-----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, ORehUy0MEz11Okoe8fvAZL67Qy0MCOR8OztLxASZHHiz+dti0HOE5JQ8kxNJlyr9 wZrv1DlJGdOQHsqSSpiNCw== 0000912057-97-011191.txt : 19970401 0000912057-97-011191.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011191 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXPEDITORS INTERNATIONAL OF WASHINGTON INC CENTRAL INDEX KEY: 0000746515 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 911069248 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-13468 FILM NUMBER: 97569472 BUSINESS ADDRESS: STREET 1: 19119 16TH AVE S STREET 2: P.O.BOX 69620 CITY: SEATTLE STATE: WA ZIP: 98188 BUSINESS PHONE: 206-246-3711 MAIL ADDRESS: STREET 1: 19119 16TH AVENUE SOUTH STREET 2: P.O.BOX 69620 CITY: SEATTLE STATE: WA ZIP: 98168-9620 10-K405 1 FORM10-K,COVER,2-28,F1-14,S-1,EXHCOVER,INDEX/EXH UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________to__________ Commission File Number: 0-13468 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. (Exact name of registrant as specified in its charter) Washington 91-1069248 (State or other jurisdiction (I.R.S.Employer Identification Number) of incorporation or organization) 999 Third Avenue, Suite 2500, 98104 Seattle, Washington (Zip Code) (Address of principal executive offices) (206) 674-3400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] At March 10, 1997, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $613,509,208. At March 10, 1997, the number of shares outstanding of registrant's Common Stock was 24,282,689. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the Registrant's 1997 Annual Meeting of Shareholders to be held on May 7, 1997 are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1--BUSINESS Expeditors International of Washington, Inc. (the "Company") is engaged in the business of providing global logistics services. The Company offers its customers a seamless international network supporting the movement and strategic positioning of goods. The Company's services include the consolidation or forwarding of air and ocean freight. In each U.S. office, and in many overseas offices, the Company acts as a customs broker. The Company also provides additional services including distribution management, vendor consolidation, cargo insurance, purchase order management and customized logistics information. The Company does not compete for domestic freight, overnight courier or small parcel business and does not own aircraft or steamships. The Company, including its majority owned subsidiaries, operates full service offices (-) in the major cities identified below. Full service offices have also been established in locations where the Company maintains unilateral control over assets and operations and where the existence of the parent subsidiary relationship is maintained by means other than record ownership of voting stock (#). In other cities, the Company contracts with independent agents to provide required services and has established over 120 such relationships world-wide. Locations where Company employees perform sales and customer service functions are identified below as international service centers (*). In each case, the opening date for the full service office or international service center is set forth in parenthesis.
NORTH AMERICA SOUTH AMERICA FAR EAST - ------------- ------------- -------- UNITED STATES - - Seattle (5/79) - Buffalo-Peace BRAZIL CHINA - - Chicago (7/81) Bridge (12/96) - Sao Paulo (9/95) - Beijing (7/94) - - San Francisco (7/81) - Lewiston-Queenston - Rio de Janeiro (9/95) - Guangzhou (4/94) - - New York (11/81) (12/96) - Campinas (9/95) - Dalian (7/94) - - Los Angeles (5/82) - El Paso (1/97) - Shanghai (7/94) - - Atlanta (8/83) - Laredo (2/97) CHILE - Shenzen (7/94) - - Boston (11/85) - Nogales (2/97) - Santiago (2/95) - Quingdao (7/94) - - Miami (3/86) - Tianjin (7/94) - - Minneapolis (7/86) PUERTO RICO - Xi'an (7/94) - - Denver (2/88) - San Juan (5/95) - Xiamen (7/94) - - Detroit (7/88) - Nanjing (8/95) - - Portland (7/88) CANADA - - Cincinnati (8/89) - Toronto (5/84) HONG KONG (9/81) - - Cleveland (7/90) - Vancouver (9/95) - - Phoenix (7/91) INDONESIA - - Louisville (10/91) MEXICO # Jakarta (12/90) - - St. Louis (4/92) - Mexico City (6/95) # Surabaya (2/92) - - Houston (4/92) - - Baltimore (4/92) JAPAN - - Dallas (5/92) - Tokyo (3/91) - - Columbus (6/92) - Osaka (9/96) - - Charlotte (7/92) - - Newark (9/94) KOREA - - Philadelphia (3/95) - Pusan (10/94) - - Charleston (6/95) - Seoul (10/94) - - Memphis (8/95) - Bupyung (6/96) - - Salt Lake City (11/95) - Chonan (6/96) * Syracuse (4/96) - Kwangju (6/96) - - Norfolk (9/96) - Kumi (6/96) - - Indianapolis (11/96) - Masan (6/96) - - Port Huron-Blue Water - Taegu (6/96) Bridge (12/96) - - Detroit-Ambassador MALAYSIA Bridge (12/96) - Penang (11/87) - - Dearborn-CPC (12/96) - Kuala Lumpur (6/90) * Johore Bharu (03/96)
NEAR/MIDDLE ------------ EAST AFRICA ---- ------ SINGAPORE (9/81) PORTUGAL - Lisbon (10/91) BANGLADESH EGYPT TAIWAN - Oporto (10/91) * Dacca (6/89) - Cairo (2/95) # Taipei (9/81) * Chittagong (8/93) - Alexandria (2/95) # Kaohsiung (9/81) SPAIN # Taichung (9/81) - Barcelona (1/94) INDIA SOUTH AFRICA # Hsin-Chu (9/89) - Madrid (1/94) - New Delhi (7/96) - Johannesburg (3/94) - Alicante (4/96) - Mumbai - Durban (3/94) (Bombay) (12/96) - Capetown (1/97) THAILAND - - Bangkok (9/94) SWEDEN KUWAIT - Stockholm (1/94) # Kuwait City (12/91) - Goteborg (1/94) EUROPE LEBANON - ------ UNITED KINGDOM - Beirut (4/93) - London (4/86) AUSTRIA - Manchester (11/88) PAKISTAN - - Salzburg (11/95) - Birmingham (3/90) - Karachi (9/96) - - Vienna (11/95) - Glasgow (4/92) - Lahore (9/96) - Bedford (6/94) BELGIUM SAUDI ARABIA - - Brussels (7/90) AUSTRALASIA # Riyadh (7/92) - - Antwerp (4/91) ----------- # Jeddah (7/92) FINLAND AUSTRALIA - - Helsinki (4/94) - Sydney (8/88) SRI LANKA - Melbourne (8/88) # Colombo (3/95) FRANCE - Brisbane (10/93) - - Paris (1/97) - Perth (12/94) TURKEY - - Espinal (1/97) * Istanbul (5/91) - - Lyon (1/97) NEW ZEALAND - - Lille (3/97) -Auckland (8/88) U.A.E. * Dubai (10/92) GERMANY * Abu Dhabi (1/94) - - Frankfurt (4/92) - - Munich (4/92) - - Dusseldorf (4/92) CYPRUS - - Stuttgart (4/92) * Nicosia (6/96) - - Hamburg (1/93) GREECE * Athens (1/91) IRELAND - - Dublin (3/97) - - Cork (3/97) - - Shannon (3/97) ITALY - - Milan (4/93) - - Verona (4/93) NETHERLANDS - - Amsterdam (6/94) - - Rotterdam (3/95)
The Company was incorporated in the State of Washington in May 1979. Its executive offices are located at 999 Third Avenue, Suite 2500, Seattle, Washington, and its telephone number is (206) 674-3400. For information concerning the amount of revenues, operating income, identifiable assets, capital expenditures and depreciation and amortization attributable to the geographic areas in which the Company conducts its business, see Note 7 to the Consolidated Financial Statements. Beginning in 1981, the Company's primary business focus was on airfreight shipments from the Far East to the United States and related customs brokerage and import services. In the mid-1980's, the Company began to expand its service capabilities in export airfreight, ocean freight and distribution services. Today the Company offers a complete range of global logistics services to a diversified group of customers, both in terms of industry specialization and geographic location. As opportunities for profitable growth arise, the Company plans to create new offices. While the Company has historically expanded through organic growth, the Company has also been open to growth through acquisition of, or establishing joint ventures with, existing agents or others within the industry. AIRFREIGHT SERVICES Airfreight services accounted for approximately 47, 47 and 48 percent of the Company's 1996, 1995, and 1994 consolidated revenues net of freight consolidation expenses ("net revenues"), respectively. When performing airfreight services, the Company typically acts either as a freight consolidator or as an agent for the airline which carries the shipment. When acting as a freight consolidator, the Company purchases cargo space from airlines on a volume basis and resells that space to its customers at lower rates than the customers could obtain directly from airlines. When moving shipments between points where the volume of business does not facilitate consolidation, the Company receives and forwards individual shipments as the agent of the airline which carries the shipment. Whether acting as an agent or consolidator, the Company offers its customers knowledge of optimum routing, familiarity with local business practices, knowledge of export and import documentation and procedures, the ability to arrange for ancillary services, and assistance with space availability in periods of peak demand. In its airfreight forwarding operations, the Company procures shipments from its customers, determines the routing, consolidates shipments bound for a particular airport distribution point, and selects the airline for transportation to the distribution point. At the distribution point, the Company or its agent arranges for the consolidated lot to be broken down into its component shipments and for the transportation of the individual shipments to their final destinations. The Company estimates its average airfreight consolidation weighs approximately 3,500 to 4,500 pounds and includes merchandise from several shippers. Because shipment by air is relatively expensive compared with ocean transportation, air shipments are generally characterized by a high value-to-weight ratio, the need for rapid delivery, or both. The Company typically delivers shipments from a Company warehouse at the origin to the airline after consolidating the freight into containers or onto pallets. Shipments normally arrive at the destination distribution point within forty-eight hours after such delivery. During peak shipment periods, cargo space available from the scheduled air carriers can be limited and backlogs of freight shipments may occur. When these conditions exist, the Company may charter aircraft to meet customer demand. The Company consolidates individual shipments based on weight and volume characteristics in cost-effective combinations. Typically, as the weight or volume of a shipment increases, the cost per pound/kilo or cubic inch/centimeter charged by the Company decreases. The rates charged by airlines to forwarders and others also generally decrease as the weight or volume of the shipment increases. As a result, by aggregating shipments and presenting them to an airline as a single shipment, the Company is able to obtain a lower rate per pound/kilo or cubic inch/centimeter than that which it charges to its customers for the individual shipment, while generally offering the customer a lower rate than could be obtained from the airline for an unconsolidated shipment. The Company's net airfreight forwarding revenues from a consolidated shipment includes the differential between the rate charged to the Company by an airline and the rate which the Company charges to its customers, commissions paid to the Company by the airline carrying the freight and fees for ancillary services. Such ancillary services provided by the Company include preparation of shipping and customs documentation, packing, crating and insurance services, negotiation of letters of credit, and preparation of documentation to comply with local export laws. When the Company 4 acts as an agent for an airline handling an unconsolidated shipment, its net revenues are primarily derived from commissions paid by the airline and fees for ancillary services paid by the customer. The Company does not own aircraft and does not plan to do so. Management believes that the ownership of aircraft would subject the Company to undue business risks, including large capital outlays, increased fixed operating expenses, problems of fully utilizing aircraft and competition with airlines. Because the Company relies on commercial airlines to transport its shipments, changes in carrier policies and practices such as pricing, payment terms, scheduling, and frequency of service may affect its business. The Company also performs breakbulk services which involve receiving and breaking down consolidated airfreight lots and arranging for distribution of the individual shipments. Breakbulk service revenues also include commissions from non-exclusive agents for airfreight shipments. CUSTOMS BROKERAGE AND IMPORT SERVICES Customs brokerage and import services accounted for approximately 34, 35, and 37 percent of the Company's 1996, 1995, and 1994 consolidated net revenues, respectively. As a customs broker, the Company assists importers to clear shipments through customs by preparing required documentation, calculating and providing for payment of duties on behalf of the importer, arranging for any required inspections by governmental agencies, and arranging for delivery. The Company also provides other services at destination including temporary warehousing, inland transportation, inventory manipulation and management, cargo insurance and product distribution. The Company provides customs clearance services in connection with many of the shipments it handles as a freight forwarder. However, substantial customs brokerage revenues are derived from customers that elect to use a competing forwarder. Conversely, shipments handled by the Company as a forwarder may be processed by another customs broker selected by the customer. The Company also provides custom clearances for goods moving by rail and truck between the United States, Canada and/or Mexico. The commodities being cleared and the time sensitive nature of the border brokerage business required the Company to make significant modifications to its systems and traditional office structure in order to provide competitive service. Management believes that success in the border brokerage business will be an important addition to the Company's global logistics strategy. During 1996 the Company established a subsidiary, Expeditors Consulting Services, L.L.C., to respond to customer driven requests for high-end customs consulting services. The demand for these services was stimulated by the changes made by US Customs Service in response to the 1993 Customs Modernization Act. Fees for these non-transactional services are based upon hourly billing rates and bids for mutually agreed procedures. There is currently a noticeable trend, prompted by customer demand, to quote rates on a door-to-door basis. Management foresees the potential, in the medium to long-term, for fees normally associated with customs clearance to be de-emphasized and included as a component of other services offered by the Company. OCEAN FREIGHT SERVICES Ocean freight services accounted for approximately 19, 18 and 15 percent of the Company's 1996, 1995, and 1994 consolidated net revenues, respectively. The Company's revenues as an ocean freight forwarder are derived from commissions paid by the carrier and revenues from fees charged to customers for ancillary services which the Company may provide, such as preparing documentation, procuring insurance, arranging for packing and crating services, and providing consultation. The Company operates Expeditors International Ocean ("EIO"), a Non-Vessel Operating Common Carrier ("NVOCC") specializing in ocean freight consolidation from the Far East to the United States. EIO also provides service, on a smaller scale, to and from any location where the Company has an office or agent. As an NVOCC, EIO contracts with ocean shipping lines to obtain transportation for a fixed number of containers between various points during a specified time period at an agreed rate. EIO solicits less than container load ("LCL") freight to fill the containers and charges lower rates than those available directly from shipping lines. EIO also handles full container loads for customers that do not have annual shipping volumes sufficient to negotiate comparable contracts directly with the ocean carriers. The Company does not own vessels and generally does not physically handle the cargo. 5 Expeditors Cargo Management Systems ("ECMS") supplies a sophisticated ocean consolidation service. The Company owns and maintains software that allows it to sell ECMS to large volume customers that have signed their own service contracts with the ocean carriers. As an ocean consolidator, ECMS may obtain LCL freight from several vendors and consolidate this cargo into full containers. The Company's revenues as an ocean consolidator are derived from handling LCL cargo at origin and from the fees paid by customers for access to data captured during the consolidation process. MARKETING AND CUSTOMERS The Company provides flexible service and seeks to understand the needs of the customers from point of origin to ultimate destinations. Although the domestic importer usually designates the logistics company and the services that will be required, the foreign shipper may also participate in this selection process. Therefore, the Company coordinates its marketing program to reach both domestic importers and their overseas suppliers. The Company's marketing efforts are focused primarily on the traffic, shipping and purchasing departments of existing and potential customers. The district manager of each office is responsible for marketing, sales coordination, and implementation in the area in which he or she is located. All employees are responsible for customer service and relations. The Company staffs its offices largely with managers and other key personnel who are citizens of the nations in which they operate and who have extensive experience in global logistics. Marketing and customer service staffs are responsible for marketing the Company's services directly to local shippers and traffic managers who may select or influence the selection of the logistics vendor and for ensuring that customers receive timely and efficient service. The Company believes that its expertise in supplying solutions customized to the needs of its customers, its emphasis on coordinating its origin and destination customer service and marketing activities, and the incentives it gives to its managers have been important elements of its success. The goods handled by the Company are generally a function of the products which dominate international trade between any particular origin and destination. Shipments of computer components, other electronic equipment, housewares, sporting goods, machine parts, and toys comprise a significant percentage of the Company's business. Typical import customers include computer retailers and distributors of consumer electronics, department store chains, clothing and shoe wholesalers, manufacturers and catalogue stores. Historically, no single customer has accounted for five percent or more of the Company's revenues. COMPETITION The global logistics services industry is intensively competitive and is expected to remain so for the foreseeable future. There are a large number of companies competing in one or more segments of the industry, but the number of firms with a global network that offer a full complement of logistics services is more limited. Depending on the location of the shipper and the importer, the Company must compete against both the niche players and larger entities. While there is currently a marked trend within the industry toward consolidation of the niche players into the larger firms striving for immediate multinational and multi-service networks, the regional and local competitors maintain a strong market presence. The U.S. publicly traded entities most similar to the Company are Air Express International Corporation, The Harper Group, Inc. and Fritz Companies, Inc. Historically, the primary competitive factors in the global logistics services industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. The Company emphasizes quality service and believes that its prices are competitive with the prices of others in the industry. Recently, larger customers have exhibited a trend toward more sophisticated and efficient procedures for the management of the logistics supply chain by embracing strategies such as just-in-time inventory management. This trend has made computerized customer service capabilities a significant factor in attracting and retaining customers. These computerized customer service capabilities include customized Electronic Data Interchange, or EDI, and on-line freight tracing and tracking applications. The customized EDI applications allow the transfer of key information between the customers' systems and the Company's systems. Freight tracing and tracking applications allows customers to know the location, transit time and estimated delivery time of inventory in transit. 6 Management believes that the ability to develop and deliver innovative solutions to meet customers' increasingly sophisticated information requirements is a critical factor in the ongoing success of the Company. Accordingly, the Company has devoted a significant amount of resources towards the maintenance and enhancement of systems that will meet these customer demands. Management believes that the Company's existing systems are competitive with the systems currently in use by other logistics services companies with whom it competes. Developing these systems has added a considerable indirect cost to the services provided to customers. Small and middle-tier competitors, in general, do not have the resources available to develop these customized systems. As a result, there is a significant amount of consolidation currently taking place in the industry. Management expects that this trend toward consolidation will continue for the short to medium term. Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company's competitors and typically involves the purchase of significant "goodwill." As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions. The Company's ability to attract, retain, and motivate highly qualified personnel with experience in global logistics services is an essential, if not the most important, element of its ability to compete in the industry. To this end, the Company has adopted incentive compensation programs which make percentages of branch revenues or profits available to managers for distribution among key personnel. The Company believes that these incentive compensation programs, combined with its experienced personnel and its ability to coordinate global marketing efforts, provide it with a distinct competitive advantage and accounts for historical growth that competitors have matched only through acquisition. CURRENCY AND OTHER RISK FACTORS The nature of the Company's worldwide operations necessitate the Company dealing with a multitude of currencies other than the U.S. dollar. This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference. Many of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company's ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by accelerating international currency settlements among these offices or agents. In addition, the Company's ability to provide service to its customers is highly dependent on good working relationships with a variety of entities including airlines, steamship lines and governmental agencies. The Company considers its current working relationships with these entities to be good. However, changes in space allotments available from carriers, governmental deregulation efforts, "modernization" of the regulations governing customs clearance, and/or changes in governmental quota restrictions could affect the Company's business in unpredictable ways. SEASONALITY Historically, the Company's operating results have been subject to seasonal trends when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third quarter has traditionally been the strongest. This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company's international network and service offerings. The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods. A significant portion of the Company's revenues are derived from customers in industries whose shipping patterns are tied closely to consumer demand and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of the Company's revenues are, to a large degree, impacted by factors out of the Company's control, such as shifting consumer demand for retail goods and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company's stock. ENVIRONMENTAL In the United States, the Company is subject to Federal, state and local provisions regulating the discharge of materials into the environment or otherwise for the protection of the environment. Similar laws apply in many foreign 7 jurisdictions in which the Company operates. Although current operations have not been significantly affected by compliance with these environmental laws, governments are becoming increasingly sensitive to environmental issues, and the Company cannot predict what impact future environmental regulations may have on its business. The Company does not anticipate making any material capital expenditures for environmental control purposes during the remainder of the current or succeeding fiscal years. EMPLOYEES At February 28,1997, the Company employed approximately 3,250 people, 1,550 in the United States and 40 in the balance of North America, 30 in South America, 360 in Europe, 1,100 in the Far East & Australasia, 110 in the Near/Middle East and 60 in Africa. Approximately 330 of the Company's employees are engaged principally in sales and marketing and customer service, 2,150 in operations and 770 in finance and administration. The Company is not a party to any collective bargaining agreement and considers its relations with its employees to be satisfactory. In order to retain the services of highly qualified, experienced, and motivated employees, the Company places considerable emphasis on its incentive compensation programs and stock option plans. 8 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names, ages, and positions of current executive officers of the Company.
