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 SEPTEMBER 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 76-0094895
--------------------------------- ---------------------------------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
15350 VICKERY DRIVE, HOUSTON, TEXAS 77032
(281) 618-3100
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(Address of Principal Executive Offices, Including Registrant's Zip Code, and
Telephone Number, Including Area Code)
N/A
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Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At November 8, 2002, the number of shares outstanding of the registrant's common
stock was 47,018,731.
EGL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of 1
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Operations for the 2
Nine Months ended September 30, 2002 and 2001
Condensed Consolidated Statements of Operations for the Three 3
Months ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for 4
the Nine Months ended September 30, 2002 and 2001
Condensed Consolidated Statement of Stockholders' 5
Equity for the Nine Months ended September 30, 2002
Notes to the 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
ITEM 4. CONTROLS AND PROCEDURES 32
PART II. OTHER INFORMATION 32
SIGNATURES 37
CERTIFICATIONS 38
INDEX TO EXHIBITS 40
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
-------------- --------------
Current assets:
Cash and cash equivalents $ 121,717 $ 77,440
Restricted cash 7,315 5,413
Short-term investments and marketable securities 13 3,442
Trade receivables, net of allowance of $12,830 and $11,628 347,277 365,505
Other receivables 6,685 10,868
Deferred tax asset 14,981 23,631
Income tax receivable -- 3,125
Other current assets 24,339 29,411
-------------- --------------
Total current assets 522,327 518,835
Property and equipment, net 147,362 152,922
Assets held for sale 4,488 --
Investments in unconsolidated affiliates 40,028 46,018
Goodwill, net 80,702 78,901
Deferred tax asset 24,552 6,266
Other assets, net 13,557 14,237
-------------- --------------
Total assets $ 833,016 $ 817,179
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,514 $ 7,950
Trade payables and accrued transportation costs 223,721 216,073
Accrued salaries and related costs 27,412 27,982
Accrued merger restructuring and integration costs 8,902 8,879
Income tax payable 8,864 --
Other liabilities 57,586 54,048
-------------- --------------
Total current liabilities 330,999 314,932
Notes payable 103,103 103,774
Deferred tax liability 22,241 19,155
Other noncurrent liabilities 6,310 6,194
-------------- --------------
Total liabilities 462,653 444,055
-------------- --------------
Minority interests 8,243 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; 48,126
and 48,939 shares issued; 47,064 and 47,813 shares outstanding 48 49
Additional paid-in capital 149,100 158,317
Retained earnings 267,480 264,712
Accumulated other comprehensive loss (36,146) (37,045)
Unearned compensation (159) (635)
Treasury stock, 1,062 and 1,126 shares held (18,203) (19,307)
-------------- --------------
Total stockholders' equity 362,120 366,091
-------------- --------------
Total liabilities and stockholders' equity $ 833,016 $ 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)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
----------- -----------
Revenues $ 1,194,492 $ 1,246,512
Cost of transportation 705,897 769,846
----------- -----------
Net revenues 488,595 476,666
Operating expenses:
Personnel costs 270,383 289,550
Other selling, general and administrative expenses 203,641 223,099
EEOC legal settlement (Note 14) -- 10,089
Merger related restructuring and integration costs (Note 10) 5,476 14,973
Air Transportation Safety and System Stabilization grant (Note 4) (8,923) --
----------- -----------
Operating income (loss) 18,018 (61,045)
Nonoperating expense, net (13,829) (5,618)
----------- -----------
Income (loss) before provision (benefit) for income taxes 4,189 (66,663)
Provision (benefit) for income taxes 1,634 (25,665)
----------- -----------
Income (loss) before cumulative effect of change in accounting
for negative goodwill 2,555 (40,998)
Cumulative effect of change in accounting for negative goodwill (Note 3) 213 --
----------- -----------
Net income (loss) $ 2,768 $ (40,998)
=========== ===========
Basic earnings (loss) per share before cumulative effect of change
in accounting for negative goodwill $ 0.05 $ (0.86)
Cumulative effect of change in accounting for negative goodwill 0.01 --
----------- -----------
Basic income (loss) per share $ 0.06 $ (0.86)
=========== ===========
Basic weighted-average common shares outstanding 47,804 47,477
Diluted earnings (loss) per share before cumulative effect of change
in accounting for negative goodwill $ 0.05 $ (0.86)
Cumulative effect of change in accounting for negative goodwill 0.01 --
----------- -----------
Diluted earnings (loss) per share $ 0.06 $ (0.86)
=========== ===========
Diluted weighted-average common shares outstanding 47,998 47,477
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
SEPTEMBER 30,
----------------------
2002 2001
--------- ---------
Revenues $ 420,231 $ 414,992
Cost of transportation 248,911 243,548
--------- ---------
Net revenues 171,320 171,444
Operating expenses:
Personnel costs 94,846 94,328
Other selling, general and administrative expenses 68,164 71,735
EEOC legal settlement (Note 14) -- 10,089
Merger related restructuring and integration costs (Note 10) 5,476 6,250
Air Transportation Safety and System Stabilization Act grant (Note 4) (8,923) --
--------- ---------
Operating income (loss) 11,757 (10,958)
Nonoperating expense, net (2,335) (3,062)
--------- ---------
Income (loss) before provision (benefit) for income taxes 9,422 (14,020)
Provision (benefit) for income taxes 3,675 (5,245)
--------- ---------
Net income (loss) $ 5,747 $ (8,775)
========= =========
Basic earnings (loss) per share $ 0.12 $ (0.18)
Basic weighted-average common shares outstanding 47,658 47,679
Diluted earnings (loss) per share $ 0.12 $ (0.18)
Diluted weighted-average common shares outstanding 47,792 47,679
See notes to unaudited condensed consolidated financial statements.
3
EGL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 2,768 $ (40,998)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 22,520 24,104
Provision for doubtful accounts, net of write-offs 5,678 8,342
Amortization of unearned compensation 476 502
Impairment of assets 500 --
Deferred income tax benefit (6,544) (21,434)
Tax benefit of stock options exercised 134 2,577
Equity in (earnings) losses of affiliates, net of dividends received (663) 2,519
Minority interests, net of dividends paid 599 741
Transfer to restricted cash (1,902) --
Cumulative effect of change in accounting for negative
goodwill (Note 3) (213) --
Impairment of investment in an unconsolidated affiliate 6,653 --
Other 1,113 --
Net effect of changes in working capital 41,195 31,928
--------- ---------
Net cash provided by operating activities 72,314 8,281
--------- ---------
Cash flows from investing activities:
Capital expenditures (25,255) (51,907)
Proceeds from sales of assets 7,567 9,150
Proceeds from sale-lease back transaction 2,462 --
Cash received from minority interest partner 301 --
Acquisitions of businesses, net of cash acquired -- (4,639)
Cash received from disposal of an affiliate -- 2,959
Other -- (819)
--------- ---------
Net cash used in investing activities (14,925) (45,256)
--------- ---------
Cash flows from financing activities:
Repayment of notes payable (3,808) (6,792)
Increase in borrowings on notes payable -- 44,552
Issuance of common stock 779 1,237
Proceeds from exercise of stock options 330 3,639
Repurchase of common stock (9,357) --
--------- ---------
Net cash provided by (used in) financing activities (12,056) 42,636
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (1,056) (1,045)
--------- ---------
Increase in cash and cash equivalents 44,277 4,616
Cash and cash equivalents, beginning of the period 77,440 60,001
--------- ---------
Cash and cash equivalents, end of the period $ 121,717 $ 64,617
========= =========
See notes to unaudited condensed consolidated financial statements.
