<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998 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: 1-8306
AIR EXPRESS INTERNATIONAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 36-2074327
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
120 Tokeneke Road, Darien, Connecticut 06820
(203) 655-7900
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.01 par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 24, 1999 was $449,755,008.
The number of shares of common stock outstanding as of March 24, 1999 was
33,468,494.
DOCUMENTS INCORPORATED BY REFERENCE:
To the extent specified, part III of this Form 10-K incorporates information by
reference to the Registrant's definitive proxy statement for the 1999 Annual
Meeting of Shareholders.
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AIR EXPRESS INTERNATIONAL CORPORATION
1998 Form 10-K Annual Report
Table of Contents
Part I
Page
Item 1. Business........................................................... 1
Item 2. Properties......................................................... 8
Item 3. Legal Proceedings.................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders and Executive
Officers of the Registrant........................................ 9
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 11
Item 6. Selected Financial Data........................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 13
Item 8. Financial Statements and Supplementary Data....................... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures............................. 22
Part III
Item 10. Directors and Executive Officers of the Registrant................ 22
Item 11. Executive Compensation............................................ 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................... 22
Item 13. Certain Relationships and Related Transactions.................... 22
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................................... 23
<PAGE>
Item 1. Business
(a) General Development of Business
Air Express International Corporation (the "Company" or the "Registrant") is the
oldest and largest international airfreight forwarder based in the United States
and a leading provider of global logistics services for importers and exporters
worldwide. The Company is primarily engaged in providing cargo transportation
logistics management, including international air and ocean freight forwarding,
customs brokerage and warehousing and distribution services. Beyond its
traditional freight forwarding and customs brokerage services, the Company's
value-added logistics services and information systems help its customers to
streamline operations, reduce inventories, increase speed and reliability of
worldwide deliveries and, ultimately, improve management of the customers'
supply chains.
Through its global network of Company-operated facilities and agents, the
Company provides total integrated transportation logistics solutions centered
around the consolidation, documentation and arrangements for the transportation
of its customers' shipments of cargo throughout the world. During 1998, the
Company handled more than 2,080,000 individual airfreight shipments, with an
average weight of 582 pounds, to more than 3,000 cities in more than 200
countries. Approximately 61% of the total airfreight shipments for 1998
originated from locations outside the United States. The Company generated gross
revenues in excess of $1.5 billion in 1998, of which approximately 60% were
attributable to locations outside the United States.
Headquartered in the United States, the Company has a global network with
offices located in 705 cities, including 262 cities in the United States, 165
cities in Europe and 278 cities in Asia, the South Pacific, the Middle East,
Africa and Latin America. As of December 31, 1998, this network consisted of 312
Company-operated facilities, including 89 in the United States and 223 abroad,
supplemented at 393 additional locations, which are served by agents, many of
whom serve the Company on an exclusive basis. The network is managed by
experienced professionals, most of whom are nationals of the countries in which
they serve. Approximately 50% of the Company's 52 regional and country managers
have been employed by the Company for more than ten years.
Since 1985, when its current management assumed control, the Company has focused
on the international transportation of heavy cargo and devoted its resources to
expanding and enhancing its global network and the information systems necessary
to more effectively service its customers' cargo transportation and integrated
logistics needs. In December 1987, the Company acquired the Pandair Group, a
European-based international airfreight forwarder with facilities in 14
countries. The Pandair acquisition significantly strengthened the Company's
presence in key foreign markets, particularly the United Kingdom and The
Netherlands. In July 1993, the Company acquired the Votainer group of companies
("Votainer"), a Non-Vessel Operating Common Carrier ("NVOCC") based in The
Netherlands, which provides ocean freight consolidation services, with a network
of 34 Company-operated facilities in 12 countries. During 1994, the Company
acquired all the outstanding common stock of Unimodal Australia Pty. Ltd., an
ocean freight forwarder located in Australia; Banner International Ltd., an
airfreight forwarder located in New Zealand; Pace Express Pty. Ltd., an
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airfreight forwarder located in Australia, and 75% of the outstanding common
stock of Universal Airfreight AS, the Company's exclusive airfreight agent in
Norway. During 1995, the Company acquired all of the outstanding common stock of
Radix Ventures, Inc., a leading provider of customs brokerage in the United
States; Jagro International, Inc., an ocean freight forwarder and customs broker
located in Canada; Brantford International, Inc., an air and ocean freight
forwarder located in the United Kingdom; and 40% ownership of the outstanding
common stock of Air Express International (Emirates), the Company's exclusive
air and ocean freight agent in the United Arab Emirates. In March 1996, the
Company acquired all of the outstanding stock of the Profreight group of
companies, a customs broker and air and ocean freight forwarder in South Africa.
In April 1996, the Company acquired Lusk Shipping Company, Inc., a New Orleans,
Louisiana-based ocean freight forwarder and customs broker. In May 1996, the
Company purchased the business and certain assets of John V. Carr & Son, Inc.
("J.V. Carr"), a United States and Canadian customs broker. In May 1996, the
Company acquired an additional 50% of the outstanding stock of AEI Finland Oy,
bringing its ownership of this Finland-based air and ocean freight forwarder to
approximately 90%. In November 1996, the Company acquired Muller Airfreight
B.V., an air and ocean freight forwarder based in The Netherlands. In May 1997,
the Company acquired both an additional 28% of the outstanding stock of AEI
Iberfreight bringing its ownership of this Spain-based air and ocean freight
forwarder to 48%, and it established a joint venture in Korea through the
acquisition of 50% of the stock of Korea Air Freight, Ltd., its long-time agent
in South Korea. The joint venture company was renamed "AEI Korea, Ltd." In June
1998, the Company acquired both Aero Expreso Internacional, the largest inbound
forwarder and customs broker in Argentina, and Gulf Coast Drawback Services,
Inc., the largest provider of specialized duty drawback services in the United
States. In September 1998, the Company acquired Associated Customhouse Brokers,
Inc., which provides customs brokerage and freight forwarding services primarily
in the upstate New York region. In December 1998, the Company acquired the
Translink Group of Companies, an Ireland-based air and ocean freight forwarder,
and AEI Hannover Gmbh which was the Company's exclusive agent in Hannover,
Germany. The acquisitions were consistent with the Company's strategy of
strengthening its market position, further enhancing its operating efficiencies
and providing its customers with a global logistics solution encompassing a
broad range of transportation and distribution-related services.
(b) Financial Information About Industry Segments
The Company is currently engaged in the business of providing integrated
logistics services. See Management's Discussion and Analysis of Financial
Condition and Results of Operations (Item 7), and the Company's Consolidated
Financial Statements, including the Notes thereto, for data related to the
Company's revenues and long-lived assets.
(c) Narrative Description of Business
Airfreight Forwarding and Related Services
An airfreight forwarder procures shipments from a large number of customers,
consolidates shipments bound for a particular destination from a common place of
origin, determines the routing over which the consolidated shipment will move,
selects an airline serving that route on the basis of departure time, available
cargo capacity and rate, and books the consolidated shipment for transportation
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on that airline. In addition, the forwarder prepares all required shipping
documents, delivers the shipment to the transporting airline and, in many cases,
arranges for clearance of the various components of the shipment through customs
at the final destination. If so requested by its customers, the forwarder also
will arrange for delivery of the individual components of the consolidated
shipment from the arrival airport to their intended consignees.
As a result of its consolidation of customers' shipments, the forwarder is
usually able to obtain lower rates from airlines than its customers could obtain
directly from those airlines. In addition, in certain tradelanes and with
certain airlines where the forwarder generates a continuing high volume of
freight, that forwarder is often able to obtain even lower rates. Accordingly,
the forwarder is generally able to offer its customers a lower rate than would
otherwise be available to the customer from the airline. However, the rate
charged by the forwarder to its customers is greater than that obtained by the
forwarder from the airline, and the difference represents the forwarder's gross
profit.
Ocean Freight Services
The Company's revenue from international ocean freight forwarding is derived
from service both as an indirect ocean carrier (NVOCC) and as an authorized
agent for shippers and importers. The Company contracts with ocean shipping
lines to obtain transportation for a fixed number of containers between various
points during a specified time period at an agreed rate. The Company solicits
freight from its customers to fill the containers, charging rates lower than the
rates offered directly to customers by shipping lines for similar type
shipments. In 1998, the Company handled more than 148,000 containers.
Customs Brokerage Services
As part of its integrated logistic services, the Company provides customs
brokerage clearance services in the United States and 21 foreign countries.
These services entail the preparation and assembly of required documentation in
many instances, the advancement of customs duties on behalf of importers, and
the arrangement for the delivery of goods after the customs clearance process is
completed. Additionally, other services may be provided such as the procurement
and placement of surety bonds on behalf of importers, duty drawback (recovery of
previously paid duties when goods are re-exported), and the arrangement of
bonded warehouse services which allow importers to store goods while deferring
payment of customs duties until the goods are required for delivery.
In June 1995, the Company acquired Radix Ventures, Inc. ("Radix"), which,
through its subsidiary, Radix Group International, Inc., is a leading United
States customs broker, with offices in 23 U.S. cities and approximately 520
employees. Radix's customs brokerage services were largely performed for
importers who used other freight forwarders for the transportation of goods to
the United States. In May 1996, the Company purchased the business and certain
assets of J.V. Carr which primarily serves the U.S. - Canada border with 32
offices in 25 U.S. and two Canadian cities. Since the acquisition of Radix, the
Company has continued to maintain and expand its United States customs brokerage
activities to existing and new clients without regard to whether the Company
provides transportation services to these importers. It is the Company's
strategy to ultimately expand its relationship with customs brokerage customers
by providing other services, including transportation and warehousing and
distribution.
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In 1998, the Company processed approximately 1,974,000 customs entries of which
994,000 were in the United States; in 1997, it processed 1,847,000 entries of
which 1,012,000 were in the United States; and in 1996, 1,579,000 entries were
processed of which 807,000 were in the United States. The primary reason for the
increase in 1997 was attributable to the inclusion of a full year of J.V. Carr
business.
Other Logistics Services
In addition to providing air and ocean freight forwarding and customs brokerage
services, the Company provides its import and export customers with an array of
fully integrated global logistics services, including, most notably, warehousing
and distribution services and its proprietary logistics information system for
global freight tracking and tracing. Other total logistics services offered by
the Company include extensive ground transportation capabilities enabling
door-to-door pickup and freight delivery; duty drawback; Free Trade Zone
management and associated services; information management services such as
electronic data interchange (EDI), electronic invoicing and purchase order
management; inventory management; cargo consolidation, deconsolidation, assembly
and protective packing; bonded warehousing; project cargo management; and cargo
insurance coverage.
Warehousing and Distribution
The Company owns and leases warehouse space with major facilities in the U.S.,
The Netherlands, U.K., Germany, United Arab Emirates, New Zealand, Australia,
Singapore, Malaysia and South Africa. The Company's warehousing services include
receiving, deconsolidation and decontainerization, cargo loading and unloading,
assembly of freight, customer inventory management and protective packing and
storage. The Company receives storage charges for use of its warehouses and fees
for other services. In 1998, warehouse and distribution services contributed
approximately 3% of gross revenues and 2% of net revenues.
Logistics Information System (LOGIS)
The Company introduced its proprietary logistics information system ("LOGIS")
for airfreight operations in 1986 and since that time has allocated substantial
resources to expand the system's geographic reach and enhance its capabilities.
Mainframe computers located at the Company's headquarters in Darien, Connecticut
and a facility near London, England are linked to, and accessible from,
terminals at 367 Company-operated and agent facilities in substantially all
major markets, permitting real-time inputting, processing and retrieval of
shipments, pricing, scheduling, space availability, booking and tracking data,
as well as automated preparation of shipping, customs and billing documents.
LOGIS has been developed to include worldwide ocean shipment tracing and
tracking and to provide information for logistics facilities offered by the
Company, including assembly and distribution activities for clients. As of
December 31, 1998, the LOGIS system permitted electronic interfacing with more
than 2,400 of the Company's major customers' locations in 56 countries, 49
international airlines and customs authorities in 13 countries. Electronic data
interchange ("EDI") connections to the airlines permit instant retrieval by the
Company, and by those of its customers interfacing with the LOGIS system, of
information on the status of shipments in the custody of the airlines. With its
EDI capabilities, LOGIS can receive a customer's shipping instructions and
information with respect to the cargo being shipped and then convert the data
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automatically into shipping documents. Where LOGIS is linked to customs in the
country of destination, it can prepare customs declarations, calculate the
appropriate customs duties and provide for automatic customs invoicing and
clearance.
