UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2003
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____to____
COMMISSION FILE NUMBER 0-27288
EGL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0094895
-------------------------------------------------------------- ---------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
15350 VICKERY DRIVE, HOUSTON, TEXAS 77032
(281) 618-3100
--------------------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices, Including Registrant's Zip Code, and Telephone Number, Including Area
Code)
N/A
--------------------------------------------------------------------------------
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
At May 1, 2003 the number of shares outstanding of the registrant's common stock
was 47,150,706 (net of 1,037,284 treasury shares).
EGL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of 1
March 31, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations for the 2
Three Months ended March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the 3
Three Months ended March 31, 2003 and 2002
Condensed Consolidated Statement of Stockholders' Equity for the 4
Three Months ended March 31, 2003
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
ITEM 4. CONTROLS AND PROCEDURES 22
PART II. OTHER INFORMATION 23
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 26
CERTIFICATIONS 27
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par values)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 108,247 $ 119,669
Restricted cash 14,989 7,806
Short-term investments and marketable securities 4 12
Trade receivables, net of allowance of $14,489 and $13,717 384,484 371,024
Other receivables 10,877 13,213
Deferred income taxes 13,057 6,228
Income taxes receivable 2,726 1,019
Other current assets 26,058 32,952
------------ ------------
Total current assets 560,442 551,923
Property and equipment, net 154,174 157,403
Assets held for sale 644 644
Investments in unconsolidated affiliates 40,046 40,042
Goodwill 82,249 81,881
Deferred income taxes 5,327 5,327
Other assets, net 13,692 13,087
------------ ------------
Total assets $ 856,574 $ 850,307
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables and accrued transportation costs $ 236,285 $ 232,324
Accrued salaries and related costs 31,799 31,218
Accrued merger restructuring costs 6,915 8,227
Current portion of long-term notes payable 5,419 5,639
Income taxes payable 2,679 2,595
Other liabilities 61,516 70,409
------------ ------------
Total current liabilities 344,613 350,412
Long-term notes payable 104,845 103,993
Deferred income taxes 12,164 3,720
Other noncurrent liabilities 5,811 6,789
------------ ------------
Total liabilities 467,433 464,914
------------ ------------
Minority interests 9,169 8,852
------------ ------------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Common stock, $0.001 par value, 200,000 shares authorized; 48,149
and 48,091 shares issued; 47,112 and 47,054 shares outstanding 48 48
Additional paid-in capital 149,355 148,682
Retained earnings 276,941 274,146
Accumulated other comprehensive loss (28,603) (28,566)
Treasury stock, 1,037 shares held (17,769) (17,769)
------------ ------------
Total stockholders' equity 379,972 376,541
------------ ------------
Total liabilities and stockholders' equity $ 856,574 $ 850,307
============ ============
See notes to unaudited condensed consolidated financial statements.
1
EGL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
---------- ----------
Revenues $ 483,650 $ 417,109
Cost of transportation 316,084 262,989
---------- ----------
Net revenues 167,566 154,120
Operating expenses:
Personnel costs 96,815 85,360
Other selling, general and administrative expenses 66,113 67,224
---------- ----------
Operating income 4,638 1,536
Nonoperating expense, net (142) (8,306)
---------- ----------
Income (loss) before provision (benefit) for income taxes 4,496 (6,770)
Provision (benefit) for income taxes 1,701 (2,640)
---------- ----------
Income (loss) before cumulative effect of change in accounting
for negative goodwill 2,795 (4,130)
Cumulative effect of change in accounting for negative
goodwill -- 213
---------- ----------
Net income (loss) $ 2,795 $ (3,917)
========== ==========
Basic earnings (loss) per share before cumulative effect of change
in accounting for negative goodwill $ 0.06 $ (0.09)
Cumulative effect of change in accounting for negative goodwill -- 0.01
---------- ----------
Basic earnings (loss) per share $ 0.06 $ (0.08)
========== ==========
Basic weighted-average common shares outstanding 47,066 47,859
Diluted earnings (loss) per share before cumulative effect of change
in accounting for negative goodwill $ 0.06 $ (0.09)
Cumulative effect of change in accounting for negative goodwill -- 0.01
---------- ----------
Diluted earnings (loss) per share $ 0.06 $ (0.08)
========== ==========
Diluted weighted-average common shares outstanding 47,277 47,859
See notes to unaudited condensed consolidated financial statements.
2
EGL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 2,795 $ (3,917)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,729 7,479
Bad debt expense 1,753 3,171
Amortization of unearned compensation -- 159
Deferred income tax expense (benefit) 1,614 (2,745)
Tax benefit of stock options exercised 75 58
Equity in earnings of affiliates, net of dividends received (4) (669)
Minority interests, net of dividends paid 263 319
Transfer to restricted cash (7,182) (109)
Cumulative effect of change in accounting for negative
goodwill -- (213)
Impairment of investment in an unconsolidated affiliate -- 6,653
Other (360) 73
Net effect of changes in working capital, net of assets acquired (12,075) 21,592
---------- ----------
Net cash provided by (used in) operating activities (5,392) 31,851
---------- ----------
Cash flows from investing activities:
Capital expenditures (4,313) (3,705)
Proceeds from sales of other assets 324 2,820
Proceeds from sale-lease back transactions -- 2,462
Acquisitions of businesses, net of cash acquired (1,733) --
---------- ----------
Net cash provided by (used in) investing activities (5,722) 1,577
---------- ----------
Cash flows from financing activities:
Issuance (repayment) of notes payable 321 (2,551)
Issuance of common stock, net of related costs -- 469
Proceeds from exercise of stock options 598 146
---------- ----------
Net cash provided by (used in) financing activities 919 (1,936)
---------- ----------
Effect of exchange rate changes on cash (1,227) (1,911)
---------- ----------
Increase (decrease) in cash and cash equivalents (11,422) 29,581
Cash and cash equivalents, beginning of the period 119,669 77,440
---------- ----------
Cash and cash equivalents, end of the period $ 108,247 $ 107,021
========== ==========
See notes to unaudited condensed consolidated finanacial statements.
3
EGL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Common Stock Accumulated
------------------- Additional Treasury Stock other
paid-in Retained ------------------- comprehensive
Shares Amount capital earnings Shares Amount loss Total
---------- ------- ---------- -------- ------ ---------- ------------- ----------
Balance at December 31, 2002 48,091 $ 48 $ 148,682 $274,146 (1,037) $ (17,769) $ (28,566) $ 376,541
Net income -- -- -- 2,795 -- -- -- 2,795
Recognition in earnings of changes
in fair value related to an
undesignated cash flow hedge -- -- -- -- -- -- (377) (377)
Amortization of deferred loss
on interest rate swap -- -- -- -- -- -- 379 379
Foreign currency translation
adjustments -- -- -- -- -- -- (39) (39)
Exercise of stock options,
including tax benefit 58 -- 673 -- -- -- -- 673
---------- ------- -------- -------- ------ ---------- ------------- ----------
Balance at March 31, 2003 48,149 $ 48 149,355 $276,941 (1,037) $ (17,769) $ (28,603) $ 379,972
========== ======= ======== ======== ====== ========== ============= ==========
See notes to unaudited condensed consolidated financial statements.
4
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared by EGL, Inc. (EGL or the Company) in accordance with the
rules and regulations of the Securities and Exchange Commission (the SEC) for
interim financial statements and, accordingly, do not include all information
and footnotes required under generally accepted accounting principles for
complete financial statements. The financial statements have been prepared in
conformity with the accounting principles and practices disclosed in, and should
be read in conjunction with, the annual financial statements of the Company
included in the Company's Annual Report on Form 10-K (File No.0-27288). In the
opinion of management, these interim financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position at March 31, 2003 and the
results of its operations and cash flows for three months ended March 31, 2003.
