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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2002
COMMISSION NO. 0-27288
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
HOUSTON, TEXAS 77032
(Principal executive offices) (Zip Code)
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.
---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). YES X NO
--- ---
The aggregate value of the voting stock held by non-affiliates of the
registrant as of June 28, 2002 was $629 million.
At February 28, 2003, the number of shares outstanding of registrant's
Common Stock was 47,056,191 (net of 1,037,284 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the Registrant's 2003 Annual Meeting
of Shareholders to be held on May 12, 2003 is 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, 2002.
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TABLE OF CONTENTS
PART I............................................................................................................1
Item 1. Business...........................................................................................1
ITEM 2. Properties........................................................................................19
ITEM 3. Legal Proceedings.................................................................................20
ITEM 4. Submission of Matters To a Vote of Security Holders...............................................21
PART II..........................................................................................................22
ITEM 5. Market for Registrant's Common Stock and Related Shareholder Matters..............................22
ITEM 6. Selected Financial Data...........................................................................23
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............24
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk........................................47
ITEM 8. Financial Statements and Supplementary Data.......................................................49
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............49
PART III.........................................................................................................50
ITEM 10. Directors and Executive Officers of the Registrant................................................50
ITEM 11. Executive Compensation............................................................................50
ITEM 12. Security Ownership of Certain Beneficial Owners and Management....................................50
ITEM 13. Certain Relationships and Related Transactions....................................................51
ITEM 14. Controls and Procedures...........................................................................51
PART IV..........................................................................................................51
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................51
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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
3 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 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.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any document we file at the SEC's public reference room at
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains a
website that contains annual, quarterly and current reports, proxy statements
and other information that issuers (including EGL, Inc.) file electronically
with the SEC. The SEC's website is http://www.sec.gov.
Our website is http://www.eaglegl.com. We make available free of charge
through our internet site, via a link to the SEC's website at
http://www.sec.gov, our annual reports on Form 10-K; quarterly reports on Form
10-Q; current reports on Form 8-K; and any amendments to those reports filed or
furnished pursuant to the Securities Exchange Act of 1934 (the "Exchange Act")
as soon as reasonably practicable after such material is electronically filed
with, or furnished to, the SEC. The information on our website is not
incorporated by reference into this report.
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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 with just in time processes, 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 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 FedEx Corporation, Airborne Freight Corporation, DHL Worldwide
Express, Inc. and the United Parcel Service ("UPS"). Several integrated
carriers, like Menlo Worldwide Forwarding ("Menlo") 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 2002 were $1.3 billion of which 36% were derived
from domestic air freight forwarding within the United States and 64% were
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derived from international air freight forwarding. Our air freight forwarding
and related logistics services include the following:
o domestic freight forwarding,
o global freight forwarding,
o 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),
o cargo assembly,
o export packing and vendor shipment consolidation,
o receiving and breaking down consolidated air freight shipments
and arranging for distribution of the individual shipments,
o charter arrangement and handling,
o electronic transmittal of logistics documentation,
o electronic purchase order/shipment tracking,
o expedited document delivery to overseas destinations for
customs clearance, and
o 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 cargo airplanes under a lease agreement with no
minimum requirement, to service specific transportation lanes. 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 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. During the
first four months of 2002, there were three aircraft subject to the aircraft
charter agreement. In May 2002, EGL and Miami Air mutually agreed to cancel the
aircraft charter agreement. 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
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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 "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 "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. 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 2002, our principal air freight forwarding customers included
shippers of:
o computers and other electronic and high-technology equipment,
o automotive and aerospace components,
o governmental and military,
o trade show exhibit materials,
o telecommunications equipment,
o pharmaceuticals,
o printed and publishing materials,
o oil and gas equipment,
o construction and heavy equipment and
o apparel and entertainment equipment.
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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 2002, 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. Both EGL and DHL determined not
to enter into a long-term binding agreement regarding the expanded relationship.
DOMESTIC LOCAL DELIVERY SERVICES
In the United States and Canada, we provide same-day local pick up and
delivery services, both for shipments where 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.
As of December 31, 2002, local delivery services were offered in 82 of
the 88 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 $225.8 million during 2002 and
$237.5 million during 2001. Approximately $150.3 million of these revenues
during 2002 and $160.1 million of these revenues during 2001 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 cost of providing for local pick up and delivery of our freight forwarding
shipments in 2002 and 2001 was 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,
to 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 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
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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.
INTERNATIONAL 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
2002, 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 revenues 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 2002, ocean freight consolidation and
associated ancillary services contributed approximately 6% of our net revenues.
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 most advantageous 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:
o electronic document preparation,
o cargo routing from overseas origins to ports and airports of
entry,
o bonded warehousing,
o distribution of the cleared cargo to inland locations, and
o 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 2002, approximately 12%
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 2002, approximately 19% of our net revenues
were 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
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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.
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 2002, 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
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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 a wide range of media, which has become
increasingly important.
We continue to expand our product offering to provide air, ocean and
ground transportation services, warehousing and inventory management, customs
and purchase order processing. Each of the services is supported by specific
computer applications that facilitate the operational processes. In addition, we
image many of the documents to support proof of delivery, compliance and
retention.
We have organized our computer applications to support the supply chain
process. These applications are grouped into four broad categories as follows:
o Transportation Management Systems, which include our
traditional freight forwarding and consolidation systems, our
pick up and delivery systems for dispatching our owner
operated vehicles, and route optimization systems for our
dedicated fleet of vehicles,
o Regulatory Management Systems, which support our export and
import processing. These are country specific to comply with
local regulatory and reporting requirements,
o Material Management Systems, for our logistics, warehouse
management and distribution program and
o Financial Management Systems, for our global accounting,
intercompany settlement, receivables and payable management,
and consolidation/financial reporting.
These applications are linked together through our data repositories or
data warehouse to enable us to deliver information and provide visibility both
internally and externally.
Currently our Information Technology strategic initiatives include:
o continuing to integrate our service applications to further
expand and enhance the value of our supply chain management
programs,
o developing customer oriented information delivery tools using
extranets and data marts, which provide our customers direct
access to information associated with their transportation,
inventory, and logistics activity,
o leveraging the power of the Internet to provide easy access to
this information using web-based tools,
o upgrading our financial management, human resources and
international operational systems on a global basis and
o continuing to expand our activities in business to business
connectivity with our customers' systems. This includes, but
is not limited to, receiving shipment requests, advance
shipments notices, commercial invoices, etc. and providing
status information electronically back to our customers.
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SALES AND MARKETING
We market services and supply chain solutions through a global
organization of nearly 500 full-time sales people. Our sales organization
continues to be one of our differentiating factors in the marketplace. All of
our leaders, from Senior Management down through the regions to the station
managers, support our sales people with an active and targeted selling approach.
Our managers at each station are responsible for customer service and the daily
execution of customer requirements focusing on a level of service that we
believe will exceed customer expectations. This includes proactively managing
existing customer requirements for accounts with national and global scope as
well as coordinating and communicating requirements for local customers or
national/global account affiliates. Our station managers are responsible for the
overall results of their facility and are empowered to make decisions to support
our customers and return a fair profit. In addition, our regional managers are
responsible for the financial performance of the assigned stations within their
region. Our employees are available 24 hours a day, seven days a week to respond
to our customers.
In the third quarter of 2002, we realigned our North America
organization to provide a more customer-focused approach. Our US operations were
reorganized from three expansive divisions to eight narrower regions, similar to
the operating model we used prior to the acquisition with Circle. This
realignment has improved our responsiveness to our customers and has enhanced
our ability to make day-to-day decisions at the customer and station level. As
part of the realignment, approximately 30 of our major global customers were
assigned dedicated senior sales and operating "sponsors" who are responsible for
the overall results of the customer/EGL relationship and are focused on
customizing global solutions and services. We continue to invest in the
development of our seven major vertical industry groups where we can leverage
our low-cost operating model to further enhance our revenue mix globally.
Customer retention and mining deeper into current relationships to
participate in new business opportunities is important to us, and we emphasize
this throughout our organization. Our logistics or "non-transportation" revenue
has grown at a greater rate than our transportation revenue, and we will
continue to market, design and execute supply chain solutions aimed at reducing
our customer's delivered costs and strengthening our customer alliances. We
continue to emphasize the development of high-revenue potential national and
global accounts with our corporate and global selling while aggressively
targeting local accounts where we can leverage our array of services and North
America network. The larger, more complex accounts typically have many
requirements ranging from very detailed standard operating procedures on
international opportunities to customized IT requirements. Our global network
and operating continuity allows us to provide one-stop shopping, all-in
solutions for these multi-national organizations. We believe our recent growth
and cost optimization has enabled us to more effectively compete for and obtain
many new accounts.
CUSTOMERS
Our customers are manufacturers and distributors of a vast array of
goods including, but not limited to, electronic and high-technology, automotive,
oil and gas, energy, retail, pharmaceutical and health care, machinery, printed
matter, trade show materials and aerospace. We also continue to expand our
business with government agencies and defense entities globally. In 2002, no
customer accounted for more than 10% of our revenues. Despite this healthy
diversification of customers, adverse conditions in some of our larger business
sectors could have an impact on our growth targets should there be a significant
decrease in our customers' volumes. We expect that demand for our services, and
consequently results of operations, will continue to be sensitive to domestic
and global economic conditions and other factors we cannot directly control. As
such, our focus will remain on expanding lines of business with current
customers and adding new accounts through our superior field and global sales
teams.
10
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:
o registration under the Gambling Act of 1962 and a license or
registration by the U.S. Department of Justice,
11
o authorizations and bonds by the U.S. Treasury,
o a license by the Bureau of Alcohol, Tobacco & Firearms of the
U.S. Treasury, and
o approvals by the U.S. Customs Service.
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 8,700 employees at December 31, 2002, including
approximately 500 sales personnel. 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 1,500 independent owner/operators of local delivery services as of
December 31, 2002. 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 190 of our
employees as of December 31, 2002.
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 January 31, 2003:
NAME AGE POSITION
---- --- --------
James R. Crane 49 Chairman of the Board of Directors,
President and Chief Executive Officer
Elijio V. Serrano 45 Chief Financial Officer
E. Joseph Bento 40 Chief Marketing Officer and President of
North America
Ronald E. Talley 51 President of Select Carrier Group, a
division of EGL, Inc.
James R. Crane. Mr. Crane has served as our President, Chief Executive
Officer and a director since he founded EGL in March 1984.
12
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 President of North America in
July 2002 and Chief Marketing Officer in September 2000. 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.
Ronald E. Talley. Mr. Talley was appointed President of Select Carrier
Group, a division of EGL in July 2002. He served as Chief Operating Officer,
Domestic from December 1997 to June 2002. 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.
John C. McVaney resigned from EGL as of January 17, 2003.
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:
o the realignment of sales organization including its effects and cost
synergies,
o the DHL arrangement (including its effect, timing, DHL's use of our
ground network, time of arrival in markets and cost savings),
o the effect and benefits of the Circle merger,
o our asset based credit facility,
o expectations or arrangements for our leased planes and the effects
thereof,
o the expected completion and/or effects of the Circle integration plan,
o the termination of joint venture/agency agreements and our ability to
recover assets in connection therewith,
o our plan to reduce costs (including the scope, timing, impact and
effects thereof), cost management efforts and potential annualized
costs savings,
o past and planned headcount reductions (including the scope, timing,
impact and effects thereof),
o consolidation of field offices (including the scope, timing and effects
thereof),
o anticipated future recoveries from actual or expected sublease
agreements,
o the sensitivity of demand for our services to domestic and global
economic conditions,
o ability to fund operations,
o expectations regarding an economic recovery in the U.S. and general
economic conditions,
o expected growth,
13
o construction of new facilities,
o the development, implementation, upgrading, and integration of any of
our computer system solutions,
o 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,
o future operating expenses,
o future margins,
o use of credit facility proceeds,
o fluctuations in currency valuations,
o fluctuations in interest rates,
o our Miami Air investment and credit support, including any future
results or plans relating to Miami Air or its planes,
o future acquisitions and any effects, benefits, results, terms or other
aspects of such acquisitions,
o ability to continue growth and implement growth and business strategy,
o the ability of expected sources of liquidity to support working capital
and capital expenditure requirements,
o the tax benefit of any stock option exercises, and
o 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:
o "anticipate,"
o "believe,"
o "budget,"
o "could,"
o "estimate,"
o "expect,"
o "forecast,"
o "intend,"
o "may,"
o "might,"
o "plan,"
o "predict,"
o "project," and
o "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 for any reason.
14
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:
o existing and emerging competition,
o ability to open new terminals,
o ability to operate profitably in the face of competitive pressures,
o the recruitment, training and retention of operating and management
employees,
o the strength of demand for our services,
o the availability of capital to support our growth, and
o the ability to identify, negotiate and fund acquisitions when
appropriate.
Acquisitions involve risks, including those relating to:
o the integration of acquired businesses, including different information
systems,
o the retention of prior levels of business,
o the retention of employees,
o the diversion of management attention,
o the amortization of acquired intangible assets, and
o unexpected liabilities.
We cannot assure you that we will be successful in implementing any of
our business strategies or plans for future growth.
Risks associated with operating in international markets could restrict
our ability to expand globally and harm our business and prospects.
We market and sell our services in the United States and
internationally. We anticipate that international sales will continue to account
for a significant portion of our total revenues for the foreseeable future. We
presently conduct our international sales in the following geographic areas:
North America, Europe, Asia, Middle East, South America and South Pacific. There
are some risks inherent in conducting our business internationally, including:
o general political and economic instability in international markets,
including the uncertainty of war in the Middle East, as well as a
result of the terrorist attacks in the United States on
15
September 11, 2001 and the subsequent terror alerts, could impede our
ability to deliver our services to customers and harm our results of
operations,
o changes in regulatory requirements could restrict our ability to
deliver services to our international customers,
o export restrictions, tariffs, licenses and other trade barriers could
prevent us from adequately equipping our facilities worldwide,
o differing technology standards across countries may impede our ability
to integrate our services across international borders,
o increased expenses associated with marketing services in foreign
countries could affect our ability to compete,
o difficulties in staffing and managing foreign operation could affect
our ability to compete,
o adverse taxes could potentially affect our results of operations,
o complex foreign laws and treaties could adversely affect our ability to
compete, and
o difficulties in collecting accounts receivable could adversely affect
our results of operations.
These and other risks could impede our ability to manage our
international operations effectively, limit the future growth of our business,
increase our costs and require significant management attention.
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:
o economic and political conditions in the United States and abroad,
o major work stoppages,
o exchange controls, the Euro conversion and currency fluctuations,
o wars, other armed conflicts and terrorism, and
o 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
16
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.
Currency devaluations in the foreign markets in which we operate could
decrease demand for our services.
We denominate our foreign sales in U.S. dollars. Consequently,
decreases in the value of local currencies relative to the U.S. dollar in the
markets in which we operate could adversely affect the demand for our services
by increasing the price of our services in the currencies of the countries in
which they are sold.
The terrorist attacks on September 11, 2001, and subsequent terrorist
threats 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, and subsequent terrorist threats have adversely affected many
businesses, including our business. The national and global responses many of
which are still being formulated, to these terrorist attacks and related
threats, may materially affect us adversely 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 other 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, Menlo and
smaller freight-forwarders. Internationally, we compete primarily with the major
European based freight forwarders, Expeditors International, BAX, Menlo 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.
17
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.
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 that could have a material adverse effect
on us.
18
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:
o authorize our board of directors to set the terms of preferred stock,
o 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,
o restrict the ability of stockholders to take action by written consent,
and
o 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.
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.
The following table sets forth certain information as of December 31,
2002 concerning the number of our domestic and foreign facilities and freight
handling terminals:
OWNED LEASED TOTAL
------------ ------------ ------------
North America ....................... 7 126 133
South America ....................... 6 15 21
Europe and Middle East .............. 8 108 116
Asia and South Pacific .............. 15 77 92
Corporate ........................... -- 1 1
------------ ------------ ------------
Total ......................... 36 327 363
============ ============ ============
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As of December 31, 2002, our corporate office occupied approximately
166,000 square feet of space in a facility located in Houston, Texas.
For information regarding the consolidation of facilities at our
operating locations, see note 4 of the notes to our consolidated financial
statements. For further information regarding our lease commitments, see note 17
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 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 $500,000 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
20
wrongdoing. The Consent Decree was approved by the District Court in Houston on
October 1, 2001. The Consent Decree became effective on October 3, 2002
following the dismissal of all appeals related to the Decree. 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 $500,000 to the
Leadership Development Program described above, administrative costs, legal fees
and other costs associated with the EEOC litigation and settlement.
Of the eight named Plaintiffs, one has accepted a settlement of her
claims against us. The remaining individuals who were named Plaintiffs in the
underlying action have submitted claims to be considered for settlement
compensation under the Consent Decree. The claims administration process is
currently underway; however, it could be several months before it is completed
and Claimants are notified of whether they qualify for settlement compensation
and, if so, the amount for which they qualify. Once Claimants are notified of
their eligibility status by the Claims Administrator, they have an option to
reject the settlement compensation and pursue litigation on their own behalf and
without the aid of the EEOC. 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 amount of time it will
take to resolve 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. The Consent Decree settlement
provides that we establish and maintain segregated accounts for the Class Fund
and Leadership Development Fund. As of March 24, 2003, we have deposited $5.0
million of the required $8.5 million into the Class Fund. See note 16 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, 2002.
21
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 2002.
QUARTER ENDED HIGH LOW
------------------------- ------------ ------------
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
March 31, 2002 .......... $ 15.87 $ 9.50
June 30, 2002 ........... 19.29 13.50
September 30, 2002 ...... 16.85 9.18
December 31, 2002 ....... 16.15 10.11
The closing price for our common stock was $12.62 on February 28, 2003.
There were approximately 322 stockholders of record (excluding brokerage firms
and other nominees) of our common stock as of February 28, 2003.
Since our initial public offering in November 1995, EGL has not paid
cash dividends on our common stock, although Circle had regularly declared
semi-annual 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" 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.
22
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,
--------------------------------------------------------------------------
2002 2001 2000 1999(1) 1998(1)
------------ ------------ ------------ ------------ ------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues(2)............................... $ 1,869,333 $ 1,860,749 $ 2,079,863 $ 1,409,250 $ 1,154,761
Net revenues ............................. 672,132 644,183 719,512 587,075 485,506
Operating income (loss)(3)(4)(5)(7) .... 29,672 (57,569) 9,892 72,862 56,306
Net income(loss) ......................... 9,434 (40,177) (722) 51,710 39,547
Basic earnings(loss)
per share(6) ....................... $ 0.20 $ (0.84) $ (0.02) $ 1.14 $ 0.88
Basic weighted average shares
outstanding(6) ..................... 47,610 47,558 46,600 45,504 45,141
Diluted earnings(loss)
per share(6) ....................... $ 0.20 $ (0.84) $ (0.02) $ 1.11 $ 0.85
Diluted weighted average
shares outstanding(6) .............. 47,811 47,558 46,600 46,481 46,321
BALANCE SHEET DATA (at year end):
Working capital .......................... $ 201,511 $ 190,564 $ 240,484 $ 231,533 $ 181,336
Total assets ............................. 850,307 812,471 904,225 775,694 651,142
Long-term indebtedness, net
of current portion ................. 103,993 103,774 91,051 32,244 21,558
Stockholders' equity ..................... 376,541 366,091 403,767 401,455 338,758
(1) In July 2000, we changed 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 and 1998,
with Circle's results of operations for the years ended
December 31, 1999 and 1998. The balance sheet data has been
prepared by combining our financial results as of September
30, 1999 and 1998, with Circle's financial results as of
December 31, 1999 and 1998. 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.
23
(2) We have reclassified to cost of sales, for 2002, 2001 and
2000, the costs of certain reimbursed incidental activities
previously reported net in revenues. Amounts for 1999 and 1998
have not been reclassified, as we were utilizing a different
system in those years in which the detail is no longer readily
available. There is no impact on net revenues, operating
income (loss) or net income (loss) as a result of this
reclassification. See note 1 of the notes to our consolidated
financial statements.
