UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 28, 1999
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 0-20548
FRITZ COMPANIES, INC.
Delaware 94-3083515
(State of incorporation or organization) (IRS Employer Identification Number)
706 Mission Street, Suite 900, San Francisco, California 94103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 904-8360
Not applicable
(Former name, former address and former fiscal year if changed from last report)
<TABLE>
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.[X] Yes [ ] No
As of March 25, 1999 there were 36,292,217 shares of common stock outstanding.
----------
<PAGE>
FRITZ COMPANIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Independent Accountants' Review Report 3
Condensed Consolidated Balance Sheets as of February 28, 1999
and May 31, 1998 4
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended February 28, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Market Risk Disclosure 14
PART II. OTHER INFORMATION 14
SIGNATURES 15
EXHIBIT INDEX 16
<PAGE>
Independent Accountants' Review Report
Board of Directors and Stockholders
Fritz Companies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet
of Fritz Companies, Inc. and subsidiaries (the Company) as of February
28, 1999, the related condensed consolidated statements of operations
for the three and nine month periods ended February 28, 1999 and 1998
and the condensed consolidated statement of cash flows for the nine
month periods ended February 28,1999 and 1998. These condensed
consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Fritz Companies,
Inc. and subsidiaries as of May 31, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated June
30, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of May 31, 1998,
is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derive
/S/
KPMG LLP
San Francisco, California
March 25, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
FRITZ COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
<CAPTION>
February 28, May 31,
1999 1998
---------------- -------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 59,675 $ 53,935
Accounts receivable, net of allowance for doubtful
accounts of $24,603 in February and $23,232 in May 1998 383,294 406,381
Deferred income taxes 19,930 16,978
Prepaid expenses and other assets 19,055 23,142
--------------- --------------
Total current assets 481,954 500,436
--------------- --------------
PROPERTY AND EQUIPMENT, NET 98,808 92,049
--------------- --------------
OTHER ASSETS:
Intangibles, net of accumulated amortization of $20,092
in February and $16,866 in May 1998 111,741 112,965
Other assets 22,801 16,948
--------------- --------------
Total other assets 134,542 129,913
--------------- --------------
TOTAL ASSETS $ 715,304 $ 722,398
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations and short-term
borrowings $ 4,671 $ 4,764
Accounts payable 261,954 266,863
Accrued liabilities 72,491 74,880
Income tax payable 11,406 12,394
--------------- --------------
Total current liabilities 350,522 358,901
LONG-TERM OBLIGATIONS 87,606 101,346
DEFERRED INCOME TAXES 2,172 1,585
OTHER LIABILITIES 10,112 10,238
--------------- --------------
TOTAL LIABILITIES 450,412 472,070
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock: par value $.01 per share; 60,000 shares
authorized, 36,292 shares issued and outstanding, (35,896
shares issued and outstanding as of May 31, 1998) 363 359
Additional paid-in capital 137,063 131,797
Retained earnings 143,256 130,985
Treasury stock (174) ----
Accumulated other comprehensive income (15,616) (12,813)
--------------- --------------
Total stockholders' equity 264,892 250,328
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 715,304 $ 722,398
=============== ==============
</TABLE>
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
FRITZ COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended February 28, Nine Months Ended February 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUE $ 317,553 $ 307,210 $ 1,041,828 $ 977,520
FREIGHT CONSOLIDATION COSTS 182,639 174,928 608,052 560,835
-------------- ------------ ------------- --------------
NET REVENUE 134,914 132,282 433,776 416,685
-------------- ------------ ------------- --------------
OPERATING EXPENSES
Salaries and related costs 85,474 81,336 255,392 244,805
General and administrative 52,433 49,274 156,543 152,939
-------------- ------------ ------------- --------------
Total operating expenses 137,907 130,610 411,935 397,744
-------------- ------------ ------------- --------------
INCOME (LOSS) FROM OPERATIONS (2,993) 1,672 21,841 18,941
OTHER (EXPENSE) INCOME (1,357) 1,478 (3,797) 657
-------------- ------------ -------------- --------------
INCOME (LOSS) BEFORE TAX EXPENSE (4,350) 3,150 18,044 19,598
INCOME TAX EXPENSE (BENEFIT) (1,392) 514 5,774 6,271
-------------- ------------ ------------- --------------
NET INCOME (LOSS) $ (2,958) $ 2,636 $ 12,270 $ 13,327
============== ============ ============= ==============
