1
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, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-20548
FRITZ COMPANIES, INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 94-3083515
________________________________________________________________________________
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
706 Mission Street, Suite 900, San Francisco, California 94103
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 904-8360
Not applicable
________________________________________________________________________________
(Former name, former address and former fiscal year if changed from
last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.[X] Yes [ ] No
As of August 31, 1998 there were 36,259,211 shares of common stock
outstanding.
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FRITZ COMPANIES, INC. FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Accountants' Review Report 3
Condensed Consolidated Balance Sheets as of August 31,
1998 and May 31, 1998 4
Condensed Consolidated Statements of Operations for the
three months ended August 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Market Risk Disclosure 14
PART II. OTHER INFORMATION 15
SIGNATURES 16
EXHIBIT INDEX 17
3
FRITZ COMPANIES, INC. FORM 10-Q
Independent Accountants' Review Report
Board of Directors and Stockholders
Fritz Companies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet
of Fritz Companies, Inc. and subsidiaries (the Company) as of August
31, 1998, and the related condensed consolidated statements of
operations and cash flows for the three month periods ended August 31,
1998 and 1997 included in the Company's Form 10-Q. These condensed
consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Fritz Companies,
Inc. and subsidiaries as of May 31 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated June
30, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of May 31,
1998, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
By: /s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
San Francisco, California
September 28, 1998
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FRITZ COMPANIES, INC. FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
August 31, May 31,
1998 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 63,535 $ 53,935
Accounts receivable, net of allowance for doubtful
accounts of $23,285 and $23,232 in May 1998 414,946 406,381
Deferred income taxes 16,693 16,978
Prepaid expenses and other assets 19,336 23,142
Total current assets 514,510 500,436
PROPERTY AND EQUIPMENT - NET 88,935 92,049
OTHER ASSETS:
Intangibles, net of accumulated amortization
of $17,577and $16,866 in May 1998 112,058 112,965
Other assets 17,460 16,948
Total other assets 129,518 129,913
TOTAL ASSETS $732,963 $722,398
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations and
short-term borrowings $ 4,717 $ 4,764
Accounts payable 278,992 266,863
Accrued liabilities 72,884 74,880
Income tax payable 14,838 12,394
Total current liabilities 371,431 358,901
LONG-TERM OBLIGATIONS 89,622 101,346
DEFERRED INCOME TAXES 2,638 1,585
OTHER LIABILITIES 9,955 10,238
TOTAL LIABILITIES 473,646 472,070
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share; 60,000 shares
authorized, 36,259 shares issued and outstanding,
(35,896 shares issued and outstanding as of May 31,1998) 363 359
Additional paid-in capital 135,222 131,797
Retained earnings 137,661 130,985
Accumulated other comprehensive income (13,929) (12,813)
Total stockholders' equity 259,317 250,328
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $732,963 $722,398
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements.
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FRITZ COMPANIES, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
August 31,
1998 1997
REVENUE $342,329 $ 326,699
FREIGHT CONSOLIDATION COSTS 197,183 187,460
NET REVENUE 145,146 139,239
OPERATING EXPENSES
Salaries and related costs 84,282 80,059
General and administrative 51,033 52,457
Total operating expenses 135,315 132,516
INCOME FROM OPERATIONS 9,831 6,723
OTHER INCOME (EXPENSE) (13) (868)
INCOME BEFORE TAX EXPENSE 9,818 5,855
INCOME TAX EXPENSE 3,142 2,049
NET INCOME $ 6,676 $ 3,806
Weighted average shares outstanding - Basic 35,838 35,670
Earnings per share - Basic $ .19 $ .11
Weighted average shares outstanding - Diluted 36,036 35,924
Earnings per share - Diluted $ .19 $ .11
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements.
