-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FPPmVlBC8Hg1bHM/sppzufukG+Cq2+ucSVVxnGxBSuMJuRvQr8hjvjT4eHXU1ErB PiAKZVDdea+O6o2zI30KlA== 0001047469-99-013075.txt : 19990402 0001047469-99-013075.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-013075 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXPEDITORS INTERNATIONAL OF WASHINGTON INC CENTRAL INDEX KEY: 0000746515 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 911069248 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13468 FILM NUMBER: 99583462 BUSINESS ADDRESS: STREET 1: 19119 16TH AVE S STREET 2: P.O.BOX 69620 CITY: SEATTLE STATE: WA ZIP: 98188 BUSINESS PHONE: 206-246-3711 MAIL ADDRESS: STREET 1: 19119 16TH AVENUE SOUTH STREET 2: P.O.BOX 69620 CITY: SEATTLE STATE: WA ZIP: 98168-9620 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [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: 0-13468 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. (Exact name of registrant as specified in its charter) Washington 91-1069248 (State or other jurisdiction (I.R.S.Employer of incorporation or organization) Identification Number) 1015 Third Avenue, 12th Floor, Seattle, Washington 98104 (Address of principal executive offices) (Zip Code) (206) 674-3400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share 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. [X] At March 8, 1999, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $918,964,000. At March 8, 1999, the number of shares outstanding of registrant's Common Stock was 24,916,177. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the Registrant's 1999 Annual Meeting of Shareholders to be held on May 5, 1999 are incorporated by reference into Part III of this Form 10-K. Page 1 of 51 pages. The Exhibit Index appears on page 1. Forward-Looking Statements From time to time Expeditors International of Washington, Inc. (the Company) and its representatives may provide information, whether orally or in writing, which are deemed to be "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Litigation Reform Act"). This includes certain statements in this report on Form 10-K under Part I, Item I "Business" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements and other information relating to the Company are based on the beliefs of management and are necessarily the result of assumptions made using the information currently available to management. Actual results will vary, and even vary materially, from those predicted in the forward-looking statements. In accordance with the provisions of the Litigation Reform Act the Company is making readers aware that forward-looking statements, because they relate to future events, are by their very nature subject to many important risk factors which could cause actual results to differ materially from those contained in the forward-looking statements. For additional information about forward-looking statements and for an identification of risk factors and their potential significance, see "Safe Harbor for Forward-Looking Statements Under Securities Reform Act of 1995; Certain Cautionary Statements" immediately preceding Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. PART I ITEM 1--BUSINESS Expeditors International of Washington, Inc. is engaged in the business of providing global logistics services. The Company offers its customers a seamless international network supporting the movement and strategic positioning of goods. The Company's services include the consolidation or forwarding of air and ocean freight. In each U.S. office, and in many overseas offices, the Company acts as a customs broker. The Company also provides additional services including distribution management, vendor consolidation, cargo insurance, purchase order management and customized logistics information. The Company does not compete for domestic freight, overnight courier or small parcel business and does not own aircraft or steamships. The Company, including its majority owned subsidiaries, operates full service offices (o) in the major cities identified below. Full service offices have also been established in locations where the Company maintains unilateral control over assets and operations and where the existence of the parent subsidiary relationship is maintained by means other than record ownership of voting stock (#). In other cities, the Company contracts with independent agents to provide required services and has established over 120 such relationships world-wide. Locations where Company employees perform sales and customer service functions are identified below as international service centers (*). In each case, the opening date for the full service office or international service center is set forth in parenthesis.
NORTH AMERICA - ------------- UNITED STATES o Houston (4/92) o Dearborn-CPC (1/97) MEXICO o Seattle (5/79) o Baltimore (4/92) o Buffalo-Peace Bridge o Mexico City (6/95) o Chicago (7/81) o Dallas (5/92) (1/97) o Nuevo Laredo (4/97) o San Francisco (7/81) o Columbus (6/92) o El Paso (1/97) o Guadalajara (9/97) o New York (11/81) o Charlotte (7/92) o Laredo (2/97) o Nogales (1/99) o Los Angeles (5/82) o Newark (9/94) o Nogales (2/97) o Atlanta (8/83) o Philadelphia (3/95) o San Diego (7/97) SOUTH AMERICA o Boston (11/85) o Charleston (6/95) * Rochester (10/97) ------------- o Miami (3/86) o Memphis (8/95) o McAllen (4/98) ARGENTINA o Minneapolis (7/86) o Salt Lake City (11/95) o Buenos Aires (1/98) o Denver (2/88) * Syracuse (4/96) PUERTO RICO o Detroit (7/88) o Norfolk (9/96) o San Juan (5/95) BRAZIL o Portland (7/88) o Indianapolis (11/96) o Sao Paulo (9/95) o Cincinnati (8/89) o Port Huron-Blue Water CANADA o Rio de Janeiro (9/95) o Cleveland (7/90) Bridge (12/96) o Toronto (5/84) o Campinas (9/95) o Phoenix (7/91) o Detroit-Ambassador o Vancouver (9/95) o Santos (10/97) o Louisville (10/91) Bridge (12/96) o St. Louis (4/92) o Lewiston-Queenston (12/96)
2
SOUTH AMERICA (CONT.) - --------------------- CHILE SINGAPORE PORTUGAL KUWAIT o Santiago (2/95) o Singapore (9/81) o Lisbon (10/91) # Kuwait City (7/97) o Oporto (10/91) COLOMBIA TAIWAN LEBANON o Bogota (12/98) # Taipei (9/81) SPAIN o Beirut (4/93) o Cali (12/98) # Kaohsiung (9/81) o Barcelona (1/94) # Taichung (9/81) o Madrid (1/94) PAKISTAN FAR EAST # Hsin-Chu (9/89) o Alicante (4/96) o Karachi (9/96) - -------- o Lahore (9/96) BANGLADESH THAILAND SWEDEN o Dhaka (6/89) o Bangkok (9/94) o Stockholm (1/94) SAUDI ARABIA o Chittagong (8/93) o Goteborg (1/94) # Riyadh (7/92) EUROPE # Jeddah (7/92) CHINA ------ UNITED KINGDOM o Beijing (7/94) AUSTRIA o London (4/86) SRI LANKA o Guangzhou (4/94) o Salzburg (11/95) o Manchester (11/88) # Colombo (3/95) o Dalian (7/94) o Vienna (11/95) o Birmingham (3/90) o Shanghai (7/94) o Glasgow (4/92) TURKEY o Shenzen (7/94) BELGIUM o Bedford (6/94) o Ankara (1/99) o Quingdao (7/94) o Brussels (7/90) o Swindon (3/97) o Istanbul (1/99) o Tianjin (7/94) o Antwerp (4/91) o East Midland (1/99) o Izmir (1/99) o Xi'an (7/94) o Mersin (1/99) o Xiamen (7/94) THE CZECH REPUBLIC AUSTRALASIA o Nanjing (8/95) o Prague (6/98) ----------- U.A.E. AUSTRALIA * Abu Dhabi (1/94) HONG KONG FINLAND o Sydney (8/88) o Dubai (10/98) o Kowloon (9/81) o Helsinki (4/94) o Melbourne (8/88) o Brisbane (10/93) CYPRUS INDONESIA FRANCE o Perth (12/94) * Nicosia (6/96) # Jakarta (12/90) o Paris (1/97) o Adelaide (10/97) * Larnaca (1/98) # Surabaya (2/92) o Epinal (1/97) o Lyon (1/97) FIJI AFRICA JAPAN o Lille (3/97) * Nadi (7/96) ------ * Tokyo (3/91) * Suva (5/97) SOUTH AFRICA * Osaka (9/96) GERMANY o Johannesburg (3/94) o Frankfurt (4/92) NEW ZEALAND o Durban (3/94) KOREA o Munich (4/92) o Auckland (8/88) o Capetown (1/97) o Pusan (10/94) o Dusseldorf (4/92) * Port Elizabeth (1/97) o Seoul (10/94) o Stuttgart (4/92) NEAR/MIDDLE o Bupyung (6/96) o Hamburg (1/93) EAST o Chonan (6/96) ----------- o Kwangju (6/96) IRELAND EGYPT o Kumi (6/96) o Dublin (3/97) o Cairo (2/95) o Masan (6/96) o Cork (3/97) o Alexandria (2/95) o Taegu (6/96) o Shannon (3/97) GREECE MALAYSIA ITALY o Athens (2/99) o Penang (11/87) o Milan (4/93) o Kuala Lumpur (6/90) o Verona (4/93) INDIA o Johore Bharu (3/96) o Florence (3/98) o New Delhi (7/96) o Mumbai (Bombay) (1/97) MICRONESIA THE NETHERLANDS o Bangalore (6/97) o Saipan (3/98) o Amsterdam (6/94) o Chennai (Madras) (6/97) o Rotterdam (3/95) PHILIPPINES o Manila (8/98)
3 The Company was incorporated in the State of Washington in May 1979. Its executive offices are located at 1015 Third Avenue, 12th Floor, Seattle, Washington, and its telephone number is (206) 674-3400. For information concerning the amount of revenues, net revenues, operating income, identifiable assets, capital expenditures and depreciation and amortization attributable to the geographic areas in which the Company conducts its business, see Note 7 to the Consolidated Financial Statements. Beginning in 1981, the Company's primary business focus was on airfreight shipments from the Far East to the United States and related customs brokerage and import services. In the mid-1980's, the Company began to expand its service capabilities in export airfreight, ocean freight and distribution services. Today the Company offers a complete range of global logistics services to a diversified group of customers, both in terms of industry specialization and geographic location. As opportunities for profitable growth arise, the Company plans to create new offices. While the Company has historically expanded through organic growth, the Company has also been open to growth through acquisition of, or establishing joint ventures with, existing agents or others within the industry. Airfreight Services Airfreight services accounted for approximately 41, 43, and 47 percent of the Company's 1998, 1997, and 1996 consolidated revenues net of freight consolidation expenses ("net revenues"), respectively. When performing airfreight services, the Company typically acts either as a freight consolidator or as an agent for the airline which carries the shipment. When acting as a freight consolidator, the Company purchases cargo space from airlines on a volume basis and resells that space to its customers at lower rates than the customers could obtain directly from airlines. When moving shipments between points where the volume of business does not facilitate consolidation, the Company receives and forwards individual shipments as the agent of the airline which carries the shipment. Whether acting as an agent or consolidator, the Company offers its customers knowledge of optimum routing, familiarity with local business practices, knowledge of export and import documentation and procedures, the ability to arrange for ancillary services, and assistance with space availability in periods of peak demand. In its airfreight forwarding operations, the Company procures shipments from its customers, determines the routing, consolidates shipments bound for a particular airport distribution point, and selects the airline for transportation to the distribution point. At the distribution point, the Company or its agent arranges for the consolidated lot to be broken down into its component shipments and for the transportation of the individual shipments to their final destinations. The Company estimates its average airfreight consolidation weighs approximately 3,500 to 4,500 pounds and includes merchandise from several shippers. Because shipment by air is relatively expensive compared with ocean transportation, air shipments are generally characterized by a high value-to-weight ratio, the need for rapid delivery, or both. The Company typically delivers shipments from a Company warehouse at the origin to the airline after consolidating the freight into containers or on to pallets. Shipments normally arrive at the destination distribution point within forty-eight hours after such delivery. During peak shipment periods, cargo space available from the scheduled air carriers can be limited and backlogs of freight shipments may occur. When these conditions exist, the Company may charter aircraft to meet customer demand. The Company consolidates individual shipments based on weight and volume characteristics in cost-effective combinations. Typically, as the weight or volume of a shipment increases, the cost per pound/kilo or cubic inch/centimeter charged by the Company decreases. The rates charged by airlines to forwarders and others also generally decrease as the weight or volume of the shipment increases. As a result, by aggregating shipments and presenting them to an airline as a single shipment, the Company is able to obtain a lower rate per pound/kilo or cubic inch/centimeter than that which it charges to its customers for the individual shipment, while generally offering the customer a lower rate than could be obtained from the airline for an unconsolidated shipment. The Company's net airfreight forwarding revenues from a consolidated shipment includes the differential between the rate charged to the Company by an airline and the rate which the Company charges to its customers, commissions paid to the Company by the airline carrying the freight and fees for ancillary services. Such ancillary services provided by the Company include preparation of shipping and customs documentation, packing, crating and insurance services, negotiation of letters of credit, and preparation of documentation to comply with local export laws. When the Company 4 acts as an agent for an airline handling an unconsolidated shipment, its net revenues are primarily derived from commissions paid by the airline and fees for ancillary services paid by the customer. The Company does not own aircraft and does not plan to do so. Management believes that the ownership of aircraft would subject the Company to undue business risks, including large capital outlays, increased fixed operating expenses, problems of fully utilizing aircraft and competition with airlines. Because the Company relies on commercial airlines to transport its shipments, changes in carrier policies and practices such as pricing, payment terms, scheduling, and frequency of service may affect its business. The Company also performs breakbulk services which involve receiving and breaking down consolidated airfreight lots and arranging for distribution of the individual shipments. Breakbulk service revenues also include commissions from non-exclusive agents for airfreight shipments. Customs Brokerage and Import Services Customs brokerage and import services accounted for approximately 40, 39, and 34 percent of the Company's 1998, 1997, and 1996 consolidated net revenues, respectively. As a customs broker, the Company assists importers to clear shipments through customs by preparing required documentation, calculating and providing for payment of duties on behalf of the importer, arranging for any required inspections by governmental agencies, and arranging for delivery. The Company also provides other services at destination including temporary warehousing, inland transportation, inventory manipulation and management, cargo insurance and product distribution. The Company provides customs clearance services in connection with many of the shipments it handles as a freight forwarder. However, substantial customs brokerage revenues are derived from customers that elect to use a competing forwarder. Conversely, shipments handled by the Company as a forwarder may be processed by another customs broker selected by the customer. The Company also provides custom clearances for goods moving by rail and truck between the United States, Canada and/or Mexico. The commodities being cleared and the time sensitive nature of the border brokerage business required the Company to make significant modifications to its systems and traditional office structure in order to provide competitive service. Management believes that success in the border brokerage business will be an important addition to the Company's global logistics strategy. During 1996 the Company established a subsidiary, Expeditors Tradewin, L.L.C., to respond to customer driven requests for high-end customs consulting services. The demand for these services was stimulated by the changes made by US Customs Service in response to the 1993 Customs Modernization Act. Fees for these non-transactional services are based upon hourly billing rates and bids for mutually agreed procedures. There is currently a noticeable trend, prompted by customer demand, to quote rates on a door-to-door basis. Management foresees the potential, in the medium to long-term, for fees normally associated with customs clearance to be de-emphasized and included as a component of other services offered by the Company. Ocean Freight Services Ocean freight services accounted for approximately 19, 18, and 19 percent of the Company's 1998, 1997, and 1996 consolidated net revenues, respectively. The Company's revenues as an ocean freight forwarder are derived from commissions paid by the carrier and revenues from fees charged to customers for ancillary services which the Company may provide, such as preparing documentation, procuring insurance, arranging for packing and crating services, and providing consultation. The Company operates Expeditors International Ocean ("EIO"), a Non-Vessel Operating Common Carrier ("NVOCC") specializing in ocean freight consolidation from the Far East to the United States. EIO also provides service, on a smaller scale, to and from any location where the Company has an office or agent. As an NVOCC, EIO 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. EIO solicits less than container load ("LCL") freight to fill the containers and charges lower rates than those available directly from shipping lines. EIO also handles full container loads for customers that do not have annual shipping volumes sufficient to negotiate comparable contracts directly with the ocean carriers. The Company does not own vessels and generally does not physically handle the cargo. 