(3) 2002, 2001 and 2000 include transaction, integration and
restructuring charges related to the merger with Circle
totaling $5.7 million or $3.5 million net of tax ($0.07 per
diluted share), $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
3 and 4 of the notes to our consolidated financial statements
for a discussion of the Circle merger and other acquisitions
made in 2000 and 1999.
(4) 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.
(5) 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 16 of the notes to our consolidated
financial statements.
(6) Earnings (loss) 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.
(7) 2002 includes grant proceeds of $8.9 million or $5.4 million
net of tax ($0.11 per diluted share) received in the third
quarter of 2002 from the United States Department of
Transportation under the Air Transportation Safety and System
Stabilization Act signed into law on September 22, 2001. See
note 2 of the notes to our consolidated financial statements.
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 Policies"
beginning on page 44.
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 was 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 was 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
24
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, customs brokerage and other value-added logistics services. The
following table provides certain statement of operations data attributable to
our principal services during the periods indicated. Revenues for air freight
and ocean freight consolidations (indirect shipments) include the cost of
transporting such freight, whereas net revenues do not. Revenues for air freight
and ocean freight agency or direct shipments, customs brokerage and import
services, include only the fees or commissions for these services. A comparison
of net revenues best measures the relative importance of our principle services.
YEAR ENDED DECEMBER 31,
2002 2001 2000
--------------------------- --------------------------- ---------------------------
% OF % OF % OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------------ ------------ ------------ ------------ ------------ ------------
(in thousands, except percentages)
Revenues:
Air freight forwarding ........... $ 1,283,025 68.6 $ 1,307,101 70.2 $ 1,511,740 72.7
Ocean freight forwarding ......... 216,298 11.6 194,642 10.5 202,956 9.8
Customs brokerage ................ 370,010 19.8 359,006 19.3 365,167 17.5
------------ ------------ ------------ ------------ ------------ ------------
Revenues ............................... $ 1,869,333 100.0 $ 1,860,749 100.0 $ 2,079,863 100.0
============ ============ ============ ============ ============ ============
% OF NET % OF NET % OF NET
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------------ ------------ ------------ ------------ ------------ ------------
Net revenues:
Air freight forwarding ........... $ 405,404 60.3 $ 386,171 59.9 $ 473,397 65.8
Ocean freight forwarding ......... 57,831 8.6 58,514 9.1 53,462 7.4
Customs brokerage and other ...... 208,897 31.1 199,498 31.0 192,653 26.8
------------ ------------ ------------ ------------ ------------ ------------
Net revenues ........................... $ 672,132 100.0 $ 644,183 100.0 $ 719,512 100.0
============ ============ ============ ============ ============ ============
Operating expenses:
Personnel costs .................. 370,817 55.2 383,211 59.5 378,461 52.6
Other selling, general and
administrative expenses ...... 274,878 40.9 294,488 45.7 256,270 35.6
Air transportation safety and
system stabilization grant ... (8,923) (1.3) -- -- -- --
EEOC legal settlement ............ -- -- 10,089 1.5 7,500 1.0
Transaction, restructuring and
intergration costs ........... 5,688 0.8 13,964 2.2 67,389 9.4
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) ................ 29,672 4.4 (57,569) (8.9) 9,892 1.4
Nonoperating income (expense),
net .............................. (14,556) (2.2) (8,442) (1.3) 2,549 0.3
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before provision
(benefit) for income taxes ....... 15,116 2.2 (66,011) (10.2) 12,441 1.7
Provision (benefit) for income taxes ... 5,895 0.8 (25,834) (4.0) 13,163 1.8
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative
effect of change in accounting
for negative goodwill ............ 9,221 1.4 (40,177) (6.2) (722) (0.1)
Cumulative effect of change in
accounting principle ............. 213 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) ...................... $ 9,434 1.4 $ (40,177) (6.2) $ (722) (0.1)
============ ============ ============ ============ ============ ============
----------
25
2002 Compared to 2001
Revenues. Revenues increased $8.6 million, or 0.5%, to $1,869.3 million
in 2002 compared to $1,860.7 million in 2001 primarily due to an increase in
ocean freight consolidations of $21.7 million and an increase in customs
brokerage and other of $11.0 million offset by a decrease of $24.1 million in
air freight forwarding revenues. Net revenues, which represent revenues less
freight transportation costs, increased $27.9 million, or 4.3%, to $672.1
million in 2002 compared to $644.2 million in 2001.
Air freight forwarding revenues. Air freight forwarding revenues
decreased $24.1 million, or 1.8%, to $1,283.0 million in 2002 compared to
$1,307.1 million in 2001 primarily as a result of volume decreases in North
America offset by volume increases in South America and Asia Pacific. The volume
decreases in North America were primarily due to the weakened U.S. economy.
North America was also adversely affected by the shift from air expedited
shipments (next flight out, next day or second day time definite shipments) to
economy ground deferred shipments (third through fifth day). Air freight
forwarding revenues increased $41.4 million, or 12.2% to $380.2 million in the
fourth quarter of 2002 compared to $338.8 million in the fourth quarter of 2001.
During the fourth quarter of 2002, we benefited from the U.S. West Coast port
strike and chartered 42 dedicated planes to move product from Asia to North
America.
Air freight forwarding net revenues increased $19.2 million, or 5.0%,
to $405.4 million in 2002 compared to $386.2 million in 2001. The air freight
forwarding margin (net revenues as a percentage of revenues) increased to 31.6%
in 2002 as compared to 29.5% for 2001. The increase in margin was primarily
related to the elimination of the U.S. dedicated charter commitments in 2002,
better yield management and better buying opportunities on our international
freight forwarding services.
Ocean freight forwarding revenues. Ocean freight forwarding revenues
increased $21.7 million, or 11.2%, to $216.3 million in 2002 compared to $194.6
million in 2001 primarily as a result of volume increases in Europe and Asia
Pacific offset by decreases in North and South America. Ocean freight forwarding
net revenues decreased $683,000, or 1.2%, to $57.8 million in 2002 compared to
$58.5 million in 2001 and the ocean freight forwarding margin decreased to 26.7%
in 2002 compared to 30.1% in 2001 primarily due to a decrease in the number of
shipments moving on a direct basis rather than through consolidation service.
Customs brokerage and other revenues. Customs brokerage and other
revenues, which include warehousing, distribution and other logistics services,
increased $11.0 million, or 3.1%, to $370.0 million in 2002 compared to $359.0
million in 2001. The increase is due to higher warehousing, distribution and
other logistics revenues resulting from new warehousing customers and expansion
of existing warehousing business in Europe and Asia Pacific. Customs brokerage
revenues remained constant in 2002 compared to 2001 with increases in inbound
traffic in Asia Pacific offset by decreases across all other geographic
divisions.
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 decreased $12.4 million, or
3.2%, to $370.8 million in 2002 compared to $383.2 million in 2001. As a
percentage of net revenues, personnel costs were 55.2% in 2002 compared to 59.5%
in 2001. The reduction in personnel costs was a result of headcount reductions
throughout 2001, which eliminated approximately 500 full-time employees, a
reduction of approximately 225 employees during 2002, controls in the use of
contract labor and a temporary salary reduction for five pay periods implemented
in the U.S. during the first quarter of 2002. The cost savings from the
reduction in headcount in 2002 were offset by approximately $1.0 million of
severance costs recorded in the third quarter of 2002.
26
Other selling, general and administrative expenses, excluding EEOC
legal costs and transaction, restructuring and integration costs, decreased
$19.6 million, or 6.7%, to $274.9 million in 2002 compared to $294.5 million in
2001. As a percentage of net revenues, other selling, general and administrative
expenses, excluding EEOC legal costs and transaction, restructuring and
integration costs, were 40.9% in 2002 compared to 45.7% in 2001. This decrease
is primarily due to management initiatives on costs savings, the realization of
merger related cost synergies, and the elimination of goodwill amortization
expense due to the implementation of SFAS 142. These cost savings were partially
offset by an increase in facility costs, insurance premiums, and depreciation
expense. Although we completed the consolidation of many of our facilities, our
facility costs increased by approximately $9.7 million because we are leasing
more space than in the previous year for our expanded warehousing and logistics
services. The increase in depreciation expense was largely related to increases
in computer software and office equipment depreciation. During the third quarter
of 2002, we took an impairment charge of $500,000 related to a management
decision not to use certain architectural design plans for a proposed building
in Canada.
EEOC legal settlement. In October 2001, we settled our claim with the
EEOC and recorded a charge of $10.1 million during the third quarter 2001, which
included $8.5 million placed into a settlement fund, $500,000 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.
Air Transportation Safety and System Stabilization Act grant. During
the third quarter 2002, we received a total of $8.9 million related to the Air
Transportation Safety and system Stabilization Act, which was signed into law on
September 22, 2001 (See note 2 of the notes to our consolidated financial
statements).
Transaction, restructuring and integration costs. Primarily in
connection with the Circle merger and our decision to terminate certain charter
lease obligations, we recorded charges of $5.7 million, or $3.5 million after
tax, during 2002 and $14.0 million, or $8.5 million after tax, during 2001. The
categories of costs incurred, the actual cash payments made in 2002 and 2001 and
the accrued balances at December 31, 2002 and 2001 are summarized below (in
thousands):
Accrued Revisions Amounts Paid/ Accrued
Balance at to Written Off Balance at
December 31, New Charges Estimates in December 31,
2000 2001 2001 2001 2001
------------ ------------ ------------ ------------ ------------
Cash costs:
Severance costs ................. $ 6,267 $ 3,345 $ (398) $ (8,301) $ 913
Future lease obligations,
net of expected sublease
income ........................ 10,063 1,917 2,746 (7,763) 6,963
Termination of joint
venture/agency
agreements .................... 5,212 -- (3,000) (1,209) 1,003
Charter lease obligations,
net of sublease income ........ -- 2,287 -- (2,287) --
Integration costs ............... 3,434 7,564 -- (10,998) --
------------ ------------ ------------ ------------ ------------
Subtotal cash cost ................ 24,976 15,113 (652) (30,558) 8,879
Noncash cost ...................... -- -- (497) 497 --
------------ ------------ ------------ ------------ ------------
Total ...................... $ 24,976 $ 15,113 $ (1,149) $ (30,061) $ 8,879
============ ============ ============ ============ ============
Revisions Amounts Paid/ Accrued
to Written Off Balance at
Estimates in December 31,
2002 2002 2002
------------ ------------ ------------
Cash costs:
Severance costs ................. $ -- $ (126) $ 787
Future lease obligations,
net of expected sublease
income ........................ 5,939 (5,687) 7,215
Termination of joint
venture/agency
agreements .................... (251) (527) 225
Charter lease obligations,
net of sublease income ........ -- -- --
Integration costs ............... -- -- --
------------ ------------ ------------
Subtotal cash cost ................ 5,688 (6,340) 8,227
Noncash cost ...................... -- -- --
------------ ------------ ------------
Total ...................... $ 5,688 $ (6,340) $ 8,227
============ ============ ============
27
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 $100,000 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. 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 $37.0 million in anticipated future recoveries
from actual or expected sublease agreements as of December 31, 2002. Sublease
income has been anticipated under the integration plan only in locations where
sublease agreements have been executed as of December 31, 2002 or are deemed
probable of execution during the first half of 2003. 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 2002 and 2001, we recorded an additional charge of $5.9
million and $4.7 million, respectively, 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 represent contractually obligated costs
incurred to terminate selected joint venture and agency agreements with certain
of our former business partners along with assets that were not expected to be
fully recoverable as a result of our decision to terminate these agreements. In
conjunction with our integration plan, we completed the termination of joint
venture and agency agreements in Brazil, Chile, Panama, Venezuela, Taiwan and
South Africa in 2001. 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 in
2001. In the fourth quarter of 2002, we reversed an additional $251,000 of this
reserve due to more favorable settlements.
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.
28
Integration costs. Integration costs of approximately $7.6 million were
incurred during 2001 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 were expensed as incurred.
Noncash charge. During 2000, we recorded a charge for assets not
expected to be recoverable which primarily consisted of fixed assets at the
various locations that were being consolidated under our integration plan and
will no longer be used in our ongoing operations. In 2001, we revised these
estimates by $497,000 for assets that were determined to be recoverable since
they will continue to be used in operations.
Operating income (loss). Operating income was $29.7 million in 2002 as
compared to an operating loss of $57.6 million for 2001. The increase in
operating income was primarily due to an increase in net revenues of $27.9
million, decreases in personnel costs of $12.4 million, other selling, general
and administrative expenses of $19.6 million and transaction, restructuring and
integration costs of $8.3 million as well as $8.9 million received from the Air
Transportation Safety and System Stabilization Act.
Nonoperating income (expense), net. Nonoperating expense, net was $14.6
million in 2002 as compared to $8.4 million in 2001. The $6.2 million increase
was primarily due to an impairment charge of approximately $6.7 million for our
investment in Miami Air and a $1.3 million reserve established for Miami Air's
outstanding letters of credit guaranteed by us offset by lower interest expense
as a result of the lower interest rate on our convertible notes compared to the
interest rate on debt outstanding in 2001. See note 8 of the notes to our
consolidated financial statements. Additionally, we incurred net foreign
exchange gains of $366,000 in 2002 compared to a net foreign exchange loss of
$55,000 in 2001. Nonoperating expense in 2001 was reduced by a $2.3 million gain
recognized by recording the market value of a nonmarketable investment in equity
securities that became marketable and was classified as available for sale.
Effective tax rate. The effective tax rate for 2002 was 39.0% compared
to 39.1% for 2001. Our overall effective tax rate fluctuates primarily due to
changes in the level of pre-tax income in foreign countries that have different
rates and certain income and/or expenses that are permanently non-taxable or
non-deductible in certain jurisdictions, respectively.
2001 Compared to 2000
Revenues. Revenues decreased $219.2 million, or 10.5%, to $1,860.7
million in 2001 compared to $2,079.9 million in 2000 primarily due to decreases
in air freight forwarding revenues. Net revenues, which represents revenues 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 revenues. Air freight forwarding revenues
decreased $204.6 million, or 13.5%, to $1,307.1 million in 2001 compared to
$1,511.7 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
through fifth day).
Air freight forwarding net revenues 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 revenues as a percentage of revenues) declined to 29.5%
in 2001 as compared to 31.3% 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 revenues and lower margins. The air freight
forwarding margin was also adversely impacted in 2001 by the fixed
29
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. 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 revenues. Ocean freight forwarding revenues
decreased $8.4 million, or 4.1%, to $194.6 million in 2001 compared to $203.0
million in 2000 primarily as a result of volume decreases in North America and
Asia. Ocean freight forwarding net revenues 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 30.1% in 2001 compared to 26.3% 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 revenues. Customs brokerage and other
revenues, which includes warehousing, distribution and other logistics services,
decreased $6.2 million, or 1.7%, to $359.0 million in 2001 compared to $365.2
million in 2000, while net customs brokerage and other revenues increased $6.8
million, or 3.5%, to $199.5 million in 2001 compared to $192.7 million in 2000.
Customs brokerage revenues were lower in 2001 due to a decrease in inbound
traffic in all geographic divisions except Europe and the 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 the Middle East segment. Warehousing and
distribution revenues 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 revenues 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 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
revenues, 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.
30
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 revenues, 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 revenues 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, $500,000
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 and our decision to terminate certain charter
lease obligations, we recorded charges of $14.0 million, or $8.5 million after
tax, during 2001 and $67.4 million or $49.9 million after tax, during 2000. The
categories of costs incurred, the actual cash payments made in 2001 and 2000 and
the accrued liabilities at December 31, 2001 and 2000 are summarized below (in
thousands):
Accrued
New Amounts Balance at New
Charges Paid/Written December 31, Charges
2000 Off in 2000 2000 2001
------------ ------------ ------------ ------------
Cash costs:
Transaction costs ............... $ 9,774 $ (9,774) $ -- $ --
Severance costs 8,377 (2,110) 6,267 3,345
Future lease obligations,
net of expected sublease income 11,105 (1,042) 10,063 1,917
Termination of joint
venture/agency agreements .... 9,322 (4,110) 5,212 --
Charter lease obligation,
net of sublease income ....... . -- -- -- 2,287
Integration costs ............... 8,214 (4,780) 3,434 7,564
------------ ------------ ------------ ------------
Subtotal cash cost ................ 46,792 (21,816) 24,976 15,113
Noncash costs ..................... 20,597 (20,597) -- --
------------ ------------ ------------ ------------
Total ........................... $ 67,389 $ (42,413) $ 24,976 $ 15,113
============ ============ ============ ============
Revisions Accrued
to Amounts Balance at
Estimates Paid/Written December 31,
2001 Off in 2001 2001
------------ ------------ ------------
Cash costs:
Transaction costs ............... $ -- $ -- $ --
Severance costs (398) (8,301) 913
Future lease obligations,
net of expected sublease income 2,746 (7,763) 6,963
Termination of joint
venture/agency agreements .... (3,000) (1,209) 1,003
Charter lease obligation,
net of sublease income ....... -- (2,287) --
Integration costs ............... -- (10,998) --
------------ ------------ ------------
Subtotal cash cost ................ (652) (30,558) 8,879
Noncash costs ..................... (497) 497 --
------------ ------------ ------------
Total ........................... $ (1,149) $ (30,061) $ 8,879
============ ============ ============
31
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 was approximately $100,000 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 were 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 quarter 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 were net of approximately $31.3 million in anticipated future recoveries
from actual or expected sublease agreements as of December 31, 2001. 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 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 represent contractually obligated costs
incurred to terminate selected joint venture and agency agreements with certain
of our former business partners along with assets that were 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
32
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.
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 consisted
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 $497,000 for
assets that were determined to be recoverable since they will continue to be
used in operations.
Operating income (loss). We incurred an operating loss of $57.6 million
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 by recording the market value of a nonmarketable
investment in equity securities that became marketable and classified as
available for sale 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 4 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 and certain income and expenses that are permanently
non-taxable or non-deductible in certain jurisdictions, respectively.
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 2002. If we achieve
33
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.
Based on current plans, we believe that our existing capital resources
will be sufficient to meet working capital requirements through December 31,
2003. However, we cannot provide assurance that there will be no change that
would consume available resources significantly before that time. For example,
the terrorist attacks on the United States in 2001, as well as future events
occurring in response to, or in connection with them, including, without
limitation, future terrorist attacks against the United States or its allies or
military or trade or travel disruptions impacting our ability to sell and market
our services in the United States and internationally may impact our results of
operations. Additionally, funds may not be available when needed and even if
available, additional funds may be raised through financing arrangements and/or
the issuance of preferred or common stock or convertible securities on terms and
prices significantly more favorable than those of the currently outstanding
common stock, which could have the effect of diluting or adversely affecting the
holdings or rights of our existing stockholders. If adequate funds are
unavailable, we may be required to delay, scale back or eliminate some of our
operating activities, including, without limitation, the timing and extent of
our marketing programs, and the extent and timing of hiring additional
personnel. We cannot provide assurance that additional financing will be
available to us on acceptable terms, or at all.
We make significant disbursements on behalf of our customers for
transportation costs (primarily ocean) and customs duties for which the customer
is the primary obligor. 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.
2002 Compared to 2001
Net cash provided by operating activities. Net cash provided by
operating activities was $72.8 million in 2002 compared to $23.5 million in
2001. The increase in 2002 was primarily due to the net income in 2002 as
compared to the loss incurred in 2001 and improved days sales outstanding
reflecting improved operational performance.
Net cash used in investing activities. Net cash used in investing
activities in 2002 was $23.9 million compared to $23.2 million in 2001. Capital
expenditures were $41.4 million during 2002 as compared to $64.9 million during
2001, a $23.5 million decrease. These expenditures were mainly due to
information technology initiatives and general facilities expansion in North
America. The sale and sale-leaseback of real estate and the sale of other assets
resulted in cash proceeds of $26.0 million in 2002 compared to $37.3 million in
2001. The purchase of assets held for sale totaled $11.6 million in 2002.
Net cash provided by (used in) financing activities. Net cash used in
financing activities in 2002 was $9.7 million compared to $19.0 million provided
by financing activities in 2001. We expended $10.0 million to repurchase and
retire common stock in 2002. In 2001 net proceeds from the sale of 5%
convertible subordinated notes were $96.9 million. Proceeds from this sale were
used to repay amounts borrowed against the revolving line of credit of $82.0
million. Net borrowings were $14.5 million in 2001. Proceeds from the exercise
of stock options were $687,000 in 2002 compared to $3.3 million in 2001. We did
not purchase any treasury stock in 2001.