The LOGIS system has enabled the Company to improve the productivity of its
personnel and the quality of its customer service and has enabled many of its
customers to manage their freight transportation logistics needs more
effectively. The system has resulted in substantial reductions in paperwork and
expedited the entry, processing, retrieval and dissemination of critical
information. The Company plans to continually improve and enhance the LOGIS
system. Management believes that the LOGIS system has positioned the Company to
better capitalize on the continuing trend toward outsourcing by large
corporations of logistics management functions and reliance by many of these
corporations on single-source providers.
Operations
The Company has a global network of Company-operated facilities and supporting
agents with offices located in over 705 cities, including 262 in the United
States, 165 in Europe, 130 in Asia and the South Pacific and 148 in the Middle
East, Africa and Latin America. As a consequence, a substantial portion of its
revenues and profits is derived from the shipment of goods from or between
locations outside the United States. For the year ended December 31, 1998,
approximately 60% of its gross revenues and 55% of its net revenues were
recorded in locations outside the United States.
The Company neither owns nor operates any ships or aircraft. It arranges for
transportation of its customers' shipments via steamship lines, commercial
airlines and air cargo carriers. On limited occasions, when the size of a
particular shipment so warrants, the Company will charter a cargo aircraft. The
Company acts solely as a forwarder for approximately 91% of the shipments it
handles. When acting as an airfreight forwarder, the Company becomes legally
responsible to its customer for the safe delivery of the customer's cargo to its
ultimate destination, subject to a limitation on liability of $20.00 per kilo
($9.07 per pound). When acting as an ocean freight consolidator, the Company
assumes cargo liability to its customers for lost or damaged shipments. This
liability is typically limited by contract to a maximum of $500 per package or
customary freight unit. However, because a freight forwarder's relationship to
an airline or steamship line (the "Carrier") is that of a shipper to a carrier,
the Carrier generally assumes the same responsibility to the Company as the
Company assumes to its customers. On occasion, the Company acts in the capacity
of a cargo agent for a designated Carrier. In this capacity, the Company
contracts for freight carriage for which it receives a commission from the
Carrier, but it does not have legal responsibility for the safe delivery of the
shipment. During 1998, shipments for which the Company acted as a cargo agent
accounted for less than 2% of its revenues.
The Company also offers door-to-door express delivery among 20 European
countries through its Pandalink service which operates from a central hub in
Brussels. Pandalink operates predominately as an overnight service to major
European cities, with alternative delivery services to outlying areas within 48
to 72 hours.
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Quality Initiatives
The Company maintains a department focused on implementing quality initiatives
to better serve its customers' needs. In 1998, more than 90% of the Company's
revenues were handled by International Organization for Standardization ("ISO")
9002 certified offices. ISO is a stringent set of internationally recognized
quality assurance guidelines. The Company is committed to a broad program to
maintain and to increase its ISO 9002 certifications. The Company also sponsors
a Shippers' Council to stimulate discussion among customers aimed at
identifying, upgrading and standardizing the Company's and the industry's best
practices.
Regulation
The Company's activities as an International Air Transport Association ("IATA")
cargo agent are subject to the rules and regulations of that organization to the
extent the Company acts as an agent for an airline which is an IATA member.
Certain IATA rules and regulations are subject to the Department of
Transportation ("DOT") approval. In addition, several states in which the
Company operates regulate intrastate trucking. In these states, the Company has
obtained the necessary operating authority. In the United States, the Company,
operating as a customs broker, is licensed by the United States Department of
the Treasury and regulated by the United States Customs Service. Customs
brokerage fees are not subject to regulation. The Company is licensed as an
ocean freight forwarder by the United States Federal Maritime Commission ("FMC")
which prescribes qualifications for acting as a shipping agent, including surety
bonding requirements. The FMC does not regulate the Company's fees in any
material respect. The Company's ocean freight NVOCC business is subject to
regulation as an indirect ocean cargo carrier under the FMC tariff filing and
surety bond requirements, which require the Company to abide by tariffs filed
with the FMC specifying the rates that may be charged to customers.
Customers and Marketing
The Company's principal customers are large manufacturers and distributors of
computers and electronics equipment, pharmaceuticals, heavy industrial and
construction equipment, motion pictures and printed materials. During 1998, the
Company shipped goods and provided logistics services for more than 200,000
customer accounts, none of which individually accounted for more than 10% of the
Company's revenues.
The Company markets its global cargo transportation and integrated logistics
services worldwide through an international sales organization consisting of 469
full-time salespersons (as of December 31, 1998), supported by the sales efforts
of senior management and the Company's country, regional and district managers.
In markets where the Company does not operate its own facilities, its direct
sales efforts are supplemented by those of the Company's agents. The Company's
marketing is directed primarily to large, multinational corporations with
substantial requirements for the international transportation of cargo.
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Competition
Competition within the freight forwarding industry is intense. Although the
industry is highly fragmented with a large number of participants, the Company
competes primarily with a relatively small number of international firms with
worldwide networks and the capability to provide the breadth of services offered
by the Company. The Company also encounters competition from regional and local
freight forwarders, integrated transportation companies that operate their own
aircraft, cargo sales agents and brokers, surface freight forwarders and
carriers, certain airlines, and associations of shippers organized for the
purpose of consolidating their members' shipments to obtain lower freight rates
from carriers.
Currency and Other Risk Factors
The Company operates in many countries throughout the world, resulting in
significant sums of money to be collected in various local currencies. There are
risks from fluctuations in the value of these currencies, devaluations, or other
actions and events that may result in the Company carrying assets in foreign
currencies that are not easily convertible, or not convertible at all, into U.S.
dollars. These foreign currency assets are included in the Company's net
investment in its foreign operations. From time to time and when feasible and
cost effective, the Company seeks to minimize the effect of fluctuations in the
values of foreign currencies on its financial position through the purchase of
foreign currency forward exchange contracts (See Note 14 to the Consolidated
Financial Statements).
In addition, the Company's business requires good working relationships with the
airlines, which are its largest creditor as a group. To the extent that the
airlines decrease cargo space available to forwarders, cut back cargo or
passenger flights or enter the forwarding business themselves, the airfreight
forwarding business could be adversely affected. The Company considers its
working relationship with the airlines to be good.
Employees
As of December 31, 1998, the Company employed 7,423 people, of whom 4,704 were
based at locations outside the United States, including 2,423 in the United
Kingdom and Europe, 1,219 in Asia and 1,062 in the South Pacific, South America,
Africa and Canada. Approximately 640 of the Company's 2,719 employees based in
the United States were covered by agreements with various locals of the
International Brotherhood of Teamsters, the United Auto Workers and the
International Association of Machinists and Aerospace Workers. In addition,
approximately 32% of the Company's foreign-based personnel are represented by
various types of collective bargaining organizations. The Company maintains a
good working relationship with its employees.
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(d) Financial Information About Foreign and Domestic Operations
See the Company's Consolidated Financial Statements including the Notes thereto
for data related to the Company's revenues, operating profit and identifiable
assets.
Item 2. Properties
The Company owns its worldwide headquarters building (approximately 40,000
square feet in area) in Darien, Connecticut; a warehouse and office facility
(approximately 78,000 square feet in area) in Sydney, Australia, which is
subject to a $1.4 million mortgage; a warehouse and distribution facility
(approximately 59,000 square feet in area) in Venlo, Holland, which is subject
to a $.8 million mortgage; a warehouse and distribution facility (approximately
150,000 square feet in area) in Singapore, which is subject to a $4.3 million
term loan; and a warehouse and office facility (approximately 40,000 square feet
in area) in Johannesburg, South Africa.
The Company leases facilities at or near airports, ocean terminals and
international borders at 72 locations in the United States and 148 offices in 32
other countries. Most facilities have office, loading dock and warehouse space.
The principal facilities are set forth in the following table:
<TABLE>
<CAPTION>
Approximate Sq. Feet of Lease
Location Floor Space Expiration
<S> <C> <C>
Amsterdam, The Netherlands 141,000 sq.ft. of warehouse and office 2003
Boston, Massachusetts 78,000 sq.ft. of warehouse and office 2007
Dublin, Ireland 86,000 sq.ft. of warehouse and office 2009
London, England 93,000 sq.ft. of warehouse and office 2002
Los Angeles, California 151,300 sq.ft. of warehouse and office 2001
Miami, Florida 506,300 sq.ft. of warehouse and office 1999/2006
New York, New York 135,000 sq.ft. of warehouse and office 2015
San Francisco, California 78,000 sq.ft. of warehouse and office 2000/2003
Sydney, Australia 222,000 sq.ft. of warehouse and office 2012
</TABLE>
The Company believes that its facilities are adequate for its needs now and in
the foreseeable future and none of its principal facilities is material to the
operation of its business.
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Item 3. Legal Proceedings
While all litigation, claims and assessments contain an element of uncertainty
with respect to their resolution and their outcome cannot be predicted with
certainty, based on information presently available, the Company believes that
it is unlikely that the aggregate effect of all known and threatened litigation,
claims and assessments will have a material adverse effect on the Company's
consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Following is a listing of the executive officers of the Company.
The information listed below with respect to age and business experience for the
past five years has been furnished to the Company as of March 30, 1999 by each
executive officer of the Company. There are no family relationships between any
director or officer of the Company.
Positions with the Company and
Business Experience for the
Name Age Past Five Years
Guenter Rohrmann 59 President and Chief Executive
Officer of the Company since
1989 (President and Chief Operating
Officer from 1985 to 1989).
Hendrik J. Hartong, Jr. 59 Chairman of the Company since 1985;
(Chief Executive Officer of the
Company from 1985 through 1989);
General Partner since 1985 of The
Brynwood Management Limited
Partnerships, which serve as
managing general partners of
The Brynwood Partners Limited
Partnerships, private investment
partnerships; Director of Hurco
Companies, Inc; Director of Lincoln
Snacks Company.
Dennis M. Dolan 41 Executive Vice President and Chief
Financial Officer since March 1999;
Vice President and Chief Financial
Officer of the Company since 1989;
U.S. Controller from 1985 to 1989.
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Giorgio Laccona 40 Senior Vice President- The Americas
since March 1999; Vice President -
General Manager - North America
since 1996; Vice President-
Operations from 1994 to 1996; Vice
President - Export Sales and
Operations from 1989 to 1994.
Daniel J. McCauley 64 Vice President, General Counsel and
Secretary of the Company since
1991.
Paul J. Gallagher 53 Vice President - Treasurer of the
Company since 1993; Vice President-
International Controller from 1989
to 1993.
Martin J. McDonnell 48 Vice President and Controller of
the Company since April 1998; Chief
Financial Officer, LEP North
America from 1993 to 1997.
Robert J. O'Connell 62 Senior Vice President since 1996;
Vice President - General Manager -
North America of the Company from
1989; Vice President-North America
Sales of the Company from 1985 to
1989.
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, $.01 par value (the "Common Stock"), trades on The
Nasdaq Stock Market under the symbol: AEIC.
The table below indicates the quarterly high and low prices of the Common Stock
and the dividends declared per share for the years ended December 31, 1998 and
1997.
<TABLE>
<CAPTION>
Quarter
1st 2nd 3rd 4th
Year Ended December 31, 1998:
<S> <C> <C> <C> <C>
High .......................... $ 31 3/8 $ 29 3/8 $ 29 $ 25 7/8
Low ........................... $ 24 5/16 $ 24 1/8 $ 15 1/4 $ 14 1/4
Dividends ..................... $ .05 $ .06 $ .06 $ .06
Year Ended December 31, 1997:
High .......................... $ 22 1/8 $ 26 5/8 $ 36 1/2 $ 37 1/8
Low ........................... $ 19 7/8 $ 20 1/2 $ 24 1/2 $ 26 3/8
Dividends ..................... $ .04 $ .05 $ .05 $ .05
</TABLE>
At March 24, 1999, there were 832 holders of record of the Company's Common
Stock. The closing price of the Common Stock on that date was $14.4375 per
share.