Results of operations and cash flows for the three months ended March 31, 2003
are not necessarily indicative of the results that may be expected for EGL's
full fiscal year.
NOTE 1 - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EGL is a leading global transportation, supply chain management and
information services company operating in one business segment and dedicated to
providing flexible logistics solutions on a price competitive basis. The
Company's services include air and ocean freight forwarding, customs brokerage,
local pick up and delivery service, materials management, warehousing, trade
facilitation and procurement and integrated logistics and supply chain
management services. The Company provides services 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, South America and South Pacific (see Note 13).
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
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 Company has reclassified certain
prior year amounts to conform with the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the amounts reported in the financial statements and accompanying notes.
Management considers many factors in selecting appropriate operational and
financial accounting policies and controls, and in developing the assumptions
that are used in the preparation of these financial statements. Management must
apply significant judgment in this process. Among the factors, but not fully
inclusive of all factors that may be considered by management in these processes
are: the range of accounting policies permitted by accounting principles
generally accepted in the United States of America; management's understanding
of the Company's business - both historical results and expected future results;
the extent to which operational controls exist that provide high degrees of
assurance that all desired information to assist in the estimation is available
and reliable or whether there is greater uncertainty in the information that is
available upon which to base the estimate; expectations of the future
performance of the economy, both domestically, and globally, within various
areas that serve the Company's principal customers and suppliers of goods and
services; expected rates of change, sensitivity and volatility associated with
the assumptions used in developing estimates; and whether historical trends are
expected to be representative of future trends. The estimation process often
times may yield a range of potentially reasonable estimates of the ultimate
future outcomes and management must select an amount that lies within that range
of reasonable estimates - which may result in the 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 uses its business and financial accounting judgment in
selecting the most appropriate
5
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
estimates. The Company believes that the estimates utilized in the preparation
of the condensed consolidated financial statements are prudent and reasonable;
however, actual amounts could and will differ from those estimates.
COMPREHENSIVE INCOME (LOSS)
Components of comprehensive income (loss) for the three months ended
March 31, 2003 and 2002 are as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------- ----------
Net income (loss) $ 2,795 $ (3,917)
Change in value of marketable securities, net -- 3
Amortization of deferred unrealized loss on interest
rate swap 379 379
Recognition in earnings of changes in fair value
related to an undesignated cash flow hedge (377) --
Foreign currency translation adjustments (39) (2,186)
---------- ----------
Comprehensive income (loss) $ 2,758 $ (5,721)
========== ==========
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143 (SFAS 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 adopted SFAS 143, beginning January 1, 2003, with no material impact on
its results of operations, financial position or cash flows.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 supersedes EITF Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and establishes fair value as the objective for
initial measurement of a liability. SFAS 146 states that an entity's commitment
to a plan does not create a present obligation to others that meets the
definition of a liability. Generally, SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company adopted SFAS
146 as of January 1, 2003 with no material impact on its results of operations,
financial position or cash flows.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 expands on the accounting guidance of SFAS 5, 57 and 107 and
incorporates without change the provisions of FIN 34, which is being superseded.
FIN 45 elaborates on the existing disclosure requirements for most guarantees
and clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company adopted the disclosure provisions of FIN 45
effective December 31, 2002 and the remainder of this pronouncement effective
January 1, 2003 with no material impact on its results of operations, financial
position or cash flows.
6
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In January 2003, the Financial Accounting Standards Board issued FIN
No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an interpretation
of ARB 51." The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities" or "VIEs") and how to
determine when and which business enterprise should consolidate the VIE (the
"primary beneficiary"). This new model for consolidation applies to an entity in
which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. The provisions of FIN 46 are
effective for the Company as of July 1, 2003. The Company is not presently a
party to any transactions with VIEs.
In March 2003, the Emerging Issues Task Force released EITF Issue No.
00-21 "Revenue Arrangements with Multiple Deliverables." This issue addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. This issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company is currently in the process of evaluating the impact, if any,
the adoption of this standard will have on its results of operations, financial
position or cash flows.
NOTE 3 - BUSINESS COMBINATIONS
During the first quarter of 2003, the Company acquired Transimpex, SA,
an international freight forwarder and customs broker based in France, for
approximately $1.1 million, net of cash acquired and made an earnout payment of
$600,000 related to an acquisition completed in a prior year.
NOTE 4 - DERIVATIVE INSTRUMENTS
In April 2001, the Company entered into a three year interest rate swap
agreement, which was designated as a cash flow hedge, to reduce its exposure to
fluctuations in interest rates on $70 million of its LIBOR based revolving
credit facility or any substitute debt agreements the Company enters into.
Accordingly, the change in the fair value of the swap agreement was initially
recorded in other comprehensive income (loss).
In December 2001, the Company issued $100 million of 5% convertible
subordinated notes due December 15, 2006. The proceeds from these notes
substantially retired the LIBOR based debt outstanding under the then-existing
revolving credit agreement. The interest rate on the convertible notes is fixed;
therefore, the variability of the future interest payments has been eliminated.
The swap agreement no longer 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. Subsequent changes in the fair value of the swap agreement are
recorded in interest expense. During the three months ended March 31, 2003 and
2002, the Company recorded $379,000 and $252,000, respectively, in net interest
expense which includes $379,000 each period for interest expense relating to the
amortization of the deferred loss and $605,000 and $654,000, respectively, of
interest income related to changes in the fair value of the swap agreement. The
fair value of the swap agreement at March 31, 2003 was a liability of $124,000.
In conjunction with its aircraft charter agreements, the Company is
obligated to pay current market prices for jet fuel. During November 2002, the
Company entered into a jet fuel swap agreement. The purpose of this agreement is
to hedge the Company's exposure to volatility in market prices for jet fuel. The
swap agreement has a term of one year and expires in December 2003. On a monthly
basis, the Company pays a fixed rate of approximately $0.68 per gallon for
400,000 gallons of jet fuel and receives a payment equal to the monthly average
commodity price for the same amount of jet fuel. The Company originally
designated this swap as a cash flow hedge under the provisions of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." Due to changes
in the market prices of jet fuel and the associated volatility during the first
quarter of 2003, the swap agreement was ineffective for the three months ended
March 31, 2003, and on a prospective basis, and no longer qualifies for cash
flow hedge accounting. The Company reclassified all previously deferred gains
recorded as a component of accumulated other comprehensive loss as of March 31,
2003. During the three months ended March 31, 2003, the Company recorded
$564,000 in nonoperating income for
7
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
associated realized and unrealized gains.
The fair value of this swap agreement at March 31, 2003 was an asset of
approximately $286,000. Future changes in fair value will be recognized in
current earnings during the period of the change.
NOTE 5 - STOCK-BASED COMPENSATION
At March 31, 2003, the Company has six stock-based employee
compensation plans under which stock-based awards have been granted. The Company
accounts for stock-based awards to employees and non-employee directors using
the intrinsic value method prescribed in Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
intrinsic value method used by the Company generally results in no compensation
expense being recorded for stock option grants made by the Company because those
grants are typically made with option exercise prices substantially equal to
fair market value at the date of option grant. The application of the
alternative fair value method under SFAS No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," which estimates the fair value of the option awarded
to the employee, would result in compensation expense being recognized over the
period of time that the employee's rights in the options vest. The following
table illustrates the pro forma effect on net income (loss) and earnings (loss)
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation (in thousands).
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------- ----------
Net income (loss) as reported $ 2,795 $ (3,917)
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of related tax effects 1,408 1,274
---------- ----------
Pro forma net income (loss) $ 1,387 $ (5,191)
========== ==========
Earnings (loss) per share:
Basic-as reported $ 0.06 $ (0.08)
Basic-pro forma 0.03 (0.11)
Diluted-as reported 0.06 (0.08)
Diluted-pro forma 0.03 (0.11)
NOTE 6 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the three months ended March 31, 2003 and 2002.
