<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1997.
REGISTRATION NO. 333-39971
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DISPATCH MANAGEMENT SERVICES CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4215 13-3967426
State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
DISPATCH MANAGEMENT SERVICES CORP.
65 WEST 36TH STREET
NEW YORK, NEW YORK 10018
(212) 268-2910
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Linda M. Jenkinson
Chief Executive Officer
DISPATCH MANAGEMENT SERVICES CORP.
65 WEST 36TH STREET
NEW YORK, NEW YORK 10018
(212) 268-2910
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
Bruce S. Mendelsohn, Esq. Bruce E. Macdonough, Esq.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. GREENBERG TRAURIG HOFFMAN LIPOFF
1333 New Hampshire Avenue, N.W. ROSEN & QUENTEL, P.A.
Suite 400 1221 Brickell Avenue
Washington, D.C. 20036 Miami, Florida 33131
(202) 887-4000 (305) 579-0500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / / ______
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / / ______
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value per share..................................... $92,000,000 $27,140
</TABLE>
(1) Estimated solely for purpose of calculating the registration fee pursuant to
Rule 457(o) and of which $24,394 was paid on November 10, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH AN OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF ANY SUCH
STATE.
<PAGE>
SUBJECT TO COMPLETION -- DATED DECEMBER 24, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
[ ] Shares
DISPATCH MANAGEMENT SERVICES CORP.
Common Stock
- -------------------------------------------------------------------------
All of the shares of common stock, par value $0.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by Dispatch Management
Services Corp. (the "Company").
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price for the Common
Stock will be between $ and $ per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
The Company has applied for inclusion of the Common Stock in The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol "DMSC."
SEE "RISK FACTORS" ON PAGES 13 TO 21 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON
STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share...................................................... $ $ $
Total (3)...................................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to additional shares of Common Stock on the same
terms and conditions as set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ and the
total Proceeds to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made through the facilities
of The Depository Trust Company, New York, New York, on or about January ,
1998.
PRUDENTIAL SECURITIES INCORPORATED
January , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES APPEARING ELSEWHERE IN THE PROSPECTUS. UNLESS OTHERWISE INDICATED,
ALL SHARE, PER SHARE AND FINANCIAL INFORMATION IN THE PROSPECTUS: (I) HAVE BEEN
ADJUSTED TO GIVE EFFECT TO THE COMBINATIONS; (II) ASSUME THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED; AND (III) ASSUME AN INITIAL PUBLIC
OFFERING PRICE OF $ PER SHARE WHICH REPRESENTS THE MID-POINT OF THE
PROPOSED OFFERING RANGE.
SIMULTANEOUSLY WITH AND AS A CONDITION TO THE CLOSING OF THE OFFERING MADE
BY THIS PROSPECTUS (THE "PROSPECTUS"), THE COMPANY WILL ACQUIRE, IN SEPARATE
COMBINATION TRANSACTIONS (THE "COMBINATIONS"), IN EXCHANGE FOR CASH OR SHARES OF
ITS COMMON STOCK OR A COMBINATION OF BOTH, 41 URGENT, ON-DEMAND, POINT-TO-POINT
COURIER FIRMS AND ONE SOFTWARE FIRM (EACH, TOGETHER WITH ONE SOFTWARE FIRM
PREVIOUSLY ACQUIRED BY THE COMPANY, A "FOUNDING COMPANY," AND COLLECTIVELY, THE
"FOUNDING COMPANIES"). UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE
"COMPANY" AND "DMS" HEREIN MEAN DISPATCH MANAGEMENT SERVICES CORP., ITS
SUBSIDIARIES AND THE FOUNDING COMPANIES. FOR MORE INFORMATION ABOUT THE
COMBINATIONS, SEE "THE COMPANY."
THE COMPANY
Dispatch Management Services Corp. has recently been formed to create one of
the largest providers of urgent, on-demand, point-to-point ("Point-to-Point")
delivery services in the world. The Company focuses on Point-to-Point delivery
by foot, bicycle, motorcycle, car and truck and operates in 18 of the largest
metropolitan markets in the United States as well as in London, U.K. and
Wellington, New Zealand. The Company believes that it has the largest market
share of Point-to-Point delivery service companies operating in each of New York
City, London, San Francisco, Atlanta, Washington, D.C. and Seattle. The Company
also believes that it is the only courier firm focused exclusively on
consolidating the highly fragmented Point-to-Point delivery industry. Although
several large, national, publicly traded companies have begun to consolidate
other segments of the delivery industry, the Company intends to become the
largest consolidator focused exclusively on the Point-to-Point market. The
Company's pro forma combined revenues for the year ended December 31, 1996 and
the nine months ended September 30, 1997 were $136.7 million and $111.8 million,
respectively. The Company has conducted no operations other than in connection
with the Offering and the Combinations, and has generated no revenues to date
other than the receipt of licensing fees.
Management believes that the Company's distinctive operating methodology
(the "DMS Model") significantly differentiates it from both local market
competitors and other large, same-day delivery service providers who compete in
the Point-to-Point delivery industry on a limited basis. The DMS Model is
designed to reduce operating complexities inherent in the Point-to-Point
delivery industry and allows for both significant growth and increased
profitability. Key elements of the DMS Model include: (i) restructuring the
Company's courier operations into three distinct operating functions relating to
dispatch management, road management and marketing management; (ii) utilizing
proprietary software to manage order entry and delivery completion, on-time
performance and transaction processing; (iii) operating multiple brands in local
markets in order to target specific customers through individual brand
identities and capitalize on niche marketing opportunities; (iv) empowering the
courier fleet, rather than dispatchers, to determine optimal use of road
resources ("Free Call Dispatch"); and (v) incentivizing the Company's workforce
in each of the three operating functions to maximize efficiency and
profitability. Management has chosen to focus on the Point-to-Point delivery
industry due to: (a) the customers' requirements for immediate service and
responsiveness, which management believes enables the Company to distinguish the
DMS Model from the operating methods employed by its competitors; (b) the
Company's ability to charge premium pricing for guaranteed, on-time delivery;
and (c) the lack of a focused national or international consolidator.
3
<PAGE>
The Company believes that the DMS Model provides it with significant
competitive advantages, including the ability to provide higher levels of
customer service and to guarantee the delivery of time-critical parcels in as
little as 15 minutes within certain downtown areas of selected major
metropolitan markets. The Company also believes that implementation of the DMS
Model creates an entrepreneurial environment which facilitates increased
personnel utilization and lower transaction processing costs as a percentage of
revenue, resulting in increased profitability. In addition, the Company believes
the resulting reduction of operating complexity allows the Company to
substantially increase the number of transactions the Company is able to process
with minimal incremental cost.
The Company's founders and senior executives have significant experience
operating Point-to-Point courier companies or consolidating back-office
operations of transaction-oriented Fortune 100 companies. The Company's founder
created the DMS Model in 1991. Since 1994, the Company's management team has
introduced certain components of the DMS Model and has refined the DMS Model
through licensing arrangements with a number of courier firms, including 18
Founding Companies in 10 of the 20 markets in which the Company will operate
subsequent to the Offering. These companies collectively represented 14.2% of
the Company's pro forma combined revenues in 1996. The Company's founders and
management team have developed and have begun implementing a conversion and
integration plan with each of the Founding Companies in order to expedite the
full conversion to the DMS Model.
The Company's growth strategy is intended to increase revenue and
profitability by increasing market penetration in existing markets and expanding
into new markets. A key element of the Company's growth strategy is to acquire
additional brands in existing markets. The Company believes that it will be able
to achieve operating efficiencies by converting acquired companies to the DMS
Model and consolidating their operations into existing DMS operations. The
Company intends to further develop its relationships with existing clients and
to expand its client base by (i) niche marketing the Company's services through
multiple brands in each market and (ii) providing enhanced services not
currently provided to customers, such as guaranteed, on-time delivery. The
Company intends to enter new markets by acquiring companies which on a combined
or stand-alone basis will make the Company the largest or second largest
provider of Point-to-Point delivery services in such market. The Company also
intends to expand its 1-800-COURIER-TM- network, which currently is operating in
seven markets, and its 1-800 DELIVER-TM- brand, to develop a premium branded
national accounts program. Although barriers to entry in the Point-to-Point
delivery services market traditionally have been low, the Company believes that
the DMS Model will allow it to provide higher levels of customer services than
traditionally available from its competitors, thereby permitting the Company to
charge premium prices for these services.
The Company will pay, subject to adjustments, approximately $59.2 million in
cash to the stockholders of the Founding Companies and an additional $2.2
million to repay certain indebtedness of the Founding Companies assumed by the
Company, which together represent approximately % of the net proceeds of the
Offering. See "The Company--The Combinations." After payment of the cash portion
of the purchase price for the Founding Companies, no assurance can be given that
the remaining net proceeds of the Offering will be sufficient to meet the
Company's requirements for working capital and potential acquisitions.
4
<PAGE>
SUMMARY FINANCIAL DATA FOR INDIVIDUAL FOUNDING COMPANIES
UNAUDITED
The following table presents summary statement of operations data for the
Founding Companies for the year ended December 31, 1996 and for the nine months
ended September 30, 1996 and 1997. Operating income (loss) has not been adjusted
for any pro forma adjustments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Adjusted pro forma operating
income (loss) includes operating income adjusted for the Compensation
Differential and royalty payments made by certain Founding Companies related to
franchise agreements and excludes pro forma amortization of intangible assets.
Adjusted pro forma operating income (loss) includes compensation costs
eliminated or which will be eliminated in connection with the Combinations (See
Note 4 of Notes to the Unaudited Pro Forma Combined Financial Statements).
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,(2)
DECEMBER 31, --------------------
BRAND NAME 1996(1) 1996 1997
- --------------------------------------------------------------------------- -------------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
LONDON, U.K.