NAME AGE POSITION - ------------------------------------------- --- ------------------------------------------- Peter J. Rose.............................. 54 Chairman and Chief Executive Officer and director President and Chief Operating Officer and Kevin M. Walsh............................. 46 director Executive Vice President and Director-Far James L.K. Wang............................ 49 East and director Executive Vice President and Director-North Glenn M. Alger............................. 40 America William J. Coogan.......................... 42 Senior Vice President-Ocean Cargo Senior Vice President-Air Cargo and Rommel C. Saber............................ 39 Director-Middle East Michael R. Claydon......................... 49 Director-Europe Timothy C. Barber.......................... 37 Vice President-Sales and Marketing R. Jordan Gates............................ 41 Chief Financial Officer and Treasurer Vice President-General Counsel and Jeffrey J. King............................ 42 Secretary David M. Lincoln........................... 38 Vice President-Systems Management Charles J. Lynch........................... 36 Corporate Controller
Peter J. Rose has served as a director and Vice President of the Company since July 1981. Mr. Rose was elected a Senior Vice President of the Company in May 1986, Executive Vice President in May 1987, President and Chief Executive Officer in October 1988, and Chairman and Chief Executive Officer in May 1991. Kevin M. Walsh has served as a director and Vice President of the Company since July 1981. Mr. Walsh was elected a Senior Vice President of the Company in May 1986, Executive Vice President in December 1989, and President and Chief Operating Officer in May 1991. James L.K. Wang has served as a director and the Managing Director of Expeditors International Taiwan Ltd., the Company's former exclusive Taiwan agent, since September 1981. Mr. Wang's employment agreement with the Company has been assigned to the Company's current exclusive Taiwan agent, E.I. Freight (Taiwan), Ltd. In October 1988, Mr. Wang became a director of the Company and its Director-Far East. In January 1996, Mr. Wang was elected to the office of Executive Vice President. Glenn M. Alger joined the Company in July 1981 as a Regional Manager. Mr. Alger was elected Vice President in October 1988, Senior Vice President and Regional Manager in January 1992, and Senior Vice President in January 1993. In March 1997, Mr. Alger was elected Executive Vice President and Director-North America. William J. Coogan was employed as New York Ocean Manager of EIO when it was acquired by the Company in May 1985. Mr. Coogan was promoted to East Coast Regional Sales Manager of the Company in June 1986, District Manager of the Company's New York office in July 1988, and Senior Vice President of EIO in April 1989. Mr. Coogan was elected Senior Vice President--Ocean in February 1993 and Senior Vice President-Ocean Cargo in May 1996. Rommel C. Saber joined the Company as Director-Middle/Near East in February 1990 and was elected Senior Vice President-Sales and Marketing in January 1993. In September 1993, Mr. Saber was elected Senior Vice President-Air Export. Mr. Saber was elected Senior Vice President-Air Cargo and Director-Middle East in May 1996. 12 Michael R. Claydon joined the Company as Director-Europe in October 1987. Timothy C. Barber joined the Company in May 1986 as Import Manager in the Seattle office. Mr. Barber was promoted to District Manager in January 1987 and Regional Vice President in January 1993. Mr. Barber was elected Vice President-Sales and Marketing in September 1993. R. Jordan Gates joined the Company as its Controller-Europe in February 1991. Mr. Gates was elected Chief Financial Officer and Treasurer of the Company in August 1994. Jeffrey J. King joined the Company in October 1990 as Director-Taxation and Legal Services and was elected Vice President-General Counsel in May 1992. In August 1994, Mr. King was elected Vice President-General Counsel and Secretary. 9 David M. Lincoln joined the Company as its Controller-U.S. Operations in March 1984. Mr. Lincoln served as Corporate Controller of the Company from May 1986 to January 1991, and was elected Vice President-Systems Management in December 1989. Mr. Lincoln was elected Vice President-Information Systems in May 1996. Charles J. Lynch joined the Company as its Senior Accountant in September 1984. Mr. Lynch was promoted to Assistant Controller in July 1985 and Controller-Domestic Operations in January 1989. Mr. Lynch was elected Corporate Controller in January 1991. REGULATION With respect to Company's activities in the air transportation industry in the United States, it is subject to regulation by the Department of Transportation ("DOT") as an indirect air carrier. The Company's overseas offices and agents are licensed as airfreight forwarders in their respective countries of operation. The Company is licensed in each of its offices or in the case of its newer offices, has made application for a license, as an airfreight forwarder by the International Air Transport Association ("IATA"). IATA is a voluntary association of airlines which prescribes certain operating procedures for airfreight forwarders acting as agents for its members. The majority of the Company's airfreight forwarding business is conducted with airlines which are IATA members. The Company is licensed as a customs broker by the Customs Service of the Department of the Treasury in each U.S. customs district in which it does business. All U.S. customs brokers are required to maintain prescribed records and are subject to periodic audits by the Customs Service. In other jurisdictions in which the Company performs clearance services, the Company is licensed by the appropriate governmental authority. The Company is licensed as an ocean freight forwarder by the Federal Maritime Commission ("FMC"). The FMC has established certain qualifications for shipping agents, including certain surety bonding requirements. The FMC also is responsible for the economic regulation of NVOCC activity originating or terminating in the United States. To comply with these economic regulations, vessel operators and NVOCCs, such as EIO, are required to file tariffs electronically which establish the rates to be charged for the movement of specified commodities into and out of the U.S. The FMC has the power to enforce these regulations by assessing penalties. The Company does not believe that current U.S. and foreign governmental regulation impose significant economic restraint upon its business operations. In general, the Company conducts its business activities in each country through a majority owned subsidiary corporation that is organized and existing under the laws of that country. However, the regulations of foreign governments can impose barriers to the Company's ability to provide the full range of its business activities in a wholly or majority U.S. owned subsidiary. For example, foreign ownership of a customs brokerage business is prohibited in some jurisdictions and less frequently the ownership of the licenses required for freight forwarding and/or freight consolidation is restricted to local entities. When the Company encounters this sort of governmental restriction, it works to establish a legal structure that meets the requirements of the local regulations while also giving the Company the substantive operating and economic advantages that would be available in the absence of such regulation. This can be accomplished by creating a joint venture or exclusive agency relationship with a qualified local entity that holds the required license. In cases where the Company has unilateral control over the assets and operations of the local entity, notwithstanding the lack of technical majority ownership of common stock, the Company consolidates the accounts of the local entity. In such cases, consolidation is necessary to fairly present the financial position and results of operations of the Company because of the existence of the parent-subsidiary relationship by means other than record ownership of voting common stock. CARGO LIABILITY When acting as an airfreight consolidator, the Company assumes a carrier's liability for lost or damaged shipments. This legal liability is typically limited by contract to the lower of the transaction value or the released value ($9.07 per pound unless the customer declares a higher value and pays a surcharge), except if the loss or damage is caused by willful misconduct or in the absence of an appropriate air waybill. The airline which the Company utilizes to make the actual shipment is generally liable to the Company in the same manner and to the same extent. When acting solely as the agent of the airline or shipper, the Company does not assume any contractual liability for loss or damage to shipments tendered to the airline. 10 When acting as an ocean freight consolidator, the Company assumes a carrier's liability for lost or damaged shipments. This liability is typically limited by contract to the lower of the transaction value or the released value ($500 per package or customary freight unit unless the customer declares a higher value and pays a surcharge). The steamship line which the Company utilizes to make the actual shipment is generally liable to the Company in the same manner and to the same extent. In its ocean freight forwarding and customs clearance operations, the Company does not assume cargo liability. When providing warehouse and distribution services, the Company limits its legal liability by contract and tariff to an amount generally equal to the lower of fair value or fifty cents per pound with a maximum of fifty dollars per "lot"--which is defined as the smallest unit that the warehouse is required to track. Upon payment of a surcharge for warehouse and distribution services, the Company will assume additional liability. The Company maintains marine cargo insurance covering claims for losses attributable to missing or damaged shipments for which it is legally liable. The Company also maintains insurance coverage for the property of others which is stored in Company warehouse facilities. 11 ITEM 2--PROPERTIES The Company owns a 27,200 square foot office facility near Seattle-Tacoma International Airport, an 80,000 square foot office and warehouse facility on a ten-acre parcel near O'Hare International Airport in Chicago, a 5,500 square foot office facility in the Tsim Sha Tsui East district of Kowloon, Hong Kong, and a 10,900 square foot office facility in Taipei, Taiwan. The Company also owns a 23,400 square foot office and warehouse facility on a long-term renewable land lease at the Brussels Cargo facility in Brussels, Belgium. During 1996, the Company purchased a 150,000 square foot warehouse with the underlying land in Nassau County, New York. The Company also purchased a 130,000 square foot office building in downtown Seattle, Washington. The Company intends to renovate and expand the building and will initially occupy approximately 60,000 square feet as a new corporate office. The remaining square footage will be leased to tenants. The Company leases and maintains 32 additional offices and satellite locations in the United States and 78 offices throughout the world, each located close to an airport, ocean port, or on an important border crossing. The majority of these facilities contain warehouse facilities. Lease terms are either on a month-to-month basis or terminate at various times through 2007. As an office matures, the Company will investigate the possibility of building or buying suitable facilities. Lease payments currently aggregate approximately $665,000 per month. See Note 5 to the Company's Consolidated Financial Statements. The Company believes that current leases can be extended and that suitable alternative facilities are available in the vicinity of each present facility should extensions be unavailable at the conclusion of current leases. ITEM 3--LEGAL PROCEEDINGS The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management's opinion, will have a significant effect on the Company's financial condition. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. 12 PART II ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth the high and low sale prices in the over-the-counter market for the Company's Common Stock as reported by The NASDAQ National Market System under the symbol EXPD.
COMMON STOCK QUARTER HIGH LOW HIGH LOW - ----------------------------------------- --------- --------- ------------ --------- 1996 1995 First..................................... 15 11 1/2 First 11 5/8 9 7/8 Second.................................... 16 1/2 13 Second 12 1/2 10 1/2 Third..................................... 18 1/4 13 5/8 Third 14 1/8 10 1/2 Fourth.................................... 23 1/4 17 1/4 Fourth 14 1/8 11 3/8
There were 609 shareholders of record as of December 31, 1996. Management estimates that there were approximately 4,500 beneficial shareholders at that date. In 1995 and 1996, the Board of Directors declared a semi-annual dividend of $.03 per share and $.04 per share, respectively, which was paid as follows: 1995 15 June 15 December 1996 17 June 16 December ITEM 6--SELECTED FINANCIAL DATA Financial Highlights In thousands except per share data
1996 1995 1994 1993 1992 ---------- --------- --------- --------- --------- Revenues.................................................. $ 730,088 584,691 450,607 361,487 333,166 Net earnings.............................................. 24,263 17,395 13,217 10,167 11,279 Net earnings per share.................................... .95 .69 .54 .42 .47 Cash dividends paid per share............................. .08 .06 .05 .05 -- Working capital........................................... 83,468 81,431 68,464 60,847 53,498 Total assets.............................................. 271,986 204,128 162,788 144,314 118,029 Long-term debt............................................ -- -- -- -- 789 Shareholders' equity...................................... 140,011 117,192 101,110 87,641 78,993 Weighted average shares outstanding....................... 25,644 25,166 24,550 24,051 24,123
All share and per share information has been adjusted to reflect two 2-for-1 stock splits effected in November, 1993 and November, 1996. 13 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by the Company with the Securities and Exchange Commission. The words or phrases "will likely result", "are expected to",'will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to maximize to the fullest extent possible the protections of the safe harbor established in the Reform Act. Accordingly, such statements are qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements. The risks included here are not exhaustive. Furthermore, reference is also made to other sections of this report which include additional factors which could adversely impact the Company's business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all of such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a guarantee of actual results. Shareholders should be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to such analysts any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of such statement or report. Furthermore, the Company has a policy against issuing financial forecasts or projections or confirming the accuracy of forecasts or projections issued by others. Accordingly, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company. 14 International Trade The Company primarily provides services to customers engaged in international commerce. Everything that effects international trade has the potential to expand or contact the Company's primary market. Third Party Vendors The Company is a non-asset based supplier of global logistics services. As a result the Company depends on a variety of asset based third party vendors. The quality and profitability of the Company's services depend upon effective selection, management and discipline of third party vendors. Predictability of Results The Company is not aware of any accurate means of forecasting short term customer requirements. However, long term customer satisfaction depends upon the Company's ability to meet these unpredictable short term customer requirements. Personnel costs, the Company's single largest variable expense, are always less flexible in the very near term as the Company must staff to meet uncertain demand. As a result, short term operating results could be disproportionately effected. Foreign Operations The majority of the Company's revenues and operating income come from operations conducted outside the United States. To maintain a global service network, the Company may be required to operate in hostile locations. Key Personnel The Company is a service business. The quality of this service is directly related to the quality of the Company's employees. Identifying, training and retaining key employees is essential to continued growth and future profitability. Continued loyalty to the Company will not be assured by contract. Technology Increasingly, the Company must compete based upon the flexibility and sophistication of the technologies utilized in preforming its core businesses. Future results depend upon the Company's success in the cost effective development and integration of communication and information systems technologies. Growth To date the Company has relied primarily upon organic growth and has tended to avoid growth through acquisition. Future results will depend upon the Company's ability to continue to grow internally or to demonstrate the ability to successfully identify and integrate non-dilutive acquisitions. 15 ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto contained elsewhere within this document. GENERAL Expeditors International of Washington, Inc. is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight. The Company acts as a customs broker in all domestic offices, and in many of its overseas offices. The Company also provides additional services for its customers including value added distribution, purchase order management, vendor consolidation and other logistics solutions. The Company offers domestic forwarding services only in conjunction with international shipments. The Company does not compete for overnight courier or small parcel business. The Company does not own or operate aircraft or steamships. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions. The Company cannot predict which, if any, of these proposals may be adopted. Nor can the Company predict the effects adoption of any such proposal will have on the Company's business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being affected by governmental policies concerning international trade, the Company's business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business. The Company's ability to provide services to its customers is highly dependent on good working relationships with a variety of entities including airlines, ocean steamship lines, and governmental agencies. The Company considers its current working relationships with these entities to be satisfactory. However, changes in space allotments available from carriers, governmental deregulation efforts, "modernization" of the regulations governing customs brokerage, and/or changes in governmental quota restrictions could affect the Company's business in unpredictable ways. Historically, the Company's operating results have been subject to a seasonal trend when measured on a quarterly basis. The first quarter has traditionally been the weakest and the third quarter has traditionally been the strongest. This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces. In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company's international network and service offerings. The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods. A significant portion of the Company's revenues are derived from customers in retail industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of the Company's revenues are, to a large degree, impacted by factors out of the Company's control, such as a sudden change in consumer demand for retail goods and/or manufacturing production delays. Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter. To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company's stock. RESULTS OF OPERATIONS The following table shows the consolidated net revenues (revenues less consolidation expenses) attributable to the Company's principal services and the Company's expenses for 1996, 1995 and 1994, expressed as percentages of net revenues. With respect to the Company's services other than consolidation, net revenues are identical to revenues. Management believes that net revenues are a better measure than total revenues of the relative importance of the 16 Company's principal services since total revenues earned by the Company as a freight consolidator include the carriers' charges to the Company for carrying the shipment whereas revenues earned by the Company in its other capacities include only the commissions and fees actually earned by the Company.