Diluted earnings per share includes potential dilution that could occur if
options to issue common stock were exercised. Stock options and shares related
to the convertible notes issued in December 2001 are the only potentially
dilutive share equivalents the Company has outstanding for the periods
presented. For the three months ended March 31, 2003, incremental shares of
211,000 were used in the calculation of diluted earnings per share, all of which
were attributable to stock options. As of March 31, 2003, approximately 3.9
million potential common shares related to employee stock options and
approximately 5.7 million potential common shares related to the convertible
notes were excluded from the calculation of diluted earnings per share because
their effect was antidilutive. No shares related to options or the convertible
notes were included in diluted earnings per share for the three months ended
March 31, 2002, because their effect would have been antidilutive as the Company
incurred a net loss during that period.
8
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7 - IMPAIRMENT OF INVESTMENT IN AN UNCONSOLIDATED AFFILIATE
In the first quarter of 2002, the Company recognized an other than
temporary impairment of the entire $6.7 million carrying value of its common
stock investment in Miami Air, which included a $509,000 increase in value
attributable to the Company's 24.5% share of Miami Air's first quarter 2002
results of operations. In addition, the Company recorded an accrual of $1.3
million for its estimated exposure on the outstanding funded debt and letters of
credit supported by the $7.0 million standby letter of credit. During the third
quarter of 2002, Miami Air informed the Company that certain of its creditors
had made certain concessions. The Company has not adjusted its accrual; however,
there can be no assurance that the ultimate loss, if any, will not exceed such
estimate. The standby letter of credit was reduced to $3.0 million in January
2003.
NOTE 8 - MERGER TRANSACTION, RESTRUCTURING AND INTEGRATION COSTS
The Company maintains an accrual for charges established under its
fourth quarter 2000 plan (the Plan) to integrate the former EGL and Circle
operations and to eliminate duplicate facilities resulting from the merger. The
principal components of the Plan involved the termination of certain employees
at the former Circle's headquarters and various international locations,
elimination of duplicate facilities in the United States and certain
international locations, and the termination of selected joint venture and
agency agreements at certain of the Company's international locations. With the
exception of payments to be made for remaining future lease obligations, the
terms of the Plan were substantially completed in 2001. There were no charges
incurred under the Plan in the three months ended March 31, 2003 and 2002. The
changes in the accrual during the three months ended March 31, 2003 and the
remaining unpaid accrued charges as of December 31, 2002 and March 31, 2003 are
as follows (in thousands):
ACCRUED ACCRUED
LIABILITY LIABILITY
DECEMBER 31, PAYMENTS/ MARCH 31,
2002 REDUCTIONS 2003
-------------- -------------- --------------
Severance costs $ 787 $ 336 $ 451
Future lease obligations, net of subleasing 7,215 970 6,245
Termination of joint venture/agency agreements 225 6 219
-------------- -------------- --------------
$ 8,227 $ 1,312 $ 6,915
============== ============== ==============
Future lease obligations consist of the Company's remaining lease
obligations under noncancelable operating leases at domestic and international
locations that the Company has vacated and consolidated due to excess capacity
resulting from the Company having multiple facilities in certain locations. All
lease costs for facilities being consolidated were charged to operations until
the date that the Company vacated each facility.
Amounts recorded for future lease obligations under the Plan are net of
approximately $19.0 million in anticipated future recoveries from actual
sublease agreements and $13.2 million from expected sublease agreements as of
March 31, 2003. Sublease income has been anticipated under the plan only in
locations where sublease agreements have been executed as of March 31, 2003 or
are deemed probable of execution during the first half of 2003. There is a risk
that subleasing transactions will not occur within the same timing or pricing
assumptions made by the Company, or at all, which could result in future
revisions to these estimates.
NOTE 9 - NOTES PAYABLE
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
9
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
connection with the transaction totaled $3.2 million and are being amortized
over five years as a component of interest expense.
The notes are convertible at any time up to four trading days prior to
maturity into shares of common stock at a conversion price of approximately
$17.4335 per share, subject to certain adjustments, which was a premium of 20.6%
of the stock price at the issuance date. This is equivalent to a conversion rate
of 57.3608 shares per $1,000 principal amount of notes. Upon conversion, a
noteholder will not receive any cash representing accrued interest, other than
in the case of a conversion in connection with an optional redemption. The
shares that are potentially issuable may impact the Company's diluted earnings
per share calculation in future periods by approximately 5.7 million shares. As
of March 31, 2003, the fair value of these notes was $114.4 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
Effective December 20, 2001, the Company amended and restated its
credit facility originally entered into on January 5, 2001. The amended and
restated credit facility (Restated Credit Facility), which was last amended
effective as of March 31, 2003, is with a syndicate of three financial
institutions, with Bank of America, N.A. (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 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
10
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Restated Credit Facility based on the Company's eligible borrowing base. The
required amount of borrowing availability is currently $25 million. The amount
of borrowing availability is determined by subtracting the following from the
Company's eligible borrowing base: (a) the Company's borrowings under the
Restated Credit Facility; and (b) the Company's accounts payable and the
accounts payable of all of its domestic subsidiaries and its Canadian operating
subsidiary that remain unpaid more than the longer of (i) sixty days from their
respective invoice dates or (ii) thirty days from their respective due dates.
The Restated Credit Facility includes a $50 million letter of credit
subfacility. The Company had $23.1 million in standby letters of credit
outstanding as of March 31, 2003 under this facility. The collateral value
associated with the revolving line of credit at March 31, 2003 was $176.6
million. No amounts were outstanding under the revolving line of credit as of
March 31, 2003. Therefore, the Company had available, unused borrowing capacity
of $51.9 million as of March 31, 2003.
For each tranche of principal borrowed under the revolving line of
credit, the Company may elect an interest rate of either LIBOR plus an
applicable margin of 2.00% to 2.75% that varies based upon availability under
the line, or the prime rate announced by the Bank, plus, if the borrowing
availability is less than $25 million, an applicable margin of 0.25%.
The Company refers to borrowings bearing interest based on LIBOR as a
LIBOR tranche and to other borrowings as a prime rate tranche. The interest on a
LIBOR tranche is payable on the last day of the interest period (one, two or
three months, as selected by the Company) for such LIBOR tranche. The interest
on a prime rate tranche is payable monthly.
A termination fee of 0.25% of the total revolving commitment would be
payable upon termination of the Restated Credit Facility if the termination
occurs before December 20, 2003 (unless terminated in connection with a
refinancing arranged or underwritten by the Bank or its affiliates).
The Company is subject to certain covenants under the terms of the
Restated Credit Facility, including, but not limited to, (a) maintenance at the
end of each fiscal quarter of a minimum specified adjusted tangible net worth
and (b) quarterly and annual limitations on capital expenditures of $12 million
per quarter or $48 million cumulative per year.
The Restated Credit Facility also places restrictions on additional
indebtedness, dividends, liens, investments, acquisitions, asset dispositions,
change of control and other matters, is secured by substantially all of the
Company's assets, and is guaranteed by all domestic subsidiaries and the
Company's Canadian operating subsidiary. In addition, the Company will be
subject to additional restrictions, including restrictions with respect to
distributions and asset dispositions if the Company's eligible borrowing base
falls below $40 million. Events of default under the Restated Credit Facility
include, but are not limited to, the occurrence of a material adverse change in
the Company's operations, assets or financial condition or its ability to
perform under the Restated Credit Facility or that of any of the Company's
domestic subsidiaries or its Canadian operating subsidiary. The Amendment to the
Credit Agreement dated March 31, 2003 consented to the Company's acquisition of
substantially all the business operations and assets of Miami International
Forwarders (MIF) (see Note 12).
