FRITZ COMPANIES, INC. FORM 10-Q
4
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 November 30, 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 or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
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 January 10, 2000 there were __36,648,500__shares of common stock
outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of November 30,
1999 and May 31, 1999 3
Condensed Consolidated Statements of Operations for the three
and six months ended November 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the six
months ended November 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3.Quantitative and Qualitative Market Risk Disclosure 16
PART II. OTHER INFORMATION 18
SIGNATURES 19
EXHIBIT INDEX 20
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<CAPTION>
November 30, May 31,
1999 1999
---------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 59,980 $ 50,599
Accounts receivable, net of allowance for doubtful
Accounts of $21,477 in November 1999 and $20,466 in May 1999 492,780 396,640
Deferred income taxes 16,754 16,461
Prepaids and other current assets 18,399 17,860
------------- ------------
Total current assets 587,913 481,560
------------- ------------
PROPERTY AND EQUIPMENT - NET 104,328 103,535
------------- ------------
OTHER ASSETS:
Intangibles, net of accumulated amortization of $23,361 in November
1999 and $21,362 in May 1999 110,307 112,666
Deferred income taxes 14,872 13,395
Other assets 13,688 15,752
------------- ------------
Total other assets 138,867 141,813
------------- ------------
TOTAL ASSETS $ 831,108 $ 726,908
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations and short-term
borrowings $ 3,036 $ 4,333
Accounts payable 270,765 255,706
Accrued liabilities 111,700 87,562
Income tax payable 16,438 15,348
------------- ------------
Total current liabilities 401,939 362,949
------------- ------------
LONG-TERM OBLIGATIONS 139,822 89,606
OTHER LIABILITIES 9,790 10,271
------------- ------------
TOTAL LIABILITIES 551,551 462,826
------------- ------------
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 141,513 138,369
Treasury stock - at cost (174) (174)
Retained earnings 159,540 144,437
Accumulated other comprehensive loss (21,690) (18,914)
------------- ------------
Total stockholders' equity 279,557 264,082
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 831,108 $ 726,908
============= ============
</TABLE>
<PAGE>
<TABLE>
FRITZ COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUE $ 426,503 $ 381,946 $ 818,154 $ 724,275
FREIGHT CONSOLIDATION COSTS 265,779 228,230 506,780 425,413
-------------- ------------ ------------- --------------
NET REVENUE 160,724 153,716 311,374 298,862
-------------- ------------ ------------- --------------
OPERATING EXPENSES
Salaries and related costs 91,538 85,636 177,972 169,918
General and administrative 53,801 53,077 107,323 104,110
-------------- ------------ ------------- --------------
Total operating expenses 145,339 138,713 285,295 274,028
-------------- ------------ ------------- --------------
INCOME FROM OPERATIONS 15,385 15,003 26,079 24,834
OTHER EXPENSE (1,968) (2,427) (3,869) (2,440)
-------------- ------------ -------------- --------------
INCOME BEFORE TAX EXPENSE 13,417 12,576 22,210 22,394
INCOME TAX EXPENSE 4,293 4,024 7,107 7,166
-------------- ------------ ------------- --------------
NET INCOME $ 9,124 $ 8,552 $ 15,103 $ 15,228
============== ============ ============= ==============
Weighted average shares outstanding - Basic 36,627 36,262 36,559 36,078
============== ============ ============= ==============
Earnings per share - Basic $ .25 $ .24 $ .41 $ .42
============== ============ ============= ==============
Weighted average shares outstanding - Diluted 36,814 36,277 36,771 36,170
============== ============ ============= ==============
Earnings per share - Diluted $ .25 $ .24 $ .41 $ .42
============== ============ ============= ==============
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
November 30,
-----------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,103 $ 15,228
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 14,789 12,884
Deferred income taxes (1,770) 533
Stock compensation -- 917
Other 548 (378)
Effect of changes in:
Receivables (96,140) (29,291)
Prepaid expenses and other assets 1,455 4,580
Payables and accrued liabilities 41,880 13,054
----------------- -----------------
Net cash provided by (used in) operating activities (24,135) 17,527
