ITEM 1 - BUSINESS
General
Fritz Companies, Inc. (the Company) is a leader in providing global logistics services and related information services for importers and exporters worldwide. The Company is primarily engaged in providing logistics management, international air and ocean freight forwarding, customs brokerage, warehousing and distribution services. The Company also provides value-added services for logistics information and the international and domestic movement of goods in addition to those customarily provided by traditional freight forwarders and customs brokers. These services are designed to provide integrated global logistics solutions for customers in order to streamline their operations, improve logistics information, enhance their profitability and provide them with more efficient and effective international transportation strategies.
The Company was incorporated in Delaware in August 1988 and is a successor to a company incorporated in California in 1933. Internationally, the Company operates a number of subsidiaries under the names "Fritz Transportation International", "Fritz Air Freight", "Starber Fritz", "Fritz Fliway", "Fritz Logistics", and "Fritz Companies", among others. Unless the context otherwise requires, references in this Form 10-K to the Company include Fritz Companies, Inc., its subsidiaries and its predecessor companies. Although the Company's executive office is located in the United States at 706 Mission Street, Suite 900, San Francisco, California 94103, its network is global. The Company has offices throughout the United States, Asia, Europe and Latin America.
See Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements, including the Notes thereto, for data related to the Company's revenue, operating profit and identifiable assets by geographic regions.
Effective June 1, 1995, the Company approved the change from a fiscal year end of December 31 to a fiscal year end of May 31. The period from January 1, 1995 through May 31, 1995 is referred to herein as the "Transition Period".
The following table shows the revenue and net revenue, in thousands of dollars and as a percentage of total revenue or net revenue, as the case may be, attributable to the Company's principal logistics services:
(a) The unaudited twelve months ended May 31, 1995 is provided for comparative purposes. As discussed in Note 1 of Notes to Consolidated Financial Statements, effective May 31, 1995 the Company changed its fiscal year end of December 31 to a fiscal year end of May 31. The May 31, 1995 period represents combined operating results reported for Fritz Companies, Inc. and Intertrans Corporation (Intertrans) for the twelve months ended March 31, 1995 and April 30, 1995, respectively, accounted for as a pooling of interests.
Recent Developments and Acquisitions
The Company's net revenue increased 25% to $457.6 million in 1996 from $366.5 million in 1995. Management attributes this growth principally to its continued implementation of integrated logistics programs for new and existing customers worldwide and continued expansion of the Company's global network and product services through internal developments and strategic acquisitions.
On May 30, 1995, the Company and Intertrans completed the merger of the two companies. In the merger, each outstanding share of Intertrans common stock was converted into the right to receive 0.365 of a share of Fritz Companies common stock. The Intertrans business is now operated under the name "Fritz Air Freight".
This merger was accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements have been restated, for all periods prior to the merger, to include the results of operations, financial position and cash flows of Intertrans. In addition, all information in this Form 10-K incorporates both the Company and Intertrans.
The Company continued to make strategic acquisitions in 1996. Among the companies acquired were the following:
The Company's strategy continues to focus on the following elements: emphasize integrated transportation logistics, devote resources to expanding and enhancing the Company's global network and information systems, pursue strategic acquisitions and focus on quality.
Narrative Description of Business
International Airfreight and Ocean Freight Forwarding: The Company believes that it is one of the largest forwarders of international airfreight and ocean freight in the United States.
The Company's revenue from international ocean freight forwarding is derived from logistics services both as an indirect ocean carrier (a "Non-Vessel Operating Common Carrier" or "NVOCC") and as an authorized agent for shippers and importers. The Company's revenue from international airfreight forwarding is derived from logistics services both as an indirect air carrier and as an authorized cargo sales agent of various airlines.
The Company provides additional logistics services such as inland transportation of freight from point of origin to distribution center or the carrier's cargo terminal, warehousing, protective packing, cargo consolidation, document preparation and electronic transmittal, electronic purchase order/shipment tracking, inventory management, expedited document delivery for customs clearance and priority notification to consignee of cargo arrival.
The Company serves a broad range of freight forwarding customers. The Company's principal ocean freight forwarding customers are retailers, as well as industrial companies shipping automobiles and related parts, heavy equipment, steel, chemicals, forest products and produce. In general, airfreight has a high value relative to its weight and the cost of shipment is only a small portion of its value. The principal customers for airfreight are shippers of medical equipment and parts, drugs and pharmaceuticals, computers and high technology equipment and parts, aircraft and automotive parts, electrical equipment, machinery and machine parts, chemicals, high fashion apparel, measuring and testing instruments.
As an indirect ocean carrier (NVOCC) and an indirect air carrier, the Company procures customer shipments, consolidates shipments bound for a particular destination, determines the routing over which the consolidated shipments will move, selects the direct carrier or charters a ship or aircraft, and tenders each consolidated lot as a single shipment to the direct carrier for transportation to a distribution point. The Company's rates are based on the shipment weight and/or volume and generally decrease as the weight or volume of the shipment increases. The Company ordinarily charges the shipper a rate less than the rate which the shipper would be charged by a steamship line or an airline. As a result of its consolidation of customers' shipments, the Company is able to obtain lower rates from steamship lines or airlines than the rates the Company charges to its customers for individual shipments. In addition, in certain tradelanes, due to the high volume of freight controlled by the Company, the Company is able to obtain lower contracted rates from certain carriers or charter operators. This rate differential is the primary source of the Company's net ocean and airfreight forwarding revenue as an indirect carrier.
By accepting goods for ocean or air shipment as an indirect carrier, the Company assumes the role of a carrier and becomes responsible to the shipper for the safe delivery of the shipments subject to a legal limitation on liability of $500 per ordinary shipping unit in the case of ocean freight and $20.00 per kilogram in the case of airfreight. Because the Company's relationship to the steamship line or airline is that of a shipper to a carrier, the steamship line or airline generally assumes the same responsibility to the Company as the Company assumes to its clients.
As an authorized agent for shippers and importers, and as an authorized cargo agent of various airlines, the Company arranges for the transportation of individual shipments and receives a commission from the direct carrier for arranging the shipments. When acting as such an agent, the Company does not consolidate shipments or have responsibility for shipments once they have been tendered to the direct carrier.
As part of the Company's freight forwarding activities, the Company provides project forwarding and logistics services involving governmental and commercial projects, including foreign military sales, power plant construction, shipbuilding, construction of manufacturing assembly facilities, civil infrastructures and other large scale installations. The Company's project forwarding services provide integrated logistics for conveying heavy materials and equipment from multiple origins to project sites. Such services include managing the customer's transportation, customs clearance and warehousing and distribution activities in connection with these projects. Most of such shipments are transported by ocean carrier. The government portion of the Company's project forwarding business requires a United States Government security clearance of the Company's management team and employees assigned to the project and security cleared warehouses where the cargo is received and stored according to the forwarding schedule.
In addition to its ocean and airfreight forwarding services, the Company provides forwarding services and cross marketing in the United States for a number of its foreign agents. The Company is compensated by sharing in the agents' profits on their consolidation shipments.
The Company is licensed by the Federal Maritime Commission of the United States (the "FMC") and is a member of the International Air Transport Association.
Customs Brokerage: The Company is the largest customs broker in the United States according to the United States Customs Service. The Company's customs brokerage operations for air and ocean imports cover approximately 442 ports of entry in the United States. The Company believes that its customs brokerage operation is among the most sophisticated in the United States as a result of its size, technology and integration with other transportation logistics services provided to customers by the Company. In addition, the Company provides customs brokerage services overseas - such as Australia, Canada and the United Kingdom. Customs brokerage activities accounted for 32.3%, 32.8%, 34.0% and 34.2% of the Company's net revenue in 1996, the Transition Period, 1994, and 1993, respectively.