NOTE 10 - GUARANTEES
At March 31, 2003, the Company had guaranteed certain financial
liabilities, the majority of which relate to the Company's freight forwarding
operations. The Company, in the normal course of business is required to
guarantee certain amounts related to customs bonds and services received from
airlines. These types of guarantees are usual and customary in the freight
forwarding industry and include IATA (International Air Transport Association)
guarantees together with customs bonds. The Company operates as a customs broker
and prepares and files all formal documentation required for clearance through
customs agencies, obtains customs bonds, in many cases facilitates the payment
of import duties on behalf of the importer, arranges for payment of collect
freight charges and assists the importer in obtaining the most advantageous
commodity classifications and in qualifying for duty drawback refunds. The
Company also arranges for surety bonds for importers as part of its customs
brokerage activities.
11
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company secures guarantees primarily by three methods: a $50
million standby letter of credit subfacility discussed in Note 9, surety bonds
and security time deposits which are restricted as to withdrawal for a specified
timeframe and are classified on the Company's balance sheet in restricted cash.
The total guarantees for IATA related guarantees and customs bonds as
of March 31, 2003 were approximately $44.3 million with approximately $28.9
million outstanding to facilitate the movement and clearance of freight.
The Company guarantees other working capital credit lines in the normal
course of business. These lines of credit include, but are not limited to,
guarantees associated with insurance requirements and certain taxing
authorities. Generally, guarantees have a one-year term and are renewed
annually. EGL guarantees up to approximately $32.8 million of such working
capital lines of credit and surety bonds; however, as of March 31, 2003, the
amount of the maximum potential payment is $23.2 million. These guarantees are
associated with outstanding liabilities which are reflected in the Company's
consolidated financial statements.
Additionally, at March 31, 2003 the Company had guaranteed certain
other financial liabilities related to unconsolidated affiliates and joint
venture investments as detailed below.
In connection with its equity investment in Miami Air, the Company
caused a $7 million standby letter of credit to be issued in favor of certain
creditors for Miami Air to assist Miami Air in financing the conversion of its
aircraft. Miami Air agreed to pay the Company an annual fee equal to 3.0% of the
face amount of the letter of credit and to reimburse the Company for any
payments made by the Company in respect of the letter of credit. As of March 31,
2003, Miami Air had no funded debt under the line of credit that is supported by
the standby letter of credit. Additionally, as of March 31, 2003, Miami Air had
outstanding $2.2 million in letters of credit and surety bonds that were
supported by the standby letter of credit. Payment by the Company would be
required upon default by Miami Air. The maximum potential amount of future
payments which the Company could be required to make under this guarantee at
March 31, 2003 is $3.0 million, reflecting a reduction in the line of credit in
January 2003.
The Company is a guarantor on a revolving line of credit with respect
to another of the Company's unconsolidated affiliates. The outstanding balance
owed by the unconsolidated affiliate was $60,000 as of March 31, 2003 and the
maximum exposure to the Company under this guarantee is $300,000.
In connection with two of the Company's 51% owned subsidiaries, the
Company has guaranteed 100% of the working capital line of credit and other
various operational guarantees of each of these joint ventures. As of March 31,
2003, the maximum amount of these guarantees was $3.0 million with $2.3 million
drawn against these obligations.
The Company is a guarantor for 40% of outstanding amounts on a $5.0
million revolving line of credit for one of the Company's unconsolidated
affiliates. The unconsolidated affiliate's outstanding balance was approximately
$3.2 million at March 31, 2003; therefore, the amount of the Company's guarantee
was approximately $1.3 million. The future maximum exposure to the Company under
this guarantee is $2.0 million.
In addition, the Company has entered into indemnification agreements
with certain officers and directors of the Company.
NOTE 11 - LEGAL MATTERS
EEOC LEGAL SETTLEMENT
On October 2, 2001, the U.S. Equal Employment Opportunity Commission
(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. The EEOC's Commissioner's Charge was issued in
December 1997 and subsequent events were most recently disclosed in our Form
10-K for the year ended December 31, 2002. Under the Consent Decree, the Company
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, the Company agreed to contribute $500,000 to
establish a Leadership Development Program (the Leadership Development Fund).
This Program will provide training and educational opportunities for women and
minorities already employed by the Company and will
12
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
also establish scholarships and work study opportunities at educational
institutions. In entering the Consent Decree, the Company 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 costs, legal fees and other costs associated with the EEOC
litigation and settlement.
The Consent Decree settlement provides that the Company establish and
maintain segregated accounts for the Class Fund and Leadership Development Fund.
The Company is required to make an initial deposit of $2.5 million to the Class
Fund within 30 days after the Consent Decree has been approved and fund the
remaining $6.0 million of the Class Fund in equal installments of $2.0 million
each on or before the fifth day of the first month of the calendar quarter
(January 5th, April 5th and October 5th) which will occur immediately after the
effective date of the Consent Decree. The Leadership Development Fund will be
funded fully at the time of the first quarterly payment as discussed above. As
of March 31, 2003, the Company had funded $4.5 million into the Class Fund and
$500,000 into the Leadership Development Fund. This amount is included as
restricted cash in the accompanying condensed consolidated balance sheet. Total
related accrued liabilities included in the accompanying condensed consolidated
balance sheet at March 31, 2003 were $12.4 million.
Of the eight named plaintiffs who filed suit against the Company in
2000 alleging gender, race and national origin discrimination, as well as sexual
harassment, one has accepted a settlement of her claims against the Company. The
remaining individuals who were named Plaintiffs in the underlying action have
submitted claims to be considered for settlement compensation under the Consent
Decree. The claims administration process is currently underway; however, it
could be several months before it is completed and Claimants are notified of
whether they qualify for settlement compensation and, if so, the amount for
which they qualify. Once Claimants are notified of their eligibility status by
the Claims administrator, they have an option to reject the settlement
compensation and pursue litigation on their own behalf and without the aid of
the EEOC. To the extent any of the individual plaintiffs or any other persons
who might otherwise be covered by the settlement opt out of the settlement, the
Company intends to continue to vigorously defend 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.
OTHER LEGAL MATTERS
An employee was injured while on property owned by an executive
officer of the Company. No claim has been asserted against the Company at this
time, but the Company believes that any asserted claim would be covered by
insurance and defended by the Company's insurance carriers. In addition, the
Company is party to routine litigation incidental to its business, which
primarily involve other employment matters or claims for goods lost or damaged
in transit or improperly shipped. Many of the other lawsuits to which the
Company is a party are covered by insurance and are being defended by Company's
insurance carriers. The Company has established accruals for these other matters
and it is management's opinion that the resolution of such litigation will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
NOTE 12 - SUBSEQUENT EVENT
On April 1, 2003, the Company acquired the operations of Miami
International Forwarders (MIF), a privately held international freight forwarder
and customs broker based in Miami, Florida for approximately $14.0 million in
cash and a future payment of $10.0 million in the aggregate, which is payable in
two equal payments of $5.0 million on April 1, 2004 and April 1, 2005. Under the
terms of the purchase agreement, the Company acquired substantially all of the
operating assets of MIF. The purchase agreement also contains a two-year earnout
payable in cash if certain performance benchmarks are achieved.