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Item 6. Selected Financial Data
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenues .............................. $1,513,196 $1,545,720 $1,335,447 $1,222,217 $ 997,379
Net income ............................ $ 43,756 $ 49,451 $ 38,500 $ 29,027 $ 22,619
Net income per common share: (1)
Basic .............................. $ 1.27 $ 1.44 $ 1.23 $ 1.07 $ .87
Diluted ............................ $ 1.26 $ 1.41 $ 1.16 $ .99 $ .81
Cash dividends declared per
common share ........................ $ .23 $ .19 $ .153 $ .127 $ .102
Total assets .......................... $ 675,478 $ 634,570 $ 581,329 $ 486,843 $ 383,626
Long-term debt (excluding current
portion) ............................. $ 42,578 $ 31,008 $ 16,616 $ 82,762 $ 83,992
Stockholders' investment .............. $ 310,871 $ 291,562 $ 259,086 $ 147,566 $ 99,350
</TABLE>
(1) Income per share amounts for all periods presented give effect to a
three-for-two stock split in the nature of a 50.0% stock dividend in July
1997 and December 1994 and are based upon the weighted-average number of
shares of Common Stock outstanding during each period.
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1998 decreased to $60.2 million
compared to $67.6 million at December 31, 1997. The Company's primary sources of
cash in 1998 consisted of $55.1 million provided by operating activities and
$13.8 million from restricted funds (See Note 5 to the Consolidated Financial
Statements). The Company's primary uses of cash in 1998 were capital
expenditures of $36.0 million, treasury stock purchases of $22.2 million, and
acquisitions of $19.5 million (See Note 15 to the Consolidated Financial
Statements). Cash flow provided by operating activities increased $6.5 million
over 1997. The increase resulted mainly from the decline in the Company's
accounts receivable due to improved collections. Working capital decreased $6.2
million to $129.0 million at December 31, 1998 primarily due to the increase in
current portion of long-term debt and overdrafts payable. The Company makes
significant disbursements on behalf of its customers, such as customs duties,
which are billed directly to the Company's customers. The billings for these
disbursements, which may be several times the amount of revenue and fees derived
from these transactions, are not recorded as revenue and expense in the
Company's statements of operations.
Capital expenditures increased approximately $17.3 million to $36.0 million for
1998 from $18.7 million for 1997. Approximately $13.8 million of the capital
expenditures related to the construction of a freight terminal at New York's
John F. Kennedy International Airport and $1.5 million related to the expansion
of a warehouse facility in Singapore, scheduled for completion in 1999, the
total cost of which will approximate $8.0 million (See Note 9 to the
Consolidated Financial Statements). The remaining balance of expenditures were
primarily for improvement and expansion of facilities and management information
services. Depreciation expense and amortization of goodwill totaled $17.4
million in 1998 and $15.8 million in 1997. Total capital expenditures for 1999
are estimated to be approximately $30.0 million which will be used primarily for
management information systems and improvement and expansion of facilities.
At December 31, 1998, the Company had available for future borrowings
approximately $71.8 million of its $75.0 million revolving credit facility (See
Note 8 to the Consolidated Financial Statements). The Company utilized
approximately $3.2 million under this facility mainly for letters of credit
issued in connection with its insurance programs. Additionally, various of the
Company's foreign subsidiaries maintained overdraft facilities with foreign
banks, aggregating approximately $22.2 million, of which approximately $4.4
million was outstanding.
During the third quarter of 1998, the Company's Board of Directors authorized
the purchase from time to time in the open market of up to one million shares of
the Company's common stock. This authorization combined with a similar one
granted in November 1997, allows the Company to purchase up to two million of
its common shares in the open market. As of December 31, 1998, the Company has
purchased 1,077,500 of its common shares at a cost of approximately $22.2
million. Additionally, in June 1998, the Company's Board of Directors authorized
an increase in the quarterly cash dividend from five cents ($.05) to six cents
($.06) per share.
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<PAGE>
In 1998, the Company made five acquisitions for approximately $29.0 million
comprised of $23.0 million of cash and $6.0 million of debt (See Note 15 to the
Consolidated Financial Statements).
During 1998, the Company's total long-term debt increased approximately $13.3
million (See Note 9 to the Consolidated Financial Statements) mainly due to
acquisitions. As a result, its debt to equity ratio (total long-term debt as a
percentage of stockholders' investment) was 15.1% at December 31, 1998 as
compared to 11.5% at December 31, 1997.
The Company purchases foreign currency forward exchange contracts principally to
hedge foreign currency exposure associated with net investments in certain
foreign operations and certain intercompany transactions. The Company does not
speculate in the financial markets and therefore does not hold these contracts
for trading purposes. The Company's risk management procedures include the
monitoring of foreign exchange exposures and the Company's offsetting hedge
positions utilizing analytical analysis of value-at-risk estimates. However, the
use of this technique to quantify market risk should not be construed as an
endorsement of its accuracy or the accuracy of the related assumptions. The
estimated maximum yearly loss in earnings due to foreign exchange rate
instruments, calculated utilizing value-at-risk estimates, is not material to
the Company's results of the operations. Actual results in the future may differ
materially from projected results due to actual developments in global financial
markets. The Company's accounting policies for foreign exchange rate instruments
is disclosed in the Company's financial statements (See Note 14 to the
Consolidated Financial Statements).
At December 31, 1998, the carrying values of cash and cash equivalents
approximates fair value due to the short-term nature of the cash equivalents
which have original maturities of three months or less. Fluctuations of interest
rates would not have a material effect on the fair value of cash equivalents
held by the Company.
At December 31, 1998, the fair value of the Company's long-term debt was
approximately $46.9 million. If interest rates were to either increase or
decrease by 1.0%, the fair value of long-term debt would increase or decrease by
approximately $3.0 million.
Management believes that the Company's available cash and sources of credit,
together with expected future sources of credit and cash generated from
operations, will be sufficient to satisfy its anticipated needs for working
capital, capital expenditures and dividends.
-14-
<PAGE>
Results of Operations
1998 Compared to 1997
The Company operates its integrated logistics business as a single segment
comprised of three major services: airfreight forwarding, ocean freight
forwarding, and customs brokerage and other services, all of which are fully
integrated. The following table sets forth the gross revenues and net revenues
(gross revenues minus transportation expenses) for each of these three service
categories, as well as the Company's internal operating expenses (terminal and
selling, general and administrative expenses) and operating profit:
<TABLE>
<CAPTION>
1998 1997
($ in millions)
Gross Revenues:
<S> <C> <C>
Airfreight ..................................... $ 1,158.3 $ 1,202.3
Ocean freight .................................. 201.7 201.1
Customs brokerage and other .................... 153.2 142.3
Total Gross Revenues ............................. $ 1,513.2 $ 1,545.7
Net Revenues:
Airfreight ..................................... $ 305.6 $ 310.1
Ocean freight .................................. 61.9 58.1
Customs brokerage and other .................... 123.0 120.0
Total Net Revenues ............................... 490.5 488.2
Internal Operating Expenses:
Terminal ....................................... 276.8 266.9
Selling, general and administrative ............ 151.6 150.4
Total Internal Operating Expenses ................ 428.4 417.3
Operating Profit ................................. $ 62.1 $ 70.9
</TABLE>
Gross revenues decreased $32.5 million (2.1%) in 1998 compared to 1997. The
decrease was comprised of a $44.0 million (3.7%) decline in airfreight revenues,
a marginal increase in ocean freight revenues, and a $10.9 million (7.7%)
increase in customs brokerage and other revenues. The effect of a stronger U.S.
dollar when converting foreign currency revenues into U.S. dollars for financial
reporting purposes negatively impacted gross revenues by approximately $57.1
million. Net revenues increased $2.3 million (.5%) to $490.5 million in 1998.
The increase reflects a $4.5 million (1.5%) decrease in airfreight net revenues,
a $3.8 million (6.5%) increase in ocean freight net revenues, and a $3.0 million
(2.5%) increase in customs brokerage and other net revenues. Beginning in the
second quarter of 1998, the Company experienced lower export airfreight shipping
volumes with negative gross revenue comparisons in its Singapore and United
Kingdom operations. Additionally, export airfreight shipping volumes in the
United States began to decline during the second half of 1998. The United
States, United Kingdom and Singapore are three of the Company's five largest
airfreight markets. Partially offsetting the decline in airfreight gross
revenues were improvements in the transportation costs paid by the Company which
resulted in an increase in airfreight gross profit margin (airfreight net
revenue/airfreight gross revenues) to 26.4% from 25.8%. Additionally, the
Company initiated reductions in personnel in the above mentioned countries
during 1998 and in the first quarter of 1999. Excluding the effects from the
sale of a foreign affiliate in 1997, ocean freight gross and net revenues from
continuing operations increased $15.3 million (8.2%) and $6.5 million (11.7%),
-15-
<PAGE>
respectively. These increases were mainly attributable to greater shipping
volumes from existing customers and the Company's continuing penetration into
the ocean freight market. The increases in gross and net revenues from customs
brokerage and other services were due to the inclusion of the results from the
acquisitions of Gulf Coast Drawback Services, Inc. and Aero Expreso
Internacional (See Note 15 to the Consolidated Financial Statements) and from
the Company's continuing efforts to expand its customs brokerage and other
activities to new and existing customers.
Additionally, during the fourth quarter of 1998 (See Note 18 to the Consolidated
Financial Statements) the Company recorded a nonrecurring pre-tax charge of $3.6
million pertaining to the negotiation of a long-term contract with a major
customer in which the Company retroactively granted volume discounts for
shipments in the first half of 1998. This one-time charge was recorded as a
reduction in airfreight revenues in the fourth quarter of 1998.
The Company's internal operating expenses increased $11.1 million (2.7%) over
1997. The increase was mainly attributable to the inclusion of operating
expenses from acquired companies (See Note 15 to the Consolidated Financial
Statements) which contributed positively to the Company's full year results. As
a percentage of gross revenues, internal operating expenses increased to 28.3%
in 1998 from 27.0% in 1997 and as a percentage of net revenues, increased to
87.3% in 1998 from 85.5% in 1997.
Consolidated operating profit decreased $8.8 million (12.4%) compared to 1997.
The decline was mainly due to the decrease in airfreight shipping activity
primarily in the United States, United Kingdom and Singapore.
Interest, net improved $.7 million to $2.1 million due to increased interest
income. Other, net decreased $1.5 million to $5.4 million in 1998. Excluding a
$1.9 million gain on the sale of an foreign affiliate in 1997 (See Note 16 to
the Consolidated Financial Statements), Other, net increased $.4 million over
1997.
The effective income tax rate decreased to 37.0% compared to 37.5% in 1997. The
decrease was largely the result of a change in the geographic composition of
worldwide earnings to countries with lower effective income tax rates.
United States Operations
United States gross revenues decreased $5.1 million (.8%) to $607.1 million in
1998 compared to 1997, reflecting a decrease of $16.0 million (3.3%) in
airfreight revenues, a $3.5 million (5.1%) increase in ocean freight revenues,
and a $7.4 million (13.1%) increase in customs brokerage and other revenues. The
decrease in airfreight revenues was due to the decline in the number of
shipments for both the domestic and export business and the volume discounts
previously discussed. The increase in ocean freight revenues was attributable to
the Company's continuing efforts to market its ocean freight services to both
existing and new customers. The increase in customs brokerage and other revenues
was due to the increase in drawback revenues from the acquisition of Gulf Coast
(See Note 15 to the Consolidated Financial Statements) and to the Company's
continuing efforts to expand its customs brokerage and other activities to new
and existing customers.
-16-
<PAGE>
United States internal operating expenses increased $13.0 million (6.8%) over
1997. The increase was primarily the result of the inclusion of expenses from
acquired companies, and the ongoing integration and expansion of management
information systems and facilities. As a percentage of gross revenues, internal
operating expenses increased to 33.7% in 1998 from 31.3% in 1997 and as a
percentage of net revenues, increased to 92.3% in 1998 from 89.1% in 1997,
resulting in a $6.3 million (27.1%) decrease in operating profit.
