FRITZ COMPANIES, INC. FORM 10-Q
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 August 31, 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.
(Exact name of registrant as specified in its charter)
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.)
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 September 30, 1999 there were 36,660,000 shares of common stock
outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Independent Auditors' Review Report 3
Condensed Consolidated Balance Sheets as of August 31, 1999
and May 31, 1999 4
Condensed Consolidated Statements of Operations for the
three months ended August 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 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 10
Item 3. Quantitative and Qualitative Market Risk Disclosure 15
PART II. OTHER INFORMATION 17
SIGNATURES 18
EXHIBIT INDEX 19
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Independent Auditors' 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 August 31, 1999, and the
related condensed consolidated statements of operations and cash flows for the
three month periods ended August 31, 1999 and 1998 included in the Company's
Form 10-Q. 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 1999, 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 28, 1999, 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, 1999, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
San Francisco, California
September 24, 1999
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<CAPTION>
August 31, May 31,
1999 1999
---------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 51,032 $ 50,599
Accounts receivable, net of allowance for
doubtful accounts of $20,558 in August 1999 and $20,466 in May 1999 466,983 396,640
Deferred income taxes 16,336 16,461
Prepaids and other current assets 19,941 17,860
------------- ------------
Total current assets 554,292 481,560
------------- ------------
PROPERTY AND EQUIPMENT - NET 105,076 103,535
------------- ------------
OTHER ASSETS:
Intangibles, net of accumulated amortization of $22,366 in August 1999
and $21,362 in May 1999 111,625 112,666
Deferred income taxes 16,658 13,395
Other assets 15,565 15,752
------------- ------------
Total other assets 143,848 141,813
------------- ------------
TOTAL ASSETS $ 803,216 $ 726,908
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations and short-term
borrowings $ 3,646 $ 4,333
Accounts payable 273,575 255,706
Accrued liabilities 96,355 87,562
Income tax payable 16,644 15,348
------------- ------------
Total current liabilities 390,220 362,949
------------- ------------
LONG-TERM OBLIGATIONS 129,299 89,606
OTHER LIABILITIES 11,540 10,271
------------- ------------
TOTAL LIABILITIES 531,059 462,826
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share; 60,000 shares
authorized, 36,650 shares issued and outstanding,
(36,420 shares issued and outstanding as of May 31,1999) 368
364
Additional paid-in capital 141,426 138,369
Treasury stock - at cost (174) (174)
Retained earnings 150,416 144,437
Accumulated other comprehensive loss (19,879) (18,914)
------------- ------------
Total stockholders' equity 272,157 264,082
------------
=============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 803,216 $ 726,908
============= ============
See accompanying independent auditors' review report and
notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
August 31,
------------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
REVENUE $ 391,651 $ 342,329
FREIGHT CONSOLIDATION COSTS 241,001 197,183
------------------ -----------------
NET REVENUE 150,650 145,146
------------------ -----------------
OPERATING EXPENSES
Salaries and related costs 86,434 84,282
General and administrative 53,522 51,033
------------------ -----------------
Total operating expenses 139,956 135,315
------------------ -----------------
INCOME FROM OPERATIONS 10,694 9,831
OTHER (EXPENSE) (1,901) (13)
------------------ -----------------
INCOME BEFORE TAX EXPENSE 8,793 9,818
INCOME TAX EXPENSE 2,814 3,142
------------------ -----------------
NET INCOME $ 5,979 $ 6,676
================== =================
Weighted average shares outstanding - Basic 36,491 35,838
================== =================
Earnings per share - Basic $ .16 $ .19
================== =================
Weighted average shares outstanding - Diluted 36,736 36,036
================== =================
Earnings per share - Diluted $ .16 $ .19
================== =================
See accompanying independent auditors' review report and
notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
August 31,
-----------------------------------------
1999 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 5,979 $ 6,676
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 7,538 6,509
Deferred income taxes (1,402) 1,269
Stock Compensation -- 602
Other 655 (231)
Effect of changes in:
Receivables (70,343) (8,565)
Prepaid expenses and other current assets (2,081) 3,806
Payables and accrued liabilities 29,649 14,937
----------------- -----------------
Net cash provided by (used in) operating activities (30,005) 25,003
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,150) (5,233)
Acquisitions, net of cash acquired (205) (710)
Payment of acquisition related debt (616) (962)
Proceeds from sale of fixed assets 472 64
Other 139 739
----------------- -----------------
Net cash (used in) investing activities (8,360) (6,102)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in short-term borrowings -- (100)
Proceeds from issuance of long-term obligations 39,870 398
Payment of debt (360) (10,635)
Proceeds from stock options exercised 257 --
Employee stock purchases 96 --
Other -- 208
----------------- -----------------
Net cash provided by (used in) financing activities 39,863 (10,129)
----------------- -----------------
Foreign currency translation effect on cash (1,065) 828
----------------- -----------------
INCREASE IN CASH AND EQUIVALENTS 433 9,600
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 50,599 53,935
----------------- -----------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 51,032 $ 63,535
================= =================
OTHER CASH FLOW INFORMATION:
Income taxes paid $ 4,744 $ 492
================= =================
Interest paid $ 906 $ 388
================= =================
See accompanying independent auditors' review report and
notes to condensed consolidated financial statements
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
1. GENERAL
The accompanying condensed consolidated financial statements of Fritz
Companies, Inc. and subsidiaries (the Company) or the three months ended
August 31, 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.