1996 1995 1994 ------------------------ -------------------- --------------------------- PERCENT PERCENT PERCENT OF NET OF NET OF NET IN THOUSANDS AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES - ------------------------------------------------- ------------- --------- --------- --------- ------------ ------------- Net revenues: Airfreight....................................... $ 94,954 47% $ 71,642 47% $ 57,289 48% Ocean freight.................................... 38,304 19 27,768 18 17,477 15 Customs brokerage and import services............ 69,077 34 54,663 35 44,374 37 ------------- --------- --------- --------- ------------ ------- Net revenues..................................... 202,335 100 154,073 100 119,140 100 ------------- --------- --------- --------- ------------ ------- Operating expenses: Salaries and related costs....................... 108,797 54 84,272 55 64,177 54 Other............................................ 56,113 27 42,950 28 33,609 28 ------------- --------- --------- --------- ------------ ------- Total operating expenses......................... 164,910 81 127,222 83 97,786 82 ------------- --------- --------- --------- ------------ ------- Operating income................................. 37,425 19 26,851 17 21,354 18 Other income, net................................ 2,159 1 1,548 1 1,034 1 ------------- --------- --------- --------- ------------ ------- Earnings before income taxes..................... 39,584 20 28,399 18 22,388 19 Income tax expense............................... 15,321 8 11,004 7 9,171 8 ------------- --------- --------- --------- ------------ ------- Net earnings..................................... $ 24,263 12% $ 17,395 11% $ 13,217 11% ------------- --------- --------- --------- ------------ ------- ------------- --------- --------- --------- ------------ -------
1996 compared with 1995 Airfreight net revenues in 1996 increased 33% compared with 1995 primarily due to (1) increased airfreight shipments and tonnages handled by the Company from the Far East to North America and Europe, (2) increased prices charged by the airlines which were passed along to customers, and (3) increased export airfreight shipments and tonnages from North America and Europe, and from North America to Australia and the Middle East. The Company's North American export airfreight net revenues increased 32% in 1996 compared to 1995. Airfreight net revenues from the Far East and from Europe increased 46% and 6%, respectively, for 1996 compared with 1995. Ocean freight net revenues increased 38% in 1996 compared to 1995. During the first three quarters of 1996, the ocean freight market to North America from the Far East was severely impacted by extreme overcapacity on the part of direct ocean carriers. This overcapacity situation was largely the result of new vessels being placed into service. As a result, ocean freight rates during this period dropped precipitously. However, due to aggressive marketing and its relations with direct ocean carriers, management was able to expand market share, increase ocean tonnage, expand margins and increase net ocean freight revenues while still being able to offer competitive market rates to its customers. In addition to increases in the traditional NVOCC (Non-Vessel Operating Common Carrier) and ocean forwarding business, E.C.M.S. (Expeditors Cargo Management Systems), a PC-based ocean freight consolidation management and purchase order tracking service, continues to be instrumental in providing new business. The Company's North American export ocean freight net revenues increased 31% in 1996 compared to 1995. This increase was a result of the Company handling more ocean shipments moving from North America to the Far East and, to a lesser extent, from North America to Europe. Ocean freight net revenues from the Far East and from Europe increased 54% and 10%, respectively, for 1996 compared with 1995. Customs brokerage and import services revenue increased 26% in 1996 as compared with 1995 as a result of (1) the Company's growing reputation for providing high quality service, (2) consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program, and (3) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers-- distribution services accounted for nearly 12% of the increase in customs brokerage and import services revenues for 1996 compared with 1995. 17 Salaries and related costs increased annually as a result of (1) the Company's increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity and (2) increased compensation levels. Salaries and related costs decreased approximately 1% as a percentage of net revenues. This 1% decrease is largely attributable to increased net revenues in both new and existing offices without a commensurate increase in personnel cost. The relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee. Using this compensation model, changes in individual compensation will occur in proportion to changes in Company profits. Management believes that the growth in revenues, net revenues and net earnings for 1996, (and 1995 and 1994) are directly impacted by the incentives inherent in the Company's compensation program. Other operating expenses increased in 1996 as compared with 1995 as rent expense, communications expense, quality and training expenses, and other costs expanded to accommodate the Company's growing operations. Other operating expenses as a percentage of net revenues decreased 1% in 1996 as compared with 1995 due to increased revenues in both new and existing offices and the realization of certain economies of scale. Other income, net, increased in 1996 as compared to 1995 primarily due to higher interest income earned, as a result of higher positive cash flow during 1996 and resulting in higher interest income on the Company's invested cash balances. In addition, due to the change in the Company's tax policy effected January 1, 1993, line of credit borrowings in the United States were kept at a minimum level by repatriating cash from overseas subsidiaries. This is very significant to the Company's U.S. operations where the Company is most active in its role as a customs broker and regularly advances duties on behalf of customers. The Company pays income taxes in the United States and other jurisdictions, as well as other taxes, which are typically included in costs of operations. The Company's consolidated effective income tax rate remained constant at 38.7% for both 1996 and 1995. 1995 compared with 1994 Airfreight net revenues in 1995 increased 25% compared with 1994 primarily due to (1) increased airfreight shipments and tonnages handled by the Company from the Far East to North America and Europe, (2) increased prices charged by the airlines which were passed along to customers, and (3) increased export airfreight shipments and tonnages from North America and Europe, and from North America to Australia and the Middle East. The Company's North American export airfreight net revenues increased 24% in 1995 compared to 1994. Airfreight net revenues from the Far East and from Europe increased 14% and 46%, respectively, for 1995 compared with 1994. Ocean freight net revenues increased 59% in 1995 compared to 1994 a result of the Company being able to aggressively market extremely competitive ocean freight rates to its customers, primarily on freight from the Far East to North America. The ability to offer these competitive rates was due to favorable contracts with certain key ocean carriers from whom the Company contracts space on a wholesale basis to be offered to its customers on a retail basis. The Company was able to expand market share while at the same time increase its ocean freight margins. In addition to increases in the traditional NVOCC and ocean forwarding business, E.C.M.S., was instrumental in providing new business. The Company's North American export ocean freight net revenues increased 52% in 1995 compared to 1994. This increase was a result of the Company handling more ocean shipments moving from North America to Europe, and, from North America to the Far East. Ocean freight net revenues from the Far East and from Europe increased 71% and 71%, respectively, for 1995 compared with 1994. Customs brokerage and import services revenue increased 23% in 1995 as compared with 1994 as a result of (1) the Company's growing reputation for providing high quality service, (2) consolidation within the customs brokerage market as customers seek out customs brokers with more sophisticated computerized capabilities, critical to an overall logistics management program, and (3) the growing importance of distribution services as a separate and distinct service offered to existing and potential customers-distribution services accounted for nearly 15% of the increase in Customs brokerage and import services revenues for 1995 compared with 1994. Salaries and related costs increased annually as a result of, (1) the Company's increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity and (2) increased compensation levels. Salaries and related costs increased approximately 1% as a percentage of net revenues. This small 18 1% increase is largely attributable to increased staffing related to the opening of new offices, principally in Latin America and Europe, in the last six months of 1995. Other operating expenses increased in 1995 as compared with 1994 as rent expense, communications expense, quality and training expenses, and other costs to accommodate the Company's growing operations. Other operating expenses as a percentage of net revenues remained constant in 1995 as compared with 1994. Other income, net, increased in 1995 as compared to 1994 primarily due to higher interest income earned, as a result of higher positive cash flow during 1995 and resulting in higher interest income on the Company's invested cash balances. The Company pays income taxes in the United States and other jurisdictions, as well as other taxes, which are typically included in costs of operations. The Company's consolidated effective income tax rate decreased in 1995 to 38.7% compared with 41% in 1994. This decrease is a result of lower state taxes in the state of California allowed because of changes in that state's unitary tax regulations and also as a result of the reversal of certain valuation allowances established in 1994 and earlier. These valuation allowances related to net operating loss carryforwards generated at the time the actual losses were incurred in foreign countries, but were not recognized as a reduction in income tax expense until actually utilized to offset subsequent taxable income. CURRENCY AND OTHER RISK FACTORS International air/ocean freight forwarding and customs brokerage are intensively competitive and are expected to remain so for the foreseeable future. There are a large number of entities competing in the global logistics industry, however, the Company's primary competition is confined to a relatively small number of companies within this group. While there is currently a marked trend within the industry toward consolidation into large firms with multinational office and agency networks, regional and local broker/ forwarders remain a competitive force. Historically, the primary competitive factors in the international logistics industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations. The Company emphasizes quality service and believes that its prices are competitive with those of others in the industry. Recently customers have exhibited a trend towards more sophisticated and efficient procedures for the management of the logistics supply chain by embracing strategies such as just-in-time inventory management. This trend has made having sophisticated computerized customer service capabilities and a stable worldwide network significant factors in attracting and retaining customers. Developing these systems and a worldwide network has added a considerable indirect cost to the services provided to customers. Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network. As a result, there is a significant amount of consolidation currently taking place in the industry. Management expects that this trend toward consolidation will continue for the short- to medium-term. Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company's competitors and typically involves the purchase of significant "goodwill," the value of which can be realized in large measure only by retaining the customers and profit margins of the acquired business. As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions. The nature of the Company's worldwide operations necessitate the Company dealing with a multitude of currencies other than the U.S. dollar. This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference. Many of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company's ability to hedge foreign currency exposure. The Company tries to compensate for these exposures by accelerating international currency settlements among these offices or agents. Foreign currency gains and losses recognized during 1996, 1995 and 1994 were immaterial. The Company has traditionally generated revenues from airfreight, ocean freight and customs brokerage and import services. In light of the customer-driven trend to provide customer rates on a door-to-door basis, management foresees the potential, in the medium- to long-term, for fees normally associated with customs house brokerage to be de-emphasized and included as a component of other services offered by the Company. 19 LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of liquidity is cash generated from operations. At December 31, 1996, working capital was $83 million, including cash and short-term investments of $37 million. The Company had no long-term debt at December 31, 1996. The Company purchased land and a 150,000 square foot office and warehouse facility in Inwood, New York and a new corporate office building located in Seattle, Washington. While the nature of its business does not require an extensive investment in property and equipment, the Company cannot eliminate the possibility that it could acquire an equity interest in facilities and/or property at or near airports. The Company currently expects to spend approximately $30 million on property and equipment in 1997, which is expected to be financed with cash, short-term floating rate, and/or long-term fixed-rate borrowings. The Company borrows internationally and domestically under unsecured bank lines of credit totaling $31.7 million. At December 31, 1996, the Company was directly liable for $3.5 million drawn on these lines of credit and was contingently liable for an additional $14.9 million of standby letters of credit. In addition, the Company maintains a bank facility with its U.K. bank for $8.05 million. The Company was contingently liable at December 31, 1996 for the entire $8.05 million. Management believes that the Company's current cash position, bank financing arrangements, and operating cash flows will be sufficient to meet its capital and liquidity requirements for the foreseeable future. In some cases, the Company's ability to repatriate funds from foreign operations is subject to foreign exchange controls. These matters, at the current time, do not have a significant impact on the Company's operations. The repatriation of certain undistributed earnings of the Company's subsidiaries would, under most circumstances, require the Company to pay some additional Federal and state income tax. The Company has not provided for this additional tax on undistributed earnings accumulated through December 31, 1992 because the Company intends to reinvest such earnings to fund the expansion of its foreign activities, or to distribute them in a manner in which no significant additional taxes would be incurred. At December 31, 1996, the total of such pre-1993 undistributed earnings was approximately $41.9 million and the associated Federal and state tax that would be payable on any hypothetical repatriation of these earnings approximates $10.1 million. IMPACT OF INFLATION To date, the Company's business has not been adversely affected by inflation, nor has the Company experienced significant difficulty in passing carrier rate increases on to its customers by means of price increases. Direct carrier rate increases could occur over the short- to medium-term period. Due to the high degree of competition in the market place, these rate increases might lead to an erosion in the Company's margins. However, as the Company is not required to purchase or maintain extensive property and equipment and has not otherwise incurred substantial interest rate-sensitive indebtedness, the Company currently has no direct exposure to increased costs resulting from increases in interest rates. 20 ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following documents are filed on the pages listed below, as part of Part II, Item 8 of this report.
DOCUMENT PAGE - --------------------------------------------------- -------------- 1. Financial Statements and Accountants' Report: Independent Auditors' Report.................. F-1 Consolidated Financial Statements: Balance Sheets as of December 31, 1996 and 1995........................................ F-2 Statements of Earnings for the Years Ended December 31, 1996, 1995 and 1994............ F-3 Statement of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994........................................ F-4 Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994............ F-5 Notes to Consolidated Financial Statements.... F-6 through F-14 2. Financial Statement Schedules: Schedule II................................... S-1
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. 21 PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to information under the caption "Proposal 1--Election of Directors" and to the information under the caption "Section 16(a) Reporting Delinquencies" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 7, 1997. See also Part I--Item 1--Executive Officers of the Registrant. ITEM 11--EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to information under the caption "Executive Compensation" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 7, 1997. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to information under the captions "Voting Securities and Principal Holders" and "Proposal 1--Election of Directors" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 7, 1997. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to information under the caption "Executive Compensation" and "Certain Transactions" in the Company's definitive Proxy Statement for its annual meeting of shareholders to be held on May 7, 1997. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS Page ------ Independent Auditors' Report F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2 Consolidated Statements of Earnings for the Years Ended December 31, F-3 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the Years Ended F-4 December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, F-5 1996, 1995 and 1994 Notes to Consolidated Financial Statements F-6 2. FINANCIAL STATEMENT SCHEDULES Included in Part IV of this report: Schedules: II Valuation and Qualifying Accounts S-1
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. 22 (a)(3) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS The following list is a subset of the list of exhibits described below and contains all compensatory plans, contracts or arrangements in which any director or executive officer of the Company is a participant, unless the method of allocation of benefits thereunder is the same for management and non-management participants: (1) Form of Employment Agreement executed by the Company's Chairman and Chief Executive Officer. See Exhibit 10.23. (2) Form of Employment Agreement executed by the Company's President and Chief Operating Officer and certain of the Company's executive officers. See Exhibit 10.24. (3) Form of Employment Agreement executed by certain of the Company's Principal foreign employees. See Exhibit 10.2. (4) Form of Employment Agreement executed by the Company's Director -Europe. See Exhibit 10.3. (5) The Company's Amended 1985 Stock Option Plan. See Exhibit 10.4. (6) Form of Stock Option Agreement used in connection with options granted under the Company's Amended 1985 Stock Option Plan. See Exhibit 10.5. (7) The Company's Restated and Amended 1988 Employee Stock Purchase Plan. See Exhibit 10.20. (8) Form of Stock Purchase Agreement used in connection with options granted under the Company's Restated and Amended 1988 Employee Stock Purchase Plan. See Exhibit 10.7. (9) The Company's 1993 Directors' Non-Qualified Stock Option Plan. See Exhibit 10.8. (10) Form of Stock Option Agreement used in connection with options granted under the Company's 1993 Directors' Non-Qualified Stock Option Plan. See Exhibit 10.9. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report on Form 10-K. (c) EXHIBITS
EXHIBIT NUMBER EXHIBIT - ----------- --------------------------------------------------------------------------------------------------------- 3.1 The Company's Restated Articles of Incorporation and the Articles of Amendment thereto dated December 9, 1993. (Incorporated by reference to Exhibit 3.1 to Form 10-K, filed on or about March 31, 1995.) 3.1.1 Articles of Amendment to the Restated Articles of Incorporation dated November 12, 1996. 3.2 The Company's Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to Form 10-K, filed on or about March 28, 1994.) 10.2 Form of Employment Agreement executed by certain of the Company's Principal foreign employees. (Incorporated by reference to Exhibit 10.18 to Registration Statement No. 2-91224, filed on May 21, 1984.)
23
EXHIBIT NUMBER EXHIBIT - ----------- --------------------------------------------------------------------------------------------------------- 10.3 Form of Employment Agreement executed by the Company's Director--Europe. (Incorporated by reference to Exhibit 10.7 to Form 10-K, filed on or about March 28, 1991.) 10.4 The Company's Amended 1985 Stock Option Plan. (Incorporated by reference to Exhibit 10.14 to Form 10-K, filed on or about March 28, 1991.) 10.5 Form of Stock Option Agreement used in connection with options granted under the Company's Amended 1985 Stock Option Plan. (Incorporated by reference to Exhibit 10.15 to Form 10-K, filed on or about March 28, 1991.) 10.7 Form of Stock Purchase Agreement used in connection with options granted under the Company's Restated and Amended 1988 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.36 to Form 10-K, filed on or about March 28, 1989.) 10.8 The Company's 1993 Directors' Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.8 to Form 10-K, filed on or about March 28, 1994.) 10.9 Form of Stock Option Agreement used in connection with options granted under the Company's 1993 Directors' Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.9 to Form 10-K, filed on or about March 28, 1994.) 10.17 Exclusive Agency Agreement, dated as of January 1, 1991, between E.I. Freight (Taiwan) Ltd. and EI Freight (H.K.) Limited. (Incorporated by reference to Exhibit 10.17 to Form 10-K, filed on or about March 28, 1994.) 10.18 Plan and Agreement of Reorganization, dated as of January 1, 1984, between the Company and the individual shareholders of Fons Pte. Ltd. (Incorporated by reference to Exhibit 2.5 to Registration Statement No. 2-91224, filed on May 21, 1984.) 10.19 Plan and Agreement of Reorganization, dated as of January 1, 1984, among the Company, EIO Investment Ltd., Wong Hoy Leung, Chiu Chi Shing, and James Li Kou Wang. (Incorporated by reference to Exhibit 2.6 to Registration Statement No. 2-91224, filed on May 21, 1984.) 10.20 The Company's Restated and Amended 1988 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-81460, filed on July 12, 1994.) 10.21 Credit Agreement Between the Company and Seattle-First National Bank dated June 6, 1994 with respect to the Company's $10,000,000 unsecured line of credit together with the Revolving Note due March 31, 1995. (Incorporated by reference to Exhibit 10.21 to Form 10-K, filed on or about March 31, 1995.) 10.23 Form of Employment Agreement executed by the Company's Chairman and Chief Executive Officer dated November 2, 1994. (Incorporated by reference to Exhibit 10.23 to Form 10-K, filed on or about March 31, 1995.) 10.24 Form of Employment Agreement executed by the Company's President and Chief Operating Officer and certain of the Company's executive officers dated November 2, 1994. (Incorporated by reference to Exhibit 10.24 to Form 10-K, filed on or about March 31, 1995.)