Foreign Operations
Foreign revenues decreased $27.5 million (2.9%) compared to 1997. Foreign
revenues were negatively impacted by approximately $57.1 million (Europe $7.1
million, Asia and Others $50.0 million) due to the effect of a stronger U.S.
dollar when converting foreign currency revenues into U.S. dollars for financial
reporting purposes. European revenues increased $12.3 million (2.6%) over 1997,
due to increases of $4.2 million (1.1%) in airfreight revenues, $2.8 million
(5.0%) in ocean freight revenues, and $5.3 million (13.2%) in customs brokerage
and other revenues. The increases in airfreight and ocean freight revenues were
attributable to greater shipping volumes from existing and new customers.
Customs brokerage and other revenues increased as a result of the increase in
the number of import clearances. Revenues in the Asia and Others region
decreased $39.7 million (8.5%) in 1998 compared to 1997. The decrease was
comprised of $32.2 million (9.3%) in airfreight revenues, $5.7 million (7.5%) in
ocean freight revenues, and $1.8 million (4.0%) in customs brokerage and other
revenues. The decline in airfreight revenues was primarily due to the weak
economies in Southeast Asia along with reduced shipping activity from some
selected major customers, particularly in Singapore, and the volume discounts
previously discussed. Excluding the effect from the sale of an affiliate in
1997, ocean freight revenues from continuing operations increased $9.0 million
(14.7%) due to increased shipping activity to new and existing customers.
Foreign operating profit decreased $2.5 million (5.3%) to $45.0 million compared
to 1997. The European region's operating profit decreased $3.6 million (15.4%)
compared to 1997. The decrease was mainly due to the declines in airfreight
shipments in the United Kingdom. Excluding the effect from the sale of an
affiliate in 1997, the Asia and Others region's operating profit increased $1.4
million (6.0%) over 1997.
-17-
<PAGE>
Results of Operations
1997 Compared to 1996
The following table sets forth the gross revenues and net revenues for each
service category, as well as the Company's internal operating expenses and
operating profit:
<TABLE>
<CAPTION>
1997 1996
($ in millions)
Gross Revenues:
<S> <C> <C>
Airfreight ..................................... $ 1,202.3 $ 1,026.5
Ocean freight .................................. 201.1 190.1
Customs brokerage and other .................... 142.3 118.9
Total Gross Revenues ............................. $ 1,545.7 $ 1,335.5
Net Revenues:
Airfreight ..................................... $ 310.1 $ 274.5
Ocean freight .................................. 58.1 51.9
Customs brokerage and other .................... 120.0 106.0
Total Net Revenues ............................... 488.2 432.4
Internal Operating Expenses:
Terminal ....................................... 266.9 234.6
Selling, general and administrative ............ 150.4 139.0
Total Internal Operating Expenses ................ 417.3 373.6
Operating Profit ................................. $ 70.9 $ 58.8
</TABLE>
Gross revenues increased $210.2 million (15.7%) in 1997 over 1996, reflecting
increases of $175.8 million (17.1%) in airfreight revenues, $11.0 million (5.8%)
in ocean freight revenues and $23.4 million (19.7%) in customs brokerage and
other revenues. The increase in revenues was negatively impacted by
approximately $50.2 million due to the effect of a stronger U.S. dollar when
converting foreign currency revenues into U.S. dollars for financial reporting
purposes. Net revenues increased $55.8 million (12.9%) to $488.2 million in 1997
with the increase comprised of $35.6 million (13.0%) in airfreight net revenues,
$6.2 million (11.9%) in ocean freight net revenues and $14.0 million (13.2%) in
customs brokerage and other net revenues. The increases in both gross and net
revenues from airfreight services were attributable to increased airfreight
shipping volumes, as the number of shipments increased 14.0% and the total
weight of cargo shipped increased 18.1% over 1996, and to higher prices
initiated by the Company in response to rate increases from the airlines. The
increases in gross and net revenues from ocean freight services were
attributable to greater shipping volumes from existing customers and the
Company's continuing penetration into the ocean freight market. The increases in
gross and net revenues from customs brokerage and other services were from the
Company's continuing efforts to expand its customs brokerage activities to
existing and new customers.
The Company's internal operating expenses increased $43.7 million (11.7%) in
1997 over 1996. The increase was attributable to the inclusion of operating
expenses from acquired companies and the greater volume of shipments handled. As
a percentage of gross revenues, internal operating expenses decreased to 27.0%
in 1997 from 28.0% in 1996 and as a percentage of net revenues, decreased to
85.5% in 1997 from 86.4% in 1996.
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<PAGE>
Consolidated operating profit increased $12.1 million (20.6%) over 1996 due
primarily to the growth in the Company's business and the improvement in
internal operating expenses as a percentage of gross and net revenues.
Interest expense, net improved $2.7 million to $1.4 million of interest income
in 1997 due primarily to the elimination of interest expense associated with the
conversion of the 6.0% Convertible Subordinated Debentures on or before July 8,
1996. Other, net increased $2.3 million to $6.9 million in 1997 due to a gain of
approximately $1.9 million on the sale of a foreign affiliate.
The Company's effective tax rate decreased to 37.5% compared to 38.0% in 1996.
The decrease was largely the result of a change in the geographic composition of
worldwide earnings to countries with lower effective income tax rates, along
with a reduction in the total nondeductible expenses as a percentage of pre-tax
income.
United States Operations
United States gross revenues increased $100.4 million (19.6%) to $612.2 million
in 1997 compared to 1996, reflecting increases of $83.9 million (20.8%) in
airfreight revenues, $9.0 million (15.0%) in ocean freight revenues and $7.5
million (15.3%) in customs brokerage and other revenues. The increase in
airfreight revenues was attributable to increased shipping volumes, as the
number of shipments increased 18.7% and the total weight of cargo shipped
increased 13.6% over 1996, and to higher prices initiated by the Company in
response to rate increases from the airlines. The significant increase in the
number of shipments was due to a large increase in United States domestic
shipments (the United States domestic business accounted for only 3.0% of
consolidated revenues for 1997). Excluding United States domestic shipments, the
increase in airfreight shipments was 2.7%. The increase in ocean freight revenue
was attributable to the Company's ongoing efforts to market its ocean freight
services to both existing and new customers. The increase in customs brokerage
and other revenues was from the Company's continuing efforts to expand its
customs brokerage activities to existing and new customers.
United States internal operating expenses increased $24.5 million (14.7%) over
1996. The increase was primarily the result of the inclusion of expenses from
acquired companies, increased volume of transactions handled, and the ongoing
integration and expansion of management information systems and facilities. As a
percentage of gross revenues, internal operating expenses decreased to 31.3%
from 32.7% in 1996 and as a percentage of net revenues, decreased to 89.1% in
1997 from 90.7% in 1996, resulting in a $6.3 million (36.7%) increase in
operating profit.
Foreign Operations
Foreign revenues increased $109.8 million (13.3%) in 1997 over 1996. The
increase in foreign revenues was negatively impacted by approximately $50.2
million (Europe $25.8 million, Asia and Others $24.4 million) due to the effect
of a stronger U.S. dollar when converting foreign currency revenues into U.S.
dollars for financial reporting purposes. European revenues increased $56.9
million (13.9%) over 1996, due to increases of $37.8 million (11.4%) in
airfreight revenues, $9.0 million (18.9%) in ocean freight revenues and $10.1
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<PAGE>
million (34.0%)in customs brokerage and other revenues. Revenues in the Asia and
Others region increased $52.9 million (12.8%) in 1997 over 1996, reflecting
increases of $54.1 million (18.6%) in airfreight revenues, $5.8 million (14.5%)
in customs brokerage and other revenues, and a $7.0 million (8.4%) decrease in
ocean freight revenues. Excluding the effects from the sale of an affiliate,
ocean freight revenues from continuing operations were marginally lower than
1996. The increase in airfreight revenues was attributable to greater shipping
volumes from existing and new customers. Customs brokerage and other revenues
increased primarily due to the increase in the number of import clearances.
Foreign operating profit increased $5.9 million (14.1%) in 1997 over 1996 to
$47.5 million. The European region's operating profit increased $6.4 million
(37.5%), while the Asia and Others region's operating profit decreased $.5
million (2.0%). The increase in European operating profit was attributable to
the higher revenues as airfreight shipments increased 10.5% and the weight of
cargo shipped increased 23.0%, and a decline in internal operating expenses as a
percentage of revenues. The $.5 million decrease in the Asia and Others region's
operating profit was attributable to Australia and New Zealand, where increased
competition in transporting cargo to and from Australia and New Zealand, and a
significant reduction in the exports of perishable produce, particularly to the
Far East, resulted in a reduction in operating profit for these countries. This
decline was offset in part by increases in operating profit from Asia, Africa,
South America and Others which make up the region.
Year 2000
In 1997, the Company undertook an assessment to determine the impact of Year
2000 compliance on its computer systems. This assessment resulted in preliminary
plans to prepare the Company for Year 2000 readiness. These plans include
remediation, upgrading or replacement of the Company's various systems including
those utilizing embedded technology. In accordance with Issue 96-14 of the
Emerging Issues Task Force of the Financial Accounting Standards Board, which
requires the costs associated with modifying computer software for the Year 2000
to be expensed as incurred, the Company will expense the costs incurred to
remediate the applicable systems. For 1998, the Company incurred approximately
$3.6 million of expense and approximately $1.0 million of expense in 1997. Year
2000 expense for 1999 is anticipated to be approximately $2.5 million.
The remediation of the Company's systems is expected to be 99% complete by the
end of the first quarter of 1999. Systems testing is scheduled to be completed
by the end of June 1999. The systems testing will verify existing functionality
and system operation before, during and after January 1, 2000. The testing will
place particular emphasis on the high risk dates of December 31, 1999, January
1, 2000, February 29, 2000, March 1, 2000, and March 1, 2001. The Company
believes that the remediation, upgrade and replacement of its systems will be
ready for Year 2000 prior to any impact on its operations. If, however, the
remediation, upgrade or replacement of the Company's systems is not completed
timely, and negatively impacts the Company's Year 2000 readiness, the Company's
operations may be materially adversely affected.
In connection with this effort, the Company has initiated a program to
communicate with its many customers and suppliers to determine the level of Year
2000 readiness of these entities and the potential impact on the Company's
operations if these entities' computer systems are not ready. This program
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<PAGE>
encompasses contacting the Company's major customers and its major suppliers -
airlines, steamship lines, trucking companies, handling agents, customs
authorities and other governmental agencies and financial institutions. During
the third quarter and early fourth quarter of 1998, questionnaires were sent to
the Company's significant suppliers. As of February 28, 1999, the Company
surveyed approximately 1,200 of its significant suppliers - approximately 50% of
those suppliers surveyed have advised the Company that they are currently Year
2000 compliant or expect compliance by September 30, 1999.
Those suppliers who advised the Company of compliance after February 28, 1999
or who have not responded to the Company, will receive additional communication
from the Company. Based upon responses, these suppliers will be evaluated for
their level of compliance. For those suppliers deemed "at risk" for
non-compliance, the Company will develop contingency plans wherever necessary.
Contingency plans will include: redeployment of existing personnel and employing
additional personnel to processes that were automated and will require manual
intervention due to Year 2000 non-compliance, selection of alternative air
carriers, steamship lines, trucking companies etc., customer notification of
possible service disruptions in markets where carriers, aviation and/or customs
authorities may not be Year 2000 compliant.
The Company's Year 2000 compliance evaluation of customers and suppliers is
ongoing and the potential impact of non-compliance by the Company's customers
and suppliers has not been determined. However, the Company does not warrant as
true and accurate any assurance it receives from customers and suppliers
regarding the compliance of its systems. The Company relies entirely on its
transportation suppliers' airlines, steamship lines and independent trucking
firms to transport its customers' cargo throughout its network. To the degree
that the operations of any number of transportation providers are adversely
effected by Year 2000, disruptions in the Company's business may occur which may
have a material adverse effect on the Company's operations.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Statement
establishes accounting and financial reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company does not anticipate that the
adoption of this Statement will have a material impact on either its results of
operations or financial position.
Forward-Looking Statements
Statements contained herein which are not historical facts are forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995). These statements are based upon information available to the
Company on the date hereof. Inherent in these statements are a variety of risks
and other factors, both known and unknown, which may cause the Company's actual
results to differ materially from those in forward-looking statements.