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, 1999. 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, 1999 included in the Company's Form 10-K filed on
July 26, 1999. The results of operations for the three months ended
August 31, 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 net income and 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 August 31,
----------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Net Income $ 5,979 $ 6,676
Other comprehensive loss:
Foreign currency translation (965) (1,116)
adjustment
------------ -------------
Total comprehensive income $ 5,014 $ 5,560
============ =============
</TABLE>
During the quarters ended August 31, 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 1998, the Financial Accounting Standards Board 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. SFAS No.133, as amended
by SFAS No. 137, is effective for all quarters of fiscal years beginning
after June 15, 2000.
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 three months ended August 31, 1999 consisted
of approximately $4.2 million of current tax provision and $1.4 million
of deferred tax benefit. The Company's global effective tax rate remains
at 32%.
5. ACQUISITIONS
The Company recorded approximately $0.2 million and $0.7 million for
the three months ended August 31,1999 and 1998, respectively, of additional
purchase price relating to achievement of specified net revenue or pre-tax
income levels of certain prior acquisitions or to purchase the remaining
minority interest of a company. At August 31, 1999, the remaining maximum
payments in connection with acquisitions providing a contingent purchase
price are approximately $1.6 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 was 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 was dismissed without
leave to amend. That dismissal is on appeal.
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. SEGMENT DISCLOSURE AND GEOGRAPHIC AREA INFORMATION
The Company operates in the international freight forwarding industry,
which encompasses customs brokerage, airfreight and ocean freight
forwarding, and material management and distribution. No single customer
accounted for ten percent or more of consolidated revenue for the periods
presented.
The Company manages its operations in two segments, United States and
Foreign. The Company's Chief Operating Officer reviews operating results
and creates operating plans based on these two segments. The Company's two
key operations executives represent these segments. Bonuses and other
incentives are distributed based on the segment results. There has been no
change in the basis of measurement of segment profit and loss since
May 31, 1999.
Certain information regarding the Company's principal logistics
services and operations by geographic areas is summarized below:
<TABLE>
<CAPTION>
Three Months Ended August 31,
----- ---------------- ----- --------------
1999 1998
---------------- --------------
Net Revenue:
<S> <C> <C>
Customs Brokerage $ 45,593 $ 41,838
Ocean Freight Forwarding 32,272 31,546
Airfreight Forwarding 40,604 40,412
Material Management & Distribution 32,181 31,350
================ ==============
Total Net Revenue $ 150,650 $ 145,146
================ ==============
Net Revenue
United States $ 79,761 $ 77,058
---------------- --------------
Canada 12,183 10,767
Europe 23,442 23,358
China 11,662 10,275
Singapore 2,845 2,498
Other Asia 11,124 9,592
Latin America 9,633 11,598
---------------- --------------
Total Foreign 70,889 68,088
---------------- --------------
Total Net Revenue $ 150,650 $ 145,146
================ ==============
Income From Operations
United States $ 4,166 $ 1,290
---------------- --------------
Canada 401 294
Europe 724 2,225
China 4,303 4,806
Singapore 464 598
Other Asia 1,413 47
Latin America (777) 571
---------------- --------------
Total Foreign 6,528 8,541
================ ==============
Total Income from Operations $ 10,694 $ 9,831
================ ==============
</TABLE>
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 ended August 31, 1999 and 1998.
See Note 1 of Notes to Condensed Consolidated Financial Statements.
The Company operates its integrated logistics business as two segments
comprised of four principal services. The segments are comprised of United
States Operations and Foreign Operations. The Company's principal services are
customs brokerage, airfreight and ocean freight forwarding and material
management and distribution.