24
EXHIBIT NUMBER EXHIBIT - ----------- --------------------------------------------------------------------------------------------------------- 10.25 Loan Modification Agreement Between the Company and Seattle-First National Bank dated August 2, 1995 amending the maximum principal amount of the Company's unsecured line of credit to $15,000,000 and increasing the Company's maximum obligation under the Revolving Note to $15,000,000. (Incorporated by reference to Exhibit 10.25 to Form 10-K, filed on or about April 1, 1996. Superseded by Exhibit 10.27 to this Report.) 10.26 Loan Modification Agreement Between the Company and Bank of America NW, N.A. doing business as Seafirst Bank dated March 22, 1996 amending the maturity date of the Revolving Note and extending the loan commitment to March 31, 1997. (Incorporated by reference to Exhibit 10.26 to Form 10-K, filed on or about April 1, 1996. Superseded by Exhibit 10.28 to this Report.) 10.27 Loan Modification Agreement Between the Company and Bank of America National Trust and Savings Association doing business as Seafirst Bank dated January 17, 1997 amending the maximum principal amount of the Company's unsecured line of credit to $30,000,000 and increasing the Company's maximum obligation under the Revolving Note to $30,000,000. (Superseded by Exhibit 10.28 to this Report.) 10.28 Credit Agreement Between the Company and Bank of America National Trust and Savings Association, doing business as Seafirst Bank dated March 31, 1997 with respect to the Company's $30,000,000 unsecured line of credit together with a Revolving Note due March 30, 1998. 11.1 Statement Re: Computation of Per Share Net Earnings. 21.1 Subsidiaries of the Registrant. 23. Consent of Independent Certified Public Accountants. 27. Financial Data Schedule (Filed Electronically Only).
25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 31, 1997. EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. By: /s/ R. Jordan Gates -------------------- R. Jordan Gates Chief Financial Officer and Treasurer 26 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 1997. SIGNATURE TITLE - --------------------------- ------------------------------------------------ /s/ Peter J. Rose Chairman of the Board and Chief Executive Officer - --------------------------- (Principal Executive Officer) and Director (Peter J. Rose) /s/ R. Jordan Gates Chief Financial Officer and Treasurer - --------------------------- (Principal Financial and Accounting Officer) (R. Jordan Gates) /s/ Kevin M. Walsh President and Chief Operating Officer and - --------------------------- Director (Kevin M. Walsh) /s/ James Li Kou Wang Executive Vice President and Director-Far East - --------------------------- and Director (James Li Kou Wang) /s/ James J. Casey Director - --------------------------- (James J. Casey) /s/ Dan P. Kourkoumelis Director - --------------------------- (Dan P. Kourkoumelis) /s/ John W. Meisenbach Director - --------------------------- (John W. Meisenbach) 27 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. AND SUBSIDIARIES ----------- CONSOLIDATED FINANCIAL STATEMENTS COMPRISING ITEM 8 AND SCHEDULE II LISTED IN THE INDEX AT ITEM 14(a)2 OF ANNUAL REPORT ON FORM 10-K TO SECURITIES AND EXCHANGE COMMISSION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Expeditors International of Washington, Inc.: We have audited the consolidated financial statements of Expeditors International of Washington, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Expeditors International of Washington, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK, LLP /s/ KPMG Peat Marwick, LLP Seattle, Washington February 14, 1997 F-1 Consolidated Balance Sheets In thousands except share data December 31,
1996 1995 --------- ---------- Current Assets Cash and cash equivalents...................... $36,966 36,142 Short-term investments...................... 357 457 Accounts receivable, less allowance for doubtful accounts of $5,047 in 1996 and $3,807 in 1995............................... 168,763 123,793 Deferred Federal and state income taxes........ 4,854 4,113 Other.......................................... 4,503 3,862 ------- -------- Total current assets....................... 215,443 168,367 ------- -------- Property and Equipment: Buildings and leasehold improvements........... 21,486 13,493 Furniture, fixtures, and equipment............. 34,928 27,210 Vehicles....................................... 4,346 3,644 ------- -------- 60,760 44,347 Less accumulated depreciation and amortization................................. 28,368 20,799 ------- -------- 32,392 23,548 Land........................................... 13,854 4,694 ------- -------- Net property and equipment.................... 46,246 28,242 Other assets, net.............................. 10,297 7,519 ------- -------- $271,986 204,128 ------- -------- ------- -------- Current Liabilities: Short-term borrowings.......................... $3,452 285 Accounts payable............................... 101,670 72,238 Accrued expenses, primarily salaries and related costs................................ 21,194 11,129 Federal, state, and foreign income taxes....... 5,659 3,284 ------- -------- Total current liabilities.................... 131,975 86,936 ------- -------- Shareholders' Equity Preferred stock, par value $.01 per share Authorized 2,000,000 shares; none issued.................................. -- -- Common stock, par value $.01 per share 1996 and 24,021,326 shares at December 31, 1995 Authorized 80,000,000 shares at December 31, 1996 and 40,000,000 shares at December 31, 1995; issued and outstanding 24,212,946 shares at December 31,....................... 242 240 Additional paid-in capital..................... 13,179 13,009 Retained earnings.............................. 123,258 100,928 Equity adjustments from foreign currency translation.................................. 3,332 3,015 ------- -------- Total shareholders' equity................... 140,011 117,192 ------- -------- Commitments and contingencies.................. $271,986 204,128 ------- -------- ------- --------
See accompanying notes to consolidated financial statements. F-2 Consolidated Statements of Earnings In thousands except share data Years ended December 31,
1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Revenues: Airfreight........................................................ $ 512,104 405,923 315,283 Ocean freight..................................................... 148,907 124,105 90,950 Customs brokerage and import services............................. 69,077 54,663 44,374 --------- -------- ------- Total revenues................................................... 730,088 584,691 450,607 --------- -------- ------- Operating Expenses: Airfreight consolidation.......................................... 417,150 334,281 257,994 Ocean freight consolidation....................................... 110,603 96,337 73,473 Salaries and related costs........................................ 108,797 84,272 64,177 Selling and promotion............................................. 10,409 7,545 5,293 Rent.............................................................. 8,279 6,651 5,563 Depreciation and amortization..................................... 8,147 6,629 4,919 Other............................................................. 29,278 22,125 17,834 --------- -------- ------- Total operating expenses......................................... 692,663 557,840 429,253 --------- -------- ------- Operating income................................................. 37,425 26,851 21,354 --------- -------- ------- Other Income (Expense) Interest income..................................................... 2,264 1,741 1,273 Interest expense.................................................. (163) (312) (199) Other, net........................................................ 58 119 (40) --------- -------- ------- Other income, net................................................ 2,159 1,548 1,034 --------- -------- ------- Earnings before income taxes...................................... 39,584 28,399 22,388 Income tax expense................................................ 15,321 11,004 9,171 --------- -------- ------- Net earnings..................................................... $ 24,263 17,395 13,217 --------- -------- ------- --------- -------- ------- Net earnings per common share..................................... $ .95 $ .69 $ .54 --------- -------- ------- --------- -------- ------- Weighted average shares outstanding.............................. 25,644,296 25,166,156 24,550,234 --------- -------- ------- --------- -------- -------
See accompanying notes to consolidated financial statements. F-3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY In thousands, except share data Years ended December 31, 1996, 1995 and 1994
EQUITY ADJUSTMENTS FROM COMMON STOCK ADDITIONAL FOREIGN ------------------------- PAID-IN RETAINED CURRENCY SHARES PAR VALUE CAPITAL EARNINGS TRANSLATION TOTAL ------------ ----------- ----------- --------------- ----------- --------- Balance at December 31, 1993............... 23,681,360 $ 237 12,210 72,945 2,249 87,641 Exercise of stock options.................. 308,680 3 1,621 -- -- 1,624 Issuance of shares under stock purchase plan..................................... 101,998 1 555 -- -- 556 Shares repurchased under provisions of stock repurchase plan.................... (222,352) (2) (2,171) -- -- (2,173) Tax benefits related to stock options and stock purchase plan...................... -- -- 316 -- -- 316 Net earnings............................... -- -- -- 13,217 -- 13,217 Foreign currency translation adjustments, net of deferred taxes of $196............ -- -- -- -- 1,120 1,120 Dividends paid ($.05 per share)............ -- -- -- (1,191) -- (1,191) ----------- --------- ------ -------------- --------- -------- Balance at December 31, 1994............... 23,869,686 $ 239 12,531 84,971 3,369 101,110 Exercise of stock options.................. 193,040 2 1,142 -- -- 1,144 Issuance of shares under stock purchase plan..................................... 120,846 1 989 -- -- 990 Shares repurchased under provisions of stock repurchase plan.................... (162,246) (2) (2,061) -- -- (2,063) Tax benefits related to stock options and stock purchase plan...................... -- -- 408 -- -- 408 Net earnings............................... -- -- -- 17,395 -- 17,395 Foreign currency translation adjustments, net of deferred tax credit of $196....... -- -- -- -- (354) (354) Dividends paid ($.06 per share)............ -- -- -- (1,438) -- (1,438) ----------- --------- ------ -------------- --------- -------- Balance at December 31, 1995............... 24,021,326 $ 240 13,009 100,928 3,015 117,192 Exercise of stock options.................. 264,260 3 1,409 -- -- 1,412 Issuance of shares under stock purchase plan..................................... 127,974 1 1,319 -- -- 1,320 Shares repurchased under provisions of stock repurchase plan (200,614) (2) (3,318) -- -- (3,320) Tax benefits related to stock options and stock purchase plan...................... -- -- 760 -- -- 760 Net earnings............................... -- -- -- 24,263 -- 24,263 Foreign currency translation adjustments, net of deferred taxes of $164............ -- -- -- -- 317 317 Dividends paid ($.08 per share)............ -- -- -- (1,933) -- (1,933) ----------- --------- ------ -------------- --------- -------- Balance at December 31, 1996............... 24,212,946 $ 242 13,179 123,258 3,332 140,011 ----------- --------- ------ -------------- --------- -------- ----------- --------- ------ -------------- --------- --------
See accompanying notes to consolidated financial statements. F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS YEARS ENDED DECEMBER 31, 1996 1995 1994 - --------------------------------------- ------- --------- --------- Operating Activities: Net earnings............................ $24,263 17,395 13,217 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for losses on accounts receivable............................ 2,120 710 1,322 Depreciation and amortization........... 8,147 6,629 4,919 Deferred income tax benefit............. (37) (340) (2,461) Amortization of cost in excess of net assets of acquired businesses......... 363 320 244 Changes in operating assets and liabilities: Increase in accounts receivable......... (45,795) (24,054) (15,725) Increase in accounts payable, accrued expenses and taxes payable............ 35,669 24,525 9,571 Other................................... (563) (1,641) 107 --------- -------- -------- Net cash provided by operating activities............................ $24,167 23,544 11,194 --------- -------- -------- Investing Activities Decrease (increase) in short-term investments........................... 87 2,353 (1,325) Purchase of property and equipment..... (20,824) (9,302) (8,561) Other................................... (3,058) (977) (1,147) --------- -------- -------- Net cash used in investing activities... (23,795) (7,926) (11,033) --------- -------- -------- Financing Activities Short-term borrowings, net.............. 3,164 44 (4,092) Proceeds from issuance of common stock................................. 2,732 2,134 2,180 Repurchases of common stock............. (3,320) (2,063) (2,173) Dividends paid.......................... (1,933) (1,438) (1,191) --------- -------- -------- Net cash provided by (used in) financing activities............................ 643 (1,323) (5,276) Effect of exchange rate changes on cash.................................. (191) 420 369 --------- -------- -------- Increase (decrease) in cash and cash equivalents........................... 824 14,715 (4,746) Cash and cash equivalents at beginning of year............................... 36,142 21,427 26,173 --------- -------- -------- Cash and cash equivalents at end of year.................................. $36,966 36,142 21,427 --------- -------- -------- --------- -------- -------- Interest and Taxes paid: Interest................................ $282 306 158 Income taxes............................ 13,580 13,697 8,797
Non-Cash Investing and Financing Activities: During 1996 the Company purchased real estate for $5.7 million with short-term financing provided by the seller. No principal was paid in 1996. The obligation was paid in February 1997. See accompanying notes to consolidated financial statements. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION Expeditors International of Washington, Inc. ("the Company") is a global logistics company operating through a worldwide network of offices, international service centers and exclusive or non-exclusive agents. The Company's customers include retailing and wholesaling, electronics, and manufacturing companies around the world. The Company grants credit upon approval to customers. The consolidated financial statements include the accounts of the Company and its subsidiaries. In addition the accounts of exclusive agents have been consolidated in those circumstances where the Company maintains unilateral control over the agents' assets and operations, notwithstanding a lack of technical majority ownership of the agents common stock. All significant intercompany accounts and transactions have been eliminated in consolidation. All dollar amounts in the footnotes are presented in thousands except for share data. B. Short-term Investments Short-term investments are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Short-term investments are designated as available-for-sale and cost approximates market at December 31, 1996 and 1995. C. Property and Equipment, Depreciation and Amortization Property and equipment are recorded at cost, including interest capitalized for the construction of certain facilities, and are depreciated or amortized on the straight-line method over the shorter of the assets' estimated useful lives or lease terms. Interest capitalized in 1996 amounts to $133. No interest was capitalized in 1995 or 1994. Expenditures for maintenance, repairs, and renewals of minor items are charged to earnings as incurred. Major renewals and improvements are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income for the period. The excess of the cost over the fair value of the net assets of acquired businesses (included in Other assets, net) is amortized on the straight-line method over periods up to 40 years. D. Revenues and Revenue Recognition Airfreight revenues include the charges to the Company for carrying the shipments when the Company acts as a freight consolidator. Ocean freight revenues include the charges to the Company for carrying the shipments when the Company acts as a Non-Vessel Operating Common Carrier (NVOCC). Revenues realized in other capacities include only the commissions and fees earned. Revenues related to shipments are recognized at the time the freight is tendered to a direct carrier at origin. All other revenues, including breakbulk services, local transportation, customs formalities, distribution services and logistics management, are recognized upon performance. E. Income Taxes Income taxes are accounted for under the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-6 F. Net Earnings per Common Share Net earnings per common share is computed using the weighted average number of common shares and dilutive common share equivalents outstanding. Common share equivalents represent outstanding stock options. Fully diluted earnings per share do not differ materially from primary earnings per share. G. Foreign Currency Foreign currency amounts attributable to foreign operations have been translated into U.S. dollars using year-end exchange rates for assets and liabilities, historical rates for equity, and average annual rates for revenues and expenses. Unrealized gains or losses arising from fluctuations in the year-end exchange rates are generally recorded as equity adjustments from foreign currency translation. Currency fluctuations are a normal operating factor in the conduct of the Company's business and exchange transaction gains and losses are included in freight consolidation expenses. Foreign currency transaction gains and losses realized by the Company's foreign operations in 1996, 1995, and 1994, were insignificant. H. Cash Equivalents All highly liquid investments with a maturity of three months or less at date of purchase are considered to be cash equivalents. I. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments and taxation. Periodically, governments consider a variety of changes to current tariffs and trade restrictions. The Company cannot predict which, if any, of these proposals may be adopted. Nor can the Company predict the effects adoption of any such proposal will have on the Company's business. Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises. In addition to being affected by governmental policies concerning international trade, the Company's business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business. J. Reclassification Certain 1994 and 1995 amounts have been reclassified to conform with the 1996 presentation. NOTE 2. CREDIT ARRANGEMENTS The Company has a $30,000 bank line of credit with a United States bank extending through March 31, 1997. Borrowings under the line bear interest at the prime rate (8.01% at December 31, 1996) and are unsecured. As of December 31, 1996, the Company had $2,500 of borrowings under this line. The majority of the Company's foreign subsidiaries maintain bank lines of credit for short-term working capital purposes. These credit lines are supported by standby letters of credit issued by a United States bank, or guarantees issued by the Company to the foreign banks issuing the credit line. Lines of credit bear interest at .5% to 1.5% over the foreign banks' equivalent prime rates. At December 31, 1996 and 1995, the Company was liable for $952 and $285, respectively, of borrowings under these lines, and at December 31, 1996 was contingently liable for approximately $14,873 under outstanding standby letters of credit and guarantees related to these lines of credit and other obligations. In addition, at December 31, 1996 the Company had a $8,050 credit facility with a United Kingdom bank (U.K. facility), secured by a corporate guarantee. The Company was contingently liable under the U.K. facility at December 31, 1996 for $8,050 used to secure customs bonds issued by foreign governments. At December 31, 1996, the Company was in compliance with all restrictive covenants of these credit lines and the associated credit facilities, including maintenance of certain minimum asset, working capital and equity balances and ratios. F-7 NOTE 3. INCOME TAXES Income tax expense for 1996, 1995 and 1994 includes the following components:
FEDERAL STATE FOREIGN TOTAL --------- --------- ----------- --------- 1996 Current...................................................................... $ 8,633 1,248 5,477 15,358 Deferred income tax (tax benefit)............................................ (390) 353 -- (37) --------- --------- ----- --------- $ 8,243 1,601 5,477 15,321 --------- --------- ----- --------- --------- --------- ----- --------- 1995 Current...................................................................... $ 7,121 866 3,357 11,344 Deferred income tax (tax benefit)............................................ (403) 63 -- (340) --------- --------- ----- --------- $ 6,718 929 3,357 11,004 --------- --------- ----- --------- --------- --------- ----- --------- 1994 Current...................................................................... $ 7,162 1,660 2,810 11,632 Deferred income tax (tax benefit)............................................ (2,131) (330) -- (2,461) --------- --------- ----- --------- $ 5,031 1,330 2,810 9,171 --------- --------- ----- --------- --------- --------- ----- ---------
Income tax expense differs from amounts computed by applying the U.S. Federal income tax rate of 35% to earnings before income taxes as a result of the following:
1996 1995 1994 --------- --------- --------- Computed "expected" tax expense...................................................... $ 13,855 9,940 7,836 Increase (reduction) in income taxes resulting from: State and local income taxes, net of Federal income tax benefit...................... 1,041 604 865 (Decrease) increase in valuation allowance for deferred tax assets................... (72) 49 119 Other, net........................................................................... 497 411 351 --------- --------- --------- $ 15,321 11,004 9,171 --------- --------- --------- --------- --------- ---------
The components of earnings before income taxes are as follows:
1996 1995 1994 --------- --------- --------- United States....................................................................... $ 15,213 13,307 11,108 Foreign............................................................................. 24,371 15,092 11,280 --------- --------- --------- $ 39,584 28,399 22,388 --------- --------- --------- --------- --------- ---------
F-8 The tax effects of temporary differences, tax credits and operating loss carryforwards that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows:
YEAR ENDED DECEMBER 31, 1996 1995 - --------------------------------------------------------------------------- --------- --------- Deferred tax assets: Foreign tax credits related to unremitted foreign earnings................. $ 7,952 4,010 Accrued intercompany and third party charges, deductible for taxes upon economic performance (i.e. actual payment)............................... 3,192 2,501 Provision for doubtful accounts receivable................................. 1,217 1,035 Excess of financial statement over tax depreciation........................ 1,017 610 Foreign net operating loss carryforwards................................... 515 587 Provision for insurance claims............................................. 372 372 Interest income--seller financed real estate............................... 259 168 Other...................................................................... 353 434 --------- --------- Total gross deferred tax assets............................................ 14,877 9,717 Less valuation allowance................................................... (515) (587) --------- --------- 14,362 9,130 --------- --------- Deferred tax liabilities: Unremitted foreign earnings................................................ (8,479) (4,219) Other...................................................................... (1,029) (798) --------- --------- Total gross deferred tax liabilities....................................... (9,508) (5,017) Net deferred tax assets.................................................... $ 4,854 4,113 --------- --------- --------- ---------
F-9 At December 31, 1996 the Company has net operating loss carryforwards for foreign income tax purposes of $1,470 which are available over an indefinite period to offset future foreign taxable income. The Company has not provided U.S. Federal income taxes on undistributed earnings of foreign subsidiaries accumulated through December 31, 1992 since the Company intends to reinvest such earnings indefinitely or to distribute them in a manner in which no significant additional taxes would be incurred. Such undistributed earnings are approximately $41,900 and the additional Federal and state taxes payable in a hypothetical distribution of such accumulated earnings would approximate $10,100. Commencing in 1993, the Company provides for Federal and state income tax expense on foreign earnings without regard to whether such earnings will be permanently reinvested outside the United States. NOTE 4. SHAREHOLDERS' EQUITY A. DIVIDENDS On November 7, 1996, the Board of Directors declared a 2-for-1 stock split, effected in the form of a stock dividend of one share of common stock for every share outstanding, and increased the authorized common stock to 80,000,000 shares. The stock dividend was distributed on December 11, 1996 to shareholders of record on November 25, 1996. All share and per share information, except par value, has been adjusted for all years to reflect the stock split. The Board of Directors declared and the Company paid dividends during 1996, 1995 and 1994 as set forth in the table below:
RECORD PAYMENT PER SHARE YEAR DATE DATE AMOUNT - --------- ------------ ------------ ----------- 1996 3 June 17 June $0.04 2 December 16 December $ 0.04 1995 1 June 15 June $ 0.03 1 December 15 December $ 0.03 1994 1 June 15 June $0.025 1 December 15 December $0.025
B. Non-Discretionary Stock Repurchase Plan The Board of Directors has approved a Non-Discretionary Stock Repurchase Plan. Under the terms of this plan, management is authorized to repurchase up to 1,100,000 shares of the Company's common stock, in the open market, with the proceeds received from the exercise of Employee and Director Stock Options. As of December 31, 1996, the Company had repurchased and retired 585,212 shares of common stock at an average price of $12.91. C. Stock Option Plans The Company has a stock option plan ("1985 Plan") for employees under which the Board of Directors may grant to officers and key employees non-qualified stock options to purchase common stock at prices equal to or greater than market value on the date of grant. The Company also has a stock option plan ("Directors' Plan") under which non-employee directors elected at each annual meeting are granted non-qualified options to purchase 4,000 shares of common stock on the first business day of the next month following the meeting. Outstanding options under the 1985 Plan generally vest and become exercisable over periods up to five years from the date of grant and expire no more than ten years from the date of grant. Outstanding options under the Directors' Plan vest and are exercisable immediately and expire ten years from the date of grant. Upon the exercise of non-qualified stock options, the Company derives a tax deduction measured by the excess of the market value over the option price at the date of exercise. The related tax benefit is credited to additional paid-in capital. F-10 Details regarding the plans are as follows:
UNOPTIONED SHARES OUTSTANDING OPTIONS ----------------------- --------------------------- 1985 DIRECTORS' NUMBER OF PRICE PER PLAN PLAN SHARES SHARE ---------- ----------- ---------- --------------- Balance at December 31, 1993............................... 1,098,364 100,000 2,448,004 $ .19-$7.88 Options granted............................................ (345,500) (12,000) 357,500 $ 8.50-$10.38 Options exercised.......................................... -- -- (345,564) $ .19-$6.50 Options canceled........................................... 127,500 -- (127,500) $ 5.63-$8.50 --------- ------- --------- --------------- Balance at December 31, 1994............................... 880,364 88,000 2,332,440 $ 2.59-$10.38 --------- ------- --------- --------------- Options granted............................................ (704,600) (12,000) 716,600 $ 11.25-$11.38 Options exercised.......................................... -- -- (193,040) $ 2.59-$7.88 Options canceled........................................... 45,800 -- (45,800) $ 2.96-$11.25 --------- ------- --------- --------------- Balance at December 31, 1995............................... 221,564 76,000 2,810,200 $ 2.59-$11.38 --------- ------- --------- --------------- Options granted............................................ (212,200) (12,000) 224,200 $ 11.25-$14.60 Options exercised.......................................... -- -- (264,260) $ 2.59-$11.25 Options canceled........................................... 108,800 -- (108,800) $ 6.32-$14.60 --------- ------- --------- --------------- Balance at December 31, 1996............................... 118,164 64,000 2,661,340 $ 3.47-$14.60 --------- ------- --------- ---------------
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's three stock based compensation plans been determined consistent with FASB No. 123, the Company's net earnings and net earnings per share would have been decreased to the pro forma amounts indicated below:
1996 1995 --------- --------- Net earnings--as reported............................................... $ 24,263 $ 17,395 Net earnings--pro forma................................................. $ 22,789 $ 16,484 Net earnings per share--as reported..................................... $ 0.95 $ 0.69 Net earnings per share--pro forma....................................... $ 0.89 $ 0.66
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants:
1996 1995 --------- --------- Dividend yield......................................................... 0.5% 0.5% Volatility............................................................. 48% 35% Risk-free interest rates............................................... 6.8--8.5% 6.4--8.5% Expected life (years).................................................. 7 7 Weighted average fair value of stock options granted during the year... $ 8.10 $ 4.33 Weighted average fair value of stock purchase rights................... $ 5.34 $ 3.17
F-11 The following table summarizes information about fixed-price stock options outstanding at December 31, 1996:
WEIGHTED AVERAGE AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------ ----------- --------------- ---------- ------------ ---------- $3.47-5.31.... 82,600 1.9 years $ 4.74 82,600 $ 4.74 5.63......... 720,000 3.6 years 5.63 720,000 5.63 5.75-7.13.... 467,790 4.6 years 6.41 395,290 6.40 7.30-10.38... 490,750 6.7 years 8.25 141,188 7.88 11.25........ 700,000 8.4 years 11.25 -- -- 11.38-14.60.. 200,200 9.3 years 14.41 -- -- - ------------- --------- --------- --------- --------- --------- $3.47-14.60... 2,661,340 6.0 years $ 8.36 1,339,078 $ 6.04
D. Stock Purchase Plan The Company's 1988 Employee Stock Purchase Plan provides for 1,400,000 shares of the Company's common stock to be reserved for issuance upon exercise of purchase rights granted to employees who elect to participate through regular payroll deductions beginning August 1 of each year. The purchase rights are exercisable on July 31 of the following year at a price equal to the lesser of (1) 85% of the fair market value of the Company's stock on July 31 or (2) 85% of the fair market value of the Company's stock on the preceding August 1. At December 31, 1996, 1995 and 1994, an aggregate of 675,746 shares, 547,772 shares and 426,926 shares, respectively, had been issued under the plan, and at December 31, 1996, $893 had been withheld in connection with the plan year ending July 31, 1997. NOTE 5. COMMITMENTS A. LEASES The Company occupies office and warehouse facilities under terms of operating leases expiring up to 2007. At December 31, 1996, future minimum annual lease payments under all leases are as follows: 1997...........................................................$ 7,960 1998........................................................... 6,545 1999........................................................... 2,919 2000........................................................... 1,559 2001........................................................... 791 Thereafter..................................................... 310 --------- $ 20,084 --------- ---------
B. Employee Benefits The Company has an employee savings plan under which the Company provides a discretionary matching contribution. In 1996, 1995, and 1994, the Company's contributions under the plan were $1,044, $756 and $558, respectively. NOTE 6. CONTINGENT LIABILITIES The Company is ordinarily involved in claims and lawsuits which arise in the normal course of business, none of which currently, in management's opinion, will have a significant effect on the Company's financial condition. F-12 NOTE 7. BUSINESS SEGMENT INFORMATION Financial information regarding the Company's 1996, 1995, and 1994 operations by geographic area follows:
AUSTRALIA/ UNITED FAR NEW MIDDLE LATIN ELIMI- CONSOLI- STATES EAST ZEALAND CANADA EUROPE EAST AMERICA NATIONS DATED ---------- --------------- ----------- --------- --------- ----------- ----------- --------- --------- 1996 Revenues from unaffiliated customers.. $ 217,955 422,762 7,743 4,345 71,037 2,615 3,631 -- 730,088 Transfers between geographic areas...... 9,692 2,322 1,811 198 2,577 561 713 (17,874) -- ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- Total revenues... $ 227,647 425,084 9,554 4,543 73,614 3,176 4,344 (17,874) 730,088 ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- Operating income..... $ 14,707 17,204 942 630 5,218 (632) (644) -- 37,425 Identifiable assets at year end... $ 129,001 82,229 7,279 4,778 40,693 3,604 4,402 -- 271,986 Capital expenditures.. $ 20,430 2,905 410 178 1,642 840 119 -- 26,524 Depreciation and amortization.. $ 3,986 1,715 330 132 1,560 206 218 -- 8,147 Equity....... $ 140,011 58,996 4,406 1,029 6,932 406 (1,098) (70,671) 140,011 - ----------------------------------------------------------------------------------------------------------------------------- 1995 Revenues from unaffiliated customers.. $ 161,809 351,056 5,610 3,217 61,785 511 703 -- 584,691 Transfers between geographic areas...... 8,588 1,579 1,883 168 2,083 301 181 (14,783) -- ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- Total revenues... $ 170,397 352,635 7,493 3,385 63,868 812 884 (14,783) 584,691 ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- Operating income..... $ 12,952 9,005 651 479 4,553 (308) (481) -- 26,851 Identifiable assets at year end... $ 107,958 51,732 5,135 4,290 31,326 2,213 1,474 -- 204,128 Capital expenditures.. $ 4,033 1,422 373 177 2,189 457 651 -- 9,302 Depreciation and amortization.. $ 3,403 1,328 261 82 1,427 62 66 -- 6,629 Equity....... $ 117,192 51,517 2,416 681 4,238 347 (444) (58,755) 117,192 - ----------------------------------------------------------------------------------------------------------------------------- 1994 Revenues from unaffiliated customers.. $ 131,808 269,432 5,400 2,118 41,617 232 -- -- 450,607 Transfers between geographic area....... 6,640 1,134 388 131 1,426 263 -- (9,982) -- ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- Total revenues... $ 138,448 270,566 5,788 2,249 43,043 495 -- (9,982) 450,607 ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- ---------- --------------- ----- --------- --------- ----- ----------- -------- --------- Operating income..... $ 10,455 7,309 384 334 2,951 (79) -- -- 21,354 Identifiable assets at year end... $ 82,518 47,327 3,760 3,115 24,761 1,307 -- -- 162,788 Capital expenditures.. $ 4,171 1,645 640 122 1,908 75 -- -- 8,561 Depreciation and amortization.. $ 2,559 955 230 43 1,107 25 -- -- 4,919 Equity....... $ 101,110 48,075 2,034 380 2,888 29 -- (53,406) 101,110 expenditure - ----------------------------------------------------------------------------------------------------------------------------
The Company charges its subsidiaries and affiliates for services rendered in the United States on a cost recovery basis. F-13 Note 8. Quarterly Results (Unaudited)
1ST 2ND 3RD 4TH ---------- --------- --------- --------- 1996 Revenues............................................................. $ 137,670 166,206 204,892 221,320 Net revenues......................................................... 40,732 47,130 56,233 58,240 Net earnings......................................................... 3,789 5,371 7,680 7,423 Net earnings per share............................................... .15 .21 .30 .29 1995 Revenues............................................................. $ 122,878 141,520 159,168 161,125 Net revenues......................................................... 33,286 36,732 41,272 42,783 Net earnings......................................................... 3,218 4,087 5,015 5,075 Net earnings per share............................................... .13 .16 .20 .20
Net revenues are determined by deducting freight consolidation costs from total revenues. Quarterly per share data may not equal the per share total reported for the year. F-14 SCHEDULE II EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands) Additions --------- Balance at Charged to Balance beginning costs and Deductions at end Description of year expenses Other write-offs of year - ----------- ---------- ----------- --------- -------------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE 1996 $3,807 $2,120 $ -- $ 880 $5,047 ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- 1995 $3,310 $ 710 $ 14 $ 227 $3,807 ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- 1994 $2,230 $1,322 $ -- $ 242 $3,310 ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- S-1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. ------------------- ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996 ------------------- EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. EXHIBITS INDEX TO EXHIBITS
LOCATION IN EXHIBIT THIS REPORT NUMBER DESCRIPTION ON FORM 10-K - ----------- ------------------------------------------------------------------------------------------------------ ------------ 3.1.1 Articles of Amendment to the Restated Articles of Incorporation dated November 12, 1996. 2 10.27 Loan Modification Agreement Between the Company and Bank of America National Trust and Savings Association doing business as Seafirst Bank dated January 17, 1997 amending the maximum principal amount of the Company's unsecured line of credit to $30,000,000 and increasing the Company's maximum obligation under the Revolving Note to $30,000,000. 10.28 Credit Agreement Between the Company and Bank of America National Trust and Savings Association, doing 4 business as Seafirst Bank dated March 31, 1997 with respect to the Company's $30,000,000 unsecured line of credit together with a Revolving Note due March 30, 1998. 11.1 Statement Re: Computation of Per Share Net Earnings. 25 21.1 Subsidiaries of the Registrant. 26 23. Consent of Independent Certified Public Accountants. 28 27. Financial Data Schedule (Filed Electronically Only).
