables and trade payables. Growth in the level of this activity or
lengthening of the period of time between incurring these costs and being
reimbursed by our customers for these costs may negatively affect our liquidity.
2001 Compared to 2000
Cash provided by operating activities. Net cash provided by operating
activities was $23.5 million in 2001 compared to cash provided by operating
activities of $33.4 million in 2000. The decrease in 2001 was primarily due to
the loss incurred in 2001 and transaction, integration and restructuring costs
paid during 2001 as compared to income and corresponding cash flows that were
produced in 2000, partially offset by cash provided by collections of
receivables, net of other working capital uses.
Cash used in investing activities. Cash used in investing activities in
2001 was $23.2 million compared to $94.8 million in 2000. Capital expenditures
were $64.9 million during 2001 as compared to $70.4 million during 2000, a $5.5
million decrease. These expenditures were mainly due to information technology
initiatives and general facilities expansion in North America. Acquisitions of
businesses including the buyout of certain joint venture agreements in foreign
locations accounted for $4.6 million of cash used as compared to $28.7 million
in 2000. The sale and sale-leaseback of real estate and the sale of other assets
resulted in cash proceeds of $37.3 million in 2001.
29
Cash provided by financing activities. Cash provided by financing
activities in 2001 was $19.0 million compared to $48.3 million used in financing
activities in 2000. Net proceeds from the sale of 5% convertible subordinated
notes were $96.9 million in 2001. Proceeds from this sale were used to repay
amounts borrowed against the revolving line of credit of $82.0 million,
resulting in net borrowings of $14.5 million in 2001 as compared to net
borrowings of $43.6 million in 2000. Proceeds from the exercise of stock options
were $3.3 million in 2001 compared to $18.9 million in 2000. We expended $10.5
million to purchase treasury stock in 2000. We did not purchase any treasury
stock in 2001.
2000 Compared to 1999
Cash provided by operating activities. Net cash provided by operating
activities was $33.4 million in 2000 compared to $33.6 million in 1999. The
decrease in 2000 was primarily due to an increase in net working capital. Net
working capital increased $9.0 million during 2000 principally due to expansion
activities and the timing of receipts and disbursements.
Cash used in investing activities. Cash used in investing activities in
2000 was $94.8 million compared to $41.3 million in 1999. We incurred capital
expenditures of $70.4 million during 2000. These expenditures were mainly due to
information technology initiatives and general facilities expansion in North
America. Cash paid for acquisitions in 2000, net of cash acquired, was $28.7
million. See note 2 of the notes to our consolidated financial statements for a
discussion of business combinations.
Cash provided by financing activities. Cash provided by financing
activities in 2000 was $48.3 million compared to $1.9 million in 1999. Long-term
notes payable increased $58.8 million due primarily to a $56.0 million increase
in the revolving line of credit, which had a balance of $81.0 million at
December 31, 2000 compared to a $25.0 million balance in commercial paper at
December 31, 1999. Proceeds from the exercise of stock options were $18.9
million in 2000 compared to $11.1 million in 1999.
Other factors affecting our liquidity and capital resources
Convertible subordinated notes. In December 2001, we 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.
The notes are convertible at any time 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. 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.
We 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 us 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 EGL. The notes are
subordinated in right of payment to all of our existing and future senior
indebtedness as defined in the indenture. We and our 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
our assets.
Credit agreement. Effective December 20, 2001, we amended and restated our
existing credit agreement. The amended and restated credit facility, which was
amended effective as of March 7, 2002, is with a syndicate of three financial
institutions, with Bank of America, N.A. as collateral and administrative agent
for the lenders, and matures on December 20, 2004. The amended and restated
credit facility provides a revolving line of credit of up to the lesser of:
- $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
30
- an amount equal to:
- up to 85% of the net amount of our billed and posted eligible accounts
receivable and the billed and posted eligible accounts receivable of our
wholly owned domestic subsidiaries and our operating subsidiary in
Canada, subject to some exceptions and limitations, plus
- up to 85% of the net amount of our billed and unposted eligible accounts
receivable and billed and unposted eligible accounts receivable of our
wholly owned domestic subsidiaries owing by account debtors located in
the United States, subject to a maximum aggregate availability cap of
$10 million, plus
- up to 50% of the net amount of our unbilled, fully earned and unposted
eligible accounts receivable and unbilled, fully earned and unposted
eligible accounts receivable of our wholly owned domestic subsidiaries
owing by account debtors located in the United States, subject to a
maximum aggregate availability cap of $10 million, minus
- reserves from time to time established by Bank of America in its
reasonable credit judgment.
The aggregate of the four sub-bullet points above is referred to as our
eligible borrowing base. The amended and restated credit facility includes a $50
million letter of credit subfacility. We had $17.3 million in standby letters of
credit outstanding as of December 31, 2001 under this facility.
The maximum amount that we can borrow at any particular time may be less
than the amount of our revolving credit line because we are required to maintain
a specified amount of borrowing availability under the amended and restated
credit agreement based on our 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 our 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 our
eligible borrowing base:
- our borrowings under the amended and restated credit facility, and
- our accounts payable and the accounts payable of all of our domestic
subsidiaries and our 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,
we 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% if the amount available to be borrowed under the line of credit,
which we call our borrowing availability, is greater than or equal to
$65 million,
- 2.25% if the borrowing availability is less than $65 million, but
greater than or equal to $45 million,
- 2.50% if the borrowing availability is less than $45 million, but
greater than or equal to $25 million, and
- 2.75% if the borrowing availability is less than $25 million, or
- the prime rate announced by Bank of America, plus, if the borrowing
availability is less than $25 million, an applicable margin of 0.25%.
We refer 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 us) for such LIBOR tranche. The interest on a prime rate tranche is
payable monthly.
31
A termination fee would be payable upon termination of the amended and
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 Bank of America or its
affiliates).
We are subject to certain covenants under the terms of the amended and
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 amended and 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 our assets, and is guaranteed by all domestic subsidiaries and our
Canadian operating subsidiary. In addition, we will be subject to additional
restrictions, including restrictions with respect to distributions and asset
dispositions, if our eligible borrowing base falls below $40 million. Events of
default under the amended and restated credit facility include, but are not
limited to, the occurrence of a material adverse change in our operations,
assets or financial condition or our ability to perform under the amended and
restated credit facility or that any of our domestic subsidiaries or our
Canadian operating subsidiary.
No amounts were outstanding under this agreement as of March 28, 2002.
See note 6 of the notes to our consolidated financial statements for a
discussion of our credit agreement prior to December 20, 2001.
Other bank lines of credit and guarantees. We maintain a $10 million bank
line of credit, in addition to the $50 million sublimit under our amended and
restated credit facility, to secure customs bonds and bank letters of credit to
guarantee certain transportation expenses in foreign locations. At December 31,
2001, we were contingently liable for approximately $6.7 million, under
outstanding letters of credit and guarantees related to our $10 million line of
credit. Our ability to borrow under bank lines of credit and to maintain bank
letters of credit is subject to the limitations on additional indebtedness
contained in our amended and restated credit facility discussed above.
Additionally several of our foreign operations guarantee amounts associated with
our custom brokerage services. As of December 31, 2001, these outstanding
guarantees approximated $15.6 million.
Sale-leaseback. On December 31, 2001, we terminated an operating lease
agreement relating to our corporate headquarters facility in Houston, Texas and
purchased the property covered by this agreement for $8.1 million. In connection
with the termination of the lease agreement and the purchase of the property, we
entered into a transaction whereby we sold this property and certain other
properties in Houston and Denver owned by us with a net book value of $17.2
million to an unrelated third party for $18.6 million, net of closing costs of
$0.8 million. Mr. Crane also conveyed his ownership in a building adjacent to
the Houston facility directly to the buyer and received approximately $5.8
million in proceeds. Mr. Crane's investment in the building was approximately
$5.8 million. One of our subsidiaries then leased these properties for a term of
16 years, with options to extend the initial term for up to an additional 15
years. Under the terms of the new lease agreement, the quarterly lease payment
is approximately $0.9 million, which amount is subject to escalation after the
first two years based on increases in the Consumer Price Index.
Synthetic lease agreements. We have 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 us real estate at some
of our 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 our balance sheet. Thus, the obligations are not recorded as
debt and the underlying properties are not recorded as assets on our balance
sheet. Under a synthetic lease, our rental payments (which approximate interest
amounts under the synthetic lease financing)
32
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. On April 3, 1998, we 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
us. 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 $0.1 million 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
December 31, 2001, the aggregate lease balance was approximately $14.1 million.
If these facilities were consolidated in our financial statements, we would
reflect an increase in property and equipment and in indebtedness of
approximately $14.1 million and the annual depreciation expense would increase
by approximately $0.4 million. We intend to enter into alternative financing
arrangements for these facilities prior to November 2002.
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 us from incurring debt
in an amount greater than $30 million, except pursuant to a single credit
facility involving a commitment of not more than $110 million and $100 million
of 5% convertible subordinated notes.
We have 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 we do not exercise the
purchase option, and do not otherwise meet our obligations, we are subject to a
deficiency payment computed as the amount equal to the outstanding lease balance
minus the then current fair market value of each financed facility within
limits, up to a maximum of $13.7 million. We expect that the amount of any
deficiency payment would be expensed. We 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 agreement relates to the land and is currently
being accounted for as a synthetic operating lease. We are required to make
bi-annual payments of $0.1 million for 10 years under the synthetic lease. At
December 31, 2001, the lease balance was approximately $9.5 million.
A second agreement relates to the building and improvements and is
accounted for as a capital lease rather than as a synthetic lease. Therefore,
the fixed asset and related liability for the second lease are included in our
balance sheet. Property under the capital lease is amortized over the lease
term. As of December 31, 2001, the carrying value of property held under the
building and improvements lease was $3.7 million, which is net of $1.9 million
of accumulated amortization.
Computer system upgrades. We are in the process of developing and
implementing computer system solutions for operational and financial systems. As
of December 31, 2001, we had capitalized $20.9 million related to the
development of these systems. This amount is currently not being depreciated.
Once placed in service, depreciation related to the systems will be charged.
Miami Air. Please read "-- Certain Relationships and Related
Transactions -- Miami Air" for information on our investment in Miami Air,
including Miami Air's efforts to renegotiate its loan obligations and lease
commitments with its creditors given the status of the airline industry as a
result of the events of September 11 and the weak economy.
33
Share repurchase. In January 2000, our board of directors authorized the
repurchase of up to one million shares of our outstanding common stock. In April
2000, our board of directors increased the authorization to three million
shares. Our intention has been that repurchases would help to offset increases
in the number of shares outstanding resulting from previous and future stock
option exercises. On July 2, 2000, our board of directors terminated the share
repurchase authorization, at which time we had repurchased an aggregate of
449,500 shares for a total of $10.5 million under the authorization.
Stock options. As of December 31, 2001, we had outstanding non-qualified
stock options to purchase an aggregate of 5.9 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 fiscal years ended December
31, 2001 and December 31, 2000 of non-qualified stock options to purchase an
aggregate of 0.5 million and 1.2 million shares of common stock, we are entitled
to a federal income tax deduction of approximately $7.8 million and $17.0
million, respectively. We have recognized a reduction of our federal and state
income tax liability of approximately $3.0 million and $5.0 million in 2001 and
2000. 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.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of payments due by period of our contractual obligations and
commercial commitments as of December 31, 2001 are shown in the tables below (in
thousands). A more complete description of these obligations and commitments is
included in the notes to our consolidated financial statements as referenced
below.
LESS THAN 1-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------------------- -------- --------- -------- ------- --------
Long-term debt.................... $111,724 $ 7,950 $ 2,605 $ 267 $100,902
Capital lease obligations......... 3,309 608 1,216 608 877
Operating leases.................. 359,731 51,537 105,437 82,470 120,287
-------- ------- -------- ------- --------
Total contractual obligations..... $474,764 $60,095 $109,258 $83,345 $222,066
======== ======= ======== ======= ========
As of December 31, 2001, we had approximately $48.3 million of standby
letters of credit and surety bonds maturing in less than one year, approximately
$7.0 million of standby letters of credit and surety bonds maturing in one to
three years and no standby letters of credit and surety bonds maturing in more
than three years. As of December 31, 2001, we also had $1.9 million of other
commercial commitments without a maturity.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Aircraft Leasing Companies
James R. Crane, our Chairman of the Board, President and Chief Executive
Officer, holds interests in two entities (one of which is 50% owned and one of
which is wholly owned by Mr. Crane) that lease passenger aircraft to us. From
time to time, our employees use these aircraft in connection with travel
associated with our business, for which we make payments to those entities.
Under our arrangement with Mr. Crane during the period from January 1, 2001
through July 31, 2001, we reimbursed Mr. Crane for approximately $0.1 million
per month in monthly lease obligations for a total of $0.8 million. In August
2001, we revised our agreement with Mr. Crane whereby we are now charged for
actual company usage of the aircraft on an hourly
34
basis and are billed on a periodic basis. During the period August 1, 2001
through December 31, 2001, we reimbursed Mr. Crane $0.05 million for hourly
usage of the aircraft.
Investment in Miami Air International, Inc.
In July 2000, we purchased 24.5% of the outstanding common stock of Miami
Air International, Inc., a privately held domestic and international passenger
and freight charter airline headquartered in Miami, Florida, for approximately
$6.3 million in cash in a stock purchase transaction. Our primary objective for
engaging in the transaction was to develop a business relationship with Miami
Air in order to obtain access to an additional source of reliable freight
charter capacity. In the transaction, certain stockholders of Miami Air sold 82%
of the aggregate number of outstanding shares of Miami Air common stock to
private investors, including EGL, James R. Crane and Frank J. Hevrdejs, a member
of our Board of Directors. Mr. Crane purchased 19.2% of the outstanding common
stock for approximately $4.7 million in cash, and Mr. Hevrdejs purchased 6.0% of
the outstanding common stock for approximately $1.5 million in cash.
In connection with the Miami Air investment, Miami Air and EGL 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
EGL for a three-year term, and we 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 EGL an annual
fee equal to 3.0% of the face amount of the letter of credit and to reimburse
EGL for any payments owed by EGL in respect of the letter of credit. As of
December 31, 2001 Miami Air had no funded debt under the line of credit that is
supported by the EGL letter of credit. However, Miami Air had outstanding $2.8
million in letters of credit that were supported by the EGL letter of credit.
There were previously four aircraft subject to the aircraft charter
agreement. During 2001, we paid Miami Air approximately $11.8 million under the
aircraft charter agreement for use of four 727 cargo airplanes under an
aircraft, crew, maintenance and insurance, or ACMI, arrangement. The payments
were based on market rates in effect at the time the lease was entered into. In
late February 2002, EGL and Miami Air mutually agreed to ground one of these
aircraft because of the need for maintenance on that plane. We are negotiating
with Miami Air to reduce the costs of operating the remaining three aircraft and
are further exploring opportunities to reduce our dependence on those planes. We
have been made aware of Miami Air's efforts to renegotiate its loan obligations
and lease commitments with their creditors given the status of the airline
industry as a result of the events of September 11 and the weak economy. If
Miami Air is not able to successfully reach agreement with its creditors, or if
its business continues to decline, we would expect to reassess the carrying
value of our $6.1 million common stock investment in Miami Air (the result of
which may be an impairment charge) and may be required to perform on our credit
support ($2.8 million outstanding as of March 28, 2002 against a $7 million
standby letter of credit) on behalf of Miami Air (the result of which may be the
recognition of a related loss).
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 has 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.
Miami Air has indicated that they are 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. An offer from a third
party to purchase three of the 727 cargo planes being leased by EGL is also
being evaluated by Miami Air. If the three 727 cargo planes are sold, EGL
expects that it would be released from its lease obligations. Miami Air has
informed EGL that its creditors have indicated a willingness to make
concessions. There can be no assurance as to the amount, timing or terms of such
concessions, if any.
Miami Air is interested in exiting the 727 business to concentrate
primarily on 737 passenger business. Miami Air believes its business model is
viable if it is able to: (1) exit the 727 business -- this
35
division's cost structure, pricing and scale are no longer competitive; (2)
obtain concessions from its bank and lessors, and (3) focus on 737 passenger
business.
Miami Air, each of the private investors and the continuing Miami Air
stockholders also entered into a stockholders agreement under which:
- Mr. Crane and Mr. Hevrdejs are obligated to purchase up to approximately
$1.7 million and $0.5 million, respectively, worth of Miami Air's Series
A preferred stock upon demand by the board of directors of Miami Air,
- each of EGL and Mr. Crane has the right to appoint one member of Miami
Air's board of directors, and
- 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 February 28, 2002, directors appointed to Miami Air's board include a
designee of Mr. Crane, Mr. Elijio Serrano (our 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 EGL were negotiated
with Miami Air's management at arms length at the time of our 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 our directors in other business transactions unrelated to
Miami Air.
For additional information, please also read "-- Liquidity and Capital
Resources -- Other factors affecting our liquidity and capital
resources -- Miami Air."
EGL Subsidiaries in Spain and Portugal
In 1999, Circle sold a 49% interest in two Circle subsidiaries in Spain and
Portugal to Peter Gibert, who relocated to Barcelona, Spain. Mr. Gibert
currently serves as the managing director of both subsidiaries and is one of our
directors.