West One:
Revenues................................................................. $ 24,148 $ 18,838 $ 20,491
Operating income......................................................... 1,752 1,371 1,424
Adjusted pro forma operating income...................................... 1,736 1,359 1,416
Security Despatch Limited:
Revenues................................................................. 9,440 6,776 7,366
Operating income......................................................... 1,296 995 949
Adjusted pro forma operating income...................................... 1,397 1,071 974
NEW YORK METRO AREA
Earlybird Courier Service, LLC:
Revenues................................................................. 13,189 9,845 10,995
Operating income......................................................... 1,362 462 1,998
Adjusted pro forma operating income...................................... 995 612 1,203
Atlantic Freight Systems, Inc.:
Revenues................................................................. 8,728 6,192 6,760
Operating income (loss).................................................. (513) (319) (197)
Adjusted pro forma operating income (loss)............................... (269) (136) (12)
Zoom Courier:
Revenues................................................................. 8,404 6,318 6,524
Operating income (loss).................................................. (338) (245) (319)
Adjusted pro forma operating income (loss)............................... (102) (68) (142)
Bullit Services, Inc.:
Revenues................................................................. 7,696 5,789 6,612
Operating income (loss).................................................. (65) 164 340
Adjusted pro forma operating income...................................... 155 273 422
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,(2)
DECEMBER 31, --------------------
BRAND NAME 1996(1) 1996 1997
- --------------------------------------------------------------------------- -------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
SAN FRANCISCO
Aero Special Delivery Service, Inc.:
Revenues................................................................. $ 10,998 $ 8,245 $ 9,318
Operating income (loss).................................................. (109) (51) (391)
Adjusted pro forma operating income (loss)............................... (89) (36) (385)
S-Car-Go Courier, Inc.:
Revenues................................................................. 1,263 921 1,251
Operating income......................................................... 14 39 124
Adjusted pro forma operating income...................................... 87 69 170
Battery Point:
Revenues................................................................. 732 532 657
Operating income......................................................... 157 138 171
Adjusted pro forma operating income...................................... 90 84 103
Chris Neal, Sole Prop Zap:
Revenues................................................................. 941 448 593
Operating income......................................................... 141 69 114
Adjusted pro forma operating income...................................... 70 35 63
Michael Studebaker, Sole Prop:
Revenues................................................................. 342 244 309
Operating income......................................................... 69 45 44
Adjusted pro forma operating income...................................... 39 25 23
MINNEAPOLIS/PHOENIX
American Eagle Endeavors, Inc.:
Revenues................................................................. 8,536 6,476 5,222
Operating income (loss).................................................. 594 539 (444)
Adjusted pro forma operating income...................................... 642 484 127
WASHINGTON, DC
Washington Express Services, Inc.:
Revenues................................................................. 5,800 4,372 4,341
Operating income......................................................... 140 132 38
Adjusted pro forma operating income...................................... 435 424 471
ATLANTA
A Courier:
Revenues................................................................. 6,020 4,380 5,367
Operating income......................................................... 446 474 257
Adjusted pro forma operating income...................................... 542 542 298
MLQ Express, Inc.:
Revenues................................................................. 5,310 3,621 4,617
Operating income......................................................... 117 32 225
Adjusted pro forma operating income...................................... 420 259 383
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,(2)
DECEMBER 31, --------------------
BRAND NAME 1996(1) 1996 1997
- --------------------------------------------------------------------------- -------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
DENVER
Kangaroo Express:
Revenues................................................................. $ 2,650 $ 2,001 $ 2,140
Operating income (loss).................................................. 25 68 (15)
Adjusted pro forma operating income (loss)............................... 36 76 (5)
1-800 Courier--Denver:
Revenues................................................................. 1,247 969 904
Operating income (loss).................................................. 33 89 (126)
Adjusted pro forma operating income...................................... 94 94 61
LOS ANGELES
National Messenger, Inc.:
Revenues................................................................. 2,413 1,801 2,082
Operating income......................................................... 260 154 306
Adjusted pro forma operating income...................................... 182 133 157
1-800 Courier--LAX:
Revenues................................................................. 1,212 850 1,235
Operating income (loss).................................................. (67) (53) (15)
Adjusted pro forma operating income (loss)............................... 33 (36) 41
BOSTON
1-800 Courier--Boston:
Revenues................................................................. 1,343 1,023 1,071
Operating income (loss).................................................. (25) (8) 81
Adjusted pro forma operating income...................................... 35 25 181
SEATTLE
Fleetfoot Max, Inc.:
Revenues................................................................. 2,172 1,565 1,842
Operating income......................................................... 132 102 93
Adjusted pro forma operating income...................................... 163 114 138
HOUSTON
A&W Couriers, Inc.:
Revenues................................................................. 1,560 1,171 1,270
Operating income (loss).................................................. (9) 10 35
Adjusted pro forma operating income...................................... 108 87 95
DETROIT
Express Messenger:
Revenues................................................................. 1,612 1,222 1,447
Operating income......................................................... 40 43 64
Adjusted pro forma operating income...................................... 122 92 108
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,(2)
DECEMBER 31, --------------------
BRAND NAME 1996(1) 1996 1997
- --------------------------------------------------------------------------- -------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CHICAGO
Deadline Express:
Revenues................................................................. $ 1,177 $ 824 $ 962
Operating income (loss).................................................. (6) (21) (76)
Adjusted pro forma operating income (loss)............................... 49 7 (48)
SOFTWARE COMPANY
Fleetway:
Revenues................................................................. 1,048 867 922
Operating income (loss).................................................. (82) 68 58
Adjusted pro forma operating income...................................... 117 218 160
OTHER FOUNDING COMPANIES
Revenues................................................................. 8,719 6,625 7,282
Operating income......................................................... 215 445 395
Adjusted pro forma operating income...................................... 554 600 618
</TABLE>
(1) Consists of operating results for the year ended December 31, 1996, except
that West One, Security Despatch Limited, Bullit Services, Inc., Washington
Express Services, Inc., MLQ Express, Inc., National Messenger, Fleetfoot
Max, Inc. and Fleetway operating results are for the years ended September
30, 1996, March 31, 1997, February 28, 1997, September 30, 1996, February
28, 1997, November 30, 1996, August 31, 1996 and March 31, 1997,
respectively.
(2) Consists of operating results for the nine months ended September 30, 1996
and 1997, except that Washington Express Services, Inc., and Fleetfoot Max,
Inc. operating results are for the nine months ended June 30, 1996 and 1997
and August 31, 1996 and 1997, respectively.
8
<PAGE>
RECENT DEVELOPMENTS
Approximately $0.9 million of indebtedness was incurred by the Company in
July 1997 to partially fund expenses associated with the Offering and the
Combinations (the "Bridge Loan"). The Bridge Loan bears interest at 10% per
annum and matures on the earlier of the consummation of the Offering or on
January 22, 1999. DMS Equity Investors Limited Partnership (the "Partnership"),
an entity not affiliated with the Company, provided the Bridge Loan. The
partners of the Partnership will receive shares of Common Stock representing a
1.4% interest in the Company after the Offering.
Approximately $2.0 million of indebtedness was incurred by the Company in
December 1997 to partially fund expenses associated with the Offering and the
Combinations (the "December Bridge Loan"). The December Bridge Loan bears
interest at 14% per annum and matures on the earlier of the consummation of the
Offering or on December 31, 1998. The December Bridge Loan was made by certain
individual investors, including affiliates of the Company. See "Use of
Proceeds."
9
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company Hereby... shares
Common Stock to be Issued to Founding
Companies in the Combinations.............. shares (1)
Common Stock held by Existing Stockholders of
the Company................................ shares (1)
Common Stock to be Outstanding after the
Offering................................... shares (2)
Use of Proceeds.............................. To pay the cash portion of the purchase price
for the Founding Companies and for general
corporate purposes, including future
acquisitions. See "Use of Proceeds."(3)
Proposed Nasdaq National Market Symbol....... DMSC
</TABLE>
- ------------------------
(1) Assumes an initial public offering price of $ per share which
represents the mid-point of the proposed offering range. The Company will
issue Common Stock to the Founding Companies valued at $44.8 million.
Accordingly, if the initial public offering price is higher than $
per share, the number of shares to be issued in the Combinations will be
reduced and the existing stockholders will hold a greater percentage of the
Company's outstanding Common Stock subsequent to the Offering. Conversely,
if the initial public offering price is less than $ per share, the
number of shares to be issued in the Combinations will be increased and the
existing stockholders will hold a lower percentage of the Company's
outstanding Common Stock subsequent to the Offering. See "The Company--The
Combinations."
(2) Excludes shares of Common Stock reserved for issuance under the
Company's 1997 Stock Incentive Plan. The Company expects to issue options to
acquire shares of Common Stock to certain directors, executive
officers and other employees at the initial public offering price. See
"Management--1997 Stock Incentive Plan."
(3) Of the net proceeds, $59.2 million ( % of the aggregate net proceeds) will
be used to pay the cash portion of the purchase price for the Founding
Companies, of which approximately $14.7 million is subject to possible
repayment (the "Earnout") by the former owners of the Founding Company if
the financial results of that Founding Company fails to meet certain
financial targets, and $2.2 million ( % of the aggregate net proceeds) will
be used to pay certain indebtedness of the Founding Companies assumed by the
Company. There can be no assurance that the remaining net proceeds will be
sufficient to meet the Company's working capital requirements or to pay any
cash consideration in future acquisitions. See "Use of Proceeds."
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the impact to investors from various
events that could adversly affect the Company's business. See "Risk Factors."
10
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has been identified as the "accounting acquiror" in connection
with the Combinations. The following unaudited summary pro forma statement of
operations data for the Company have been adjusted to give effect to (i) the
consummation of the Combinations and (ii) certain pro forma adjustments to the
historical financial statements as described in the notes below. The following
unaudited summary pro forma combined balance sheet data for the Company have
been adjusted to give effect to (i) the consummation of the Combinations and
(ii) the consummation of the Offering and the application of the net proceeds
therefrom. The summary pro forma data are not necessarily indicative of the
Company's operating results or financial position that might have occurred had
the events described above been consummated at the beginning of the period and
should not be construed as representative of future operating results or
financial position. The summary pro forma combined financial data should be read
in conjunction with the Unaudited Pro Forma Combined Financial Statements and
the related notes thereto and the historical financial statements of the
Founding Companies and the related notes thereto included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
TWELVE NINE MONTHS ENDED
MONTHS ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues................................................................. $ 136,700 $ 101,915 $ 111,800
Cost of revenues......................................................... 86,521 63,332 69,317
------------ ---------- ----------
Gross profit............................................................. 50,179 38,583 42,483
Operating Expenses:
Sales and marketing expenses........................................... 6,993 4,356 4,674
General and administrative expenses(2)................................. 11,778 8,141 9,982
Other operating expenses............................................... 21,769 18,093 19,490
Depreciation and amortization(3)....................................... 4,032 3,162 3,307
------------ ---------- ----------
Operating income......................................................... 5,607 4,831 5,030
Interest and other expense, net.......................................... 1,360 1,047 1,043
------------ ---------- ----------
Income before income taxes............................................... 4,247 3,784 3,987
Provision for income taxes(4)............................................ 2,373 2,008 2,090
------------ ---------- ----------
Net income............................................................... $ 1,874 $ 1,776 $ 1,897
------------ ---------- ----------
------------ ---------- ----------
Net income per share..................................................... $ $ $
Shares used in computing pro forma net income per share(5)...............
Net income per share as adjusted.........................................
Shares used in computing pro forma net income as adjusted................
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------
PRO FORMA PRO FORMA
COMBINED(6) AS ADJUSTED(7)
------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................................................... $ (40,929)(8) $ 10,717
Total assets................................................................. 112,468 126,443
Long term debt, net of current maturities.................................... 3,780 3,780
Stockholders' equity......................................................... 34,073 100,383
</TABLE>
- ------------------------
(FOOTNOTES BEGIN ON NEXT PAGE)
11
<PAGE>
(1) The pro forma combined statement of operations data assumes that the
Combinations and the disposition of a business segment at one of the
Founding Companies occurred on January 1, 1996.
(2) The pro forma combined statement of operations data reflect pro forma
reductions in (i) salaries, bonuses and benefits to the owners of the
Founding Companies (the "Compensation Differential") aggregating
approximately $1.8 million, $1.5 million and $875,000, for the year ended
December 31, 1996 and the nine-month periods ended September 30, 1996 and
1997, respectively, and (ii) royalty payments made by certain Founding
Companies related to franchise agreements which will be terminated with the
closing of the Combinations.
(3) Primarily consists of amortization of goodwill to be recorded as a result of
the Combinations computed on the basis described in the Note 3 of Notes to
the Unaudited Pro Forma Combined Financial Statements.
(4) Assumes the Company is subject to a corporate income tax rate of 40%. The
higher resulting effective tax rate is due to the amortization of certain
goodwill expenses which are not tax deductible.
(5) Assumes an initial public offering price per share of $ and
includes: (i) shares to be issued to owners of certain of the Founding
Companies; (ii) shares held by the existing stockholders of the
Company; and (iii) the shares required to be sold in the Offering to
pay the cash portion of the Combination consideration and to pay expenses
associated with the Offering and the Combinations.
(6) The pro forma combined balance sheet data assume that the Combinations were
consummated on September 30, 1997.
(7) Adjusted for the sale of the shares of Common Stock offered by the
Company hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
(8) Reflects $44.5 million of cash consideration due to certain owners of the
Founding Companies pursuant to the Combinations and excludes $14.7 million
subject to the Earnout. See "The Company--The Combinations."
12
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information contained in the Prospectus,
in connection with an investment in the shares of Common Stock offered hereby.
The Prospectus contains forward-looking statements. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "could,"
"may" and similar expressions are intended to identify forward-looking
statements. These statements include information regarding future net cash
flows. Such statements reflect the Company's current views with respect to
future events and financial performance and involves certain risks and
uncertainties, including without limitation the risks described below in "Risk
Factors." Should one or more of these risks or uncertainties occur, or should
underlying assumptions prove incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
RISKS RELATING TO CONVERSION TO THE DMS MODEL. None of the Founding
Companies has utilized every aspect of the DMS Model. Subsequent to the
Offering, the Company intends to convert the operations of the Founding
Companies, and of future acquisitions, to the DMS Model to the extent feasible.
The process of converting an existing Point-to-Point courier operation to the
DMS Model involves the implementation of the Free Call Dispatch system as well
as the integration of new software systems, pricing structures, billing methods,
personnel utilization practices and data standardization. Changes in the pricing
structures and billing methods could result in the loss of customers. The
process of conversion in a particular market may involve unforeseen
difficulties, including delays in the consolidation of facilities, complications
and expenses in implementing the new operating software system, or the loss of
customers or key operating personnel, any of which can cause substantial delays
to the conversion process in such particular market and may have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, Brand Managers, as defined, are expected to have
substantial authority with respect to the continuing operation of the Founding
Companies subsequent to the Offering. There are significant limitations on the
Company's ability to terminate such Brand Managers. Additionally, the timing of
any acquisitions of additional Point-to-Point courier firms and their respective
conversion to the DMS Model may have a significant impact on the Company's
financial results, particularly in quarters immediately following such
acquisitions. See "Business--The DMS Model."