Weighted average shares outstanding - Basic 36,277 35,818 36,144 35,756
============== ============ ============= ==============
Earnings (loss) per share - Basic $ (.08) $ .07 $ .34 $ .37
============== ============ ============= ==============
Weighted average shares outstanding - Diluted 36,396 36,308 36,293 36,144
============== ============ ============= ==============
Earnings (loss) per share - Diluted $ (.08) $ .07 $ .34 $ .37
============== ============ ============= ==============
</TABLE>
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
-----------------------------------------
February 28, February 28,
1999 1998
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 12,270 $ 13,327
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,072 20,136
Deferred income taxes (3,031) (6,629)
Stock compensation 1,432 3,398
Other 851 2,181
Effect of changes in:
Receivables 23,087 7,436
Prepaid expenses and other current assets 4,087 2,366
Payables and accrued liabilities (5,769) (4,136)
------------------ --------------------
Net cash provided by operating activities 52,999 38,079
------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (25,281) (16,275)
Acquisitions, new and contingent (1,426) (3,308)
Acquisitions, debt (1,538) (11,259)
Proceeds from sale of fixed assets 2,278 4,495
Purchase of Treasury Stock (174) ----
Other (7,659) (1,292)
------------------ --------------------
Net cash used in investing activities (33,800) (27,639)
------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations 8,390 10,254
Debt Repaid (20,231) (17,079)
Other 1,148 (320)
----------------- -------------------
Net cash used by financing activities (10,693) (7,145)
------------------ --------------------
Foreign currency translation effect on cash (2,766) (3,327)
------------------ --------------------
INCREASE IN CASH AND EQUIVALENTS 5,740 (32)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 53,935 43,368
----------------- -------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 59,675 $ 43,336
================= ===================
OTHER CASH FLOW INFORMATION:
Income taxes paid $ 10,863 $ 4,095
================= ===================
Interest paid $ 4,281 $ 5,074
================= ===================
</TABLE>
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements.
<PAGE>
FRITZ COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accompanying condensed consolidated financial statements of Fritz
Companies, Inc. and subsidiaries (the Company) for the three and nine
months ended February 28, 1999 and 1998 are unaudited and, in the opinion
of management, contain all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the results of
such periods. Certain prior year amounts have been reclassified to conform
to the current year's financial statement presentation.
The significant accounting policies followed by the Company are
described in Note 1 to the audited consolidated financial statements for
the year ended May 31, 1998. In accordance with SEC regulations, certain
information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted for the purposes of
the condensed consolidated interim financial statements. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements, including the notes thereto, for the
year ended May 31, 1998 included in the Company's Form 10-K filed on July
15, 1998. The results of operations for the nine months ended February 28,
1999 may not necessarily be indicative of the results to be expected for
the full year.
Effective June 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting of comprehensive income and
its components in financial statements. Comprehensive income consists of
net income and other gains and losses affecting shareholders' equity that,
under generally accepted accounting principles, are excluded from net
income. For the Company, the components of comprehensive income consist of
foreign currency translation gains and losses.
The components of total comprehensive income for interim periods are
presented in the following table:
<TABLE>
Three Months Ended Nine Months Ended
1999 1998 1999 1998
----------- ----------- ---------- ----------
<CAPTION>
<S> <C> <C> <C> <C>
Net Income (Loss) $ (2,958) $ 2,636 $ 12,270 $ 13,327
Other comprehensive income (loss):
Foreign currency translation adjustment (2,468) (3,289) (2,803) (10,260)
---------- ----------- ---------- ----------
Total comprehensive income (loss) $ (5,426) $ (653) $ 9,467 $ 3,067
========= =========== ========== ==========
</TABLE>
During the three and nine month periods ended February 28, 1999 and
1998 the Company maintained its policy to reinvest the earnings of the
non-United States subsidiaries as a long-term commitment. Accordingly, the
"foreign currency translation adjustments" have not been adjusted for
United States taxes.
2. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for operating segments and related
disclosures about products, services, geographic areas and major customers.
