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, 2000
---------------
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
(State or other jurisdiction of incorporation or organization)
94-3083515
(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 October 6, 2000 there were 36,830,424 shares of common stock outstanding.
<PAGE>
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,
2000 and May 31, 2000 4
Condensed Consolidated Statements of Operations for the three
months ended August 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows for the three
months ended August 31, 2000 and 1999 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 14
PART II. OTHER INFORMATION 16
SIGNATURES 17
EXHIBIT INDEX 18
<PAGE>
Independent Auditors' Review Report
Board of Directors and Stockholders
Fritz Companies, Inc.
We have reviewed the condensed consolidated balance sheet of Fritz
Companies, Inc. and subsidiaries (the Company) as of August 31, 2000, the
related condensed consolidated statements of operations for the three months
ended August 31, 2000 and August 31, 1999 and condensed consolidated cash flows
for the three months ended August 31, 2000 and August 31, 1999.
These condensed 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 modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Fritz Companies, Inc. and subsidiaries as of May 31 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for the year then ended (not presented herein); and in
our report dated June 28, 2000, 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, 2000 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 28, 2000
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C>
August 31, May 31,
2000 2000
---------------- ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 75,082 $ 55,481
Accounts receivable, net of allowance for
doubtful accounts of $19,883 in August 2000 and $19,381 in May 2000 544,224 485,679
Deferred income taxes 11,983 14,468
Prepaids and other current assets 13,992 13,132
------------- ------------
Total current assets 645,281 568,760
------------- ------------
PROPERTY AND EQUIPMENT - NET 110,980 110,208
------------- ------------
OTHER ASSETS:
Intangibles, net of accumulated amortization of $ 26,360 in August 2000
and $25,348 in May 2000 105,301 107,148
Deferred income taxes 29,104 24,903
Other assets 15,522 14,213
------------- ------------
Total other assets 149,927 146,264
------------- ------------
TOTAL ASSETS $ 906,188 $ 825,232
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations and short-term
borrowings $ 2,448 $ 2,479
Accounts payable 349,893 291,576
Accrued liabilities 115,131 113,370
Income tax payable 18,599 18,089
------------- ------------
Total current liabilities 486,071 425,514
------------- ------------
LONG-TERM OBLIGATIONS 132,301 116,891
OTHER LIABILITIES 8,710 8,472
------------- ------------
TOTAL LIABILITIES 627,082 550,877
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share; 60,000 shares authorized,
36,813 shares issued and outstanding, ( 36,702 shares issued and
outstanding as of May 31, 2000)
368 366
Additional paid-in capital 141,048 139,474
Treasury stock - at cost (706) (706)
Retained earnings 167,709 161,862
Accumulated other comprehensive loss (29,313) (26,641)
------------- ------------
Total stockholders' equity 279,106 274,355
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 906,188 $ 825,232
============ =============
See accompanying independent auditors' review report and
notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
August 31,
<S> <C> <C>
------------------------------------------
2000 1999
------------------ -----------------
REVENUE $ 412,950 $ 391,651
FREIGHT CONSOLIDATION COSTS 259,838 241,001
------------------ -----------------
NET REVENUE 153,112 150,650
------------------ -----------------
OPERATING EXPENSES
Salaries and related costs 87,226 86,434
General and administrative 55,480 53,522
------------------ -----------------
Total operating expenses 142,706 139,956
------------------ -----------------
INCOME FROM OPERATIONS 10,406 10,694
OTHER (EXPENSE) (1,679) (1,901)
------------------ -----------------
INCOME BEFORE TAX EXPENSE 8,727 8,793
INCOME TAX EXPENSE 2,880 2,814
------------------ -----------------
NET INCOME $ 5,847 $ 5,979
================== =================
Weighted average shares outstanding - Basic 36,604 36,491
================== =================
Earnings per share - Basic $ .16 $ .16
================== =================
Weighted average shares outstanding - Diluted 37,246 36,736
================== =================
Earnings per share - Diluted $ .16 $ .16
================== =================
See accompanying independent auditors' review
report and notes to condensed consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
August 31,
<S> <C> <C>
-----------------------------------------
2000 1999
----------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,847 $ 5,979
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 7,404 7,538
Deferred income taxes (1,716) (1,402)
Other (336) 655
Effect of changes in:
Receivables (58,545) (70,343)
Prepaid expenses and other current assets (860) (2,081)
Payables and accrued liabilities 60,371 29,649
----------------- -------------------
Net cash provided by (used in) operating activities 12,165 (30,005)
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,003) (8,150)
Acquisitions, net of cash acquired (205)
Payment of acquisition related debt (1,635) (616)
Proceeds from sale of fixed assets 448 472
Other 548 139
----------------- -------------------
Net cash used in investing activities (8,642) (8,360)
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations 17,670 39,870
Re-payments of long-term obligations (683) (360)
Proceeds from stock options exercised 1,967 257
Employee stock purchases 66 96
Other (911) --
----------------- -------------------
Net cash provided by financing activities 18,109 39,863
----------------- -------------------
Foreign currency translation effect on cash (2,031) (1,065)
----------------- -------------------
INCREASE IN CASH AND EQUIVALENTS 19,601 433
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 55,481 50,599
----------------- -------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 75,082 $ 51,032
================= ===================
OTHER CASH FLOW INFORMATION:
Income taxes paid $ 4,182 $ 4,744
================= ===================
Interest paid $ 2,474 $ 906
================= ===================
See accompanying independent auditors' review report and
notes to condensed consolidated financial statements
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 1. Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements of Fritz
Companies, Inc. and subsidiaries (the Company) for the three months ended
August 31, 2000 and 1999 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.