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION. The Company
was founded in September 1997, has conducted no operations other than in
connection with the Offering and the Combinations, and has generated no revenues
to date other than receipt of licensing fees relating to the software company
previously acquired by the Company. Although the Company has entered into
agreements to acquire the Founding Companies (other than one software company
that was previously acquired) upon completion of the Offering, the Company and
the Founding Companies operate as separate, independent businesses.
Consequently, the historical and pro forma financial information contained
herein may not be indicative of the Company's financial condition and historical
or future operating results. See "The Company" and "Certain Transactions."
The process of integrating acquired businesses often involves unforeseen
difficulties and may require a disproportionate amount of the Company's
financial and other resources, including management time. The success of the
Company will depend, in part, on the extent to which the Company is able to
institute and centralize accounting and other administrative functions such as
billing, collections and cash management, implement financial controls,
eliminate the unnecessary duplication of other functions and otherwise integrate
the Founding Companies, and such additional businesses the Company may acquire
in the future, into a cohesive, efficient enterprise. The Company may experience
delays, complications and unanticipated expenses in implementing, integrating
and operating such systems, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no
13
<PAGE>
assurance that the Company's founders or senior management group will be able to
successfully integrate, profitably manage or achieve anticipated cost savings
from the combined operations of the Founding Companies or implement the
Company's business, internal and acquisition growth strategies subsequent to the
Offering. The inability of the Company to successfully integrate the Founding
Companies would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Acquisition
Strategy" and "Management."
CERTAIN TAX MATTERS RELATED TO INDEPENDENT CONTRACTORS. Subsequent to the
Offering, a significant number of the couriers utilized by the Company will be
independent contractors. From time to time, federal and state taxing authorities
have sought to assert that independent contractors in the Point-to-Point
delivery industry are employees of the Company, rather than independent
contractors. Tax authorities recently have made such an assertion against one of
the Founding Companies. The Company does not pay or withhold any federal or
state employment tax with respect to or on behalf of independent contractors.
Couriers utilized by the Company will be employees of or independent contractors
with individual RMS Centers in their respective metropolitan markets, each of
which will be indirect wholly owned subsidiaries of the Company. The Company
believes that the independent contractors utilized by the Company and who have
entered into contracts with an RMS Center are not employees of the Company under
existing interpretations of federal and state laws. However, there can be no
assurance that federal and state authorities will not challenge this position,
or that other laws or regulations, including tax laws, or interpretations
thereof, will not change. If the IRS successfully asserts that such persons or
others classified by the Company as independent contractors are in fact
employees of the Company, the Company would be required to pay withholding taxes
and administer added employee benefits, thereby increasing the Company's
operating costs. In addition, the Company could become responsible for certain
past and future employment taxes. Additionally, if the Company is required to
pay back-up withholding taxes with respect to amounts previously paid to such
persons, it may be required to pay penalties or be subject to other liability as
a result of incorrectly classifying such couriers. If the couriers are deemed to
be employees, rather than independent contractors, then the Company may be
required to increase their compensation since they will no longer be receiving
commission-based compensation. As a result, the operating costs of the Company
could increase. Any of the foregoing circumstances could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--The DMS Model" and "Employees and Independent Contractors."
MANAGEMENT OF GROWTH. The Company expects to expend significant time and
effort in expanding its existing businesses and identifying, acquiring and
integrating acquisitions. There can be no assurance that the Company's
management and financial reporting systems, procedures and controls will be
adequate to support the Company's operations as they expand. Any future growth
also will impose significant added responsibilities on members of senior
management, including the need to identify, recruit and integrate additional
management and employees. There can be no assurance that such additional
management and employees will be identified and retained by the Company. To the
extent that the Company is unable to manage its growth efficiently and
effectively, or is unable to attract and retain additional qualified personnel,
the Company's business, financial condition and results of operations could be
materially adversely effected. See "Business--Internal Growth Strategy" and
"Management."
RISKS RELATING TO THE COMPANY'S ACQUISITION STRATEGY. One of the Company's
primary growth strategies is to increase its revenues and profitability and
expand the markets it serves through the acquisition of additional
Point-to-Point courier businesses. Several large, national publicly traded
companies have begun to consolidate the delivery industry through the
acquisition of independent Point-to-Point courier companies. As a result,
competition for acquisition candidates is intense and there can be no assurance
that the Company will be able to compete effectively for acquisition candidates
on terms deemed acceptable to the Company. There also can be no assurance that
the Company will be able to successfully convert acquired businesses to the DMS
Model and integrate such businesses into the Company without substantial costs,
delays or other operational or financial problems. In addition, there can be no
assurance that companies
14
<PAGE>
acquired in the future either will be beneficial to the successful
implementation of the Company's overall strategy or will ultimately produce
returns that justify the investment therein, or that the Company will be
successful in achieving meaningful economies of scale through the acquisitions
thereof. Further, acquisitions involve a number of special risks, including
possible adverse effects on the Company's operating results and the timing of
those results, diversion of management's attention, dependence on retention,
hiring and training of key personnel, risks associated with unanticipated
problems or legal liabilities, and the realization of intangible assets, some or
all of which could have a material adverse effect on the Company's business,
financial condition and results of operations, particularly in the fiscal
quarters immediately following the consummation of such transactions. Customer
dissatisfaction or performance problems at a single acquired company could also
have an adverse effect on the reputation of the Company. In addition, there can
be no assurance that the Founding Companies or other Point-to-Point courier
companies acquired in the future will achieve the anticipated level of revenues
and earnings. To the extent that the Company is unable to acquire additional
Point-to-Point courier firms or integrate such businesses successfully, the
Company's ability to expand its operations and increase its revenues and
earnings to the degree desired would be reduced significantly.
FACTORS AFFECTING INTERNAL GROWTH. Certain of the Founding Companies have
individually experienced significant revenue and earnings growth over the past
few years. There can be no assurance that these Founding Companies will continue
to experience internal growth comparable to these levels, if at all. From time
to time, certain of the Founding Companies have been unable to hire and train as
many couriers, operating and sales personnel as necessary to meet the increasing
demands of these businesses. Factors affecting the ability of each of these
Founding Companies to experience continued internal growth includes, but are not
limited to, the continued relationships with existing customers, the ability to
expand the customer base, the ability to recruit and retain qualified couriers,
operating and sales personnel, continued access to capital and the ability to
cross-sell services between the Founding Companies. See "Business--Internal
Growth Strategy."
NEED FOR ADDITIONAL FINANCING. The Company currently intends to finance
future acquisitions by using a combination of shares of its Common Stock and
cash. In the event that the Common Stock of the Company does not maintain a
sufficient market value, or potential acquisition candidates are unwilling to
accept the Company's Common Stock as part of or all of the consideration to be
paid for their business, the Company may be required to utilize its cash
resources, if available, to maintain its acquisition program. If the Company has
insufficient cash resources to pursue acquisitions, its growth could be limited
unless it is able to obtain additional capital through debt or equity financing.
There can be no assurance that the Company will be able to obtain such financing
if and when it is needed or that, if available, such financing can be obtained
on terms the Company deems acceptable. The inability to obtain such financing
could negatively impact the Company's acquisition program and have a resulting
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company intends to seek a line of credit,
there can be no assurance that the Company will be able to obtain such line of
credit in such amounts and on terms the Company deems acceptable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Combined Liquidity and Capital Resources."
CERTAIN TAX MATTERS RELATING TO REIMBURSEMENT POLICIES. Several of the
Founding Companies in the past have reimbursed certain automobile expenses of
their drivers who are independent contractors and own their vehicles. These
Founding Companies have discontinued this reimbursement policy, and the Company
does not intend to adopt this particular policy and will terminate a similar
policy of any other Founding Company which had such a policy prior to the
consummation of the Combinations. The Internal Revenue Service ("IRS") has
challenged this policy and the treatment of such payments as reimbursed
expenses, and has asserted that the reimbursements constitute additional
compensation to the couriers on which the company should withhold certain taxes.
See "Note 3 of Notes to Financial Statements of Aero Delivery Service, Inc."
There can be no assurance that the IRS will not be able to successfully
challenge
15
<PAGE>
this policy if any other Founding Company is presently practicing or has
practiced this particular policy in the past and that this would not have a
material adverse impact on the Company's business, financial condition and
results of operations for which the Company will not be adequately covered by
indemnification from the Founding Companies.
RISK OF LIMITATIONS ON TERMINATION OF BRAND MANAGERS. Upon the consummation
of the Offering, the Company intends to operate certain of the Brands acquired
in the Combinations through Brand Manager Agreements with Brand Managers. Each
Brand Manager will be responsible for managing his or her Brand to maximize its
revenues and profit margin. The Brand Manager Agreement can be terminated by the
Company, upon approval of the Business Steering Committee (consisting of the
President of the Company and certain Brand Managers), under certain limited
conditions. There can be no assurance that the Company will be able to terminate
in a timely manner any Brand Manager who is not performing as expected and that
such inability would not have a material adverse impact on the Company's
business, financial condition and results of operations.
RISK OF LOSS OF CUSTOMERS. The implementation of the DMS Model is intended
to enable the Company to offer a higher level of customer service than its
competitors. The prices that the Company may charge for such services could be
greater than the prices currently being charged customers for services they are
currently receiving. There can be no assurance that customers will not decline
to purchase the services to be offered by the Company, thereby adversely
affecting the Company's business, financial condition and results of operations.
LIMITATIONS ON ACCESS TO RADIO CHANNELS. The Company relies to a
significant extent on the use of two-way radio channels to communicate with its
courier fleet. Such radio channels are made available, on a limited basis, by
local government authorities and the Federal Communications Commission.
Accordingly, providers of the transmission networks for the radio channels may
have the ability to restrict, or substantially increase the costs with respect
to, the Company's use or access to the radio channels. The Company may, at its
own expense, be required to incur substantial costs to obtain, build or maintain
its own transmission networks in the event that third party owners of the
current transmission networks restrict or otherwise obstruct the Company's
access to radio channels. Any increases in the costs of radio transmission,
obstruction of current radio channel service or any need for the Company to
build its own transmission networks could severely inhibit the Company's ability
to deliver Point-to-Point delivery services and have a material adverse effect
on the Company's business, financial condition and results of operations.
CLAIMS EXPOSURE. The Company is exposed to claims for personal injury,
death and property damage as a result of automobile, bicycle and other accidents
involving its employees and independent contractors. The Company may also be
subject to claims resulting from the non-delivery or delayed delivery of
packages, many of which claims could be significant because of the unique or
time sensitive nature of the deliveries. The Company intends to carry liability
insurance and independent contractors are required to maintain the minimum
amounts of liability insurance required by state law. However, there can be no
assurance that claims will not exceed the amount of coverage. In addition, the
Company's increased visibility and financial strength as a public company may
create additional claims exposure. If the Company were to experience a material
increase in the frequency or severity of accidents, liability claims, workers'
compensation claims or unfavorable resolution of claims, the Company's insurance
costs could significantly increase and operating results could be negatively
affected. In addition, future claims against the Company or one of the Founding
Companies could negatively affect the Company's reputation and could have a
correspondingly material adverse effect on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH THE POINT-TO-POINT DELIVERY INDUSTRY; GENERAL ECONOMIC
CONDITIONS. The Company's revenues and earnings are especially sensitive to
events that affect the delivery services industry, including extreme weather
conditions, economic factors affecting the Company's significant
16
<PAGE>
customers, increases in fuel prices and shortages of or disputes with labor, any
of which could result in the Company's inability to service its clients
effectively or the inability of the Company to profitably manage its operations.
In addition, demand for the Company's services may be negatively impacted by
downturns in the level of general economic activity and employment in the United
States or the U.K. The development and increased popularity of facsimile
machines and electronic mail via the Internet has recently reduced the demand
for certain types of Point-to-Point delivery services, including those offered
by the Company. As a result, Point-to-Point courier firms are increasingly
dependent upon delivery requests for items that are unable to be delivered via
alternative methods. There can be no assurance that similar industry-wide
developments will not have a material adverse effect on the Company's business,
financial condition or results of operations.