As a customs broker in the United States, the Company is engaged by importers for the purpose of preparing all documentation required for entry of merchandise into the United States. In this capacity, the Company is responsible for coordinating all events and communicating the status of shipments from the time of shipment arrival through customs clearance. The Company receives commercial and transportation documentation, reviews it for completeness and accuracy, prepares and files all documents necessary to clear customs, obtains customs bonds, assists the importer in obtaining the appropriate commodity classification and arranges for payment of collect freight charges. In most cases, the Company also deposits import duties with the United States Customs Service on behalf of the importer. In addition, the Company provides ancillary customs brokerage services to its customers, including placement of surety bonds, duty reduction programs and duty-drawback (recovery of duties paid when imported merchandise is re-exported). The Company also provides bonded warehouse services which enable importers to defer payment of customs duties until release of the cargo in conjunction with their production or distribution schedules. See "Warehousing and Distribution Services".
In providing customs brokerage services, the Company has access to information concerning a shipment's origin, destination and mode of transportation. As a result, the Company has been able to obtain additional business by identifying opportunities where service to a customer can be improved or expenses reduced through greater utilization of the Company's other services, including cost-effective cargo consolidations, routing from overseas origin to ports of entry, cargo insurance, container unloading, inventory warehousing and arranging for the domestic delivery of cleared cargo to its final destination.
The Company believes it has been a leader in the use of computer technology for customs brokerage activities on behalf of its clients. The Company was one of the first customs brokerage operations to link with the United States Customs Service through the Automated Broker Interface information system and to develop a comprehensive, proprietary, on-line, interactive customs brokerage system which permits customers to monitor the status of a shipment as it passes through the government clearance process. The Company's information systems enable the Company to electronically prepare documents, transmit information necessary for cargo pre-clearance through customs, expedite cargo release and provide nationwide control of customs clearance at multiple ports of entry for its customers. See "Information Systems".
The Company's customs brokerage services are provided by the Company's licensed customs brokers and support staff who have substantial knowledge of the complex tariff and government regulations with respect to the payment of customs duties and other fees, commodity classifications, valuation and import restrictions. In addition, the Company has concentrated on developing substantial customs brokerage expertise within particular client industries. The Company believes that its focus on industry specialization is unique among its competitors and enables the Company to provide high levels of service to customers in these industries. The Company provides ongoing training programs, which include preparation for the United States customs broker license examination, to employees as well as to customers.
The following table sets forth the number of United States Customs entries filed by the Company (in thousands):
As a customs broker operating in the United States, the Company is licensed by the United States Department of the Treasury and regulated by the United States Customs Service. The Company's fees for customs brokerage services are not regulated and the Company does not have a fixed fee schedule for such services. Instead, customs brokerage fees are based upon the complexity of the transaction and the type of services required and are generally not related to the value of its customer's goods. In addition to its fees, the Company bills the importer for amounts which the Company pays on the importer's behalf, including duties, collect freight charges and similar payments.
The Company offers its customs brokerage services to all shippers, not exclusively to its ocean or airfreight forwarding customers. The Company's largest customs brokerage customer in 1996, the Transition Period, 1994 and 1993 accounted for 17.0%, 15.6%, 17.6% and 22.3% of the Company's customs brokerage revenue, respectively; and 5.5%, 2.1%, 2.6% and 3.4% of the Company's revenue in 1996, the Transition Period, 1994, and 1993, respectively. The Company's contracts with this customer expire in September 1996 and February 1997. The Company has been in ongoing renewal negotiations with the customer and anticipates the contracts will be renewed (See Other Risk Factors). No other customer accounted
for more than 5.0% of the Company's customs brokerage revenue in 1996, the Transition Period, 1994 and 1993.
Warehousing and Distribution Services: As part of its integrated global logistics services, the Company provides an array of warehousing and distribution services to its import and export customers.
Warehousing services are available for the Company's customers in certain of its facilities, as well as in space leased from others. The Company maintains 5.9 million square feet of its own and leased warehouse space. The Company's warehousing services include receiving, deconsolidation and decontainerization, cargo loading and unloading, assembly of freight, customer inventory management, protective packing and storage. For import shipments, the Company provides bonded warehouse services to importers to enable them to defer payment of customs duties and to coordinate cargo releases with the customers' production or distribution schedules. The goods stored in the bonded warehouses are supervised by customs officials until the importer is ready to withdraw or re-export them. The Company receives storage charges for use of its warehouses and fees for other services.
The Company provides surface transportation and domestic distribution services involving the movement of shipments for local and long-haul delivery to and from customers' doors. In this capacity, the Company procures shipments from its customers, consolidates less than truckload quantities, determines the routing, selects the carrier and tenders each shipment to such carrier for transportation. The Company provides this service both as an indirect carrier and as an agent. The Company also provides logistics services by coordinating the most efficient and cost-effective mode of long-haul surface transportation to its customers.
Information Systems: The Company believes it has been a leader in providing its customers with integrated logistics management. The Company continues to invest substantial management and financial resources in the development and enhancement of its information systems. The basis for the Company's information systems is the concept that an international freight transaction is a single integrated unit of events rather than a series of separate, unrelated transactions.
The first modules of the FLEX environment, "Fritz Logistics Expediting System", were released in late 1991 and the Company is continuing development of new enhancements to its suite of software applications. FLEX currently permits the Company and its customers to track the flow of particular goods from a foreign port of origin through the transportation process and United States Customs to its point of delivery. At any time, any customer utilizing FLEX can input an inquiry into FLEX or receive the current status of its shipment, which facilitates management of customer's sourcing process. FLEX is available on-line and is currently utilized by many of the Company's major customers.
Most of the current users of FLEX are multi-national corporations which utilize a large number of foreign suppliers. Several of these customers utilize the FLEX System to generate special reports on supplier compliance with purchase order requirements in order to enhance the effectiveness of their merchandising programs. The Company's objective is to expand use of the FLEX System by its customers. The Company believes that expanded use of FLEX is an important tool in achieving its business strategy in the future. In certain cases, the Company deploys its personnel with computer access in the offices of some of its on-line customers in order to assist them in the logistics management and on-line tracking process.
As part of its ongoing research and development program, the Company has linked its automated customs brokerage systems and FLEX to monitor the status of shipments as they pass through the customs clearance process. The Company's on-line, interactive, nationwide customs brokerage system was one of the first to link with the United States Customs Service's information systems. The Company believes that as FLEX software modules continue to develop, many of the Company's major customers will ultimately elect to utilize FLEX.
Marketing
An important part of the Company's business strategy is its customer-oriented marketing approach. The Company's marketing efforts focus on senior transportation executives, financial officers and purchasing directors of large complex users of international transportation logistics services. In connection with the Company's emphasis on developing and maintaining long-term relationships with such customers, the Company has developed several special marketing programs, including the national accounts program, the Global Logistics Council and the Global Advisory Board.
The national accounts program was established in 1971 in order to increase the visibility of the Company's services to large complex users of international transportation logistics services. The Company's Senior Director of Sales supervises the marketing efforts of a team of national account sales executives who are responsible for securing new business from major companies and assisting in maintaining customer relationships with such companies.
The Shippers' Council program was formed by the Company in 1984 as a forum for major importers and exporters, some of which are not currently customers of the Company, to discuss their transportation logistics requirements, views of global trade and other related topics. In 1996, the program was renamed Global Logistics Council in order to more accurately reflect its worldwide focus. Global Logistics Council meetings are generally held three times a year, and representatives of approximately 40 companies participate in each meeting. Participants in the Global Logistics Council are invited to participate on an ongoing basis in the Company's Global Advisory Board. The Global Advisory Board assists the Company in formulating strategies designed to better serve the needs of the Company's customers. The Global Logistics Council and the Global Advisory Board help the Company to maintain close contact with its customers and the global trade community on a continuing basis.