4
EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Accumulated
Common stock Additional Treasury stock other
------------------ paid-in Unearned Retained ------------------- 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
Net income 2,768 2,768
Change in value of marketable
securities, net (17) (17)
Amortization of unrealized loss
on interest rate swap 1,138 1,138
Foreign currency translation
adjustments (222) (222)
Issuance of shares under
stock purchase plan 47 (325) 64 1,104 779
Exercise of stock options,
including tax benefit 464 464
Repurchase
of common stock (860) (1) (9,356) (9,357)
Amortization of unearned
compensation 476 476
---------- ------ -------- ------ -------- ------- --------- --------- ---------
Balance at September 30, 2002 48,126 $ 48 $149,100 $ (159) $267,480 (1,062) $ (18,203) $ (36,146) $ 362,120
========== ====== ======== ====== ======== ======= ========= ========= =========
See notes to unaudited condensed consolidated financial statements.
5
EGL, INC.
NOTES TO THE 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 September 30, 2002 and
the results of its operations for the nine and three months ended September 30,
2002. Results of operations for the nine and three months ended September 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 operating
in one business segment. 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 16).
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, both domestically and globally, within
various areas that serve the Company's principal customers and suppliers of
goods and services; expected rates of change, sensitivity and volatility
associated with the assumptions used in developing estimates; and whether
historical trends are expected to be representative of future trends. The
estimation process often 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 that 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 THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 - Comprehensive income (loss):
Components of comprehensive income (loss) for the nine and three months
ended September 30, 2002 and 2001 are as follows:
(in thousands)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income (loss) $ 2,768 $ (40,998) $ 5,747 $ (8,775)
Change in value of marketable
securities, net (17) (47) (3) (21)
Amortization of unrealized loss
on interest rate swap 1,138 -- 377 --
Change in value of cash flow
hedge -- (2,197) -- (1,837)
Foreign currency translation
adjustments (222) (4,168) (4,254) 2,908
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 3,667 $ (47,410) $ 1,867 $ (7,725)
========== ========== ========== ==========
Note 3 - 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 SFAS 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 nine months ended September 30, 2002.
SFAS 142 supersedes Accounting Principles Board (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. SFAS 142 requires
additional disclosures including information about carrying amounts of goodwill
and other intangible assets, and estimates as to future intangible asset
amortization expense. The Company adopted this standard effective January 1,
2002 (See Note 7).
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred and that the
associated long-lived asset retirement costs are capitalized. This statement is
effective for fiscal years beginning after June 15, 2002. The Company will adopt
SFAS 143 beginning, January 1, 2003, and does not believe that it will have any
material impact on its results of operations, financial condition or cash flows.
7
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In August 2001, the Financial Accounting Standards Board (FASB) 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
losses 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 a 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
supersedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and establishes fair value
as the objective for initial measurement of a liability. SFAS 146 states that an
entity's commitment to a plan does not create a present obligation to others
that meets the definition of a liability. Generally, SFAS 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company'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 4 - Air Transportation Safety and System Stabilization Act:
On September 11, 2001, terrorists hijacked and used four commercial
aircraft in terrorist attacks on the United States. As a result of these
terrorist attacks, the Federal Aviation Administration (FAA) immediately
suspended all commercial airline flights from September 11, 2001 until September
14, 2001, which effectively shut down the Company's air freight forwarding
operations. Once the Company resumed air shipment operations, the passenger load
factors on commercial airlines had been severely impacted which caused the
airlines to cancel flights and greatly limited the movement of freight by air,
along with increased pricing from the airlines on the remaining flights.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the Act). The Act provides
for up to $5 billion in cash grants to qualifying U.S. airlines and freight
carriers to compensate for direct and incremental losses, as defined in the Act,
from September 11, 2001 through December 31, 2001, associated with the terrorist
attacks. The Department of Transportation (DOT) makes the final determination of
the amount of eligible direct and incremental losses incurred by each airline
and freight carrier. The DOT issued its final rules with respect to the Act on
April 16, 2002. The Company filed its final application for grant proceeds on
August 26, 2002. During the third quarter of 2002, the Company received grant
proceeds of $8.9 million from the DOT, and recorded this amount in operating
income. The DOT, Congress, or other governmental agencies may perform an
additional audit and/or review of the Company's application.
8
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 5 - Assets held for sale:
During the third quarter of 2002, the Company made a decision to sell
land in Canada to a developer who will construct a building on the property and
then lease the building back to the Company. The carrying value of the land has
been classified as assets held for sale on the Company's balance sheet as of
September 30, 2002.
Note 6 - 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 are recorded in
interest expense. During the three and nine months ended September 30, 2002, the
Company recorded $519,000 and $1.7 million, respectively, net interest expense
which includes $77,000 and $397,000, respectively, relating to amortization of
the deferred loss and changes in the fair value of the swap agreement.
Note 7 - Goodwill and other intangible assets:
As discussed in Note 3, 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:
(in thousands, except per share amounts)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Reported net loss $ (40,998) $ (8,775)
Adjustments:
Amortization of goodwill 3,210 1,185
------------------ ------------------
Adjusted net loss $ (37,788) $ (7,590)
================== ==================
Reported net loss per share - basic $ (0.86) $ (0.18)
Adjusted net loss per share - basic (0.80) (0.16)
Reported net loss per share - diluted (0.86) (0.18)
Adjusted net loss per share - diluted (0.80) (0.16)
The implementation of SFAS 142 requires that goodwill be tested for
impairment using a two-step approach. The first step is used to identify
potential impairment by calculating a "fair value" of the reporting unit. The
calculated fair value amount in step one is then compared to the carrying amount
of the reporting unit including goodwill. If the fair value of the reporting
unit is greater than its carrying amount, goodwill is not considered impaired
and the second step is not required. If the estimated fair value is less than
the carrying value of the assets, a prescribed step two calculation is required
to determine the amount of impairment to be recorded in the Company's statement
of operations. The initial impairment recognition would be accounted for as a
cumulative effect of change in accounting principle.
9
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 geographic regions 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 was not required.
The estimated fair value calculated and referred to above is merely an estimate
based upon a number of assumptions. The actual fair value of each reporting unit
may vary significantly from its estimated fair value.
Note 8 - 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 to the letter of credit. As of September
30, 2002, Miami Air had $2.0 million in funded debt under the line of credit
that is supported by the $7 million standby letter of credit. Additionally, as
of September 30, 2002, Miami Air had outstanding $2.1 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 were expected to be delivered in 2002.
Throughout the fourth quarter of 2001 and the first quarter of 2002, Miami Air
was in discussions with its bank and lessors to obtain debt concessions on the
seven 727 planes, to buy out the lease on a 727 cargo plane and to reduce the
rates on the 737 passenger planes. Miami Air had informed the Company that its
creditors had indicated a willingness to make concessions. In May 2002, the
Company was informed that Miami Air's creditors were no longer willing to make
concessions and that negotiations with creditors had reached an impasse and no
agreement appeared feasible. 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
funded debt and letters of credit supported by the $7.0 million standby letter
of credit. During the third quarter of 2002, Miami Air informed the
10
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company that certain of its creditors have now, in fact, made certain
concessions. The Company has not adjusted its reserve and there can be no
assurance that the ultimate loss, if any, will not exceed such estimate.