13
EGL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 - GEOGRAPHIC AND SERVICES INFORMATION
The Company operates in one segment and is organized functionally in
geographic divisions. Accordingly, management focuses its attention on revenues,
net revenues and income from operations associated with each of these geographic
divisions when evaluating the effectiveness of geographic management. Certain
information regarding the Company's operations by geographic division is
summarized below (in thousands):
Europe, Asia &
North South Middle East South
America America & Africa Pacific Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Three months ended March 31, 2003:
Total revenues $ 256,276 $ 23,797 $ 104,477 $ 111,463 $ (12,363) $ 483,650
Transfers between divisions (4,113) (1,410) (3,618) (3,222) 12,363 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 252,163 $ 22,387 $ 100,859 $ 108,241 $ -- $ 483,650
============ ============ ============ ============ ============ ============
Net revenues $ 106,614 $ 3,886 $ 35,630 $ 21,436 $ 167,566
============ ============ ============ ============ ============
Income (loss) from operations $ 327 $ 791 $ (566) $ 4,086 $ 4,638
============ ============ ============ ============ ============
Three months ended March 31, 2002:
Total revenues $ 245,950 $ 17,725 $ 80,675 $ 84,404 $ (11,645) $ 417,109
Transfers between divisions (3,501) (1,205) (3,497) (3,442) 11,645 --
------------ ------------ ------------ ------------ ------------ ------------
Revenues from customers $ 242,449 $ 16,520 $ 77,178 $ 80,962 $ -- $ 417,109
============ ============ ============ ============ ============ ============
Net revenues $ 103,000 $ 3,804 $ 28,189 $ 19,127 $ 154,120
============ ============ ============ ============ ============
Income (loss) from operations $ (5,277) $ 332 $ 2,036 $ 4,445 $ 1,536
============ ============ ============ ============ ============
Revenues from transfers between divisions represent approximate amounts
that would be charged if an unaffiliated company provided the services. Total
divisional revenues are reconciled with total consolidated revenues by
eliminating inter-divisional revenues.
14
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors, which have affected certain aspects of the Company's
financial position, and operating results during the periods included in the
accompanying unaudited condensed consolidated financial statements. This
discussion should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the annual financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002 (File No. 0-27288).
Three Months Ended March 31,
------------------------------------------------------------
2003 2002
---------------------------- ----------------------------
% of % of
Amount Revenues Amount Revenues
------------ ------------ ------------ ------------
(in thousands, except percentages)
Revenues:
Air freight forwarding $ 325,636 67.3 $ 281,841 67.5
Ocean freight forwarding 63,357 13.1 48,027 11.5
Customs brokerage and other 94,657 19.6 87,241 21.0
------------ ------------ ------------ ------------
Revenues $ 483,650 100.0 $ 417,109 100.0
============ ============ ============ ============
% of Net % of Net
Amount Revenues Amount Revenues
------------ ------------ ------------ ------------
Net revenues:
Air freight forwarding $ 97,815 58.4 $ 91,783 59.6
Ocean freight forwarding 14,417 8.6 13,977 9.0
Customs brokerage and other 55,334 33.0 48,360 31.4
------------ ------------ ------------ ------------
Net revenues $ 167,566 100.0 $ 154,120 100.0
============ ============ ============ ============
Operating expenses:
Personnel costs 96,815 57.8 85,360 55.4
Other selling, general and
administrative expenses 66,113 39.4 67,224 43.7
------------ ------------ ------------ ------------
Operating income 4,638 2.8 1,536 0.9
Nonoperating expense, net (142) (0.1) (8,306) (5.3)
------------ ------------ ------------ ------------
Income (loss) before provision
(benefit) for income taxes 4,496 2.7 (6,770) (4.4)
Provision (benefit) for income taxes 1,701 1.0 (2,640) (1.7)
------------ ------------ ------------ ------------
Income (loss) before cumulative change
in accounting for negative goodwill 2,795 1.7 (4,130) (2.7)
Cumulative effect of change in
accounting for negative goodwill -- -- 213 0.1
------------ ------------ ------------ ------------
Net income (loss) $ 2,795 1.7 $ (3,917) (2.6)
============ ============ ============ ============
15
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
SUBSEQUENT EVENT
On April 1, 2003, we acquired the operations of Miami International
Forwarders (MIF), a privately held international freight forwarder and customs
broker based in Miami, Florida for approximately $14.0 million in cash and a
future payment of $10.0 million in the aggregate, which is payable in two equal
payments of $5.0 million on April 1, 2004 and April 1, 2005. Under the terms of
the purchase agreement, we acquired substantially all of the operating assets of
MIF. The purchase agreement also contains a two-year earnout payable in cash if
certain performance benchmarks are achieved.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues. Revenues increased $66.6 million, or 16.0%, to $483.7 million
in the three months ended March 31, 2003 compared to $417.1 million in the three
months ended March 31, 2002 primarily due to increases in both air freight
forwarding and ocean freight forwarding revenues. Net revenues, which represents
revenues less freight transportation costs, increased $13.5 million, or 8.8%, to
$167.6 million in the three months ended March 31, 2003 compared to $154.1
million in the three months ended March 31, 2002 due to increases in both air
freight forwarding and customs brokerage and other net revenues.
Air freight forwarding revenues. Air freight forwarding revenues
increased $43.8 million, or 15.5%, to $325.6 million in the three months ended
March 31, 2003 compared to $281.8 million in the three months ended March 31,
2002 as a result of volume increases primarily in Asia Pacific, followed by
Europe/Middle East and North America. The volume increases are primarily due to
new large customer contracts and gains in market share.
Air freight forwarding net revenues increased $6.0 million, or 6.5%, to
$97.8 million in the three months ended March 31, 2003 compared to $91.8 million
in the three months ended March 31, 2002. The air freight forwarding margin
decreased to 30.0% for the three months ended March 31, 2003 compared to 32.6%
for the three months ended March 31, 2002 due to pricing pressures resulting
from our customers' focus on costs, higher fuel and security surcharges levied
by airlines and the continued weakened U.S. economy.
Ocean freight forwarding revenues. Ocean freight forwarding revenues
increased $15.4 million, or 32.1%, to $63.4 million in the three months ended
March 31, 2003 compared to $48.0 million in the three months ended March 31,
2002. The increase in revenues was principally due to volume increases in Asia
Pacific, South America and Europe. Ocean freight forwarding net revenues
increased $0.4 million, or 2.9%, to $14.4 million in the three months ended
March 31, 2003 compared to $14.0 million in the three months ended March 31,
2002. Ocean forwarding margins, however, decreased to 22.8% in the three months
ended March 31, 2003 compared to 29.1% in the three months ended March 31, 2002
due to a combination of declines in yields on consolidated traffic and a change
in the mix from direct to consolidated activity.
Customs brokerage and other revenues. Customs brokerage and other
revenues, which includes warehousing, distribution and other logistics services,
increased $7.5 million, or 8.6%, to $94.7 million in the three months ended
March 31, 2003 compared to $87.2 million in the three months ended March 31,
2002 mainly due to increased logistics and import activity in Europe due to our
acquisition of a company in France that focuses on imports and the start-up of
two major logistics projects. Customs brokerage and other net revenues increased
by $6.9 million, or 14.3%, to $55.3 million in the three months ended March 31,
2003 compared to $48.4 million in the three months ended March 31, 2002. The
customs brokerage and other margin increased to 58.5% for the three months ended
March 31, 2003 compared to 55.4% for the three months ended March 31, 2002
primarily due to the new logistics projects in Europe.
Personnel costs. Personnel costs include all compensation expenses,
including those relating to sales commissions and salaries and to headquarters
employees and executive officers. Personnel costs increased $11.4 million, or
13.3%, to $96.8 million in the three months ended March 31, 2003 compared to
$85.4 million in the three months
16
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
ended March 31, 2002. As a percentage of net revenues, personnel costs were
57.8% in the three months ended March 31, 2003 compared to 55.4% in the three
months ended March 31, 2002. The increase in personnel costs is primarily due to
increases in expenses in North America and Europe. The increase in North America
is due to the temporary salary reduction for five pay periods implemented in the
U.S. during the first quarter of 2002. The increase in Europe is a result of
additional personnel for the new logistics projects.
