-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GiRwpQ1QUNu2VXG5w6v+/4hNeoCdMkkNzKYTNV282qL7poo6Yc8AQfs/r9uQ6dkY u2hxVUUUkji5YhZa+mDrVw== 0000950129-01-502620.txt : 20010815 0000950129-01-502620.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950129-01-502620 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EGL INC CENTRAL INDEX KEY: 0001001718 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 760094895 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27288 FILM NUMBER: 1713079 BUSINESS ADDRESS: STREET 1: 15340 VICKERY DR CITY: HOUSTON STATE: TX ZIP: 77032 BUSINESS PHONE: 2816183100 MAIL ADDRESS: STREET 1: 15350 VICKERY DR STREET 2: SUITE 510 CITY: HOUSTON STATE: TX ZIP: 77032 FORMER COMPANY: FORMER CONFORMED NAME: EAGLE USA AIRFREIGHT INC DATE OF NAME CHANGE: 19951002 10-Q 1 h89920e10-q.txt EGL INC - JUNE 30, 2001 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended JUNE 30, 2001 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 (IRS Employer Identification No.) Incorporation or Organization) 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 --- --- At August 1, 2001, the number of shares outstanding of the registrant's common stock was 48,822,986 (net of 1,161,125 treasury shares). ================================================================================ 2 EGL, INC. INDEX TO FORM 10-Q PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet as of 1 June 30, 2001 and December 31, 2000 Condensed Consolidated Statement of Operations for the Six 2 Months ended June 30, 2001 and 2000 Condensed Consolidated Statement of Operations for the Three 3 Months ended June 30, 2001 and 2000 Condensed Consolidated Statement of Cash Flows for 4 the Six Months ended June 30, 2001 and 2000 Condensed Consolidated Statement of Stockholders' 5 Equity for the Six Months ended June 30, 2001 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22 PART II. OTHER INFORMATION 22 SIGNATURES 27 INDEX TO EXHIBITS 28 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EGL, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS, EXCEPT PAR VALUES)
JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents .................................................. $ 51,680 $ 60,001 Short-term investments ..................................................... 5,878 13,056 Trade receivables, net of allowance of $11,525 and $14,115 ................. 418,814 497,461 Other receivables .......................................................... 7,975 7,498 Deferred income taxes ...................................................... 20,426 17,167 Income tax receivable ...................................................... 18,574 2,128 Other current assets ....................................................... 9,945 10,996 --------- --------- Total current assets ................................................... 533,292 608,307 Property and equipment, net .................................................... 172,255 153,345 Investments in unconsolidated affiliates ....................................... 47,357 52,717 Goodwill, net................................................................... 76,810 76,254 Other assets, net .............................................................. 9,004 9,123 --------- --------- Total assets ........................................................... $ 838,718 $ 899,746 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable .............................................................. $ 130,628 $ 3,429 Trade payables and accrued transportation costs ............................ 223,364 260,802 Accrued salaries and related costs ......................................... 27,691 29,068 Accrued merger and integration costs (Note 6)............................... 17,651 24,976 Other liabilities .......................................................... 41,925 54,027 --------- --------- Total current liabilities .............................................. 441,259 372,302 Deferred income taxes .......................................................... 7,648 18,864 Long-term notes payable ........................................................ 5,012 91,051 Other noncurrent liabilities ................................................... 2,616 2,980 --------- --------- Total liabilities ...................................................... 456,535 485,197 --------- --------- Minority interests ............................................................. 7,742 10,782 --------- --------- Commitments and contingencies (Note 9) Stockholders' equity: Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued Common stock, $0.001 par value, 200,000 shares authorized; 49,984 and 49,803 shares issued; 48,823 and 48,411 shares outstanding ............ 49 48 Additional paid-in capital ................................................. 155,907 150,131 Retained earnings .......................................................... 272,666 304,889 Accumulated other comprehensive loss ....................................... (35,191) (27,729) Unearned compensation ...................................................... (953) (1,300) Treasury stock, 1,161 and 1,392 shares held ................................ (18,037) (24,195) Obligation to deliver common stock ......................................... -- 1,923 --------- --------- Total stockholders' equity ............................................. 374,441 403,767 --------- --------- Total liabilities and stockholders' equity ............................. $ 838,718 $ 899,746 ========= =========
See notes to unaudited condensed consolidated financial statements. 1 4 EGL, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED JUNE 30, ---------------------- 2001 2000 --------- --------- Revenue ......................................................... $ 831,520 $ 855,691 Cost of transportation .......................................... 526,298 514,913 --------- --------- Net revenues .............................................. 305,222 340,778 Operating expenses: Personnel costs ........................................... 195,222 184,068 Other selling, general and administrative expenses ........ 151,364 120,846 Merger related restructuring and integration costs (Note 6) 8,723 --------- --------- Operating income (loss) ......................................... (50,087) 35,864 Non-operating income (expense), net ............................. (2,556) 2,206 --------- --------- Income (loss) before provision (benefit) for income taxes ....... (52,643) 38,070 Provision (benefit)for income taxes ............................. (20,420) 14,631 --------- --------- Net income (loss) ............................................... $ (32,223) $ 23,439 ========= ========= Basic earnings (loss) per share ................................. $ (0.68) $ 0.51 Basic weighted-average common shares outstanding ................ 47,564 46,299 Diluted earnings (loss) per share ............................... $ (0.68) $ 0.49 Diluted weighted-average common equivalent shares outstanding ........................................ 47,564 47,477
See notes to unaudited condensed consolidated financial statements. 2 5 EGL, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PAR VALUES)
THREE MONTHS ENDED JUNE 30, ---------------------- 2001 2000 --------- --------- Revenue .......................................................... $ 409,201 $ 450,779 Cost of transportation ........................................... 263,169 271,703 --------- --------- Net revenues ............................................... 146,032 179,076 Operating expenses: Personnel costs ............................................ 100,681 93,551 Other selling, general and administrative expenses ......... 79,951 62,464 Merger related restructuring and integration costs (Note 6).................................................. 1,178 --------- --------- Operating income (loss) .......................................... (35,778) 23,061 Non-operating income (expense), net .............................. (1,595) 1,231 --------- --------- Income (loss) before provision (benefit) for income taxes ........ (37,373) 24,292 Provision (benefit)for income taxes .............................. (14,201) 9,309 --------- --------- Net income (loss) ................................................ $ (23,172) $ 14,983 ========= ========= Basic earnings (loss) per share .................................. $ (0.49) $ 0.32 Basic weighted-average common shares outstanding ................. 47,570 46,292 Diluted earnings (loss) per share ................................ $ (0.49) $ 0.32 Diluted weighted-average common equivalent shares outstanding ......................................... 47,570 47,241
See notes to unaudited condensed consolidated financial statements. 3 6 EGL, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------- 2001 2000 -------- -------- Cash flows from operating activities: Net income (loss) .................................................................. $(32,223) $ 23,439 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization ................................................... 15,526 15,035 Provision for doubtful accounts, net of write-offs .............................. (2,478) 4,358 Amortization of unearned compensation ........................................... 347 313 Deferred income tax benefit ..................................................... (14,475) (311) Tax benefit of stock options exercised .......................................... 2,577 1,281 Unrealized gain on marketable securities ........................................ (2,299) Equity in (earnings) losses of affiliates, net of dividends received ............ 1,761 (1,154) Minority interests, net of dividends paid ....................................... 776 (216) Net effect of changes in working capital ........................................ 5,138 (3,449) -------- -------- Net cash (used in) provided by operating activities...................................... (25,350) 39,296 -------- -------- Cash flows from investing activities: Capital expenditures ............................................................ (31,163) (25,742) Net proceeds from marketable securities and short-term investments .............. 8,970 10,053 Proceeds from sales of other assets ............................................. 1,957 Acquisitions of businesses, net of cash acquired ................................ (652) (19,850) Cash received from disposal of affiliates ....................................... 2,243 -------- -------- Net cash used in investing activities ................................................... (20,602) (33,582) -------- -------- Cash flows from financing activities: Repayment of notes payable ...................................................... (1,886) Increase in borrowings on notes payable ......................................... 43,045 (4,169) Issuance of common stock, net of related costs .................................. 733 5,312 Proceeds from exercise of stock options ......................................... 3,200 1,269 Treasury stock purchases ........................................................ (10,478) Dividends paid .................................................................. (2,360) -------- -------- Net cash provided by (used in) financing activities...................................... 45,092 (10,426) -------- -------- Effect of exchange rate changes on cash ................................................. (7,461) (1,506) -------- -------- Increase (decrease) in cash and cash equivalents......................................... (8,321) (6,218) Cash and cash equivalents, beginning of the period ...................................... 60,001 40,347 -------- -------- Cash and cash equivalents, end of the period ............................................ $ 51,680 $ 34,129 ======== ========
See notes to unaudited condensed consolidated financial statements. 4 7 EGL, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
ACCUMULATED OBLIGATION OTHER TO COMMON STOCK ADDITIONAL COMPRE- COMPRE- DELIVER UNEARNED ------------------ PAID-IN RETAINED HENSIVE HENSIVE COMMON COMPEN- TREASURY SHARES AMOUNT CAPITAL EARNINGS (LOSS) LOSS STOCK SATION STOCK TOTAL -------- -------- ---------- -------- -------- -------- ----------- ---------- -------- --------- Balance at December 31, 2000 ..... 48,411 $ 48 $150,131 $304,889 $(27,729) $ 1,923 $ (1,300) $(24,195) $403,767 ------ -------- -------- -------- -------- -------- -------- -------- -------- -------- Comprehensive income: Net loss .............. (32,223) $(32,223) (32,223) Change in value of marketable securities, net ................... (26) (26) (26) Change in value of cash flow hedge ....... (360) (360) (360) Foreign currency translation adjustments ........... (7,076) (7,076) (7,076) -------- Comprehensive loss .... $(39,685) ======== Issuance of shares under stock purchase plan .................. 733 733 Issuance of common stock for acquisition . (1,923) 5,425 3,502 Exercise of stock options including tax benefit ........... 412 1 5,776 5,777 Amortization of unearned compensation .......... 347 347 ------ -------- -------- -------- -------- -------- -------- -------- -------- Balance at June 30, 2001.......... 48,823 $ 49 $155,907 $272,666 $(35,191) $ -- $ (953) $(18,037) $374,441 ====== ======== ======== ======== ======== ======== ======== ======== ======== Comprehensive income (loss) for the three months ended June 30, 2001 was ($13,422).
See notes to unaudited condensed consolidated financial statements. 5 8 EGL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared by EGL, Inc. (EGL or the Company) in accordance with the rules and regulations of the Securities and Exchange Commission (the SEC) for interim financial statements and accordingly do not include all information and footnotes required under generally accepted accounting principles for complete financial statements. The financial statements have been prepared in conformity with the accounting principles and practices disclosed in, and should be read in conjunction with, the annual financial statements of the Company included in the Company's Annual Report on Form 10-K (File No.0-27288). In the opinion of management, these interim financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position at June 30, 2001 and the results of its operations for the six and three months ended June 30, 2001. Results of operations for the six and three months ended June 30, 2001 are not necessarily indicative of the results that may be expected for EGL's full fiscal year. The Company has reclassified certain prior period amounts to conform with the current period presentation. NOTE 1 - ORGANIZATION, OPERATIONS, AND SIGNIFICANT ACCOUNTING POLICIES: EGL is an international transportation and logistics company. The Company's principal lines of business are air freight forwarding, ocean freight forwarding, customs brokerage and other value-added services such as warehousing, distribution and insurance. The Company provides services through offices around the world as well as through its worldwide network of exclusive and nonexclusive agents. In October 2000, the Company acquired Circle International Group, Inc. (Circle) in a merger transaction and expanded its operations to over 100 countries on six continents (Note 5). 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 (Note 10). NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS 141 supercedes Accounting Principles Board Opinion No. 16, "Business Combinations." SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill arising from new transactions to be written off immediately as an extraordinary gain, and for pre-existing transactions to be recognized as the cumulative effect of a change in accounting principle. SFAS 142 supercedes Accounting Principles Board Opinion No. 17, "Intangible Assets." SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. SFAS 142 requires that goodwill and indefinite lived intangible assets will no longer be amortized; goodwill will be tested for impairment at least annually at the reporting unit level; intangible assets deemed to have an indefinite life will be tested for impairment at least annually; and the amortization of intangible assets with finite lives will no longer be limited to forty years. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001. This statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. The Company will adopt SFAS 142 as of January 1, 2002 and is currently determining the impact it will have on its results of operations and financial position. NOTE 3 - ACCOUNTING POLICY FOR DERIVATIVE INSTRUMENTS: Effective January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138. These statements require the Company to recognize all derivative instruments on the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as 6 9 EGL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of net investment in a foreign operation. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. The Company uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. The Company formally designates and documents the financial instrument as a hedge of a specific underlying exposure when it is entered into, as well as the risk, management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded in the balance sheet at fair value in either other assets or other liabilities. The earnings impact resulting from the derivative instruments is recorded in the same line item within the statement of earnings as the underlying exposure being hedged. The Company also formally assesses, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposures. The ineffective portion of a financial instrument's change in fair value is immediately recognized in earnings as non-operating (expense), net. Cash Flow Hedging Strategy In April 2001, the Company entered into an interest rate swap agreement, which has been designated as a cash flow hedge, to reduce its exposure to fluctuations in interest rates on $70 million of its LIBOR based revolving credit facility. Accordingly, the change in the fair value of the swap agreement is recorded in other comprehensive income (loss). NOTE 4 - EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes potential dilution that could occur if securities to issue common stock were exercised. Stock options are the only potentially dilutive share equivalents the Company had outstanding for the periods presented. Incremental shares of 1.2 million and 949,000 were used in the calculation of diluted earnings per share for the six and three months ended June 30, 2000, respectively. No shares related to options were included in diluted earnings per share for the six and three months ended June 30, 2001 because their effect would have been antidilutive as the Company incurred a net loss during those periods. NOTE 5 - BUSINESS COMBINATIONS: On October 2, 2000, EGL completed its merger with Circle pursuant to the terms and conditions of the Agreement and Plan of Merger dated as of July 2, 2000. EGL issued approximately 17.9 million shares of EGL common stock in exchange for all issued and outstanding shares of Circle common stock and assumed Circle options exercisable for approximately 1.1 million shares of EGL common stock. The exchange ratio of one share of 7 10 EGL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EGL common stock for each share of Circle common stock was determined by arms-length negotiations between EGL and Circle. The merger qualified as a tax-free reorganization for U.S. federal income tax purposes and as a pooling of interests for accounting and financial reporting purposes as such, the Company's financial statements have been restated to include the operations of Circle for all periods presented. NOTE 6 - MERGER TRANSACTION, RESTRUCTURING AND INTEGRATION COSTS: Transaction and integration costs As a result of the merger with Circle, as discussed in Note 5, the Company paid $1.3 million and $9.1 of transaction and integration costs during the three and six months ended June 30, 2001, respectively, of which $3.4 million was accrued as of December 31, 2000. Integration costs of approximately $1.3 million and $5.7 million incurred and expensed during the three and six months ended June 30, 2001, respectively, included personnel costs for redundant employees at the former Circle's headquarters, the costs of legal registrations in various jurisdictions, changing signs and logos at major facilities around the world, and other integration costs. Restructuring charges During the fourth quarter of 2000, the Company established a plan (the Plan) to integrate the former EGL and Circle operations and to eliminate duplicate facilities as a result of the merger. The principal components of the Plan involve 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, it is anticipated that the terms of the Plan will be substantially completed by the end of the third quarter of 2001. The charges incurred under the Plan for the six months ended June 30, 2001 and the remaining portion of the unpaid accrued charges as of June 30, 2001 are as follows:
ADDITIONAL INCOME STATEMENT CHARGE FOR THE SIX MONTHS ENDED JUNE 30, 2001 ----------------------------- ACCRUED ACCRUED LIABILITY REVISIONS LIABILITY DECEMBER 31, NEW TO PAYMENTS/ JUNE 30, (in thousands) 2000 CHARGES ESTIMATES REDUCTIONS 2001 ------------ ---------- ----------- ----------- ----------- Severance costs ..................... $ 6,267 $ 3,091 $ (4,552) $ 4,806 Future lease obligations, net of subleasing ................ 10,063 1,917 (1,138) 10,842 Termination of joint venture/agency agreements ....................... 5,212 -- (2,000) (1,209) 2,003 ------- ------- -------- --------- ------- $21,542 $ 5,008 $ (2,000) $ (6,899) $ 17,651 ======= ======= ======== ========= ========
