-----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, O5zNmmxi8siqrhseemR7XVO9w7OY50A99xL05490TYHMutt/NXiRuQVbuGIJHsq/ W4rvPAEfpWw/4gm502uv8Q== 0000700674-97-000003.txt : 19970329 0000700674-97-000003.hdr.sgml : 19970329 ACCESSION NUMBER: 0000700674-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIR EXPRESS INTERNATIONAL CORP /DE/ CENTRAL INDEX KEY: 0000700674 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 362074327 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08306 FILM NUMBER: 97567306 BUSINESS ADDRESS: STREET 1: 120 TOKENEKE RD PO BOX 1231 CITY: DARIEN STATE: CT ZIP: 06820 BUSINESS PHONE: 2036557900 MAIL ADDRESS: STREET 1: 120 TOKENEKE RD STREET 2: P O BOX 1231 CITY: DARIEN STATE: CT ZIP: 06820 10-K 1 1996 YEAR END 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) for the fiscal year ended December 31, 1996 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) for the transition period from______to ___. Commission file number: 1-8306 AIR EXPRESS INTERNATIONAL CORPORATION (Exact name of Registrant as Specified in its Charter) Delaware 36-2074327 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 120 Tokeneke Road, Darien, Connecticut 06820 (203) 655-7900 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, $.01 par value Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[_] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 24, 1997 was $636,705,502. The number of shares of common stock outstanding as of March 24, 1997 was 22,814,072. DOCUMENTS INCORPORATED BY REFERENCE: To the extent specified, part III of this Form 10-K incorporates information by reference to the Registrant's definitive proxy statement for the 1997 Annual Meeting of Shareholders. AIR EXPRESS INTERNATIONAL CORPORATION 1996 Form 10-K Annual Report Table of Contents Part I Page Item 1. Business...................................................... 1 Item 2. Properties.................................................... 8 Item 3. Legal Proceedings............................................. 8 Item 4. Submission of Matters to a Vote of Security Holders and Executive Officers of the Registrant......................... 9 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................... 11 Item 6. Selected Financial Data....................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 13 Item 8. Financial Statements and Supplementary Data................... 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures......................... 20 Part III Item 10. Directors and Executive Officers of the Registrant............ 20 Item 11. Executive Compensation........................................ 20 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 20 Item 13. Certain Relationships and Related Transactions................ 20 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................. 21 Part I Item 1. Business (a) General Development of Business Air Express International Corporation ( the "Company" or the "Registrant") is the oldest and largest international airfreight forwarder based in the United States and a leading provider of global logistics services for importers and exporters worldwide. The Company is primarily engaged in providing cargo transportation logistics management, including international air and ocean freight forwarding, customs brokerage and warehousing and distribution services. Beyond its traditional freight forwarding and customs brokerage services, the Company's value-added logistics services and information systems help its customers to streamline operations, reduce inventories, increase speed and reliability of worldwide deliveries and, ultimately, improve management of the customers' supply chain. Through its global network of Company-operated facilities and agents, the Company provides total integrated transportation logistics solutions centered around the consolidation, documentation and arrangements for the transportation of its customers' shipments of cargo throughout the world. During 1996, the Company handled more than 1,839,000 individual airfreight shipments, with an average weight of 535 pounds, to more than 3,000 cities in more than 200 countries. Approximately 58% of the total airfreight shipments for 1996 were attributable to locations outside the United States. The Company generated gross revenues in excess of $1.3 billion in 1996, of which approximately 62% was attributable to locations outside the United States. Headquartered in the United States, the Company has a global network with offices located in over 876 cities, including 273 cities in the United States, 186 cities in Europe and 417 cities in Asia, the South Pacific, the Middle East, Africa and Latin America. As of December 31, 1996, this network consisted of 250 Company-operated facilities, including 99 in the United States and 151 abroad, supplemented at 626 additional locations, which are served by agents, many of whom serve the Company on an exclusive basis. The network is managed by experienced professionals, most of whom are nationals of the countries in which they serve. Approximately 74% of the Company's 53 regional and country managers have been employed by the Company for more than ten years. Since 1985, when its current management assumed control, the Company has focused on the international transportation of heavy cargo and devoted its resources to expanding and enhancing its global network and the information systems necessary to more effectively service its customers' cargo transportation and integrated logistics needs. In December 1987, the Company acquired the Pandair Group, a European-based international airfreight forwarder with facilities in 14 countries. The Pandair acquisition significantly strengthened the Company's presence in key foreign markets, particularly the United Kingdom and The Netherlands. In July 1993, the Company acquired the Votainer group of companies ("Votainer"), a Non-Vessel Operating Common Carrier ("NVOCC") based in The Netherlands, which provides ocean freight consolidation services, with a network of 34 Company-operated facilities in 12 countries. During 1994, the Company acquired all the outstanding common stock of Unimodal Australia -1- Pty. Ltd., an ocean freight forwarder located in Australia; Banner International Ltd., an airfreight forwarder located in New Zealand; and Pace Express Pty. Ltd., an airfreight forwarder located in Australia, and 75% of the outstanding common stock of Universal Airfreight AS, the Company's exclusive airfreight agent in Norway. During 1995, the Company acquired all of the outstanding common stock of Radix Ventures, Inc., a leading provider of customs brokerage in the United States; Jagro International, Inc., an ocean freight forwarder and customs broker located in Canada; Brantford International, Inc., an air and ocean freight forwarder located in the United Kingdom; and 40% ownership of the outstanding common stock of Air Express International (Emirates), the Company's exclusive air and ocean freight agent in the United Arab Emirates. In March 1996, the Company acquired all of the outstanding stock of the Profreight group of companies, a customs broker and air and ocean freight forwarder in South Africa. In April 1996, the Company acquired Lusk Shipping Company, Inc., a New Orleans, Louisiana-based ocean freight forwarder and customs broker. In May 1996, the Company purchased the business and certain assets of John V. Carr & Son, Inc. ("J.V. Carr"), a United States and Canadian customs broker. In May 1996, the Company acquired an additional 50% of the outstanding stock of AEI Finland Oy, bringing its ownership of this Finland-based air and ocean freight forwarder to approximately 90%. In November 1996, the Company acquired Muller Airfreight B.V., an air and ocean freight forwarder based in The Netherlands. The acquisitions were consistent with the Company's strategy of strengthening its market position, further enhancing its operating efficiencies and providing its customers with a global logistics solution encompassing a broad range of transportation and distribution-related services. (b) Financial Information About Industry Segments The Company currently is engaged in the business of freight forwarding. See Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7), and the Company's Consolidated Financial Statements, including the Notes thereto, for data related to the Company's revenues, operating profit and identifiable assets. (c) Narrative Description of Business Airfreight Forwarding and Related Services An airfreight forwarder procures shipments from a large number of customers, consolidates shipments bound for a particular destination from a common place of origin, determines the routing over which the consolidated shipment will move, selects an airline serving that route on the basis of departure time, available cargo capacity and rate, and books the consolidated shipment for transportation on that airline. In addition, the forwarder prepares all required shipping documents, delivers the shipment to the transporting airline and, in many cases, arranges for clearance of the various components of the shipment through customs at the final destination. If so requested by its customers, the forwarder also will arrange for delivery of the individual components of the consolidated shipment from the arrival airport to their intended consignees. As a result of its consolidation of customers' shipments, the forwarder is usually able to obtain lower rates from airlines than its customers could obtain directly from those airlines. In -2- addition, in certain tradelanes and with certain airlines where the forwarder generates a continuing high volume of freight, that forwarder is often able to obtain even lower rates. Accordingly, the forwarder is generally able to offer its customers a lower rate than would otherwise be available to the customer from the airline. However, the rate charged by the forwarder to its customers is greater than that obtained by the forwarder from the airline, and the difference represents the forwarder's gross profit. Ocean Freight Services The Company's revenue from international ocean freight forwarding is derived from service both as an indirect ocean carrier (NVOCC) and as an authorized agent for shippers and importers. The Company contracts with ocean shipping lines to obtain transportation for a fixed number of containers between various points during a specified time period at an agreed rate. The Company solicits freight from its customers to fill the containers, charging rates lower than the rates offered directly to customers by shipping lines for similar type shipments. In 1996 the Company handled more than 95,000 containers. Customs Brokerage Services The Company provides customs brokerage clearance services in the United States and 21 foreign countries. These services entail the preparation and assembly of required documentation, in many instances, the advancement of customs duties on behalf of importers, and the arrangement for the delivery of goods after the customs clearance process is completed. Additionally, other services may be provided such as the procurement and placement of surety bonds on behalf of importers, duty drawback (recovery of previously paid duties when goods are re-exported), and the arrangement of bonded warehouse services which allows importers to store goods while deferring payment of customs duties until the goods are required for delivery. In June 1995, the Company acquired Radix Ventures, Inc. ("Radix") which, through its subsidiary, Radix Group International, Inc., is a leading United States customs broker, with offices in 23 U.S. cities and approximately 520 employees. Radix's customs brokerage services were largely performed for importers who used other freight forwarders for the transportation of goods to the United States. In May 1996, the Company purchased the business and certain assets of John V. Carr & Son, Inc, a U.S. and Canadian customs broker which primarily serves the U.S. - Canada border with 32 offices in 25 U.S. and two Canadian cities. Since the acquisition of Radix, the Company has continued to maintain and expand its United States customs brokerage activities to existing and new clients without regard to whether the Company provides transportation services to these importers. It is the Company's strategy to ultimately expand its relationship with customs brokerage customers by providing other services, including transportation and warehousing and distribution. In 1996, the Company processed approximately 1,579,000 customs entries of which 806,566 were in the United States; in 1995, it processed 905,000 entries of which 173,000 were in the United States; and in 1994, 729,000 entries were processed of which 63,000 were in the United States. The primary reason for the increase in 1996 was attributable to the acquisition of J.V. Carr and the inclusion of a full year of Radix business. -3- Integrated Global Logistics Services In addition to providing air and ocean freight forwarding and customs brokerage services, the Company provides its import and export customers with an array of fully integrated global logistics services, including, most notably, warehousing and distribution services and its proprietary logistics information system for global freight tracking and tracing. Other total logistics services offered by the Company include extensive ground transportation capabilities enabling door-to-door pickup and freight delivery; duty drawback; Free Trade Zone management and associated services; information management services such as electronic data interchange (EDI), electronic invoicing and purchase order management; inventory management; cargo consolidation, deconsolidation, assembly and protective packing; bonded warehousing; project cargo management; and cargo insurance coverage. Warehousing and Distribution The Company owns and leases warehouse space with major facilities in the U.S., The Netherlands, U.K., Germany, United Arab Emirates, New Zealand, Australia, Singapore, Malaysia and South Africa. The Company's warehousing services include receiving, deconsolidation and decontainerization, cargo loading and unloading, assembly of freight, customer inventory management and protective packing and storage. The Company receives storage charges for use of its warehouses and fees for other services. In 1996, warehouse and distribution services contributed approximately 2% of gross revenues and net revenues. Logistics Information System (LOGIS) The Company introduced its proprietary logistics information system ("LOGIS") for airfreight operations in 1986 and since that time has allocated substantial resources to expand the system's geographic reach and enhance its capabilities. Mainframe computers located at the