In addition to these major marketing programs, the Company has employees working on regional accounts and providing support to national accounts located in their regions. The Company has regional sales teams responsible for obtaining new business from local and regional customers in their areas. Managers at each office are responsible for customer service and coordinate the reporting of customers' requirements and expectations with the Chief Operating Officer and the regional directors.
Competition and Business Conditions
The Company's principal businesses are directly related to the volume of international trade, particularly trade between the United States and foreign nations. The extent of such trade is influenced by many factors, including economic and political conditions in the United States and abroad, major work stoppages, exchange controls, currency fluctuations, wars and other armed conflicts and United States and foreign laws relating to tariffs, trade restrictions, foreign investments and taxation.
The global logistics services industry is intensively competitive and is expected to remain so for the foreseeable future. The Company encounters competition from a large number of firms with respect to the services provided by the Company. Much of this competition comes from local or regional firms which have only one or a small number of offices and do not offer the breadth of services and integrated approach offered by the Company. However, some of this competition comes from major United States and foreign-owned firms which have networks of offices and offer a wide variety of services. The Company believes that quality of service, including information systems capability, global network capacity, reliability, responsiveness, expertise and convenience, scope of operations, customized program design and implementation and price are important competitive factors in its industry.
As a customs broker, the Company encounters strong competition in every port in which it does business. The Company has customs brokerage offices in most major ports in the United States, Canada, Europe and other selected foreign ports, and although it competes with several large United States and foreign firms, its principal competition comes from local and regional firms. According to the United States Customs Service, the Company is the largest customs broker in the United States. As an ocean freight forwarder, the Company encounters strong competition in every port in which it does business. This includes competition from steamship companies and both large forwarders with multiple offices and local and regional forwarders with one or a small number of offices. As an airfreight forwarder, the Company encounters strong competition from other airfreight forwarders in the United States and overseas. As a warehouse and distribution service provider, the Company encounters strong competition from local, regional, national and international providers of the same or similar services.
Regulation
As a customs broker operating in the United States, the Company is licensed by the United States Department of the Treasury and regulated by the United States Customs Service. The Company's fees for acting as a customs broker are not regulated. The Company's airfreight forwarding business is subject to regulation, as an indirect air cargo carrier, under the Federal Aviation Act by the Department of Transportation (the "DOT"), the successor to the Civil Aeronautics Board, although Part 296 of the DOT's Economic Aviation Regulations exempts airfreight forwarders from most of such act's requirements. In its
ocean freight forwarding business, the Company is licensed as an ocean freight forwarder by the Federal Maritime Commission (FMC). The FMC does not regulate the Company's fees in any material respect. The Company's ocean freight NVOCC business is subject to regulation, as an indirect ocean cargo carrier, under the FMC tariff filing and surety bond requirements, and under the Shipping Act of 1984, particularly those terms proscribing rebating practices. The Company is regulated as a direct and as an indirect truck cargo carrier by the Federal Highway Administration of Motor Carriers, previously the Interstate Commerce Commission, by which the Company is licensed as both a common carrier and a property broker. For dispatch purposes, the Company also holds an FCC Radio License. The Company's marine cargo insurance brokerage business is licensed by the California Department of Insurance. Certain of the Company's offshore operations are subject to similar regulation by the regulatory authorities of the respective foreign jurisdictions. Certain of the Company's warehouse operations are licensed as container freight stations, public bonded warehouses and customs examination sites by the United States Customs Service.
Trademarks
The Company holds registered trademarks in the United States and numerous foreign countries for "Fritz Companies" and certain related names and logo.
Employees
As of May 31, 1996, the Company had approximately 8,100 employees. The Company considers its relationship with its employees to be satisfactory.
MANAGEMENT
The Company's executive officers are as follows:
Lynn C. Fritz became Chief Executive Officer of the Company in 1986 after serving in numerous positions since joining the Company on a full-time basis in 1965. Mr. Fritz received his B.A. degree from Georgetown University and his J.D. degree from Lincoln University School of Law. Mr. Fritz was honored with the "Marketing Executive of the Year -- 1991" award by the National Account Marketing Association.
Dennis L. Pelino, who joined the Company in 1986 as Director of Sales and Marketing, became a director of the Company in 1991 and was appointed Chief Operating Officer in October of 1993. He was promoted to Executive Vice President in May 1995 and President in August 1996. Since 1988, Mr. Pelino has been responsible for all Company-owned international operations, as well as the Company's transportation services as an indirect carrier and key warehousing distribution services. Mr. Pelino is also responsible for the Company's independent agent network and national account marketing and sales programs. Since his appointment as Chief Operating Officer, Mr. Pelino has also been responsible for all operations.
John H. Johung was appointed Executive Vice President in May 1995 and served as Senior Vice President from August 1992 to April 1995. He was appointed Chief Strategist in August 1996. Mr. Johung was Chief Financial Officer from August 1992 until August 1996. He served as Corporate Controller -- Principal Accounting Officer of the Company from 1970 to 1982. He left the Company in 1983 to pursue a consulting career in taxation and financial planning, and rejoined the Company in March 1990 as Director of Financial Planning.
Ronald A. Marcillac joined the Company in 1963 and has served the Company in numerous positions since that time, most recently as Senior Vice President since August 1992. He became a director of the Company in 1988. Mr. Marcillac is currently responsible for the Company's Information Systems and insurance brokerage operations. He is a graduate of the University of San Francisco with a B.S. degree in economics and has a customs broker's license from the Department of the Treasury.
Jan H. Raymond has been General Counsel of the Company since 1985, Secretary since 1991 and Senior Vice President since 1993. Prior to joining the Company, Mr. Raymond was an associate with the law firm of Brobeck, Phleger & Harrison. Mr. Raymond, who is a licensed customs broker, holds a B.S. degree from Cornell University with a J.D. degree from the University of California at Berkeley's Boalt Hall School of Law.
Ronald W. Womack has been Vice President of Finance of the Company since August 1996. He served as Corporate Controller and Principal Accounting Officer from May 1996 until August 1996. Previously, Mr. Womack had served as Regional Controller and Director of Treasury Services. Prior to rejoining the Company in 1995, he was the Chief Financial Officer for HEAD Sports, Inc., a sporting equipment distribution company and was the Director of Internal Audit with Sanifill, Inc., a landfill and waste management company.
ITEM 2
ITEM 2 - PROPERTIES
As of May 31, 1996, the Company operated approximately 340 offices, and logistics centers worldwide including its headquarters in San Francisco. The Company also operated approximately 90 warehousing and distribution centers, which range in size from approximately 1,000 square feet to approximately 670,000 square feet. The warehousing and distribution centers totaled approximately 5.9 million square feet as of May 31, 1996 of which the Company owns approximately 1.2 million square feet, and leases the balance. The leases for the Company's principal properties generally have terms of three years or more and often include options to renew. While some of the Company's leases are month-to-month and others expire in the near term, the Company does not believe that the expiration of any of its leases will have a material adverse effect on its operations. See Note 6 of Notes to Consolidated Financial Statements.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Company is a party to routine litigation incident to its business, primarily claims for goods lost or damaged in transit or improperly shipped. Most of the lawsuits to which the Company is party are covered by insurance and are being defended by the Company's insurance carriers. The Company has established reserves which management believes are adequate to cover any other routine litigation losses which may occur.
On July 29, 1996, a complaint was filed in the Superior Court of the State of California, County of San Francisco, against the Company and certain of its directors and officers under the caption "Levenson v. Lynn C. Fritz, John H. Johung, Stephen M. Mattessich, Carsten S. Andersen and Fritz Companies, Inc.".
The complaint, which purports to be brought on behalf of a class of purchasers of the Company's stock between August 28, 1995 and July 23, 1996, alleges various violations of California law in connection with prior disclosures made by the Company and seeks unspecified damages. On July 31, 1996, a second complaint containing substantially similar allegations was filed in the same court under the caption "Hack v. Lynn C. Fritz, John H. Johung, Stephen M. Mattessich, Carsten S. Andersen and Fritz Companies, Inc.".