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,886) (15,231)
Acquisitions, net of cash acquired (242) (710)
Payment of acquisition related debt (616) (1,463)
Investment in foreign affiliates 284 --
Proceeds from sale of fixed assets 937 614
Purchase of treasury stock -- (174)
Other (839) 337
----------------- -----------------
Net cash used in investing activities (14,362) (16,627)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations 50,564 2,543
Payment of debt (1,076) (1,825)
Proceeds from stock options exercised 333 635
Employee stock purchases 193 207
Other -- 27
----------------- -----------------
Net cash provided by financing activities 50,014 1,587
----------------- -----------------
Foreign currency translation effect on cash (2,136) (1,025)
----------------- -----------------
INCREASE IN CASH AND EQUIVALENTS 9,381 1,462
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 50,599 53,935
----------------- -----------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 59,980 $ 55,397
================= =================
OTHER CASH FLOW INFORMATION:
Income taxes paid $ 10,019 $ 6,091
================= =================
Interest paid $ 4,519 $ 3,495
================= =================
</TABLE>
<PAGE>
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) for the three and six months
ended November 30, 1999 and 1998 are unaudited and, in the opinion of
management, contain all adjustments, consisting only of normal and
recurring adjustments, (except as noted below with respect to the certain
financial information from United Kingdom) 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 six months ended November 30,
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 Six Months Ended
November 30, November 30,
1999 1998 1999 1998
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Net Income $ 9,124 $ 8,552 $ 15,103 $ 15,228
Other comprehensive income (loss):
Foreign currency translation adjustment (1,811) 781 (2,776) (335)
---------- ---------- -------- ---------
Total comprehensive income $ 7,313 $ 9,333 $ 12,327 $ 14,893
========== ========== ======== =========
</TABLE>
During the three and six month periods ended November 30, 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.
During fiscal year 2000 the company's subsidiary in the UK completed a
conversion of its general ledger and revenue and cost accounting system to
its new global business system. A number of cost accrual errors were
generated as a result of system interface issues, affecting transportation
costs. Management of the UK subsidiary undertook various corrective
actions, and the systems are now believed to be operating properly.
However, management has not completed its analysis of the effects of the
original errors on the second quarter results. Management has made an
adjustment based on all the facts currently known reflecting its best
estimate of the effects of these items. The ultimate disposition may
require future adjustment of the financial statements, but management
believes that such adjustments would not exceed $.02 per share for the
quarter ended November 30, 1999.
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 recognizes
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 six months ended November 30, 1999 consisted
of approximately $8.9 million of current tax provision and $1.8 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 six months ended November 30, 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 November 30, 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 filed an appeal
with the Ninth Circuit Court of Appeals. On November 2, 1999, the Ninth
Circuit Court of Appeals vacated the district court dismissal and remanded
the case to the trial court for reconsideration in light of the Ninth
Circuit U.S. Court of Appeals ruling in The Silicon Graphics Case.
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 November 30, Six Months Ended November 30,
1999 % 1998 % 1999 % 1998 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUE:
Customs brokerage $49,309 30.7 $40,778 26.5 $94,902 30.5 $82,616 27.6
Ocean freight forwarding 31,561 19.6 35,039 22.8 63,833 20.5 66,585 22.3
Airfreight forwarding 45,527 28.3 45,804 29.8 86,131 27.7 86,216 28.9
Material Management
&Distribution 34,327 21.4 32,095 20.9 66,508 21.3 63,445 21.2
------ ---- ------ ---- ------ ---- ------ ----
Total revenue $160,724 100.0 $153,716 100.0 $311,374 100.0 $298,862 100.0
======== ===== ======== ===== ======== ===== ======== =====
Net Revenue