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FRITZ COMPANIES, INC. FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
August 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,676 $ 3,806
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,509 6,852
Deferred income taxes 1,269 (3,107)
Stock Compensation 602 2,257
Other (231) ----
Effect of changes in:
Receivables (8,565) (25,563)
Prepaid expenses and other current assets 3,806 2,321
Payables and accrued liabilities 14,937 16,551
Net cash provided by operating activities 25,003 3,117
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,233) (4,387)
Acquisitions, new and contingent (710) (1,172)
Acquisitions, debt (962) (1,661)
Proceeds from sale of fixed assets 64 959
Other 739 (1,396)
Net cash used in investing activities (6,102) (7,657)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings (100) 1,305
Proceeds from issuance of long-term obligations 398 6,591
Long-term obligations repaid (10,635) (2,140)
Other 208 134
Net cash provided by (used in) financing activities (10,129) 5,890
Foreign currency translation effect on cash 828 (248)
INCREASE IN CASH AND EQUIVALENTS 9,600 1,102
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 53,935 43,368
CASH AND EQUIVALENTS AT END OF PERIOD $63,535 $ 44,470
OTHER CASH FLOW INFORMATION:
Income taxes paid $ 492 $ 1,561
Interest paid $ 388 $ 786
See accompanying independent accountants' review report and
notes to condensed consolidated financial statements
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FRITZ COMPANIES, INC. FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
1.GENERAL
The accompanying condensed consolidated financial statements
of Fritz Companies, Inc. and subsidiaries (the Company) for the
three months ended August 31, 1998 and 1997 are unaudited and, in
the opinion of management, contain all adjustments, consisting
only of normal and recurring adjustments, necessary for a fair
presentation of the results of such periods. Certain prior year
amounts have been reclassified to conform to the current year's
financial statement presentation.
The significant accounting policies followed by the Company
are described in Note 1 to the audited consolidated financial
statements for the year ended May 31, 1998. In accordance with
SEC regulations, certain information and footnote disclosures
normally included in the annual financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted for the purposes of the condensed
consolidated interim financial statements. The condensed
consolidated financial statements should be read in conjunction
with the consolidated financial statements, including the notes
thereto, for the year ended May 31, 1998 included in the
Company's Form 10-K filed on July 20, 1998. The results of
operations for the three months ended August 31, 1998 may not
necessarily be indicative of the results to be expected for the
full year.
Effective June 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for the
reporting of comprehensive income and its components in financial
statements. Comprehensive income consists of net income and
other gains and losses affecting shareholders' equity that, under
generally accepted accounting principles, are excluded from net
income. For the Company, these components of comprehensive
income consist of foreign currency translation gains and losses.
The components of total comprehensive income for interim
periods are presented in the following table:
Three Months Ended
1998 1997
Net Income $ 6,676 $ 3,806
Other comprehensive income (loss):
Foreign currency translation adjustment (1,116) (4,830)
Total comprehensive income(loss) $ 5,560 $(1,024)
During the quarters ended August 31, 1998 and 1997 the
Company maintained its policy to reinvest the earnings of the non-
United States subsidiaries as a long-term commitment.
Accordingly, the "foreign currency translation adjustments" have
not been adjusted for United States taxes.
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FRITZ COMPANIES, INC. FORM 10-Q
2. NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP provides guidance for accounting for the
costs of computer software for internal use whether developed or
purchased. The provisions of the SOP are effective for financial
statements for the Company's fiscal year ended May 31, 1999.
Adoption of this SOP is not expected to materially impact the
Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting
standards for operating segments and related disclosures about
products, services, geographic areas and major customers. The
reporting requirements of this statement are effective for the
Company's fiscal year ended May 31, 1999. The effect of this
statement will be limited to the form and content of the
Company's disclosures and is not expected to materially impact
the Company's results of operations, cash flow or financial
position.
3. COMMON STOCK
The increase in common stock issued and paid in capital was
primarily due to shares issued upon exercise of options,
restricted stock grants and issuance of shares under the employee
stock purchase plan.