Circle's outside advisors determined the methodology for determining the
value of the subsidiaries, which was deemed to be fair by a third-party
valuation expert. The agreed purchase price was $1.3 million, paid one-third at
closing, and the balance to be paid in equal installments 18 and 36 months
following closing. The two installment payments were evidenced by a promissory
note bearing interest at six percent (6%) and secured by a pledge of Mr.
Gibert's interest in the subsidiaries. The loan balance as of December 31, 2001
was $0.4 million.
In addition, the purchase agreement provides Mr. Gibert with the right at
his option to require Circle, and now EGL, to purchase his interest in the
subsidiaries at a price based on the same valuation methodology. After December
31, 2005 (or earlier under certain circumstances), we have the right to require
Mr. Gibert to sell his entire interest in the subsidiaries at a price based on
the valuation methodology.
Consulting Agreement
In connection with Peter Gibert stepping down as Chief Executive Officer of
Circle and relocating to Spain in 1999, Mr. Gibert entered into a consulting
agreement with Circle pursuant to which he agreed to provide sales, marketing,
strategic planning, acquisition, training and other assistance as reasonably
requested wherever Circle has operations, other than in the United States, Spain
and Portugal. The consulting agreement provided for annual compensation in the
first year of $0.4 million and annual compensation in the second and third years
of $0.3 million per year. The consulting agreement, which has a three-year term
that commenced January 1, 1999, also prohibits Mr. Gibert, directly or
indirectly, from competing against Circle during the term of the consulting
agreement, plus six months thereafter.
36
Upon returning to Circle as Interim Chief Executive Officer in May 2000,
Mr. Gibert agreed to suspend the term of the consulting agreement until he was
no longer an employee of Circle, which occurred in November 2000 as a result of
our merger with Circle. The original term of the consulting agreement has been
extended for a period equal to the period during which the consulting agreement
was suspended. This arrangement was extended in June 2001 until May 31, 2004.
Source One Spares
Mr. Crane, our Chairman, President and Chief Executive Officer, is a
director and 24.9% shareholder of Source One Spares, Inc., a company
specializing in the "just-in-time" delivery of overhauled flight control,
actuation and other rotable airframe components to commercial aircraft operators
around the world. In May 1999, we began subleasing a portion of our warehouse
space in Houston, Texas and London, England to Source One Spares pursuant to a
five-year sublease, which terminated in 2002. Rental income was approximately
$0.1 million for the year ended December 31, 2001. During 2001, we billed Source
One Spares approximately $0.5 million for freight forwarding services.
Sale-Leaseback
In connection with a sale-leaseback agreement entered into by us, Mr. Crane
conveyed his ownership in a building adjacent to the Houston facility directly
to a third party buyer. We then leased the property directly from the buyer. See
"-- Other factors affecting our liquidity and capital resources."
ACQUISITIONS
Eagle Transfer, Inc. and S. Boardman (Air Services) Limited
On April 3, 1998, we acquired substantially all of the operating assets and
assumed some liabilities of Eagle Transfer, Inc., a privately held international
freight forwarder/consolidator based in Miami, Florida. Despite the similarity
in names, EGL and Eagle Transfer had no prior affiliation. On April 14, 1998, we
acquired all of the outstanding stock of S. Boardman (Air Services) Limited, a
privately held full services forwarder based in London, England. The aggregate
purchase price for the two 1998 acquisitions was approximately $5.4 million,
including $4.3 million in cash plus 41,999 shares of common stock valued at $0.8
million. The agreements also specify maximum contingent earnout payments in the
aggregate of $2.0 million in cash plus $2.3 million in common stock, if
specified performance benchmarks are met during the three-year period following
the acquisitions. The acquisitions were accounted for as purchases. Accordingly,
in each case the purchase price was allocated based upon the estimated fair
market value of the net assets acquired with the excess being recorded as
goodwill. The results of operations for the acquired operations were included in
the consolidated statement of operations from the acquisition date forward.
Through December 31, 2001, contingent payments of $2.0 million in cash and our
common stock had been recorded and recognized as additional goodwill in
connection with the 1998 acquisitions.
Compass Cargo Limitada
On December 15, 1999, we completed the acquisition of Compass Cargo
Limitada, a privately held air freight forwarder in Chile for an aggregate
purchase price of $1.2 million in cash at closing. The results of operations for
Compass Cargo Limitada were included in the consolidated statement of operations
from the acquisition date forward.
CTI and Fastair
On January 7, 2000, we completed the acquisitions of two commonly
controlled freight forwarding companies in Canada, Commercial Transport
International (Canada) Ltd. and Fastair Cargo Systems Ltd., for an aggregate
purchase price of approximately $21.3 million in cash paid at closing and
approximately $4.9 million to be paid in cash in three annual installments
beginning in 2001. The agreement also provided for an earnout. The agreement was
amended in December 2000 to provide that the remaining earnout payments will
consist of (a) shares of our common stock with a value of $3.5 million, which
shares were issued in 2001,
37
and (b) eight quarterly installments of $0.1 million beginning in December 2000
if CTI and Fastair achieve certain budgeted results for the previous quarter.
Through December 31, 2001, contingent payments of $6.4 million had been recorded
and recognized as additional goodwill in connection with this acquisition. If
CTI and Fastair achieve only a portion of the budgeted results for a particular
quarter, then the related quarterly installment will be reduced pro rata;
provided, that if CTI and Fastair thereafter achieve the annual budgeted
results, the last quarterly installment for the fiscal year in question will be
increased by the amount of any previous decreases during the fiscal year in
question. Each of these acquisitions were accounted for as a purchase and the
results of operations for the acquired businesses are included in consolidated
statement of operations from the acquisition date forward.
Miami Air International, Inc.
In July 2000, we purchased 24.5% of the outstanding common stock of Miami
Air International, Inc., a privately held domestic and international charter
airline headquartered in Miami, Florida, for approximately $6.3 million in cash
in a stock purchase transaction. For additional information, see "-- Certain
Relationships and Related Transactions" above.
Circle International Group, Inc.
On October 2, 2000, we completed the acquisition of Circle. The merger is
intended to qualify as a tax-free reorganization for U.S. federal income tax
purposes and as a pooling of interests for accounting and financial reporting
purposes. As a result of the merger, each share of Circle's common stock issued
and outstanding immediately prior to the effective time of the merger (other
than shares owned by Circle, EGL or the special purpose merger subsidiary) has
been converted to the right to receive one validly issued, fully paid and
nonassessable share of our common stock. In the aggregate, we issued 17.9
million shares of our common stock in exchange for issued and outstanding shares
of Circle common stock and assumed options exercisable for 1.1 million shares of
our common stock. The exchange ratio of one share of our common stock for each
share of Circle common stock was determined by arms-length negotiations between
us and Circle. See note 2 of the notes to our consolidated financial statements.
SEASONALITY
Historically, our operating results have been subject to a limited degree
to seasonal trends when measured on a quarterly basis. The first quarter, ending
March 31, has traditionally been the weakest, and the third quarter, ending
September 30, has traditionally been the strongest. This pattern is the result
of, or is influenced by, numerous factors, including climate, national holidays,
consumer demand, economic conditions and a myriad of other similar and subtle
forces. In addition, this historical quarterly trend has been influenced by the
growth and diversification of our terminal network. We cannot accurately
forecast many of these factors, nor can we estimate accurately the relative
influence of any particular factor. As a result, there can be no assurance that
historical patterns, if any, will continue in future periods.
CRITICAL ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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.
38
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,
- whether historical trends are expected to be representative of future
trends,
- future estimates of cash flows to be produced by various assets and
groups of assets,
- how long assets are expected to remain productive before they must be
replaced or undergo substantial repairs,
- what the fair market value of an asset or liability may be at a point in
time when there is no established trading market where the specific asset
or liability can be readily sold or settled,
- expectations regarding the financial viability of counterparties to
business transactions with us and the counterparties' ability,
willingness and whether they actually will perform in accordance with
their business obligations under the terms of the arrangements,
- in some circumstances management judgment must be applied to interpret
what the provisions of commercial arrangements obligate the parties to do
and estimates are sometimes required of the efforts and cost necessary to
meet those obligations or to resolve disputes among the parties,
including the costs related to resolving litigation,
- expectations of future income for financial and income tax reporting
purposes to evaluate the recoverability of certain assets, and
- and the categorization and allocation of costs among different categories
reported in the financial statements, as well as estimates of reasonable
pricing assumptions used in our segment reporting analysis.
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.
Revenue recognition
Revenue and freight consolidation costs are recognized at the time the
freight departs the terminal of origin, one of the permissible methods
authorized by Emerging Issues Task Force Issue No. 91-9 Revenue and Expense
Recognition for Freight Services in Process. This method generally results in
recognition of revenue and gross profit earlier than methods that do not
recognize revenue until a proof of delivery is received. Customs brokerage and
other revenues are recognized upon completing the documents necessary for
customs clearance or completing other fee-based services. Revenue recognized as
an indirect air carrier or an
39
ocean freight consolidator includes the direct carrier's charges to EGL for
carrying the shipment. Revenue recognized in other capacities includes only the
commission and fees received. In December 1999, the SEC issued Staff Accounting
Bulleting (SAB) No. 101, Revenue Recognition in Financial Statements, and
related interpretative guidelines in November 2000. The provisions of SAB No.
101 had no material impact on our financial statements.
Computer software
We account for internally developed software using the guidelines of the
American Institute of Certified Public Accountants Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. This standard requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. This SOP also requires that
costs related to the preliminary project stage, data conversion and the
post-implementation/operation stage of an internal-use computer software
development project be expensed as incurred. Upon retirement or sale of assets,
the cost of such assets and accumulated depreciation are removed from the
accounts and the gain or loss, if any, is credited or charged to income.
We have incurred substantial costs during 2001 and 2000 related to a number
of information systems projects that were being developed during that time
period. Inherent in the capitalization of those projects are the assumptions
that after considering the technological and business issues related to their
development, such development efforts will be successfully completed and that
benefits to be provided by the completed projects will exceed the costs
capitalized to develop the systems. Management believes that all projects
capitalized at December 31, 2001 and 2000 will be successfully completed and
will result in benefits recoverable in future periods.
Goodwill and other intangibles
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired, and other intangible assets are amortized on a
straight-line basis over the period of expected benefit, not exceeding 40 years.
Goodwill is a residual amount and is determined after numerous estimates are
made regarding the fair values of assets and liabilities included in a business
combination, and therefore, indirectly affected by management's estimates and
judgments. Accumulated amortization as of December 31, 2001 and 2000, was $15.7
million and $19.0 million, respectively.
Impairment of assets
The carrying value of long-lived assets, including goodwill, is reviewed
periodically based on the projected undiscounted cash flows of the related asset
or the business unit over the remaining amortization period. If the cash flow
analysis indicates that the carrying amount of an asset exceeds related
undiscounted cash flows, the carrying value will be reduced to the estimated
fair value of the assets or the present value of the expected future cash flows.
Substantial judgment is necessary in the determination as to whether an event or
circumstances have occurred that may trigger an impairment analysis and in
determination of the related cash flows from the asset. Estimating cash flows
related to long-lived assets is a difficult and subjective process that applies
historical experience and future business expectations to revenues and related
operating costs of assets. Should impairment appear to be necessary, subjective
judgment must be applied to estimate the fair value of the asset, for which
there may be no ready market, which oftentimes results in the use of discounted
cash flow analysis and judgmental selection of discount rates to be used in the
discounting process.
Other critical accounting policies
See note 1 of the notes to our consolidated financial statements for
further information on our critical accounting policies and the judgment made in
their application.
40
NEW ACCOUNTING PRONOUNCEMENTS
See note 1 of the notes to our consolidated financial statements for a
description of new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flows and net income are subject to fluctuations due to changes in
exchange rates. We attempt to limit our exposure to changing foreign exchange
rates through operational actions. We provide services to customers in locations
throughout the world and, as a result, operate with many functional currencies
including the key currencies of North America, Latin America, Asia, the South
Pacific and Europe. This diverse base of local currency costs serves to
partially counterbalance the effect of potential changes in the value of our
local currency denominated revenues and expenses. Short-term exposures to
changing foreign currency exchange rates are related primarily to intercompany
transactions. The duration of these exposures is minimized through the use of an
intercompany netting and settlement system that settles the majority of
intercompany obligations two times per month.
As of December 31, 2001, we had no amounts outstanding under our line of
credit. Our lease payments on certain financed facilities are tied to market
interest rates. At December 31, 2001, a 10% rise in the base rate for these
financing arrangements would not have a material impact on operating income in
2001.
We have not purchased any material futures contracts nor have we purchased
or held any material derivative financial instruments for trading purposes
during 2001. In the second quarter of 2000, we entered into contracts for the
purpose of hedging the costs of a portion of anticipated jet fuel purchases for
chartered aircraft during the following twelve months. These contracts matured
in the second quarter of 2001. Such contracts were nominally insignificant.
In April 2001, we entered into a three year interest rate swap agreement,
which was designated as a cash flow hedge, to reduce our exposure to
fluctuations in interest rates on $70 million of our LIBOR-based revolving
credit facility or any substitutive debt agreements we enter into. In December
2001, we issued $100 million of 5% convertible subordinated notes due December
15, 2006. The proceeds from these notes substantially retired the LIBOR-based
debt outstanding under the then-existing revolving credit agreement. The
interest rate on the convertible 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 has been 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 will be
amortized to interest expense over the remaining life of the swap agreement and
changes in fair value of the swap agreement will be recorded in interest
expense.
41
EXCHANGE RATE SENSITIVITY
The following tables provide comparable information about our
non-functional currency components of balance sheet items by currency, and
presents such information in U.S. dollar equivalents at December 31, 2001 and
2000. These tables summarize information on transactions that are sensitive to
foreign currency exchange rates, including non-functional currency-denominated
receivables and payables. The net amount that is exposed to changes in foreign
currency rates is then subjected to a 10% change in the value of the functional
currency versus the non-functional currency.
NON-FUNCTIONAL CURRENCY EXPOSURE IN U.S. DOLLAR EQUIVALENTS AS OF DECEMBER 31,
2001
(IN THOUSANDS)
FOREIGN EXCHANGE
GAIN/(LOSS) IF
FUNCTIONAL CURRENCY
NET EXPOSURE -------------------------
---------------------------------- APPRECIATES DEPRECIATES
NON-FUNCTIONAL CURRENCY ASSET LIABILITY LONG/(SHORT) BY 10% BY 10%
----------------------- ------- --------- ------------ ----------- -----------
United States dollar........... $10,095 $ 1,134 $ 8,961 $ 896 $(896)
Singaporean dollar............. 2,890 9,094 (6,204) (620) 620
Hong Kong dollar............... 6,430 1,438 4,992 499 (499)
European Union euro............ 6,449 2,832 3,617 362 (362)
Brazilian reals................ 4,296 7,164 (2,868) (287) 287
Taiwanese dollar............... 14,037 10,794 3,243 324 (324)
Chilean pesos.................. 430 3,099 (2,669) (267) 267
Indian rupee................... 4,197 3,526 671 67 (67)
British pound.................. 3,524 3,415 109 11 (11)
All others..................... 8,068 11,119 (3,051) (305) 305
------- ------- ------- ----- -----
Totals............... $16,219 $21,159 $(4,940) $(494) $ 494
======= ======= ======= ===== =====
NON-FUNCTIONAL CURRENCY EXPOSURE IN U.S. DOLLAR EQUIVALENTS AS OF DECEMBER 31,
2000
(IN THOUSANDS)
FOREIGN EXCHANGE
GAIN/(LOSS) IF
FUNCTIONAL CURRENCY
NET EXPOSURE -------------------------
---------------------------------- APPRECIATES DEPRECIATES
NON-FUNCTIONAL CURRENCY ASSET LIABILITY LONG/(SHORT) BY 10% BY 10%
----------------------- ------- --------- ------------ ----------- -----------
United States dollar.................... $18,322 $18,727 $ (405) $ (40) $ 40
Singaporean dollar...................... 2,250 1,442 808 81 (81)
Japanese yen............................ 1,061 396 665 66 (66)
British pound........................... 1,584 6,995 (5,411) (541) 541
German mark............................. (854) 1,341 (2,195) (220) 220
French franc............................ 852 160 692 69 (69)
Australian dollar....................... 417 118 299 30 (30)
All others.............................. 3,591 1,231 2,360 236 (236)
------- ------- ------- ----- -----
Totals........................ $27,223 $30,410 $(3,187) $(319) $ 319
======= ======= ======= ===== =====
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
information under the caption "Proposal 1 -- Election of Directors" and to the
information under the caption "Section 16(a) Reporting Delinquencies" in our
definitive Proxy Statement (the "2002 Proxy Statement") for our annual meeting
of shareholders to be held on May 22, 2002. The 2002 Proxy Statement will be
filed with the SEC not later than 120 days subsequent to December 31, 2001.