United States $84,187 52.4 $78,164 50.8 $163,948 52.7 $155,222 51.9
------- ---- ------- ---- -------- ---- -------- ----
Canada 13,528 8.4 11,343 7.4 25,711 8.2 22,110 7.4
Europe 26,384 16.4 28,461 18.5 49,826 16.0 51,819 17.3
China 11,188 7.0 10,483 6.8 22,850 7.3 20,758 7.0
Singapore 2,792 1.7 2,946 2.0 5,637 1.8 5,444 1.8
Other Asia 12,772 8.0 10,595 6.9 23,896 7.7 20,187 6.8
Latin America 9,873 6.1 11,724 7.6 19,506 6.3 23,322 7.8
----- --- ------ --- ------ --- ------ ---
Total Foreign 76,537 47.6 75,552 49.2 147,426 47.3 143,640 48.1
------ ---- ------ ---- ------- ---- ------- ----
Total net revenue $160,724 100.0 $153,716 100.0 $311,374 100.0 $298,862 100.0
======== ===== ======== ===== ======== ===== ======== =====
Segment Profit or Loss
Income From Operations
United States 5,588 36.3 5,514 36.8 $9,754 37.4 $6,804 27.4
----- ---- ----- ---- ------- ---- -------- ----
Canada 939 6.1 318 2.0 1,340 5.1 611 2.5
Europe 2,613 17.0 4,029 26.9 3,337 12.8 6,254 25.2
China 3,589 23.3 1,695 11.3 7,892 30.3 6,501 26.1
Singapore 789 5.2 608 4.1 1,253 4.8 1,206 4.9
Other Asia 2,357 15.3 2,419 16.1 3,770 14.5 2,466 9.9
Latin America (490) (3.2) 420 2.8 (1,267) (4.9) 992 4.0
------------ -------- ----------- ------- ----------- -------- ----------- --------
Total Foreign 9,797 63.7 9,489 63.2 16,325 62.6 18,030 72.6
------------ -------- ----------- ------- ----------- -------- ----------- --------
Total Income
from 15,385 100.0 15,003 100.0 26,079 100.0 24,834 100.0
Operations
------------ -------- ----------- ------- ----------- -------- ----------- --------
Other Income / (Expense) (1,968) (2,427) (3,869) (2,440)
------------ -------- ----------- ------- ----------- -------- ----------- --------
Total Income Before Taxes $ 13,417 $ 12,576 $ 22,210 $ 22,394
</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 and six months
ended November 30, 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.
General:
For the three months ended November 30, 1999 compared with the three
months ended November 30, 1998, revenue increased 11.7% to $426.5 million
and net revenue increased 4.6% to $160.7 million. Operating expenses
increased 4.8%, slightly higher than the net revenue increase. There were
minor currency losses in the second quarter of fiscal years 2000 and 1999.
Interest expense increased by $ 0.3 million to $2.5 million for the
quarter.
For the six months ended November 30, 1999 compared with the six months
ended November 30, 1998, revenue increased 13.0% to $818.2 million and net
revenue increased 4.2% to $311.4 million. Operating expenses increased
4.1%, slightly lower than the net revenue increase. There were minimal
currency gains in the six months of fiscal year 2000 while the same period
last year produced $1.4 million of currency gains. Interest expense
increased to $4.8 million from $3.8 million for the six months due to
increased borrowings supporting higher receivables levels.
The January 1, 2000 opening of a new US Customs Brokerage Processing
Center in Dallas, Texas is projected to have an earnings per share cost of
between 14 and 16 cents during the second half of the current fiscal year.
As a result of these investments the company is expected to experience
favorable impact on future earnings beginning fiscal year 2001.
The company periodically reviews the realizability of its deferred tax
assets based on number of factors, including projected taxable income. As a
result of the costs described in the preceding paragraph the risk profile
of the recorded deferred tax assets has increased slightly; however,
management still believes that it is more likely than not that these
deferred tax assets will be realized.
During fiscal year 2000 the company's subsidiary in the UK completed a
conversion of its general ledger and revenue and cost accounting system to
its new global business system. A number of cost accrual errors were
generated as a result of system interface issues, affecting transportation
costs. Management of the UK subsidiary undertook various corrective
actions, and the systems are now believed to be operating properly.
However, management has not completed its analysis of the effects of the
original errors on the second quarter results. Management has made an
adjustment based on all the facts currently known reflecting its best
estimate of the effects of these items. The ultimate disposition may
require future adjustment of the financial statements, but management
believes that such adjustments would not exceed $.02 per share for the
quarter ended November 30, 1999.