On July 31, 1996, a complaint was filed in the United States District Court for the Northern District of California, against the Company and certain of its directors and officers under the caption "Polk v. Lynn C. Fritz, John H. Johung, Stephen M. Mattessich, Carsten S. Andersen and Fritz Companies, Inc.". The complaint, which purports to be brought on behalf of a class of purchasers of the Company's stock between August 28, 1995 and July 23, 1996 alleges various violations of federal securities law in connection with prior disclosures made by the Company and seeks unspecified damages. On July 31, 1996, a second complaint containing substantially similar allegations was filed in the same court under the caption "Weiss v. Lynn C. Fritz, John H. Johung, Stephen M. Mattessich, Carsten S. Andersen and Fritz Companies, Inc.". On August 13, 1996, a third complaint containing substantially similar allegations was filed in the same court under the caption "E.M. Lawrence Limited Frozen Retirement Trust Dated September 1, 1992 v. Fritz Companies, Inc., Lynn C. Fritz, Carsten S. Andersen, John H. Johung and Stephen M. Mattessich".
The Company is unable to estimate the ultimate outcome of the suits filed in July and August 1996, and it is possible that such outcome could have a significant adverse impact on the Company's consolidated results of operations. The Company believes that the ultimate outcome of these matters will not have a significant adverse impact on the Company's consolidated financial position (See Other Risk Factors).
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded on the NASDAQ national market system under the symbol FRTZ.
The following table sets forth the high and low sales price in the NASDAQ national market system for the Company's common stock for the period from January 1, 1993 to May 31, 1996.
There were approximately 560 stockholders of record as of May 31, 1996. No cash dividends were paid to the stockholders during 1996. In October 1995, the Company's Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend. The stock prices above have been adjusted to give effect to the stock split.
The Company intends to retain its future earnings for use in its business and, accordingly, it is anticipated that no cash dividends will be paid to holders of shares of common stock in the foreseeable future.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA)(a)
(a) On May 30, 1995, the Company completed its merger with Intertrans, which was accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated, for all periods prior to the merger, to include the results of operations, financial position and cash flows of Intertrans. The May 31, 1995 period represents combined operating results reported for Fritz Companies, Inc. and Intertrans Corporation (Intertrans) for the twelve months ended March 31, 1995 and April 30, 1995, respectively.
(b) In 1996, the Company recorded additional merger and related costs associated with the merger with Intertrans of $14.6 million. In May 1995 the Company recorded merger and related costs in connection with the merger with Intertrans of approximately $30.0 million. For further discussion see Note 7 of Notes to Consolidated Financial Statements. Excluding these merger and related costs, the income from operations for the five months ended May 31, 1995 would have been $17.6 million.
(c) The pro forma data reflect adjustments assuming the Company had not elected S Corporation status for income tax purposes, including the repurchase of the minority interest in its subsidiaries sold to the former sole stockholder to qualify for S Corporation status. The provisions for federal and state income taxes assume effective tax rates of 35% for 1992 and 40% for 1991. The lower effective tax rate beginning in 1992 was primarily due to the Company's expanded operations in foreign countries which had lower income tax rates.
(d) Figures are as of May 31, 1995.
(e) In 1994 and 1992 the Company received approximately $42.2 million and $40.3 million, respectively, of net proceeds from public offerings of its common stock.
(f) See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements for further discussion of the Company's financial condition and results of operations.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
GENERAL
For comparative purposes, the following table provides the results of operations for the twelve months ended May 31, 1996 and the Transition Period compared to the respective comparable unaudited prior periods (in thousands).
(a) Effective May 31, 1995, the Company changed its fiscal year end of December 31 to a fiscal year end of May 31. See Note 1 of Notes to Consolidated Financial Statements for further discussion. The May 31, 1995 period represents combined operating results reported for Fritz Companies, Inc. and Intertrans for the twelve months ended March 31, 1995 and April 30, 1995, respectively, accounted for as a pooling of interests.
During the period from 1993 through 1996, the Company's revenue increased 90.1% to $1,043.9 million in 1996 from $549.0 million in 1993, and its net revenue increased 88.3% to $457.6 million in 1996 from $243.0 million in 1993. Management attributes this growth principally to: (1) the expansion of the Company's global network and its product line of services through internal development and strategic acquisitions; and, (2) the continued success of the Company's integrated logistics programs, with which the Company added a significant number of multinational corporations to its customer base and broadened the range of services offered by the Company to existing customers.
Effective June 1, 1995, the Company approved the change from a fiscal year end of December 31 to a fiscal year end of May 31. The following discussion is of the Company's financial condition and results of operations for the fiscal year ended May 31, 1996, the five months ended May 31, 1995 (the Transition Period) and fiscal years ended December 31, 1994 and 1993. For discussion purposes, the fiscal year ended May 31, 1996 is compared to the unaudited fiscal year ended May 31, 1995; and the Transition Period is compared to the unaudited period from January 1, 1994 to May 31, 1994 (the Comparable Period). For further discussion see Notes to Consolidated Financial Statements.
The Company completed its merger with Intertrans on May 30, 1995 which was accounted for as a pooling of interests. Accordingly, the Company's consolidated financial statements have been restated, for all periods prior to the merger, to include the results of operations, financial position and cash flows of Intertrans.
In connection with the Intertrans merger, the Company recorded approximately $30 million of merger and related costs in May 1995. At May 31, 1995 the merger accrual balance was approximately $12.5 million. Subsequently, the Company has determined an additional $14.6 million of merger and related costs was required. For further discussion see Operating Expenses section below and Note 7 of Notes to Consolidated Financial Statements.
The Company continued to make strategic acquisitions in 1996. Among the companies acquired were the following:
RESULTS OF OPERATIONS
The Company's principal services are customs brokerage, international airfreight and ocean freight forwarding and warehousing and distribution. Revenue for international ocean and airfreight forwarding and surface transportation consolidation as an indirect carrier includes the consolidation and transportation costs (i.e. ocean freight costs, etc.) of such freight. Revenue for customs brokerage, international ocean and airfreight forwarding and surface transportation as an agent includes only the fees and commissions related to such shipments. The Company believes that net revenue is a better measure than total revenue of the relative importance of the Company's principal services for its results of operations.
The Company anticipates that during fiscal 1997, particularly the first six months, the Company's results of operations are likely to be adversely affected by a number of factors, including continuing price competition in its traditional lines of business, the requirement to make substantial investments in advance of receipt of revenue in connection with the Company's developing global supply chain management and integrated logistics business, as well as the possibility of a reduced pace of acquisitions and substantially increased legal expenses in connection with securities litigation pending against the Company.
FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO THE UNAUDITED FISCAL YEAR ENDED MAY 31, 1995
Revenue and Net Revenue: Revenue increased 19.9% to $ 1,043.9 million in 1996 from $870.9 million in 1995. All of the Company's principal service areas reported revenue increases. The increase in revenue was primarily due to ocean freight, warehouse and distribution and airfreight forwarding. The increase in ocean freight was primarily attributable to expansion of NVOCC activities in Europe and Asia. The warehouse and distribution revenue increase was primarily attributable to the Company's continued expansion of domestic services from existing integrated logistics customers on inbound shipments from Asia and Europe to the United States and strategic acquisitions. The revenue increase in airfreight was primarily due to the Company's continued expansion of its operations in Latin America, Europe and Asia, as well as margin expansion from the Company's merger with Intertrans. As a result of the increased volumes from the merger with Intertrans, the Company was able to negotiate better rates with carriers.