5 Expeditors Cargo Management Systems ("ECMS") supplies a sophisticated ocean consolidation service. The Company owns and maintains software that allows it to sell ECMS to large volume customers that have signed their own service contracts with the ocean carriers. As an ocean consolidator, ECMS may obtain LCL freight from several vendors and consolidate this cargo into full containers. The Company's revenues as an ocean consolidator are derived from handling LCL cargo at origin and from the fees paid by customers for access to data captured during the consolidation process. Marketing and Customers The Company provides flexible service and seeks to understand the needs of the customers from point of origin to ultimate destinations. Although the domestic importer usually designates the logistics company and the services that will be required, the foreign shipper may also participate in this selection process. Therefore, the Company coordinates its marketing program to reach both domestic importers and their overseas suppliers. The Company's marketing efforts are focused primarily on the traffic, shipping and purchasing departments of existing and potential customers. The district manager of each office is responsible for marketing, sales coordination, and implementation in the area in which he or she is located. All employees are responsible for customer service and relations. The Company staffs its offices largely with managers and other key personnel who are citizens of the nations in which they operate and who have extensive experience in global logistics. Marketing and customer service staffs are responsible for marketing the Company's services directly to local shippers and traffic managers who may select or influence the selection of the logistics vendor and for ensuring that customers receive timely and efficient service. The Company believes that its expertise in supplying solutions customized to the needs of its customers, its emphasis on coordinating its origin and destination customer service and marketing activities, and the incentives it gives to its managers have been important elements of its success. The goods handled by the Company are generally a function of the products which dominate international trade between any particular origin and destination. Shipments of computer components, other electronic equipment, housewares, sporting goods, machine parts, and toys, comprise a significant percentage of the Company's business. Typical import customers include computer retailers and distributors of consumer electronics, department store chains, clothing and shoe wholesalers, manufacturers and catalogue stores. Historically, no single customer has accounted for five percent or more of the Company's revenues. Competition The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future. There are a large number of companies competing in one or more segments of the industry, but the number of firms with a global network that offer a full complement of logistics services is more limited. Depending on the location of the shipper and the importer, the Company must compete against both the niche players and larger entities. While there is currently a marked trend within the industry toward consolidation of the niche players into the larger firms striving for immediate multinational and multi-service networks, the regional and local competitors maintain a strong market presence. The U.S. publicly traded entities most similar to the Company are Air Express International Corporation, The Harper Group, Inc. and Fritz Companies, Inc. Historically, the primary competitive factors in the global logistics services industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. The Company emphasizes quality service and believes that its prices are competitive with the prices of others in the industry. Recently, larger customers have exhibited a trend toward more sophisticated and efficient procedures for the management of the logistics supply chain by embracing strategies such as just-in-time inventory management. This trend has made computerized customer service capabilities a significant factor in attracting and retaining customers. These computerized customer service capabilities include customized Electronic Data Interchange, or EDI, and on-line freight tracing and tracking applications. The customized EDI applications allow the transfer of key information between the customers' systems and the Company's systems. Freight tracing and tracking applications allows customers to know the location, transit time and estimated delivery time of inventory in transit. 6 Management believes that the ability to develop and deliver innovative solutions to meet customers' increasingly sophisticated information requirements is a critical factor in the ongoing success of the Company. Accordingly, the Company has devoted a significant amount of resources towards the maintenance and enhancement of systems that will meet these customer demands. Management believes that the Company's existing systems are competitive with the systems currently in use by other logistics services companies with whom it competes. Developing these systems has added a considerable indirect cost to the services provided to customers. Small and middle-tier competitors, in general, do not have the resources available to develop these customized systems. As a result, there is a significant amount of consolidation currently taking place in the industry. Management expects that this trend toward consolidation will continue for the short to medium-term. Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company's competitors and typically involves the purchase of significant "goodwill". As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions. The Company's ability to attract, retain, and motivate highly qualified personnel with experience in global logistics services is an essential, if not the most important, element of its ability to compete in the industry. To this end, the Company has adopted incentive compensation programs which make percentages of branch revenues or profits available to managers for distribution among key personnel. The Company believes that these incentive compensation programs, combined with its experienced personnel and its ability to coordinate global marketing efforts, provide it with a distinct competitive advantage and account for historical growth that competitors have matched only through acquisition. Currency and Other Risk Factors The nature of the Company's worldwide operations necessitate the Company dealing with a multitude of currencies other than the U.S. Dollar. This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference. Many of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company's ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by accelerating international currency settlements among these offices or agents. In addition, the Company's ability to provide service to its customers is highly dependent on good working relationships with a variety of entities including airlines, steamship lines and governmental agencies. The Company considers its current working relationships with these entities to be good. However, changes in space allotments available from carriers, governmental deregulation efforts, "modernization" of the regulations governing customs clearance, and/or changes in governmental quota restrictions could affect the Company's business in unpredictable ways. Seasonality Historically, the Company's operating results have been subject to seasonal trends when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third quarter has traditionally been the strongest. This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company's international network and service offerings. The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods. A significant portion of the Company's revenues are derived from customers in industries whose shipping patterns are tied closely to consumer demand and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of the Company's revenues are, to a large degree, impacted by factors out of the Company's control, such as shifting consumer demand for retail goods and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company's stock. 7 Environmental In the United States, the Company is subject to Federal, state and local provisions regulating the discharge of materials into the environment or otherwise for the protection of the environment. Similar laws apply in many foreign jurisdictions in which the Company operates. Although current operations have not been significantly affected by compliance with these environmental laws, governments are becoming increasingly sensitive to environmental issues, and the Company cannot predict what impact future environmental regulations may have on its business. The Company does not anticipate making any material capital expenditures for environmental control purposes during the remainder of the current or succeeding fiscal years. Employees At February 28, 1999, the Company employed approximately 5,300 people, 2,400 in the United States and 200 in the balance of North America, 100 in South America, 780 in Europe, 1,400 in the Far East & Australasia, 300 in the Near/Middle East and 120 in Africa. Approximately 500 of the Company's employees are engaged principally in sales and marketing and customer service, 3,400 in operations and 1,400 in finance and administration. The Company is not a party to any collective bargaining agreement and considers its relations with its employees to be satisfactory. In order to retain the services of highly qualified, experienced, and motivated employees, the Company places considerable emphasis on its incentive compensation programs and stock option plans. 8 Executive Officers of the Registrant The following table sets forth the names, ages, and positions of current executive officers of the Company.
Name Age Position - ---- --- -------- Peter J. Rose 56 Chairman and Chief Executive Officer and director Kevin M. Walsh 48 President and Chief Operating Officer and director James L.K. Wang 50 Executive Vice President and Director-Far East and director Glenn M. Alger 42 Executive Vice President and Director-North America William J. Coogan 44 Senior Vice President-Ocean Cargo Albert H. Leung 51 Senior Vice President-Far East Rommel C. Saber 41 Senior Vice President-Near/Middle East and Indian Subcontinent Michael R. Claydon 51 Senior Vice President-Europe and Africa Jean Claude Carcaillet 53 Senior Vice President-Australasia Timothy C. Barber 39 Senior Vice President-Sales and Marketing R. Jordan Gates 43 Senior Vice President-Chief Financial Officer and Treasurer Jeffrey J. King 44 Senior Vice President-General Counsel and Secretary David M. Lincoln 40 Senior Vice President and Chief Information Officer Charles J. Lynch 38 Vice President-Corporate Controller
Peter J. Rose has served as a director and Vice President of the Company since July 1981. Mr. Rose was elected a Senior Vice President of the Company in May 1986, Executive Vice President in May 1987, President and Chief Executive Officer in October 1988, and Chairman and Chief Executive Officer in May 1991. Kevin M. Walsh has served as a director and Vice President of the Company since July 1981. Mr. Walsh was elected a Senior Vice President of the Company in May 1986, Executive Vice President in December 1989, and President and Chief Operating Officer in May 1991. James L.K. Wang has served as a director and the Managing Director of Expeditors International Taiwan Ltd., the Company's former exclusive Taiwan agent, since September 1981. Mr. Wang's employment agreement with the Company has been assigned to the Company's current exclusive Taiwan agent, E.I. Freight (Taiwan), Ltd. In October 1988, Mr. Wang became a director of the Company and its Director-Far East. In January 1996, Mr. Wang was elected to the office of Executive Vice President. Glenn M. Alger joined the Company in July 1981 as a Regional Manager. Mr. Alger was elected Vice President in October 1988, Senior Vice President and Regional Manager in January 1992, and Senior Vice President in January 1993. In March 1997, Mr. Alger was elected Executive Vice President and Director-North America. William J. Coogan has worked for the Company since May 1985. Mr. Coogan was promoted District Manager of the Company's New York office in July 1988 and Senior Vice President of EIO in April 1989. Mr. Coogan was elected Senior Vice President-Ocean in February 1993 and Senior Vice President-Ocean Cargo in May 1996. Albert H. Leung joined the Company as Senior Vice President-Far East in May 1997. Prior to joining the Company, Mr. Leung was employed by Northwest Airlines for 23 years, most recently as Regional Director-Cargo, Taiwan, S.E. Asia and Indian Subcontinent. Rommel C. Saber joined the Company as Director-Middle/Near East in February 1990 and was elected Senior Vice President-Sales and Marketing in January 1993. Mr. Saber was elected Senior Vice President-Air Export in September 1993. Since July 1997 he has served as Senior Vice President Near/Middle East and Indian Subcontinent. Michael R. Claydon joined the Company as Director-Europe in October 1987. He was elected Senior Vice President-Europe and Africa in September 1997. Jean Claude Carcaillet joined the Company as Managing