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 SEC
URITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SE
CURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-20548
FRITZ COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3083515
(State or other jurisdiction 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.)
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 November 30, 1998 there were 36,266,000 shares of common
stock outstanding.
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 November 30,
1998 and May 31, 1998 4
Condensed Consolidated Statements of Operations for the three
months and six months ended November 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the six
months ended November 30, 1998 and 1997 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 16
EXHIBIT INDEX 17
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 November 30, 1998, the related condensed consolidated
statements of operations for the three and six month periods
ended November 30, 1998 and 1997 and the condensed consolidated
statements of cash flows for the six month periods ended November 30,
1998 and 1997. 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 derived.
KPMG Peat Marwick LLP
San Francisco, California
December 21, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
<TABLE>
FRITZ COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
(Unaudited)
<CAPTION>
November 30, May 31,
1998 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 55,397 $ 53,935
Accounts receivable, net of allowance
for doubtful accounts of $23,560 in
November and $23,232 in May 1998 435,672 406,381
Deferred income taxes 17,197 16,978
Prepaid expenses and other assets 18,562 23,142
Total current assets 526,828 500,436
PROPERTY AND EQUIPMENT, NET 95,822 92,049
OTHER ASSETS:
Intangibles, net of accumulated
amortization of $18,992
in November and $16,866 May 1998 111,426 112,965
Other assets 18,188 16,948
Total other assets 129,614 129,913
TOTAL ASSETS $ 752,264 $ 722,398
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
obligations and short-term
borrowings $ 4,499 $ 4,764
Accounts payable 273,632 266,863
Accrued liabilities 76,569 74,880
Income tax payable 14,053 12,394
Total current liabilities 368,753 358,901
LONG-TERM OBLIGATIONS 101,052 101,346
DEFERRED INCOME TAXES 2,478 1,585
OTHER LIABILITIES 10,532 10,238
TOTAL LIABILITIES 482,815 472,070
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock: par value $.01 per
share; 60,000 shares authorized,
36,266 shares issued and outstanding,
(35,896 shares issued and outstanding
as of May 31, 1998) 363 359
Additional paid-in capital 136,195 131,797
Retained earnings 146,213 130,985
Treasury Stock (174) ----
Accumulated other comprehensive income (13,148) (12,813)
Total stockholders' equity 269,449 250,328
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 752,264 $ 722,398
</TABLE>
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements.
<TABLE>
FRITZ COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amount)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUE $ 381,946 $ 343,611 $ 724,271 $ 670,310
FREIGHT CONSOLIDATION COSTS 228,230 198,447 425,413 385,907
NET REVENUE 153,716 145,164 298,862 284,403
OPERATING EXPENSES
Salaries and related costs 85,636 83,410 169,918 163,469
General and administrative 53,077 51,208 104,110 103,665
Total operating expenses 138,713 134,618 274,028 267,134
INCOME FROM OPERATIONS 15,003 10,546 24,834 17,269
OTHER (EXPENSE) INCOME (2,427) 47 (2,440) (821)
INCOME BEFORE TAX EXPENSE 12,576 10,593 22,394 16,448
INCOME TAX EXPENSE 4,024 3,708 7,166 5,757
NET INCOME $ 8,552 $ 6,885 $ 15,228 $ 10,691
Weighted average shares 36,262 36,109 36,078 35,911
outstanding - Basic
Earnings per share - Basic $ .24 $ 0.19 $ .42 $ 0.30
Weighted average shares 36,277 36,216 36,170 36,020
outstanding - Diluted
Earnings per share - Diluted $ .24 $ 0.19 $ .42 $ 0.30
</TABLE>
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
November 30, November 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,228 $ 10,691
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 12,884 13,225
Deferred income taxes 533 (5,321)
Stock Compensation 917 749
Other (378) ----
Effect of changes in:
Receivables (29,291) (35,763)
Prepaid expenses and other 4,580 3,719
current assets
Payables and accrued liabilities 13,054 32,851
Net cash provided by operating 17,527 20,151
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,231) (13,239)
Acquisitions, new and contingent (710) (2,641)
Acquisitions, debt (1,463) (5,350)
Proceeds from sale of fixed assets 614 1,513
Purchase of Treasury Stock (174) ----
Other 337 (360)
Net cash used in investing activities (16,627) (20,077)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term 2,543 9,678
obligations
Decrease in short term borrowings ---- (4,695)
Debt Repaid (1,825) (1,996)
Other 869 430
Net cash provided by financing 1,587 3,417
activities
Foreign currency translation effect (1,025) (382)
on cash
INCREASE IN CASH AND EQUIVALENTS 1,462 3,109
CASH AND EQUIVALENTS AT BEGINNING OF 53,935 43,368
PERIOD
CASH AND EQUIVALENTS AT END OF PERIOD $ 55,397 $ 46,477
OTHER CASH FLOW INFORMATION:
Income taxes paid $ 6,091 $ 3,738
Interest paid $ 3,495 $ 3,917
</TABLE>
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements.