Company's headquarters in Darien, Connecticut, and a facility near London, England, are linked to, and accessible from, terminals at 337 of its Company-operated and agent facilities in substantially all major markets, permitting real-time inputting, processing and retrieval of shipments, pricing, scheduling, space availability, booking and tracking data, as well as automated preparation of shipping, customs and billing documents. LOGIS has been developed to include worldwide ocean shipment tracing and tracking and to provide information for logistics facilities offered by the Company, including assembly and distribution activities for clients. As of December 31, 1996, the LOGIS system permitted electronic interfacing with more than 1,300 of the Company's major customers' locations in 39 countries, 50 international airlines and customs authorities in the United States, United Kingdom, Australia, New Zealand, Belgium, Germany and France. Electronic data interchange ("EDI") connections to the airlines permit instant retrieval by the Company, and by those of its customers interfacing with the LOGIS system, of information on the status of shipments in the custody of the airlines. With its EDI capabilities, LOGIS can receive a customer's shipping instructions and information with respect to the cargo being shipped and converts the data automatically into shipping documents. Where LOGIS is linked -4- to customs in the country of destination, it can prepare customs declarations, calculate the appropriate customs duties and provide for automatic customs invoicing and clearance. The LOGIS system has enabled the Company to improve the productivity of its personnel and the quality of its customer service and has enabled many of its customers to manage their freight transportation logistics needs more effectively. The system has resulted in substantial reductions in paperwork and expedited the entry, processing, retrieval and dissemination of critical information. The Company plans to continually improve and enhance the LOGIS system. Management believes that the LOGIS system has positioned the Company to better capitalize on the continuing trend toward outsourcing by large corporations of logistics management functions and reliance by many of these corporations on single-source providers. Operations The Company has a global network of Company-operated facilities and supporting agents with offices located in over 876 cities, including 273 in the United States, 186 in Europe, 120 in Asia and the South Pacific and 297 in the Middle East, Africa and Latin America. As a consequence, a substantial portion of its revenues and profits is derived from the shipment of goods from or between locations outside the United States. For the year ended December 31, 1996, approximately 62% of its gross revenues and 57% of its net revenues were recorded in locations outside the United States. The Company neither owns nor operates any ships or aircraft. It arranges for transportation of its customers' shipments via steamship lines, commercial airlines and air cargo carriers. On limited occasions, when the size of a particular shipment so warrants, the Company will charter a cargo aircraft. The Company acts solely as a forwarder for approximately 91% of the shipments it handles. When acting as an airfreight forwarder, the Company becomes legally responsible to its customer for the safe delivery of the customer's cargo to its ultimate destination, subject to a limitation on liability of $20.00 per kilo ($9.07 per pound). When acting as an ocean freight consolidator, the Company assumes cargo liability to its customers for lost or damaged shipments. This liability is typically limited by contract to a maximum of $500 per package or customary freight unit. However, because a freight forwarder's relationship to an airline or steamship line (the "Carrier") is that of a shipper to a carrier, the Carrier generally assumes the same responsibility to the Company as the Company assumes to its customers. On occasion, the Company acts in the capacity of a cargo agent for a designated Carrier. In this capacity, the Company contracts for freight carriage for which it receives a commission from the Carrier, but it does not have legal responsibility for the safe delivery of the shipment. During 1996, shipments for which the Company acted as a cargo agent accounted for less than 2% of its revenues. The Company also offers door-to-door express delivery among 20 European countries through its Pandalink service which operates from a central hub in Brussels. Pandalink operates predominately as an overnight service to major European cities, with alternative delivery services to outlying areas within 48 to 72 hours. -5- Quality Initiatives The Company maintains a department focused on implementing quality initiatives to better serve its customers' needs. In 1996, more than 90% of the Company's revenues were handled by International Organization for Standardization ("ISO") 9002 certified offices. ISO is a stringent set of internationally recognized quality assurance guidelines. The Company is committed to a broad program to maintain and to increase its ISO 9002 certifications. The Company also sponsors a Shippers' Council to stimulate discussion among customers aimed at identifying, upgrading and standardizing the Company's and the industry's best practices. Regulation The Company's activities as an International Air Transport Association ("IATA") cargo agent are subject to the rules and regulations of that organization to the extent the Company acts as an agent for an airline which is an IATA member. Certain IATA rules and regulations are subject to the Department of Transportation ("DOT") approval. In addition, several states in which the Company operates regulate intrastate trucking. In these states, the Company has obtained the necessary operating authority. In the United States, the Company, operating as a customs broker, is licensed by the United States Department of the Treasury and regulated by the United States Customs Service. Customs brokerage fees are not subject to regulation. The Company is licensed as an ocean freight forwarder by the United States Federal Maritime Commission ("FMC") which prescribes qualifications for acting as a shipping agent, including surety bonding requirements. The FMC does not regulate the Company's fees in any material respect. The Company's ocean freight NVOCC business is subject to regulation as an indirect ocean cargo carrier under the FMC tariff filing and surety bond requirements, which require the Company to abide by tariffs filed with the FMC specifying the rates which may be charged to customers. Customers and Marketing The Company's principal customers are large manufacturers and distributors of computers and electronics equipment, pharmaceuticals, heavy industrial and construction equipment, motion pictures and printed materials. During 1996, the Company shipped goods and provided logistics services for more than 200,000 customer accounts, none of which accounted for more than 5% of the Company's revenues. The Company markets its global cargo transportation and integrated logistics services worldwide through an international sales organization consisting of approximately 520 full-time salespersons (as of December 31, 1996), supported by the sales efforts of senior management and the Company's country, regional, and district managers. In markets where the Company does not operate its own facilities, its direct sales efforts are supplemented by those of the Company's agents. The Company's marketing is directed primarily to large, multinational corporations with substantial requirements for the international transportation of cargo. -6- Competition Competition within the freight forwarding industry is intense. Although the industry is highly fragmented with a large number of participants, the Company competes primarily with a relatively small number of international firms with worldwide networks and the capability to provide the breadth of services offered by the Company. The Company also encounters competition from regional and local freight forwarders, integrated transportation companies that operate their own aircraft, cargo sales agents and brokers, surface freight forwarders and carriers, certain airlines, and associations of shippers organized for the purpose of consolidating their members' shipments to obtain lower freight rates from carriers. Currency and Other Risk Factors The Company operates in many countries throughout the world, resulting in significant funds to be collected in various local currencies. There are risks from fluctuations in the value of these currencies, devaluations, or other actions and events which may result in the Company carrying assets in foreign currencies that are not easily convertible, or convertible at all, into U.S. dollars. These foreign currency assets are included in the Company's net investment in its foreign operations. From time to time and when feasible and cost effective, the Company seeks to minimize the effect of fluctuations in the values of foreign currencies on its financial position through the purchase of foreign currency forward exchange contracts (See Note 13 to the Consolidated Financial Statements). In addition, the Company's business requires good working relationships with the airlines, which are its largest creditor as a group. To the extent that the airlines decrease cargo space available to forwarders, cut back cargo or passenger flights or enter the forwarding business themselves, the airfreight forwarding business could be adversely affected. The Company considers its working relationship with the airlines to be good. Employees As of December 31, 1996, the Company employed 6,747 people, of whom 4,188 were based at locations outside the United States, including 1,878 in the United Kingdom and Europe, 1,084 in Asia and 1,226 in the South Pacific, South America, Africa and Canada. Approximately 664 of the Company's 2,559 employees based in the United States were covered by agreements with various locals of the International Brotherhood of Teamsters, the United Auto Workers and the International Association of Machinists and Aerospace Workers. In addition, approximately 22% of the Company's foreign-based personnel are represented by various types of collective bargaining organizations. The Company maintains a good working relationship with its employees. -7- (d) Financial Information About Foreign and Domestic Operations See the Company's Consolidated Financial Statements including the Notes thereto for data related to the Company's revenues, operating profit and identifiable assets. Item 2. Properties The Company owns its worldwide headquarters building (approximately 40,000 square feet in area) in Darien, Connecticut, a warehouse and office facility (approximately 78,000 square feet in area) in Sydney, Australia, which is subject to a $2.8 million mortgage, a warehouse and distribution facility (approximately 59,000 square feet in area) in Venlo, Holland, which is subject to a $1.3 million mortgage, a warehouse and distribution facility (approximately 150,000 square feet in area) in Singapore, which is subject to a $5.0 million mortgage, and a warehouse and office facility (approximately 43,000 square feet in area) in Johannesburg, South Africa. The Company leases facilities at or near airports, ocean terminals and international borders at 71 locations in the United States and 132 offices in 27 other countries. Most facilities have office, loading dock and warehouse space. The principal facilities are set forth in the following table:
Approximate Sq. Feet of Lease Location Floor Space Expiration Amsterdam, The Netherlands 68,000 sq. ft. of warehouse and office 1998 Chicago, Illinois 164,000 sq. ft. of warehouse and office 1998/1999 Frankfurt, Germany 37,000 sq. ft. of warehouse and office 2007 London, England 93,000 sq. ft. of warehouse and office 2002 Los Angeles, California 127,000 sq. ft. of warehouse and office 2001 Miami, Florida 255,000 sq. ft. of warehouse and office 1999/2006 New York, New York 90,000 sq. ft. of warehouse and office 1999 San Francisco, California 78,000 sq. ft. of warehouse and office 1998/2000 Johannesburg, South Africa 55,000 sq. ft. of warehouse and office 2000
The Company believes that its facilities are adequate for its needs now and in the foreseeable future. Item 3. Legal Proceedings None. -8- Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant Following is a listing of the executive officers of the Company. The information listed below with respect to age and business experience for the past five years has been furnished to the Company as of March 27, 1997 by each executive officer of the Company. There are no family relationships between any Director or officer of the Company. Positions with the Company and Business Experience for the Name Age Past Five Years Hendrik J. Hartong, Jr. 57 Chairman of the Company since 1985; (Chief Executive Officer of the Company from 1985 through 1989); General Partner since 1985 of The Brynwood Management Limited Partnerships, which serve, as managing general partners of The Brynwood Partners Limited Partnerships, private investment partnerships; Director of Hurco Companies, Inc. Guenter Rohrmann 57 President and Chief Executive Officer of the Company since 1989 (President and Chief Operating Officer from 1985 to 1989). Dennis M. Dolan 39 Vice President and Chief Financial Officer of the Company since 1989; U.S. Controller from 1985 to 1989. -9- Giorgio Laccona 38 Vice President - General Manager - North America since 1996; Vice President-Operations from 1994 to 1996, Vice President - Export Sales and Operations from 1989 to 1994. Daniel J. McCauley 62 Vice President, General Counsel and Secretary of the Company since 1991; Executive Vice President, Secretary and General Counsel, for more than five years prior to 1990, and consultant from 1990 to 1991, Emery Airfreight Corporation, Wilton, CT, a transportation company. Paul J. Gallagher 51 Vice President - Treasurer of the Company since 1993; Vice President- International Controller from 1989 to 1993. Walter L. McMaster 64 Vice President and Controller of the Company since 1983; U.S. Controller from 1974 to 1983. Robert J. O'Connell 60 Senior Vice President since 1996; Vice President - General Manager - North America of the Company from 1989; Vice President-North America Sales of the Company from 1985 to 1989. -10- Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock, $.01 par value (the "Common Stock"), trades on The Nasdaq Stock Market under the symbol: AEIC. The table below indicates the quarterly high and low prices of the Common Stock and the dividends declared per share for the years ended December 31, 1996 and 1995.