Note 9 - 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 Notes
11 and 13) 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 was 134,000 and
194,000 for the three and nine months ended September 30, 2002. The 5.7 million
shares relating to the Company's convertible notes were excluded, as their
effect would have been antidilutive. There were no common stock equivalents
related to options outstanding included in diluted earnings per share for the
three and nine months ended September 30, 2001, respectively, because their
effect would have been antidilutive as the Company incurred a net loss during
those periods.
Note 10 - Merger restructuring and integration costs:
During the three and nine months ended September 30, 2001, the Company
incurred $6.3 million and $15.0 million of merger related restructuring and
integration costs related to its acquisition of Circle International Group, Inc.
(Circle) in 2000. 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. Due to the downturn in the real
estate market, the Company reviewed its original estimates related to duplicate
facility costs and increased the reserve by $5.5 million during the third
quarter of 2002.
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. The
remaining unpaid accrued charges as of September 30, 2002 are as follows (in
thousands):
ACCRUED ACCRUED
LIABILITY LIABILITY
DECEMBER 31, REVISIONS TO PAYMENTS/ SEPTEMBER 30,
2001 ESTIMATES REDUCTIONS 2002
-------------- ------------ ------------ --------------
Severance costs $ 913 $ -- $ (125) $ 788
Future lease obligations, net of subleasing 6,963 5,476 (4,861) 7,578
Termination of joint venture/agency agreements 1,003 -- (467) 536
------------ ------------ ----------- -------------
$ 8,879 $ 5,476 $ (5,453) $ 8,902
============= ============ =========== =============
The payments to be made for remaining future lease obligations is net
of approximately $34.7 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 11 - 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.
11
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 September 30, 2002, the fair value of these notes was $90.2 million.
The Company may redeem the notes on or after December 20, 2004 at
specified redemption prices, plus accrued and unpaid interest to, but excluding,
the redemption date. Upon a change in control (as defined in the indenture 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
The Company's amended and restated credit facility (Restated Credit
Facility), which was last amended effective, as of October 14, 2002, is with a
syndicate of three financial institutions, with 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 $25.8 million in
standby letters of credit outstanding as of September 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
12
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, currently the Company may elect an interest rate of either LIBOR plus an
applicable margin of 2.00% to 2.75% that varies based upon availability under
the line, or the prime rate announced by the Bank, plus, if the borrowing
availability is less than $25 million, an applicable margin of 0.25%.
The Company refers to borrowings bearing interest based on LIBOR as a
LIBOR tranche and to other borrowings as a prime rate tranche. The interest on a
LIBOR tranche is payable on the last day of the interest period (one, two or
three months, as selected by the Company) for such LIBOR tranche. The interest
on a prime rate tranche is payable monthly.
A termination fee would be payable upon termination of the Restated
Credit Facility during the first two years after the closing thereof, in the
amount of 0.50% of the total revolving line commitment if the termination occurs
on or before the first anniversary of the closing and 0.25% of the total
revolving line commitment if the termination occurs after the first anniversary,
but on or before the second anniversary of such closing (unless terminated in
connection with a refinancing arranged or underwritten by the Bank or its
affiliates).
The Company is subject to certain covenants under the terms of the
Restated Credit Facility, including, but not limited to, (a) maintenance at the
end of each fiscal quarter of a minimum specified adjusted tangible net worth
and (b) quarterly and annual limitations on capital expenditures of $12 million
per quarter or $48 million cumulative per year.
The Restated Credit Facility also places restrictions on additional
indebtedness, dividends, liens, investments, acquisitions, asset dispositions,
change of control and other matters, is secured by substantially all of the
Company's assets, and is guaranteed by all domestic subsidiaries and the
Company's Canadian operating subsidiary. In addition, the Company will be
subject to additional restrictions, including restrictions with respect to
distributions and asset dispositions if the Company's eligible borrowing base
falls below $40 million. Events of default under the Restated Credit Facility
include, but are not limited to, the occurrence of a material adverse change in
the Company's operations, assets or financial condition or the Company's ability
(including the Company's domestic subsidiaries or its Canadian operating
subsidiary) to perform under the Restated Credit Facility.
During the nine months ended September 30, 2002, the Company had no
borrowings under this facility. As of September 30, 2002, the Company had
available unused borrowing capacity of $49.2 million.
Other guarantees
Several of the Company's foreign operations guarantee amounts
associated with the Company's custom brokerage services. As of September 30,
2002, these outstanding guarantees approximated $31.2 million.
Note 12 - 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 THE 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 any time 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
$98,000 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 September 30, 2002, the aggregate lease balance was approximately
$13.5 million.
On September 17, 2002, the Company entered into a purchase and sale
agreement with an unrelated third party for four of the five properties covered
by the master operating synthetic lease for $15.3 million, which is greater than
the outstanding lease balance. The purchaser will be required to immediately
lease the properties back to the Company upon closing. This sale-leaseback
transaction is scheduled to close in November 2002. There was no deficiency
between the lease balance and fair market value of the remaining property not
covered by the purchase and sale agreement, as of September 30, 2002. This
transaction is subject to customary closing conditions.
Other synthetic lease and related capital lease
During 1998, the Company 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
14
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company is required to make semi-annual payments of $139,000 until December 31,
2007. The second agreement relates to buildings and improvements and is
accounted for as a capital lease rather than as a synthetic lease. Therefore,
the fixed asset and related liability for the second lease are included in the
accompanying condensed consolidated balance sheet. Property under the capital
lease is amortized over the lease term. As of September 30, 2002, the carrying
value of property held under the building and improvements lease was $3.1
million, which is net of $2.5 million of accumulated amortization. At September
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 13 - Stock options:
As of September 30, 2002, the Company had outstanding non-qualified
stock options to purchase an aggregate of 5.3 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 nine months ended September
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 14 - Litigation:
EEOC Settlement
In December 1997, the U.S. Equal Employment Opportunity Commission
(EEOC) issued a Commissioner's Charge pursuant to Sections 706 and 707 of Title
VII of the Civil Rights Act of 1964, as amended (Title VII). In the
Commissioner's Charge, the EEOC charged the Company and certain of its
subsidiaries with violations of Section 703 of Title VII, as amended, the Age
Discrimination in Employment Act of 1967, and the Equal Pay Act of 1963,
resulting from (i) engaging in unlawful discriminatory hiring, recruiting and
promotion practices and maintaining a hostile work environment, based on one or
more of race, national origin, age and gender, (ii) failures to investigate,
(iii) failures to maintain proper records and (iv) failures to file accurate
reports. The Commissioner's Charge states that the persons aggrieved include all
Blacks, Hispanics, Asians and females who are, have been or might be affected by
the alleged unlawful practices.
On May 12, 2000, four individuals filed suit against EGL alleging
gender, race and national origin discrimination, as well as sexual harassment.
This lawsuit was filed in the United States District Court for the Eastern
District of Pennsylvania in Philadelphia, Pennsylvania. The EEOC was not
initially a party to the Philadelphia litigation. In July 2000, four additional
individual plaintiffs were allowed to join the Philadelphia litigation. The
Company filed an Answer in the Philadelphia case and extensive discovery was
conducted. The individual plaintiffs sought to certify a class of approximately
1,000 current and former EGL employees and applicants. The plaintiff's initial
motion for class certification was denied in November 2000.