EFFECT OF POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The
Company may experience significant quarter to quarter fluctuations in its
results of operations. Quarterly results of operations may fluctuate as a result
of a variety of factors including, but not limited to, the timing of the
integration of the Founding Companies and other acquired companies and their
conversion to the DMS Model, the demand for the Company's services, the timing
and introduction of new services or service enhancements by the Company or its
competitors, the market acceptance of new services, competitive conditions in
the industry and general economic conditions. As a result, the Company believes
that period to period comparisons of its results of operations are not
necessarily meaningful or indicative of the results that the Company may achieve
in any subsequent quarter or full year. Such quarterly fluctuations may result
in volatility in the market price of the Common Stock of the Company, and it is
possible that in future quarters the Company's results of operations could be
below the expectations of the public market. Such an event could have a material
adverse effect on the market price of the Common Stock of the Company. Several
of the Founding Companies recorded a net loss for the nine months ended
September 30, 1997. No assurance can be given that these Founding Companies will
become profitable in the future or that their respective financial performance
will be accretive to the Company's earnings.
RISK OF NON-PROPRIETARY ELEMENTS OF THE DMS MODEL. Many of the key elements
of the DMS Model have been described in various public forums, such as trade
shows and industry publications, and also have been made available to companies
that are or have been licensees of the Company but are not Founding Companies.
Although the software used in the DMS Model is proprietary, certain other key
elements of the DMS Model cannot be protected by patents or trademarks.
Therefore, there can be no assurance that other Point-to-Point courier companies
will not be able to effectively replicate the DMS Model and implement it more
effectively than the Company and at a lower cost.
DEPENDENCE ON TECHNOLOGY. The Company's business is dependent upon a number
of different information and telecommunication technologies to operate the DMS
Model, manage a high volume of inbound and outbound calls and process
transactions accurately and on a timely basis. Any impairment of the Company's
ability to process transactions on an accurate and timely basis could result in
the loss of customers and diminish the reputation of the Company.
Currently, many of the Founding Companies operate on separate computer and
telephone systems, several of which utilize different technologies. There can be
no assurance that the contemplated integration of these systems and conversion
to the Company's proprietary software will be successful or completed on a
timely basis or without unexpected costs. There can also be no assurance that
the Company will be able to continue to design, develop and refine its computer
systems and software on a cost efficient basis, whether due to the loss of
employees or otherwise. Any of the foregoing would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company utilizes computer hardware and operating systems
designed and manufactured by Apple Computer, Inc. ("Apple"). Any material
changes in computer and operating platform technology designed and manufactured
by Apple which is incompatible with the Company's current computer systems, or
the discontinuance of Apple computer hardware or support services, would have a
material adverse effect on the Company's
17
<PAGE>
business, financial condition and results of operations. If the Company decides
to change its hardware and operating systems to a different operating platform
technology, there can be no assurance that the Company will be able to
successfully make such a change or that such new hardware and operating systems
will be as effective as the existing hardware and operating system. For a
discussion of the Company's capital expenditures, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Pro Forma
Combined Liquidity and Capital Resources."
DEPENDENCE ON AVAILABILITY OF QUALIFIED COURIER PERSONNEL. The Company is
dependent upon its ability to attract, train and retain, as employees or through
independent contractor or other arrangements, qualified courier personnel who
possess the skills and experience necessary to meet the needs of its operations.
The Company competes in markets in which unemployment is relatively low and the
competition for couriers and other employees is intense. The Company must
continually evaluate, train and upgrade its pool of available couriers to keep
pace with demands for delivery services. There can be no assurance that
qualified courier personnel will continue to be available in sufficient numbers
and on terms acceptable to the Company. The inability to attract and retain
qualified courier personnel would have a material adverse impact on the
Company's business, financial condition and results of operations. See
"Business--The DMS Model" and "--Employees and Independent Contractors."
RELIANCE ON KEY PERSONNEL. The Company's success is largely dependent on
the efforts and relationships of R. Gregory Kidd, the Company's founder and
Chairman of the Board of Directors, Linda M. Jenkinson, the Company's Chief
Executive Officer, the executive officers and senior managers of the Founding
Companies and Brand Managers. Furthermore, the Company will likely be dependent
on the senior management of any businesses acquired in the future, particularly
the Brand Managers and sales representatives who have on-going relationships
with customers. The loss of the services of any of these individuals could have
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that such individuals will
continue in their present capacity for any particular period of time. The
Company does not intend to obtain key man life insurance covering any of its
executive officers or other members of senior management. However, the Company
has entered into two-year employment contracts with its five executive officers.
In addition, the Company's future success and plans for growth also depend on
the Company's ability to attract, train and retain skilled personnel in all
areas of its business. See "Management."
COMPETITION. The market for Point-to-Point delivery services is highly
competitive and has low barriers to entry. Many of the Company's competitors
operate in only one location and may have more experience and brand recognition
than the Company in such local market. In addition, several large, national,
publicly traded companies have begun to consolidate the Point-to-Point delivery
industry through the acquisition of independent Point-to-Point courier
companies. Other companies in the industry compete with the Company not only for
the provision of services but also for acquisition candidates. Some of these
companies have longer operating histories and greater financial resources than
the Company. In addition, other firms involved in segments other than
Point-to-Point delivery services may expand into this market in order to provide
their customers with "one-stop" shopping of delivery and logistics services.
Many of such companies have greater financial resources and brand name
recognition than the Company. There can be no assurance that any of the
foregoing would not have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON KEY MARKETS. A significant portion of the Company's revenues
and profitability are attributable to services rendered in the metropolitan New
York City, London and San Francisco markets. Revenues from the New York City,
London and San Francisco markets accounted for 27.6%, 24.9% and 10.9%,
respectively, of pro forma combined revenues, during the nine months ended
September 30, 1997. Therefore, the Company's results of operations are
significantly affected by fluctuations in the general economic and business
cycles in these markets. The Company's reliance on these individual markets
makes it susceptible to risks that it would not otherwise be exposed to if it
operated in a more geographically
18
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diverse market. The Company believes that it will be susceptible to geographic
concentration risks for the foreseeable future.
RISK OF BUSINESS INTERRUPTIONS AND DEPENDENCE ON SINGLE FACILITIES IN A
MARKET. The Company believes that its future results of operations will be
dependent in large part on its ability to provide prompt and efficient service
to its customers. Upon conversion of the Company to the DMS Model, the Company's
operations typically will be performed at a single DMS Center for each
respective metropolitan market it services and, therefore, the operation of such
DMS centers are dependent on continuous computer, electrical and telephone
service. As a result, any disruption of the Company's day-to-day operations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
SUBSTANTIAL PROCEEDS FROM THE OFFERING PAYABLE TO AFFILIATES. The Company
will use a substantial portion of the net proceeds from the Offering to meet its
cash requirements relating to the consummation of the acquisitions of the
Founding Companies. The Company will pay, subject to adjustments, approximately
$59.2 million in cash, of which $14.7 million is the Earnout and subject to
possible repayment to the Company from the stockholders of the Founding
Companies. See "The Company--The Combinations." After payment of the cash
portion of the purchase price for the Founding Companies, no assurance can be
given that the remaining net proceeds of the Offering will be sufficient to meet
the Company's requirements for working capital and potential acquisitions. See
"Use of Proceeds" and "Certain Transactions."
PERMITS AND LICENSING. The Company's operations are subject to various
state, local and federal regulations that, in many instances, require permits
and licenses. Additionally, some of the Company's operations may involve the
delivery of items subject to more stringent regulation, including hazardous
materials, requiring the Company to obtain additional permits. The failure of
the Company to maintain required permits and licenses, or to comply with
applicable regulations, could result in substantial fines or revocation of the
Company's permits and licenses which could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
delays in obtaining approvals, for the transfer or grant of permits or licenses,
or failure to obtain such approvals could delay or impede the Company's
acquisition program. See "Business--Regulation and Safety."
REGULATORY COMPLIANCE. As a public company, the Company will be subject to
continuing compliance with federal securities laws and may also be subject to
increased scrutiny with respect to laws applicable to all businesses, such as
employment, safety and environmental regulations. Certain of the Company's
management have no experience in managing a public company. There can be no
assurance that management will be able to effectively and timely implement
programs and policies that adequately respond to such increased legal and
regulatory compliance requirements.
FOREIGN EXCHANGE. Approximately 25% of the Company's combined pro forma
revenues for the nine months ended September 30, 1997 are derived from
operations conducted in the U.K. Exchange rate fluctuations between the U.S.
dollar and British pound will result in fluctuations in the amounts relating to
the U.K. currency reported in the Company's consolidated financial statements
due to repatriation of earnings from the U.K. to the United States or
translation of the earnings of the Company's U.K. operations into U.S. dollars
for financial reporting purposes. The Company also conducts operations in New
Zealand and intends to pursue acquisitions in other foreign countries. The
Company does not intend to enter into hedging transactions with respect to its
foreign currency exposure. There can be no assurance that fluctuations in
foreign currency exchange rates will not have a material adverse impact on the
Company's business, financial condition or results of operations.
DEVELOPMENT OF NEW SERVICES. The Company believes that its long-term
success depends on its ability to enhance its current services, develop new
services that utilize the DMS Model and address the increasingly sophisticated
needs of its customers. The failure of the Company to develop and introduce
enhancements and new services in a timely and cost-effective manner in response
to changing technologies, customer requirements or increased competition could
have a material adverse effect on the
19
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Company's business, financial condition or results of operations. See
"Business--Internal Growth Strategy."
POTENTIAL LIABILITY FOR BREACH OF CONFIDENTIALITY. A substantial portion of
the Company's business involves the handling of documents containing
confidential and other sensitive information. There can be no assurance that
unauthorized disclosure will not result in liability to the Company. It is
possible that such liabilities could have a material adverse effect on the
Company's business, financial conditions or results of operations.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. After the Offering,
existing shareholders of the Company will beneficially own approximately % of
the Company's outstanding Common Stock (approximately % assuming that the
Underwriters' over-allotment option is exercised in full). In light of the
foregoing, such persons will have the ability to significantly influence the
election of the Company's directors and the outcome of all other issues
submitted to the Company's shareholders. Such persons, together with the
staggered Board of Directors and the anti-takeover effects of certain provisions
contained in the Delaware General Corporation Law and in the Company's
Certificate of Incorporation and Bylaws (including, without limitation, the
ability of the Board of Directors of the Company to issue shares of Preferred
Stock and to fix the rights and preferences thereof), also may have the effect
of delaying, deferring or preventing an unsolicited change in the control of the
Company, which may adversely affect the market price of the Common Stock or the
ability of shareholders to participate in a transaction in which they might
otherwise receive a premium for their shares. See "Management," "Principal
Stockholders" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have a total of shares of Common Stock outstanding. Of these
shares, the shares of Common Stock offered hereby ( shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or registration under the Securities Act by
persons other than "affiliates" of the Company, as defined under the Securities
Act. The remaining shares of Common Stock outstanding will be "restricted
securities" as that term is defined by Rule 144 as promulgated under the
Securities Act. Upon completion of the Offering, the Company will have issued
options to purchase shares of Common Stock. In addition, options to
purchase an additional shares will remain available for issuance under the
Company's 1997 Stock Incentive Plan. See "Management--1997 Stock Incentive Plan"
and "Shares Eligible for Future Sale."
The restricted securities will become eligible for sale upon the expiration
of the lock-up restrictions described below. The holders of these shares, which
include the Company's executive officers, directors and certain shareholders,
have agreed that they will not, without the prior written consent of the Company
and Prudential Securities Incorporated, directly or indirectly, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise dispose of or transfer (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other disposition
or transfer of) any shares of Common Stock or any other securities convertible
into, or exercisable or exchangeable for, shares of Common Stock or other
similar securities of the Company, currently beneficially owned or hereafter
acquired by such holders for a period of two years from the consummation of the
Offering. After such two-year period, the foregoing restriction will expire, and
of such shares will be freely tradeable under Rule 144, while the remaining
of such shares will be permitted to be sold under Rule 144 subject to the
timing, volume and manner of sale restrictions of Rule 144. In addition, such
executive officers, directors and certain shareholders have also agreed that
they will not, without the prior written consent of Prudential Securities
Incorporated, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise dispose of or transfer
(or announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other disposition or transfer of) any shares of Common
Stock or any other securities convertible into, or exercisable or exchangeable
for, shares of Common Stock or other similar securities of the Company,
currently beneficially owned or hereafter
20
<PAGE>
acquired by such holders for a period of 180 days from the date of the
Prospectus. The Company and Prudential Securities Incorporated on behalf of the
Underwriters, respectively, may, in their sole discretion, at any time and
without prior notice, release all or any portion of the shares of Common Stock
subject to such agreements to which they are party.
