<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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
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FRITZ COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3083515
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
706 Mission Street, Suite 900, San Francisco, California 94103
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(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 11, 2001 there were 36,758,801 shares of common stock outstanding.
<PAGE> 2
FRITZ COMPANIES, INC. FORM 10-Q
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C> <C>
Item 1. Financial Statements:
Independent Auditors' Review Report 3
Condensed Consolidated Balance Sheets as of November 30, 2000 and
May 31, 2000 4
Condensed Consolidated Statements of Operations for the three-month
and six-month periods ended November 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows for the six-month
periods ended November 30, 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 12
Item 3. Quantitative and Qualitative Market Risk Disclosure 20
PART II. OTHER INFORMATION 22
SIGNATURES 26
EXHIBIT INDEX 27
</TABLE>
2
<PAGE> 3
FRITZ COMPANIES, INC. FORM 10-Q
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 November 30, 2000, and the
related condensed consolidated statements of operations for the three-month and
six-month periods ended November 30, 2000, and the condensed consolidated
statement of cash flows for the six-month period ended November 30, 2000
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 auditing standards generally accepted in the United States of America, 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 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
January 8, 2001
3
<PAGE> 4
FRITZ COMPANIES, INC. FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 85,889 $ 55,481
Accounts receivable, net of allowance for doubtful
accounts of $19,334 in November 2000 and $19,381 in May 2000 485,413 485,679
Deferred income taxes 12,753 14,468
Prepaids and other current assets 17,296 13,132
------------ ------------
Total current assets 601,351 568,760
------------ ------------
PROPERTY AND EQUIPMENT - NET 108,820 110,208
------------ ------------
OTHER ASSETS:
Intangibles, net of accumulated amortization of $27,160 in
November 2000 and $25,348 in May 2000 103,451 107,148
Deferred income taxes 30,067 24,903
Other assets 15,150 14,213
------------ ------------
Total other assets 148,668 146,264
------------ ------------
TOTAL ASSETS $ 858,839 $ 825,232
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations and short-term
borrowings $ 2,359 $ 2,479
Accounts payable 272,484 291,576
Accrued liabilities 116,805 113,370
Income tax payable 14,226 18,089
------------ ------------
Total current liabilities 405,874 425,514
------------ ------------
LONG-TERM OBLIGATIONS 163,262 116,891
OTHER LIABILITIES 10,222 8,472
------------ ------------
TOTAL LIABILITIES 579,358 550,877
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share; 60,000 shares
authorized, 36,842 shares issued and outstanding,
(36,702 shares issued and outstanding as of May 31,2000) 370 366
Additional paid-in capital 141,015 139,474
Treasury stock - at cost (706) (706)
Retained earnings 172,996 161,862
Accumulated other comprehensive loss (34,194) (26,641)
------------ ------------
Total stockholders' equity 279,481 274,355
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 858,839 $ 825,232
============ ============
</TABLE>
SEE ACCOMPANYING INDEPENDENT AUDITORS' REVIEW REPORT AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
FRITZ COMPANIES, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE $ 422,052 $ 426,503 $ 835,002 $ 818,154
FREIGHT CONSOLIDATION COSTS 263,897 265,779 523,735 506,780
------------- ------------- ------------- -------------
NET REVENUE 158,155 160,724 311,267 311,374
------------- ------------- ------------- -------------
OPERATING EXPENSES
Salaries and related costs 88,580 91,538 175,806 177,972
General and administrative 58,854 53,801 114,334 107,323
CHB consolidation costs 452 -- 452 --
------------- ------------- ------------- -------------
Total operating expenses 147,886 145,339 290,592 285,295
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 10,269 15,385 20,675 26,079
OTHER EXPENSE (2,378) (1,968) (4,057) (3,869)
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAX EXPENSE 7,891 13,417 16,618 22,210
INCOME TAX EXPENSE 2,604 4,293 5,484 7,107
------------- ------------- ------------- -------------
NET INCOME $ 5,287 $ 9,124 $ 11,134 $ 15,103
============= ============= ============= =============
Weighted average shares outstanding - Basic 36,725 36,627 36,655 36,559
============= ============= ============= =============
Earnings per share - Basic $ .14 $ .25 $ .30 $ .41
============= ============= ============= =============
Weighted average shares outstanding - Diluted 36,841 36,814 37,021 36,771
============= ============= ============= =============
Earnings per share - Diluted $ .14 $ .25 $ .30 $ .41
============= ============= ============= =============
</TABLE>
SEE ACCOMPANYING INDEPENDENT AUDITORS' REVIEW REPORT AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
FRITZ COMPANIES, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,134 $ 15,103
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 14,600 14,789
Gain from sale of a U.S. subsidiary (532) --
Deferred income taxes (3,449) (1,770)
Other -- 548
Effect of changes in:
Receivables 1,332 (96,140)
Prepaid expenses and other assets (4,369) 1,455
Payables and accrued liabilities (19,043) 41,880
------------ ------------
Net cash used in operating activities (327) (24,135)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,077) (13,886)
Acquisitions, net of cash acquired -- (242)
Payment of acquisition related debt (1,635) (616)
Investment in foreign affiliates 37 284
Proceeds from sale of fixed assets 980 937
Other 1,239 (839)
------------ ------------
Net cash used in investing activities (13,456) (14,362)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations 49,534 50,564
Re-payments of long-term obligations (1,507) (1,076)
Proceeds from stock options exercised 2,015 333
Employee stock purchases 136 193
Other (749) --
------------ ------------
Net cash provided by financing activities 49,429 50,014
------------ ------------
Foreign currency translation effect on cash (5,238) (2,136)
------------ ------------
INCREASE IN CASH AND EQUIVALENTS 30,408 9,381
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 55,481 50,599
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 85,889 $ 59,980
============ ============
OTHER CASH FLOW INFORMATION:
Income taxes paid $ 12,710 $ 10,019
============ ============
Interest paid $ 7,790 $ 4,519
============ ============
</TABLE>
SEE ACCOMPANYING INDEPENDENT AUDITORS' REVIEW REPORT AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
FRITZ COMPANIES, INC. FORM 10-Q
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 and six months
ended November 30, 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 November 30, 2000, the Company capitalized
approximately $0.7 million of certain costs 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). SOP 98-1 requires computer software costs associated
with internal use software to be expensed as incurred unless certain
capitalization criteria are met.