Accordingly, the realization of forward-looking statements is not certain, and
all such statements should be evaluated based upon the applicable risks and
uncertainties affecting the Company.
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<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
See Management Discussion and Analysis of Financial Condition and Results of
Operations (Item 7).
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this Item 8 are
included in the Company's Consolidated Financial Statements and set forth in the
pages indicated in Item 14(a) of this Annual Report.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information called for by this item is incorporated herein by reference to
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the Company's year end and to
be delivered by the Company to its shareholders in conjunction with the 1999
Annual Meeting of Shareholders.
Item 11. Executive Compensation
The information called for by this item is incorporated herein by reference to
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the Company's year end and to
be delivered by the Company to its shareholders in conjunction with the 1999
Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated herein by reference to
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the Company's year end and to
be delivered by the Company to its shareholders in conjunction with the 1999
Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
The information called for by this item is incorporated herein by reference to
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the Company's year end and to
be delivered by the Company to its shareholders in conjunction with the 1999
Annual Meeting of Shareholders.
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<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) The following documents are filed as a part of this report on Form 10-K.
(1) Financial Statements: Page
Report of Independent Public Accountants. F-1
Consolidated Balance Sheets as of December 31, 1998
and 1997. F-2
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996. F-3
Consolidated Statements of Stockholders' Investment
for the years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996. F-5
Notes to Consolidated Financial Statements. F-6
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts. F-24
All other financial statement schedules are omitted because they are not
applicable, not required, or because the required information is included in the
Company's Consolidated Financial Statements or Notes thereto.
Separate financial statements of the Company have been omitted since less
than 25% of the net assets of its subsidiaries and equity investments are
formally restricted from being loaned, advanced or distributed to the holding
company.
(3) Exhibits required to be filed by Item 601 of Regulation S-K:
3a. Certificate of Incorporation, as amended through June 18, 1998:
b. The Bylaws, as amended through March 22, 1992 (Incorporated herein
by reference to Exhibit 3 to the Company's Current Report on Form
8-K, filed March 22, 1992).
10. Material Contracts:
a. Employment Agreement, effective July 1, 1997 between the Company
and Hendrik J. Hartong, Jr.
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<PAGE>
b. Employment Agreement, effective January 1, 1986, between the
Company and Guenter Rohrmann (Incorporated herein by reference to
Exhibit10(iv) to the Company's Current Report on Form 8-K filed
March 22, 1991).
c. Air Express International Corporation 1984 International Employees'
Stock Option Plan (Incorporated herein by reference to the
Company's Proxy Statement, dated July 18, 1984, furnished to
stockholders in connection with the Annual Meeting of Stockholders
held on August 9, 1984).
d. Air Express International Corporation Employees' 1991 Incentive
Stock Option Plan, approved by the Shareholders of the Company on
June 20, 1991 (Incorporated herein by reference to the Company's
Proxy Statement, dated May 17, 1991, furnished to stockholders in
connection with the Annual Meeting of Stockholders held on June 20,
1991).
e. Air Express International Corporation Employees' 1996 Incentive
Stock Option Plan, as amended and approved by the Shareholders of
the Company on June 18, 1998 (Incorporated herein by reference to
the Company's Proxy Statement dated May 19, 1998, furnished to
stockholders in connection with the Annual Meeting of Stockholders
held on June 18, 1998).
f. Agreement and Plan of Reorganization dated May 3, 1995, by and
among RADIX VENTURES, INC., the Company, AEIC ACQUISITION
CORPORATION and THE SHAREHOLDER REPRESENTATIVES (as defined
therein) (Incorporated herein by reference to the Company's Report
on 10Q, filed August 11, 1995).
g. Industrial Development Revenue Bonds, due July 1, 2024, to finance
in part the development of an air cargo facility terminal building
at John F. Kennedy International Airport. (The Company is not
required to file this Indenture pursuant to Rule 601 (b)(iii). The
Company agrees that it will furnish a copy to the Commission upon
request).
21. Subsidiaries of the Registrant. Exhibit 21.
23. Consent of Independent Public Accountants. Exhibit 23.
27. Financial Data Schedule. Exhibit 27.
All other exhibits are omitted because they are not applicable, not required
or because the required information is included in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K: None.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AIR EXPRESS INTERNATIONAL CORPORATION
Registrant
By: /s/ Dennis M. Dolan
Dennis M. Dolan
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Martin J. McDonnell
Martin J. McDonnell
Vice President and Controller
(Principal Accounting Officer)
Date: March 30, 1999
-25-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ John M. Fowler Director March 30, 1999
(John M. Fowler)
/s/ Hendrik J. Hartong, Jr. Chairman of the Board
(Hendrik J. Hartong, Jr.) of Directors March 30, 1999
/s/ Donald J. Keller Director March 30, 1999
(Donald J. Keller)
/s/ Andrew L. Lewis IV Director March 30, 1999
(Andrew L. Lewis IV)
/s/ Richard T. Niner Director March 30, 1999
(Richard T. Niner)
/s/ John Radziwill Director March 30, 1999
(John Radziwill)
/s/ Guenter Rohrmann President, Chief Executive
(Guenter Rohrmann) Officer and Director
(Principal Executive Officer) March 30, 1999
/s/ Noel E. Vargas Director March 30, 1999
(Noel E. Vargas)
-26-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Air Express International Corporation:
We have audited the accompanying consolidated balance sheets of Air Express
International Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' investment and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Air Express International
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 26, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in thousands)
1998 1997
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents ........................... $ 60,246 $ 67,576
Accounts receivable (less allowance for doubtful
accounts of $5,112 and $4,224) ..................... 366,417 366,159
Marketable securities ............................... 7,188 --
Other current assets ................................ 7,096 8,344
Total current assets ............................ 440,947 442,079
Investment in unconsolidated affiliates .............. 29,507 19,174
Restricted funds ..................................... 2,126 15,957
Property, plant and equipment (less accumulated
depreciation of $70,515 and $57,235) ............... 81,178 60,441
Deposits and other assets ............................ 13,937 13,815
Goodwill (less accumulated amortization of $15,331
and $12,424) ........................................ 107,783 83,104
Total assets .................................... $ 675,478 $ 634,570
Liabilities and stockholders' investment
Current liabilities:
Current portion of long-term debt ................... $ 4,337 $ 2,654
Bank overdrafts payable ............................. 4,432 315
Transportation payables ............................. 157,763 174,125
Accounts payable .................................... 66,023 58,373
Accrued liabilities ................................. 72,780 61,263
Income taxes payable ................................ 6,644 10,168
Total current liabilities ....................... 311,979 306,898
Long-term debt ...................................... 42,578 31,008
Other liabilities ................................... 10,050 5,102
Total liabilities ............................... 364,607 343,008
Commitments and contingencies (Note 13)
Stockholders' investment:
Capital stock -
Preferred (authorized 1,000,000 shares,
none outstanding).................................. -- --
Common, $.01 par value (authorized 100,000,000
shares, issued 35,028,154 and 34,676,626 shares) .. 350 347
Additional paid-in capital ......................... 147,544 142,674
Accumulated other comprehensive income ............. (28,192) (28,961)
Retained earnings .................................. 216,763 180,887
336,465 294,947
Less: 1,217,586 and 132,388 shares of treasury
stock, at cost.................................. (25,594) (3,385)
Total stockholders' investment.................. 310,871 291,562
Total liabilities and stockholders' investment $ 675,478 $ 634,570
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
1998 1997 1996
<S> <C> <C> <C>
Revenues ...............................$ 1,513,196 $ 1,545,720 $ 1,335,447
Operating expenses:
Transportation ....................... 1,022,683 1,057,499 903,016
Terminal ............................. 276,789 266,897 234,636
Selling, general and administrative .. 151,650 150,412 139,040
1,451,122 1,474,808 1,276,692
Operating profit ....................... 62,074 70,912 58,755
Other income (expense):
Interest, net ........................ 2,076 1,360 (1,277)
Other, net ........................... 5,352 6,850 4,618
7,428 8,210 3,341
Income before provision for income taxes 69,502 79,122 62,096
Provision for income taxes ............. 25,746 29,671 23,596
Net income .............................$ 43,756 $ 49,451 $ 38,500
Net income per common share:
Basic ................................$ 1.27 $ 1.44 $ 1.23
Diluted ..............................$ 1.26 $ 1.41 $ 1.16
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additional Accumulated Other
Common Stock Paid-In Comprehesive Retained Treasury
Shares Amount Capital Income Earnings Stock Total
(Dollars in thousands)
<S> ................................... <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ............ 27,866,535 $ 279 $ 60,071 $ (12,539) $ 100,372 $ (617) $ 147,566
Exercise of common stock options ... 214,067 1 1,843 -- -- -- 1,844
Purchase of treasury stock ......... -- -- -- -- -- (55) (55)
Dividends declared ($.153 per share) -- -- -- -- (5,016) -- (5,016)
Stock issued for Muller acquisition 37,500 -- 802 -- -- -- 802
Stock issued for Lusk acquisition-
acquired under pooling of interests 1,124,991 12 67 -- 4,133 -- 4,212
Conversion of convertible
subordinated debentures ........... 4,936,134 50 74,277 -- -- -- 74,327
Comprehensive income:
Net income for the year .......... -- -- -- -- 38,500 -- 38,500
Translation of foreign currency
financial statements ............ -- -- -- (3,775) -- -- (3,775)
Income tax benefit ............... -- -- -- 681 -- -- 681
Total comprehensive income ...... -- -- -- -- -- -- 35,406
Balance, December 31, 1996 ............ 34,179,227 342 137,060 (15,633) 137,989 (672) 259,086
Exercise of common stock options ... 497,399 5 5,614 -- -- -- 5,619
Purchase of treasury stock ......... -- -- -- -- -- (2,713) (2,713)
Dividends declared ($.19 per share) -- -- -- -- (6,553) -- (6,553)
Comprehensive income:
Net income for the year .......... -- -- -- -- 49,451 -- 49,451
Translation of foreign currency
financial statements ............ -- -- -- (13,040) -- -- (13,040)
Income tax expense ............... -- -- -- (288) -- -- (288)
Total comprehensive income ...... -- -- -- -- -- -- 36,123
Balance, December 31, 1997 ............ 34,676,626 347 142,674 (28,961) 180,887 (3,385) 291,562
Exercise of common stock options ... 351,528 3 4,870 -- -- -- 4,873
Purchase of treasury stock ......... -- -- -- -- -- (22,209) (22,209)
Dividends declared ($.23 per share) -- -- -- -- (7,880) -- (7,880)
Comprehensive income:
Net income for the year .......... -- -- -- -- 43,756 -- 43,756
Translation of foreign currency
financial statements ............ -- -- -- (2,889) -- -- (2,889)
Unrealized gain on marketable
securities ...................... -- -- -- 7,019 -- -- 7,019
Income tax expense ............... -- -- -- (3,361) -- -- (3,361)
Total comprehensive income ...... -- -- -- -- -- -- 44,525
Balance, December 31, 1998 ............ 35,028,154 $ 350 $ 147,544 $ (28,192) $ 216,763 $ (25,594) $ 310,871
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
1998 1997 1996
Cash flows from operating activities:
<S> <C> <C> <C>
Net Income ...................................... $ 43,756 $ 49,451 $38,500
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense ......................... 14,706 13,282 10,310
Amortization of goodwill ..................... 2,715 2,563 2,370
Amortization of bond discount ................ -- -- 115
Deferred income taxes ........................ 2,374 527 1,400
Equity in earnings of unconsolidated
affiliates .................................. (2,809) (2,993) (1,276)
(Gains) losses on sales of assets, net ....... (8) 34 (164)
(Gain) on sale of affiliate .................. -- (1,876) --
Changes in assets and liabilities, net of
business acquisitions:
Decrease (increase) in accounts receivable, net 10,205 (26,031) (51,565)
Decrease (increase) in other current assets ... 2,036 (2,274) 25
(Increase) in other assets ..................... (1,843) (2,362) (837)
(Decrease) increase in transportation payables . (20,538) 9,271 2,051
(Decrease) increase in accounts payable ........ (625) 10,455 291
Increase in accrued liabilities ............... 6,958 590 11,585
(Decrease) increase in income taxes payable .... (3,548) (3,534) 3,814
Increase in other liabilities ................. 1,685 1,508 169
Total adjustments ........................... 11,308 (840) (21,712)
Net cash provided by operating activities ..... 55,064 48,611 16,788
Cash flows from investing activities:
Business acquisitions, net of cash acquired ...... (19,501) -- (15,393)
Restricted funds ................................. 13,831 (15,957) --
Other investing activities ....................... 1,816 700 (1,653)
Proceeds from sales of assets .................... 952 444 436
Proceeds from sale of affiliate, net of
cash given ...................................... -- 2,003 --
Capital expenditures ............................. (35,957) (18,732) (13,826)
Investment in unconsolidated affiliates .......... (7,139) (4,164) (70)
Net cash used in investing activities ......... (45,998) (35,706) (30,506)
Cash flows from financing activities:
Net borrowings (repayments) in bank overdrafts
payable .......................................... 3,870 (1,522) 1,573
Additions to long-term debt ...................... 9,158 19,000 9,737
Payment of long-term debt ........................ (2,828) (2,902) (1,904)
Issuance of common stock ......................... 3,975 5,619 1,844
Payment of cash dividends ........................ (7,579) (6,189) (4,581)
Purchase of treasury stock ....................... (22,209) (2,713) (55)
Net cash (used) provided by financing
activities ................................... (15,613) 11,293 6,614
Effect of foreign currency exchange rates on cash .. (783) (3,138) (843)
Net (decrease) increase in cash and cash equivalents (7,330) 21,060 (7,947)
Cash and cash equivalents at beginning of year ..... 67,576 46,516 54,463
Cash and cash equivalents at end of year ...........$ 60,246 $ 67,576 $ 46,516
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
F-5
<PAGE>
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(1) Summary of Significant Accounting Policies:
Principles of Consolidation -
The consolidated financial statements include the accounts of Air Express
International Corporation and its majority-owned subsidiaries (the "Company"),
all of which conduct operations within a single business segment providing
integrated logistic services. All significant intercompany accounts and
transactions have been eliminated. Investments in 20.0% to 50.0%-owned
affiliates are accounted for using the equity method.