Revenue for ocean and airfreight forwarding and surface transportation
consolidation as an indirect carrier includes the consolidation and
transportation costs (e.g., ocean freight costs). Revenue for customs brokerage,
ocean and airfreight forwarding and surface transportation as an agent includes
only the fees and commissions related to such shipments. Margin represents the
ratio of net revenue to revenue.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
Results of Operations
The following table provides, by business segment, the revenue, and net
revenue, in thousands of dollars and percentages attributable to the Company's
principal logistics services during the periods indicated:
<TABLE>
UNITED STATES OPERATIONS
<CAPTION>
Three Months Ended August 31,
1999 % 1998 %
REVENUE:
<S> <C> <C> <C> <C>
Customs brokerage $31,204 23.0 $27,642 20.7
Ocean freight forwarding 31,209 23.0 27,044 20.2
Airfreight forwarding 49,164 36.2 54,325 40.7
Material management &
Distribution 24,184 17.8 24,569 18.4
Total revenue $ 135,761 100.0 $ 133,580 100.0
NET REVENUE:
Customs brokerage $31,204 39.1 $27,642 35.9
Ocean freight forwarding 13,176 16.5 13,808 17.9
Airfreight forwarding 15,893 19.9 16,049 20.8
Material management &
Distribution 19,488 24.5 19,559 25.4
Total net revenue $79,761 100.0 $77,058 100.0
FOREIGN OPERATIONS
Three Months Ended August 31,
1999 % 1998 %
REVENUE:
Customs brokerage $14,389 5.6 $14,196 6.8
Ocean freight forwarding 97,830 38.2 80,872 38.7
Airfreight forwarding 114,845 44.9 89,137 42.7
Material management &
Distribution 28,826 11.3 24,544 11.8
Total revenue $ 255,890 100.0 $ 208,749 100.0
NET REVENUE:
Customs brokerage $14,389 20.3 $14,196 20.8
Ocean freight forwarding 19,096 26.9 17,738 26.1
Airfreight forwarding 24,711 34.9 24,363 35.8
Material management &
Distribution 12,693 17.9 11,791 17.3
Total net revenue $70,889 100.0 $68,088 100.0
</TABLE>
Three Months Ended August 31, 1999 Compared with Three Months Ended August
31, 1998
General:
Revenue increased 14.4% to $391.7 million. Net revenue increased 3.8% to
$150.7 million. Operating expenses increased 3.4%, marginally lower than the net
revenue increase. There was an absence of currency gains in this quarter while
the same quarter of last year produced $1.5 million of currency gains. Interest
expense increased to $2.2 million for the quarter due to increased borrowings.
United States Operations:
Revenue and Net Revenue: Revenue increased 1.6% compared to last year while
net revenue increased by 3.5%. Operating expenses decreased slightly.
Customs brokerage revenue and net revenue increased 12.9%. The
increase was largely due to growth in the retail and electronics industries
from both new and existing customers. The number of United States Customs
entries filed by the Company increased approximately 3.8% to 0.6 million.
Rescoping major accounts contributed to the improvement of revenue. Focus
areas for fiscal year 2000 include rescoping our top 30 clients for maximum
utilization of automation and productivity tools, emphasizing customer
satisfaction and using customer hubbing to achieve consistency in billing
backup and as a means of faster issue resolution.
Ocean freight forwarding revenue increased 15.4% while net revenue
declined 4.6%. Inbound ocean freight demand continued to remain strong in
the first quarter. Ocean freight rates have increased due to peak season
pricing, causing margin pressures. Conversely, ocean export activity
remains down significantly due to softness in Latin America and parts of
Europe & Asia. U.S. export orders and volume were down in all three
regions. The decline in net revenue was partially due to the continued
shift to Non-Vessel Operating Common Carrier (NVOCC) from the traditional
freight forwarding shipments. The inclusion of the direct transportation
cost in the revenue amount decreases the revenue margin with a much smaller
increase in the actual dollar amount of net revenue.
Airfreight forwarding revenue decreased 9.5%, due to decreased volume
to Asia, Europe and Latin America. Many shippers are continuing to shift to
ocean transportation in an attempt to reduce costs. However, net revenue
decreased only 1.0% partially due to the increased use of charters and
lower export carrier rates
Material management and distribution revenue and net revenue remained
flat. An increase in long-haul trucking activity was offset by a decline in
short-haul activity.