Further discussion of other significant accounting policies followed by
the Company is contained 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 has 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 six months ended November 30, 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 Six Months Ended
November 30, November 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 5,287 $ 9,124 $ 11,134 $ 15,103
Other comprehensive loss:
Foreign currency translation adjustment (4,881) (1,811) (7,553) (2,776)
-------- -------- -------- --------
Total comprehensive income $ 406 $ 7,313 $ 3,581 $ 12,327
======== ======== ======== ========
</TABLE>
During the three and six month periods ended November 30, 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.
7
<PAGE> 8
FRITZ COMPANIES, INC. FORM 10-Q
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 six months ended November 30, 2000 consisted
of approximately $8.9 million of current tax provision and $3.4 million of
deferred tax benefit. The Company's global effective tax rate remains at 33%.
A substantial portion of the Company's net deferred tax assets are
federal net operating losses carried forward of approximately $68 million.
These federal net operating losses expire in the fiscal years May 31, 2013 to
May 31, 2021. In order to realize these deferred tax assets the Company will
need to generate future federal taxable income. The Company believes that it is
more likely than not that the results of future operations will generate
sufficient taxable income to realize these net deferred tax assets. In reaching
this conclusion, the Company anticipates that it should accomplish this as its
earnings improve from recent history.
NOTE 6. ACQUISITIONS
For the six months ended November 30, 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 November 30, 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.
8
<PAGE> 9
FRITZ COMPANIES, INC. FORM 10-Q
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. That reversal is on appeal to the
California Supreme Court which has granted review of that reversal.
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 this 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.
9
<PAGE> 10
FRITZ COMPANIES, INC. FORM 10-Q
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. The basis of
measurement of segment profit and loss is the same for both periods presented.
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,
------------------------------------------------ ------------------------------------------------
2000 % 1999 % 2000 % 1999 %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUE:
Customs brokerage $ 46,228 29.2 $ 49,309 30.7 $ 92,459 29.7 $ 94,902 30.5
Ocean freight forwarding 33,680 21.3 31,561 19.6 66,183 21.3 63,833 20.5
Airfreight forwarding 42,826 27.1 45,527 28.3 83,298 26.7 86,131 27.7
Material management &
distribution 35,421 22.4 34,327 21.4 69,327 22.3 66,508 21.3
--------- --------- --------- --------- --------- --------- --------- ---------
Total Net Revenue $ 158,155 100.0 $ 160,724 100.0 $ 311,267 100.0 $ 311,374 100.0
========= ========= ========= ========= ========= ========= ========= =========
NET REVENUE:
United States $ 78,600 49.7 $ 84,187 52.4 $ 155,980 50.1 $ 163,948 52.7
--------- --------- --------- --------- --------- --------- --------- ---------
Canada 14,023 8.9 13,528 8.4 27,179 8.7 25,711 8.2
Europe 24,639 15.5 26,384 16.4 47,950 15.4 49,826 16.0
China 13,706 8.7 11,188 7.0 27,284 8.8 22,850 7.3
Singapore 3,432 2.2 2,792 1.7 6,490 2.1 5,637 1.8
Other Asia 13,002 8.2 12,772 8.0 25,515 8.2 23,896 7.7
Latin America 10,753 6.8 9,873 6.1 20,869 6.7 19,506 6.3
--------- --------- --------- --------- --------- --------- --------- ---------
Total Foreign 79,555 50.3 76,537 47.6 155,287 49.9 147,426 47.3
--------- --------- --------- --------- --------- --------- --------- ---------
Total Net Revenue $ 158,155 100.0 $ 160,724 100.0 $ 311,267 100.0 $ 311,374 100.0
========= ========= ========= ========= ========= ========= ========= =========
INCOME FROM OPERATIONS:
United States $ (3,553) (34.6) $ 5,588 36.3 $ (4,621) (22.4) $ 9,754 37.4
--------- --------- --------- --------- --------- --------- --------- ---------
Canada 1,349 13.1 939 6.1 1,857 9.0 1,340 5.1
Europe 3,502 34.1 2,613 17.0 5,490 26.6 3,337 12.8
China 5,063 49.4 3,589 23.3 10,512 50.8 7,892 30.3
Singapore 740 7.2 789 5.2 1,506 7.3 1,253 4.8
Other Asia 3,567 34.7 2,357 15.3 7,149 34.6 3,770 14.5
Latin America (399) (3.9) (490) (3.2) (1,218) (5.9) (1,267) (4.9)
----------------------------------------------------------------------------------------------------
Total Foreign 13,822 134.6 9,797 63.7 25,296 122.4 16,325 62.6
----------------------------------------------------------------------------------------------------
Total Income from
Operations $ 10,269 100.0 $ 15,385 100.0 $ 20,675 100.0 $ 26,079 100.0
----------------------------------------------------------------------------------------------------
Other Income / (Expense) (2,378) (1,968) (4,057) (3,869)
----------------------------------------------------------------------------------------------------
TOTAL INCOME BEFORE TAXES $ 7,891 $ 13,417 $ 16,618 $ 22,210
========= ========= ========= =========
</TABLE>
NOTE 9. SUBSEQUENT EVENT
On January 10, 2001, the Company, United Parcel Service, Inc., a Delaware
corporation ("Parent"), and VND Merger Sub, Inc., a Delaware corporation and
wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"). The Merger Agreement sets forth the
terms and conditions of the proposed merger of Merger Sub with and into Company
10
<PAGE> 11
FRITZ COMPANIES, INC. FORM 10-Q
(the "Merger"). Upon effectiveness of the Merger, each outstanding share of
common stock, par value of $0.01 per share, of the Company, other than shares
held by the Company, Parent or Merger Sub, will be converted into the right to
receive 0.2 of a share of Class B common stock, par value $0.01 per share, of
Parent. As a result of the Merger, the Company will become a wholly owned
subsidiary of Parent. The parties intend for the Merger to be treated as a
tax-free reorganization under Section 368 of the Internal Revenue Code of 1986,
as amended, and as a "purchase" for accounting purposes.