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>
<CAPTION>
UNITED STATES OPERATIONS
Three Months Ended November 30,
1999 % 1998 %
---- - ---- -
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $ 32,913 18.0 $ 26,888 17.0
Ocean freight forwarding 71,747 39.4 57,869 36.6
Airfreight forwarding 52,395 28.7 48,788 30.8
Material management &
Distribution 25,433 13.9 24,984 15.6
------ ---- ------ ----
Total revenue 182,488 100.0 158,529 100.0
======= ===== ======= =====
NET REVENUE:
Customs brokerage $ 32,913 39.1 $ 26,888 34.4
Ocean freight forwarding 12,718 15.1 15,237 19.5
Airfreight forwarding 17,386 20.7 16,814 21.5
Material management &
Distribution 21,170 25.1 19,225 24.6
------ ---- ------ ----
Total net revenue $ 84,187 100.0 $ 78,164 100.0
======== ===== ======== =====
FOREIGN OPERATIONS
Three Months Ended November 30,
1999 % 1998 %
---- - ---- -
REVENUE:
Customs brokerage $ 16,395 6.7 $ 13,890 6.2
Ocean freight forwarding 46,703 19.2 54,938 24.6
Airfreight forwarding 150,418 61.6 123,525 55.3
Material management &
Distribution 30,499 12.5 31,064 13.9
------ ---- ------ ----
Total revenue 244,015 100.0 223,417 100.0
======= ===== ======= =====
NET REVENUE:
Customs brokerage $ 16,395 21.4 $ 13,890 18.4
Ocean freight forwarding 18,844 24.6 19,802 26.2
Airfreight forwarding 28,140 36.8 28,990 38.4
Material management &
Distribution 13,158 17.2 12,870 17.0
------ ---- ------ ----
Total net revenue $ 76,537 100.0 $ 75,552 100.0
======== ===== ======== =====
</TABLE>
Three Months Ended November 30, 1999 Compared with Three Months
Ended November 30, 1998
United States Operations:
Revenue and Net Revenue: Revenue increased 15.1% compared to last year
while net revenue increased by 7.7%. Operating expenses increased 8.2%
compared to last year at slightly higher than the net revenue increase.
Customs brokerage revenue and net revenue increased 22.4%. The increase was
largely due to growth from several of our largest and existing customers.
Strong file count growth and stable pricing in the US also led the
increase. The number of United States Customs entries filed by the Company
increased approximately 21.1%. 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 to accelerate issue resolution.
Ocean freight forwarding revenue increased 24.0 % while net revenue
declined 16.5%. Inbound ocean freight demand continued to remain strong in
the second 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 increased 7.4%, due to increased 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
increased by 3.4% partially due to the increased use of charters and lower
export carrier rates.
Material management and distribution revenue increased by 1.8%. Net revenue
increased by 10.1%. Results reflect continued strong inbound traffic to the
US and warehousing at higher utilization rates.
Operating Expenses: Operating expenses increased by 8.2%. Salaries and
related costs increased due to higher 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 1.0 % to 71.4%. Operating expenses as a percentage of net
revenue increased to 93.4% from 92.9% 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 9.2% while net revenue
decreased 1.3% due to stronger volume from Asian operation that is lower
margin than the other regions, and a soft European market. The effect of
translation rate changes during the period resulted in a decrease in net
revenue during the quarter of approximately $2.4 million. The resultant
growth rate was adversely affected by approximately 1.5%.
Customs brokerage revenue and net revenue increased 18.0%. Results reflect
significant improvement in Asia, Latin America and Europe including
Australia, Venezuela, Northern Brazil, South Africa and the United Kingdom.
Ocean freight forwarding revenue decreased by 15.0% while net revenue
decreased by 4.8%. 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 21.8% while net revenue
decreased by 2.9%, reflecting soft European markets and stronger Asian
volume that is lower margin than the other regions.
Material management and distribution revenue decreased 1.8%, while net
revenue increased by 2.2%. Revenue growth was impacted by competitive
pricing in warehouse and trucking activities primarily in Europe.
Operating Expenses: Operating expenses increased 1.0%. Salaries and related
costs increased due to higher labor costs associated with the
implementation of the Company's new global transportation and financial
systems. Labor expense growth this quarter was adversely impacted by a
nonrecurring severance payments of $1.4 million. Reflecting the labor cost
increase, operating expenses as a percentage of net revenue were 87.2% in
the second quarter and 87.4% in the comparable quarter of the prior year.
