UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to______________
COMMISSION FILE NUMBER 0-27288
EGL, INC.
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(Exact name of registrant as specified in its charter)
TEXAS
(State or Other Jurisdiction of 76-0094895
------------------------------- ---------------------------------
Incorporation or Organization) (IRS Employer Identification No.)
15350 VICKERY DRIVE, HOUSTON, TEXAS 77032
(281) 618-3100
-------------------------------------------------------------------------
(Address of Principal Executive Offices, Including Registrant's Zip Code,
and Telephone Number, Including Area Code)
N/A
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At August 1, 2002 the number of shares outstanding of the registrant's common
stock was 48,985,905.
EGL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Operations for the
Six Months ended June 30, 2002 and 2001 2
Condensed Consolidated Statements of Operations for the Three
Months ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows for
the Six Months ended June 30, 2002 and 2001 4
Condensed Consolidated Statement of Stockholders' 5
Equity for the Six Months ended June 30, 2002
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
PART II. OTHER INFORMATION 32
SIGNATURES 37
INDEX TO EXHIBITS 38
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
--------- ------------
Current assets:
Cash and cash equivalents $ 124,753 $ 77,440
Restricted cash 6,598 5,413
Short-term investments and marketable securities 13 3,442
Trade receivables, net of allowance of $12,956 and $11,628 338,378 365,505
Other receivables 8,752 10,868
Deferred tax asset 16,587 23,631
Income tax receivable -- 3,125
Other current assets 27,449 29,411
--------- ---------
Total current assets 522,530 518,835
Property and equipment, net 145,658 152,922
Investments in unconsolidated affiliates 40,213 46,018
Goodwill, net 80,495 78,901
Deferred tax asset 19,587 6,266
Other assets, net 14,366 14,237
--------- ---------
Total assets $ 822,849 $ 817,179
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,780 $ 7,950
Trade payables and accrued transportation costs 225,597 216,073
Accrued salaries and related costs 27,853 27,982
Accrued restructuring merger and integration costs 5,348 8,879
Income tax payable 1,436 --
Other liabilities 54,121 54,048
--------- ---------
Total current liabilities 321,135 314,932
Notes payable 102,979 103,774
Deferred tax liability 14,721 19,155
Other noncurrent liabilities 6,585 6,194
--------- ---------
Total liabilities 445,420 444,055
--------- ---------
Minority interests 7,978 7,033
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized,
no shares issued
Common stock, $0.001 par value, 200,000 shares authorized; 50,048
and 50,065 shares issued; 48,986 and 48,939 shares outstanding 49 49
Additional paid-in capital 158,456 158,317
Retained earnings 261,733 264,712
Accumulated other comprehensive loss (32,266) (37,045)
Unearned compensation (318) (635)
Treasury stock, 1,062 and 1,126 shares held (18,203) (19,307)
--------- ---------
Total stockholders' equity 369,451 366,091
--------- ---------
Total liabilities and stockholders' equity $ 822,849 $ 817,179
========= =========
See notes to unaudited condensed consolidated financial statements.
1
EGL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
SIX MONTHS ENDED
JUNE 30,
------------------------
2002 2001
--------- ---------
Revenues $ 774,261 $ 831,520
Cost of transportation 456,986 526,298
--------- ---------
Net revenues 317,275 305,222
Operating expenses:
Personnel costs 175,537 195,222
Other selling, general and administrative expenses 135,477 151,364
Merger related restructuring and integration costs (Note 7) -- 8,723
--------- ---------
Operating income (loss) 6,261 (50,087)
Nonoperating expense, net (11,494) (2,556)
--------- ---------
Loss before benefit for income taxes (5,233) (52,643)
Benefit for income taxes (2,041) (20,420)
--------- ---------
Loss before cumulative effect of change in accounting (3,192) (32,223)
Cumulative effect of change in accounting for negative goodwill (Note 2) 213 --
--------- ---------
Net loss $ (2,979) $ (32,223)
========= =========
Basic and diluted loss per share before
cumulative effect of change in accounting $ (0.07) $ (0.68)
Cumulative effect of change in accounting for negative goodwill 0.01 --
--------- ---------
Basic and diluted net loss per share $ (0.06) $ (0.68)
========= =========
Basic and diluted weighted-average common shares outstanding 47,901 47,564
See notes to unaudited condensed consolidated financial statements.
2
EGL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED
JUNE 30,
------------------------
2002 2001
--------- ---------
Revenues $ 402,262 $ 409,201
Cost of transportation 239,107 263,169
--------- ---------
Net revenues 163,155 146,032
Operating expenses:
Personnel costs 90,177 100,681
Other selling, general and administrative expenses 68,177 79,951
Merger related restructuring and integration costs (Note 7) -- 1,178
--------- ---------
Operating income (loss) 4,801 (35,778)
Nonoperating expense, net (3,264) (1,595)
--------- ---------
Income (loss) before provision (benefit) for income taxes 1,537 (37,373)
Provision (benefit) for income taxes 599 (14,201)
--------- ---------
Net income (loss) $ 938 $ (23,172)
========= =========
Basic earnings (loss) per share $ 0.02 $ (0.49)
Basic weighted-average common shares outstanding 47,895 47,570
Diluted earnings (loss) per share $ 0.02 $ (0.49)
Diluted weighted-average common shares outstanding 48,152 47,570
See notes to unaudited condensed consolidated financial statements.
3
EGL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $ (2,979) $(32,223)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 14,869 15,526
Provision for doubtful accounts, net of write offs 4,821 (2,478)
Amortization of unearned compensation 317 347
Deferred income tax benefit (10,715) (14,475)
Tax benefit of stock options exercised 134 2,577
Unrealized gain on marketable securities -- (2,299)
Equity in (earnings) losses of affiliates, net of dividends received (848) 1,761
Minority interests, net of dividends paid 606 776
Transfer to restricted cash (1,185) --
Cumulative effect of change in accounting for negative
goodwill (Note 2) (213) --
Impairment of investment in an unconsolidated affiliate 6,653 --
Other 766 --
Net effect of changes in working capital 34,537 5,138
--------- --------
Net cash provided by (used in) operating activities 46,763 (25,350)
--------- --------
Cash flows from investing activities:
Capital expenditures (9,813) (31,163)
Proceeds from sales of other assets 7,350 8,970
Proceeds from sale-lease back transactions 2,462 --
Acquisitions of businesses, net of cash acquired -- (652)
Other -- 2,243
--------- --------
Net cash used in investing activities (1) (20,602)
--------- --------
Cash flows from financing activities:
Repayment of notes payable (1,528) (1,886)
Increase in borrowings on notes payable -- 43,045
Issuance of common stock 779 733
Proceeds from exercise of stock options 330 3,200
--------- --------
Net cash provided by (used in) financing activities (419) 45,092
--------- --------
Effect of exchange rate changes on cash and cash equivalents 970 (7,461)
--------- --------
Increase (decrease) in cash and cash equivalents 47,313 (8,321)
Cash and cash equivalents, beginning of the period 77,440 60,001
--------- --------
Cash and cash equivalents, end of the period $ 124,753 $ 51,680
========= ========
See notes to unaudited condensed consolidated finanacial statements.
4
EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except per share amounts)
Accumulated
Additional other
Common stock paid-in Unearned Retained Treasury Stock comprehensive
Shares Amount capital compensation earnings Shares Amount loss Total
------ ------ ---------- ------------ -------- ------ ------ ------------- -------
Balance at
December 31, 2001 48,939 $ 49 $158,317 ($635) $264,712 (1,126) $(19,307) ($37,045) $366,091
Comprehensive loss:
Net loss (2,979) (2,979)
Change in value
of marketable
securities, net (14) (14)
Amortization of
unrealized loss
on interest rate
swap 761 761
Foreign currency
translation
adjustments 4,032 4,032
Comprehensive income
Issuance of shares
under stock
purchase plan (325) 64 1,104 779
Exercise of stock
options, including
tax benefit 47 464 464
Amortization of
unearned
compensation 317 317
------- ------ -------- ----- -------- ------ -------- -------- --------
Balance at
June 30, 2002 48,986 $ 49 $158,456 $(318) $261,733 (1,062) $(18,203) $(32,266) $369,451
======= ======= ======== ===== ======== ====== ======== ======== ========
See notes to unaudited condensed consolidated financial statements.
5
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared by EGL, Inc. (EGL or the Company) in accordance with the
rules and regulations of the Securities and Exchange Commission (the SEC) for
interim financial statements and, accordingly, do not include all information
and footnotes required under generally accepted accounting principles for
complete financial statements. The financial statements have been prepared in
conformity with the accounting principles and practices disclosed in, and should
be read in conjunction with, the annual financial statements of the Company
included in the Company's Annual Report on Form 10-K (File No.0-27288). In the
opinion of management, these interim financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position at June 30, 2002 and the
results of its operations for the three and six months ended June 30, 2002.
Results of operations for the three and six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for EGL's full fiscal
year. The Company has reclassified certain prior period amounts to conform to
the current period presentation.
Note 1 - Organization, operations and significant accounting policies:
EGL is an international transportation and logistics company. The
Company's principal lines of business are air freight forwarding, ocean freight
forwarding, customs brokerage and other value-added services such as
warehousing, distribution and insurance. The Company provides services in over
100 countries on six continents through offices around the world as well as
through its worldwide network of exclusive and nonexclusive agents. The
principal markets for all lines of business are North America, Europe and Asia
with significant operations in the Middle East, Africa, South America and the
South Pacific (Note 13).
The accompanying condensed 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 preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management considers many factors in selecting appropriate
operational and financial accounting policies and controls, and in developing
the estimates and assumptions that are used in the preparation of these
financial statements. Management must apply significant judgment in this
process. Among the factors, but not fully inclusive of all factors that may be
considered by management in these processes are: the range of accounting
policies permitted by U.S. generally accepted accounting principles;
management's understanding of the Company's business - both historical results
and expected future results; the extent to which operational controls exist that
provide a high degree of assurance that all desired information to assist in the
estimation is available and reliable or whether there is greater uncertainty in
the information that is available upon which to base the estimate; expectations
of the future performance of the economy - domestically, globally and within
various sectors that serve as principal customers and suppliers of goods and
services; expected rates of change, sensitivity and volatility associated with
the assumptions used in developing estimates; and whether historical trends are
expected to be representative of future trends. The estimation process often
times may yield a range of potentially reasonable estimates of the ultimate
future outcomes and management must select an amount that lies within that range
of reasonable estimates - which may result in the selection of estimates which
could be viewed as conservative or aggressive by others - based upon the
quantity, quality and risks associated with the variability that might be
expected from the future outcome and the factors considered in developing the
estimate. Management attempts to select the most appropriate estimate using its
business and financial accounting judgment, however, actual results could and
will differ from those estimates.
6
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Comprehensive Income
Components of comprehensive income for the three and six months ended
June 30, 2002 and 2001 are follows:
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ------------- ------------
Net income (loss) $ (2,979) $ (32,223) $ 938 $ (23,172)
Change in value of marketable
securities, net (14) (26) (17) --
Amortization of unrealized loss
on interest rate swap 761 -- 381 --
Change in value of cash flow
hedge -- (360) -- (360)
Foreign currency translation
adjustments 4,032 (7,076) 6,219 (2,731)
-------- -------- ------- ---------
Comprehensive income (loss) $ 1,800 $(39,685) $ 7,521 $ (26,263)
======== ======== ======= =========
Note 2 - New accounting pronouncements:
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No.142, Goodwill and Other Intangible Assets. SFAS 141
supersedes Accounting Principles Board Opinion (APB) No. 16, Business
Combinations. SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, establishes
specific criteria for the recognition of intangible assets separately from
goodwill and requires unallocated negative goodwill arising from new
transactions to be written off immediately as an extraordinary gain, and for
pre-existing transactions to be recognized as the cumulative effect of a change
in accounting principle. The Company adopted FAS 141 effective January 1, 2002
and recognized approximately $213,000 of negative goodwill as a cumulative
effect of a change in accounting principle in the accompanying statement of
operations for the six months ended June 30, 2002.