The transaction is expected to be completed during the spring of 2001.
Consummation of the acquisition is subject to a number of conditions, including,
among other things, the approval of a majority of the Company's stockholders and
regulatory clearance. For additional information about the Merger Agreement,
including but not limited to the Company's adoption of a Rights Plan, see Item
5.
NOTE 10. RELATED PARTY TRANSACTIONS
On November 30, 2000, the Company agreed to sell 100% of the common stock of FCI
Logistics Inc., a wholly-owned subsidiary, to Tradami, Inc., an entity in which
the Company's Chairman of the Board and Chief Executive Officer owns
approximately 90% of the outstanding common stock. Under terms of the sales
agreement, Tradami, Inc. will pay $1,672,000 in cash. The Company recognized a
gain of $532,000 on the sale.
Also on November 30, 2000, the Company entered into a Services Agreement with
Tradami, Inc. whereby both parties agree to further enter into a License and a
Co-Marketing Agreement. Under the terms of the License Agreement, Tradami, Inc.
will develop and license E-commerce technology that will enable the Company to
improve customer service. Under the Co-Marketing agreement the Company and
Tradami, Inc. will jointly market their services to potential and existing
customers.
11
<PAGE> 12
FRITZ COMPANIES, INC. FORM 10-Q
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, 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.
Overall, the Company's performance during the quarter was characterized
by weakness in the U.S., but strong activity levels overseas. The reorganization
of the customs brokerage operation has continued to impact the domestic
performance, but steps have been taken to improve productivity and customer
service levels. While labor productivity during the quarter was encouraging,
general and administrative expenses were adversely affected by higher demurrage
charges and an increase in data processing costs. The Company has seen some
early signs of success with respect to its new sales initiatives and progress
has been made with accounts receivable, with a reduction in days billing
outstanding in the U.S. of 5 days since May 31, 2000. At the same time,
investments and advances have been made with respect to the Company's systems
initiatives:
- The transportation management module of the Company's Global
Business System has been deployed in all countries in Asia, except
Korea;
- The roll-out of customers on the new Purchase Order Management
system has continued; and
- The Company began testing the first release of its U.S. customs
brokerage system.
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:
UNITED STATES OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
--------------------------------------------------
2000 % 1999 %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $ 30,048 23.9 $ 32,913 24.0
Ocean freight forwarding 25,574 20.3 26,245 19.2
Airfreight forwarding 44,680 35.4 52,395 38.2
Material management &
distribution 25,645 20.4 25,433 18.6
-------- -------- -------- --------
Total revenue $125,947 100.0 $136,986 100.0
======== ======== ======== ========
NET REVENUE:
Customs brokerage $ 30,048 38.3 $ 32,913 39.1
Ocean freight forwarding 12,591 16.0 12,718 15.1
Airfreight forwarding 14,386 18.3 17,386 20.7
Material management &
distribution 21,575 27.4 21,170 25.1
-------- -------- -------- --------
Total net revenue $ 78,600 100.0 $ 84,187 100.0
======== ======== ======== ========
</TABLE>
12
<PAGE> 13
FRITZ COMPANIES, INC. FORM 10-Q
FOREIGN OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
--------------------------------------------------
2000 % 1999 %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $ 16,180 5.5 $ 16,395 5.7
Ocean freight forwarding 94,096 31.8 92,205 31.8
Airfreight forwarding 152,714 51.5 150,418 52.0
Material management &
distribution 33,115 11.2 30,499 10.5
-------- -------- -------- --------
Total revenue $296,105 100.0 $289,517 100.0
======== ======== ======== ========
NET REVENUE:
Customs brokerage $ 16,180 20.3 $ 16,395 21.4
Ocean freight forwarding 21,089 26.5 18,844 24.6
Airfreight forwarding 28,440 35.8 28,140 36.8
Material management &
distribution 13,846 17.4 13,158 17.2
-------- -------- -------- --------
Total net revenue $ 79,555 100.0 $ 76,537 100.0
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED NOVEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED NOVEMBER
30, 1999
GENERAL:
Revenue decreased by 1.0% to $422.1 million and net revenue decreased by 1.6% to
$158.2 million for the three-month period ended November 30, 2000 as compared
with the same period last year. Operating expenses increased by 1.8%. The
foreign exchange transaction gain for this quarter amounted to $1.5 million
compared to a loss of $0.2 million in the same quarter last year. Interest
expense increased by $1.6 million to $4.1 million for this quarter due
principally to increased borrowings.
The Company capitalized approximately $0.7 million of certain costs associated
with the development of the Company's global systems in accordance with SOP
98-1.
