ITEM 1 - BUSINESS
General
Circle International Group, Inc. (formerly known as the Harper Group, Inc.) ("the Company") is a leader in providing transportation and integrated logistics services for the international movement of goods and the furnishing of value-added information, distribution, and inventory management services to customers worldwide. The Company is principally engaged in international air and ocean freight forwarding, customs brokerage and integrated logistics. The Company provides value- added services in addition to those customarily provided by traditional air freight forwarders, ocean freight forwarders and customs brokers. These services are designed to provide global logistics solutions for customers in order to streamline their supply chain, reduce their inventories, improve their logistics information, enhance their profitability and provide them with more efficient and effective international distribution strategies.
The Company's global array of services benefits customers by reducing overall international logistics costs and increasing the speed and reliability of the delivery of goods worldwide. These services include: air and ocean export and import freight transportation; worldwide customs brokerage, duty drawback, Free Trade Zone management and associated services; global freight tracking; other information management services such as electronic data interchange ("EDI"), electronic invoicing and purchase order management; logistics management; warehousing and distribution services; inventory and materials management; protective cargo packing; bonded warehousing; project cargo management; global purchasing and trade finance services; and marine insurance (ocean and air coverage).
The Company's global services are supplied through its network of over 300 offices, agents and distribution centers located in over 100 countries on six continents. These facilities are linked by the Company's real-time, on-line communications network that speeds the two- way flow of shipment data and related logistics information between origins and destinations around the world. In addition to its own operations, the Company utilizes a network of overseas agents for comprehensive, global coverage of major trade centers.
The Company commenced operations in 1898, was incorporated in California in 1970, and reincorporated in Delaware in 1987. Until December 31, 1993, its operating subsidiaries in the United States included Circle Airfreight Corporation, Inc., its principal international air freight subsidiary, Harper Robinson & Co., Inc., its principal international ocean freight forwarding and customs brokerage subsidiary; Max Gruenhut International, Inc., a full service air and ocean freight forwarding firm; and Darrell J. Sekin and Co. ("Sekin"), a full service firm engaged in air and ocean freight forwarding and customs brokerage.
Effective January 1, 1994, Circle Airfreight Corporation, Inc. and Max Gruenhut International, Inc. were merged into Harper Robinson & Co., Inc., which was renamed Circle International, Inc. These domestic operating subsidiaries were unified in order to achieve economic and service efficiencies, to provide a common set of standards and procedures, and to improve the sales and marketing of the Company's integrated services. Internationally, the Company continues to operate a number of subsidiaries under the names "Circle Freight International" and "Max Gruenhut", in addition to the name "Circle International". On May 13, 1997 the Company changed its name to Circle International Group, Inc. to align its identity with that of its operating subsidiaries. Unless the context otherwise requires, references to the Company or Circle include Circle International Group, Inc. and its subsidiaries.
Certain information regarding the Company's operations by geographic regions for the three years in the period ended December 31, 1997 is contained in Note 12 of the Notes to Consolidated Financial Statements.
The following tables show the approximate amounts of revenue and net revenue, expressed in dollars and as a percentage, attributable to the Company's principal services during each of the three years in the period ended December 31, 1997. Revenue from air and ocean freight forwarding, where the Company acts in the capacity of a consolidator of shipments, includes all transportation charges to the customer. Revenue from air and ocean freight forwarding, where the Company acts in the capacity of a cargo agent, includes only the commissions charged to carriers and forwarding and related fees charged to customers. Revenue earned by the Company as a customs broker includes commissions and fees charged to customers for those services as well as services relating to distribution, warehousing, materials management, and other related services. Net revenue for air and ocean freight forwarding, which is the equivalent of gross profit in other industries, is determined by deducting any freight consolidation costs from freight forwarding revenue. In the opinion of management, net revenue provides a more accurate measure than revenue of the relative importance of the Company's principal services.
Recent Developments
Acquisitions: - -------------
The Company expanded its operations in 1997 by acquiring businesses in New Zealand and Kansas City, USA, entering into a joint venture in Turkey (which became operational in the first quarter of 1998), and opening offices in Hungary, China, Finland and the Czech Republic. It also purchased all of the shares of its partner in Circle Gilmex International, a Belgium company.
In February 1997, the Company combined its owned operations in Thailand with Worldbridge International to form a new joint venture company called Circle Worldbridge International (Thailand), owned 55% by the Company. The purpose of this transaction was to increase market share in Thailand and improve the level of services offered to customers in that market.
Information Systems: - --------------------
The Company continuously enhances its information systems capabilities in order to meet its customers' changing needs and to provide first-class information transmission, processing, and management services. The Company has been a leader in providing its customers with global shipment tracking and tracing capabilities and with providing data and reports to better manage the global logistics process.
The Company is devoted to improving the automation of its services in order to support the logistics needs of its customers, increase efficiency and enhance employee productivity. The Company's information systems allow its customers to track shipments on line, produce variance reports and analyses helpful to managing their business, and provide an easy-to-use electronic mail communication system.
The Company has invested considerable effort on its EDI capabilities to allow electronic transmission of shipment documentation according to customer requirements. Additionally, the Company maintains a web-site through which customers can track airfreight shipments. The Company continues to link future development of its information systems to the specific requirements of its customers and seeks to connect its customers to its information systems and Internet tools whenever possible. New information systems initiatives include implementation of purchased integrated accounting and operational software within Europe, internally developed enhancements to the Company's global tracking systems, and assessment of new accounting and operational software for the Americas.
Year 2000: - ----------
The Company is currently engaged in an enterprise wide project to upgrade its information, accounting and operational computer software to provide a more integrated and cost effective means of conducting its business. This process involves modifying or replacing certain hardware or software. An important factor in this project is ensuring the software programs purchased or designed internally will consistently recognize the Year 2000. The Company anticipates that all hardware and software which is integral to the Company's ability to effectively operate and manage its business will be replaced, modified or upgraded by the Year 2000.
The Company is communicating with all of its significant suppliers and large customers to determine the extent to which the Company would be vulnerable to those parties' failure to remedy their own Year 2000 issues. The Company can give no guarantees that the systems of other companies will be converted on time or that a failure to convert by another company would not have a material adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram, replace and test software. The Company anticipates completing the project not later than September 1999, which is prior to any anticipated Year 2000 impact on its operating systems. The Company is currently assessing the related overall costs and determining whether such costs will be material to its financial position, results of operations or its cash flows. Purchased hardware and software will be capitalized in accordance with normal policy.
The costs and completion date of the project are based on management's best estimates. However, due to the interdependent nature of worldwide computer systems, both internal and external to the Company, there can be no assurances that the Company will not be adversely affected in the Year 2000.
Quality Initiatives: - --------------------
In key global regions the Company maintains personnel focused on implementing quality initiatives to better serve customers' needs and improve internal efficiencies. In 1996 and 1997 the Company achieved ISO 9002 certification at 32 major locations within the USA, covering approximately 90% of our USA employee population. The Company has achieved ISO 9001 or 9002 certifications in many locations throughout Europe, South Africa and in the Asia-Pacific region. The Company's customers increasingly demand ISO or similar quality certification, and the Company's quality initiatives improve its ability to attract and retain business, and to identify ways to improve customer service.