SFAS 142 supersedes APB Opinion No. 17, Intangible Assets and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition. SFAS 142 requires that goodwill and indefinite lived intangible
assets no longer be amortized; goodwill should be tested for impairment at least
annually at the reporting unit level; intangible assets deemed to have an
indefinite life should be tested for impairment at least annually; and the
amortization of intangible assets with finite lives is no longer limited to
forty years. SFAS 142 does not presume that all intangible assets are wasting
assets. In addition, this standard provides specific guidance on how to
determine and measure goodwill impairment. Intangible assets that have finite
useful lives will continue to be amortized over their estimated useful lives,
but without the constraint of an arbitrary useful life as was the case under APB
Opinion No 17. SFAS 142 requires additional disclosures including information
about carrying amounts of goodwill and other intangible assets, and estimates
relating to future intangible asset amortization expense. The Company adopted
this standard effective January 1, 2002 (See Note 4).
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred and that the
associated long-lived asset retirement costs are capitalized. This statement is
effective for fiscal years beginning after June 15, 2002.
7
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company will adopt SFAS 143 beginning January 1, 2003 and does not believe
that it will have any material impact on its results of operations, financial
position or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes FASB Statement No. 121, Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS
144 requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
broadens the presentation of discontinued operations to include more disposal
transactions. The Company adopted SFAS 144 as of January 1, 2002 with no impact
on its results of operations, financial condition, or cash flows.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of SFAS No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS 145 eliminates the requirement that gains and
loss from the extinguishments of debt be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. Further, SFAS 145
amends paragraph 14(a) of SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the accounting for sale-leaseback transactions and certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The amendment requires that a lease modification
results in recognition of the gain or loss in the financial statements and is
subject to SFAS No. 66, Accounting for Sales of Real Estate, if the leased asset
is real estate (including integral equipment), and is subject in its entirety to
the sale-leaseback rules of SFAS No. 98, Accounting for Leases: Sales-Leaseback
Transactions involving Real Estate, Sales-Type Leases of Real Estate, Definition
of the Lease Term, and Initial Direct costs of Direct Financing Leases.
Generally, SFAS 145 is effective for transactions occurring after May 15, 2002.
The Company adopted SFAS 145 with no material impact on its results of
operations, financial condition 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
replaces Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit and 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's management
is in the process of evaluating the impact, if any, of SFAS 146 and currently
does not expect the impact, if any, to be material to its results of operations,
financial condition or cash flows.
Note 3 -Derivative instruments:
In April 2001, the Company entered into an interest rate swap
agreement, which had been designated as a cash flow hedge, to reduce its
exposure to fluctuations in interest rates on $70 million of its LIBOR-based
revolving credit facility or any substitutive debt agreements the Company enters
into. Accordingly, the change in the fair value of the swap agreement was
recorded in other comprehensive income (loss). In December 2001, the Company
issued $100 million of 5% convertible subordinated notes due December 15, 2006.
The proceeds from the notes substantially retired the LIBOR based debt
outstanding under the then-existing revolving credit agreement. The interest
rate on the convertible subordinated notes is fixed; therefore, the variability
of the future interest payments has been eliminated. The swap agreement no
longer qualified for cash flow hedge accounting and was undesignated as of
December 7, 2001. The net loss on the swap agreement included in other
comprehensive income (loss) as of December 7, 2001 was $2.0 million and is being
amortized to interest expense over the remaining life of the swap agreement and
subsequent changes in the fair value of the swap agreement will be recorded in
interest expense. During the three and six months ended June 30, 2002, the
Company recorded $1.1 million and $1.3 million, respectively, net interest
expense which includes $594,000 and $319,000, respectively, relating to
amortization and changes in the fair value of the swap agreement.
8
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4 - Goodwill and other intangible assets:
As discussed in Note 2, the Company adopted SFAS 142 effective January
1, 2002. SFAS 142 requires the suspension of the amortization of goodwill and
certain intangible assets with an indefinite useful life. The Company has
suspended its amortization of goodwill and does not have any intangible assets
that have an indefinite useful life.
The following table shows the unaudited effects of SFAS 142 for
historical results had goodwill not been amortized during that period:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
------------------ -----------------
Reported net loss $ (23,172) $ (32,223)
Adjustments:
Amortization of goodwill 851 2,025
---------- ---------
Adjusted net loss $ (22,321) $(30,198)
Reported net loss per share - basic (0.49) (0.68)
Adjusted net loss per share - basic (0.47) (0.64)
Reported net loss per share - diluted (0.49) (0.68)
Adjusted net loss per share - diluted (0.47) (0.64)
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. The calculation used for step one gives the
estimated "fair value" which is then compared to the carrying amount of each
reporting unit including goodwill. If the estimated fair value exceeds the
carrying value, no further analysis is 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 would be accounted
for as a cumulative effect of change in accounting principle.
Reporting unit is a new term under the guidance of SFAS 142. SFAS 142
defines a reporting unit as 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
the same as its operating segments as defined by SFAS 131 which are: North
America, Europe & Middle East, South America and Asia & South Pacific.
During the second quarter of 2002, the Company completed the step one
analysis under SFAS 142 to test for goodwill impairment. The Company's required
assessment of goodwill related to each of its reporting units under step one of
SFAS 142 did not result in an impairment; therefore step two under SFAS 142 was
not required. The estimated fair value
9
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
calculated and referred to above is merely an estimate based upon a number of
defined assumptions. The actual fair value of each reporting unit may vary
significantly from its estimated fair value.
Note 5 - Impairment of investment in an unconsolidated affiliate:
In July 2000, the Company purchased 24.5% of the outstanding common
stock of Miami Air, a privately held domestic and international passenger and
freight charter airline headquartered in Miami, Florida for approximately $6.3
million in cash. The Company's primary objective for engaging in the transaction
was to develop a business relationship with Miami Air in order to obtain access
to an additional source of reliable freight charter capacity.
In connection with the Company's investment in Miami Air, the two
parties entered into an aircraft charter agreement whereby Miami Air agreed to
convert certain of its passenger aircraft to cargo aircraft and to provide
aircraft charter services to the Company for a three-year term. The Company
caused a $7 million standby letter of credit to be issued in favor of certain
creditors of Miami Air to assist Miami Air in financing the conversion of its
aircraft. Miami Air agreed to pay the Company an annual fee equal to 3.0% of the
face amount of the letter of credit and to reimburse the Company for any
payments owed by the Company in respect of the letter of credit. As of June 30,
2002, Miami Air had no funded debt under the line of credit that is supported by
the $7 million standby letter of credit. However, as of June 30, 2002, Miami Air
had outstanding $2.6 million in letters of credit and surety bonds supported by
the $7 million standby letter of credit.
During the first four months of 2002, there were three aircraft subject
to the aircraft charter agreement for which the Company paid Miami Air $6.1
million. In May 2002, the Company and Miami Air agreed to cancel the aircraft
charter agreement for the three planes as of May 9, 2002, and the Company 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 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 are expected to be delivered in 2002.
Throughout the fourth quarter of 2001 and the first quarter of 2002, Miami Air
was in discussions with 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 and had informed the Company that its
creditors had indicated a willingness to make concessions. In May 2002, the
Company was informed that Miami Air's creditors were no longer willing to make
concessions and that negotiations with creditors had reached an impasse and no
agreement appeared feasible. Accordingly, in the first quarter of 2002, the
Company recognized an other than temporary impairment of the carrying value of
its $6.7 million common stock investment in Miami Air, which carrying value
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 a reserve of $1.3 million for its estimated exposure on the outstanding
letters of credit supported by the $7 million standby letter of credit. There
can be no assurance that the ultimate loss, if any, will not exceed such
estimate.
Note 6 - Earnings (loss) per share
Basic earnings (loss) per share excludes dilution and is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
includes potential dilution that could occur if securities to issue common stock
and stock options were exercised. Stock options and convertible notes (see Note
8 and 10) are the only potentially dilutive common stock equivalents that the
Company had outstanding for the periods presented. The number of incremental
shares used in the calculation of diluted earnings per share for the three
months ended June 30, 2002 was 257,000. The 5.7 million shares relating to our
convertible debt were excluded as their effect would have been antidilutive.
There were no common stock equivalents related to options outstanding or the
convertible notes included in diluted earnings per share for the six months
ended June 30, 2002 and the three and six months ended June 30, 2001,
respectively, because their effect would have been antidilutive as the Company
incurred a net loss during those periods.
10
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7 - Merger restructuring and integration costs:
During the three and six months ended June 30, 2001, the Company
incurred $1.2 million and $8.7 million of merger related restructuring and
integration costs related to its acquisition of Circle International Group, Inc.
(Circle) in 2000. During the three and six months ended June 30, 2002, the
Company did not incur any such additional merger related costs.
The Company maintains a reserve for charges established under its plan
to integrate the former EGL and Circle operations and to eliminate duplicate
facilities resulting from the merger. The principal components of the plan
involved the termination of certain employees at the former Circle's
headquarters and various international locations, elimination of duplicate
facilities in the United States and certain international locations, and the
termination of selected joint venture and agency agreements at certain of the
Company's international locations. With the exception of payments to be made,
the terms of the plan were completed in 2001. The remaining unpaid accrued
charges as of June 30, 2002 are as follows (in thousands):
ACCRUED ACCRUED
LIABILITY LIABILITY
DECEMBER 31, PAYMENTS/ JUNE 30,
2001 REDUCTIONS 2002
-------------- ------------ --------
Severance costs $ 913 $ (31) $ 882
Future lease obligations, net of subleasing 6,963 (2,693) 4,270
Termination of joint venture/agency agreements 1,003 (807) 196
------- -------- --------
$ 8,879 $ (3,531) $ 5,348
======= ======== ========
The payments to be made for remaining future lease obligations is net
of approximately $27.9 million in anticipated future recoveries from actual or
expected sublease agreements. There is a risk that subleasing transactions will
not occur within the same timing or pricing assumptions made by the Company, or
at all, which could result in future revisions to these estimates.
Note 8 - Borrowings
Convertible subordinated notes
In December 2001, the Company issued $100 million aggregate principal
amount of 5% convertible subordinated notes. The notes bear interest at an
annual rate of 5%. Interest is payable on June 15 and December 15 of each year,
beginning June 15, 2002. The notes mature on December 15, 2006. Deferred
financing fees incurred in connection with the transaction totaled $3.2 million
and are being amortized over five years as a component of interest expense.
The notes are convertible at any time up to four trading days prior to
maturity into shares of common stock at a conversion price of approximately
$17.43 per share, subject to certain adjustments, which was a premium of 20.6%
of the stock price at the issuance date. This is equivalent to a conversion rate
of 57.3608 shares per $1,000 principal amount of notes. Upon conversion, a
noteholder will not receive any cash representing accrued interest, other than
in the case of a conversion, in connection with an optional redemption. The
shares that are potentially issuable may impact the Company's diluted earnings
per share calculation in future periods by approximately 5.7 million shares. As
of June 30, 2002, the fair value of these notes was $119.6 million.
11
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 for
the notes), a noteholder may require the Company to purchase its notes at 100%
of the principal amount of the notes, plus accrued and unpaid interest to, but
excluding, the purchase date.