UNITED STATES OPERATIONS:
Revenue and Net Revenue: Revenue decreased by 8.1% and net revenue decreased by
6.6% for the three-month period ended November 30, 2000 as compared with the
same period last year. Operating expenses increased 4.5%.
Customs brokerage revenue and net revenue decreased by 8.7%. This decrease
reflects lower volumes resulting from the transition to a centralized
environment as well as competitive pressures which continue to adversely impact
volumes. The East and West regions experienced a 19% reduction in file counts.
Volume reductions from higher margin customers have been partially offset by
volume increases from lower margin customers. For the three months ended
November 30, 2000, the number of United States Customs entries filed by the
Company increased by 3.5%, as compared with the same period last year.
Ocean freight forwarding revenue decreased by 2.6% and net revenue decreased by
1.0%. Ocean export net revenue decreased by 16.4%, primarily due to a shortfall
in customer projects, as compared to a year ago. Outbound NVOCC (Non-Vessel
Operating Common Carrier) revenue decreased by 2.8%, reflecting
13
<PAGE> 14
FRITZ COMPANIES, INC. FORM 10-Q
the continuing downward trend in ocean export pricing. Outbound NVOCC net
revenue showed a 3.1% decrease reflecting higher direct costs for warehousing
and trucking. These decreases were partially offset by a 23.7% increase in ocean
inbound agent-type net revenue primarily attributable to new customers.
Airfreight forwarding revenue decreased by 14.7% and net revenue decreased by
17.3%. File counts decreased 17% compared with the same period last year.
Notwithstanding the Company's use of centralized gateways to improve
consolidation costs control, competitive pressure on pricing and lower volumes
during the quarter combined to cause a 17.3% decrease in net revenue. Air export
services recorded a 14.9% decrease in revenue and 15.0% decrease in net revenue
reflecting a soft air outbound market due to the current strength of the dollar.
Air export file counts declined by 18%. Air inbound services decreased by 17.7%
in revenue and net revenue primarily as a result of the transition to Center of
Excellence (COE), a soft market out of Asia in November 2000 and extraordinarily
high volume in the second quarter a year ago related to Y2K. Air inbound file
counts decreased by 14%.
Material management and distribution revenue increased by 0.8% and net revenue
increased by 1.9%. The net revenue increase was primarily due to higher service
revenue with no associated direct cost. Material management and distribution
file counts increased by 1%.
Operating Expenses: Operating expenses increased by 4.5%. This increase was
mainly due to costs related to our systems initiatives such as increased
depreciation of technology assets and communications expense, as well as
demurrage charges related to the centralization of the Company's custom house
brokerage activities. As a percentage of net revenue, salaries and related costs
increased 2.1% to 67.7%. Operating expenses in total as a percentage of net
revenue increased to 104.5% from 93.4% in the prior year.
FOREIGN OPERATIONS:
Revenue and Net Revenue: Revenue increased by 2.3% and net revenue increased by
3.9% for the three-month period ended November 30, 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 $6.4
million. The resultant growth rate was adversely affected by approximately 3.2%.
Customs brokerage revenue and net revenue decreased by 1.3% reflecting lower
volumes in Europe and Asia.
Ocean freight forwarding revenue increased by 2.1% while net revenue increased
by 11.9%. The revenue and net revenue increases were largely due to an increase
of approximately 25% on commissions on agency-type shipments.
Airfreight forwarding revenue increased by 1.5% while net revenue increased
1.1%. The revenue increase was primarily due to higher export volume generated
by Asia, which was partially offset by decreased volumes by all other regions.
Material management and distribution revenue increased by 8.6%, while net
revenue increased by 5.2%. 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 decreased 1.5% largely due to the
reduction of salaries and benefits. Operating expenses as a percentage of net
revenue were 82.6% in the second quarter and 87.2% in the comparable quarter of
the prior year.
14
<PAGE> 15
FRITZ COMPANIES, INC. FORM 10-Q
UNITED STATES OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER 30,
-----------------------------------------------
2000 % 1999 %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Customs brokerage $ 60,363 24.1 $ 64,118 23.9
Ocean freight forwarding 50,185 20.1 52,838 19.7
Airfreight forwarding 90,282 36.0 101,559 37.9
Material management &
distribution 49,465 19.8 49,617 18.5
-------- -------- -------- --------
Total revenue $250,295 100.0 $268,132 100.0
======== ======== ======== ========
NET REVENUE:
Customs brokerage $ 60,363 38.7 $ 64,118 39.1
Ocean freight forwarding 24,807 15.9 25,892 15.8
Airfreight forwarding 29,328 18.8 33,280 20.3
Material management &
distribution 41,482 26.6 40,658 24.8
-------- -------- -------- --------
Total net revenue $155,980 100.0 $163,948 100.0
======== ======== ======== ========
FOREIGN OPERATIONS
SIX MONTHS ENDED NOVEMBER 30,
-----------------------------------------------
2000 % 1999 %
-------- -------- -------- --------
REVENUE:
Customs brokerage $ 32,096 5.5 $ 30,784 5.6
Ocean freight forwarding 193,723 33.1 194,651 35.4
Airfreight forwarding 291,655 49.9 265,263 48.2
Material management &
distribution 67,233 11.5 59,325 10.8
-------- -------- -------- --------
Total revenue $584,707 100.0 $550,023 100.0
======== ======== ======== ========
NET REVENUE:
Customs brokerage $ 32,096 20.7 $ 30,784 20.9
Ocean freight forwarding 41,376 26.6 37,941 25.8
Airfreight forwarding 53,970 34.8 52,851 35.8
Material management &
distribution 27,845 17.9 25,850 17.5
-------- -------- -------- --------
Total net revenue $155,287 100.0 $147,426 100.0
======== ======== ======== ========
</TABLE>
SIX MONTHS ENDED NOVEMBER 30, 2000 COMPARED WITH SIX MONTHS ENDED NOVEMBER 30,
1999
GENERAL:
For the six months ended November 30, 2000 compared with the six months ended
November 30, 1999, revenue increased 2.1% to $835.0 million and net revenue
remained flat. Operating expenses increased 1.9%, slightly higher than the net
revenue increase. There were $2.4 million of currency gains in the six months
ended November 30, 2000 compared to a loss of $0.2 million in the same period
last year. Interest
15
<PAGE> 16
FRITZ COMPANIES, INC. FORM 10-Q
expense increased to $7.1 million as compared with $4.8 million for the same
period last year due principally to increased borrowings.