The reporting requirements of this statement are effective for the
Company's fiscal year ended May 31, 1999. The effect of this statement will
be limited to the form and content of the Company's disclosures and is not
expected to impact the Company's results of operations, cash flow or
financial position.
<PAGE>
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP provides
guidance for accounting for the costs of computer software for internal use
whether developed or purchased. The Company's current policy follows the
provisions of this Statement of Position.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"), which provides guidance on the financial reporting of start-up and
organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The Company's current policy
follows the provisions of this Statement of Position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company is currently evaluating the
impact, if any, of SFAS No. 133 which is effective for all quarters of
fiscal years beginning after June 15, 1999.
3. COMMON STOCK
The increase in common stock issued and paid in capital was primarily
due to shares issued upon exercise of options, restricted stock grants and
issuance of shares under the employee stock purchase plan.
4. INCOME TAXES
Income tax expense for the nine month period ended February 28, 1999
consisted of approximately $8.8 million of current tax provision and $3.0
million of deferred tax benefit. The Company's expected global effective
tax rate for the year ended May 31, 1999 is 32%.
5. ACQUISITIONS
The Company recorded approximately $1.5 million and $5.5 million for
the nine months ended February 28, 1999 and 1998, respectively, of
additional purchase price adjustments relating to achievement of specified
net revenue or pre-tax income levels of certain prior acquisitions. At
February 28, 1999, the remaining maximum payments in connection with
acquisitions providing a contingent purchase price is approximately $2.2
million. There is no certainty these businesses will achieve the revenue or
profit levels to require these contingent payments.
6. CONTINGENCIES
The Company is party to routine litigation incident to its business,
primarily claims for goods lost or damaged in transit or improperly
shipped. Most of the lawsuits in which the Company is the defendant are
covered by insurance and are being defended by the Company's insurance
carriers.
In 1996, a total of six complaints were filed (three in federal court
and three in state court of California) against the Company and certain of
its then officers and directors, purporting to be brought on behalf of a
class of purchasers or holders of the Company's stock between August 28,
1995 and July 23, 1996. The complaints allege various violations of Federal
Securities law and California Corporate Securities law in connection with
prior disclosures made by the Company and seek unspecified damages.
<PAGE>
The three class action suits filed against the Company in state court
were dismissed with prejudice by the Superior Court of California for the
County of San Francisco on grounds the claims asserted under the California
Corporate Securities law and common law fraud were not legally tenable. One
of the dismissals has been reversed on appeal, permitting the plaintiff to
file an amended complaint. That amended complaint was dismissed with leave
to amend. A further amended complaint was filed and has been dismissed.
The three class action suits filed against the Company in federal court
were consolidated into one suit which was dismissed with prejudice, finding
that plaintiffs had not alleged any statement that was false and misleading
in violation of the federal securities laws. Plaintiffs have filed an
appeal with the Ninth Circuit Court of Appeals. That appeal is pending.
The Company is unable to predict the ultimate outcome of these suits
and it is possible the outcome could have a significant adverse impact on
the Company's future consolidated results of operations. However, the
Company believes the ultimate outcome of these matters will not have a
significant adverse impact on the Company's consolidated financial
position.
7. SUBSEQUENT EVENT
None.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion is applicable to the Company's financial
condition and results of operations for the three months and nine months
ended February 28, 1999 and 1998. See Note 1 of Notes to Condensed
Consolidated Financial Statements.