The notes are general unsecured obligations of the Company. The notes
are subordinated in right of payment to all of the Company's existing and future
senior indebtedness as defined in the indenture. The Company and its
subsidiaries are not prohibited from incurring senior indebtedness or other debt
under the indenture for the notes. The notes impose some restrictions on mergers
and sales of substantially all of the Company's assets.
Credit agreements
Effective December 20, 2001, the Company amended and restated its then
existing credit facility. The amended and restated credit facility (Restated
Credit Facility), which was amended effective as of March 7, 2002, is with a
syndicate of three financial institutions, with Bank of America (the Bank) as
collateral and administrative agent for the lenders, and matures on December 20,
2004. The Restated Credit Facility provides a revolving line of credit of up to
the lesser of:
o $75 million, which will be increased to $100 million if an additional
$25 million of the revolving line of credit commitment is syndicated to
other financial institutions, or
o an amount equal to:
o up to 85% of the net amount of the Company's billed and posted
eligible accounts receivable and the billed and posted eligible
accounts receivable of its wholly owned domestic subsidiaries and
its operating subsidiary in Canada, subject to some exceptions
and limitations, plus
o up to 85% of the net amount of the Company's billed and unposted
eligible accounts receivable and billed and unposted eligible
accounts receivable of its wholly owned domestic subsidiaries
owing by account debtors located in the United States, subject to
a maximum aggregate availability cap of $10 million, plus
o up to 50% of the net amount of the Company's unbilled, fully
earned and unposted eligible accounts receivable and unbilled,
fully earned and unposted eligible accounts receivable of its
wholly owned domestic subsidiaries owing by account debtors
located in the United States, subject to a maximum aggregate
availability cap of $10 million, minus
o reserves from time to time established by the Bank in its
reasonable credit judgment.
The aggregate of the last four sub-bullet points above is referred to
as the Company's eligible borrowing base. The Restated Credit Facility includes
a $50 million letter of credit subfacility. The Company had $31.7 million in
standby letters of credit outstanding as of June 30, 2002 under this facility.
The maximum amount that the Company can borrow at any particular time
may be less than the amount of its revolving credit line because the Company is
required to maintain a specified amount of borrowing availability under the
Restated Credit Facility based on the Company's eligible borrowing base. The
required amount of borrowing availability is currently $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.
For each tranche of principal borrowed under the revolving line of
credit, the Company may elect an interest rate of either LIBOR plus an
applicable margin of 2.50%, which is subject to adjustment after June 30, 2002
to 2.00% to
12
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2.75%, which varies based upon availability under the line, or the prime rate
announced by the Bank, plus, if the borrowing availability is less than $25
million, an applicable margin of 0.25%.
The Company refers to borrowings bearing interest based on LIBOR as a
LIBOR tranche and to other borrowings as a prime rate tranche. The interest on a
LIBOR tranche is payable on the last day of the interest period (one, two or
three months, as selected by the Company) for such LIBOR tranche. The interest
on a prime rate tranche is payable monthly.
A termination fee would be payable upon termination of the Restated
Credit Facility during the first two years after the closing thereof, in the
amount of 0.50% of the total revolving line commitment if the termination occurs
on or before the first anniversary of the closing and 0.25% of the total
revolving line commitment if the termination occurs after the first anniversary,
but on or before the second anniversary of such closing (unless terminated in
connection with a refinancing arranged or underwritten by the Bank or its
affiliates).
The Company is subject to certain covenants under the terms of the
Restated Credit Facility, including, but not limited to, (a) maintenance at the
end of each fiscal quarter of a minimum specified adjusted tangible net worth
and (b) quarterly and annual limitations on capital expenditures of $12 million
per quarter or $48 million cumulative per year.
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 the Company's ability
(including the Company's domestic subsidiaries or its Canadian operating
subsidiary) to perform under the Restated Credit Facility.
During the six months ended June 30, 2002, the Company had no
borrowings under this facility and as of June 30, 2002, had available unused
borrowing capacity of $43.3 million.
Other bank lines of credit and guarantees
At June 30, 2002, the Company's $10 million bank line of credit, which
was in addition to the $50 million Restated Credit Facility, 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 types
of guarantees.
Additionally, several of the Company's foreign operations guarantee
amounts associated with the Company's custom brokerage services. As of June 30,
2002, these outstanding guarantees approximated $27.2 million.
Note 9 - Off balance sheet financing
Sale/leaseback agreement
On March 31, 2002, the Company entered into a transaction whereby it
sold its San Antonio, Texas property with a net book value of $2.5 million to an
unrelated third party for $2.5 million, net of closing costs. One of the
Company's subsidiaries 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 new lease agreement, the quarterly lease payment is approximately $84,750,
which amount is subject to escalation after the first year based on increases in
the Consumer Price Index. A pre-tax loss of $42,000 on the sale of this property
was recognized in the first quarter 2002 in the accompanying statement of
operations.
13
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Synthetic lease agreements
The Company has entered into two operating lease arrangements that
involve a special purpose entity, which acquired title to properties, paid for
the construction costs and leased back to the Company real estate at some of the
Company's terminal and warehouse facilities. This kind of leveraged financing
structure is commonly referred to as a "synthetic lease."
A synthetic lease is a form of lease financing that qualifies for
operating lease accounting treatment and under generally accepted accounting
principles is not reflected in the Company's accompanying condensed consolidated
balance sheet. Thus, the obligations are not recorded as debt and the underlying
properties are not recorded as assets on the Company's condensed consolidated
balance sheet. Under a synthetic lease, the Company's rental payments (which
approximate interest amounts under the synthetic lease financing) are treated as
operating rent commitments and are excluded from the Company's aggregate debt
maturities. A synthetic lease is generally preferable to a conventional real
estate lease since the lessee benefits from attractive interest rates and the
ability to claim depreciation under tax laws.
Master operating synthetic lease
On April 3, 1998, the Company entered into a five-year $20 million
master operating synthetic lease agreement with two unrelated parties for
financing the acquisition, construction and development of terminal and
warehouse facilities throughout the United States as designated by the Company.
The lease facility was funded by a financial institution and is secured by the
properties to which it relates. Construction was completed during 2000 on five
terminal facilities.
The master operating synthetic lease agreement contains restrictive
financial covenants requiring the maintenance of a fixed charge coverage ratio
of at least 1.5 to 1.0 and specified amounts of consolidated net worth and
consolidated tangible net worth. In addition, the master operating synthetic
lease agreement, as amended on February 11, 2002, restricts the Company from
incurring debt in an amount greater than $30 million, except pursuant to a
single credit facility involving a commitment of not more than $110 million and
$100 million of 5% convertible subordinated notes.
The Company has an option, exercisable at anytime during the lease
term, and under particular circumstances may be obligated, to acquire the
financed facilities for an amount equal to the outstanding lease balance. If the
Company does not exercise the purchase option, or does not otherwise meet its
obligations, the Company is subject to a deficiency payment computed as the
amount equal to the outstanding lease balance minus the then current fair market
value of each financed facility within limits. The Company expects that the
amount of any deficiency payment would be expensed. The Company may also have to
find other suitable facilities to operate in or potentially be subject to a
reduction in revenues and other operating activities.
Under the terms of the master operating synthetic lease agreement,
average monthly lease payments, including monthly interest costs based upon
LIBOR plus 145 basis points, begin upon the completion of the construction of
each financed facility. The monthly lease obligations currently approximate
$103,000 per month. A balloon payment equal to the outstanding lease balances,
which were initially equal to the cost of the facilities, is due in November
2002. As of June 30, 2002, the aggregate lease balance was approximately $13.7
million.
As of June 30, 2002, the Company had received a non-binding letter of
intent to purchase, by an unrelated third party, four of the five properties
covered by the master synthetic operating lease for $15.3 million which amount
is greater than the outstanding lease balance. Under this letter of intent, the
purchaser would immediately lease the properties back to the Company. The
Company is still in the negotiation process on the terms of the lease. This
sale-leaseback transaction is scheduled to close the first week of October 2002.
In the event this transaction is not completed, management intends to seek
alternative financing relating to the properties. There was no deficiency
between the lease balance and fair market value of the remaining property not
covered by the letter of intent as of June 30, 2002.
14
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other synthetic lease and related capital lease
During 1998, Circle entered into two lease agreements related to one of
its domestic terminal facilities. One of the lease agreements relates to land
and is currently being accounted for as a synthetic operating lease. The Company
is required to make semi-annual payments of $139,000 for 5 more years. The
second agreement relates to buildings and improvements and is accounted for as
capital lease rather than as a synthetic lease. Therefore, the fixed asset and
related liability for the second lease are included in the accompanying
condensed consolidated balance sheet. Property under the capital lease is
amortized over the lease term. As of June 30, 2002, the carrying value of
property held under the building and improvements lease was $3.3 million, which
is net of $2.3 million of accumulated amortization. At June 30, 2002, the
outstanding liability related to the principal balances on these leases was
approximately $12.9 million. The Company is also required to make semi-annual
payments of $304,000 related to the building and improvements lease.
Note 10 - Stock options:
As of June 30, 2002, the Company had outstanding non-qualified stock
options to purchase an aggregate of 5.4 million shares of common stock at
exercise prices equal to the fair market value of the underlying common stock on
the dates of grant (prices ranging from $5.50 to $33.81). At the time a
non-qualified stock option is exercised, the Company will generally be entitled
to a deduction for federal and state income tax purposes equal to the difference
between the fair market value of the common stock on the date of exercise and
the option price. As a result of exercises for the six months ended June 30,
2002, of non-qualified stock options to purchase an aggregate of 46,925 shares
of common stock, the Company is entitled to an income tax deduction of
approximately $134,000. Accordingly, the Company recorded an increase to
additional paid-in capital and a reduction to current taxes payable pursuant to
the provisions of SFAS No. 109, Accounting for Income Taxes. Any exercises of
non-qualified stock options in the future at exercise prices below the then fair
market value of the common stock may also result in tax deductions equal to the
difference between those amounts. There is uncertainty as to whether the
exercises will occur, the amount of any deductions, and the Company's ability to
fully utilize any tax deductions.
Note 11 - Litigation:
EEOC Settlement
In December 1997, the U.S. Equal Employment Opportunity Commission
(EEOC) issued a Commissioner's Charge pursuant to Sections 706 and 707 of Title
VII of the Civil Rights Act of 1964, as amended (Title VII). In the
Commissioner's Charge, the EEOC charged the Company and certain of its
subsidiaries with violations of Section 703 of Title VII, as amended, the Age
Discrimination in Employment Act of 1967, and the Equal Pay Act of 1963,
resulting from (i) engaging in unlawful discriminatory hiring, recruiting and
promotion practices and maintaining a hostile work environment, based on one or
more of race, national origin, age and gender, (ii) failures to investigate,
(iii) failures to maintain proper records and (iv) failures to file accurate
reports. The Commissioner's Charge states that the persons aggrieved include all
Blacks, Hispanics, Asians and females who are, have been or might be affected by
the alleged unlawful practices.
On May 12, 2000, four individuals filed suit against EGL alleging
gender, race and national origin discrimination, as well as sexual harassment.
This lawsuit was filed in the United States District Court for the Eastern
District of Pennsylvania in Philadelphia, Pennsylvania. The EEOC was not
initially a party to the Philadelphia litigation. In July 2000, four additional
individual plaintiffs were allowed to join the Philadelphia litigation. The
Company filed an Answer in the Philadelphia case and extensive discovery was
conducted. The individual plaintiffs sought to certify a class of approximately
1,000 current and former EGL employees and applicants. The plaintiff's initial
motion for class certification was denied in November 2000.