Facilities: - -----------
The Company continues to modernize and expand its facilities to meet the increased need for distribution, materials management and warehouse services. In 1997, the Company expanded its leased facilities in Singapore, China, the Philippines and the United Kingdom. The Company expanded or made improvements to several of its existing leased or owned facilities throughout the USA. In 1997, the Company entered into a built to suit lease for a 120,000 square foot facility near JFK airport in New York, which is expected to become operational in 1998. Additional new facilities are anticipated in 1998 in continuation of the Company's facilities program.
Description of Business
International Air Freight Forwarding: - -------------------------------------
The Company believes that it is one of the largest forwarders of international air freight in the United States. The Company's air freight forwarding and related logistics services include the following: inland transportation of freight from point of origin to distribution center or the carrier's cargo terminal; warehousing; cargo assembly; export packing and vendor shipment consolidation; global freight forwarding; charter arrangement and handling; electronic transmittal of logistics documentation; electronic purchase order/shipment tracking; expedited document delivery to overseas destinations for customs clearance; and priority notification to shipper and consignee of cargo arrival. In addition, the Company continues to expand the scope of its services, including such services as logistics services for commercial and governmental projects, inventory management, EDI and cargo insurance. The Company does not own or operate aircraft, which management believes gives the Company increased flexibility to tailor its services to customer requirements.
As a global air freight forwarder, the Company is both a consolidator of air freight shipments (an indirect air carrier) and an airline cargo agent. The following table provides certain information concerning the Company's air freight forwarding business during each of the three years ended December 31, 1997.
During 1997, the Company's principal air freight forwarding customers were shippers of computer, electronic and high technology equipment, automotive products, machinery and machine parts, consumer goods, clothing, pharmaceuticals, chemicals, and aerospace equipment.
The air freight forwarding business of the Company is not dependent on any one customer or industry. The Company provides services to global or multinational customers, as well as regional customers. No customer accounted for more than 5% of the Company's net air freight forwarding revenue in 1997.
Indirect Air Carrier: As an indirect air carrier, the Company procures shipments from its customers, consolidates shipments bound for a particular destination, determines the routing, selects the direct carrier (an airline) with which the consolidated lot is to move and tenders each consolidated lot as a single shipment to the direct carrier for transportation to a destination. At the destination the Company or its agent receives the consolidated lot, breaks it into its component shipments and distributes the individual shipments. During 1997, the Company derived approximately 85% of its net air freight forwarding revenue from its services as an indirect air carrier.
The Company's rates are based on a per kilo charge that generally decreases within a certain range as the weight of the shipment increases. The Company ordinarily charges the shipper a rate less than the rate which the shipper would be charged by an airline. The rates that airlines charge to forwarders and others also generally decrease as the weight of the shipment increases. As a result of the consolidation of its customers' shipments, the Company generally obtains lower rates per kilo from airlines than the rates it charges its customers for individual shipments. This rate differential is the primary source of the Company's net air freight forwarding revenue. The Company's practice is to make prompt adjustments in its rates to match changes in airline rates.
As part of its services, the Company prepares documentation relating to the international movement of goods; provides handling, packing, and containerizing services; arranges for the routing and tracing of shipments when necessary; provides physical breakbulk, delivery and inland transportation services; and arranges for freight insurance. Another source of the Company's net air freight forwarding revenue is the fees which the Company charges for services related to the movement of goods, which include computer-prepared shipment documentation; expedited delivery of air waybills, packing lists, commercial invoices, and other documents; and electronic shipment tracking and tracing. The Company offers its customers access to its global on-line computer information system, which acts as a comprehensive source of vital information for its customers.
Airline Agent: As an authorized cargo sales agent of most airlines worldwide, the Company arranges for the transportation of individual shipments and receives from the airline a commission for arranging the shipment. In addition, the Company provides the shipper with ancillary services such as export documentation for which it receives a separate fee. When acting in this capacity, the Company does not consolidate shipments or have responsibility for shipments once they have been tendered to the airline. The Company conducts its agency air freight forwarding operations from the same facilities as its indirect carrier operations, and services the same regions of the world. During 1997, the Company derived approximately 15% of its air freight forwarding net revenue from its services as an airline agent.
Customs Brokerage: - ------------------
The Company functions as a customs broker with respect to entries of freight into approximately 55 major destinations in the United States and in about 250 overseas destinations through its network of offices and agents.
In its capacity as a customs broker, the Company 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 best commodity classifications and in qualifying for duty drawback refunds. The Company's customs brokers and support staff have substantial knowledge of the complex tariff laws and customs regulations governing the payment of duty, as well as valuation and import restrictions in their respective countries. Within the U.S. the Company employs a significant number of personnel holding individual Customs broker licenses.
The Company believes that it is a leader in the use of computer technology for customs brokerage activities on behalf of its clients. The Company has been a leader in the use of the Automated Brokerage Interface information system, providing an on-line link with the United States customs agencies. In several global trading centers in addition to the United States, the Company's offices are connected electronically to customs agencies for expedited pre-clearance of goods and centralized import management. Such on-line interface with customs agencies speeds freight release and provides nationwide control of clearances at multiple ports and airports of entry.
The Company works with importers to design cost-effective import programs that utilize the Company's distribution and logistics services and computer technology. Such services include electronic document preparation, routing cargo from overseas origins to ports and airports of entry, bonded warehousing, distribution of the cleared cargo to inland locations and duty drawback. For consolidated shipments, containers are devanned, cargo is segregated according to final destination, and goods are forwarded to final destinations. In many U.S. and overseas locations, the Company's bonded warehouses enable importers to defer payment of customs duties and coordinate release of cargo with their production or distribution schedules. Goods are stored under Customs Service supervision until the importer is ready to withdraw or re-export them. The Company receives storage charges for these in-transit goods and fees for related ancillary services. The Company also offers Free Trade Zone management and duty drawback services to provide customers with additional tools to maintain cost- effective import programs.
As a customs broker operating in the United States, the Company is licensed by the Treasury Department and regulated by the United States Customs Service. The Company's fees for acting as a customs broker in the United States are not regulated and the Company does not have a fixed fee schedule for customs brokerage services. Instead, its fees are generally based on the volume of business transacted for a particular customer, and the type, number and complexity of services provided. In addition to its fees, the Company bills the importer for amounts which the Company has paid on the importer's behalf, including duties, collect freight charges, and similar payments.
International Ocean Freight Forwarding: - ---------------------------------------
As a global ocean freight forwarder, the Company arranges for the shipment of freight by ocean carriers and acts as the agent of the shipper or the importer. The Company's ocean freight forwarding and related logistics services include inland transportation from point of origin to distribution facility or port of export; cargo assembly, packing and consolidation; warehousing; electronic transmittal of documentation and shipment tracking; expedited document delivery; pre- alert consignee notification; and cargo insurance.