2001 Compared to 2000
Net 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
34
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.
Net cash used in investing activities. Net 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.
Net cash provided by financing activities. Net cash provided by
financing activities in 2001 was $19.0 million compared to $48.3 million 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. Net borrowings were $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 repurchase any stock in 2001.
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, which was a premium of 20.6%
of the stock price at the issuance date. This is equivalent to a conversion rate
of 57.3608 shares per $1,000 principal amount of notes. Upon conversion, a
noteholder will not receive any cash representing accrued interest, other than
in the case of a conversion in connection with an optional redemption. The
shares that are potentially issuable may impact our diluted earnings per share
calculation in future periods by approximately 5.7 million shares. As of
December 31, 2002, the fair value of the notes was $110.9 million.
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 as defined in the indenture agreement,
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 agreement. We and our subsidiaries are
not prohibited from incurring senior indebtedness or other debt under the
indenture agreement. 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 last amended effective as of October 14, 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:
35
o $75 million, which increases to $100 million if an additional
$25 million of the revolving line of credit commitment is
syndicated to other financial institutions, or
o an amount equal to:
o up to 85% of the net amount of 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
o 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
o 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
o reserves from time to time established by Bank of
America in its reasonable credit judgment.
The aggregate of the last four sub-bullet points above is referred to
as our eligible borrowing base.
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 $25 million. The amount of
borrowing availability is determined by subtracting the following from our
eligible borrowing base:
o our borrowings under the amended and restated credit facility,
and
o 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.
The amended and restated credit facility includes a $50 million letter
of credit subfacility. We had $31.4 million in standby letters of credit
outstanding as of December 31, 2002 under this facility. The collateral value
associated with the revolving line of credit at December 31, 2002 was $180.7
million. No amounts were outstanding under the revolving line of credit as of
December 31, 2002. Therefore, our available, unused borrowing capacity was $43.6
million as of December 31, 2002.
For each tranche of principal borrowed under the revolving line of
credit, we may elect an interest rate of either:
o LIBOR plus an applicable margin of 2.50%, which is subject to
adjustment to:
o 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,
o 2.25% if the borrowing availability is less than $65
million, but greater than or equal to $45 million,
36
o 2.50% if the borrowing availability is less than $45
million, but greater than or equal to $25 million,
and
o 2.75% if the borrowing availability is less than $25
million, or
o 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.
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 in the event our available 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.
Other guarantees. Several of our foreign operations guarantee amounts
associated with our international freight forwarding services. As of December
31, 2002, these outstanding guarantees approximated $6.9 million.
Synthetic lease agreements. Entering 2002, EGL was the lessee in two
synthetic lease agreements with special purpose entities. Both of these lease
agreements were terminated during 2002 as a result of the expiration of the
original lease terms as further discussed below.
In November 2002, our $20 million master operating synthetic lease
agreement expired. This lease facility financed the acquisition, construction
and development of five terminal and warehouse facilities throughout the United
States. Upon termination of this agreement, we purchased the five properties
leased under this agreement for $14.1 million which was the amount of the
outstanding lease balance at the time of termination. Three of these terminal
facilities were then sold and leased back from an unrelated party in the fourth
quarter of 2002 as discussed below. A sale-leaseback transaction for a
37
fourth terminal facility is expected to be completed in the first half of 2003
and its cost basis is included in assets held for sale on the consolidated
balance sheet as of December 31, 2002. The remaining terminal facility, with a
book value of approximately $3.4 million, was retained by us and is leased to an
unrelated party under a lease to purchase agreement that requires the lessor to
purchase the property by October 2005.
In December 2002, we were required to pay the lease balance and related
interest of $15.5 million under a second synthetic lease agreement entered into
during 1998 by Circle. This lease facility financed the acquisition,
construction and development of a terminal facility located in New York, New
York. The land leased under this agreement was accounted for as a synthetic
operating lease and the building and improvements were accounted for as a
capital lease. As of December 31, 2002, the carrying value of the land and
property is included in property and equipment on the consolidated balance sheet
and the building is being depreciated over its useful life.
As a result of the above two lease expirations, we are no longer a
party to any lease agreements with special purpose entities as of December 31,
2002.
Sale-leaseback agreements. In the fourth quarter of 2002, we completed
transactions to sell three of our terminal and warehouse facilities located in
Grapevine, Texas, Austin, Texas and South Bend, Indiana to an unrelated party
for $14.1 million, net of related closing costs. One of our subsidiaries then
leased these properties for a term of 11 years, with options to extend the
initial term for up to 20 years. Under the terms of the lease agreements, the
monthly lease payments average approximately $141,000 in total for these
facilities. These facilities were constructed under our master operating
synthetic lease agreement, which became due in November 2002. The sale-leaseback
transactions were completed in conjunction with paying the master operating
synthetic lease balance for two of the facilities. The third facility was
completed in December 2002. The lease payment for these facilities and related
closing costs was $10.5 million resulting in a gain of $3.6 million on the sale
of the properties. The gain was deferred and is being recognized over the term
of the lease agreements.
In December 2002, we entered into agreements to sell land in Miami,
Florida and Toronto, Canada to developers who will build-to-suit terminal
warehouse facilities and lease them back to us upon completion of the
facilities. The purchase price of the Miami land was $9.8 million, which equaled
its carrying value. The Miami land was originally purchased by EGL from James R.
Crane, President and Chief Executive Officer of EGL. See note 19 of the notes to
our consolidated financial statements. The purchase price of the Toronto land
was $4.8 million and the carrying value was $4.4 million resulting in a gain of
$358,000, which has been deferred as of December 31, 2002, and will be
recognized over the term of the lease agreement. In the third quarter of 2002,
we recorded an impairment charge of $500,000 related to a management decision
not to use certain architectural design plans for the proposed Toronto building.
The Miami facility is estimated to be complete in November 2003. The terms of
the Miami lease agreement include average monthly lease payments of $196,000 for
125 months with options to extend the initial term for up to an additional 120
months commencing with the month of completion. The Toronto facility is
estimated to be complete in December 2003. The terms of the Toronto lease
agreement include average monthly lease payments of approximately $110,000 for
185 months with options to extend the initial term for up to an additional 120
months commencing with the month of completion.
On March 31, 2002, we entered into a transaction whereby we sold our
San Antonio, Texas property with a net book value of $2.5 million to an
unrelated party for $2.5 million, net of closing costs. One of our subsidiaries
subsequently leased the property for a term of 10 years, with options to extend
the initial term for up to 23 years. Under the terms of the lease agreement, the
quarterly lease payment is approximately $85,000, which amount is subject to
escalation after the first year based on increases in the Consumer Price Index.
A loss of $42,000 on the sale of this property was recognized in the first
quarter of 2002.
38
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 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 $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 $865,000,
which amount is subject to escalation after the first two years based on
increases in the Consumer Price Index. A gain of $641,000 on the sale of the
properties was deferred and is being recognized over the term of the lease
agreement.
The future lease payments for each of these transactions are included
in the table of future minimum lease payments in note 17 of the notes to our
consolidated financial statements.
Computer system upgrades. We are in the process of developing and
implementing computer system solutions for operational, human resources and
financial systems. As of December 31, 2002, we had capitalized approximately
$28.7 million related to the development of these systems. This amount is
currently not being depreciated. Once placed into 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.
Share repurchase program. In August 2002, our Board of Directors
authorized the repurchase of up to $15.0 million in value of our outstanding
common stock. Under this authorization, which expired on December 8, 2002, we
repurchased 920,200 shares for total of $10.0 million.
Stock options. As of December 31, 2002, we had outstanding
non-qualified stock options to purchase an aggregate of 5.7 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 $8.09 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 in 2002 and 2001 of non-qualified
stock options to purchase an aggregate of 72,000 and 528,000 shares of common
stock, we are entitled to a federal income tax deduction of approximately
$539,000 and $7.8 million, respectively. We have recognized a reduction of our
federal and state income tax liability of approximately $198,000 and $3.0
million in 2002 and 2001. Accordingly, we recorded an increase to additional
paid-in capital and a reduction to current taxes payable. 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, 2002 are shown in the tables below (in
thousands). A more complete
39
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 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
------------ ------------ ------------ ------------ ------------
Long-term debt (Note 9) ................ $ 109,632 $ 5,639 $ 2,020 $ 100,571 $ 1,402
Capital lease obligations (Note 17) .... 312 97 215 -- --
Operating leases (Note 17) ............. 588,708 68,862 129,976 51,484 338,386
------------ ------------ ------------ ------------ ------------
Total contractual obligations .......... $ 698,652 $ 74,598 $ 132,211 $ 152,055 $ 339,788
============ ============ ============ ============ ============
As of December 31, 2002, we had approximately $48.6 million of standby
letters of credit and surety bonds maturing in less than one year, approximately
$2.7 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, 2002, we also had $3.7 million of other
commercial commitments without a maturity.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Aircraft Usage Payments
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 $100,000
per month in monthly lease obligations for a total of $800,000. 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 basis and are billed on a periodic
basis. During the period August 1, 2001 through December 31, 2001, we reimbursed
Mr. Crane $49,000 for hourly usage of the aircraft. During the year ended
December 31, 2002, we reimbursed Mr. Crane $1.2 million for actual 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 charter airline headquartered in Miami, Florida, for approximately
$6.3 million in cash. 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
40
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 made by EGL in respect of the letter of
credit. As of December 31, 2002, Miami Air had no funded debt under the line of
credit that is supported by the standby letter of credit. Additionally, as of
December 31, 2002, Miami Air had outstanding $2.2 million in letters of credit
and surety bonds that were supported by the standby letter of credit. This
letter of credit was reduced to $3.0 million in January 2003.
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. During the first
four months of 2002, there were three aircraft subject to the aircraft charter
agreement and we paid approximately $6.1 million related to this agreement. In
May 2002, EGL and Miami Air mutually agreed to cancel the aircraft charter
agreement for the three planes as of May 9, 2002 and we paid $450,000 for
services rendered in May 2002 and aircraft repositioning costs.
The weak economy and events of September 11, 2001 significantly reduced
the demand for cargo plane services, particularly 727 cargo planes. As a result,
the market value of these planes declined dramatically. Miami Air made EGL aware
that the amounts due Miami Air's bank (which are secured by seven 727 planes)
were significantly higher than the market value of those planes. In addition,
Miami Air had outstanding operating leases for 727 and 737 airplanes at above
current market rates, including two planes that were expected to be delivered in
2002. Throughout the fourth quarter of 2001 and the first quarter of 2002, Miami
Air was in discussions with its 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. Miami Air had informed us that its creditors had indicated
a willingness to make concessions. In May 2002, we were informed that Miami
Air's creditors were no longer willing to make concession and that negotiations
with its creditors had reached an impasse and no agreement appeared feasible. As
such, in the first quarter of 2002, we recognized an other than temporary
impairment of the entire carrying value of our $6.7 million investment in Miami
Air, which included a $509,000 increase in value attributable to EGL's 24.5%
share of Miami Air's first quarter 2002 results of operations. In addition, we
recorded an accrual of $1.3 million for our estimated exposure on the
outstanding funded debt and letters of credit supported by the $7 million
(subsequently reduced to $3.0 million in January 2003) standby letter of credit.
During the third quarter of 2002, Miami Air informed us that certain of its
creditors had, in fact, made certain concessions. We have not adjusted our
accrual, and there can be no assurance that the ultimate loss, if any, will not
exceed such estimate requiring an additional charge.
Miami Air, each of the private investors and the continuing Miami Air
stockholders also entered into a stockholders agreement under which:
o Mr. Crane and Mr. Hevrdejs 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,
o each of EGL and Mr. Crane has the right to appoint one member
of Miami Air's board of directors, and
o 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, 2003, directors appointed to Miami Air's board
include a designee of Mr. Crane, Mr. Elijio Serrano (our Chief Financial
Officer) and three others. The Series A preferred stock was issued in December
2002, when all investors expect one were called upon by the Board of Directors
of
41
Miami Air to purchase their preferred shares. The Series A preferred stock (1)
is not convertible, (2) has a 15.0% annual dividend rate and (3) is subject to
mandatory redemption in July 2006 or upon the prior occurrence of specified
events.
The original charter transactions between Miami Air and us 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.
Miami Land Purchase
Currently, our operations in Miami, Florida are located in three
different facilities. In order to increase operational efficiencies, we acquired
land to be used as the site for a new facility to consolidate our Miami
operations. The land was acquired on August 30, 2002 from a related party entity
controlled by James R. Crane for $9.8 million in cash, including our acquisition
costs of $131,000. This parcel of land had been previously identified by EGL as
the most advantageous property on which to consolidate its Miami operations. EGL
entered into negotiations on the land and reached agreement with the seller on
terms. However, given the downturn in the economy and our weakening financial
condition at that point in time, EGL elected to delay purchasing this property
until our financial condition improved. On July 10, 2001, Mr. Crane purchased
the land in anticipation of reselling the land to EGL. The purchase price
represented the lower of current market value, based on an independent
appraisal, or Mr. Crane's purchase price plus carrying costs for the land. EGL's
Audit Committee, consisting of five independent directors, engaged in an
analysis and discussion regarding whether it was in the best interest of EGL to
enter into a purchase agreement to purchase this particular tract of land from
Mr. Crane. The Audit Committee analysis included, but was not limited to,
obtaining an independent appraisal of the land, reviewing a comparative
properties analysis performed by an outside independent real estate company and
performing a cost benefit analysis for several different alternatives. Based
upon the data obtained from the analysis, the Audit Committee determined the
best alternative for EGL, in its opinion, was for EGL to purchase the property
from Mr. Crane. The Audit Committee then made a recommendation to EGL's Board of
Directors, which includes six independent directors, to purchase this land at
Mr. Crane's purchase price plus carrying costs, which was lower than the current
market value. In August 2002, the purchase was approved unanimously by EGL's
Board of Directors, with Mr. Crane abstaining from the vote.
EGL Subsidiaries in Spain and Portugal
In 1999, Circle sold a 49% interest in two previously wholly-owned
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 was one of our directors in 2000 and 2001 and resigned from our Board of
Directors in May 2002.
Circle's outside advisors determined the methodology for determining
the value of the subsidiaries, which was deemed to be fair by an independent
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 was paid in full during 2002.
42
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 $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 prohibited 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 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 until May 31, 2004 in
June 2001.
Source One Spares
Mr. Crane 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 early 2002. Rental income
was approximately $30,000 for the year ended December 31, 2002. During 2002, we
billed Source One Spares approximately $133,000 for freight forwarding services.
Houston Property
In connection with a sale-leaseback agreement entered into by us in
2001, Mr. Crane conveyed his ownership in a property adjacent to the Houston
facility directly to an unrelated buyer. We then leased the property directly
from the buyer. See "--Other factors affecting our liquidity and capital
resources."
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.
43
CRITICAL ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates 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 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:
o the range of accounting policies permitted by accounting
principles generally accepted in the United States of America,
o management's understanding of the company's business - both
historical results and expected future results,
o 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,
o 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,
o expected rates of change, sensitivity and volatility
associated with the assumptions used in developing estimates,
and
o whether historical trends are expected to be representative of
future trends.
44
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 amounts 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 (EITF) 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 January 2002, EITF
Issue No. 01-14, "Income Statement Characterization of Reimbursements Received
for 'Out of Pocket' Expenses Incurred" was effective for EGL. This issue
clarified certain provisions of EITF No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent," and among other things established when
reimbursements are required to be shown gross as opposed to net. EITF No. 01-14
also directed that the new rules should be applied in financial reporting
periods beginning after December 15, 2001. The clarifying rules now require the
Company to report revenues from certain reimbursed incidental activities on a
gross rather than net basis. The Company has complied with the guidance in EITF
No. 01-14 and reclassified to cost of transportation, for all periods presented,
the costs of certain reimbursed incidental activities previously reported net in
revenues. The following table illustrates the financial statement impact of the
reclassification by comparing revenues previously reported on a net basis with
revenues reported on a gross basis in this Annual Report on Form 10-K. There is
no impact on net revenues, operating income (loss) or net income (loss) as a
result of this reclassification.
45
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
NET GROSS NET GROSS NET GROSS
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Revenues:
Air freight forwarding $1,273,540 $1,283,025 $1,296,026 $1,307,101 $1,465,438 $1,511,740
Ocean freight forwarding 197,846 216,298 176,470 194,642 184,602 202,956
Customs brokerage and
other 208,897 370,010 199,498 359,006 211,166 365,167
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 1,680,283 1,869,333 1,671,994 1,860,749 1,861,206 2,079,863
Cost of transportation:
Air freight forwarding 868,136 877,621 909,855 920,930 992,041 1,038,343
Ocean freight forwarding 140,015 158,467 117,956 136,128 131,140 149,494
Customs brokerage and
other -- 161,113 -- 159,508 18,513 172,514
---------- ---------- ---------- ---------- ---------- ----------
Total costs 1,008,151 1,197,201 1,027,811 1,216,566 1,141,694 1,360,351
---------- ---------- ---------- ---------- ---------- ----------
Net revenues $ 672,132 $ 672,132 $ 644,183 $ 644,183 $ 719,512 $ 719,512
========== ========== ========== ========== ========== ==========
Computer software
Certain costs related to the development or purchase of internal-use
software are capitalized and amortized over the estimated useful life of the
software. Costs related to the preliminary project stage, data conversion and
the post-implementation/operation stage of a software development project are
expensed as incurred. On 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 the periods presented related
to a number of information systems projects that were being developed over 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, 2002 will be successfully completed and will result
in benefits recoverable in future periods.
Goodwill and other intangibles
Goodwill represents the excess of purchase price over the fair value of
net assets acquired. Goodwill is a residual amount and is determined after
numerous estimates are made regarding the fair value of assets and liabilities
included in a business combination, and therefore, indirectly affected by
management's estimates and judgments. Prior to January 1, 2002, we amortized
goodwill and other intangible assets on a straight-line basis over the period of
expected benefit, not exceeding 40 years. In 2002, we adopted the provisions of
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Effective January 1, 2002, we no longer amortize goodwill
and indefinite lived intangible assets but instead test for impairment at least
annually or wherever circumstances indicate a possible impairment. Finite lived
intangible assets are amortized over the period of expected benefit.
46
Impairment of assets
Substantial judgment is necessary in the determination as to whether an
event or circumstance has 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. If we determine an asset has been impaired based on the
projected undiscounted cash flows of the related asset or the business unit over
the remaining amortization period, and if the cash flow analysis indicates that
the carrying amount of an asset exceeds related undiscounted cash flows, the
carrying value is reduced to the estimated fair value of the asset or the
present value of the expected future cash flows.
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.
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, 2002, 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, 2002, a 10% rise in the base rate for these
financing arrangements would not have a material impact on operating income in
2002.
We have not purchased any material futures contracts nor have we
purchased or held any material derivative financial instruments for trading
purposes during 2002. In December 2002, we entered into a contract for the
purpose of hedging the costs of a portion of our anticipated jet fuel purchases
for chartered aircraft during the following twelve months. This contract matures
in November 2003. See note 14 of the notes to our consolidated financial
statements.
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
47
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 is being amortized to interest expense over the remaining life of
the swap agreement and changes in fair value of the swap agreement are recorded
in interest expense. During the twelve months ended December 31, 2002, we
recorded $2.2 million net interest expense which includes $220,000 relating to
amortization of the deferred loss and changes in the fair value of the swap
agreement.
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, 2002 and
2001. 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.