On December 29, 2000, the EEOC filed a Motion to Intervene in the
Philadelphia litigation, which was granted by the Court in Philadelphia on
January 31, 2001. In addition, the Philadelphia Court also granted EGL's motion
that the case be transferred to the United States District Court for the
Southern District of Texas -- Houston Division where EGL
15
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
had previously initiated litigation against the EEOC due to what EGL believes to
have been inappropriate practices by the EEOC in the issuance of the
Commissioner's Charge and in the subsequent investigation. Subsequent to the
settlement of the EEOC action described below, the claims of one of the eight
named plaintiffs were ordered to binding arbitration at EGL's request. The
Company recognized a charge of $7.5 million in the fourth quarter of 2000 for
its estimated cost of defending and settling the asserted claims.
On October 2, 2001, the EEOC and EGL announced the filing of a Consent
Decree settlement. This settlement resolves all claims of discrimination and/or
harassment raised by the EEOC's Commissioner's Charge mentioned above. Under the
Consent Decree, EGL has agreed to pay $8.5 million into a fund (the Class Fund)
that will compensate individuals who claim to have experienced discrimination.
The settlement covers (1) claims by applicants arising between December 1, 1995
and December 31, 2000; (2) disparate pay claims arising between January 1, 1995
and April 30, 2000; (3) promotion claims arising between December 1, 1995 and
December 31, 1998; and (4) all other adverse treatment claims arising between
December 31, 1995 and December 31, 2000. In addition, EGL will contribute
$500,000 to establish a Leadership Development Program (the Leadership
Development Fund). This Program will provide training and educational
opportunities for women and minorities already employed at EGL and will also
establish scholarships and work study opportunities at educational institutions.
In entering the Consent Decree, EGL has not made any admission of liability or
wrongdoing. The Consent Decree was approved by the District Court in Houston on
October 1, 2001. It will become effective following the exhaustion of any
appeals by any individual plaintiffs or potential claimants. There is currently
one appeal pending before the United States Court of Appeals for the Fifth
Circuit which challenges the entry of the Consent Decree. We do not expect a
ruling on this appeal for the next four to six months. During the quarter ended
September 30, 2001, the Company accrued $10.1 million related to the settlement,
which includes the $8.5 million payment into the fund and $500,000 into the
leadership development program described above, administrative, legal fees and
other costs associated with the EEOC litigation and settlement.
The Consent Decree settlement provides that the Company establish and
maintain segregated accounts for the Class Fund and Leadership Development Fund.
The Company is required to make an initial deposit of $2.5 million to the Class
Fund within 30 days after the Consent Decree has been approved and fund the
remaining $6.0 million of the Class Fund in equal installments of $2.0 million
each on or before the fifth day of the first month of the calendar quarter
(January 5th, April 5th, and October 5th) which will occur immediately after the
effective date of the Consent Decree. The Leadership Development Fund will be
funded fully at the time of the first quarterly payment as discussed above. As
of June 30, 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 condensed consolidated balance sheets. Total
related accrued liabilities included in the accompanying condensed consolidated
balance sheet at June 30, 2002 and December 31, 2001 were $13.8 million and
$14.3 million, respectively.
It is unclear whether some or all of the seven remaining individual
plaintiffs will attempt to participate under the Consent Decree or whether they
will elect to continue to pursue their claims on their own. To the extent any of
the individual plaintiffs or any other persons who might otherwise be covered by
the settlement opt out of the settlement, the Company intends to continue to
vigorously defend itself against their allegations. The Company currently
expects to prevail in its defense of any remaining individual claims. There can
be no assurance as to what the amount of time it will take to resolve the appeal
relating to the settlement of the Commissioner's Charge and the other lawsuits
and related issues or the degree of any adverse effect these matters may have on
our financial condition and results of operations. A substantial settlement
payment or judgment could result in a significant decrease in our working
capital and liquidity and recognition of a loss in our consolidated statement of
operations.
Other
In addition to the EEOC matter, the Company is party to routine
litigation incidental to its business, which primarily involve other employment
matters or claims for goods lost or damaged in transit or improperly shipped.
Many of the other lawsuits to which the Company is a party are covered by
insurance and are being defended by the Company's insurance carriers. The
Company has established reserves for these other matters and it is management's
opinion that the resolution of such litigation will not have a material adverse
effect on the Company's consolidated financial position, results of operations
and cash flows.
16
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12 - Related party transactions:
In conjunction with the Company's business activities, the Company
periodically utilizes aircraft owned by entities controlled by Mr. Crane. 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 and other related costs on this aircraft and the
Company would bill Mr. Crane for any use of this aircraft unrelated to company
business on an hourly basis. During the three and six months ended June 30,
2001, the Company reimbursed Mr. Crane $300,000 and $700,000, respectively, in
lease payments and related costs on the aircraft. In August 2001, the Company
revised its agreement with Mr. Crane whereby the Company is now charged for
actual usage of the plane on an hourly basis and is billed on a periodic basis.
During the three and six months ended June 30, 2002, the Company paid Mr. Crane
$409,000 and $755,000, respectively, for actual hourly usage of the plane.
The Company subleases a portion of its warehouse space in Houston,
Texas and London, England to a customer pursuant to a five-year sublease. The
customer is partially owned by Mr. Crane. The Company did not receive any rental
income for the three months ended June 30, 2002 and received $21,000, for the
six months ended June 30, 2002. In addition, the Company billed this customer
approximately $20,000 and $55,000, respectively, for freight forwarding services
for the three and six months ended June 30, 2002.
Note 13 - Business segment information:
EGL's reportable segments are geographic segments that offer similar products
and services. They are managed separately because each segment requires close
customer contact and each segment is affected by similar economic conditions.
Certain information regarding EGL's operations by region is summarized below (in
thousands):
Europe Asia
North South Middle East & South
America America & Africa Pacific Eliminations Consolidated
----------- --------- ----------- ---------- ------------ ------------
Six months ended June 30, 2002:
Total revenues $ 472,839 $ 34,677 $ 127,696 $ 162,943 $ (23,894) $ 774,261
Transfers between regions (6,797) (2,495) (7,132) (7,470) 23,894 --
----------- --------- --------- --------- --------- ---------
Revenues from customers $ 466,042 $ 32,182 $ 120,564 $ 155,473 $ -- $ 774,261
=========== ========= ========= ========= ========= =========
Net revenues $ 210,138 $ 7,727 $ 58,994 $ 40,416 $ 317,275
=========== ========= ========= ========= =========
Income (loss) from operations $ (7,819) $ 487 $ 4,812 $ 8,781 $ 6,261
=========== ========= ========= ========= =========
Six months ended June 30, 2001:
Total revenues $ 531,508 $ 29,054 $ 118,443 $ 175,090 $ (22,575) $ 831,520
Transfers between regions (7,235) (2,890) (7,172) (5,278) 22,575 --
----------- --------- --------- --------- --------- ---------
Revenues from customers $ 524,273 $ 26,164 $ 111,271 $ 169,812 $ -- $ 831,520
=========== ========= ========= ========= ========= =========
Net revenues $ 200,440 $ 6,911 $ 54,422 $ 43,449 $ 305,222
=========== ========= ========= ========= =========
Income (loss) from operations $ (66,301) $ (1,305) $ 5,801 $ 11,718 $ (50,087)
=========== ========= ========= ========= =========
17
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Europe Asia
North South Middle East & South
America America & Africa Pacific Eliminations Consolidated
----------- --------- ----------- ---------- ------------ ------------
Three months ended June 30, 2002:
Total revenues $ 243,500 $ 17,796 $ 65,966 $ 87,249 $(12,249) $ 402,262
Transfers between regions (3,296) (1,290) (3,635) (4,028) 12,249 --
--------- --------- --------- --------- --------- ---------
Revenues from customers $ 240,204 $ 16,506 $ 62,331 $ 83,221 $ -- $ 402,262
========= ========= ========= ========= ========= =========
Net revenues $ 107,138 $ 3,923 $ 30,805 $ 21,289 $ 163,155
========= ========= ========= ========= =========
Income (loss) from operations $ (2,466) $ 155 $ 2,776 $ 4,336 $ 4,801
========= ========= ========= ========= =========
Three months ended June 30, 2001:
Total revenues $ 258,733 $ 12,929 $ 59,359 $ 87,554 $ (9,374) $ 409,201
Transfers between regions (1,266) (1,736) (3,743) (2,629) 9,374 -
--------- --------- --------- --------- --------- ---------
Revenues from customers $ 257,467 $ 11,193 $ 55,616 $ 84,925 $ -- $ 409,201
========= ========= ========= ========= ========= =========
Net revenues $ 91,778 $ 3,436 $ 27,981 $ 22,837 $ 146,032
========= ========= ========= ========= =========
Income (loss) from operations $ (42,921) $ (1,048) $ 3,168 $ 5,023 $(35,778)
========= ========= ========= ========= =========
Revenues from transfers between regions represents approximate amounts
that would be charged if an unaffiliated company provided the services. Total
regional revenues are reconciled with total consolidated revenues by eliminating
inter-regional revenues.
18
EGL, INC.
Item 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors, which have affected certain aspects of the Company's
financial position, operating results and cash flows during the periods included
in the accompanying unaudited condensed consolidated financial statements. This
discussion should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the annual financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001 (File No. 0-27288).
Six Months Ended June 30,
----------------------------------------------------------
2002 2001
--------------------------- ---------------------------
% of % of
Amount Revenues Amount Revenues
----------- ---------- ------------ ----------
(in thousands, except percentages)
Revenues:
Air freight forwarding $ 582,953 75.3 $ 643,140 77.3
Ocean freight forwarding 91,396 11.8 87,911 10.6
Customs brokerage and other 99,912 12.9 100,469 12.1
----------- --------- ----------- --------
Revenues $ 774,261 100.0 $ 831,520 100.0
=========== ========= =========== ========
% of Net % of Net
Amount Revenues Amount Revenues
----------- ---------- ------------ ----------
Net revenues:
Air freight forwarding $ 188,936 59.5 $ 177,427 58.1
Ocean freight forwarding 28,427 9.0 27,326 9.0
Customs brokerage and other 99,912 31.5 100,469 32.9
----------- --------- ----------- --------
Net revenues 317,275 100.0 305,222 100.0
----------- --------- ----------- --------
Operating expenses:
Personnel costs 175,537 55.3 195,222 64.0
Other selling, general and
administrative expenses 135,477 42.7 151,364 49.6
Restructuring
and integration costs - 0.0 8,723 2.9
----------- --------- ----------- --------
Operating income (loss) 6,261 2.0 (50,087) (16.5)
Nonoperating expense, net (11,494) (3.6) (2,556) (0.8)
----------- --------- ----------- --------
Income loss before benefit for
income tax (5,233) (1.6) (52,643) (17.3)
Benefit for income taxes (2,041) (0.6) (20,420) (6.7)
----------- --------- ----------- --------
Loss before change in accounting
for negative goodwill (3,192) (1.0) (32,223) (10.6)
Cumulative effect of change in
accounting for negative
goodwill (Note 2) 213 0.1 - 0.0
----------- --------- ----------- --------
Net loss $ (2,979) (0.9) $ (32,223) (10.6)
=========== ========= =========== ========
19
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (Continued)
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenues. Revenues decreased $57.2 million, or 6.9%, to $774.3 million
in the six months ended June 30, 2002 compared to $831.5 million in the six
months ended June 30, 2001 primarily due to decreases in air freight forwarding
revenue. Net revenues, which represent revenues less freight transportation
costs, increased $12.1 million, or 4.0%, to $317.3 million in the six months
ended June 30, 2002 compared to $305.2 million in the six months ended June 30,
2001 due to an increase in air freight forwarding and ocean freight forwarding
offset by a decrease in customs brokerage and other net revenues.