4. INCOME TAXES
Income tax expense for the three months ended August 31, 1998
consisted of approximately $1.8 million of current tax provision
and $1.3 million of deferred tax expense. The Company's global
effective tax rate is 32%.
5. ACQUISITIONS
The Company recorded approximately $0.7 million and $3.4
million for the three months ended August 31, 1998 and 1997,
respectively, of additional purchase price relating to
achievement of specified net revenue or pre-tax income levels of
certain prior acquisitions. At August 31, 1998, the remaining
maximum payments in connection with acquisitions providing a
contingent purchase price is approximately $2.9 million. There
is no certainty these businesses will achieve the revenue or
profit levels to require these contingent payments.
6. CONTINGENCIES
The Company is party to routine litigation incident to its
business, primarily claims for goods lost or damaged in transit
or improperly shipped. Most of the lawsuits in which the Company
is the defendant are covered by insurance and are being defended
by the Company's insurance carriers.
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FRITZ COMPANIES, INC. FORM 10-Q
In 1996, a total of six complaints were filed (three in
federal court and three in state court of California) against the
Company and certain of its then officers and directors,
purporting to be brought on behalf of a class of purchasers or
holders of the Company's stock between August 28, 1995 and July
23, 1996. The complaints allege various violations of Federal
Securities law and California Corporate Securities law in
connection with prior disclosures made by the Company and seek
unspecified damages.
The three class action suits filed against the Company in
state court were dismissed with prejudice by the Superior Court
of California for the County of San Francisco on grounds the
claims asserted under the California Corporate Securities law and
common law fraud were not legally tenable. One of the dismissals
has been reversed on appeal, permitting the plaintiff to file an
amended complaint. That amended complaint was dismissed with
leave to amend.
The three class action suits filed against the Company in
federal court were consolidated into one suit which was dismissed
with prejudice, finding that plaintiffs had not alleged any
statement that was false and misleading in violation of the
federal securities laws. Plaintiffs have filed an appeal with
the Ninth Circuit Court of Appeals. That appeal is pending.
The Company is unable to predict the ultimate outcome of these
suits and it is possible the outcome could have a significant
adverse impact on the Company's future consolidated results of
operations. However, the Company believes the ultimate outcome
of these matters will not have a significant adverse impact on
the Company's financial position or its results of operations.
7. SUBSEQUENT EVENT
None.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion is applicable to the Company's
financial condition and results of operations for the three
months ended August 31, 1998 and 1997. See Note 1 of Notes to
Condensed Consolidated Financial Statements.
Results of Operations
The following table provides the revenue, and net revenue, in
thousands of dollars and percentages attributable to the
Company's principal logistics services during the periods
indicated (in thousands, except percentages):
Three Months Ended August 31,
1998 % 1997 %
REVENUE:
Customs brokerage $ 41,838 12.2 $ 41,222 12.6
Ocean freight forwarding 107,916 31.5 97,455 29.8
Airfreight forwarding 143,462 41.9 143,256 43.9
Warehousing and distribution 49,113 14.4 44,766 13.7
Total revenue $342,329 100.0 $ 326,699 100.0
NET REVENUE:
Customs brokerage $ 41,838 28.8 $ 41,222 29.6
Ocean freight forwarding 31,546 21.7 30,222 21.7
Airfreight forwarding 40,412 27.9 38,091 27.4
Warehousing and distribution 31,350 21.6 29,704 21.3
Total net revenue $145,146 100.0 $ 139,239 100.0
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FRITZ COMPANIES, INC. FORM 10-Q
Three Months Ended August 31, 1998 Compared with Three Months
Ended August 31, 1997
Revenue and Net Revenue: For the first quarter of fiscal year
1999, revenue increased 4.8% to $342.3 million from $326.7
million for the comparable period in the prior year and net
revenue increased 4.2% to $145.1 million from $139.2 million for
the comparable period in the prior year. All of the Company's
principal service areas reported revenue increases. The effect
of translation rate changes during the period adversely affected
the growth rates in revenue and net revenue by approximately five
and four percentage points, respectively.