Pursuant to Item 401(b) of Regulation S-K, the information required by this
item with respect to our executive officers is set forth in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the 2002 Proxy Statement, which will be filed with the SEC not later than 120
days subsequent to December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the 2002 Proxy Statement, which will be filed with the SEC not later than 120
days subsequent to December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the 2002 Proxy Statement, which will be filed with the SEC not later than 120
days subsequent to December 31, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
ITEM PAGE
---- ----
Report of Independent Accountants........................... F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheet as of December 31, 2001 and
2000...................................................... F-4
Consolidated Statement of Operations for the Years Ended
December 31, 2001, 2000 and 1999.......................... F-5
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.......................... F-6
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999.................... F-8
Notes to Consolidated Financial Statements.................. F-9
43
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable regulations of
the Commission have been omitted because they are not required under the
relevant instructions or because the required information is given in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*2.1 -- Agreement and Plan of Merger, dated as of July 2, 2000 among
EGL, Inc., EGL Delaware I, Inc. and Circle International
Group, Inc. (Exhibit 2.1 to EGL's Current Report on Form 8-K
filed on July 5, 2000 and incorporated herein by reference).
*3.1 -- Second Amended and Restated Articles of Incorporation of
EGL, as amended (filed as Exhibit 3(i) to EGL'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 EGL (filed as Exhibit 3(ii)
to EGL's Form 10-Q for the fiscal quarter ended June 30,
2001 and incorporated herein by reference).
*3.3 -- Amended and Restated Bylaws of EGL, as amended (filed as
Exhibit 3(ii) to EGL'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 EGL's
Form 10-Q for the fiscal quarter ended September 30, 2001
and incorporated herein by reference).
*4.2 -- Indenture dated December 7, 2001 between EGL and JPMorgan
Chase Bank, as trustee (filed as Exhibit 4.1 to EGL's
Current Report on Form 8-K filed on December 10, 2001 and
incorporated herein by reference).
*4.3 -- First Supplemental Indenture dated December 7, 2001 between
EGL and JPMorgan Chase Bank, as trustee (filed as Exhibit
4.2 to EGL's Current Report on Form 8-K filed on December
10, 2001 and incorporated herein by reference).
*4.4 -- Form of 5% Convertible Subordinated Note due December 15,
2006 (filed as Exhibit 4.3 to EGL's Current Report on Form
8-K filed on December 10, 2001 and incorporated herein by
reference).
*4.5 -- Registration Rights Agreement dated December 7, 2001 between
EGL and Credit Suisse First Boston Corporation (filed as
Exhibit 4.4 to EGL's Current Report on Form 8-K filed on
December 10, 2001 and incorporated herein by reference).
+*10.1 -- Long-Term Incentive Plan, as amended and restated effective
July 26, 2000 (filed as Exhibit 10(ii) to EGL's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000
and incorporated herein by reference).
+*10.2 -- 1995 Non-employee Director Stock Option Plan (filed as
Exhibit 10.2 to EGL's Registration Statement on Form S-1,
Registration No. 33-97606 and incorporated herein by
reference).
+*10.3 -- 401(k) Profit Sharing Plan (filed as Exhibit 10.3 to EGL's
Registration Statement on Form S-1, Registration No.
33-97606 and incorporated herein by reference).
+*10.4 -- Circle International Group, Inc. 1994 Omnibus Equity
Incentive Plan (filed as Exhibit 10.11 to Annual Report on
Form 10-K of Circle (SEC File No. 0-8664) for the fiscal
year ended December 31, 1993 and incorporated herein by
reference).
+*10.5 -- Amendment No. 1 to Circle International Group, Inc. 1994
Omnibus Equity Incentive Plan (filed as Exhibit 10.11.1 to
Annual Report on Form 10-K of Circle (SEC File No. 9-8664)
for the fiscal year ended December 31, 1995 and incorporated
herein by reference).
44
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+*10.6 -- Circle International Group, Inc. Employee Stock Purchase
Plan (filed as Exhibit 99.1 to the Registration Statement on
Form S-8 of Circle (SEC Registration No. 333-78747) filed on
May 19, 1999 and incorporated herein by reference).
+*10.7 -- Circle International Group, Inc. 1999 Stock Option Plan
(filed as Exhibit 99.1 to the Form S-8 Registration
Statement of Circle (SEC Registration No. 333-85807) filed
on August 24, 1999 and incorporated herein by reference).
+*10.8 -- Form of Nonqualified Stock Option Agreement for Circle
International Group, Inc. 2000 Stock Option Plan (filed as
Exhibit 4.8 to Post-Effective Amendment No. 1 on Form S-8 to
Registration Statement on Form S-4 (SEC Registration No.
333-42310) filed on October 2, 2000 and incorporated herein
by reference).
*10.9 -- Shareholders' Agreement dated as of October 1, 1994 among
EGL and Messrs. Crane, Swannie, Seckel and Roberts (filed as
Exhibit 10.4 to EGL's Registration Statement on Form S-1,
Registration No. 33-97606 and incorporated herein by
reference).
*10.10 -- Form of Indemnification Agreement (filed as Exhibit 10.6 to
EGL's Registration Statement on Form S-1, Registration No.
33-97606 and incorporated herein by reference).
10.11A -- Credit Agreement dated December 20, 2001 between EGL and
Bank of America, N.A., and the other financial institutions
named therein.
10.11B -- First Amendment to Credit Agreement dated March 7, 2002
between EGL and Bank of America, N.A., and the other
financial institutions named therein.
+*10.12 -- Employment Agreement dated as of October 1, 1996 between EGL
and James R. Crane (filed as Exhibit 10.7 to EGL's Annual
Report on Form 10-K for the fiscal year ended September 30,
1996 and incorporated herein by reference).
+*10.13 -- Employment Agreement dated as of September 24, 1998 between
EGL and John C. McVaney (filed as Exhibit 10.9 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
+*10.14 -- Employment Agreement dated as of May 19, 1998 between EGL
and Ronald E. Talley (filed as Exhibit 10.10 to EGL's Annual
Report on Form 10-K for the fiscal year ended September 30,
1998 and incorporated herein by reference).
+*10.15 -- Employment Agreement dated as of October 19, 1999 between
EGL and Elijio Serrano (filed as Exhibit 10.11 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 and incorporated herein by reference).
+*10.16 -- Employee Stock Purchase Plan, as amended and restated
effective July 26, 2000 (filed as Exhibit 10(iii) to EGL's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
10.17A -- Lease Agreement dated as of December 31, 2001 between iStar
Eagle LP, as landlord, and EGL Eagle Global Logistics, LP,
as tenant.
10.17B -- Guaranty dated as of December 31, 2001 among iStar Eagle LP,
EGL Eagle Global Logistics, LP and EGL, Inc.
*10.18A -- Master Lease and Development Agreement dated as of April 3,
1998 between Asset XVI Holdings Company, L.L.C. and Eagle
USA Airfreight, Inc. (filed as Exhibit 10(iii) A to EGL's
Quarterly Report on Form 10-Q to the quarter ended June 30,
1998 and incorporated herein by reference).
*10.18B -- Master Participation Agreement dated as of April 3, 1998
among Asset XVI Holdings Company, L.L.C., Eagle USA
Airfreight, Inc. and Bank One, Texas, N.A. (filed as Exhibit
10(iii) B to EGL's Quarterly Report on Form 10-Q to the
quarter ended June 30, 1998 and incorporated herein by
reference).
*10.18C -- Loan Agreement dated as of April 3, 1998 between Asset
Holdings Company, L.L.C. and Bank One, Texas, N.A. (filed as
Exhibit 10(iii) C to EGL's Quarterly Report on Form 10-Q to
the quarter ended June 30, 1998 and incorporated herein by
reference).
45
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.18D -- Appendix I to Master Participation Agreement, Master Lease
and Development Agreement and Loan Agreement (filed as
Exhibit 10(iii) D to EGL's Quarterly Report on Form 10-Q to
the quarter ended June 30, 1998 and incorporated herein by
reference).
*10.18E -- First Amendment to Master Participation Agreement, Master
Lease and Development Agreement, and Loan Agreement dated as
of April 3, 1998 among Asset XVI Holdings Company, L.L.C.,
Eagle USA Airfreight, Inc. and Bank One, Texas, N.A. (filed
as Exhibit 10.19E to EGL's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by
reference).
*10.18F -- Amendment to Master Participation Agreement dated as of
April 1, 1999 among Asset XVI Holdings Company, L.L.C.,
Eagle USA Airfreight, Inc. and Bank One, Texas, N.A. (filed
as Exhibit 10.19F to EGL's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by
reference).
*10.18G -- Second Amendment to Participation Agreement, Lease Agreement
and Loan Agreement dated as of October 20, 2000 among Asset
XVI Holdings Company, L.L.C., EGL and Bank One, NA. (filed
as Exhibit 10.19G to EGL's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by
reference).
10.18H -- Third Amendment to Master Participation Agreement, Lease
Agreement and Loan Agreement dated December 20, 2001 between
EGL Asset XVI Holdings Company and Bank One, N.A.
+*10.19 -- Consulting Agreement dated as of January 1, 1999 between
Zita Logistics, Ltd. and Circle International European
Holdings Limited (filed as Exhibit 10.4.3 to Circle's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998 and incorporated herein by reference).
12 -- Ratio of Earnings to Fixed Charges.
21 -- Subsidiaries of EGL.
23.1 -- Consent of PricewaterhouseCoopers LLP.
23.2 -- Consent of Deloitte & Touche LLP.
---------------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
(b) On December 3, 2001, EGL filed a current Report on Form 8-K, which was
dated December 3, 2001, to furnish certain information under Item 9 thereof. On
December 10, 2001, EGL filed a current Report on Form 8-K, which was dated
December 10, 2001, to file certain information under Item 5 thereof.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on our
behalf by the undersigned, thereunto duly authorized.
EGL, INC.
By: /s/ JAMES R. CRANE
--------------------------------------
James R. Crane
Chairman, President and Chief
Executive Officer
Date: March 29, 2002
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME CAPACITY DATE
---- -------- ----
/s/ JAMES R. CRANE Chairman, President and Chief March 29, 2002
----------------------------------------------------- Executive Officer (Principal
James R. Crane Executive Officer)
/s/ ELIJIO V. SERRANO Chief Financial Officer and March 29, 2002
----------------------------------------------------- Director (Principal Financial and
Elijio V. Serrano Accounting Officer)
/s/ FRANK J. HEVRDEJS Director March 29, 2002
-----------------------------------------------------
Frank J. Hevrdejs
/s/ NEIL E. KELLEY Director March 29, 2002
-----------------------------------------------------
Neil E. Kelley
/s/ NORWOOD W. KNIGHT-RICHARDSON Director March 29, 2002
-----------------------------------------------------
Norwood W. Knight-Richardson
/s/ REBECCA A. MCDONALD Director March 29, 2002
-----------------------------------------------------
Rebecca A. McDonald
47
EGL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
PAGE
----
Report of Independent Accountants........................... F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheet as of December 31, 2001 and F-4
2000......................................................
Consolidated Statement of Operations for the Years Ended F-5
December 31, 2001, 2000 and 1999..........................
Consolidated Statement of Cash Flows for the Years Ended F-6
December 31, 2001, 2000 and 1999..........................
Consolidated Statement of Stockholders' Equity for the Years F-8
Ended December 31, 2001, 2000 and 1999....................
Notes to Consolidated Financial Statements.................. F-9
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
EGL, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, cash flows and stockholders' equity present fairly, in all
material respects, the financial position of EGL, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of the Company and Circle International Group,
Inc. on October 2, 2000 in a transaction accounted for as a pooling of
interests, as described in Note 2 to the consolidated financial statements. We
did not audit the financial statements of Circle International Group, Inc.,
which statements reflect total revenues of 58% and net income of 45% of the
related consolidated totals for the year ended December 31, 1999. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Circle International Group, Inc., is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 28, 2002
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders,
EGL, Inc.:
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Circle International Group, Inc. and subsidiaries for
the year ended December 31, 1999 (not presented herein). These financial
statements are the responsibility of Circle's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations,
stockholders' equity and cash flows of Circle International Group, Inc. and
subsidiaries for the year ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Francisco, California
March 29, 2000
F-3
EGL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001 AND 2000
2001 2000
-------- --------
(IN THOUSANDS,
EXCEPT PAR VALUES)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 77,440 $ 60,001
Restricted cash........................................... 5,413 --
Short-term investments and marketable securities.......... 3,442 13,056
Trade receivables, net of allowance of $11,628 and
$14,115................................................. 365,505 497,461
Other receivables......................................... 10,868 7,498
Deferred income taxes..................................... 29,897 21,646
Income tax receivable..................................... 3,125 2,128
Other current assets...................................... 29,411 10,996
-------- --------
Total current assets............................... 525,101 612,786
Property and equipment, net................................. 152,922 153,345
Investments in unconsolidated affiliates.................... 46,018 52,717
Goodwill, net............................................... 78,901 76,254
Other assets, net........................................... 14,237 9,123
-------- --------
Total assets....................................... $817,179 $904,225
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 7,950 $ 3,429
Trade payables and accrued transportation costs........... 216,073 260,802
Accrued salaries and related costs........................ 27,982 29,068
Accrued restructuring, merger and integration costs....... 8,879 24,976
Other liabilities......................................... 54,048 54,027
-------- --------
Total current liabilities.......................... 314,932 372,302
Deferred income taxes....................................... 19,155 23,343
Notes payable............................................... 103,774 91,051
Other noncurrent liabilities................................ 6,194 2,980
-------- --------
Total liabilities.................................. 444,055 489,676
-------- --------
Minority interests.......................................... 7,033 10,782
-------- --------
Commitments and contingencies (Notes 12, 13 and 14)
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;
50,065 and 49,803 shares issued; 48,939 and 48,411
shares outstanding...................................... 49 48
Additional paid-in capital................................ 156,543 150,131
Retained earnings......................................... 264,712 304,889
Accumulated other comprehensive loss...................... (37,045) (27,729)
Unearned compensation..................................... (635) (1,300)
Treasury stock, 1,126 and 1,392 shares held............... (17,533) (24,195)
Obligation to deliver common stock........................ -- 1,923
-------- --------
Total stockholders' equity......................... 366,091 403,767
-------- --------
Total liabilities and stockholders' equity......... $817,179 $904,225
======== ========
The accompanying notes are an integral part of these financial statements.
F-4
EGL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues................................................. $1,671,994 $1,861,206 $1,409,250
Cost of transportation................................... 1,027,811 1,141,694 822,175
---------- ---------- ----------
Net revenues............................................. 644,183 719,512 587,075
Operating expenses:
Personnel costs........................................ 383,211 378,461 302,373
Other selling, general and administrative expenses..... 294,488 256,270 211,840
EEOC legal settlement.................................... 10,089 7,500 --
Merger related transaction, restructuring and
integration costs (Note 3)............................. 13,964 67,389 --
---------- ---------- ----------
Operating income (loss).................................. (57,569) 9,892 72,862
Nonoperating income (expense), net....................... (8,442) 2,549 11,158
---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes.................................................. (66,011) 12,441 84,020
Provision (benefit) for income taxes..................... (25,834) 13,163 32,310
---------- ---------- ----------
Net income (loss)........................................ $ (40,177) $ (722) $ 51,710
========== ========== ==========
Net income (loss) per share:
Basic.................................................. $ (0.84) $ (0.02) $ 1.14
Diluted................................................ (0.84) (0.02) 1.11
Weighted average common shares outstanding:
Basic.................................................. 47,558 46,600 45,504
Diluted................................................ 47,558 46,600 46,481
The accompanying notes are an integral part of these financial statements.
F-5
EGL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $(40,177) $ (722) $ 51,710
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 33,033 30,009 22,334
Impairment of assets due to merger..................... (497) 20,597 --
Provision for doubtful accounts........................ 13,629 9,060 10,091
Amortization of unearned compensation.................. 803 605
Deferred income tax benefit............................ (12,453) (11,259) (2,725)
Amortization of deferred debt expense.................. 1,279 -- --
Interest capitalization................................ (854) -- --
Tax effect of stock options exercised.................. 2,956 4,991 4,454
Gain on sale of assets................................. (2,657) (755) (5,228)
Equity in (earnings) losses of affiliates, net of
dividends received................................... 3,100 (1,714) (3,156)
Minority interests, net of dividends paid.............. 313 146 338
Transfer to restricted cash............................ (5,413) -- --
Other.................................................. 65 (5,545) 2,202
Changes in assets and liabilities:
(Increase) decrease in trade receivables............... 98,726 (89,179) (82,900)
(Increase) decrease in other receivables............... (5,309) 10,790 (938)
(Increase) decrease in other assets and liabilities.... (20,837) 1,189 (2,736)
Increase (decrease) in payables and other accrued
liabilities.......................................... (26,561) 40,172 40,134
Increase (decrease) in accrued restructuring, merger
and integration costs................................ (15,600) 24,976 --
-------- -------- --------
Net cash provided by operating activities............ 23,546 33,361 33,580
-------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (64,866) (70,449) (41,906)
Purchases of marketable securities........................ -- -- (24,438)
Proceeds from sales/maturities of marketable securities... 6,740 7 24,731
Proceeds from sale-leaseback transaction.................. 16,667 -- --
Proceeds from sales of property and equipment............. 20,654 2,710 5,868
Net proceeds from sales (purchases) of short-term
investments............................................ -- 8,383 (436)
Acquisitions of businesses, net of cash acquired.......... (4,637) (28,664) (5,098)
Disposal of consolidated subsidiary....................... (819) -- --
Cash received from disposal of a unconsolidated
subsidiary............................................. 3,062 -- --
Investment in equity method investee...................... -- (6,300) --
Other..................................................... -- (452) --
-------- -------- --------
Net cash used in investing activities................ (23,199) (94,765) (41,279)
-------- -------- --------
F-6
EGL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Cash flows from financing activities:
Issuance (repayment) of notes payable..................... $(82,383) $ 43,634 $ 10,618
Net proceeds from convertible debt offering............... 96,875 -- --
Issuance of common stock, net of related costs............ 1,236 1,334 256
Proceeds from exercise of stock options................... 3,319 18,942 11,106
Treasury stock purchases.................................. -- (10,478) (14,845)
Dividends paid............................................ -- (4,764) (4,645)
Other..................................................... -- (362) (634)
-------- -------- --------
Net cash provided by financing activities.............. 19,047 48,306 1,856
-------- -------- --------
Effect of exchange rate changes on cash..................... (1,955) (5,586) (412)
-------- -------- --------
Cash flow from EGL on a stand-alone basis for the three
months ended December 31, 1999 (Note 18).................. -- -- 3,163
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 17,439 (18,684) (3,092)
-------- -------- --------
Cash and cash equivalents, beginning of the year............ 60,001 78,685 81,777
-------- -------- --------
Cash and cash equivalents, end of the year.................. $ 77,440 $ 60,001 $ 78,685
======== ======== ========
Supplemental cash flow information:
Cash paid for interest.................................... $ 8,552 $ 4,891 $ 2,951
Cash paid for income taxes................................ 9,704 29,934 28,301
Cash received from income tax refund...................... 27,456 -- --
Noncash transactions:
Issuance of stock for acquisitions..................... 3,503 200 --
Mortgages assumed in acquisitions...................... -- 5,818 --
Property acquired under capital lease.................. -- -- 4,366
Issuance of notes payable for acquisition.............. -- 5,939 --
Obligation to deliver common stock..................... -- 1,923 --
Exchange of investment as payment of a liability....... 2,234 -- --
The accompanying notes are an integral part of these financial statements.