Quarter 1st 2nd 3rd 4th Year Ended December 31, 1996: High .............................. $ 26 1/4 $ 29 1/4 $ 29 $ 34 1/2 Low ............................... $ 20 $ 25 1/2 $ 23 1/2 $ 28 Dividends ......................... $ .05 $ .06 $ .06 $ .06 Year Ended December 31, 1995: High .............................. $ 25 1/2 $ 26 1/2 $ 25 1/2 $ 25 1/4 Low ............................... $ 18 1/2 $ 20 3/4 $ 22 1/4 $ 20 1/4 Dividends ......................... $ .04 $ .05 $ .05 $ .05
At March 24, 1997, there were 948 holders of record of the Company's Common Stock. The closing price of the Common Stock on that date was $30.375 per share. -11- Item 6. Selected Financial Data AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES (In thousands, except per share data)
Years Ended December 31, 1996 1995 1994 1993 1992 Revenues ...................... $1,335,447 $1,222,217 $997,379 $725,719 $672,287 Net income .................... $ 38,500 $ 29,027 $ 22,619 $ 17,340 $ 18,633 Net income per common share: (1) Primary .................... $ 1.81 $ 1.58 $ 1.28 $ .99 $ 1.08 Fully diluted .............. $ 1.72 $ 1.48 $ 1.21 $ .97 $ 1.08 Cash dividends declared per common share ................ $ .23 $ .19 $ .153 $ .125 $ .085 Total assets .................. $ 581,329 $ 486,843 $383,626 $298,816 $211,721 Long-term debt (excluding current portion) ... $ 16,616 $ 82,762 $ 83,992 $ 78,464 $ 7,120 Stockholders' investment ...... $ 259,086 $ 147,566 $ 99,350 $ 78,119 $ 65,376
(1) Income per share amounts for all periods presented give effect to a three-for-two stock split in the nature of a 50.0% stock dividend in each of July 1992 and December 1994 and are based upon the weighted average number of shares of Common Stock outstanding during each period. -12- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Cash and cash equivalents at December 31, 1996 decreased to $46.5 million compared to $54.5 million at December 31, 1995. The Company's primary sources of cash in 1996 consisted of $16.8 million provided by operating activities and $11.3 million from short and long-term borrowings. The Company's primary uses of cash in 1996 were for business acquisitions of $15.4 million, capital expenditures of $13.8 million and dividend payments of $4.6 million. Working capital increased approximately $23.3 million (30.3%) to $100.2 million at December 31, 1996 from $76.9 million at December 31, 1995 primarily due to the increase in the excess of trade receivables over trade payables. The Company makes significant disbursements on behalf of its customers, such as customs duties, which are billed directly to the Company's customers. The billings for these disbursements, which may be several times the amount of revenue and fees derived from these transactions, are not recorded as revenue and expense in the Company's income statement. Capital expenditures decreased approximately $6.6 million from $20.4 million for 1995 to $13.8 million for 1996. The decrease was primarily due to expenditures incurred during the first nine months of 1995 for the Company's new warehouse and distribution facility in Singapore which was completed during the third quarter of 1995. The $13.8 million of capital expenditures were primarily for facility improvements and management information systems. Depreciation and amortization expense (including goodwill amortization) totaled $12.7 million in 1996 and $9.8 million in 1995. Capital expenditures for 1997 are estimated to be approximately $21.0 million and will be primarily for improvement and expansion of facilities and management information systems. During 1996, the Company acquired five companies in separate transactions. Four of the acquisitions were accounted for as purchases and one as a pooling of interest (See Note 4 to the Consolidated Financial Statements). In June 1996, the Company secured a $75 million revolving credit facility (See Note 7 to the Consolidated Financial Statements). At December 31, 1996, the Company was utilizing approximately $2.6 million under this facility primarily for letters of credit issued in connection with the Company's insurance programs. Additionally, at December 31, 1996, various of the Company's foreign subsidiaries maintained overdraft facilities with foreign banks, aggregating approximately $15.6 million, of which approximately $2.1 million was outstanding. On July 8, 1996, the Company completed the redemption for all of its 6.0% Convertible Subordinated Debentures (See Note 8 to the Consolidated Financial -13- Statements). As a result, the Company's Stockholders' Investment increased approximately $74.3 million and, correspondingly, its debt to equity ratio (total long-term debt as a percentage of stockholders' investment) decreased from 57.9% at December 31, 1995 to 7.9% at December 31, 1996. During the second quarter of 1996, the Company's Board of Directors authorized an increase in the quarterly cash dividend from five cents ($.05) to six cents ($.06) per share. The Company purchases foreign currency forward exchange contracts principally to hedge foreign currency exposure associated with net investments in certain foreign operations and certain intercompany transactions. The Company does not speculate in the financial markets and therefore does not hold these contracts for trading purposes (See Note 13 to the Consolidated Financial Statements). Management believes that the Company's available cash and sources of credit, together with expected future sources of credit and cash generated from operations, will be sufficient to satisfy its anticipated needs for working capital, capital expenditures and dividends. Results of Operations 1996 Compared to 1995 The Company considers its total business to represent a single segment comprised of three major services: airfreight forwarding, ocean freight forwarding, and customs brokerage and other services, all of which are fully integrated. The following table sets forth the gross revenues and net revenues (gross revenues minus transportation expenses) for each of these three service categories, as well as the Company's internal operating expenses (terminal and selling, general and administrative expenses) and operating profit:
1996 1995 ($ in millions) Gross Revenues: Airfreight ..................................... $1,026.5 $ 972.6 Ocean freight .................................. 190.1 166.2 Customs brokerage and other .................................... 118.9 83.4 Total Gross Revenues ............................. $1,335.5 $1,222.2 Net Revenues: Airfreight ..................................... $ 274.5 $ 245.7 Ocean freight .................................. 51.9 38.8 Customs brokerage and other .................................... 106.0 82.1 Total Net Revenues ............................... 432.4 366.6 Internal Operating Expenses: Terminal ....................................... 234.6 196.6 Selling, general and administrative ............ 139.0 122.6 Total Internal Operating Expenses ................ 373.6 319.2 Operating Profit ................................. $ 58.8 $ 47.4
-14- Gross revenues increased $113.3 million (9.3%) in 1996 over 1995, reflecting increases of $53.9 million (5.5%) in airfreight revenues, $23.9 million (14.4%) in ocean freight revenues and $35.5 million (42.6%) in customs brokerage and other revenues. Net revenues increased $65.7 million (17.9%) to $432.4 million in 1996 and was comprised of increases of $28.7 million (11.7%) in airfreight net revenues, $13.1 million (33.8%) in ocean freight net revenues and $23.9 million (29.1%) in customs brokerage and other net revenues. The increases in both gross and net revenues from airfreight services were attributable to increased airfreight shipping volumes, as the number of shipments increased (3.7%) and the total weight of cargo shipped increased (7.0%) over 1995, and to higher prices initiated by the Company in response to rate increases from the airlines. The increases in gross and net revenues from ocean freight services were attributable to greater shipping volumes from existing customers, the Company's continuing penetration into the ocean freight market and the inclusion of ocean freight business of acquired companies. The increases in gross and net revenues from customs brokerage and other services were largely due to the acquisitions of Radix in June 1995 and J.V. Carr in May 1996. The Company's internal operating expenses increased $54.3 million (17.0%) in 1996 over 1995. The increase was attributable to the inclusion of operating expenses from acquired companies and the greater volume of shipments handled. As a percentage of gross revenues, internal operating expenses increased to 28.0% from 26.1% in 1995, due largely to the inclusion of the operating expenses related to the customs brokerage operations of Radix and J.V. Carr. However, due to the higher level of customs brokerage revenues, for which gross and net revenues are the same, internal operating expenses, as a percentage of net revenues, decreased to 86.4% in 1996 from 87.1% in 1995. Consolidated operating profit increased $11.4 million (24.1%) over 1995, due primarily to significant improvement in operating profits in the Company's European region and its Asia and Others region (See Note 5 to the Consolidated Financial Statements). Interest expense, net decreased $2.1 million to $1.3 million in 1996 due primarily to the conversion of the Company's 6.0% Convertible Subordinated Debentures (See Note 8 to the Consolidated Financial Statements). Other, net increased $1.1 million to $4.6 million in 1996, due primarily to increased earnings from unconsolidated affiliates and foreign exchange gains (See Note 14 to the Consolidated Financial Statements). The Company's effective income tax rate for 1996 decreased to 38.0% compared to 39.0% in 1995. The decrease in the effective income tax rate was largely the result of reduced losses incurred by certain foreign subsidiaries for which there were no tax benefits available, and the utilization of net operating loss carryforwards by other foreign subsidiaries. The Company's effective income tax rate fluctuates due to changes in tax rates and regulations in the countries in which it operates and the level of pre-tax profit earned in those countries. -15- United States Operations United States revenues increased $52.5 million (11.4%) to $511.8 million in 1996 compared to 1995, reflecting increases of $19.2 million (5.0%) in airfreight revenues, $12.1 million (25.3%) in ocean freight revenues and $21.2 million (76.1%) in customs brokerage and other