48
NON-FUNCTIONAL CURRENCY EXPOSURE IN U.S. DOLLAR EQUIVALENTS AS OF
DECEMBER 31, 2002
(IN THOUSANDS)
FOREIGN EXCHANGE
GAIN/(LOSS) IF
FUNCTIONAL CURRENCY
-------------------------------
APPRECIATES DEPRECIATES
NON-FUNCTIONAL CURRENCY ASSET LIABILITY LONG/(SHORT) BY 10% BY 10%
------------------------ ------------ ------------ ------------ -------------- --------------
United States dollar ... $ 2,847 $ 15,187 $ (12,340) $ (1,234) $ 1,234
Hong Kong dollar ....... 12,275 1,093 11,182 1,118 (1,118)
European Union euro .... 9,564 2,832 6,732 673 (673)
Singaporean dollar ..... 4,110 8,341 (4,231) (423) 423
Canadian dollar ........ 3,936 72 3,864 386 (386)
South Africa rand ...... 990 3,991 (3,001) (300) 300
Chilean pesos .......... 622 2,357 (1,735) (174) 174
British pound .......... 3,117 1,791 1,326 133 (133)
Indian rupee ........... 3,994 2,891 1,103 110 (110)
All others ............. 13,840 12,171 1,669 167 (167)
------------ ------------ ------------ -------------- --------------
Totals ...... $ 55,295 $ 50,726 $ 4,569 $ 456 $ (456)
============ ============ ============ ============== ==============
NON-FUNCTIONAL CURRENCY EXPOSURE IN U.S. DOLLAR EQUIVALENTS AS OF
DECEMBER 31, 2001
(IN THOUSANDS)
FOREIGN EXCHANGE
GAIN/(LOSS) IF
FUNCTIONAL CURRENCY
-------------------------------
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)
Bristish pound ......... 3,524 3,415 109 11 (11)
All others ............. 8,068 11,119 (3,051) (305) 305
------------ ------------ ------------ -------------- --------------
Totals ...... $ 60,416 $ 53,615 $ 6,801 $ 680 $ (680)
============ ============ ============ ============== ==============
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.
49
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 "2003 Proxy Statement") for our annual meeting
of shareholders to be held on May 12, 2003. The 2003 Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days
subsequent to December 31, 2002.
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 2003 Proxy Statement, which will be filed with the SEC not
later than 120 days subsequent to December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by
reference to the 2003 Proxy Statement, which will be filed with the SEC not
later than 120 days subsequent to December 31, 2002.
EQUITY COMPENSATION PLANS
The following table sets forth information about EGL's common stock
that may be issued under all of our existing equity compensation plans as of
December 31, 2002 (shares in thousands):
(a) (b) (c)
-------------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights (2) rights (3) reflected in column (a))(4)
-------------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security
holders(1)............................ 5,701 $19.34 7,104
-------------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders.......... -- -- --
-------------------------------------- ---------------------------- ---------------------------- ----------------------------
Total................................. 5,701 $19.34 7,104
-------------------------------------- ---------------------------- ---------------------------- ----------------------------
-----------------
(1) These plans include the EGL Long-Term Incentive Plan, the EGL Employee
Stock Purchase Plan and the EGL 1995 Non-Employee Director Stock Option
Plan.
(2) Includes 567,924 shares of EGL common stock to be issued upon the
exercise of outstanding options assumed in connection with the
acquisition of Circle International Group, Inc. at a
50
weighted average exercise price of $21.78, which options were
originally issued under one of the following Circle plans: the 1982
Stock Option Plan, the 1990 Stock Option Plan, the 1994 Omnibus Equity
Incentive Plan, the 1999 Stock Option Plan and the Employee Stock
Purchase Plan. No additional awards may be granted under the Circle
plans. Also excludes shares of EGL common stock issuable under the EGL
Employee Stock Purchase Plan.
(3) Excludes restricted stock.
(4) Includes 355,000 shares of EGL common stock remaining available for
future issuance under the EGL Employee Stock Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the 2003 Proxy Statement, which will be filed with the SEC not
later than 120 days subsequent to December 31, 2002.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, an evaluation was carried
out under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the disclosure controls and procedures (as defined in
Rules 13a-15 and 15d-14 of the Exchange Act). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective. No significant changes were
made in internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
ITEM PAGE
---- ----
Index........................................................................................................F-1
Report of Independent Accountants............................................................................F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001.................................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000...................F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000...................F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001
and 2000................................................................................................F-7
Notes to Consolidated Financial Statements...................................................................F-8
(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
51
EXHIBIT NUMBER DESCRIPTION
*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 10Q 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).
52
EXHIBIT NUMBER DESCRIPTION
+*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).
+*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 (filed as Exhibit 10.11A to
EGL's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 and incorporated herein by
reference).
*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 (filed as Exhibit
10.11B to EGL's Annual Report on for 10-K for the fiscal
year ended December 31, 2001 and incorporated herein by
reference).
*10.11C -- Consent and Second Amendment to Credit Agreement dated
October 14, 2002 between EGL and Bank of America, N.A.,
and the other financial institutions named therein
(filed as Exhibit 10.1 to EGL's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference).
+*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).
EXHIBIT NUMBER DESCRIPTION
+*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.
+*10.19 -- 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).
+*10.20 -- Executive Deferred Compensation Plan (filed as Exhibit
10.2 to EGL's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 and incorporated
herein by reference).
+*10.21 -- Amendment Number 1 to 1995 Non-Employee Director Stock
Option Plan (filed as Exhibit 10.4 to EGL's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002 and incorporated herein by reference).
10.22 -- Agreement for Purchase and Sale of Real Property, dated
September 17, 2002 by and between MacFarlan Holdings,
Ltd., as buyer, and EGL, Inc., as seller.
10.23 -- Lease Agreement for real property in Austin, Texas,
dated as of November 13, 2002, by and between EGL Texas
Partners, L.P., as landlord, and EGL Eagle Global
Logistics, LP, as tenant.
10.24 -- Lease Agreement for real property in Grapevine, Texas,
dated as of November 13, 2002, by and between EGL Texas
Partners, L.P., as landlord, and EGL Eagle Global
Logistics, LP, as tenant.
10.25 -- Lease Agreement for real property in South Bend,
Indiana, dated as of December 20, 2002, by and between
South Bend Partners, LP, as landlord, and EGL Eagle
Global Logistics, LP, as tenant.
10.26 -- Agreement for Purchase and Sale of Real Property, dated
as of December 15, 2002, by and between McMillan
Investment Company, Ltd., as buyer, and EGL Eagle Global
Logistics, LP, as seller.
10.27 -- Lease Agreement, dated as of December 20, 2002, by and
between McMillan/Miami LLC, as landlord, and EGL Eagle
Global Logistics, LP, as buyer.
10.28 -- Agreement for Purchase and Sale of Real Property, dated
as of December 30, 2002, by and between Giffels
Development Inc., as buyer, and EGL Eagle Global
Logistics (Canada) Corp., as seller.
10.29 -- Lease Agreement, dated as of December 30, 2002, by and
between Giffels Development Inc., as landlord, and EGL
Eagle Global Logistics (Canada) Corp., as tenant.
12 -- Ratio of Earnings to Fixed Charges.
21 -- Subsidiaries of EGL.
23.1 -- Consent of PricewaterhouseCoopers 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.
53
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 26, 2003
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 Executive Officer March 26, 2003
James R. Crane (Principal Executive Officer)
/s/ Elijio V. Serrano
------------------------------------- Chief Financial Officer (Principal Financial March 26, 2003
Elijio V. Serrano and Accounting Officer)
/s/ Michael Jhin
------------------------------------- Director March 26, 2003
Michael Jhin
/s/ Frank J. Hevrdejs
------------------------------------- Director March 26, 2003
Frank J. Hevrdejs
/s/ Neil E. Kelley
------------------------------------- Director March 26, 2003
Neil E. Kelley
------------------------------------- Director March 26, 2003
Norwood W. Knight-Richardson
/s/ Rebecca A. McDonald
------------------------------------- Director March 26, 2003
Rebecca A. McDonald
/s/ Paul William Hobby
------------------------------------- Director March 26, 2003
Paul William Hobby
54
CERTIFICATIONS
I, James R. Crane, certify that:
1. I have reviewed this annual report on Form 10-K of EGL, Inc.
(the "registrant");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003
By /s/ James R. Crane
-----------------------------------------------------------
James R. Crane, Chief Executive Officer
55
I, Elijio V. Serrano, certify that:
1. I have reviewed this annual report on Form 10-K of EGL, Inc.
(the "registrant");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003
By /s/ Elijio V. Serrano
-----------------------------------------------------------
Elijio V. Serrano, Chief Financial Officer
56
EGL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
PAGE
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of EGL, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of EGL, Inc.
and its subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 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. 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 provide a reasonable basis for our opinion.
As discussed in note 7 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets on
January 1, 2002.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 21, 2003
F-2
EGL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
(in thousands, except par values)
ASSETS
Current assets:
Cash and cash equivalents $ 119,669 $ 77,440
Restricted cash 7,806 5,413
Short-term investments and marketable securities 12 3,442
Trade receivables, net of allowance of $13,717 and $11,628 371,024 365,505
Other receivables 13,213 10,868
Deferred income taxes 6,228 8,762
Income tax receivable 1,019 11,297
Other current assets 32,952 29,411
------------ ------------
Total current assets 551,923 512,138
Property and equipment, net 157,403 152,922
Assets held for sale 644 --
Investments in unconsolidated affiliates 40,042 46,018
Goodwill 81,881 78,901
Deferred income taxes 5,327 8,255
Other assets, net 13,087 14,237
------------ ------------
Total assets $ 850,307 $ 812,471
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables and accrued transportation costs $ 232,324 $ 216,073
Accrued salaries and related costs 31,218 27,982
Accrued restructuring, merger and integration costs 8,227 8,879
Current portion of long-term notes payable 5,639 7,950
Income taxes payable 2,595 6,642
Other liabilities 70,409 54,048
------------ ------------
Total current liabilities 350,412 321,574
Deferred income taxes 3,720 7,805
Long-term notes payable 103,993 103,774
Other noncurrent liabilities 6,789 6,194
------------ ------------
Total liabilities 464,914 439,347
------------ ------------
Minority interests 8,852 7,033
------------ ------------
Commitments and contingencies (Notes 10, 16, 17 and 18)
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;
48,091 and 48,939 shares issued; 47,054 and 47,813 shares outstanding 48 49
Additional paid-in capital 148,682 158,317
Retained earnings 274,146 264,712
Accumulated other comprehensive loss (28,566) (37,045)
Unearned compensation -- (635)
Treasury stock, 1,037 and 1,126 shares held (17,769) (19,307)
------------ ------------
Total stockholders' equity 376,541 366,091
------------ ------------
Total liabilities and stockholders' equity $ 850,307 $ 812,471
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
EGL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
(in thousands, except per share amounts)
Revenues (Note 1) $ 1,869,333 $ 1,860,749 $ 2,079,863
Cost of transportation 1,197,201 1,216,566 1,360,351
------------ ------------ ------------
Net revenues 672,132 644,183 719,512
Operating expenses:
Personnel costs 370,817 383,211 378,461
Other selling, general and administrative expenses 274,878 294,488 256,270
EEOC legal settlement (Note 16) -- 10,089 7,500
Air transportation safety and system stablization grant (8,923) -- --
(Note 2)
Merger related transaction, restructuring and
integration costs (Note 4) 5,688 13,964 67,389
------------ ------------ ------------
Operating income (loss) 29,672 (57,569) 9,892
Nonoperating income (expense), net (14,556) (8,442) 2,549
------------ ------------ ------------
Income (loss) before provision (benefit) for income taxes 15,116 (66,011) 12,441
Provision (benefit) for income taxes 5,895 (25,834) 13,163
------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting for negative goodwill 9,221 (40,177) (722)
Cumulative effect of change in accounting for
negative goodwill (Note 7) 213 -- --
------------ ------------ ------------
Net income (loss) $ 9,434 $ (40,177) $ (722)
============ ============ ============
Basic earnings (loss) per share before cumulative effect of
change in accounting for negative goodwill $ 0.19 $ (0.84) $ (0.02)
Cumulative effect of change in accounting for negative
goodwill 0.01 -- --
------------ ------------ ------------
Basic earnings (loss) per share $ 0.20 $ (0.84) $ (0.02)
============ ============ ============
Basic weighted-average common shares outstanding 47,610 47,558 46,600
Diluted earnings (loss) per share before cumulative effect
of change in accounting for negative goodwill $ 0.19 $ (0.84) $ (0.02)
Cumulative effect of change in accounting for negative
goodwill 0.01 -- --
------------ ------------ ------------
Diluted earnings (loss) per share $ 0.20 $ (0.84) $ (0.02)
============ ============ ============
Diluted weighted-average common shares outstanding 47,811 47,558 46,600
The accompanying notes are an integral part of these financial statements.
F-4
EGL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 9,434 $ (40,177) $ (722)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 30,527 33,033 30,009
Impairment of assets 635 (497) 20,597
Bad debt expense 7,669 13,629 9,060
Amortization of unearned compensation 635 803 605
Deferred income tax expense (benefit) 1,365 (10,895) (11,259)
Amortization of debt issuance costs 2,078 1,279 --
Interest capitalization (986) (854) --
Tax benefit of stock options exercised 196 2,956 4,991
Amortization of deferred loss on interest rate swap 1,518 -- --
Unrealized gain on derivatives (1,298) -- --
Cumulative effect of change in accounting for negative goodwill (213) -- --
Impairment of investment in an unconsolidated affiliate 6,653 -- --
Gain on sales of assets (89) (2,657) (755)
Equity in (earnings) losses of affiliates, net of dividends received (814) 3,100 (1,714)
Minority interests, net of dividends paid 1,006 313 146
Transfer to restricted cash (2,393) (5,413) --
Other -- 65 (5,545)
Changes in assets and liabilities:
(Increase) decrease in trade receivables 1,897 98,726 (89,179)
(Increase) decrease in other receivables (1,935) (5,309) 10,790
(Increase) decrease in other assets and liabilities 2,278 (20,837) 1,189
Increase (decrease) in payables and other accrued liabilities 15,306 (28,119) 40,172
Increase (decrease) in accrual for merger, restructuring and
integration costs (652) (15,600) 24,976
------------ ------------ ------------
Net cash provided by operating activities 72,817 23,546 33,361
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (41,429) (64,866) (70,449)
Purchase of assets for sale-leaseback transactions (11,570) -- --
Proceeds from sales/maturities of marketable securities 3,430 6,740 8,390
Proceeds from sale-leaseback transactions 21,487 16,667 --
Proceeds from sales of property and equipment 4,544 20,654 2,710
Acquisitions of businesses, net of cash acquired (1,081) (4,637) (28,664)
Disposal of a consolidated subsidiary -- (819) --
Cash received from disposal of an unconsolidated affiliate 385 3,062 --
Cash received from minority interest partner 301 -- --
Investment in unconsolidated affiliate -- -- (6,300)
Other -- -- (452)
------------ ------------ ------------
Net cash used in investing activities (23,933) (23,199) (94,765)
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-5
EGL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(continued)
2002 2001 2000
------------ ------------ ------------
(in thousands)
Cash flows from financing activities:
Issuance (repayment) of notes payable, net $ (1,407) $ (82,383) $ 43,634
Net proceeds from convertible subordinated debt
offering -- 96,875 --
Issuance of common stock for employee
stock purchase plan 1,033 1,236 1,334
Proceeds from exercise of stock options 687 3,319 18,942
Repurchases of common stock (10,014) -- (10,478)
Dividends paid -- -- (4,764)
Other -- -- (362)
------------ ------------ ------------
Net cash provided by (used in) financing activities (9,701) 19,047 48,306
------------ ------------ ------------
Effect of exchange rate changes on cash 3,046 (1,955) (5,586)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 42,229 17,439 (18,684)
Cash and cash equivalents, beginning of the year 77,440 60,001 78,685
------------ ------------ ------------
Cash and cash equivalents, end of the year $ 119,669 $ 77,440 $ 60,001
============ ============ ============
Supplemental cash flow information:
Cash paid for interest $ 8,985 $ 8,552 $ 4,891
Cash paid for income taxes 10,756 9,704 29,934
Cash received from income tax refund 11,540 27,456 --
Noncash transactions:
Issuance of stock for acquisitions -- 5,426 200
Mortgages assumed in acquisitions -- -- 5,818
Issuance of notes payable for acquisition 603 -- 5,939
Obligation to deliver common stock -- (1,923) 1,923
Exchange of investment as payment of a liability -- 2,234 --
Change in fair value of cash flow hedge 421 2,024 --
Financing of insurance premiums 11,428 -- --
The accompanying notes are an integral part of these financial statements.
F-6
EGL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Accumulated
Common stock Additional other
-------------------- paid-in Retained Comprehensive comprehensive Unearned
Shares Amount capital earnings income (loss) loss compensation
---------- ------- ---------- ---------- ------------- ------------- ------------
(in thousands)
Balance at January 1, 2000 47,223 $ 47 $ 123,638 $ 308,026 $ (15,661) --
Comprehensive loss:
Net loss -- -- -- (722) $ (722) -- --
Change in value of
marketable securities, net -- -- -- -- 2 2 --
Foreign currency translation
adjustments -- -- -- -- (12,070) (12,070) --
----------
Comprehensive loss $ (12,790)
==========
Issuance of shares under
employee stock purchase plan 26 -- 921 -- -- --
Issuance of common stock for
acquisitions -- -- 49 -- -- --
Exercise of stock options and
issuance of restricted stock
awards with related tax benefit 1,162 1 25,195 -- -- (1,905)
Purchase of treasury stock -- -- -- -- -- --
Cash dividends -- -- -- (2,415) -- --
Amortization of unearned
compensation -- -- -- -- -- 605
---------- ------- ---------- ---------- ------------ ---------
Balance at December 31, 2000 48,411 48 149,803 304,889 (27,729) (1,300)
Comprehensive loss:
Net loss -- -- -- (40,177) $ (40,177) -- --
Change in value of marketable
securities, net -- -- -- -- (29) (29) --
Change in fair value of cash
flow hedge -- -- -- -- (2,024) (2,024) --
Foreign currency translation
adjustments -- -- -- -- (7,263) (7,263) --
----------
Comprehensive loss $ (49,493)
==========
Issuance of shares under employee
stock purchase plan -- -- 29 -- -- --
Issuance of common stock for
acquisitions -- -- 2,073 -- -- --
Exercise of stock options and
issuance of restricted stock
awards with related tax benefit 528 1 6,412 -- -- (138)
Amortization of unearned compensation -- -- -- -- -- 803
---------- ------- ---------- ---------- ------------ ---------
Balance at December 31, 2001 48,939 49 158,317 264,712 (37,045) (635)
Comprehensive income:
Net income -- -- -- 9,434 $ 9,434 -- --
Change in fair value of cash flow
hedge -- -- -- -- 421 421 --
Amortization of deferred loss on
interest rate swap -- -- -- -- 1,518 1,518 --
Foreign currency translation
adjustments -- -- -- -- 6,540 6,540 --
----------
Comprehensive income $ 17,913
==========
Issuance of shares under employee
stock purchase plan -- -- (436) -- -- --
Exercise of stock options and
issuance of restricted stock awards
with related tax benefit 72 -- 814 -- -- --
Repurchase and retirement of common
stock (920) (1) (10,013) -- -- --
Amortization of unearned compensation -- -- -- -- -- 635
---------- ------- ---------- ---------- ------------ ---------
Balance at December 31, 2002 48,091 $ 48 $ 148,682 $ 274,146 $ (28,566) $ --
========== ======= ========== ========== ============ =========
Obligation
Treasury stock to deliver
------------------------------ common
Shares Amount stock Total
------------ ------------ ------------ ------------
(in thousands)
Balance at January 1, 2000 (1,022) $ (14,595) -- $ 401,455
Comprehensive loss:
Net loss -- -- -- (722)
Change in value of
marketable securities, net -- -- -- 2
Foreign currency translation
adjustments -- -- -- (12,070)
Comprehensive loss
Issuance of shares under
employee stock purchase plan 26 413 -- 1,334
Issuance of common stock for
acquisitions 9 151 1,923 2,123
Exercise of stock options and
issuance of restricted stock
awards with related tax benefit 45 642 -- 23,933
Purchase of treasury stock (450) (10,478) -- (10,478)
Cash dividends -- -- -- (2,415)
Amortization of unearned
compensation -- -- -- 605
------------ ------------ ------------ ------------
Balance at December 31, 2000 (1,392) (23,867) 1,923 403,767
Comprehensive loss:
Net loss -- -- -- (40,177)
Change in value of marketable
securities, net -- -- -- (29)
Change in fair value of cash
flow hedge -- -- -- (2,024)
Foreign currency translation
adjustments -- -- -- (7,263)
Comprehensive loss
Issuance of shares under employee
stock purchase plan 70 1,207 -- 1,236
Issuance of common stock for
acquisitions 196 3,353 (1,923) 3,503
Exercise of stock options and
issuance of restricted stock
awards with related tax benefit -- -- -- 6,275
Amortization of unearned compensation -- -- -- 803
------------ ------------ ------------ ------------
Balance at December 31, 2001 (1,126) (19,307) -- 366,091
Comprehensive income:
Net income -- -- -- 9,434
Change in fair value of cash flow
hedge -- -- -- 421
Amortization of deferred loss on
interest rate swap -- -- -- 1,518
Foreign currency translation
adjustments -- -- -- 6,540
Comprehensive income
Issuance of shares under employee
stock purchase plan 85 1,469 -- 1,033
Exercise of stock options and
issuance of restricted stock awards
with related tax benefit 4 69 -- 883
Repurchase and retirement of common
stock -- -- -- (10,014)
Amortization of unearned compensation -- -- -- 635
------------ ------------ ------------ ------------
Balance at December 31, 2002 (1,037) $ (17,769) $ -- $ 376,541
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-7
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
EGL, Inc. (EGL or the Company) is a leading global transportation,
supply chain management and information services company dedicated to providing
flexible logistics solutions on a price competitive basis. The Company's
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.