1 EX-3.1 2 EXH 3.1.1 ARTICLES OF AMENDMENT Exhibit 3.1.1 ARTICLES OF AMENDMENT OF EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Restated Articles of Incorporation: FIRST: The name of the corporation is EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. (the "Corporation"). SECOND: The Restated Articles of Incorporation are hereby amended by deleting Article V, Section 1 in it entirety and replacing it with a new Article V, Section 1 to read as follows: ARTICLE V (1) Authorized Capital. The total number of shares which the Corporation is authorized to issue is eighty-two million (82,000,000), consisting of eighty million (80,000,000) shares of common stock, having a par value of $.01, and two million (2,000,000) shares of preferred stock, having a par value of $.01. Shares shall be issued at such prices as shall be determined by the Board of Directors. The common stock is subject to the rights and preferences of the preferred stock as hereinafter set forth. THIRD: This amendment does not provide for an exchange, reclassification or cancellation of issued shares. FOURTH: The foregoing amendment was adopted by the Board of Directors of the Corporation on November 7, 1996 without shareholder action. Pursuant to RCW 23B.10.020(4), shareholder action with regard to this amendment of the Restated Articles of Incorporation of the Corporation is not required. DATED: November 12, 1996 EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. By: /s/ Jeffrey J. King ------------------------ Jeffrey J. King Vice President-General Counsel and Secretary 2 EX-10.27 3 EXH 10.27 LOAN MOD AGREMT EXHIBIT 10.27 [Bank Logo] LOAN MODIFICATION AGREEMENT This agreement amends the REVOLVING NOTE dated June 6, 1994, ("Note") and Credit Agreement dated June 6, 1994 ("Credit Agreement"), each executed by EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. ("Borrower") in favor of Bank of America Trust and Savings Association doing business as Seafirst Bank, successor by name change to Seattle-First National Bank ("Bank"), regarding a loan in the maximum principal amount of $10,000,000.00 (the "Loan"). For mutual consideration, Borrower and Bank agree to amend the above loan documents as follows: 1. Credit Limit. The maximum principal amount of Borrower's line of credit is hereby changed to $30,000,000.00, and Borrower's maximum liability for principal under the Note is also changed to $30,000,000.00. 2. Other Terms. Except as specifically amended by this agreement or any prior amendment, all other terms, conditions, and definitions of the Note and all other security agreements, guaranties, deeds of trust, mortgages, and other instruments or agreements entered into with regard to the Loan shall remain in full force and effect. DATED January 17, 1997 Bank: Borrower: SEATTLE-FIRST NATIONAL BANK EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. By: /s/ Peter J. Rose ------------------------------------ Title: Chief Executive Officer --------------------------------- By: /s/ Stan Diddams Title Vice President By: /s/ R. Jordan Gates ------------------------------------ Title: Chief Financial Officer --------------------------------- 3 EX-10.28 4 EXHIBIT 10.28 REVOLVE.NOTE Exhibit 10.28 CREDIT AGREEMENT BETWEEN EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. and SEAFIRST BANK 4 TABLE OF CONTENTS ARTICLE 1 Definitions........................... 1 1.1 Adjusted LIBOR Rate........................ 1 1.2 Advances................................... 1 1.3 Assessment Rate............................ 1 1.4 Available Amounts.......................... 1 1.5 Business Day............................... 1 1.6 Commencement Date.......................... 1 1.7 Credit Limit............................... 1 1.8 Current Assets............................. 2 1.9 Current Liabilities........................ 2 1.10 Debt....................................... 2 1.11 ERISA...................................... 2 1.12 Fixed Rate................................. 2 1.13 Fixed Rate Loans........................... 2 1.14 Floating Rate Loans........................ 2 1.15 GAAP....................................... 2 1.16 Ineligible Securities...................... 2 1.17 Interest Payment Dates..................... 2 1.18 Interest Period............................ 2 1.19 LIBOR Rate................................. 2 1.20 LIBOR Rate Loans........................... 2 1.21 Loan Documents............................. 2 1.22 London Banking Day......................... 3 1.23 Obligations................................ 3 1.24 Person..................................... 3 1.25 Plan....................................... 3 1.26 Quoted Rate................................ 3 1.27 Quoted Rate Loans.......................... 3 1.28 Reference Rate............................. 3 1.29 Reserve Adjustment......................... 3 1.30 Tangible Net Worth......................... 3 1.31 Termination Date........................... 3 ARTICLE 2 Revolving Loan....................... 4 2.1 Revolving Loan Facility.................... 4 2.2 Revolving Note............................. 4 2.3 Procedure for Advances..................... 4 2.4 Facility Fee............................... 4 ARTICLE 3 Interest Rate Options................ 4 3.1 Interest Rates and Payment Date............ 4 3.2 Procedure.................................. 4 3.3 Option Restrictions........................ 4 3.4 Prepayments................................ 4 3.5 Reversion to Floating...................... 4 3.6 Inability to Participate in Market......... 5 3.7 Costs...................................... 5 3.8 Basis of Quotes............................ 5
5 S> ARTICLE 4 Conditions of Lending................ 5 4.1 Authorization.............................. 5 4.2 Documentation.............................. 5 4.3 Proof of Insurance......................... 5 4.4 Representations and Warranties............. 5 4.5 Compliance................................. 5 ARTICLE 5 Representations and Warranties....... 6 5.1 Existence.................................. 6 5.2 Enforceability............................. 6 5.3 No Legal Bar............................... 6 5.4 Financial Information...................... 6 5.5 Liens and Encumbrances..................... 6 5.6 Litigation................................. 6 5.7 Payment of Taxes........................... 6 5.8 Employee Benefit Plan...................... 6 5.9 Misrepresentations......................... 7 5.10 No Default................................. 7 5.11 No Burdensome Restrictions................. 7 ARTICLE 6 Affirmative Covenants................ 7 6.1 Use of Proceeds............................ 7 6.2 Tangible Net Worth......................... 7 6.3 Current Ratio.............................. 7 6.4 Debt Ratio................................. 7 6.5 Financial Information...................... 7 6.6 Maintenance of Existence................... 8 6.7 Books and Records.......................... 8 6.8 Notice of Events........................... 8 6.9 Payment of Debts and Taxes................. 8 6.10 Insurance.................................. 9 ARTICLE 7 Negative Covenants................... 9 7.1 Liens and Encumbrances..................... 9 7.2 Disposition of Assets...................... 9 7.3 Mergers.................................... 9 7.4 Capital Structure.......................... 9 7.5 Wage and Hour Laws......................... 9 7.6 ERISA...................................... 9 7.7 Dissolution................................ 9 7.8 Business Activities........................ 9 ARTICLE 8 Events and Consequences of Default... 10 8.1 Events of Default.......................... 10 8.2 Remedies Upon Default...................... 11 8.3 Alleged Default by Bank.................... 11
6 ARTICLE 9 Miscellaneous........................ 11 9.1 Manner of Payments......................... 11 9.2 Notices.................................... 12 9.3 Collection Expenses........................ 12 9.4 Waiver..................................... 12 9.5 Assignment................................. 12 9.6 Merger..................................... 12 9.7 Amendments................................. 12 9.8 Mandatory Arbitration...................... 13 9.9 Construction............................... 13
EXHIBITS: EXHIBIT A--FORM OF REVOLVING NOTE EXHIBIT B--FORM OF CFO CERTIFICATE 7 CREDIT AGREEMENT THIS CREDIT AGREEMENT ("Agreement") is made between Expeditors International of Washington, Inc., a Washington corporation ("Borrower"), and Bank of America National Trust and Savings Association, a national banking association, doing business as Seafirst Bank (including its successors and/or assigns, "Bank"), and supersedes the Credit Agreement dated June 6, 1994, between Borrower and Bank's predecessor in interest, Seattle-First National Bank. The parties agree as follows: ARTICLE 1 DEFINITIONS All terms defined below shall have the meaning indicated. All references in this Agreement to: (a) 'dollars" or "$" shall mean U.S. dollars; (b) 'Article," "Section," or "Subsection" shall mean articles, sections, and subsections of this Agreement, unless otherwise indicated; (c) terms defined in the Washington version of the Uniform Commercial Code, R.C.W. Section62A.9-101, et seq. ("UCC"), and not otherwise defined in this Agreement, shall have the meaning given in the UCC; and (d) an accounting term not otherwise defined in this Agreement shall have the meaning assigned to it under GAAP. 1.1 ADJUSTED LIBOR RATE shall mean for any day that per annum rate equal to the sum of (a) a margin of 0.75%, (b) the Assessment Rate, and (c) the quotient of (i) the LIBOR Rate as determined for such day, divided by (ii) the Reserve Adjustment. The Adjusted LIBOR Rate shall change with any change in the LIBOR Rate on the first day of each Interest Period and on the effective date of any change in the Assessment Rate or Reserve Adjustment. 1.2 ADVANCES shall mean the disbursement of loan proceeds under the Revolving Loan. An Advance shall not constitute a "payment order" under R.C.W. Section62A.4A-103. 1.3 ASSESSMENT RATE shall mean as of any day the minimum annual percentage rate established by the Federal Deposit Insurance Corporation (or any successor) for the assessment due from members of the Bank Insurance Fund (or any successor) in effect for the assessment period during which said day occurs based on deposits maintained at such members' offices located outside of the United States. 1.4 AVAILABLE AMOUNTS shall mean at any time the amount of the Credit Limit minus the unpaid balance of the Revolving Note. 1.5 BUSINESS DAY shall mean any day other than a Saturday, Sunday, or other day on which commercial banks in Seattle, Washington, are authorized or required by law to close. 1.6 COMMENCEMENT DATE shall mean the first day of any Interest Period as requested by Borrower. 1.7 CREDIT LIMIT shall mean $30,000,000. 8 1.8 CURRENT ASSETS shall mean all consolidated assets of Borrower, on a GAAP basis, which may be properly classified as current assets in accordance with GAAP; provided, that short-term investments shall be valued at cost or market, whichever is less. 1.9 CURRENT LIABILITIES shall mean all consolidated indebtedness of Borrower, on a GAAP basis, maturing on demand or within a period of one year from the date when Borrower's current liabilities are determined and which may be properly classified as current liabilities in accordance with GAAP. 1.10 DEBT shall mean total liabilities, on a GAAP basis, included in the liability section of a balance sheet of Borrower. 1.11 ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.12 FIXED RATE shall mean the Quoted Rate or the Adjusted LIBOR Rate. 1.13 FIXED RATE LOANS shall mean Quoted Rate Loans and LIBOR Rate Loans. 1.14 FLOATING RATE LOANS shall mean those portions of principal of the Revolving Note accruing interest at the Reference Rate. 1.15 GAAP shall mean generally accepted accounting principles as in effect from time to time in the United States and as consistently applied by Borrower. 1.16 INELIGIBLE SECURITIES shall mean securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section24, Seventh), as amended. 1.17 INTEREST PAYMENT DATES shall mean the last Business Day of each month as to each Floating Rate Loan and the last day of each Interest Period as to each Fixed Rate Loan, and upon maturity, including upon maturity by acceleration. 1.18 INTEREST PERIOD shall mean the period commencing on the date of any Advance at, or conversion to, a Fixed Rate and ending on any date thereafter as selected by Borrower, subject to the restrictions of Section 3.3. If any Interest Period would end on a day which is not a Business Day, the Interest Period shall be extended to the next succeeding Business Day. 1.19 LIBOR RATE shall mean for any Interest Period the per annum rate, calculated on the basis of actual number of days elapsed over a year of 360 days, for U.S. Dollar deposits for a period equal to the Interest Period appearing on the display designated as "Page 3750" on the Telerate Service (or such other page on that service or such other service designated by the British Banker's Association for the display of that Association's Interest Settlement Rates for U.S. Dollar deposits) as of 11:00 a.m., London time, on the day which is two London Banking Days prior to the first day of the Interest Period. If there is no period equal to the Interest Period on the display, the LIBOR Rate shall be determined by straight-line interpolation to the nearest month (or week or day if expressed in weeks or days) corresponding to the Interest Period between the two nearest neighboring periods on the display. 1.20 LIBOR RATE LOANS shall mean those portions of principal of the Revolving Note accruing interest at the Adjusted LIBOR Rate. 1.21 LOAN DOCUMENTS shall mean collectively this Agreement, the Revolving Note, and all other documents, instruments, and agreements now or later executed in connection with this Agreement. 9 1.22 LONDON BANKING DAY shall mean any day other than a Saturday, Sunday, or other day on which commercial banks in London, England, are authorized or required by law to close. 1.23 OBLIGATIONS shall mean the Revolving Note, and all fees, costs, expenses, and indemnifications due to Bank under this Agreement. 1.24 PERSON shall mean any individual, partnership, corporation, business trust, unincorporated organization, joint venture, or any governmental entity, department, agency, or political subdivision. 1.25 PLAN shall mean any employee benefit plan or other plan maintained for Borrower's employees and covered by Title IV of ERISA, excluding any plan created or operated by or for any labor union. 1.26 QUOTED RATE shall mean that per annum fixed rate quoted by Bank and accepted by Borrower as the applicable rate for the Interest Period commencing on the Business Day and of the duration specified by Borrower in its request to Bank for a fixed rate quote. 1.27 QUOTED RATE LOANS shall mean those portions of principal of the Revolving Note accruing interest at the Quoted Rate. 1.28 REFERENCE RATE shall mean the rate of interest publicly announced from time to time by Bank in San Francisco, California, as its "Reference Rate." The Reference Rate is set based on various factors, including Bank's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans. Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Reference Rate. 1.29 RESERVE ADJUSTMENT shall mean as of any day the remainder of one minus that percentage (expressed as a decimal) which is the highest of any such percentages established by the Board of Governors of the Federal Reserve System (or any successor) for required reserves (including any emergency, marginal, or supplemental reserve requirement) regardless of the aggregate amount of deposits with said member bank and without benefit of any possible credit, proration, exemptions, or offsets for time deposits established at offices of member banks located outside of the United States or for eurocurrency liabilities, if any. 1.30 TANGIBLE NET WORTH shall mean the excess of total assets over total liabilities, excluding, however, from the determination of total assets (a) all assets which should be classified as intangible assets (such as goodwill, patents, trademarks, copyrights, franchises, and deferred charges, including unamortized debt discount and research and development costs), (b) treasury stock, (c) cash held in a sinking or other similar fund established for the purpose of redemption or other retirement of capital stock, (d) to the extent not already deducted from total assets, reserves for depreciation, depletion, obsolescence, or amortization of properties and other reserves or appropriations of retained earnings which have been or should be established in connection with Borrower's business, and (e) any revaluation or other write-up in book value of assets subsequent to the fiscal year of Borrower last ended at the date Tangible Net Worth is being measured. 1.31 TERMINATION DATE shall mean March 30, 1998, or such earlier date upon which Bank's commitment to lend is terminated pursuant to Subsection 8.2(a). 10 ARTICLE 2 REVOLVING LOAN 2.1 REVOLVING LOAN FACILITY. Subject to the terms and conditions of this Agreement, Bank shall make Advances to Borrower from time to time, until the Termination Date ("Revolving Loan"), with the aggregate principal amount at any one time outstanding not to exceed the Credit Limit. Borrower may use the Revolving Loan by borrowing, prepaying, and reborrowing the Available Amounts, in whole or in part. 2.2 REVOLVING NOTE. The obligation of Borrower to repay the Revolving Loan shall be evidenced by a promissory note (including all renewals, modifications, and extensions thereof, the "Revolving Note") made by Borrower to the order of Bank, and shall bear interest as provided in Article 3. The Revolving Note shall be unsecured and shall be in substantially the same form as Exhibit A attached. 2.3 PROCEDURE FOR ADVANCES. Borrower may borrow under the Revolving Loan on any Business Day. Borrower shall give Bank irrevocable notice (written or oral) specifying the amount to be borrowed and the requested borrowing date. Bank must receive such notice on or before 11:30 a.m., Seattle time, on the day borrowing is requested. All Advances shall be discretionary to the extent notification by Borrower is given subsequent to that time. 2.4 FACILITY FEE. On the last Business Day of each quarter, beginning June 30, 1997, Borrower shall pay to Bank in arrears a commitment fee equal to 0.1875% per annum of the difference between the Credit Limit and the daily outstanding principal balance of the Revolving Note. ARTICLE 3 INTEREST RATE OPTIONS 3.1 INTEREST RATES AND PAYMENT DATE. The Revolving Note shall bear interest from the date of Advance on the unpaid principal balance outstanding from time to time at the Reference Rate or Fixed Rate as selected by Borrower and all accrued interest shall be payable in arrears on each Interest Payment Date. 3.2 PROCEDURE. Borrower may, before 9:30 a.m. on any Commencement Date, request Bank to give a Quoted Rate quote for a specified loan amount and Interest Period or, on any London Banking Day two London Banking Days before a Commencement Date, request Bank to give an Adjusted LIBOR Rate quote for a specified loan amount and Interest Period. Bank will then quote to Borrower the available Quoted Rate or Adjusted LIBOR Rate. Borrower shall have two hours from the time of the quote to elect a Fixed Rate by giving Bank irrevocable notice of such election. 3.3 OPTION RESTRICTIONS. Each Interest Period shall be one, two, three, six or 12 months for LIBOR Rate Loans, and from overnight to 30 days for Quoted Rate Loans. In no event shall an Interest Period extend beyond the Termination Date. The minimum amount of a Fixed Rate Loan shall be $1,000,000. 3.4 PREPAYMENTS. If Borrower prepays all or any portion of a Fixed Rate Loan prior to the end of an Interest Period, there shall be due at the time of any such prepayment the Prepayment Fee, determined in accordance with Form 51-6325, which shall be attached as Exhibit 1 to the Revolving Note. 3.5 REVERSION TO FLOATING. The Revolving Note shall bear interest at the Reference Rate unless a Fixed Rate is specifically selected. At the termination of any Interest Period each Fixed Rate Loan shall revert to a Floating Rate Loan unless Borrower directs otherwise pursuant to Section 3.2. 11 3.6 INABILITY TO PARTICIPATE IN MARKET. If Bank in good faith cannot participate in the Eurodollar market for legal or practical reasons, the Adjusted LIBOR Rate shall cease to be a Fixed Rate option. Bank shall notify Borrower of and when it again becomes legal or practical to participate in the Eurodollar market, at which time the Adjusted LIBOR Rate shall resume being a Fixed Rate option. 3.7 COSTS. Borrower shall, as to LIBOR Rate Loans, reimburse Bank for all costs, taxes, and expenses, and defend and hold Bank harmless for any liabilities, which Bank may incur as a consequence of any changes in the cost of participating in, or in the laws or regulations affecting, the Eurodollar market, including any additional reserve requirements, except to the extent such costs are already calculated into the Adjusted LIBOR Rate. This covenant shall survive this Agreement and the payment of the Revolving Note. 3.8 BASIS OF QUOTES. Borrower acknowledges that Bank may or may not in any particular case actually match-fund a Fixed Rate Loan. FDIC assessments, and Federal Reserve Board reserve requirements, if any are assessed, will be based on Bank's best estimates of its marginal cost for each of these items. Whether such estimates in fact represent the actual cost to Bank for any particular dollar or Eurodollar deposit or any Fixed Rate Loan will depend upon how Bank actually chooses to fund the Fixed Rate Loan. By electing a Fixed Rate, Borrower waives any right to object to Bank's means of calculating the Fixed Rate quote accepted by Borrower. ARTICLE 4 CONDITIONS OF LENDING Bank's obligation to make the initial Advance is subject to the conditions precedent listed in Sections 4.1 through 4.3, and to make subsequent Advances is subject to the conditions precedent listed in Sections 4.4 and 4.5, unless waived by Bank in writing: 4.1 AUTHORIZATION. Borrower shall have delivered to Bank a certified copy of the resolution of Borrower's board of directors authorizing the transactions contemplated by this Agreement and the execution, delivery, and performance of all Loan Documents, together with appropriate certificates of incumbency. 