Severance costs Severance costs have been recorded for certain employees at the former Circle headquarters and former Circle management at certain international locations who were terminated or notified of their termination under the Plan prior to December 31, 2000. At December 31, 2000 approximately 60 of the 150 employees included in the Plan were no longer employed by the Company. The termination of substantially all of the remaining 90 employees occurred in the first quarter of 2001 and severance costs of approximately $3.0 million were recorded. Also, during January 2001 the Company announced the additional reduction in the Company's workforce of approximately 125 additional employees. The charge for this workforce reduction is approximately $0.1 million and was recorded during the first quarter of 2001. 8 11 EGL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future lease obligations Future lease obligations consist of the Company's remaining lease obligations under noncancelable operating leases at domestic and international locations that the Company is in the process of vacating and consolidating due to excess capacity resulting from the Company having multiple facilities in certain locations. Amounts recorded for future lease obligations under the Plan are net of approximately $28.0 million in anticipated future recoveries from actual or expected sublease agreements. Sublease income has been anticipated under the Plan only in locations where sublease agreements have been executed or are likely to be executed during the next six months. The provisions of the Plan include the consolidation of facilities at approximately 80 of the Company's operating locations. As of June 30, 2001 consolidation of facilities has been completed at 37 of these locations with the remaining locations expected to be completed by the end of the first quarter of 2002. During the six months ended June 30, 2001, the Company determined the estimated consolidation dates for several of the remaining 43 facilities and recorded an additional charge of $1.9 million. In addition, the Company expects further consolidation at some of its other locations in the future. Costs for the consolidation at these locations has not been included in the Plan as of June 30, 2001 as the Company has not yet been able to determine the estimated consolidation dates for these facilities. All lease costs for facilities being consolidated are charged to operations until the date that the Company vacates each facility. The charges recorded under the Plan include provisions for closing Circle's logistics facility in Los Angeles, California. Termination of joint venture/agency agreements Costs to terminate joint venture/agency agreements represent contractually obligated costs incurred to terminate selected joint venture/agency agreements with certain of the Company's former business partners along with assets that are not expected to be fully recoverable as a result of the Company's decision to terminate these agreements. In conjunction with the Company's Plan, the Company is currently terminating certain of its joint venture/agency agreements in Brazil, Chile, Panama, Venezuela, and Taiwan. During the second quarter of 2001 the Company completed the termination of its South African joint venture agreement on more favorable terms than originally expected and revised its estimate by $2.0 million. NOTE 7 - REVOLVING CREDIT FACILITY: On January 5, 2001, the Company entered into an agreement (the Credit Facility) with various financial institutions, with the Bank of America, N.A. (the Bank) serving as administrative agent, to replace its previous credit facility. The Credit Facility (as amended on June 28, 2001) provides a $150 million revolving line of credit and includes a $30 million sublimit for the issuance of letters of credit and a $15 million sublimit for a swing line loan. The Credit Facility matures on January 5, 2004. For each tranche of principal obtained under the revolving line of credit, the Company elects an interest rate calculation on either LIBOR plus an applicable margin based on a ratio of consolidated debt to consolidated EBITDA (a Libor Tranche) or the greater of the prime rate announced by the Bank or the federal funds rate plus 50 basis points (a Prime Rate Tranche). The interest for a LIBOR Tranche is due at the earlier of three months from inception of the LIBOR Tranche, as selected by the Company, or the expiration of the LIBOR Tranche, whichever is earlier. The interest for a Prime Rate Tranche is due quarterly. The Company is subject to certain covenants under the terms of the new Credit Facility, including, but not limited to, maintenance at the end of any fiscal quarter of (a) minimum specified consolidated net worth, (b) a ratio of consolidated funded debt to total capitalization of no greater than 0.40 to 1.00, (c) a ratio of consolidated funded debt to consolidated EBITDA of no greater than 3.00 to 1.00, (d) a consolidated fixed charge coverage ratio of no less than 1.35 to 1.00 and (e) minimum consolidated domestic accounts receivable coverage ratio not to be less than 1.25 to 1.00. The new Credit Facility also places restrictions on additional indebtedness, liens, investments, change of control and other matters and is secured by an interest in substantially all of the Company's assets. As of June 30, 2001, our results did not satisfy the requirements of certain of these covenants. On August 13, 2001, we received a waiver letter from the banks to waive the event of default until September 30, 2001. The Company is seeking to refinance the debt under the revolving line of credit with borrowing under a new secured credit facility described below. The Company and Bank of America, National Association (the Bank) have entered into a binding commitment letter pursuant to which the Bank has agreed to underwrite a secured Credit Facility for the Company consisting of Revolving Loans and Letters of Credit of up to the lesser of (a) $220 million or (b) an amount equal to the sum of (i) 85% of eligible accounts of the Company and its wholly owned Subsidiaries in Canada, the United 9 12 EGL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Kingdom, the Netherlands, Australia, and Singapore plus (ii) eligible standby letters of credit in favor of the Bank for the account of the Company or any Subsidiary plus (iii) eligible cash deposits or short-term investments of the Company or any Subsidiary. Such Credit Facility, which would have a Letter of Credit Subfacility of up to $50 million, would bear interest, at the election of the Company, at the Bank's Base Rate or LIBOR plus 2.50% (subject to performance pricing adjustments providing for increases of up to 0.25% and decreases of up to 50%) and would contain customary representations, warranties and covenants (including financial covenants requiring an agreed tangible net worth, a leverage ratio (subject to a $40 million minimum availability trigger) of funded debt (excluding existing synthetic lease arrangements) to adjusted EBITDA of 6.0 at September 30, 2001, 5.5 at December 31, 2001, 5.0 at March 30, 2002, 4.5 at June 30, 2002, and 4.0 at September 30, 2002 and each fiscal quarter thereafter, and agreed maximum capital expenditures) to be negotiated. The Commitment Letter will expire on September 30, 2001 unless a definitive Credit Agreement is executed on or prior to such date. There can be no assurance that the Company will be able to enter into a definitive Credit Agreement upon the terms described above or at all; therefore the balance under the existing Credit Facility has been classified as short-term as of June 30, 2001. NOTE 8 - SHAREHOLDERS' RIGHTS PLAN: On May 23, 2001, the Company's Board of Directors declared a dividend of one Right to purchase preferred stock ("Right") for each outstanding share of Company common stock to shareholders of record at the close of business on June 4, 2001. Each right initially entitles the registered holder to purchase from the Company a fractional share consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $.001 per share, at a purchase price of $120 per fractional share, subject to adjustment. The Rights generally will not become exercisable until ten days after a public announcement that a person or group has acquired 15% or more of Company common stock (thereby becoming an "Acquiring Person") or the commencement of a tender or exchange offer that would result in an Acquiring Person (the earlier of such dates being called the "Distribution Date"). James R. Crane will not become an Acquiring Person, unless and until he and his affiliates become the beneficial owner of 49% or more of the Common Stock. Rights will be issued with all shares of Company common stock issued from the record date to the Distribution Date. Until the Distribution Date, the Rights will be evidenced by the certificates representing Company common stock and will be transferable only with our common stock. Generally, if any person or group becomes an Acquiring Person, each right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter entitle its holder to purchase, at the Rights' then current exercise price, shares of the Company's common stock having a market value of two times the exercise price of the Right. If, after there is an Acquiring Person, and the Company or a majority of its assets is acquired in certain transactions, each Right not owned by an Acquiring Person will entitle its holder to purchase, at a discount, shares of common stock of the acquiring entity (or its parent) in the transaction. At any time until ten days after a public announcement that the Rights have been triggered, the Company will generally be entitled to redeem the Rights for $.01 and to amend the rights in any manner other than to change the redemption price. Certain subsequent amendments are also permitted. The Rights expire on June 4, 2011. NOTE 9 - COMMITMENTS AND CONTINGENCIES: In mid-August 2001 the Company negotiated agreements to reduce its exposure to future losses on charter aircraft leases. Leases for two of the aircraft were terminated with no financial penalty and the Company has agreed to sublease five aircraft to a third party at rates below the Company's current contractual commitment, which is expected to result in the recognition of a loss of approximately $3 million (excluding taxes) in the third quarter of 2001. The Company expects to operate six charter aircraft for its own benefit, with increased utilization of remaining fixed capacity. The remaining charter aircraft leases have expiration dates ranging between December 31, 2001 and 2003. In December 1997, the U.S. Equal Employment Opportunity Commission (EEOC) issued a Commissioner's Charge pursuant to Sections 706 and 707 of Title VII of the Civil Rights Act of 1964, as amended (Title VII). The Company continues to vigorously defend against allegations contained in the Commissioner's Charge. In the Commissioner's Charge, the EEOC charged the Company and certain of its subsidiaries with violations of Section 703 of Title VII, as amended, the Age Discrimination in Employment Act of 1967, and the Equal Pay Act of 1963, resulting from (i) engaging in unlawful discriminatory hiring, recruiting and promotion practices and maintaining a hostile work environment, based on one or more of race, national origin, age and gender, (ii) failures to investigate, (iii) failures to maintain proper records and (iv) failures to file accurate reports. The Commissioner's Charge states that the persons aggrieved include all Blacks, Hispanics, Asians and females who are, have been or might be affected by the alleged unlawful practices. On May 12, 2000, four individuals filed suit against EGL alleging gender, race and national origin discrimination, as well as sexual harassment. This lawsuit was filed in the United States District Court for the Eastern District of Pennsylvania in Philadelphia, Pennsylvania. The EEOC was not initially a party to the Philadelphia litigation. In July 2000, four additional individual plaintiffs were allowed to join the Philadelphia 10 13 EGL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) litigation. The Company filed an Answer in the Philadelphia case and extensive discovery is underway. The individual plaintiffs are seeking to certify a class of approximately 1,000 current and former EGL employees and applicants. The plaintiff's initial motion for class certification was denied in November 2000. On December 29, 2000, the EEOC filed a Motion to Intervene in the Philadelphia litigation. That motion was granted by the Court in Philadelphia on January 31, 2001 and could allow claims to be brought with respect to a class of individuals. In addition, the Philadelphia Court also granted EGL's motion that the case be transferred to the United States District Court for the Southern District of Texas - Houston Division where EGL had previously initiated litigation against the EEOC due to what EGL believes to have been inappropriate practices by the EEOC in the issuance of the Commissioner's Charge and in the subsequent investigation. EGL intends to continue to vigorously pursue its lawsuit against the EEOC alleging agency bias and misconduct. EGL is currently in the midst of active discovery on this matter and will be requesting an appropriate remedy from the Court. The Company intends to continue to vigorously defend itself against the allegations made by the EEOC, as well as the private plaintiffs. The Company has recognized a pre-tax charge of $7.5 million in its consolidated statement of operations during the year ended December 31, 2000 for the expected cost of its litigation efforts related to this matter. The Company currently expects to prevail in its defense of this matter. There can be no assurance, however, as to what the amount of time it will take to resolve the Commissioner's Charge, 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. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and "Part II, Item 1. Legal Proceedings." NOTE 10 - BUSINESS SEGMENT INFORMATION: EGL's reportable segments are geographic segments that offer similar products and services. They are managed separately because each segment requires close customer contact and each segment is affected by similar economic conditions. Certain information regarding EGL's operations by region is summarized below.
(in thousands) Europe & Asia & North South Middle South America America East Pacific Eliminations Consolidated --------- --------- --------- --------- ------------ ------------ Six months ended June 30, 2001: Total revenue ............... $ 531,508 $ 29,054 $ 118,443 $ 175,090 $ (22,575) $ 831,520 Transfers between regions ... (7,235) (2,890) (7,172) (5,278) 22,575 -- --------- --------- --------- --------- --------- --------- Revenues from customers ..... $ 524,273 $ 26,164 $ 111,271 $ 169,812 $ -- $ 831,520 ========= ========= ========= ========= ========= ========= Net revenue ................. $ 200,440 $ 6,911 $ 54,422 $ 43,449 $ 305,222 ========= ========= ========= ========= ========= Income (loss) from operations $ (66,301) $ (1,305) $ 5,801 $ 11,718 $ (50,087) ========= ========= ========= ========= ========= Six months ended June 30, 2000: Total revenue ............... $ 559,372 $ 22,338 $ 108,697 $ 182,608 $ (17,324) $ 855,691 Transfers between regions ... (4,421) (2,364) (4,895) (5,644) 17,324 -- --------- --------- --------- --------- --------- --------- Revenues from customers ..... $ 554,951 $ 19,974 $ 103,802 $ 176,964 $ -- $ 855,691 ========= ========= ========= ========= ========= ========= Net revenue ................. $ 244,150 $ 7,905 $ 48,319 $ 40,404 $ 340,778 ========= ========= ========= ========= ========= Income (loss) from operations $ 21,854 $ (505) $ 8,500 $ 6,015 $ 35,864 ========= ========= ========= ========= =========
11 14 EGL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands) Europe & Asia & North South Middle South America America East Pacific Eliminations Consolidated --------- --------- --------- --------- ------------ ------------ Three months ended June 30, 2001: Total revenue ............... $ 258,733 $ 12,929 $ 59,359 $ 87,554 $ (9,374) $ 409,201 Transfers between regions ... (1,266) (1,736) (3,743) (2,629) 9,374 -- --------- --------- --------- --------- --------- --------- Revenues from customers ..... $ 257,467 $ 11,193 $ 55,616 $ 84,925 $ -- $ 409,201 ========= ========= ========= ========= ========= ========= Net revenue ................. $ 91,778 $ 3,436 $ 27,981 $ 22,837 $ 146,032 ========= ========= ========= ========= ========= Income (loss) from operations $ (42,921) $ (1,048) $ 3,168 $ 5,023 $ (35,778) ========= ========= ========= ========= ========= Three months ended June 30, 2000: Total revenue ............... $ 293,091 $ 12,301 $ 56,880 $ 98,110 $ (9,603) $ 450,779 Transfers between regions ... (2,434) (1,443) (2,677) (3,049) 9,603 -- --------- --------- --------- --------- --------- --------- Revenues from customers ..... $ 290,657 $ 10,858 $ 54,203 $ 95,061 $ -- $ 450,779 ========= ========= ========= ========= ========= ========= Net revenue ................. $ 128,357 $ 4,298 $ 25,080 $ 21,341 $ 179,076 ========= ========= ========= ========= ========= Income (loss) from operations $ 14,249 $ 93 $ 5,269 $ 3,450 $ 23,061 ========= ========= ========= ========= =========
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. 12 15 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) 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, 2000 (File No. 0-27288). RESULTS OF OPERATIONS EGL's principal services are international air freight forwarding, ocean freight forwarding, and customs brokerage and other value-added logistics services. The following table provides the revenue and net revenue attributable to EGL's principal services during the periods indicated. Revenue for air freight and ocean freight consolidations (indirect shipments) includes the cost of transporting such freight, whereas net revenue does not. Revenue for air freight and ocean freight agency or direct shipments, customs brokerage and import services, includes only the fees or commissions for these services. A comparison of net revenue best measures the relative importance of EGL's principal services. The following table presents certain statement of operations data for the periods indicated.
Six Months Ended June 30, --------------------------------------------- 2001 2000 --------------------- --------------------- % of % of Amount Revenues Amount Revenues --------- --------- --------- --------- (in thousands, except percentages) Revenues: Air freight forwarding .......... $643,140 77.3 $668,100 78.1 Ocean freight forwarding ........ 87,911 10.6 86,689 10.1 Customs brokerage and other ..... 100,469 12.1 100,902 11.8 -------- ----- -------- ----- Revenues ............................. $831,520 100.0 $855,691 100.0 ======== ===== ======== =====
% of Net % of Net Amount Revenues Amount Revenues --------- --------- --------- --------- Net revenues: Air freight forwarding .......... $ 177,427 58.1 $ 222,552 65.3 Ocean freight forwarding ........ 27,326 9.0 25,509 7.5 Customs brokerage and other ..... 100,469 32.9 92,717 27.2 --------- ----- --------- ----- Net revenues ......................... $ 305,222 100.0 $ 340,778 100.0 ========= ===== ========= ===== Operating expenses: Personnel costs ................. 195,222 64.0 184,068 54 Other selling, general and administrative expenses ....... 151,364 49.6 120,846 35.5 Merger related, restructuring and integration costs ......... 8,723 2.9 -- -- Operating income (loss) .............. (50,087) (16.5) 35,864 10.5 Nonoperating income (expense), net ... (2,556) (0.8) 2,206 0.6 --------- ----- --------- ----- Net income (loss) .................... $ (32,223) (10.6) $ 23,439 6.9 ========= ===== ========= =====
13 16 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000. Revenue. Revenue decreased $24.2 million, or 2.8%, to $831.5 million in the six months ended June 30, 2001 compared to $855.7 million in the six months ended June 30, 2000 primarily due to decreases in air freight forwarding revenue. Net revenue, which represents revenue less freight transportation costs, decreased $35.6 million, or 10.4%, to $305.2 million in the six months ended June 30, 2001 compared to $340.8 million in the six months ended June 30, 2000 due to a decrease in air freight forwarding net revenue. Air freight forwarding revenue. Air freight forwarding revenue decreased $25.0 million, or 3.7%, to $643.1 million in the six months ended June 30, 2001 compared to $668.1 million in the six months ended June 30, 2000 primarily as a result of volume decreases in North America offset by volume increases in Europe and South America. Air freight forwarding net revenue decreased $45.2 million, or 20.3%, to $177.4 million in the six months ended June 30, 2001 compared to $222.6 million in the six months ended June 30, 2000. The air freight forwarding margin declined to 27.6% for the six months ended June 30, 2001 compared to 33.3% for the six months ended June 30, 2000 primarily due to a softening of the U.S. economy, primarily in the technology, telecommunications and automotive industries and the resulting shift from air expedited shipments to economy ground deferred shipments which generate lower revenue at lower margins. The Company's airfreight forwarding margin was also adversely impacted in 2001 by the fixed costs of transportation related to 13 charter jet leases, which were carrying less freight than targeted operating levels as a result of the factors discussed in the previous sentence. In addition, the Company paid $2.0 million in June 2001 to terminate one of its air charter lease agreements. In mid-August 2001 the Company negotiated agreements to reduce its exposure to future losses on charter aircraft leases. Leases for two of the aircraft were terminated with no financial penalty and the Company has agreed to sublease five aircraft to a third party at rates below the Company's current contractual commitment, which is expected to result in the recognition of a loss of approximately $3 million (excluding taxes) in the third quarter of 2001. The Company expects to operate six charter aircraft for its own benefit, with increased utilization of remaining fixed capacity. The remaining charter aircraft leases have expiration dates ranging between December 31, 2001 and 2003. Ocean freight forwarding revenue. Ocean freight forwarding revenue increased $1.2 million, or 1.4%, to $87.9 million in the six months ended June 30, 2001 compared to $86.7 million in the six months ended June 30, 2000, while ocean freight forwarding net revenue increased $1.8 million, or 7.1%, to $27.3 million in the six months ended June 30, 2001 compared to $25.5 million in the six months ended June 30, 2000. The increases were principally due to volume increases in South America and Europe. The ocean freight forwarding margin increased to 31.1% in the six months ended June 30, 2001 compared to 29.4% in the six months ended June 30, 2000 primarily due to better buying opportunities of purchased transportation mainly in North America and Europe. Customs brokerage and other revenue. Customs brokerage and other revenue, which includes warehousing, distribution and other logistics services, decreased $0.4 million, or 0.4%, to $100.5 million in the six months ended June 30, 2001 compared to $100.9 million in the six months ended June 30, 2000. Net customs brokerage and other revenue increased $7.8 million, or 8.4%, to $100.5 million in the six months ended June 30, 2001 compared to $92.7 million in the six months ended June 30, 2000 mainly due to an increase in logistics services provided to customers in North America and Europe offset by a decline in services in Asia. Operating expenses. Personnel costs include all compensation expenses, including those relating to sales commissions and salaries and to headquarters employees and executive officers. Personnel costs increased $11.2 million, or 6.1%, to $195.2 million in the six months ended June 30, 2001 compared to $184.1 million in the six months ended June 30, 2001. As a percentage of net revenue, personnel costs were 64.0% in the six months ended June 30, 2001 compared to 54.0% in the six months ended June 30, 2000. Our history of rapid revenue growth has historically required us to increase our headcount at a fast pace to prepare for increased levels of activity to maintain our high level of customer service. As a result, employee headcount increased throughout 2000. When freight shipments began to slow during the first quarter of 2001, we attempted to alleviate the impact of the slowdown by implementing a furlough program in March 2001. With no strong signs of a near-term economic rebound, we reduced our headcount during the first six months of 2001 to bring it in line with current activity levels. During the six months ended June 30, 2001, over 700 regular full-time and contract employees were released, including the former Circle headquarters employees. The majority of these reductions were in the United States and, in total, represented approximately 13% of EGL's U.S. workforce. 14 17 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Other selling, general and administrative expenses, excluding transaction, restructuring and integration costs, increased $30.6 million, or 25.3%, to $151.4 million in the six months ended June 30, 2001 compared to $120.8 million in the six months ended June 30, 2000. As a percentage of net revenue, other selling, general and administrative expenses, excluding transaction, restructuring and integration costs, were 49.6% in the six months ended June 30, 2001 compared to 35.5% in the six months ended June 30, 2000. This increase is due to an overall increase in the level of our activities during 2000 and the six months ended June 30, 2001 without the corresponding net revenue growth in the six months ended June 30, 2001 due to the reduced shipping volumes and the shift from air expedited shipments to economy ground deferred shipments which generate lower revenue at lower margins, but with a similar cost structure. Merger related transaction, restructuring and integration costs. During the six months ended June 30, 2001 the Company recorded $3.0 million of merger restructuring costs related to its EGL/Circle Plan. This amount included a $1.9 million reduction to future lease obligations, net of expected sublease income, an additional charge of $3.1 in severance costs and a $2.0 million revision in the reserve related to the termination of a South African joint venture on more favorable terms than originally expected. Integration costs of $5.7 million were incurred during the six months ended June 30, 2001 and included personnel costs for redundant employees at the former Circle headquarters, the costs of legal registrations in various jurisdictions, changing signs and logos at major facilities around the world, and other integration costs. Nonoperating income (expense), net. For the six months ended June 30, 2001, we had nonoperating expense, net, of $2.6 million compared to nonoperating income, net, of $2.2 million for the six months ended June 30, 2000. The $4.7 million change is due to a lower level of interest income resulting from reduced short-term investments that were liquidated to fund expansion activity and higher interest expense from increased borrowings, partially offset by a gain recognized on recording the market value of an investment held by the Company, which is classified as available for sale, that became marketable during the second quarter of 2001. Effective tax rate. The effective income tax rate for the six months ended June 30, 2001 was 38.8% compared to 38.5% for the six months ended June 30, 2000. Our effective tax rate fluctuates primarily due to changes in the level of pre-tax income in foreign countries that have different tax rates.