Results of Operations
The following table provides the revenue and net revenue in thousands
of dollars and percentages attributable to the Company's principal
logistics services during the periods indicated:
<TABLE>
Three Months Ended February 28, Nine Months Ended February 28,
1999 % 1998 % 1999 % 1998 %
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Customs brokerage $37,635 11.9 $38,802 12.6 $ 120,251 11.5 $ 121,658 12.4
Ocean freight forwarding 98,165 30.9 89,333 29.1 318,888 30.6 284,500 29.1
Airfreight forwarding 134,663 42.4 133,369 43.4 450,438 43.2 433,628 44.4
Warehousing and distribution 47,090 14.8 45,706 14.9 152,251 14.7 137,734 14.1
-------- ----- -------- ----- ---------- ----- -------- -----
Total revenue $317,553 100.0 $307,210 100.0 $1,041,828 100.0 $977,520 100.0
======== ===== ======== ===== ========== ===== ======== =====
NET REVENUE:
Customs brokerage $37,635 27.9 $38,802 29.3 $120,251 27.7 $121,658 29.2
Ocean freight forwarding 28,769 21.3 28,313 21.4 95,354 22.0 90,175 21.7
Airfreight forwarding 39,782 29.5 37,946 28.7 125,998 29.0 117,583 28.2
Warehousing and distribution 28,728 21.3 27,221 20.6 92,173 21.3 87,269 20.9
-------- ----- -------- ----- ---------- ----- -------- -----
Total net revenue $134,914 100.0 $132,282 100.0 $433,776 100.0 $416,685 100.0
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Three Months Ended February 28, 1999 Compared with Three Months Ended
February 28, 1998
Revenue and Net Revenue: For the three months ended February 28, 1999,
revenue increased 3.4% to $317.6 million from $307.2 million reported in
the prior year and net revenue increased 2.0% to $134.9 million from $132.3
million reported in the prior year. All of the Company's principal service
areas reported growth in revenue and net revenue, except customs brokerage
which had a small decline in both. The effect of translation rate changes
during the period adversely affected the growth rates of net revenue by
approximately one percentage point.
<PAGE>
Customs brokerage revenue decreased 3.0% to $37.6 million from $38.8
million reported in the prior year. This resulted from fewer numbers of
entries being processed in the quarter. In addition the number of United
States Customs entries filed by the Company now includes more informal
entries, which have a lesser effort and price, as a result of increased
dollar limits for such entries.
Ocean freight forwarding revenue increased 9.9% primarily due to
increased shipping volumes from existing customers, while net revenue
increased by 1.6%, The increase in ocean revenues was led by Non-Vessel
Operating Common Carrier (NVOCC) imports into the United States and Canada
from Europe and Asia. The revenue from ocean freight forwarding activities
declined during the quarter due to declines in U. S. exports. As a result,
gross margin (net revenue as a percentage of revenue) decreased from 31.7%
as reported in the prior year to 23.7%.
Airfreight forwarding revenue and net revenue increased 1.0% and 4.8%,
respectively. The rate of growth is slower because of soft markets in Asia,
Brazil and parts of Europe. Net revenue as a percentage of gross revenue
increased to 29.5% in this quarter as compared to 28.5% in the comparable
quarter of the prior year, due primarily to excess capacity and favorable
spot rate buying.
Warehousing and distribution revenue and net revenue increased 3.0% and
5.5%, respectively. The greatest growth was in the United States where new
customers, programs and increased volumes grew revenue in Seattle, Dallas,
Atlanta and Rochester. In addition, the growth in revenues and net revenues
was due to increased demand from existing integrated logistics customers,
expansion of overseas services, expansion of warehouse facilities and the
strong United States economy.
Operating Expenses: Operating expenses increased 5.6% to $137.9 million
from $130.6 million reported in the prior year. Salaries and related costs
increased due to higher labor costs associated with Year 2000 compliance
and the Company's new global transportation and financial systems and
higher medical insurance costs. Salaries and related costs as a percentage
of net revenue were 63.4% compared to 61.5% reported in the prior year.
General and administrative expenses increased 6.4% to $52.4 million
from $49.3 million reported in the prior year. The increase was mainly
attributable to supporting greater shipping volumes, higher occupancy
capacity costs, and an increase in information systems costs, particularly
due to work related to Year 2000 and the development and implementation of
the Company's new global operating system. General and administrative
expenses as a percentage of net revenue were 38.9% compared to 37.2%
reported in the prior year.
OtherIncome and Expense: Currency gains of $0.3 million were
made by certain international operations where trade accounts receivable
or payable were denominated in a currency other than the functional
currency compared to a currency gain of $2.9 million in the previous
year.Other expense mainly represents net interest expense of $1.3
million for the quarter.
Substantially all of the Company's services experienced some pressure
on prices and margins due to the competitive environment. The Company
continues to focus on improving productivity, efficiency and providing
value added customer service at competitive prices.
Nine Months Ended February 28, 1999 Compared with Nine Months Ended
February, 1998
Revenue and Net Revenue: For the nine months ended February 28, 1999
revenue increased 6.6% to $1041.8 million from $977.5 million reported in
the prior year and net revenue increased 4.1% to $433.8 million from $416.7
million reported in the prior year. All of the Company's principal service
areas reported growth in revenue and net revenue, except customs brokerage
which had a small decline. The effect of translation rate changes during
the period adversely affected the growth rates in net revenue by
approximately two percentage points.