During the quarter ended August 31, 2000, the Company capitalized
approximately $0.8 million of certain costs that would have otherwise been
expensed in accordance with the Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
issued by the American Institute of Certified Public Accountants. SOP 98-1
requires computer software costs associated with internal use software to
be expensed as incurred until certain capitalization criteria were met.
Further discussion of other significant accounting policies followed
by the Company are described in Note 1 to the audited consolidated
financial statements for the year ended May 31, 2000. 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, 2000 included in the Company's Form
10-K filed on August 14, 2000. The results of operations for the three
months ended August 31, 2000 may not necessarily be indicative of the
results to be expected for the full year.
Note 2. Comprehensive Income
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,
----------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Net Income $ 5,847 $ 5,979
Other comprehensive loss:
Foreign currency translation
adjustment (2,672) (965)
------------ -------------
Total comprehensive income $ 3,175 $ 5,014
============ =============
</TABLE>
During the quarters ended August 31, 2000 and 1999, 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.
Note 3. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (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, as amended by SFAS No. 137 and SFAS No.
138, which is effective for all quarters of fiscal years beginning after
June 15, 2000.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements as amended by SAB 101A, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basis criteria that
must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. In June 2000, the SEC issued SAB
101B which deferred the effective date of SAB 101 until the last quarter of
fiscal years beginning after December 15, 1999. The Company believes that
the adoption of SAB 101 will not have a material impact on its consolidated
financial position or results of operations.
Note 4. COMMON STOCK
The increase in common stock issued and paid-in capital was primarily
due to shares issued upon exercise of options and issuance of shares under
the employee stock purchase plan.
Note 5. INCOME TAXES
Income tax expense for the three months ended August 31, 2000 consisted
of approximately $ 4.6 million of current tax provision and $ 1.7 million
of deferred tax benefit. The Company's global effective tax rate remains at
33.0%.
Note 6. ACQUISITIONS
For the three months ended August 31, 2000, there was no recording 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. For the same period last year,
the amount recorded was $0.2 million. At August 31, 2000, the remaining
maximum payments in connection with acquisitions providing a contingent
purchase price are approximately $0.5 million. There is no certainty these
businesses will achieve the revenue or profit levels to require these
contingent payments.
Note 7. 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 litigation in which the Company is the defendant is
covered by insurance and is 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 was reversed on appeal in July 2000 but is
the subject of a pending petition for review by the California Supreme
Court.
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
litigation and it is possible the outcome could have a significant adverse
impact on the Company's future consolidated results of operations, although
the amount is not currently estimable. However, the Company believes the
ultimate outcome of these matters will not have a significant adverse
impact on the Company's consolidated financial position.
Note 8. 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. 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,
2000.