UNITED STATES OPERATIONS:
Revenue and Net Revenue: Revenue decreased 6.7% compared to last year while net
revenue decreased by 4.9%. Operating expenses increased by 4.3%.
Customs brokerage revenue and net revenue decreased by 5.9%. This decrease
reflects lower volumes resulting from the transition to a centralized
environment as well as competitive pressures which continue to adversely impact
volumes. The East and West regions experienced a 16% reduction in file counts.
Volume reductions from higher margin customers were partially offset by
increases in volumes from lower margin customers. The number of United States
Customs entries filed by the Company increased approximately 5% to 1.3 million.
Ocean freight forwarding revenue decreased 5.0% while net revenue declined 4.2%.
Ocean export net revenue decreased by 14.2% primarily due to a shortfall in
projects, as compared to the same period a year ago. Ocean outbound NVOCC gross
revenue decreased by 5.8% reflecting the lower ocean freight rates this year.
Outbound NVOCC net revenue decreased by 6.3% due to an increase in trucking and
warehousing costs. These decreases were partially offset by a 14.7% increase in
ocean inbound agent-type net revenue primarily attributable to new customers.
Airfreight forwarding revenue decreased 11.1% and net revenue decreased by
11.9%. Airfreight forwarding combined transactions file counts decreased by 12%
compared to prior year. Air export services experienced decreases of 7.4% in
gross revenue and 11.2% in net revenue due to competitive pressure on pricing
and lower volumes. The air outbound market from the U.S. is soft due, among
other things, to the current strength of the dollar. Air inbound services net
revenue decreased by 8.9% due to the combined impact of the transition to COE
and the extraordinarily higher volumes in the same period last year related to
Y2K.
Material management and distribution revenue decreased slightly by 0.3% while
net revenue increased by 2.0%. The net revenue increase was primarily due to
higher service revenue with no associated direct cost.
Operating Expenses: Operating expenses increased by 4.3%. Salaries and related
costs decreased slightly. As a percentage of net revenue, salaries and related
costs increased 1.9% to 67.6%. Operating expenses as a percentage of net revenue
increased to 103.0% from 93.9% in the prior year.
A substantial portion of the Company's net deferred tax assets are federal net
operating losses carried forward of approximately $68 million. These federal
net operating losses expire in the fiscal years May 31, 2013 to May 31, 2021.
In order to realize these deferred tax assets the Company will need to generate
future federal taxable income. The Company believes that it is more likely than
not that the results of future operations will generate sufficient taxable
income to realize these net deferred tax assets. In reaching this conclusion,
the Company anticipates that it should accomplish this as its earnings improve
from recent history.
FOREIGN OPERATIONS:
Revenue and Net Revenue: Revenue increased by 6.3% while net revenue increased
by 5.3%. The effect of translation rate changes during the period resulted in a
decrease in net revenue during the six months of approximately $9.7 million. The
resultant growth rate was adversely affected by approximately 2.5%.
Customs brokerage revenue and net revenue increased by 4.3% reflecting increased
volumes in Canada and Latin America which were partially offset by lower volumes
in Asia and Europe in the second quarter as compared to a year ago.
16
<PAGE> 17
FRITZ COMPANIES, INC. FORM 10-Q
Ocean freight forwarding revenue decreased by 0.5% while net revenue increased
by 9.1%. The slight decrease in revenue was primarily due to the decline in
NVOCC shipments into the United States. NVOCC shipments into the United States
decreased as a result of increased competition in the market. This decrease was
largely offset by an increase in commissions on agency-type shipments. The
increase in net revenue reflects the combined impact of the increase in agency
commissions and the utilization of carriers with lower ocean freight rates.
Airfreight forwarding revenue increased by 9.9% while net revenue increased
2.1%. The revenue increase was primarily due to higher export volume generated
by Asia. However, the margin was adversely affected by general upward pressure
on carrier rates.
Material management and distribution revenue increased by 13.3%, while net
revenue increased by 7.7%. The increases in revenue and net revenue were
primarily generated in Asia and Latin America. 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. The lower increase in
margin is due to competitive pricing in warehouse and trucking activities.
Operating Expenses: Operating expenses decreased 1.0%. Salaries and related
costs decreased slightly primarily due to a nonrecurring expense reported in the
same period last year, related to the departure of a key executive. Operating
expenses as a percentage of net revenue were 83.7% for the six months and 89.1%
in the comparable period of the prior year.
SUBSEQUENT EVENT
On January 10, 2001, the Company, United Parcel Service, Inc., a Delaware
corporation ("Parent"), and VND Merger Sub, Inc., a Delaware corporation and
wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"). The Merger Agreement sets forth the
terms and conditions of the proposed merger of Merger Sub with and into Company
(the "Merger"). Upon effectiveness of the Merger, each outstanding share of
common stock, par value of $0.01 per share, of the Company, other than shares
held by the Company, Parent or Merger Sub, will be converted into the right to
receive 0.2 of a share of Class B common stock, par value $0.01 per share, of
Parent. As a result of the Merger, the Company will become a wholly owned
subsidiary of Parent. The parties intend for the Merger to be treated as a
tax-free reorganization under Section 368 of the Internal Revenue Code of 1986,
as amended, and as a "purchase" for accounting purposes.