A number of the Company's facilities provide protective cargo packing, crating and specialized handling services for retail goods, government-specification cargo, consumer goods, hazardous cargo, heavy machinery and assemblies, and perishable cargo. Other facilities are equipped to handle tons of equipment and material from multiple origins to overseas "turn-key" projects, such as manufacturing facilities or government installations. The Company does not own or operate ships or assume carrier responsibility, preferring to retain the flexibility to tailor logistics services and options to the customer's requirements.
The Company's compensation for its ocean freight forwarding services is derived principally from commissions paid by shipping lines and from forwarding and documentation fees paid by its customers, who are either shippers or consignees. In 1997, approximately 57% of the Company's net ocean freight forwarding revenue was attributable to commissions, forwarding fees, and associated ancillary services.
Ocean Freight Consolidation: - ----------------------------
The Company's global operations as an indirect ocean carrier or NVOCC (non-vessel operating common carrier) are similar in some respects to its air freight consolidation operations. The Company procures customer freight, consolidates shipments bound for a particular destination, determines the routing, selects the ocean carrier or charters a ship, and tenders each consolidated lot as a single shipment to the direct carrier for transportation to a distribution point. As a NVOCC, the Company generally derives its revenue from the spread between the rate specified in a tariff which it has on file with the Federal Maritime Commission and the ocean carrier's charge to the Company for carrying the shipment, in addition to charging for other ancillary services related to the movement of the freight. Because of the volume of freight controlled and consolidated by the Company, it is generally able to obtain lower rates from ocean carriers than the rate which the shipper would be able to procure. In 1997, this service, and associated ancillary services, contributed approximately 43% of the Company's net ocean freight forwarding revenue.
Distribution and Materials Management Services: - -----------------------------------------------
The Company offers a full range of customized distribution and materials management services in connection with the transportation of cargo. These services are provided in a number of the Company's owned logistics facilities in many locations throughout the world, as well as in premises leased from others. In 1997, the Company continued its program of building state-of-the-art warehouse and distribution facilities and new facilities projects are contemplated for 1998. The Company's distribution and materials management services include inventory control, order processing, import/export freight staging, protective and specialized packing and crating, pick and pack operations, containerization, consolidation and deconsolidation, and special handling for perishables, hazardous materials, and heavy-lift equipment. For import shipments, the Company provides bonded warehouse services and in certain locations Free Trade Zone services. These warehouse and distribution services complement the other transportation services, including information systems tools, provided by the Company and form part of the integrated logistics solutions the Company offers to its customers.
Insurance: - ----------
Another transportation service offered to customers is the arranging of international marine/air cargo insurance in connection with the Company's air freight and ocean freight forwarding operations. Insurance coverage frequently is tailored to a customer's shipping program and is procured for the customer as a component of the Company's integrated logistics. The Company also arranges for surety bonds for importers as part of its customs brokerage activities.
Global Projects: - ----------------
The Company has global project divisions in North America and the United Kingdom to meet the special requirements of global project management and heavy lift movements. In addition to logistics advice, and traditional ocean and air transportation services, the project divisions provide on-site assistance, vessel chartering services and consulting regarding large-scale project movements.
Trade Facilitation Services: - ----------------------------
The Company's wholly - owned subsidiary, Circle Trade Services Ltd. ("CTSL"), offers purchasing, procurement and trade finance services to companies engaged in global trade. CTSL's mission is to provide customers requiring the international transportation of cargo with creative global trade solutions, which enable them to successfully complete international transactions. Included among its various trade services, CTSL has developed programs for customers which result in lower costs by finding new sourcing opportunities, coordinating the activities of multiple suppliers, and creating trade finance solutions. CTSL offers international procurement and financing expertise not offered by traditional logistics companies and works with a global network to develop this specialized business.
Competition and Business Conditions
The Company's principal businesses are directly related to the volume of international trade, particularly trade between the United States and other nations. In general, global trading is expanding as businesses increasingly seek new sourcing opportunities and penetrate international markets. The extent of such trade is influenced by many factors, including economic and political conditions in the United States and abroad, changes in supply or manufacturing practices, labor conditions, wars and other armed conflicts, currency fluctuations, and United States and foreign laws relating to tariffs, trade restrictions, foreign investments and taxation.
The Company is one of the world's largest international freight forwarders and integrated logistics providers. In addition to competition from other freight forwarders and cargo sales agents, the Company encounters competition from direct carriers which actively solicit freight from shippers and from integrated transportation companies that operate their own aircraft and also act as carriers. Other transportation-related businesses, such as trucking and distribution companies, have also entered the logistics and freight forwarding market. In recent years, there has been a trend towards consolidation in the forwarding industry which, together with pressure to reduce transportation costs, has led to intensified competition and lower operating margins. Significant competition comes from large domestic and foreign firms with substantial capital resources which have offices in multiple global locations, offer a broad array of services and provide information systems.
As a customs broker and ocean freight forwarder, the Company encounters strong competition in every port in which it does business. The Company has customs brokerage and ocean freight forwarding offices in most major United States ports, and it competes with large domestic and foreign firms, as well as local and regional firms.
For several years the Company has offered customers multiple transportation services, in addition to traditional air and ocean freight forwarding, in order to meet all of the logistics requirements of its customers. An extension of its array of multiple services is the Company's integrated transportation logistics program under which the Company offers a comprehensive program designed to meet the customer's total door-to-door transportation requirements. This assists the customer in creating more efficient global sourcing, financing, inventory distribution, and warehousing strategies. The value-added logistics capabilities which support this strategy use the full spectrum of services offered by the Company, including information management, materials management, protective packing, vendor coordination and purchase order processing, ocean or air transportation, customs brokerage, warehouse and distribution and global trade services. The Company's transportation logistics program often relies on the integration of its customers' information systems with the Company's information systems, frequently using electronic data interfaces and requiring employees assigned and dedicated exclusively to the customer's shipment management requirements.
Integrated logistics and related value-added services are, in part, a response to the growing trend toward the outsourcing of key distribution functions by businesses requiring international logistics services and are a response to competitive pressures which have reduced traditional freight forwarding transportation margins.
Marketing
The Company's worldwide services are marketed primarily by its senior executives, by its salespersons and by over 400 country, regional, branch and district managers who divide their time between marketing, administration and operations. Such persons generally deal directly with executives in the transportation, finance, logistics, shipping or purchasing departments of the Company's existing and potential customers. Their sales efforts are supplemented by the Company's agents in certain foreign commercial centers in which the Company does not have an office or terminal. The Company employs a global sales team targeting multinational customers, regional sales teams, local sales professionals, the overseas assignments of foreign employees responsible for targeting specific trade lanes, and the use of foreign agents. The Company also has Marketing and Global Sales departments designed to support the Company's sales and marketing activities.
In conjunction with these sales and marketing efforts, the Company continues to invest significant resources in enhancing its information systems to make these systems more responsive to customers and other users in managing their international transportation needs. The use of EDI applications and dial up visibility to a customer's shipments via the Internet also serve as important sales tools.
Employees
As of December 31, 1997, the Company employed over 3,900 persons, of whom approximately 775 were engaged in managerial and sales activities, and the balance were engaged in operations or were general office employees.