F-7
EGL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMU-
LATED OBLIGA-
COMMON COMPRE- OTHER TREASURY TION TO
STOCK ADDITIONAL HENSIVE COMPRE- UNEARNED STOCK DELIVER
------------- PAID-IN RETAINED INCOME HENSIVE COMPEN- ---------------- COMMON
SHARES AMOUNT CAPITAL EARNINGS (LOSS) LOSS SATION SHARES AMOUNT STOCK TOTAL
------ ------ ---------- -------- -------- ------- -------- ------ -------- ------- --------
(IN THOUSANDS)
Balance at December 31,
1998......................... 45,820 $46 $101,051 $251,038 $(13,377) $ -- -- $ -- $ -- $338,758
Comprehensive income:
Net income................... -- -- -- 51,710 $ 51,710 -- -- -- -- 51,710
Change in value of marketable
securities, net............ -- -- -- -- 39 39 -- -- -- -- 39
Foreign currency translation
adjustments................ -- -- -- -- (2,507) (2,507) -- -- -- -- (2,507)
--------
Comprehensive income.......... $ 49,242
========
Exercise of stock options with
related tax benefit.......... 1,052 1 15,853 -- -- -- -- -- -- 15,854
Purchase of treasury stock.... -- -- -- -- -- -- (1,045) (14,845) -- (14,845)
Issuance of shares under stock
purchase plan................ -- -- -- -- -- -- 23 275 -- 275
Cash dividends................ -- -- -- (4,682) -- -- -- -- -- (4,682)
EGL stand-alone activity for
the three months ended
December 31, 1999 (Note 18).. 351 -- 6,709 9,960 184 -- -- -- -- 16,853
------ --- -------- -------- -------- ------- ------ -------- ------- --------
Balance at December 31,
1999......................... 47,223 47 123,613 308,026 (15,661) -- (1,022) (14,570) -- 401,455
Comprehensive loss:
Net loss..................... -- -- -- (722) $ (722) -- -- -- -- -- (722)
Change in value of marketable
securities, net............ -- -- -- -- 2 2 -- -- -- -- 2
Foreign currency translation
adjustments................ -- -- -- -- (12,070) (12,070) -- -- -- -- (12,070)
--------
Comprehensive loss........... $(12,790)
========
Issuance of shares under
employee stock purchase
plan......................... 26 -- 681 -- -- -- 26 653 -- 1,334
Issuance of common stock for
other acquisitions........... -- -- -- -- -- -- 9 200 1,923 2,123
Exercise of stock options and
restricted stock awards with
related tax benefit.......... 1,162 1 25,837 -- -- (1,905) 45 -- -- 23,933
Purchase of treasury stock.... -- -- -- -- -- -- (450) (10,478) -- (10,478)
Cash dividends................ -- -- -- (2,415) -- -- -- -- -- (2,415)
Amortization of unearned
compensation................. -- -- -- -- -- 605 -- -- -- 605
------ --- -------- -------- -------- ------- ------ -------- ------- --------
Balance at December 31,
2000......................... 48,411 48 150,131 304,889 (27,729) (1,300) (1,392) (24,195) 1,923 403,767
Comprehensive loss:
Net loss..................... -- -- -- (40,177) $(40,177) -- -- -- -- -- (40,177)
Change in value of marketable
securities, net............ -- -- -- -- (29) (29) -- -- -- -- (29)
Change in value of cash flow
hedge...................... -- -- -- -- (2,024) (2,024) -- -- -- -- (2,024)
Foreign currency translation
adjustments................ -- -- -- -- (7,263) (7,263) -- -- -- -- (7,263)
--------
Comprehensive loss........... $(49,493)
========
Issuance of shares under
employee stock purchase
plan......................... -- -- -- -- -- -- 70 1,236 -- 1,236
Issuance of common stock for
other acquisitions........... -- -- -- -- -- -- 196 5,426 (1,923) 3,503
Exercise of stock options and
restricted stock awards with
related tax benefit.......... 528 1 6,412 -- -- (138) -- -- -- 6,275
Amortization of unearned
compensation................. -- -- -- -- -- 803 -- -- -- 803
------ --- -------- -------- -------- ------- ------ -------- ------- --------
Balance at December 31,
2001......................... 48,939 $49 $156,543 $264,712 $(37,045) $ (635) (1,126) $(17,533) $ -- $366,091
====== === ======== ======== ======== ======= ====== ======== ======= ========
The accompanying notes are an integral part of these financial statements.
F-8
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 -- ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
EGL, Inc. (EGL or the Company) is an international transportation and
logistics company. The Company's principal lines of business are air freight
forwarding, ocean freight forwarding, customs brokerage and other value-added
services such as warehousing, distribution and insurance. The Company provides
services through offices around the world as well as through its worldwide
network of exclusive and nonexclusive agents. In October 2000, the Company
merged with Circle International Group, Inc. (Circle) and expanded its
operations to over 100 countries on six continents (see Note 2). The principal
markets for all lines of business are North America, Europe and Asia with
significant operations in the Middle East, South America and South Pacific (see
Note 16).
On February 21, 2000, the Company's stockholders approved changing the
Company's name to EGL, Inc. from Eagle USA Airfreight, Inc. in recognition of
EGL's increasing globalization, broader spectrum of services and long-term
growth strategy.
CHANGE IN FISCAL YEAR END
On July 2, 2000, the Company changed its fiscal year end from a
twelve-month period ending September 30 to a twelve-month period ending December
31.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of EGL have been prepared to give
retroactive effect to the merger with Circle in October 2000, which was
accounted for as a pooling of interests. The companies had differing year-ends
prior to 2000. Therefore, the Company's statements of operations, cash flows and
stockholders' equity reflect the consolidation of EGL's former fiscal year ended
September 30,1999 with Circle's year ended December 31, 1999. This period has
been labeled year ended December 31, 1999 to be more consistent with our current
year-end. EGL's results for the three months ended December 31, 1999 have been
omitted from the accompanying consolidated statement of operations and presented
as summary adjusting items in the statements of cash flows and stockholders'
equity. EGL's results of operations, cash flows and stockholders' equity
activity for the three months ended December 31, 1999 are presented on a
stand-alone basis in Note 18.
The accompanying 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 Company has reclassified certain prior year
amounts to conform with the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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
F-9
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
RESTRICTED CASH
During 2001, as part of the settlement with the EEOC the Company is
required to place certain amounts on deposit in a financial institution for the
Class Fund and Leadership Development Fund. The total amount included in
restricted cash related to the settlement with the EEOC was $3.0 million as of
December 31, 2001 (see Note 12). Additionally, the Company has certain
requirements related to security deposits that are restricted from withdrawal
for a specified timeframe and therefore are classified as restricted cash.
SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
At December 31, 2001 and 2000, the Company had short-term investments in
commercial paper, certificates of deposits, U.S. Treasury Bills and Tax Exempt
Municipal Bonds with a carrying value of $3.4 million and $13.1 million,
respectively. All outstanding securities at December 31, 2001 mature in less
than one year. These investments are stated at amortized cost, which
approximates fair market value. By policy, the Company invests primarily in
high-grade marketable securities. All marketable securities are defined as
available-for-sale securities under the provisions of the Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Unrealized holding gains or losses have been recorded by
the Company as a component of other comprehensive income and loss at each
balance sheet date. As such, changes in the fair value of available for sale
securities, net of deferred taxes, are excluded from income and presented in the
stockholders' equity section of the balance sheet under the caption "Accumulated
other comprehensive loss."
TRADE RECEIVABLES
Management establishes reserves on trade receivables based on the expected
ultimate recovery of these receivables. Management considers many factors
including historical customer collection experience, general and specific
economic trends and known specific issues related to individual customers,
sectors and transactions that might impact collectibility. Trade receivables
include disbursements made by EGL on behalf of its customers for transportation
costs and customs duties. As the billings to customers for these disbursements
may be several times the amount of revenue and fees derived from these
transactions and are not recorded as revenue and expense on the Company's
statement of operations, the inability to collect such amounts could result in
losses greater than the revenues recognized when such amounts were believed to
be collectible.
F-10
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of property held under
capital leases is equal to the lower of the net present value of the minimum
lease payments or the fair value of the leased property at the inception of the
lease. Depreciation is computed principally by the straight-line method at rates
based on the estimated useful lives of the various classes of property.
Estimates of useful lives are based upon a variety of factors including
durability of the asset, the amount of usage that is expected from the asset,
the rate of technological change and the Company's business plans for the asset.
Should the Company change its plans with respect to the use and productivity of
property and equipment, it may require a change in the useful life of the asset
or incur a charge to reflect the difference between the carrying value of the
asset and the proceeds expected to be realized upon the asset's sale or
abandonment. Expenditures for maintenance and repairs are expensed as incurred
and significant major improvements are capitalized.
COMPUTER SOFTWARE
The Company accounts for internally developed software using the guidelines
of the American Institute of Certified Public Accountants Statement of Position
(SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. This standard requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. This SOP also requires that
costs related to the preliminary project stage, data conversion and the
post-implementation/operation stage of an internal-use computer software
development project be expensed as incurred. Upon retirement or sale of assets,
the cost of such assets and accumulated depreciation are removed from the
accounts and the gain or loss, if any, is credited or charged to income.
The Company has incurred substantial costs during 2001 and 2000 related to
a number of information systems projects that were being developed during that
time period. Inherent in the capitalization of those projects are the
assumptions that after considering the technological and business issues related
to their development, such development efforts will be successfully completed
and that benefits to be provided by the completed projects will exceed the costs
capitalized to develop the systems. Management believes that all projects
capitalized at December 31, 2001 and 2000 will be successfully completed and
will result in benefits recoverable in future periods.
INTEREST CAPITALIZATION
The Company is in the process of constructing several computer systems for
future use. Interest associated with these assets is capitalized and included in
the cost of the asset in accordance with SFAS No. 34, Capitalization of Interest
Cost. The amount capitalized is calculated based upon the Company's current
incremental borrowing rate and was $854,000 in 2001.
GOODWILL AND OTHER INTANGIBLES
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired, and other intangible assets are amortized on a
straight-line basis over the period of expected benefit, not exceeding 40 years.
Goodwill is a residual amount and is determined after numerous estimates are
made regarding the fair values of assets and liabilities included in a business
combination, and therefore, indirectly affected by management's estimates and
judgments. Accumulated amortization as of December 31, 2001 and 2000, was $15.7
million and $19.0 million, respectively.
F-11
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
IMPAIRMENT OF ASSETS
The carrying value of long-lived assets, including goodwill, is reviewed
periodically based on the projected undiscounted cash flows of the related asset
or the business unit over the remaining amortization period. If the cash flow
analysis indicates that the carrying amount of an asset exceeds related
undiscounted cash flows, the carrying value will be reduced to the estimated
fair value of the assets or the present value of the expected future cash flows.
Substantial judgment is necessary in the determination as to whether an event or
circumstances have occurred that may trigger an impairment analysis and in
determination of the related cash flows from the asset. Estimating cash flows
related to long-lived assets is a difficult and subjective process that applies
historical experience and future business expectations to revenues and related
operating costs of assets. Should impairment appear to be necessary, subjective
judgment must be applied to estimate the fair value of the asset, for which
there may be no ready market, which oftentimes results in the use of discounted
cash flow analysis and judgmental selection of discount rates to be used in the
discounting process.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at year-end rates of exchange and income and expenses are
translated at average rates during the year. Adjustments resulting from
translating financial statements into U.S. dollars are reported as cumulative
translation adjustments and are shown as a separate component of other
comprehensive income (loss) in the accompanying consolidated statement of
stockholders' equity. Gains and losses from foreign currency transactions are
included in net income at the time of the transaction.
REVENUE RECOGNITION
Revenue and freight consolidation costs are recognized at the time the
freight departs the terminal of origin, one of the permissible methods
authorized by Emerging Issues Task Force Issue No. 91-9 Revenue and Expense
Recognition for Freight Services in Process. This method generally results in
recognition of revenue and gross profit earlier than methods that do not
recognize revenue until a proof of delivery is received. Customs brokerage and
other revenues are recognized upon completing the documents necessary for
customs clearance or completing other fee-based services. Revenue recognized as
an indirect air carrier or an ocean freight consolidator includes the direct
carrier's charges to EGL for carrying the shipment. Revenue recognized in other
capacities includes only the commission and fees received. In December 1999, the
SEC issued Staff Accounting Bulleting (SAB) No. 101, Revenue Recognition in
Financial Statements, and related interpretative guidelines in November 2000.
The provisions of SAB No. 101 had no material impact on the Company's financial
statements.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees and non-employee
directors using the intrinsic value method prescribed in Accounting Principles
Board No. 25, Accounting for Stock Issued to Employees and its interpretations
as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. The
intrinsic value method used by the Company generally results in no compensation
expense being recorded related to stock option grants made by the Company
because those grants are typically made with option exercise prices equal to
fair market value at the date of option grant. This method is used by the vast
majority of public reporting companies. The application of the alternative fair
value method under SFAS 123, which estimates the fair value of the option
awarded to the employee, would result in compensation expense being recognized
over the period of time that the employee's rights in the option vest. The
impact of using the fair value method would result in including additional
compensation expense and lower net income levels in the Company's consolidated
statement of operations, as disclosed in Note 9.
F-12
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
TAXES ON INCOME
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred tax liabilities and assets are determined
based on temporary differences between the bases of assets and liabilities for
income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary based upon the judgment of management to reduce
deferred tax assets to the amount expected to be realized and could be necessary
based upon estimates of future profitability and expenditure levels over
specific time horizons in particular tax jurisdictions. During the current year,
the Company reclassified certain prior year deferred tax amounts on the balance
sheet to conform with the current year presentation.
EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share includes potential
dilution that could occur if options to issue common stock were exercised. Stock
options and shares related to convertible notes issued in December 2001 are the
only potentially dilutive share equivalents the Company has outstanding for the
periods presented. No shares related to options or the convertible notes were
included in diluted earnings per share for the years ended December 31, 2001,
and 2000 as their effect would have been antidilutive as the Company incurred a
net loss during those periods. For the year ended December 31, 1999, incremental
shares of 977,000 were used in the calculation of diluted earnings per share;
options for 1.4 million shares were excluded from the diluted earnings per share
computation because their effect was antidilutive.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income.
Under SFAS No. 130, companies are required to report in the financial
statements, in addition to net income, comprehensive income, including, as
applicable, foreign currency items, minimum pension liability adjustments,
unrealized gains and losses on certain investments in debt and equity
securities, the effects of qualifying hedging activities and changes in
stockholders' equity that are not the result of transactions with stockholders.
The Company's components of other comprehensive income (loss) are foreign
currency translation adjustments, any change in the value of marketable
securities and changes in the fair value of cash flow hedges.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented throughout these financial statements have been
estimated using appropriate valuation methodologies and market information
available at December 31, 2001 and 2000. However, ready trading markets do not
exist for all of these items and considerable judgment is required in
interpreting market data to develop estimates of fair value and the estimates
presented are not necessarily indicative of the amounts that EGL could realize
in a current market exchange. The use of different market assumptions or
estimation methodologies could have a material effect on the estimated fair
values. Additionally, the fair values presented throughout these financial
statements have not been estimated since December 31, 2001. Current estimates of
fair value may differ significantly from the amounts presented.
The following method and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents, restricted cash, short-term investments and
marketable securities -- The carrying amount approximates fair value
because of the short maturity of those instruments.