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 3).
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 20).
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 accompanying consolidated financial statements include EGL and all
of its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Investments in 50% or less
owned affiliates, over which the Company has significant influence, are
accounted for by the equity method. 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 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 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 accounting principles
generally accepted in the United States of America; 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, both domestically, and globally, within various
areas that serve the Company's 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
F-8
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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 amounts 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
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, 2002
(see Note 16). 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 (see Note 10).
SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
At December 31, 2002 and 2001, 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 $12,000 and $3.4 million,
respectively. All outstanding securities at December 31, 2002 mature in less
than one year. By policy, the Company invests primarily in high-grade marketable
securities. All marketable securities are designated as available-for-sale
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 as a component of accumulated other
comprehensive loss. As of December 31, 2002 and 2001, these investments are
stated at amortized cost, which approximates fair value.
TRADE RECEIVABLES
Management establishes an allowance for doubtful accounts 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. Unrecovered trade accounts receivable charged
against the allowance for doubtful accounts were $5.9 million and $15.2 million
in 2002 and 2001, respectively.
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
F-9
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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.
ASSETS HELD FOR SALE
The Company classifies assets for which a buyer has been identified
or an active program to find a buyer is in progress as assets held for sale on
the consolidated balance sheet.
COMPUTER SOFTWARE
Certain costs related to the development or purchase of internal-use
software are capitalized and amortized over the estimated useful life of the
software. Costs related to the preliminary project stage, data conversion and
the post-implementation/operation stage of a software development project are
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 2002, 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, 2002 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. The amount capitalized is calculated based
upon the Company's current incremental borrowing rate and was $986,000 and
$854,000 in 2002 and 2001, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of purchase price over the fair value
of net assets acquired. Goodwill is a residual amount and is determined after
numerous estimates are made regarding the fair value of assets and liabilities
included in a business combination, and therefore, indirectly affected by
management's estimates and judgments. Prior to January 1, 2002, the Company
amortized goodwill and other intangible assets on a straight-line basis over the
period of expected benefit, not exceeding 40 years. In 2002, the Company adopted
the provisions of SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." Effective January 1, 2002, the Company
no longer amortizes goodwill and indefinite lived intangible assets but instead
tests for impairment at least annually or whenever circumstances indicate a
possible impairment. Finite lived intangible assets are amortized over the
period of expected benefit.
F-10
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
IMPAIRMENT OF ASSETS
Substantial judgment is necessary in the determination as to whether
an event or circumstance has occurred that may trigger an impairment analysis
and in the 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. If the Company determines an asset has been
impaired based on the projected undiscounted cash flows of the related asset or
the business unit over the remaining amortization period, and if the cash flow
analysis indicates that the carrying amount of an asset exceeds related
undiscounted cash flows, the carrying value is reduced to the estimated fair
value of the asset or the present value of the expected future cash flows.
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 exchange 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). Gains and losses from foreign currency
transactions are included in net income.
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 (EITF) 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 January 2002, EITF
Issue No. 01-14, "Income Statement Characterization of Reimbursements Received
for 'Out of Pocket' Expenses Incurred" was effective for the Company. This issue
clarified certain provisions of EITF No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent," and among other things established when
reimbursements are required to be shown gross as opposed to net. EITF No. 01-14
also directed that the new rules should be applied in financial reporting
periods beginning after December 15, 2001. The clarifying rules now require the
Company to report revenues from certain reimbursed incidental activities on a
gross rather than net basis. The Company has complied with the guidance in EITF
No. 01-14 and reclassified to cost of transportation, for all periods presented,
the costs of certain reimbursed incidental activities previously reported net in
revenues. The following table illustrates the financial statement impact of the
reclassification by comparing revenues previously reported on a net basis with
revenues reported on a gross basis in this Annual Report on Form 10-K. There is
no impact on net revenues, operating income (loss) or net income (loss) as a
result of this reclassification.
F-11
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
YEAR ENDED DECEMBER 31,
2002 2001 2000
----------------------- ----------------------- -----------------------
NET GROSS NET GROSS NET GROSS
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Revenues:
Air freight forwarding $1,273,540 $1,283,025 $1,296,026 $1,307,101 $1,465,438 $1,511,740
Ocean freight forwarding 197,846 216,298 176,470 194,642 184,602 202,956
Customs brokerage and
other 208,897 370,010 199,498 359,006 211,166 365,167
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 1,680,283 1,869,333 1,671,994 1,860,749 1,861,206 2,079,863
Cost of transportation:
Air freight forwarding 868,136 877,621 909,855 920,930 992,041 1,038,343
Ocean freight forwarding 140,015 158,467 117,956 136,128 131,140 149,494
Customs brokerage and
other -- 161,113 -- 159,508 18,513 172,514
---------- ---------- ---------- ---------- ---------- ----------
Total costs 1,008,151 1,197,201 1,027,811 1,216,566 1,141,694 1,360,351
---------- ---------- ---------- ---------- ---------- ----------
Net revenues $ 672,132 $ 672,132 $ 644,183 $ 644,183 $ 719,512 $ 719,512
========== ========== ========== ========== ========== ==========
STOCK-BASED COMPENSATION
At December 31, 2002, the Company has six stock-based employee
compensation plans under which stock-based awards have been granted. 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 related interpretations. 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 No. 123, "Accounting for Stock-Based Compensation,"
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 options vest. The following table illustrates the pro
forma effect on net income (loss) and earnings (loss) per share if the Company
had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
F-12
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
2002 2001 2000
------------ ------------ ------------
(in thousands)
Net income (loss) as reported $ 9,434 $ (40,177) $ (722)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 5,419 6,930 7,971
------------ ------------ ------------
Pro forma net income (loss) $ 4,015 $ (47,107) $ (8,693)
============ ============ ============
Earnings (loss) per share:
Basic-as reported $ 0.20 $ (0.84) $ (0.02)
Basic-pro forma 0.08 (0.99) (0.19)
Diluted-as reported 0.20 (0.84) (0.02)
Diluted-pro forma 0.08 (0.99) (0.19)
PROVISION (BENEFIT) FOR INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. 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.
EARNINGS (LOSS) 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 the convertible subordinated
notes issued in December 2001 are the only potentially dilutive share
equivalents the Company has outstanding for the periods presented. For the year
ended December 31, 2002, incremental shares of 201,000 were used in the
calculation of diluted earnings per share, all of which were attributable to
stock options. The shares related to the convertible subordinated notes were
excluded from the diluted earnings per share calculation as their effect was
antidilutive. No shares related to options or the convertible subordinated 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.
COMPREHENSIVE INCOME (LOSS)
In addition to net income (loss), comprehensive income (loss),
includes, as applicable, foreign currency translation adjustments, 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, change in the value
of marketable securities and changes in the fair value of cash flow hedges.
Accumulated other comprehensive loss consists of the following as of
December 31:
2002 2001
--------- ---------
(in thousands)
Cumulative foreign currency translation
adjustment $ (28,481) $ (35,021)
Fair value of cash flow hedge 421 --
Deferred loss on interest rate swap (506) (2,024)
--------- ---------
$ (28,566) $ (37,045)
========= =========
F-13
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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, 2002 and 2001. 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, 2002. 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 and short-term investments
and marketable securities - The carrying amount approximates fair value because
of the short maturity of those instruments.
Notes payable - The fair value of the Company's convertible
subordinated notes was estimated based upon an indicative price quotation of the
notes on December 31, 2002 and the closing price of the Company's stock on
December 31, 2001. An indicative price quotation includes a bid and offer price
provided by a market maker for the purpose of evaluation or information. At
December 31, 2001, no indicative price quotation information was available as
the notes were just recently issued. The Company's notes payable 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.
Swap agreements - The fair value of interest rate swaps and jet fuel
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 and jet fuel prices.
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 synthetic leases is the
outstanding lease balance and represents the amount the Company would be
obligated to pay to terminate the lease agreement.
The carrying amounts and fair values of financial instruments (assets
and (liabilities)) at December 31, 2002 and 2001 are as follows (in thousands):
F-14
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CARRYING AMOUNT FAIR VALUE
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Cash and cash equivalents $ 119,669 $ 77,440 $ 119,669 $ 77,440
Restricted cash 7,806 5,413 7,806 5,413
Short-term investments and marketable securities 12 3,442 12 3,442
Convertible subordinated notes (100,000) (100,000) (110,938) (80,018)
Notes payable (9,632) (11,724) (9,632) (11,724)
Interest rate swap agreement (729) (2,028) (729) (2,028)
Jet fuel swap agreement 421 -- 421 --
Off balance sheet financial instruments:
Letters of credit -- -- (31,398) (24,000)
Synthetic leases -- -- -- (24,000)
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.
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
The Company recognizes 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.
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
F-15
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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. 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 and jet fuel prices. 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 operations
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 recognized in earnings.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
that the associated long-lived asset retirement costs are capitalized. This
statement is effective for fiscal years beginning after June 15, 2002. The
Company will adopt SFAS 143, beginning January 1, 2003, and does not believe
that it will have any material impact on its results of operations, financial
position or cash flows.
In June 2002, the Financial Accounting Standards Board issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 supersedes EITF Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred and establishes fair value as the objective for initial
measurement of a liability. SFAS 146 states that an entity's commitment to a
plan does not create a present obligation to others that meets the definition of
a liability. Generally, SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company will adopt SFAS 146 as
of January 1, 2003.
In November 2002, the Financial Accounting Standards Board issued
FASB Interpretation No. (FIN), 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 expands on the accounting guidance of SFAS 5, 57 and 107 and
incorporates without change the provisions of FIN 34, which is being superseded.
FIN 45 elaborates on the existing disclosure requirements for most guarantees
and clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market
F-16
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
value, of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company adopted the
recognition and measurement provisions of FIN 45 effective January 1, 2003 and
is currently evaluating the impact on its results of operations, financial
position and cash flows. The Company adopted the disclosure provisions of FIN 45
effective December 31, 2002 (see Note 10).
In December 2002, the Financial Accounting Standards Board issued
SFAS No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123." SFAS 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Generally, SFAS 148 transition guidance and provisions for disclosure
are effective for fiscal years ending after December 15, 2002 and is effective
for interim period disclosures for interim periods beginning after December 15,
2003. The Company adopted the disclosure provisions of SFAS 148 effective
December 31, 2002 as previously detailed in this note.
In January 2003, the Financial Accounting Standards Board issued FIN
No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB
51." The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities" or "VIEs") and how to
determine when and which business enterprise should consolidate the VIE (the
"primary beneficiary"). This new model for consolidation applies to an entity in
which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. The provisions of FIN 46 are
effective for the Company as of July 1, 2003. The Company is not presently a
party to any transactions with VIEs.
NOTE 2 - AIR TRANSPORTATION SAFETY AND SYSTEM STABILIZATION ACT
On September 11, 2001, terrorists hijacked and used four commercial
aircraft in terrorist attacks on the United States. As a result of these
terrorist attacks, the Federal Aviation Administration immediately suspended all
commercial airline flights from September 11, 2001 until September 14, 2001,
which effectively shut down the Company's air freight forwarding operations.
Once the Company resumed air shipment operations, the passenger load factors on
commercial airlines had been severely impacted which caused the airlines to
cancel flights and greatly limited the movement of freight by air, along with
increased pricing from the airlines on the remaining flights.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the Act). The Act provides
for up to $5 billion in cash grants to qualifying U.S. airlines and freight
carriers to compensate for direct and incremental losses, as defined in the Act,
from September 11, 2001 through December 31, 2001, associated with the terrorist
attacks. The Department of Transportation (DOT) makes the final determination of
the amount of eligible direct and incremental losses incurred by each airline
and freight carrier. The DOT issued its final rules with respect to the Act on
April 16, 2002. The Company filed its final application for grant proceeds on
August 26, 2002. During the third quarter of 2002, the Company received grant
proceeds of $8.9 million from the DOT and
F-17
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
recorded this amount in operating income. The DOT, Congress, or other
governmental agencies may perform an additional audit and/or review of the
Company's application. No assurance can be provided that the result of such an
audit/review would not result in a refund of a portion of the grant.
NOTE 3 - 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.
EGL and Circle had no significant intercompany transactions prior
to the merger and no material adjustments were necessary to conform the
accounting policies of EGL and Circle.
The Company entered into six business combination transactions
between January 1, 2000 and December 31, 2002 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 $46.5 million, comprised of $34.4 million in cash, $6.5 million notes
payable and stock consideration valued at approximately $5.6 million. The
Company has recognized $42.2 million in goodwill in connection with these
acquisitions. 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, 2002, the Company had recognized $8.2
million in additional contingent consideration on these acquisitions paid in
cash and the Company's common stock. 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 4 - MERGER TRANSACTION, RESTRUCTURING AND INTEGRATION COSTS
TRANSACTION AND INTEGRATION COSTS
As a result of the merger with Circle, as discussed in Note 3, 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.
RESTRUCTURING CHARGES
In the fourth quarter of 2000, the Company developed a plan (the
Plan) to integrate the former EGL and Circle operations and to eliminate
duplicate facilities as a result of the merger. The principal components of the
Plan involved the termination of certain employees at the former Circle
headquarters
F-18
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
and various international locations, elimination of duplicate facilities in the
United States and certain international locations including the Circle
headquarters facility, and the termination of selected international joint
venture and agency agreements. The Company recorded restructuring charges of
$5.7 million, $6.4 million and $49.4 million in 2002, 2001 and 2000,
respectively, primarily as a result of the Plan and the decision to terminate
certain charter lease obligations. 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 in 2002, 2001 and 2000 and the remaining portion
of the unpaid accrued charges as of December 31, 2002 and 2001 are as follows:
Income statement charge
2001
Income Accrued ----------------------------
statement liability Revisions
charge Payments/ December 31, New to Payments/
Q4 2000 reductions 2000 charges estimates reductions
------------ ------------ ------------ ------------ ------------ ------------
(in thousands)
Severance costs .................... $ 8,377 $ (2,110) $ 6,267 $ 3,345 $ (398) $ (8,301)
Future lease obligations, net of
subleasing income .............. 11,105 (1,042) 10,063 1,917 2,746 (7,763)
Assets not expected to be
recoverable .................... 18,284 (18,284) -- -- (497) 497
Termination of joint venture/
agency agreements .............. 11,635 (6,423) 5,212 -- (3,000) (1,209)
Charter lease obligation, net of
subleasing income ............. -- -- -- 2,287 -- (2,287)
------------ ------------ ------------ ------------ ------------ ------------
$ 49,401 $ (27,859) $ 21,542 $ 7,549 $ (1,149) $ (19,063)
============ ============ ============ ============ ============ ============
Income
statement
charge 2002
Accrued ------------ Accrued
liability Revisions liability
December 31, to Payments/ December 31,
2001 estimates reductions 2002
------------ ------------ ------------ ------------
(in thousands)
Severance costs .................... $ 913 $ -- $ (126) $ 787
Future lease obligations, net of
subleasing income .............. 6,963 5,939 (5,687) 7,215
Assets not expected to be
recoverable .................... -- -- -- --
Termination of joint venture/
agency agreements .............. 1,003 (251) (527) 225
Charter lease obligation, net of
subleasing income ............. -- -- -- --
------------ ------------ ------------ ------------
$ 8,879 $ 5,688 $ (6,340) $ 8,227
============ ============ ============ ============
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 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 was approximately $100,000 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
F-19
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
approximately 80 of the Company's operating locations. During the second half 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 $37.0 million in anticipated future recoveries from actual or
expected sublease agreements as of December 31, 2002. Sublease income has been
anticipated under the Plan only in locations where sublease agreements have been
executed as of December 31, 2002 or are deemed probable of execution during the
first half of 2003. 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 2002 and 2001,
the Company recorded an additional charge of $5.9 million and $4.7 million,
respectively, 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, 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 $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 represent
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 Plan,
the Company completed the termination of joint venture and agency agreements in
Brazil, Chile, Panama, Venezuela, Taiwan and South Africa in 2001. The joint
venture agreements in South Africa and Taiwan were terminated on more favorable
terms than originally expected and the related estimate was revised downward by
$3.0 million in 2001. In the fourth quarter of 2002, the Company reversed an
additional $251,000 of this reserve due to more favorable settlements.
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 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.
F-20
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
ESTIMATED
USEFUL LIVES 2002 2001
----------------- ----------------
(in thousands)
Land $ 10,139 $ 14,923
Software 1 to 5 years 69,950 57,099
Buildings and improvements 5 to 50 years 91,516 72,807
Equipment and furniture 3 to 10 years 124,980 119,956
----------------- ----------------
296,585 264,785
Less - accumulated depreciation 139,182 111,863
----------------- ----------------
$ 157,403 $ 152,922
================= ================
Depreciation expense for 2002, 2001 and 2000 was $30.4 million, $28.6
million and $25.8 million, respectively.
The Company is in the process of developing and implementing computer
system solutions for its operational, human resources and financial systems. As
of December 31, 2002 and 2001, the Company had capitalized approximately $28.7
million and $20.9 million, respectively, related to the development of these
systems. These amounts are included in the software amount above and are
currently not being depreciated. Once placed into service, depreciation related
to the systems will be charged.
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 2002, the Company sold and leased back four terminal and warehouse
facilities, three of which were constructed under its master operating synthetic
lease agreement. In December 2002, the Company sold land that it held in Miami,
Florida and Toronto, Canada to a developer to develop terminal and warehouse
facilities under build-to-suit agreements whereby the Company will lease back
the buildings upon their completion. 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 an unrelated party. See Note 18 for
additional discussion related to the sale-leaseback agreements entered into by
the Company.
In December 2002, the Company was required to pay off the lease
balance and related interest of $15.5 million under a synthetic lease agreement
entered into during 1998 by Circle. This lease facility financed the
acquisition, construction and development of a terminal facility located in New
York, New York. The land leased under this agreement was accounted for as a
synthetic operating lease and the building and improvements were accounted for
as a capital lease. As of December 31, 2002, the carrying value of the land and
property is included in property and equipment on the consolidated balance sheet
and the building is being depreciated over its useful life.