<PAGE>
Customs brokerage revenue decreased 1.2% to $120.3 million from $121.7
million reported in the prior year. The number of United States Customs
entries filed by the Company remained flat at approximately 2.0 million.
Ocean freight forwarding revenue and net revenue increased 12.1% and
5.7%, respectively, due to increased shipping volumes from existing and new
customers. Gross margin decreased to 29.9% from 31.7% reported in the prior
year, due to competitive pressures.
Airfreight forwarding revenue and net revenue increased 3.9% and 7.2%,
respectively, due to increased shipments and total chargeable weight of
cargo shipped. The increase in the number of shipments was primarily due to
an increase in shipments with existing customers. Gross margin increased to
28.0% from 27.1% reported in the prior year. The increase in gross margin
was due to increased availability of lift from the U. S., lower fuel costs,
better utilization of gateways and favorable spot rate buying.
Warehousing and distribution revenue and net revenue increased 10.5%
and 5.6%, respectively, due to increased demand from existing integrated
logistic customers, continued expansion of overseas and domestic services
and expansion of warehouse facilities in Seattle, Dallas, Atlanta and
Rochester.
Operating Expenses: Operating expenses increased 3.6% to $411.9 million
from $397.7 million reported in the prior year. Salaries and related costs
increased primarily due to Year 2000 compliance and the Company's new
global transportation and financial systems and higher medical insurance
costs. Salaries and related costs as a percentage of net revenue were 58.9%
compared to 58.8% reported in the prior year.
General and administrative expenses increased 2.4% to $156.5 million
from $152.9 million reported in the prior year. General and administrative
expenses as a percentage of net revenue were 36.1% compared to 36.7%
reported in the prior year.
Other Income and Expense: Currency gains of $1.7 million were obtained
by certain international operations where trade accounts receivable or
payable were denominated in a currency other than the functional currency
compared to a currency gain of $5.8 million in the previous year. Other
expense mainly represents interest expense of $5.8 million for the nine
months
Liquidity and Capital Resources
The Company's cash and equivalents increased $5.7million to $59.7
million at February 28, 1999 from $53.9 million at May 31, 1998. Positive
operational cash flow of $53.0 million was used to fund capital
expenditures of $25.3 million resulting in free cash flow of $27.7 million.
Capital expenditures consisted mostly of expenditures for computer
hardware, building and leasehold improvements, and warehouse equipment.
Also, $13.8 million of the free cash flow was used to reduce debt during
the nine month period.
As of February 28, 1999, utilization of the syndicated multicurrency
credit facility (the Credit Facility) was $15.2 million, consisting of
outstanding letters of credit. Therefore, the Company's total available
borrowing capacity under the Credit Facility as of February 28, 1999 was
approximately $84.8 million.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act
of 1995:
In this document, the Company makes forward-looking statements that are
subject to risks and uncertainties. These forward-looking statements
include information about possible or assumed future results of our
operations. Also, when we use any of the words "believes", "expects",
"anticipates" or similar expressions, we are making forward-looking
statements. Many possible
<PAGE>
events or factors could affect the future financial results and performance
of the Company. This could cause results or performance to differ
materially from those expressed in our forward-looking statements. These
possible events or factors include those set forth in the "Risk Factors"
and "Year 2000" sections of this document.
Year 2000
Many computer systems, including some utilized by the Company, use only
two digits to represent the year in date fields. These systems may be
unable to accurately process certain data before, during, or after the year
2000. Business and governmental entities are at risk for possible
miscalculations or systems failures, possibly causing disruptions in their
business operations. This is commonly known as the Year 2000 (Y2K) issue.
The Company is reliant on its internal computer systems and
applications, located in numerous countries, to conduct its business as an
international freight forwarder, customs broker and logistics provider. The
Company is also reliant upon the external system capabilities of third
parties, with which the Company has major business relationships.
The key computer systems of the Company are its transportation (ocean
freight, airfreight and trucking), customs brokerage, warehousing
management, communications, marketing, and financial systems. The Company
has established a Y2K program management office to identify and resolve
specific Y2K issues and problems. A Y2K inventory, assessment, and plan of
action has been completed for all of the Company's global systems. The
Company plans to have all of its business systems Y2K compliant by June
1999.