Director-Australasia in August 1988. He was elected Senior Vice President-Australasia in September 1997. Timothy C. Barber joined the Company in May 1986. Mr. Barber was promoted to District Manager of the Seattle 9 office in January 1987 and Regional Vice President in January 1993. Mr. Barber was elected Vice President-Sales and Marketing in September 1993 and Senior Vice President-Sales and Marketing in January 1998. R. Jordan Gates joined the Company as its Controller-Europe in February 1991. Mr. Gates was elected Chief Financial Officer and Treasurer of the Company in August 1994 and Senior Vice President-Chief Financial Officer and Treasurer in January 1998. Jeffrey J. King joined the Company in October 1990 as Director-Taxation and Legal Services and was elected Vice President-General Counsel in May 1992. In August 1994, Mr. King was elected Vice President-General Counsel and Secretary and Senior Vice President-General Counsel and Secretary in January 1998. David M. Lincoln joined the Company as its Controller-U.S. Operations in March 1984. Mr. Lincoln served as Corporate Controller of the Company from May 1986 to January 1991, and was elected Vice President-Systems Management in December 1989. Mr. Lincoln was elected Vice President-Information Systems in May 1996 and Senior Vice President and Chief Information Officer in October 1997. Charles J. Lynch joined the Company in September 1984. Mr. Lynch was promoted to Assistant Controller in July 1985 and Controller-Domestic Operations in January 1989. Mr. Lynch was elected Corporate Controller in January 1991 and Vice President-Corporate Controller in January 1998. Regulation With respect to Company's activities in the air transportation industry in the United States, it is subject to regulation by the Department of Transportation ("DOT") as an indirect air carrier. The Company's overseas offices and agents are licensed as airfreight forwarders in their respective countries of operation. The Company is licensed in each of its offices or in the case of its newer offices, has made application for a license, as an airfreight forwarder by the International Air Transport Association ("IATA"). IATA is a voluntary association of airlines which prescribes certain operating procedures for airfreight forwarders acting as agents for its members. The majority of the Company's airfreight forwarding business is conducted with airlines which are IATA members. The Company is licensed as a customs broker by the Customs Service of the Department of the Treasury in each U.S. customs district in which it does business. All U.S. customs brokers are required to maintain prescribed records and are subject to periodic audits by the Customs Service. In other jurisdictions in which the Company performs clearance services, the Company is licensed by the appropriate governmental authority. The Company is licensed as an ocean freight forwarder by the Federal Maritime Commission ("FMC"). The FMC has established certain qualifications for shipping agents, including certain surety bonding requirements. The FMC also is responsible for the economic regulation of NVOCC activity originating or terminating in the United States. To comply with these economic regulations, vessel operators and NVOCCs, such as EIO, are required to file tariffs electronically which establish the rates to be charged for the movement of specified commodities into and out of the U.S. The FMC has the power to enforce these regulations by assessing penalties. As of May 1, 1999, the Ocean Shipping Reform Act of 1998 will require the Company to register with the FMC as an Ocean Transportation Intermediary. The Company does not anticipate any difficulty in meeting this regulatory requirement. The Company does not believe that current U.S. and foreign governmental regulation impose significant economic restraint upon its business operations. In general, the Company conducts its business activities in each country through a majority owned subsidiary corporation that is organized and existing under the laws of that country. However, the regulations of foreign governments can impose barriers to the Company's ability to provide the full range of its business activities in a wholly or majority U.S. owned subsidiary. For example, foreign ownership of a customs brokerage business is prohibited in some jurisdictions and less frequently the ownership of the licenses required for freight forwarding and/or freight consolidation is restricted to local entities. When the Company encounters this sort of governmental restriction, it works to establish a legal structure that meets the requirements of the local regulations while also giving the Company the substantive operating and economic advantages that would be available in the absence of such regulation. This can be accomplished by creating a joint venture or exclusive agency relationship with a qualified local entity that holds the required license. In cases where the Company has unilateral control over the assets and operations of the local entity, notwithstanding the lack of technical majority ownership of common stock, the Company consolidates the accounts of the local entity. In such cases, consolidation is necessary to fairly present the financial position and results of operations of the Company because of the existence of the parent-subsidiary relationship by 10 means other than record ownership of voting common stock. Cargo Liability When acting as an airfreight consolidator, the Company assumes a carrier's liability for lost or damaged shipments. This legal liability is typically limited by contract to the lower of the transaction value or the released value ($9.07 per pound unless the customer declares a higher value and pays a surcharge), except if the loss or damage is caused by willful misconduct or in the absence of an appropriate air waybill. The airline which the Company utilizes to make the actual shipment is generally liable to the Company in the same manner and to the same extent. When acting solely as the agent of the airline or shipper, the Company does not assume any contractual liability for loss or damage to shipments tendered to the airline. When acting as an ocean freight consolidator, the Company assumes a carrier's liability for lost or damaged shipments. This liability is typically limited by contract to the lower of the transaction value or the released value ($500 per package or customary freight unit unless the customer declares a higher value and pays a surcharge). The steamship line which the Company utilizes to make the actual shipment is generally liable to the Company in the same manner and to the same extent. In its ocean freight forwarding and customs clearance operations, the Company does not assume cargo liability. When providing warehouse and distribution services, the Company limits its legal liability by contract and tariff to an amount generally equal to the lower of fair value or fifty cents per pound with a maximum of fifty dollars per "lot" - -- which is defined as the smallest unit that the warehouse is required to track. Upon payment of a surcharge for warehouse and distribution services, the Company will assume additional liability. The Company maintains marine cargo insurance covering claims for losses attributable to missing or damaged shipments for which it is legally liable. The Company also maintains insurance coverage for the property of others which is stored in Company warehouse facilities. 11 ITEM 2 -- PROPERTIES The Company owns a 214,000 square foot office building in downtown Seattle, a 150,000 square foot warehouse/industrial office facility in Nassau County, New York, a 27,200 square foot office facility near Seattle-Tacoma International Airport, an 80,000 square foot office and warehouse facility on a ten-acre parcel near O'Hare International Airport in Chicago, a 5,500 square foot office facility in the Tsim Sha Tsui East district of Kowloon, Hong Kong, and a 10,900 square foot office facility in Taipei, Taiwan. The Company also owns a 23,400 square foot office and warehouse facility on a long-term renewable land lease at the Brussels Cargo facility in Brussels, Belgium. The Company leases and maintains 40 additional offices and satellite locations in the United States and 105 offices throughout the world, each located close to an airport, ocean port, or on an important border crossing. The majority of these facilities contain warehouse facilities. Lease terms are either on a month-to-month basis or terminate at various times through 2005. As an office matures, the Company will investigate the possibility of building or buying suitable facilities. Lease payments currently aggregate approximately $1,330,000 per month. See Note 5 to the Company's Consolidated Financial Statements. The Company believes that current leases can be extended and that suitable alternative facilities are available in the vicinity of each present facility should extensions be unavailable at the conclusion of current leases. ITEM 3 -- LEGAL PROCEEDINGS The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management's opinion, will have a significant effect on the Company's financial condition. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. 12 PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth the high and low sale prices in the over-the-counter market for the Company's Common Stock as reported by The NASDAQ National Market System under the symbol EXPD.
Common Stock Common Stock Quarter High Low Quarter High Low ------- ---- --- ------- ---- --- 1998 1997 First 44 1/2 29 15/16 First 28 7/8 20 5/8 Second 48 1/4 38 5/8 Second 30 3/4 22 3/4 Third 47 5/8 25 Third 47 5/8 28 1/4 Fourth 43 1/4 24 7/8 Fourth 48 3/4 32
There were 1,453 shareholders of record as of December 31, 1998. Management estimates that there were approximately 7,500 beneficial shareholders at that date. The Board of Directors declared semi-annual dividends during the two most recent fiscal years as follows: June 15, 1998 $ .07 December 15, 1998 $ .07 June 16, 1997 $ .05 December 15, 1997 $ .05
ITEM 6 -- SELECTED FINANCIAL DATA Financial Highlights In thousands except per share data
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Revenues $1,063,707 954,002 730,088 584,691 450,607 Net earnings 47,274 38,411 24,263 17,395 13,217 Basic earnings per share 1.92 1.57 1.00 .73 .56 Diluted earnings per share 1.78 1.46 .95 .69 .54 Cash dividends paid per share .14 .10 .08 .06 .05 Working capital 94,601 87,252 83,468 81,431 68,464 Total assets 406,596 344,106 271,986 204,128 162,788 Shareholders' equity 217,198 171,854 140,011 117,192 101,110 Basic weighted average shares outstanding 24,617 24,429 24,161 23,972 23,775 Diluted weighted average shares outstanding 26,529 26,324 25,644 25,166 24,550
All share and per share information have been adjusted to reflect a 2-for-1 stock split effected in November, 1996. Certain 1997 amounts have been reclassified to conform to the 1998 presentation. 13 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by the Company with the Securities and Exchange Commission. The words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Securities Litigation Reform Act. Such statements are qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements. The risks included here are not exhaustive. Furthermore, reference is also made to other sections of this report which include additional factors which could adversely impact the Company's business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all of such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements cannot be relied upon as a guarantee of actual results. Shareholders should be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to such analysts any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of such statement or report. Furthermore, the Company has a policy against issuing financial forecasts or projections or confirming the accuracy of forecasts or projections issued by others. Accordingly, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company. 14
RISK FACTORS DISCUSSION AND POTENTIAL SIGNIFICANCE - ------------ ------------------------------------- International Trade The Company primarily provides services to customers engaged in international commerce. Everything that effects international trade has the potential to expand or contract the Company's primary market. For example, international trade is influenced by: o currency exchange rate and interest rate fluctuations; o changes in governmental policies; o changes in international and domestic customs regulations; o wars and other conflicts; o natural disasters; o changes in consumer attitudes regarding goods made in countries other than their own; and o changes in the price and readily available quantities of oil and other petroleum-related products. Third Party Vendors The Company is a non-asset based supplier of global logistics services. As a result the Company depends on a variety of asset based third party vendors. The quality and profitability of the Company's services depend upon effective selection, management and discipline of third party vendors. Predictability of Results The Company is not aware of any accurate means of forecasting short-term customer requirements. However, long-term customer satisfaction depends upon the Company's ability to meet these unpredictable short-term customer requirements. Personnel costs, the Company's single largest variable expense, are always less in the very near term as the Company must staff to meet uncertain demand. As a result, short-term operating results could be disproportionately effected. Foreign Operations The majority of the Company's revenues and operating income come from operations conducted outside the United States. To maintain a global service network, the Company may be required to operate in hostile locations. Key Personnel The Company is a service business. The quality of this service is directly related to the quality of the Company's employees. Identifying, training and retaining key employees is essential to continued growth and future profitability. Continued loyalty to the Company will not be assured by contract. Technology Increasingly, the Company must compete based upon the flexibility and sophistication of the technologies utilized in performing its core businesses. Future results depend upon the Company's success in the cost effective development and integration of communication and information systems technologies. Growth To date, the Company has relied primarily upon organic growth and has tended to avoid growth through acquisition. Future results will depend upon the Company's ability to continue to grow internally or to demonstrate the ability to successfully identify and integrate non-dilutive acquisitions.
15 ITEM 7-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto contained elsewhere within this report. Results of Operations The following table shows the consolidated net revenues (revenues less consolidation expenses) attributable to the Company's principal services and the Company's expenses for 1998, 1997 and 1996, expressed as percentages of net revenues. With respect to the Company's services other than consolidation, net revenues are identical to revenues. Management believes that net revenues are a better measure than total revenues of the relative importance of the Company's principal services since total revenues earned by the Company as a freight consolidator include the carriers' charges to the Company for carrying the shipment whereas revenues earned by the Company in its other capacities include only the commissions and fees actually earned by the Company.