Executive Officers
The Company's executive officers are as follows:
Name Age Position
Peter Gibert 55 Chairman of the Board, President and Chief Executive Officer Robert J. Diaz 55 Senior Vice President, Chief Financial Officer and Treasurer Kim E. Wertheimer 44 Vice President (and Executive Vice President of Circle International, Inc.) Robert H. Kennis 45 Vice President, Secretary and General Counsel
Mr. Gibert assumed the position of Chief Operating Officer in May 1991, following the Company's acquisition of Darrell J. Sekin & Co. ("Sekin"). Mr. Gibert originally joined the Company in 1965 and served in numerous positions within the Company until January 1984, when he joined Sekin as its President. In May 1992, he became Chief Executive Officer of the Company, and in May 1993 he was elected Chairman of the Board of Directors. Mr. Gibert was first elected to the Board of Directors at the 1992 Annual Meeting of Shareholders and serves as a Class I director.
Mr. Diaz originally joined the Company in April 1992. He served as its Vice President and Chief Financial Officer until October 1992, when he joined Coors Brewing Company as its Vice President, Corporate Controller, and later served as its Principal Financial Officer. Mr. Diaz returned to the Company in December 1994 as its Senior Vice President and Chief Financial Officer. From mid-1991 to April 1992, Mr. Diaz served as President of Com-Pro International, a company engaged in the distribution of computer products to Latin America. From 1982 to August 1990 Mr. Diaz worked for the Clorox Company, serving as Corporate Vice President-International from 1988 to August 1990.
Mr. Wertheimer joined the Company in May 1991, following the Company's acquisition of Sekin Transport International. In May 1995, he was elected Vice President of the Company and also serves as Executive Vice President for Circle International, Inc. He presently has management responsibilities for the Company's North American integrated logistics operations and leads logistics programs with major customers on a worldwide basis. From 1988 to 1991, Mr. Wertheimer was Vice President of Planning and Development at Sekin Transport International. Prior to 1988, Mr. Wertheimer was a consultant with McKinsey & Company, an international management consulting firm.
Mr. Kennis joined the Company in 1989. He serves as Vice President and Secretary, and is the Company's Chief Legal Officer. Prior to joining the Company, he was Vice President and Legal Counsel for The Consolidated Capital Companies for four years. From 1978 to 1984, he was with the law firm of Bronson, Bronson & McKinnon as an associate and first-level partner.
ITEM 2
ITEM 2 - PROPERTIES
The properties used in the Company's domestic and foreign operations consist principally of air and ocean freight forwarding offices, customs brokerage offices, and warehouse and distribution facilities. In the United States, almost all freight forwarding operations and customs brokerage offices are conducted from the same facility. The Company's foreign offices are principally engaged in customs brokerage and ocean and air freight forwarding; additionally, other transportation management services such as warehousing, distribution, packing, containerization, and inland transportation are offered at many offices.
The following table sets forth certain information as of December 31, 1997 concerning the Company's domestic and foreign facilities and freight handling terminals.
The Company owns its headquarters building in San Francisco.
Under many of its leases, the Company, in addition to rental payments, is responsible for payment of property taxes, maintenance and insurance. In 1997, the aggregate rental expense for all of the Company's leased facilities was approximately $16.3 million.
For further information concerning the Company's lease commitments, see Note 5 of the Notes to Consolidated Financial Statements.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Company is party to routine litigation incident to its business, primarily relating to claims for goods lost or damaged in transit or improperly shipped. Many of the lawsuits to which the Company is a party are covered by insurance and are being defended by the Company's insurance carriers. The Company has established reserves 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 statements taken as a whole.
During 1997, the Company successfully concluded all of the audits with the Internal Revenue Service for the years 1986 through 1992, with no material effect on the financial statements.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded over the counter under the symbol CRCL. The following table sets forth the closing prices in the NASDAQ national market system for the Company's common stock for the calendar periods indicated, as reported by NASDAQ.
As of March 2, 1998, the approximate number of stockholders of record of the Company's common stock, excluding stockholders whose stock is held as nominee or in street name by brokers, was 371.
Dividends Declared Dividends declared per common share during 1997 and 1996 were:
1997 1996 - ---- ----
June 30 $ .135 June 24 $ .120 December 15 .135 December 20 .120
The Board of Directors considers payment of cash dividends on a semi- annual basis subject to the availability of earnings, the financial condition of the Company and other relevant factors.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements reflecting the Company's current expectations that are dependent on certain risks and uncertainties including but not limited to such factors as market demand, pricing, risks associated with operations outside of the U.S., changing economic conditions, the effect of the Company's accounting policies and other risk factors detailed herein. There can be no assurances that the Company's actual future performance will meet such expectations. There may also be important, unforeseen risks not described herein.
Results of Operations: 1997 versus 1996 - ----------------
Revenue in 1997 increased by $73.6 million or 12% over 1996:
Air freight revenue increased by $57.2 million or 15% over 1996 as a result of revenue increases in Asia and the Americas. Increases were due to higher kilo volumes and increased number of consolidation export shipments, offset slightly by lower direct agency shipments. This is due to shifting more share of the business to consolidations and higher kilo global accounts. Management believes this strategy will result in the ability to expand the range of services sold in the future.
Customs brokerage and other revenue, which includes warehousing, distribution and other fee based services, increased $11.0 million or 9% over 1996. The improvement was a result of increases in the number of customs entries processed and in warehousing and distribution services.
Ocean freight revenue increased $5.4 million or 5% over 1996 as a result of an increase in the number of shipments in the Americas.
Net revenue in 1997 increased by $17.1 million or 7% over 1996:
Air freight net revenue increased $4.2 million or 4% over the prior year due to an increase in the number of shipments in Asia and the Americas. Significant volume increases in these regions were offset by fewer direct agency shipments and downward pressure on air freight yields as a result of intense competition.
Ocean freight net revenue increased $2 million or 6% over the prior year as a result of an increase in the number of shipments.
The net revenue increase of $17.1 million included a negative impact from foreign exchange of approximately $6.8 million resulting from converting foreign currency into U.S. Dollars for financial reporting purposes.
Salaries and related costs increased $4.3 million or 3% over the prior year as a result of an increase in the number of employees due to increased business, but declined as a percentage of net revenue due to administrative cost controls and productivity initiatives.
Operating, selling and administrative costs increased $10.5 million or 13% as a result of costs related to processing higher transaction volumes and increases in occupancy expense on additional leased facilities. New facilities have been added to support the growth in warehousing and distribution services.
Other income - net increased $3.3 million or 63% from prior year primarily due to strong earnings from our unconsolidated affiliates and higher foreign exchange gains resulting from U.S. dollar denominated transactions in Asia. These gains were partially offset by higher minority partner expense associated with our consolidated joint ventures as well as lower interest income and higher interest expense due to the sale of marketable securities during 1996 and additional debt incurred in the third quarter of 1996 to acquire 40% of TDS Logistics, Inc.