Net revenue increased 24.9% to $457.6 million in 1996 from $366.5 million in 1995 reflecting increases in all of the Company's principal services. The increase in net revenue was primarily due to warehousing and distribution, customs brokerage and ocean freight forwarding services. The increase in warehouse and distribution net revenue can be attributed to the Company's continued expansion of domestic services from existing integrated logistics customers on inbound shipments from Asia and Europe to the United States and strategic acquisitions. The increase in customs brokerage net revenue can be attributed to growth in the Company's existing customer base, new clients and acquisitions. Ocean freight forwarding net revenue increase can be primarily attributed to expansion of NVOCC activities in Europe and Asia but was partially offset by higher ocean carrier costs.
Operating Expenses: Operating expenses increased 32.6% to $418.9 million in 1996 from $315.8 million in 1995. The increase of 32.6% includes additional merger and related costs of approximately $14.6 million in 1996. See Note 7 of Notes to Consolidated Financial Statements for further discussion. Operating expenses, excluding the merger and related costs in 1996 were 88.4% and 86.2% as a percentage of net revenue in 1996 and 1995. Salaries and related costs increased 24.3% primarily as a result of an increase in the number of employees. Salaries and related costs as a percentage of net revenue is comparable to the prior period. The increase in general and administrative expenses was primarily due to expenditures to support the Company's expansion, including product development, acquisitions, information systems development, global supply chain management and warehouse-related expenses.
Other Income (Expense): Other expense was $196,000 compared to $1.4 million of other expense for the prior period. The decrease was primarily due to the increase in net foreign currency exchange gains which were offset by an increase in interest expense.
Income Taxes: Taxes on income for 1996 were $13.5 million compared to taxes on income of $16.9 million for 1995. The effective tax rates for 1996 and 1995 were 35% and 34.4%. The Company's effective tax rate may fluctuate due to changes in local tax rates and regulations in the countries in which the Company operates and the level of pre-tax profit earned in these countries.
TRANSITION PERIOD ENDED MAY 31, 1995 COMPARED TO THE UNAUDITED FIVE MONTH PERIOD ENDED MAY 31, 1994
Revenue and Net Revenue: Revenue increased 46.4% to $400.2 million in the Transition Period from $273.5 million for the Comparable Period, and net revenue increased 42.9% to $165.7 million in the Transition Period from $116.0 million for the Comparable Period. All of the Company's principal service areas reported revenue and net revenue increases, as the Company continued to focus on integrated transportation logistics services for existing and new customers, geographic expansion and strategic acquisitions. See Note 7 of Notes to Consolidated Financial Statements for further discussion of acquisitions.
The increases in revenue were mostly due to increases in airfreight and ocean freight forwarding revenue due to the Company's continued expansion of its operations in Asia, Europe and Latin America.
Operating Expenses: Salaries and related costs increased 36.8% to $93.1 million in the Transition Period from $68.1 million in the Comparable Period. General and administrative expenses increased 53.2% to $55.0 million in the Transition Period from $35.9 million in the Comparable Period. The increase in salaries and related costs and general and administrative expenses was due primarily to expenditures necessary to support the Company's expansion and new business.
In connection with the merger with Intertrans, the Company recorded merger and related costs of $30.0 million in May 1995. For additional discussion, see Note 7 of Notes to Consolidated Financial Statements.
Income Before Tax Expense (Benefit): For the Transition Period, the Company's pre-tax income, excluding merger and related costs, would have been $17.6 million, compared to $12.1 million in the Comparable Period, or an increase of 45.5%.
Including merger and related costs of $30.0 million, the loss from operations is $(12.4) million in the Transition Period compared to $12.1 million pre-tax income in the Comparable Period.
Income Taxes: The Company recorded a tax benefit of $4.1 million (33.2% rate) during the Transition Period due to the loss from operations. In the Comparable Period, the Company had a tax expense of $4.1 million (33.7% rate) on income before taxes.
TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 1993
Revenue and Net Revenue: Revenue increased 40.9% to $773.4 million in 1994 from $549.0 million in 1993 and net revenue increased 36.8% to $332.6 million in 1994 from $243.0 million in 1993. The increase in revenue and net revenue was due to airfreight forwarding, ocean freight forwarding, customs brokerage and warehousing and distribution. Increased revenue and net revenue for all service areas can be attributed to the Company's continued focus on integrated transportation logistics services for existing and new customers, geographic expansion and strategic acquisitions. The increase in airfreight forwarding can be attributed to the Company's continued expansion of its operations in Latin America, Europe and Asia which led to volume increases in airfreight forwarding. The ocean freight forwarding increase was due primarily to the expansion of NVOCC activities with Asia and Europe. The increase in customs brokerage was primarily attributable to growth in the Company's existing customer base and from revenues generated from acquisitions. The warehousing and distribution increase was attributed primarily to the Company's acquisition of a warehouse/distribution concern and increased penetration of domestic distribution services for existing customers on inbound shipments from Asia and Europe to the United States.
Operating Expenses: Operating expenses increased 36.6% to $286.4 million in 1994 from $209.6 million in 1993, but declined as a percentage of net revenue. Salaries and related costs increased 34.5% and general and administrative expenses increased 40.5%. The increase was due primarily to expenditures necessary to support the Company's expansion and new business.
Other Income (Expense): Interest expense increased to $2.2 million in 1994 compared to $300,000 in 1993 primarily due to borrowing incurred by the Company to finance real estate purchases in 1994 and to obligations related to acquisitions. Other income decreased to $1.5 million in 1994 from $1.7 million in 1993 primarily due to lower interest income.
Income Taxes: Taxes on income for 1994 were $15.4 million compared to $12.1 million for 1993. The effective tax rate for 1994 and 1993 was 33.7% and 34.7%. The Company's effective tax rate may fluctuate due to changes in local tax rates and regulations in the countries in which the Company operates and the level of pre-tax profit earned in these countries.
SUBSEQUENT EVENTS
In July and August 1996, litigation was commenced against the Company alleging violation of California law and federal securities law by the Company and certain of its officers and directors. See "Item 3 - Legal Proceedings" and Notes 8 and 9 of Notes to Consolidated Financial Statements. The Company is unable to estimate the ultimate outcome of these matters, and it is possible that such outcome could have a significant adverse impact on the Company's consolidated results of operations. The Company believes that the ultimate outcome of these matters will not have a significant adverse impact on the Company's consolidated financial position (See Other Risk Factors).
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents increased to $86.5 million at May 31, 1996 from $74.3 million at May 31, 1995. The increase was primarily due to cash flow from the Company's operating and financing activities in excess of net cash used for the Company's investing activities. The Company's financing activities included a private placement that was completed in March 1996 for $75 million principal amount of 6.43% Senior Notes. In December 1995, the Company also entered into an $80 million syndicated multi-currency credit facility (the Credit Facility). The Credit Facility replaced the Company's previous revolving line of credit of $50 million. The Company's total available borrowing capacity under the Credit Facility as of May 31, 1996 was approximately $63 million. See Note 3 of Notes to Consolidated Financial Statements for further discussion of long term obligations and short term borrowings. The Company's investing activities in 1996 included capital expenditures of approximately $42.6 million which primarily includes expenditures for furniture, computer hardware, equipment and real property. The Company also made cash outlays of approximately $27.1 million for interests in acquired companies in 1996. The Company currently expects to spend approximately $40 million in 1997 for capital expenditures (See Other Risk Factors).
The Company makes significant disbursements on behalf of its customers, such as customs duties. The billings to customers for these disbursements, which are several times the amount of revenue and fees derived from these transactions, are not recorded as revenue and expenses on the Company's income statement.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995. As discussed in Note 1 of the Notes to Consolidated Financial Statements, the Company plans to continue to use the intrinsic value based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to account for all of its stock-based compensation. Therefore, the Company will make the required pro forma disclosures in the notes to the consolidated financial statements for fiscal 1997. SFAS No. 123 is not expected to have a material effect on the Company's consolidated results of operations or financial position.
OTHER RISK FACTORS
The nature of the Company's worldwide operations involves a multitude of currencies other than the U.S. Dollar. Accordingly the Company is exposed to the inherent risks of international currency markets and governmental interference. The Company seeks to compensate for currency exposures by accelerating international payment among the Company's offices and agents.