The Company believes its greatest Y2K risk for disruption to its
business is the potential noncompliance of third parties. The Company
believes these third party risks are an inherent risk to the industry and
are not specific to the Company. As a result, the Company has initiated
communications with third parties (i.e. customers, vendors, governmental
agencies, etc.) around the world with whom the Company has material direct
and indirect business relationships. The Company is currently in the
process of contacting third parties in order to determine the extent to
which the Company's business is vulnerable to the third parties failure to
make their systems Y2K compliant. The contact involves questionnaires and
interviews with the intention to ascertain the level of readiness of the
Company's customers, carriers, ocean ports, airports, government agencies
and financial institutions. Most of the business partners that have
responded to the Company's inquiries indicate that they will be Y2K
compliant on a timely basis. U.S. Customs also indicates that their
critical systems have been fixed, tested and implemented. Year 2000 efforts
of Customs bureaus in other countries are being monitored and are varying
in scope and progress. The Company is continuing to gather information from
other important business partners. Despite written assurances, there are no
guarantees that the systems of other parties, on which the Company and its
competitors rely, will be compliant. These potential interruptions may have
a material adverse effect on the Company's operations.
Total costs to replace or modify the Company's business systems for Y2K
are currently estimated to be $7 million. However, there can be no
assurance that the costs to replace or modify the Company's business
systems will not exceed this estimate. As of February 28, 1999,
approximately $3 million has been spent on Y2K efforts. The cost estimates
include, but are not limited to, the cost of internal staff and outside
consultants who are working on modifying, upgrading and testing systems;
the Y2K project management office; new or upgraded software; and various
Y2K tools. These costs are being expensed as incurred. The expected funding
of all past and future Y2K expenses is anticipated to be paid through
internally generated cash flows from operations or borrowed funds. The
costs associated with the replacement of the selected international
stations' operating and financial systems are not included in the above
estimates. The cost of the replacement systems are being capitalized and
amortized in accordance with the Company's normal accounting policies as
Y2K compliance is an incidental benefit expected from these systems. The
primary reasons for installing these replacement systems include
productivity gains, improved customer service, improved operating
procedures, and controls.
<PAGE>
In the event that the Company's systems or the systems of those third
parties that have a material business relationship with the Company are not
Y2K compliant by January 1, 2000, the Company's business may be materially
affected. The possible consequences of noncompliance include, among other
things, the inability to provide services to certain areas of the world,
delays in product delivery, invoicing errors, and possible collection
difficulties. The Company may be required to shift portions of its daily
operations to manual processes and thus face time delays in its operations
as well as increased processing costs. In addition, the Company may not be
able to provide customers with timely and pertinent information regarding
their orders or shipments. This may negatively affect customer relations
and potentially lead to the loss of customers. The Company is unable to
estimate the potential financial impact of these scenarios. However, the
Company believes that its Y2K readiness program, including its contingency
plans, should help to reduce material adverse effects that such disruptions
may create.
As part of the Company's contingency planning, it has determined that
operating in a manual mode, for a limited time, is a workable alternative
with the exception of its U.S. customshouse brokerage system. The Company
is currently identifying and developing specific contingency plans intended
to mitigate the effects of possible Y2K disruptions. In the event of a Y2K
disruption resulting from a Company system or other third party system
failure, the Company believes it will be able to provide adequate resources
to successfully transition from automated systems processing to manual
processing. In addition, the Company will have the ability to engage
outside temporary labor. Also, the Company will secure alternate carriers
who are Y2K ready in order to continue to provide basic business services.
Risk Factors
The Company's worldwide operations are transacted in many currencies
other than the U.S. dollar. Accordingly, the Company is exposed to inherent
risks of international currency markets and governmental regulations. The
Company manages these currency exposures through a variety of means such as
hedging, conversion of other national currencies into U.S. dollars,
accelerating and decelerating international payments among the Company's
offices and agents. The Company's translation adjustment and foreign
exchange gains for the third quarter of fiscal 1999 increased due to the
strengthening of the U.S. dollar relative to certain currencies of Asia,
Europe and Latin America. The charge to equity in the currency translation
adjustment during the nine months ended February 28, 1999 was $2.8 million
while net foreign currency gains realized during the first nine months
ended February 28, 1999 were approximately $1.7 million. Devaluation of
foreign currencies could adversely impact the financial results of the
operations in future periods.