Customs brokerage net revenue increased 1.5% to $41.8 million
from $41.2 million reported in the prior year. The number of
United States Customs entries filed by the Company during the
quarter increased approximately 4.7% to 226 from 216 for the same
period in the prior year. Management believes that the Asian
economic crisis contributed to the growth in imports which in
turn contributed to the increase in United States customs
entries. However, price competition in certain portions of the
customs brokerage business resulted in downward pressure on
prices.
Ocean freight forwarding revenue and net revenue increased
10.7% and 4.4%, respectively, due to the increased shipping
volumes from existing and new customers. The increase in ocean
revenues was led by Non-Vessel Operating Common Carrier (NVOCC)
imports into the United States and Canada from Europe and Asia.
Net revenue as a percentage of gross revenue decreased to 29.2%
from 31.0% reported in the prior year. The decrease in margins
resulted from rapidly increasing transportation rates and
shortages in outbound capacity and locally available empty
containers in the Asian export markets, which have plagued the
industry throughout the quarter.
Airfreight forwarding revenue remained constant while net
revenues increased by 6.1%. The increase in net revenue is due
to the increased number of shipments and total chargeable weight
of cargo shipped. The increase in the number of shipments was
primarily provided from existing customers. Net revenue as a
percentage of gross revenue increased to 28.2% from 26.6%
reported in the prior year. Aggressive purchasing of export
cargo space from the United States allowed the Company to profit
from changes in the market's spot rate pricing structure. In
addition, a significant portion of the increase in net revenues
and margins is due to increased United States domestic airfreight
services.
Warehousing and distribution revenue and net revenue increased
9.7% and 5.5%, respectively. The greatest growth was in the
United States where new customers, programs and increased volumes
grew revenues in sites such as Seattle, Rochester, Chicago and
Dallas. In addition, the growth in revenues and net revenues is
due to increased demand from existing integrated logistics
customers, expansion of overseas services, expansion of warehouse
facilities and strong European economies.
Operating Expenses: Operating expenses increased 2.1% from
$132.5 million to $135.3 million for the first quarter of
fiscal year 1999 compared to the comparable period in the
prior year. Salaries and related costs increased due to
higher labor costs associated with Year 2000 compliance and
the Company's new global transportation and financial
systems. In addition, the increase was also concentrated in
the implementation of the Company's hubbing initiative
related to the
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FRITZ COMPANIES, INC. FORM 10-Q
Company's United States brokerage business. The increase in
salaries and related costs was partially offset by a decrease
in general and administrative expenses. Salaries and related
costs as a percentage of net revenue increased to 58.1% from
57.5% reported in the prior year.
Liquidity and Capital Resources
The Company's cash and equivalents increased $9.6 million to
$63.5 million at August 31, 1998 from $53.9 million at May 31,
1998. Positive cash flow from operations of $25.0 million during
the quarter was partially used to fund capital expenditures of
$5.2 million resulting in free cash flow of $19.8 million.
Capital expenditures were incurred for computer hardware and
software, leasehold improvements and warehouse equipment. Debt
was reduced during the quarter by $11.8 million.
The Company paid $1.7 million in cash in connection with earn
out provisions for acquisitions made in prior periods. These
payments consisted of reductions to existing debt totaling $1.0
million and additional payments to the sellers of the acquired
businesses totaling $0.7 million resulting from achievement of
specified net revenue or pre-tax income levels from operating
units with purchase price contingencies.
As of August 31, 1998, the balance outstanding under the $100.0
million syndicated multi-currency credit facility (the Credit
Facility) was $14.0 million, consisting of outstanding letters of
credit. Therefore, the Company's total available borrowing
capacity under the Credit Facility as of August 31, 1998 was
approximately $86.0 million.