Other selling, general and administrative expenses. Other selling,
general and administrative expenses decreased $1.1 million, or 1.7%, to $66.1
million in the three months ended March 31, 2003 compared to $67.2 million in
the three months ended March 31, 2002. As a percentage of net revenues, other
selling, general and administrative expenses were 39.4% in the three months
ended March 31, 2003 compared to 43.7% in the three months ended March 31, 2002.
The decrease is primarily due to a management focus on cost savings and
realization of merger related cost synergies. The lower expenses are offset by
increases primarily in facilities costs of $2.5 million, or 14.2%, as a result
of expansion of facilities for new logistics projects in Europe.
Nonoperating expense, net. For the three months ended March 31, 2003,
nonoperating expense, net, was $142,000 compared to nonoperating expense, net,
of $8.3 million for the three months ended March 31, 2002. The approximate $8.2
million change is primarily due to an impairment charge in the first quarter of
2002 of approximately $6.7 million for our investment in Miami Air. In addition,
in the first quarter of 2002, we recorded an accrual of $1.3 million for Miami
Air's outstanding letters of credit we guaranteed. See Note 7 of the notes to
the condensed consolidated financial statements.
Effective tax rate. The effective income tax rate for the three months
ended March 31, 2003 was 37.8% compared to 39.0% for the three months ended
March 31, 2002. Our effective tax rate fluctuates primarily due to changes in
the level of pre-tax income in foreign countries that have different rates and
certain income and/or expenses that are permanently non-taxable or
non-deductible in certain jurisdictions.
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. In 2002, we substantially reduced operating costs and worked to
diversify our customer base. Additionally in 2002, we made significant efforts
to collect outstanding customer accounts receivable amounts and were able to use
the cash from these collections to avoid additional new borrowings on our line
of credit. If we achieve significant near-term revenue growth, we may experience
a need for increased working capital financing as a result of the difference
between our collection cycles and the timing of our payments to vendors.
Based on current plans, we believe that our existing capital resources
will be sufficient to meet working capital requirements through March 31, 2004.
However, we cannot provide assurance that there will be no change that would
consume available resources significantly before that time. For example, the
effect of the war in Iraq and other tensions in the Middle East, concerns about
possible acts of terrorism directed against the United States and its interests,
the effect of Severe Acute Respiratory Syndrome, or SARS, or other military,
trade or travel disruptions impacting our ability to sell and market our
services in the United States and internationally may negatively impact our
results of operations. Additionally, funds may not be available when needed and
even if available, additional funds may be raised through financing arrangements
and/or the issuance of preferred or common stock or convertible securities on
terms and prices significantly more favorable than those of the currently
outstanding common stock, which could have the effect of diluting or adversely
affecting the holdings or rights of our existing stockholders. If adequate funds
are unavailable, we may be required to delay, scale back or eliminate some of
our operating activities, including, without limitation, the timing and extent
of our marketing programs and the extent and timing of hiring additional
personnel. We cannot provide assurance that additional financing will be
available to us on acceptable terms, or at all.
17
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
We make significant disbursements on behalf of our customers for
transportation costs (primarily ocean) and customs duties for which the customer
is the primary obligor. The billings to customers for these disbursements, which
are several times the amount of revenues and fees derived from these
transactions, are not recorded as revenues and expenses on our statement of
operations; rather, they are reflected in our trade receivables and trade
payables. Growth in the level of this activity or lengthening of the period of
time between incurring these costs and being reimbursed by our customers for
these costs may negatively affect our liquidity.
On April 1, 2003, we acquired the operations of Miami International
Forwarders (MIF), a privately held international freight forwarder and customs
broker based in Miami, Florida for approximately $14.0 million in cash and a
future payment of $10.0 million in the aggregate, which is payable in two equal
payments of $5.0 million on April 1, 2004 and April 1, 2005. Under the terms of
the purchase agreement, we acquired substantially all of the operating assets of
MIF. The purchase agreement also contains a two-year earnout payable in cash if
certain performance benchmarks are achieved.
Cash flows from operating activities. Net cash used in operating
activities was $5.4 million in the three months ended March 31, 2003 compared to
net cash provided by operating activities of $31.9 million in the three months
ended March 31, 2002. The decrease in the three months ended March 31, 2003 was
primarily due to a $12.1 million net decrease in cash from changes in working
capital for the three months ended March 31, 2003 compared to a $21.6 million
net increase in cash from changes in working capital for the three months ended
March 31, 2002. The positive working capital cash flow in the first quarter of
2002 was related to our efforts to collect significantly aged customer accounts
receivable amounts outstanding as of December 31, 2001. The negative working
capital cash flow in the first quarter of 2003 was due to an increase in current
accounts receivable balances related to our increase in revenues and timing of
payments for accounts payable and accrued transportation. Additionally during
the three months ended March 31, 2003, $7.2 million was transferred to
restricted cash, which consisted of $5.3 million to back security deposits for
an international subsidiary and $2.0 million for funding requirements related to
the EEOC Consent Decree settlement (see Note 11).
Cash flows from investing activities. Net cash used in investing
activities in the three months ended March 31, 2003 was $5.7 million compared to
net cash provided by investing activities of $1.6 million in the three months
ended March 31, 2002. We incurred capital expenditures of $4.3 million during
the three months ended March 31, 2003 as compared $3.7 million during the three
months ended March 31, 2002. During the first quarter of 2003, we completed an
acquisition of an international freight forwarder and customs broker in France
for approximately $1.1 million, net of cash acquired and made a $600,000
earnout payment related to an acquisition completed in a prior year. During the
three months ended March 31, 2002, we received proceeds of $5.3 million from
sales of other assets and a sale-lease back transaction.
Cash flows from financing activities. Net cash provided by financing
activities in the three months ended March 31, 2003 was $919,000 compared to net
cash used in financing activities of $1.9 million in the three months ended
March 31, 2002. Net borrowings on notes payable was $321,000 for the three
months ended March 31, 2003 compared to net repayments of $2.6 million in the
three months ended March 31, 2002. Proceeds from the exercise of stock options
were $598,000 in the three months ended March 31, 2003 compared to $146,000 in
the three months ended March 31, 2002.
Convertible subordinated notes
In December 2001, we issued $100 million aggregate principal amount of
5% convertible subordinated notes. The notes bear interest at an annual rate of
5%. Interest is payable on June 15 and December 15 of each year, beginning June
15, 2002. The notes mature on December 15, 2006. Deferred financing fees
incurred in connection with the transaction totaled $3.2 million and are being
amortized over five years as a component of interest expense.
The notes are convertible at any time four trading days prior to
maturity into shares of EGL common stock at a conversion price of approximately
$17.4335 per share, subject to certain adjustments, which was a premium of 20.6%
of the stock price at the issuance date. This is equivalent to a conversion rate
of 57.3608 shares per $1,000 principal amount of notes. Upon conversion, a
noteholder will not receive any cash representing accrued interest, other than
in the case of a conversion in connection with an optional redemption. The
shares that are potentially issuable may impact our diluted earnings per share
calculation in future periods by approximately 5.7 million shares. As of March
31, 2003, the fair value of the notes was $114.4 million.
We may redeem the notes on or after December 20, 2004 at specified
redemption prices, plus accrued and unpaid interest to, but excluding, the
redemption date. Upon a change in control as defined in the indenture agreement,
a
18
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
noteholder may require us to purchase its notes at 100% of the principal amount
of the notes, plus accrued and unpaid interest to, but excluding, the purchase
date.
The notes are general unsecured obligations of EGL. The notes are
subordinated in right of payment to all of our existing and future senior
indebtedness as defined in the indenture agreement. We and our subsidiaries are
not prohibited from incurring senior indebtedness or other debt under the
indenture agreement. The notes impose some restrictions on mergers and sales of
substantially all of our assets.