With the exception of entities operating in highly inflationary economies,
assets and liabilities of foreign subsidiaries are translated at rates of
exchange in effect at the close of the period. Revenues and expenses are
translated at average exchange rates in effect during the year. The resulting
translation adjustments are recorded as a component of other comprehensive
income in the Consolidated Statements of Stockholders' Investment. Translation
gains or losses of the Company's entities which operate in highly inflationary
economies are included in the Consolidated Statements of Operations.
Accounting Estimates -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from these estimates.
Cash and Cash Equivalents -
Cash and cash equivalents include cash on hand, demand deposits and short-term
investments with original maturities of three months or less.
Transportation Payables -
Transportation payables represent the Company's largest trade payables which are
mainly due to airlines, steamship and trucking companies.
F-6
<PAGE>
Property, Plant and Equipment -
The Company provides for depreciation using the straight-line method over the
estimated useful lives of the related assets. Maintenance and repairs are
charged to expense as incurred.
Estimated Useful Life
Buildings and improvements 25-40 years
Furniture and fixtures 3-10 years
Automotive equipment 3-5 years
Terminal and data processing equipment 3-5 years
Leasehold improvements Life of lease or estimated
useful life, if shorter
Goodwill -
Goodwill, which represents the excess of purchase price over the fair value of
net assets acquired, is being amortized on a straight-line basis over periods
not exceeding 40 years. When deemed necessary, the Company analyzes the value of
goodwill based upon the projected, undiscounted, net cash flows of the related
business unit. Impairment would be recognized in operating results if permanent
diminution in value were to occur.
Method of Revenue and Expense Recognition -
International revenues from the transportation of international freight are
recognized at the time the freight has been exported from the country of origin
via commercial carrier. The corresponding transportation costs charged by the
commercial carriers are recognized concurrently with the freight revenues.
Destination delivery costs are recognized as incurred and subsequently billed to
consignees, except door-to-door cargo movements which are accrued concurrently
with freight revenue recognition. Domestic revenues from the transportation of
freight within the United States are recognized on the day freight departs the
Company's terminal of origin. Transportation costs and destination delivery
costs are recognized concurrently with freight revenues. For both international
and domestic revenues, the above methods of revenue recognition approximate
recognizing revenues and expenses when a shipment is completed.
Reclassifications and New Accounting Standards -
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130 - "Reporting Comprehensive Income," SFAS No. 131 -
"Disclosures about Segments of an Enterprise and Related Information" and SFAS
No. 132 - "Employees' Disclosures about Pensions and Other Postretirement
Benefits." These standards increased financial reporting disclosures and had no
impact on the Company's financial position or results of operations. Certain
reclassifications have been made to the December 31, 1997 and 1996 Consolidated
F-7
<PAGE>
Financial Statements to conform with the financial reporting requirements of
SFAS No. 130 (See Consolidated Statements of Stockholders' Investment) SFAS No.
131 (See Note 6 to the Consolidated Financial Statements) and SFAS No. 132 (See
Note 12 to the Consolidated Financial Statements). Additionally, the Company
adopted Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Adoption of this statement of
position did not have a material impact on the Company's results of operation or
financial position.
Recently Issued Accounting Standards -
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Statement
establishes accounting and financial reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company does not anticipate that the
adoption of this Statement will have a material impact on either its results of
operations or financial position.
(2) Marketable Securities:
At December 31, 1998, the Company held an investment in equity shares of Equant
N.V., an international data network service provider, of which 30% represent
marketable securities. The remaining shares are not currently marketable and are
carried at cost of $.4 million in the accompanying balance sheet. The marketable
securities were classified as available-for-sale and were carried at fair value
which was based upon quoted prices. Unrealized gains and losses, net of tax,
were reported as a component of other comprehensive income. At December 31,
1998, the fair value, cost, and unrealized gain on the shares was approximately
$7.2 million, $.2 million, and $7.0 million, respectively. During the first
quarter of 1999, the Company sold these marketable securities for a pre-tax gain
of approximately $7.9 million and a net after-tax gain of approximately $4.7
million, or $.14 per diluted share. The sale will be recorded in the Company's
1999 first quarter results.
(3) Common Stock Split:
On June 19, 1997, the Company's Board of Directors declared a three-for-two
split of the Company's Common Stock, payable in the form of a stock dividend.
The additional shares were distributed on July 25, 1997 to shareholders of
record on July 11, 1997. Accordingly, all share and per share information
throughout the consolidated financial statements was restated to reflect the
split.
F-8
<PAGE>
(4) Earnings Per Share:
Basic earnings per share is computed by dividing net income by the
weighted-average common shares outstanding during the year. Diluted earnings per
share is computed by dividing net income by the weighted-average common shares
and common share equivalents outstanding during the year. For the year 1996,
diluted earnings per share was calculated assuming the conversion of the
convertible subordinated debentures outstanding for the year, and the
elimination of the related interest expense, net after tax, which approximated
$1.5 million.
The basic and diluted earnings per share and number of common shares and common
share equivalents were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Earnings per share:
<S> <C> <C> <C>
Basic .......................................... $ 1.27 $ 1.44 $ 1.23
Diluted ........................................ $ 1.26 $ 1.41 $ 1.16
Common shares and common share
equivalents (in thousands):
Weighted-average shares outstanding ............ 34,359 34,356 31,377
Basic shares ................................... 34,359 34,356 31,377
Shares issuable with respect to subordinated
convertible securities and additional common
share equivalents (stock options) ............. 428 742 3,218
Diluted equivalent shares ...................... 34,787 35,098 34,595
</TABLE>
(5) Restricted Funds:
The restricted funds consist of cash and investments held in trust and committed
for the construction of an air cargo facility terminal building in accordance
with the Company's bond indenture (See Note 9 to the Consolidated Financial
Statements). Investments are stated at cost, which approximates market, as it is
the intent of the Company to hold the investments until maturity. The funds are
invested in compliance with the Company's bond indenture which restricts the
type, quality and maturity of investments.
F-9
<PAGE>
(6) Regional Operations:
The Company operates its integrated logistics business as a single segment
comprised of three major services: airfreight forwarding, ocean freight
forwarding, and customs brokerage and other services, all of which are fully
integrated.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
Revenues by service:
<S> <C> <C> <C>
Airfreight ........................ $1,158,338 $1,202,332 $1,026,476
Ocean freight ..................... 201,700 201,083 190,082
Customs brokerage & other ......... 153,158 142,305 118,889
Total revenues .................... $1,513,196 $1,545,720 $1,335,447
Revenues by geographic area:
U.S.A ............................. $ 607,145 $ 612,191 $ 511,759
United Kingdom ................... 159,657 167,185 152,724
Other ............................ 319,522 299,727 257,303
Europe ............................ 479,179 466,912 410,027
Asia and Others ................... 426,872 466,617 413,661
Total foreign ................... 906,051 933,529 823,688
Total revenues .................... $1,513,196 $1,545,720 $1,335,447
Operating profit by
geographic area:
U.S.A ............................. $ 17,061 $ 23,389 $ 17,107
Europe ............................ 19,709 23,295 16,943
Asia and Others ................... 25,304 24,228 24,705
Total foreign ................... 45,013 47,523 41,648
Total operating profit ............ $ 62,074 $ 70,912 $ 58,755
Long-lived assets by
geographic area:
U.S.A ............................. $ 127,436 $ 100,560 $ 74,901
Europe ............................ 55,560 45,578 50,035
Asia and Others ................... 48,800 42,047 49,850
Total foreign ................... 104,360 87,625 99,885
Total long-lived assets ........... $ 231,796 $ 188,185 $ 174,786
</TABLE>
F-10
<PAGE>
(7) Property, Plant and Equipment:
A summary of property, plant and equipment, at cost, is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Buildings and improvements ......................... $ 44,700 $ 29,555
Leasehold improvements ............................. 11,419 10,620
Automotive equipment ............................... 2,933 4,064
Furniture and fixtures ............................. 26,052 20,345
Terminal and data processing equipment ............. 61,059 47,690
146,163 112,274
Less: accumulated depreciation ..................... (70,515) (57,235)
75,648 55,039
Land ............................................... 5,530 5,402
Property, plant and equipment, net ................. $ 81,178 $ 60,441
</TABLE>
(8) Revolving Credit Loan Agreement and Other Short-Term
Borrowing Facilities:
The Company maintains a $75.0 million unsecured Revolving Credit Loan Agreement
(the "Agreement"). The Agreement with a syndicated group of U.S. banks has a
three-year term which expires in June 2001 with the option to extend annually on
the anniversary date. The interest charged on borrowings is the bank's prime
rate, or London Interbank Offered Rate (LIBOR) plus .25% to .50% per annum. The
Company is required to pay an annual facility fee at a variable rate of .12% to
.25% on the maximum amount available under the Agreement. Among the various
covenants contained in this Agreement, the Company is required to maintain
certain ratios and balances as to minimum stockholders' investment, debt to
stockholders' investment and fixed charge coverage. The Company is in compliance
with all financial covenants of the Agreement, as of December 31, 1998. At
December 31, 1998, the Company was utilizing approximately $3.2 million under
this facility primarily for letters of credit issued in connection with the
Company's insurance programs.
A number of the Company's foreign subsidiaries have unsecured short-term
overdraft facilities with foreign banks which approximated $22.2 million at
December 31, 1998. The largest single facility, extended to the Company's
Netherlands subsidiary, was approximately $6.0 million. Borrowings under these
facilities generally bear interest at .5% to 2.0% over the foreign banks'
equivalent of the prime rate. At December 31, 1998, outstanding borrowings from
these facilities were approximately $4.4 million.