Certain information regarding the Company's principal logistics
services and operations by geographic areas is summarized below:
<TABLE>
<CAPTION>
Three Months Ended August 31,
---- ---------------- ----- ----------------
2000 1999
<S> <C> <C>
---------------- ----------------
Net Revenue:
Customs Brokerage $ 46,231 $ 45,593
Ocean Freight Forwarding 32,503 32,272
Airfreight Forwarding 40,472 40,604
Material Management & Distribution 33,906 32,181
---------------- ----------------
Total Net Revenue $ 153,112 $ 150,650
================ ================
Net Revenue
United States $ 77,383 $ 79,761
---------------- ----------------
Canada 13,154 12,183
Europe 23,310 23,442
China 13,578 11,662
Singapore 3,057 2,845
Other Asia 12,514 11,124
Latin America 10,116 9,633
---------------- ----------------
Total Foreign 75,729 70,889
---------------- ----------------
Total Net Revenue $ 153,112 $ 150,650
================ ================
Income From Operations
United States $ (848) $ 4,166
---------------- ----------------
Canada 471 401
Europe 1,921 724
China 5,398 4,303
Singapore 753 464
Other Asia 3,533 1,413
Latin America (822) (777)
---------------- ----------------
Total Foreign 11,254 6,528
---------------- ----------------
Total Income from Operations $ 10,406 $ 10,694
---------------- ----------------
Other Income (Expense) (1,679) (1,901)
---------------- ----------------
Total Income Before Taxes 8,727 8,793
================ ================
</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,
2000 and 1999. See Note 1 of Notes to Condensed Consolidated Financial
Statements.
The Company operates its integrated logistics business in two segments,
United States and Foreign, consisting of four principal services. 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>
<CAPTION>
UNITED STATES OPERATIONS
Three Months Ended August 31,
-----------------------------
2000 % 1999 %
------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $30,316 24.4 $31,204 23.0
Ocean freight forwarding 24,612 19.8 31,209 23.0
Airfreight forwarding 45,602 36.7 49,164 36.2
Material management &
distribution 23,820 19.1 24,184 17.8
------ ---- ------ ----
Total revenue $124,350 100.0 $ 135,761 100.0
======= ===== ========= =====
NET REVENUE:
Customs brokerage $30,316 39.2 $31,204 39.1
Ocean freight forwarding 12,217 15.8 13,176 16.5
Airfreight forwarding 14,943 19.3 15,893 19.9
Material management &
distribution 19,907 25.7 19,488 24.5
------ ---- ------ ----
Total net revenue $77,383 100.0 $79,761 100.0
====== ===== ======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOREIGN OPERATIONS
Three Months Ended August 31,
-----------------------------
2000 % 1999 %
---- - ---- -
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $15,915 5.5 $14,389 5.6
Ocean freight forwarding 99,626 34.5 97,830 38.2
Airfreight forwarding 138,941 48.2 114,845 44.9
Material management &
distribution 34,118 11.8 28,826 11.3
------ ---- ------ ----
Total revenue $288,600 100.0 $ 255,890 100.0
======== ===== ========= =====
NET REVENUE:
Customs brokerage $ 15,915 21.0 $14,389 20.3
Ocean freight forwarding 20,286 26.8 19,096 26.9
Airfreight forwarding 25,529 33.7 24,711 34.9
Material management &
distribution 13,999 18.5 12,693 17.9
------ ---- ------ ----
Total net revenue $ 75,729 100.0 $70,889 100.0
======== ===== ======= =====
</TABLE>
Three Months Ended August 31, 2000 Compared with Three Months Ended
August 31, 1999
General:
Revenue increased 5.4% to $413.0 million and net revenue increased 1.6% to
$153.1 million for the three-month period ended August 31, 2000 as compared
with the same period last year. Operating expenses increased 2.0%,
marginally higher than the net revenue increase. The foreign exchange
transaction gain for this quarter amounted to $0.8 million compared to a
loss of $0.1 million in the same quarter last year. Interest expense
increased to $ 3.0 million for the quarter due principally to increased
borrowings. The Company capitalized approximately $0.8 million of certain
costs associated with the development of the Company's global systems that
would have otherwise been expensed.
United States Operations:
Revenue and Net Revenue: Revenue decreased 8.4% while net revenue decreased
by 3.0% for the three-month period ended August 31, 2000 as compared with
the same period last year. Operating expenses increased 3.5%.
Customs brokerage revenue and net revenue decreased 2.8%. The decrease was
primarily due to a reduction in the file counts of 13.1% in the North,
South and West regions. The transition to centralized environment and
competitive pressures have adversely impacted volumes. Revenue losses from
higher margin customers have been partially offset by revenue gains from
lower margin customers. For the three months ended August 31, 2000, the
number of United States Customs entries filed by the Company increased by
4.1%.
Ocean freight forwarding revenue decreased 21.1% while net revenue
decreased 7.3%. The decline in revenue and net revenue is due to a decrease
in file transaction count of 3.4% and the erosion of ocean container rates
in all of the major trade lanes. Outbound NVOCC (Non-Vessel Operating
Common Carrier) experienced 11.7% decrease in revenue and 9.2% decrease in
net revenue as volumes declined 5.1%. Ocean export activity declined
significantly as volumes of shipments decreased to Asia and Latin America.