Operating Expenses: Operating expenses decreased slightly. Salaries
and related costs decreased slightly despite labor costs associated with
Year 2000 compliance and the Company's rollout of new global transportation
and financial systems. As a percentage of net revenue, salaries and related
costs decreased 2.1% to 52.5%. Operating expenses as a percentage of net
revenue fell to 94.8% from 98.3% in the prior year. The Company is
committed to the reduction of operating expenses through the continuing
implementation of its strategic plan by focusing resources, training
personnel, and emphasizing customer satisfaction.
Foreign Operations:
Revenue and Net Revenue: Revenue increased by 22.6% while net revenue
increased only 4.1% reflecting the higher costs associated with the
imbalance of trade with the U.S. The effect of translation rate changes
during the period resulted in a decrease in net revenue during the quarter
of approximately $1.9 million. The resultant growth rate was adversely
affected by approximately 2.7%.
Customs brokerage revenue and net revenue increased 1.4%.
\
Ocean freight forwarding revenue increased by 21.0 % while net revenue
increased by 7.7%. The margin decrease reflected the soft European market
and the resultant pressure on margins. The continued shift to NVOCC service
had a negative effect on margin. Ocean Export revenue, which consists of
documentation fees and commissions, was negatively impacted because lower
shipping costs produce lower commissions.
Airfreight forwarding revenue increased by 28.8% while net revenue
increased 1.4%, the decrease in margins principally reflects the soft
European markets.
Material management and distribution revenue increased by 17.4%, while
net revenue increased by 7.6%. The lower increase in margin is due to
competitive pricing in warehouse activities. The opening of our 400,000
plus square foot warehouse in South China in the quarter intends to
position the Company for further growth in revenue and net revenue for
these services.
Operating Expenses: Operating expenses increased 8.1%. Salaries and
related costs increased due to higher labor costs associated with Year 2000
compliance and the implementation of the Company's new global
transportation and financial systems. Reflecting the labor cost increase,
operating expenses as a percentage of net revenue were 90.8% in the quarter
and 87.5% in the comparable quarter of the prior year.
Liquidity and Capital Resources
The Company's cash and equivalents increased $0.4 million to $51.0
million at August 31, 1999 from $50.6 million at May 31, 1999. Operating
activities during the quarter produced a negative cash flow of $30.0
million. Capital expenditures in the amount of $8.2 million were incurred
for computer hardware and software, leasehold improvements and warehouse
equipment. As a result, debt was increased by $39.0 million.
The Company paid $0.6 million in cash in connection with earn out
provisions for acquisitions made in prior periods
As of August 31, 1999, the balance outstanding under the $100.0
million syndicated multi-currency credit facility (the Credit Facility) was
$55.8 million, consisting of borrowings of $44.3 million and outstanding
letters of credit totaling $11.5 million. Therefore, the Company's total
available borrowing capacity under the Credit Facility as of August 31,
1999 was approximately $44.2 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) problem.
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, material 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. All of
the Company's key business systems, with minor exceptions, were Y2K
compliant by the end of June 1999. There are several locations including
Singapore, Indonesia, and Peru that became compliant by September 30, 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 contacted
third parties (i.e. vendors, governmental agencies, etc.) around the world
with whom the Company has material direct and indirect business
relationships. The business partners that have responded to the Company's
inquiries indicate that they will be Y2K compliant on a timely basis. The
Company successfully completed Year 2000 testing with the U.S. Customs
Service. Year 2000 efforts of Customs bureaus in other countries are being
monitored and are varying in scope and progress. 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 $6.1 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 August 31, 1999, approximately
$6.0 million had 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 funding of all past and future
Y2K expenses has been, or will 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 is 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
The Company's business may be materially affected if its systems or
the systems of critical third parties are not Y2K compliant by January 1,
2000. 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 Y2K disruptions. In the event of a Y2K
disruption resulting from the 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 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 first quarter of fiscal 2000 was $1.0 million while
net foreign currency transaction gains realized during the first quarter of
fiscal were negligible. 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 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,
(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) Possible concerns with
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,
(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)Other risks disclosed elsewhere in this Form 10-Q or
in the Company's other filings with the Securities and
Exchange Commission.
ITEM 3.QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
The Company is exposed to market risks in the ordinary course of
business. These risks relate primarily to fluctuations in foreign currency
exchange rates and short term interest rates. Financial derivatives are
employed to manage these risks in certain countries under certain
circumstances. Under no circumstances are financial derivatives utilized
for trading or speculative purposes.