The effective income tax rates for 1997 and 1996 were 35.9% and 37.9%, respectively. The Company's effective tax rate fluctuates due to changes in foreign tax rates and regulations and the level of pre-tax profit in foreign countries. In 1997, the Company benefited from the favorable resolution of IRS audits of the years 1986 through 1992, resulting in net refunds in excess of amounts previously anticipated.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1996 versus 1995 - ----------------
Revenue in 1996 increased by $53.1 million or 10% over 1995:
Air freight revenue increased by $28.9 million or 8% over 1995 as a result of revenue increases from North America, Europe, and South Pacific. The increase resulted primarily from an increase in the number of shipments in these regions, but was offset by declines in the business where the Company acts as airline agent for customers and declines in the average revenue per kilo, due to shifting more share of the business to consolidations and higher kilo global accounts. Management believes this strategy will result in the ability to expand the range of services sold in the future.
Customs brokerage and other revenue, which includes warehousing, distribution and other fee based services, increased $14.5 million or 14% over 1995. The improvement was a result of an increase in import related services, warehousing and distribution services, as well as an increase in the number of customs entries processed. These increases included the impact of the acquisition of the customer list of Celadon/Jacky Maeder, Ltd., a U.S. based international freight forwarder and customs brokerage company.
Ocean freight revenue increased $9.8 million or 10% over 1995 as a result of an increase in the number of shipments in Asia and the Americas.
Net revenue in 1996 increased by $23.8 million or 11% over 1995:
Air freight net revenue increased $5.9 million or 7% over the prior year due to an increase in revenue per shipment and improvements in air freight yield in the Middle East, South Pacific and parts of Asia. However, the Company continues to experience yield pressures in other regions, as the available lift capacity is not as profitable in all the trade lanes where kilos are growing.
Ocean freight net revenue increased $3.4 million or 11% over the prior year as a result of yield increases in Latin America, Middle East and Asia. The increase is offset by a slight reduction in yields in other regions.
Salaries and related costs increased $13.3 million or 11% over the prior year as a result of an increase in the number of employees hired to serve new customers, and due to increased business from acquisitions. Salaries as a percentage of net revenue are consistent with prior year levels.
Operating, selling and administrative costs increased $8.2 million or 11% as a result of processing higher transaction volumes and additional occupancy costs of new facilities and facilities sold and leased back. New facilities have been added to support the growth in warehousing and distribution services.
Other income - net increased $1.9 million or 59% from prior year primarily as a result of higher equity earnings from unconsolidated affiliates, lower interest expense due to lower average debt during the year, and foreign currency losses on the Japanese Yen in 1995 that did not recur in 1996. In order to minimize this type of risk, in the latter part of 1995 the Company implemented a hedging program for certain foreign currency payables. The proceeds from sales of marketable securities were used for the acquisition of TDS Logistics, Inc. and other corporate purposes.
The effective income tax rates for 1996 and 1995 were 37.9% and 38.2%, respectively. The Company's effective tax rate fluctuates due to changes in foreign tax rates and regulations and the level of pre-tax profit in foreign countries.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources: 1997 and 1996 - -------------
Commercial paper issued and outstanding at the end of 1997 was $25 million which is supported by a $40 million back-up facility line of credit. In addition, the Company had short term and long term notes payable totaling $5.5 million and $11.7 million at the end of 1997 and 1996, respectively. At December 31, 1997 the Company had authorized borrowing capacity of $50 million, of which $25 million had been utilized. Management believes its borrowing capacity is adequate to supplement cash flows from operations, fund its capital expenditures and pay dividends.
Net cash provided by operating activities increased to $33.1 million in 1997 from $30.8 million in 1996. The Company continues to augment its reporting, training and measurement systems that were designed to improve the Company's trade working capital position and cash flow from operations in relation to its increase in billings to customers. The Company believes these efforts continue to improve the Company's ability to generate cash.
Capital expenditures for 1997 and 1996 were $14 million and $21 million, respectively, representing investments in information technology and investments in new facilities. The Company expects to incur capital expenditures in 1998 at levels comparable to 1997, depending on lease vs. buy opportunities.
The semi-annual dividend if $0.120 per share declared in December 1996 was paid in the first quarter of 1997 for a total of $1.9 million. The Board of Directors authorized an increase in the semi-annual cash dividend from $0.120 to $0.135 per share on June 30, 1997. Total dividends paid to common shareholders for the 12 months ended December 31, 1997 were $4.1 million.
During the year ended December 31, 1997, the Company received $7.6 million in tax refunds and accrued interest from the Internal Revenue Service relating to the settlement of numerous issues through 1992. The majority of these tax refunds had been anticipated.
The Company makes significant disbursements on behalf of its customers for transportation costs and customs duties. The billings to customers for these disbursements, which are several times the amount of revenue and fees derived from these transactions, are not recorded as revenue and expense on the Company's income statement.
Year 2000:
The Company is currently engaged in an enterprise wide project to upgrade its information, accounting and operational computer software to provide a more integrated and cost effective means of conducting its business. This process involves modifying or replacing certain hardware or software. An important factor in this project is ensuring the software programs purchased or designed internally will consistently recognize the Year 2000. The Company anticipates that all hardware and software which is integral to the Company's ability to effectively operate and manage its business will be replaced, modified or upgraded by the Year 2000.
The Company is communicating with all of its significant suppliers and large customers to determine the extent to which the Company would be vulnerable to those parties' failure to remedy their own Year 2000 issues. The Company can give no guarantees that the systems of other companies will be converted on time or that a failure to convert by another company would not have a material adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram, replace and test software. The Company anticipates completing the project not later than September 1999, which is prior to any anticipated Year 2000 impact on its operating systems. The Company is currently assessing the related overall costs and determining whether such costs will be material to its financial position, results of operations or its cash flows. Purchased hardware and software will be capitalized in accordance with normal policy.
The costs and completion date of the project are based on management's best estimates. However, due to the interdependent nature of worldwide computer systems, both internal and external to the Company, there can be no assurances that the Company will not be adversely affected in the Year 2000.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet applicable.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth at the pages indicated in Item 14(a) of this Annual Report.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the sections of the Company's Proxy Statement dated April 1, 1998 entitled "Election of Directors" and "Section 16(a) Information". Also see "Executive Officers" under Item 1 above.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the sections of the Company's Proxy Statement dated April 1, 1998 entitled "Compensation of Executive Officers", "Options Granted to Executive Officers", and "Employment Agreements".
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the section of the Company's Proxy Statement dated April 1, 1998 entitled "Ownership of Management and Principal Stockholders".
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the sections of the Company's Proxy Statement dated April 1, 1998 entitled "Transactions with the Company" and "Compensation Committee Interlocks and Insider Participation".
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following are filed as part of this report:
PAGE (1) (2)Consolidated Financial Statements of the Company:
Consolidated Income Statements for the years ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements -
Independent Auditors' Report
(3) Exhibits: See the attached Exhibit Index on pages 19 and 20.
(b) Form 8-K:
No reports on Form 8-K were filed during the 12 months ended December 31, 1997.
EXHIBIT INDEX
Exhibit Number EXHIBIT PAGE - ------ ------- ----
3.1 Certificate of Incorporation of the Harper Group, Inc., a Delaware corporation. (Incorporated by reference to Exhibit 4.2 to Registration Statement No. 33-40826 filed on May 24, 1991.)