On December 29, 2000, the EEOC filed a Motion to Intervene in the
Philadelphia litigation, which was granted by the Court in Philadelphia on
January 31, 2001. In addition, the Philadelphia Court also granted EGL's motion
that the case be transferred to the United States District Court for the
Southern District of Texas -- Houston Division where EGL had previously
initiated litigation against the EEOC due to what EGL believes to have been
inappropriate practices by the EEOC in the issuance of the Commissioner's Charge
and in the subsequent investigation. Subsequent to the settlement of the EEOC
action described below, the claims of one of the eight named plaintiffs were
ordered to binding arbitration at EGL's request. The Company recognized a charge
of $7.5 million in the fourth quarter of 2000 for its estimated cost of
defending and settling the asserted claims.
15
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. The Consent Decree became effective on October 3, 2002
following the dismissal of all appeals related to the Decree. During the quarter
ended September 30, 2001, the Company accrued $10.1 million related to the
settlement, which includes the $8.5 million payment into the Class Fund and
$500,000 into the Leadership Development Fund 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 September 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. The
total related reserves included in the accompanying condensed consolidated
balance sheets at September 30, 2002 and December 31, 2001 were $13.6 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 amount of time it will take to resolve the other
lawsuits and related issues or the degree of any adverse effect these matters
may have on the Company's financial condition and results of operations. A
substantial settlement payment or judgment could result in a significant
decrease in the Company's working capital and liquidity and recognition of a
loss in the Company's 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 condition, results of operations
and cash flows.
Note 15 - Related party transactions:
Currently, the Company's operations in Miami, Florida are located in
three different facilities. In order to increase operational efficiencies, the
Company acquired land to be used as the site for a new facility to consolidate
its Miami operations. The land was acquired on August 30, 2002 from a related
party entity controlled by James R. Crane, Chairman, President and Chief
Executive Officer of EGL for $9.8 million in cash, including the Company's
acquisition costs of $131,000. This parcel of land had been previously
identified by EGL as the most advantageous property on which to consolidate its
Miami operations. EGL entered into negotiations on the land and reached
agreement with the seller on terms. However, given the downturn in the economy
and the Company's weakening financial condition at that point in time, EGL
elected to delay purchasing this property until its financial condition
improved. On July 10, 2001, Mr. Crane purchased the land in anticipation of
reselling the land to EGL. The purchase price represents the lower of current
market value, based on an independent appraisal, or Mr. Crane's purchase price
plus carrying costs for the land. The Company's Audit Committee (the Audit
Committee), consisting of five independent directors, engaged in an
16
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
analysis and discussion regarding whether it was in the best interest of the
Company to enter into a purchase agreement to purchase this particular tract of
land from Mr. Crane. The Audit Committee analysis included, but was not limited
to, obtaining an independent appraisal of the land, reviewing a comparative
properties analysis performed by an outside independent real estate company and
performing a cost benefit analysis for several different alternatives. Based
upon the data obtained from the analysis and after lengthy discussion, the Audit
Committee determined the best alternative for the Company, in its opinion, was
for the Company to purchase the property from Mr. Crane. The Audit Committee
then made a recommendation to the Company's Board of Directors, which includes
six independent directors, to purchase this land. In August 2002, the purchase
was approved unanimously by the Company's Board of Directors, with Mr. Crane
abstaining from the vote.
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 nine months ended September
30, 2001, the Company reimbursed Mr. Crane $100,000 and $800,000, 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 nine months ended September 30, 2002, the Company paid Mr.
Crane $132,000 and $887,000, respectively, for actual hourly usage of the plane.
The Company subleased a portion of its warehouse space in Houston,
Texas and London, England to a customer pursuant to a five-year sublease which
ended during the first quarter 2002. The customer is partially owned by Mr.
Crane. The Company received $21,000 in rental income for the nine months ended
September 30, 2002. In addition, the Company billed this customer approximately
$67,000 and $122,000, respectively, for freight forwarding services for the
three and nine months ended September 30, 2002.
Note 16 - Geographic region information:
EGL's reportable segments are geographic regions that offer similar
products and services. They are managed separately because each region requires
close customer contact and each region is affected by similar economic
conditions. Certain information regarding EGL's operations by region is
summarized below (in thousands):
Europe,
North South Middle East Asia & South
America America & Africa Pacific Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Nine months ended September 30, 2002:
Total revenues $ 716,879 $ 49,281 $ 200,630 $ 263,683 $ (35,981) $ 1,194,492
Transfers between regions (9,842) (3,827) (10,679) (11,633) 35,981 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 707,037 $ 45,454 $ 189,951 $ 252,050 $ -- $ 1,194,492
============ ============ ============ ============ ============ ============
Net revenues $ 323,859 $ 11,169 $ 90,872 $ 62,695 $ 488,595
============ ============ ============ ============ ============
* Income (loss) from operations $ (9,673) $ 578 $ 5,785 $ 12,405 $ 9,095
============ ============ ============ ============ ============
Nine months ended September 30, 2001:
Total revenues $ 795,699 $ 43,230 $ 183,548 $ 262,414 $ (38,379) $ 1,246,512
Transfers between regions (12,071) (4,504) (12,059) (9,745) 38,379 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 783,628 $ 38,726 $ 171,489 $ 252,669 $ -- $ 1,246,512
============ ============ ============ ============ ============ ============
Net revenues $ 317,724 $ 10,375 $ 83,362 $ 65,205 $ 476,666
============ ============ ============ ============ ============
Income (loss) from operations $ (85,086) $ (750) $ 8,102 $ 16,689 $ (61,045)
============ ============ ============ ============ ============
17
EGL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Europe,
North South Middle East Asia & South
America America & Africa Pacific Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Three months ended September 30, 2002:
Total revenues $ 244,040 $ 14,604 $ 72,934 $ 100,740 $ (12,087) $ 420,231
Transfers between regions (3,045) (1,332) (3,547) (4,163) 12,087 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 240,995 $ 13,272 $ 69,387 $ 96,577 $ -- $ 420,231
============ ============ ============ ============ ============ ============
Net revenues $ 113,721 $ 3,442 $ 31,878 $ 22,279 $ 171,320
============ ============ ============ ============ ============
* Income (loss) from operations $ (1,854) $ 92 $ 973 $ 3,623 $ 2,834
============ ============ ============ ============ ============
Three months ended September 30, 2001:
Total revenues $ 264,191 $ 14,176 $ 65,105 $ 87,324 $ (15,804) $ 414,992
Transfers between regions (4,836) (1,614) (4,887) (4,467) 15,804 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 259,355 $ 12,562 $ 60,218 $ 82,857 $ -- $ 414,992
============ ============ ============ ============ ============ ============
Net revenues $ 117,284 $ 3,464 $ 28,940 $ 21,756 $ 171,444
============ ============ ============ ============ ============
Income (loss) from operations $ (18,785) $ 555 $ 2,301 $ 4,971 $ (10,958)
============ ============ ============ ============ ============
*Excludes Air Transportation Safety and System Stabilization Act grant of $8.9
million (Note 4).
Revenues from transfers between regions represent 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.
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
-------- --------- -------- ---------
Operating income (loss) for
reportable regions $ 9,095 $ (61,045) $ 2,834 $ (10,958)
Airline stablization grant 8,923 -- 8,923 --
-------- --------- -------- ---------
Total operating income (loss) $ 18,018 $ (61,045) $ 11,757 $ (10,958)
======== ========= ======== =========
18
EGL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors, which have affected certain aspects of the Company's
financial position, 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).