revenues. The increase in airfreight revenues was due to an 11.0% increase in the weight of cargo shipped, as well as price increases initiated in response to airline rate increases. The increase in ocean freight revenues was attributable to the Company's ongoing efforts to market its ocean freight services to both existing and new customers. The increase in customs brokerage and other revenues was largely attributable to the inclusion of business from Radix, which was acquired in June of 1995 and J.V. Carr in May of 1996. United States internal operating expenses increased $47.7 million (39.9%) over 1995. The increase was primarily the result of the inclusion of expenses from acquired companies, particularly J.V. Carr, increased volume of transactions handled, and the on-going integration and expansion of management information systems and facilities. The higher expenses resulted in a marginal increase in United States operating profit of $.5 million (2.8%) over 1995. Foreign Operations Foreign revenues increased $60.7 million (8.0%) in 1996 over 1995. The increase in foreign revenues was negatively impacted by approximately $12.9 million due to the effect of a stronger U.S. dollar when converting foreign currency revenues into U.S. dollars for financial reporting purposes. European revenues increased $22.9 million (5.9%) over 1995, due to increases of $16.5 million (5.2%) in airfreight revenues, $2.1 million (4.5%) in ocean freight revenues and $4.3 million (17.1%) in customs brokerage and other revenues. Revenues in the Asia and Others region increased $37.9 million (10.1%) in 1996 over 1995, reflecting increases of $18.2 million (6.7%) in airfreight revenues, $9.7 million (13.3%) in ocean freight revenues and $10.0 million (33.3%) in customs brokerage and other revenues. The increases in both airfreight and ocean freight revenues were attributable to greater shipping volumes from existing and new customers and the inclusion of business from acquired companies. Customs brokerage and other revenues increased primarily due to the increase in the number of import clearances. Foreign operating profit increased $10.9 million (35.3%) over 1995 to $41.7 million. The European region's operating profit increased $5.8 million (51.8%) over 1995, while the Asia and Others region's operating profit increased $5.1 million (26.0%) over 1995. The increase in European operating profit was attributable to the higher revenues as airfreight shipments increased 4.3% and the weight of cargo shipped increased 4.0%, coupled with management initiatives to reduce internal operating expenses in selected European countries in the last quarter of 1995 and first half of 1996. The increase in Asia and Others operating profit was largely attributable to greater shipping volumes. -16- Results of Operations 1995 Compared to 1994 The following table sets forth the gross revenues and net revenues for each service category, as well as the Company's internal operating expenses and operating profit:
1995 1994 ($ in millions) Gross Revenues: Airfreight ....................................... $ 972.6 $810.6 Ocean freight .................................... 166.2 112.3 Customs brokerage and other ...................................... 83.4 74.4 Total Gross Revenues ............................... $1,222.2 $997.3 Net Revenues: Airfreight ....................................... $ 245.7 $204.5 Ocean freight .................................... 38.8 28.2 Customs brokerage and other ...................................... 82.1 57.3 Total Net Revenues ................................. 366.6 290.0 Internal Operating Expenses: Terminal ......................................... 196.6 151.7 Selling, general and administrative .............. 122.6 101.4 Total Internal Operating Expenses .................. 319.2 253.1 Operating Profit ................................... $ 47.4 $ 36.9
Gross revenues increased $224.9 million (22.6%) in 1995 over those for 1994, reflecting increases of $162.0 million (20.0%) in airfreight revenues, $53.9 million (48.0%) in ocean freight revenues and $9.0 million (12.1%) in customs brokerage and other revenues. Additionally, approximately $34.3 million of the increase in gross revenues was attributable to the effect of a weaker U.S. dollar when converting foreign currency revenues into U.S. dollars for financial reporting purposes. Gross revenues from customs brokerage in 1994 included $16.0 million of handling and related revenues. In 1995, $21.4 million of what were formerly classified as handling and related revenues were reclassified as a reduction to related transportation expense. Net revenues increased $76.7 million (26.4%) to $366.7 million in 1995 and was attributable to increases of $41.3 million (20.2%) in airfreight net revenues, $10.6 million (37.6%) in ocean freight net revenues and $24.8 million (43.3%) in customs brokerage and other net revenues. The increases in both gross and net revenues from airfreight services were attributable to increased airfreight shipping volumes as the number of shipments increased 8.7% and the total weight of cargo shipped increased 16.8% over 1994, and to higher prices initiated by the Company in -17- response to rate increases from the airlines. The increases in gross and net revenues from ocean freight services were attributable to greater shipping volumes from existing customers, the Company's continuing penetration into the ocean freight market since its acquisition of Votainer in 1993 and the inclusion of ocean freight business of acquired companies. The increases in gross and net revenues from customs brokerage and other services were largely due to the acquisition of Radix. The Company's internal operating expenses increased $66.2 million (26.2%) in 1995 over 1994. The increase was attributable to the inclusion of operating expenses from acquired companies and the greater volume of shipments handled. Additionally, 1994 internal operating expenses included a one-time, pre-tax charge of $1.0 million for the Company's estimated proportionate withdrawal liability from a multi-employer pension plan covering certain of its employees (See Note 11 to the Consolidated Financial Statements). As a percentage of gross revenues, internal operating expenses increased to 26.1% from 25.4% in 1994, due largely to the inclusion of operating expenses related to Radix's customs brokerage operations. However, due to the higher level of customs brokerage revenues, for which gross and net revenues are the same, internal operating expenses, as a percentage of net revenues, decreased to 87.1% from 87.3% in 1994. Consolidated operating profit increased $10.5 million (28.5%) over 1994, due primarily to significant improvement in operating profits in the Company's United States region and its Asia and Others region (See Note 5 to the Consolidated Financial Statements). The Company's European operations were negatively impacted by economic weakness in Europe, particularly during the second half of 1995 when the Company experienced only minimal growth in the weight of airfreight cargo shipped. Interest expense, net increased $.1 million to $3.3 million in 1995. Other, net increased $.4 million to $3.5 million in 1995 (See Note 14 to the Consolidated Financial Statements). The Company's effective income tax rate for 1995 was 39.0% compared to 38.5% in 1994. The increase in the effective income tax rate was largely due to losses in countries where no tax credit was available and an increase in the amount of nondeductible expenses. The Company's effective income tax rate fluctuates due to changes in tax rates and regulations in the countries in which it operates and the level of pre-tax profit earned in those countries. United States Operations United States revenues increased $92.0 million (25.0%) to $459.3 million in 1995 compared to 1994, reflecting increases of $70.7 million (22.6%) in airfreight revenues, $15.3 million (47.2%) in ocean freight revenues and $6.0 million (27.5%) in customs brokerage and other revenues. The increase in airfreight revenues was due to an 18.7% increase in the weight of cargo shipped, as well as price increases initiated in response to airline rate increases. The increase in ocean freight revenues was attributable to the Company's ongoing efforts to market its ocean freight services to both existing and new customers. The increase in customs brokerage revenues was largely attributable to the inclusion of business from Radix, which was acquired in June of 1995. -18- United States operating profit in 1995 increased $9.7 million (141.0%) over 1994, due to increased airfreight revenues, the inclusion of Radix customs brokerage and freight forwarding business, and the achievement of operating profitability in ocean freight services in 1995 compared to a loss of $2.0 million from these services in 1994. Foreign Operations Foreign revenues increased $132.8 million (21.1%) in 1995 over 1994. Approximately $34.3 million of the increase was attributable to the effect of a weaker U.S. dollar when converting foreign currency revenues into U.S. dollars for financial reporting purposes. European revenues increased $63.1 million (19.5%) over 1994, due to increases of $57.1 million (22.0%) in airfreight revenues, $5.6 million (14.0%) in ocean freight revenues and $.4 million in customs brokerage and other revenues. The rate of increase in European airfreight revenues declined throughout the year, as the percentage increase in the weight of airfreight cargo shipped declined from approximately 27.0% in the first quarter to 1.0% in the fourth quarter of 1995, due largely to a slowdown in economic activity in the region. Revenues in the Asia and Others region increased $69.7 million (22.8%) in 1995 over 1994, reflecting increases of $34.3 million (14.4%) in airfreight revenues, $33.0 million (82.5%) in ocean freight revenues and $2.4 million in customs brokerage and other revenues. The increases in both airfreight and ocean freight revenues were attributable to greater shipping volumes from existing and new customers and the inclusion of business from acquired companies. Customs brokerage revenues increased primarily due to the increase in the number of import clearances. Foreign operating profit was $30.8 million compared to $30.0 million in 1994. The increase was attributable entirely to the Asia and Others region, where operating profit increased $3.0 million (17.8%) over 1994, offsetting a decline of $2.2 million in the Company's European region. The lower operating profit in Europe was