NOTE 6 - ASSETS HELD FOR SALE
In November 2002, the Company purchased its terminal facility in
Hartford, Connecticut. This facility was previously financed under its master
synthetic lease agreement that became due in November
F-21
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
2002. The Hartford property is expected to be sold to an unrelated investor and
leased back by the Company in the first half of 2003. The carrying value of this
asset has been classified as assets held for sale on the Company's balance sheet
as of December 31, 2002.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS 141 and SFAS 142 effective January 1, 2002.
SFAS 142 requires the suspension of the amortization of goodwill and certain
identifiable intangible assets with an indefinite useful life. The Company has
suspended its amortization of goodwill and does not have any identifiable
intangible assets that have an indefinite useful life.
Intangible assets subject to amortization are as follows at December
31:
2002 2001
----------------------------------- -----------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
--------------- --------------- --------------- ---------------
(in thousands)
Noncompetition agreements $ 1,256 $ (969) $ 1,256 $ (869)
Customer lists 464 (88) -- --
--------------- --------------- --------------- ---------------
Total $ 1,720 $ (1,057) $ 1,256 $ (869)
=============== =============== =============== ===============
Aggregate amortization expense for 2002, 2001 and 2000 was $164,000,
$417,000 and $339,000, respectively. The following table shows the estimated
future amortization expense for the next five years (in thousands).
YEAR ENDED ESTIMATED
DECEMBER 31: FUTURE EXPENSE
------------ --------------
2003 $ 401
2004 92
2005 60
2006 60
2007 50
-------------
$ 663
=============
The implementation of SFAS 141 required any unallocated negative
goodwill to be written off immediately. Accordingly, the Company recognized
approximately $213,000 of negative goodwill as a cumulative effect of a change
in accounting principle in 2002.
F-22
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The following table shows the pro forma effects for 2001 and 2000 had
goodwill not been amortized during those years:
YEAR ENDED DECEMBER 31,
2001 2000
--------------- ---------------
(in thousands, except per share amounts)
Net loss, as reported $ (40,177) $ (722)
Amortization of goodwill, net of tax 2,459 2,532
--------------- ---------------
Pro forma net income (loss) $ (37,718) $ 1,810
=============== ===============
Earnings (loss) per share:
Basic - as reported $ (0.84) $ (0.02)
Basic - pro forma (0.79) 0.04
Diluted - as reported (0.84) (0.02)
Diluted - pro forma (0.79) 0.04
The implementation of SFAS 142 requires that goodwill be tested for
impairment using a two-step approach. The first step is used to identify
potential impairment by calculating a "fair value" of the reporting unit. The
calculated fair value amount in step one is then compared to the carrying amount
of the reporting unit including goodwill. If the fair value of the reporting
unit is greater than its carrying amount, goodwill is not considered impaired
and the second step is not required. If the estimated fair value is less than
the carrying value of the assets, a prescribed step two calculation is required
to determine the amount of impairment to be recorded in the Company's statement
of operations. The initial impairment recognition, if any, would be accounted
for as a cumulative effect of change in an accounting principle.
A reporting unit is an operating segment or one level below an
operating segment (referred to as a component). A component of an operating
segment is a reporting unit if the component constitutes a business for which
discrete financial information is available and management regularly reviews the
operating results of that component. The Company's assessment of reporting units
included an analysis of its network of approximately 400 facilities, agents and
distribution centers located in over 100 countries on six continents. SFAS 142
required the Company to evaluate how its international units function within its
network and how its international management reviews the results of operations.
The Company determined that its reporting units for the purpose of SFAS 142 are
its geographic divisions which are: North America, Europe and Middle East, South
America and Asia and South Pacific.
The Company performed the step one analysis under SFAS 142 to test
for goodwill impairment in the second quarter of 2002 for its initial test and
selected October 31, 2002 for its annual test date. The Company's required
assessments of goodwill related to each of its reporting units under step one of
SFAS 142 did not result in an impairment; therefore step two was not required at
either testing dates. The estimated fair value calculated and referred to above
is merely an estimate based upon a number of assumptions. The actual fair value
of each reporting unit may vary significantly from its estimated fair value.
The changes in the carrying amount of goodwill for the year ended
December 31, 2002 are as follows:
F-23
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
EUROPE & ASIA &
NORTH SOUTH MIDDLE SOUTH CONSOLI-
AMERICA AMERICA EAST PACIFIC DATED
---------- ---------- ---------- ---------- ----------
(in thousands)
Balance at January 1, 2001 $ 49,373 $ 35 $ 9,929 $ 16,917 $ 76,254
Goodwill acquired during the year 3,503 1,135 -- 3,520 8,158
Amortization expense (2,542) (51) (638) (807) (4,038)
Effect of exchange rate changes on goodwill (332) (223) (927) 9 (1,473)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 50,002 896 8,364 19,639 78,901
Goodwill acquired during the year 268 597 -- 603 1,468
Change in accounting for negative goodwill -- -- 213 -- 213
Effect of exchange rate changes on goodwill 5 (109) 873 530 1,299
---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2002 $ 50,275 $ 1,384 $ 9,450 $ 20,772 $ 81,881
========== ========== ========== ========== ==========
NOTE 8 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in net assets of unconsolidated affiliated companies were
$40.0 million and $46.0 million as of December 31, 2002 and 2001, respectively.
This balance primarily consists of a 40% investment in TDS Logistics, Inc.
(TDS), a 5% investment in TDS Europe SA and a 24.5% investment in Miami Air
International, Inc. (Miami Air).
TDS
The investment balance in TDS was $39.9 million and $39.6 million as
of December 31, 2002 and 2001, respectively, and includes the excess of purchase
price over net assets of $24.1 million as of December 31, 2002 and 2001. The
investment balance at December 31, 2001 included the Company's 5% investment in
TDS Europe SA. In May 2002, the Company sold its 5% interest in TDS Europe SA
for $385,000 and recognized a gain of $402,000. Summarized results of operations
and financial position of TDS are as follows:
Condensed consolidated statement of operations information for the
years ended December 31:
2002 2001 2000
------------ ------------ ------------
(in thousands)
Revenues $ 196,929 $ 100,690 $ 82,244
Operating income (loss) 17,330 (7,736) 6,624
Net income (loss) 696 (4,413) 6,115
EGL 40% equity interest in TDS earnings (loss) 278 (1,765) 2,446
Amortization of investment premium and other adjustments -- (1,004) (760)
------------ ------------ ------------
Amount included in EGL nonoperating income (expense) $ 278 $ (2,769) $ 1,686
============ ============ ============
Condensed balance sheet information at December 31:
2002 2001
------------ ------------
(in thousands)
Current assets $ 44,824 $ 40,539
Noncurrent assets 66,136 63,377
Current liabilities 41,852 50,908
Noncurrent liabilities 29,952 14,998
Minority interest 163 163
Stockholders' equity 38,993 37,847
F-24
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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
charter airline headquartered in Miami, Florida, for approximately $6.3 million
in cash. The Company's primary objective for engaging in the transaction was to
develop a business relationship with Miami Air in order to obtain access to an
additional source of reliable freight charter capacity. The Company's Chairman
and President and a member of EGL's board of directors also purchased 19.2% and
6.0% of Miami Air, respectively. See Note 19 for additional information related
to Miami Air.
The weak economy and events of September 11, 2001 significantly
reduced the demand for cargo plane services, particularly 727 cargo planes. As a
result, the market value of these planes declined dramatically. Miami Air
informed EGL that the amount due Miami Air's bank (which is secured by seven 727
planes) was significantly higher than the market value of those planes. In
addition, Miami Air had outstanding operating leases for 727 and 737 airplanes
at above current market rates, including two planes that were expected to be
delivered in 2002. Throughout the fourth quarter of 2001 and the first quarter
of 2002, Miami Air was in discussions with its bank and lessors to obtain debt
concessions on the seven 727 planes, to buy out the lease on a 727 cargo plane
and to reduce the rates on the 737 passenger planes. Miami Air had informed the
Company that its creditors had indicated a willingness to make concessions. In
May 2002, the Company was informed that Miami Air's creditors were no longer
willing to make concessions and that negotiations with creditors had reached an
impasse and no agreement appeared feasible. As such, in the first quarter of
2002, the Company recognized an other than temporary impairment of the entire
$6.7 million carrying value of its common stock investment in Miami Air, which
included a $509,000 increase in value attributable to EGL's 24.5% share of Miami
Air's first quarter 2002 results of operations. In addition, the Company
recorded an accrual of $1.3 million for its estimated exposure on the
outstanding funded debt and letters of credit supported by the $7 million
(subsequently reduced to $3 million in January 2003) standby letter of credit.
During the third quarter of 2002, Miami Air informed the Company that certain of
its creditors had, in fact, made certain concessions. The Company has not
adjusted its accrual, and there can be no assurance that the ultimate loss, if
any, will not exceed such estimate requiring an additional charge. The
investment balance in Miami Air was $6.1 million as of December 31, 2001 and
included the excess of purchase price over net assets of $5.2 million.
Summarized results of operations and financial position of Miami Air are as
follows:
Condensed statement of operations information for the years ended
December 31, 2002 and December 31, 2001, and for the period from July 2000 (date
of EGL investment) to December 31, 2000:
2002 2001 2000
------------ ------------ ------------
(in thousands)
Revenues $ 94,992 $ 113,937 $ 51,471
Operating income (loss) 3,227 (4,580) (95)
Loss before change in accounting priniciple (16,226) (7,380) (766)
Cumulative effect of change in accounting priniciple -- 8,667 --
Net income (loss) (16,226) 1,287 (766)
Impairment and letter of credit accrual $ (8,254) $ -- $ --
EGL 24.5% equity interest in Miami Air earnings (loss) 509 315 (187)
Amortization of investment premium and other adjustments -- (292) --
------------ ------------ ------------
Amount included in EGL nonoperating income (expense) $ (7,745) $ 23 $ (187)
============ ============ ============
F-25
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Condensed balance sheet information at December 31:
2002 2001
------------ ------------
(in thousands)
Current assets $ 14,295 $ 10,676
Noncurrent assets 5,354 33,453
Current liabilities 17,068 19,660
Noncurrent liabilities 13,908 20,569
Stockholder's equity (deficit) (11,327) 3,899
NOTE 9 - NOTES PAYABLE
Notes payable consist of the following amounts as of December 31:
2002 2001
------------ ------------
(in thousands)
Convertible subordinated notes $ 100,000 $ 100,000
Notes payable 9,632 11,724
------------ ------------
109,632 111,724
Less - current portion 5,639 7,950
------------ ------------
Long-term notes payable $ 103,993 $ 103,774
============ ============
Future scheduled principal payments on debt are as follows (in
thousands):
2003 $ 5,639
2004 1,406
2005 614
2006 100,571
2007 and beyond 1,402
------------
Total $ 109,632
============
CONVERTIBLE SUBORDINATED NOTES
In December 2001, the Company issued $100 million aggregate
principal amount of 5% convertible subordinated notes. The notes bear interest
at an annual rate of 5%. Interest is payable on June 15 and December 15 of each
year, beginning June 15, 2002. The notes mature on December 15, 2006. Deferred
financing fees incurred in connection with the transaction totaled $3.2 million
and are being amortized over five years as a component of interest expense.
The notes are convertible at any time 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 may impact the Company's diluted earnings
per share calculation in future periods by approximately 5.7 million shares. At
December 31, 2002 and 2001, the fair value of these notes was $110.9 million and
$80.0 million.
The Company may redeem the notes on or after December 20, 2004 at
specified redemption prices, plus accrued and unpaid interest to, but excluding,
the redemption date. Upon a change in control as defined in the indenture
agreement, 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.
F-26
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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 agreement. The Company and its
subsidiaries are not prohibited from incurring senior indebtedness or other debt
under the indenture agreement. The notes impose some restrictions on mergers and
sales of substantially all of the Company's assets.
CREDIT AGREEMENTS
On January 5, 2001, the Company entered into an agreement (the Credit
Facility) with various financial institutions, with Bank of America, N.A. (the
Bank) serving as administrative agent, to replace its previous credit facility.
The Credit Facility provided a $150 million revolving line of credit and
included a $30 million sublimit for the issuance of letters of credit and a $15
million sublimit for a swing line loan. The Credit Facility was scheduled to
mature on January 5, 2004. The Company was subject to certain covenants under
the terms of the Credit Facility. The Company was in violation of several of
these covenants at various times during 2001. As a result, the Credit Facility
was amended on June 28, 2001 and again on November 9, 2001. In connection with
the November 9, 2001 amendment, the borrowing capacity of the Credit Facility
was reduced and the Company wrote off approximately $694,000 of deferred debt
costs associated with the Credit Facility.
Effective December 20, 2001, the Company amended and restated the
Credit Facility. The amended and restated credit facility (Restated Credit
Facility), which was last amended effective as of October 14, 2002, is with a
syndicate of three financial institutions, with the Bank as collateral and
administrative agent for the lenders, and matures on December 20, 2004. The
Restated Credit Facility provides a revolving line of credit of up to the lesser
of:
o $75 million, which increases to $100 million if an additional
$25 million of the revolving line of credit commitment is
syndicated to other financial institutions, or
o an amount equal to:
o up to 85% of the net amount of the Company's billed
and posted eligible accounts receivable and the
billed and posted eligible accounts receivable of its
wholly owned domestic subsidiaries and its operating
subsidiary in Canada, subject to some exceptions and
limitations, plus
o up to 85% of the net amount of the Company's billed
and unposted eligible accounts receivable and billed
and unposted eligible accounts receivable of its
wholly owned domestic subsidiaries owing by account
debtors located in the United States, subject to a
maximum aggregate availability cap of $10 million,
plus
o up to 50% of the net amount of the Company's
unbilled, fully earned and unposted eligible accounts
receivable and unbilled, fully earned and unposted
eligible accounts receivable of its wholly owned
domestic subsidiaries owing by account debtors
located in the United States, subject to a maximum
aggregate availability cap of $10 million, minus
o reserves from time to time established by the Bank in
its reasonable credit judgment.
The aggregate of the four sub-bullet points above is referred to as the
Company's eligible borrowing base.
F-27
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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 $25 million. 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.
The Restated Credit Facility includes a $50 million letter of credit
subfacility. The Company had $31.4 million and $17.3 million in standby letters
of credit outstanding as of December 31, 2002, and 2001, respectively, under
this facility. The collateral value associated with the revolving line of credit
at December 31, 2002 was $180.7 million. No amounts were outstanding under the
revolving line of credit as of December 31, 2002. Therefore, the Company had
available, unused borrowing capacity of $43.6 million and $57.7 million as of
December 31, 2002 and 2001, respectively.
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 2.00% to 2.75%, that varies based upon availability under
the line, or the prime rate announced by the Bank, plus, if the borrowing
availability is less than $25 million, an applicable margin of 0.25%.
The Company refers to borrowings bearing interest based on LIBOR as a
LIBOR tranche and to other borrowings as a prime rate tranche. The interest on a
LIBOR tranche is payable on the last day of the interest period (one, two or
three months, as selected by the Company) for such LIBOR tranche. The interest
on a prime rate tranche is payable monthly.
A termination fee would be payable upon termination of the Restated
Credit Facility during the first two years after the closing thereof, in the
amount of 0.50% of the total revolving line commitment if the termination occurs
on or before the first anniversary of the closing and 0.25% of the total
revolving line commitment if the termination occurs after the first anniversary,
but on or before the second anniversary of such closing (unless terminated in
connection with a refinancing arranged or underwritten by the Bank or its
affiliates).
The Company is subject to certain covenants under the terms of the
Restated Credit Facility, including, but not limited to, (a) maintenance at the
end of each fiscal quarter of a minimum specified adjusted tangible net worth
and (b) quarterly and annual limitations on capital expenditures of $12 million
per quarter or $48 million cumulative per year.
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.
F-28
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
OTHER BANK LINES OF CREDIT
The Company maintained 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, the Company was
contingently liable for approximately $6.7 million, under outstanding letters of
credit and guarantees related to its $10 million line of credit. At June 30,
2002, this bank line of credit expired. The Company did not renew this line of
credit, and the Company's foreign operations replaced the previous outstanding
letters of credit with other working capital lines of credit and other types of
guarantees. Additionally, notes payable includes a mortgage for one of the
Company's facilities in Chile.
INTEREST RATE SWAP AGREEMENT
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 is being amortized to interest expense over the remaining life of
the swap agreement. Subsequent changes in the fair value of the swap agreement
are recorded in interest expense. During 2002, the Company recorded $2.2 million
net interest expense, which includes $220,000 relating to amortization of
deferred loss and changes in the fair value of the swap agreement.
NOTE 10 - GUARANTEES
At December 31, 2002, the Company had guaranteed certain financial
liabilities, the majority of which relate to the Company's freight forwarding
operations. The Company, in the normal course of business is required to
guarantee certain amounts related to customs bonds and services received from
airlines. These types of guarantees are usual and customary in the freight
forwarding industry and include IATA (International Air Transport Association)
guarantees together with customs bonds. The Company operates as a customs broker
and prepares and files all formal documentation required for clearance through
customs agencies, obtains customs bonds, in many cases facilitates the payment
of import duties on behalf of the importer, arranges for payment of collect
freight charges and assists the importer in obtaining the most advantageous
commodity classifications and in qualifying for duty drawback refunds. The
Company also arranges for surety bonds for importers as part of our customs
brokerage activities.
F-29
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The Company secures guarantees primarily by three methods: a $50
million letter of credit subfacility discussed in Note 9, surety bonds and
security time deposits which are restricted as to withdrawal for a specified
timeframe and are classified on the Company's balance sheet in restricted cash
(see Note 1).
The total guarantees for IATA related guarantees and customs bonds as
of December 31, 2002 were approximately $46.1 million with $16.6 million
outstanding at December 31, 2002 to facilitate the movement and clearance of
freight.
The Company guarantees other working capital credit lines and
guarantees in the normal course of business. These lines of credit include but
are not limited to guarantees associated with insurance requirements and certain
taxing authorities. Generally, guarantees have a one-year term and are renewed
annually. EGL, Inc. guarantees up to approximately $30.0 million of such working
capital lines of credit and surety bonds; however, as of December 31, 2002, the
amount of the maximum potential payment is $18.6 million. These guarantees are
associated with outstanding liabilities which are reflected in the Company's
consolidated financial statements.
Additionally, at December 31, 2002 the Company had guaranteed certain
other financial liabilities related to unconsolidated affiliates and joint
venture investments.
In connection with its equity investment in Miami Air, 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 made by the Company in respect of the letter of credit. As of December
31, 2002, Miami Air had no funded debt under the line of credit that is
supported by the $7 million standby letter of credit. Additionally, as of
December 31, 2002, Miami Air had outstanding $2.2 million in letters of credit
and surety bonds that were supported by the standby letter of credit. Payment by
the Company would be required upon default by Miami Air. The maximum potential
amount of future payments which the Company could be required to make under this
guarantee at December 31, 2002 is $7.0 million. This letter of credit was
reduced to $3.0 million in January 2003.
The Company is a guarantor on a revolving line of credit with respect
to another of the Company's unconsolidated affiliates. The outstanding balance
owed by the unconsolidated affiliate was $60,000 as of December 31, 2002 and the
maximum exposure to the Company under this guarantee is $300,000.
In connection with two of the Company's 51% owned subsidiaries, the
Company has guaranteed 100% of the working capital line of credit and other
various operational guarantees of each of these joint ventures. As of December
31, 2002, the maximum amount of these guarantees was $3.0 million with $2.7
million drawn against these obligations at December 31, 2002.
The Company is a guarantor for 40% of outstanding amounts on a $5.0
million revolving line of credit for one of the Company's unconsolidated
affiliates. The unconsolidated affiliate's outstanding balance was
approximately $1.9 million at December 31, 2002; therefore, the amount of the
Company's guarantee was approximately $752,000. The future maximum exposure to
the Company under this guarantee is $2.0 million.