1998 1997 1996 ---- ---- ---- Percent Percent Percent of net of net of net Amount revenues Amount revenues Amount revenues ------ -------- ------ -------- ------ -------- in thousands - ------------ Net revenues: Airfreight $145,907 41% $124,781 43% $ 94,954 47% Ocean freight 66,297 19 51,776 18 38,304 19 Customs brokerage and import services 141,246 40 113,967 39 69,077 34 -------- --- -------- --- -------- --- Net revenues 353,450 100 290,524 100 202,335 100 -------- --- -------- --- -------- --- Operating expenses: Salaries and related costs 190,288 54 153,196 53 108,797 54 Other 89,790 25 77,413 26 56,113 27 -------- --- -------- --- -------- --- Total operating expenses 280,078 79 230,609 79 164,910 81 -------- --- -------- --- -------- --- Operating income 73,372 21 59,915 21 37,425 19 Other income, net 2,205 0 2,657 1 2,159 1 -------- --- -------- --- -------- --- Earnings before income taxes 75,577 21 62,572 22 39,584 20 Income tax expense 28,303 8 24,161 9 15,321 8 -------- --- -------- --- -------- --- Net earnings $ 47,274 13% $ 38,411 13% $ 24,263 12% -------- --- -------- --- -------- --- -------- --- -------- --- -------- ---
1998 compared with 1997 Airfreight net revenues in 1998 increased 17% compared with 1997 primarily due to (1) increased airfreight shipments and tonnages handled by the Company from the Far East to North America and Europe, (2) increased prices charged by the airlines which were passed along to customers, and (3) increased export airfreight shipments and tonnages from North America and Europe. The Company's North American export airfreight net revenues increased 20% in 1998 compared to 1997. Airfreight net revenues from the Far East and from Europe increased 9% and 22%, respectively, for 1998 compared with 1997. Ocean freight net revenues increased 28% in 1998 compared to 1997. Ocean freight demand remained strong throughout 1998 and ocean freight rates from the Far East, the Company's largest trade lane, increased in the last half of the year. During 1998, management continued to expand market share, increase ocean tonnage, and increase net ocean freight revenues while offering competitive market rates to customers. Margins diminished slightly as a result of this increased demand and due to regulatory constraints which restricted the ability of the Company to promptly 16 pass carrier rate increases to NVOCC (Non-Vessel Operating Common Carrier) customers. In addition to increases in the traditional NVOCC and ocean forwarding business, ECMS (Expeditors Cargo Management Systems), a PC-based ocean freight consolidation management and purchase order tracking service, continued to be instrumental in attracting new business. The Company's North American export ocean freight net revenues increased 26% in 1998 compared to 1997. This increase was a result of the Company handling more ocean shipments moving from North America to the Far East and, to a lesser extent, from North America to Europe. Ocean freight net revenues from the Far East and from Europe increased 24% and 35%, respectively, for 1998 compared with 1997. Customs brokerage and import services revenue increased 24% in 1998 as compared with 1997 as a result of (1) the Company's growing reputation for providing high quality service, (2) consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program, and (3) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers. Distribution services accounted for nearly 35% of the increase in customs brokerage and import services revenues for 1998 compared with 1997. Salaries and related costs increased in 1998 compared to 1997 as a result of (1) the Company's increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity and (2) increased compensation levels. Salaries and related costs increased approximately 1% as a percentage of net revenues. This 1% increase is largely attributable to the 1998 peak season being somewhat below initial expectations. The relatively consistent relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual compensation will occur in proportion to changes in Company profits. Management believes that the growth in revenues, net revenues and net earnings for 1998 are a result of the incentives inherent in the Company's compensation program. Other operating expenses increased in 1998 as compared with 1997 as rent expense, communications expense, quality and training expenses, and other costs expanded to accommodate the Company's growing operations. Other operating expenses as a percentage of net revenues decreased 1% in 1998 as compared with 1997 due to the realization of certain economies of scale. Other income, net, decreased in 1998 as compared to 1997 primarily due to smaller foreign exchange gains recorded in 1998 than in 1997. Interest income was slightly higher in 1998 than in 1997. Interest expense was also slightly higher due to a temporary increase in short-term borrowings. The Company pays income taxes in the United States and other jurisdictions, as well as other taxes which are typically included in costs of operations. The Company's consolidated effective income tax rate decreased slightly in 1998 to 37.5%. 1997 compared with 1996 Airfreight net revenues in 1997 increased 31% compared with 1996 primarily due to (1) increased airfreight shipments and tonnages handled by the Company from the Far East to North America and Europe, (2) increased prices charged by the airlines which were passed along to customers, and (3) increased export airfreight shipments and tonnages from North America and Europe. The Company's North American export airfreight net revenues increased 34% in 1997 compared to 1996. Airfreight net revenues from the Far East and from Europe increased 25% and 40%, respectively, for 1997 compared with 1996. Ocean freight net revenues increased 35% in 1997 compared to 1996. During the first two quarters of 1997, the ocean freight market to North America from the Far East continued to be impacted by overcapacity experienced by direct ocean carriers. During the last two quarters of 1997, freight volumes between North America and the Far East somewhat reduced the overcapacity situation. As a result, freight rates, which had steadily fallen over the previous two years, stabilized. Management was still able to expand market share, increase ocean tonnage, expand margins and increase net ocean freight revenues while offering competitive market rates to its customers. In addition to increases in the traditional NVOCC business and ocean forwarding business, ECMS continued to be instrumental in attracting new business. The Company's North American export ocean freight net revenues increased 41% in 1997 compared to 1996. This increase was a result of the Company handling more ocean shipments moving from 17 North America to the Far East and, to a lesser extent, from North America to Europe. Ocean freight net revenues from the Far East and from Europe increased 26% and 57%, respectively, for 1997 compared with 1996. Customs brokerage and import services revenue increased 65% in 1997 as compared with 1996 as a result of (1) the Company's entry into the truck and rail border brokerage business in the United States, (2) the Company's growing reputation for providing high quality service, (3) consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program, and (4) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers. Distribution services accounted for nearly 16% of the total increase in customs brokerage and import services revenues for 1997 compared with 1996. Salaries and related costs increased in 1997 compared to 1996 as a result of (1) the Company's increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity and (2) increased compensation levels. Salaries and related costs decreased approximately 1% as a percentage of net revenues - a measure that management believes is significant in assessing the effectiveness of corporate cost containment objectives. This 1% decrease is largely attributable to increased net revenues in both new and existing offices without a commensurate increase in personnel costs. Other operating expenses increased in 1997 as compared with 1996 as rent expense, communications expense, quality and training expenses, and other costs expanded to accommodate the Company's growing operations. Other operating expenses as a percentage of net revenues decreased 1% in 1997 as compared with 1996 due to increased revenues in both new and existing offices and the realization of certain economies of scale. Other income, net, increased in 1997 as compared to 1996 primarily due to foreign exchange gains. Interest income was lower in 1997 as a result of cash being used for the acquisitions of real estate and of the Company's Irish agent. The Company pays income taxes in the United States and other jurisdictions, as well as other taxes which are typically included in costs of operations. The Company's consolidated effective income tax rate remained virtually constant at 38.6% for 1997 and 38.7% in 1996. Currency and Other Risk Factors International air/ocean freight forwarding and customs brokerage are intensively competitive and are expected to remain so for the foreseeable future. There are a large number of entities competing in the global logistics industry, however, the Company's primary competition is confined to a relatively small number of companies within this group. Historically, the primary competitive factors in the international logistics industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. The Company emphasizes quality service and believes that its prices are competitive with those of others in the industry. Recently customers have exhibited a trend towards more sophisticated and efficient procedures for the management of the logistics supply chain by embracing strategies such as just-in-time inventory management. This trend has made having sophisticated computerized customer service capabilities and a stable worldwide network significant factors in attracting and retaining customers. Developing these systems and a worldwide network has added a considerable indirect cost to the services provided to customers. Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network. As a result, there is a significant amount of consolidation currently taking place in the industry. Management expects that this trend toward consolidation will continue for the short- to medium-term. However, regional and local broker/forwarders will likely remain a competitive force. The nature of the Company's worldwide operations necessitate the Company dealing with a multitude of currencies other than the U.S. Dollar. This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference. Many of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company's ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by pricing as much of its business as possible in U.S. Dollars and by accelerating international currency settlements among its offices or agents primarily 18 using an internal clearing house. The Company enters into foreign currency hedging transactions only in limited locations where there are regulatory or commercial limitations on the company's ability to move money freely around the world. Any such hedging activity during 1998, 1997 and 1996 was insignificant. During the third and fourth quarters of 1997, the currencies in Thailand, Malaysia, Indonesia and South Korea devalued significantly. The currencies of Taiwan, Singapore and other Far East countries were also weakened by events in these other Asian countries. Net foreign currency losses realized during 1998 were approximately $0.534 million. Net foreign currency gains realized in 1997 were approximately $1.065 million. Foreign currency gains and losses realized during 1996 were insignificant. The Company has traditionally generated revenues from airfreight, ocean freight and customs brokerage and import services. In light of the customer-driven trend to provide customer rates on a door-to-door basis, management foresees the potential, in the medium- to long-term, for fees normally associated with customs house brokerage to be de-emphasized and included as a component of other services offered by the Company. Throughout 1998, macroeconomic conditions in Brazil, Mexico and across the Far East have impacted the global economy and, to some degree, have also impacted the Company's business. The Company has a very strong presence in the Far East, where it is most active in arranging exports to North America and Europe. Because of this strong export bias, and also due to the fact that a large volume of the Company's business is transacted in U.S. Dollars, the devaluation of various Asian and other currencies over the past year has not severely impacted the Company's earnings. The Company continues to evaluate what actions may need to be taken in these markets in response to the global economic events in order to safeguard, to the extent possible, the ongoing profitability of the Company's operations. On January 1, 1999, eleven of fifteen member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and a new common currency - the Euro. The Euro trades on currency exchanges and may be used in business transactions. The conversion to the Euro eliminates currency exchange rate risk between the member countries. Beginning in January 2002, new Euro-denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. The Company has established plans to address the issues raised by the Euro currency conversion including the need to adapt computer systems and business processes to accommodate Euro-denominated transactions. Since existing financial systems currently accommodate multiple currencies, the plans contemplate full conversion by the end of 2001. The Company does not expect the conversion costs to be material. Due to numerous uncertainties, the Company is evaluating the effects one common European currency will have on pricing. The Company is unable to predict resulting impact, if any, on the Company's consolidated financial statements. Year 2000 The Company has established teams to identify and correct Year 2000 compliance issues. Information systems with non-compliant code are expected to be modified or replaced with systems that are Year 2000 compliant. The teams are also charged with investigating the Year 2000 readiness of suppliers, customers, agents and other third parties and with developing contingency plans where necessary. Key systems have been inventoried and assessed for compliance, and detailed plans are in place for required system modifications or replacements. Remediation and testing activities are underway, with the majority of the systems already compliant. The Company expects to be fully compliant by the end of the second quarter of 1999. Because the Company's systems were developed from the late 1980's forward, the substantial Year 2000 concerns inherent in hardware and software systems place into service by many companies at earlier dates are not a primary concern. Management does not believe that future costs directly related to Year 2000 issues will be material. Costs incurred through 1998 were immaterial. The Company has identified critical suppliers, customers and other third parties and is in the process of surveying their Year 2000 remediation programs. Contingency plans for Year 2000-related interruptions are being developed and are expected to include the development of emergency recovery procedures, replacing electronic applications with manual processes and identification of alternate suppliers. Risk assessments and contingency plans, where necessary, are expected to be finalized no later than the second quarter of 1999. The Company's Year 2000 efforts are ongoing and its overall plan, as well as the consideration of contingency plans, will continue to evolve as new information becomes available. It should be noted that uninterrupted operations depend upon the ability of third parties, especially airlines, air traffic control and governmental customs organizations to be Year 19 2000 compliant. The Company has no direct ability to influence the compliance actions of customers, suppliers, agents and other third parties. Accordingly, it is unable to eliminate or estimate the ultimate effect of third party Year 2000 risks on the Company's operating results. The Company's greatest risk is a potential temporary inability of air traffic control and government customs agencies to track flights or transact normal procedures on a timely basis. Should this actually happen, management anticipates that restoring normal commerce would become a global priority. Sources of Growth Historically, growth through aggressive acquisition typically involves the purchase of significant "goodwill", the value of which can be realized in large measure only by retaining the customers and profit margins of the acquired business. As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions, where future economic benefit significantly exceeds the "goodwill" recorded in the transactions. Office Additions The Company started 4 new offices during 1998 and added 6 offices through acquisitions. Offices added through acquisitions are followed by an asterisk.