Three Months Ended June 30, --------------------------------------------- 2001 2000 --------------------- --------------------- % of % of Amount Revenues Amount Revenues --------- --------- --------- --------- (in thousands, except percentages) Revenues: Air freight forwarding .......... $315,851 77.2 $352,184 78.1 Ocean freight forwarding ........ 43,890 10.7 46,240 10.3 Customs brokerage and other ..... 49,460 12.1 52,355 11.6 -------- ----- -------- ----- Revenues ............................. $409,201 100.0 $450,779 100.0 ======== ===== ======== =====
% of Net % of Net Amount Revenues Amount Revenues --------- --------- --------- --------- Net revenues: Air freight forwarding .......... $ 82,110 56.2 $ 117,499 65.6 Ocean freight forwarding ........ 14,462 10.0 13,333 7.5 Customs brokerage and other ..... 49,460 33.8 48,244 26.9 --------- ----- --------- ----- Net revenues ......................... $ 146,032 100.0 $ 179,076 100.0 ========= ===== ========= ===== Operating expenses: Personnel costs ................. 100,681 68.9 93,551 52.2 Other selling, general and administrative expenses ....... 79,951 54.7 62,464 34.9 Merger related, restructuring and integration costs ......... 1,178 (0.8) -- -- --------- ----- --------- ----- Operating income (loss) .............. (35,778) (24.4) 23,061 12.9 Nonoperating income (expense), net ... (1,595) (1.1) 1,231 0.7 --------- ----- --------- ----- Net income (loss) .................... $ (23,172) (15.9) $ 14,983 8.4 ========= ===== ========= =====
15 18 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Revenue. Revenue decreased $41.6 million, or 9.2%, to $409.2 million in the three months ended June 30, 2001 compared to $450.8 million in the three months ended June 30, 2000 primarily due to decreases in air freight forwarding revenue. Net revenue, which represents revenue less freight transportation costs, decreased $33.1 million, or 18.5%, to $146.0 million in the three months ended June 30, 2001 compared to $179.1 million in the three months ended June 30, 2000 due to a decrease in air freight forwarding net revenue. Air freight forwarding revenue. Air freight forwarding revenue decreased $36.3 million, or 10.3%, to $315.9 million in the three months ended June 30, 2001 compared to $352.2 million in the three months ended June 30, 2000 primarily as a result of volume decreases in North America and Asia Pacific. Air freight forwarding net revenue decreased $35.4 million, or 30.1%, to $82.1 million in the three months ended June 30, 2001 compared to $117.5 million in the three months ended June 30, 2000. The air freight forwarding margin declined to 26.0% for the three months ended June 30, 2001 compared to 33.4% for the three months ended June 30, 2000 primarily due to a softening of the U.S. economy, primarily in the technology, telecommunications and automotive industries and the resulting shift from air expedited shipments to economy ground deferred shipments which generate lower revenue at lower margins. The Company's airfreight forwarding margin was also adversely impacted in 2001 by the fixed costs of transportation related to 13 charter jet leases, which were carrying less freight than targeted operating levels as a result of the factors discussed in the previous sentence. In addition, the Company paid $2.0 million in June 2001 to terminate on of its air charter lease agreements. In mid-August 2001 the Company negotiated agreements to reduce its exposure to future losses on charter aircraft leases. Leases for two of the aircraft were terminated with no financial penalty and the Company has agreed to sublease five aircraft to a third party at rates below the Company's current contractual commitment, which is expected to result in the recognition of a loss of approximately $3 million (excluding taxes) in the third quarter of 2001. The Company expects to operate six charter aircraft for its own benefit, with increased utilization of remaining fixed capacity. The remaining charter aircraft leases have expiration dates ranging between December 31, 2001 and 2003. Ocean freight forwarding revenue. Ocean freight forwarding revenue decreased $2.3 million, or 5.0%, to $43.9 million in the three months ended June 30, 2001 compared to $46.2 million in the three months ended June 30, 2000, while ocean freight forwarding net revenue increased $1.2 million, or 9.0%, to $14.5 million in the three months ended June 30, 2001 compared to $13.3 million in the three months ended June 30, 2000. The decrease in revenues was principally due to volume decreases in North America and Asia. The ocean freight forwarding margin increased to 33.0% in the three months ended June 30, 2001 compared to 28.8% in the three months ended June 30, 2000 primarily due to lower cost of purchased transportation mainly in Europe and North America combined with a higher percentage of activity handled through ocean forwarding services. Customs brokerage and other revenue. Customs brokerage and other revenue, which includes warehousing, distribution and other logistics services, decreased $2.9 million, or 5.5%, to $49.5 million in the three months ended June 30, 2001 compared to $52.4 million in the three months ended June 30, 2000. Net customs brokerage and other revenue increased $1.3 million, or 2.7%, to $49.5 million in the three months ended June 30, 2001 compared to $48.2 million in the three months ended June 30, 2000 mainly due to an increase in logistics services provided to customers in North America and Europe offset by a decline in services in Asia. Operating expenses. Personnel costs include all compensation expenses, including those relating to sales commissions and salaries and to headquarters employees and executive officers. Personnel costs increased $7.1 million, or 7.6%, to $100.7 million in the three months ended June 30, 2001 compared to $93.6 million in the three months ended June 30, 2001. As a percentage of net revenue, personnel costs were 68.9% in the three months ended June 30, 2001 compared to 52.2% in the three months ended June 30, 2000. Our history of rapid revenue growth has historically required us to increase our headcount at a fast pace to prepare for increased levels of activity to maintain our high level of customer service. As a result, employee headcount increased throughout 2000. When freight shipments began to slow during the first quarter of 2001, we attempted to alleviate the impact of the slowdown by implementing a furlough program in March 2001. With no strong signs of a near-term economic rebound, we reduced our headcount by approximately 400 during the second quarter, with the majority occurring toward the end of the quarter, to bring it in line with current activity levels. 16 19 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Other selling, general and administrative expenses, excluding transaction, restructuring and integration costs, increased $17.5 million, or 28.0%, to $80.0 million in the three months ended June 30, 2001 compared to $62.5 million in the three months ended June 30, 2000. As a percentage of net revenue, other selling, general and administrative expenses, excluding transaction, restructuring and integration costs, were 54.7% in the three months ended June 30, 2001 compared to 34.9% in the three months ended June 30, 2000. This increase is due to an overall increase in the level of our activities during 2000 and the first quarter of 2001 without the corresponding net revenue growth in the first quarter of 2001 due to reduced shipping volumes and the shift from air expedited shipments to economy ground deferred shipments which generate lower revenue at lower margins, but with a similar cost structure. Merger related transaction, restructuring and integration costs. During the three months ended June 30, 2001 the Company recorded a reduction of $83,000 in merger restructuring costs related to its EGL/Circle Plan. This amount included an additional $1.9 million related to future lease obligations, net of expected sublease income, net of a $2.0 million revision in the reserve related to the termination of the South African joint venture on more favorable terms than originally expected. Integration costs of $1.3 million were incurred during the three months ended June 30, 2001 and included personnel costs for redundant employees at the former Circle headquarters, the costs of legal registrations in various jurisdictions, changing signs and logos at major facilities around the world, and other integration costs. Nonoperating income (expense), net. For the three months ended June 30, 2001, we had nonoperating expense, net, of $1.6 million compared to nonoperating income, net of $1.2 million for the three months ended June 30, 2000. The $2.8 million change is due to a lower level of interest income resulting from reduced short-term investments that were liquidated to fund expansion activity and higher interest expense from increased borrowings, offset by a gain recognized on recording the market value of an investment held by the Company, which is classified as available for sale, that became marketable during the second quarter of 2001. Effective tax rate. The effective income tax rate for the three months ended June 30, 2001 was 38.0% compared to 38.3% for the three months ended June 30, 2000. Our effective tax rate fluctuates primarily due to changes in the level of pre-tax income in foreign countries that have different rates. LIQUIDITY AND CAPITAL RESOURCES General We make significant disbursements on behalf of our customers for 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 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. Cash used in operating activities. Net cash used in operating activities was $25.4 million in the six months ended June 30, 2001 compared to cash provided by operating activities of $39.3 million in the six months ended June 30, 2000. The decrease in the six months ended June 30, 2001 was primarily due to the loss incurred in the six months ended June 30, 2001 and transaction, integration and restructuring costs paid during the six months ended June 30, 2001 as compared to income and corresponding cash flows that were produced in 2000. Cash used in investing activities. Cash used in investing activities in the six months ended June 30, 2001 was $20.6 million compared to $33.6 million in the six months ended June 30, 2000. We incurred an increase in capital expenditures of $5.4 million during the six months ended June 30, 2001 as compared to the 2000 period. These expenditures were mainly due to information technology initiatives and general facilities expansion in North America. Cash provided by financing activities. Cash provided by financing activities in the six months ended June 30, 2001 was $45.1 million compared to $10.4 million used in financing activities in the six months ended June 30, 2000. Notes payable increased $43.0 million due primarily to a $47.0 million increase in the revolving line of credit, which had a balance of $128.0 million at June 30, 2001 compared to $81.0 million at December 31, 2000. 17 20 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Proceeds from the exercise of stock options were $3.2 million in the six months ended June 30, 2001 compared to $1.3 million in the six months ended June 30, 2000. The Company expended $0 and $10.5 million to purchase treasury stock in the six months ended June 30, 2001 and 2000, respectively. Other factors affecting our liquidity and capital resources Treasury stock repurchase authorization. In May 2001, the Company's Board of Directors authorized the repurchase of up to 3 million shares of its outstanding Common Stock subject to certain financial conditions. As of August 14, 2001, the Company had made no repurchases under this authorization. This authorization expires on September 18, 2001, unless extended. The Company's bank agreements place restrictions on the amount of stock that may be repurchased. There can be no assurance as to what amount, if any, of shares will be repurchased by the Company. Credit agreements. In January 2001, we entered into a new credit agreement with several banks with respect to a $150 million revolving line of credit. The revolving line of credit (as amended on June 28, 2001) provides a $150 million revolving line and includes a $30 million sublimit for the issuance of letters of credit and a $15 million sublimit for a swing line loan. The revolving line of credit terminates in January 2004. For each tranche of principal obtained under the revolving line of credit, we elect an interest rate based on either LIBOR plus an applicable margin based on a ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation and amortization, known as EBITDA (a LIBOR Tranche) or the greater of the prime rate announced by Bank of America, N.A. or the federal funds rate plus 50 basis points (a Prime Rate Tranche). The interest for a LIBOR Tranche is due at the earlier of three months from inception of the LIBOR Tranche, as selected by us, or the expiration of the LIBOR Tranche, whichever is earlier. The interest for a Prime Rate Tranche is due quarterly. We are subject to certain covenants under the terms of the revolving line of credit, including, but not limited to, maintenance at the end of any fiscal quarter of (a) minimum specified consolidated net worth, (b) a ratio of consolidated funded debt to total capitalization of no greater than 0.40 to 1.00, (c) a ratio of consolidated funded debt to consolidated EBITDA of no greater than 3.00 to 1.00, (d) a consolidated fixed charge coverage ratio of no less than 1.35 to 1.00 and (e) minimum consolidated domestic accounts receivable coverage ratio not to be less than 1.25 to 1.00. In addition, the revolving line of credit generally prohibits additional indebtedness, except pursuant to the following: (a) the revolving line of credit, (b) interest hedge agreements not entered into for speculative purposes, (c) off balance sheet synthetic leases up to $35.0 million in the aggregate, (d) any other 18 21 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) agreement or agreements up to an aggregate of $40.0 million, and (e) reimbursement obligations to sureties issuing payment and performance bonds in the ordinary and usual course of our business. The revolving line of credit also limits our ability to make distributions to our shareholders, whether through the repurchase of stock, in cash or in kind, for any rolling four fiscal quarter period to an amount not in excess of 50% of our consolidated net income over such period. The revolving line of credit also places restrictions on liens, investments, changes of control and other matters and is secured by an interest in substantially all of our assets. As of June 30, 2001, our results did not satisfy the requirements of certain of these covenants. On August 13, 2001, we received a waiver letter from the banks to waive the event of default until September 30, 2001. The Company is seeking to refinance the debt under the revolving line of credit with borrowing under a new secured credit facility described below. As of July 31, 2001, $126.6 million was outstanding under the revolving line of credit. The terms of the revolving credit facility would permit borrowings thereunder to be used to finance future acquisitions, joint venture operations or capital expenditures or for other corporate purposes. We believe that operating cash flows, our financial structure and borrowing capacity under either our existing facility or our expected new credit facility will be adequate to fund our operations and finance capital expenditures and acquisitions over the coming year. The Company and Bank of America, National Association (the "Bank") have entered into a binding commitment letter pursuant to which the Bank has agreed to underwrite a secured Credit Facility for the Company consisting of Revolving Loans and Letters of Credit of up to the lesser of (a) $220 million or (b) an amount equal to the sum of (i) 85% of eligible accounts of the Company and its wholly owned Subsidiaries in Canada, the United Kingdom, the Netherlands, Australia, and Singapore plus (ii) eligible standby letters of credit in favor of the Bank for the account of the Company or any Subsidiary plus (iii) eligible cash deposits or short-term investments of the Company or any Subsidiary. Such Credit Facility, which would have a Letter of Credit Subfacility of up to $50 million, would bear interest, at the election of the Company, at the Bank's Base Rate or LIBOR plus 2.50% (subject to performance pricing adjustments providing for increases of up to .025% and decreases of up to 0.50%) and would contain customary representations, warranties and covenants (including financial covenants requiring an agreed tangible net worth, a leverage ratio (subject to be a $40 million minimum availability trigger) of funded debt (excluding existing synthetic lease arrangements) to adjusted EBITDA of 6.0 at September 30, 2001, 5.5 at December 31, 2001, 5.0 at March 30, 2002, 4.5 at June 30, 2002, and 4.0 at September 30, 2002 and each fiscal quarter thereafter, and agreed maximum capital expenditures). to be negotiated. The Commitment Letter will expire on September 30, 2001 unless a definitive Credit Agreement is executed on or prior to such date. There can be no assurance that the Company will be able to enter into a definitive Credit Agreement upon the terms described above or at all; therefore, the balance under the existing Credit Agreement has been classified as short-term as of June 30, 2001. Bank lines of credit and letters of credit. We maintain a $10 million bank line of credit, in addition to the $30 million sublimit under our revolving line of credit, to secure customs bonds and bank letters of credit to guarantee certain transportation expenses in foreign locations. At June 30, 2001, we were contingently liable for approximately $7.2 million, under outstanding letters of credit and guarantees related to these obligations. Our ability to borrow under bank lines of credit and to maintain bank letters of credit is subject to the limitations on additional indebtedness contained in our revolving line of credit discussed above. Agreement with charter airlines. We currently have agreements with certain charter airlines which provide us with full access to regularly scheduled chartered aircraft on a monthly basis. These agreements contain guaranteed monthly minimum use requirements of the aircraft by us. Certain of these agreements contain provisions which allow for early termination or modification of the agreements to provide for an increase in or reduction of the amount of aircraft available for our use at our discretion. One of these charter agreements is for capacity on five aircraft with Miami Air International, Inc., a related party. Based on the charter agreements presently in place and aircraft presently being used, we expect to incur average minimum guaranteed charges of approximately $4.3 million, $1.5 million and $1.5 million on a monthly basis under these charter agreements during 19 22 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) the years ended December 31, 2001, 2002 and 2003, respectively, before subleasing receipts. These charter agreements are generally cancelable with a minimum notice period. In mid-August 2001 the Company negotiated agreements to reduce its exposure to future losses on charter aircraft leases. Leases for two of the aircraft were terminated with no financial penalty and the Company has agreed to sublease five aircraft at rates below the Company's current contractual commitment, which is expected to result in the recognition of a loss of approximately $3 million (excluding taxes) in the third quarter of 2001. The Company expects to operate six charter aircraft for its own benefit, with increased utilization of remaining fixed capacity. The remaining charter aircraft leases have expiration dates ranging between December 31, 2001 and 2003. Operating lease agreements. On January 10, 1997, we entered into a five-year operating lease agreement with two unrelated parties for financing the construction of our Houston terminal, warehouse and headquarters facility (the "Houston facility"). The cost of the Houston facility was approximately $8.5 million. Under the terms of the lease agreement, average monthly lease payments are approximately $59,000, which includes monthly interest costs based upon LIBOR plus 145 basis points beginning on July 1, 1998 through January 2, 2002. A balloon payment equal to the outstanding lease balance, which was initially equal to the cost of the facility, is due on January 2, 2002. As of June 30, 2001, the lease balance was approximately $8.1 million. On April 3, 1998, we entered into a five-year $20 million master operating lease agreement with two unrelated parties for financing the construction of terminal and warehouse facilities throughout the United States designated by us. Under the terms of the master operating lease agreement, average monthly lease payments, including monthly interest costs based upon LIBOR plus 145 basis points, begin upon the completion of the construction of each financed facility. The monthly lease obligations continue for a term of 52 months and currently approximate $150,000 per month. A balloon payment equal to the outstanding lease balances, which were initially equal to the cost of the facility, is due at the end of each lease term. Construction began during 1999 on five terminal facilities. As of June 30, 2001, the aggregate lease balance was approximately $15.0 million under the master operating lease agreement. The operating lease agreements contain restrictive financial covenants requiring the maintenance of a fixed charge coverage ratio of at least 1.5 to 1.0 and specified amounts of consolidated net worth and consolidated tangible net worth. In addition, the master operating lease agreement as amended on October 20, 2000 restricts us from incurring debt in an amount greater than $30 million, except pursuant to a single credit facility involving a commitment of not more than $150 million. The Company expects to seek an increase in this limit in connection with its plans to enter into the proposed $220 million secured facility. We have an option, exercisable at anytime during the lease term, and under particular circumstances may be obligated, to acquire the Houston terminal and each of our other financed facilities for an amount equal to the outstanding lease balance. If we do not exercise the purchase option, and do not otherwise meet our obligations, we are subject to a deficiency payment computed as the amount equal to the outstanding lease balance minus the then current fair market value of each financed facility within limits. We expect that the amount of any deficiency payment would be expensed. Commitments to construct warehouse and terminal facilities. As of June 30, 2001, we had entered into commitments to construct warehouse and terminal facilities for an aggregate cost of approximately $18.6 million. Payment for the construction of the facilities is being made from cash balances. Construction of the facilities is estimated to be completed during 2001. Stock options. As of June 30, 2001, we had outstanding non-qualified stock options to purchase an aggregate of 5.4 million shares of common stock at exercise prices equal to the fair market value of the underlying common stock on the dates of grant (prices ranging from 0.83 to $33.82). At the time a non-qualified stock option is exercised, we will generally be entitled to a deduction for federal and state income tax purposes equal to the difference between the fair market value of the common stock on the date of exercise and the option price. As a result of exercises for the six months ended June 30, 2001, of non-qualified stock options to purchase an aggregate of 0.4 million shares of common stock, we are entitled to a federal income tax deduction of approximately $1.5 million. 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." 