In addition, 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. However, changes in space allotments available from carriers, governmental deregulation efforts, "modernization" of the regulations governing customs clearance, and/or changes in the international trade and tariff environment could affect the Company's business in unpredictable ways.
There are also risks and uncertainties associated with the Company's acquisition strategy, such as a reduction in the pace and/or magnitude of future acquisitions and the complexities of integrating systems and operations of the acquired companies.
Management believes the Company's business has not been adversely affected by inflation in the past. The Company has generally been successful in passing cost increases on to its customers by means of price increases. Due to the high degree of competition presently being experienced in the marketplace, it is possible that continued cost increases could lead to an erosion in the Company's margin.
Additional risks and uncertainties include dependence of the Company on international trade and worldwide economic conditions; dependence of the Company on the continued services of key management and operating executives including Lynn Fritz and Dennis Pelino; risks associated with the Company's continuing aggressive acquisition strategy, including the diversion of management's attention to the assimilation of the operations and personnel of acquired companies, adverse short-term effects on the Company's operating results, integration of financial reporting systems and acquired assets, and the possible inability of the Company's information systems to keep pace with the increasing complexity and rapid growth of the Company's business; the increasing level of investment required by the transition of the Company to an integrated logistics company providing a full range of international transportation and global supply chain management services; and diversion of management's focus and resources as a result of pending litigation; and other risks disclosed in the Company's filings with the Securities and Exchange Commission.
The risks and uncertainties described above could cause actual results to differ materially from those set forth in or implied by forward-looking statements contained in this Form 10-K, i.e., those statements that are not historical facts. The description of risks and uncertainties is intended to qualify such forward-looking statements in order to invoke the "safe harbor" provided by the Private Securities Litigation Reform Act of 1995.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth at the pages indicated in Item 14(a) of this Annual Report.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference in the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement for the Company's Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the "Proxy Statement"). See also Item 1 above.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference in the sections entitled "Compensation of Executive Officers", "Options Granted to Executive Officers and "Employment Agreements" of the Proxy Statement.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference in the section entitled "Ownership of Management and Principal Stockholders" of the Proxy Statement.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference in the section entitled "Transactions with the Company" of the Proxy Statement.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(b) The Company filed the following reports on Form 8-K from March 1, 1996 through the date hereof in 1996.
(1) July 29, 1996 Item 5. Other Events
- Filed the Company's fourth quarter earnings release.
(2) July 29, 1996 Item 5. Other Events
- The Company disclosed that on July 29, 1996, a complaint was filed in the Superior Court of the State of California, County of San Francisco, against the Company and certain of its directors and officers. The complaint, which purports to be brought on behalf of a class of purchasers of the Company's stock between August 28, 1995 and July 23, 1996, alleges various violations of California law in connection with prior disclosures made by the Company and seeks unspecified damages.
(3) July 31, 1996 Item 5. Other Events
- The Company disclosed that on July 31, 1996, a second complaint was filed in the Superior Court of the State of California, County of San Francisco, against the Company and certain of its directors and officers containing similar allegations as the first complaint filed on July 29, 1996.
- The Company disclosed that on July 31, 1996, two complaints were filed in the U.S. District Court for the Northern District of California, against the Company and certain of its directors and officers. The complaints, which purport to be brought on behalf of a class of purchasers of the Company's stock between August 28, 1995 and July 23, 1996, allege various violations of federal securities law in connection with prior disclosures made by the Company and seeks unspecified damages.
(4) August 13, 1996 Item 5. Other Events
- The Company disclosed that on August 13, 1996, a complaint was filed in the U.S. District Court for the Northern District of California, against the Company and certain of its directors and officers. The complaint, which purports to be brought on behalf of a class of purchasers of the Company's stock between August 28, 1995 and July 23, 1996, alleges various violations of federal securities law in connection with prior disclosures made by the Company and seeks unspecified damages.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: August 29, 1996
FRITZ COMPANIES, INC.
By /s/ Lynn C. Fritz -------------------------------- Lynn C. Fritz Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on August 29, 1996.
FRITZ COMPANIES, INC. CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
FRITZ COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
FRITZ COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
See notes to consolidated financial statements.
FRITZ COMPANIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See notes to consolidated financial statements.
FRITZ COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include the accounts of Fritz Companies, Inc. and all significant domestic and international companies in which the Company has more than a 50% equity ownership or otherwise exercises control. All significant intercompany balances and transactions have been eliminated.
The preparation of the consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
The Company changed its fiscal year end of December 31 to a fiscal year end of May 31, beginning with the five-month period ended May 31, 1995 (herein referred to as the Transition Period).
Cash and Equivalents--Cash and equivalents (at cost which approximates market value) include demand deposits and short-term investments with maturities of three months or less.
Property and Equipment--Property and equipment are stated at cost, and depreciation and amortization are computed principally by the straight-line method at rates based on the estimated useful lives of assets -- buildings 40 years; furniture and equipment 5 - 10 years; and computer hardware and software 5 years. Leasehold improvements are depreciated over their estimated useful lives or the terms of the related lease, whichever is shorter. Incremental costs related to internally developed software projects are capitalized and amortized over the expected useful life on a straight-line basis not to exceed five years, commencing when the asset is placed into service.
Intangibles--Intangibles, which include goodwill and covenants not to compete, arose from business acquisitions and are amortized on a straight-line basis over estimated useful lives ranging from two years through forty years. The Company annually evaluates its carrying value and expected period of benefit of goodwill in relation to results of operations.
Foreign Currency Translation Adjustment--Foreign assets and liabilities are translated using month end exchange rates, and the impact of exchange rate changes is shown as "Cumulative Foreign Currency Translation Adjustments" in stockholders' equity. Gains and losses from foreign exchange transactions are included in results of operations.
Off-Balance Sheet Risk and Concentration of Credit Risk--Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions or the U.S. Government and, thus, limits the amount of credit exposure to any one entity. The Company's customer base is comprised of customers in a wide range of industries which are located throughout the world. The Company had no significant concentrations of credit risk as of May 31, 1996 and 1995. (See Notes 3 and 8 for discussion of the Company's off-balance sheet risks.)
Revenue Recognition--Revenues and expenses related to the transportation of freight are recognized at the time the freight departs the terminal of origin. This method approximates recognizing revenues and expenses when the shipment is completed. Customs brokerage revenue is recognized upon completing documents necessary for customs entry purposes. Warehouse and distribution revenue is recognized upon execution of the service provided.
Revenue realized by the Company as an indirect carrier includes the direct carrier's charges to the Company for carrying the shipment. Revenue realized in other capacities includes only the commissions and fees received. Net revenue for air and ocean freight forwarding and the consolidation of surface transportation as an indirect carrier is determined by deducting freight consolidation and transaction costs from such revenue.
Net Income (Loss) Per Share--For the twelve months ended May 31, 1996, December 31, 1994 and 1993, net income per common share was based on the weighted average number of common shares outstanding and common stock equivalents. Common stock equivalents are a result of outstanding stock options. For the five months ended May 31, 1995 net loss per share was based on the weighted average number of common shares outstanding (common stock equivalents of approximately 863,000 shares were not included since their inclusion would be antidilutive).
Income Taxes--The Company uses the liability method to account for income taxes effective January 1, 1993, in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Adoption of SFAS No. 109 did not have a significant impact on the Company's results of operations.
The Company realizes an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in current income taxes payable and an increase in additional paid in capital.
New Accounting Standards -- In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require the Company to either recognize in its consolidated financial statements costs related to its employee stock based compensation plans, such as stock option and stock purchase plans, or make pro forma disclosures of such costs in a footnote to the consolidated financial statements.