F-11
<PAGE>
(9) Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Industrial Development Revenue Bonds ................... $ 19,000 $ 19,000
Term Loan Ireland- principal paid monthly through
2005, in local currency, bearing interest at 4.37% .... 8,030 --
Term Loan Holland-principal paid quarterly through
2004, in local currency, bearing interest at 4.30% .... 6,779 7,190
Note Payable-principal due in 2003, bearing interest
at 6.0% ............................................... 6,000 --
Term Loan Singapore - principal paid semi-annually
through 2007, in local currency, bearing interest
at 4.90% .............................................. 4,263 3,952
Mortgage Australia - principal paid quarterly through
2002, in local currency, bearing interest at
10.2% payable monthly ................................. 1,393 1,902
Mortgage Holland - principal paid quarterly through
2002, in local currency, bearing interest at 8.51% .... 808 938
Other long-term debt ................................... 642 680
46,915 33,662
Less: current portion .................................. (4,337) (2,654)
$ 42,578 $ 31,008
</TABLE>
The maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending Principal
December 31, Amount
<S> <C> <C>
1999 $ 4,337
2000 3,504
2001 3,476
2002 3,271
2003 and beyond 32,327
$46,915
</TABLE>
The combined carrying value of the assets collateralized under mortgages was
approximately $7.1 million at December 31, 1998.
On July 1, 1997, as part of a lease development agreement entered into with the
New York City Industrial Development Agency, the Company issued $19.0 million of
Industrial Development Revenue Bonds ("Bonds"), due July 1, 2024, to finance in
part the development of an air cargo facility terminal building at John F.
Kennedy International Airport. The Bonds are fully secured by an irrevocable
direct-pay letter of credit issued by a U.S. bank with a termination date of
July 16, 2002. The Company is obligated under agreement to reimburse the bank
for amounts drawn under the letter of credit. At the direction of the Company,
the Bonds may be redeemed in whole or in part prior to maturity date.
The Bonds were issued with a variable interest rate based upon a Weekly Rate (as
determined by a Remarketing Agent) which is the minimum rate necessary for the
Remarketing Agent to sell the Bonds on the effective date of such Weekly Rate at
F-12
<PAGE>
(9) Long-Term Debt - continued:
a price equal to 100% of the Bonds' principal amount without regard to accrued
interest. The Company may from time to time change the method of determining the
interest rate to a daily, weekly, commercial paper or long-term interest rate.
However, in no event shall the interest rate exceed the maximum annual interest
rate of 15%. For 1998, the interest rate on the Bonds ranged between 2.9% and
4.5%.
The Singapore term loan is a two-tranche, fully secured loan facility for the
construction of warehouse and distribution facilities. The first tranche is
fully utilized bearing a 4.90% interest rate for the first five years of the
loan and thereafter at the rate per annum exceeding by 1.25% the six-month SWAP
Offer Rate. At December 31, 1998, the second tranche had an available balance of
approximately $9.7 million of which approximately $.7 million was utilized.
At December 31, 1998, the fair value of the Company's long-term debt
approximated the carrying amount of $46.9 million.
Interest expense on long-term debt for the years ended December 31, 1998, 1997
and 1996 was approximately $.9 million, $1.0 million and $3.3 million,
respectively.
(10) Common Stock Option Plans:
The Company has three fixed stock option plans: the 1984 International
Employees' Stock Option Plan ("International Plan") and the 1991 and 1996
Employees Incentive Stock Plans ("Incentive Plans"). Under all three plans, the
Company may grant options to its officers and employees at prices equal to or
greater than the fair market value of the common stock on the date of the grant.
Additionally, under both Incentive Plans, the Company may grant stock
appreciation rights (SAR's) to employees at prices equal to or greater than the
fair market value of the common stock on the date of the grant. To date, no
SAR's have been granted. For all plans, options become exercisable over a
four-year vesting period and expire five years after the grant date. Under the
combined plans, 5,400,000 shares of the Company's Common Stock were authorized.
The Company applies APB 25 and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
these plans. Had compensation cost for the Company's option plans been
determined based upon the fair value at the grant dates for awards under these
plans consistent with the method set forth under FASB Statement 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
Net Income:
<S> <C> <C> <C>
As reported .......... $ 43,756 $ 49,451 $ 38,500
Pro forma ............ $ 40,784 $ 47,574 $ 37,409
Earnings Per share:
Basic -
As reported .......... $ 1.27 $ 1.44 $ 1.23
Pro forma ............ $ 1.19 $ 1.38 $ 1.19
Diluted -
As reported .......... $ 1.26 $ 1.41 $ 1.16
Pro forma ............ $ 1.17 $ 1.36 $ 1.12
</TABLE>
F-13
<PAGE>
(10) Common Stock Option Plans - continued:
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: expected
volatility of 27.0%, 27.0% and 28.0%, risk-free interest rates of 5.5%, 6.2% and
6.3%, dividend yield of .9% for 1998; .8% for 1997 and 1.2% for 1996 and an
expected life of four years for all years.
A summary of the status of the Company's fixed stock option plans as of December
31, 1998, 1997 and 1996, and the changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted-Average Weighted-Average Weighted-Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding
Beginning of Year ...... 2,349,270 $ 18.15 1,990,450 $ 12.99 2,072,517 $ 12.32
Options Granted ......... 160,500 26.33 1,011,375 24.48 132,000 16.49
Options Exercised ....... (351,528) 11.36 (497,398) 11.30 (214,067) 8.61
Options Canceled or
Expired ................ (65,616) 11.83 (155,157) 15.01 -- --
Options Outstanding
End of Year ............ 2,092,626 $ 20.13 2,349,270 $ 18.15 1,990,450 $ 12.99
Options Exercisable
End of Year ............ 956,412 790,590 789,897
Weighted-Average Fair
Value of Options Granted
During the Year ........ $ 7.33 $ 7.23 $ 4.76
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range of Number Weighted-Average Number
Exercise Outstanding Years Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/98 Contract Life Exercise Price at 12/31/98 Exercise Price
<S> <C> <C> <C> <C> <C> <C>
$ 8.53 $15.50 189,224 .2 $ 9.63 183,592 $ 9.45
$ 15.83 $18.24 794,415 1.5 $ 15.95 536,701 $ 15.91
$ 20.42 $37.30 1,108,987 3.6 $ 24.91 236,119 $ 24.66
2,092,626 956,412
</TABLE>
F-14
<PAGE>
(11) Income Taxes:
The Company and its domestic subsidiaries file a consolidated U.S. Federal
income tax return. Foreign subsidiaries file separate corporate income tax
returns in their respective countries. The components of income before provision
for income taxes and the current and deferred components of the provision for
income taxes were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
Income before provision for income
taxes:
<S> <C> <C> <C>
U.S ............................ $ 23,813 $ 31,767 $ 20,204
Foreign ........................ 45,689 47,355 41,892
$ 69,502 $ 79,122 $ 62,096
Current provision:
U.S. Federal ................... 7,194 10,837 6,346
Foreign ........................ 15,021 16,357 14,494
State .......................... 1,157 1,950 1,356
23,372 29,144 22,196
Deferred provision:
U.S. Federal ................... 1,877 621 1,368
Foreign ........................ 228 (187) (165)
State .......................... 269 93 197
2,374 527 1,400
Total provision for income taxes ...... $ 25,746 $ 29,671 $ 23,596
</TABLE>
The provision for income taxes includes deferred taxes resulting from the
recognition of certain revenues and expenses in different periods for financial
reporting purposes than for tax reporting purposes. The components of the
provision for deferred taxes were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net change in allowance for doubtful accounts
and other reserves ...............................$ 1,566 $ (264) $ 768
Undistributed earnings of unconsolidated
affiliates........................................ 575 1,124 544
Accelerated depreciation .......................... 106 260 294
Net unrealized foreign exchange gains (losses) .... 127 (593) (206)
$ 2,374 $ 527 $ 1,400
</TABLE>
F-15
<PAGE>
(11) Income Taxes - continued:
The difference between the actual provision and the amount computed at the
statutory U.S. Federal income tax rate of 35.0% for 1998, 1997 and 1996 is
attributable to the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Income before provision for income taxes .... $ 69,502 $ 79,122 $ 62,096
Tax provision computed at statutory rate .... $ 24,326 $ 27,693 $ 21,734
Increases (reductions) in tax provision
due to:
Benefit of operating loss carryforwards .. (470) (356) (523)
Net operating losses for which no tax
benefit has been recognized ............ 605 778 455
Goodwill amortization .................... 845 846 802
Other nondeductible expenses ............. 582 337 879
Foreign income taxed at different rates .. (1,654) (1,643) (1,304)
State income tax, net of Federal tax
benefit ................................. 1,406 2,043 1,553
Other .................................... 106 (27) --
Total provision for income taxes ............ $ 25,746 $ 29,671 $ 23,596
</TABLE>
For tax reporting purposes, the Company and its subsidiaries had available,
dependent upon future taxable income, the following net operating loss
carryforwards as of December 31, 1998:
<TABLE>
<CAPTION>
Expiring In Net Operating Losses
<S> <C> <C>
2000 $ 66
2001 33
2002 580
2003 276
2004 54
No Expiration 16,716
$ 17,725
</TABLE>
The net operating losses include $7.5 million incurred by companies prior to
their acquisition by the Company. Future utilization of the $7.5 million in net
operating losses will be treated as a reduction of goodwill. The use of any loss
carryforwards is dependent upon future taxable income in the applicable taxing
jurisdiction.
F-16
<PAGE>
(11) Income Taxes - continued:
Accumulated unremitted earnings of foreign subsidiaries, which are intended to
be permanently reinvested for continued use in their operations and for which no
U.S. income taxes have been provided, aggregated approximately $170.9 million at
December 31, 1998.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Reserves for doubtful accounts and other
operating reserves ............................ $ 4,538 $ 5,379
Net operating losses ........................... 7,710 7,081
Realized foreign exchange losses ............... -- 49
Unrealized tax translation ..................... 279 --
Tax credits .................................... -- 480
Total deferred tax assets: .................. 12,527 12,989
Valuation allowance ............................ (6,750) (6,121)
Net deferred tax asset ...................... $ 5,777 $ 6,868
Deferred tax liabilities:
Realized foreign exchange gains ................ $ 78 $ --
Depreciation ................................... 594 487
Undistributed earnings of
unconsolidated affiliates ..................... 3,036 2,462
Other .......................................... 210 205
Unrealized gain on sale of securities .......... 2,892 --
Total deferred tax liabilities: ............. 6,810 3,154
Net deferred tax liability (asset) ............. $ 1,033 $ (3,714)
</TABLE>
F-17
<PAGE>
(12) Retirement Plans:
The Company maintains a 401(k) Retirement Plan, covering substantially all U.S.
employees not participating in collective bargaining agreements. The Company
contributes 3.0% of salary for all eligible participants. In addition, the
Company matches, dollar for dollar, employee contributions up to 3.0% of salary,
subject to certain limitations imposed by the Internal Revenue Code. The total
expense for Company contributions was $2.8 million in 1998, $3.0 million in 1997
and $2.8 million in 1996.
Pursuant to collective bargaining agreements with its labor unions, the Company
made payments to union-sponsored, multi-employer pension plans, based upon the
hours worked by covered employees. Such payments approximated $1.8 million in
1998, $1.7 million in 1997 and $1.4 million for 1996. These amounts were
determined by the union contracts, and the Company does not administer or
control the funds. In the event of plan terminations or Company withdrawal from
the plans, the Company may be liable for a portion of the plans' unfunded vested
benefits, if any. In 1994 the Company recorded a pre-tax charge in the amount of
$1.0 million for the Company's estimated portion of its unfunded vested
liability to one multi- employer pension plan. The Company accrued interest on
this amount in 1995 and 1996 and subsequently paid approximately $1.6 million in
the third quarter of 1996 to the Plan's trustees in full settlement of the
unfunded vested liability.
One foreign subsidiary maintains a defined benefit pension plan ("the Plan")
which covers substantially all of its employees. The Plan provides benefits
based upon years of service and compensation which are in addition to certain
retirement benefits accruing to the employees under government regulations.
Participating employees contribute 5.0% of their annual compensation to the
Plan.