<TABLE>
<CAPTION>
UNITED STATES OPERATIONS
Six Months Ended November 30,
1999 % 1998 %
---- - ---- -
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $ 64,118 23.9 $ 54,530 21.5
Ocean freight forwarding 52,838 19.7 46,154 18.2
Airfreight forwarding 101,559 37.9 103,113 40.7
Material management &
Distribution 49,617 18.5 49,553 19.6
------ ---- ------ ----
Total revenue 268,132 100.0 253,350 100.0
======== ===== ======== =====
NET REVENUE:
Customs brokerage $ 64,118 39.1 $ 54,530 35.1
Ocean freight forwarding 25,892 15.8 29,045 18.7
Airfreight forwarding 33,280 20.3 32,863 21.2
Material management &
Distribution 40,658 24.8 38,784 25.0
------ ---- ------ ----
Total net revenue $ 163,948 100.0 $ 155,222 100.0
========= ===== ========= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOREIGN OPERATIONS
Six Months Ended November 30,
1999 % 1998 %
---- - ---- -
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $ 30,784 5.6 $ 28,086 6.0
Ocean freight forwarding 194,651 35.4 174,569 37.0
Airfreight forwarding 265,263 48.2 212,662 45.2
Material management &
Distribution 59,325 10.8 55,608 11.8
------ ---- ------ ----
Total revenue 550,023 100.0 470,925 100.0
======== ===== ======== =====
NET REVENUE:
Customs brokerage $ 30,784 20.9 $ 28,086 19.6
Ocean freight forwarding 37,941 25.8 37,540 26.1
Airfreight forwarding 52,851 35.8 53,353 37.1
Material management &
Distribution 25,850 17.5 24,661 17.2
------ ---- ------ ----
Total net revenue $ 147,426 100.0 $ 143,640 100.0
========= ===== ========= =====
</TABLE>
Six Months Ended November 30, 1999 Compared with Six Months
Ended November 30, 1998
United States Operations:
Revenue and Net Revenue: Revenue increased 5.8% compared to
last year while net revenue increased by 5.6%. Operating expenses
increased by 4.0%.
Customs brokerage revenue and net revenue increased 17.6%. The increase was
largely due to growth from several of the largest and existing customers.
The number of United States Customs entries filed by the Company increased
approximately 14.7% to 1.6 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 14.5% while net revenue declined
10.9 %. Inbound ocean freight demand continued to remain strong in the
second 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 and 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 1.5%, 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
increased by 1.3% partially due to the increased use of charters and lower
export carrier rates.
Material management and distribution revenue remained flat while net
revenue increased by 4.8%. Results reflect continued strong inbound traffic
to the US and warehousing at higher utilization rates.
Operating Expenses: Operating expenses increased by 4.0%. Salaries and
related costs in relation to net revenue decreased slightly despite labor
costs associated with the Company's rollout of new global transportation
and financial systems. As a percentage of net revenue, salaries and related
costs decreased 0.3% to 62.2%. Operating expenses as a percentage of net
revenue fell to 94.1% from 95.5% 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 16.8% while net revenue
increased by 2.6% 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 six months period
of approximately $1.9 million. The resultant growth rate was adversely
affected by approximately 2.7%.
Customs brokerage revenue and net revenue increased 9.6%. Results reflect
significant improvement in Asia and Latin America including Australia,
Venezuela, Northern Brazil, South Africa and the United Kingdom.
Ocean freight forwarding revenue increased by 11.5 % while net revenue
increased by 1.1%. 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 24.7% while net revenue
decreased 0.9%. The increase in revenue is due to increased shipments and
total chargeable weight of cargo shipped primarily in Asia. However, the
decrease in margins principally reflects the competitive lower rates.
Material management and distribution revenue increased by 6.7%, while net
revenue increased by 4.8%. The lower increase in margin is due to
competitive pricing in warehouse and trucking 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 4.4%. Salaries and related
costs increased due to higher labor costs associated with 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 88.9% in the second quarter and 87.4% in the
comparable quarter of the prior year.
Liquidity and Capital Resources
The Company's cash and equivalents increased $9.4 million to $60.0
million at November 30, 1999 from $50.6 million at May 31, 1999. Operating
activities through the second quarter produced a negative cash flow of
$24.1 million. Capital expenditures in the amount of $13.9 million were
incurred for computer hardware and software, leasehold improvements and
warehouse equipment. As a result, debt increased by $48.9 million.
The Company paid $0.9 million in cash in connection with earn out
provisions for acquisitions made in prior periods.
As of November 30, 1999, the balance outstanding under the $100.0
million syndicated multi-currency credit facility (the Credit Facility) was
$67.1 million, consisting of borrowings of $55.0 million and outstanding
letters of credit totaling $12.1 million. Therefore, the Company's total
available borrowing capacity under the Credit Facility as of November 30,
1999, was approximately $32.9 million.