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 six months ended November 30, 1998 and 1997 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 six months ended
November 30, 1998 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>
<CAPTION>
Three Months Ended Six Months Ended
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $ 8,552 $ 6,885 $ 15,228 $ 10,691
Other comprehensive
income (loss):
Foreign currency
translation adjustment 781 (2,140) (335) (6,970)
Total comprehensive income $ 9,333 $ 4,745 $ 14,893 $ 3,721
</TABLE>
During the three and six month periods ended November 30, 1998 and
1997 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.
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. Although the provisions of the SOP are effective for
financial statements for the Company's fiscal year ended May 31,
1999 the Company's current policy follows these provisions. Adoption
of this SOP is not expected to materially impact the Company's
results of operations.
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
provisions of the SOP are effective for financial statements for the
Company's fiscal year ended May 31, 2000. Adoption of this SOP is not
expected to materially impact the Company's results of operations.
In September 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 September 15, 1998.
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 six month period ended November 30, 1998
consisted of approximately $6.7 million of current tax provision
and $ 0.5 million of deferred tax expense. The Company's expected
global effective tax rate for the year ended May 31, 1999 is 32%.
5. ACQUISITIONS
The Company recorded approximately $0.7 million and $5.1 million
for the six months ended November 30, 1998 and 1997, respectively,
of additional purchase price adjustments relating to achievement of
specified net revenue or pre-tax income levels of certain prior
acquisitions. At November 30, 1998, the remaining maximum payments
in connection with acquisitions providing a contingent purchase
price is approximately $2.9 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.
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 the Company has
moved for its dismissal. The Company's motion is pending.
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 six
months ended November 30, 1998 and 1997. 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>
<CAPTION>
Three Months Ended November 30,
1998 % 1997 %
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $ 40,778 10.7 $ 41,634 12.1
Ocean freight forwarding 112,807 29.5 97,712 28.4
Airfreight forwarding 172,313 45.1 157,003 45.7
Warehousing and distribution 56,048 14.7 47,262 13.8
Total revenue $ 381,946 100.0 $ 343,611 100.0
NET REVENUE:
Customs brokerage $ 40,778 26.5 $ 41,634 28.7
Ocean freight forwarding 35,039 22.8 31,641 21.8
Airfreight forwarding 45,804 29.8 41,546 28.6
Warehousing and distribution 32,095 20.9 30,343 20.9
Total net revenue $ 153,716 100.0 $ 145,164 100.0
Six Months Ended November 30,
1998 % 1997 %
REVENUE:
Customs brokerage $ 82,616 11.4 $ 82,856 12.4
Ocean freight forwarding 220,723 30.5 195,167 29.1
Airfreight forwarding 315,775 43.6 300,259 44.8
Warehousing and distribution 105,161 14.5 92,028 13.7
Total revenue $ 724,275 100.0 $ 670,310 100.0
NET REVENUE:
Customs brokerage $ 82,616 27.6 $ 82,856 29.1
Ocean freight forwarding 66,585 22.3 61,862 21.8
Airfreight forwarding 86,216 28.8 79,638 28.0
Warehousing and distribution 63,445 21.3 60,047 21.1
Total net revenue $ 298,862 100.0 $ 284,403 100.0
</TABLE>
Three Months Ended November 30, 1998 Compared with Three Months Ended
November 30, 1997
Revenue and Net Revenue: For the three months ended November 30,
1998, revenue increased 11.2% to $381.9 million from $343.6 million
reported in the prior year and net revenue increased 5.9% to $153.7
million from $145.2 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 of revenue and net revenue by
approximately 3.3 and 2.4 percentage points, respectively.