Nine Months Ended September 30,
--------------------------------------------------------
2002 2001
-------------------------- --------------------------
% of % of
Amount Revenues Amount Revenues
----------- ----------- ----------- -----------
(in thousands, except percentages)
Revenues:
Air freight forwarding $ 896,852 75.1 $ 959,935 77.0
Ocean freight forwarding 145,148 12.1 135,879 10.9
Customs brokerage and other 152,492 12.8 150,698 12.1
----------- ----------- ----------- -----------
Revenues $ 1,194,492 100.0 $ 1,246,512 100.0
=========== =========== =========== ===========
% of Net % of Net
Amount Revenues Amount Revenues
----------- ----------- ----------- -----------
Net revenues:
Air freight forwarding $ 292,494 59.9 $ 283,117 59.4
Ocean freight forwarding 43,609 8.9 42,851 9.0
Customs brokerage and other 152,492 31.2 150,698 31.6
----------- ----------- ----------- -----------
Net revenues 488,595 100.0 476,666 100.0
----------- ----------- ----------- -----------
Operating expenses:
Personnel costs 270,383 55.3 289,550 60.8
Other selling, general and administrative
expenses 203,641 41.7 223,099 46.8
EEOC legal settlement (Note 14) -- -- 10,089 2.1
Restructuring and integration costs (Note 10) 5,476 1.1 14,973 3.1
Air Transportation Safety and System
Stabilization Act grant (Note 4) (8,923) (1.8) -- --
----------- ----------- ----------- -----------
Operating income (loss) 18,018 3.7 (61,045) (12.8)
Nonoperating expense net (13,829) (2.8) (5,618) (1.2)
----------- ----------- ----------- -----------
Income (loss) before provision (benefit)
for income tax 4,189 0.9 (66,663) (14.0)
Provision (benefit) for income taxes 1,634 0.3 (25,665) (5.4)
----------- ----------- ----------- -----------
Income (loss) before change in accounting
for negative goodwill 2,555 0.5 (40,998) (8.6)
Cumulative effect of change in accounting
for negative goodwill (Note 3) 213 0.1 -- --
----------- ----------- ----------- -----------
Net income (loss) $ 2,768 0.6 $ (40,998) (8.6)
=========== =========== =========== ===========
19
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Revenues. Revenues decreased $52.0 million, or 4.2%, to $1,194.5
million in the nine months ended September 30, 2002 compared to $1,246.5 million
in the nine months ended September 30, 2001 primarily due to decreases in air
freight forwarding revenue. Net revenues, which represent revenues less freight
transportation costs, increased $11.9 million, or 2.5%, to $488.6 million in the
nine months ended September 30, 2002 compared to $476.7 million in the nine
months ended September 30, 2001 due to an increase in air freight forwarding,
ocean freight forwarding, and customs brokerage and other net revenues.
Air freight forwarding revenue. Air freight forwarding revenue
decreased $63.0 million, or 6.6%, to $896.9 million in the nine months ended
September 30, 2002 compared to $959.9 million in the nine months ended September
30, 2001 primarily as a result of volume decreases in North America and Asia
Pacific offset by volume increases in South America and Europe. Airfreight
forwarding net revenue increased $9.4 million, or 3.3%, to $292.5 million in the
nine months ended September 30, 2002, as compared to $283.1 million in the nine
months ended September 30, 2001. The air freight forwarding margin increased to
32.6% for the nine months ended September 30, 2002, compared to 29.5% for the
nine months ended September 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 flight out, next day, or second day
time definite shipments) to economy ground deferred shipments (third through
fifth day). The increase in margin was primarily related to the elimination of
the U.S. dedicated charter commitments, except for two "power by the hour"
agreements that are cancelable with a 30 day notice, in 2002, better yield
management and better buying opportunities on our international freight
forwarding services.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
increased $9.2 million, or 6.8%, to $145.1 million in the nine months ended
September 30, 2002 compared to $135.9 million in the nine months ended September
30, 2001, while ocean freight forwarding net revenue increased $758,000, or
1.8%, to $43.6 million in the nine months ended September 30, 2002 compared to
$42.9 million in the nine months ended September 30, 2001. The increase was
principally due to volume increases in Asia Pacific and Europe offset by
decreases in North and South America. The ocean freight forwarding margin
decreased to 30.0% in the nine months ended September 30, 2002 compared to 31.5%
in the nine months ended September 30, 2001. The decline in ocean margins was
due to a decline in direct ocean shipments, which have a higher margin, during
the nine months ended September 30, 2002.
Customs brokerage and other revenue. Customs brokerage and other
revenue, which includes warehousing, distribution and other logistics services,
increased $1.8 million, or 1.2%, to $152.5 million in the nine months ended
September 30, 2002 compared to $150.7 million in the nine months ended September
30, 2001. The increase was principally due to higher logistics revenue in Europe
and Asia Pacific offset by a decrease in North America. The decrease in North
America was due to lower import activities during the nine months ended
September 30, 2002.
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 $19.2 million, or
6.6%, to $270.4 million in the nine months ended September 30, 2002 compared to
$289.6 million in the nine months ended September 30, 2001. As a percentage of
net revenues, personnel costs were 55.3% in the nine months ended September 30,
2002, compared to 60.8% in the nine months ended September 30, 2001. The
reduction in personnel costs was a result of headcount reductions throughout
2001, which eliminated approximately 500 full-time employees, a reduction of
approximately 225 employees during 2002, controls in the use of contract labor
and a temporary salary reduction for five pay periods implemented in the U.S.
during the first quarter 2002. The cost savings from the reduction in headcount
in 2002 were offset by approximately $1.0 million of severance costs recorded in
the third quarter of 2002.
Other selling, general and administrative expenses. Other selling,
general and administrative expenses decreased $19.5 million, or 8.7%, to $203.6
million in the nine months ended September 30, 2002 compared to $223.1 million
in the nine months ended September 30, 2001. As a percentage of net revenues,
other selling, general and administrative expenses were 41.7% in the nine months
ended September 30, 2002 compared to 46.8% in the nine months ended September
30, 2001. This decrease is primarily due to management initiatives on cost
savings, the
20
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
realization of merger related cost synergies, and the elimination of goodwill
amortization expense due to the implementation of SFAS 142. These cost savings
were partially offset by an increase in facility costs, insurance premiums and
depreciation expense. Although we completed the consolidation of many of our
facilities, our facility costs increased by approximately $5.2 million as we are
leasing more space than in the previous year for our expanded warehousing and
logistics services. The increase in depreciation expense was largely related to
increases in computer software and office equipment depreciation. During the
third quarter of 2002, the Company took an impairment charge of $500,000 related
to a management decision not to use certain architectural design plans for a
proposed building in Canada.
Restructuring and integration costs. Primarily in connection with the
Circle merger, we recorded costs of $15.0 million in the nine months ended
September 30, 2001. We revised our original estimated sublease income related to
duplicate facility costs and recorded an additional $5.5 million of
restructuring and integration costs, during the third quarter of 2002. Our
reserve for restructuring and integration was $8.9 million, as of September 30,
2002.
Air Transportation Safety and System Stabilization Act grant. During
the third quarter 2002, we received a total of $8.9 million related to the Air
Transportation Safety and System Stabilization Act, which was signed into law on
September 22, 2001 (See Note 4 of the Notes to the Condensed Consolidated
Financial Statements).