"Safe Harbor" Statement Under the Private Securities Litigation
Reform Act of 1995:
In this document, the Company makes forward-looking statements
that are subject to risks and uncertainties. These forward-
looking statements include information about possible or assumed
future results of our operations. Also, when we use any of the
words "believes", "expects", "anticipates" or similar
expressions, we are making forward-looking statements. Many
possible events or factors could affect the future financial
results and performance of the Company. This could cause results
or performance to differ materially from those expressed in our
forward-looking statements. These possible events or factors
include those set forth in the "Risk Factors" and "Year 2000"
sections of this document.
Year 2000
As many computer systems, including some of those utilized by
the Company, use only two digits to represent the year in the
date field, they may be unable to process accurately certain data
before, during or after the year 2000. As a result, business and
governmental entities are at risk for possible miscalculations or
systems failures causing disruptions in their business
operations. This is commonly known as the Year 2000 (Y2K) issue.
As an international freight forwarder, customs broker and
logistics provider operating in numerous countries, the Company
is reliant on its computer systems and applications to conduct
its business. In addition to its internal systems, the Company
is also reliant upon system capabilities of third parties with
which the Company has major business relationships in the conduct
of its business. The key United States and international
business computer systems of the Company are its transportation
(ocean freight,
airfreight and trucking), customs, warehousing management,
marketing and financial systems. The Company has established a
program management office to identify and resolve specific Y2K
issues related to it operations. In addition, an inventory and
assessment of Y2K issues within the Company's global systems,
hardware, and embedded chips have been accomplished. The Company
expects all of its business systems to be fully Y2K compliant by
June 1999 except for the Canadian systems which the Company
expects to be compliant by August 1999.
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FRITZ COMPANIES, INC. FORM 10-Q
The Company's United States transportation and warehousing
management systems are already Y2K compliant. Y2K specific
testing of the mainframe equipment is expected to be completed by
February 1999. Changes to make other major United States
business systems, including the customs, marketing and financial
systems, Y2K compliant are also underway with modifications to
the customs, marketing and financial systems expected to be
complete by April 1999.
The Company's implementation plan for its international
stations includes the replacement of certain non-Y2K compliant
transportation and financial systems and the upgrade and
modification of the existing Canadian business systems. The
Company's international warehousing systems are already Y2K
compliant. The replacement of the European, Asian and Latin
American transportation and financial systems involves the
installation of completely new software that has been designed
and developed to be Y2K compliant. Deployment of these
replacement systems will begin in the European stations during
the latter months of 1998, moving on to Asian and Latin American
stations thereafter. The replacement of these international
systems is expected to be complete by June 1999. The Canadian
business systems will undergo specific upgrades and modifications
to be Y2K compliant. Final implementation and testing of the
Canadian system upgrades and modifications are expected to be
completed by August 1999.
The testing and implementation phases of the embedded chips
within the Company's computer systems resulted in minimal
findings of non-compliance which required either a fix or
replacement. Further testing and implementation of other Y2K
issues related to embedded chips in the Company's computer
systems is scheduled to occur during the latter part of 1998.
Additionally, the Company has engaged outside consultants to
assist in identifying specific associated risks and to provide
solutions to Y2K issues regarding non-computer related embedded
chips.
The Company has initiated communications with third parties
(i.e., customers, vendors, governmental agencies, etc.) around
the world with whom the Company has material direct and indirect
business relationships to determine the extent to which the
Company's systems are vulnerable to those third parties' failure
to make necessary changes related to Y2K issues. The intent of
these inquiries through questionnaires and interviews is to
ascertain the level of readiness of the identified customers,
carriers, ocean ports and airports, government agencies, and
financial institutions. Most ocean carriers and trucking firms
have already responded to the Company's inquiries and have
indicated that they will be Y2K compliant on a timely basis. To
date, the Company is still continuing to gather information from
the airlines. Financial institutions with which the Company is
doing business are in the process of being contacted. Contact
information is being gathered for ocean ports and airports, and
communications with those entities have begun. U.S. Customs
claims to be well along in their effort toward compliance with a
target date of October 1, 1998 for having all major systems Y2K
compliant. Year 2000 efforts of Customs bureaus in other
countries are being monitored and are varying in scope and
progress to date. Despite written
assurances, there are no guarantees that the systems of other
parties on which the Company relies will be compliant. These
potential interruptions may have a material adverse effect on the
Company's operations.