The overall Ocean export file counts declined 5.0%. Ocean inbound freight
demand to remain strong in the first quarter.
Airfreight forwarding revenue decreased 7.2% and net revenue decreased
6.0%. File counts decreased 7.4% compared with the same period last year.
Notwithstanding the Company's use of centralized gateways to improve
consolidation costs control, during the quarter competitive pressure on
pricing and lower volumes combined to cause a 6.0% decrease in net revenue.
Air export services recorded a 1.6% increase in revenue and 3.5% decrease
in net revenue, which was largely due to a decline in agency business. Air
inbound services decreased by 10.1% in revenue and net revenue. The
decrease was primarily due to a decline in volume shipment counts this
quarter by 10.0%.
Material management and distribution revenue decreased 1.5% and net revenue
increased 2.2%. The decrease in revenue was a direct result of decline in
volumes. The net revenue increase was primarily due to higher service
revenue with no associated direct cost.
Operating Expenses: Operating expenses increased 3.5%. This increase was
mainly due to costs related to our systems initiatives such as depreciation
and communications expense as well as demurrage charges related to the
centralization of the Company's custom house brokerage activities. The
Company is committed to the goal of reducing operating expenses through the
continued implementation of its strategic plan by focusing resources and
training personnel.
Foreign Operations:
Revenue and Net Revenue: Revenue increased by 12.8% and net revenue
increased by 6.8% for the three-month period ended August 31, 2000 as
compared with the same period last year. The effect of translation rate
changes during the period resulted in a decrease in net revenue during the
quarter of approximately $ 3.3 million. The resultant growth rate was
adversely affected by approximately 1.8%.
Customs brokerage revenue and net revenue increased 10.6% primarily due to
file count increases in Canada and Latin America. The increase in Latin
America was related to an acquisition in the fourth quarter of fiscal year
2000.
Ocean freight forwarding revenue increased by 1.8% while net revenue
increased by 6.2%. The revenue and net revenue increases were largely due
to increases in ocean outbound shipments from Asia of 2.8% and 11.6%
respectively as compared to the same period last year.
Airfreight forwarding revenue increased by 21.0% while net revenue
increased 3.3%. The revenue increase was primarily due to higher export
volume generated by Asia. However, the margin was adversely affected by the
general upward pressure on carrier rates.
Material management and distribution revenue increased by 18.4%, while net
revenue increased by 10.3%. The lower increase in net revenue was
principally due to competitive pricing in warehouse activities. The opening
of the Company's 400,000 plus square foot warehouse in South China
contributed to the continued growth in revenue and net revenue for these
services.
Operating Expenses: Operating expenses increased 0.2% primarily due to
higher contract labor cost in Canada to support the increase in revenue.
Operating expenses as a percentage of net revenue were 85.1% in the quarter
and 90.8% in the comparable quarter of the prior year. The foreign
operations other than Canada have maintained their operating expenses at
the same level as last year despite the increase in business.
Liquidity and Capital Resources
Cash and equivalents were $75.1 million at August 31, 2000, representing a
35.3% increase from $55.5 million at May 31, 2000. Positive operational
cash flow of $12.2 million was used to partially fund capital expenditures
of $8.0 million resulting in positive free cash flow of $4.2 million.
Capital expenditures consisted mostly of expenditures for computer hardware
and software, leasehold improvements, and warehouse equipment. The size and
growth of the company's pass-through billings is one of the primary reasons
for the increase in accounts receivable, and a number of initiatives are
underway to address this issue.
The Company paid $1.6 million in cash in connection with an earn-out
provision for an acquisition made in prior periods. During the months of
August and September, the Company completed the syndication of a new,
two-and-a-half year, $175 million revolving credit facility. At
quarter-end, the facility was limited to $150 million, under which the
Company had borrowed $50 million and had issued $12 million in letters of
credit, leaving $88 million in available credit. Following quarter-end,
additional bank commitments were received raising the total credit facility
to $175 million. This larger facility will ensure adequate liquidity for
the Company for the foreseeable future.
"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" section of this document.
Currency and Other 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 local cash to U.S. dollars, and accelerating and
decelerating international payments among the Company's offices and agents.
Devaluation of foreign currencies could adversely impact the financial
results of operations in future periods.