3.1.2 Certificate of Amendment to Certificate of Incorporation dated May 13, 1997. 39
3.2 Registrant's by-laws, as heretofore amended. (Incorporated by reference to Exhibit 3.2.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1986, filed on or about March 31, 1987.)
3.2.1 Amendments to Article IV, Sections 2,3,4,5 and 6 of Registrant's by-laws, effective as of May 23, 1991. (Incorporated by reference to Exhibit 3.2.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1991, filed on or about March 31, 1992.)
3.2.2 Sections 2 and 3 of Registrant's by-laws effective as of May 31, 1992. (Incorporated by reference to Exhibit 3.2.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 filed on or about March 31, 1993.)
4.1 Specimen certificate of Registrant's Common Stock. (Incorporated by reference to Exhibit 4.1 to Registration Statement No. 2-59017, filed on May 16, 1977.)
4.2 Rights Agreement, dated as of October 24, 1994, between The Harper Group, Inc. and Chemical Trust Company of California, which includes as Exhibit A thereto the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, as Exhibit B thereto the Form of Rights Certificate and as Exhibit C thereto a Summary of Rights to Purchase Common Stock. (Incorporated by reference to the Form 8-A Registration Statement filed on or about October 24, 1994.)
10.1 Agreement of Merger between Registrant and the Harper Group, a California corporation, providing for the reincorporation of Registrant in Delaware. (Incorporated by reference to Exhibit A to Registrant's Proxy Statement dated April 1, 1987, filed on or about April 10, 1987.)
10.3 Form of indemnity agreement between Registrant and each of its directors (Incorporated by reference to Exhibit 10.3 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed on or about March 31, 1989.)
10.4 Agreement and Plan of Reorganization dated as of April 23, 1992, with exhibits attached, including Registration Rights Agreement, Employment Agreement between Registrant and Peter Gibert and Indemnification Agreement. (Incorporated by reference to Exhibit 2.1. to Current Report on Form 8-K, dated May 21, 1991, filed on or about May 23, 1991.)
Exhibit Number EXHIBIT PAGE - ------ ------- ----
10.4.1 Amendments to May 1991 Employment Agreement of Peter Gibert (Incorporated by reference to Exhibit 10.4.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1995.) *
10.4.2 Amendment dated October 27, 1997 to Employment Agreement of Peter Gibert * 40
10.5 1990 Stock Option Plan. (Incorporated by reference to Exhibit 10.5 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992, filed on or about March 31, 1993.) *
10.6 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992, filed on or about March 31, 1993.)*
10.8 Credit Agreement dated October 15, 1993 between Registrant and Bank of America National Trust and Savings Association. (Incorporated by reference to Pages 14-103 to Form 10-Q for the nine months ended September 30, 1993, filed on or about November 10, 1993.)
10.9 1994 Omnibus Equity Incentive Plan (Incorporated by reference to the Form S-8 Registration Statement filed on or about May 9, 1994) *
10.9.1 Amendment No. 1 to 1994 Omnibus Equity Incentive Plan (Incorporated by reference to Exhibit 10.11.1 to Annual Report on Form 10-K for fiscal year ended December 31, 1995.) *
10.10 1995 Stock Option Plan For Non-Employee Directors (Incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K for the fiscal year ended December 31, 1995.) *
10.11 Employment Agreement with Kim Wertheimer (Incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the fiscal year ended December 31, 1995.) *
10.12 Agreement dated July 31, 1997 with Steven Leonard * 42
11.1 Computation of Earnings per Share 44
21.1 List of Subsidiaries 45
23.1 Consent of Deloitte & Touche LLP 46
27 Financial Data Schedule 47
____________________________
* Indicates, as required by Item 14(a)(3), a management contract or compensatory plan required to be filed as an exhibit to this Form 10-K.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 5, 1998
CIRCLE INTERNATIONAL GROUP, INC.
By: /S/ Peter Gibert ---------------------------------------------- Peter Gibert Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 5, 1998.
Signature Title
/s/ Peter Gibert Chairman of the Board, President - ------------------------------ and Chief Executive Officer (Peter Gibert) (Principal Executive Officer)
/s/ Robert J. Diaz Senior Vice President and Chief - ------------------------------ Financial Officer (Principal (Robert J. Diaz) Financial Officer and Principal Accounting Officer)
/s/ Wesley J. Fastiff Director - ------------------------------ (Wesley J. Fastiff)
/s/ Edwin J. Holman Director - ------------------------------ (Edwin J. Holman)
/s/ John M. Kaiser Director - ------------------------------ (John M. Kaiser)
/s/ John M. Lillie Director - ------------------------------ (John M. Lillie)
/s/ Ray C. Robinson, Jr. Director - ------------------------------ (Ray C. Robinson, Jr.)
/s/ Frank J. Wezniak Director - ------------------------------ (Frank J. Wezniak)
[FN]
See Notes to Consolidated Financial Statements
[FN]
See Notes to Consolidated Financial Statements
[FN]
See Notes to Consolidated Financial Statements
[FN]
See Notes to Consolidated Financial Statements
CIRCLE INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Nature of Operations - Circle International Group, Inc. (the Company), is an international transportation and logistics service provider. Effective in May 1997, the Company changed its name from the Harper Group, Inc. to Circle International Group, Inc. The Company's services are provided through its network of over 300 offices, distribution centers, and agents located in over 100 countries on six continents. The Company's principal lines of business are air freight forwarding, ocean freight forwarding, customs brokerage and value added services in the materials management area, such as warehousing, distribution and insurance. The principal markets for all lines of business are North America, Europe and the Far East with significant operations in the Middle East, Latin America and the South Pacific (see Note 12).
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Risk Factors - The Company's operations are influenced by many factors, including economic and political conditions around the world, international laws, and currency exchange rates. The impact of these risk factors is reduced by having customers in a wide range of industries located throughout the world.
Principles of Consolidation - The accompanying consolidated financial statements include Circle International Group, Inc. and its majority- owned subsidiaries. Investments in 50% or less owned affiliates over which the Company has significant influence are accounted for by the equity method (see Note 10). All significant intercompany balances and transactions have been eliminated.
Cash and Equivalents include demand deposits and investments with original maturities of three months or less.
Short-term Investments include deposits of cash in interest bearing securities which have original maturities of greater than 90 days and less than one year. Such investments are classified as available for sale and the carrying value approximates fair value.
Trade Receivables include disbursements made by the Company on behalf of its customers for transportation costs and customs duties. The billings to customers for these disbursements, which are several times the amount of revenue and fees derived from these transactions, are not recorded as revenue and expense on the Company's income statement. Management establishes reserves based on the expected ultimate recovery of these receivables. Write-offs during 1997, 1996 and 1995 were $2.4 million, $2.6 million and $2.7 million respectively.
Property and Equipment are stated at cost. Depreciation is computed principally by the straight-line method at rates based on the estimated useful lives of the various classes of property as follows: building, 20-50 years; leasehold improvements, life of the lease or estimated useful life if shorter; equipment and furniture, 3-10 years.