Air freight forwarding revenue. Air freight forwarding revenue
decreased $60.1 million, or 9.4%, to $583.0 million in the six months ended June
30, 2002 compared to $643.1 million in the six months ended June 30, 2001
primarily as a result of volume decreases in North America, Europe and Asia
Pacific offset by volume increases in South America. Airfreight forwarding net
revenue increased $11.5 million, or 6.5%, to $188.9 million in the six months
ended June 30, 2002, as compared to $177.4 million in the six months ended June
30, 2001. The air freight forwarding margin increased to 32.4% for the six
months ended June 30, 2002, compared to 27.6% for the six months ended June 30,
2001. The volume decreases were primarily due to the weakened global economy.
North America was also adversely affected by the shift from air expedited
shipments (next day out, next night, or second day time definite shipments) to
economy ground deferred shipments (third or fourth day). The increase in margin
was primarily related to the elimination of the U.S. dedicated charter network
in 2002, better yield management from our consolidation mix and better buying
opportunities on our international freight forwarding services.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
increased $3.5 million, or 4.0%, to $91.4 million in the six months ended June
30, 2002 compared to $87.9 million in the six months ended June 30, 2001, while
ocean freight forwarding net revenue increased $1.1 million, or 4.0%, to $28.4
million in the six months ended June 30, 2002 compared to $27.3 million in the
six months ended June 30, 2001. The increase was principally due to volume
increases in Asia Pacific. The ocean freight forwarding margin remained
unchanged at 31.1% in the six months ended June 30, 2002 compared to 31.1% in
the six months ended June 30, 2001.
Customs brokerage and other revenue. Customs brokerage and other
revenue, which includes warehousing, distribution and other logistics services,
decreased $0.6 million, or 0.6%, to $99.9 million in the six months ended June
30, 2002 compared to $100.5 million in the six months ended June 30, 2001. The
decrease was principally due to lower import activities in North America
partially offset by higher logistics revenue in Europe.
Personnel costs. Personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. Personnel costs decreased $19.7 million, or
10.1%, to $175.5 million in the six months ended June 30, 2002 compared to
$195.2 million in the six months ended June 30, 2001. As a percentage of net
revenues, personnel costs were 55.3% in the six months ended June 30, 2002,
compared to 64.0% in the six months ended June 30, 2001. The reduction in
personnel costs was a result of headcount reductions throughout 2001 which
eliminated approximately 500 full-time employees, controls in the use of
contract labor and a temporary salary reduction for five pay periods implemented
in the U.S. during the first quarter 2002.
Other selling, general and administrative expenses. Other selling,
general and administrative expenses, excluding restructuring and integration
costs, decreased $15.9 million, or 10.5%, to $135.5 million in the six months
ended June 30, 2002 compared to $151.4 million in the six months ended June 30,
2001. As a percentage of net revenues, other selling, general and administrative
expenses, excluding restructuring and integration costs, were 42.7% in the six
months ended June 30, 2002 compared to 49.6% in the six months ended June 30,
2001. This decrease is primarily due to management initiatives on cost 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
premium and depreciation expense. Although we completed the consolidation of
many of our facilities, our facility costs increased by approximately $2.6
million as we are leasing more space than in the
20
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (Continued)
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. In addition, we had a net gain of $146,000 in
the six months ended June 30, 2002 related to the sale of facilities in
Australia and Japan.
Restructuring and integration costs. During the six months ended June
30, 2002, we did not record any additional restructuring and integration costs
as compared to $3.0 million of restructuring costs and $5.7 million integration
costs recorded during the six months ended June 30, 2001.
Nonoperating income (expense), net. For the six months ended June 30,
2002, we had net nonoperating expenses of $11.5 million compared to $2.6 million
for the six months ended June 30, 2001. The $8.9 million change was primarily
due to a reserve of $1.3 million for outstanding letters of credit guaranteed by
us and an impairment charge of approximately $6.7 million for our investment in
Miami Air which carrying amount includes a $509,000 increase in value
attributable to EGL's 24.5% share of Miami Air's first quarter 2002 results of
operations. See Note 5 of the notes to the condensed consolidated financial
statements. In addition, we had foreign exchange losses of $262,000 in the six
months ended June 30, 2002 as compared to a gain of $184,000 for the six months
ended June 30, 2001. The losses were primarily a result of volatility in the
South American currencies. Nonoperating expense in the six months ended June 30,
2001 was reduced by a $2.3 million gain recognized by recording the market value
of an investment that became available for sale.
Effective tax rate. The effective income tax rate for the six months
ended June 30, 2002 was 39.0% compared to 38.8% for the six months ended June
30, 2001. Our effective tax rate fluctuated primarily due to the elimination of
goodwill amortization and changes in the level of pre-tax income in foreign
countries that had different rates.
21
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Three Months Ended June 30,
----------------------------------------------------------
2002 2001
--------------------------- ---------------------------
% of % of
Amount Revenues Amount Revenues
----------- ---------- ------------ ----------
(in thousands, except percentages)
Revenues:
Air freight forwarding $ 303,166 75.3 $ 315,851 77.2
Ocean freight forwarding 47,788 11.9 43,890 10.7
Customs brokerage and other 51,308 12.8 49,460 12.1
----------- --------- ----------- --------
Revenues $ 402,262 100.0 $ 409,201 100.0
=========== ========= =========== ========
% of Net % of Net
Amount Revenues Amount Revenues
----------- ---------- ------------ ----------
Net revenues:
Air freight forwarding $ 97,307 59.6 $ 82,110 56.2
Ocean freight forwarding 14,540 8.9 14,462 10.0
Customs brokerage and other 51,308 31.5 49,460 33.8
----------- --------- ----------- --------
Net revenues 163,155 100.0 146,032 100.0
----------- --------- ----------- --------
Operating expenses:
Personnel costs 90,177 55.3 100,681 68.9
Other selling, general and
administrative expenses 68,177 41.8 79,951 54.7
Restructuring
and integration costs - 0.0 1,178 0.8
----------- --------- ----------- --------
Operating income (loss) 4,801 2.9 (35,778) (24.4)
Nonoperating expense, net (3,264) (2.0) (1,595) (1.1)
----------- --------- ----------- --------
Income (loss) before provision
(benefit) for income taxes 1,537 0.9 (37,373) (25.5)
Provision (benefit) for income taxes 599 0.3 (14,201) (9.6)
----------- --------- ----------- --------
Net income (loss) $ 938 0.6 $ (23,172) (15.9)
=========== ========= =========== ========
22
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenues. Revenues decreased $6.9 million, or 1.7%, to $402.3 million
in the three months ended June 30, 2002 compared to $409.2 million in the three
months ended June 30, 2001 primarily due to decreases in air freight forwarding
revenue. Net revenues, which represents revenues less freight transportation
costs, increased $17.2 million, or 11.8%, to $163.2 million in the three months
ended June 30, 2002 compared to $146.0 million in the three months ended June
30, 2001 due to an increase in both air freight forwarding and customs brokerage
and other net revenues.
Air freight forwarding revenue. Air freight forwarding revenue
decreased $12.7 million, or 4%, to $303.2 million in the three months ended June
30, 2002 compared to $315.9 million in the three months ended June 30, 2001
primarily as a result of volume decreases in North America. The volume decreases
were primarily due to the weakened U.S. economy. North America was also
adversely affected by the shift from air expedited shipments next day out, next
night or second day time definite shipments) to economy ground deferred
shipments (third or fourth day).
Air freight forwarding net revenue increased $15.2 million, or 18.5%,
to $97.3 million in the three months ended June 30, 2002 compared to $82.1
million in the three months ended June 30, 2001. The air freight forwarding
margin increased to 32.1% for the three months ended June 30, 2002 compared to
26.0% for the three months ended June 30, 2001 reflecting the elimination of the
U.S. dedicated charter network in 2002, better yield management from our
consolidation mix and better buying opportunities on our international freight
forwarding services except for Asia Pacific where capacity constraints reduced
margins.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
increased $3.9 million, or 8.9%, to $47.8 million in the three months ended June
30, 2002 compared to $43.9 million in the three months ended June 30, 2001,
while ocean freight forwarding net revenue remained constant at $14.5 million in
the three months ended June 30, 2002 compared to $14.5 million in the three
months ended June 30, 2001. Ocean freight forwarding margins decreased to 30.3%
for the three months ended June 30, 2002 compared to 33.0% in the three months
ended June 30, 2001. The increase in revenue was principally due to a reduction
in consolidation activity in North America offset by improved trading levels in
Europe and Asia Pacific. The decrease in margin was primarily due a change in
the mix between ocean consolidation shipments and direct shipments. Ocean
consolidation shipment activity increased by 24.2% where direct shipment
activity declined by 13.4%
Customs brokerage and other revenue. Customs brokerage and other
revenue, which includes warehousing, distribution and other logistics services,
increased $1.8 million, or 3.6%, to $51.3 million in the three months ended June
30, 2002 compared to $49.5 million in the three months ended June 30, 2001 due
to an increase in import and logistics activity in Europe and Asia Pacific.
Personnel costs. Personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. Personnel costs decreased $10.5 million, or
10.4%, to $90.2 million in the three months ended June 30, 2002 compared to
$100.7 million in the three months ended June 30, 2001. As a percentage of net
revenues, personnel costs were 55.3% in the three months ended June 30, 2002
compared to 68.9% in the three months ended June 30, 2001. The reduction in
personnel costs was a result of headcount reductions throughout 2001, which
eliminated approximately 500 regular full-time employees, and a reduction in the
use of contract labor.
Other selling, general and administrative expenses. Other selling,
general and administrative expenses, excluding restructuring and integration
costs, decreased $11.8 million, or 14.8%, to $68.2 million in the three months
ended June 30, 2002 compared to $80.0 million in the three months ended June 30,
2001. As a percentage of net revenues, other selling, general and administrative
expenses, excluding restructuring and integration costs, were 41.8% in the three
months ended June 30, 2002 compared to 54.7% in the three months ended June 30,
2001. This decrease was primarily due to management initiatives on cost savings,
realization of merger related cost synergies, the elimination of goodwill
amortization expense due to the implementation of SFAS 142, and lower bad debt
expense reflecting improvements in collection management. The lower expenses
were partially offset by an increase in facility costs and depreciation expense.
Although we have completed the consolidation of many of our facilities, our
facility costs
23
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
increased by approximately $1.4 million as we are leasing more space than in the
prior year for our expanded warehousing and logistics services. The increase in
depreciation expense was primarily related to increases in computer software and
office equipment depreciation. In addition, we had a net gain of $146,000 in the
three months ended June 30, 2002 related to the sale of facilities in Australia
and Japan.
Restructuring and integration costs. During the three months ended June
30, 2002, we did not record any additional, restructuring and integration costs.
During the three months ended June 30, 2001, we recorded $1.3 million in
integration costs and a reduction of $83,000 in merger restructuring costs.
Nonoperating expense, net. For the three months ended June 30, 2002, we
had net nonoperating expenses of $3.3 million compared to $1.6 million for the
three months ended June 30, 2001, which included a $2.3 million gain from
recording the market value of an investment that became available for sale. In
addition, we had equity income from unconsolidated affiliates of $178,000 in the
three months ended June 30, 2002 as compared to equity losses from
unconsolidated affiliates of $1.6 million in the three months ended June 30,
2001. For the three months ended June 30, 2002, we had approximately $893,000 in
foreign exchange losses as compared to a loss of approximately $72,000 in the
three months ended June 30, 2001. The losses were incurred primarily as a result
of volatility in the South American currencies.