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FRITZ COMPANIES, INC. FORM 10-Q
Total costs to replace or modify the Company's business systems
for Y2K are estimated to be approximately $6.0 million, of which
$1.9 million has been earmarked for unforeseen contingencies.
These costs, exclusive of the cost of replacement systems that are
being capitalized and amortized in accordance with the Company's
policies, are being expensed as incurred. The expected funding of
all system costs is through internally generated cash flows from
operations or borrowed funds. The costs associated with the
replacement of the international stations' operating and financial
systems are not included in the above estimates as Y2K compliance
is incidental to the operating procedures and controls expected to
be derived from these systems. Included in the estimate are the
costs for outside consultants and internal staff for design and
programming of systems, the replacement or modification of software
purchased or internally developed, and the implementation of
contingency plans. As of September 30, 1998, approximately $1.3
million of Y2K costs have been incurred. No significant
information technology projects have been deferred as a result of
the Y2K effort as the Company has augmented its systems development
staff for this effort. There can be no assurance the costs to
replace or modify the Company's business systems will not exceed
the Company's current estimates nor that other information
technology projects will be uninterrupted.
Because of the numerous systems used by the Company, the
significant number of third parties who have a material business
relationship with the Company, the extent of the Company's
foreign operations, including operations within countries that
are not actively promoting correction of Y2K issues, the Company
presently believes that it may experience some disruption in its
business due to the Y2K issue although the Company believes its
systems will be Y2K compliant by August 1999. In the event that
the Company's systems or the systems of those third parties who
have a material business relationship with the Company are not
Y2K compliant by January 1, 2000, the Company's business and
results of operations may be materially and adversely affected as
the Company will be required to shift portions of its daily
operations to manual processes in certain countries. The Company
will face time delays in its daily operations and increased
processing costs due to the required shift to manual processes.
In addition, the Company may not be able to provide customers
with timely and pertinent information regarding their orders or
shipments, which may negatively affect customer relations and
lead to the potential loss of customers even though monetary
consequences would be limited by the Company's standard terms and
conditions. The Company has determined that operating in a
manual mode for some limited time is a workable alternative. The
Company believes that a greater risk for disruption to its
business exists with Y2K noncompliance of third parties that have
major business relationships with the Company. The possible
consequences of noncompliance include, among other things,
inability to provide service to certain areas of the world,
delays in delivery of product and invoicing errors with resultant
collection difficulties. The Company believes these third party
risks are inherent in the industry and not specific to the
Company. The Company is unable to estimate the potential
financial impact of the scenarios described above. However, the
Company believes that its Y2K readiness program, including the
contingency plans described below, should reduce any material
adverse effect that any such disruptions may have.
The Company is currently identifying and developing specific
contingency plans intended to mitigate the effects of a Y2K
disruption. In the event of a
Y2K disruption resulting from a Company system or other third party system
failure, the Company will be able to provide adequate resources to successfully
transition from automated systems processes to manual processes. In addition,
the Company will have the ability to engage outside temporary
14
FRITZ COMPANIES, INC. FORM 10-Q
labor to increase manual productivity. Prior to January 1, 2000 the Company will
procure materials and forms required for manual processes and entries in order
to facilitate the manual processes. The Company is currently identifying
specific third parties, which the Company has major business relations with that
will be Y2K compliant. For those parties for which the Company has identified to
be non-Y2K compliant, the Company will secure alternate carriers who are Y2K
ready in order to continue to provide basic business services.