4.2 DOCUMENTATION. Borrower shall have executed and delivered to Bank all documents to reflect the existence of the Obligations. 4.3 PROOF OF INSURANCE. Proof of insurance as required by Section 6.10 has been provided to Bank. 4.4 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Borrower in the Loan Documents and in any certificate, document, or financial statement furnished at any time shall continue to be true and correct, except to the extent that such representations and warranties expressly relate to an earlier date. 4.5 COMPLIANCE. No Default or other event which, upon notice or lapse of time or both would constitute a Default, shall have occurred and be continuing, or shall exist after giving effect to the advance of credit to be made. 12 ARTICLE 5 REPRESENTATIONS AND WARRANTIES To induce Bank to enter into this Agreement, Borrower represents, warrants, and covenants to Bank as follows: 5.1 EXISTENCE. Borrower is in good standing as a corporation under the laws of the state of its incorporation, has the power, authority, and legal right to own and operate its property or lease the property it operates and to conduct its current business; and is qualified to do business and is in good standing in all other jurisdictions where the ownership, lease, or operation of its property or the conduct of its business requires such qualification. 5.2 ENFORCEABILITY. The Loan Documents, when executed and delivered by Borrower, shall be enforceable against Borrower in accordance with their respective terms. 5.3 NO LEGAL BAR. The execution, delivery, and performance by Borrower of the Loan Documents, and the use of the loan proceeds, shall not violate any existing law or regulation applicable to Borrower; any ruling applicable to Borrower of any court, arbitrator, or governmental agency or body of any kind; Borrower's articles of incorporation or bylaws; any security issued by Borrower; or any mortgage, indenture, lease, contract, undertaking, or other agreement to which Borrower is a party or by which Borrower or any of its property may be bound. 5.4 FINANCIAL INFORMATION. By submitting each of the financial statements required by Subsection 6.5(a) and 6.5(b), Borrower is deemed to represent and warrant that: (a) such statement is complete and correct and fairly presents the financial condition of Borrower as of the date of such statement; (b) such statement discloses all liabilities of Borrower that are required to be reflected or reserved against under GAAP, whether liquidated or unliquidated, fixed or contingent; and (c) such statement has been prepared in accordance with GAAP. As of this date, there has been no adverse change in Borrower's financial condition since preparation of its December 31, 1996 fiscal year end financial statement which would materially impair Borrower's ability to repay the Obligations. 5.5 LIENS AND ENCUMBRANCES. As of this date, Borrower has good and marketable title to its property free and clear of all security interests, liens, encumbrances, or rights of others, except as disclosed in writing to Bank, and except for taxes which are not yet delinquent and for conditions, restrictions, easements, and rights of way of record which do not materially affect the use of any of Borrower's property. 5.6 LITIGATION. Except as disclosed in writing to Bank, there is no threatened (to Borrower's knowledge) or pending litigation, investigation, arbitration, or administrative action which may materially adversely affect Borrower's business, property, operations, or financial condition. 5.7 PAYMENT OF TAXES. Borrower has filed or caused to be filed all tax returns when required to be filed; and has paid all taxes, assessments, fees, licenses, excise taxes, franchise taxes, governmental liens, penalties, and other charges levied or assessed against Borrower or any of its property imposed on it by any governmental authority, agency, or instrumentality that are due and payable (other than those returns or payments of which the amount, enforceability, or validity are contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP are provided on Borrower's books). 5.8 EMPLOYEE BENEFIT PLAN. Borrower is in compliance in all respects with the provisions of ERISA and the regulations and published interpretations thereunder. Borrower has not engaged in any acts or omissions which would make Borrower liable to the Plan, to any of its participants, or to the Internal Revenue Service, under ERISA. 13 5.9 MISREPRESENTATIONS. No information, exhibits, data, or reports furnished by Borrower or delivered to Bank in connection with Borrower's application for credit misstates any material fact, or omits any fact necessary to make such information, exhibits, data, or reports not misleading. 5.10 NO DEFAULT. Borrower is not in default in any Loan Document, or in any contract, agreement, or instrument to which it is a party. 5.11 NO BURDENSOME RESTRICTIONS. No contract or other instrument to which Borrower is a party, or order, award, or decree of any court, arbitrator, or governmental agency, materially impairs Borrower's ability to repay the Obligations. ARTICLE 6 AFFIRMATIVE COVENANTS So long as this Agreement shall remain in effect, or any liability exists under the Loan Documents, Borrower shall: 6.1 USE OF PROCEEDS. Use the proceeds of the Revolving Loan for working capital or other general purposes. Borrower shall not use any Advances to: (a) knowingly purchase Ineligible Securities from BA Securities, Inc. (the "Arranger") during any period in which the Arranger makes a market in such Ineligible Securities; or (b) knowingly purchase during the underwriting or placement period Ineligible Securities being underwritten or privately placed by the Arranger; or (c) make payments of principal or interest on Ineligible Securities underwritten or privately placed by the Arranger and issued by or for the benefit of Borrower or any affiliate of Borrower. 6.2 TANGIBLE NET WORTH. Maintain a Tangible Net Worth, determined as of each quarter end, of not less than $100,000,000. 6.3 CURRENT RATIO. Maintain a ratio of Current Assets to Current Liabilities, determined as of each quarter end, of not less than 1.5 to 1. 6.4 DEBT RATIO. Maintain a ratio of Debt to Tangible Net Worth, determined as of each quarter end, of not more than 2.0 to 1. 6.5 FINANCIAL INFORMATION. Maintain a standard system of accounting in accordance with GAAP and furnish to Bank the following: (a) Quarterly Financial Statements. As soon as publicly available and, in any event, within 45 days after the end of each quarter except the last fiscal quarter of each fiscal year, a copy of the consolidated statement of income and retained earnings of Borrower for the quarter and for the current fiscal year through such quarter, and for each such quarter a copy of the consolidated balance sheet, consolidated statement of shareholders' equity, and consolidated statement of cash flow of Borrower as of the end of such quarter, setting forth, in each case, in comparative form, figures for the corresponding period of the preceding fiscal year, all in reasonable detail and satisfactory in scope to Bank, prepared by the chief financial officer of Borrower, and in form and substance satisfactory to Bank; 14 (b) Annual Financial Statements. As soon as publicly available and, in any event, within 90 days after the end of each fiscal year, a copy of the consolidated balance sheet, consolidated statement of income and retained earnings, consolidated statement of shareholders' equity, and consolidated statement of cash flow of Borrower for such year, setting forth in each case, in comparative form, corresponding figures from the preceding annual statements, each audited by independent certified public accountants of recognized standing selected by Borrower certifying that such statement is complete and correct, fairly presents without qualification the financial condition of Borrower for such period, is prepared in accordance with GAAP, and has been audited in conformity with generally accepted auditing standards; (c) Other Certificates. Together with the delivery of the financial statements required by Subsection 6.5(a) and 6.5(b), a certificate of the chief financial officer of Borrower, in the form of Exhibit B attached; and (d) Additional Financial Information. As soon as available and, in any event, within ten days after request, such other data, information, or documentation as Bank may reasonably request. 6.6 MAINTENANCE OF EXISTENCE. Preserve and maintain its existence, powers, and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in each jurisdiction in which its presence is necessary or desirable in view of its business, operations, or ownership of its property. Borrower shall also maintain and preserve all of its property which is necessary or useful in the proper course of its business, in good working order and condition, ordinary wear and tear excepted. 6.7 BOOKS AND RECORDS. Keep accurate and complete books, accounts, and records in which complete entries shall be made in accordance with GAAP, reflecting all financial transactions of Borrower. 6.8 NOTICE OF EVENTS. Furnish Bank prompt written notice of: (a) Proceedings. Any proceeding instituted by or against Borrower in any court or before any commission or regulatory body, or any proceeding threatened against it in writing by any governmental agency which if adversely determined would have a material adverse effect on Borrower's business, property, or financial condition, or where the amount involved is $1,000,000 or more and not covered by insurance; (b) Material Development. Any material development in any such proceeding referred to in Subsection 6.8(a); (c) Defaults. Any accident, event, or condition which is or, with notice or lapse of time or both, would constitute a Default, or a default under any other agreement to which Borrower is a party; and (d) Adverse Effect. Any other action, event, or condition of any nature which could result in a material adverse effect on the business, property, or financial condition of Borrower. 6.9 PAYMENT OF DEBTS AND TAXES. Pay all Debt and perform all obligations promptly and in accordance with their terms, and pay and discharge promptly all taxes, assessments, and governmental charges or levies imposed upon Borrower, its property, or revenues prior to the date on which penalties attach thereto, as well as all lawful claims for labor, material, supplies, or otherwise which, if unpaid, might become a lien or charge upon Borrower's property. Borrower shall not, however, be required to pay or discharge any such tax, assessment, charge, levy, or claim so long as its enforceability, amount, or validity is contested in good faith by appropriate proceedings. 15 6.10 INSURANCE. Maintain commercially adequate levels of coverage with financially sound and reputable insurers, including, without limitation: (a) Property Insurance. Insurance on all property of a character usually insured by organizations engaged in the same or similar type of business as Borrower against all risks, casualties, and losses through extended coverage or otherwise and of the kind customarily insured against by such organizations; (b) Liability Insurance. Public liability insurance against tort claims which may be asserted against Borrower; and (c) Additional Insurance. Such other insurance as may be required by law. ARTICLE 7 NEGATIVE COVENANTS So long as this Agreement shall remain in effect, or any liability shall exist under the Loan Documents, Borrower shall not, without prior written consent of Bank, which consent shall not be unreasonably withheld: 7.1 LIENS AND ENCUMBRANCES. Create, incur, or assume, or agree to create, incur, or assume any lien, whether consensual or nonconsensual, on any of its property, or to enter into any lease with respect to any of its property except liens or leases securing obligations not exceeding, in the aggregate, 10% of the book value of Borrower's total assets. 7.2 DISPOSITION OF ASSETS. Sell, transfer, lease, or otherwise assign or dispose of portions of its property to any Person, outside the ordinary course of business, which in the aggregate exceed 10% of the book value of Borrower's total assets. 7.3 MERGERS. Become a party to any merger, consolidation, or like corporate change, or make any substantial transfer or contribution to, or material investment in, stock, shares, or licenses of any Person, except for acquisitions not exceeding, in the aggregate, 15% of the book value of Borrower's total assets. 7.4 CAPITAL STRUCTURE. Purchase, retire, or redeem any of its capital stock or otherwise effect any change in Borrower's capital structure, in excess of 5% of the outstanding shares in the aggregate in any one fiscal year. 7.5 WAGE AND HOUR LAWS. Intentionally violate the federal Fair Labor Standards Act or any comparable state wage and hour law, with all violations to be promptly corrected. 7.6 ERISA. Engage in any act or omission which would make Borrower liable under ERISA to the Plan, to any of its participants, or to the Internal Revenue Service. 7.7 DISSOLUTION. Adopt any agreement or resolution for dissolving, terminating, or substantially altering Borrower's present business activities. 7.8 BUSINESS ACTIVITIES. Engage or enter into any material activity which is unusual to Borrower's existing business. 16 ARTICLE 8 EVENTS AND CONSEQUENCES OF DEFAULT 8.1 EVENTS OF DEFAULT. Any of the following events shall, at the option of Bank and at any time without regard to any previous knowledge on the part of Bank, constitute a default by Borrower under the terms of this Agreement, the Revolving Note, and all other Loan Documents ("Default"): (a) Nonpayment. Any payment or reimbursement due or demanded under this Agreement or any Loan Document is not made within five days of the date when due; (b) Breach of Warranty. Any representation or warranty made in connection with this Agreement or any other Loan Document, or any certificate, notice, or report furnished pursuant hereto, is determined by Bank to be false in any respect when made, and is relied upon by Bank to its detriment; (c) Failure to Perform. Any other term, covenant, or agreement contained in any Loan Document is not performed or satisfied, and, if remediable, such failure continues unremedied for 30 days after written notice thereof has been given to Borrower by Bank; (d) Defaults on Other Obligations. There exists a default in the performance of any other agreement or obligation for the payment of borrowed money, for the deferred purchase price of property or services, or for the payment of rent under any lease, if all such obligations in default, when taken together, exceed $500,000; (e) Loss, Destruction, or Condemnation of Property. A material portion of Borrower's property is affected by any uninsured loss, damage, destruction, theft, sale, or encumbrance other than created herein or is condemned, seized, or appropriated, the effect of which materially impairs Borrower's financial condition or its ability to pay its debts as they come due; (f) Attachment Proceedings and Insolvency. Borrower or any of Borrower's property is affected by any: (i) Judgment lien, execution, attachment, garnishment, general assignment for the benefit of creditors, sequestration, or forfeiture, to the extent Borrower's financial condition or its ability to pay its debts as they come due is thereby materially impaired; or (ii) Proceeding under the laws of any jurisdiction relating to receivership, insolvency, or bankruptcy, whether brought voluntarily or involuntarily by or against Borrower, including, without limitation, any reorganization of assets, deferment or arrangement of debts, or any similar proceeding, and, if such proceeding is involuntarily brought against Borrower, it is not dismissed within 60 days; (g) Judgments. Final judgment on claims not covered by insurance which, together with other outstanding final judgments against Borrower, exceeds $100,000, is rendered against Borrower and is not discharged, vacated, or reversed, or its execution stayed pending appeal, within 60 days after entry, or is not discharged within 60 days after the expiration of such stay; or (h) Government Approvals. Any governmental approval, registration, or filing with any governmental authority, now or later required in connection with the performance by Borrower of its obligations under the Loan Documents, is revoked, withdrawn, or withheld, or fails to remain in full force and effect, except Borrower shall have 60 days after notice of any 17 such event to take whatever action is necessary to obtain all necessary approvals, registrations, and filings. 8.2 REMEDIES UPON DEFAULT. If any Default occurs and is continuing, Bank may at its option, by notice to Borrower: (a) Terminate Commitments. Refuse to make further Advances; (b) Accelerate. Declare the Revolving Note, together with all accrued interest, to be immediately due and payable without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by Borrower; (c) Setoff. Exercise its right of setoff against deposit accounts of Borrower with Bank; and/or (d) All Remedies. Pursue all available legal and equitable remedies. All of Bank's rights and remedies in all Loan Documents shall be cumulative and can be exercised separately or concurrently. 8.3 ALLEGED DEFAULT BY BANK. In the event that Borrower at any time concludes that Bank has defaulted in any respect under this Agreement or any of the Loan Documents, Borrower shall promptly give notice thereof to Bank and provide Bank with a period of not less than 30 days in which to cure such alleged default; provided, however, that in no event shall this Section 8.3 or the Borrower's giving such notice to Bank extend the time period(s) granted to the Borrower to cure any Default under Section 8.1(c). Failure of the Borrower to provide such notice to Bank shall waive the Borrower's right to assert a claim against Bank for such alleged default. ARTICLE 9 MISCELLANEOUS 9.1 MANNER OF PAYMENTS. (a) Payments on Nonbusiness Days. Whenever any event is to occur or any payment is to be made under any Loan Document on any day other than a Business Day, such event may occur or such payment may be made on the next succeeding Business Day and such extension of time shall be included in computation of interest in connection with any such payment. (b) Payments. All payments and prepayments to be made by Borrower shall be made to Bank when due, at Bank's office as may be designated by Bank, without offsets or counterclaims for any amounts claimed by Borrower to be due from Bank, in U.S. dollars and in immediately available funds. (c) Application of Payments. All payments made by Borrower shall be applied first against fees, expenses, and indemnities due; second, against interest due; and third, against principal, with Bank having the right, after a Default which is continuing, to apply any payments or collections received against any one or more of the Obligations in any manner which Bank may choose. (d) Recording of Payments. Bank is authorized to record on a schedule or computer-generated statement the date and amount of each Advance, all conversions between interest rate options, and all payments of principal and interest. All such schedules or statements shall constitute prima facie evidence of the accuracy of the information so 18 recorded, with Borrower to have 10 days from receipt of any such schedule or statement to object to the calculations therein. 9.2 NOTICES. Bank may make Advances and conversions between interest rates based on telephonic, telex, and oral requests made by any Person whom Bank in good faith believes to be authorized to act on behalf of Borrower. All other notices, demands, and other communications to be given pursuant to any of the Loan Documents shall be in writing and shall be deemed received the earlier of when actually received, or two days after being mailed, postage prepaid and addressed as follows, or as later designated in writing: Bank: Borrower: SEAFIRST BANK EXPEDITORS INTERNATIONAL Northwest National Division OF WASHINGTON, INC 701 Fifth Ave., 12th Floor 999 Third Avenue, Suite 2500 Seattle, Washington 98104 Seattle, Washington 98104 Attention: Stanley S. Diddams Attention: R. Jordan Gates 9.3 COLLECTION EXPENSES. The nonprevailing party shall pay, reimburse, and indemnify the prevailing party for all of its costs, expenses, and reasonable attorneys' fees (including the allocated cost of in-house counsel) incurred in connection with any controversy or claim between Bank and Borrower, arising from or relating to this Agreement or any of the other Loan Documents, or arising from an alleged tort relating to the transactions reflected in the Agreement, whether or not suit is brought or arbitration commenced, and including any costs, expenses, and attorneys' fees incurred in any bankruptcy or arbitration proceeding, or in the course of exercising any judicial or nonjudicial remedies. 