primarily due to losses in the Company's German operations, which negatively impacted European operating profit by $2.5 million. In the second half of 1995, the Company initiated actions in Germany to lower costs through reductions in personnel and reductions in other operating expenses. As a result of the weaker shipping volumes handled in Europe and the losses in Germany, the Company's European operating profit for the third and fourth quarters of 1995 were lower than for the comparable quarters of 1994. In addition to the losses in Germany, a decline in operating profit was realized in the United Kingdom, which contributed 39.6% and 49.2% of European revenue and operating profit, respectively. -19- Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required by this Item 8 are included in the Company's Consolidated Financial Statements and set forth in the pages indicated in Item 14(a) of this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. Part III Item 10. Directors and Executive Officers of the Registrant The Company's definitive Proxy Statement to be issued in conjunction with the 1997 Annual Meeting of Shareholders is incorporated herein by reference. Item 11. Executive Compensation The Company's definitive Proxy Statement to be issued in conjunction with the 1997 Annual Meeting of Shareholders is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The Company's definitive Proxy Statement to be issued in conjunction with the 1997 Annual Meeting of Shareholders is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The Company's definitive Proxy Statement to be issued in conjunction with the 1997 Annual Meeting of Shareholders is incorporated herein by reference. -20- Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report on Form 10-K. (1) Financial Statements: Page Report of Independent Public Accountants. F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995. F-2 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994. F-3 Consolidated Statements of Stockholders' Investment for the years ended December 31, 1996, 1995 and 1994. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. F-5 Notes to Consolidated Financial Statements. F-6 (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts. F-23 All other financial statement schedules are omitted because they are not applicable, not required, or because the required information is included in the Company's Consolidated Financial Statements or Notes thereto. Separate financial statements of the Company have been omitted since less than 25% of the net assets of its subsidiaries and equity investments are formally restricted from being loaned, advanced or distributed to the holding company. -21- (3) Exhibits required to be filed by Item 601 of Regulation S-K. 3 a. Certificate of Incorporation, as amended through July 24, 1993. b. The Bylaws, as amended through March 22, 1992 (Incorporated herein by reference to Exhibit 3 to the Company's Current Report on Form 8-K, filed March 22, 1992). 4 a. Indenture, dated as of January 15, 1993, between the Company and The Bank of New York, as Trustee (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K, dated February 2, 1993). b. Specimen Convertible Subordinated Debenture (Incorporated herein by reference to Exhibit 4(b) to the Company's Registration Statement on Form S-3, dated December 22, 1992). c. Specimen certificate representing the Common Stock (Incorporated herein by reference to Exhibit 4(c) to the Company's Registration Statement on Form S-3, dated December 22, 1992). 10. Material Contracts: a. Employment Agreement, effective January 1, 1986, between the Company and Hendrik J. Hartong, Jr. (Incorporated herein by reference to Exhibit 10(iii) to the Company's Current Report on Form 8-K, filed March 22, 1992). b. Employment Agreement, effective January 1, 1986, between the Company and Guenter Rohrmann (Incorporated herein by reference to Exhibit 10(iv) to the Company's Current Report on Form 8-K filed March 22, 1991). c. Air Express International Corporation Employees' 1981 Incentive Stock Option Plan (Incorporated herein by reference to Exhibit 10(i) to the Company's Report on Form 10-K, dated April 12, 1985). d. Air Express International Corporation 1984 International Employees' Stock Option Plan (Incorporated herein by reference to the Company's Proxy Statement, dated July 18, 1984, furnished to stockholders in connection with the Annual Meeting of Stockholders held on August 9, 1984). e. Lease Agreement, entered into in June 1986, between the Company and The Port Authority of New York and New Jersey for Hangar 5, John F. Kennedy Airport (Incorporated herein by reference to Exhibit A to the Company's Report on Form 8-K filed March 19, 1987). -22- f. Air Express International Corporation Employees' 1991 Incentive Stock Option Plan, approved by the Shareholders of the Company on June 20, 1991 (Incorporated herein by reference to the Company's Proxy Statement, dated May 17, 1991, furnished to stockholders in connection with the Annual Meeting of Stockholders held on June 20, 1991). g. Air Express International Corporation Employees' 1996 Incentive Stock Option Plan, approved by the Shareholders of the Company on June 20, 1996 (Incorporated herein by reference to the Company's Proxy Statement dated May 17, 1996, furnished to stockholders in connection with the Annual Meeting of Stockholders held on June 20, 1996). 21. Subsidiaries of the Registrant. Exhibit 21. 23. Consent of Independent Public Accountants. Exhibit 23. 27. Financial Data Schedule. Exhibit 27. All other exhibits are omitted because they are not applicable, not required or because the required information is included in the Consolidated Financial Statements or Notes thereto. (b) Reports on Form 8-K: None. -23- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AIR EXPRESS INTERNATIONAL CORPORATION Registrant By: /s/ Dennis M. Dolan Dennis M. Dolan Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Walter L. McMaster Walter L. McMaster Vice President and Controller (Principal Accounting Officer) Date: March 28, 1997 -24- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ John M. Fowler Director March 28, 1997 (John M. Fowler) /s/ Hendrik J. Hartong, Jr. Chairman of the Board (Hendrik J. Hartong, Jr.) of Directors March 28, 1997 /s/ Donald J. Keller Director March 28, 1997 (Donald J. Keller) /s/ Andrew L. Lewis IV Director March 28, 1997 (Andrew L. Lewis IV) /s/ Richard T. Niner Director March 28, 1997 (Richard T. Niner) /s/ John Radziwill Director March 28, 1997 (John Radziwill) /s/ Guenter Rohrmann President, Chief Executive (Guenter Rohrmann) Officer and Director (Principal Executive Officer) March 28, 1997 /s/ Noel E. Vargas Director March 28, 1997 (Noel E. Vargas) -25- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Air Express International Corporation: We have audited the accompanying consolidated balance sheets of Air Express International Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Air Express International Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 27, 1997 F-1
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (Dollars in thousands) 1996 1995 Assets Current assets: Cash and cash equivalents ........................... $ 46,516 $ 54,463 Accounts receivable (less allowance for doubtful accounts of $4,721 and $4,695) ............ 346,323 268,289 Other current assets ................................ 6,295 4,754 Total current assets ............................ 399,134 327,506 Investment in unconsolidated affiliates .............. 13,991 13,228 Property, plant and equipment (less accumulated depreciation and amortization of $53,455 and $43,242) ....................................... 61,112 54,149 Deposits and other assets ............................ 15,226 12,999 Goodwill (less accumulated amortization of $10,673 and $8,269) ............................. 91,866 78,961 Total assets .................................... $ 581,329 $ 486,843 Liabilities and stockholders' investment Current liabilities: Current portion of long-term debt ................... $ 3,915 $ 2,690 Bank overdrafts payable ............................. 2,058 620 Transportation payables ............................. 166,686 149,536 Accounts payable .................................... 50,201 41,625 Accrued liabilities ................................. 61,347 45,556 Income taxes payable ................................ 14,691 10,581 Total current liabilities ....................... 298,898 250,608 Long-term debt ...................................... 16,616 82,762 Other liabilities ................................... 6,729 5,907 Total liabilities ............................... 322,243 339,277 Commitments and contingencies (Note 12) .............. -- -- Stockholders' investment: Capital stock - Preferred (authorized 1,000,000 shares, none outstanding) ................................. -- -- Common, $.01 par value (authorized 40,000,000 shares, issued 22,786,341 and 18,577,880 shares) .. 228 186 Capital surplus ..................................... 137,174 60,164 Cumulative translation adjustments .................. (15,633) (12,539) Retained earnings ................................... 137,989 100,372 259,758 148,183 Less: 27,305 and 25,279 shares of treasury stock, at cost .................................. (672) (617) Total stockholders' investment .................. 259,086 147,566 Total liabilities and stockholders' investment .. $ 581,329 $ 486,843 See Notes to Consolidated Financial Statements.
F-2
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Dollars in thousands) 1996 1995 1994 Revenues ................................. $ 1,335,447 $ 1,222,217 $ 997,379 Operating expenses: Transportation ......................... 903,016 855,568 707,338 Terminal ............................... 234,636 196,639 151,769 Selling, general and administrative .... 139,040 122,603 101,398 1,276,692 1,174,810 960,505 Operating profit ......................... 58,755 47,407 36,874 Other income (expense): Interest expense, net .................. (1,277) (3,344) (3,201) Other, net ............................. 4,618 3,522 3,106 3,341 178 (95) Income before provision for income taxes . 62,096 47,585 36,779 Provision for income taxes ............... 23,596 18,558 14,160 Net income ............................... $ 38,500 $ 29,027 $ 22,619 Net income per common share: Primary ................................ $ 1.81 $ 1.58 $ 1.28 Fully diluted .......................... $ 1.72 $ 1.48 $ 1.21 See Notes to Consolidated Financial Statements.