20 23 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) Any exercises of non-qualified stock options in the future at exercise prices below the then fair market value of the common stock may also result in tax deductions equal to the difference between those amounts. There is uncertainty as to whether the exercises will occur, the amount of any deductions, and our ability to fully utilize any tax deductions. COMMISSIONER'S CHARGE As discussed in "Part II, Item 1. Legal Proceedings", the Company has received a Letter of Determination and Conciliation Proposal from the EEOC relating to the Commissioner's Charge described in that section. Following the issuance of the EEOC's Determination in May 2000, a lawsuit was filed in Philadelphia, Pennsylvania by three former EGL employees and one individual who had unsuccessfully applied for a position. Four additional plaintiffs joined the suit in late July 2000. The lawsuit alleges discrimination and adopts in their entirety the EEOC's conclusions. Although the named plaintiffs on the Philadelphia lawsuit seek to represent a class of individuals, no class action has yet been approved by the Court, although the EEOC has been allowed to intervene, which could allow claims to be brought with respect to a class of individuals. The lawsuit seeks unspecified damages. Any relief sought in these lawsuits would be in addition to and not limited by the relief sought by the EEOC. There can be no assurance as to what will be the amount of time it will take to resolve the Commissioner's Charge, 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. RELATED PARTY TRANSACTIONS In connection with the Miami Air investment, we entered into an aircraft charter agreement with Miami Air. Under this agreement Miami Air agreed to convert certain of its passenger aircraft to cargo aircraft and to provide aircraft charter services to us for a three-year term. We issued a $7.0 million standby letter of credit in favor of certain creditors of Miami Air to enhance Miami Air's borrowing capacity to assist in this aircraft conversion. Miami Air has agreed to pay us an annual fee equal to 3.0% of the face amount of the letter of credit and to reimburse us for any payments owed by us in respect of the letter of credit. Additionally, during the three and six months ended June 30, 2001, we paid Miami Air $3.9 million and $6.1 million, respectively, under the aircraft charter agreement. There were no unpaid balances related to this agreement as of June 30, 2001. Additionally, Miami Air, each of the private investors and the continuing Miami Air stockholders also entered into a stockholders agreement under which Mr. Crane (Chairman, President and CEO) and Mr. Hevrdejs (a director of the Company) are obligated to purchase up to approximately $1.7 million and $.5 million, respectively, worth of Miami Air's Series A preferred stock upon demand by the board of directors of Miami Air. The Company and Mr. Crane both have the right to appoint one member of Miami Air's board of directors. Additionally, the other private investors in the stock purchase transaction, including Mr. Hevrdejs, collectively have the right to appoint one member of Miami Air's board of directors. The Series A preferred stock, if issued, will not be convertible, will have a 15.0% annual dividend rate and will be mandatorily redeemable in July 2006 or upon the prior occurrence of specified events. In conjunction with our business activities, we periodically utilize aircraft owned by entities controlled by Mr. Crane. On October 30, 2000, our Board of Directors approved a change in this arrangement whereby we would reimburse Mr. Crane for the $112,000 monthly lease obligation and other related costs on this aircraft and we would bill Mr. Crane for any use of this aircraft unrelated to company business on an hourly basis. For the three and six months ended June 30, 2001, we reimbursed Mr. Crane for $0.3 million and $0.7 million, respectively, in monthly lease payments and related costs on the aircraft. 21 24 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) The Company subleases a portion of its warehouse space in Houston, Texas and London, England to a customer pursuant to a five-year sublease. The customer is partially owned by Mr. Crane. Rental income was approximately $31,000 and $131,000 for the three and six months ended June 30, 2001, respectively. In addition the Company billed this customer approximately $59,000 and $134,000 for freight forwarding services for the three and six months ended June 30, 2001, respectively. NEW ACCOUNTING PRONOUNCEMENTS See Notes 2 and 3 of the notes to condensed consolidated financial statements and management's discussion and analysis of new accounting pronouncements for a description. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in exposure to market risk from that discussed in EGL's Annual Report on Form 10-K for the year ended December 31, 2000 other than the cash flow hedge entered into by the Company in April 2001. See Note 4 of the notes to condensed consolidated financial statements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In December 1997, the U.S. Equal Employment Opportunity Commission ("EEOC") issued a Commissioner's Charge against us and some of our subsidiaries (the "Commissioner's Charge") pursuant to Sections 706 and 707 of Title VII of the Civil Rights Act of 1964, as amended (Title VII). In the Commissioner's Charge, the EEOC charged us and some of our subsidiaries with violations of Section 703 of Title VII, as amended, the Age Discrimination in Employment Act of 1967, and the Equal Pay Act of 1963, resulting from (1) engaging in unlawful discriminatory hiring, recruiting and promotion practices and maintaining a hostile work environment, based on one or more of race, national origin, age and gender, (2) failures to investigate, (3) failures to maintain proper records and (4) failures to file accurate reports. The Commissioner's Charge states that the persons aggrieved include all Blacks, Hispanics, Asians and females who are, have been or might be affected by the alleged unlawful practices. In May 2000, the Houston District Office of the EEOC provided us with its "Letter of Determination and Conciliation Proposal" with respect to the investigation pertaining to the Commissioner's Charge and made a final determination that there is a sufficient evidentiary basis to sustain all allegations in the Commissioner's Charge, except as to certain charges relating to Asian Americans. The Conciliation Proposal "invites [EGL] to actively engage in conciliation to resolve this matter," and proposes certain monetary and non-monetary remedies to "serve to facilitate confidential discussions which, hopefully, will eventuate in an appropriate settlement." That proposed relief includes (1) backpay and benefits for a class of minorities in the amount of $6,000,000 (this is a $950,000 reduction from the amount claimed under the preliminary assessment), (2) compensation for certain incumbent minorities and women who were allegedly underpaid relative to white male counterparts in the amount of $5,000,000, (3) compensation for certain minority and female employees who were allegedly not promoted at rates comparable to their respective employment rates in the amount of $2,950, 000, and (4) financial compensation for certain other employees as a result of alleged "disparate discipline" in the amount of $745, 000, all of which is exclusive of interest, compensatory and punitive damages and costs. The specific monetary relief as outlined above is $950,000 less than that amount proposed in its preliminary assessment. The Conciliation Proposal stated, however, that "the EEOC agreed that its claim [for monetary relief] could be resolved for $20,000,000." The EEOC also sought non-monetary relief, including hiring 244 minority employees, certain upward adjustments to salaries, reinstatement of up to 15 employees and required 22 25 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) promotion of 30 employees. The Conciliation Proposal also sought other non-monetary relief, including (1) reformation of our policies and practices with respect to record keeping, recruiting, hiring and placement, reinstatement, promotion and transfer, and corporate governance, (2) revision of certain job descriptions, (3) institution of employee and supervisory training, and (4) the institution of specified procedures and steps with respect to such matters. We believe that the Houston District Office's May 2000 Determination finding systemic discrimination is unsupported by any credible evidence and was rendered by the agency in part due to agency bias against us and our Chief Executive Officer because of our vigorous defense of this matter. We accepted the EEOC's offer to conciliate this matter and have participated in numerous conciliation conferences with the EEOC during the past few months. Certain individual employees have brought charges of this nature against us in the ordinary course of business. Additionally, following the issuance of the EEOC's Determination in May 2000, a lawsuit was filed on May 12, 2000 in the U.S. District Court for the Eastern District of Pennsylvania (Civil Action No. 00-CV-2461) by Augustine Dube, Noelle Davis, Kshanti Morris and Ruben Capaletti, who are former employees or individuals who had unsuccessfully applied for a position with us. Four additional plaintiffs joined the suit in late July 2000. The lawsuit alleges discrimination and adopts the EEOC's conclusions in their entirety. Although the named plaintiffs on this lawsuit seek to represent a class of individuals, no class action has yet been approved by the court, and the plaintiff's request for class certification has been preliminarily denied. In January 2001, the EEOC was allowed to intervene in the case, which could allow claims to be brought with respect to a class of individuals. At that time, the court in Philadelphia also granted our request that the case be transferred to the U.S. District Court for the Southern District of Texas in Houston. The lawsuit seeks unspecified damages that are not limited by the relief sought by the EEOC in the Conciliation Proposal. Because the lawsuit is essentially based upon the contested EEOC allegations described above, we fully intend to defend ourselves in both matters but would consider a settlement with both the plaintiffs and the EEOC that we believe is reasonable in both monetary and non-monetary terms. We initiated a mediation process with both the EEOC and the plaintiffs in the lawsuit in a effort to resolve this matter but results to date have been unsuccessful. There can be no assurance as to what will be the amount of time it will take to resolve the Commissioner's Charge, the other lawsuits and related issues or the degree of any adverse effect these matters may have on us and our financial condition and results of operation. A substantial settlement payment or judgment could result in a significant decrease in working capital and liquidity. See Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations " and Note 9 of the notes to condensed consolidated financial statements for a discussion of commitments and contingencies. From time to time we are a party to various legal proceedings arising in the ordinary course of business. Except as described above, we are not currently a party to any material litigation and are not aware of any litigation threatened against us, which we believe would have a material adverse effect on our business. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS (b) Adoption of Shareholder Rights Plan. On May 23, 2001, the Company's Board of Directors declared a dividend of one right (Right) for each outstanding share of the Company's Common Stock, par value $.001 per share, to shareholders of record at the close of business on June 4, 2001. The Rights will have certain anti-takeover effects. The Rights will cause substantial dilution to any person or group that attempts to acquire the Company without the approval of the Company's Board of Directors. As a result, the overall effect of the Rights may be to render more difficult or discourage any attempt to acquire the Company even if such acquisition may be favorable to the interests of the Company's shareholders. Because the Company's Board of Directors can redeem the Rights or approve a permitted offer under the 23 26 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) plan, the Rights should not interfere with a merger or other business combination approved by the Board of Directors of the Company. The Rights are described in Note 8 of the notes to condensed consolidated financial statements and in our Form 8-K filed on May 24, 2001. (c) As previously reported, included under Management's Discussion and Analysis of Financial Condition and Results of Operations Overview," in the Company's Form 10-K for the fiscal year ended December 31, 2000, the Company agreed to issue shares of Company common stock as additional partial consideration for the January 7, 2000 acquisition of Commercial Transport International (Canada) Ltd. and Fastair Cargo Systems Ltd. Earlier this year, 195,481 shares of Common Stock were issued in respect of the Company's $3.5 million obligation in connection with this acquisition. Such transaction is exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof as a transaction not involving any public offering. ITEM 3. DEFAULTS UPON SENIOR SECURITIES NONE ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY-HOLDERS (a) ANNUAL MEETING OF SHAREHOLDERS ON MAY 23, 2001
(b) ELECTION OF DIRECTORS FOR AGAINST WITHHELD ABSTAIN BROKER NONVOTES --------------------- ---------- ------- -------- ------- --------------- James R.Crane 44,605,122 * 87,784 -- * Peter Gibert 44,602,907 * 89,999 -- * Frank J. Hevrdejs 44,604,130 * 88,776 -- * Neil E. Kelley 44,604,823 * 88,083 -- * Norwood W. Knight-Richardson 44,605,678 * 87,228 -- * Rebecca A. McDonald 44,603,169 * 89,737 -- * Elijio V. Serrano 44,603,587 * 89,319 -- * (c) PROPOSALS --------- Approval of Appointment of PricewaterhouseCoopers LLP as Independent Accountants 44,618,631 66,813 * 7,462 *
* Not Applicable 24 27 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) ITEM 5. OTHER INFORMATION FORWARDING LOOKING STATEMENTS The statements contained in all parts of this document that are not historical facts are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, but are not limited to, those relating to the following: the effect and benefits of the Circle merger; the proposed new credit facility; expectations or arrangements for the Company's leased planes and the effects thereof; the expected completion and/or effects of the Plan; the termination of joint venture/agency agreements and the Company's ability to recover assets in connection therewith; the Company's plan to reduce costs (including the scope, timing, impact and effects thereof); past and planned headcount reductions (including the scope, timing, impact and effects thereof); potential annualized cost savings; changes in the Company's dedicated charter fleet strategy (including the scope, timing, impact and effects thereof); the Company's plans to outsource leased planes, the Company's ability to improve its cost structure; consolidation of field offices (including the scope, timing and effects thereof), the Company's ability to restructure the debt covenants in its credit facility, if at all; anticipated future recoveries from actual or expected sublease agreements; the sensitivity of demand for the Company's services to domestic and global economic conditions; cost management efforts; expected growth; construction of new facilities; the results, timing, outcome or effect of matters relating to the Commissioner's Charge or other litigation and our intentions or expectations of prevailing with respect thereto; future operating expenses; future margins; use of credit facility proceeds; fluctuations in currency valuations; fluctuations in interest rates; future acquisitions and any effects, benefits, results, terms or other aspects of such acquisitions; 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 the Circle merger, including the integration of its systems, operations and other businesses, termination of joint ventures, charter aircraft arrangements (including expected losses, increased utilization and other effects), the Company's dependence on its ability to attract and retain skilled managers and other personnel; the intense competition within the freight industry; the uncertainty of the Company's ability to manage and continue its growth and implement its business strategy; the Company's dependence on the availability of cargo space to serve its customers; the potential for liabilities if certain independent owner/operators that serve the Company are determined to be employees; effects of regulation; results of litigation (including the results and outcome of the Commissioner's Charge); the Company's vulnerability to general economic conditions and dependence on its principal customers; the timing, success and effects of the Company's restructuring and other changes to its leased aircraft arrangements, whether the Company enters into arrangements with third parties relating to such leased aircraft and the terms of such arrangements, the results of the new air network, whether the Company enters into definitive agreements for either new lift capacity or for a new credit facility and the terms of any such agreements, the ability of the Company's lead bank to syndicate such a facility and the market for such syndications, responses of customers to the Company's actions by the Company's principal shareholder; the Company's potential exposure to claims involving its local pickup and delivery operations; risk of international operations; risks relating to acquisitions; the Company's future financial and operating results, cash needs and demand for its services; 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, 2000. 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. 25 28 EGL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) EXHIBITS. *2(i) Agreement and Plan of Merger, dated as of July 2, 2000 among EGL, Inc., EGL Delaware I, Inc. and Circle International Group, Inc. (Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 5, 2000). *3(i) 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). 3(ii) Statement of Resolutions Establishing the Series A Junior Participating Preferred Stock of the Company. *3(iii) Amended and Restated Bylaws of the Company, as amended (Exhibit 3(ii) to the Company's Form 10-Q for the fiscal quarter ended June 30, 2000). *4 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. (Exhibit 1 to the Company's Current Report on Form 8-K dated May 23, 2001). 10(i) First Amendment dated June 28, 2001 to Credit Agreement dated January 5, 2001 between EGL, Bank of America, N.A., SouthTrust Bank, The Bank of Tokyo-Mitsubishi, Ltd. and the other financial institutions named therein. - ------------ * Incorporated by reference as indicated. (b) REPORTS ON FORM 8-K. The Company filed a report of Form 8-K on May 24, 2001 related to the Rights Agreement dated as of May 23, 2001 between EGL, Inc. and Computershare Investor Services, L.L.C., as Rights Agent. 26 29 EGL, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EGL, INC. ---------------------------------------- (Registrant) Date: August 14, 2001 BY: /s/ James R. Crane ---------------------------------------- James R. Crane Chairman, President and Chief Executive Officer Date: August 14, 2001 BY: /s/ Elijio V. Serrano ---------------------------------------- Elijio V. Serrano Chief Financial Officer 27 30 EGL, INC. INDEX TO EXHIBITS EXHIBITS DESCRIPTION - -------- ----------- *2(i) Agreement and Plan of Merger, dated as of July 2, 2000 among EGL, Inc., EGL Delaware I, Inc. and Circle International Group, Inc. (Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 5, 2000). *3(i) 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). 3(ii) Statement of Resolutions Establishing the Series A Junior Participating Preferred Stock of the Company. *3(iii) Amended and Restated Bylaws of the Company, as amended (Exhibit 3(ii) to the Company's Form 10-Q for the fiscal quarter ended June 30, 2000). *4 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. (Exhibit 1 to the Company's Current Report on Form 8-K dated May 23, 2001). 10(i) First Amendment dated June 28, 2001 to Credit Agreement dated January 5, 2001 between EGL, Bank of America, N.A., SouthTrust Bank, The Bank of Tokyo-Mitsubishi, Ltd. and the other financial institutions named therein. - ------------ * Incorporated by reference as indicated. 28 EX-3.II 3 h89920ex3-ii.txt STMT OF RESOLUTIONS ESTABLISHING SERIES A STOCK 1 EXHIBIT 3(ii) STATEMENT OF RESOLUTION ESTABLISHING SERIES OF SHARES designated SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of EGL, INC. Pursuant to Article 2.13D of the Texas Business Corporation Act Pursuant to the provisions of Article 2.13D of the Texas Business Corporation Act, the undersigned corporation submits the following statement for the purpose of establishing and designating a series of shares of Preferred Stock, par value $0.01 per share, designated as "Series A Junior Participating Preferred Stock" and fixing and determining the relative rights and preferences thereof: 1. The name of the corporation is EGL, Inc. (the "Corporation"). 2. The following resolution, establishing and designating a series of shares and fixing and determining the relative rights and preferences thereof, was duly adopted by all necessary action on the part of the Corporation, consisting of due adoption by the Board of Directors of the Corporation at a meeting duly held on May 23, 2001; RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of the Restated Articles of Incorporation, a series of Preferred Stock, par value $.001 per share, of the Corporation be and hereby is created, and that the designation and number of shares thereof and the preferences, limitations and relative rights, including voting and rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows: SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 1. Designation and Amount. There shall be a series of Preferred Stock that shall be designated as "Series A Junior Participating Preferred Stock," and the number of shares constituting such series shall be 200,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Junior Participating Preferred Stock to less than the number of shares then issued and outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. - 1 - 2 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock, in preference to the holders of shares of any class or series of stock of the Corporation ranking junior to the Series A Junior Participating Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $20 or (b) subject to the provision for adjustment hereinafter set forth, the Adjustment Number (as defined below) times the aggregate per share amount of all cash dividends, and the Adjustment Number times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.001 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. The "Adjustment Number" shall initially be 1000. In the event the Corporation shall at any time after May 23, 2001 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $20 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating - 2 - 3 Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (A) Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to a number of votes equal to the Adjustment Number on all matters submitted to a vote of the shareholders of the Corporation. (B) Except as otherwise provided herein, in the Restated Articles of Incorporation or by law, the holders of shares of Series A Junior Participating Preferred Stock, the holders of shares of any other class or series entitled to vote with the Common Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") that shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, (1) the number of Directors shall be increased by two, effective as of the time of election of such Directors as herein provided, and (2) the holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) upon which these or like voting rights have been conferred and are exercisable (the "Voting Preferred Stock") with dividends in arrears in an amount equal to six quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect such two Directors. (ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of shareholders, and thereafter at annual meetings of shareholders, provided that such voting right shall not be exercised unless the holders of at least one-third in number of the shares of Voting Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Voting Preferred Stock of such voting right. At any meeting at which the holders of Voting Preferred Stock shall exercise such voting right initially - 3 - 4 during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two Directors or, if such right is exercised at an annual meeting, to elect two Directors. If the number that may be so elected at any special meeting does not amount to the required number, the holders of the Voting Preferred Stock shall, to the extent not inconsistent with the Restated Articles of Incorporation, have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Voting Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Voting Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock. (iii) Unless the holders of Voting Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any shareholder or shareholders owning in the aggregate not less than ten percent of the total number of shares of Voting Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Voting Preferred Stock, which meeting shall thereupon be called by the Chairman of the Board, the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Voting Preferred Stock are entitled to vote pursuant to this paragraph (C)(iii) shall be given to each holder of record of Voting Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or, in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any shareholder or shareholders owning in the aggregate not less than ten percent of the total number of shares of Voting Preferred Stock outstanding. Notwithstanding the provisions of this paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the shareholders. (iv) In any default period, after the holders of Voting Preferred Stock shall have exercised their right to elect Directors voting as a class, (x) the Directors so elected by the holders of Voting Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class or classes of stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class or classes of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Voting Preferred Stock as a class to elect Directors shall cease, (y) the - 4 - 5 term of any Directors elected by the holders of Voting Preferred Stock as a class shall terminate and (z) the number of Directors shall be such number as may be provided for in the Restated Articles of Incorporation or By-Laws irrespective of any increase made pursuant to the provisions of paragraph (C) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the Restated Articles of Incorporation or By-Laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or (iii) redeem or purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Junior Participating Preferred Stock, or to all such holders and the holders of any such shares ranking on a parity therewith, upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the - 5 - 6 Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to any conditions and restrictions on issuance set forth herein. 