The transaction is expected to be completed during the spring of 2001.
Consummation of the acquisition is subject to a number of conditions, including,
among other things, the approval of a majority of the Company's stockholders and
regulatory clearance. For additional information about the Merger Agreement,
including but not limited to the Company's adoption of a Rights Plan, see Item
5.
RELATED PARTY TRANSACTIONS
On November 30, 2000, the Company agreed to sell 100% of the common stock of FCI
Logistics Inc., a wholly-owned subsidiary, to Tradami, Inc., an entity in which
the Company's Chairman of the Board and Chief Executive Officer owns
approximately 90% of the outstanding common stock. Under terms of the sales
agreement, Tradami, Inc. will pay $1,672,000 in cash. The Company recognized a
gain of $532,000 on the sale.
Also on November 30, 2000, the Company entered into a Services Agreement with
Tradami, Inc. whereby both parties agree to further enter into a License and a
Co-Marketing Agreement. Under the terms of the License agreement, Tradami, Inc.
will develop and license E-commerce technology that will enable the Company to
improve customer service. Under the co-marketing agreement the Company and
Tradami, Inc. will jointly market their services to potential and existing
customers.
17
<PAGE> 18
FRITZ COMPANIES, INC. FORM 10-Q
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents were $85.9 million at November 30, 2000, representing a
$30.4 million increase from the $55.5 million at May 31, 2000. Slightly negative
operating cash flow of $0.3 million through the second quarter was significantly
improved from the negative $24.1 million operating cash flow incurred in the
same period last year. This improvement was driven primarily by better working
capital management.
Capital expenditures through the second quarter totaled $14.1 million, slightly
ahead of the $13.9 million incurred in the same period last year. Capital
expenditures consisted mainly of expenditures for computer hardware and
software, leasehold improvements, and warehouse equipment. The Company paid $1.6
million in cash in connection with an acquisition made in a prior period and
received $1.0 million from asset sales throughout the second quarter.
Cash flow from financing activities exceeded the cash consumed by operating and
investing activities. This occurred due to positive free cash flow overseas but
negative cash flow in the United States. The Company is currently studying tax
efficient means to repatriate funds to the United States, which would reduce
worldwide cash and debt levels.
Earlier this fiscal year, the Company completed the syndication of a new,
two-and-a-half year, $175 million revolving credit facility. On November 30,
2000 the Company had borrowed $81.3 million and had issued $12.5 million in
letters of credit, leaving $81.2 million in available credit. The Company
believes this 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. In addition, with respect
to the announced merger transaction with UPS, investors should be aware of the
following factors, among others: the possibility that the merger will not be
consummated as a result of failure of the Company's stockholders to approve the
merger; the possibility that the merger will be delayed substantially; the
inability to obtain, or meet conditions imposed for, governmental approvals of
the merger; the possibility that the announcement of the merger transaction will
have an adverse impact on the Company's business; and costs relating to the
merger.
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 half 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 half of
fiscal year 2001 was $7.6 million while foreign currency gains realized, during
the first half of fiscal year 2001 was approximately $2.4 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.
18
<PAGE> 19
FRITZ COMPANIES, INC. FORM 10-Q
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. Dependence of the Company on retention and addition of significant
customers.
11. The ability to recruit and retain skilled employees in a tight labor
market.
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.
19
<PAGE> 20
FRITZ COMPANIES, INC. FORM 10-Q
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 November 30, 2000, the Company had forward foreign currency contracts
outstanding of $29.6 million equivalent value with maturities ranging from
December 1, 2000 to December 20, 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
November 30, 2000, the difference between the contract amounts and the fair
values was $0.1 million. 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 $3.0 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.
(dollar amounts in millions)
<TABLE>
<CAPTION>
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 139.5 (50.9) 88.6 (8.9) 8.9
All Other Currencies 15.6 (22.3) (6.7) 0.7 (0.7)
</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
20
<PAGE> 21
FRITZ COMPANIES, INC. FORM 10-Q
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
the 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 November 30, 2000, the Company had an interest rate swap outstanding with
a notional value of Singapore Dollars (SGD) 7.0 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 2.8% on November 30, 2000. The fair value of
this instrument represents the estimated receipts or payments that would be made
to terminate the agreement. On November 30, 2000, the Company would have paid
$0.3 million to terminate the agreement.
On November 30, 2000, the Company had $86 million of cash and cash equivalents,
subject to variable, short-term interest rates. On the same date, the Company
had debt obligations of $166 million, of which $85 million was subject to
variable, short-term interest rate risk. In addition, the Company had $25
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 $24 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.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 5. OTHER EVENTS
On January 10, 2001, the Company, United Parcel Service, Inc., a
Delaware corporation ("Parent"), and VND Merger Sub, Inc., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub"), entered into
an Agreement and Plan of Merger (the "Merger Agreement"). The Merger Agreement
sets forth the terms and conditions of the proposed merger of Merger Sub with
and into Company (the "Merger"). Upon effectiveness of the Merger, each
outstanding share of common stock, par value $0.01 per share, of the Company
(the "Company Common Stock"), other than shares held by the Company, Parent or
Merger Sub, will be converted into the right to receive 0.2 of a share of Class
B common stock, par value $0.01 per share, of Parent (the "Parent Common
Stock"). As a result of the Merger, the Company will become a wholly owned
subsidiary of Parent. The parties intend for the Merger to be treated as a
tax-free reorganization under Section 368 of the Internal Revenue Code of 1986,
as amended, and as a "purchase" for accounting purposes.