Credit agreement
Effective December 20, 2001, we amended and restated our existing
credit agreement. The amended and restated credit facility, which was last
amended effective as of March 31, 2003, is with a syndicate of three financial
institutions, with Bank of America, N.A. as collateral and administrative agent
for the lenders, and matures on December 20, 2004. The amended and restated
credit facility provides a revolving line of credit of up to the lesser of:
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 our billed and posted eligible
accounts receivable and the billed and posted eligible accounts
receivable of our wholly owned domestic subsidiaries and our
operating subsidiary in Canada, subject to some exceptions and
limitations, plus
o up to 85% of the net amount of our billed and unposted eligible
accounts receivable and billed and unposted eligible accounts
receivable of our wholly owned domestic subsidiaries owing by
account debtors located in the United States, subject to a maximum
aggregate availability cap of $10 million, plus
o up to 50% of the net amount of our unbilled, fully earned and
unposted eligible accounts receivable and unbilled, fully earned and
unposted eligible accounts receivable of our wholly owned domestic
subsidiaries owing by account debtors located in the United States,
subject to a maximum aggregate availability cap of $10 million,
minus
o reserves from time to time established by Bank of America in its
reasonable credit judgment.
The aggregate of the last four sub-bullet points above is referred to
as our eligible borrowing base.
The maximum amount that we can borrow at any particular time may be
less than the amount of our revolving credit line because we are required to
maintain a specified amount of borrowing availability under the amended and
restated credit 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 amended and 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.
The amended and restated credit facility includes a $50 million letter
of credit subfacility. We had $23.1 million in standby letters of credit
outstanding as of March 31, 2003 under this facility. The collateral value
associated with the revolving line of credit at March 31, 2003 was $176.6
million. No amounts were outstanding under the revolving line of credit as of
March 31, 2003. Therefore, our available, unused borrowing capacity was $51.9
million as of March 31, 2003.
19
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
For each tranche of principal borrowed under the revolving line of
credit, we may elect an interest rate of either LIBOR plus an applicable margin
of 2.00% to 2.75% that varies based upon availability under the line, or the
prime rate announced by Bank of America, plus, if the borrowing availability is
less than $25 million, an applicable margin of 0.25%.
We refer to borrowings bearing interest based on LIBOR as a LIBOR
tranche and to other borrowings as a prime rate tranche. The interest on a LIBOR
tranche is payable on the last day of the interest period (one, two or three
months, as selected by us) for such LIBOR tranche. The interest on a prime rate
tranche is payable monthly.
A termination fee of 0.25% of the total revolving commitment would be
payable upon termination of the amended and restated credit facility if the
termination occurs before December 20, 2003 (unless terminated in connection
with a refinancing arranged or underwritten by Bank of America or its
affiliates).
We are subject to certain covenants under the terms of the amended and
restated credit facility, including, but not limited to, (a) maintenance at the
end of each fiscal quarter of a minimum specified adjusted tangible net worth
and (b) quarterly and annual limitations on capital expenditures of $12 million
per quarter or $48 million cumulative per year.
The amended and restated credit facility also places restrictions on
additional indebtedness, dividends, liens, investments, acquisitions, asset
dispositions, change of control and other matters, is secured by substantially
all of our assets, and is guaranteed by all domestic subsidiaries and our
Canadian operating subsidiary. In addition, we will be subject to additional
restrictions, including restrictions with respect to distributions and asset
dispositions if our eligible borrowing base falls below $40 million. Events of
default under the amended and restated credit facility include, but are not
limited to, the occurrence of a material adverse change in our operations,
assets or financial condition or our ability to perform under the amended and
restated credit facility or that of any of our domestic subsidiaries or our
Canadian operating subsidiary. The Amendment to the Credit Agreement dated March
31, 2003 consented to our acquisition of substantially all the business
operations and assets of MIF. See Note 12 of the notes to the condensed
consolidated financial statements.
Litigation
In addition to the EEOC matter (Note 11), 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 accruals for
these other matters and it is management's opinion that the resolution of such
litigation will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Stock options
As of March 31, 2003, we had outstanding non-qualified stock options to
purchase an aggregate of 5.5 million shares of common stock at exercise prices
equal to the fair market value of the underlying common stock on the dates of
grant (prices ranging from $8.09 to $33.81). At the time a non-qualified stock
option is exercised, we will generally be entitled to a deduction for federal
and state income tax purposes equal to the difference between the fair market
value of the common stock on the date of exercise and the option price. As a
result of exercises for the three months ended March 31, 2003 of non-qualified
stock options to purchase an aggregate of 58,000 shares of common stock, we were
entitled to a federal income tax deduction of approximately $75,000.
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.
20
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
COMMISSIONER'S CHARGE
As discussed in "Part II, Item 1. Legal Proceedings", we have reached a
Consent Decree settlement with the EEOC which resolves the EEOC's allegations
contained in the Commissioners Charge. This Consent Decree was approved by the
District Court on October 1, 2001. The Consent Decree became effective on
October 3, 2002 following the dismissal of all appeals related to the Decree.
RELATED PARTY TRANSACTIONS
Investment in Miami Air International, Inc.
In connection with the Miami Air investment, Miami Air and EGL entered
into an aircraft charter agreement whereby Miami Air agreed to convert certain
of its passenger aircraft to cargo aircraft and to provide aircraft charter
services to us for a three-year term. In addition, 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. This letter
of credit was reduced to $3.0 million in January 2003. 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 made by us in respect to the letter of credit. As
of March 31, 2003, Miami Air had no funded debt under the line of credit that is
supported by the standby letter of credit. As of March 31, 2003, Miami Air had
outstanding $2.2 million in letters of credit and surety bonds that were
supported by the standby letter of credit.
During the first quarter of 2002, there were three aircraft subject to
the aircraft charter agreement and we paid approximately $4.9 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 agreed
to pay $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 the
Company aware that the amounts due Miami Air's bank (which are secured by seven
727 planes) were significantly higher than the market value of those planes. In
addition, Miami Air had outstanding operating leases for 727 and 737 airplanes
at above current market rates, including two planes that were expected to be
delivered in 2002. Throughout the fourth quarter of 2001 and the first quarter
of 2002, Miami Air was in discussions with its bank to obtain debt concessions
on the seven 727 planes, to buy out the lease on a 727 cargo plane and to reduce
the rates on the 737 passenger planes. Miami Air had informed us that its
creditors had indicated a willingness to make concessions. In May 2002, we were
informed that Miami Air's creditors were no longer willing to make concessions
and that negotiations with its creditors had reached an impasse and no agreement
appeared feasible. As such, in the first quarter of 2002, we recognized an other
than temporary impairment of the entire carrying value of our $6.7 million
investment in Miami Air, which included a $509,000 increase in value
attributable to our 24.5% share of Miami Air's first quarter 2002 results of
operations. In addition, we recorded an accrual of $1.3 million for our
estimated exposure on the outstanding funded debt and letters of credit
supported by the standby letter of credit. During the third quarter of 2002,
Miami Air informed us that certain of its creditors had made certain
concessions. As of March 31, 2003, we had not adjusted our accrual and there can
be no assurance that the ultimate loss, if any, will not exceed such estimate
requiring an additional charge.
Miami Air, each of the private investors and the continuing Miami Air
stockholders also entered into a stockholders agreement under which 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 March 31, 2003,
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 was issued in December 2002, when all investors were called upon
by the Board of Directors of Miami Air to purchase their preferred shares. The
Series A
21
EGL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
preferred stock (1) is not convertible, (2) has a 15.0% annual dividend rate and
(3) is subject to mandatory redemption in July 2006 or upon the prior occurrence
of specified events. The original charter transactions between Miami Air and us
were negotiated with Miami Air's management at arms length at the time 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.