Effective tax rate. The effective income tax rate for the three months
ended June 30, 2002 was 39.0% compared to 38.0% for the three months ended June
30, 2001. Our effective tax rate fluctuated primarily due to the elimination of
goodwill amortization and changes in the level of pre-tax income in foreign
countries that had different rates.
LIQUIDITY AND CAPITAL RESOURCES
General
Our ability to satisfy our debt obligations, fund working capital and
make capital expenditures depends upon our future performance, which is subject
to general economic conditions and other factors, some of which are beyond our
control. We have substantially reduced operating costs and have worked to
diversify our customer base. Additionally, we have made significant efforts to
collect outstanding customer accounts receivable amounts and were able to use
the cash from these collections to avoid additional new borrowings on our line
of credit during the three and six months ending June 30, 2002. Should we
achieve significant near-term revenue growth, we may experience a need for
increased working capital financing as a result of the difference between our
collection cycles and the timing of our payments to vendors.
We make significant disbursements and in turn bill our customers for
customs duties and other expenses. Due to the timing of the billings to
customers for these disbursements, which are reflected in our trade receivables
and trade payables, any growth in the level of this activity or lengthening of
the period of time between incurring these costs and being reimbursed by our
customers for these costs may negatively affect our liquidity.
Cash flows from operating activities. Net cash provided by operating
activities was $46.8 million in the six months ended June 30, 2002 compared to
net cash used in operating activities of $25.4 million in the six months ended
June 30, 2001. The increase in the six months ended June 30, 2002 was primarily
due to a positive change in the net effect of changes in working capital and a
lower net loss in 2002 as compared 2001. Additionally, in the six months ended
June 30, 2002, the adjustments to reconcile net loss to net cash provided by
operating activities included an impairment charge of approximately $6.7 million
related to our investment in Miami Air.
Cash flows from investing activities. Net cash used in investing
activities in the six months ended June 30, 2002 was $1,000 compared to net cash
used in investing activities of $20.6 million in the six months ended June 30,
2001. We incurred capital expenditures of $9.8 million during the six months
ended June 30, 2002 as compared to $31.2 million during the six months ended
June 30, 2001. We received proceeds from the sale of assets of $9.8 million
during the six months ended June 30, 2002 as compared to $9.0 million during the
six months ended June 30, 2001. The cash proceeds
24
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
from the sale of assets in 2002 included $2.5 million from a sale-leaseback
transaction in the first quarter, $2.6 million from the sale of facilities in
Australia and Japan in the second quarter, and $1.3 million from the maturity of
a time deposit in Hong Kong in the second quarter.
Cash flows from financing activities. Net cash used in financing
activities in the six months ended June 30, 2002 was $419,000 compared to net
cash provided by financing activities of $45.1 million in the six months ended
June 30, 2001. Net borrowings on notes payable were $41.2 million for the six
months ended June 30, 2001 and net repayments of notes payable were $1.5 million
in the six months ended June 30, 2002. Proceeds from the exercise of stock
options were $330,000 in the six months ended June 30, 2002 compared to $3.2
million in the six months ended June 30, 2001.
Convertible subordinated notes. In December 2001, we issued $100
million aggregate principal amount of 5% convertible subordinated notes. These
notes bear interest at an annual rate of 5%. Interest is payable on June 15 and
December 15 of each year, beginning June 15, 2002. The notes mature on December
15, 2006. Deferred financing fees incurred in connection with the transaction
totaled $3.2 million and are being amortized over five years as a component of
interest expense.
The notes are convertible at any time up to four trading days prior to
maturity into shares of our common stock at a conversion price of approximately
$17.4335 per share, subject to certain adjustments, which was a premium of 20.6%
of the stock price at the issuance date. This is equivalent to a conversion rate
of 57.3608 shares per $1,000 principal amount of notes. Upon conversion, a
noteholder will not receive any cash representing accrued interest, other than
in the case of a conversion in connection with an optional redemption. The
shares that are potentially issuable may impact our diluted earnings per share
calculation in future periods by approximately 5.7 million shares. As of June
30, 2002, the fair value of the notes was $119.6 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 for the
notes), 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. Our subsidiaries and we are not
prohibited from incurring senior indebtedness or other debt under the indenture
for the notes. The notes impose some restrictions on mergers and sales of
substantially all of our assets.
Revolving credit facility. Effective December 20, 2001, we amended and
restated our existing credit agreement. The amended and restated credit facility
(Restated Credit Facility), which was amended effective as of March 7, 2002, is
with a syndicate of three financial institutions, with Bank of America (the
Bank) as collateral and administrative agent for the lenders, matures on
December 20, 2004. The Restated Credit Facility provides a revolving line of
credit of up to the lesser of:
o $75 million, which will be increased to $100 million if an additional
$25 million of the revolving line of credit commitment is syndicated to
other financial institutions,
o or an amount equal to:
o up to 85% of the net amount of 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
25
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 the Bank in its
reasonable credit judgment.
The aggregate of the last four sub-bullet points above is referred to
as our eligible borrowing base. The Restated Credit Facility includes a $50
million letter of credit subfacility. We had $31.7 million in standby letters of
credit outstanding as of June 30, 2002 under this facility.
The maximum amount that we can borrow at any particular time may be
less than the amount of our revolving credit line because we are required to
maintain a specified amount of borrowing availability under the Restated Credit
Facility 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: (a)
our borrowings under the Restated Credit Facility; and (b) our accounts payable
and the accounts payable of all of our domestic subsidiaries and our Canadian
operating subsidiary that remain unpaid more than the longer of (i) sixty days
from their respective invoice dates or (ii) thirty days from their respective
due dates.
For each tranche of principal borrowed under the revolving line of
credit, we may elect an interest rate of either LIBOR plus an applicable margin
of 2.50%, which is subject to adjustment after June 30, 2002 to 2.00% to 2.75%,
which varies based upon availability under the line, or the prime rate announced
by the Bank, plus, if the borrowing availability is less than $25 million, an
applicable margin of 0.25%.
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 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).
We are 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 our
assets, and is guaranteed by all domestic subsidiaries and our Canadian
operating subsidiary. In addition, we will be subject to additional
restrictions, including restrictions with respect to distributions and asset
dispositions if our eligible borrowing base falls below $40 million. Events of
default under the 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 (including our domestic subsidiaries or our Canadian
operating subsidiary) to perform under the Restated Credit Facility. During the
six months ended June 30, 2002, we had no borrowings under this facility and as
of June 30, 2002, had available unused borrowing capacity of $43.3 million.
Other bank lines of credit and guarantees. At June 30, 2002, our $10
million bank line of credit, which was in addition to the $50 million Restated
Credit Facility, expired. We did not renew this line of credit, and our foreign
operations replaced previously outstanding letters of credit with other types of
guarantees.
26
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Additionally, several of our foreign operations guarantee amounts
associated with our custom brokerage services. As of June 30, 2002, these
outstanding guarantees approximated $27.2 million.
Agreements with charter airlines. As of June 30, 2002, we were not
obligated under any lease agreements for charter aircraft. In May 2002, EGL and
Miami Air mutually agreed to cancel the aircraft charter agreement as of May 9,
2002, and we paid $450,000 for services rendered in May 2002 and aircraft
repositioning costs. We lease other cargo aircraft for utilization in our
domestic and international heavy-cargo overnight air network based on actual
utilization.
Litigation. In addition to the EEOC matter (see Note 11 of the notes to
condensed consolidated financial statements), we are party to routine litigation
incidental to our 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 we are a party are covered by insurance and are being
defended by our insurance carriers. We have established reserves for these other
matters, and it is management's opinion that the resolution of such litigation
will not have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
Sale/leaseback agreement. 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 third 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 new lease agreement, the quarterly lease payment is
approximately $84,750, which amount is subject to escalation after the first
year based on increases in the Consumer Price Index. A loss of $42,000 on the
sale of this property was recognized in the first quarter of 2002.
Synthetic lease agreements. We have entered into two operating lease
arrangements that involve a special purpose entity that has acquired title to
properties, paid for the construction costs and leased to us real estate at some
of our terminal and warehouse facilities. This kind of leveraged financing
structure is commonly referred to as a "synthetic lease."
A synthetic lease is a form of lease financing that qualifies for
operating lease accounting treatment and under generally accepted accounting
principles is not reflected in our accompanying condensed consolidated balance
sheet. Thus, the obligations are not recorded as debt and the underlying
properties are not recorded as assets on our accompanying condensed consolidated
balance sheet. Under a synthetic lease, our rental payments (which approximate
interest amounts under the synthetic lease financing) are treated as operating
rent commitments and are excluded from our aggregate debt maturities. A
synthetic lease is generally preferable to a conventional real estate lease
since the lessee benefits from attractive interest rates and the ability to
claim depreciation under tax laws.
Master operating synthetic lease agreement. On April 3, 1998, we
entered into a five-year $20 million master operating synthetic lease agreement
with two unrelated parties for financing the construction of terminal and
warehouse facilities throughout the United States as designated by us. The lease
facility was funded by a financial institution and is secured by the properties
to which it relates. Construction was completed during 2000 on five terminal
facilities.
The master operating synthetic lease agreement contains restrictive
financial covenants requiring the maintenance of a fixed charge coverage ratio
of at least 1.5 to 1.0 and specified amounts of consolidated net worth and
consolidated tangible net worth. In addition, the master operating synthetic
lease agreement, as amended on February 11, 2002, restricts us from incurring
debt in an amount greater than $30 million, except pursuant to a single credit
facility involving a commitment of not more than $110 million and $100 million
of 5% convertible subordinated notes.
We have an option, exercisable at anytime during the lease term, and
under particular circumstances may be obligated, to acquire the financed
facilities for an amount equal to the outstanding lease balance. If we do not
exercise the purchase option, and do not otherwise meet our obligations, we are
subject to a deficiency payment computed as the amount equal to the outstanding
lease balance minus the then current fair market value of each financed facility
within limits. We expect that the amount of any deficiency payment would be
expensed. We may also have to find other suitable facilities to operate in or
potentially be subject to a reduction in revenues and other operating
activities.
27
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Under the terms of the master operating synthetic lease agreement,
average monthly lease payments, including monthly interest costs based upon
LIBOR plus 145 basis points, begin upon the completion of the construction of
each financed facility. The monthly lease obligations currently approximate
$103,000 per month. A balloon payment equal to the outstanding lease balances,
which were initially equal to the cost of the facilities is due in November
2002. As of June 30, 2002, the aggregate lease balance was approximately $13.7
million.
As of June 30, 2002, we had received a non-binding letter of intent to
purchase, by an unrelated third party, four of the five properties covered under
the master synthetic operating lease for $15.3 million which amount is greater
than the outstanding lease balance under this letter of intent the purchaser
would immediately lease the properties back to the Company. This sale-leaseback
transaction is scheduled to close the first week of October 2002. In the event
this transaction is not completed, we intend to seek alternative financing
relating to the properties. There was no deficiency between the outstanding
lease balance and the fair market value of the remaining property not covered by
the letter of intent as of June 30, 2002.
Other synthetic lease and related capital lease. During 1998, Circle
entered into two lease agreements related to one of its domestic terminal
facilities. One of the lease agreements relates to land and is currently being
accounted for as a synthetic operating lease. We are required to make
semi-annual payments of $139,000 for 5 more years. The second agreement relates
to buildings and improvements and is accounted for as capital lease rather than
as a synthetic lease. Therefore, the fixed asset and related liability for the
second lease are included in the accompanying condensed consolidated balance
sheet. Property under the capital lease is amortized over the lease term. As of
June 30, 2002, the carrying value of property held under the building and
improvements lease was $3.3 million, which is net of $2.3 million of accumulated
amortization. At June 30, 2002, the outstanding liability related to the
principal balances on these leases was approximately $12.9 million. We are also
required to make semi-annual payments of $304,000 related to the building and
improvements lease.