Customs brokerage revenue decreased 2.1% to $40.8 million from
$41.6 million reported in the prior year. The number of United
States Customs entries filed by the Company now includes more informal
entries as a result of increased dollar limits for such entries. In
certain portions of the customs brokerage business, price
competition remained strong resulting in downward pressure on prices.
Ocean freight forwarding revenue and net revenue increased 15.4%
and 10.7%, respectively, primarily due to increased shipping volumes
from existing customers. 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. Gross margin (net revenue as a
percentage of revenue) decreased to 31.1% from 32.4% reported in the
prior year. The decreases in margins resulted from rapidly
increasing transportation rates and shortages in outbound capacity.
Airfreight forwarding revenue and net revenue increased 9.8% and
10.2%, respectively, due to increased shipments and total
chargeable weight of cargo shipped. The increase in the number of
shipments was primarily from existing customers. Net revenue as a
percentage of gross revenue was steady at 26.6% in this quarter as
compared to 26.5% in the comparable quarter of the prior year.
Warehousing and distribution revenue and net revenue increased
18.6% and 5.8%, 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 and European economies.
Operating Expenses: Operating expenses increased 3.0% to $138.7
million from $134.6 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. Salaries and related costs
as a percentage of net revenue were 55.7% compared to 57.5%
reported in the prior year.
General and administrative expenses increased 3.6% to $53.1
million from $51.2 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 remediation. General and administrative expenses as a
percentage of net revenue were 34.5% compared to 35.3% reported in
the prior year.
Other Income and Expense: Currency losses of $0.1 million were
incurred by certain international operation where trade accounts
were denominated in U. S. Dollars as compared to a currency gain of
$1.7 million in the previous year. Other expense mainly represents
interest expense of $2.0 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.
Six Months Ended November 30, 1998 Compared with Six Months Ended
November 30, 1997
Revenue and Net Revenue: For the six months ended November 30,
1998, revenue increased 8.1% to $724.3 million from $670.3 million
reported in the prior year and net revenue increased 5.1% to $298.9
million from $284.4 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 revenue and net revenue by
approximately 4.4 and 3.1 percentage points, respectively.
Customs brokerage revenue decreased 0.3% to $82.6 million from
$82.9 million reported in the prior year. The number of United
States Customs entries filed by the Company increased approximately
2.6% to 1.4 million from 1.3 million for the same period in the
prior year. Competitive pricing pressures were partially offset by
the closure of non profitable stations and shifting the processing
to other locations.
Ocean freight forwarding revenue and net revenue increased 13.1%
and 7.6%, respectively, due to increased shipping volumes from
existing and new customers. Gross margin decreased to 30.2% from
31.7% reported in the prior year, due to competitive pressures.
Airfreight forwarding revenue and net revenue increased 5.2% and
8.3%, 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 27.3% from 26.5% reported in
the prior year. The increase in gross margin was due to ocean capacity
issues out of certain Asian countries, better utilization of gateways
and favorable spot rate buying.
Warehousing and distribution revenue and net revenue increased
14.3% and 5.7%, 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 2.6% to $274.0
million from $267.1 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.
Salaries and related costs as a percentage of net revenue were
56.9% compared to 57.5% reported in the prior year.
General and administrative expenses increased 0.4% to $104.1
million from $103.7 million reported in the prior year. General and
administrative expenses as a percentage of net revenue were 34.8%
compared to 36.5% reported in the prior year.