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE. Prior to the Offering,
there has been no public market for the Common Stock, and there can be no
assurance that an active trading market will develop or continue following the
Offering, or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price for the
Common Stock will be determined by negotiations among the Underwriters based on
several factors, and may not be indicative of the market price for the Common
Stock after the Offering. See "Underwriting." The Company believes that various
factors unrelated to the Company's performance, such as general economic
conditions, changes or volatility in the financial markets and changing market
conditions in the Point-to-Point delivery industry, as well as various factors
related to the Company's performance, such as quarterly or annual variations in
the Company's financial results, could cause the market price of the Common
Stock to fluctuate substantially.
IMMEDIATE AND SUBSTANTIAL DILUTION; DIVIDEND POLICY. Purchasers of the
Common Stock offered hereby will experience immediate and substantial dilution
in the pro forma as adjusted net tangible book value per share of Common Stock
from the initial public offering price set forth on the cover of this
Prospectus. Assuming an initial public offering price of $ per share,
such dilution to new investors will be $ per share while the pro forma
as adjusted net tangible book value of the shares of Common Stock owned by the
existing shareholders will increase by $ per share. See "Dilution."
The Company anticipates that for the foreseeable future, its earnings will
be retained for the operation and expansion of its business and that it will not
pay cash dividends. In addition, the Company anticipates that any credit
facility agreement into which it enters will limit the payment of cash dividends
without the lender's consent. See "Dividend Policy."
21
<PAGE>
THE COMPANY
OVERVIEW
The Company has recently been formed to create one of the largest providers
of Point-to-Point delivery services in the world. The Company focuses on
Point-to-Point delivery by foot, bicycle, motorcycle, car and truck and operates
in 18 of the largest metropolitan markets in the United States as well as in
London, U.K. and Wellington, New Zealand. The Company believes that it has the
largest market share of Point-to-Point delivery service companies operating in
each of New York City, London, San Francisco, Atlanta, Washington, D.C. and
Seattle. The Company also believes that it is the only courier firm focused
exclusively on consolidating the highly fragmented Point-to-Point delivery
industry. Although several large, national, publicly traded companies have begun
to consolidate other segments of the delivery industry, the Company intends to
become the largest consolidator focused exclusively on the Point-to-Point
market. The Company's pro forma combined revenues for the year ended December
31, 1996 and the nine months ended September 30, 1997 were $136.7 million and
$111.8 million, respectively. The Company has conducted no operations other than
in connection with the Offering and the Combinations, and has generated no
revenues to date other than the receipt of licensing fees.
HISTORY
While a Project Manager with Booz Allen & Hamilton, Inc. in New Zealand
during the 1980s, R. Gregory Kidd, the Company's founder and Chairman, observed
the use by certain delivery firms of a Free Call Dispatch operating methodology
which enabled couriers, rather than dispatchers, to decide which deliveries to
make and in which order. Mr. Kidd concluded that firms utilizing Free Call
Dispatch were able to achieve higher levels of customer service than firms where
dispatchers generally have absolute authority in assigning and routing
deliveries to the courier fleet ("Command and Control Dispatch"). Mr. Kidd began
to implement the use of the Free Call Dispatch model on a larger scale and
developed a proprietary software system and operating methodology which would
support the model. Mr. Kidd's efforts resulted in the development of the
Company's DMS Model.
The DMS Model was implemented on a test basis in New Zealand in 1991 and was
first introduced in the United States in 1994 in four Founding Companies in San
Francisco. Margin improvements were realized by these firms as a result of a
reduction of back-office staff and a significant increase in courier
productivity. Since 1994, the Company's management team has introduced certain
components of the DMS Model and has refined the DMS Model through licensing
arrangements with a number of firms, including 18 Founding Companies in 10 of
the 20 markets in which the Company will operate subsequent to the Offering.
THE COMBINATIONS
Between September and December 1997, the Company entered into separate
agreements to acquire the Founding Companies in exchange for cash or Common
Stock or a combination of both. The purpose of the Combinations is to
consolidate the operations of DMS and the Founding Companies into one
corporation. The Combinations will be effective simultaneously with the closing
of the Offering and the Founding Companies, or their investors, will receive an
aggregate of shares of Common Stock (assuming an initial public offering price
of $ per share which represents the mid-point of the proposed offering
range) and an aggregate of $59.2 million in cash from the net proceeds of the
Offering (which includes $14.7 million subject to the Earnout provision). The
existing stockholders of the Company will receive the difference between (i) the
shares of Common Stock to be outstanding after the Combinations, exclusive of
the shares sold in the Offering, and (ii) the total number of shares issued to
the Founding Companies or the investors in the Founding Companies. The specific
number of shares of Common Stock to be issued in the Combinations to the
Founding Companies or their investors (the "Stock Consideration") will be
determined by dividing $44.8 million by the price to the public in the Offering.
The table
22
<PAGE>
below illustrates the aggregate number of shares of Common Stock that will be
issued to the Founding Companies and held by the existing stockholders of the
Company in connection with the Combinations if the price to the public is,
alternatively $ , $ or $ .
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
STOCK IF THE PRICE TO THE
PUBLIC IS:
-------------------------------
<S> <C> <C> <C>
$ $ $
--------- --------- ---------
Founding Companies.......................................................
Existing Stockholders of the Company.....................................
--- --- ---
Total after the Combination (exclusive of the shares of Common
Stock to be sold in the Offering)..................................
--- --- ---
--- --- ---
</TABLE>
In certain situations, a portion of the cash consideration issued pursuant
to the Combinations will be subject to the Earnout. The former owners of certain
of the Founding Companies will each give a promissory note to the Company in the
principal amount of the Earnout, which note will be secured by a pledge of the
Stock Consideration received in the respective Combination. Such shares of
Common Stock will be held in escrow for two years. The promissory note will be
forgiven incrementally over the escrow period as the requisite financial targets
are met. Failure to meet those targets will, in effect, result in a reduction of
the cash consideration.
The consideration to be paid for each of the Founding Companies was
determined through arms-length negotiations between the Company and
representatives of each Founding Company. Certain factors considered by the
parties in determining the consideration to be paid included historical
operating results and the future prospects of each Founding Company.
The consummation of the Combinations are subject to customary conditions
which include, among others, the accuracy of the representations and warranties
of each Founding Company and of the Company on the closing date of the
Combinations, the performance by each Founding Company of all covenants included
in the agreements relating to the Combinations and the nonexistence of a
material adverse change in the business, financial condition and results of
operations of each Founding Company.
In September 1997, Kiwi Express Software, L.L.C. ("Kiwi Express"), founded
by Mr. Kidd and a provider of dispatch software to DMS Centers in the United
States and New Zealand, was merged into the Company. See "Certain Transactions."
Upon consummation of the Offering, the Company also intends to acquire Brookside
Systems and Programming Limited, a U.K. company that conducts business under the
tradename "Fleetway." Fleetway develops and markets software systems principally
to the Point-to-Point delivery industry in the U.K. and currently has software
licensing agreements with over 300 courier firms.
Upon the consummation of the Offering, the Company intends to operate
certain of the brands acquired in the Combinations (each, a "Brand") through
agreements (each, a "Brand Manager Agreement") with former owners (each, a
"Brand Manager"). Each Brand Manager will be responsible for managing his or her
Brand to maximize its revenues and profit margins. The Brand Manager will
receive payments according to a formula based on the "Contribution" (which is
defined as total revenue less certain expenses attributable to the Brands and
certain administrative and corporate overhead allocations). The Contribution
Percentage (defined as the Contribution divided by total revenue of the Brand)
up to 7.5% accrues to the Company and between 7.5% and 15% accrues to the Brand
Manager. The Contribution Percentage in excess of 15% accrues to the Brand
Manager and the Company in a proportion of 25% and 75%, respectively. Payments
to each Brand Manager are to be made in a combination of cash and shares of
Common Stock of the Company. The Brand Manager Agreement can be terminated by
the Company, upon approval of the Business Steering Committee (consisting of the
President of the Company
23
<PAGE>
and certain Brand Managers), under certain limited conditions. Founding
Companies representing approximately 50% of the Company's revenues for the nine
months ended September 30, 1997 will not have Brand Manager Agreements, in which
case all operating income will accrue to the Company.
Pursuant to the agreements entered into in connection with the Combinations,
the stockholders of the Founding Companies have agreed not to compete with the
Company for a two-year period, commencing on the date of consummation of the
Offering for persons who are not Brand Managers and commencing on the date that
all consideration payable under the Combination has been received for persons
who are Brand Mangers.
24
<PAGE>
THE FOUNDING COMPANIES
The following table sets forth certain information regarding the Founding
Companies:
<TABLE>
<CAPTION>
ACQUISITION
UNAUDITED CONSIDERATION
PRO FORMA COMBINED --------------------
REVENUES FOR TWELVE VALUE OF BRAND
MONTHS ENDED CASH COMMON MANAGER
BRAND NAME DECEMBER 31, 1996 VALUE(1) STOCK AGREEMENT
- ------------------------------------------------------ ---------------------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LONDON, U.K.
West One............................................ $ 24,148 $ 16,613 $ 2,477 No
Security Despatch................................... 9,440 5,923 0 No
NEW YORK METRO AREA
Earlybird Courier................................... 13,189 12,092 4,649 Yes
Atlantic Freight.................................... 8,728 143 4,200 Yes
Zoom................................................ 8,404 1,065 2,000 Yes
Bullit Courier...................................... 7,696 3,540 3,000 No
SAN FRANCISCO
Aero Delivery....................................... 10,998 2,141 3,645 No
S-Car-Go Courier.................................... 1,263 234 638 Yes
Battery Point....................................... 732 222 428 Yes
Zap................................................. 941 178 473 Yes
Studebaker.......................................... 342 100 180 Yes
MINNEAPOLIS/PHOENIX
1-800 COURIER--Minneapolis, Phoenix................. 8,536 577 4,264 Yes
WASHINGTON, D.C.
Washington Express.................................. 5,800 1,176 2,792 Yes
ATLANTA
A Courier........................................... 6,020 2,573 1,920 Yes
MLQ Express......................................... 5,310 4,678 0 No
DENVER
Kangaroo Express.................................... 2,650 681 1,079 Yes
1-800 COURIER--Denver............................... 1,247 70 774 Yes
LOS ANGELES
National Messenger.................................. 2,413 665 1,210 Yes
1-800 COURIER--L.A.X................................ 1,212 376 450 No
BOSTON
1-800 COURIER--Boston............................... 1,343 193 636 Yes
SEATTLE
Fleetfoot Messenger................................. 2,172 0 1,279 Yes
HOUSTON
A&W Couriers........................................ 1,560 294 755 Yes
DETROIT
Express Messenger................................... 1,612 250 750 Yes
CHICAGO
Deadline Express.................................... 1,177 0 923 Yes
SOFTWARE COMPANY
Fleetway Systems.................................... 1,048 838 2,016 No
OTHER FOUNDING COMPANIES (2).......................... 8,719 2,251 4,229 Yes (3 )
-------- --------- ---------
TOTAL................................................. $ 136,700 $ 59,186 $ 44,767
-------- --------- ---------
-------- --------- ---------
</TABLE>
- ------------------------
(1) Includes $14.7 million subject to certain Earnouts. See "--The
Combinations."
(2) Financial statements for these Founding Companies are not required to be
included in this Prospectus under applicable rules of the Securities and
Exchange Commission.
(3) These Founding Companies also have Brand Manager Agreements: Pacific Freight
Systems, Rocket Courier, AFS Courier, Express Air Messenger, Clover Supply,
Christian Delivery, Time Couriers, Jet City, Striders Courier, United
Messengers, Kiwicorp Limited, 1-800 COURIER--Portland, Time Cycle, A Courier
of Tennessee and A Courier of the Carolinas.
The Company's executive offices are located at Dispatch Management Services
Corp., 65 West 36th Street, New York, New York 10018, and its telephone number
is (212) 268-2910.