The Company plans to continue to use the intrinsic value based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to account for stock-based compensation plans. Therefore, in its consolidated financial statements for fiscal 1997, the Company will make the required pro forma disclosures in a footnote to the consolidated financial statements. SFAS No. 123 is not expected to have a material effect on the Company's consolidated results of operations or financial position.
Reclassifications -- Prior years' amounts have been reclassified to conform to 1996 presentation.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Software development in progress represents costs related to incomplete internally developed software. In fiscal year 1996 and the Transition Period, $885,000 and $648,000 of software development was completed and transferred to computer hardware and software. The amortization expense for completed projects was $1.2 million, $0.4 million, $1.0 million and $0.4 million in 1996, the Transition Period, 1994 and 1993, respectively.
NOTE 3. LONG-TERM OBLIGATIONS AND BORROWINGS
Long-term obligations and borrowings consist of the following (in thousands):
At May 31, 1996, the Company's aggregate amounts of maturing long-term obligations for the years 1997 through 2001 and thereafter are $12.5 million, $6.3 million, $2.0 million, $2.2 million, $1.6 million, respectively and $77.4 million thereafter. The carrying value of the Company's long-term obligations approximates their fair value.
In December 1995, the Company entered into an $80 million syndicated multi-currency credit facility (the Credit Facility), as amended, maturing December 1998. As of May 31, 1996, the balance outstanding under the Credit Facility was $2 million and the floating interest rate as of that date was 3.1%. The borrowings under the Credit Facility are unsecured. At May 31, 1996 and 1995, the Company was contingently liable for letters of credit worldwide of $34 million and $15.4 million, respectively, of which $15 million reduced the Company's borrowing capacity under the Credit Facility.
In March 1996, the Company completed a private placement of $75 million principal amount of 6.43% Senior Notes with interest payable semi-annually.
The Company is required to comply with certain minimum working capital, financial ratios and net worth requirements. The Company also must comply with other provisions including limitations on the payment of dividends, the purchase and sale of significant assets and certain cross default provisions.
Information regarding the Company's bank lines was as follows (dollars in thousands):
NOTE 4. INCOME TAXES
The current and deferred components of income tax expense (benefit) were as follows (in thousands):
Sources of income (loss) before income taxes were as follows (in thousands):
The following is a reconciliation of the statutory federal income tax provision (benefit) and rate to the effective income tax provision (benefit) and rate (dollars in thousands):
The significant components of net deferred income tax assets were as follows (in thousands):
The valuation allowance for deferred income tax assets as of May 31, 1996 and 1995 was $713,000, and $793,000, respectively. The Company has evaluated the deferred tax assets for which a valuation allowance has not been provided and believes that it is more likely than not that they will be realized in the future.
At May 31, 1996 and 1995, no provision has been made for cumulative earnings of consolidated foreign subsidiaries designated as permanently invested. Such earnings amounted to approximately $86.3 million and taxes that would have to be paid on such earnings amount to approximately $15.2 million at May 31, 1996.
NOTE 5. RELATED PARTY TRANSACTIONS
The Company leases office space from the Company's Chief Executive Officer. Minimum future rental payments under such leases at May 31, 1996 which expire within one year were approximately $172,000. Rental expense from these leases was $758,000, $284,000, $550,000 and $510,000 for the twelve months ended May 31, 1996, the Transition Period and for years ended December 31, 1994, and 1993, respectively.
In connection with the Company's U.S. customs brokerage operations, the Company's customers are required to obtain surety bonds. The Company places such customs bonds with Intercargo Corporation ("Intercargo") and other underwriters of customs bonds. The Company's Chief Executive Officer owns approximately 3.49% of the outstanding common stock of Intercargo.
In 1996, the Company placed approximately $2.8 million of insurance business with Intercargo and received approximately $251,000 in insurance commissions and fees from Intercargo. The Company believes the amounts paid and received are substantially the same as the Company would have incurred from other third parties.
The Company had paid premiums until 1992 on life insurance policies on the Company's Chief Executive Officer, though the Company is not the beneficiary. Such cumulative premium payments, (which approximate surrender value) of $1.4 million at May 31, 1996 and 1995, are included in other assets, and will be refunded by the beneficiary upon death of the insured or cancellation of the policies, whichever comes first. The Company has no future obligation to pay premiums on these policies.
NOTE 6. COMMITMENTS
Lease Commitments--The Company leases office and warehouse space, computer and other office equipment from third parties, including certain operating leases that are financed by special purpose entities, under operating leases expiring through 2001. Minimum future rental payments under such leases (including leases discussed above) as of May 31, 1996 were as follows (in thousands):
Rental expense from these leases was as follows (in thousands):
NOTE 7. ACQUISITIONS
Purchases
In 1996, the Company acquired 16 freight forwarding/customs brokerage companies, and purchased interests in 13 companies for an aggregate purchase price of $37.1 million consisting of cash of approximately $27.1 million and net obligations payable of approximately $10 million. Of the total acquisition price, the Company acquired current assets of approximately $33.9 million, fixed assets of approximately $10.9 million, noncurrent assets of approximately $4.7 million, current liabilities of approximately $31.7 million and noncurrent liabilities of approximately $4.9 million.
In addition to the merger with Intertrans, during the Transition Period, the Company acquired assets and interests in freight forwarding and customs brokerage companies for an aggregate purchase price of $15.3 million (cash of $7.1 million and obligations payable of $5.7 million and 43,323 shares at $2.5 million market value of the Company's common stock). In addition, see Note 11 for further discussion. Of the total acquisition price, the Company acquired current assets of $14.5 million, fixed assets of $3.9 million, noncurrent assets of $123,000, current liabilities of $14.4 million, noncurrent liabilities of $3.5 million and recorded minority interests of $241,000.
Certain acquisition agreements provide for future payments totaling a maximum amount as of May 31, 1996 of approximately $34 million based on achievement of specified net revenue or pretax income levels.
Intangible assets, including goodwill and covenants not to compete, of approximately $24.2 million and $15.0 million were recorded in connection with these acquisitions in 1996 and in the Transition Period, respectively. Amortization expense for intangible assets was approximately $4.0 million, $1.4 million, $2.7 million, and $1.0 million, in 1996, the Transition Period, 1994, and 1993, respectively.
The purchase method of accounting was used in all acquisitions, except the merger with Intertrans as discussed below. The operations of the acquired companies are reflected in the Company's consolidated financial statements from the date of acquisition.
The following unaudited consolidated pro forma information presents the results of operations as if acquisitions occurred at the beginning of fiscal year 1995 (in millions, except per share data):
Information above is presented for informational purposes only and is not necessarily indicative of operating results that would have occurred had the acquisitions been in effect for the entire periods presented, nor are they necessarily indicative of future operating results and do not reflect any synergies that might be achieved from combined operations.
POOLING OF INTERESTS
On May 30, 1995, the Company merged with Intertrans, a provider of international airfreight and ocean freight forwarding, customs brokerage, and other consulting and transportation services. The majority of Intertrans' business related to freight forwarding from the United States to overseas destinations. In the merger, each outstanding share of Intertrans common stock was converted into the right to receive 0.365 of a share of the Company's common stock. This merger was accounted for as a pooling of interests, and accordingly, consolidated financial statements for periods prior to the business combination have been restated to include the results of operations, financial position and cash flows of Intertrans.
Results of operations for the separate companies and the combined amounts presented in the accompanying consolidated financial statements were as follows (in thousands):
Prior to the merger, the Company's fiscal year ended on December 31. Intertrans' financial statements for the five months ended May 31, 1995 and twelve months ended October 31, 1994 and 1993 were combined with the Company's financial statements for the five months ended May 31, 1995 and the twelve months ended December 31, 1994 and 1993.
There were no significant transactions between the Company and Intertrans prior to the merger which required elimination. In order to conform to accounting policies of the Company, revenue and freight consolidation costs for Intertrans were reduced so that pass-through amounts paid as agent for ocean freight, foreign collect freight, customs duty, and other services were not included in the Consolidated Statements of Operations.