EEOC legal settlement. In October 2001, we settled our claim with the
EEOC and recorded a charge of $10.1 million during the third quarter 2001, which
included $8.5 million to be placed into a settlement fund, $500,000 to establish
a leadership development program, legal fees, administrative costs and other
costs associated with the litigation and settlement (See Note 14 of the Notes to
the Condensed Consolidated Financial Statements).
Nonoperating expense, net. For the nine months ended September 30,
2002, we had net nonoperating expenses of $13.8 million compared to $5.6 million
for the nine months ended September 30, 2001. The $8.2 million increase was
primarily due to an impairment charge of approximately $6.7 million for our
investment in Miami Air and a $1.3 million reserve established for Miami Air's
outstanding letters of credit guaranteed by us. (See Note 8 of the Notes to the
Condensed Consolidated Financial Statements). Additionally, we incurred net
foreign exchange losses of $886,000 in the nine months ended September 30, 2002,
which was an increase from the nine months ended September 30, 2001 of $543,000.
Nonoperating expense in the nine months ended September 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 nine months
ended September 30, 2002 was 39.0% compared to 38.5% for the nine months ended
September 30, 2001. Our effective tax rate fluctuated primarily due to the
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 September 30,
------------------------------------------------------------
2002 2001
----------------------------- ----------------------------
% of % of
Amount Revenues Amount Revenues
----------- ----------- ----------- -----------
(in thousands, except percentages)
Revenues:
Air freight forwarding $ 313,899 74.7 $ 316,795 76.3
Ocean freight forwarding 53,752 12.8 47,968 11.6
Customs brokerage and other 52,580 12.5 50,229 12.1
----------- ----------- ----------- -----------
Revenues $ 420,231 100.0 $ 414,992 100.0
=========== =========== =========== ===========
% of Net % of Net
Amount Revenues Amount Revenues
----------- ----------- ----------- -----------
Net revenues:
Air freight forwarding $ 103,558 60.4 $ 105,690 61.6
Ocean freight forwarding 15,182 8.9 15,525 9.1
Customs brokerage and other 52,580 30.7 50,229 29.3
----------- ----------- ----------- -----------
Net revenues 171,320 100.0 171,444 100.0
----------- ----------- ----------- -----------
Operating expenses:
Personnel costs 94,846 55.4 94,328 55.0
Other selling, general and
administrative expenses 68,164 39.8 71,735 41.8
EEOC legal settlement (Note 14) -- -- 10,089 6.0
Restructuring and
integration costs (Note 10) 5,476 3.2 6,250 3.7
Air Transportation Safety and System
Stabilization Act grant (Note 4) (8,923) (5.2) -- --
----------- ----------- ----------- -----------
Operating income (loss) 11,757 6.8 (10,958) (6.4)
Nonoperating expense, net (2,335) (1.3) (3,062) (1.8)
----------- ----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes 9,422 5.5 (14,020) (8.2)
Provision (benefit) for income taxes 3,675 2.1 (5,245) (3.1)
----------- ----------- ----------- -----------
Net income (loss) $ 5,747 3.4 $ (8,775) (5.1)
=========== =========== =========== ===========
22
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Revenues. Revenues increased $5.2 million, or 1.3%, to $420.2 million
in the three months ended September 30, 2002 compared to $415.0 million in the
three months ended September 30, 2001 primarily due to increases in ocean
freight forwarding and customer brokerage and other revenue. Net revenues, which
represents revenues less freight transportation costs, decreased $124,000, or
0.1%, to $171.3 million in the three months ended September 30, 2002 compared to
$171.4 million in the three months ended September 30, 2001 primarily due to a
decrease in air freight forwarding offset by an increase in customs brokerage
and other net revenues.
Air freight forwarding revenue. Airfreight forwarding revenue decreased
$2.9 million, or 0.9%, to $313.9 million in the three months ended September 30,
2002 compared to $316.8 million in the three months ended September 30, 2001
primarily as a result of volume decreases in North America which were partially
offset by a volume increase in Asia Pacific. The volume decreases in North
America were primarily due to the weakened U.S. economy. North America was also
adversely affected by the shift from air expedited shipments (next flight out,
next day or second day time definite shipments) to economy ground deferred
shipments (third through fifth day).
Air freight forwarding net revenue decreased $2.1 million, or 2.0%, to
$103.6 million in the three months ended September 30, 2002 compared to $105.7
million in the three months ended September 30, 2001. The air freight forwarding
margin decreased to 33.0% for the three months ended September 30, 2002 compared
to 33.4% for the three months ended September 30, 2001. The decrease in margin
was primarily due to a decrease of 19.1% in direct air shipments, offset
slightly by an increase of 1.0% in international shipments.
Ocean freight forwarding revenue. Ocean freight forwarding revenue
increased $5.8 million, or 12.1%, to $53.8 million in the three months ended
September 30, 2002 compared to $48.0 million in the three months ended September
30, 2001, while ocean freight forwarding net revenue decreased $343,000 or 2.2%
to $15.2 million in the three months ended September 30, 2002 compared to $15.5
million in the three months ended September 30, 2001. Ocean freight forwarding
margins decreased to 28.2% for the three months ended September 30, 2002
compared to 32.4% in the three months ended September 30, 2001. The increase in
revenue was principally due to improved trading levels in Europe and Asia
Pacific partially offset by a decline in consolidation activities in North
America and South America. The decrease in margin was primarily due to a change
in the mix between ocean consolidation shipments and direct shipments. Ocean
consolidation shipment activity increased by 24.5% while direct shipment
activity declined by 23.7%.
Customs brokerage and other revenue. Customs brokerage and other
revenue, which includes warehousing, distribution and other logistics services,
increased $2.4 million, or 4.8%, to $52.6 million in the three months ended
September 30, 2002 compared to $50.2 million in the three months ended September
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 increased $518,000, or 0.5%,
to $94.8 million in the three months ended September 30, 2002 compared to $94.3
million in the three months ended September 30, 2001, primarily due to $1.0
million of severance costs recorded in the third quarter of 2002, offset by a
cost savings related to a reduction in headcount. As a percentage of net
revenues, personnel costs were 55.4% in the three months ended September 30,
2002 compared to 55.0% in the three months ended September 30, 2001.
Other selling, general and administrative expenses. Other selling,
general and administrative expenses decreased $3.5 million, or 4.9%, to $68.2
million in the three months ended September 30, 2002 compared to $71.7 million
in the three months ended September 30, 2001. As a percentage of net revenues,
other selling, general and administrative expenses were 39.8% in the three
months ended September 30, 2002 compared to 41.8% in the three months ended
September 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 increased by approximately $2.6 million as we are leasing
more
23
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
space than in the prior year for our expanded warehousing and logistics services
in certain locations. The increase in depreciation expense was primarily related
to increases in computer software and office equipment depreciation. During the
third quarter of 2002, the Company took an impairment charge of $500,000 related
to a management decision not to use certain architectural design plans for a
proposed building in Canada.
Restructuring and integration costs. Primarily in connection with the
Circle merger, we recorded costs of $6.3 million in the three months ended
September 30, 2001. In September 2002, we revised our original estimated
sublease income related to duplicate facility costs and recorded an additional
$5.5 million of restructuring and integration costs during the third quarter of
2002.