F-30
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 11 - INCOME TAXES
Sources of pretax income (loss) are summarized as follows for the
years ended December 31:
2002 2001 2000
------------ ------------ ------------
(in thousands)
Domestic $ (10,543) $ (90,125) $ (20,804)
Foreign 25,659 24,114 33,245
------------ ------------ ------------
Total $ 15,116 $ (66,011) $ 12,441
============ ============ ============
Provision (benefit) for income taxes includes the following for the
years ended December 31:
2002 2001 2000
------------ ------------ ------------
(in thousands)
Current income tax expense (benefit):
U.S. Federal $ (4,460) $ (18,592) $ 10,612
U.S. State (532) (3,826) 1,488
Foreign 9,509 7,479 12,340
------------ ------------ ------------
4,517 (14,939) 24,440
Deferred income tax expense (benefit):
U.S. Federal 1,784 (9,924) (9,689)
U.S. State 307 (904) (1,284)
Foreign (713) (67) (304)
------------ ------------ ------------
1,378 (10,895) (11,277)
------------ ------------ ------------
Total provision (benefit) $ 5,895 $ (25,834) $ 13,163
============ ============ ============
Taxes on income were different than the amount computed by applying
the statutory income tax rate. Such differences are summarized as follows for
the years ended December 31:
2002 2001 2000
------------ ------------ ------------
(in thousands)
Tax computed at statutory rate $ 5,291 $ (23,104) $ 4,354
Increases (decreases) resulting from:
Foreign taxes (184) 601 275
Nondeductible merger related costs -- -- 5,015
Other nondeductible items 658 559 1,481
State taxes on income, net of
federal income tax effect (146) (3,075) 511
Other 276 (815) 1,527
------------ ------------ ------------
Total provision (benefit) $ 5,895 $ (25,834) $ 13,163
============ ============ ============
F-31
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Significant components of the Company's net deferred tax assets are
as follows at December 31:
2002 2001
------------------------------ ------------------------------
DEFERRED TAX DEFERRED TAX
------------------------------ ------------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
(in thousands)
Undistributed earnings of foreign subsidiaries
and equity affiliates $ -- $ (12,564) $ -- $ (14,704)
Depreciation and amortization -- (9,614) -- (4,451)
Foreign tax credits 9,102 -- 9,180 --
Federal alternative minimum tax credits 322 -- 200 --
State net operating losses 5,327 -- 6,113 --
Bad debts 3,094 -- 1,385 --
Accrued liabilities 13,986 -- 13,536 --
Other 1,879 (3,697) 229 (2,276)
------------ ------------ ------------ ------------
Gross deferred tax assets (liabilities) 33,710 (25,875) 30,643 (21,431)
Reclassification, principally netting by tax
jurisdiction (22,155) 22,155 (13,626) 13,626
------------ ------------ ------------ ------------
Net total deferred tax assets (liabilities) 11,555 (3,720) 17,017 (7,805)
Net current deferred tax assets 6,228 -- 8,762 --
------------ ------------ ------------ ------------
Net noncurrent deferred tax assets (liabilities) $ 5,327 $ (3,720) $ 8,255 $ (7,805)
============ ============ ============ ============
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, 2002, cumulative earnings of consolidated foreign subsidiaries
designated as permanently reinvested were approximately $21.5 million for which
the related federal tax impact would approximate $5.6 million.
The Company also has generated excess foreign tax credits of
approximately $9.1 million that expire in 2003, 2004, 2005 and 2006. There is no
assurance the Company will generate sufficient taxable income in the appropriate
jurisdictions to fully utilize such carry-forwards and credits.
As a result of stock option exercises for the years ended December 31,
2002, 2001 and 2000 of non-qualified stock options to purchase an aggregate of
72,000, 528,000 and 1.2 million shares of common stock, respectively, the
Company is entitled to a federal income tax deduction of approximately $539,000,
$7.8 million and $17.0 million, respectively, with a related reduction in its
tax obligations of approximately $198,000, $3.0 million and $5.0 million,
respectively. Accordingly, the Company recorded an increase to additional
paid-in capital and a reduction in current taxes payable. 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.
F-32
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 12 - STOCKHOLDERS' EQUITY
In August 2002, the Company's Board of Directors authorized the
repurchase and retirement of up to $15.0 million in value of its outstanding
common stock. As of December 31, 2002, the Company had repurchased and retired
920,200 shares for a total of $10.0 million under this authorization, which
expired on December 8, 2002.
During the year ended December 31, 2000, the Board of Directors
authorized a repurchase of up to 3.0 million shares under which the Company
purchased 450,000 shares of common stock for $10.5 million. The Company
terminated this authorization on July 2, 2000. During 2002, 2001 and 2000,
89,000, 266,000 and 80,000 shares, respectively, were reissued to satisfy, or
help offset increases in shares resulting from purchases under the Company's
Employee Stock Purchase Plan (Note 13), payment of additional consideration for
previous acquisitions (Note 3) and restricted stock awards. As of December 31,
2002 and 2001, 1.0 million and 1.1 million shares, respectively, were held in
treasury. 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, 2002, all shares under this award were vested.
Prior to the merger, as discussed in Note 3, 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. 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.
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
the Company's 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 the Company's 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, Chairman of the
Board, President and Chief Executive Officer of EGL, will not become an
Acquiring Person unless and until he and his affiliates become the beneficial
owner of 49% or more of the Common Stock. Rights will be issued with all shares
of the Company's common stock issued from the record date to the Distribution
Date. Until the Distribution Date, the Rights will be evidenced by the
certificates representing the Company's common stock and will be transferable
only with our common stock. Generally, if any person or group becomes an
Acquiring Person, each right, other than Rights beneficially owned by the
Acquiring Person (which will thereupon become void), will thereafter entitle its
holder to purchase, at the Rights' then current exercise price, shares of the
Company's common stock having a market value of two times the exercise price of
the Right. If, after there is an Acquiring Person, and the Company or a majority
of its assets is acquired in certain transactions, each Right not owned by an
Acquiring Person will entitle its holder to purchase, at a discount, shares of
common stock of the acquiring entity (or its parent) in the transaction. At any
time until ten days after a public announcement that the rights have been
triggered, the Company will generally
F-33
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
be entitled to redeem the Rights for $.01 and to amend the rights in any manner
other than to change the redemption price. Certain subsequent amendments are
also permitted. The Rights expire on June 4, 2011.
NOTE 13 - 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 for employees in the United States. 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, 2002, 2001 and 2000 the Company
recorded charges of $1.0 million, $1.0 million and $4.0 million, respectively,
related to discretionary contributions to this plan.
Prior to the Circle merger, as discussed in Note 3, 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.
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. The
Company's obligation related to these plans at December 31, 2002 and 2001 was
approximately $23.0 million and $18.0 million, respectively. The yearly costs
associated with these plans are approximately $2.5 million to $3.0 million each
year.
STOCK PURCHASE PLANS
In 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 2002, 2001 and 2000, 50,000, 70,000 and 52,000 shares of common
stock were purchased under this plan at an average price of $12.09, $17.65 and
$25.12 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 Plan
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
F-34
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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 such award may be subject to certain conditions, including continuous
service with the Company or achievement of certain business objectives. There
have been no awards issued 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-35
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Transaction Summary
A summary of stock option transactions for each of the three years
ended December 31, 2002 is as follows (in thousands, except option price):
WEIGHTED-AVERAGE
OPTIONS OPTION PRICE
------------ ----------------
Outstanding at January 1, 2000 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
Granted 539 11.80
Exercised (72) 6.81
Cancelled (627) 21.70
------------
Outstanding at December 31, 2002 5,701 19.34
============
Options vested at December 31, 2002, 2001 and 2000 totaled 3.5
million shares, 2.8 million shares and 2.5 million shares, respectively.
F-36
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The following table summarizes information about stock options
outstanding at December 31, 2002 (in thousands, except option price and average
remaining life):
OUTSTANDING EXERCISABLE
---------------------------------------------- -----------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES NUMBER LIFE IN YEARS PRICE NUMBER PRICE
--------------- ------------ ------------- ------------ ------------ ------------
$8.09 - $15.00 1,389 5.33 $ 10.20 351 $ 10.12
$15.08 - $19.42 2,029 3.19 18.75 1,709 18.70
$19.83 - $25.06 1,702 4.71 24.08 987 23.70
$25.13 - $33.81 581 3.85 29.29 414 28.53
------------ ------------ ------------ ------------ ------------
$8.09 - $33.81 5,701 3.85 $ 19.34 3,461 $ 20.43
============ ============ ============ ============ ============
As discussed in Note 1, the Company applies the intrinsic value
method to account for its stock option plans. No compensation cost has been
recognized for these plans. The weighted-average fair values of options granted
during 2002, 2001 and 2000 were $5.97, $5.85 and $13.26, respectively. The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes model with the following weighted average assumptions used for
grants:
YEAR ENDED DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Expected volatility 51.09% 59.00% 55.00%
Risk-free interest rate 3.70% 4.40% 6.08%
Dividend yield 0.00% 0.00% 0.19%
Expected life of option (years) 4.56 4.85 4.80
NOTE 14 - JET FUEL SWAP AGREEMENT
In conjunction with its aircraft charter agreements, the Company is
obligated to pay current market prices for jet fuel. During November 2002, the
Company entered into a jet fuel swap agreement. The purpose of this agreement is
to hedge the Company's exposure to volatility in market prices for jet fuel. The
swap agreement has a term of one year and expires in December 2003. On a monthly
basis, the Company pays a fixed rate of approximately $0.68 per gallon for
400,000 gallons of jet fuel and receives a payment equal to the monthly average
commodity price for the same amount of jet fuel. The fair market value of this
swap agreement at December 31, 2002 was approximately $421,000.
The Company has designated this swap as a cash flow hedge under the
provisions SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities (SFAS 133)." The Company has complied with the provisions of SFAS 133
regarding timely documentation of the hedge and preparation of the necessary
effectiveness test. The Company expects that this hedge will be highly effective
in offsetting its exposure to future changes in market prices of jet fuel. Under
SFAS 133, the Company has
F-37
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
reflected the fair market value of this swap agreement on its balance sheet at
the inception of the hedge and on a quarterly basis will adjust the value of the
swap to fair market value and perform additional prospective and retroactive
effectiveness tests.
NOTE 15 - NONOPERATING INCOME (EXPENSE), NET
Nonoperating income (expense), net, consists of the following for the
years ended December 31:
2002 2001 2000
------------ ------------ ------------
(in thousands)
Interest income $ 2,130 $ 2,651 $ 3,427
Interest expense (9,207) (10,543) (5,197)
Income (loss) from unconsolidated affiliates, net (7,467) (3,145) 1,599
Rental income 63 492 685
Gains (losses) on sales of securities (54) 2,303 --
Minority interests (1,006) (1,161) (1,654)
Foreign exchange gains (losses), net 366 55 2,801
Other 619 906 888
------------ ------------ ------------
Total $ (14,556) $ (8,442) $ 2,549
============ ============ ============
The Company held in a trust, equity securities of Equant N.V., an
international data network service provider. These shares became marketable in
the second quarter of 2001 and a gain of $2.3 million was recognized. The shares
were then exchanged for payment of a portion of the Company's liability with its
international data network service provider.
NOTE 16 - 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 plaintiffs' initial
motion for class certification was denied in November 2000.
F-38
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
On December 29, 2000, the EEOC filed a Motion to Intervene in the
Philadelphia litigation, which was granted by the Court in Philadelphia on
January 31, 2001. In addition, the Philadelphia Court also granted EGL's motion
that the case be transferred to the United States District Court for the
Southern District of Texas -- Houston Division where EGL had previously
initiated litigation against the EEOC due to what EGL believes to have been
inappropriate practices by the EEOC in the issuance of the Commissioner's Charge
and in the subsequent investigation. Subsequent to the settlement of the EEOC
action described below, the claims of one of the eight named plaintiffs were
ordered to binding arbitration at EGL's request. The Company recognized a charge
of $7.5 million in the fourth quarter of 2000 for its estimated cost of
defending and settling the asserted claims.
On October 2, 2001, the EEOC and EGL announced the filing of a Consent
Decree settlement. This settlement resolves all claims of discrimination and/or
harassment raised by the EEOC's Commissioner's Charge mentioned above. Under the
Consent Decree, EGL has agreed to pay $8.5 million into a fund (the Class Fund)
that will compensate individuals who claim to have experienced discrimination.
The settlement covers (1) claims by applicants arising between December 1, 1995
and December 31, 2000; (2) disparate pay claims arising between January 1, 1995
and April 30, 2000; (3) promotion claims arising between December 1, 1995 and
December 31, 1998; and (4) all other adverse treatment claims arising between
December 31, 1995 and December 31, 2000. In addition, EGL agreed to 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. The Consent Decree became effective on October 3, 2002
following the dismissal of all appeals related to the Decree. 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 costs,
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, 2002, 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, 2002 and 2001 were $13.0 million and $14.3 million, respectively.
Of the eight named Plaintiffs, one has accepted a settlement of her
claims against the Company. The remaining individuals who were named Plaintiffs
in the underlying action have submitted claims to be considered for settlement
compensation under the Consent Decree. The claims administration process is
currently underway; however, it could be several months before it is completed
and Claimants are notified of whether they qualify for settlement compensation
and, if so, the amount for which they qualify. Once Claimants are notified of
their eligibility status by the Claims Administrator, they have an option to
reject the settlement compensation and pursue litigation on their own behalf and
without the aid of the EEOC. 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
F-39
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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 amount of time it will take to resolve 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 17 - COMMITMENTS AND CONTINGENCIES
LEASES
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 of future
minimum payment obligations under non-cancelable leases with remaining lease
terms in excess of one year as of December 31, 2002 (in thousands):
CAPITAL OPERATING
LEASES LEASES
--------- ---------
2003 ................................................... $ 97 $ 68,862
2004 ................................................... 102 68,943
2005 ................................................... 113 61,033
2006 ................................................... -- 51,484
2007 and thereafter .................................... -- 338,386
--------- ---------
Total future minimum lease payments .................. 312 $ 588,708
=========
Less - amounts representing interest ................... (60)
---------
Present value of net minimum lease payments ............ 252
Less - current obligations ............................. (87)
---------
Noncurrent obligations ................................. $ 163
=========
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 merger restructuring and integration reserve as of December 31,
2002 and 2001. As of December 31, 2002, 26 of these leases with an aggregate
remaining lease liability of $29.6 million have been subleased to third parties
with aggregate future sublease payments due to the Company under these
agreements of $18.1 million.
Rent expense under non-cancelable operating leases was $68.2 million,
$63.4 million and $40.6 million for the years ended December 31, 2002, 2001 and
2000, respectively, which is net of sublease income of $3.8 million, $1.2
million and $700,000, respectively.
AGREEMENTS WITH CHARTER AIRLINES
The Company leases cargo aircraft for utilization in its domestic and
international heavy-cargo, overnight air network based on actual utilization
with no monthly minimum usage. These agreements are cancelable with a 30-day
notice;
F-40
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
therefore, as of December 31, 2002, the Company was not obligated under any
long-term lease agreements. Total lease expense for these aircraft recognized by
the Company in its statement of operations for 2002 and 2001 approximated $12.8
million and $58.7 million, respectively.
LITIGATION
In addition to the EEOC matter (Note 16), 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 accruals 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 18 - OFF BALANCE SHEET FINANCING
SYNTHETIC LEASE AGREEMENTS
Entering 2002, EGL was the lessee in two synthetic lease agreements
with special purpose entities. Both of these lease agreements were terminated
during 2002 as a result of the expiration of the original lease terms as further
discussed below.
In November 2002, the Company's $20 million master operating synthetic
lease agreement expired. This lease facility financed the acquisition,
construction and development of five terminal and warehouse facilities
throughout the United States. Upon termination of this agreement, the Company
purchased the five properties leased under this agreement for $14.1 million
which was the amount of the outstanding lease balance at the time of
termination. Three of these terminal facilities were then sold and leased back
from an unrelated party in the fourth quarter of 2002 as discussed below. A
sale-leaseback transaction for a fourth terminal facility is expected to be
completed in the first half of 2003 and its cost basis is included in assets
held for sale on the consolidated balance sheet as of December 31, 2002. The
remaining terminal facility, with a book value of approximately $3.4 million,
was retained by the Company and is leased to an unrelated party under a lease to
purchase agreement that requires the lessor to purchase the property by October
2005.
In December 2002, the Company was required to pay the lease balance and
related interest of $15.5 million under a second synthetic lease agreement
entered into during 1998 by Circle. This lease facility financed the
acquisition, construction and development of a terminal facility located in New
York, New York. The land leased under this agreement was accounted for as a
synthetic operating lease and the building and improvements were accounted for
as a capital lease. As of December 31, 2002, the carrying value of the land and
property is included in property and equipment on the consolidated balance sheet
and the building is being depreciated over its useful life.
As a result of the above two lease expirations, the Company is no
longer a party to any lease agreements with special purpose entities as of
December 31, 2002.
SALE - LEASEBACK AGREEMENTS
In the fourth quarter of 2002, the Company completed transactions to
sell three of its terminal and warehouse facilities located in Grapevine, Texas,
Austin, Texas and South Bend, Indiana to an unrelated party for $14.1 million,
net of related closing costs. One of the Company's subsidiaries then leased
these
F-41
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
properties for a term of 11 years, with options to extend the initial term for
up to 20 years. Under the terms of the lease agreements, the monthly lease
payments average approximately $141,000 in total for these facilities. These
facilities were constructed under our master operating synthetic lease
agreement, which became due in November 2002. The sale-leaseback transactions
were completed in conjunction with paying the master operating synthetic lease
balance for two of the facilities. The third facility was completed in December
2002. The lease payment for these facilities and related closing costs was $10.5
million resulting in a gain of $3.6 million on the sale of the properties. The
gain was deferred and is being recognized over the term of the lease agreements.
In December 2002, EGL entered into agreements to sell land in Miami,
Florida and Toronto, Canada to developers who will build-to-suit terminal
warehouse facilities and lease them back to the Company upon completion of the
facilities. The purchase price of the Miami land was $9.8 million, which equaled
its carrying value. The Miami land was originally purchased by the Company from
James R. Crane, President and Chief Executive Officer of EGL (see Note 19). The
purchase price of the Toronto land was $4.8 million and the carrying value was
$4.4 million resulting in a gain of $358,000, which has been deferred as of
December 31, 2002 and will be recognized over the term of the lease agreement.
In the third quarter of 2002, the Company recorded an impairment charge of
$500,000 related to a management decision not to use certain architectural
design plans for the proposed Toronto building. The Miami facility is estimated
to be complete in November 2003. The terms of the Miami lease agreement include
average monthly lease payments of $196,000 for 125 months with options to extend
the initial term for up to an additional 120 months commencing with the month of
completion. The Toronto facility is estimated to be complete in December 2003.
The terms of the Toronto lease agreement include average monthly lease payments
of approximately $110,000 for 185 months with options to extend the initial term
for up to an additional 120 months commencing with the month of completion.
On March 31, 2002, the Company entered into a transaction whereby the
Company sold its San Antonio, Texas property with a net book value of $2.5
million to an unrelated party for $2.5 million, net of closing costs. One of the
Company's subsidiaries subsequently leased the property for a term of 10 years,
with options to extend the initial term for up to 23 years. Under the terms of
the lease agreement, the quarterly lease payment is approximately $85,000, which
amount is subject to escalation after the first year based on increases in the
Consumer Price Index. A loss of $42,000 on the sale of this property was
recognized in the first quarter of 2002.
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 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 $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. A gain of $641,000 on the sale of the
properties was deferred and is being recognized over the term of the lease
agreement.
The future lease payments for each of these transactions are included
in the table of future minimum lease payments in Note 17.
F-42
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 19 - RELATED PARTY TRANSACTIONS
INVESTMENT IN MIAMI AIR INTERNATIONAL, INC.
In connection with the Miami Air investment (see Note 8), 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. There were
previously four aircraft subject to the aircraft charter agreement. During 2002,
2001 and 2000, the Company paid Miami Air approximately $6.1 million, $11.8
million and $1.4 million, respectively, under the aircraft charter agreement for
use of 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. In May 2002, the Company and Miami Air mutually
agreed to cancel the aircraft charter agreement for the three planes and paid
$450,000 for services rendered in May 2002 and aircraft repositioning costs.
There were no unpaid balances to Miami Air at December 31, 2002.