F-3
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Cumulative Common Stock Capital Translation Retained Treasury Shares Amount Surplus Adjustments Earnings Stock Total (Dollars in thousands) Balance, December 31, 1993 ................. 19,474,620 $ 195 $ 41,193 $ (12,282) $ 88,657 $(39,644) $ 78,119 Exercise of common stock options ........ 145,906 1 805 - - - 806 Purchase of treasury stock .............. - - - - - (358) (358) Translation of foreign currency financial statements................... - - - 840 - - 840 Dividends declared ($.153 per share)..... - - - - (2,676) - (2,676) Net income for the year.................. - - - - 22,619 - 22,619 Balance, December 31, 1994 ................ 19,620,526 196 41,998 (11,442) 108,600 (40,002) 99,350 Exercise of common stock options ........ 202,644 2 1,451 - - - 1,453 Purchase of treasury stock............... - - - - - (990) (990) Translation of foreign currency financial statements................... - - - (1,097) - - (1,097) Dividends declared ($.19 per share)...... - - - - (3,481) - (3,481) Net income for the year.................. - - - - 29,027 - 29,027 Stock issued for Radix acquisition, net.. 979,887 10 23,911 - - (617) 23,304 Retirement of treasury stock............. (2,225,177) (22) (7,196) - (33,774) 40,992 - Balance, December 31, 1995.................. 18,577,880 186 60,164 (12,539) 100,372 (617) 147,566 Exercise of common stock options......... 142,711 1 1,843 - - - 1,844 Purchase of treasury stock............... - - - - - (55) (55) Translation of foreign currency financial statements .................. - - - (3,094) - - (3,094) Dividends declared ($.23 per share)...... - - - - (5,016) - (5,016) Net income for the year.................. - - - - 38,500 - 38,500 Stock issued for Muller acquisition...... 25,000 - 802 - - - 802 Stock issued for Lusk acquisition - acquired under pooling of interests..... 749,994 8 71 - 4,133 - 4,212 Conversion of convertible subordinated debentures................. 3,290,756 33 74,294 - - - 74,327 Balance, December 31, 1996.................. 22,786,341 $ 228 $ 137,174 $ (15,633) $ 137,989 $ (672) $ 259,086
See Notes to Consolidated Financial Statements. F-4
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Dollars in thousands) 1996 1995 1994 Cash flows from operating activities: Net Income ......................................$ 38,500 $ 29,027 $ 22,619 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............... 10,310 7,794 6,224 Amortization of goodwill .................... 2,370 1,983 1,414 Amortization of bond discount ............... 115 230 230 Deferred income taxes ....................... 1,352 (788) (1,577) Equity in earnings of unconsolidated affiliates ................................ (1,276) (1,449) (1,039) (Gains) losses on sales of assets ............ (164) (208) 41 Changes in assets and liabilities, net of business acquisitions: (Increase) in accounts receivable, net ....... (50,627) (26,411) (38,851) (Increase) decrease in other current assets .. (91) (1,137) 850 (Increase) decrease in other assets .......... (803) (2,081) 177 Increase in transportation payables ......... 1,705 19,228 25,291 (Decrease) in accounts payable ............... (489) (5,062) (1,729) Increase (decrease) in accrued liabilities .. 11,700 (2,600) 10,957 Increase (decrease) in income taxes payable . 4,044 216 (415) Increase in other liabilities ............... 192 1,117 1,567 Total adjustments ......................... (21,662) (9,168) 3,140 Net cash provided by operating activities ... 16,838 19,859 25,759 Cash flows from investing activities: Business acquisitions, net of cash acquired ..... (15,393) (1,292) (14,992) Sales of short-term investments ................. -- -- 10,109 Other investing activities ...................... (1,653) (1,934) (1,110) Proceeds from sales of assets ................... 436 606 588 Capital expenditures ............................ (13,826) (20,389) (12,076) Investment in unconsolidated affiliates ......... (70) (1,746) -- Sales (purchases) of marketable securities ...... -- 19,981 (19,961) Net cash used in investing activities ....... (30,506) (4,774) (37,442) Cash flows from financing activities: Net borrowings (repayments) in bank overdrafts payable ............................. 1,523 (841) (1,068) Additions to long-term debt ..................... 9,737 1,327 4,575 Payment of long-term debt ....................... (1,904) (2,556) (1,776) Issuance of common stock ........................ 1,844 1,453 806 Payment of cash dividends ....................... (4,581) (3,250) (2,555) Purchase of treasury stock ...................... (55) (990) (358) Net cash provided (used) by financing activities ...................... 6,564 (4,857) (376) Effect of foreign currency exchange rates on cash .......................................... (843) 67 1,164 Net (decrease) increase in cash and cash equivalents ................................. (7,947) 10,295 (10,895) Cash and cash equivalents at beginning of year ..... 54,463 44,168 55,063 Cash and cash equivalents at end of year ...........$ 46,516 $ 54,463 $ 44,168
See Notes to Consolidated Financial Statements. F-5 AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (1) Summary of Significant Accounting Policies: Principles of Consolidation - The consolidated financial statements include the accounts of Air Express International Corporation and its majority-owned subsidiaries (the "Company"), all of which conduct operations in a single line of business: freight forwarding. All significant intercompany accounts and transactions have been eliminated. Investments in 20.0% to 50.0% owned affiliates are accounted for using the equity method. With the exception of entities operating in highly inflationary economies, assets and liabilities of foreign subsidiaries are translated at rates of exchange in effect at the close of the period. Revenues and expenses are translated at average exchange rates in effect during the year. The resulting translation adjustments are recorded as "Cumulative Translation Adjustments" in a separate component of stockholders' investment. Translation gains or losses of the Company's entities which operate in highly inflationary economies are included in the income statement as a component of Other, net. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Management believes these estimates do not materially affect either the Company's results of operations or financial position. Method of Revenue Recognition - International revenues from the transportation of international freight are recognized at the time the freight has been exported from the country of origin via commercial carrier. The corresponding transportation costs charged by the commercial carriers are recognized concurrently with the freight revenues. Destination delivery costs are recognized as incurred and subsequently billed to consignees, except door-to-door cargo movements which are accrued concurrently with freight revenue recognition. Domestic revenues from the transportation of freight within the United States are recognized on the day freight departs the Company's terminal of origin. Transportation costs and destination delivery costs are recognized concurrently with freight revenues. For both international and domestic revenues, the above methods of revenue recognition approximate recognizing revenues and expenses when a shipment is completed. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued Property, Plant and Equipment - The Company provides depreciation and amortization using the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to expense as incurred. Estimated Useful Life Buildings and improvements 25-40 years Furniture and fixtures 3-10 years Automotive equipment 3-5 years Terminal and data processing equipment 3-5 years Leasehold improvements Life of lease or estimated useful life, if shorter Goodwill - Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is being amortized on a straight-line basis over periods not exceeding 40 years. The Company periodically evaluates the existence of goodwill impairment. When deemed necessary, the Company analyzes the value of goodwill based upon the projected, undiscounted, net cash flows of the related business unit. Impairment would be recognized in operating results if permanent diminution in value were to occur. Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of three months or less. Transportation Payables - Transportation payables represent the Company's largest trade payables which are mainly due to airlines, steamship and trucking companies. Reclassification - Certain prior year amounts were reclassified to conform with the current year presentation. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (2) Common Stock Split: On November 17, 1994, the Company's Board of Directors declared a three-for-two split of the Company's Common Stock, payable in the form of a stock dividend. The additional shares were distributed on December 21, 1994 to shareholders of record on December 5, 1994. Accordingly, all share and per share information throughout the consolidated financial statements were restated to reflect the split. (3) Earnings Per Share: Primary earnings per share is computed by dividing net income by the weighted average of the common and common share equivalents outstanding during the year. For the years 1996, 1995 and 1994, fully diluted earnings per share were calculated assuming the conversion of the convertible subordinated debentures outstanding in those years, and the elimination of the related interest expense, net after tax, which approximated $1.5 million for 1996 and $2.9 million for 1995 and 1994. The $1.4 million decrease in net interest expense in 1996, as compared with 1995 and 1994, resulted from the Company's conversion of its 6.0% Convertible Subordinated Debentures (See Note 8). The primary and fully diluted earnings per share and number of common and common share equivalents were as follows:
1996 1995 1994 Earnings per share: Primary ..................................... $ 1.81 $ 1.58 $ 1.28 Fully diluted ............................... $ 1.72 $ 1.48 $ 1.21 Common and common share equivalents (in thousands) Weighted average shares outstanding ......... 20,918 18,043 17,403 Common share equivalents .................... 392 289 227 Primary equivalent shares ................... 21,310 18,332 17,630 Shares issuable with respect to subordinated convertible securities and additional common share equivalents ............................... 1,889 3,295 3,406 Fully diluted equivalent shares ............. 23,199 21,627 21,036
F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (4) Business Acquisitions: During 1996, the Company acquired five companies in separate transactions. Four of the acquisitions were accounted for as purchases and one as a pooling of interest. In March, the Company acquired all the outstanding stock of the Profreight group of companies, a customs broker and air and ocean freight forwarder in South Africa. In May, the Company made two acquisitions. The first was John V. Carr & Son, Inc., a United States and Canadian customs broker, of which the Company acquired the business and certain assets. The second was AEI Finland Oy, a Finland based air and ocean freight forwarder, of which the Company acquired an additional 50% of the outstanding stock bringing its ownership to approximately 90%. In November, the Company acquired all the outstanding stock of Muller Air Freight B.V., a provider of air and ocean freight forwarding, warehousing and distribution and related logistic services in The Netherlands. The total paid for these four acquisitions approximated $19.2 million which included 25,000 shares of the Company's Common Stock valued at approximately $.8 million issued in connection with the Muller acquisition. The total cost in excess of the net assets acquired for these four acquisitions of approximately $15.3 million is being amortized over 40 years. The results of operations of these acquisitions were included in the Consolidated Statement of Operations from the dates of acquisitions. Additionally, in April, the Company acquired Lusk Shipping Company, Inc., a New Orleans, Louisiana based ocean freight forwarder and customs broker for 749,994 shares of the Company's Common Stock. The acquisition was accounted for as a pooling of interest. The combined effect of these acquisitions did not have a material pro forma impact on either the Company's results of operations or financial position. On June 8, 1995, the Company acquired Radix Ventures, Inc. ("Radix") for 954,608 shares of Common Stock valued at approximately $23.3 million and $.5 million in cash. The acquisition was accounted for as a purchase. Accordingly, the purchase price was allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed. This allocation resulted in goodwill of approximately $26.4 million. Radix's results of operations were included in the consolidated statement of income from the acquisition date forward. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (5) Regional Operations: Revenues, operating profit and identifiable assets are set forth below by geographic area.