The Company incurred a negative translation adjustment and a foreign
exchange gain for the first quarter of fiscal year 2001 due to the
strengthening of the U.S. dollar relative to certain currencies of Asia,
Europe and Latin America. The charge to equity related to currency
translation during the first quarter of fiscal year 2001 was $2.7 million
while net foreign currency gains realized during the first quarter were
approximately $0.8 million.
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 significantly or
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 Company's ability to pass on future cost increases to customers
and could erode the Company's operating margins.
Additional risks and uncertainties include:
1. Risks of international currency markets and governmental regulations
adversely affecting currency exchange rates.
2. Lower space allotments
available from carriers.
3. Governmental deregulation efforts, regulations
governing the Company's products and/or the international trade and tariff
environment adversely affecting our ability to provide services to
Customers.
4. Competitive marketplace conditions impeding the ability of
the Company to pass future cost increases to Customers.
5. The Company's
ability to continue its program to improve productivity, operating results
and cash flows.
6. The Company's ability to realize the benefit of deferred
taxes.
7. The Company's ability to centralize transaction processing for
its customs brokerage product.
8. Dependence of the Company on
international trade resulting from favorable worldwide economic conditions.
9. Dependence of the Company on continued services of key executives and
managers.
10. The ability to recruit and retain skilled employees in a
tight labor market.
11. The ability to obtain and retain major clients.
12. The ability of the Company to develop and implement information systems to
keep pace with the increasing complexity and growth of the Company's
business.
13. Diversion of management focus and resources as a result of
pending litigation.
14. Other risks disclosed in the Company's 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 US 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, 2000, the Company had forward foreign currency contracts
outstanding of $47.6 million equivalent value with maturities ranging from
September 1, 2000 to September 28, 2000. The estimated fair value of these
foreign currency contracts represents the amount required to enter into
offsetting contracts with similar remaining maturities based on quoted market
prices. At August 31, 2000, the difference between the contract amounts and the
fair values was $269 thousand. A 10% change in value of the functional currency
relative to the underlying currency of these forward contracts would negatively
impact the Company's earnings by $4.7 million. However, these forwards contracts
hedge underlying payables or receivables and therefore the net impact of the
change in currency values would be negligible.
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
10.0% 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 Dept Exposure 10% 10%
-------- --- ---- -------- --- ---
<S> <C> <C> <C> <C> <C>
U.S. Dollar 121.3 (56.3) 65.0 (6.5) 6.5
All Other Currencies 25.6 (30.4) (4.8) 0.5 (0.5)
</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. The Company uses an interest rate swap
to manage the interest cost and the risk associated with changing interest
rates. As interest rates change, the differential paid or received is
recognized in interest expense of the period.
The Company uses an interest rate swap to manage the interest cost and the risk
associated with changing interest rates. As interest rates change, the
differential paid or received is recognized in interest expense of the period.
As of August 31, 2000, the Company had an interest rate swap outstanding with a
notional value of Singapore Dollars (SGD) 7,000 million. This swap mitigates
the interest exposure of a subsidiary's long-term debt. The interest swap will
mature in the year 2002. It requires the Company to pay interest at a fixed
rate of 6.5%, and receive interest at the floating rate based on the Singapore
Interbank Offered Rate, which was 2.5% on August 31, 2000. The fair value of
this instrument represents the estimated receipts or payments that would be
made to terminate the agreement. At May 31, 2000, the Company would have paid
$322 thousand to terminate the agreement.
On August 31, 2000, the Company had $75.1 million of cash and cash equivalents,
subject to variable, short-term interest rates. On the same date, the Company
had debt obligations of $134.7 million, of which $54.2 million was subject to
variable, short-term interest rate risk. In addition, the Company had $25.2
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 $4.3 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 3 of the Notes to Condensed Consolidated Financial Statements.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Amended and Restated Credit Agreement
15 Letter regarding unaudited interim financial information
27 Financial Data Schedule
(b) The company filed the following reports on Form 8-K during the quarter
ended August 31, 2000 and through the date hereof:
None.
<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: October 9, 2000
/s/ Lynn C. Fritz
Chairman of the Board
/s/ Raymond L. Smith
Chief Executive Officer
/s/ Graham R. F. Napier
Chief Operating Officer
Ronald Dutt
/s/ Executive Vice President and
Chief Financial Officer and
Principal Accounting Officer
/s/Janice Washburn
Vice President and Controller
<PAGE>
EXHIBIT INDEX
Exhibit Page
10 Amended and Restated Credit Agreement 19
10 Second Amendment to Note Purchase Agreement 129
15 Letter regarding unaudited interim financial information 139
27 Financial Data Schedule 140
<PAGE>