Consummation of the Merger is subject to the satisfaction or waiver of
certain conditions, including (1) approval by the stockholders of the Company of
the Merger Agreement and the Merger; (2) effectiveness of a registration
statement registering with the Securities and Exchange Commission the shares of
Parent Common Stock to be issued in the Merger to the stockholders of the
Company; (3) approval of the listing of such shares of Parent Common Stock on
the New York Stock Exchange; (4) expiration or termination of all applicable
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and any other federal, state and foreign law that is intended to
regulate mergers and acquisitions and imposes such a waiting period; and (5)
certain other customary conditions.
Upon effectiveness of the Merger, outstanding director and employee
options to purchase Company Common Stock will be assumed by Parent and become
options to purchase shares of Parent's Class A common stock, par value $.01 per
share. The exercise price and number of shares of Company Common Stock subject
to each such option will be appropriately adjusted based on the 0.2 exchange
ratio.
Pursuant to the Merger Agreement, the Company and its directors,
officers, employees and representatives are prohibited from negotiating with,
soliciting offers from, or providing information to any third party with respect
to any Acquisition Proposal (generally, any proposal or offer to acquire 20% or
more of the assets of the Company and its subsidiaries or 20% or more of the
voting power of the Company Common Stock or any merger or other business
combination). However, if within 60 days of the date of the Merger Agreement
(i.e., January 10, 2001) (or, if earlier than the end of such 60-day period, no
later than the date of the stockholders' meeting held to vote on the Merger),
the Company's Board of Directors, in exercise of its fiduciary duties,
reasonably determines in good faith that the Board is required to do so to
comply with its fiduciary duties to the Company's stockholders under applicable
law, the Board may, in response to a "Superior Proposal" that did not result in
a breach of the foregoing prohibition, furnish information to, and engage in
negotiations with, the proponent of such Superior Proposal. The Merger Agreement
generally defines a Superior Proposal as an Acquisition Proposal relating to
substantially all the assets of the Company or 100% of the Company Common Stock
which is on terms which the Board determines in good faith (x) to be more
favorable from a financial point of view to the stockholders of the Company than
the Merger, (y) is reasonably capable of being completed and (z) for which
financing, to the extent required, is then committed or can be obtained.
22
<PAGE> 23
In accordance with the Merger Agreement, the Board of Directors of the
Company has unanimously adopted resolutions approving, and recommending that the
Company's stockholders approve and adopt, the Merger Agreement and the Merger.
The Board of Directors of the Company also has approved the Company Option
Agreement and the Stockholder Option Agreements described below and the
transactions contemplated by such agreements. The Merger Agreement generally
prohibits the Board from withdrawing or modifying, in either case in a manner
adverse to Parent, its approval or recommendation of the Merger or the Merger
Agreement. If, within 60 days of the date of the Merger Agreement (or, if
earlier than the end of such 60-day period, no later than the date of the
stockholders' meeting held to vote on the Merger), the Board, in exercise of its
fiduciary duties, reasonably determines in good faith that the Board is required
to do so to comply with its fiduciary duties to the Company's stockholders under
applicable law, the Board may, in response to a "Superior Proposal" that did not
result in a breach of the prohibitions described in the preceding paragraph, and
after providing Parent with at least 72 hours advance notice of its decision to
take such action, the Board may modify or propose publicly to modify, in a
manner adverse to Parent, its approval or recommendation of the Merger or the
Merger Agreement.
The Board of Directors of the Company has approved a Rights Plan, as
required by the Merger Agreement, which includes a provision stating that a
person will become an "Acquiring Person" (as such term is defined in the Rights
Plan) if they become the "Beneficial Owner" (as such term is defined in the
Rights Plan) of at least 15% of the Company Common Stock. The Rights Plan also
includes provisions to the effect that: (i) neither the Parent nor the Merger
Sub will become an Acquiring Person as a result of the consummation of the
transactions contemplated by the Merger Agreement, the Company Option Agreement
or the Stockholders Option Agreements; (ii) no "Stock Acquisition Date" or
"Distribution Date" (as such terms are defined in the Rights Plan) will occur as
a result of the consummation of the transactions contemplated by the Merger
Agreement, the Company Option Agreement or the Stockholders Option Agreements;
and (iii) all outstanding rights to purchase issued and outstanding Company
Common Stock under the Rights Plan will expire at the time the certificate of
merger is filed with the Secretary of State of the State of Delaware.
The Company is obligated by the Merger Agreement to pay to Parent a
$13.5 million fee in the event that the Merger Agreement is terminated by Parent
because the Company's Board of Directors' modifies its approval or
recommendation of the Merger Agreement or the Merger when and as permitted by
the Merger Agreement. Alternatively, such fee is payable to Parent in the event
that the Merger Agreement is terminated for any other reason (other than
material breach by Parent) and, within nine months of such termination, the
Company enters into an agreement relating to, or consummates, an Acquisition
Proposal.
23
<PAGE> 24
Pursuant to a Stock Option Agreement, dated as of January 10, 2001 (the
"Company Option Agreement"), between Company and Parent, Company has granted
Parent an option (the "Option") to purchase 3,707,609 shares of Company Common
Stock (approximately 10.1% of the outstanding Company Common Stock) at a
purchase price per share equal to the lower of (1) 0.2 multiplied by the average
closing price per share of Parent Class B common stock and (2) the average
closing price per share of the Company Common Stock calculated in accordance
with the terms of the Company Option Agreement. The number of shares of Company
Common Stock subject to the Option will be adjusted if necessary so that the
number of shares purchaseable by the Parent upon exercise of the Option is equal
to 10.1% of the total outstanding shares of Company Common Stock. The Option
will become exercisable after the occurrence of any event as a result of which
Parent is entitled to receive the termination fee described above.