Goodwill, representing the excess of purchase price over the fair value of net assets acquired, is being amortized on a straight-line basis over the period of expected benefit not exceeding 40 years. The carrying value of goodwill is reviewed periodically based on the projected undiscounted cash flows of the related business unit over the remaining amortization period. If the cash flow analysis indicates that the goodwill is not recoverable, the carrying value will be reduced by the estimated shortfall of the cash flows. No reduction in goodwill was necessary for 1997 and 1996.
Impairment of Long-Lived Assets - Statement of Financial Accounting Standards ("SFAS") No.121, "Accounting for the Impairment of Long Lived Assets", requires that long-lived assets, and certain identifiable intangibles related to those assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management believes that there is no impairment of long-lived assets as of December 31, 1997.
Revenue Recognition - Revenue and freight consolidation costs are recognized at the time the freight departs the terminal of origin. Customs brokerage and other revenue are recognized upon completing the documents necessary for customs clearance.
Revenue realized as an indirect air carrier or an ocean freight consolidator includes the direct carrier's charges to the Company for carrying the shipment. Revenue realized in other capacities includes only the commissions and fees received.
Net Income per Share - In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings Per Share", which requires that net income per share be presented on both a basic and diluted basis. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share includes the potential dilution from the exercise of stock options using the treasury stock method. The difference between weighted average shares outstanding for basic and diluted is the dilutive effect of outstanding stock options. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding including the dilutive effect of outstanding stock options.
Taxes on Income - The Company provides a deferred tax expense or benefit equal to the change in the deferred tax assets and liabilities during the year. Deferred income taxes represent tax credit carry forwards and future tax effects resulting from temporary differences between the financial statement and the tax basis of assets and liabilities using current or enacted tax rates in effect for the year in which the differences are expected to reverse.
Foreign Currency Translation - Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at year-end rates of exchange, and income and expenses are translated at average rates during the year. Adjustments resulting from translating financial statements into U.S. dollars are reported as cumulative translation adjustments and are shown net of applicable income taxes as a separate component of stockholders' equity. Gains and losses from foreign exchange transactions are included in net income.
Fair Value of Financial Instruments - The fair values presented throughout these financial statements have been estimated using appropriate valuation methodologies and market information available at December 31, 1997 and 1996. However, considerable judgment is required in interpreting market data to develop estimates of fair value and the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. Additionally, the fair values presented throughout these financial statements have not been estimated since December 31, 1997. Current estimates of fair value may differ significantly from the amounts presented.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and equivalents, receivables and payables, short-term investments and notes payable to banks - The carrying amount approximates fair value.
Marketable securities - The fair value is based on quoted market prices. As discussed in Note 3 to the Consolidated Financial Statements, these securities are recorded at fair value.
Borrowings - The fair value of the Company's long-term debt is estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying amounts approximate their fair value.
Foreign Currency Forward Contracts - The Company uses foreign currency forward contracts to hedge foreign currency exposure on trade payable transactions in certain currencies. These contracts do not subject the Company to risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the payable being hedged. Gains and losses on such contracts are recognized currently in the carrying amount of the related payable. At December 31, 1997, no foreign currency forward contracts were outstanding. Realized gains and losses on the contracts for 1997 and 1996 were insignificant.
Stock Based Compensation - The Company accounts for stock based awards to employees using the intrinsic value method in accordance with Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees".
New Accounting Standards - In June 1997, the Financial Accounting Standards Board issued SFAS No.130, "Reporting Comprehensive Income", which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from non-owner sources; and SFAS No. 131, "Disclosures about Segments of an Enterprise", which established annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of disclosures. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted.
Reclassification - Certain 1996 and 1995 amounts have been reclassified to conform with the 1997 presentation.
Note 2 - Acquisitions
During 1997, the Company acquired the assets of various freight forwarders and customs brokers for an aggregate purchase price of $4.9 million, including $0.8 million in the Company's common stock. These acquisitions were accounted for as purchases. In connection with these acquisitions, the Company recorded $3.4 million of goodwill, which is being amortized over estimated useful lives of up to 20 years.
Had all the 1997 acquisitions occurred on January 1, 1997, the effect on revenues and net income would have been immaterial.
During 1996, the Company acquired the assets of various freight forwarders and customs brokers for an aggregate purchase price of $11.0 million, including $0.5 million in the Company's common stock. These acquisitions were accounted for under the purchase method. The excess of cost over the sum of identifiable net assets acquired has been allocated to goodwill, to be amortized over estimated lives of up to 20 years.
In August 1996, the Company acquired a 40% interest in TDS Logistics, Inc. ("TDS") for $30 million. TDS provides specialty packaging and services for automotive exports. The investment in TDS is recorded in investments in unconsolidated affiliates and as of the acquisition date included $28.1 million of excess purchase price over net assets, which is being amortized over 37 years. The Company has an option to purchase the other 60% interest in TDS at a price to be determined when the option is exercised. The option is exercisable between October 1, 1999 and December 31, 1999. If the Company elects not to exercise its options, other TDS shareholders have the right to sell their shares and can require the Company to sell its shares in the same manner. (See Note 10, "Investments in Unconsolidated Affiliates".)
Note 3 - Long-term Marketable Securities
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" requires that debt and equity securities be classified into one of three categories: held to maturity, available for sale or trading. Management has designated marketable debt and equity securities as available for sale. Changes in the fair value of available for sale securities, net of deferred taxes, are excluded from income and presented in the stockholders' equity section of the balance sheet under the caption "Unrealized loss in value of marketable securities, net". In 1997 and 1996, the Company sold debt and equity securities and realized losses of $20,000 and $189,000 respectively. Total unrealized loss on marketable securities before deferred taxes was $15,000 and $667,000 as of December 31, 1997 and 1996 respectively.
At December 31, 1997, 1996 and 1995, the aggregate fair value (individual unrealized gains and losses are immaterial), gross unrealized (gains) losses, and amortized cost of marketable securities were as follows (in thousands):
Note 4 - Borrowings
Long-term notes payable included commercial paper of $25 million at December 31, 1997 and 1996. The commercial paper is supported by a $40 million backup facility line of credit which expires on June 30, 1999. The backup facility line of credit requires the Company to comply with certain financial covenants. Although the commercial paper is issued on a short-term basis, it is classified as long-term because the Company intends to, and has the ability to reissue such paper as it matures. At December 31, 1997 and 1996, the weighted average interest rate of outstanding commercial paper was 6.1% and 5.5%, respectively.
At December 31, 1997 and 1996, the Company had long-term notes payable of approximately $2.7 and $4.0 million, respectively (excluding current portion), with a weighted average interest rate of 7.1% and 7.6%, respectively. These notes are secured by real property.
Principal payments of $2.8 million on long-term notes that mature in 1998 are classified as notes payable to banks. Principal payments for 1999 through 2002 are approximately $0.6 million, $0.8 million, $0.9 million, and $0.3 million, respectively. Principal repayments thereafter are approximately $0.1 million.