<PAGE>
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.
Fritz Companies successfully entered Year 2000 without disruption to
its services from the Y2K problem. The Company monitored each significant
office located globally on January 1, 2000 to ensure offices had power,
telecommunications, and access to systems. Various operational, financial,
administrative, and telecommunication systems; PCs; and facilities are
reported to be functioning correctly with regard to dates. While the
Company is reasonably certain that all systems are functioning and
calculating correctly, the Company will continue to monitor its systems, as
date-related problems may possibly appear in the future. While the Company
has tested all critical systems, they can not guarantee that all
date-related processing or calculation errors have been located and
corrected.
The Company's business may be materially affected if its systems or the
systems of critical third parties have date-related problems in the future.
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 contingency plans should help to reduce
material adverse effects that such disruptions may create.
The total cost-to-date to replace or modify the Company's business
systems for Year 2000 compliance was $6.1 million. However, if future
date-related problems occur, the total cost may increase. The funding for
Y2K compliance has been paid through internally generated cash flows from
operations or borrowed funds.
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 half of fiscal
year 2000 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 half of fiscal year 2000 was $2.8 million while net foreign currency
transaction loss realized during the first half of fiscal year 2000 were
$0.2 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,
(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) The possible inability of the Company's information
systems to keep pace with the increasing complexity
and growth of the Company's business,
(v) 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,
(vi) Other risks disclosed elsewhere in this Form 10-Q or in
the Company's other filings with the Securities and
Exchange Commission.
"Safe Harbor" Statement Under the Private Securities Litigation R
eform 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.
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 November 30, 1999, the
Company had forward contracts outstanding of $0.3 million equivalent
value and had no option contracts. A 10% change in value of the U.S.
dollar relative to the underlying currency of these forward 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.
<TABLE>
<CAPTION>
(dollar amounts in millions)
Gain/(Loss) if
Functional Currency
Non-Functional Cash & A/P & Net Appreciates Depreciates
Currency A/R Debt Exposure 10% 10%
<S> <C> <C> <C> <C> <C>
U.S. Dollar 116.3 (46.1) 70.2 (7.0) 7.0
All Other Currencies 12.6 (32.8) (20.2) 2.0 (2.0)
</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 November 30, 1999 the Company had $60.0 million of cash and cash
equivalents, subject to variable, short-term interest rates. On the
same date, the Company had debt obligations of $142.9 million, of which
$58.3 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 $13.0 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.
<PAGE>
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 November 30, 1999 and through the date hereof:
(1) On October 21, 1999, announcing the resignation of Dennis L. Pelino,
President and Director and the promotion of two key executives.
(2) On November 8, 1999, announcing a court ruling regarding stockholders class
action suits.
(3) On November 23, 1999, announcing the opening of a new U.S. Customs Brokerage
Processing Center in Dallas, Texas. .
<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: January 10, 2000
/s/ Lynn C. Fritz
Lynn C. Fritz
Chairman and Chief Executive Officer
/s/ Raymond L. Smith
Raymond L. Smith
Chief Operating Officer
/s/ Ronald Dutt
Ronald Dutt
Executive Vice President and
Chief Financial Officer
/s/ Janice Washburn
Janice Washburn
Vice President and
Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
27 Financial Data Schedule 23
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000890662
<NAME> FRITZ COMPANIES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-1-1999
<PERIOD-END> NOV-30-1999
<CASH> 59,980
<SECURITIES> 0
<RECEIVABLES> 514,257
<ALLOWANCES> 21,477
<INVENTORY> 0
<CURRENT-ASSETS> 587,913
<PP&E> 207,894
<DEPRECIATION> 103,566
<TOTAL-ASSETS> 831,108
<CURRENT-LIABILITIES> 401,839
<BONDS> 0
0
0
<COMMON> 368
<OTHER-SE> 279,189
<TOTAL-LIABILITY-AND-EQUITY> 831,108
<SALES> 0
<TOTAL-REVENUES> 818,154
<CGS> 0
<TOTAL-COSTS> 792,075
<OTHER-EXPENSES> (914)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,783
<INCOME-PRETAX> 22,210
<INCOME-TAX> 7,107
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,103
<EPS-BASIC> .41
<EPS-DILUTED> .41
</TABLE>