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received $1000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Junior Participating Preferred Stock Liquidation Preference"). Following the payment of the full amount of the Series A Junior Participating Preferred Stock Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Junior Participating Preferred Stock Liquidation Preference by (ii) the Adjustment Number. Following the payment of the full amount of the Series A Junior Participating Preferred Stock Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall, subject to the prior rights of all other series of Preferred Stock, if any, ranking prior thereto, receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Series A Junior Participating Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Junior Participating Preferred Stock Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, that rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) Neither the merger or consolidation of the Corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6, but the sale, lease or conveyance of all or substantially all the Corporation's assets shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6. - 6 - 7 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination, share exchange or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to the Adjustment Number times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. 8. Redemption. (A) The Corporation, at its option, may redeem shares of the Series A Junior Participating Preferred Stock in whole at any time and in part from time to time, at a redemption price equal to the Adjustment Number times the current per share market price (as such term is hereinafter defined) of the Common Stock on the date of the mailing of the notice of redemption, together with unpaid accumulated dividends to the date of such redemption. The "current per share market price" on any date shall be deemed to be the average of the closing price per share of such Common Stock for the ten consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current per share market price of the Common Stock is determined during a period following the announcement of (A) a dividend or distribution on the Common Stock other than a regular quarterly cash dividend or (B) any subdivision, combination or reclassification of such Common Stock and the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, shall not have occurred prior to the commencement of such ten Trading Day period, then, and in each such case, the current per share market price shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sales price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange but sales price information is reported for such security, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other self-regulatory organization or registered securities information processor (as such terms are used under the Securities Exchange Act of 1934, as amended) that then reports information concerning the Common Stock, or, if sales price information is not so reported, the average of the high bid and low asked prices in the over-the-counter market on such day, as reported by NASDAQ or such other entity, or, if on any such date the Common Stock is not quoted by any such entity, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Corporation. If on any such date no such market maker is making a market in the Common Stock, the fair value of the Common Stock on such date as determined in good faith by the Board of Directors of the Corporation shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business, or, if the Common Stock is not listed or admitted to trading on any national securities exchange but is quoted by NASDAQ, a day on which NASDAQ reports trades, or, if the Common Stock is not - 7 - 8 so quoted, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York are not authorized or obligated by law or executive order to close. (B) In the event that fewer than all the outstanding shares of the Series A Junior Participating Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method that may be determined by the Board of Directors in its sole discretion to be equitable. (C) Notice of any such redemption shall be given by mailing to the holders of the shares of Series A Junior Participating Preferred Stock to be redeemed a notice of such redemption, first class postage prepaid, not later than the fifteenth day and not earlier than the sixtieth day before the date fixed for redemption, at their last address as the same shall appear upon the books of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the close of business on such redemption date. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the shareholder received such notice, and failure duly to give such notice by mail, or any defect in such notice, to any holder of Series A Junior Participating Preferred Stock shall not affect the validity of the proceedings for the redemption of any other shares of Series A Junior Participating Preferred Stock that are to be redeemed. On or after the date fixed for redemption as stated in such notice, each holder of the shares called for redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the redemption price. If fewer than all the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (D) The shares of Series A Junior Participating Preferred Stock shall not be subject to the operation of any purchase, retirement or sinking fund. 9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise, and shall rank senior to the Common Stock as to such matters. 10. Amendment. At any time that any shares of Series A Junior Participating Preferred Stock are outstanding, the Restated Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. 11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holder's fractional - 8 - 9 shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. IN WITNESS WHEREOF, EGL, Inc. has caused this Statement to be executed on its behalf by the undersigned officer on June 1, 2001. EGL, INC. _______________________________________ Elijio V. Serrano Chief Financial Officer - 9 - EX-10.I 4 h89920ex10-i.txt FIRST AMENDMENT TO CREIDT AGREEMENT 1 EXHIBIT 10(i) FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment to Credit Agreement (this "FIRST AMENDMENT") is made and entered into as of the 28th day of June, 2001, by and among EGL, INC., a Texas corporation ("BORROWER"); each of the domestic Subsidiaries of Borrower; BANK OF AMERICA, N.A., as Administrative Agent for the Banks, a Bank, the Swing Line Lender, and the Issuing Bank; SOUTHTRUST BANK, as a Co-Agent, and a Bank; THE BANK OF TOKYO-MITSUBISHI, LTD., as a Co-Agent and a Bank; and the other lending institutions which are a party to this First Amendment. W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to that certain Credit Agreement (the "CREDIT AGREEMENT") dated January 5, 2001, Banks (as that term is defined in the Credit Agreement and is hereafter used) agreed to make certain loans to Borrower upon the terms and conditions therein contained; and WHEREAS, Borrower and Banks desire to modify and amend certain terms and provisions of the Credit Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower, the Administrative Agent, the Co-Agents, and Banks agree as follows: 1. Defined Terms. Words and terms used herein which are defined in the Credit Agreement are used herein as defined therein, except as specifically modified by the terms of this First Amendment. 2. Amendments to Credit Agreement. Upon the full and complete satisfaction of each of the conditions listed in numerical Section 3 below, the Credit Agreement shall be modified and amended as follows: 2.1 Subparagraph (c) of the definition assigned to "ACQUISITION CRITERIA" in Section 1.1 of the Credit Agreement is deleted in its entirety and replaced with the following: (c) the Acquisition Consideration to be paid for that Acquisition (and its Subsidiaries) is either (i) $20,000,000.00 or less in the aggregate, determined without duplication of amounts, or (ii) Approved Consideration. 2 2.2 The definition of "APPLICABLE MARGIN" in Section 1.1 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: "APPLICABLE MARGIN" means with respect to interest rates, unused commitment fees, and letter of credit fees, as applicable, the percentage per annum set forth opposite the designated ranges of the Consolidated Funded Debt to Consolidated EBITDA Ratio:
Consolidated Funded Applicable Margin Debt to Consolidated LIBOR Tranches and Applicable Margin Applicable Margin EBITDA Ratio Letter of Credit Fee Prime Rate Tranche Commitment Fee - -------------------- -------------------- ------------------ ----------------- < .50x 1.25% 0% 0.25% - - > .50x but < 1.00x 1.50% 0% 0.25% - > 1.00 but < 1.50x 1.75% 0.25% 0.375% - > 1.50x but < 2.00x 2.00% 0.50% 0.375% - > 2.00 but < 2.50x 2.50% 1.00% 0.50% - > 2.50 2.75% 1.25% 0.50%
The Consolidated Funded Debt to Consolidated EBITDA Ratio for purposes of determining the Applicable Margin shall be based upon Schedule B of the most recent Compliance Certificate delivered to the Administrative Agent pursuant to Section 5.2(a) or Section 5.2(b). Any adjustments to the Applicable Margin shall become effective on the 45th day following the last day of each fiscal quarter (except the last fiscal quarter of each fiscal year) or on the 90th day following the last day of each fiscal year as applicable; provided, however, that if any such Compliance Certificate is not delivered when required hereunder, unless otherwise agreed to by the Administrative Agent in writing, the Applicable Margin shall be deemed to be the maximum percentage amount in the above table from such 45th or 90th day until such Compliance Certificate is received by the Administrative Agent, and further provided that notwithstanding any of the foregoing, until delivery by Borrower of its Compliance Certificate for the fiscal quarter ending on December 31, 2001, the Applicable Margin shall not be less than the percentages per annum listed in the above table for the range when the Consolidated Funded Debt to Consolidated EBITDA Ratio is greater than 2.00 to 1.00 but less than or equal to 2.50 to 1.0. Upon any change in the Applicable Margin, the Administrative Agent shall promptly notify the Borrower and the Banks of the new Applicable Margin. 2.3 The definition of "CONSOLIDATED EBIT" in Section 1.1 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: 2 3 "CONSOLIDATED EBIT" means, for any applicable period, an amount equal to (i) Consolidated Net Income, plus (ii) each of the following to the extent actually deducted in determining Consolidated Net Income (a) Consolidated Interest Expense, (b) Consolidated Tax Expense, and (c) a pre-tax adjusted non-recurring charge up to $81,900,000.00 for the fiscal quarter ending December 31, 2000, and a pre-tax adjusted non-recurring charge up to $7,500,000.00 for the fiscal quarter ending on March 31, 2001, minus (iii) the pre-tax adjusted amount of any non-recurring gains. 2.4 The definition of "CONSOLIDATED EBITDA" in Section 1.1 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: "CONSOLIDATED EBITDA" means, for any applicable period, an amount equal to (i) Consolidated Net Income, plus (ii) each of the following to the extent actually deducted in determining Consolidated Net Income (a) Consolidated Interest Expense, (b) Consolidated Tax Expense, (c) the amount of all depreciation and amortization expense deducted in determining Consolidated Net Income, all calculated on a consolidated basis for the Borrower and its Subsidiaries and as determined in accordance with GAAP, and (d) a pre-tax adjusted non-recurring charge up to $81,900,000.00 for the fiscal quarter ending December 31, 2000, and a pre-tax adjusted non-recurring charge up to $7,500,000.00 for the fiscal quarter ending on March 31, 2001, minus (iii) the pre-tax adjusted amount of any non-recurring gains. 2.5 The definition of "CONSOLIDATED NET INCOME" in Section 1.1 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: "CONSOLIDATED NET INCOME" means, for any period, the net income (or loss), after provision or benefit for taxes of the Borrower and its Subsidiaries on a consolidated basis for such period, determined in accordance with GAAP. 3 4 2.6 The definition of "ENGAGEMENT LETTER" in Section 1.1 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: "ENGAGEMENT LETTER" means, collectively, (a) the letter agreement dated as of October 24, 2000, from the Administrative Agent and agreed to by Borrower, regarding, among other things, the administrative agency fee payable to Administrative Agent, as amended, and (b) the letter agreement dated as of May 31, 2001, from the Administrative Agent and agreed to by Borrower, regarding, among other things, the additional administrative agency fee payable to Administrative Agent in connection with the First Amendment to this Agreement, dated June 28, 2001. 2.7 Subparagraph (f) of the definition of "PERMITTED DEBT" in Section 1.1 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: (f) in addition to the Debt listed in subparagraphs (a), (b), (c), (d), and (e) of this definition: (i) Debt of Borrower or any Subsidiary owing to the Administrative Agent (or any Affiliate of the Administrative Agent) under or with respect to the credit facility provided by the Administrative Agent in its corporate capacity under the Foreign Credit Reimbursement Agreement of even date herewith (the "FOREIGN CREDIT DEBT"), which is listed in Schedule 4.21 as the $10 million multi-currency line of credit, and (ii) additional Debt (including, without limitation, purchase money indebtedness and secured trade payables and any Debt assumed by Borrower in connection with an Acquisition) of Borrower and its Subsidiaries not to exceed at any time an outstanding aggregate principal amount of such additional Debt equal to $20,000,000.00. 2.8 Subparagraph (d) of the definitions of "PERMITTED INVESTMENTS" in Section 1.1 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: (d) investments listed on Schedule 4.21, together with investments up to an aggregate amount of $20,000,000.00, at any one time outstanding, in any Person (other than Borrower or a Subsidiary). 2.9 The following terms and definitions are added to and made a part of Section 1.1 of the Credit Agreement: "CONSOLIDATED DOMESTIC ACCOUNTS RECEIVABLE" means all of Borrower's and its domestic Subsidiaries' now owned or hereafter acquired (a) domestic accounts receivable, domestic book debts and other forms of domestic obligations, whether arising out of goods sold or services rendered or from any other transaction; (b) rights in, to and under all domestic purchase orders or domestic receipts for goods or services; (c) rights to any goods represented or purported to be represented by any of the foregoing (including unpaid sellers' 4 5 rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed, or repossessed goods); (d) moneys due or to become due to such Borrower or any of its domestic Subsidiaries under all domestic purchase orders and domestic contracts for the sale of goods or the performance of services or both by Borrower or that domestic Subsidiary, including the proceeds of the foregoing; (e) any notes, drafts, letters of credit, insurance proceeds or other instruments, documents and writings evidencing or supporting the foregoing; and (f) all collateral security and guarantees of any kind given by any other Person with respect to any of the foregoing. "CONSOLIDATED DOMESTIC ACCOUNTS RECEIVABLE COVERAGE RATIO" means, as of the end of any fiscal quarter of Borrower, the ratio of (a) Consolidated Domestic Accounts Receivable at that time, to (b) the sum of the combined aggregate outstanding principal balances of the Revolving Loan Notes, plus the outstanding principal balance of the Swing Line Note, plus the Letter of Credit Exposure at that time, plus the outstanding obligations with respect to the Foreign Credit Debt. "SECURITY AGREEMENT" means the Security Agreements made by the Borrower and the domestic Subsidiaries of the Borrower in favor of the Administrative Agent, in substantially the form of Exhibits K-1, and K-2 granting the Administrative Agent a security interest in, among other things, the accounts receivable of each such Person to secure the Credit Obligations, as may be modified, amended, and supplemented from time to time. References in this Agreement to a Subsidiary Security Agreement shall be to the Security Agreement set forth in Exhibit K-2. 2.10 Section 5.5 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: Financial Covenants. The Administrative Agent shall determine compliance with the following financial covenants based upon the applicable Schedule of the most recent Compliance Certificate delivered to the Administrative Agent pursuant to Sections 5.2(a) or 5.2(b). (a) Consolidated Net Worth. Borrower shall not permit its Consolidated Net Worth to be less than an amount equal to (i) $363,390,000.00, plus (ii) 50% of the cumulative quarterly Consolidated Net Income of the Borrower for each fiscal quarter of Borrower ending after December 31, 2000, and which the Borrower has positive consolidated net earnings for that fiscal quarter; plus (iii) 100% of the net proceeds received by Borrower after December 31, 2000, from any sale or issuance of any equity securities of, or any other additions to capital by, the Borrower or its Subsidiaries. Compliance with this paragraph (a) shall be determined based upon Schedule B of the applicable Compliance Certificate. 5 6 (b) Maximum Consolidated Funded Debt to Total Capitalization Ratio. Borrower shall not permit its Consolidated Funded Debt to Total Capitalization Ratio to be greater than.40 to 1.00. Compliance with this paragraph (b) shall be determined based upon Schedule B of the applicable Compliance Certificate. (c) Maximum Consolidated Funded Debt to Consolidated EBITDA Ratio. As of the last day of each fiscal quarter of the Borrower, the Borrower shall not permit its Consolidated Funded Debt to Consolidated EBITDA Ratio to be greater than (i) 3.00 to 1.00 for any fiscal quarter ending prior to March 31, 2002, (ii) 2.50 to 1.00 for any fiscal quarter of Borrower ending on or after March 31, 2002, or prior to June 30, 2002, and (iii) 2.00 to 1.00 for any fiscal quarter of Borrower ending on or after June 30, 2002. Compliance with this paragraph (c) shall be determined based upon Schedule B of the applicable Compliance Certificate. (d) Minimum Consolidated Fixed Charge Coverage Ratio. As of the last day of each fiscal quarter of the Borrower, the Borrower shall not permit its Consolidated Fixed Charge Coverage Ratio to be less than (i) 1.35 to 1.00 for any fiscal quarter of Borrower ending prior to March 31, 2002, (ii) 1.75 to 1.00 for any fiscal quarter of Borrower ending on or after March 31, 2002, and prior to June 30, 2002, and (iii) 2.00 to 1.00 for any fiscal quarter of Borrower ending on or after June 30, 2002. Compliance with this paragraph (e) shall be determined based upon Schedule B of the applicable Compliance Certificate. (e) Minimum Consolidated Domestic Accounts Receivable Coverage Ratio. As of the last day of any fiscal quarter of Borrower, the Borrower shall not permit its Consolidated Domestic Accounts Receivable Coverage Ratio to be less than 1.25 to 1.00. Compliance with this paragraph (e) shall be determined based upon Schedule B of the applicable Compliance Certificate. 2.11 Section 5.7 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: Liens; Negative Pledges. The Borrower and each domestic Subsidiary shall execute and deliver to the Administrative Agent a Subsidiary Security Agreement and all financing statements and related agreements and endorsements required by the Administrative Agent with respect to the Subsidiary Security Agreement. The Borrower shall not, and shall not permit any of its Subsidiaries to, create, assume, incur, or suffer to exist any Lien on any of its real or personal property whether now owned or hereafter acquired, or assign any right to receive its income, except for Permitted Encumbrances. Further, Borrower shall not, and shall not permit any of its Subsidiaries to, agree with any 6 7 other Person (directly or indirectly), in connection with Permitted Debt or otherwise, that it will not create, assume, incur, assume, or suffer to exist any Liens. 2.12 Section 5.10 of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: Distributions. Borrower shall not declare or pay Distributions in excess of $5,000,000.00 during any rolling four fiscal quarter period. 2.13 Section 6.1(e) of the Credit Agreement is deleted in its entirety and the following is substituted in place thereof: Material Debt Default. (i) Any principal, interest, fees, or other amounts due on any Debt of Borrower or any of its Subsidiaries (other than the Credit Obligations, but, including, without limitation, the Permitted Foreign Credit Debt) is not paid when due, whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise, and such failure is not cured within the applicable grace period, if any, and the aggregate amount of all Debt of such Persons so in default exceeds $1,000,000; (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to any Debt of any such Person (other than the Credit Obligations, but, including, without limitation, the Permitted Foreign Credit Debt) the effect of which is to accelerate or to permit the acceleration of the maturity of any such Debt, whether or not any such Debt is actually accelerated, and such event or condition shall not be cured within the applicable grace period, if any, and the aggregate amount of all Debt of such Persons so in default exceeds $1,000,000; and (iii) any Debt of any such Person shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled prepayment) prior to the stated maturity thereof, and the aggregate amount of all Debt of such Persons so accelerated exceeds $1,000,000. 2.14 Exhibit "G" to the Credit Agreement is deleted in its entirety and replaced with Exhibit "G" to this First Amendment. 2.15 Exhibits "K-1" and "K-2" to this First Amendment are added to and made a part of the Credit Agreement as Exhibits "K-1" and "K-2" thereof. 7 8 3. Conditions Precedent. The obligations of Administrative Agent, the Swing Line Lender, the Issuing Bank, each Co-Agent, and the other Banks under this First Amendment, and the effectiveness of the amendments to the Credit Agreement set forth herein, are subject to the full, complete, and timely satisfaction of each of the following conditions precedent: (a) The Administrative Agent shall have received and approved an executed original of this First Amendment, executed by authorized officers of Borrower and each domestic Subsidiary of Borrower and by the Majority Banks; (b) The Administrative Agent shall have received and approved (subject to the terms of the Credit Agreement, as hereby amended) a fully executed counterpart of the Security Agreement and all related financing statements and related documents and instruments required by the Administrative Agent; (c) Borrower shall have paid to each Bank executing this First Amendment an upfront fee equal to 0.25% of that Bank's Revolving Loan Commitment as independent consideration for that Bank's agreement to enter into this First Amendment and shall have reimbursed the Administrative Agent for all its reimbursable costs and expenses (including without limitation, attorneys' fees) incurred in connection with the preparation, negotiation, review, and execution of this First Amendment and the transaction described herein, and have paid the Administrative Agent for all other amounts then due and owing by Borrower to Banks and the Administrative Agent under the Credit Agreement, the Engagement Letter, and the Revolving Loan Notes; and (d) The representations and warranties contained in Article 4 of the Credit Agreement shall be true and unbreached and no Event of Default shall have occurred and be then existing. 