F-13
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
Borrowings -- The fair value of the Company's convertible subordinated
notes was estimated based upon the closing price of the Company's stock on
December 31, 2001. The Company's other long-term debt approximates fair
value based upon the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
Foreign currency forward contracts -- The fair value is estimated
based on the U.S. dollar equivalent at the contract exchange rate. Any gain
or loss is largely offset by a change in the value of the underlying
transaction, and is recorded as an unrealized foreign exchange gain or loss
until the contract maturity date. Such amounts are insignificant.
Interest rate swap agreement -- The fair value of interest rate swaps
(used for hedging purposes) is the estimated amount that the Company would
receive or pay to terminate the swap agreements at the reporting date,
taking into account current interest rates.
Letters of credit -- The Company utilizes letters of credit to back
certain financing instruments and payment obligations. The letters of
credit reflect fair values as a condition of their underlying purpose and
are subject to fees competitively determined.
Synthetic leases -- The fair value of the Company's synthetic leases
approximates fair value based upon the Company's current incremental
borrowing rates for similar types of financing arrangements.
The carrying amounts and fair values of financial instruments at December
31, 2001 and 2000 are as follows:
CARRYING AMOUNT FAIR VALUE
------------------ -----------------
2001 2000 2001 2000
-------- ------- ------- -------
(IN THOUSANDS)
Cash and cash equivalents..................... $ 77,440 $60,001 $77,440 $60,001
Restricted cash............................... 5,413 -- 5,413 --
Short-term investments and marketable
securities.................................. 3,442 13,056 3,442 13,056
Convertible subordinated notes................ 100,000 -- 80,018 --
Other long-term debt.......................... 3,774 91,051 3,774 91,051
Interest rate swap agreement.................. 2,028 -- 2,028 --
Off balance sheet financial instruments:
Letters of credit........................... 24,000 17,200 24,000 17,200
Synthetic leases............................ 24,000 21,400 24,000 21,400
RISKS AND UNCERTAINTIES
The Company's operations are influenced by many factors, including the
global economy, international laws and currency exchange rates. The impact of
some of these risk factors is reduced by having customers in a wide range of
industries located throughout the world. However, contractions in the more
significant economies of the world (either countries or industrial sectors)
could have a substantial negative impact on the rate of the Company's growth and
its profitability. The availability and affordability of airlift and other
transportation capacity could also significantly influence the Company's
operations. Acts of war or terrorism could influence these areas of risk and the
Company's operations.
Doing business in foreign locations subjects the Company to various risks
and considerations typical to foreign enterprises including, but not limited to,
economic and political conditions in the United States and abroad, currency
exchange rates, tax laws and other laws and trade restrictions.
F-14
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
CONCENTRATION OF CREDIT RISK
The Company's customers include retailing, wholesaling, manufacturing,
electronics and telecommunications companies, as well as international agents
throughout the world. Management believes that concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base and their dispersion across
many different industries and geographic regions. The Company performs ongoing
credit evaluation of its customers to minimize credit risk. The Company's
investment policies restrict investments to low-risk, highly liquid securities
and the Company performs periodic evaluations of the relative credit standing of
the financial institutions with which it deals.
DERIVATIVE INSTRUMENTS
Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and
SFAS No. 138. These statements require the Company to recognize all derivative
instruments on the balance sheet at fair value. The accounting for changes in
the fair value of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship, and further, on the
type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of the foreign currency exposure of a net
investment in a foreign operation. The effect of adoption of this pronouncement
at January 1, 2001 was immaterial.
For derivative instruments that are designated and qualify as a fair value
hedge, the gain or loss on the derivative instrument as well as the offsetting
gain or loss on the hedged item attributable to the hedged risk are recognized
in current earnings during the period of the change in fair values. For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument in excess of the
cumulative change in the present value of future cash flows of the hedged item,
if any, is recognized in current earnings during the period of the interest rate
or foreign currency exposure of a change. For derivative instruments that are
designated and qualify as a hedge of a net investment in a foreign operation
currency, the gain or loss is reported in other comprehensive income as part of
the cumulative translation adjustment to the extent it is effective. For
derivative instruments not designated as hedging instruments, the gain or loss
is recognized in current earnings during the period of change.
The Company uses derivative financial instruments to reduce its exposure to
fluctuations in interest rates. The Company formally designates and documents
the financial instrument as a hedge of a specific underlying exposure when it is
entered into, as well as the risk, management objectives and strategies for
undertaking the hedge transaction. Derivatives are recorded in the balance sheet
at fair value in either other assets or other liabilities. The earnings impact
resulting from the derivative instruments is recorded in the same line item
within the statement of earnings as the underlying exposure being hedged. The
Company also formally assesses, both at inception and at least quarterly
thereafter, whether the derivative instruments that are used in hedging
transactions are effective at offsetting changes in either the fair value or
cash flows of the related underlying exposures. The ineffective portion of a
derivative instrument's change in fair value is immediately recognized in
earnings as nonoperating income (expense), net.
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
F-15
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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 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 did not have any business combinations after June 30,
2001; therefore, the required portion of the adoption of this standard had no
effect on the Company's 2001 results.
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 Company is required to adopt this standard
and will disclose the results of the implementation of this standard in the
Company's first quarter 2002 Form 10-Q.
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. The Company will
adopt SFAS 143 beginning January 1, 2003 and does not believe that it will have
a material impact on its results of operations and financial position.
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 will adopt SFAS 144 as of January 1, 2002 and is
currently determining the impact, if any; it will have on its results of
operations and financial position.
NOTE 2 -- BUSINESS COMBINATIONS
On October 2, 2000, EGL completed its merger with Circle pursuant to the
terms and conditions of the Agreement and Plan of Merger dated as of July 2,
2000 (the Merger Agreement). EGL issued 17.9 million shares of EGL common stock
in exchange for all issued and outstanding shares of Circle common stock and
assumed options exercisable for 1.1 million shares of EGL common stock. The
exchange ratio of one share of EGL common stock for each share of Circle common
stock was determined by arms-length negotiations between EGL and Circle. The
Merger qualified as a tax-free reorganization for U.S. federal income tax
purposes and as a pooling of interests for accounting and financial reporting
purposes.
The Company's financial statements have been restated to include the
operations of Circle for all periods presented. The presentation of the year
ended December 31, 1999 reflected the consolidation of EGL's year ended
September 30, 1999 with Circle's year ended December 31, 1999. EGL's results for
the three months ended December 31, 1999 have been omitted from the accompanying
consolidated statement of operations and presented as summary adjusting items in
the statement of cash flows and stockholders' equity. EGL's results of
operations, cash flows and stockholders' equity activity for the three months
ended December 31, 1999 are presented on a stand-alone basis in Note 18. EGL and
Circle had no significant intercompany
F-16
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
transactions prior to the merger and no material adjustments were necessary to
conform the accounting policies of EGL and Circle.
The Company entered into five business combination transactions between
January 1, 1999 and December 31, 2001 which have been accounted for using the
purchase method of accounting, with the related results of operations being
included in the Company's consolidated financial statements from the date of
acquisition forward. The aggregate consideration paid for these acquisitions
totaled $44.6 million, comprised of $33.3 million in cash, $5.9 million notes
payable and stock consideration valued at approximately $5.4 million. The
Company recognized $41.8 million in goodwill in connection with these
acquisitions, and is amortizing those amounts over the related estimated useful
lives ranging between 20 and 40 years. Two of the acquisitions provided for the
payment of additional contingent consideration if certain post-acquisition
performance criteria are satisfied for periods as long as three years which
could aggregate as much as $7.9 million in cash and Company common stock. All
contingent payments on acquisitions made by the Company are accounted for as
adjustments to goodwill and are recorded at the time that the amounts of the
payments are determinable by the Company. Through December 31, 2001, the Company
had recognized $7.8 million in additional contingent consideration on these
acquisitions paid in cash and the Company's common stock. Certain of the
transactions resulted in the sellers retaining a minority interest, for which
the Company has a buyout option. The pro forma effect on revenues and net income
of the Company assuming each of these acquisitions were consummated at the
beginning of the year of acquisition would have been immaterial.
NOTE 3 -- MERGER TRANSACTION, RESTRUCTURING AND INTEGRATION COSTS
TRANSACTION AND INTEGRATION COSTS
As result of the merger with Circle, as discussed in Note 2, the Company
incurred and expensed transaction and integration costs during the years ended
December 31, 2001 and 2000. Merger related transaction costs of $9.8 million
were incurred in 2000 and included investment banking, legal, accounting,
printing fees and other costs directly related to the merger. During the years
ended December 31, 2001 and 2000, integration costs of approximately $7.6
million and $8.2 million, respectively, were incurred and included the costs of
legal registrations in various jurisdictions, changing signs and logos at major
facilities around the world, and other integration costs. Approximately $3.4
million of this amount was unpaid at December 31, 2000.
RESTRUCTURING CHARGES
During the years ended December 31, 2001 and 2000, the Company recorded
$6.4 million and $49.4 million, respectively, of restructuring charges primarily
as result of the Company's plan (the Reorganization Plan or the Plan) to
integrate the former EGL and Circle operations and to eliminate duplicate
facilities as a result of the merger. The principal components of the Plan
involve the termination of certain employees at the former Circle's headquarters
and various international locations, elimination of duplicate facilities at the
former Circle headquarters, 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 substantially completed as of December
31, 2001.
The charges incurred under the Reorganization Plan for the years ended
December 31, 2001 and 2000 and the remaining portion of the unpaid accrued
charges as of December 31, 2001 and 2000 are as follows:
F-17
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
ADDITIONAL INCOME
STATEMENT CHARGE
FOR THE YEAR ENDED
DECEMBER 31, 2001
INCOME ACCRUED ------------------- ACCRUED
STATEMENT LIABILITY REVISIONS LIABILITY
CHARGE ASSET DECEMBER 31, NEW TO PAYMENTS/ DECEMBER 31,
Q4 2000 PAYMENTS WRITE-DOWNS 2000 CHARGES ESTIMATES REDUCTIONS 2001
--------- -------- ----------- ------------ ------- --------- ---------- ------------
(IN THOUSANDS)
Severance costs............. $ 8,377 $(2,110) $ -- $ 6,267 $3,345 $ (398) $ (8,301) $ 913
Future lease obligations,
net of subleasing
income.................... 11,105 (1,042) -- 10,063 1,917 2,746 (7,763) 6,963
Assets not expected to be
recoverable............... 18,284 -- (18,284) -- -- (497) 497 --
Termination of joint
venture/ agency
agreements................ 11,635 (4,110) (2,313) 5,212 (3,000) (1,209) 1,003
Charter lease obligation,
net of subleasing
income.................... -- -- -- -- 2,287 -- (2,287) --
------- ------- -------- ------- ------ ------- -------- ------
$49,401 $(7,262) $(20,597) $21,542 $7,549 $(1,149) $(19,063) $8,879
======= ======= ======== ======= ====== ======= ======== ======
SEVERANCE COSTS
Severance costs were recorded for certain employees at the former Circle
headquarters and former Circle management at certain international locations who
were terminated or notified of their termination under the Plan prior to
December 31, 2000. As of December 31, 2000, approximately 60 of the 150
employees included in the Reorganization Plan were no longer employed by the
Company. The termination of substantially all of the remaining 90 employees
occurred in the first quarter of 2001. Additional severance costs of
approximately $3.2 million were recorded during the year ended December 31,
2001.
Also, during January 2001 the Company announced an additional reduction in
the Company's workforce of approximately 125 additional employees. The charge
for this workforce reduction is approximately $0.1 million and was recorded
during the first quarter of 2001.
FUTURE LEASE OBLIGATIONS
Future lease obligations consist of the Company's remaining lease
obligations under noncancelable operating leases at domestic and international
locations that the Company is in the process of vacating and consolidating due
to excess capacity resulting from the Company having multiple facilities in
certain locations. The provisions of the Plan include the consolidation of
facilities at approximately 80 of the Company's operating locations. As of
December 31, 2001, consolidation of facilities has been completed at
substantially all of these locations with the remaining locations expected to be
completed by the end of the first quarter of 2002. During the second quarter of
2001, the Company determined the estimated consolidation dates for several of
the remaining facilities and recorded an additional charge of $1.9 million. All
lease costs for facilities being consolidated are charged to operations until
the date that the Company vacates each facility.
Amounts recorded for future lease obligations under the Plan are net of
approximately $31.3 million in anticipated future recoveries from actual or
expected sublease agreements. Sublease income has been anticipated under the
Plan only in locations where sublease agreements have been executed as of
December 31, 2001 or are deemed probable of execution during the first half of
2002. 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. During the year ended December
31, 2001, the Company recorded an additional charge of $4.7 million based on
revised estimates for future recoveries from actual or expected sublease
agreements that were or are expected to be less favorable than anticipated due
to
F-18
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
the weakened U.S. economy. In addition, during the fourth quarter of 2001, the
Company decided to utilize two of the facilities in its logistics operations as
the Company determined the expected return on operations was greater than the
sublease income it could obtain in these two markets. The $2.0 million reserve
established for these facilities was reversed.
ASSETS NOT EXPECTED TO BE RECOVERABLE
During 2000, the Company recorded a charge for assets not expected to be
recoverable which primarily consisted of fixed assets at the various locations
that are being consolidated under the Plan and will no longer be used in the
Company's ongoing operations. In 2001, the Company revised this estimate by
approximately $497,000 for assets that were determined to be recoverable since
they will continue to be used in operations.
TERMINATION OF JOINT VENTURE/AGENCY AGREEMENTS
Costs to terminate joint venture/agency agreements represents contractually
obligated costs incurred to terminate selected joint venture and agency
agreements with certain of the Company's former business partners along with
assets that are not expected to be fully recoverable as a result of the
Company's decision to terminate these agreements. In conjunction with the
Company's Reorganization Plan, during the year ended December 31, 2001, the
Company completed the termination of joint venture and agency agreements in
Brazil, Chile, Panama, Venezuela, Taiwan and South Africa. The Company completed
the termination of joint venture agreements in South Africa and Taiwan on more
favorable terms than originally expected and revised the related estimate by
reducing the expected charge by $3.0 million.
CHARTER LEASE OBLIGATION
In August 2001, the Company negotiated agreements to reduce its exposure to
future losses on leased aircraft. A lease for two of the aircraft was terminated
with no financial penalty. The Company subleased five aircraft to a third party
at rates below the Company's contractual commitment and recorded of a charge of
approximately $2.3 million in the third quarter of 2001 for the excess of the
Company's commitment over the sublease income through the end of the lease term.
As of December 31, 2001, the Company is obligated under one lease agreement with
Miami Air (one of its equity method investees) for four aircraft. This agreement
expires June 30, 2003.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
ESTIMATED
USEFUL LIVES 2001 2000
------------- -------- --------
Land............................................... $ 14,923 $ 17,115
Software........................................... 1 to 5 years 57,099 29,092
Buildings and improvements......................... 5 to 50 years 72,807 104,841
Equipment and furniture............................ 3 to 10 years 119,956 103,157
-------- --------
264,785 254,205
Less -- accumulated depreciation................... 111,863 100,860
-------- --------
$152,922 $153,345
======== ========
The Company is in the process of developing and implementing computer
system solutions for its operational, human resource and financial systems. As
of December 31, 2001, the Company had capitalized
F-19
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
$20.9 million related to the development of these systems. This amount is
included in the software amount above and is currently not being depreciated.
Once placed in service, depreciation related to the system will be charged.
Additionally, one of the Company's foreign subsidiaries is in the process
of constructing new warehouse and terminal facilities. At December 31, 2001,
$168,000 related to this construction is included in buildings and improvements.
The Company expects to expend approximately $1 million on the construction of
this asset. As of December 31, 2001, the Company has total outstanding
commitments to construct office, warehouse and terminal facilities and to
develop software for $1.3 million.
The Company sold the former Circle headquarters facility in December 2001
for $12.3 million and recognized a pretax gain of $1.6 million included as a
reduction of other selling, general and administrative expenses in the
accompanying consolidated statement of operations.
In December 2001, the Company sold and leased back its corporate
headquarters, terminal and warehouse facilities in Houston and a terminal
facility in Denver to a third party. See Note 14.