Year Ended December 31, 1996 1995 1994 Revenues: U.S.A .......................... $ 511,759 $ 459,265 $ 367,249 Europe ......................... 410,027 387,164 324,025 Asia and Others ................ 413,661 375,788 306,105 Total foreign ................ 823,688 762,952 630,130 Total revenues ................. $1,335,447 $1,222,217 $ 997,379 Operating profit: U.S.A .......................... $ 17,107 $ 16,636 $ 6,890 Europe ......................... 16,943 11,159 13,338 Asia and Others ................ 24,705 19,612 16,646 Total foreign ................. 41,648 30,771 29,984 Total operating profit ......... $ 58,755 $ 47,407 $ 36,874
December 31, 1996 1995 1994 Identifiable assets: U.S.A ................................ $214,959 $181,464 $128,554 Europe ............................... 171,708 142,121 121,946 Asia and Others ...................... 180,671 150,030 123,756 Total foreign ...................... 352,379 292,151 245,702 Investment in unconsolidated affiliates ......................... 13,991 13,228 9,370 Total identifiable assets ............ $581,329 $486,843 $383,626
At December 31, 1996, net assets of foreign subsidiaries including intercompany accounts deemed to be long-term investments amounted to approximately $138.2 million. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (6) Property, Plant and Equipment: A summary of property, plant and equipment, at cost, is as follows:
December 31, 1996 1995 Buildings and improvements ......................... $ 29,258 $ 29,376 Leasehold improvements ............................. 10,319 8,313 Automotive equipment ............................... 5,149 4,831 Furniture and fixtures ............................. 21,276 17,400 Terminal and data processing equipment ............. 42,202 31,698 108,204 91,618 Less: accumulated depreciation and amortization .... (53,455) (43,242) 54,749 48,376 Land ............................................... 6,363 5,773 Property, plant and equipment, net ................. $ 61,112 $ 54,149
(7) Revolving Credit Loan Agreement and Other Short-term Borrowing Facilities: In June 1996, the Company entered into a $75.0 million unsecured Revolving Credit Loan Agreement (the "Agreement"). The Agreement with a syndicated group of U.S. banks has a three year maturity which expires in June 1999 with the option to extend annually on the anniversary date. The interest charged on borrowings is the bank's prime rate, or London Interbank Offered Rate (LIBOR) plus .25% to .50% per annum. The Company is required to pay an annual facility fee at a variable rate of .12% to .25% on the maximum amount available under the Agreement. Among the various covenants contained in this Agreement, the Company is to maintain certain ratios and balances as to minimum stockholders' investment, debt to stockholders' investment and fixed charge coverage. The Company is in compliance with all conditions of the Agreement. At December 31, 1996, the Company was utilizing approximately $2.6 million under this facility primarily for letters of credit issued in connection with the Company's insurance programs. A number of the Company's foreign subsidiaries have unsecured short-term overdraft facilities with foreign banks which approximated $15.6 million at December 31, 1996. The largest single facility, extended to the Company's German subsidiary, was approximately $3.7 million. Borrowings under these facilities generally bear interest at .5% to 2.0% over the foreign banks' equivalent of the prime rate. At December 31, 1996, outstanding borrowings from these facilities were approximately $2.1 million. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (8) Long-Term Debt: Long-term debt consists of the following:
December 31, 1996 1995 Term Loan Holland-principal paid quarterly through 2004, in local currency, bearing interest at 4.30% .............. $ 9,765 $ -- Mortgage Singapore - principal paid semi-annually through 2000, in local currency, bearing interest at 5.55% .............. 5,002 6,370 Convertible Subordinated Debentures due 2003, bearing interest at 6%, net of unamortized discount of $1,661 ................... -- 73,089 Mortgage Australia - principal paid quarterly through 2002, in local currency, bearing interest at 10.2 % payable monthly ............... 2,841 3,141 Mortgage Holland - principal paid quarterly through 2002, in local currency, bearing interest at 8.51% ................................ 1,310 1,713 Other long-term debt ............................... 1,613 1,139 20,531 85,452 Less: current portion .............................. (3,915) (2,690) $ 16,616 $ 82,762
The maturities of long-term debt are as follows:
Year Ending Principal December 31, Amount 1997 $ 3,915 1998 4,166 1999 3,821 2000 2,856 2001 and beyond 5,773 $20,531
The combined carrying value of the assets collateralized under mortgages was approximately $18.4 million at December 31, 1996. On July 8, 1996, the Company completed its announced redemption for all of its $74,750,000 outstanding 6.0% Convertible Subordinated Debentures ("Debentures"). The outstanding Debentures were convertible into the Company's Common Stock at $22.71 per share or 44.03 common shares for each $1,000 principal amount of Debentures. As a result, $74,735,000 of the Debentures were converted, resulting in the issuance of 3,290,756 shares of Common Stock with the remainder redeemed for cash. The impact of cash redemptions was immaterial to the Company's results of operations. F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (8) Long-Term Debt - continued: At December 31, 1996, the fair value of the Company's long-term debt approximated the carrying amount of $20.5 million. Interest expense on long-term debt for the years ended December 31, 1996, 1995 and 1994 was $3.3 million, $5.5 million and $5.2 million, respectively. (9) Common Stock Option Plans: The Company has three fixed stock option plans. The 1984 International Employees' Stock Option Plan ("International Plan") and the 1991 and 1996 Employee Incentive Stock Plans ("Incentive Plans"). During 1996, the Company's Board of Directors adopted and shareholders approved the 1996 Incentive Plan. The plan makes available an additional 500,000 shares for grants of options. Under all three plans, the Company may grant options to its officers and employees at prices equal to or greater than the fair market value of the common stock on the date of the grant. Additionally, under both Incentive Plans, the Company may grant stock appreciation rights (SAR's) to employees at prices equal to or greater than the fair market value of the common stock on the date of the grant. To date, no SAR's have been granted. For all plans, options become exercisable over a four-year vesting period and expire five years after the grant date. Under the combined plans, 2,525,000 shares of the Company's Common Stock were authorized. The Company applies APB25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for these plans. Had compensation cost for the Company's option plans been determined based upon the fair value at the grant dates for awards under these plans consistent with the method set forth under FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 Net Income: As reported ........................ $ 38,500 $ 29,027 Pro forma .......................... $ 37,409 $ 28,521 Earnings Per share: Primary - As reported ........................ $ 1.81 $ 1.58 Pro forma .......................... $ 1.76 $ 1.56 Fully diluted - As reported ........................ $ 1.72 $ 1.48 Pro forma .......................... $ 1.68 $ 1.45
F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (9) Common Stock Option Plans - continued: The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: expected volatility of 28.0% and 27.0%, risk-free interest rates of 6.3% and 5.8%, dividend yield of 1.2% for all years, and expected life of four years for all years. A summary of the status of the Company's fixed stock option plans as of December 31, 1996, 1995 and 1994, and the changes during the years ending on those dates is presented below:
1996 1995 1994 Weighted Average Weighted Average Weighted Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price Options Outstanding Beginning of Year ......... 1,381,678 $ 18.48 971,947 $ 12.71 961,860 $ 11.55 Options Granted ............. 88,000 24.73 620,250 23.75 216,000 13.06 Options Exercised ........... (142,711) 12.91 (202,644) 7.18 (145,906) 5.53 Options Canceled or Expired .................... -- -- (7,875) 12.21 (60,007) 12.92 Options Outstanding End of Year ................ 1,326,967 $ 19.49 1,381,678 $ 18.48 971,947 $ 12.71 Options Exercisable End of Year ................ 526,598 292,070 292,126 Weighted Average Fair Value of Options Granted During the Year ............ $7.14 $ 6.53
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE RANGE OF NUMBER WEIGHTED AVERAGE NUMBER EXERCISE OUTSTANDING YEARS REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE PRICES AT 12/31/96 CONTRACT LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE $ 12.21 - $12.92 387,223 1.6 $ 12.62 205,348 $ 12.59 $ 14.33 - $18.50 236,932 1.3 $ 17.73 164,745 $ 17.87 $ 23.25 - $27.36 702,812 3.6 $ 23.87 156,505 $ 23.73 ---------- 1,326,967 526,598
F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (10) Income Taxes: The Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return. Foreign subsidiaries file separate corporate income tax returns in their respective countries. The components of income before provision for income taxes and the current and deferred components of the provision for income taxes were as follows:
Years Ended December 31, 1996 1995 1994 Income before provision for income taxes: U.S ........................... $ 20,204 $ 17,538 $ 11,286 Foreign ....................... 41,892 30,047 25,493 $ 62,096 $ 47,585 $ 36,779 Current provision: U.S. Federal .................. 6,346 6,056 5,383 Foreign ....................... 14,494 11,803 9,215 State ......................... 1,356 1,484 1,073 22,196 19,343 15,671 Deferred provision: U.S. Federal .................. 1,368 334 (1,190) Foreign ....................... (165) (1,139) (158) State ......................... 197 20 (163) 1,400 (785) (1,511) Total provision for income taxes ..... $ 23,596 $ 18,558 $ 14,160
The provision for income taxes includes deferred taxes resulting from the recognition of certain revenues and expenses in different periods for financial reporting purposes than for tax reporting purposes. The components of the provision for deferred taxes were as follows:
Years Ended December 31, 1996 1995 1994 Net operating losses .......................... $ -- $ (960) $ -- Net change in allowance for doubtful accounts and other reserves ................. 768 (817) (2,378) Undistributed earnings of unconsolidated affiliates .................................. 544 453 343 Accelerated depreciation ...................... 294 186 7 Net unrealized foreign exchange (losses) gains ............................... (206) 353 517 $ 1,400 $ (785) $(1,511)
F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (10) Income Taxes - continued: The difference between the actual provision and the amount computed at the statutory U.S. Federal income tax rate of 35.0% for 1996 and 1995, and 34.3% for 1994 is attributable to the following:
Years Ended December 31, 1996 1995 1994 Income before provision for income taxes ... $ 62,096 $ 47,585 $ 36,779 Tax provision computed at statutory rate ... $ 21,734 $ 16,655 $ 12,615 Increases (reductions) in tax provision due to: Benefit of operating loss carryforwards . (523) -- -- Net operating losses for which no tax benefit has been recognized ........... 455 931 961 Goodwill amortization ................... 802 625 375 Other nondeductible expenses ............ 879 777 645 Foreign income taxed at different rates . (1,304) (1,083) (776) State income tax, net of Federal tax benefit ............................... 1,553 1,249 910 Other ................................... -- (596) (570) Total provision for income taxes ........... $ 23,596 $ 18,558 $ 14,160
For tax reporting purposes, the Company and its subsidiaries had available, dependent upon future taxable income, the following net operating loss carryforwards and foreign tax credits as of December 31, 1996:
Expiring In Net Operating Losses Foreign Tax Credit 1998 $ 541 $ 480 1999 746 -- 2000 282 -- 2001 52 -- 2002 73 -- 2003 65 -- No Expiration 12,338 -- $14,097 $ 480 The net operating losses consist of $2,641 incurred by the Pandair companies prior to the December 23, 1987 acquisition and $1,612 incurred by the Votainer companies prior to the July 1, 1993 acquisition. Future utilization of Pandair and Votainer losses will be treated as a reduction of goodwill. The use of any loss carryforwards or foreign tax credits is dependent upon future taxable income in the applicable taxing jurisdiction. F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (10) Income Taxes - continued: Accumulated unremitted earnings of foreign subsidiaries, which are intended to be permanently reinvested for continued use in their operations and for which no U.S. income taxes have been provided, aggregated approximately $131.3 million at December 31, 1996. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities were as follows: December 31, 1996 1995 Deferred tax assets: Reserve for doubtful accounts and other operating reserves .......................... $ 5,635 $ 5,054 Net operating losses ............................... 5,447 5,687 Foreign tax credits ................................ 480 480 Depreciation ....................................... 334 318 Total deferred tax assets ....................... 11,896 11,539 Valuation allowance for deferred tax assets ........ (4,487) (4,727) Net deferred tax asset (included in "Deposits and Other Assets") ................... $ 7,409 $ 6,812 Deferred tax liabilities: Realized foreign exchange gains .................... $ 544 $ 750 Depreciation ....................................... 667 298 Other .............................................. 114 185 Undistributed earnings of unconsolidated affiliates ......................... 1,337 789 Amortization of deductible goodwill ................ 507 528 Total deferred tax liabilities (included in "Other Liabilities") .............. 3,169 2,550 Net deferred tax (asset) ........................... $ (4,240) $ (4,262)
F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (11) Retirement Plans: The Company maintains a 401(k) Retirement Plan, covering substantially all U.S. employees not participating in collective bargaining agreements. The Company contributes 3.0% of salary for all eligible participants. In addition, the Company matches, dollar for dollar, employee contributions up to 3.0% of salary, subject to certain limitations imposed by the Internal Revenue Code. The total expense for Company contributions was $2.8 million in 1996, $1.6 million in 1995, and $1.5 million in 1994. Pursuant to collective bargaining agreements with its labor unions, the Company made payments to union-sponsored, multi-employer pension plans, based upon the hours worked by covered employees. Such payments approximated $1.4 million in 1996, $1.2 million for 1995 and $1.3 million for 1994. These amounts were determined by the union contracts, and the Company does not administer or control the funds. In the event of plan terminations or Company withdrawal from the plans, the Company may be liable for a portion of the plans' unfunded vested benefits, if any. The Company was advised by the trustees of one multi-employer pension plan ("Plan") to which the Company contributes, that the present value of the Plan's liabilities for vested benefits is significantly in excess of the Plan's assets. In the fourth quarter of 1994, the Company initiated a withdrawal from this Plan and incurred a pre-tax charge of $1.0 million for its estimated portion of the unfunded vested liability. In 1996, the Company made a payment of approximately $1.6 million to the pension plan trustees to settle in full the unfunded vested liability. As part of the settlement, the Company recorded an additional pre-tax charge in 1996 which did not have a material impact on the Company's results of operations. One foreign subsidiary maintains a defined benefit pension plan ("the Plan") which covers substantially all of its employees. The Plan provides benefits based upon years of service and compensation which are in addition to certain retirement benefits accruing to the employees under government regulations. Participating employees contribute 5.0% of their annual compensation to the Plan. The net periodic pension cost for the years ended December 31, 1996, 1995 and 1994 for the Plan are as follows:
December 31, 1996 1995 1994 Service cost .................................. $ 733 $ 648 $ 543 Interest cost ................................. 1,328 1,176 1,014 Actual return on assets - (gains) losses ...... (2,950) (2,040) 2,399 Net amortization and deferral of actuarial gains (losses) ............................... 1,752 309 (3,840) Net periodic pension cost ..................... $ 863 $ 93 $ 116
F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (11) Retirement Plans - continued: The funding of the Plan is actuarially determined. The Plan's assets are invested primarily in equity securities, and contributions were made by the Company to the Plan in 1996, 1995 and 1994. The funded status of the Plan at December 31, 1996 and 1995 is summarized below:
December 31, 1996 1995 Actuarial present value of benefit obligation: Vested and non-vested benefits ................... $ 8,416 $ 7,135 Accumulated benefit obligation ................... $ 8,416 $ 7,135 Effect of anticipated salary increases ........... 9,361 7,429 Projected benefit obligation ..................... 17,777 14,564 Plan assets at fair market value ................... 22,337 17,943 Unrecognized net gain .............................. $ 4,560 $ 3,379
The major assumptions used in determining the funded status of the Plan are set forth below. The first two assumptions are used in determining the Plan's funded status, whereas all three assumptions are used in determining the net periodic pension cost. These assumptions approximate the rates prevailing in the applicable foreign country.