4. Waiver. Borrower has failed to comply with the terms of Section 5.5(a) of the Credit Agreement (Consolidated Funded Debt to Consolidated EBITDA Ratio) for the period ending on March 31, 2001, and Section 5.5(d) of the Credit Agreement (Consolidated Fixed Charge Coverage Ratio) for the period ending on March 31, 2001. At the request of Borrower, upon the full and complete satisfaction of each condition listed in numerical Section 3 above, compliance by Borrower with the foregoing described covenants for the applicable period stated herein is waived. The waiver contained in this First Amendment is specifically limited to a waiver of the foregoing described covenants for the period stated herein and Borrower's failure to comply with such covenants during the period provided for in the first sentence shall not constitute an Event of Default or a Default. This waiver shall not constitute a waiver of either (a) any further violation of the foregoing described covenants (as amended hereby) beyond such periods, or (ii) any violation of any other provision of the Credit Agreement, or any 8 9 Event of Default thereunder, whether now existing or occurring after the date of this First Amendment, or (iii) of any right of Administrative Agent and each Bank to require strict compliance with the Credit Agreement, as hereby amended. Lender specifically reserves all of the rights and remedies they may have under the Credit Agreement or otherwise as the result of any violation or Event of Default (other than those waived herein). This First Amendment constitutes the only evidence of the waiver of compliance by Borrower with the above-described covenants. 5. Joinder. Each domestic Subsidiary of Borrower joins in the execution and delivery of this First Amendment to (a) evidence that the Subsidiary Guaranty, Security Agreement, and other Credit Documents executed by each of them remain in full force and effect, and are not limited or impaired by the execution and delivery of this First Amendment, or the occurrence of any other event, and (ii) to join in and be bound by the releases and other agreements made in numerical Section 6 of this First Amendment. 6. Release. Borrower and each of the domestic Subsidiaries on their own behalf and on behalf of their predecessors, successors and assigns (collectively, the "RELEASING PARTIES"), hereby acknowledge and stipulate that as of the date of this Agreement, none of the Releasing Parties has any claims or causes of action of any kind whatsoever against Administrative Agent or any Bank or any of their officers, directors, employees, agents, attorneys, or representatives, or against any of their respective predecessors, successors, or assigns. Each of the Releasing Parties hereby forever releases, remises, discharges and holds harmless Administrative Agent and each Lender and all of their officers, directors, employees, agents, attorneys and representatives, and all of their respective predecessors, successors, and assigns, from any and all claims, causes of action, demands, and liabilities of any kind whatsoever, whether direct or indirect, fixed or contingent, liquidated or nonliquidated, disputed or undisputed, known or unknown, which any of the Releasing Parties has or may acquire in the future relating in any way to any event, circumstance, action, or failure to act concerning the Credit Agreement, the other Credit Documents or the transactions contemplated therein from the beginning of time through the date of this First Amendment. 7. NO CONTROL BY BANKS. BORROWER AGREES AND ACKNOWLEDGES THAT ALL OF THE COVENANTS AND AGREEMENTS PROVIDED FOR AND MADE BY BORROWER IN THIS FIRST AMENDMENT, THE CREDIT AGREEMENT, AND IN THE OTHER CREDIT DOCUMENTS ARE THE RESULT OF EXTENSIVE AND ARMS-LENGTH NEGOTIATIONS AMONG BORROWER, ADMINISTRATIVE AGENT, AND BANKS. THE ADMINISTRATIVE AGENT'S AND BANKS' RIGHTS AND REMEDIES PROVIDED FOR IN THE CREDIT AGREEMENT AND IN THE OTHER CREDIT DOCUMENTS ARE INTENDED TO PROVIDE THE ADMINISTRATIVE AGENT AND BANKS WITH A RIGHT TO MONITOR BORROWER'S ACTIVITIES AS THEY RELATE TO THE LOAN TRANSACTIONS PROVIDED FOR IN THE CREDIT AGREEMENT, WHICH RIGHT IS BASED ON THE ADMINISTRATIVE AGENT'S AND BANKS' VESTED INTEREST IN 9 10 BORROWER'S ABILITY TO PAY THE NOTES AND PERFORM THE OTHER OBLIGATIONS. NONE OF THE COVENANTS OR OTHER PROVISIONS CONTAINED IN THE CREDIT AGREEMENT SHALL, OR SHALL BE DEEMED TO, GIVE THE ADMINISTRATIVE AGENT OR ANY BANK THE RIGHT OR POWER TO EXERCISE CONTROL OVER, OR OTHERWISE IMPAIR, THE DAY-TO-DAY AFFAIRS, OPERATIONS, AND MANAGEMENT OF BORROWER. 8. Lien Continuation: Miscellaneous. The liens granted in the Credit Documents are hereby ratified and confirmed as continuing to secure the payment of the Revolving Loan Notes. Nothing herein shall in any manner diminish, impair or extinguish the Revolving Loan Notes, as reissued in connection herewith. The liens granted in the Credit Documents are not waived. Borrower ratifies and acknowledges the Credit Documents as valid, subsisting, and enforceable and agrees that the indebtedness evidenced by the Revolving Loan Notes is just, due, owing and unpaid, and is subject to no offsets, deductions, credits, charges or claims of whatsoever kind or character, and further agrees that all offsets, credits, charges and claims of whatsoever kind or character are fully settled and satisfied. 9. Representations and Warranties. Borrower certifies that the representations and warranties made by Borrower in Article 4 of the Credit Agreement are true and correct as of the date of this First Amendment (except with respect to the Events of Default described in numerical section 4 above). 10. Miscellaneous. 10.1 Preservation of the Credit Agreement. Except as specifically amended and modified by the terms of this First Amendment, all of the terms, provisions, covenants, warranties, and agreements contained in the Credit Agreement and in the other Credit Documents shall remain in full force and effect (any irreconcilable conflicts or inconsistencies between the terms of this First Amendment and the Credit Agreement, or any other Credit Document, shall be governed and controlled by this First Amendment). 10.2 Counterparts. This First Amendment may be executed in two or more counterparts, and it shall not be necessary that any one of the counterparts be executed by all of the parties hereto. Each fully or partially executed counterpart shall be deemed an original, but all such counterparts taken together shall constitute but one and the same instrument. 10.3 NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT AND THE OTHER WRITTEN CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 10 11 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 11 12 IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date first above written. BORROWER: -------- EGL, INC. By: ___________________________________ Douglas A. Seckel, Treasurer ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., as Administrative Agent By: ___________________________________ David A. Johanson, Vice President CO-AGENTS: SOUTHTRUST BANK By: ___________________________________ John E. Elam, Jr., Group Vice President THE BANK OF TOKYO-MITSUBISHI, LTD. By: ___________________________________ Joey Powell, Banking Officer By: ___________________________________ John Mearns, Vice President and Manager 12 13 BANKS: BANK OF AMERICA, N.A. By: ___________________________________ William B. Borus, Senior Vice President SOUTHTRUST BANK By: ___________________________________ John E. Elam, Jr., Group Vice President THE BANK OF TOKYO-MITSUBISHI, LTD. By: ___________________________________ Joey Powell, Banking Officer By: ___________________________________ John Mearns, Vice President and Manager CREDIT LYONNAIS NEW YORK BRANCH By: ___________________________________ Attila Koc, Senior Vice President BNP PARIBAS By: ___________________________________ Angela Bentley, Associate 13 14 THE NORTHERN TRUST COMPANY By: ___________________________________ Fred W. McClendon, Vice President WELLS FARGO BANK TEXAS, NATIONAL ASSOCIATION By: ___________________________________ Patricia F. Taylor, Vice President BANK HAPOALIM B.M. By: ___________________________________ Thomas J. Hepperle, Vice President By: ___________________________________ Michael J. Byrne, Vice President and Senior Lending Officer 14 15 SUBSIDIARIES: EGL EAGLE GLOBAL LOGISTICS, LP, a Delaware limited partnership By: EGL MANAGEMENT, LLC , a Delaware limited liability company, its general partner By: _______________________________ Name: _____________________________ Title: ____________________________ EGL DELAWARE LIMITED LIABILITY COMPANY, a Delaware limited liability company By: ___________________________________ Name: _________________________________ Title: ________________________________ EGL Management, LLC, a Delaware limited liability company By: ___________________________________ Name: _________________________________ Title: ________________________________ EGL (Canada) HOLDING CO., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ 15 16 EAGLE MARITIME SERVICES, INC., a Texas corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ EAGLE USA IMPORT BROKERS, INC., a Texas corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ EAGLE URBAN RENEWAL CORPORATION, a New Jersey Urban Renewal Entity By: ___________________________________ Name: _________________________________ Title: ________________________________ EAGLE INTERNATIONAL HOLDINGS, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ EAGLE PARTNERS, a Texas general partnership By: EUSA HOLDINGS, INC., a Delaware corporation, Managing Partner By: _______________________________ Name: _____________________________ Title: ____________________________ 16 17 EAGLE PARTNERS, LP, a Texas limited partnership By: EUSA Holdings, Inc., its general partner By: ___________________________________ Name: _________________________________ Title: ________________________________ EUSA PARTNERS, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ CIRCLE INTERNATIONAL, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ CIRCLE INTERNATIONAL GROUP, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ EUSA HOLDINGS, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ Address: 15350 Vickery Drive Houston, Texas 77032 17 18 EXHIBIT "G" JOINDER AGREEMENT ([Subsidiary]) [Subsidiary], a corporation (the "SUBSIDIARY"), hereby agrees with (a) Bank of America, N.A., as Administrative Agent (the "ADMINISTRATIVE AGENT"), under the Credit Agreement dated as of January 5, 2001, among EGL, Inc., a Texas corporation, the financial institutions parties thereto, and the Administrative Agent (as modified from time to time, the "CREDIT AGREEMENT," the capitalized terms of which are used herein unless otherwise defined herein), and (b) the other parties to the Guaranty dated as of January 5, 2001, and the Subsidiary Security Agreement dated as of ___________, 2001, each executed in connection with the Credit Agreement, as follows: In accordance with Sections 5.19 and 5.21, of the Credit Agreement as applicable, the Subsidiary hereby (a) joins the Guaranty and the Subsidiary Security Agreement as a party thereto and assumes all the obligations of a Guarantor (as defined in the Guaranty) under the Guaranty and a Debtor (as defined in the Security Agreement) under the Subsidiary Security Agreement, (b) agrees to be bound by the provisions of the Guaranty and the Subsidiary Security Agreement as if the Subsidiary had been an original party to the Guaranty and the Subsidiary Security Agreement, and (c) confirms that, after joining the Guaranty and the Subsidiary Security Agreement as set forth above, the representations and warranties set forth in the Credit Agreement, the Guaranty, and the Subsidiary Security Agreement, with respect to the Subsidiary are true and correct in all material respects as of the date of this Joinder Agreement. In connection with the foregoing, the Subsidiary has and does hereby grant a security interest in and to its Collateral (as that term is defined in the Subsidiary Security Agreement), which is hereby made a part thereof, as security for the obligations secured by the Subsidiary Security Agreement. For purposes of notices under the Guaranty and under the Security Agreement, the notice address for the Subsidiary is as follows: _____________________________________ _____________________________________ _____________________________________ Attention: __________________________ Telephone: (___)_____________________ Telecopy: (___)_____________________ Schedule I to the Security Agreement is supplemented with the information regarding the Subsidiary set forth on Schedule I (Security Agreement) to this Joinder Agreement. G-1 19 THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF this Joinder Agreement is executed and delivered as of the ______ day of _______________________________. [SUBSIDIARY] By: ___________________________________ Name: _________________________________ Title: ________________________________ G-2 20 EXHIBIT K-1 BORROWER SECURITY AGREEMENT THIS SECURITY AGREEMENT is made and entered into as of the ____ day of __________, 2001, by EGL, INC., a Texas corporation ("Debtor"), whose address is 15350 Vickery Drive, Houston, Texas 77032, in favor of BANK OF AMERICA, N.A., whose address is 700 Louisiana, P.O. Box 2518, Houston, Harris County, Texas 77252-2518, in its capacity as Administrative Agent, Swing Line Lender, and Issuing Bank under the hereinafter defined Loan Agreement, and each Bank from time to time party to such Loan Agreement. WITNESSETH: WHEREAS, pursuant to a Credit Agreement (as may be modified and amended from time to time, the "Loan Agreement") dated January 5, 2001, by and among Debtor, the Administrative Agent, the Issuing Bank, the Swing Line Lender, and the Banks from time to time a party to the Loan Agreement, the Banks have agreed to extend credit to the Debtor; and WHEREAS, it is a condition precedent to the obligation of the Banks to extend credit to the Debtor under the Loan Agreement that the Debtor shall have executed and delivered this Security Agreement to the Administrative Agent as the Secured Party for the ratable benefit of the Banks. NOW, THEREFORE, for and in consideration of the premises and the agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor hereby agrees with Banks as follows: ARTICLE 1 - GENERAL TERMS Section 1.1 Terms Defined Above. As used in this Security Agreement, the terms "Loan Agreement" and "Debtor" shall have the respective meanings indicated above. Section 1.2 Terms Defined in Loan Agreement. Each capitalized term used but not defined herein shall have the meaning assigned to such term in the Loan Agreement (regardless of whether or not specific reference is made to the Loan Agreement). Section 1.3 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings unless the context otherwise requires: "ACCOUNTS RECEIVABLE" shall mean all accounts under and as defined in the UCC, including, without limitation, accounts receivables, health care receivables, book debts and other forms of obligations, K-1-1 21 whether arising out of goods sold or services rendered or from any other transaction; (b) rights in, to and under all purchase orders or receipts for goods or services; (c) rights to any goods represented or purported to be represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed, or repossessed goods); (d) moneys due or to become due to Debtor under all purchase orders and contracts for the sale of goods or the performance of services or both by Debtor (whether or not yet earned by performance of the part of by Debtor), including the proceeds of the foregoing; (e) any notes, drafts, letters of credit, insurance proceeds or other instruments, documents and writings evidencing or supporting the foregoing; and (f) all collateral security and guarantees of any kind given by any other person with respect to any of the foregoing. "CHATTEL PAPER" shall mean all chattel paper (as such term is defined in the UCC) of Debtor, including, without limitation, equipment leases and conditional rate agreements. "COLLATERAL" shall have the meaning set forth in Section 2.1 hereof. "DEPOSIT ACCOUNTS" shall mean all deposit accounts (as such term is defined in the UCC) of Debtor which are located at any Bank (or any affiliate of any Bank). "DOCUMENTS" shall mean all documents (as such term is defined in the UCC) of Debtor, including, without limitation, documents of title, warehouse receipts, and bills of lading. "EVENT OF DEFAULT" shall have the meaning assigned to such term in the Loan Agreement. "GENERAL INTANGIBLES" shall mean all general intangibles (as such term is defined in the UCC) of Debtor, including, without limitation, the right to use rights to the payment of money, trademarks, copyrights, patents, contracts, licenses, and franchises (excluding contracts, licenses, and franchises which prohibit the assignment or grant of a security interest by Debtor), limited and general partnership interests and joint venture interests, federal income tax refunds, trade names, distributions on certificated securities and uncertificated securities, computer programs and other computer software, inventions, designs, trade secrets, goodwill, proprietary rights, customer lists, supplier contracts, sale orders, correspondence, advertising materials, payments due in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any property, reversionary interests in pension and profit-sharing plans, and reversionary, beneficial, and residual interests in trusts, credits with and other claims against any person, together with any collateral for any of the K-1-2 22 foregoing and the rights under any security agreement granting a security interest in such collateral. "INSTRUMENTS" shall mean all instruments (as such term is defined in the UCC) of Debtor, including, without limitation, promissory notes. "RELATED RIGHTS" shall mean all Chattel Paper, Documents, General Intangibles, and/or Instruments relating to the Accounts and Inventory, and all rights now or hereafter existing in and to all security agreements, leases, and other contracts securing or otherwise relating to the Accounts and Inventory, or any such Chattel Papers, Documents, General Intangibles, and/or Instruments. "SECURED PARTY" shall mean Bank of America N.A., in its capacity as Administrative Agent under the Loan Agreement. "SECURITY AGREEMENT" shall mean this Security Agreement, as the same may be amended, modified, restated, or supplemented from time to time. "SUPPORTING OBLIGATIONS" shall have the meaning set forth in the UCC for that term. "TRANSFER" shall have the meaning set forth in Section 4.1. "UCC" shall mean the Uniform Commercial Code in effect at any time in the State of Texas. Section 1.4 Terms Defined in UCC. All terms used herein which are defined in the UCC shall have the same meaning herein unless the context otherwise requires. ARTICLE 2 - SECURITY INTEREST Section 2.1 Grant of Security Interest. Debtor, for value received, the receipt and sufficiency of which are hereby acknowledged, and to induce each Bank to extend credit to Debtor, hereby pledges, assigns, conveys, transfers, and grants to Secured Party, for the ratable benefit of Banks, a first security interest in, general lien upon, and right of set-off against the following described personal property of Debtor, whether now owned or existing or hereafter acquired or arising and wherever located (the "Collateral"): (a) all of Debtor's Accounts, Deposit Accounts, and all Related Rights; and (b) all Supporting Obligations, proceeds, cash proceeds, cash equivalents, products, replacements, additions and improvements to, substitutions for, and accessions of any and all property described in Subsection K-1-3 23 (a) of this Section 2.1. Section 2.2 Obligations Secured. The security interest in, general lien upon, and right of set-off against the Collateral is granted to secure the performance of all obligations of (a) Debtor to pay and perform all Credit Obligations (as such term is defined in the Loan Agreement, which shall include all Interest Hedge Agreements), (b) of Debtor (or any Subsidiary) under the Foreign Credit Reimbursement Agreement of even date herewith, between the Debtor and the Administrative Agent, and (d) any of the foregoing that arises after the filing of a petition by or against Debtor under the Bankruptcy Code, even if the Obligations do not accrue because of the automatic stay under Bankruptcy Code ss. 362 or otherwise (clauses (a), and (b) collectively, the "SECURED OBLIGATIONS"). ARTICLE 3 - REPRESENTATIONS AND WARRANTIES Section 3.1 Representations and Warranties. In order to induce Banks to enter into the Loan Agreement and to extend credit to Debtor, Debtor hereby confirms and warrants to Secured Party (which representations and warranties will survive the execution of this Security Agreement) that this Security Agreement creates a valid and binding first priority security interest in the Collateral securing the Secured Obligations, except for Permitted Encumbrances. The execution and delivery of this Security Agreement has benefitted each Debtor directly and indirectly, and has not rendered any Debtor insolvent or so undercapitalized that it is unable to pay its debts as they become due. ARTICLE 4 - COVENANTS AND AGREEMENTS Debtor will at all times comply with the covenants contained in this Article 4 from the date hereof and for so long as any part of the Secured Obligations is outstanding. Section 4.1 Title; Prohibited Liens and Filings. Debtor agrees to protect the title to the Collateral and to defend the same against all claims and demands of all persons or entities claiming any interest therein adverse to Secured Party. Debtor will not pledge, mortgage, encumber, create, or suffer a lien to exist on any of the Collateral, or sell, assign, lend, rent, lease, or otherwise transfer or dispose of (collectively called "TRANSFER") any of the Collateral to or in favor of any person or entity, except as provided for in the Loan Agreement and this Security Agreement. Debtor will not file or execute or permit to be filed or recorded any financing statement or other security instrument with respect to the Collateral other than in favor of Secured Party or in connection with a Permitted Encumbrance. Section 4.2 Section 4.2 Possession of Collateral. Secured Party, for the ratable benefit of Banks, shall be deemed to have possession of any of the tangible Collateral in transit to it or set apart for it. Otherwise the tangible Collateral shall remain in Debtor's constructive possession and control at all times, at Debtor's risk of loss, and shall, unless in transit or rolling stock, be kept at the locations represented in the Loan K-1-4 24 Agreement or as otherwise disclosed to Secured Party in accordance with the terms of the Loan Agreement. Section 4.3 Filings by Secured Party Authorized. Debtor hereby authorizes Secured Party to file financing statements, without the signature of Debtor, describing the Collateral or any other property of Debtor. Section 4.4 Filing Reproductions. At the option of Secured Party, a photocopy or other reproduction of this Security Agreement or of a financing statement covering the Collateral shall be sufficient and may be filed as a financing statement. Section 4.5 Delivery of Information. Debtor will promptly transmit to Secured Party, for the ratable benefit of Banks, all information that Debtor may have or receive with respect to the Collateral which might in any way materially affect Bank's rights or remedies with respect to the Collateral. Section 4.6 Financing Statement Filings; Notifications. Debtor recognizes that financing statements pertaining to the Collateral have been or will be filed in all jurisdictions necessary to perfect the security interests granted hereby. Debtor will promptly notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, Debtor will: (a) notify Secured Party within a reasonable period of time in advance of any change to a jurisdiction other than as represented in the Loan Agreement, (i) in the location of Debtor's place of business or its state of organization, (ii) in the location of the office where Debtor keeps its records concerning the original of all the Related Rights, (iii) in the "location" of Debtor within the meaning of Section 9-103(c) of the UCC, or (iv) in the location where any tangible Collateral is located; and (b) promptly notify Secured Party of any change in Debtor's name or in any assumed name used by Debtor. In any notice furnished pursuant to this Section, Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's and Bank's security interest in the Collateral. Section 4.7 Control. Subject to the terms of the Loan Agreement, Debtor will cooperate with Secured Party in obtaining control, for purposes of the UCC, with respect to all Deposit Accounts and other applicable Collateral. Section 4.8 Limitations on Obligations Concerning Maintenance of Collateral. Debtor agrees that its has the risk of loss with respect to the Collateral, and the Secured Party has no duty to collect any income accruing on the Collateral or to preserve any rights relating to the Collateral. K-1-5 25 Section 4.9 No Disposition of Collateral. Neither the Administrative Assistant nor any Bank authorizes, and Debtor agrees not to (except in the ordinary course of business): (a) Make any sales or leases of the Collateral; (b) License any of the Collateral; and (c) Grant any other security interest