25
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby, after deducting the underwriting discounts and commissions
and estimated offering expenses, are estimated to be approximately $66.3 million
($78.0 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $ per share. Of the net
proceeds, $59.2 million will be used to pay the cash portion of the purchase
price for the Founding Companies, of which approximately $14.7 million which is
subject to the Earnout.
Approximately $5.2 million of the proceeds from the Offering will be used to
repay certain indebtedness of the Company: (i) approximately $1 million will be
used to repay the Bridge Loan and accrued interest; (ii) approximately $2
million will be used to repay the December Bridge Loan and accrued interest; and
(iii) the remaining amount will be used to pay approximately $2.2 million of the
approximately $8.9 million principal amount of indebtedness incurred by the
Founding Companies and assumed by the Company. The Bridge Loan bears interest at
10% per annum and matures on the earlier of the consummation of the Offering or
on January 22, 1999. The parties who provided the Bridge Loan also will receive
shares of Common Stock representing a 1.4% interest in the Company after the
Offering. The December Bridge Loan bears interest at 14% per annum and matures
on the earlier of the consummation of the Offering or December 31, 1998. The
indebtedness incurred by the Founding Companies and assumed by the Company bears
interest at rates ranging from 8.5% to 12.5% per annum with maturities from
current to approximately 15 years.
The Company will have approximately $5.6 million in cash as a result of the
Combinations and the Offering which will be used for working capital, capital
expenditures and for general corporate purposes, including the acquisition of
additional Point-to-Point courier firms. The Company has held preliminary
discussions with a number of such acquisition candidates; however, except for
the Combinations, the Company has no agreement with respect to any acquisition.
Pending such uses, the net proceeds will be invested in short-term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any dividends, intends to retain all
of its earnings, if any, to finance the expansion of its business and for
general corporate purposes, including future acquisitions, and does not
anticipate declaring or paying any cash dividends on its Common Stock for the
foreseeable future. In addition, in the event the Company is successful in
obtaining one or more lines of credit, it is likely that any such facility will
include restrictions on the ability of the Company to pay dividends.
26
<PAGE>
CAPITALIZATION
The following table sets forth the pro forma combined capitalization of the
Company at September 30, 1997 and as adjusted to give effect to the Offering and
the application of the net proceeds. See "Use of Proceeds." This table should be
read in conjunction with the Pro Forma Combined Financial Statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
<S> <C> <C>
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED
----------- -----------
Cash and cash equivalents............................................................... $ 3,155 $ 5,579
----------- -----------
----------- -----------
Payable to Founding Companies (1)....................................................... $ 44,522 $ --
----------- -----------
----------- -----------
Short-term debt and current portion of long-term debt (2)(3)............................ 5,985 706
----------- -----------
----------- -----------
Long-term debt, less current maturities(2)(3)........................................... $ 3,780 $ 3,780
Stockholders' equity:
Preferred Stock: $0.01 par value, 10,000,000 shares authorized; 176,515 shares of
Series A and 100 shares of Series B issued and outstanding, pro forma; and none
issued and outstanding, pro forma as adjusted..................................... 2 --
----------- -----------
Common Stock: $0.01 par value, 100,000,000 shares authorized; shares issued and
outstanding, pro forma; and shares issued and outstanding, pro forma as
adjusted(4)....................................................................... 30 32
Additional paid-in capital.......................................................... 34,949 101,259
Accumulated deficit................................................................. (908) (908)
----------- -----------
Total stockholders' equity........................................................ 34,073 100,383
----------- -----------
Total capitalization............................................................ $ 37,853 $ 104,163
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Excludes $14.7 million paid to certain of the former owners of the Founding
Companies in connection with the Earnout. This amount is subject to
repayment to the Company and is recorded as a note receivable on the
Company's September 30, 1997 pro forma combined balance sheet. See "The
Company--The Combinations."
(2) For a description of the Company's debt, see Notes to Historical Financial
Statements of the Founding Companies included elsewhere in the Prospectus.
(3) Excludes the December Bridge Loan. See "The Summary--Recent Developments."
(4) Excludes shares of Common Stock reserved for issuance under the
Company's 1997 Stock Interest Plan. The Company expects to issue options to
acquire shares of Common Stock to certain directors, executive officers
and other employees at the initial public offering price. See
"Management--1997 Stock Incentive Plan."
27
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of their
Common Stock from the initial public offering price. The pro forma net tangible
book value of the Company as of , 1997 was $ or $ per
share of Common Stock. Pro forma net tangible book value per share represents
the amount of the Company's tangible net worth divided by the total number of
shares of Common Stock outstanding as of , 1997 assuming that the
Combinations had been consummated as of such date. After giving effect to the
sale of shares of Common Stock by the Company in the Offering (assuming an
initial public offering price of $ per share) and the application of the
net proceeds therefrom (after deduction of underwriting discounts and
commissions and estimated Offering expenses payable by the Company), the pro
forma net tangible book value of the Company as of , 1997 would have been
$ million or $ per share of Common Stock. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to purchasers of
shares in the Offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................... $
Pro forma net tangible book value before the
Offering............................................. $
Increase in pro forma tangible book value per share
attributable to new investors........................
Pro forma as adjusted net tangible book value after the
Offering.................................................
---------
Dilution in pro forma as adjusted net tangible book value
to new investors......................................... $
---------
---------
</TABLE>
The following table sets forth on a pro forma basis as of , 1997 the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the Company's
existing stockholders (including persons who receive Common Stock pursuant to
the Combinations) and to be paid by new investors in the Offering (assuming an
initial public offering price of $ per share) and before deduction of
underwriting discounts and commissions and estimated Offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED(1)
TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders (2)............................... % $ % $
New investors
--------- --- ---------- ---
Total................................................... % $ %
--------- --- ---------- ---
--------- --- ---------- ---
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance under the
Company's 1997 Stock Incentive Plan. The Company expects to issue options to
acquire shares of Common Stock to certain directors, executive officers
and other employees at the initial public offering price. See
"Management--1997 Stock Incentive Plan."
(2) Includes persons who receive Common Stock pursuant to the Combinations.
28
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has been identified as the "accounting acquiror" in connection
with the Combinations. The following unaudited summary pro forma statement of
operations data for the Company have been adjusted to give effect to (i) the
consummation of the Combinations and (ii) certain pro forma adjustments to the
historical financial statements as described in the notes below. The following
unaudited summary pro forma combined balance sheet data for the Company have
been adjusted to give effect to (i) the consummation of the Combinations and
(ii) the consummation of the Offering and the application of the net proceeds
therefrom. The summary pro forma data are not necessarily indicative of the
Company's operating results or financial position that might have occurred had
the events described above been consummated at the beginning of the period and
should not be construed as representative of future operating results or
financial position. The summary pro forma combined financial data should be read
in conjunction with the Unaudited Pro Forma Combined Financial Statements and
the related notes thereto and the historical financial statements of the
Founding Companies and the related notes thereto included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------
TWELVE
MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ----------------------
1996 1996 1997
-------------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues............................................................... $ 136,700 $ 101,915 $ 111,800
Cost of revenues....................................................... 86,521 63,332 69,317
-------------- ---------- ----------
Gross profit........................................................... 50,179 38,583 42,483
Operating Expenses:
Sales and marketing expenses......................................... 6,993 4,356 4,674
General and administrative expenses(2)............................... 11,778 8,141 9,982
Other operating expenses............................................. 21,769 18,093 19,490
Depreciation and amortization(3)..................................... 4,032 3,162 3,307
-------------- ---------- ----------
Operating income....................................................... 5,607 4,831 5,030
Interest and other expense, net........................................ 1,360 1,047 1,043
-------------- ---------- ----------
Income before income taxes............................................. 4,247 3,784 3,987
Provision for income taxes(4).......................................... 2,373 2,008 2,090
-------------- ---------- ----------
Net income............................................................. $ 1,874 $ 1,776 $ 1,897
-------------- ---------- ----------
-------------- ---------- ----------
Net income per share................................................... $ $ $
Shares used in computing pro forma net income per share (5)
Net income per share as adjusted.......................................
Shares used in computing pro forma.....................................
Net income per share as adjusted.......................................
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
----------------------------
PRO FORMA PRO FORMA AS
COMBINED (6) ADJUSTED (7)
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................................................ $ (40,929)(8) $ 10,717
Total assets..................................................................... 112,468 126,443
Long term debt, net of current maturities........................................ 3,780 3,780
Stockholders' equity............................................................. 34,073 100,383
</TABLE>
- ------------------------
(FOOTNOTES BEGIN ON NEXT PAGE)
29
<PAGE>
(1) The pro forma combined statement of operations data assumes that the
Combinations and the disposition of a business segment at one of the
Founding Companies occurred on January 1, 1996.
(2) The pro forma combined statement of operations data reflect pro forma
reductions in (i) salaries, bonuses and benefits to the owners of the
Founding Companies (the "Compensation Differential") aggregating
approximately $1.8 million, $1.5 million and $875,000, for the year ended
December 31, 1996 and the nine-month periods ended September 30, 1996 and
1997, respectively, and (ii) royalty payments made by certain Founding
Companies related to franchise agreements which will be terminated with the
closing of the Combinations.
(3) Consists of amortization of goodwill to be recorded as a result of the
Combinations computed on the basis described in the Note 3 of Notes to the
Unaudited Pro Forma Combined Financial Statements.
(4) Assumes the Company is subject to a corporate income tax rate of 40%. The
higher resulting effective tax rate is due to the amortization of certain
goodwill expenses which are not tax deductible.
(5) Assumes an initial offering price per share of $ and includes: (i)
shares to be issued to owners of certain of the Founding Companies;
(ii) shares held by the existing stockholders of the Company; and
(iii) the shares required to be sold in the Offering to pay the cash
portion of the Combination consideration and to pay expenses associated with
the Offering and the Combinations.
(6) The pro forma combined balance sheet data assume that the Combinations were
consummated on September 30, 1997.
(7) Adjusted for the sale of the shares of Common Stock offered by the
Company hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
(8) Reflects $44.5 million of cash consideration due to certain owners of the
Founding Companies pursuant to the Combinations and excludes $14.7 million
subject to the Earnout. See "The Company--The Combinations."
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED PRO
FORMA COMBINED FINANCIAL DATA," THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS OF THE COMPANY AND THE RELATED NOTES THERETO AND THE FOUNDING
COMPANIES' AUDITED HISTORICAL FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. A NUMBER OF STATEMENTS IN THIS
PROSPECTUS ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS WHICH THE COMPANY
ANTICIPATES MAY OCCUR IN THE FUTURE, INCLUDING SUCH MATTERS AS THE COMPANY'S
STRATEGY FOR ACQUISITION AND INTERNAL GROWTH AND IMPROVED PROFITABILITY,
ADDITIONAL CAPITAL EXPENDITURES (INCLUDING THE AMOUNT AND NATURE THEREOF),
ACQUISITIONS OF ASSETS AND BUSINESSES, INDUSTRY TRENDS AND OTHER SUCH MATTERS.
THESE STATEMENTS ARE BASED ON CERTAIN ASSUMPTIONS AND ANALYSES MADE BY THE
COMPANY IN LIGHT OF ITS PERCEPTION OF HISTORICAL TRENDS, CURRENT BUSINESS AND
ECONOMIC CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS, AS WELL AS OTHER FACTORS
THE COMPANY BELIEVES ARE REASONABLE OR APPROPRIATE. HOWEVER, WHETHER ACTUAL
RESULTS AND DEVELOPMENTS WILL CONFORM WITH THE COMPANY'S EXPECTATIONS AND
PREDICTIONS IS SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THOSE
SET FORTH IN "RISK FACTORS"; GENERAL ECONOMIC, MARKET OR BUSINESS CONDITIONS;
THE BUSINESS OPPORTUNITIES (OR LACK THEREOF) THAT MAY BE PRESENTED TO AND
PURSUED BY THE COMPANY; CHANGES IN LAWS OR REGULATIONS; AND OTHER FACTORS, MANY
OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. CONSEQUENTLY, THERE CAN BE NO
ASSURANCE THAT THE ACTUAL RESULTS OR DEVELOPMENTS ANTICIPATED BY THE COMPANY
WILL BE REALIZED OR, EVEN IF SUBSTANTIALLY REALIZED, THAT THEY WILL HAVE THE
EXPECTED CONSEQUENCES TO OR EFFECTS ON THE COMPANY OR ITS BUSINESS OR
OPERATIONS.