Risk Factors
The Company's worldwide operations are transacted in many
currencies other than the U.S. dollar. Accordingly, the Company
is exposed to inherent risks of international currency markets
and governmental regulations. The Company manages these currency
exposures through a variety of means such as hedging, conversion
of other national currencies into U.S. dollars, accelerating and
decelerating international payments among the Company's offices
and agents. The Company's translation adjustment and foreign
exchange gains for the first quarter of fiscal 1999 increased due
to the strengthening of the U.S. dollar relative to certain
currencies of Asia, Europe and Latin America. The charge to
equity in the currency translation adjustment during the first
quarter of fiscal 1999 was $1.1 million while net foreign
currency gains realized during the first quarter of fiscal 1999
were approximately $1.5 million. Devaluation of foreign
currencies could adversely impact the financial results of the
operations in future periods.
The Company's ability to provide service to its customers is
highly dependent on good working relationships with a variety of
entities such as airlines, steamship carriers and governmental
agencies. Changes in space allotments available from carriers,
governmental deregulation efforts regulations governing the
Company's products and/or the international trade and tariff
environment could affect the Company's business in unpredictable
ways.
Management believes the Company's business has not been
adversely affected by inflation in the past. Historically, the
Company has generally been successful in passing cost increases
to its customers by means of price increases. However,
competitive marketplace conditions could impede the ability to
pass future cost increases to customers and could erode the
Company's operating margin.
Additional risks and uncertainties include:
(i)The Company's ability to continue its improvement
in operating results and cash flow,
(ii) Dependence of the Company on international
trade and worldwide economic conditions,
(iii) Dependence of the Company on the continued
services of key executives and managers,
(iv) Risks associated with the Company's acquisition
strategy, including:
(a) Diversion of management's attention to the
assimilation of the operations and personnel of
acquired companies,
(b) Potential adverse short-term effects of acquisitions on the
Company's operating results, and
(c) Integration of financial reporting systems
and acquired assets.
(v)The possible inability of the Company's information
systems to keep pace with the increasing complexity
and growth of the Company's business,
15
FRITZ COMPANIES, INC. FORM 10-Q
(vi) The increasing level of investment required by
the transition of the Company from prior
predominance of customs brokerage revenue to its
increasing emphasis on integrated logistics and
providing a full range of international
transportation and supply chain management
services,
(vii) Diversion of management focus and resources as
a result of pending litigation,
(viii) Other risks disclosed elsewhere in this Form 10-
Q or in the Company's other filings with the
Securities and Exchange Commission.
Recent Accounting Pronouncements
See Note 2 of the Notes to Condensed Consolidated Financial
Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE
The Company's market capitalization as of January 28, 1997 did
not exceed $2.5 billion. Therefore, in accordance with the
instructions to this item, this item as part of this report is
not applicable.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15 Letter regarding unaudited interim financial information,
Edgar Filing Only.
27 Financial Data Schedule, Edgar Filing Only.
(b) The company filed the following reports on Form 8-K during the
quarter ended August 31, 1998 and through the date hereof:
1. September 16, 1998
Item 5. Other Events
On September 16, 1998, the Company issued a press release
announcing the Board authorized stock repurchase program of
up to $5 million of the Company's common stock.
16
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: October 7, 1998
/s/ LYNN C. FRITZ
------------------------------------
Lynn C. Fritz
Chairman and Chief Executive Officer
/s/ DENNIS L. PELINO
-------------------------------------
Dennis L. Pelino
President and Chief Operating Officer
/s/ ROBERT AROVAS
-------------------------------------
Robert Arovas
Executive Vice President and
Chief Financial Officer
17
EXHIBIT INDEX
Exhibit Page
15 Letter regarding unaudited interim financial information 18
27 Financial Data Schedule 19