in any of the Collateral (except as provided herein). ARTICLE 5 - RIGHTS, REMEDIES AND DEFAULT Section 5.1 Rights and Remedies With Respect to Collateral. Upon the happening and during the continuance of any Event of Default, Banks, acting through the Secured Party, are hereby fully authorized and empowered (without the necessity of any further consent or authorization from Debtor) and the right is expressly granted to Banks, and Debtor hereby appoints and makes Secured Party, for the ratable benefit of Banks, as Debtor's true and lawful attorney-in-fact and agent for Debtor and in Debtor's name, place, and stead with full power of substitution, in Secured Party's and Bank's name or Debtor's name or otherwise, for the ratable benefit of Banks, but at Debtor's cost and expense, to exercise, without notice, all or any of the following powers at any time with respect to all or any of the Collateral: (a) notify account debtors or the obligors on the Related Rights to make and deliver payment and/or provide performance directly to Secured Party, for the ratable benefit of Banks; (b) demand, sue for, collect, receive, and give acquittance for any and all moneys due or to become due by virtue of the Collateral, and otherwise deal with proceeds; (c) receive, take, endorse, assign and deliver any and all checks, notes, drafts, documents and other negotiable and non-negotiable instruments and chattel paper and Related Rights taken or received by Secured Party, for the ratable benefit of Banks in connection therewith; (d) settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto; (e) deal in or with the Collateral as fully and effectively as if Secured Party, for the ratable benefit of Banks were the absolute owner thereof; and (f) extend or alter the time or manner of payment or performance of any or all thereof, grant waivers and make any allowance or other adjustment with reference thereto; provided, however, Secured Party shall be under no obligation or duty to exercise any of the powers hereby conferred upon it and shall be without liability for any act or failure to act in connection with the collection of, or the preservation of any rights under or the depreciation in value of, any Collateral. Debtor hereby irrevocably authorizes and directs each person or entity who shall be a party to or liable for the performance or payment of any of the Related Rights, upon receipt of written notice from Secured Party to pay or otherwise perform or accept performance of the obligations under the Related Rights to, with or for Secured Party, for the ratable benefit of Banks directly, and to continue to do so until otherwise notified by Secured Party. Each such person or entity shall have no duty to inquire or investigate as to whether an Event of Default shall have actually occurred or whether this Security Agreement shall have terminated, and no such person or entity K-1-6 26 shall be liable to Debtor or its successors or assigns for acting in reliance on Secured Party's notification as provided in this Section. Section 5.2 Additional Default Remedies. Without limiting any of the above powers or the provisions of the Loan Agreement, to the extent permitted by applicable law, Secured Party, for the ratable benefit of Banks may, upon the happening and during the continuance of any Event of Default, apply, set-off, collect, sell in one or more sales, lease, or otherwise transfer any or all of the Collateral, in its then condition or following any commercially reasonable preparation or processing, in such order as Secured Party may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any brokers' board or securities exchange, either for cash or upon credit or for future delivery, at such price as Secured Party may deem fair, and Secured Party, for the ratable benefit of Banks, may be the purchaser of any or all of the Collateral so sold and may hold the same thereafter in its own right, free from any claim of Debtor or right of redemption. No such purchase or holding by Secured Party, for the ratable benefit of Banks, shall be deemed a retention by Secured Party, for the ratable benefit of Banks in satisfaction of the Secured Obligations. If, notwithstanding the foregoing provisions, any applicable provision of the UCC or other applicable law requires Secured Party to give reasonable notice of any such sale or disposition or other action, and reasonable notice is not defined in such law, Debtor hereby agrees that ten (10) days prior written notice shall constitute reasonable notice. Secured Party may require Debtor to assemble the Collateral and make it available to Secured Party. Any sale hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. After the occurrence and during the continuance of an Event of Default, Secured Party, for the ratable benefit of Banks, shall have the right to take possession of any or all of the Collateral and to take possession of all books, records, documents, information, agreements, and other property of Debtor or in Debtor's possession or control relating to the Collateral, and for such purpose may enter upon any premises upon which any of the Collateral or any of such books, records, information, agreements or other property are situated and remove the same therefrom without any liability for trespass or damages occasioned thereby. Section 5.3 Proceeds. After the happening and during the continuance of any Event of Default, the proceeds of any sale or other transfer of the Collateral and all sums received or collected by Secured Party from or on account of the Collateral shall be applied by Secured Party in the manner set forth in ss.9.504 of the UCC (unless otherwise required by the Loan Agreement or any other applicable law). In connection with the exercise of Secured Party's rights hereunder, Debtor hereby grants to Secured Party, after the happening and during the continuance of an Event of Default, the right to receive, change the address for delivery, open, and dispose of mail addressed to Debtor, and to execute, assign and endorse negotiable and other instruments, documents or other evidence of payment, shipment, storage, or transfer for any form of Collateral on behalf of and in the name of Debtor to the extent any such action is reasonably necessary to collect proceeds of the Collateral. K-1-7 27 Section 5.4 Deficiency. Debtor shall remain liable to Banks for any unpaid Secured Obligations, advances, costs, charges, and expenses incurred by Secured Party in connection herewith, together with interest thereon, and shall pay the same immediately to Secured Party at Secured Party's offices. Section 5.5 Secured Party's Duties. The powers conferred upon Secured Party, on behalf of Banks, by this Security Agreement are solely to protect Banks' interest in the Collateral, and shall not impose any duty upon Secured Party, on behalf of Banks, to exercise any such powers. Secured Party, on behalf of Banks, shall be under no duty whatsoever to make or give any presentment, demand for performance, notice of nonperformance, protest, notice of protest, notice of dishonor, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Secured Obligations, except as specifically provided in this Security Agreement and the Loan Agreement or as required by applicable law, or to take any steps necessary to preserve any rights against prior parties. Neither Secured Party nor the Banks shall be liable for failure to collect or realize upon the Collateral, or for any delay in so doing, nor shall Secured Party or the Banks be under any duty to take any action whatsoever with regard thereto. Secured Party shall use reasonable care in the custody and preservation of any Collateral in its possession but need not take any steps to keep the Collateral identifiable. Secured Party shall have no duty to comply with any recording, filing or other legal requirements necessary to establish or maintain the validity, priority or enforceability of, or Secured Party's or Banks' respective rights in, any of the Collateral. Section 5.6 Secured Party's Actions. Debtor waives (i) any right to require Secured Party, for and on behalf of the Banks, to proceed against any person or entity, exhaust any Collateral, or have any person or entity joined with Debtor in any suit arising out of the Secured Obligations or this Security Agreement or pursue any other remedy in Secured Party's or Banks' power; (ii) any and all notice of acceptance of this Security Agreement or of creation, modification, rearrangement, renewal or extension for any period of any of the Secured Obligations from time to time; and (iii) any defense arising by reason of any disability or other such defense. All dealings between Debtor and Secured Party and Banks, whether or not in connection with the Secured Obligations, shall conclusively be presumed to have been had or consummated in reliance upon this Security Agreement and the Loan Agreement. Until all the Secured Obligations shall have been paid in full, Debtor shall have no right to subrogation, and Debtor waives any benefit of and any right to participate in any Collateral or security whatsoever now or hereafter held by Secured Party, for and on behalf of the Banks. Debtor authorizes Secured Party, for and on behalf of the Banks, without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Secured Obligations, from time to time to (a) take and hold any other property as collateral, other than the Collateral, as security for any or all of the Secured Obligations, and exchange, enforce, waive and release any or all of the Collateral or such other property; (b) after the occurrence and during the continuance of an Event of Default, apply the Collateral or such other property and direct the order or manner of sale thereof as Secured Party, in its discretion, may K-1-8 28 determine; (c) renew, extend for any period, accelerate, modify, compromise, settle, or release the obligation of any person or entity with respect to any or all of the Secured Obligations or the Collateral; and (d) waive, enforce, modify, amend, or supplement any of the provisions of the Credit Documents (other than this Security Agreement). Section 5.7 Cumulative Security. The execution and delivery of this Security Agreement in no manner shall impair or affect any other security (by endorsement or otherwise) for the Secured Obligations. No security taken hereafter as security for the Secured Obligations shall impair in any manner or affect this Security Agreement. All such present and future additional security is to be considered as cumulative security. Section 5.8 Continuing Agreement. This is a continuing agreement, and the grant of a security interest hereunder shall remain in full force and effect. All the rights of Secured Party and Banks hereunder shall continue to exist until the Secured Obligations are paid and the Revolving Credit Commitments are terminated; and upon the full satisfaction of the foregoing, Secured Party, for and on behalf of the Banks, upon request of Debtor, shall execute a written termination statement reassigning to Debtor, without recourse, the Collateral and all rights conveyed hereby and returning possession of the Collateral, if applicable, to Debtor. Otherwise this Security Agreement shall continue irrespective of the fact that the liability of Debtor or any other person or entity may have ceased, or irrespective of the validity or enforceability of any note or any other loan document to which Debtor or any other person or entity may be a party, and notwithstanding the reorganization or bankruptcy of Debtor or any other person or entity, or any other event or proceeding affecting Debtor or any other person or entity. Rights Under Uniform Commercial Code. Regardless of whether the Uniform Commercial Code is in effect in the jurisdiction where such rights under this Security Agreement are asserted, Secured Party, for the ratable benefit of Banks, shall have the rights, powers and remedies of a secured party under the UCC or any similar law in any other jurisdiction whose laws are applicable. Secured Party and Banks may exercise their right of set-off with respect to the Secured Obligations as provided for in the Loan Agreement, as if the Secured Obligations were unsecured. Section 5.9 Exercise of Rights, Etc. Time shall be of the essence for the performance of any act under this Security Agreement or the Secured Obligations by Debtor, but neither Secured Party's or any Bank's acceptance of partial or delinquent payments nor any forbearance, failure or delay by Secured Party in exercising any right shall be deemed a waiver of any obligation of Debtor or of any right of Secured Party, for the ratable benefit of Banks, or preclude any other or further exercise thereof; and no single or partial exercise of any right shall preclude any other or further exercise thereof, or the exercise of any other right. Section 5.10 Remedy and Waiver. Secured Party may remedy any Event of Default and may waive any Event of Default (with the consent of the Majority Banks) without waiving the Event of Default remedied or waiving any prior or subsequent Event of Default. K-1-9 29 Section 5.11 Non-Judicial Remedies. To the fullest extent permitted by law, Secured Party, for the ratable benefit of Banks, may enforce its rights hereunder without prior judicial process or judicial hearing, and Debtor expressly waives, renounces, and knowingly relinquishes any and all legal rights which might otherwise require Secured Party, for the ratable benefit of Banks, to enforce their rights by judicial process. In so providing for non-judicial remedies, Debtor recognizes that such remedies are consistent with the usage of the trade, are responsive to commercial necessity and are the result of bargain at arm's length. Nothing herein is intended to prevent Secured Party, Banks or Debtor from resorting to judicial process at either party's option. Section 5.12 Assignment of Secured Party's Duties. Secured Party's duties and rights hereunder may be assigned and transferred from time to time to another Bank or other Person in accordance with the terms of the Loan Agreement, in which case, such transferee shall have the rights and duties of Secured Party under this Security Agreement. Section 5.13 Compliance With Other Laws. Administrative Agent and each Bank may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. ARTICLE 6 - MISCELLANEOUS Section 6.1 Preservation of Liability. Neither this Security Agreement nor the exercise by Secured Party, for the ratable benefit of Banks, of (or the failure to so exercise) any right conferred herein or by law shall be construed as relieving any person or entity liable on the Secured Obligations from liability on the Obligations and for any deficiency thereon. Section 6.2 Survival of Agreements. All representations and warranties of Debtor herein, and all covenants and agreements herein not fully performed before the effective date of this Security Agreement, shall survive such date. Section 6.3 Notice. Except as otherwise provided herein, all notices, demands, requests, and communications permitted or required under this Agreement shall be delivered in the time and manner as required by the Loan Agreement. Section 6.4 Amendment and Waiver. This Security Agreement may not be amended nor may any of its terms be waived except in writing duly signed by the party against whom enforcement of the amendment or waiver is sought. Section 6.5 Invalidity. If any provision of this Security Agreement is rendered or declared illegal, invalid, or unenforceable by reason of any existing or subsequently enacted legislation or by a judicial decision that has become final, all of the remaining provisions shall remain in full force and effect. K-1-10 30 Section 6.6 Successors and Assigns. The covenants, representations, warranties, and agreements herein set forth shall be binding upon Debtor and shall inure to the benefit of Secured Party, for the ratable benefit of Banks, and their heirs, legal representatives, successors, and assigns. Section 6.7 Conflicting Provisions. To the extent any irreconcilable conflicts or inconsistencies exist between the terms of this Security Agreement and the Loan Agreement, the terms of the Loan Agreement shall govern and control. Section 6.8 CONSTRUCTION. THIS SECURITY AGREEMENT HAS BEEN MADE IN AND THE SECURITY INTEREST GRANTED HEREBY IS GRANTED IN, AND EACH SHALL BE GOVERNED BY THE LAWS OF, THE STATE OF TEXAS (EXCEPT TO THE EXTENT THAT THE LAWS OF ANY OTHER JURISDICTION GOVERN THE PERFECTION, PRIORITY, OR FORECLOSURE OF THE SECURITY INTEREST GRANTED HEREBY) AND OF THE UNITED STATES OF AMERICA, AS APPLICABLE, IN ALL RESPECTS, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY, ENFORCEMENT, AND PERFORMANCE. Section 6.9 ENTIRE AGREEMENT. THIS SECURITY AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS SECURITY AGREEMENT AND THE OTHER WRITTEN CREDIT DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] K-1-11 31 IN WITNESS HEREOF, Debtor and Secured Party have caused this instrument to be duly executed as of the date first above written. DEBTOR: EGL, INC. By: ___________________________________ Douglas A. Seckel, Treasurer ACKNOWLEDGED AND AGREED TO BY SECURED PARTY: BANK OF AMERICA, N.A., as Administrative Agent on behalf of itself and each of the other Banks By: _____________________________________ David A. Johanson, Vice President K-1-12 32 EXHIBIT K-2 SUBSIDIARY SECURITY AGREEMENT THIS SECURITY AGREEMENT is made and entered into as of the _____ day of __________, 2001, by each of the undersigned companies (collectively, "DEBTORS", whether one or more, each a "DEBTOR"), each whose address for purposes of this financing statement is 15350 Vickery Drive, Houston, Texas 77032, in favor of BANK OF AMERICA, N.A., whose address is 700 Louisiana, P.O. Box 2518, Houston, Harris County, Texas 77252-2518, in its capacity as Administrative Agent, Swing Line Lender, and Issuing Bank under the hereinafter defined Loan Agreement, and each Bank from time to time party to such Loan Agreement. W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to a Credit Agreement (as modified and amended from time to time, the "LOAN AGREEMENT") dated July 5, 2001, by and among EGL, INC., a Texas corporation ("BORROWER"), the Administrative Agent, the Issuing Bank, the Swing Line Lender, and the Banks from time to time a party to the Loan Agreement, the Banks have agreed to extend credit to the Borrower; and WHEREAS, it is a condition precedent to the obligation of the Banks to extend credit to the Borrower under the Loan Agreement that the Debtors shall have executed and delivered this Security Agreement to the Administrative Agent as Secured Party for the ratable benefit of the Banks. NOW, THEREFORE, for and in consideration of the premises and the agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Debtor hereby agrees with Banks as follows: ARTICLE 1 - GENERAL TERMS Section 1.1 Terms Defined Above. As used in this Security Agreement, the terms "BORROWER," "LOAN AGREEMENT" and "DEBTOR" and shall have the respective meanings indicated above. Section 1.2 Terms Defined in Loan Agreement. Each capitalized term used but not defined herein shall have the meaning assigned to such term in the Loan Agreement (regardless of whether or not specific reference is made to the Loan Agreement). Section 1.3 Certain Definitions. As used in this Security Agreement, the following terms shall have the following meanings unless the context otherwise requires: "ACCOUNTS RECEIVABLE" shall mean all accounts under and as defined in the UCC, including, without limitation, accounts receivables, K-2-1 33 health care receivables, book debts and other forms of obligations, whether arising out of goods sold or services rendered or from any other transaction; (b) rights in, to and under all purchase orders or receipts for goods or services; (c) rights to any goods represented or purported to be represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed, or repossessed goods); (d) moneys due or to become due to Debtor under all purchase orders and contracts for the sale of goods or the performance of services or both by Debtor (whether or not yet earned by performance of the part of by Debtor), including the proceeds of the foregoing; (e) any notes, drafts, letters of credit, insurance proceeds or other instruments, documents and writings evidencing or supporting the foregoing; and (f) all collateral security and guarantees of any kind given by any other person with respect to any of the foregoing. "CHATTEL PAPER" shall mean all chattel paper (as such term is defined in the UCC) of a Debtor, including, without limitation, equipment leases and conditional rate agreements. "COLLATERAL" shall have the meaning set forth in Section 2.1 hereof. "DEPOSIT ACCOUNTS" shall mean all deposit accounts (as such term is defined in the UCC) of Debtor which are located at any Bank (or any affiliate of any Bank). "DOCUMENTS" shall mean all documents (as such term is defined in the UCC) of a Debtor, including, without limitation, documents of title, warehouse receipts, and bills of lading. "EVENT OF DEFAULT" shall have the meaning assigned to such term in the Loan Agreement. "GENERAL INTANGIBLES" shall mean all general intangibles (as such term is defined in the UCC) of a Debtor, including, without limitation, the right to use rights to the payment of money, trademarks, copyrights, patents, contracts, licenses, and franchises (excluding contracts, licenses, and franchises which prohibit the assignment or grant of a security interest by a Debtor), limited and general partnership interests and joint venture interests, federal income tax refunds, trade names, distributions on certificated securities and uncertificated securities, computer programs and other computer software, inventions, designs, trade secrets, goodwill, proprietary rights, customer lists, supplier contracts, sale orders, correspondence, advertising materials, payments due in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any property, reversionary interests in pension and profit-sharing plans, and reversionary, beneficial, and residual interests in trusts, credits with and K-2-2 34 other claims against any person, together with any collateral for any of the foregoing and the rights under any security agreement granting a security interest in such collateral. "INSTRUMENTS" shall mean all instruments (as such term is defined in the UCC) of any Debtor, including, without limitation promissory notes. "PERMITTED ENCUMBRANCE" shall have the meaning assigned to such term in the Loan Agreement. "RELATED RIGHTS" shall mean all Chattel Paper, Documents, General Intangibles, and/or Instruments relating to the Accounts and Deposit Accounts, and all rights now or hereafter existing in and to all security agreements, leases, and other con-tracts securing or otherwise relating to the Accounts and Deposit Accounts, or any such Chattel Papers, Documents, General Intangibles, and/or Instruments. "SECURED PARTY" shall mean Bank of America, in its capacity as Administrative Agent under the Loan Agreement. "SECURITY AGREEMENT" shall mean this Security Agreement, as the same may be amended, modified, restated, or supplemented from time to time. "SUPPORTING OBLIGATIONS" shall have the meaning set forth in the UCC for that term. "TRANSFER" shall have the meaning set forth in Section 4.1. "UCC" shall mean the Uniform Commercial Code in effect at any time and from time to time in the State of Texas. Section 1.4 Terms Defined in UCC. All terms used herein which are defined in the UCC shall have the same meaning herein unless the context otherwise requires. ARTICLE 2 - SECURITY INTEREST Section 2.1 Grant of Security Interest. Each Debtor, for value received, the receipt and sufficiency of which are hereby acknowledged, and to induce each Bank to extend credit to Borrower, hereby pledges, assigns, conveys, transfers, and grants to Secured Party, for the ratable benefit of Banks, a first security interest in, general lien upon, and right of set-off against the following described personal property of that Debtor, whether now owned or existing or hereafter acquired or arising and wherever located (the "COLLATERAL"): (a) all of each Debtor's Accounts, Deposit Accounts, and all Related Rights; and K-2-3 35 (b) all supporting obligations and all proceeds, cash proceeds, cash equivalents, products, replacements, additions and improvements to, substitutions for, and accessions of any and all property described in Subsection (a) of this Section 2.1. Section 2.2 Obligations Secured. The security interest in, general lien upon, and right of set-off against the Collateral is granted to secure the performance of all obligations of (a) Borrower to pay and perform all Credit Obligations (as such term is defined in the Loan Agreement, which shall include all Interest Hedge Agreements), (b) of each Debtor under its Subsidiary Guaranty of even date herewith, executed by that Debtor in connection with the Loan Agreement and under this Security Agreement, and of Borrower (or any Debtor) under the Foreign Credit Reimbursement Agreement of even date herewith between Borrower and with the Administrative Agent (and under the guaranty issued by each Debtor pursuant thereto), and (d) any of the foregoing that arises after the