Foreign Exchange Sensitivity
The Company maintains worldwide operations and transacts business in
many currencies other than the U.S. dollar. Because the Company's foreign
subsidiaries are typically local-currency functional entities, the Company
is exposed to transactional and translational gains and losses as relative
currency values fluctuate. As a result, the Company's consolidated cash
flow and net income are subject to variations due to changes in exchange
rates.
The Company manages its currency risks through a variety of means,
such as employing financial derivatives, converting local cash to U.S.
dollars, and accelerating and decelerating payments among the Company's
offices and agents. Financial derivatives typically take the form of
forward foreign exchange contracts, though options are occasionally
purchased to hedge certain transactions. As of August 31, 1999, the
Company had forward contracts outstanding of $1.5 million equivalent value
and had no option contracts. A 10% change in value of the U.S. dollar
relative to the underlyinorward contracts would have an immaterial effect
on the Company's earnings.
The Company's earnings are sensitive to changes in foreign exchange
rates due to the revaluation of monetary assets and liabilities. These
balance sheet items, denominated in non-functional currency include cash,
accounts receivable, accounts payable and debt. The table below provides
the U.S. dollar equivalent of these balances summarized as assets and
liabilities and shows the sensitivity of the net exposure to a 10% change
in value of the functional currency relative to the non-functional
currency.
(dollar amounts in millions)
<TABLE>
<CAPTION>
Gain/(Loss) if
Functional Currency
Non-Functional Cash & A/P & Net Appreciates Depreciates
Currency A/R Dept Exposure 10% 10%
<S> <C> <C> <C> <C> <C>
U.S. Dollar 87.9 (34.3) 53.6 (5.4) 5.4
All Other Currencies 10.8 (27.8) (17.0) 1.8 (1.8)
</TABLE>
Interest Rate Sensitivity
The Company's exposure to interest rate risk relates primarily to its
cash and short-term investments and its debt obligations. The Company
currently does not employ any financial derivatives to manage the risk
associated with its cash investments. It does however, currently employ a
swap to convert a portion of its variable rate debt to a fixed rate.
At August 31, 1999 the Company had $51.0 million of cash and cash
equivalents, subject to variable, short-term interest rates. On the same
date, the Company had debt obligations of $132.9 million, of which $48.4
million was subject to variable, short-term interest rate risk. In
addition, the Company had $13.7 million of off-balance sheet transactions
which were subject to variable interest rate risk. The net exposure of the
Company to variable, short-term interest rate risk is therefore $11.1
million. A hypothetical increase or decrease in variable, short-term
interest rates of 1% would have an immaterial effect on the Company's
earnings.
Recent Accounting Pronouncements
See Note 2 of the Notes to Condensed Consolidated Financial Statements.
PART II. OTHER INFORMATION
ITEM 6. 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 the following reports on Form 8-K during the quarter
ended August 31, 1999 and through the date hereof:
None.
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: September 30, 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/ Ronald Dutt
Ronald Dutt
Executive Vice President and
Chief Financial Officer
/s/ Janice Washburn
Janice Washburn
Principal Accounting Officer
EXHIBIT INDEX
Exhibit Page
15 Letter regarding unaudited interim financial information 20
27 Financial Data Schedule 21
EXHIBIT 15
The Board of Directors and Stockholders
Fritz Companies, Inc.:
Re: Registration Statement Nos. 33-78472, 33-57238, 33-93070,
333-15921 and 333-07639
With respect to the subject registration statements, we acknowledge
our awareness of the use therein of our report dated September 24, 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/KPMG LLP
San Francisco, California
October 4, 1999
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<CIK> 0000890662
<NAME> FRITZ COMPANIES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 51,032
<SECURITIES> 0
<RECEIVABLES> 487,541
<ALLOWANCES> 20,558
<INVENTORY> 0
<CURRENT-ASSETS> 554,292
<PP&E> 203,535
<DEPRECIATION> 98,459
<TOTAL-ASSETS> 803,216
<CURRENT-LIABILITIES> 390,220
<BONDS> 0
<COMMON> 368
0
0
<OTHER-SE> 271,789
<TOTAL-LIABILITY-AND-EQUITY> 803,216
<SALES> 0
<TOTAL-REVENUES> 391,651
<CGS> 0
<TOTAL-COSTS> 380,957
<OTHER-EXPENSES> (345)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,246
<INCOME-PRETAX> 8,793
<INCOME-TAX> 2,814
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,979
<EPS-BASIC> .16
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