Lynn C. Fritz, the Chairman of the Board of the Company, and Tamara
Fritz, who beneficially owned as of January 10, 2001 approximately 35.2 % of the
outstanding shares of Company Common Stock, have entered into Stockholder Option
Agreements with Parent. Pursuant to these agreements, Mr. and Mrs. Fritz have,
among other things, granted to Parent options (collectively, the "Stockholder
Option") to purchase such shares at a per share price equal to 0.2 multiplied by
the average closing price per share of Parent Class B common stock. The
Stockholder Option is exercisable generally following (i) a tender offer by a
third party which would result in such third party holding more than 20% of the
outstanding Company Common Stock; (ii) the Company authorizing or publicly
announcing a merger or acquisition by a third party or taking any action which
violates the prohibitions on negotiating with, soliciting offers from or
providing information to third parties with respect to any Acquisition Proposal
(as described above); (iii) a third party acquiring the ability to control more
that 15% of the outstanding Company Common Stock; or (iv) a third party making
an offer to acquired more than 20% of the assets of the Company or of the
outstanding Company Common Stock and such offer having been publicly announced.
Pursuant to these agreements, Mr. and Mrs. Fritz also have agreed to vote their
shares of Company Common Stock in favor of the Merger at any meeting of Company
stockholders held to consider and vote upon the Merger and otherwise in the
manner directed by Parent on all matters presented for a vote of Company
stockholders during the term of the Stockholder Options and have granted to
Parent a proxy to so vote their shares of Company Common Stock.
The Company currently anticipates that the Merger will become effective
during the third quarter of fiscal year 2001.
Copies of the Merger Agreement, the Company Option Agreement and the
Stockholder Option Agreements are filed herewith as Exhibits 2.1, 2.2, 2.3, 2.4,
2.5 and 2.6, respectively. The foregoing descriptions of these agreements are
qualified in their entirety by reference to the full text of each of such
exhibits.
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<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of January 10, 2001, among Fritz
Companies, Inc., United Parcel Service, Inc., and VND Merger Sub, Inc.
(the disclosure letters to such agreement are not filed herewith and
the contents thereof are listed on the last page of Exhibit 2.1. The
registrant hereby undertakes to furnish supplementally a copy of any
omitted portion of the disclosure letters to the Securities and
Exchange Commission upon request).
2.2 Stock Option Agreement, dated as of January 10, 2001, between Fritz
Companies, Inc. and United Parcel Service, Inc.
2.3 Stockholder Option Agreement, dated as of January 10, 2001, between
United Parcel Service, Inc. and Lynn C. Fritz.
2.4 Stockholder Option Agreement, dated as of January 10, 2001, between
United Parcel Service, Inc. and Tamara Fritz.
2.5 Stockholder Option Agreement, dated as of January 10, 2001, between
United Parcel Service, Inc. and the Lynn C. Fritz 1999 Grantor Retained
Annuity Trust.
2.6 Stockholder Option Agreement, dated as of January 10, 2001, between
United Parcel Service, Inc. and the Tamara Fritz 1999 Grantor Retained
Annuity Trust.
10.1 Resignation and Consulting Agreement between Raymond Smith and Fritz
Companies, Inc., dated October 25, 2000.
10.2 Employment Agreement between Graham R. F. Napier and Fritz Companies,
Inc., dated November 9, 2000.
15 Letter regarding unaudited interim financial information.
27 Financial Data Schedule.
(b) The Company filed the following reports on Form 8-K during the
quarterly period ended November 30, 2000 and through the date hereof:
None.
25
<PAGE> 26
FRITZ COMPANIES, INC. FORM 10-Q
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 16, 2001
/s/ Lynn C. Fritz
--------------------------------------
Lynn C. Fritz
Chairman of the Board and
Chief Executive Officer
/s/ Graham R. F. Napier
--------------------------------------
Graham R. F. Napier
President and Chief Operating Officer
/s/ Ronald Dutt
--------------------------------------
Ronald Dutt
Executive Vice President and
Chief Financial Officer and
Principal Accounting Officer
/s/ Janice Washburn
--------------------------------------
Janice Washburn
Vice President and Controller
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of January 10, 2001, among Fritz
Companies, Inc., United Parcel Service, Inc., and VND Merger Sub, Inc.
(the disclosure letters to such agreement are not filed herewith and the
contents thereof are listed on the last page of Exhibit 2.1. The
registrant hereby undertakes to furnish supplementally a copy of any
omitted portion of the disclosure letters to the Securities and Exchange
Commission upon request).
2.2 Stock Option Agreement, dated as of January 10, 2001, between Fritz
Companies, Inc. and United Parcel Service, Inc.
2.3 Stockholder Option Agreement, dated as of January 10, 2001, between
United Parcel Service, Inc. and Lynn C. Fritz.
2.4 Stockholder Option Agreement, dated as of January 10, 2001, between
United Parcel Service, Inc. and Tamara Fritz.
2.5 Stockholder Option Agreement, dated as of January 10, 2001, between
United Parcel Service, Inc. and the Lynn C. Fritz 1999 Grantor Retained
Annuity Trust.
2.6 Stockholder Option Agreement, dated as of January 10, 2001, between
United Parcel Service, Inc. and the Tamara Fritz 1999 Grantor Retained
Annuity Trust.
10.1 Resignation and Consulting Agreement between Raymond Smith and Fritz
Companies, Inc., dated October 25, 2000.
10.2 Employment Agreement between Graham R. F. Napier and Fritz Companies,
Inc., dated November 9, 2000.
15 Letter regarding unaudited interim financial information
27 Financial Data Schedule
</TABLE>
27