Air Transportation Safety and System Stabilization Act grant. During
the third quarter 2002, we received a total of $8.9 million related to the Air
Transportation Safety and System Stabilization Act, which was signed into law on
September 22, 2001 (See Note 4 of the Notes to the Condensed Consolidated
Financial Statements).
EEOC legal settlement. In October 2001, we settled our claim with the
EEOC and recorded a charge of $10.1 million during the third quarter 2001, which
included $8.5 million to be placed into a settlement fund, $500,000 to establish
a leadership development program, legal fees, administrative costs and other
costs associated with the litigation and settlement (See Note 14 of the Notes to
the Condensed Consolidated Financial Statements).
Nonoperating expense, net. For the three months ended September 30,
2002, we had net nonoperating expenses of $2.3 million compared to $3.1 million
for the three months ended September 30, 2001. The $800,000 decrease was
primarily due to reduced losses, associated with our unconsolidated affiliates,
which were $104,000 in the three months ended September 30, 2002 as compared
$751,000 in the three months ended September 30, 2001. Additionally, we
incurred foreign exchange losses of $624,000 and $528,000 in the three months
ended September 30, 2002 and 2001, respectfully.
Effective tax rate. The effective income tax rate for the three months
ended September 30, 2002 was 39.0% compared to 37.4% for the three months ended
September 30, 2001. Our effective tax rate fluctuated primarily due to the
changes in the level of pre-tax income in foreign countries that have different
rates.
LIQUIDITY AND CAPITAL RESOURCES
General
Our ability to satisfy our debt obligations, fund working capital and
make capital expenditures depends upon our future performance, which is subject
to general economic conditions and other factors, some of which are beyond our
control. We 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 any borrowings on our line of credit
during the three and nine months ended September 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 $72.3 million in the nine months ended September 30, 2002
compared to $8.3 million in the nine months ended September 30, 2001. The
increase in the nine months ended September 30, 2002 was primarily due to a
positive change in the net effect of changes in working capital and net income
in 2002 as compared to net losses in 2001. In the nine months ended September
30, 2002, the adjustments to reconcile net income to net cash provided by
operating activities include an impairment charge of approximately $6.7 million
related to our investment in Miami Air, $5.5 million of additional restructuring
and
24
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
integration reserve for duplicate facilities and a $8.9 million grant related to
the Air Transportation Safety and System Stabilization Act. (See Notes 4, 8 and
10 of the Notes to the Condensed Consolidated Financial Statements).
Cash flows from investing activities. Net cash used in investing
activities in the nine months ended September 30, 2002 was $14.9 million
compared to $45.3 million in the nine months ended September 30, 2001. We
incurred capital expenditures of $25.3 million during the nine months ended
September 30, 2002 as compared to $51.9 million during the nine months ended
September 30, 2001. Capital expenditures in 2002 include land we acquired on
August 30, 2002, from a related party for $9.8 million in cash, including
acquisition costs of $100,000 (See Note 15 of the Notes to the Condensed
Consolidated Financial Statements). We received proceeds from the sale of assets
of $7.6 million during the nine months ended September 30, 2002 as compared to
$9.2 million during the nine months ended September 30, 2001. The cash proceeds
from the sale of assets in 2002 included $2.6 million from a sale-leaseback
transaction in the first quarter, $2.5 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 nine months ended September 30, 2002 was $12.1 million
compared to net cash provided by financing activities of $42.6 million in the
nine months ended September 30, 2001. Net repayments of notes payable were $3.8
million in the nine months ended September 30, 2002 and net borrowings on notes
payable were $37.8 million for the nine months ended September 30, 2001.
Proceeds from the exercise of stock options were $330,000 in the nine months
ended September 30, 2002 compared to $3.6 million in the nine months ended
September 30, 2001. Additionally, we purchased $9.4 million of common stock
during the third quarter of 2002.
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
$17.43 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 our diluted earnings per share
calculation in future periods by approximately 5.7 million shares. As of
September 30, 2002, the fair value of the notes was $90.2 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. We and our 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 our assets.
Revolving credit facility. Our amended and restated credit facility
(Restated Credit Facility), which was last amended effective as of October 14,
2002, is with a syndicate of three financial institutions, with 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, or
25
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
o an amount equal to:
o up to 85% of the net amount of our billed and posted
eligible accounts receivable and the billed and
posted eligible accounts receivable of our wholly
owned domestic subsidiaries and our operating
subsidiary in Canada, subject to some exceptions and
limitations, plus
o up to 85% of the net amount of our billed and
unposted eligible accounts receivable and billed and
unposted eligible accounts receivable of our wholly
owned domestic subsidiaries owing by account debtors
located in the United States, subject to a maximum
aggregate availability cap of $10 million, plus
o up to 50% of the net amount of our unbilled, fully
earned and unposted eligible accounts receivable and
unbilled, fully earned and unposted eligible accounts
receivable of our wholly owned domestic subsidiaries
owing by account debtors located in the United
States, subject to a maximum aggregate availability
cap of $10 million, minus
o reserves from time to time established by 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 $25.8 million in standby letters of
credit outstanding as of September 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, currently, we may elect an interest rate of either LIBOR plus currently
an applicable margin of 2.00% to 2.75% that varies based upon availability under
the line, or the prime rate announced by the Bank, plus, if the borrowing
availability is less than $25 million, an applicable margin of 0.25%.
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
26
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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
nine months ended September 30, 2002, we had no borrowings under this facility.
As of September 30, 2002, we had available unused borrowing capacity of $49.2
million.
Other guarantees. Several of our foreign operations guarantee amounts
associated with our custom brokerage services. As of September 30, 2002, these
outstanding guarantees approximated $31.2 million.
Agreements with charter airlines. As of September 30, 2002, we were not
obligated under any long-term 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 and these agreements are cancelable with a 30-day notice.
Litigation. In addition to the EEOC matter (See Note 14 of the Notes to
the 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 any time 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
27
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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.
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
$98,000 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 September 30, 2002, the aggregate lease balance was approximately
$13.5 million.
On September 17, 2002, we entered into a purchase and sale agreement
with an unrelated third party for four of the five properties covered under the
master operating synthetic lease for $15.3 million, which amount is greater than
the outstanding lease balance. The purchaser will be required to immediately
lease the properties back to us upon closing. This sale-leaseback transaction is
scheduled to close in November 2002. There was no deficiency between the
outstanding lease balance and the fair market value of the remaining property
not covered by the purchase and sales agreement as of September 30, 2002. The
transaction is subject to customary closing conditions.
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 until December 31, 2007. 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 September 30, 2002, the carrying value of property held
under the building and improvements lease was $3.1 million, which is net of $2.5
million of accumulated amortization. At September 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 repurchase program. In August 2002, the Company's Board of
Directors authorized the repurchase of up to $15.0 million in value of its
outstanding common stock. As of November 8, 2002, the Company had repurchased
920,200 shares for a total of $10.0 million under this authorization, which
expires on December 8, 2002. Any future repurchases are subject to market
conditions. There can be no assurance as to what additional amount, if any, of
shares we will repurchase.
Stock options. As of September 30, 2002, we had outstanding
non-qualified stock options to purchase an aggregate of 5.3 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 nine months ended September
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
28
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
approved by the District Court on October 1, 2001. The Consent Decree became
effective on October 3, 2002 following the dismissal of all appeals related to
the Decree.