filing of a petition by or against Debtor under the Bankruptcy Code, even if the Obligations do not accrue because of the automatic stay under Bankruptcy Code ss. 362 or otherwise (clauses (a), and (b) collectively, the "SECURED OBLIGATIONS"). ARTICLE 3 - REPRESENTATIONS AND WARRANTIES Section 3.1 Representations and Warranties. In order to induce Banks to enter into the Loan Agreement and to extend credit to Borrower, each Debtor hereby confirms and warrants to Secured Party (which representations and warranties will survive the execution of this Security Agreement) that this Security Agreement creates a valid and binding first priority security interest in the Collateral securing the Secured Obligations, except for Permitted Encumbrances. The execution and delivery of this Security Agreement has benefitted each Debtor directly and indirectly, and has not rendered any Debtor insolvent or so undercapitalized that it is unable to pay its debts as they become due. ARTICLE 4 - COVENANTS AND AGREEMENTS Each Debtor will at all times comply with the covenants contained in this Article 4 from the date hereof and for so long as any part of the Secured Obligations is outstanding. Section 4.1 Title; Prohibited Liens and Filings. Each Debtor agrees to protect the title to the Collateral and to defend the same against all claims and demands of all persons or entities claiming any interest therein adverse to Secured Party. Debtor will not pledge, mortgage, encumber, create, or suffer a lien to exist on any of the Collateral, or sell, assign, lend, rent, lease, or otherwise transfer or dispose of (collectively called "TRANSFER") any of the Collateral to or in favor of any person or entity, except as provided for in the Loan Agreement and this Security Agreement. Debtor will not file or execute or permit to be filed or recorded any financing statement or other security instrument with respect to the Collateral other than in favor of Secured Party or in connection with a Permitted Encumbrance. K-2-4 36 Section 4.2 Possession of Collateral. Secured Party, for the ratable benefit of Banks, shall be deemed to have possession of any of the tangible Col-lateral in transit to it or set apart for it. Otherwise the tangible Collateral shall remain in each Debtor's constructive possession and control at all times, at each Debtor's risk of loss, and shall, unless in transit or rolling stock, be kept at the locations represented in the Loan Agreement or as otherwise disclosed to Secured Party in accordance with the terms of the Loan Agreement. Section 4.3 Filings by Secured Party Authorized. Each Debtor hereby authorizes Secured Party to file financing statements, without the signature of each Debtor, describing the Collateral or any other property of that Debtor Section 4.4 Filing Reproductions. At the option of Secured Party, a photocopy or other reproduction of this Security Agreement or of a financing statement covering the Collateral shall be sufficient and may be filed as a financing statement. Section 4.5 Delivery of Information. Each Debtor will promptly transmit to Secured Party, for the ratable benefit of Banks, all information that the Debtor may have or receive with respect to the Collateral which might in any way materially affect Bank's rights or remedies with respect to the Collateral. Section 4.6 Financing Statement Filings; Notifications. Each Debtor recognizes that financing statements pertaining to the Collateral have been or will be filed in all jurisdictions necessary to perfect the security interests granted hereby. Each Debtor will promptly notify Secured Party of any condition or event that may change the proper location for the filing of any financing statements or other public notice or recordings for the purpose of perfecting a security interest in the Collateral. Without limiting the generality of the foregoing, each Debtor will: (a) notify Secured Party within a reasonable period of time in advance of any change to a jurisdiction other than as represented in the Loan Agreement, (i) in the location of any Debtor's place of business or its state of organization, (ii) in the location of the office where any Debtor keeps its records concerning the original of all the Related Rights, (iii) in the "location" of any Debtor within the meaning of the UCC, or (iv) in the location where any tangible Collateral is located; and (b) promptly notify Secured Party of any change in any Debtor's name or in any assumed name used by any Debtor. In any notice furnished pursuant to this Section, each Debtor will expressly state that the notice is required by this Security Agreement and contains facts that will or may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's and Bank's security interest in the Collateral. Section 4.7 Control. Subject to the terms of the Loan Agreement, each Debtor will cooperate with Secured Party in obtaining control, for purposes of the UCC, with respect to all Deposit Accounts and other applicable Collateral. Section 4.8 Limitations on Obligations Concerning Maintenance of Collateral. Each Debtor agrees that its has the risk of loss with respect to the Collateral, and the K-2-5 37 Secured Party has no duty to collect any income accruing on the Collateral or to preserve any rights relating to the Collateral. Section 4.9 No Disposition of Collateral. Neither the Administrative Assistant nor any Bank authorizes, and each Debtor agrees not to (except in the ordinary course of business): (a) Make any sales or leases of the Collateral; (b) License any of the Collateral; and (c) Grant any other security interest in any of the Collateral (except as provided herein). ARTICLE 5 - RIGHTS, REMEDIES AND DEFAULT Section 5.1 Rights and Remedies With Respect to Collateral. Upon the happening and during the continuance of any Event of Default, Banks, acting through the Secured Party, are hereby fully authorized and empowered (without the necessity of any further consent or authorization from any Debtor) and the right is expressly granted to Banks, and each Debtor hereby appoints and makes Secured Party, for the ratable benefit of Banks, as each Debtor's true and lawful attorney-in-fact and agent for each Debtor and in each Debtor's name, place, and stead with full power of substitution, in Secured Party's and Bank's name or each Debtor's name or otherwise, for the ratable benefit of Banks, but at each Debtor's cost and expense, to exercise, without notice, all or any of the following powers at any time with respect to all or any of the Collateral: (a) notify account debtors or the obligors on the Related Rights to make and deliver payment and/or provide performance directly to Secured Party, for the ratable benefit of Banks; (b) demand, sue for, collect, receive, and give acquittance for any and all moneys due or to become due by virtue of the Collateral, and otherwise deal with proceeds; (c) receive, take, endorse, assign and deliver any and all checks, notes, drafts, documents and other negotiable and non-negotiable instruments and chattel paper and Related Rights taken or received by Secured Party, for the ratable benefit of Banks in connection therewith; (d) settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto; (e) deal in or with the Collateral as fully and effectively as if Secured Party, for the ratable benefit of Banks were the absolute owner thereof; and (f) extend or alter the time or manner of payment or performance of any or all there-of, grant waivers and make any allowance or other adjustment with reference thereto; provided, however, Secured Party shall be under no obligation or duty to exercise any of the powers hereby conferred upon it and shall be without liability for any act or failure to act in connection with the collection of, or the preservation of any rights under or the depreciation in value of, any Collateral. Each Debtor hereby irrevocably authorizes and directs each person or entity who shall be a party to or liable for the performance or payment of any of the Related Rights, upon receipt of written notice from Secured Party to pay or otherwise perform or accept performance of the obligations under the Related Rights to, with or for Secured Party, for the ratable benefit K-2-6 38 of Banks directly, and to continue to do so until otherwise notified by Secured Party. Each such person or entity shall have no duty to inquire or investigate as to whether an Event of Default shall have actually occurred or whether this Security Agreement shall have terminated, and no such person or entity shall be liable to any Debtor or its successors or assigns for acting in reliance on Secured Party's notification as provided in this Section. Section 5.2 Additional Default Remedies. Without limiting any of the above powers or the provisions of the Loan Agreement, to the extent permitted by applicable law, Secured Party, for the ratable benefit of Banks may, upon the happening and during the continuance of any Event of Default, apply, set-off, collect, sell in one or more sales, lease, or otherwise transfer any or all of the Collateral, in its then condition or following any commercially reasonable preparation or processing, in such order as Secured Party may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any brokers' board or securities exchange, either for cash or upon credit or for future delivery, at such price as Secured Party may deem fair, and Secured Party, for the ratable benefit of Banks, may be the purchaser of any or all of the Collateral so sold and may hold the same thereafter in its own right, free from any claim of any Debtor or right of redemption. No such purchase or holding by Secured Party, for the ratable benefit of Banks, shall be deemed a retention by Secured Party, for the ratable benefit of Banks in satisfaction of the Secured Obligations. If, notwithstanding the foregoing provisions, any applicable provision of the UCC or other applicable law requires Secured Party to give reasonable notice of any such sale or disposition or other action, and reasonable notice is not defined in such law, each Debtor hereby agrees that ten (10) days prior written notice shall constitute reasonable notice. Secured Party may require each Debtor to assemble the Collateral and make it available to Secured Party. Any sale hereunder may be conducted by an auctioneer or any officer or agent of Secured Party. After the occurrence and during the continuance of an Event of Default, Secured Party, for the ratable benefit of Banks, shall have the right to take possession of any or all of the Collateral and to take possession of all books, records, documents, information, agreements, and other property of any Debtor or in any Debtor's possession or control relating to the Collateral, and for such purpose may enter upon any premises upon which any of the Collateral or any of such books, records, information, agreements or other property are situated and remove the same therefrom without any liability for trespass or damages occasioned thereby. Section 5.3 Proceeds. After the happening and during the continuance of any Event of Default, the proceeds of any sale or other transfer of the Collateral and all sums received or collected by Secured Party from or on account of the Collateral shall be applied by Secured Party in the manner set forth in ss.9.504 of the UCC (unless otherwise required by the Loan Agreement or any other applicable law). In connection with the exercise of Secured Party's rights hereunder, each Debtor hereby grants to Secured Party, after the happening and during the continuance of an Event of Default, the right to receive, change the address for delivery, open, and dispose of mail addressed to any Debtor, and to execute, assign and endorse negotiable and other K-2-7 39 instruments, documents or other evidence of payment, shipment, storage, or transfer for any form of Collateral on behalf of and in the name of any Debtor to the extent any such action is reasonably necessary to collect proceeds of the Collateral. Section 5.4 Deficiency. Each Debtor and Borrower shall remain jointly and severally liable to Banks for any unpaid Secured Obligations, advances, costs, charges, and expenses incurred by Secured Party in connection herewith, together with interest thereon, and shall pay the same immediately to Secured Party at Secured Party's offices. Section 5.5 Secured Party's Duties. The powers conferred upon Secured Party, on behalf of Banks, by this Security Agreement are solely to protect Banks' interest in the Collateral, and shall not impose any duty upon Secured Party, on behalf of Banks, to exercise any such powers. Secured Party, on behalf of Banks, shall be under no duty whatsoever to make or give any presentment, demand for performance, notice of nonperformance, protest, notice of protest, notice of dishonor, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Secured Obligations, except as specifically provided in this Security Agreement and the Loan Agreement or as required by applicable law, or to take any steps necessary to preserve any rights against prior parties. Neither Secured Party nor the Banks shall be liable for failure to collect or realize upon the Collateral, or for any delay in so doing, nor shall Secured Party or the Banks be under any duty to take any action whatsoever with regard thereto. Secured Party shall use reasonable care in the custody and preservation of any Collateral in its possession but need not take any steps to keep the Collateral identifiable. Secured Party shall have no duty to comply with any recording, filing or other legal requirements necessary to establish or maintain the validity, priority or enforceability of, or Secured Party's or Banks' respective rights in, any of the Collateral. Section 5.6 Secured Party's Actions. Each Debtor waives (i) any right to require Secured Party, for and on behalf of the Banks, to proceed against any person or entity, exhaust any Collateral, or have any person or entity joined with any Debtor in any suit arising out of the Secured Obligations or this Security Agreement or pursue any other remedy in Secured Party's or Banks' power; (ii) any and all notice of acceptance of this Security Agreement or of creation, modification, rearrangement, renewal or extension for any period of any of the Secured Obligations from time to time; and (iii) any defense arising by reason of any disability or other such defense. All dealings between any Debtor and Secured Party and Banks, whether or not in connection with the Secured Obligations, shall conclusively be presumed to have been had or consummated in reliance upon this Security Agreement and the Loan Agreement. Until all the Secured Obligations shall have been paid in full, Debtor shall have no right to subrogation, and each Debtor waives any benefit of and any right to participate in any Collateral or security whatsoever now or hereafter held by Secured Party, for and on behalf of the Banks. Each Debtor authorizes Secured Party, for and on behalf of the Banks, without notice or demand and without any reservation of rights against Debtor and without affecting any Debtor's liability hereunder or on the Secured Obligations, K-2-8 40 from time to time to (a) take and hold any other property as collateral, other than the Collateral, as security for any or all of the Secured Obligations, and exchange, enforce, waive and release any or all of the Collateral or such other property; (b) after the occurrence and during the continuance of an Event of Default, apply the Collateral or such other property and direct the order or manner of sale thereof as Secured Party, in its discretion, may determine; (c) renew, extend for any period, accelerate, modify, compromise, settle, or release the obligation of any person or entity with respect to any or all of the Secured Obligations or the Collateral; and (d) waive, enforce, modify, amend, or supplement any of the provisions of the Credit Documents (other than this Security Agreement). Section 5.7 Cumulative Security. The execution and delivery of this Security Agreement in no manner shall impair or affect any other security (by endorsement or otherwise) for the Secured Obligations. No security taken hereafter as security for the Secured Obligations shall impair in any manner or affect this Security Agreement. All such present and future additional security is to be considered as cumulative security. Section 5.8 Continuing Agreement. This is a continuing agreement, and the grant of a security interest hereunder shall remain in full force and effect. All the rights of Secured Party and Banks hereunder shall continue to exist until the Secured Obligations are paid and the Revolving Credit Commitments are terminated; and upon the full satisfaction of the foregoing, Secured Party, for and on behalf of the Banks, upon request of each Debtor, shall execute a written termination statement reassigning to each Debtor, without recourse, the Collateral owned by it and all rights conveyed hereby and returning possession of the Collateral, if applicable, to each Debtor. Otherwise this Security Agreement shall continue irrespective of the fact that the liability of any Debtor or any other person or entity may have ceased, or irrespective of the validity or enforceability of any note or any other loan document to which any Debtor or any other person or entity may be a party, and notwithstanding the reorganization or bankruptcy of any Debtor or any other person or entity, or any other event or proceeding affecting any Debtor or any other person or entity. Section 5.9 Rights Under Uniform Commercial Code. Regardless of whether the Uniform Commercial Code is in effect in the jurisdiction where such rights under this Security Agreement are asserted, Secured Party, for the ratable benefit of Banks, shall have the rights, powers and remedies of a secured party under the UCC or any similar law in any other jurisdiction whose laws are applicable. Secured Party and Banks may exercise their right of set-off with respect to the Secured Obligations as provided for in the Loan Agreement, as if the Secured Obligations were unsecured. Section 5.10 Exercise of Rights, Etc. Time shall be of the essence for the performance of any act under this Security Agreement or the Secured Obligations by each Debtor, but neither Secured Party's or any Bank's acceptance of partial or delinquent payments nor any forbearance, failure or delay by Secured Party in exercising any right shall be deemed a waiver of any obligation of any Debtor or of any right of Secured Party, for the ratable benefit of Banks, or preclude any other or further K-2-9 41 exercise thereof; and no single or partial exercise of any right shall preclude any other or further exercise thereof, or the exercise of any other right. Section 5.11 Remedy and Waiver. Secured Party may remedy any Event of Default and may waive any Event of Default (with the consent of the Majority Banks) without waiving the Event of Default remedied or waiving any prior or sub-sequent Event of Default. Section 5.12 Non-Judicial Remedies. To the fullest extent permitted by law, Secured Party, for the ratable benefit of Banks, may enforce its rights hereunder without prior judicial process or judicial hearing, and each Debtor expressly waives, renounces, and knowingly relinquishes any and all legal rights which might otherwise require Secured Party, for the ratable benefit of Banks, to enforce their rights by judicial process. In so providing for non-judicial remedies, each Debtor recognizes that such remedies are consistent with the usage of the trade, are responsive to commercial necessity and are the result of bargain at arm's length. Nothing herein is intended to prevent Secured Party, Banks or any Debtor from resorting to judicial process at either party's option. Section 5.13 Assignment of Secured Party's Duties. Secured Party's duties and rights hereunder may be assigned and transferred from time to time to another Bank or other Person in accordance with the terms of the Loan Agreement, in which case, such transferee shall have the rights and duties of Secured Party under this Security Agreement. Section 5.14 Compliance With Other Laws. Administrative Agent and each Bank may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. ARTICLE 6 - MISCELLANEOUS Section 6.1 Preservation of Liability. Neither this Security Agreement nor the exercise by Secured Party, for the ratable benefit of Banks, of (or the failure to so exercise) any right conferred herein or by law shall be construed as relieving any person or entity liable on the Secured Obligations from liability on the Obligations and for any deficiency thereon. Section 6.2 Survival of Agreements. All representations and warranties of Debtor herein, and all covenants and agreements herein not fully performed before the effective date of this Security Agreement, shall survive such date. Section 6.3 Notice. Except as otherwise provided herein, all notices, demands, requests, and communications permitted or required under this Agreement shall be delivered in the time and manner as required by the Loan Agreement. K-2-10 42 Section 6.4 Amendment and Waiver. This Security Agreement may not be amended nor may any of its terms be waived except in writing duly signed by the party against whom enforcement of the amendment or waiver is sought. Section 6.5 Invalidity. If any provision of this Security Agreement is rendered or declared illegal, invalid, or unenforceable by reason of any existing or subsequently enacted legislation or by a judicial decision that has become final, all of the remaining provisions shall remain in full force and effect. Section 6.6 Successors and Assigns. The covenants, representations, warranties, and agreements herein set forth shall be binding upon Debtor and shall inure to the benefit of Secured Party, for the ratable benefit of Banks, and their heirs, legal representatives, successors, and assigns. Section 6.7 Conflicting Provisions. To the extent any irreconcilable conflicts or inconsistencies exist between the terms of this Security Agreement and the Loan Agreement, the terms of the Loan Agreement shall govern and control. Section 6.8 CONSTRUCTION. THIS SECURITY AGREEMENT HAS BEEN MADE IN AND THE SECURITY INTEREST GRANTED HEREBY IS GRANTED IN, AND EACH SHALL BE GOVERNED BY THE LAWS OF, THE STATE OF TEXAS (EXCEPT TO THE EXTENT THAT THE LAWS OF ANY OTHER JURISDICTION GOVERN THE PERFECTION, PRIORITY, OR FORECLOSURE OF THE SECURITY INTEREST GRANTED HEREBY) AND OF THE UNITED STATES OF AMERICA, AS APPLICABLE, IN ALL RESPECTS, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY, ENFORCEMENT, AND PERFORMANCE. Section 6.9 ENTIRE AGREEMENT. THIS SECURITY AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS SECURITY AGREEMENT AND THE OTHER WRITTEN CREDIT DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] K-2-11 43 IN WITNESS HEREOF, Debtor and Secured Party have caused this instrument to be duly executed as of the date first above written. DEBTOR: EGL EAGLE GLOBAL LOGISTICS, LP, a Delaware limited partnership By: EGL MANAGEMENT, LLC , a Delaware limited liability company, its general partner By: ___________________________________ Name: _________________________________ Title: ________________________________ EGL DELAWARE LIMITED LIABILITY COMPANY, a Delaware limited liability company By: ___________________________________ Name: _________________________________ Title: ________________________________ EGL Management, LLC, a Delaware limited liability company By: ___________________________________ Name: _________________________________ Title: ________________________________ EGL (Canada) HOLDING CO., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ EAGLE MARITIME SERVICES, INC., a Texas corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ K-2-12 44 EAGLE USA IMPORT BROKERS, INC., a Texas corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ EAGLE URBAN RENEWAL CORPORATION, a New Jersey Urban Renewal Entity By: ___________________________________ Name: _________________________________ Title: ________________________________ EAGLE INTERNATIONAL HOLDINGS, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ EAGLE PARTNERS, a Texas general partnership By: EUSA HOLDINGS, INC., a Delaware corporation, Managing Partner By: ___________________________________ Name: _________________________________ Title: ________________________________ K-2-13 45 EAGLE PARTNERS, LP, a Texas limited partnership By: EUSA Holdings, Inc., its general partner By: ___________________________________ Name: _________________________________ Title: ________________________________ EUSA PARTNERS, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ CIRCLE INTERNATIONAL, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ CIRCLE INTERNATIONAL GROUP, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ EUSA HOLDINGS, INC., a Delaware corporation By: ___________________________________ Name: _________________________________ Title: ________________________________ Address: 15350 Vickery Drive Houston, Texas 77032 K-2-14 46 ACKNOWLEDGED AND AGREED TO: BANK OF AMERICA, N.A., as Administrative Agent on behalf of itself and the other Banks By: __________________________________________ David Johanson, Vice President K-2-15 -----END PRIVACY-ENHANCED MESSAGE-----