INTRODUCTION
The Company has recently been formed to create one of the largest providers
of Point-to-Point delivery services in the world. The Company focuses on
Point-to-Point delivery by foot, bicycle, motorcycle, car and truck and operates
in 18 of the largest metropolitan markets in the United States as well as in
London, U.K. and Wellington, New Zealand. The Company believes that it has the
largest market share of Point-to-Point delivery service companies operating in
each of New York City, London, San Francisco, Atlanta, Washington, D.C. and
Seattle. The Company also believes that it is the only courier firm focused
exclusively on consolidating the highly fragmented Point-to-Point delivery
industry. Although several large, national, publicly traded companies have begun
to consolidate other segments of the delivery industry, the Company intends to
become the largest consolidator focused exclusively on the Point-to-Point
market. The Company's pro forma combined revenues for the year ended December
31, 1996 and the nine months ended September 30, 1997 were $136.7 million and
$111.8 million, respectively. The Company has conducted no operations other than
in connection with the Offering and the Combinations, and has generated no
revenues to date other than the receipt of licensing fees.
BASIS FOR PRESENTATION
Management does not believe that a period-to-period comparison of the
results of operations of the Founding Companies whose financial statements are
included elsewhere in this Prospectus would be meaningful to prospective
investors. The Founding Companies have been managed as independent private
companies and, as such, their results of operations reflect different corporate
and tax structures which have been influenced, among other things, by their
historical levels of owners' compensation. The owners of the Founding Companies
have agreed to certain reductions in their salaries, bonuses and benefits in
connection with the organization of the Company. The Compensation Differentials
for the year ended December 31, 1996 and for the nine months ended September 30,
1997 were $1.8 million and $875,000, respectively, and have been reflected as
pro forma adjustments in the Unaudited Pro Forma Combined Statements of
Operations. The Unaudited Pro Forma Combined Statements of Operations include a
provision for income tax as if the Company were taxed as a C corporation.
INTEGRATION SYNERGIES. Subsequent to the Offering, the Company believes
that it can realize savings from: (i) increased productivity of courier fleets;
(ii) increased productivity of dispatchers and order takers; (iii) greater
volume discounts from suppliers; (iv) consolidation of insurance programs and
treasury
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functions; and (v) consolidation of other corporate operations, such as research
and development and financial and management reporting. Integration of the
Founding Companies may also present opportunities to reduce costs through the
elimination of duplicative functions and through increased employee utilization.
However, subsequent to the Offering, the Company will incur significant
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration and
facilities expansion. Although these integration synergies, potential savings
and additional costs may make historical operating results not comparable to, or
indicative of, future performance, such matters are not presently quantifiable
with any degree of certainty. Accordingly, neither the anticipated savings nor
the anticipated costs have been included in the unaudited pro forma financial
data presented herein. There can be no assurance that the Company will achieve
any such cost savings. See "Risk Factors--Risks Relating to Conversion to the
DMS Model," "--Risks of Integration" and "--Effect of Potential Fluctuations in
Quarterly Operating Results."
Although there can be no assurance, management believes that use of the DMS
Model enables courier companies to achieve higher margins than typically
associated with Point-to-Point courier companies. The following table sets forth
certain (i) combined operating margin information, which has been derived from
the historical financial statements included elsewhere in this Prospectus, and
(ii) unaudited pro forma combined operating margin information. This information
is presented with respect to (a) Founding Companies which have utilized the
Company's proprietary software since January 1, 1996 and whose historical
results are included elsewhere in this Prospectus ("DMS Founding Companies") and
(b) Founding Companies which, as of January 1, 1996, and through September 30,
1997, were not utilizing such software and whose historical results are included
elsewhere in this Prospectus ("Non-DMS Founding Companies"). The DMS Founding
Companies represent approximately 10% of the Company's combined revenues in 1996
and Non-DMS Founding Companies represent approximately 84% of the Company's
combined revenues in 1996. During the periods presented below, the Founding
Companies were not under common control or management and, therefore, the data
presented may not be comparable to or indicative of post-Combination results to
be achieved by the Company. Further, none of the Founding Companies has, to
date, utilized all aspects of the DMS Model, and there can be no assurance that
the results reflected below are indicative of results to be achieved upon full
utilization of the DMS Model. In addition, the average size of the Non-DMS
Founding Companies is significantly larger than the DMS Founding Companies.
There can be no assurance that the higher margins of the DMS Founding Companies
illustrated below are not directly attributable to the relatively fewer
complexities involved in the operation of a smaller company. Finally, the
following data does not purport to compare the performance of the DMS Founding
Companies prior to and subsequent to the utilization of the Company's
proprietary software, and the conversion process itself could temporarily reduce
margins. Accordingly, no definitive conclusion can be drawn as to the degree to
which the Company's proprietary software, or other components of the DMS Model,
contributed to the higher operating margins of the DMS Founding Companies or
could contribute to operating margins in the future.
<TABLE>
<CAPTION>
HISTORICAL COMBINED PRO FORMA COMBINED
OPERATING MARGIN(1) OPERATING MARGIN(2)
-------------------------------------------- --------------------------------------------
TWELVE MONTHS TWELVE MONTHS
ENDED NINE MONTHS ENDED ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997 DECEMBER 31, 1996 SEPTEMBER 30, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
DMS Founding Companies............. 6.7% 8.0% 6.8% 9.3%
Non-DMS Founding Companies......... 3.9% 4.0% 3.7% 3.7%
</TABLE>
- ------------------------
(1) Derived from the historical financial statements included elsewhere in the
Prospectus.
(2) Derived from the unaudited pro forma combined financial statements of the
Company included elsewhere in the Prospectus and reflects pro forma
adjustments for goodwill amortization, the
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<PAGE>
compensation differential and royalty payments made by certain Founding
Companies. See Notes 1, 2, 3 and 4 to the Selected Pro Forma Combined
Financial Data.
REVENUES. The Company primarily earns revenues from fees charged for
Point-to-Point delivery services with the remainder of revenues being derived
from strategic stocking and other services. Revenues consist primarily of
charges to customers for individual delivery services and weekly or monthly
charges for other ongoing services. Revenues are recognized when packages are
delivered. The revenue per transaction for a particular delivery service is
dependent upon a number of factors, including the time sensitivity of a
particular delivery, special handling requirements and local market conditions.
COST OF REVENUES. Cost of revenues consists of costs relating directly to
performance of services, including earned courier compensation and employee
benefits, if any, vehicle lease expenses and the cost of managing the Company's
courier fleet. The Company believes that the Point-to-Point delivery business
generally offers higher gross margins than scheduled or routed deliveries, which
results from lower courier compensation as a percentage of revenues as well as
premium pricing for the time sensitive deliveries. The Company's couriers have
historically been compensated based on a fixed percentage of the revenue for a
delivery. However, the Company intends to realign courier compensation to an
effort-based standard. Management believes that this structure maximizes courier
fleet productivity and allows it to better manage its pricing policies and gross
margin.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include expenses
related to new business development, account management and local brand
marketing initiatives, including Brand Manager compensation, sales commissions
and advertising and other promotional expenses. The Company anticipates the need
for additional investment in sales and marketing initiatives and the
implementation and execution of the 1-800-DELIVER-TM- and 1-800-COURIER-TM-
national brand strategies. Prior to the consummation of the Combinations,
compensation expenses for the former owners of the Founding Companies were
classified as the general and administrative expenses of the Founding Companies.
Subsequent to the Offering, payments under Brand Manager Agreements and
compensation to sales personnel will appear in sales and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include salaries and benefits of management and administrative staff,
professional fees, expenditures for research and development, training costs and
expenses related to comprehensive insurance programs.
OTHER OPERATING EXPENSES. Other operating expenses, primarily related to
the cost of operating the DMS Centers, include costs associated with call
capture, dispatch management, customer service and local supervisory personnel.
DEPRECIATION AND AMORTIZATION. The Company has no significant investment in
warehousing facilities or transportation equipment and, as such, depreciation
expense primarily relates to the depreciation of office, communication and
computer equipment. Amortization expense primarily relates to the amortization
of acquisition goodwill. In July 1996, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 97 ("SAB 97") relating to business
combinations immediately prior to an initial public offering. SAB 97 requires
that the Combinations be accounted for using the purchase method of accounting.
A total of $700,000 of the purchase price has been allocated to in-process
research and development and will be expensed upon the closing of the
Combinations. In addition, approximately $740,000 of the purchase price has been
allocated to internally developed software at a Founding Company and will be
amortized over a period of five years. The excess of the fair value of the
consideration received in the Combinations over the fair value of the net assets
to be acquired totals approximately $70.3 million. This excess purchase price
will be recorded as goodwill on the Company's balance sheet. Goodwill will be
amortized as a non-cash charge to the income statement over a period ranging
from 5 to 40 years. The pro forma impact of this amortization expense for the
year ended December 31, 1996 was approximately $2.1 million, of which
approximately $560,000 was deductible for income tax purposes. The Company
expects to continue to make acquisitions and anticipates that certain
acquisitions will be accounted for using the
33
<PAGE>
purchase method of accounting. As a consequence, in the future the Company will
incur additional expense for the amortization of acquired intangible assets,
primarily goodwill.
PRO FORMA COMBINED RESULTS OF OPERATIONS
The pro forma combined results of operations of the Founding Companies for
the periods presented may not be comparable to, and may not be indicative of,
the Company's post-Combination results of operations because: (i) the Founding
Companies were not under common control or management during the periods
presented; (ii) the Company will incur incremental costs related to its new
corporate management and the costs of being a public company; and (iii) the
combined data do not reflect potential benefits and cost savings the Company
expects to realize when operating as a combined entity. The following discussion
should be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements and the related Notes thereto and certain Founding Companies'
Historical Financial Statements and the Notes thereto appearing elsewhere in the
Prospectus.
The following table sets forth the combined results of operations of the
Founding Companies on a pro forma combined basis and as a percentage of revenues
for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1996 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues....................................... $ 101,915 100.0% $ 111,800 100.0%
Cost of revenues............................... 63,332 62.1 69,317 62.0
---------- --------- ---------- ---------
Gross profit................................... 38,583 37.9 42,483 37.9
Operating expenses:
Sales and marketing expenses................. 4,356 4.3 4,674 4.2
General and administrative expenses.......... 8,141 8.0 9,982 8.9
Other operating expenses..................... 18,093 17.8 19,490 17.4
Depreciation and amortization................ 3,162 3.1 3,307 3.0
---------- --------- ---------- ---------
Operating income............................... 4,831 4.7 5,030 4.5
---------- --------- ---------- ---------
Interest and other expenses, net............... 1,047 1.0 1,043 1.0
Provision for income taxes..................... 2,008 2.0 2,090 1.8
---------- --------- ---------- ---------
Net income................................. $ 1,776 1.7% $ 1,897 1.7%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Revenues increased approximately $9.9 million, or 9.7%, to $111.8 million
for the nine months ended September 30, 1997 from $101.9 million for the nine
months ended September 30, 1996.
Of the Founding Companies, significant increases in revenues were recorded
by West One of $1.7 million, or 8.8%; Aero Delivery of $1.1 million, or 13.0%;
Earlybird Courier of $1.2 million, or 11.7%; Bullit Courier of $733,000, or
12.5%; Security Despatch of $590,000, or 8.7%; Atlantic Freight of $568,000, or
9.2%; MLQ Courier of $996,000, or 27.5%; and A Courier of $981,000, or 22.3%.
These increases were primarily attributable to the addition of significant new
accounts or service contracts, the expansion of product scope or the purchase of
additional customer lists. These increases were offset in part by a decrease in
revenue recorded by American Eagle of $1.3 million, or 19.0%. This decrease can
be attributed to the loss of customers associated with American Eagle's move to
a former national courier franchise.
In the aggregate, the aforementioned companies accounted for 66.3% of the
total increase in revenues of the Company for the corresponding periods.
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<PAGE>
COST OF REVENUES
Cost of revenues increased approximately $6.0 million, or 9.4%, to $69.3
million for the nine months ended September 30, 1997 from $63.3 million for the
nine months ended September 30, 1996.
Of the Founding Companies, significant increases in cost of revenues were
recorded by West One of $887,000, or 7.0%; Aero Delivery of $894,000, or 18.9%;
Earlybird Courier of $611,000, or 10.8%; Security Despatch, of $494,000 or
12.8%; MLQ Courier of $551,000, or 25.0%; and A Courier of $611,000, or 24.6%.