Aircraft usage payments
In conjunction with our business activities, we periodically utilize
aircraft owned by entities controlled by Mr. Crane. We are charged for actual
usage of the plane on an hourly basis and billed on a periodic basis. During the
three months ended March 31, 2003 and 2002, respectively, we reimbursed the
entities controlled by Mr. Crane $126,000 and $346,000, respectively, for hourly
usage of the plane.
Source One Spares
We subleased a portion of our warehouse space in Houston, Texas to a
customer pursuant to a five-year sublease, which was terminated in early 2002
and became a month-to-month sublease agreement. The customer is partially owned
by Mr. Crane. Rental income was approximately $54,000 and $21,000 for the three
months ended March 31, 2003 and 2002, respectively. In addition, we billed this
customer approximately $7,000 and $35,000 for freight forwarding services for
the three months ended March 31, 2003 and 2002, respectively.
NEW ACCOUNTING PRONOUNCEMENTS AND CRITICAL ACCOUNTING POLICIES
See Notes 1 and 2 of the notes to the condensed consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in exposure to market risk from
that discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. See Note 4 of the notes to the condensed consolidated
financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, an evaluation was carried
out under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the disclosure controls and procedures (as defined in
Rules 13a-15 and 15d-14 of the Exchange Act). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective. No significant changes were
made in internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
22
EGL, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 2, 2001, we and the U.S. Equal Employment Opportunity
Commission (the EEOC) announced the filing of a Consent Decree settlement. This
settlement resolves all claims of discrimination and/or harassment raised by the
EEOC's Commissioner's Charge. The EEOC's Commissioner's Charge was issued in
December 1997 and subsequent events were most recently disclosed in our Form
10-K for the year ended December 31, 2002. Under the Consent Decree, we 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, we agreed to contribute $500,000 to establish a
Leadership Development Program (the Leadership Development Fund). The Program
will provide training and educational opportunities for women and minorities
already employed by us and will also establish scholarships and work study
opportunities at educational institutions. In entering the Consent Decree, we
have not made any admission of liability or wrongdoing. The Consent Decree was
approved by the District Court in Houston on October 1, 2001. The Consent Decree
became effective on October 3, 2002 following the dismissal of all appeals
related to the Decree. During the quarter ended September 30, 2001, we accrued
$10.1 million related to the settlement, which includes the $8.5 million payment
into the fund and $500,000 to the Leadership Development Program described
above, administrative costs, legal fees and other costs associated with the EEOC
litigation and settlement.
Of the eight named plaintiffs who filed suit against us in 2000
alleging gender, race and national origin discrimination, as well as sexual
harassment, one has accepted a settlement of her claims against us. The
remaining individuals who were named Plaintiffs in the underlying action have
submitted claims to be considered for settlement compensation under the Consent
Decree. The claims administration process is currently underway; however, it
could be several months before it is completed and Claimants are notified of
whether they qualify for settlement compensation and, if so, the amount for
which they qualify. Once Claimants are notified of their eligibility status by
the Claims Administrator, they have an option to reject the settlement
compensation and pursue litigation on their own behalf and without the aid of
the EEOC. To the extent any of the individual plaintiffs or any other persons
who might otherwise be covered by the settlement opt out of the settlement, we
intend to continue to vigorously defend against their allegations. We currently
expect to prevail in our defense of any remaining individual claims. There can
be no assurance as to what amount of time it will take to resolve the other
lawsuits and related issues or the degree of any adverse effect these matters
may have on our financial condition and results of operations. A substantial
settlement payment or judgment could result in a significant decrease in our
working capital and liquidity and recognition of a loss in our consolidated
statement of operations. The Consent Decree settlement provides that we
establish and maintain segregated accounts for the Class Fund and Leadership
Development Fund. As of March 31, 2003, we have deposited $4.5 million of the
required $8.5 million into the Class Fund and $500,000 into the Leadership
Development Fund. See Note 11 of the notes to our condensed consolidated
financial statements.
From time to time we are a party to various legal proceedings arising
in the ordinary course of business. Except as described above, we are not
currently a party to any material litigation and are not aware of any litigation
threatened against us, which we believe would have a material adverse effect on
our business.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
23
EGL, INC
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS
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 and the MIF acquisition; the Restated Credit Facility; 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); headcount reductions (including the scope, timing, impact and
effects thereof); pending or expected financing transactions; changes in the
Company's dedicated charter fleet strategy (including the scope, timing, impact
and effects thereof); 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 litigation and our intentions or expectations of prevailing with respect
thereto; future operating expenses; future margins; use of credit facility
proceeds; 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; the impact
of the war in Iraq and other tensions in the Middle East, concerns of possible
terrorism directed against the United States and its interests, the impact of
SARS, or other military or trade or travel disruptions that could impact our
ability to do business; ability to continue growth and implement growth and
business strategy; the ability of expected sources of liquidity to support
working capital and capital expenditure requirements; the tax benefit of any
stock option exercises; future expectations and outlook and any other statements
regarding future growth, cash needs, terminals, operations, business plans and
financial results and any other statements which are not historical facts. When
used in this document, the words "anticipate," "estimate," "expect," "may,"
"plans," "project," and similar expressions are intended to be among the
statements that identify forward-looking statements.
The Company's results may differ significantly from the results
discussed in the forward-looking statements. Such statements involve risks and
uncertainties, including, but not limited to, those relating to costs, delays
and difficulties related to acquisitions or mergers, including the integration
of 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 results of
the EEOC settlement (including the timing and terms thereof and the results of
any appeals or challenges thereto) and the results of related or other
litigation; the Company's vulnerability to general economic conditions and
dependence on its principal customers; the Company's vulnerability to risks
inherent in operating in international markets, including without limitation,
general political and economic instability in international markets as a result
of, among other things, the war in Iraq and other tensions in the Middle East,
concerns of possible terrorism directed against the United States and its
interests, the impact of SARS, or other military or trade or travel disruptions;
the timing, success and effects of the Company's restructuring, 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
24
EGL, INC.
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 Department of Transportation grant application; accuracy of
accounting and other estimates; the Company's potential exposure to claims
involving its local pickup and delivery operations; 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, 2002.
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 Third Amendment to Credit Agreement, dated as of
March 31, 2003, between EGL and Bank of America, N.A., and
other financial institutions named therein.
10.2 Amended and Restated Non-Employee Director Stock Plan.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
----------
* Incorporated by reference as indicated.
(b) REPORTS ON FORM 8-K.
NONE
25
EGL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EGL, INC.
---------------------
(Registrant)
Date: May 15, 2003 By: /s/JAMES R. CRANE
------------ -----------------------
James R. Crane
Chairman, President and
Chief Executive Officer
Date: May 15, 2003 By: /s/ELIJIO V. SERRANO
------------ -------------------------
Elijio V. Serrano
Chief Financial Officer
26
EGL, INC.
CERTIFICATIONS
I, James R. Crane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EGL,
Inc. (the "registrant");
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 officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
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 officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this 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: May 15, 2003
By: /s/ JAMES R. CRANE
---------------------------------------
James R. Crane, Chief Executive Officer
27
EGL, INC.
CERTIFICATIONS
I, Elijio V. Serrano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EGL,
Inc. (the "registrant");
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 officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
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 officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this 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: May 15, 2003
By: /s/ ELIJIO V. SERRANO
------------------------------------------
Elijio V. Serrano, Chief Financial Officer
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EGL, INC.
INDEX TO 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 Third Amendment to Credit Agreement, dated as of March 31,
2003, between EGL and Bank of America, N.A., and other financial
institutions named therein.
10.2 Amended and Restated Non-Employee Director Stock Plan.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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