Latin North America Europe Middle East Far East America - ------------- ------ ----------- -------- ------- UNITED STATES: CZECH REPUBLIC: U.A.E.: JAPAN: ARGENTINA: McAllen TX Prague Dubai* Osaka* Buenos Aires Tokyo* ITALY: COLOMBIA: Florence PHILIPPINES: Bogota* Manila* Cali*
Internal Growth Management believes that a comparison of "same store" growth is critical in the evaluation of the quality and extent of the Company's internally generated growth. This "same store" analysis isolates the financial contributions from offices that have been included in the Company's operating results for at least one full year. The table below presents "same store" comparisons for the year ended December 31, 1998, relative to the same period of 1997, and for the year ended December 31, 1997, relative to the same period of 1996. Same store comparisons for the years ended December 31,
1998 1997 ---- ---- Net revenues 18% 30% Operating income 21% 52%
Liquidity and Capital Resources The Company's principal source of liquidity is cash generated from operations. At December 31, 1998, working capital was $94.6 million, including cash and cash equivalents and short-term investments of $49.8 million. The Company had no long-term debt at December 31, 1998. The Company has purchased and renovated a corporate office building located in Seattle, Washington, a portion of which houses the Company's corporate offices. Total costs approximated $40 million. While the nature of its business does not require an extensive investment in property and equipment, the Company cannot eliminate the possibility that it could acquire an equity interest in property in certain geographic locations. The Company currently expects to spend approximately $15 million on property and equipment in 1999, which is expected to be financed with cash, short-term floating rate, and/or long-term fixed-rate borrowings. 20 The Company borrows internationally and domestically under unsecured bank lines of credit totaling $40.2 million. At December 31, 1998, the Company was directly liable for $12.2 million drawn on these lines of credit and was contingently liable for an additional $19.6 million of standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $8.3 million. The Company was contingently liable at December 31, 1998 for the entire $8.3 million. Management believes that the Company's current cash position, bank financing arrangements, and operating cash flows will be sufficient to meet its capital and liquidity requirements for the foreseeable future. In some cases, the Company's ability to repatriate funds from foreign operations is subject to foreign exchange controls. These matters, at the current time, do not have a significant impact on the Company's operations. The repatriation of certain undistributed earnings of the Company's subsidiaries would, under most circumstances, require the Company to pay some additional Federal and state income tax. The Company has not provided for this additional tax on undistributed earnings accumulated through December 31, 1992 because the Company intends to reinvest such earnings to fund the expansion of its foreign activities, or to distribute them in a manner in which no significant additional taxes would be incurred. At December 31, 1998, the total of such pre-1993 undistributed earnings was approximately $41.9 million and the associated Federal and state tax that would be payable on any hypothetical repatriation of these earnings approximates $10.1 million. Impact of Inflation To date, the Company's business has not been adversely affected by inflation, nor has the Company experienced significant difficulty in passing carrier rate increases on to its customers by means of price increases. Direct carrier rate increases could occur over the short- to medium-term period. Due to the high degree of competition in the market place, these rate increases might lead to an erosion in the Company's margins. However, as the Company is not required to purchase or maintain extensive property and equipment and has not otherwise incurred substantial interest rate-sensitive indebtedness, the Company currently has no direct exposure to increased costs resulting from increases in interest rates. The forward-looking statements contained in this document involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from these statements include, but are not limited to: risks associated with foreign operations, elimination of intercompany transactions, matching of expenses with the associated revenue, seasonality, shifts in consumer demand, the actual impact of the Year 2000 issue, the effect that the adoption of the Euro as the primary currency of 11 member states of the European Union might have on the global economy and the Company's international and domestic customers, other accounting estimates and other risk factors disclosed from time to time in the Company's public reports. 21 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks in the ordinary course of its business. These risks are primarily related to foreign exchange risk and changes in short-term interest rates. The potential impact of the Company's exposure to these risks is presented below: Foreign Exchange Risk The Company conducts business in many different countries and currencies. The Company's business often results in revenue billings issued in a country and currency which differs from that where the expenses related to the service are incurred. In the ordinary course of business, the Company creates numerous intercompany transactions. This brings a market risk to the Company's earnings. Foreign exchange rate sensitivity analysis can be quantified by estimating the impact on the Company's earnings as a result of hypothetical changes in the value of the U.S. Dollar, the Company's functional currency, relative to the other currencies in which the Company transacts business. All other things being equal, an average 10% weakening of the U.S. Dollar, throughout the year ended December 31, 1998, would have had the effect of raising operating income approximately $4.1 million. An average 10% strengthening of the U.S. Dollar, for the same period, would have the effect of reducing operating income approximately $3.3 million. The Company has approximately $50 million of intercompany transactions unsettled at any one point in time. The Company currently does not use derivative financial instruments to manage foreign currency risk. The Company instead follows a policy of accelerating international currency settlements to manage foreign exchange risk relative to intercompany billings. The majority of intercompany billings are resolved within 30 days and intercompany billings arising in the normal course of business are fully settled within 90 days. Interest Rate Risk At December 31, 1998, the Company had cash and cash equivalents and short-term investments of $48,823,000 and short-term borrowings of $12,245,000, all subject to variable short-term interest rates. A hypothetical change in the interest rate of 10% would have an immaterial impact on the Company's earnings. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following documents are filed on the pages listed below, as part of Part II, Item 8 of this report. Document Page - -------- ---- 1. Financial Statements and Accountants' Report: Independent Auditors' Report F-1 Consolidated Financial Statements: Balance Sheets as of December 31, 1998 and 1997 F-2 Statements of Earnings for the Years Ended December 31, 1998, 1997 and 1996 F-3 Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996 F-4 Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-5 Notes to Consolidated Financial Statements F-6 through F-15 2. Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996 S-1 ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. 22 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to information under the caption "Proposal 1 - Election of Directors" and to the information under the caption "Section 16(a) Reporting Delinquencies" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 5, 1999. See also Part I - Item 1 - Executive Officers of the Registrant. ITEM 11 -- EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to information under the caption "Executive Compensation" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 5, 1999. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to information under the captions "Principal Holders of Voting Securities" and "Proposal 1 - Election of Directors" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 5, 1999. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to information under the caption "Executive Compensation" and "Certain Transactions" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 5, 1999. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS PAGE ---- Independent Auditors' Report F-1 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2 Consolidated Statements of Earnings for the Years Ended December 31, 1998, 1997 and 1996 F-3 Consolidated Statements of Shareholders' Equity and Comprehensive Income 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 Included in Part IV of this report: Schedules: II Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996 S-1 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. 23 (a)(3) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS The following list is a subset of the list of exhibits described below and contains all compensatory plans, contracts or arrangements in which any director or executive officer of the Company is a participant, unless the method of allocation of benefits thereunder is the same for management and non-management participants: (1) Form of Employment Agreement executed by the Company's Chairman and Chief Executive Officer. See Exhibit 10.23. (2) Form of Employment Agreement executed by the Company's President and Chief Operating Officer and certain of the Company's executive officers. See Exhibit 10.24. (3) Form of Employment Agreement executed by the Company's Director-Europe. See Exhibit 10.3. (4) The Company's Amended 1985 Stock Option Plan. See Exhibit 10.4. (5) Form of Stock Option Agreement used in connection with options granted under the Company's Amended 1985 Stock Option Plan. See Exhibit 10.5. (6) The Company's Restated and Amended 1988 Employee Stock Purchase Plan. See Exhibit 10.20. (7) Form of Stock Purchase Agreement used in connection with options granted under the Company's Restated and Amended 1988 Employee Stock Purchase Plan. See Exhibit 10.7. (8) The Company's 1993 Directors' Non-Qualified Stock Option Plan. See Exhibit 10.8. (9) Form of Stock Option Agreement used in connection with options granted under the Company's 1993 Directors' Non-Qualified Stock Option Plan. See Exhibit 10.9. (10) The Company's 1997 Non-Qualified and Incentive Stock Option Plan. See Exhibit 10.29. (11) Form of Stock Option Agreement used in connection with Non-Qualified options granted under the Company's 1997 Non-Qualified and Incentive Stock Option Plan. See Exhibit 10.30. (12) Form of Stock Option Agreement used in connection with Incentive options granted under the Company's 1997 Non-Qualified and Incentive Stock Option Plan. See Exhibit 10.31. (13) The Company's 1997 Executive Incentive Compensation Plan. See Exhibit 10.32. (14) Form of Executive Incentive Compensation Plan Award Certification used in connection with the awards granted under the Company's 1997 Executive Incentive Compensation Plan. See Exhibit 10.33. (15) Form of Executive Incentive Compensation Plan Award Agreement used in connection with establishing the terms and conditions of an award under the Company's 1997 Executive Incentive Compensation Plan. See Exhibit 10.34. (b)REPORTS ON FORM 8-K No reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report on Form 10-K. 24 (c) EXHIBITS Exhibit Number Exhibit ------- ------- 3.1 The Company's Restated Articles of Incorporation and the Articles of Amendment thereto dated December 9, 1993. (Incorporated by reference to Exhibit 3.1 to Form 10-K, filed on or about March 31, 1995.) 3.1.1 Articles of Amendment to the Restated Articles of Incorporation dated November 12, 1996. (Incorporated by reference to Exhibit 3.1.1 to Form 10-K, filed on or about March 31, 1997.) 3.2 The Company's Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to Form 10-K, filed on or about March 28, 1994.) 10.3 Form of Employment Agreement executed by the Company's Director - Europe. (Incorporated by reference to Exhibit 10.7 to Form 10-K, filed on or about March 28, 1991.) 10.4 The Company's Amended 1985 Stock Option Plan. (Incorporated by reference to Exhibit 10.14 to Form 10-K, filed on or about March 28, 1991.) 10.5 Form of Stock Option Agreement used in connection with options granted under the Company's Amended 1985 Stock Option Plan. (Incorporated by reference to Exhibit 10.15 to Form 10-K, filed on or about March 28, 1991.) 10.7 Form of Stock Purchase Agreement used in connection with options granted under the Company's Restated and Amended 1988 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.36 to Form 10-K, filed on or about March 28, 1989.) 10.8 The Company's 1993 Directors' Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.8 to Form 10-K, filed on or about March 28, 1994.) 10.9 Form of Stock Option Agreement used in connection with options granted under the Company's 1993 Directors' Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.9 to Form 10-K, filed on or about March 28, 1994.) 10.17 Exclusive Agency Agreement, dated as of January 1, 1991, between E.I. Freight (Taiwan) Ltd. and EI Freight (H.K.) Limited. (Incorporated by reference to Exhibit 10.17 to Form 10-K, filed on or about March 28, 1994.) 10.18 Plan and Agreement of Reorganization, dated as of January 1, 1984, between the Company and the individual shareholders of Fons Pte. Ltd. (Incorporated by reference to Exhibit 2.5 to Registration Statement No. 2-91224, filed on May 21, 1984.) 10.19 Plan and Agreement of Reorganization, dated as of January 1, 1984, among the Company, EIO Investment Ltd., Wong Hoy Leung, Chiu Chi Shing, and James Li Kou Wang. (Incorporated by reference to Exhibit 2.6 to Registration Statement No. 2-91224, filed on May 21, 1984.) 10.20 The Company's Restated and Amended 1988 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-81460, filed on July 12, 1994.) 10.23 Form of Employment Agreement executed by the Company's Chairman and Chief Executive Officer dated November 2, 1994. (Incorporated by reference to Exhibit 10.23 to Form 10-K, filed on or about March 31, 1995.) 10.24 Form of Employment Agreement executed by the Company's President and Chief Operating Officer and certain of the Company's executive officers dated November 2, 1994. (Incorporated by reference to Exhibit 10.24 to Form 10-K, filed on or about March 31, 1995.) 25 10.28 Credit Agreement Between the Company and Bank of America National Trust and Savings Association, doing business as Seafirst Bank dated March 31, 1997 with respect to the Company's $30,000,000 unsecured line of credit together with a Revolving Note due March 30, 1998. (Incorporated by reference to Exhibit 10.28 to Form 10-K, filed on or about March 31, 1997.) 10.29 The Company's 1997 Non-Qualified and Incentive Stock Option Plan. (Incorporated by reference to Appendix A of the Company's Notice of Annual Meeting of Shareholders and Proxy Statement pursuant to Regulation 14A filed on or about March 24, 1997.) 10.30 Form of Stock Option Agreement used in connection with Non-Qualified options granted under the Company's 1997 Non-Qualified and Incentive Stock Option Plan. (Incorporated by referenced to Exhibit 10.30 to Form 10-K, filed on or about March 31, 1998.) 