The Company's ability to provide service to its customers is highly
dependent on good working relationships with a variety of entities such as
airlines, steamship carriers and governmental agencies. Changes in space
allotments available from carriers, governmental deregulation efforts,
regulations governing the Company's products and/or the international trade
and tariff environment could affect the Company's business in unpredictable
ways.
Management believes the Company's business has not been adversely
affected by inflation in the past. Historically, the Company has generally
been successful in passing cost increases to its customers by means of
price increases. However, competitive marketplace conditions could impede
the ability to pass future cost increases to customers and could erode the
Company's operating margin.
<PAGE>
Additional risks and uncertainties include:
(i) The Company's ability to continue its improvement in operating results
and cash flow,
(ii) Dependence of the Company on internationaltrade and worldwide
economic conditions,
(iii) Dependence of the Company on the continued services of key executives
and managers,
(iv) Risks associated with the Company's acquisition strategy, including:
(a) Diversion of management's attention to the assimilation
of the operations and personnel of acquired companies,
(b) Potential adverse short-term effects of acquisitions on the
Company's operating results, and
(c) Integration of financial reporting systems and acquired
assets.
(v) The possible inability of the Company's information systems to
keep pace with the increasing complexity and growth of the Company's
business and Y2K issues,
(vi) The increasing level of investment required by the transition of the
Company from prior predominance of customs brokerage revenue to its
increasing emphasis on integrated logistics and providing a full range
of international transportation and supply chain management services,
(vii)Diversion of management focus and resources as a result of pending
litigation,
(viii) Other risks disclosed elsewhere in this Form 10-Q or in the
Company's other filings with the Securities and Exchange Commission.
Recent Accounting Pronouncements
See Note 2 of the Notes to Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
The Company's market capitalization as of January 28, 1997 did not exceed
$2.5 billion. Therefore, in accordance with the instructions to this item,
this item as part of this report is not applicable at this time.
PART II. OTHER INFORMATION
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15 Letter regarding unaudited interim financia information.
Edgar Filing Only
27 Financial Data Schedule. Edgar Filing Only.
(b) The Company filed a Form 8-K on March 2, 1999, announcing the appointment of
two key executives.
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRITZ COMPANIES, INC.
Registrant
Dated: March 31, 1999
/s/ Lynn C Fritz
Lynn C. Fritz
Chairman and Chief Executive Officer
/s/ Raymond L. Smith
Raymond L. Smith
Chief Operating Officer
/s/ Dennis L. Pelino
Dennis L. Pelino
President
/s/ Robert Arovas
Robert Arovas
Executive Vice President and
Chief Financial Office
/s/ Janice Washburn
Janice Washburn
Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
15 Letter regarding unaudited interim financial information 17
27 Financial Data Schedule 18
Re: Registration Statement NO. 33-78472, 33-57238, 33-93070, 333-15921 and
333-07639
With respect to the subject registration statement, we acknowledge our awareness
to the use therein of our report dated March 25, 1999 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the act.
S/S
KPMG LLP
San Francisco, California
March 31,1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000890662
<NAME> FRITZ COMPANIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 59,675
<SECURITIES> 0
<RECEIVABLES> 407,897
<ALLOWANCES> 24,603
<INVENTORY> 0
<CURRENT-ASSETS> 481,954
<PP&E> 191,558
<DEPRECIATION> 92,750
<TOTAL-ASSETS> 715,304
<CURRENT-LIABILITIES> 350,522
<BONDS> 0
0
0
<COMMON> 363
<OTHER-SE> 264,529
<TOTAL-LIABILITY-AND-EQUITY> 715,304
<SALES> 0
<TOTAL-REVENUES> 1,041,828
<CGS> 0
<TOTAL-COSTS> 1,019,987
<OTHER-EXPENSES> 3,797
<LOSS-PROVISION> 5,689
<INTEREST-EXPENSE> 6,237
<INCOME-PRETAX> 18,044
<INCOME-TAX> 5,774
<INCOME-CONTINUING> 12,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,270
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