NOTE 5 -- INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in net assets of unconsolidated affiliated companies were $46.0
million and $52.7 million at December 31, 2001 and 2000, respectively. The
largest components are a 40% investment in TDS Logistics Inc. (TDS) of $39.6
million and $42.7 million as of December 31, 2001 and 2000, respectively, and a
24.5% investment in Miami Air International, Inc. (Miami Air) of $6.1 million as
of December 31, 2001 and 2000. The TDS investment balance includes the excess of
purchase price over net assets of $24.1 million and $24.9 million as of December
31, 2001 and 2000, respectively, which is being amortized over 37 years. The
Miami Air investment balance includes the excess of purchase price over net
assets of $5.2 million and $5.5 million as of December 31, 2001 and 2000,
respectively, which is being amortized over 25 years. The unaudited results of
operations and financial position of TDS and Miami Air are summarized below (in
thousands):
TDS
Condensed Statement of Operations information for the years ended December
31:
2001 2000 1999
-------- ------- -------
Revenue................................................ $100,690 $82,244 $63,486
Income (loss) from operations.......................... (7,736) 6,624 13,884
Net income (loss)...................................... (4,413) 6,115 8,947
EGL 40% equity interest in TDS earnings (loss)......... (1,765) 2,446 3,579
Amortization of investment premium and other
adjustments.......................................... (1,004) (760) (760)
-------- ------- -------
Amount included in EGL nonoperating income (expense)... $ (2,769) $ 1,686 $ 2,819
======== ======= =======
F-20
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
Condensed Balance Sheet information at December 31:
2001 2000
------- -------
Current assets.............................................. $40,539 $41,943
Noncurrent assets........................................... 63,377 60,136
Current liabilities......................................... 50,908 27,230
Noncurrent liabilities...................................... 14,998 30,429
Minority interest........................................... 163 --
Stockholders' equity........................................ 37,847 44,420
MIAMI AIR
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 in a stock purchase transaction. The Company's primary objective for
engaging in the transaction was to develop a business relationship with Miami
Air in order to obtain access to an additional source of reliable freight
charter capacity. The Company's Chairman, CEO and President and a member of
EGL's board of directors also purchased 19.2% and 6.0% of Miami Air,
respectively. See Note 15 for additional information related to Miami Air.
Condensed Statement of Operations information for the year ended December
31, 2001 and for the period from July 2000 (date of EGL investment) to December
31, 2000:
2001 2000
-------- -------
Revenue..................................................... $113,937 $51,471
Loss from operations........................................ (4,580) (95)
Loss before change in accounting principle.................. (7,380) (766)
Change in accounting principle.............................. 8,667 --
Net income (loss)........................................... 1,287 (766)
EGL 24.5% equity interest in Miami Air earnings (loss)...... 315 (187)
Amortization of investment premium and other adjustments.... (292) --
-------- -------
Amount included in EGL nonoperating income (expense)........ $ 23 $ (187)
======== =======
Condensed Balance Sheet information at December 31:
2001 2000
------- -------
Current assets.............................................. $10,676 $13,844
Noncurrent assets........................................... 33,453 40,045
Current liabilities......................................... 19,660 26,817
Noncurrent liabilities...................................... 20,569 23,803
Stockholders' equity........................................ 3,899 3,268
F-21
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
NOTE 6 -- BORROWINGS
Borrowings as of December 31, 2001 and 2000 consist of the following
amounts:
2001 2000
-------- -------
Convertible subordinated notes.............................. $100,000 $ --
Revolving line of credit.................................... -- 81,000
Notes payable............................................... 11,724 13,480
-------- -------
111,724 94,480
Less -- current portion..................................... 7,950 3,429
-------- -------
Long-term borrowings........................................ $103,774 $91,051
======== =======
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 totalled $3.2 million
through December 31, 2001 and are being amortized over five years as a component
of interest expense.
The notes are convertible at any time 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.
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
F-22
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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:
- $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
- an amount equal to:
- 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
- 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
- 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
- reserves from time to time established by the Bank in its reasonable
credit judgment.
The aggregate of the 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 $17.3 million in standby
letters of credit outstanding as of December 31, 2001 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%.
F-23
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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.
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.
During 2000, the Company maintained a $120 million revolving line of credit
with the Bank as administrative agent under an agreement entered into on January
13, 2000 which was replaced by the Credit Facility entered into on January 5,
2001 discussed herein. The revolving line of credit bore interest at variable
rates and included unused commitment fees and letter of credit fees, each of
which was calculated on the basis of a ratio of consolidated debt to
consolidated EBITDA, and were due quarterly. The Company was also subject to
certain covenants under the terms of this agreement. Outstanding borrowings
under the revolving line of credit were classified as long term at December 31,
2000 due to the Company's ability and intent to refinance these borrowings on a
long-term basis. Additionally, $50,000 of debt issue costs were written off
prior to December 31, 2000 due to the Company's intent to refinance.
As of December 31, 2001 and 2000, the Company had available, unused
borrowing capacity of $57.7 million and $30.7 million, respectively.
OTHER BANK LINES OF CREDIT AND GUARANTEES
The Company maintains a $10 million bank line of credit, in addition to the
$50 million sublimit under the Restated Credit Facility, to secure customs bonds
and bank letters of credit to guarantee certain transportation expenses in
foreign locations. At December 31, 2001 and 2000, the Company was contingently
liable for approximately $6.7 million and $8.9, respectively, under outstanding
letters of credit and guarantees related to its $10 million line of credit. 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.
F-24
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
Additionally, several of the Company's foreign operations guarantee amounts
associated with the Company's custom brokerage services. As of December 31, 2001
these outstanding guarantees approximated $15.6 million.
Future scheduled principal payments on debt are as follows:
2002........................................................ $ 7,950
2003........................................................ 2,275
2004........................................................ 330
2005........................................................ 267
2006 and beyond............................................. 100,902
--------
Total............................................. $111,724
========
CASH FLOW HEDGING STRATEGY
In April 2001, the Company entered into a three year interest rate swap
agreement, which was 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 is 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 these notes
substantially retired the LIBOR based debt outstanding under the then-existing
revolving credit agreement. The interest rate on the convertible 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 has
been 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 will be 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.
NOTE 7 -- TAXES ON INCOME
Taxes on income include the following for the year ended December 31 (in
thousands):
2001 2000 1999
-------- -------- --------
Federal:
Current............................................ $(24,095) $ 10,612 $ 19,344
Deferred........................................... (4,421) (9,689) (2,394)
State:
Current............................................ (3,826) 1,488 3,638
Deferred........................................... (904) (1,284) (83)
Foreign:
Current............................................ 7,479 12,340 12,053
Deferred........................................... (67) (304) (248)
-------- -------- --------
Total provision (benefit).................. $(25,834) $ 13,163 $ 32,310
======== ======== ========
F-25
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
Significant components of the Company's net deferred tax (asset) liability
are as follows at December 31 (in thousands):
2001 2000
-------- -------
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries and equity
affiliates............................................. $ 14,704 $13,604
Depreciation/amortization................................. 4,451 9,739
-------- -------
$ 19,155 $23,343
======== =======
Deferred tax assets:
Foreign tax credits....................................... $ 9,180 $ 4,479
Net operating losses and alternative minimum tax
credits................................................ 3,373 --
Bad debts................................................. 1,385 3,244
Accrued liabilities....................................... 13,536 12,454
Other..................................................... 2,423 1,469
-------- -------
29,897 21,646
-------- -------
Net deferred tax (asset) liability................ $(10,742) $ 1,697
======== =======
Excess foreign tax credits have been reclassed from the deferred tax
liability on undistributed foreign earnings.
Taxes on income were different than the amount computed by applying the
statutory income tax rate. Such differences are summarized as follows for the
year ended December 31 (in thousands):
2001 2000 1999
-------- ------- -------
Tax computed at statutory rate.......................... $(23,104) $ 4,354 $29,407
Increases (decreases) resulting from:
Foreign taxes......................................... 601 275 (3,114)
Nondeductible merger related costs.................... -- 5,015 --
Other nondeductible items............................. 559 1,481 2,215
State taxes on income, net of federal income tax
effect............................................. (3,075) 511 2,311
Other................................................... (815) 1,527 1,491
-------- ------- -------
Total provision (benefit)..................... $(25,834) $13,163 $32,310
======== ======= =======
Taxes on income include deferred income taxes on undistributed earnings
(not considered permanently reinvested) of consolidated foreign subsidiaries,
net of applicable foreign tax credits. The Company does not provide for United
States income taxes on certain specific foreign subsidiaries' undistributed
earnings intended to be permanently reinvested in foreign operations. At
December 31, 2001, cumulative earnings of consolidated foreign subsidiaries
designated as permanently reinvested were approximately $11.0 million for which
the related tax impact would approximate $4.0 million.
F-26
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
Sources of pretax income (loss) are summarized as follows for the year
ended December 31 (in thousands):
2001 2000 1999
-------- -------- -------
Domestic.............................................. $(90,125) $(20,804) $56,968
Foreign............................................... 24,114 33,245 27,052
-------- -------- -------
Total....................................... $(66,011) $ 12,441 $84,020
======== ======== =======
As a result of stock option exercises for the years ended December 31,
2001, 2000 and 1999 of non-qualified stock options to purchase an aggregate of
528,000, 1.2 million and 1.1 million shares of common stock, respectively, the
Company is entitled to a federal income tax deduction of approximately $7.8
million, $17.0 million and $17.5 million, respectively, with a related reduction
in its tax obligations of approximately $3.0 million, $5.0 million and $4.5
million; respectively. Accordingly, the Company recorded an increase to
additional paid-in capital and a reduction in current taxes payable pursuant to
the provisions of SFAS 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 such amounts, although there can be no assurance as to
whether or not such exercises will occur, the amount of any deductions or the
Company's ability to fully utilize such tax deductions.
At December 31, 2001, the company has a net operating loss for domestic
income tax purposes of approximately $5.4 million that is available over a
19-year carryforward period. The Company also has generated excess foreign tax
credits of approximately $9.1 million that expire in the years 2003, 2004, and
2005.
NOTE 8 -- STOCKHOLDERS' EQUITY
During the year ended December 31, 1999, the Company's Board of Directors
authorized the repurchase of up to 1.8 million shares of the Company's common
stock in the open market. This authorization expired during December 1999.
During the year ended December 31, 2000 the Board of Directors authorized a
repurchase of up to an additional 3.0 million shares. The Company terminated
this authorization on July 2, 2000. During the years ended December 31, 2000 and
1999, the Company purchased 450,000 and 1.0 million shares of common stock for
$10.5 million and $14.8 million, respectively, under these plans. During the
years ended December 31, 2001, 2000 and 1999, 266,000, 80,000 and 23,000 shares,
respectively, were reissued to satisfy, or help offset increases in shares
resulting from, purchases under the Company's Stock Purchase Plan (Note 9),
payment of additional consideration for previous acquisitions (Note 2) and
restricted stock awards. As of December 31, 2001, 2000 and 1999, 1.1 million,
1.4 million, and 1.0 million shares were held in treasury, respectively. The
Company accounts for treasury stock using the cost method.
In January 2000, the Company agreed to issue 45,000 shares of restricted
common stock to an employee. The Company recorded these shares as unearned
compensation of $1.9 million at the date of the award based on the quoted fair
market value of the shares at the time the award was granted. This amount is
being amortized over the three-year vesting period of the award. As of December
31, 2001, 30,000 shares outstanding under this award were vested.
Prior to the merger as discussed in Note 2, Circle historically paid cash
dividends of $0.27 per common share with cash dividends of $0.135 per share
declared on a semi-annual basis in June and December of each year. As of
December 31, 1999, dividends of $2.3 million were declared and paid in March
2000. In June 2000, Circle declared an additional cash dividend of $0.135 per
share totaling $2.4 million, which was paid in September 2000. Since the
completion of the merger, the Company has not declared any additional dividends
and is restricted from doing so under its credit agreement.
F-27
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
As of December 31, 2000, the Company had an outstanding obligation to issue
approximately 55,000 shares of common stock in connection with the Fastair and
CTI acquisitions as discussed in Note 2. These shares were issued during March
2001. As of December 31, 2001, the Company had no outstanding obligations to
deliver common stock for these acquisitions.
NOTE 9 -- EMPLOYEE BENEFIT AND STOCK OPTION PLANS
DEFINED CONTRIBUTION PLAN
The Company maintains the EGL, Inc. 401(k) Plan (the EGL Plan) pursuant to
which the Company provides up to dollar for dollar discretionary matching of
employee tax-deferred savings, up to a maximum of 5% of eligible compensation.
Each participant vests in the Company's contribution over the course of five
years at a vesting rate of 20% per year. During the years ended December 31,
2001, 2000 and 1999 the Company recorded charges of $1.0 million, $4.0 and $4.9
million, respectively, related to discretionary contributions to this plan.
Prior to the Circle acquisition, as discussed in Note 2, Circle maintained
the Circle International Group Savings Plan and Trust (the Circle Plan).
Effective January 1, 2001, participants under the Circle Plan became eligible to
participate in the EGL Plan. Effective May 1, 2002, the Company expects that the
Circle Plan will be merged into the EGL Plan.
DEFINED BENEFIT PLANS
Certain of our international subsidiaries sponsor defined benefit pension
plans covering most full-time employees. Benefits are based on the employee's
years of service and compensation. The Company's plans are funded in conformity
with the funding requirements of applicable government regulations of the
country in which the plans are located. These foreign plans are not subject to
the United States Employee Retirement Income Security Act of 1974 "ERISA". The
Company's obligation related to these plans at December 31, 2001 and 2000 was
approximately $18 million and $17 million, respectively. The yearly costs
associated with these plans are approximately $3 million each year.
STOCK PURCHASE PLANS
During the year ended December 31, 1999, the Company initiated an employee
stock purchase plan in order to provide eligible employees of the Company and
its participating subsidiaries, including subsidiaries based outside of the
United States, with the opportunity to purchase the Company's common stock
through payroll deductions. Employees may purchase common stock under this plan
during a six-month offering period based on a formula provided in the plan
document, which generally allows the Company's employees to purchase common
stock at 85% of quoted fair market value. Under this plan, 550,000 shares are
authorized for purchase. During the years ended December 31, 2001, 2000, and
1999, 70,000, 52,000, and 23,000 shares of common stock were purchased under
this plan at an average price of $17.65, $25.12, and $11.96 per share,
respectively.
STOCK OPTION PLANS
The Company has six option plans whereby certain officers, directors, and
employees may be granted options, appreciation rights or awards related to the
Company's common stock.
Circle Stock Option Plans
The 1982 Stock Option Plan and 1990 Stock Option Plan provide for the
granting of non-qualified or incentive stock options to officers and key
employees for a maximum of 956,000 common shares at not less than fair market
value on the date of the grant. Under these plans, stock options are generally
issued with the
F-28
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
restriction that no option may be exercised before three years from date of
grant or later than eight years from date of grant.
The 1999 Stock Option Plan permits the grant of nonqualified stock options
in order to promote the success and enhance the value of the Company by linking
the personal interests of the participants to those of the Company's
stockholders, and by providing participants with an incentive for outstanding
performance. The plan was authorized for a maximum of 125,000 common shares.
Stock options under this plan are generally issued at an option price at not
less than fair market value on the date of the grant. To date, no incentive or
non-qualified stock options were granted below fair market value. Under this
plan, stock options are generally issued with the restriction that no option may
be exercised before one year from date of grant and not later than ten years
from date of grant.
The 1994 Omnibus Equity Incentive Plan provides for the granting of stock
options, stock appreciation rights, restricted stock awards, performance unit
awards and performance share awards to key employees and consultants of the
Company. The plan was originally authorized for a maximum of 2.0 million common
shares, and was amended in May 1998 to increase the maximum to 2.5 million
common shares. Stock options under this plan are generally issued at an option
price at not less than fair market value on the date of the grant. No incentive
or non-qualifying stock options were granted below fair market value. Under this
plan, stock options are generally issued with the restriction that no option may
be exercised before one year from date of grant and not later than ten years
from date of grant.
The 1982 Stock Option Plan, 1990 Stock Option Plan, 1994 Omnibus Equity
Incentive Plan and the 1999 Stock Option Plan were plans created by Circle prior
to the merger with EGL. Options outstanding pursuant to these plans are
exercisable in shares of EGL common stock and were automatically accelerated
upon consummation of the merger with EGL. No new options were granted under
these plans.
EGL Plan
The Long-Term Incentive Plan permits the grant of stock options at an
exercise price equal to the fair market value of the common stock on the date of
grant. The plan is authorized for a maximum of 12.2 million shares. Options
granted under the plan generally vest ratably over a five-year or seven-year
period from date of grant (or 100% upon death). Vested options granted to date
generally terminate seven years from date of grant.
Additional awards may be granted under the Long-Term Incentive Plan in the
form of cash, stock, or stock appreciation rights. The stock appreciation right
awards may consist of the right to receive payment in cash or common stock. Any
award may be subject to certain conditions, including continuous service with
the Company or achievement of certain business objectives. There have been no
awards of this kind under the Long-Term Incentive Plan.
EGL Director Plan
The Director Plan provides for automatic stock option grants to
non-employee directors at the time they join the Board and annually thereafter.
These grants vest within one year from the date of grant and terminate ten years
from date of grant. The plan was authorized for a maximum of 300,000 shares.
F-29
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
Transactions Summary
A summary of stock option transactions for each of the three years ended
December 31, 2001 follows (in thousands, except option price):
WEIGHTED
AVERAGE
OPTIONS OPTION PRICE
------- ------------
Outstanding at December 31, 1998............................ 6,507 $16.01
Granted................................................... 1,504 21.58
Exercised................................................. (908) 13.45
Cancelled................................................. (1,004) 11.56
------
Outstanding at December 31, 1999............................ 6,099 17.77
Granted................................................... 1,975 24.75
Exercised................................................. (1,162) 16.57
Cancelled................................................. (875) 21.59
------
Outstanding at December 31, 2000............................ 6,037 20.45
Granted................................................... 839 9.23
Exercised................................................. (528) 6.55
Cancelled................................................. (487) 23.09
------
Outstanding at December 31, 2001............................ 5,861 20.05
======
Options vested at December 31, 2001, 2000 and 1999 totaled 2.8 million
shares, 2.5 million shares and 2.1 million shares, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2001 (in thousands, except option price):
OUTSTANDING EXERCISABLE
----------------------------- -------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
--------------- ------ --------- -------- -------- --------
$5.50-$17.54.......................... 1,464 4.92 $11.39 629 $13.96
$17.58-$19.29......................... 399 4.99 18.45 291 18.41
$19.42-$20.13......................... 1,353 3.21 19.44 774 19.42
$20.42-$33.81......................... 2,645 5.37 25.40 1,152 24.94
----- ---- ------ ----- ------
$5.50-$33.81.......................... 5,861 4.73 $20.05 2,846 $20.34
===== ==== ====== ===== ======
As discussed in Note 1, the Company applies APB No. 25 and related
interpretations in accounting for its stock option plans. No compensation cost
has been recognized for these plans. The weighted-average fair values of options
granted during 2001, 2000, and 1999 were $5.85, $13.26 and $10.45, respectively.