Stock options. As of June 30, 2002, we had outstanding non-qualified
stock options to purchase an aggregate of 5.4 million shares of common stock at
exercise prices equal to the fair market value of the underlying common stock on
the dates of grant (prices ranging from $5.50 to $33.81). At the time a
non-qualified stock option is exercised, we will generally be entitled to a
deduction for federal and state income tax purposes equal to the difference
between the fair market value of the common stock on the date of exercise and
the option price. As a result of exercises for the six months ended June 30,
2002, of non-qualified stock options to purchase an aggregate of 46,925 shares
of common stock, we are entitled to an income tax deduction of approximately
$134,000. Accordingly, we recorded an increase to additional paid-in capital and
a reduction to current taxes payable pursuant to the provisions of SFAS No. 109,
Accounting for Income Taxes. Any exercises of non-qualified stock options in the
future at exercise prices below the then fair market value of the common stock
may also result in tax deductions equal to the difference between those amounts.
There is uncertainty as to whether the exercises will occur, the amount of any
deductions, and our ability to fully utilize any tax deductions.
COMMISSIONER'S CHARGE
As discussed in "Part II, Item 1. Legal Proceedings", we have reached a
Consent Decree settlement with the EEOC which resolves the EEOC's allegations
contained in the Commissioners Charge. This Consent Decree was approved by the
District Court on October 1, 2001. The Consent Decree becomes effective
following exhaustion of certain objectives and appeals.
RELATED PARTY TRANSACTIONS
In connection with our investment in Miami Air, we 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
us for a three-year term. We caused a $7 million standby letter of credit to be
issued in favor of certain creditors for Miami Air to assist Miami Air in
financing the conversion of its aircraft. Miami Air agreed to pay us an annual
fee equal to 3.0% of the face amount of the letter of credit and to reimburse us
for any payments owed by us in respect of the letter of credit.
28
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
As of June 30, 2002, Miami Air had no funded debt under the line of credit that
is supported by the $7 million standby letter of credit. However, as of June 30,
2002, Miami Air had outstanding $2.6 million in letters of credit and surety
bonds supported by the $7 million standby letter of credit.
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)
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 are expected to be delivered in
2002. Throughout the fourth quarter of 2001 and the first quarter of 2002, Miami
Air was in discussions with 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 and had informed us that its creditors had indicated a
willingness to make concessions. In May 2002, we were informed that Miami Air's
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 carrying value of our $6.7 million investment in
Miami Air, which carrying value includes a $509,000 increase in value
attributable to EGL's 24.5% share of Miami Air's first quarter 2002 results of
operations. In addition, we recorded a reserve of $1.3 million for our estimated
exposure on the outstanding letters of credit supported by the $7 million
standby letter of credit. There can be no assurance that the ultimate loss, if
any, will not exceed such estimate.
Miami Air, each of the private investors and the continuing Miami Air
stockholders also entered into a stockholders agreement under which Mr. Crane
(Chairman and CEO of EGL) and Mr. Hevrdejs (a director of EGL) 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. EGL 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 June 30, 2002,
directors appointed to Miami Air's board include a designee of Mr. Crane, Mr.
Elijio Serrano (EGL's Chief Financial Officer) and two others. The Series A
preferred stock, if issued, (1) will not be convertible, (2) will have a 15.0%
annual dividend rate and (3) will be subject to mandatory redemption in July
2006 or upon the prior occurrence of specified events. The original charter
transactions between Miami Air and EGL were negotiated with Miami Air's
management at arms length at the time of our original investment in Miami Air.
Miami Air's pre-transaction Chief Executive Officer has remained in that
position and as a director following the transaction and, together with other
original Miami Air investors, remained as substantial shareholders of Miami Air.
Other private investors in Miami Air have participated with our directors in
other business transactions unrelated to Miami Air.
In conjunction with our business activities, we periodically utilize
aircraft owned by entities controlled by Mr. Crane. On October 30, 2000, our
Board of Directors approved a change in this arrangement whereby we would
reimburse Mr. Crane for the $112,000 monthly lease obligation and other related
costs on this aircraft and we would bill Mr. Crane for any use of this aircraft
unrelated to company business on an hourly basis. During the three and six
months ended June 30, 2001, we reimbursed Mr. Crane $300,000 and $700,000,
respectively in lease payments and related costs on the aircraft. In August
2001, we revised our agreement with Mr. Crane whereby we are now charged for
actual usage of the plane on an hourly basis and are billed on a periodic basis.
During the three and six months ended June 30, 2002, we paid Mr. Crane $409,000
and $755,000, respectively, for actual hourly usage of the plane.
We sublease a portion of our warehouse space in Houston, Texas and
London, England to a customer pursuant to a five-year sublease. The customer is
partially owned by Mr. Crane. We did not receive any rental income for the three
months ended June 30, 2002 and received $21,000, for the six months ended June
30, 2002. In addition, we billed this customer approximately $20,000 and
$55,000, respectively for freight forwarding services for the three and six
months ended June 30, 2002.
29
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Critical Accounting Policies
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Management considers many factors in
selecting appropriate operational and financial accounting policies and
controls, and in developing the estimates and assumptions that are used in the
preparation of these financial statements. Management must apply significant
judgment in this process. 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 U.S. generally accepted
accounting principles,
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 good and services,
o expected rates of change, sensitivity and volatility associated with
the assumptions used in developing estimates,
o whether historical trends are expected to be representative of future
trends,
o future estimates of cash flows to be produced by various assets and
groups of assets,
o how long assets are expected to remain productive before they must be
replaced or undergo substantial repairs,
o what the fair market value of an asset or liability may be at a point
in time when there is no established trading market where the specific
asset or liability can be readily sold or settled.
o expectations regarding the financial viability of counterparties to
business transactions with us and the counterparties' ability,
willingness and whether they actually will perform in accordance with
their business obligations under the terms of the arrangements,
o in some circumstances management judgment must be applied to interpret
what the provisions of commercial arrangements obligate the parties to
do and estimates are sometimes required of the efforts and cost
necessary to meet those obligations or to resolve disputes among the
parties, including the costs related to resolving litigation,
o expectations of future income for financial and income tax reporting
purposes to evaluate the recoverability of certain assets, and
o the categorization and allocation of costs among different categories
reported in the financial statements, as well as estimates of
reasonable pricing assumptions used in our segment reporting analysis.
The estimation process often times may yield a range of potentially
reasonable estimates of the ultimate future outcomes and management must select
an amount that lies within that range of reasonable estimates - which may result
in the selection of estimates which could be viewed as conservative or
aggressive by others - based upon the quantity, quality and risks associated
with the variability that might be expected from the future outcome and the
factors considered in developing the estimate. Management attempts to use its
business and financial accounting judgment in selecting the most appropriate
estimate, however, actual results could and will differ from those estimates.
30
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Revenue recognition. Revenue and freight consolidation costs are
recognized at the time the freight departs the terminal of origin, one of the
permissible methods authorized by Emerging Issues Task Force Issue No. 91-9
"Revenue and Expense Recognition for Freight Services in Process." This method
generally results in recognition of revenue and gross profit earlier than
methods that do not recognize revenue until a proof of delivery is received.
Customs brokerage and other revenues are recognized upon completing the
documents necessary for customs clearance or completing other fee - based
services. Revenue recognized as an indirect air carrier or an ocean freight
consolidator includes the direct carrier's charges to EGL for carrying the
shipment. Revenue recognized in other capacities includes only the commission
and fees received. In December 1999, the SEC issued Staff Accounting Bulleting
(SAB) No. 101, "Revenue Recognition in Financial Statements," and related
interpretative guidelines in November 2000. The provisions of SAB No. 101 had no
material impact on our financial statements.
Computer software. We account for internally developed software using
the guidelines of the American Institute of Certified Public Accountants
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This standard requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. This
SOP also requires that costs related to the preliminary project stage, data
conversion and the post-implementation/ operation stage of an internal-use
computer software development project be expensed as incurred. Upon retirement
or sale of assets, the cost of such assets and accumulated depreciation are
removed from the accounts and the gain or loss, if any, is credited or charged
to income.
We have incurred substantial costs during the periods presented 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 June 30, 2002 will be successfully completed and will result in
benefits recoverable in future periods.
Goodwill and other intangibles. During the first quarter of 2002, we
changed our critical accounting policy for goodwill due to two new accounting
pronouncements. See Notes 2 and 4 of the notes to the condensed consolidated
financial statements.
Impairment of long-lived assets. The carrying value of long-lived
assets, excluding goodwill, is reviewed periodically based on the projected
undiscounted cash flows of the related asset or the business unit over the
remaining amortization period. If the cash flow analysis indicated that the
carrying amount of an asset exceeds related undiscounted cash flows, the
carrying value will be reduced to the estimated fair value of the assets or the
present value of the expected future cash flows. Substantial judgment is
necessary in the determination as to whether an event or circumstances have
occurred that may trigger an impairment analysis and in determination of the
related cash flows from the asset. Estimating cash flows related to long-lived
assets is a difficult and subjective process that applies historical experience
and future business expectations to revenues and related operating costs of
assets. Should impairment appear to be necessary, subjective judgment must be
applied to estimate the fair value of the asset, for which there may be no ready
market, which oftentimes results in the use of discounted cash flow analysis and
judgmental selection of discount rates to be used in the discounting process.
31
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in exposure to market risk from
that discussed in EGL's Annual Report on Form 10-K for the year ended December
31, 2001. We had foreign exchange losses of $262,000 in the six months ended
June 30, 2002 as compared to a gain of $184,000 in the six months ended June 30,
2001. These losses were primarily a result of volatility in the South American
Currencies. See Note 3 of the notes to the condensed consolidated financial
statements, and managements discussion and analysis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1997, the U.S. Equal Employment Opportunity Commission
(EEOC) issued a Commissioner's Charge pursuant to Sections 706 and 707 of Title
VII of the Civil Rights Act of 1964, as amended (Title VII). In the
Commissioner's Charge, the EEOC charged the Company and certain of its
subsidiaries with violations of Section 703 of Title VII, as amended, the Age
Discrimination in Employment Act of 1967, and the Equal Pay Act of 1963,
resulting from (i) engaging in unlawful discriminatory hiring, recruiting and
promotion practices and maintaining a hostile work environment, based on one or
more of race, national origin, age and gender, (ii) failures to investigate,
(iii) failures to maintain proper records and (iv) failures to file accurate
reports. The Commissioner's Charge states that the persons aggrieved include all
Blacks, Hispanics, Asians and females who are, have been or might be affected by
the alleged unlawful practices.
On May 12, 2000, four individuals filed suit against EGL alleging
gender, race and national origin discrimination, as well as sexual harassment.
This lawsuit was filed in the United States District Court for the Eastern
District of Pennsylvania in Philadelphia, Pennsylvania. The EEOC was not
initially a party to the Philadelphia litigation. In July 2000, four additional
individual plaintiffs were allowed to join the Philadelphia litigation. The
Company filed an Answer in the Philadelphia case and extensive discovery was
conducted. The individual plaintiffs sought to certify a class of approximately
1,000 current and former EGL employees and applicants. The plaintiff's initial
motion for class certification was denied in November 2000.