10.31 Form of Stock Option Agreement used in connection with Incentive options granted under the Company's 1997 Non-Qualified and Incentive Stock Option Plan. (Incorporated by referenced to Exhibit 10.31 to Form 10-K, filed on or about March 31, 1998.) 10.32 The Company's 1997 Executive Incentive Compensation Plan. (Incorporated by reference to Appendix B of the Company's Notice of Annual Meeting of Shareholders and Proxy Statement pursuant to Regulation 14A filed on or about March 24, 1997.) 10.33 Form of Executive Incentive Compensation Plan Award Certification used in connection with the awards granted under the Company's 1997 Executive Incentive Compensation Plan. (Incorporated by referenced to Exhibit 10.33 to Form 10-K, filed on or about March 31, 1998.) 10.34 Form of Executive Incentive Compensation Plan Award Agreement used in connection with establishing the terms and conditions of an award under the Company's 1997 Executive Incentive Compensation Plan. (Incorporated by referenced to Exhibit 10.34 to Form 10-K, filed on or about March 31, 1998.) 10.35 Loan Modification Agreement between the Company and Bank of America National Trust and Savings Association doing business as Seafirst Bank dated March 23, 1998 amending the maturity date of the Note and extending the termination date, as defined in the Credit Agreement to June 28, 1998. (Incorporated by referenced to Exhibit 10.35 to Form 10-K, filed on or about March 31, 1998. Superseded by Exhibit 10.36 to this Report.) 10.36 Loan Modification Agreement between the Company and Bank of America National Trust and Savings Association doing business as Seafirst Bank dated June 28, 1998 amending the credit limit to $40,000,000, amending the maturity date of the Note and extending the termination date, as defined in the Credit Agreement to June 27, 1999. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Certified Public Accountants. 27. Financial Data Schedule (Filed Electronically Only). 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 31, 1999. EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. By: /s/ R. Jordan Gates --------------------------------- R. Jordan Gates Senior Vice President-Chief Financial Officer and Treasurer 27 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 1999. Signature Title - --------- ----- /s/ Peter J. Rose Chairman of the Board and Chief Executive Officer - --------------------------- (Principal Executive Officer) and Director (Peter J. Rose) /s/ R. Jordan Gates Senior Vice President-Chief Financial Officer and - --------------------------- Treasurer (Principal Financial and Accounting (R. Jordan Gates) Officer) /s/ Kevin M. Walsh President and Chief Operating Officer and Director - --------------------------- (Kevin M. Walsh) /s/ James Li Kou Wang Executive Vice President and Director-Far East - --------------------------- and Director (James Li Kou Wang) /s/ James J. Casey Director - --------------------------- (James J. Casey) /s/ Dan P. Kourkoumelis Director - --------------------------- (Dan P. Kourkoumelis) /s/ John W. Meisenbach Director - --------------------------- (John W. Meisenbach) 28 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES ----------- CONSOLIDATED FINANCIAL STATEMENTS COMPRISING ITEM 8 ANNUAL REPORT ON FORM 10-K TO SECURITIES AND EXCHANGE COMMISSION FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 Independent Auditors' Report The Board of Directors and Shareholders Expeditors International of Washington, Inc.: We have audited the consolidated balance sheets of Expeditors International of Washington, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Expeditors International of Washington, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP /s/ KPMG LLP Seattle, Washington February 16, 1999 F-1 Consolidated Balance Sheets In thousands except share data December 31,
1998 1997 ---- ---- Current Assets: Cash and cash equivalents $ 49,429 $ 42,094 Short-term investments 394 214 Accounts receivable, less allowance for doubtful accounts of $8,198 in 1998 and $6,449 in 1997 222,598 206,501 Deferred Federal and state income taxes 2,427 4,296 Other 9,151 6,399 --------- --------- Total current assets 283,999 259,504 --------- --------- Property and Equipment: Buildings and leasehold improvements 68,833 37,003 Furniture, fixtures, and equipment 65,497 47,031 Vehicles 4,502 4,516 --------- --------- 138,832 88,550 Less accumulated depreciation and amortization 50,307 36,475 --------- --------- 88,525 52,075 Land 14,505 14,475 --------- --------- Net property and equipment 103,030 66,550 Deferred Federal and state income taxes 2,183 1,930 Other assets, net 17,384 16,122 --------- --------- $ 406,596 $ 344,106 --------- --------- --------- --------- Current Liabilities: Short-term borrowings $ 12,245 $ 2,145 Accounts payable 143,523 143,980 Accrued expenses, primarily salaries and related costs 25,326 18,946 Federal, state, and foreign income taxes 8,304 7,181 --------- --------- Total current liabilities 189,398 172,252 --------- --------- Shareholders' Equity: Preferred stock, par value $.01 per share Authorized 2,000,000 shares; none issued Common stock, par value $.01 per share Authorized 80,000,000 shares; issued and outstanding 24,681,841 shares at December 31, 1998 and 24,546,380 shares at December 31, 1997 247 245 Additional paid-in capital 17,520 15,534 Retained earnings 203,050 159,225 Accumulated other comprehensive loss (3,619) (3,150) --------- --------- Total shareholders' equity 217,198 171,854 --------- --------- Commitments and contingencies $ 406,596 $ 344,106 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. Certain 1997 amounts have been reclassified to conform to the 1998 presentation. F-2 Consolidated Statements of Earnings In thousands except share data Years ended December 31,
1998 1997 1996 ------------ ------------ ------------ Revenues: Airfreight $ 685,613 $ 659,480 $ 512,104 Ocean freight 236,848 180,555 148,907 Customs brokerage and import services 141,246 113,967 69,077 ------------ ------------ ------------ Total revenues 1,063,707 954,002 730,088 ------------ ------------ ------------ Operating Expenses: Airfreight consolidation 539,706 534,699 417,150 Ocean freight consolidation 170,551 128,779 110,603 Salaries and related costs 190,288 153,196 108,797 Selling and promotion 15,018 13,469 10,409 Rent 15,459 10,806 8,279 Depreciation and amortization 15,547 11,159 8,147 Other 43,766 41,979 29,278 ------------ ------------ ------------ Total operating expenses 990,335 894,087 692,663 ------------ ------------ ------------ Operating income 73,372 59,915 37,425 ------------ ------------ ------------ Other Income (Expense): Interest income 2,206 2,096 2,264 Interest expense (487) (358) (163) Other, net 486 919 58 ------------ ------------ ------------ Other income, net 2,205 2,657 2,159 ------------ ------------ ------------ Earnings before income taxes 75,577 62,572 39,584 Income tax expense 28,303 24,161 15,321 ------------ ------------ ------------ Net earnings $ 47,274 $ 38,411 $ 24,263 ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per share $ 1.92 $ 1.57 $ 1.00 ------------ ------------ ------------ ------------ ------------ ------------ Diluted earnings per share $ 1.78 $ 1.46 $ .95 ------------ ------------ ------------ ------------ ------------ ------------ Basic shares outstanding 24,617,219 24,428,929 24,161,363 ------------ ------------ ------------ ------------ ------------ ------------ Diluted shares outstanding 26,529,192 26,323,522 25,644,296 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-3 Consolidated Statements of Shareholders' Equity and Comprehensive Income In thousands, except share data Years ended December 31, 1998, 1997 and 1996
Accumulated Common stock Additional other ------------------ paid-in Retained comprehensive Shares Par Value capital earnings income (loss) Total ------ --------- ------- -------- ------------- ----- Balance at December 31, 1995 24,021,326 $ 240 13,009 100,928 3,015 117,192 Exercise of stock options 264,260 3 1,409 -- -- 1,412 Issuance of shares under stock purchase plan 127,974 1 1,319 -- -- 1,320 Shares repurchased under provisions of stock repurchase plan (200,614) (2) (3,318) -- -- (3,320) Tax benefits related to stock options and stock purchase plan -- -- 760 -- -- 760 Comprehensive income Net earnings -- -- -- 24,263 -- 24,263 Foreign currency translation adjustments, net of deferred taxes of $164 -- -- -- -- 317 317 ----------- ----- ------- -------- ------- -------- Total comprehensive income -- -- -- -- -- 24,580 ----------- ----- ------- -------- ------- -------- Dividends paid ($.08 per share) -- -- -- (1,933) -- (1,933) ----------- ----- ------- -------- ------- -------- Balance at December 31, 1996 24,212,946 $ 242 13,179 123,258 3,332 140,011 Exercise of stock options 235,360 2 1,476 -- -- 1,478 Issuance of shares under stock purchase plan 170,399 2 2,148 -- -- 2,150 Shares repurchased under provisions of stock repurchase plan (72,325) (1) (3,090) -- -- (3,091) Tax benefits related to stock options and stock purchase plan -- -- 1,821 -- -- 1,821 Comprehensive income Net earnings -- -- -- 38,411 -- 38,411 Foreign currency translation adjustments, net of deferred tax credit of $2,094 -- -- -- -- (6,482) (6,482) ----------- ----- ------- -------- ------- -------- Total comprehensive income -- -- -- -- -- 31,929 ----------- ----- ------- -------- ------- -------- Dividends paid ($.10 per share) -- -- -- (2,444) -- (2,444) ----------- ----- ------- -------- ------- -------- Balance at December 31, 1997 24,546,380 $ 245 15,534 159,225 (3,150) 171,854 Exercise of stock options 159,050 2 1,355 -- -- 1,357 Issuance of shares under stock purchase plan 112,777 1 3,618 -- -- 3,619 Shares repurchased under provisions of stock repurchase plan (136,366) (1) (4,734) -- -- (4,735) Tax benefits related to stock options and stock purchase plan -- -- 1,747 -- -- 1,747 Comprehensive income Net earnings -- -- -- 47,274 -- 47,274 Foreign currency translation adjustments, net of deferred tax credit of $253 -- -- -- -- (469) (469) ----------- ----- ------- -------- ------- -------- Total comprehensive income -- -- -- -- -- 46,805 ----------- ----- ------- -------- ------- -------- Dividends paid ($.14 per share) -- -- -- (3,449) -- (3,449) ----------- ----- ------- -------- ------- -------- Balance at December 31, 1998 24,681,841 $ 247 17,520 203,050 (3,619) 217,198 ----------- ----- ------- -------- ------- -------- ----------- ----- ------- -------- ------- -------- See accompanying notes to consolidated financial statements. Certain 1997 amounts have been reclassified to conform with the 1998 presentation.
F-4 Consolidated Statements of Cash Flows In thousands Years ended December 31,
1998 1997 1996 -------- ------- ------- Operating Activities: Net earnings $ 47,274 38,411 24,263 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for losses on accounts receivable 2,612 3,344 2,120 Depreciation and amortization 15,547 11,159 8,147 Deferred income tax expense (benefit) 3,697 2,253 (37) Amortization of cost in excess of net assets of acquired businesses 536 500 363 Changes in operating assets and liabilities: Increase in accounts receivable (18,375) (38,959) (45,795) Increase in accounts payable, accrued expenses and taxes payable 5,552 44,551 35,669 Other (3,605) (1,455) (563) -------- ------- ------- Net cash provided by operating activities $ 53,238 59,804 24,167 -------- ------- ------- Investing Activities: Decrease (increase) in short-term investments (121) (13) 87 Purchase of property and equipment (52,455) (36,007) (20,824) Acquisitions, net of cash -- (7,076) -- Other (93) (825) (3,058) -------- ------- ------- Net cash used in investing activities (52,669) (43,921) (23,795) -------- ------- ------- Financing Activities: Short-term borrowings, net 10,067 (2,887) 3,164 Proceeds from issuance of common stock 4,976 3,628 2,732 Repurchases of common stock (4,735) (3,091) (3,320) Dividends paid (3,449) (2,444) (1,933) -------- ------- ------- Net cash provided by (used in) financing activities 6,859 (4,794) 643 Effect of exchange rate changes on cash (93) (5,961) (191) -------- ------- ------- Increase in cash and cash equivalents 7,335 5,128 824 Cash and cash equivalents at beginning of year 42,094 36,966 36,142 -------- ------- ------- Cash and cash equivalents at end of year $ 49,429 42,094 36,966 -------- ------- ------- -------- ------- ------- Interest and Taxes Paid: Interest $ 503 865 282 Income taxes 27,003 21,148 13,580
Non-Cash Investing and Financing Activities: During 1996 the Company purchased real estate for $5.7 million with short-term financing provided by the seller. No principal was paid in 1996. The obligation was paid in February 1997. See accompanying notes to consolidated financial statements. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Basis of Presentation Expeditors International of Washington, Inc. ("the Company") is a global logistics company operating through a worldwide network of offices, international service centers and exclusive or non-exclusive agents. The Company's customers include retailing and wholesaling, electronics, and manufacturing companies around the world. The Company grants credit upon approval to customers. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions. The Company cannot predict which, if any, of these proposals may be adopted, nor can the Company predict the effects adoption of any such proposal will have on the Company's business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being affected by governmental policies concerning international trade, the Company's business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business. The consolidated financial statements include the accounts of the Company and its subsidiaries. In addition, the accounts of exclusive agents have been consolidated in those circumstances where the Company maintains unilateral control over the agents' assets and operations, notwithstanding a lack of technical majority ownership of the agents' common stock. In 1997, the Company acquired its Irish agent in a purchase business combination for approximately $8,500 of cash. Goodwill from this transaction was approximately $5,500. Results of operations of this entity are not material in relation to the Company as a whole. All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the notes are presented in thousands except for share data. B. Short-term Investments Short-term investments are designated as available-for-sale and cost approximates market at December 31, 1998 and 1997. C. Long-Lived Assets, Depreciation and Amortization Property and equipment are recorded at cost, including interest capitalized for the construction of certain facilities, and are depreciated or amortized on the straight-line method over the shorter of the assets' estimated useful lives or lease terms. Useful lives for major categories of property and equipment are as follows: Buildings 28 to 40 years Furniture, fixtures and equipment 3 to 5 years Vehicles 3 to 5 years Interest capitalized in 1998 and 1997 was $193 and $505, respectively. Expenditures for maintenance, repairs, and renewals of minor items are charged to earnings as incurred. Major renewals and improvements are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income for the period. The excess of the cost over the fair value of the net assets of acquired businesses (included in other assets, net) is amortized on the straight-line method over periods up to 40 years. F-6 In accordance with Statement of Financial Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of", long-lived assets (property and equipment) and certain identifiable intangible assets (excess costs over the fair value of the net assets of acquired businesses) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-term assets is measured by a comparison of the carrying amount of such assets against the undiscounted future cash flows expected to be generated by the assets. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the assets' carrying amounts exceeds the assets' discounted future cash flows. D. Revenues and Revenue Recognition Airfreight revenues include the charges to the Company for carrying the shipments when the Company acts as a freight consolidator. Ocean freight revenues include the charges to the Company for carrying the shipments when the Company acts as a Non-Vessel Operating Common Carrier (NVOCC). Revenues realized in other capacities include only the commissions and fees earned. Revenues related to shipments are recognized at the time the freight is tendered to a direct carrier at origin. All other revenues, including breakbulk services, local transportation, customs formalities, distribution services and logistics management, are recognized upon performance. E. Income Taxes Income taxes are accounted for under the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F. Net Earnings per Common Share During 1997, the Company adopted SFAS No. 128. Under SFAS No. 128, diluted earnings per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares represent outstanding stock options. Basic earnings per share is calculated using the weighted average of common shares outstanding without taking into consideration dilutive potential common shares outstanding. G. Foreign Currency Foreign currency amounts attributable to foreign operations have been translated into U.S. Dollars using year-end exchange rates for assets and liabilities, historical rates for equity, and average annual rates for revenues and expenses. Unrealized gains or losses arising from fluctuations in the year-end exchange rates are generally recorded as equity adjustments from foreign currency translation. Currency fluctuations are a normal operating factor in the conduct of the Company's business and exchange transaction gains and losses are generally included in freight consolidation expenses. The Company follows a policy of accelerating international currency settlements to manage its foreign exchange exposure. Accordingly, the Company enters into foreign currency hedging transactions only in limited locations where there are regulatory or commercial limitations on the Company's ability to move money freely around the world. Any such hedging activity during 1998, 1997 and 1996 was insignificant. Net foreign currency losses realized during 1998 were approximately $534. Net foreign currency gains realized in 1997 were $1,065. Foreign currency transaction gains and losses realized in 1996 were insignificant. H. Cash Equivalents All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents. F-7 I. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for the reporting of comprehensive income and its components in financial statements. Comprehensive income consists of net income and other gains and losses affecting shareholders' equity that, under generally accepted accounting principles, are excluded from net income. For the Company, these consist of foreign currency translation gains and losses, net of related income tax effects. Prior year financial statements have been reformatted to conform with the requirements of SFAS No. 130. J. Segment Reporting The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" effective for the year ended December 31, 1998. SFAS No. 131 establishes standards for the way that public companies report selected information about segments in their financial statements. The Company is organized functionally in geographic operating segments. Accordingly, management focuses its attention on revenues, net revenues, operating income, identifiable assets, capital expenditures, depreciation and amortization and equity generated by or allocated to each of these geographical areas when evaluating effectiveness of geographic management. K. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the 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 period. Actual results could differ from those estimates. L. Reclassification Certain 1996 and 1997 amounts have been reclassified to conform with the 1998 presentation. NOTE 2. CREDIT ARRANGEMENTS The Company has a $40,000 United States bank line of credit extending through June 27, 1999. Borrowings under the line bear interest at LIBOR +0.75% (5.81% at December 31, 1998) and are unsecured. As of December 31, 1998, the Company had $11,000 of borrowings under this line. The majority of the Company's foreign subsidiaries maintain bank lines of credit for short-term working capital purposes. These credit lines are supported by standby letters of credit issued by a United States bank, or guarantees issued by the Company to the foreign banks issuing the credit line. Lines of credit bear interest at .5% to 1.5% over the foreign banks' equivalent prime rates. At December 31, 1998 and 1997, the Company was liable for $1,245 and $1,145, respectively, of borrowings under these lines, and at December 31, 1998 was contingently liable for approximately $19,631 under outstanding standby letters of credit and guarantees related to these lines of credit and other obligations. In addition, at December 31, 1998 the Company had a $8,312 credit facility with a United Kingdom bank (U.K. facility), secured by a corporate guarantee. The Company was contingently liable under the U.K. facility at December 31, 1998 for $8,312 used to secure customs bonds issued by foreign governments. At December 31, 1998, the Company was in compliance with all restrictive covenants of these credit lines and the associated credit facilities, including maintenance of certain minimum asset, working capital and equity balances and ratios. F-8 NOTE 3. INCOME TAXES Income tax expense for 1998, 1997 and 1996 includes the following components:
FEDERAL STATE FOREIGN TOTAL ------- ----- ------- ----- 1998 Current $ 9,526 2,071 13,009 24,606 Deferred 2,726 971 -- 3,697 -------- ------ ------ ------- $ 12,252 3,042 13,009 28,303 -------- ------ ------ ------- -------- ------ ------ ------- 1997 Current $ 9,993 1,669 10,246 21,908 Deferred 1,420 833 -- 2,253 -------- ------ ------ ------- $ 11,413 2,502 10,246 24,161 -------- ------ ------ ------- -------- ------ ------ ------- 1996 Current $ 8,633 1,248 5,477 15,358 Deferred (benefit) (390) 353 -- (37) -------- ------ ------ ------- $ 8,243 1,601 5,477 15,321 -------- ------ ------ ------- -------- ------ ------ -------
Income tax expense differs from amounts computed by applying the U.S. Federal income tax rate of 35% to earnings before income taxes as a result of the following:
1998 1997 1996 -------- ------- ------- Computed "expected" tax expense $ 26,452 21,900 13,855 Increase (reduction) in income taxes resulting from: State and local income taxes, net of Federal income tax benefit 1,977 1,626 1,041 Decrease in valuation allowance for deferred tax assets (207) (85) (72) Other, net 81 720 497 -------- ------- ------- $ 28,303 24,161 15,321 -------- ------- ------- -------- ------- -------
The components of earnings before income taxes are as follows:
1998 1997 1996 ------- ------ ------ United States $28,542 22,799 15,213 Foreign 47,035 39,773 24,371 ------- ------ ------ $75,577 62,572 39,584 ------- ------ ------ ------- ------ ------
The tax effects of temporary differences, tax credits and operating loss carryforwards that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are as follows:
YEAR ENDED DECEMBER 31, 1998 1997 - ----------------------- ---- ---- Deferred tax assets: Foreign tax credits related to unremitted foreign earnings $ 21,453 14,938 Accrued intercompany and third party charges, deductible for taxes upon economic performance (i.e. actual payment) 2,844 3,194 Foreign currency translation adjustment 2,183 1,930 Provision for doubtful accounts receivable 1,575 1,575 Excess of financial statement over tax depreciation 1,703 1,136 Other 1,286 1,676 -------- ------- Total gross deferred tax assets 31,044 24,449 Less valuation allowance (223) (430) -------- ------- 30,821 24,019 -------- ------- F-9 Deferred tax liabilities: Unremitted foreign earnings (23,108) (15,499) Other (3,103) (2,294) -------- ------- Total gross deferred tax liabilities $(26,211) (17,793) -------- ------- Net deferred tax assets $ 4,610 6,226 -------- ------- Less current deferred tax assets $ (2,427) (4,296) -------- ------- Noncurrent deferred tax assets $ 2,183 1,930 -------- ------- -------- -------
At December 31, 1998, the Company has net operating loss carryforwards for foreign income tax purposes of $636 which are available over an indefinite period to offset future foreign taxable income. The Company has not provided U.S. Federal income taxes on undistributed earnings of foreign subsidiaries accumulated through December 31, 1992 since the Company intends to reinvest such earnings indefinitely or to distribute them in a manner in which no significant additional taxes would be incurred. Such undistributed earnings are approximately $41,900 and the additional Federal and state taxes payable in a hypothetical distribution of such accumulated earnings would approximate $10,100. Since 1993, the Company has been providing for Federal and state income tax expense on foreign earnings without regard to whether such earnings will be permanently reinvested outside the United States. NOTE 4. SHAREHOLDERS' EQUITY A. Dividends On November 7, 1996, the Board of Directors declared a 2-for-1 stock split, effected in the form of a stock dividend of one share of common stock for every share outstanding, and increased the authorized common stock to 80,000,000 shares. The stock dividend was distributed on December 11, 1996 to shareholders of record on November 25, 1996. All share and per share information, except par value, has been adjusted for all years to reflect the stock split. B. Non-Discretionary Stock Repurchase Plan The Company has a Non-Discretionary Stock Repurchase Plan under which management is authorized to repurchase up to 1,100,000 shares of the Company's common stock in the open market with the proceeds received from the exercise of Employee and Director Stock Options. As of December 31, 1998, the Company had repurchased and retired 776,748 shares of common stock at an average price of $19.40 over the period from 1994 through 1998. C. Stock Option Plans The Company has two stock option plans (the "1985 Plan" and the "1997 Plan") for employees under which the Board of Directors may grant officers and key employees options to purchase common stock at prices equal to or greater than market value on the date of the grant. The 1985 Plan provides for non-qualified grants at exercise prices equal to or greater than the market value on the date of grant. Outstanding options generally vest and become exercisable over periods up to five years from the date of grant and expire no more than 10 years from the date of grant. The 1997 Plan provides for qualified and non-qualified grants of options to purchase shares, limited to not more than 50,000 per person per year. Grants less than or equal to 10,000 shares in any fiscal year, are granted at or above common stock prices on the date of the grant. Any 1997 Plan grants in excess of the initial 10,000 shares granted per person per year (Excess Grants) require an exercise price of not less than 120% of the common stock price on the date of the grant. Excess Grants expire no later than 5 years from the date of grant. Excess Grants in 1997 vest completely 3 years from the date of grant. The Company also has a stock option plan (Directors Plan) under which non-employee directors elected at each annual meeting are granted non-qualified options to purchase 4,000 shares of common stock on the first business day of the month following the meeting. Upon the exercise of non-qualified stock options, the Company derives a tax deduction measured by the excess of the market value over the option price at the date of exercise. The related tax benefit is credited to additional paid-in capital. F-10 Details regarding the plans are as follows:
Unoptioned Shares Outstanding Options ---------------------------------- --------------------- Weighted average 1985 1997 Directors' Number of price per Plan Plan Plan shares share -------- ---------- -------- ---------- ------ Balance at December 31, 1995 221,564 -- 76,000 2,810,200 $ 7.54 -------- ---------- -------- ---------- ------ Options granted (212,200) -- (12,000) 224,200 $14.60 Options exercised -- -- -- (264,260) $ 5.42 Options canceled 108,800 -- -- (108,800) $ 8.51 -------- ---------- -------- ---------- ------ Balance at December 31, 1996 118,164 -- 64,000 2,661,340 $ 8.36 -------- ---------- -------- ---------- ------ Options authorized -- 2,000,000 -- -- -- Options granted (15,000) (416,450) (12,000) 443,450 $26.16 Options exercised -- -- -- (235,360) $ 6.72 Options canceled 97,500 3,700 -- (101,200) $11.46 -------- ---------- -------- ---------- ------ Balance at December 31, 1997 200,664 1,587,250 52,000 2,768,230 $11.29 -------- ---------- -------- ---------- ------ Options granted (105,000) (431,700) (12,000) 548,700 $43.55 Options exercised -- -- -- (159,050) $ 9.07 Options canceled 33,125 26,200 -- (59,325) $ 8.53 -------- ---------- -------- ---------- ------ Balance at December 31, 1998 128,789 1,181,750 40,000 3,098,555 $16.98 -------- ---------- -------- ---------- ------ -------- ---------- -------- ---------- ------
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option and its employee stock purchase rights plans. Accordingly, no compensation cost has been recognized for its fixed stock option or employee stock purchase rights plans. Had compensation cost for the Company's three stock based compensation and employee stock purchase rights plans been determined consistent with FASB No. 123, the Company's net earnings, basic earnings per share and diluted earnings per share would have been decreased to the pro forma amounts indicated below:
1998 1997 1996 ---------- ---------- ---------- Net earnings - as reported $ 47,274 38,411 24,263 Net earnings - pro forma $ 42,697 36,216 22,789 Basic earnings per share - as reported $ 1.92 1.57 1.00 Basic earnings per share - pro forma $ 1.73 1.48 0.94 Diluted earnings per share - as reported $ 1.78 1.46 0.95 Diluted earnings per share - pro forma $ 1.63 1.39 0.89
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants:
1998 1997 1996 -------- -------- -------- Dividend yield 0.3% 0.5% 0.5% Volatility 45% 39% 48% Risk-free interest rates 4.6 - 5.7% 5.5 - 6.7% 6.8 - 8.5% Expected life (years) - stock option plans 7 7 7 Expected life (years) - stock purchase rights plan 1 1 1 Weighted average fair value of stock options granted during the year $ 22.98 $ 11.96 $ 8.10 Weighted average fair value of stock purchase rights $ 12.50 $ 9.76 $ 5.34
F-11 The following table summarizes information about fixed-price stock options outstanding at December 31, 1998:
Weighted Weighted Weighted average average average Range of Number remaining exercise Number exercise exercise price outstanding contractual life price exercisable price -------------- ----------- ---------------- ----- ----------- ----- $ 5.31 - 6.56 1,025,780 1.84 years $ 5.88 1,025,780 $ 5.88 $ 7.13 - 11.38 959,575 5.80 years $ 10.11 592,850 $ 9.78 $14.60 - 29.31 476,250 8.03 years $ 21.78 12,000 $ 29.19 $30.08 - 43.88 636,950 8.50 years $ 41.62 12,000 $ 38.75 -------------- ----------- ---------------- ------- ----------- ------- $ 5.31 - 43.88 3,098,555 5.39 years $ 16.98 1,642,630 $ 7.70
D. Basic and Diluted Earnings Per Share The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings per share in 1998, 1997 and 1996.