RELATED PARTY TRANSACTIONS
Currently, our operations in Miami, Florida are located in three
different facilities. In order to increase operational efficiencies, we acquired
land to be used as the site for a new facility to consolidate our Miami
operations. We acquired the land, on August 30, 2002, from a related party
entity controlled by James R. Crane, Chairman, President and Chief Executive
Officer of EGL for $9.8 million in cash, including our acquisition costs of
$131,000. We previously had identified this parcel of land as the most
advantageous property on which to consolidate our Miami operations. We entered
into negotiations on the land and reached agreement with the seller on terms.
However, given the downturn in the economy and our weakening financial condition
at that point in time, we elected to delay purchasing this property until our
financial condition improved. On July 10, 2001, Mr. Crane purchased the land in
anticipation of reselling the land to us. The purchase price represents the
lower of current market value, based on an independent appraisal, or Mr. Crane's
purchase price plus carrying costs for the land. Our Audit Committee, which
consists of five independent directors, engaged in an analysis and discussion
regarding whether it was in the best interest of EGL to enter into a purchase
agreement to purchase this particular tract of land from Mr. Crane. The Audit
Committee analysis included, but was not limited to, obtaining an independent
appraisal of the land, reviewing a comparative properties analysis performed by
an outside independent real estate company and performing a cost benefit
analysis for several different alternatives. Based upon the data obtained from
the analysis and after lengthy discussion, the Audit Committee determined that
the best alternative for EGL, in its opinion, was for us to purchase the
property from Mr. Crane. The Audit Committee then made a recommendation to our
Board of Directors, which includes six independent directors, to purchase this
particular land. In August 2002, the purchase was unanimously approved by our
Board of Directors, with Mr. Crane abstaining from the vote.
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 to the letter of credit. As of September
30, 2002, Miami Air had $2.0 million in funded debt under the line of credit
that is supported by the $7 million standby letter of credit. Additionally, as
of September 30, 2002, Miami Air had outstanding $2.1 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)
were significantly higher than the market value of those planes. In addition,
Miami Air had outstanding operating leases for 727 and 737 airplanes at above
current market rates, including two planes that were expected to be delivered in
2002. Throughout the fourth quarter of 2001 and the first quarter of 2002, Miami
Air was in discussions with its bank to obtain debt concessions on the seven 727
planes, to buy out the lease on a 727 cargo plane and to reduce the rates on the
737 passenger planes. Miami Air had informed us that its creditors had indicated
a willingness to make concessions. In May 2002, we were informed that Miami
Air's 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 funded debt and letters of credit supported by the
$7 million standby letter of credit. During the third quarter of 2002, Miami Air
informed us that certain of its creditors have now, in fact, made
certain concessions. We have not adjusted our reserve, and there can be
no assurance that the ultimate loss, if any, will not exceed such estimate.
29
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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 September 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 nine
months ended September 30, 2001, we reimbursed Mr. Crane $100,000 and $800,000,
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 nine months ended September 30, 2002, we paid Mr. Crane
$132,000 and $887,000, respectively, for actual hourly usage of the plane.
We subleased a portion of our warehouse space in Houston, Texas and
London, England to a customer pursuant to a five-year sublease which ended
during the first quarter 2002. The customer is partially owned by Mr. Crane. We
received $21,000 in rental income for the nine months ended September 30, 2002.
In addition, we billed this customer approximately $67,000 and $122,000,
respectively for freight forwarding services for the three and nine months ended
September 30, 2002.
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 goods and services,
o expected rates of change, sensitivity and volatility
associated with the assumptions used in developing estimates,
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EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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.
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
31
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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 September 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 3 and 7 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 circumstance has
occurred that may trigger an impairment analysis and in the determination of the
related cash flows from the asset. Estimating cash flows related to long-lived
assets is a difficult and subjective process that applies historical experience
and future business expectations to revenues and related operating costs of
assets. Should impairment appear to be necessary, subjective judgment must be
applied to estimate the fair value of the asset, for which there may be a ready
market, which often times results in the use of discounted cash flow analysis
and judgmental selection of discount rates to be used in the discounting
process.
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 $886,000 in the nine months ended
September 30, 2002 as compared to $343,000 in the nine months ended September
30, 2001. These losses were primarily a result of volatility in the South
American currencies. (See Note 6 of the Notes to the Condensed Consolidated
Financial Statements, and Managements Discussion and Analysis of Financial
Condition and Results of Operations).
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings. Subsequent to the date of their
evaluation, there were no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
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.
32
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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. The Consent Decree became effective on October 3, 2002
following the dismissal of all appeals related to the Decree. During the quarter
ended September 30, 2001, the Company accrued $10.1 million related to the
settlement, which includes the $8.5 million payment into the Class Fund and
$500,000 into the Leadership Development Fund 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 September 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
September 30, 2002 and December 31, 2001 were $13.6 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 amount of time it will take to resolve the other
lawsuits and related issues or the degree of any adverse effect these matters
may have on our financial condition and results of operations. A substantial
settlement payment or judgment could result in a significant decrease in our
working capital and liquidity and recognition of a loss in our consolidated
statement of operations.
33
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
NONE
ITEM 5. OTHER INFORMATION
FORWARD-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 likelihood of an audit and/or review of the
Company's application for grant proceeds pursuant to the Air Transportation
Safety and System Stabilization Act; the effectiveness of the Company's
disclosure controls and procedures; 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 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
34
EGL, INC.
"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; the lack of effectiveness of the
Company's disclosure controls and procedures; the likelihood and/or result of
any audit or review of the Company's DOT grant application; 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, 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.)
10.1 Consent and Second Amendment to Credit Agreement dated October
14, 2002.
+10.2 Executive Deferred Compensation Plan.
+*10.3 1995 Non-employee Director Stock Option Plan (filed as Exhibit
10.2 to EGL's Registration Statement on Form S-1, Registration
No. 33-97606 and incorporated herein by reference).
+10.4 Amendment Number 1 to 1995 Non-Employee Director Stock Option
Plan.
35
EGL, INC.
* Incorporated by reference as indicated.
+ Management contact or compensatory plan.
(b) REPORTS ON FORM 8-K.
Current Report on Form 8-K, dated August 14, 2002,
furnished under Item 9 information regarding
certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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: November 13, 2002 BY:
-----------------
/s/ James R. Crane
-----------------------------
James R. Crane
Chairman, President and Chief
Executive Officer
Date: November 13, 2002 BY:
-----------------
/s/ Elijio V. Serrano
-----------------------------
Elijio V. Serrano
Chief Financial Officer
37
EGL, INC.
CERTIFICATIONS
I, James R. Crane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EGL, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
fulfilling the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ James R. Crane
---------------------------------------
James R. Crane,
Chief Executive Officer, President and
Chairman of the Board
38
EGL, INC.
I, Elijio V. Serrano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EGL, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
fulfilling the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Elijio V. Serrano
-----------------------------------
Elijio V. Serrano
Chief Financial Officer
39
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.)
10.1 Consent and Second Amendment to Credit Agreement dated October 14,
2002.
+10.2 Executive Deferred Compensation Plan.
+*10.3 1995 Non-employee Director Stock Option Plan (filed as Exhibit 10.2 to
EGL's Registration Statement on Form S-1, Registration No. 33-97606 and
incorporated herein by reference).
+10.4 Amendment Number 1 to 1995 Non-Employee Director Stock Option Plan.
* Incorporated by reference as indicated.
+ Management contact or compensatory plan.
40