At December 31, 1997, the Company had unused borrowing capacity from its commercial paper program and lines of credit totaling $25 million.
Note 5 - Lease Commitments
At December 31, 1997, commitments on long-term operating lease agreements for facilities require the following minimum annual rentals (in thousands):
Rental expense under such leases was $16.3 million in 1997, $9.9 million in 1996 and $7.8 million in 1995, net of rents from subleases of $1.0 million, $0.8 million and $1.3 million, respectively. Total rental expense (including leases on equipment) was $17.9 million in 1997, $11.6 million in 1996 and $9.4 million in 1995.
Note 6 - Contingencies
The Company is party to routine litigation incidental to its business, which primarily involve claims for goods lost or damaged in transit or improperly shipped. Many of the lawsuits to which the Company is a party are covered by insurance and are being defended by the Company's insurance carriers. The Company has established reserves 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 statements taken as a whole.
Note 7 - Common Stock
Stock Repurchase Program:
The Company purchased 213,000 and 287,000 shares of its outstanding common stock in 1996 and 1995, respectively, at an average purchase price of $19.05 and $17.04 per share, respectively. These 500,000 shares were held as treasury stock until July 29, 1997, when they were retired. In February 1997, the Board of Directors approved the repurchase of an additional 100,000 shares, however no shares were repurchased in 1997.
Shareholder Rights Plan:
In October 1994, the Company adopted a Shareholder Rights Plan and declared a dividend distribution of one preferred share purchase Right for each outstanding share of the Company's common stock. Each Right will entitle stockholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $53.00.
The Rights will become exercisable if, without approval of the Board of Directors, a person or group acquires 20% or more of the Company's common stock (or a lesser percentage set by the Board in the case of a person determined to present certain specific risks to the Company and its stockholders, as defined in the plan) or announces a tender offer the consummation of which would result in ownership of 20% or more of the common stock. If a person or group does acquire 20% or more of the Company's stock (or such lesser percentage as has been set with respect to a specific person) each Right unless redeemed will entitle its holder to purchase, at the Right's then current exercise price, a number of the common shares of the Company having a market value at that time of twice the Right's exercise price.
The Company will be entitled to redeem the Rights at 0.01 cents per Right at any time before a 20% position (or such lesser percentage as has been set with respect to a specific person) has been acquired. Until the Rights become exercisable, Rights certificates will not be sent to stockholders and the Rights will automatically trade with the common stock.
Stock Option Plans:
The 1982 Stock Option Plan and the 1990 Stock Option Plan provide for the granting of non-qualified or incentive stock options to officers and key employees for a maximum of 956,250 common shares at not less than fair market value on the date of grant. The Human Resources, Compensation and Nominating Committee of the Board of Directors determines the exercise period for the options. Under these plans, Stock Options generally have been issued with the restriction that no option may be exercised before three years from date of grant nor later than eight years from date of grant.
The 1994 Omnibus Equity Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock awards, performance unit awards and performance share awards to key employees and consultants of the Company and its subsidiaries for a maximum of 2,000,000 common shares. Stock options under this plan are generally issued at an option price at not less than fair market value on the date of grant. (To date, no incentive or non-qualifying stock options have been granted below fair market value.) Stock options under this plan are generally issued with the restriction that no option may be exercised before one year from the date of grant nor later than eight years from the date of grant. During 1997, 24,615 restricted share grants were issued which vest within one to three years.
A summary of stock option transactions for the three years ended December 31, 1997 follows:
The following table summarizes information about stock options outstanding at December 31, 1997:
SFAS No. 123 Pro Forma Disclosures:
The Company applies APB No. 25 and related interpretations in accounting for its Stock Options Plan described previously. Accordingly, no compensation cost has been recognized for its options granted that are not exercised. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates of the stock options, consistent with the method suggested in SFAS No. 123, "Accounting for Stock Based Compensation" the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model which requires subjective assumptions such as future stock price volatility and expected time to exercise. These assumptions greatly affect the calculated values.
The Company's calculations are based on a multiple option valuation approach and cancellations are estimated based on a historical pattern. However, in accordance with SFAS No. 123, the impact of outstanding unvested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the 1997, 1996 and 1995 pro forma adjustments are not indicative of future period pro forma adjustments. The following weighted-average assumptions were used:
Note 8 - Taxes on Income
Taxes on income include the following (in thousands):
Significant components of the Company's net deferred tax liability are as follows (in thousands):
Taxes on income were different than the amount computed by applying the United States federal statutory income tax rate. Such differences are summarized as follows (in thousands):
Taxes on income include deferred income taxes on undistributed earnings (not considered permanently invested) of consolidated subsidiaries, net of applicable foreign tax credits. At December 31, 1997, cumulative earnings of consolidated foreign subsidiaries designated as permanently invested were approximately $63 million. Deferred income taxes are not provided on permanently invested earnings.
Sources of pretax income are summarized as follows (in thousands):
Federal Tax Litigation:
During 1997, the Company successfully concluded the 1986 through 1992 Internal Revenue Service audits, with no material effect on the financial statements.
Note 9 - Other Income-Net
Other income-net includes the following (in thousands):
Note 10 - Investments in Unconsolidated Affiliates
Investments in net assets of affiliated companies accounted for under the equity method amounted to $40.5 million and $34.5 million at December 31, 1997 and 1996, respectively. This includes the Company's 40% investment in TDS Logistics, Inc. ("TDS") of $35.3 million and $30.8 million as of December 31, 1997 and 1996, respectively. The TDS investment balance includes the excess of purchase price over net assets of $27.1 million and $27.9 million as of December 31, 1997 and 1996, respectively. The results of operations and financial position of TDS as of December 31, 1997 and 1996 are summarized below (in thousands):
Note 11 - Employee Benefit Plans
The Company has a 401(k) Savings Plan under which an employee with six months of service at the beginning of a calendar quarter generally may contribute up to 15% of base salary to the plan. For every dollar contributed to the plan, the Company will match 50 cents, up to a maximum of 6% of the employee's base salary excluding incentive compensation. The Company's contributions for the years ended December 31, 1997, 1996 and 1995 were $0.9 million, $0.8 million and $0.7 million, respectively. The Company's contributions vest over a four year period.
Note 12 - Business Segment Information
The Company operates in the international freight forwarding industry, which encompasses air freight forwarding, customs brokerage, ocean freight forwarding and other services. No customer accounted for ten percent or more of consolidated revenue.
Certain information regarding the Company's operations by regions is summarized below.
Revenue from transfers between regions represents approximate amounts that would be charged if the services were provided by an unaffiliated company. Total regional revenue is reconciled with total consolidated revenue by eliminating inter-regional revenue.
Note 13 - Quarterly Data (unaudited)
Independent Auditors' Report
The Board of Directors and Stockholders of Circle International Group, Inc.:
We have audited the accompanying consolidated balance sheets of Circle International Group, Inc. and subsidiaries, formerly the Harper Group, Inc., (the "Company") as of December 31, 1997 and 1996, and the related consolidated income statements and consolidated statements of stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Circle International Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP San Francisco, California March 13, 1998