Weighted Net average Earnings earnings shares per share -------- ---------- --------- 1998 Basic earnings per share $47,274 24,617,219 $ 1.92 Effect of dilutive stock options -- 1,911,973 -- ------- ---------- -------- Diluted earnings per share $47,274 26,529,192 $ 1.78 ------- ---------- -------- ------- ---------- -------- 1997 Basic earnings per share $38,411 24,428,929 $ 1.57 Effect of dilutive stock options -- 1,894,593 -- ------- ---------- -------- Diluted earnings per share $38,411 26,323,522 $ 1.46 ------- ---------- -------- ------- ---------- -------- 1996 Basic earnings per share $24,263 24,161,363 $ 1.00 Effect of dilutive stock options -- 1,482,933 -- ------- ---------- -------- Diluted earnings per share $24,263 25,644,296 $ 0.95 ------- ---------- -------- ------- ---------- --------
E. Stock Purchase Plan The Company's 1988 Employee Stock Purchase Plan provides for 1,400,000 shares of the Company's common stock to be reserved for issuance upon exercise of purchase rights granted to employees who elect to participate through regular payroll deductions beginning August 1 of each year. The purchase rights are exercisable on July 31 of the following year at a price equal to the lesser of (1) 85% of the fair market value of the Company's stock on July 31 or (2) 85% of the fair market value of the Company's stock on the preceding August 1. At December 31, 1998, 1997 and 1996, an aggregate of 958,922 shares, 846,145 shares and 675,746 shares, respectively, had been issued under the plan, and at December 31, 1998, $2,125 had been withheld in connection with the plan year ending July 31, 1999. F-12 NOTE 5. COMMITMENTS A. Leases The Company occupies office and warehouse facilities under terms of operating leases expiring up to 2005. At December 31, 1998, future minimum annual lease payments under all leases are as follows: 1999 $15,987 2000 13,069 2001 8,222 2002 6,749 2003 4,762 Thereafter 2,241 ------- $51,030 ------- -------
B. Employee Benefits The Company has employee savings plans under which the Company provides a discretionary matching contribution. In 1998, 1997, and 1996, the Company's contributions under the plans were $2,219, $1,119, and $1,044, respectively. NOTE 6. CONTINGENCIES The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management's opinion, will have a significant effect on the Company's financial condition. The Company has established teams to identify and correct Year 2000 compliance issues. Information systems with non-compliant code are expected to be modified or replaced with systems that are Year 2000 compliant. Because the Company's information systems were developed from the late 1980's forward, the substantial Year 2000 concerns inherent in hardware and software systems placed into service by many companies at earlier dates are not a primary concern. Management does not believe that future costs directly related to Year 2000 issues will be material. Costs incurred through 1998 were immaterial. Uninterrupted operations depend upon the ability of third parties, especially airlines, air traffic control and governmental customs organizations to be Year 2000 compliant. The Company has no direct ability to influence the compliance actions of customers, suppliers, agents and other third parties. Accordingly, it is unable to eliminate or estimate the ultimate effect of third party Year 2000 risks on the Company's operating results. The Company's greatest risk is a potential temporary inability of air traffic control and government customs agencies to track flights or transact normal procedures on a timely basis. F-13 NOTE 7. BUSINESS SEGMENT INFORMATION Financial information regarding the Company's 1998, 1997, and 1996 operations by geographic area are as follows:
Australia/ United Far New Middle Latin Elimi- Consoli- States East Zealand Canada Europe East America nations dated -------- ------- ------ ----- ------- ------- ------- ---------- --------- 1998 Revenues from unaffiliated customers $311,897 562,500 10,160 4,871 143,925 19,692 10,662 -- 1,063,707 Transfers between geographic areas 13,116 3,060 2,400 226 6,559 1,029 2,021 (28,411) -- -------- ------- ------ ----- ------- ------- ------- ---------- --------- Total revenues $325,013 565,560 12,560 5,097 150,484 20,721 12,683 (28,411) 1,063,707 -------- ------- ------ ----- ------- ------- ------- ---------- --------- -------- ------- ------ ----- ------- ------- ------- ---------- --------- Net revenues $170,748 82,024 8,589 3,475 74,199 5,793 8,622 -- 353,450 Operating income $ 27,214 29,343 1,384 703 13,944 845 (61) -- 73,372 Identifiable assets at year end $220,937 70,465 6,987 4,485 84,112 8,187 11,423 -- 406,596 Capital expenditures $ 40,053 5,998 747 162 3,686 808 1,001 -- 52,455 Depreciation and amortization $ 8,225 2,481 511 151 2,957 663 559 -- 15,547 Equity $217,198 71,012 4,874 1,490 17,282 1,556 (1,354) (94,860) 217,198 -------- ------- ------ ----- ------- ------- ------- ---------- --------- 1997 Revenues from unaffiliated customers $285,166 526,878 9,611 4,363 112,726 10,098 5,160 -- 954,002 Transfers between geographic areas 11,819 3,044 1,847 205 4,688 788 1,340 (23,731) -- -------- ------- ------ ----- ------- ------- ------- ---------- --------- Total revenues $296,985 529,922 11,458 4,568 117,414 10,886 6,500 (23,731) 954,002 -------- ------- ------ ----- ------- ------- ------- ---------- --------- -------- ------- ------ ----- ------- ------- ------- ---------- --------- Net revenues $140,150 76,637 7,847 2,550 55,354 3,546 4,440 -- 290,524 Operating income $ 22,934 25,709 1,125 350 10,104 (136) (171) -- 59,915 Identifiable assets at year end $170,999 80,458 5,850 4,563 70,979 5,090 6,167 -- 344,106 Capital expenditures $ 20,695 2,642 980 130 4,142 846 872 -- 30,307 Depreciation and amortization $ 5,755 1,749 449 153 2,319 396 338 -- 11,159 Equity $171,854 62,204 4,278 1,169 10,410 995 (1,395) (77,661) 171,854 -------- ------- ------ ----- ------- ------- ------- ---------- --------- 1996 Revenues from unaffiliated customers $217,955 422,762 7,743 4,345 71,037 2,615 3,631 -- 730,088 Transfers between geographic areas 9,692 2,322 1,811 198 2,577 561 713 (17,874) -- -------- ------- ------ ----- ------- ------- ------- ---------- --------- Total revenues $227,647 425,084 9,554 4,543 73,614 3,176 4,344 (17,874) 730,088 -------- ------- ------ ----- ------- ------- ------- ---------- --------- -------- ------- ------ ----- ------- ------- ------- ---------- --------- Net revenues $ 97,635 57,388 6,698 2,470 34,341 1,703 2,100 -- 202,335 Operating income $ 14,707 17,204 942 630 5,218 (632) (644) -- 37,425 Identifiable assets at year end $129,001 82,229 7,279 4,778 40,693 3,604 4,402 -- 271,986 Capital expenditures $ 20,430 2,905 410 178 1,642 840 119 -- 26,524 Depreciation and amortization $ 3,986 1,715 330 132 1,560 206 218 -- 8,147 Equity $140,011 58,996 4,406 1,029 6,932 406 (1,098) (70,671) 140,011 -------- ------- ------ ----- ------- ------- ------- ---------- ---------
The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis. F-14 NOTE 8. QUARTERLY RESULTS (UNAUDITED)
1st 2nd 3rd 4th 1998 Revenues $223,349 241,970 289,675 308,713 Net revenues 75,704 82,374 92,890 102,422 Net earnings 8,034 11,080 14,217 13,943 Basic earnings per share .33 .45 .57 .57 Diluted earnings per share .30 .42 .54 .53 1997 Revenues $195,969 225,575 262,309 270,149 Net revenues 57,718 68,169 80,180 84,457 Net earnings 5,598 8,174 11,777 12,862 Basic earnings per share .23 .34 .48 .52 Diluted earnings per share .22 .31 .44 .48
Net revenues are determined by deducting freight consolidation costs from total revenues. Quarterly per share data may not equal the per share total reported for the year. F-15 SCHEDULE II EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (in thousands)
Additions --------------------- Balance at Charged to Balance beginning costs and Deductions at end Description of year expenses Other write-offs of year - ----------- ------- -------- ----- ---------- ------- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE 1998 $6,449 $2,612 $ -- $ 863 $8,198 ------ ------ ------- ------ ------ ------ ------ ------- ------ ------ 1997 $5,047 $3,344 $ -- $1,942 $6,449 ------ ------ ------- ------ ------ ------ ------ ------- ------ ------ 1996 $3,807 $2,120 $ -- $ 880 $5,047 ------ ------ ------- ------ ------ ------ ------ ------- ------ ------
S-1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. ---------------------- ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 ----------------------- EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. EXHIBITS INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 10.36 Loan Modification Agreement between the Company and Bank of America National Trust and Savings Association doing business as Seafirst Bank dated June 28, 1998 amending the credit limit to $40,000,000, amending the maturity date of the Note and extending the termination date, as defined in the Credit Agreement to June 27, 1999. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Certified Public Accountants. 27. Financial Data Schedule (Filed Electronically Only). 1 EX-10.36 2 LOAN MODIFICATION AGREEMENT EXHIBIT 10.36 [Bank Logo] LOAN MODIFICATION AGREEMENT This agreement amends the Revolving Note dated March 31, 1997 ("Note") and Credit Agreement dated March 31, 1997 ("Credit Agreement"), each executed by EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. ("Borrower") in favor of Bank of America National Trust and Savings Association, doing business as SEAFIRST BANK ("Bank"), regarding a loan in the maximum principal amount of $30,000,000 (the "Loan"). For mutual consideration, Borrower and Bank agree to amend the above loan documents as follows: 1. CREDIT LIMIT. Section 1.7 of the Credit Agreement is amended to increase the "Credit Limit" to $40,000,000. Borrower's maximum liability for principal under the Note is also changed to $40,000,000. 2. MATURITY DATE. The maturity date of the Note is changed to June 27, 1999. Section 1.31 of the Credit Agreement is amended to change the "Termination Date" to June 27, 1999. 3. LIBOR MARGIN. The "margin" mentioned in Section 1.1 of the Credit Agreement ("Adjusted LIBOR Rate") is changed to 0.625%. 4. FACILITY FEE. The fee percentage mentioned in Section 2.4 of the Credit Agreement ("Facility Fee") is changed to 0.15%. 5. COVENANTS. Section 6.2 of the Credit Agreement is amended to increase the required minimum Tangible Net Worth, determined as of each quarter end, to $140,000,000. 6. CURRENT RATIO. Section 6.3 of the Credit Agreement is amended to reduce the required minimum ratio of Current Assets to Current Liabilities, determined as of each quarter end, to 1.25 to 1. 7. OTHER TERMS. Except as specifically amended by this agreement or any prior amendment, all other terms, conditions, and definitions of the Note, Credit Agreement, and all other security agreements, guaranties, deeds of trust, mortgages, and other instruments or agreements entered into with regard to the Loan shall remain in full force and effect. DATED June 28, 1998 Bank: Borrower: SEAFIRST BANK EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. By: /s/ STAN DIDDAMS By: /s/ R. JORDAN GATES ------------------------ -------------------------------- Title: VICE PRESIDENT Title: SVP- CHIEF FINANCIAL OFFICER AND TREASURER By: /s/ CHARLES J. LYNCH -------------------------------- Title: VP-CORPORATE CONTROLLER EX-21.1 3 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
State or Country of Subsidiary (1)(2)(3) Organization - -------------------- ------------ EI Freight (Micronesia), Inc. Saipan EI Freight (Taiwan) Ltd. Republic of China EI Freight (U.S.A.), Inc. Illinois EI Freight Forwarding (Thailand) Limited (4) Thailand EI Freight Lanka (Pte) Ltd. Sri Lanka EI Freight SDN. BHD. (5) Malaysia EI Holdings, Ltd. (6) Thailand EIF SDN. BHD. (7) Malaysia Expeditors (Bangladesh), Ltd. Bangladesh Expeditors (China) Investment Co. Pte. Ltd. (10) Singapore Expeditors (Overseas) Investment Co. Pte. Ltd. Singapore Expeditors (Portugal)Transitarios Internacionais Lda. (11) Portugal Expeditors (Singapore) Private Limited Singapore Expeditors Argentina S.A. Argentina Expeditors Canada, Inc. Canada Expeditors Cargo Insurance Brokers, Inc. Washington Expeditors Chile Transportes Internacionales Limitada Chile Expeditors de Colombia S.A. (15) Colombia Expeditors Dubai (16) Dubai Expeditors Finland Oy Finland Expeditors Hong Kong Limited (5) Hong Kong Expeditors Internacionales De Costa Rica, S.A. Costa Rica Expeditors International (Hellas) S.A. Greece Expeditors International (India) Pvt. Ltd. India Expeditors International (Korea) Company, Ltd. South Korea Expeditors International (Kuwait) (14) Kuwait Expeditors International (NZ) Ltd. New Zealand Expeditors International (Puerto Rico) Inc. Puerto Rico Expeditors International (UK) Limited England Expeditors International B.V. Netherlands Expeditors International CR s.r.o. Czech Republic Expeditors International Cargo Co. Ltd. Saudi Arabia Expeditors International de Mexico, S.A. de C.V. Mexico Expeditors International do Brasil Ltda. Brazil Expeditors International Espana, S.A. Spain Expeditors International France, SAS France Expeditors International GmbH Germany Expeditors International Italia S.r.l. Italy Expeditors International N.V. Belgium Expeditors International Ocean, Inc. Delaware Expeditors International Pakistan Pvt. Ltd. (13) Pakistan Expeditors International Pty. Limited Australia Expeditors International SA (Proprietary) Limited South Africa Expeditors International Sverige AB Sweden Expeditors Overseas Management (Jersey) Limited Channel Islands Expeditors Phillipines, Inc. Phillipines Expeditors Sarah International Co. (8) Egypt Expeditors Seasky Limited Ireland Expeditors Speditions GmbH (9) Austria Expeditors Tradewin, L.L.C. Washington Expeditors Turnak International Turkey Heik Liquid Limited (12) Hong Kong P.T. Lancar Utama Tatnusa Indonesia P.T. Lancarpratma Intercargo Indonesia
(1) For purposes of this list, if the Company owns directly or indirectly a controlling interest in the voting securities of any entity or if the Company has unilateral control over the assets and operations of any entity, such entity is deemed to be a subsidiary. Except as otherwise noted, the Company has 100% controlling interest in subsidiary operations. With respect to certain companies, shares of voting securities in the names of nominees and qualifying shares in the names of directors are included in Company's ownership percentage. (2) Except as otherwise noted, each subsidiary does business in its own name and in the name of the Company. (3) The names of other subsidiaries have been omitted from the above list since considered in the aggregate, they would not constitute a significant subsidiary. (4) Dual ownership; of the 100%, 49% is owned by the Company and 51% is owned by EI Holdings, Ltd. (5) Second tier subsidiary. (6) Dual ownership; of the 100%, 56% is owned by the Company and 44% is owned by EI Freight Forwarding (Thailand) Limited. (7) Dual ownership; of the 100%, 53.33% is owned by the Company and 46.67% is owned by E.I. Freight SDN. BHD. (8) Company has 75% controlling interest in subsidiary. (9) Company has 85% controlling interest in subsidiary. (10) Operates in Beijing as Beijing Kang Jie Kong Cargo Agent Co., Ltd./E.I., in Shanghai as EI Freight (Co.) Ltd. and in Shenzhen as Shenzhen Yige Freight Warehouse Co. Ltd. (11) Company has 80% controlling interest in subsidiary. (12) Operates as Expeditors Overseas Management and EOM. (13) Company has 75% controlling interest in subsidiary. (14) Company has 61% controlling interest in subsidiary. (15) Company has 51% controlling interest in subsidiary. (16) Company has 75% controlling interest in subsidiary. EX-23.1 4 CONSENT OF ACCOUNTANT EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Expeditors International of Washington, Inc.: We consent to incorporation by reference in the registration statements (No. 33-17219, No. 33-22992, No. 33-36392, No. 33-38075, No. 33-67066 and No. 33-81460) on Form S-8 of Expeditors International of Washington, Inc. of our report dated February 16, 1999, relating to the consolidated balance sheets of Expeditors International of Washington, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998 and the related schedule, which report appears in the December 31, 1998 Annual Report on Form 10-K of Expeditors International of Washington, Inc. KPMG LLP /s/ KPMG LLP Seattle, Washington March 31, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet at December 31, 1998 and consolidated statement of income for the year 1998 and the related notes to these consolidated financial statements that are contained in the Company's 1998 Annual Report on Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 49,429 394 230,796 8,198 0 283,999 153,337 50,307 406,596 189,398 0 0 0 247 216,951 406,596 0 1,063,707 0 0 2,205 2,612 487 75,577 28,303 0 0 0 0 47,274 1.92 1.78
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