Retained earnings, cash and equivalents and certain balance sheet accounts were adjusted in the year ended December 31, 1994 to include the effect of including Intertrans' results of operations, financial position and cash flows for the two months ended from November 1, 1994 to December 31, 1994. Intertrans' gross revenue, net revenue, net income before extraordinary items and net income were $50.0 million, $14.6 million, $1.7 million and $1.7 million for the two months ended December 31,1994, respectively.
In connection with this merger, the Company recorded merger and related costs in May 1995 for transaction costs of $3.3 million and $26.7 million of other costs relating to combining the operations. The transaction costs consist of fees for investment bankers, attorneys, accountants, financial printing and other related charges. Costs of combining the operations include elimination of duplicate management information systems and facilities (including cancellation of leases); severance and outplacement of approximately 180 terminated employees; cancellation of certain contractual obligations; and other costs related to the merger. At May 31, 1995, the balance remaining in accrued liabilities was approximately $12.5 million.
In 1996, the Company recorded additional merger and related costs of $14.6 million associated with the Intertrans merger including approximately $2.8 million representing additional severance payments as a result of the Company's decision to eliminate 200 additional employees at all levels in the Company. As of May 31, 1996, approximately $2.5 million of this amount has been paid. The merger and related costs also included the elimination of duplicate facilities, integration of information systems, cancellation of certain contractual obligations and the write-off of pre-merger receivables. As of May 31, 1996, approximately $2.7 million was included in accrued liabilities for facilities and severances.
NOTE 8. 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. See Note 9 for additional discussion regarding legal matters.
NOTE 9. SUBSEQUENT EVENTS
In July 1996, four complaints were filed against the Company and certain of its directors and officers (two in California state court and two in federal court), purporting to be brought on behalf of a class of purchasers of the Company's stock between August 28, 1995 and July 23, 1996. The complaints allege various violations of California law and federal securities law in connection with prior disclosures made by the Company and seek unspecified damages. In August 1996, another complaint was filed in federal court containing substantially similar allegations.
The Company is unable to estimate the ultimate outcome of these matters, and it is possible that such outcome could have a significant adverse impact on the Company's consolidated results of operations. The Company believes that the ultimate outcome of these matters will not have a significant adverse impact on the Company's consolidated financial position.
NOTE 10. BUSINESS SEGMENT INFORMATION
The Company operates in the international freight forwarding industry, which encompasses customs brokerage, air and ocean freight forwarding and warehousing and distribution. No single customer accounted for ten percent or more of the consolidated revenue.
Certain information regarding the Company's operations by geographic areas is summarized below (in thousands):
(a) As of and for the five months ended May 31, 1995.
(b) Includes approximately $14.6 million and $30.0 million in 1996 and 1995, respectively, of merger and related costs as discussed in Note 7.
NOTE 11. COMMON STOCK
In October 1992, the Company established the 1992 Omnibus Equity Incentive Plan ("1992 Plan"), pursuant to which an aggregate of 1,520,000 shares of common stock was reserved for issuance to key employees of the Company. In May 1994, the 1992 Plan was amended to increase the number of shares available for award by an additional 1,520,000 shares of common stock. The 1992 Plan permits awards of non-qualified stock options, incentive stock options within the meaning of Section 422 of the Internal Revenue Code, stock appreciation rights, restricted stock, and performance awards entitling the recipient to receive cash or common stock following attainment of performance goals determined by the committee administering the 1992 Plan.
The majority of options granted under the Company's 1992 Plan are exercisable one-third each on the day after the first, second and third anniversary of the original grant. The majority of restricted stock vests 100% on the day after the fifth or seventh anniversary of the original grant. Both options and restricted stock were granted at a price equal to fair market value at date of grant except for 240,000 shares of options which were granted at 90% of fair market value at date of grant. Related compensation expense of approximately $917,000, $67,000 and $160,000 were recorded in 1996, the Transition Period and 1994, respectively.
Employee Stock Option Plans--Each option assumed by the Company under the Intertrans merger agreement will continue to have, and be subject to, the same terms and conditions set forth in the relevant Intertrans Stock Option Plan. The Intertrans plans required stock options granted to key employees must be at a price not less than the stock's fair market value of the stock at grant date. The majority of options granted are exercisable one-third after first anniversary date of the grant, two-thirds after two years and are fully exercisable three years from date of grant. In addition, the Intertrans plan allowed granting nonqualified stock options at not less than fair market value on date of grant.
Stock option activity for 1996, the Transition Period, 1994 and 1993 was as follows:
(a) Price per share has been adjusted for a two-for-one stock split.
As of May 31, 1996, options available for grant were 102,225 shares.
In May 1993, the Company established the Nonemployee Director Restricted Stock Plan, pursuant to which an aggregate of 50,000 shares of common stock was reserved for issuance to outside directors to cover the portion of their annual compensation payable in common stock. For fiscal year 1996, no shares have been issued to outside directors. Separately, 1,200 restricted shares were granted in 1996 to nonemployee directors under the 1992 Omnibus Equity Incentive Plan.
In connection with acquisitions, the Company issued 81,140 and 43,323 shares during 1996 and the Transition Period, respectively. For further discussion of acquisitions see Note 7.
Effective July 1, 1996, the Company adopted the Employee Stock Purchase Plan (Plan). Adoption of this plan is subject to approval of the Company's shareholders.
NOTE 12. TRANSITION PERIOD
During 1995, the Company changed its fiscal year end from December 31 to May 31, beginning with the five month period ended May 31, 1995. The results of operations for the unaudited comparable five month period ended May 31, 1994 for revenue, net revenue, income from operations, income taxes, net income, net income per share and weighted average shares outstanding were $273.5 million, $116.0 million, $12.0 million, $4.1 million, $8.0 million, $0.26 earnings per share and 30.6 million shares, respectively.
NOTE 13. RETIREMENT PLAN
The Company has a 401(k) retirement plan covering substantially all U.S. employees. The Company has recorded matching contributions in the amount of $540,000, $218,000, $449,000 and $429,000 in 1996, the Transition Period, 1994 and 1993, respectively.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for the twelve months ended May 31, 1996 and December 31, 1994 (in thousands, except per share amounts):
(a) Revenue, net revenue and net income for the third quarter of 1996 are presented net of adjustments to the previously reported figures. The adjustments were to decrease revenue, net revenue and net income by approximately $33.2 million, $14.9 million and $7.1 million, respectively. Included in the adjustments were approximately $4.6 million of additional merger and related costs. See Note 7 for additional discussion.
(b) The fourth quarter reflects additional charges relating to merger and related costs for approximately $10 million. See Note 7 for additional discussion.
(c) Intertrans quarterly financial data which has been included for the pooling of interests restatement is based upon a fiscal year end of October 31.
(d) Primary and fully diluted net income per share are not presented for first and second quarters of 1994 as the dilutive effect is not significant.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Fritz Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Fritz Companies, Inc. and subsidiaries as of May 31, 1996, and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended May 31, 1996, the five months ended May 31, 1995 and for each of the years in the two-year period ended December 31, 1994. In connection with our audits of the consolidated financial statements, we also audited the related consolidated Financial Statement Schedule II as of and for the year ended May 31, 1996, five months ended May 31, 1995 and for each of the years in the two-year period ended December 31, 1994. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fritz Companies, Inc. and subsidiaries as of May 31, 1996 and 1995, and the results of their operations and their cash flows for the year ended May 31, 1996, the five months ended May 31, 1995 and for each of the years in the two-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
San Francisco, California July 31, 1996
FRITZ COMPANIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED MAY 31, 1996, THE FIVE MONTHS ENDED MAY 31, 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (IN THOUSANDS)
EXHIBIT INDEX
- - --------------------- * Indicates, as required by Item 14(a)(3), a management contract of compensatory plan required to be filed as an exhibit to this Form 10-K.