The net periodic pension costs for the years ended December 31, 1998, 1997 and
1996 for the Plan are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Service cost ............................... $ 1,515 $ 789 $ 733
Interest cost .............................. 2,180 1,579 1,328
Expected return on assets .................. (2,597) (2,331) (1,841)
Net amortization and deferral .............. 241 1,333 643
Net periodic pension expense ........ ...... $ 1,339 $ 1,370 $ 863
</TABLE>
F-18
<PAGE>
(12) Retirement Plans - continued:
The funding of the Plan is actuarially determined. The Plan's assets are
invested primarily in equity securities, and contributions were made by the
Company to the Plan in 1998, 1997 and 1996. The change in benefit obligation,
plan assets and reconciliation of funded status for 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
Change in benefit obligation:
<S> <C> <C>
Benefit obligation at beginning of year .......... $ 31,350 $ 17,631
Service cost ..................................... 1,515 789
Interest cost .................................... 2,180 1,579
Employee contributions ........................... 663 655
Actuarial losses ................................. 2,245 11,608
Benefits paid .................................... (456) (354)
Foreign currency exchange rate changes ........... (51) (558)
Benefit obligation at end of year ................ 37,446 31,350
Change in plan assets:
Fair value of plan assets at beginning of year ... 26,532 22,338
Actual return .................................... 1,880 3,301
Company contribution ............................. 1,472 1,370
Employee contributions ........................... 663 655
Benefits paid .................................... (456) (354)
Foreign currency exchange rate changes ........... (35) (778)
Fair value of plan assets at end of year ......... 30,056 26,532
Funded status .................................... (7,390) (4,818)
Unrecognized transition obligation ............... 7,390 4,818
Prepaid (accrued) pension cost ................... $ -- $ --
</TABLE>
The major assumptions used in determining the funded status of the Plan are set
forth below. The first two assumptions are used in determining the Plan's funded
status, whereas all three assumptions are used in determining the net periodic
pension cost. These assumptions approximate the rates prevailing in the
applicable foreign country.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Discount rate ................................ 6.0 % 7.0 % 8.5 %
Rate of increase in future compensation ...... 4.0 % 5.0 % 5.0 %
Long-term investment return .................. 9.0 % 9.5 % 10.5 %
</TABLE>
Many of the Company's other foreign subsidiaries maintain defined contribution
or similar plans covering substantially all of their employees. The plan
benefits are funded essentially through insurance companies using deferred
annuity contracts. The cost is funded on an annual basis by the foreign
subsidiary and the employee, if the plan is contributory. For the years ended
December 31, 1998, 1997 and 1996, pension expense for these plans approximated
$4.4 million, $5.0 million and $4.7 million, respectively.
The Company does not sponsor any material retirement benefits other than
pensions. Post- employment benefits other than pensions are insignificant.
F-19
<PAGE>
(13) Commitments and Contingencies:
The Company is obligated under long-term operating lease agreements for computer
equipment, terminal facilities and automotive equipment. At December 31, 1998,
the minimum annual rentals under these long-term leases were as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
<S> <C> <C>
1999 $33,030
2000 30,084
2001 25,933
2002 18,844
2003 14,015
2004 and thereafter 58,685
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, rental expense for assets
leased under long-term operating lease agreements approximated $28.7 million,
$23.3 million and $23.1 million, respectively.
The Company is involved in various legal proceedings generally incidental to its
business. While the result of any litigation contains an element of uncertainty,
the Company presently believes that the outcome of any known pending or
threatened legal proceeding or claim, or all of them combined, will not have a
material adverse effect on its results of operations or consolidated financial
position.
(14) Foreign Currency Translation:
The Company purchases foreign currency forward exchange contracts to hedge its
foreign currency exposures associated with investments in certain foreign
operations and certain intercompany transactions. The Company does not use these
contracts for trading purposes. At December 31, 1998, the carrying value of
these contracts represents approximately $.1 million of net unrealized gains,
which was determined from the fair valuation of such contracts, and is included
in other current assets in the accompanying balance sheet. The aggregate
notional amount of these contracts, which will mature at various dates in 1999,
was $10.2 million at December 31, 1998.
Gains or losses resulting from forward exchange contracts purchased to hedge
investments in certain foreign subsidiaries are excluded from the statement of
operations and are recorded, net of tax, as a component of accumulated other
comprehensive income. In 1998, the Company recognized a $1.9 million gain on
these contracts compared with a $1.3 million gain in 1997.
F-20
<PAGE>
(14) Foreign Currency Translation - continued:
The Company recognizes, in foreign exchange gains, gains and losses on forward
exchange contracts purchased to hedge certain intercompany transactions. In
1998, the Company recognized a $.2 million pre-tax gain on these contracts.
Additionally, both gains and losses from other foreign currency transactions and
translation gains and losses of subsidiaries operating in highly inflationary
economies are recognized in Other, net (See Note 16 to the Consolidated
Financial Statements).
The Company operates in many countries throughout the world, resulting in
significant sums of money collected in various local currencies. There are risks
from fluctuations in the value of these currencies, devaluations, or other
actions and events which may result in the Company carrying assets in foreign
currencies that are not easily convertible, or not convertible at all, into U.S.
dollars. These foreign currency assets are included in the Company's net
investment in its foreign operations. From time to time and when feasible and
cost effective, the Company seeks to minimize the effect of fluctuations in the
values of foreign currencies on its financial position through the purchase of
foreign currency forward exchange contracts.
(15) Acquisitions:
During 1998, the Company made five acquisitions: Aero Expreso Internacional
("Aero Expreso"), Gulf Coast Drawback Services, Inc. ("Gulf Coast"), Associated
Customhouse Brokers, Inc. ("ACB"), Translink Group of Companies ("Translink"),
and AEI Hannover Gmbh ("Hannover"). Aero Expreso, based in Buenos Aires, is a
long-time agent of the Company and the largest inbound forwarder and customs
broker in Argentina. Gulf Coast is the largest provider of specialized duty
drawback services in the United States. ACB, headquartered in Rochester, New
York, provides customs brokerage and freight forwarding services primarily in
the upstate New York region. Translink is an Ireland-based air and ocean freight
forwarder providing services to major multi-national and Irish customers
predominately across the U.S. - Ireland trade lanes. Hannover was the Company's
exclusive agent based in Hannover, Germany. The total paid for these
acquisitions was approximately $29.0 million, which was comprised of $23.0
million of cash and a $6.0 million note. The acquisitions were accounted for as
purchases. Accordingly, the purchase price was allocated on the basis of the
estimated fair market value of the assets acquired and the liabilities assumed.
The total cost in excess of the net assets acquired was approximately $27.4
million, which is being amortized over 40 years. The results of operations for
these acquisitions were included in the Consolidated Statement of Operations
from the dates of acquisition and had no material pro forma impact on the
Company's results of operations or financial position.
F-21
<PAGE>
(16) Other, net:
Other, net consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Equity in earnings of unconsolidated
affiliates ........................... $ 4,696 $ 3,743 $ 2,578
Gain on sale of affiliate .............. -- 1,876 --
Foreign exchange gains ................. 648 1,265 1,876
Gains (losses) on sales of assets ...... 8 (34) 164
$ 5,352 $ 6,850 $ 4,618
</TABLE>
(17) Supplemental Disclosures of Cash Flow Information:
Interest and income taxes paid were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Interest ....................... $ 1,314 $ 1,182 $ 3,020
Income Taxes ................... $26,781 $28,270 $17,064
</TABLE>
Noncash investing and financing activities:
In 1998, as part of an acquisition, the Company issued a $6.0 million note (See
Note 15 to the Consolidated Financial Statements).
On July 8, 1996, as a result of debenture conversions, the Company issued
4,936,134 shares of its Common Stock valued at approximately $74.4 million.
F-22
<PAGE>
(18) Quarterly Revenues and Earnings (Unaudited):
<TABLE>
<CAPTION>
Quarter
1st 2nd 3rd 4th *
Year Ended December 31, 1998
<S> <C> <C> <C> <C>
Revenues ...................... $372,376 $378,494 $372,961 $389,365
Operating profit .............. $ 13,156 $ 19,637 $ 18,630 $ 10,651
Net income .................... $ 9,730 $ 13,661 $ 13,010 $ 7,355
Income per common share:
Basic ....................... $ .28 $ .39 $ .38 $ .22
Diluted ..................... $ .28 $ .39 $ .38 $ .22
Year Ended December 31, 1997
Revenues ...................... $351,155 $386,591 $395,405 $412,569
Operating profit .............. $ 12,287 $ 19,411 $ 19,738 $ 19,476
Net income .................... $ 8,539 $ 13,042 $ 13,363 $ 14,507
Income per common share:
Basic ....................... $ .25 $ .38 $ .39 $ .42
Diluted ..................... $ .25 $ .37 $ .38 $ .41
</TABLE>
* The fourth quarter of 1998 included a one-time pre-tax charge of $3.6
million or $2.2 million after tax ($.06 per diluted share) in connection
with a contract settlement with a major customer. The fourth quarter of
1997 included a one-time pre-tax gain of $1.9 million or $1.2 million after
tax ($.03 per diluted share) related to the sale of a foreign affiliate.
F-23
<PAGE>
<TABLE>
<CAPTION>
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
Net
Balance at Write-offs Balance
Beginning Charges Charged to at End
of Period to Income Reserves of Period
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts ... $4,224 $2,215 $1,327 $5,112
Year ended December 31, 1997:
Allowance for doubtful accounts ... $4,721 $1,906 $2,403 $4,224
Year ended December 31, 1996:
Allowance for doubtful accounts ... $4,695 $1,124 $1,098 $4,721
</TABLE>
F-24
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
21 Subsidiaries of the Registrant 54
23 Consent of Independent Public
Accountants 55
27 Financial Data Schedule 56
<PAGE>
EXHIBIT 21
AIR EXPRESS INTERNATIONAL CORPORATION
SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1998
Percent
Jurisdiction of Shares
of Owned by
Name Incorporation Direct Parent
Air Express International USA, Inc. Delaware 100%
Radix Group International, Inc. Delaware 100%
Surface Freight Corporation Florida 100%
AEI Ocean Services, Inc. Delaware 100%
Luskcom Group Inc. Louisiana 100%
AEI Aero Expreso Internacional S.A. Argentina 100%
Air Express International (Australia) Australia 100%
Air Express International (Belgium) N.V. Belgium 100%
Air Express International do Brazil Ltda. S.C. Brazil 100%
AEI (Canada) Inc. Canada 100%
Air Express International (Fiji) Limited Fiji 100%
Air Express International Finland Oy Finland 90%
Air Express International France S.A. France 100%
Air Express International GmbH Germany 100%
Air Express International (H.K.) Limited Hong Kong 100%
Air Express International (Ireland) Limited Ireland 100%
Air Express International Luxembourg Luxembourg 100%
Air Express International Holding B.V. The Netherlands 100%
Air Express International Limited New Zealand 100%
AEI (Norway) A.S. Norway 75%
Air Express International (PNG) Pty. Limited Papua New Guinea 100%
Air Express International Corporation Del Peru S.A. Peru 100%
Air Express International Singapore (Pte.) Limited Singapore 100%
Air Express International (S.A.) Pty. Limited South Africa 100%
AEI Ltd. Switzerland 100%
Air Express International Limited Switzerland 100%
AEIC Air Cargo, Inc. Taiwan 100%
Air Express International (U.K.) Ltd. United Kingdom 100%
Air Express International (PVT) Limited Zimbabwe 100%
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, dated March 26, 1999 included in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 33-10799, 33-52955, 33-63035,
333-18853, 333-6999 and 333-25629.
ARTHUR ANDERSEN LLP
New York, New York
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 60,246
<SECURITIES> 7,188
<RECEIVABLES> 371,529
<ALLOWANCES> 5,112
<INVENTORY> 0
<CURRENT-ASSETS> 440,947
<PP&E> 151,693
<DEPRECIATION> 70,515
<TOTAL-ASSETS> 675,478
<CURRENT-LIABILITIES> 311,979
<BONDS> 42,578
<COMMON> 350
0
0
<OTHER-SE> 364,307
<TOTAL-LIABILITY-AND-EQUITY> 675,478
<SALES> 0
<TOTAL-REVENUES> 1,513,196
<CGS> 0
<TOTAL-COSTS> 1,022,683
<OTHER-EXPENSES> 276,789
<LOSS-PROVISION> 2,215
<INTEREST-EXPENSE> 1,484
<INCOME-PRETAX> 69,502
<INCOME-TAX> 25,746
<INCOME-CONTINUING> 43,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,756
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.26
</TABLE>