9.4 WAIVER. No failure to exercise and no delay in exercising any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power, or privilege. Further, no waiver or indulgence by Bank of any Default shall constitute a waiver of Bank's right to declare a subsequent similar failure or event to be a Default. 9.5 ASSIGNMENT. This Agreement is made expressly for the sole benefit of Borrower and for the protection of Bank and its successors and assigns. The rights of Borrower hereunder shall not be assignable by operation of law or otherwise, without the prior written consent of Bank. 9.6 MERGER. The rights and obligations set forth in this Agreement shall not merge into or be extinguished by any of the Loan Documents, but shall continue and remain valid and enforceable. This Agreement and the other Loan Documents constitute Bank's entire agreement with Borrower, and supersede all prior writings and oral negotiations. No oral or written representation, covenant, commitment, waiver, or promise of either Bank or Borrower shall have any effect, whether made before or after the date of this Agreement, unless contained in this Agreement or another Loan Document, or in an amendment complying with Section 9.7. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. 9.7 AMENDMENTS. Any amendment or waiver of, or consent to any departure by Borrower from any provision of, this Agreement shall be in writing signed by each party to be bound thereby, and shall be effective only in the specific instance and for the specific purpose for which given. 19 9.8 MANDATORY ARBITRATION. (a) At the request of either Bank or Borrower, any controversy or claim between Bank and Borrower, arising from or relating to this Agreement or any of the other Loan Documents, or arising from an alleged tort, shall be settled by arbitration in Seattle, Washington. The United States Arbitration Act shall apply even though this Agreement is otherwise governed by Washington law. The proceedings shall be administered by the American Arbitration Association under its commercial rules of arbitration. Any controversy over whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction over the parties. The institution and maintenance of an action for judicial relief or pursuit of an ancillary or provisional remedy shall not constitute a waiver of the right of either party, including the plaintiff, to submit the controversy or claim to arbitration if such action for judicial relief is contested. For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this subsection is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this subsection is subject to any applicable statute of limitations. The arbitrator(s) will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. The parties consent to the joinder of any guarantor, hypothecator, or other party having an interest relating to the claim or controversy being arbitrated in any proceedings under this Section. (b) Notwithstanding the provisions of subsection 9.8(a), no controversy or claim shall be submitted to arbitration without the consent of all parties if at the time of the proposed submission, such controversy or claim arises from or relates to an obligation secured by real property. (c) No provision of this subsection shall limit the right of Borrower or Bank to exercise self-help remedies such as set-off, foreclosure, retention or sale of any collateral, or obtaining any ancillary, provisional, or interim remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration proceeding. The exercise of any such remedy does not waive the right of either party to request arbitration. 9.9 CONSTRUCTION. Each term of this Agreement and each Loan Document shall be binding to the extent permitted by law and shall be governed by the laws of the State of Washington, excluding its conflict of laws rules. If one or more of the provisions of this Agreement should be invalid, illegal, or unenforceable in any respect, the remaining provisions of this Agreement shall remain effective and enforceable. If there is a conflict among the provisions of any Loan Documents, the provisions of this Agreement shall be controlling. The captions and organization of this Agreement are for convenience only, and shall not be construed to affect any provision of this Agreement. DATED as of the 31st day of March, 1997. Borrower: Bank: EXPEDITORS INTERNATIONAL SEAFIRST BANK OF WASHINGTON, INC. BY BY /s/ Stan Diddams ----------------------------- -------------------------------- TITLE TITLE Vice President --------------------------- ---------------------------- 20 EXHIBIT A TO CREDIT AGREEMENT DUE: March 30, 1998 REVOLVING NOTE EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. $30,000,000.00 Dated: March 31, 1997 Seattle, Washington EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. ("Maker") unconditionally promises to pay to the order of Bank of America National Trust and Savings Association, doing business as SEAFIRST BANK ("Bank") at its Northwest National Division office, on or before March 30, 1998, in immediately available funds, the principal sum of Thirty Million Dollars ($30,000,000.00), or such lesser sum as may be advanced hereunder, together with interest on the daily unpaid principal balance from the date of each Advance until paid in full in accordance with the terms, conditions, and definitions of the Credit Agreement dated as of March 31, 1997 ("Agreement") between Maker, as Borrower, and Bank. This Note is the Revolving Note referred to in the Agreement, and the Agreement is incorporated herein. Also incorporated herein is Exhibit 1 attached hereto, regarding prepayment fees. If all or any portion of the principal amount or any installment of interest is not paid when due, and such default is not cured within the applicable grace, notice, and/or cure periods provided for in the Agreement, the entire unpaid principal amount of this Note, together with all accrued interest, shall become immediately due and payable at the option of the holder hereof, with interest accruing from the date of default at a fluctuating rate per annum equal to three percent (3%) above the Reference Rate, as it may vary from time to time. Advances under this Note may be made by Bank at the oral or written request of R. Jordan Gates or Charles J. Lynch, any one acting alone, who are authorized to request Advances and direct the disposition of any such Advances until written notice of the revocation of such authority is received by Bank at its office indicated above. Any such Advance shall be conclusively presumed to have been made to or for the benefit of Maker when made in accordance with such requests and directions, or when said Advances are deposited to the credit of an account of Maker with Bank, regardless of the fact that persons other than those authorized under this paragraph may have authority to draw against such account. Except as otherwise expressly set forth in the Agreement, Maker hereby waives presentment, demand, protest, and notice of dishonor hereof. Each party signing or endorsing this Note signs as maker and principal, and not as guarantor, surety, or accommodation party; and is estopped from asserting any defense based on any capacity other than maker or principal. This Note shall be governed by and construed in accordance with the laws of the State of Washington. EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. BY DO NOT SIGN ---------------------------- TITLE SPECIMEN ONLY ------------------------- 21 Exhibit 1--PREPAYMENT FEES If the principal balance of this note is prepaid in whole or in part, whether by voluntary prepayment, operation of law, acceleration or otherwise, a prepayment fee, in addition to any interest earned, will be immediately payable to the holder of this note. The amount of the prepayment fee depends on the following: (1) The amount by which interest reference rates as defined below have changed between the time the loan is prepaid and either a) the time the loan was made for fixed rate loans, or b) the time the interest rate last changed (repriced) for variable rate loans. (2) A prepayment fee factor (see "Prepayment Fee Factor Schedule" on reverse). (3) The amount of principal prepaid. If the proceeds from a CD or time deposit pledged to secure the loan are used to prepay the loan resulting in payment of an early withdrawal penalty for the CD, a prepayment fee will not also be charged under the loan. DEFINITION OF PREPAYMENT REFERENCE RATE FOR VARIABLE RATE LOANS The "Prepayment Reference Rate" used to represent interest rate levels for variable rate loans shall be the index rate used to determine the rate on this loan having maturities equivalent to the remaining period to interest rate change date (repricing) of this loan rounded upward to the nearest month. The "Initial Prepayment Reference Rate" shall be the Prepayment Reference Rate at the time of last repricing and a new Initial Prepayment Reference Rate shall be assigned at each subsequent repricing. The "Final Prepayment Reference Rate" shall be the Prepayment Reference Rate at the time of prepayment. DEFINITION OF PREPAYMENT REFERENCE RATE FOR FIXED RATE LOANS The "Prepayment Reference Rate" used to represent interest rate levels on fixed rate loans shall be the bond equivalent yield of the average U.S. Treasury rate having maturities equivalent to the remaining period to maturity of this loan rounded upward to the nearest month. The "Initial Prepayment Reference Rate" shall be the Prepayment Reference Rate at the time the loan was made. The "Final Prepayment Reference Rate" shall be the Prepayment Reference Rate at time of prepayment. The Prepayment Reference Rate shall be interpolated from the yields as displayed on Page 119 of the Dow Jones Telerate Service (or such other page or service as may replace that page or service for the purpose of displaying rates comparable to said U.S. Treasury rates) on the day the loan was made (Initial Prepayment Reference Rate) or the day of prepayment (Final Prepayment Reference Rate). An Initial Prepayment Reference Rate of N/A % has been assigned to this ------- loan to represent interest rate levels at origination. CALCULATION OF PREPAYMENT FEE If the Initial Prepayment Reference Rate is less than or equal to the Final Prepayment Reference Rate, there is no prepayment fee. If the Initial Prepayment Reference Rate is greater than the Final Prepayment Reference Rate, the prepayment fee shall be equal to the difference between the Initial and Final Prepayment Reference Rates (expressed as a decimal), multiplied by the appropriate factor from the Prepayment Fee Factor Schedule, multiplied by the principal amount of the loan being prepaid. Form 51-6325: Page 1 of 2 22 EXAMPLE OF PREPAYMENT FEE CALCULATION Variable Rate Loan: A non-amortizing 6-month LIBOR based loan with principal of $250,000 is fully prepaid with 3 months remaining until next interest rate change date (repricing). An Initial Prepayment Reference Rate of 7.0% was assigned to the loan at last repricing. The Final Prepayment Reference Rate (as determined by the 3-month LIBOR index) is 6.5%. Rates therefore have dropped 0.5% since last repricing and a prepayment fee applies. A prepayment fee factor of 0.31 is determined from Table 3 below and the prepayment fee is computed as follows: Prepayment Fee = (0.07 -- 0.065) x (0.31) x ($250,000) = $387.50 Fixed Rate Loan: An amortizing loan with remaining principal of $250,000 is fully prepaid with 24 months remaining until maturity. An Initial Prepayment Reference Rate of 9.0% was assigned to the loan when the loan was made. The Final Prepayment Reference Rate (as determined by the current 24-month U.S. Treasury rate on Page 119 of Telerate) is 7.5%. Rates therefore have dropped 1.5% since the loan was made and a prepayment fee applies. A prepayment fee factor of 1.3 is determined from Table 1 below and the prepayment fee is computed as follows: Prepayment Fee = (0.09 -- 0.075) x (1.3) x ($250,000) = $4,875 PREPAYMENT FEE FACTOR SCHEDULE TABLE I: FULLY AMORTIZING LOANS
PROPORTION OF REMAINING PRINCIPAL AMOUNT BEING PREPAID MONTHS REMAINING TO MATURITY/REPRICING1 - ------------------------------------------------------------------------------------------------------------- 0 3 6 9 12 24 36 48 60 84 120 240 360 - ------------------------------------------------------------------------------------------------------------- 90-100%... 0 .21 .36 .52 .67 1.3 1.9 2.5 3.1 4.3 5.9 10.3 13.1 60-89%.... 0 .24 .44 .63 .83 1.6 2.4 3.1 3.9 5.4 7.5 13.2 17.0 30-59%.... 0 .28 .53 .78 1.02 2.0 3.0 4.0 5.0 7.0 9.9 18.5 24.4 0-29%..... 0 .31 .63 .92 1.22 2.4 3.7 5.0 6.3 9.0 13.4 28.3 41.8
TABLE II: PARTIALLY AMORTIZING (BALLOON) LOANS
PROPORTION OF REMAINING PRINCIPAL AMOUNT BEING PREPAID MONTHS REMAINING TO MATURITY/REPRICING1 - ------------------------------------------------------------------------------------------------------------- 0 3 6 9 12 24 36 48 60 84 120 240 360 - ------------------------------------------------------------------------------------------------------------- 90-100%... 0 .26 .49 .71 .94 1.8 2.7 3.4 4.2 5.6 7.4 11.6 14.0 60-89%.... 0 .30 .59 .86 1.15 2.2 3.3 4.3 5.3 7.1 9.4 15.0 18.1 30-59%.... 0 .31 .63 .95 1.27 2.6 3.9 5.3 6.6 9.1 12.6 21.2 26.2 0-29%..... 0 .31 .63 .95 1.27 2.6 4.0 5.4 7.0 10.2 15.7 33.4 46.0
ABLE III: NONAMORTIZING (INTEREST ONLY) LOANS
PROPORTION OF REMAINING PRINCIPAL AMOUNT BEING PREPAID MONTHS REMAINING TO MATURITY/REPRICING1 - ------------------------------------------------------------------------------------------------------------- 0 3 6 9 12 24 36 48 60 84 120 240 360 - ------------------------------------------------------------------------------------------------------------- 0-100%... 0 .31 .61 .91 1.21 2.3 3.4 4.4 5.3 6.9 8.9 13.0 14.8
(1) For the remaining period to maturity/repricing between any two maturities/repricings shown in the above schedules, interpolate between the corresponding factors to the closest month. The holder of this note is not required to actually reinvest the prepaid principal in any U.S. Government Treasury Obligations, or otherwise prove its actual loss, as a condition to receiving a prepayment fee as calculated above. Form 51-6325: Page 2 of 2 23 EXHIBIT B TO CREDIT AGREEMENT [Form of Certificate to be sent with financial reports] [Date] Seafirst Bank Northwest National Division 701 Fifth Ave., 12th Floor Seattle, Washington 98104 Attention: Stan Diddams Re: Certificate of Chief Financial Officer Ladies and Gentlemen: With respect to that certain Credit Agreement between Expeditors International of Washington, Inc. ("Borrower") and Bank of America National Trust and Savings Association, doing business as Seafirst Bank ("Bank") dated March 31, 1997 (the "Agreement"), we hereby represent to you the following (capitalized terms used in this certificate shall have the same meaning as in the Agreement): 1. Enclosed are financial statements required by Section 6.5 of the Agreement. 2. As of the date of such financial statements, Borrower's Tangible Net Worth is $ . --------- 3. As of the date of such financial statements, Borrower's ratio of Current Assets to Current Liabilities is . ------ 4. As of the date of such financial statements, Borrower's ratio of Debt to Tangible Net Worth is . ----- 5. Such financial statements are complete and correct, fairly present, without qualification, the financial condition of Borrower for such period, and are prepared in accordance with GAAP; 6. No Default exists, nor any event which, with lapse of time or upon the giving of notice would constitute a Default under the Agreement. SINCERELY, EXPEDITORS INTERNATIONAL OF WASHINGTON, INC. By ----------------------------------- Chief Financial Officer 24 EX-11.1 5 EXHIBIT 11.1 STMT.RE:COMP/PER SHARE NET EARNINGS EXHIBIT 11.1 Statement Re: Computation of Per Share Net Earnings Net earnings per weighted average common share is computed using the weighted average number of common shares and common share equivalents outstanding during each period presented. Common share equivalents represent stock options. Fully diluted earnings per share do not differ materially from primary earnings per share. 25 EX-21.1 6 EXHIBIT 21.1 SUB. OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
STATE OR COUNTRY OF SUBSIDIARY (1)(2)(3) ORGANIZATION - ---------------------------------------------- ------------------ E.I. Freight SDN. BHD......................... Malaysia EI Freight Forwarding (Thailand) Limited (4)......................................... Thailand EI Freight (H.K.) Limited (5)................. Hong Kong EI Freight (Taiwan) Ltd....................... Republic of China EI Freight (U.S.A.), Inc...................... Illinois EI Holdings, Ltd. (6)......................... Thailand EIF SDN. BHD. (7)............................. Malaysia Expeditors Canada, Inc........................ Canada Expeditors Chile Transportes Internacionales Limitada.................................... Chile Expeditors Finland Oy......................... Finland Expeditors International...................... Saudi Arabia Expeditors International B.V.................. Netherlands Expeditors International de Mexico, S.A. de C.V......................................... Mexico Expeditors International do Brasil Ltda....... Brazil Expeditors International Espana, S.A.......... Spain Expeditors International GmbH................. Germany Expeditors International Italia S.r.l......... Italy Expeditors International N.V.................. Belgium Expeditors International Ocean, Inc........... Delaware Expeditors International Pty. Limited......... Australia Expeditors International SA (Proprietary) Limited..................................... South Africa Expeditors International Sverige AB........... Sweden Expeditors International (Korea) Company, Ltd......................................... South Korea Expeditors International (NZ) Ltd............. New Zealand Expeditors International (Puerto Rico) Inc.... Puerto Rico Expeditors International (UK) Limited......... England Expeditors Sarah International Co. (8)........ Egypt Expeditors Speditions GmbH (9)................ Austria Expeditors (China) Investment Co. Pte. Ltd. (10)........................................ Singapore Expeditors (Portugal)Transitarios Internacionais Lda. (11).................... Portugal Expeditors (Singapore) Private Limited........ Singapore Heik Liquid Limited (12)...................... Hong Kong P.T. Lancar Utama Tatnusa..................... Indonesia P.T. Lancarpratma Intercargo.................. Indonesia E.I. Freight Lanka (Pte) Ltd.................. Sri Lanka Expeditors International France, SAS.......... France Seasky Express Limited........................ Ireland Expeditors (Bangladesh), Ltd.................. Bangladesh Expeditors International Pakistan Pvt. Ltd. (13)........................................ Pakistan Expeditors International (India) Pvt. Ltd..... India
- ------------------------ (1) For purposes of this list, if the Company owns directly or indirectly a controlling interest in the voting securities of any entity or if the Company has unilateral control over the assets and operations of any entity, such entity is deemed to be a subsidiary. Except as otherwise noted, the Company has 100% controlling interest in subsidiary operations. With respect to certain companies, shares of voting securities in the names of nominees and qualifying shares in the names of directors are included in Company's ownership percentage. (2) Except as otherwise noted, each subsidiary does business in its own name and in the name of the Company. 26 (3) The names of other subsidiaries have been omitted from the above list since considered in the aggregate, they would not constitute a significant subsidiary. (4) Dual ownership; of the 100%, 49% is owned by the Company and 51% is owned by EI Holdings, Ltd. (5) Second tier subsidiary. (6) Dual ownership; of the 100%, 56% is owned by the Company and 44% is owned by EI Freight Forwarding (Thailand) Limited. (7) Dual ownership; of the 100%, 53.33% is owned by the Company and 46.67% is owned by E.I. Freight SDN. BHD. (8) Company has 75% controlling interest in subsidiary. (9) Company has 85% controlling interest in subsidiary. (10) Operates in Beijing as Beijing Kang Jie Kong Cargo Agent Co., Ltd./E.I., in Shanghai as EI Freight (Co.) Ltd. and in Shenzhen as Shenzhen Yige Freight Warehouse Co. Ltd. (11) Company has 80% controlling interest in subsidiary. (12) Operates as Expeditors Overseas Management and EOM. (13) Company has 75% controlling interest in subsidiary. 27 EX-23 7 EXH 23 CONSENT OF INDEPEND.CERT.PUBLIC ACCTS. EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Expeditors International of Washington, Inc.: We consent to incorporation by reference in the registration statements (No. 33-17219, No. 33-22992, No. 33-36392, No. 33-38075, No. 33-67066 and No. 33-81460) on Form S-8 of Expeditors International of Washington, Inc. of our report dated February 14, 1997, relating to the consolidated balance sheets of Expeditors International of Washington, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996 and the related schedule, which report appears in the December 31, 1996 Annual Report on Form 10-K of Expeditors International of Washington, Inc. KPMG PEAT MARWICK LLP /s/ KPMG Peat Marwick LLP Seattle, Washington March 31, 1997 28 EX-27 8 EXH 27 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet at December 31, 1996 and consolidated statement of income for the year 1996 and the related notes to these consolidated financial statements that are contained in the Company's 1996 Annual Report on Form 10-K and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1996 DEC-31-1996 36,966 357 173,810 5,047 0 215,443 93,152 28,368 271,986 131,975 0 0 0 242 139,769 271,986 0 730,088 0 527,753 164,910 0 163 39,584 15,321 0 0 0 0 24,263 .95 .95
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