If compensation cost for the Company's option plans had been determined based
upon the fair value at the grant dates for awards under these plans consistent
with the method set forth under SFAS No. 123, the Company's net income (loss)
for the years ended December 31, 2001, 2000 and 1999 would have been reduced
(increased) by $3.0 million, $9.6 million and $6.7 million, respectively.
Diluted earnings (loss) per share for fiscal 2001, 2000 and 1999 would have been
reduced (increased) by $0.06, $0.21 and $0.14, respectively.
F-30
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes options-repricing model with the following weighted
average assumptions used for grants:
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
Expected volatility......................................... 59.00% 55.00% 57.00%
Risk-free interest rate..................................... 4.40% 6.08% 5.44%
Dividend yield.............................................. 0.00% 0.19% 0.41%
Expected life of option (years)............................. 4.85 4.80 4.60
NOTE 10 -- SHAREHOLDERS' RIGHTS PLAN
On May 23, 2001, the Company's Board of Directors declared a dividend of
one Right to purchase preferred stock (Right) for each outstanding share of
Company common stock to shareholders of record at the close of business on June
4, 2001. Each right initially entitles the registered holder to purchase from
the Company a fractional share consisting of one one-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $.001 per share, at a
purchase price of $120 per fractional share, subject to adjustment. The Rights
generally will not become exercisable until ten days after a public announcement
that a person or group has acquired 15% or more of Company common stock (thereby
becoming an "Acquiring Person") or the commencement of a tender or exchange
offer that would result in an Acquiring Person (the earlier of such dates being
called the "Distribution Date"). James R. Crane will not become an Acquiring
Person unless and until he and his affiliates becomes the beneficial owner of
49% or more of the Common Stock. Rights will be issued with all shares of
Company common stock issued from the record date to the Distribution Date. Until
the Distribution Date, the Rights will be evidenced by the certificates
representing Company common stock and will be transferable only with our common
stock. Generally, if any person or group becomes and Acquiring Person, each
right, other than Rights beneficially owned by the Acquiring Person (which will
thereupon become void), will thereafter entitle its holder to purchase, at the
Rights' then current exercise price, shares of the Company's common stock having
a market value of two times the exercise price of the Right. If, after there is
an Acquiring Person, and the Company or a majority of its assets is acquired in
certain transactions, each Right not owned by an Acquiring Person will entitle
its holder to purchase, at a discount, shares of common stock of the acquiring
entity (or its parent) in the transaction. At any time until ten days after a
public announcement that the rights have been triggered, the Company will
generally be entitled to redeem the Rights for $.01 and to amend the rights in
any manner other than to change the redemption price. Certain subsequent
amendments are also permitted. The Rights expire on June 4, 2011.
F-31
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
NOTE 11 -- NONOPERATING INCOME (EXPENSE), NET
Nonoperating income (expense), net, includes the following for the year
ended December 31:
2001 2000 1999
-------- ------- -------
Interest income........................................ $ 2,651 $ 3,427 $ 4,982
Interest expense, net of capitalized interest.......... (10,543) (5,197) (2,986)
Income (expense) from unconsolidated subsidiaries,
net.................................................. (3,145) 1,599 3,922
Rental income.......................................... 492 685 143
Gains (losses) on sales of equity securities........... 2,303 -- 4,519
Minority interests..................................... (1,161) (1,654) (920)
Net foreign exchange gains............................. 55 2,801 1,151
Other.................................................. 906 888 347
-------- ------- -------
Total........................................ $ (8,442) $ 2,549 $11,158
======== ======= =======
During the quarter ended December 31, 1999, the Company sold approximately
30% of its investment in the equity securities of Equant N.V., an international
data network service provider, for net proceeds and a pre-tax gain of
approximately $4.5 million. The remaining shares held in a trust, became
marketable in the second quarter of 2001 and a gain of $2.3 million was
recognized. These shares were exchanged for payment of a portion of the
Company's liability with its international data network service provider.
NOTE 12 -- EEOC LEGAL 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
F-32
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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 Leadership Development Fund will be
funded fully at the time of the first quarterly payment as discussed above. As
of 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
December 31, 2001 were $14.3 million.
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.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
In addition to property at one of its freight operations facilities
acquired under a capital lease, the Company has a number of operating lease
agreements, principally for freight operation facilities and office space. These
leases are non-cancelable and expire on various dates through 2025. The
following is a summary
F-33
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
of future minimum payment obligations under non-cancelable leases with remaining
lease terms in excess of one year as of December 31, 2001.
CAPITAL OPERATING
LEASES LEASES
------- ---------
2002........................................................ $ 608 $ 51,537
2003........................................................ 608 57,870
2004........................................................ 608 47,567
2005........................................................ 608 41,235
2006 and thereafter......................................... 877 161,522
------ --------
Total minimum lease payments...................... 3,309 $359,731
========
Less -- amounts representing interest....................... (474)
------
Present value of net minimum lease payments................. 2,835
Less -- current obligations................................. (390)
------
Noncurrent obligations...................................... $2,445
======
Included in the above summary of minimum future lease payment obligations
are leases on freight operations facilities and office space. The obligations
related to approximately 80 of these facilities has been accrued in the
Company's restructuring charges for the years ended December 31, 2001 and 2000.
As of December 31, 2001, 13 of these leases with an aggregate remaining lease
liability of $12.1 million have been subleased to third parties with aggregate
future sublease payments due to the Company under these agreements of $12.4
million.
As of December 31, 2001, the Company has outstanding commitments to
construct office, warehouse and terminal facilities and to develop software for
$1.3 million. The Company also has a commitment to purchase $1.9 million in
warehouse equipment.
Rent expense under non-cancelable operating leases was $63.4 million, $40.6
million and $32.6 million for the years ended December 31, 2001, 2000 and 1999,
respectively, which is net of sublease income of $1.2 million, $700,000 and $1.6
million, respectively.
The carrying value of property held under the capital leases as of December
31, 2001 was $3.7 million, which is net of $1.9 million of accumulated
amortization.
AGREEMENTS WITH CHARTER AIRLINES
The Company has lease agreements with certain charter airlines for cargo
aircraft for utilization in our domestic and international heavy-cargo overnight
air network. These agreements contain guaranteed monthly minimum use
requirements of the aircraft by us. Certain of these agreements contain
provisions, which allow for early termination or modification of the agreements
to provide for an increase in or reduction of the amount of aircraft available
for our use at our discretion. Due to the softening of the overnight airfreight
market, in mid-August 2001 the Company negotiated agreements to reduce its
exposure to future losses on charter aircraft leases. A lease for two of the
aircraft was terminated with no financial penalty and the Company completed an
agreement to sublease five of the leased aircraft to a third party at rates
below the Company's current contractual commitment and recorded a charge of
approximately $2.3 million in the third quarter of 2001. Total lease expense for
these aircraft recognized by the Company in its statement of operations for the
year ended December 31, 2001 approximated $58.7 million. As of December 31,
2001, the Company was obligated under one lease agreement for four aircraft with
Miami Air International, Inc., a
F-34
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
related party (See Note 15). Based upon the charter agreement in place and
aircraft currently being used, the Company expects to incur $1.8 million per
month during the years ended December 31, 2002 and 2003. This agreement expires
June 30, 2003.
LITIGATION
In addition to the EEOC matter (Note 12), 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.
NOTE 14 -- OFF BALANCE SHEET FINANCING
SALE/LEASEBACK AGREEMENT
On December 31, 2001, the Company terminated an operating lease agreement
relating to its corporate headquarters facility in Houston, Texas and purchased
the property covered by this agreement for $8.1 million. In connection with the
termination of the lease agreement and the purchase of the property, the Company
entered into a transaction whereby it sold this property and certain other
properties in Houston and Denver owned by the Company with a net book value of
$17.2 million to an unrelated third party for $18.6 million, net of closing
costs of $771,000. Mr. Crane also conveyed his ownership in a building adjacent
to the Houston facility directly to the buyer and received approximately $5.8
million in proceeds. Mr. Crane's investment in the building was approximately
$5.8 million. One of the Company's subsidiaries then leased these properties for
a term of 16 years, with options to extend the initial term for up to 15 years.
Under the terms of the new lease agreement, the quarterly lease payment is
approximately $865,000, which amount is subject to escalation after the first
two years based on increases in the Consumer Price Index. These amounts are
included in the table of future minimum lease payments in Note 13. A gain of
$641,000 on the sale of the properties has been deferred as of December 31, 2001
and will be recognized over the term of the lease agreement.
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 principles and under generally accepted accounting treatment 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
F-35
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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
December 31, 2001 and 2000, the aggregate lease balance was approximately $14.1
million and $14.3 million, respectively. If these facilities were consolidated
in these financial statements, the Company would reflect an increase in property
and equipment and indebtedness of approximately $14.1 million and the annual
depreciation expense would be approximately $360,000.
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 which are included
in the table of future lease commitments in Note 13. At December 31, 2001, 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 consolidated balance sheet. Property under the capital lease is
amortized over the lease term. As of December 31, 2001, the carrying value of
property held under the building and improvements lease was $3.7 million, which
is net of $1.9 million of accumulated amortization.
NOTE 15 -- RELATED PARTY TRANSACTIONS
In connection with the Miami Air investment (see Note 5), Miami Air and the
Company entered into an aircraft charter agreement whereby Miami Air agreed to
convert certain of its passenger aircraft to cargo aircraft and to provide
aircraft charter services to the Company for a three-year term. 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 December
31, 2001, Miami Air had no funded debt under the line of
F-36
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
credit that is supported by the $7 million standby letter of credit. However,
Miami Air had outstanding $2.8 million in letters of credit that were supported
by the $7 million standby letter of credit.
There were previously four aircraft subject to the aircraft charter
agreement. During 2001 and 2000, the Company paid Miami Air approximately $11.8
million and $1.4 million, respectively, under the aircraft charter agreement for
use of four 727 cargo airplanes under an aircraft, crew, maintenance and
insurance, or ACMI, arrangement. The payments were based on market rates in
effect at the time the lease was entered into. In late February 2002, EGL and
Miami Air mutually agreed to ground one of these aircraft because of the need
for maintenance on that plane. The Company is negotiating with Miami Air to
reduce the costs of operating the remaining three aircraft and is further
exploring opportunities to reduce its dependence on those planes. At December
31, 2001, the Company's accounts payable included $142,000 payable to Miami Air.
There were no unpaid balances to Miami Air at December 31, 2000. The Company is
aware of Miami Air's efforts to renegotiate its loan obligations and lease
commitments with their creditors given the status of the airline industry as a
result of the events of September 11 and the weak economy. If Miami Air is not
able to successfully reach agreement with its creditors, or if its business
continues to decline, the Company would expect to reassess the carrying value of
its $6.1 million common stock investment in Miami Air, the result of which may
be an impairment charge, and the Company may be required to perform on its
outstanding credit support under the $7 million standby letter of credit on
behalf of Miami Air and recognize a related loss.
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 has 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.
Miami Air has indicated that they are 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. An offer from a third
party to purchase three of the 727 cargo planes being leased by the Company is
also being evaluated by Miami Air. If the three 727 cargo planes are sold, the
Company expects that it would be released from its lease obligations. Miami Air
has informed the Company that its creditors have indicated a willingness to make
concessions. There can be no assurance as to the amount, timing or terms of such
concessions, if any.
Miami Air is interested in exiting the 727 business to concentrate
primarily on 737 passenger business. Miami Air believes its business model is
viable if it is able to: (1) exit the 727 business -- this division's cost
structure, pricing and scale are no longer competitive; (2) obtain concessions
from its bank and lessors, and (3) focus on 737 passenger business.
Miami Air, each of the private investors and the continuing Miami Air
stockholders also entered into a stockholders agreement under which Mr. Crane
(Chairman, President and CEO) and Mr. Hevrdejs (a director of the Company) are
obligated to purchase up to approximately $1.7 million and $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 February 28, 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
F-37
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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 May 1999, the Company began subleasing a portion of its warehouse space
in Houston, Texas and London, England to a customer pursuant to a five-year
sublease, which terminated in 2002. The customer is partially owned by Mr.
Crane. Rental income was approximately $105,000, $685,000 and $143,000 for the
years ended December 31, 2001, 2000 and 1999, respectively. In addition, the
Company billed this customer approximately $511,000, $515,000 and $1.2 million
for freight forwarding services during the years ended December 31, 2001, 2000
and 1999.
In conjunction with its business activities, the Company periodically
utilizes an aircraft owned by an entity that is controlled by Mr. Crane. Prior
to November 1, 2000, the Company was charged for its actual usage on an hourly
basis. Total amounts paid by the Company under this arrangement for the
ten-month period ended October 31, 2000 and the year ended December 31, 1999 was
approximately $1.4 million and $700,000, respectively. On October 30, 2000, the
Company's Board of Directors approved a change in this arrangement whereby the
Company would reimburse Mr. Crane for the $112,000 monthly lease obligation on
this aircraft and the Company would bill Mr. Crane for any use of this aircraft
unrelated to the Company's business on an hourly basis. During the period from
November 1, 2000 to December 31, 2000, the Company reimbursed Mr. Crane for
$224,000 in monthly lease payments on the aircraft and billed Mr. Crane $53,000
for his use of the aircraft that was unrelated to the Company's operations.
During the period January 1, 2001 through July 31, 2001, the Company reimbursed
Mr. Crane $800,000 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 period August 1, 2001 through December
31, 2001, the Company reimbursed Mr. Crane approximately $49,000 for hourly
usage of the aircraft.
In connection with a sale-leaseback agreement entered into by the Company,
Mr. Crane conveyed his ownership in a building adjacent to the Houston facility
directly to a third part buyer. The Company then leased the property directly
from the buyer. See Note 14 for further discussion.
In April 1999, Circle sold a 49% interest in its two previously wholly
owned subsidiaries in Spain and Portugal for $1.3 million to Peter Gibert, a
Director of the Company who was the former Chief Executive Officer of Circle.
The purchase price was paid one-third at closing, with the balance due in equal
installments in October 2000 and April 2002 and interest accruing on the unpaid
balance at 6%. Under the terms of the sale agreement, Mr. Gibert has the option
to require the Company to purchase this interest at the fair value of these
entities at the time the option is exercised and the Company has the option to
repurchase these interests after December 31, 2005. The Company has deferred the
recognition of the gain of this transaction of $866,000 and has recorded this
amount in minority interest.
In connection with Mr. Gibert stepping down as Chief Executive Officer of
Circle and relocating to Spain in 1999, Mr. Gibert entered into a consulting
agreement with Circle pursuant to which he agreed to provide sales, marketing,
strategic planning, acquisition, training and other assistance as reasonably
requested wherever Circle has operations, other than in the United States, Spain
and Portugal. The consulting agreement provided for annual compensation in the
first year of $375,000 and annual compensation in the second and third years of
$275,000 per year. The consulting agreement, which has a three-year term that
commenced January 1, 1999, also prohibits Mr. Gibert, directly or indirectly,
from competing against Circle during the term of the consulting agreement, plus
six months thereafter.
Upon returning to Circle as Interim Chief Executive Officer in May 2000,
Mr. Gibert agreed to suspend the term of the consulting agreement until he was
no longer an employee of Circle, which occurred in
F-38
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
November 2000 as a result of the Company's merger with Circle. The original term
of the consulting agreement has been extended for a period equal to the period
during which the consulting agreement was suspended. This arrangement was
extended in June 2001 to May 31, 2004.
NOTE 16 -- BUSINESS SEGMENT INFORMATION
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" establishes standards for the way that public companies report
selected information about segments in their financial statements.
The Company is organized functionally in geographic operating segments.
Accordingly, management focuses its attention on revenues, net revenues, income
from operations and identifiable assets associated with each of these
geographical areas when evaluating effectiveness of geographic management.