On December 29, 2000, the EEOC filed a Motion to Intervene in the
Philadelphia litigation, which was granted by the Court in Philadelphia on
January 31, 2001. In addition, the Philadelphia Court also granted EGL's motion
that the case be transferred to the United States District Court for the
Southern District of Texas -- Houston Division where EGL had previously
initiated litigation against the EEOC due to what EGL believes to have been
inappropriate practices by the EEOC in the issuance of the Commissioner's Charge
and in the subsequent investigation. Subsequent to the settlement of the EEOC
action described below, the claims of one of the eight named plaintiffs were
ordered to binding arbitration at EGL's request. The Company recognized a charge
of $7.5 million in the fourth quarter of 2000 for its estimated cost of
defending and settling the asserted claims.
On October 2, 2001, the EEOC and EGL announced the filing of a Consent
Decree settlement. This settlement resolves all claims of discrimination and/or
harassment raised by the EEOC's Commissioner's Charge mentioned above. Under the
Consent Decree, EGL has agreed to pay $8.5 million into a fund (the Class Fund)
that will compensate individuals who claim to have experienced discrimination.
The settlement covers (1) claims by applicants arising between December 1, 1995
and December 31, 2000; (2) disparate pay claims arising between January 1, 1995
and April 30, 2000; (3) promotion claims arising between December 1, 1995 and
December 31, 1998; and (4) all other adverse treatment claims arising between
December 31, 1995 and December 31, 2000. In addition, EGL will contribute
$500,000 to establish a Leadership Development Program (the Leadership
Development Fund). This Program will provide training and educational
opportunities for women and minorities already employed at EGL and will also
establish scholarships and work study opportunities at educational institutions.
In entering the Consent Decree, EGL has not made any admission of liability or
wrongdoing. The Consent Decree was approved by the District Court in Houston on
October 1, 2001. It will become effective following the exhaustion of any
appeals by any individual plaintiffs or potential claimants. There is currently
one appeal pending before the United States Court of Appeals for the Fifth
Circuit which challenges the entry of the Consent Decree. We do not expect a
ruling on this appeal for the next four to six
32
EGL, INC.
months. During the quarter ended September 30, 2001, the Company accrued $10.1
million related to the settlement, which includes the $8.5 million payment into
the fund and $500,000 into the leadership development program described above,
administrative, legal fees and other costs associated with the EEOC litigation
and settlement.
The Consent Decree settlement provides that the Company establish and
maintain segregated accounts for the Class Fund and Leadership Development Fund.
The Company is required to make an initial deposit of $2.5 million to the Class
Fund within 30 days after the Consent Decree has been approved and fund the
remaining $6.0 million of the Class Fund in equal installments of $2.0 million
each on or before the fifth day of the first month of the calendar quarter
(January 5th, April 5th, and October 5th) which will occur immediately after the
effective date of the Consent Decree. The Leadership Development Fund will be
funded fully at the time of the first quarterly payment as discussed above. As
of June 30, 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
June 30, 2002 and December 31, 2001 were $13.8 million and $14.3 million,
respectively.
It is unclear whether some or all of the seven remaining individual
plaintiffs will attempt to participate under the Consent Decree or whether they
will elect to continue to pursue their claims on their own. To the extent any of
the individual plaintiffs or any other persons who might otherwise be covered by
the settlement opt out of the settlement, the Company intends to continue to
vigorously defend itself against their allegations. The Company currently
expects to prevail in its defense of any remaining individual claims. There can
be no assurance as to what the amount of time it will take to resolve the appeal
relating to the settlement of the Commissioner's Charge and the other lawsuits
and related issues or the degree of any adverse effect these matters may have on
our financial condition and results of operations. A substantial settlement
payment or judgment could result in a significant decrease in our working
capital and liquidity and recognition of a loss in our consolidated statement of
operations.
In addition to the EEOC matter, the Company is party to routine
litigation incidental to its business, which primarily involve other employment
matters or claims for goods lost or damaged in transit or improperly shipped.
Many of the other lawsuits to which the Company is a party are covered by
insurance and are being defended by Company's insurance carriers. The Company
has established reserves for these other matters and it is management's opinion
that the resolution of such litigation will not have a material adverse effect
on the Company's consolidated results of operations, financial condition and
cash flows.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
33
EGL, INC.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS
(a) Annual Meeting of Shareholders on May 22, 2002
(b) Election of Directors
For Against Withheld Abstain Broker Nonvotes
--- ------- -------- ------- ---------------
James R Crane 42,832,646 * 190,587 - *
Frank J Hevrdejs 42,362,729 * 660,504 - *
Paul William Hobby 42,833,671 * 189,562 - *
Michael K Jhin 42,830,096 * 193,137 - *
Neil E. Kelly 42,831,719 * 191,514 - *
Norwood W. Knight-Richardson 42,833,790 * 189,443 - *
Rebecca A. McDonald 42,829,317 * 193,916 - *
Elijio V. Serrano 42,829,788 * 193,445 - *
(c) Proposals
Approval of Appointment of 41,747,510 1,242,776 * 32,922 25
PricewaterhouseCoopers LLP
as Independent Accountants
* Not Applicable
ITEM 5. OTHER INFORMATION
FORWARDING LOOKING STATEMENTS
The statements contained in all parts of this document that are not
historical facts are, or may be deemed to be, forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements include, but
are not limited to, those relating to the following: the effect and benefits of
the Circle merger; the restated credit facility; expectations or arrangements
for the Company's leased planes and the effects thereof; effects of and exposure
relating to Miami Air; the termination of joint venture/agency agreements and
the Company's ability to recover assets in connection therewith; the Company's
plan to reduce costs (including the scope, timing, impact and effects thereof);
past and planned headcount reductions (including the scope, timing, impact and
effects thereof); pending or expected financing transactions; potential
annualized cost savings; changes in the Company's dedicated charter fleet
strategy (including the scope, timing, impact and effects thereof); the
Company's plans to outsource leased planes, the Company's ability to improve its
cost structure; consolidation of field offices (including the scope, timing and
effects thereof), the Company's ability to restructure the debt covenants in its
credit facility, if at all; anticipated future recoveries from actual or
expected sublease agreements; the sensitivity of demand for the Company's
services to domestic and global economic conditions; cost management efforts;
expected growth; construction of new facilities; the results, timing, outcome or
effect of matters relating to the Commissioner's Charge (including the
settlement thereof) or other litigation and our intentions or expectations of
prevailing with respect thereto; future operating expenses; future margins; use
of credit facility proceeds; the expected impact of changes in accounting
policies on the Company's results of operations, financial condition or cash
flows; the "fair value" of the Company's reporting units; fluctuations in
currency valuations; fluctuations in interest rates; future acquisitions or
dispositions and any effects, benefits, results, terms or other aspects of such
acquisitions or dispositions ; ability to continue growth and implement growth
and business strategy; the ability of expected sources of liquidity to support
working capital and capital expenditure requirements; the tax benefit of any
stock option exercises; future
34
EGL, INC.
expectations and outlook and any other statements regarding future growth, cash
needs, terminals, operations, business plans and financial results and any other
statements which are not historical facts. When used in this document, the words
"anticipate," "estimate," "expect," "may," "plans," "project," and similar
expressions are intended to be among the statements that identify
forward-looking statements.
The Company's results may differ significantly from the results
discussed in the forward-looking statements. Such statements involve risks and
uncertainties, including, but not limited to, those relating to costs, delays
and difficulties related to the Circle merger, including the integration of its
systems, operations and other businesses; termination of joint ventures, charter
aircraft arrangements (including expected losses, increased utilization and
other effects); the Company's dependence on its ability to attract and retain
skilled managers and other personnel; the intense competition within the freight
industry; the uncertainty of the Company's ability to manage and continue its
growth and implement its business strategy; the Company's dependence on the
availability of cargo space to serve its customers; the potential for
liabilities if certain independent owner/operators that serve the Company are
determined to be employees; effects of regulation; the finalization of the EEOC
settlement (including the timing and terms thereof and the results of any
appeals or challenges thereto) and the results of related or other litigation;
the Company's vulnerability to general economic conditions and dependence on its
principal customers; whether the Company closes its new sale/leaseback
transaction; the timing, success and effects of the Company's restructuring and
other changes to its leased aircraft arrangements, whether the Company enters
into arrangements with third parties relating to such leased aircraft and the
terms of such arrangements, the results of the new air network, responses of
customers to the Company's actions by the Company's principal shareholder;
actions by Miami Air and its creditors; accuracy of accounting and other
estimates; the Company's potential exposure to claims involving its local pickup
and delivery operations; risk of international operations; risks relating to
acquisitions and dispositions; the Company's future financial and operating
results, cash needs and demand for its services; changes in accounting policies;
and the Company's ability to maintain and comply with permits and licenses; as
well as other factors detailed in the Company's filings with the Securities and
Exchange Commission including those detailed in the subsection entitled "Factors
That May Affect Future Results and Financial Condition" in the Company's Form
10-K for the year ended December 31, 2001. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated. The Company undertakes
no responsibility to update for changes related to these or any other factors
that may occur subsequent to this filing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS.
*3.1 Second Amended and Restated Articles of Incorporation of the
Company, as amended. (Filed as Exhibit 3 (i) to the Company's
Form 8-A/A filed with the Securities and Exchange Commission
on September 29,2000 and incorporated herein by reference.)
*3.2 Statement of Resolutions Establishing the Series A Junior
Participating Preferred Stock of the Company (Filed as Exhibit
3 (ii) to the Company's Form 10-Q for the fiscal quarter ended
June 30, 2001and incorporated herein by reference.)
*3.3 Amended and Restated Bylaws of the Company, as amended. (Filed
as Exhibit 3 (ii) to the Company's Form 10-Q for the fiscal
quarter ended June 30, 2000 and incorporated herein by
reference.)
*4.1 Rights Agreement dated as of May 23, 2001 between EGL, Inc.
and Computershare Investor Services, L.L.C., as Rights Agent,
which includes as Exhibit B the form of Rights Certificate and
as Exhibit C the Summary of Rights to Purchase Common Stock.
(Filed as Exhibit 4.1 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 2001 and incorporated
herein by reference.)
* Incorporated by reference as indicated.
35
EGL, INC.
(b) REPORTS ON FORM 8-K.
NONE
36
EGL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EGL, INC.
-------------------------------
(Registrant)
Date: August 14, 2002 By: /s/ James R. Crane
--------------- -------------------------------
James R. Crane
Chairman, President and Chief
Executive Officer
Date: August 14, 2002 By: /s/ Elijio V. Serrano
--------------- ------------------------------
Elijio V. Serrano
Chief Financial Officer
37
EGL, INC.
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
-------- -----------
*3.1 Second Amended and Restated Articles of Incorporation of the
Company, as amended. (Filed as Exhibit 3 (i) to the Company's
Form 8-A/A filed with the Securities and Exchange Commission
on September 29,2000 and incorporated herein by reference.)
*3.2 Statement of Resolutions Establishing the Series A Junior
Participating Preferred Stock of the Company (Filed as Exhibit
3 (ii) to the Company's Form 10-Q for the fiscal quarter ended
June 30, 2001 and incorporated herein by reference.)
*3.3 Amended and Restated Bylaws of the Company, as amended. (Filed
as Exhibit 3 (ii) to the Company's Form 10-Q for the fiscal
quarter ended June 30, 2000 and incorporated herein by
reference.)
*4.1 Rights Agreement dated as of May 23, 2001 between EGL, Inc.
and Computershare Investor Services, L.L.C., as Rights Agent,
which includes as Exhibit B the form of Rights Certificate and
as Exhibit C the Summary of Rights to Purchase Common Stock.
(Filed as Exhibit 4.1 to the Company's Form 10-Q for the
fiscal quarter ended September 30, 2001 and incorporated
herein by reference.)
* Incorporated by reference as indicated.
38