December 31, 1996 1995 1994 Discount rate ....................................... 9 % 9 % 9 % Rate of increase in future compensation ............. 6 % 6 % 6 % Long-term investment return ......................... 9 % 9 % 9 %
Many of the Company's other foreign subsidiaries maintain either defined benefit or defined contribution plans covering substantially all of their employees. The plan benefits are funded essentially through insurance companies using deferred annuity contracts. The cost is funded on an annual basis by the foreign subsidiary and the employee, if the plan is contributory. For the years ended December 31, 1996, 1995 and 1994, pension expense for these plans approximated $4.7 million, $4.0 million and $3.1 million, respectively. The Company does not sponsor any material retirement benefits, other than pensions. Post- employment benefits other than pensions are insignificant. F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (12) Commitments and Contingencies: The Company is obligated under long-term operating lease agreements for computer equipment, terminal facilities and automotive equipment. At December 31, 1996, the minimum annual rentals under these long-term leases were as follows:
Year Ending December 31, Amount 1997 $24,817 1998 20,598 1999 14,957 2000 10,317 2001 10,416 2002 and thereafter 24,520
For the years ended December 31, 1996, 1995 and 1994, rental expense for assets leased under long-term operating lease agreements approximated $23.1 million, $17.2 million and $15.3 million, respectively. The Company is involved in various legal proceedings generally incidental to its business. While the result of any litigation contains an element of uncertainty, the Company presently believes that the outcome of any known pending or threatened legal proceeding or claim, or all of them combined, will not have a material adverse effect on its results of operations or consolidated financial position. (13) Foreign Currency Translation: The Company purchases foreign currency forward exchange contracts to hedge its foreign currency exposures associated with investments in certain foreign operations and certain intercompany transactions. The Company does not use these contracts for trading purposes. At December 31, 1996, the carrying value of these contracts represents approximately $.3 million of net unrealized losses, which approximates fair value, and are included in accrued liabilities in the accompanying balance sheet. The aggregate notional amount of these contracts, which will mature at various dates in 1997, was $29.6 million at December 31, 1996. Gains or losses resulting from forward exchange contracts purchased to hedge investments in certain foreign subsidiaries are excluded from the statement of operations and are recorded, net of tax, directly to stockholders' investment. In 1996, the Company recognized a $1.1 million loss on these contracts compared with a $.5 million loss in 1995. The Company recognizes, in foreign exchange gains, net, gains and losses on forward exchange contracts purchased to hedge certain intercompany transactions. In 1996, the Company recognized a $.6 million pre-tax loss on these contracts. Additionally, both gains and losses from other foreign currency transactions and translation gains and losses of subsidiaries operating in highly inflationary economies are recognized in Other, net (See Note 14). F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (14) Other, net: Other, net consists of the following:
Year Ended December 31, 1996 1995 1994 Equity in earnings of unconsolidated affiliates ........................... $ 2,578 $ 2,148 $ 1,371 Gains (losses) on sales of assets ...... 164 208 (41) Foreign exchange gains ................. 1,876 1,144 1,876 Other .................................. -- 22 (100) ------- ------ ------- $ 4,618 $ 3,522 $ 3,106
(15) Supplemental Disclosures of Cash Flow Information: Interest and income taxes paid were as follows:
Year Ended December 31, 1996 1995 1994 Interest ......................................... $ 3,020 $ 5,493 $ 5,314 Income Taxes ..................................... $17,064 $17,647 $15,170
Non cash investing and financing activities: On July 8, 1996, as a result of Debenture conversions, the Company issued 3,290,756 shares of its Common Stock valued at approximately $74.4 million (See Note 8). In June 1995, as part of the Radix acquisition, the Company issued 954,608 shares of Common Stock valued at approximately $23.3 million (See Note 4). F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued (16) Quarterly Revenues and Earnings (Unaudited):
Quarter 1st 2nd 3rd 4th Year Ended December 31, 1996 Revenues ...................... $294,787 $320,660 $340,928 $379,072 Operating profit .............. $ 10,103 $ 15,678 $ 15,340 $ 17,634 Net income .................... $ 6,147 $ 9,709 $ 10,626 $ 12,018 Income per common share: Primary ..................... $ .33 $ .49 $ .48 $ .52 Fully diluted ............... $ .31 $ .45 $ .46 $ .52 Year Ended December 31, 1995 Revenues $279,962 $299,387 $ 314,269 $328,599 Operating profit $ 8,461 $ 12,369 $ 12,014 $ 14,563 Net income $ 5,113 $ 7,557 $ 7,274 $ 9,083 Income per common share: Primary $ .29 $ .42 $ .39 $ .48 Fully diluted $ .28 $ .39 $ .36 $ .44
F-22
AIR EXPRESS INTERNATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (In thousands) Net Balance at Write-offs Balance at Beginning Charges Charged to End of Period to Income Other(1) Reserves of Period Year ended December 31, 1996: Allowance for doubtful accounts .. $4,695 $1,124 $ 320 $1,418 $4,721 Year ended December 31, 1995: Allowance for doubtful accounts .. $3,290 $2,254 $ 545 $1,394 $4,695 Year ended December 31, 1994: Allowance for doubtful accounts .. $2,846 $1,111 $ 239 $ 906 $3,290
(1) Addition to the allowance for doubtful accounts is attributable to business acquisitions which the Company made during the year. F-23 EXHIBIT INDEX Exhibit Sequential No. Description Page No. 21 Subsidiaries of the Registrant 49 23 Consent of Independent Public Accountants 50 27 Financial Data Schedule 51 EXHIBIT 21 AIR EXPRESS INTERNATIONAL CORPORATION SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1996 Percent Jurisdiction of Shares of Owned by Name Incorporation Direct Parent AEI Ocean Services Corp. Delaware 100% Air Express International USA, Inc. Delaware 100% Radix Ventures Inc. Delaware 100% Surface Freight Corporation Florida 100% Votainer USA Inc. Delaware 100% Air Express International (Australia) Australia 100% Air Express International (Belgium) N.V. Belgium 100% Air Express International do Brazil Ltda. S.C. Brazil 100% Air Express International (Canada) Limited Canada 100% Air Express International (Fiji) Limited Fiji 100% Air Express International Finland Oy Finland 90% Air Express International France S.A. France 100% Air Express International GmbH Germany 100% Air Express International (H.K.) Limited Hong Kong 100% Air Express International (Ireland) Limited Ireland 100% Air Express International Luxembourg Luxembourg 100% Air Express International Holding B.V. The Netherlands 100% Air Express International Limited New Zealand 100% AEI (Norway) A.S. Norway 75% Air Express International (Panama) S.A. Panama 100% Air Express International (PNG) Pty. Limited Papua New Guinea 100% Air Express International Corporation Del Peru S.A. Peru 100% Air Express International Singapore (Pte.) Limited Singapore 100% Air Express International (S.A.) Pty. Limited South Africa 100% AEI Ltd. Switzerland 100% Air Express International Limited Switzerland 100% AEIC Air Cargo, Inc. Taiwan 100% Air Express International (U.K.) Ltd. United Kingdom 100% Air Express International (PVT) Limited Zimbabwe 100% EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33- 10674, 33-10799 and 33-56114. ARTHUR ANDERSEN LLP New York, New York March 27, 1997 EX-27 2
5 1000 12-MOS DEC-31-1996 DEC-31-1996 46,516 0 351,044 4,721 0 399,134 114,567 53,455 581,329 298,898 16,616 228 0 0 275,163 581,329 0 1,335,447 0 903,016 234,636 1,124 3,804 62,096 23,596 38,500 0 0 0 38,500 1.81 1.72
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