EUROPE & ASIA &
NORTH SOUTH MIDDLE SOUTH
AMERICA AMERICA EAST PACIFIC ELIMINATIONS CONSOLIDATED
---------- ------- -------- -------- ------------ ------------
Year ended December 31, 2001:
Total revenue.............. $1,050,780 $59,780 $251,995 $360,378 $(50,939) $1,671,994
Transfers between
regions................. (16,679) (5,533) (15,731) (12,996) 50,939 --
---------- ------- -------- -------- -------- ----------
Revenues from customers.... $1,034,101 $54,247 $236,264 $347,382 $ -- $1,671,994
---------- ------- -------- -------- -------- ----------
Net revenue................ $ 431,414 $13,392 $113,669 $ 85,708 $ 644,183
---------- ------- -------- -------- ----------
Income (loss) from
operations.............. $ (86,306) $(1,038) $ 9,948 $ 19,827 $ (57,569)
---------- ------- -------- -------- ----------
Total assets............... $ 527,678 $19,149 $152,285 $118,067 $ 817,179
---------- ------- -------- -------- ----------
Year ended December 31, 2000:
Total revenue.............. $1,205,261 $49,058 $226,463 $416,497 $(36,073) $1,861,206
Transfers between
regions................. (9,241) (4,481) (10,290) (12,061) 36,073 --
---------- ------- -------- -------- -------- ----------
Revenues from customers.... $1,196,020 $44,577 $216,173 $404,436 $ -- $1,861,206
---------- ------- -------- -------- -------- ----------
Net revenue................ $ 518,638 $15,561 $ 99,676 $ 85,637 $ 719,512
---------- ------- -------- -------- ----------
Income (loss) from
operations.............. $ (14,966) $(5,553) $ 13,401 $ 17,010 $ 9,892
---------- ------- -------- -------- ----------
Total assets............... $ 530,678 $41,000 $173,294 $159,253 $ 904,225
---------- ------- -------- -------- ----------
Year ended December 31, 1999:
Total revenue.............. $ 921,608 $19,134 $200,909 $295,306 $(27,707) $1,409,250
Transfers between
regions................. (4,895) (3,523) (7,839) (11,450) 27,707 --
---------- ------- -------- -------- -------- ----------
Revenues from customers.... $ 916,713 $15,611 $193,070 $283,856 $ -- $1,409,250
---------- ------- -------- -------- -------- ----------
Net revenue................ $ 403,779 $11,900 $ 92,808 $ 78,588 $ 587,075
---------- ------- -------- -------- ----------
Income (loss) from
operations.............. $ 41,928 $(1,735) $ 14,224 $ 18,445 $ 72,862
---------- ------- -------- -------- ----------
Total assets............... $ 454,142 $21,150 $152,104 $148,298 $ 775,694
---------- ------- -------- -------- ----------
F-39
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
Revenue from transfers between regions represents approximate amounts that
would be charged if the services were provided by an unaffiliated company. Total
regional revenue is reconciled with total consolidated revenue by eliminating
inter-regional revenue.
The Company is domiciled in the U.S. and had revenues from external
customers in the U.S. of $993 million in 2001, $1,099 million in 2000 and $890
million in 1999. The U.S. had long lived assets of $162 million, $123 million
and $100 million at the end of 2001, 2000 and 1999, respectively.
The Company charges its subsidiaries and affiliates for management and
overhead services rendered in the United States on a cost recovery basis.
The following tables show the approximate amounts of revenue and net
revenue attributable to the Company's principal services during each of the
three years in the period ended December 31, 2001.
2001 2000 1999
---------- ---------- ----------
Revenue:
Air freight forwarding......................... $1,296,026 $1,465,438 $1,112,280
Ocean freight forwarding....................... 176,470 184,602 137,024
Customs brokerage and other.................... 199,498 211,166 159,946
---------- ---------- ----------
Total.................................. $1,671,994 $1,861,206 $1,409,250
========== ========== ==========
Net revenue:
Air freight forwarding......................... $ 386,171 $ 473,397 $ 379,602
Ocean freight forwarding......................... 58,514 53,462 49,194
Customs brokerage and other.................... 199,498 192,653 158,279
---------- ---------- ----------
Total.................................. $ 644,183 $ 719,512 $ 587,075
========== ========== ==========
NOTE 17 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
--------- -------- ------------- ------------
Revenues............................. $422,319 $409,201 $414,992 $425,482
Net revenues......................... 159,190 146,032 171,444 167,517
Operating income (loss).............. (14,309) (35,778) (10,958)(a) 3,476
Income (loss) before provision
(benefit) for income taxes......... (15,270) (37,373) (14,020) 652
Net income (loss).................... (9,051) (23,172) (8,775) 821
Basic earnings (loss) per share...... (0.19) (0.49) (0.18) 0.02
Diluted earnings (loss) per share.... (0.19) (0.49) (0.18) 0.02
F-40
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
QUARTER ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
Revenues............................. $404,912 $450,779 $490,716 $514,799
Net revenues......................... 161,702 179,076 191,895 186,839
Operating income (loss).............. 12,803 23,061 29,050 (55,022)(b)
Income (loss) before provision
(benefit) for income taxes......... 13,778 24,292 29,733 (55,362)
Net income (loss).................... 8,456 14,983 18,311 (42,472)
Basic earnings (loss) per share...... 0.18 0.32 0.39 (0.91)
Diluted earnings (loss) per share.... 0.18 0.32 0.38 (0.91)
Dividends per share.................. -- 0.135 -- --
---------------
(a) Includes a pretax charge of $10.1 million related to the Company's
settlement of its EEOC dispute and $6.3 million related to integration costs
associated with the Circle merger and revisions of its restructuring
activities. See Notes 3 and 12.
(b) Includes a pretax charge of $67.4 million of transaction, restructuring and
integration charges related to the merger of EGL and Circle.
NOTE 18 -- FINANCIAL INFORMATION FOR EGL STAND-ALONE QUARTER ENDED DECEMBER 31,
1999
As previously discussed in Note 1, the consolidated statement of
operations, cash flows and stockholders' equity do not include the three months
ended December 31, 1999 for EGL on a stand alone basis. Amounts for the
three-month period ended December 31, 1999 are recorded as adjustments to the
accompanying
F-41
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
consolidated financial statements. The consolidated results of operations and
cash flows for EGL, Inc. and its subsidiaries (excluding Circle) for the three
months ended December 31, 1999 are as follows:
THREE MONTHS ENDED
DECEMBER 31, 1999
-------------------
Revenues.................................................... $187,365
Cost of transportation...................................... 109,195
--------
Net revenues.............................................. 78,170
--------
Operating expenses:
Personnel costs........................................... 40,121
Other selling, general and administrative expenses........ 22,376
--------
62,497
--------
Operating income............................................ 15,673
Interest and other income, net.............................. 655
--------
Income before provision for income taxes.................... 16,328
Provision for income taxes.................................. 6,368
--------
Net income.................................................. 9,960
Other comprehensive income:
Foreign currency translation.............................. 184
--------
Comprehensive income........................................ $ 10,144
========
Basic earnings per share.................................... $ 0.35
========
Basic weighted-average common shares outstanding............ 28,592
========
Diluted earnings per share.................................. $ 0.33
========
Diluted weighted-average common and common equivalent shares
outstanding............................................... 29,953
========
There were no significant unusual items, charges or adjustments recorded by
EGL in the above income statement for the three months ended December 31, 1999.
F-42
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
THREE MONTHS ENDED
DECEMBER 31, 1999
-------------------
Cash flows from operating activities:
Net income................................................ $ 9,960
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 1,785
Provision for doubtful accounts........................ 1,141
Deferred income tax expense............................ 18
Tax effect of stock options exercised.................. 3,143
Changes in assets and liabilities:
Increase in trade accounts receivable.................. (21,654)
Increase in other assets............................... (2,103)
Increase in accounts payable and accrued liabilities... 1,829
Minority interest...................................... 171
--------
Net cash used in operating activities............. (5,710)
--------
Cash flows from investing activities:
Acquisition of business, net of cash acquired............. (1,190)
Maturity of investments................................... 11,319
Capital expenditures...................................... (3,880)
Payment of contingent consideration for acquisition....... (1,250)
Other..................................................... 133
--------
Net cash provided by investing activities......... 5,132
--------
Cash flows form financing activities:
Proceeds from exercise of stock options................... 3,557
--------
Net cash provided by financing activities......... 3,557
--------
Effect of exchange rate changes on cash..................... 184
--------
Net increase in cash and cash equivalents................... 3,163
Cash and cash equivalents, beginning of period.............. 35,175
--------
Cash and cash equivalents, end of period.................... $ 38,338
========
In addition, due to the method of combination of prior period financial
statements, the accompanying consolidated statement of stockholders' equity for
the year ended December 31, 1999 includes an adjustment to record all activity
effecting stockholders' equity for EGL, Inc. for the quarter ended December 31,
1999. In
F-43
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
addition to net income and effects of foreign currency translation of $10.0
million and $184,000, respectively, which are described above, the adjustments
for the quarter ended December 31, 1999 include:
Common stock:
Exercise of stock options (351 shares)....................
Additional paid-in capital:
Exercise of stock options................................. $3,557
Issuance of shares under stock purchase plan.............. (2)
Tax benefit from exercise of stock options................ 3,154
------
Total............................................. $6,709
======
F-44
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*2.1 -- Agreement and Plan of Merger, dated as of July 2, 2000 among
EGL, Inc., EGL Delaware I, Inc. and Circle International
Group, Inc. (Exhibit 2.1 to EGL's Current Report on Form 8-K
filed on July 5, 2000 and incorporated herein by reference).
*3.1 -- Second Amended and Restated Articles of Incorporation of
EGL, as amended (filed as Exhibit 3(i) to EGL'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 EGL (filed as Exhibit 3(ii)
to EGL's Form 10-Q for the fiscal quarter ended June 30,
2001 and incorporated herein by reference).
*3.3 -- Amended and Restated Bylaws of EGL, as amended (filed as
Exhibit 3(ii) to EGL'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 EGL's
Form 10-Q for the fiscal quarter ended September 30, 2001
and incorporated herein by reference).
*4.2 -- Indenture dated December 7, 2001 between EGL and JPMorgan
Chase Bank, as trustee (filed as Exhibit 4.1 to EGL's
Current Report on Form 8-K filed on December 10, 2001 and
incorporated herein by reference).
*4.3 -- First Supplemental Indenture dated December 7, 2001 between
EGL and JPMorgan Chase Bank, as trustee (filed as Exhibit
4.2 to EGL's Current Report on Form 8-K filed on December
10, 2001 and incorporated herein by reference).
*4.4 -- Form of 5% Convertible Subordinated Note due December 15,
2006 (filed as Exhibit 4.3 to EGL's Current Report on Form
8-K filed on December 10, 2001 and incorporated herein by
reference).
*4.5 -- Registration Rights Agreement dated December 7, 2001 between
EGL and Credit Suisse First Boston Corporation (filed as
Exhibit 4.4 to EGL's Current Report on Form 8-K filed on
December 10, 2001 and incorporated herein by reference).
+*10.1 -- Long-Term Incentive Plan, as amended and restated effective
July 26, 2000 (filed as Exhibit 10(ii) to EGL's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000
and incorporated herein by reference).
+*10.2 -- 1995 Non-employee Director Stock Option Plan (filed as
Exhibit 10.2 to EGL's Registration Statement on Form S-1,
Registration No. 33-97606 and incorporated herein by
reference).
+*10.3 -- 401(k) Profit Sharing Plan (filed as Exhibit 10.3 to EGL's
Registration Statement on Form S-1, Registration No.
33-97606 and incorporated herein by reference).
+*10.4 -- Circle International Group, Inc. 1994 Omnibus Equity
Incentive Plan (filed as Exhibit 10.11 to Annual Report on
Form 10-K of Circle (SEC File No. 0-8664) for the fiscal
year ended December 31, 1993 and incorporated herein by
reference).
+*10.5 -- Amendment No. 1 to Circle International Group, Inc. 1994
Omnibus Equity Incentive Plan (filed as Exhibit 10.11.1 to
Annual Report on Form 10-K of Circle (SEC File No. 9-8664)
for the fiscal year ended December 31, 1995 and incorporated
herein by reference).
+*10.6 -- Circle International Group, Inc. Employee Stock Purchase
Plan (filed as Exhibit 99.1 to the Registration Statement on
Form S-8 of Circle (SEC Registration No. 333-78747) filed on
May 19, 1999 and incorporated herein by reference).
EXHIBIT
NUMBER DESCRIPTION
------- -----------
+*10.7 -- Circle International Group, Inc. 1999 Stock Option Plan
(filed as Exhibit 99.1 to the Form S-8 Registration
Statement of Circle (SEC Registration No. 333-85807) filed
on August 24, 1999 and incorporated herein by reference).
+*10.8 -- Form of Nonqualified Stock Option Agreement for Circle
International Group, Inc. 2000 Stock Option Plan (filed as
Exhibit 4.8 to Post-Effective Amendment No. 1 on Form S-8 to
Registration Statement on Form S-4 (SEC Registration No.
333-42310) filed on October 2, 2000 and incorporated herein
by reference).
*10.9 -- Shareholders' Agreement dated as of October 1, 1994 among
EGL and Messrs. Crane, Swannie, Seckel and Roberts (filed as
Exhibit 10.4 to EGL's Registration Statement on Form S-1,
Registration No. 33-97606 and incorporated herein by
reference).
*10.10 -- Form of Indemnification Agreement (filed as Exhibit 10.6 to
EGL's Registration Statement on Form S-1, Registration No.
33-97606 and incorporated herein by reference).
10.11A -- Credit Agreement dated December 20, 2001 between EGL and
Bank of America, N.A., and the other financial institutions
named therein.
10.11B -- First Amendment to Credit Agreement dated March 7, 2002
between EGL and Bank of America, N.A., and the other
financial institutions named therein.
+*10.12 -- Employment Agreement dated as of October 1, 1996 between EGL
and James R. Crane (filed as Exhibit 10.7 to EGL's Annual
Report on Form 10-K for the fiscal year ended September 30,
1996 and incorporated herein by reference).
+*10.13 -- Employment Agreement dated as of September 24, 1998 between
EGL and John C. McVaney (filed as Exhibit 10.9 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
+*10.14 -- Employment Agreement dated as of May 19, 1998 between EGL
and Ronald E. Talley (filed as Exhibit 10.10 to EGL's Annual
Report on Form 10-K for the fiscal year ended September 30,
1998 and incorporated herein by reference).
+*10.15 -- Employment Agreement dated as of October 19, 1999 between
EGL and Elijio Serrano (filed as Exhibit 10.11 to EGL's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 and incorporated herein by reference).
+*10.16 -- Employee Stock Purchase Plan, as amended and restated
effective July 26, 2000 (filed as Exhibit 10(iii) to EGL's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
10.17A -- Lease Agreement dated as of December 31, 2001 between iStar
Eagle LP, as landlord, and EGL Eagle Global Logistics, LP,
as tenant.
10.17B -- Guaranty dated as of December 31, 2001 among iStar Eagle LP,
EGL Eagle Global Logistics, LP and EGL, Inc.
*10.18A -- Master Lease and Development Agreement dated as of April 3,
1998 between Asset XVI Holdings Company, L.L.C. and Eagle
USA Airfreight, Inc. (filed as Exhibit 10(iii) A to EGL's
Quarterly Report on Form 10-Q to the quarter ended June 30,
1998 and incorporated herein by reference).
*10.18B -- Master Participation Agreement dated as of April 3, 1998
among Asset XVI Holdings Company, L.L.C., Eagle USA
Airfreight, Inc. and Bank One, Texas, N.A. (filed as Exhibit
10(iii) B to EGL's Quarterly Report on Form 10-Q to the
quarter ended June 30, 1998 and incorporated herein by
reference).
*10.18C -- Loan Agreement dated as of April 3, 1998 between Asset
Holdings Company, L.L.C. and Bank One, Texas, N.A. (filed as
Exhibit 10(iii) C to EGL's Quarterly Report on Form 10-Q to
the quarter ended June 30, 1998 and incorporated herein by
reference).
*10.18D -- Appendix I to Master Participation Agreement, Master Lease
and Development Agreement and Loan Agreement (filed as
Exhibit 10(iii) D to EGL's Quarterly Report on Form 10-Q to
the quarter ended June 30, 1998 and incorporated herein by
reference).
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*10.18E -- First Amendment to Master Participation Agreement, Master
Lease and Development Agreement, and Loan Agreement dated as
of April 3, 1998 among Asset XVI Holdings Company, L.L.C.,
Eagle USA Airfreight, Inc. and Bank One, Texas, N.A. (filed
as Exhibit 10.19E to EGL's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by
reference).
*10.18F -- Amendment to Master Participation Agreement dated as of
April 1, 1999 among Asset XVI Holdings Company, L.L.C.,
Eagle USA Airfreight, Inc. and Bank One, Texas, N.A. (filed
as Exhibit 10.19F to EGL's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by
reference).
*10.18G -- Second Amendment to Participation Agreement, Lease Agreement
and Loan Agreement dated as of October 20, 2000 among Asset
XVI Holdings Company, L.L.C., EGL and Bank One, NA. (filed
as Exhibit 10.19G to EGL's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by
reference).
10.18H -- Third Amendment to Master Participation Agreement, Lease
Agreement and Loan Agreement dated December 20, 2001 between
EGL Asset XVI Holdings Company and Bank One, N.A.
+*10.19 -- Consulting Agreement dated as of January 1, 1999 between
Zita Logistics, Ltd. and Circle International European
Holdings Limited (filed as Exhibit 10.4.3 to Circle's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998 and incorporated herein by reference).
12 -- Ratio of Earnings to Fixed Charges.
21 -- Subsidiaries of EGL.
23.1 -- Consent of PricewaterhouseCoopers LLP.
23.2 -- Consent of Deloitte & Touche LLP.
---------------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.