Other Income and Expense: Currency gains of $1.4 million were
obtained by certain international operations where trade accounts
were denominated in U. S. Dollars as compared to a currency gain of
$2.9 million in the previous year. Other expense mainly represents
interest expense of $3.8 million for the six months.
Liquidity and Capital Resources
The Company's cash and equivalents increased $1.5 million to $55.4
million at November 30, 1998 from $53.9 million at May 31, 1998.
Positive operational cash flow of $17.5 million was used to fund
capital expenditures of $15.2 million resulting in free cash flow
of $2.3 million. Capital expenditures consisted mostly of
expenditures for land, computer hardware, building and leasehold
improvements, and warehouse equipment. Free cash flow was
supplemented by $2.5 million in long-term financing to reduce
acquisition related debt by $1.5 million, short term debt by $1.8
million and $1.5 million for other purposes.
As of November 30, 1998, utilization of the syndicated
multicurrency credit facility (the Credit Facility) was $25.5
million, consisting of $12.2 million of borrowings and $13.3 million
and for outstanding letters of credit. Therefore, the Company's
total available borrowing capacity under the Credit Facility as of
November 30, 1998 was approximately $74.5 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 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, which the Company has major
business relationships.
The key computer systems of the Company are its transportation
(ocean freight, airfreight and trucking), custom 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 the Company's global systems.
The Company expects all of its business systems to be fully
Y2K compliant by June 1999, except for the Canadian systems, whose
final implementation and testing is expected to be completed by
August 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 have indicated 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. To date, the Company is still
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
relies 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 November 30,
1998, approximately $2 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 reason for installing these replacement systems include
productivity gains, improved customer service, improved operating
procedures, and controls.
In the event that the Company's systems or the systems of
those third parties, who 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. customs brokerage
systems. 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 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 first 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 six months ended
November 30, 1998 was $0.3 million while net foreign currency gains
realized during the first six months ended November 30, 1998 were
approximately $1.4 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.
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 international trade 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.
PART II. OTHER INFORMATION
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) The annual meeting of shareholders was held on September 29,
1998.
(b) The following directors were elected at the meeting:
Lynn C. Fritz
Dennis L. Pelino
James E.Gilleran
Preston Martin
Paul Otellini
William J. Razzouk
The foregoing constitute all members of the Board of Directors
of the Company.
(c) Set forth below is a tabulation with respect to the matters voted
on at the meeting:
<TABLE>
<CAPTION>
AGAINST OR BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C>
Proposal to Amend
1992 Omnibus Equity
Incentive Plan 22,701,864 10,226,879 104,052 0
Election of Directors
Lynn C. Fritz 32,891,997 140,898 ---- ----
Dennis L. Pelino 32,894,165 138,730 ---- ----
James Gilleran 32,949,173 83,722 ---- ----
Preston Martin 32,945,727 87,168 ---- ----
Paul Otellini 32,947,881 85,014 ---- ----
William J. Razzouk 32,949,345 83,550 ---- ----
</TABLE>
(d) Inapplicable.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15 Letter regarding unaudited interim financial information.
Edgar Filing Only.
27 Financial Data Schedule. Edgar Filing Only.
(b) The Company filed a Form 8-K on September 30, 1998, announcing
the share repurchase authorization of up to $5 million of the
Company's common stock by its Board of Directors.
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: December 31, 1998
S/S
Lynn C. Fritz
Chairman and Chief Executive
Officer
S/S
Dennis L. Pelino
President and Chief Operating
Officer
S/S
Robert Arovas
Executive Vice President and
Chief Financial Officer
S/S
Janice Washburn
Principal Accounting Officer
EXHIBIT INDEX
Exhibit Page
15 Letter regarding unaudited interim financial information 16
27 Financial Data Schedule 17
EXHIBIT 15
The Board of Directors and Stockholders
Fritz Companies, Inc.:
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 of the use therein of our report dated December 21, 1998 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 Peat Marwick LLP
San Francisco, California
December 31, 1998