Miami Air, each of the private investors and the continuing Miami Air
stockholders also entered into a stockholders agreement under which Mr. Crane
and Frank J. 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 December 31, 2002,
directors appointed to Miami Air's board include a designee of Mr. Crane, Mr.
Elijio Serrano, the Company's Chief Financial Officer, and three others. The
Series A preferred stock was issued in December 2002, when all investors except
one were called upon by the Board of Directors of Miami Air to purchase their
preferred shares. The Series A preferred stock (1) is not convertible, (2) has a
15.0% annual dividend rate and (3) is subject to mandatory redemption in July
2006 or upon the prior occurrence of specified events. The original charter
transactions between Miami Air and the Company were negotiated with Miami Air's
management at arms length at the time of the Company's original investment in
Miami Air. Miami Air's pre-transaction Chief Executive Officer has remained in
that position and as a director following the transaction and together with
other original Miami Air investors, remained as substantial shareholders of
Miami Air. Other private investors in Miami Air have participated with the
Company's directors in other business transactions unrelated to Miami Air.
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. This letter of credit was reduced to $3.0 million in
January 2003 (see Note 10).
MIAMI LAND PURCHASE
Currently, the Company's operations in Miami, Florida are located in
three different facilities. In order to increase operational efficiencies, the
Company acquired land to be used as the site for a new facility to consolidate
its Miami operations. The land was acquired on August 30, 2002 from a related
party entity controlled by James R. Crane for $9.8 million in cash, including
the Company's acquisition costs of $131,000. This parcel of land had been
previously identified by EGL as the most advantageous property on which to
consolidate its Miami operations. EGL entered into negotiations on the land and
reached agreement with the seller on terms. However, given the downturn in the
economy and the Company's weakening financial condition at that point in time,
EGL elected to delay purchasing this
F-43
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
property until its financial condition improved. On July 10, 2001, Mr. Crane
purchased the land in anticipation of reselling the land to EGL. The purchase
price represented the lower of current market value, based on an independent
appraisal, or Mr. Crane's purchase price plus carrying costs for the land. The
Company's Audit Committee, consisting of five independent directors, engaged in
an analysis and discussion regarding whether it was in the best interest of the
Company to enter into a purchase agreement to purchase this particular tract of
land from Mr. Crane. The Audit Committee analysis included, but was not limited
to, obtaining an independent appraisal of the land, reviewing a comparative
properties analysis performed by an outside independent real estate company and
performing a cost benefit analysis for several different alternatives. Based
upon the data obtained from the analysis, the Audit Committee determined the
best alternative for the Company, in its opinion, was for the Company to
purchase the property from Mr. Crane. The Audit Committee then made a
recommendation to the Company's Board of Directors, which includes six
independent directors, to purchase this land at Mr. Crane's purchase price plus
carrying costs, which was lower than the current market value. In August 2002,
the purchase was approved unanimously by the Company's Board of Directors, with
Mr. Crane abstaining from the vote.
SOURCE ONE SPARES
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 $30,000, $105,000 and $685,000 for
the years ended December 31, 2002, 2001 and 2000, respectively. In addition, the
Company billed this customer approximately $133,000, $511,000 and $515,000 for
freight forwarding services during the years ended December 31, 2002, 2001 and
2000, respectively.
AIRCRAFT USAGE PAYMENTS
In conjunction with its business activities, the Company periodically
utilizes aircraft owned by entities that are 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 was approximately $1.4 million. 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 aircraft 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. During the year ended December 31,
2002, the Company reimbursed Mr. Crane $1.2 million for actual hourly usage of
the aircraft.
HOUSTON PROPERTY
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 an unrelated buyer. The Company then leased the property
directly from the buyer. See Note 18 for further discussion.
F-44
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
EGL SUBSIDIARIES IN SPAIN AND PORTUGAL
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. Mr. Gibert currently serves as the managing director of both
subsidiaries and was one of EGL's directors in 2000 and 2001 and resigned from
the Board of Directors in May 2002. 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.
CONSULTING AGREEMENT
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 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 until May 31,
2004 in June 2001.
F-45
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 20 - GEOGRAPHIC AND SERVICES INFORMATION
The Company operates in one segment and is organized functionally in
geographic divisions. Accordingly, management focuses its attention on revenues,
net revenues, income from operations and identifiable assets associated with
each of these geographical divisions when evaluating effectiveness of geographic
management.
EUROPE & ASIA &
NORTH SOUTH MIDDLE SOUTH
AMERICA AMERICA EAST PACIFIC ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------
(in thousands)
YEAR ENDED DECEMBER 31, 2002:
Total revenues $ 1,053,918 $ 69,437 $ 357,883 $ 438,755 $ (50,660) $ 1,869,333
Transfers between divisions (15,658) (5,157) (13,920) (15,925) 50,660 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 1,038,260 $ 64,280 $ 343,963 $ 422,830 $ -- $ 1,869,333
------------ ------------ ------------ ------------ ------------ ------------
Net revenues $ 446,917 $ 14,499 $ 123,229 $ 87,487 $ 672,132
------------ ------------ ------------ ------------ ------------
Income (loss) from operations $ 7,490 $ (39) $ 2,932 $ 19,289 $ 29,672
------------ ------------ ------------ ------------ ------------
Identifiable assets $ 538,013 $ 18,024 $ 154,426 $ 139,844 $ 850,307
------------ ------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2001:
Total revenues $ 1,113,430 $ 64,050 $ 335,892 $ 398,316 $ (50,939) $ 1,860,749
Transfers between divisions (16,679) (5,533) (15,731) (12,996) 50,939 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 1,096,751 $ 58,517 $ 320,161 $ 385,320 $ -- $ 1,860,749
------------ ------------ ------------ ------------ ------------ ------------
Net revenues $ 431,414 $ 13,392 $ 113,669 $ 85,708 $ 644,183
------------ ------------ ------------ ------------ ------------
Income (loss) from operations $ (86,306) $ (1,038) $ 9,948 $ 19,827 $ (57,569)
------------ ------------ ------------ ------------ ------------
Identifiable assets $ 522,970 $ 19,149 $ 152,285 $ 118,067 $ 812,471
------------ ------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2000:
Total revenues $ 1,281,875 $ 55,816 $ 308,573 $ 469,672 $ (36,073) $ 2,079,863
Transfers between divisions (9,241) (4,481) (10,290) (12,061) 36,073 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 1,272,634 $ 51,335 $ 298,283 $ 457,611 $ -- $ 2,079,863
------------ ------------ ------------ ------------ ------------ ------------
Net revenues $ 518,638 $ 15,561 $ 99,676 $ 85,637 $ 719,512
------------ ------------ ------------ ------------ ------------
Income (loss) from operations $ (14,966) $ (5,553) $ 13,401 $ 17,010 $ 9,892
------------ ------------ ------------ ------------ ------------
Identifiable assets $ 530,678 $ 41,000 $ 173,294 $ 159,253 $ 904,225
------------ ------------ ------------ ------------ ------------
Revenues from transfers between divisions represents approximate
amounts that would be charged if the services were provided by an unaffiliated
company. Total divisional revenues are reconciled with total consolidated
revenues by eliminating inter-divisional revenues.
The Company is domiciled in the U.S. and had revenues from external
customers in the U.S. of $947 million in 2002, $1,007 million in 2001 and $1,145
million in 2000. The U.S. had long lived assets of $160 million, $162 million
and $123 million at the end of 2002, 2001 and 2000, respectively.
The Company charges its subsidiaries and affiliates for management and
overhead services rendered in the United States on a cost recovery basis.
F-46
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The following tables show revenues and net revenues attributable to
the Company's principle services during the years ended December 31:
2002 2001 2000
---------- ---------- ----------
(in thousands)
Revenues:
Air freight forwarding $1,283,025 $1,307,101 $1,511,740
Ocean freight forwarding 216,298 194,642 202,956
Customs brokerage and other 370,010 359,006 365,167
---------- ---------- ----------
Total $1,869,333 $1,860,749 $2,079,863
========== ========== ==========
Net revenues:
Air freight forwarding $ 405,404 $ 386,171 $ 473,397
Ocean freight forwarding 57,831 58,514 53,462
Customs brokerage and other 208,897 199,498 192,653
---------- ---------- ----------
Total $ 672,132 $ 644,183 $ 719,512
========== ========== ==========
F-47
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
------------- ------------- ------------- -------------
(in thousands, except per share)
Revenues (3) $ 417,109 $ 454,919 $ 469,425 $ 527,880
Net revenues 154,120 163,155 171,320 183,537
Operating income (loss) 1,460 4,801 11,757 11,654
Income (loss) before provision (benefit)
for income taxes (6,770) 1,537 9,422 10,927
Income (loss) before cumulative effect
of change in accounting for negative
goodwill (4,130) 938 5,747 6,666
Cumulative effect of change in
accounting for negative goodwill 213 -- -- --
Net income (loss) (3,917) 938 5,747 6,666
Basic earnings (loss) per share before
cumulative effect of change in
accounting for negative goodwill (0.09) 0.02 0.12 0.14
Cumulative effect of change in
accounting for negative goodwill 0.01 -- -- --
Basic earnings (loss) per share (0.08) 0.02 0.12 0.14
Diluted earnings (loss) per share
before cumulative effect of change in
accounting for negative goodwill (0.09) 0.02 0.12 0.14
Cumulative effect of change in
accounting for negative goodwill 0.01 -- -- --
Diluted earnings (loss) per share (0.08) 0.02 0.12 0.14
QUARTER ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
------------- ------------- ------------- -------------
(in thousands, except per share)
Revenues (3) $ 470,743 $ 455,341 $ 461,213 $ 473,452
Net revenues 159,190 146,032 171,444 167,517
Operating income (loss) (14,309) (35,778) (10,958)(2) 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-48
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(1) Includes grant proceeds of $8.9 million received from the United
States Department of Transportation under the Air Transportation
Safety and System Stabilization Act and a $5.5 million charge to
merger related restructuring and integration costs. See Notes 2 and
4.
(2) 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 4 and 16.
(3) In the fourth quarter of 2002, the Company adopted EITF No. 01-14 and
reclassified to cost of transportation certain reimbursed incidental
activities previously reported net in revenues (see Note 1). The
following tables illustrate the financial statement impact by quarter
of the reclassification by comparing revenues previously reported on
a net basis in the Company's Quarterly Reports on Form 10-Q for 2002
with revenues reported on a gross basis in this Annual Report on Form
10-K. There is no impact on net revenues, operating income (loss) or
net income (loss) as a result of this reclassification.
F-49
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
GEOGRAPHIC INFORMATION BY QUARTER:
QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
-------------------- -------------------- -------------------- --------------------
NET GROSS NET GROSS NET GROSS NET GROSS
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Revenues:
North America $225,838 $242,449 $240,204 $256,634 $240,995 $255,901 $265,990 $283,276
South America 15,676 16,520 16,506 17,373 13,272 13,882 15,150 16,505
Europe & Middle East 58,233 77,178 62,331 88,005 69,387 93,556 72,374 85,224
Asia & South Pacific 72,252 80,962 83,221 92,907 96,577 106,086 132,277 142,875
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 371,999 417,109 402,262 454,919 420,231 469,425 485,791 527,880
Cost of transportation:
North America 122,838 139,449 133,066 149,496 127,274 142,180 142,932 160,218
South America 11,872 12,716 12,583 13,450 9,830 10,440 11,820 13,175
Europe & Middle East 30,044 48,989 31,526 57,200 37,509 61,678 40,017 52,867
Asia & South Pacific 53,125 61,835 61,932 71,618 74,298 83,807 107,485 118,083
-------- -------- -------- -------- -------- -------- -------- --------
Total costs 217,879 262,989 239,107 291,764 248,911 298,105 302,254 344,343
-------- -------- -------- -------- -------- -------- -------- --------
Net revenues:
North America 103,000 103,000 107,138 107,138 113,721 113,721 123,058 123,058
South America 3,804 3,804 3,923 3,923 3,442 3,442 3,330 3,330
Europe & Middle East 28,189 28,189 30,805 30,805 31,878 31,878 32,357 32,357
Asia & South Pacific 19,127 19,127 21,289 21,289 22,279 22,279 24,792 24,792
-------- -------- -------- -------- -------- -------- -------- --------
Total net revenues $154,120 $154,120 $163,155 $163,155 $171,320 $171,320 $183,537 $183,537
======== ======== ======== ======== ======== ======== ======== ========
QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
-------------------- -------------------- -------------------- --------------------
NET GROSS NET GROSS NET GROSS NET GROSS
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Revenues:
North America $266,806 $283,761 $257,467 $272,909 $259,355 $274,203 $250,473 $265,878
South America 14,971 16,490 11,193 12,905 12,562 13,240 15,521 15,882
Europe & Middle East 55,655 76,235 55,616 74,703 60,218 82,231 64,775 86,992
Asia & South Pacific 84,887 94,257 84,925 94,824 82,857 91,539 94,713 104,700
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 422,319 470,743 409,201 455,341 414,992 461,213 425,482 473,452
Cost of transportation:
North America 158,144 175,099 165,689 181,131 142,071 156,919 136,783 152,188
South America 11,496 13,015 7,757 9,469 9,098 9,776 12,504 12,865
Europe & Middle East 29,214 49,794 27,635 46,722 31,278 53,291 34,468 56,685
Asia & South Pacific 64,275 73,645 62,088 71,987 61,101 69,783 74,210 84,197
-------- -------- -------- -------- -------- -------- -------- --------
Total costs 263,129 311,553 263,169 309,309 243,548 289,769 257,965 305,935
-------- -------- -------- -------- -------- -------- -------- --------
Net revenues:
North America 108,662 108,662 91,778 91,778 117,284 117,284 113,690 113,690
South America 3,475 3,475 3,436 3,436 3,464 3,464 3,017 3,017
Europe & Middle East 26,441 26,441 27,981 27,981 28,940 28,940 30,307 30,307
Asia & South Pacific 20,612 20,612 22,837 22,837 21,756 21,756 20,503 20,503
-------- -------- -------- -------- -------- -------- -------- --------
Total net revenues $159,190 $159,190 $146,032 $146,032 $171,444 $171,444 $167,517 $167,517
======== ======== ======== ======== ======== ======== ======== ========
F-50
EGL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
PRINCIPLE SERVICES BY QUARTER:
QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
-------------------- -------------------- -------------------- --------------------
NET GROSS NET GROSS NET GROSS NET GROSS
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Revenues:
Air freight forwarding $279,787 $281,687 $303,166 $305,300 $313,899 $315,883 $376,688 $380,155
Ocean freight forwarding 43,608 47,937 47,788 52,526 53,752 58,593 52,698 57,242
Customs brokerage and other 48,604 87,485 51,308 97,093 52,580 94,949 56,405 90,483
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 371,999 417,109 402,262 454,919 420,231 469,425 485,791 527,880
-------- -------- -------- -------- -------- -------- -------- --------
Cost of transportation:
Air freight forwarding 188,158 190,058 205,859 207,993 210,341 212,325 263,778 267,245
Ocean freight forwarding 29,721 34,050 33,248 37,986 38,570 43,411 38,476 43,020
Customs brokerage and other -- 38,881 -- 45,785 -- 42,369 -- 34,078
-------- -------- -------- -------- -------- -------- -------- --------
Total costs 217,879 262,989 239,107 291,764 248,911 298,105 302,254 344,343
-------- -------- -------- -------- -------- -------- -------- --------
Net revenues:
Air freight forwarding 91,629 91,629 97,307 97,307 103,558 103,558 112,910 112,910
Ocean freight forwarding 13,887 13,887 14,540 14,540 15,182 15,182 14,222 14,222
Customs brokerage and other 48,604 48,604 51,308 51,308 52,580 52,580 56,405 56,405
-------- -------- -------- -------- -------- -------- -------- --------
Total net revenues $154,120 $154,120 $163,155 $163,155 $171,320 $171,320 $183,537 $183,537
======== ======== ======== ======== ======== ======== ======== ========
QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
-------------------- ------------------- ------------------- -------------------
NET GROSS NET GROSS NET GROSS NET GROSS
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Revenues:
Air freight forwarding $327,289 $330,766 $315,851 $318,298 $316,795 $319,208 $336,091 $338,829
Ocean freight forwarding 44,021 48,625 43,890 48,491 47,968 52,506 40,591 45,020
Customs brokerage and other 51,009 91,352 49,460 88,552 50,229 89,499 48,800 89,603
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 422,319 470,743 409,201 455,341 414,992 461,213 425,482 473,452
Cost of transportation:
Air freight forwarding 231,972 235,449 233,741 236,188 211,105 213,518 233,037 235,775
Ocean freight forwarding 31,157 35,761 29,428 34,029 32,443 36,981 24,928 29,357
Customs brokerage and other -- 40,343 -- 39,092 -- 39,270 -- 40,803
-------- -------- -------- -------- -------- -------- -------- --------
Total costs 263,129 311,553 263,169 309,309 243,548 289,769 257,965 305,935
-------- -------- -------- -------- -------- -------- -------- --------
Net revenues:
Air freight forwarding 95,317 95,317 82,110 82,110 105,690 105,690 103,054 103,054
Ocean freight forwarding 12,864 12,864 14,462 14,462 15,525 15,525 15,663 15,663
Customs brokerage and other 51,009 51,009 49,460 49,460 50,229 50,229 48,800 48,800
-------- -------- -------- -------- -------- -------- -------- --------
Total net revenues $159,190 $159,190 $146,032 $146,032 $171,444 $171,444 $167,517 $167,517
======== ======== ======== ======== ======== ======== ======== ========
F-51
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
*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 10Q 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).
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
+*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).
+*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 (filed as Exhibit 10.11A to
EGL's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, and incorporated herein by
reference).
*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 (filed as Exhibit
10.11B to EGL's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 and incorporated
herein by reference).
*10.11C -- Consent and Second Amendment to Credit Agreement dated
October 14, 2002 between EGL and Bank of America, N.A.,
and the other financial institution named therein (filed
as Exhibit 10.1 to EGL's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002 and
incorporated herein by reference).
+*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.
+*10.19 -- 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).
+*10.20 -- Executive Deferred Compensation Plan (filed as Exhibit
10.2 to EGL's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 and incorporated herein
by reference).
+*10.21 -- Amendment Number 1 to 1995 Non-Employee Director Stock
Option Plan (filed as Exhibit 10.4 to EGL's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002 and incorporated herein by reference).
10.22 -- Agreement for Purchase and Sale of Real Property, dated
September 17, 2002, by and between MacFarlan Holdings,
Ltd., as buyer, and EGL, Inc., as seller.
10.23 -- Lease Agreement for real property in Austin, Texas,
dated as of November 13, 2002, by and between EGL Texas
Partners, L.P., as landlord, and EGL Eagle Global
Logistics, LP, as tenant.
10.24 -- Lease Agreement for real property in Grapevine, Texas,
dated as of November 13, 2002, by and between EGL Texas
Partners, L.P., as landlord, and EGL Eagle Global
Logistics, LP, as tenant.
10.25 -- Lease Agreement for real property in South Bend,
Indiana, dated as of December 20, 2002, by and between
South Bend Partners, LP, as landlord, and EGL Eagle
Global Logistics, LP, as tenant.
10.26 -- Agreement for Purchase and Sale of Real Property, dated
as of December 15, 2002, by and between McMillan
Investment Company, Ltd., as buyer, and EGL Eagle Global
Logistics, LP, as seller.
10.27 -- Lease Agreement, dated as of December 20, 2002, by and
between McMillan/Miami LLC, as landlord, and EGL Eagle
Global Logistics, LP, as buyer.
10.28 -- Agreement for Purchase and Sale of Real Property, dated
as of December 30, 2002, by and between Giffels
Development Inc., as buyer, and EGL Eagle Global
Logistics (Canada) Corp., as seller.
10.29 -- Lease Agreement, dated as of December 20, 2002, by and
between Giffels Development Inc., as landlord, and EGL
Eagle Global Logistics (Canada) Corp., as tenant.
12 -- Ratio of Earnings to Fixed Charges.
21 -- Subsidiaries of EGL.
23.1 -- Consent of PricewaterhouseCoopers 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.