These increases were generally consistent with the respective increases in
revenues. These increases were offset in part by a decrease in cost of revenue
recorded by American Eagle of $611,000, or 15.0%. This decrease can be
attributed to the corresponding decrease in revenues noted above.
In the aggregate, the aforementioned companies accounted for 57.3% of the
total increase in cost of revenues of the Company for the corresponding periods.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased approximately $318,000, or 7.3%, to
$4.7 million for the nine months ended September 30, 1997 from $4.4 million for
the nine months ended September 30, 1996. Sales and marketing expenses as a
percentage of revenues decreased to 4.2% from 4.3% for the corresponding
periods.
Of the Founding Companies, significant increases in sales and marketing
expenses were recorded by Zoom Courier of $124,000, or 177.0% and A Courier of
$226,000, or 74.1%. These increases were primarily attributable to the addition
of senior level sales personnel and the payment of commissions. These increases
were offset in part by decreases in sales and marketing expense recorded by
Earlybird Courier of $175,000, or 38.5% and American Eagle of $141,000, or
12.3%. The decreases were primarily attributable to a reduction in sales
personnel at Earlybird and lower sales and related sales commissions at American
Eagle.
In the aggregate, the aforementioned companies accounted for 10.7% of the
total increase in sales and marketing expenses of the Company for the
corresponding periods. There were no other individually significant variances in
the remaining Founding Companies.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased approximately $1.8 million, or
22.6%, to $10.0 million for the nine months ended September 30, 1997 from $8.1
million for the nine months ended September 30, 1996. General and administrative
expenses a percentage of revenues increased to 8.9% from 8.0% for the
corresponding periods.
Of the Founding Companies, significant increases in general and
administrative expenses were recorded by Aero Delivery of $287,000, or 25.4%;
American Eagle of $481,000 or 80.1%; MLQ Courier of $225,000, or 19.2%; 1-800
Courier-L.A.X. of $184,000, or 79.3%; and A Courier of $288,000, or 161.8%.
These increases primarily related to the establishment of a provision for
accrued payroll taxes in connection with IRS assessments, the costs associated
with the conversion and transition to a former national courier franchise and
the additional infrastructure required to support the acquisition of significant
new accounts. These increases were offset in part by decreases in general and
administrative expenses recorded by Earlybird Courier of $161,000, or 61.0%, and
Atlantic Freight of $111,000, or 28.2%, which were related to the
discontinuation of non-core business operations.
In the aggregate, the aforementioned companies accounted for 66.3% of the
total increase in general and administrative expenses for the Company for the
corresponding periods.
OTHER OPERATING EXPENSES
Other operating expenses increased approximately $1.4 million, or 7.7%, to
$19.5 million for the nine months ended September 30, 1997 from $18.1 million
for the nine months ended September 30, 1996.
35
<PAGE>
Other operating expenses as a percentage of revenues decreased to 17.4% from
17.8%for the corresponding periods.
Of the Founding Companies, significant increases in other operating expenses
were recorded by West One of $670,000, or 23.4%; Aero Delivery of $143,000, or
8.5%; Security Despatch of $185,000, or 13.8%; Atlantic Freight of $178,000, or
12.9%; 1 800 Denver of $157,000, or 77.7%; Zoom Courier of $153,000, or 19.2%;
and A Courier of $104,000, or 11.5%. The increases primarily related to the
addition of front-end personnel to support the acquisition of significant new
accounts) establishment costs associated with new lines of business and
conversions to new dispatch operating systems other than the DMS Model. These
increases were offset in part by a decrease in other operating expenses recorded
by Earlybird Courier of $637,000 or 22.0%. This decrease relates to the
discontinuation of a non-core business operation.
In the aggregate, the aforementioned companies accounted for 68.1% of the
total increase in other operating expenses of the Company for the corresponding
periods.
OPERATING INCOME
As a result of the above, operating income increased $199,000, or 4.1%, to
$5.0 million for the nine months ended September 30, 1997 from $4.8 million for
the nine months ended September 30, 1996. Operating income as a percentage of
revenues decreased to 4.5% from 4.7% for the corresponding periods.
Of the Founding Companies, significant increases in operating income were
recorded by Earlybird Courier of $1.5 million, or 332.5%; Bullit Courier of
$176,000, or 107.3%; Atlantic Freight of $122,000, or 38.2%; MLQ Courier of
$193,000, or 603.1%; and National Messenger of $152,000, or 98.7%. These
increases were offset in part by decreases recorded by Aero Delivery of
$340,000, or 666.7%; American Eagle of $983,000, or 182.4%; 1-800 Courier-Denver
of $215,000, or 241.6%; and A Courier of $244,000, or 49.5%.
INTEREST AND OTHER EXPENSES, NET
Interest and other expenses, net, decreased $4,000, or 0.4%, to $1.05
million for the nine months ended September 30, 1997 from $1.05 million for the
nine months ended September 30, 1996. Interest and other expenses, net, as a
percentage of revenues remained relatively constant at 1% for the corresponding
periods.
NET INCOME
As a result of the above, net income increased $121,000, or 6.8% to $1.9
million for the nine months ended September 30, 1997 from $1.8 million for the
nine months ended September 30, 1996. Net Income as a percentage or revenues
remained constant at approximately 1.7%.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that will conduct all of its operations
through its subsidiaries. Accordingly, the Company's principal sources of
liquidity are the cash flow of its subsidiaries, cash available from credit
facilities that it may establish and the unallocated net proceeds of the
Offering. After the closing of the Combinations and the Offering, the Company
will have approximately $5.6 million in cash, working capital of approximately
$10.7 million and $4.5 million of indebtedness outstanding on a pro forma
combined basis as of September 30, 1997.
The Company is currently negotiating to obtain a credit facility which would
be available upon the consummation of the Offering. The Company anticipates that
this $25 million credit facility will be secured by assets of the Company and
will require the Company to comply with various loan covenants including: (i)
maintenance of certain financial ratios; (ii) restrictions on additional
indebtedness; and (iii) restrictions on liens, guarantees, advances and
dividends. The facility is intended to be used for acquisitions, capital
36
<PAGE>
expenditures, refinancing of Founding Company indebtedness, if necessary, and
for general corporate purposes. There can be no assurance that the Company will
obtain such a credit facility.
Capital expenditures totaled approximately $1.6 million in the nine months
ended September 30, 1997, primarily for office equipment, computer and facility
upgrades. Subsequent to the Offering, the Company expects to make capital
expenditures to upgrade certain components of its management and financial
reporting systems, to install an internal computer intranet network and
communications system integrating the Founding Companies and subsequently
acquired businesses, and to establish a centralized administrative services
center. Management presently anticipates that such capital expenditures will
total approximately $5.0 million over the next two years. However, no assurance
can be made with respect to the actual timing and amount of such expenditures.
The Company intends to pursue further acquisition opportunities, the timing,
size or success of which are unpredictable as well as the associated potential
capital commitments. The Company expects to fund further acquisitions primarily
through a combination of a portion of the unallocated net proceeds of the
Offering, cash flow from operations and borrowings, including borrowings under
the proposed line of credit, as well as issuances of additional shares of Common
Stock.
The Company believes that cash flow from operations will be sufficient to
fund the Company's operations for the foreseeable future. In addition, the
Company believes that cash flow from operations, borrowings under a potential
credit facility and the unallocated net proceeds of the Offering, will be
sufficient to implement its growth strategy. The Company currently intends to
finance future acquisitions by using a combination of shares of its Common Stock
and cash. In the event that the Common Stock of the Company does not maintain a
sufficient market value, or potential acquisition candidates are unwilling to
accept the Company's Common Stock as part of, or all of, the consideration to be
paid for their business, the Company may be required to utilize its cash
resources, if available, to support its acquisition program. If the Company has
insufficient cash resources to pursue acquisitions, its growth could be limited
unless it is able to obtain additional capital through debt or equity financing.
See "Risk Factors--Need for Additional Financing."
The Company may be required to pay up to $1.5 million to the IRS in
connection with IRS assessments against Aero Delivery for withholding taxes,
interest and penalties, and has negotiated a purchase price lower than otherwise
would be the case. See "Risk Factors--Certain Tax Matters Related to
Reimbursement Policies." The Company has also agreed with Aero Delivery that in
the event that the amount paid to the IRS and related costs are less than $1.5
million, the Company will pay the former owner of Aero Delivery an amount equal
to one-half of the difference between the amount so paid and $1.5 million. While
the former owner of Aero Delivery has agreed to be responsible for all payments
and costs in excess of $1.5 million, the Company may be required to make any
such payments and seek reimbursement from the former owner. Any payments made by
the Company relating to the IRS assessments will reduce its cash resources.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company may experience significant quarter to quarter fluctuations in
its results of operations. Quarterly results of operations may fluctuate as a
result of a variety of factors including, but not limited to, the timing of the
integration of the Founding Companies and other acquired companies and their
conversion to the DMS Model, the demand for the Company's services, the timing
and introduction of new services or service enhancements by the Company or its
competitors, the market acceptance of new services, competitive conditions in
the industry and general economic conditions. As a result, the Company believes
that period to period comparisons of its results of operations are not
necessarily meaningful or indicative of the results that the Company may achieve
in any subsequent quarter or full year. Several of the Founding Companies
recorded a net loss for the nine months ended September 30, 1997.
37
<PAGE>
BUSINESS
GENERAL
The Company has been recently formed to create one of the largest providers
of Point-to-Point delivery services in the world. The Company focuses on
Point-to-Point delivery by foot, bicycle, motorcycle, car and truck and operates
in 18 of the largest metropolitan markets in the United States as well as in
London, U.K. and Wellington, New Zealand. The Company believes that it has the
largest market share of Point-to-Point delivery service companies operating in
each of London, New York City, San Francisco, Atlanta, Washington, D.C. and
Seattle. The Company also believes that it is the only courier firm focused
exclusively on consolidating the highly fragmented Point-to-Point delivery
industry. Although several large, national, publicly traded companies have begun
to consolidate other segments of the delivery industry, the Company intends to
become the largest consolidator focused exclusively on the Point-to-Point
market. The Company's pro forma combined revenues for the year ended December
31, 1996 and the nine months ended September 30, 1997 were $136.7 million and
$111.8 million, respectively. The Company has conducted no operations other than
in connection with the Offering and the Combinations, and has generated no
revenues to date other than the receipt of licensing fees.
INDUSTRY
The $60 billion expedited small-package delivery industry in the United
States consists of multi-day delivery companies (such as Federal Express and
United Parcel Service) and same-day delivery and courier companies. The $15
billion same-day delivery market in the United States consists of: (i) intercity
and interstate line-haul specialists; (ii) route specialists, which service
preset routes through a central distribution hub or on a scheduled basis; and
(iii) Point-to-Point specialists, which focus on urgent (5 hours or less),
on-demand, local deliveries.
According to COURIER MAGAZINE, a leading industry publication, the U.S.
market for Point-to-Point delivery services is approximately $4 billion and is
served by more than 4,000 delivery companies, primarily closely held, single
center operations serving a limited geographic area. Based upon their
experience, management of the Company believes that most Point-to-Point courier
firms are small or mid-sized operations with annual revenues of $2 million or
less performing less than 500 deliveries a day. Historically, the barriers to
starting a Point-to-Point delivery service have been low in comparison to the
substantial resources required to enter into national or regional overnight or
route delivery services. However, management of the Company believes that the
urgent nature of Point-to-Point deliveries does not allow for the effective
utilization of overnight or route specialist operations. The complexities of
managing large volumes of Point-to-Point deliveries, including the time critical
nature of deliveries and constantly changing delivery locations, limit the
economies of scale and route density normally sought by line-haul or route
specialists. Management believes that the Company is the only company having a
national or an international network of delivery firms focused primarily on the
Point-to-Point delivery market.
In recent years, the emergence of alternative technologies such as facsimile
machines and the Internet have increased pressure on the same-day delivery
industry to improve cost competitiveness and service levels and to develop new
market niches. However, the same technological advancements have led to more
rapid ordering and production capabilities for products, greater expectations
regarding delivery times and movement toward just-in-time inventory standards.
Management believes that all these factors have in turn increased the demand for
urgent delivery of products. The Company believes that many of the smaller
Point-to-Point courier companies lack the communication technology and coverage
capability to adequately service this increased demand for urgent delivery of
products. Additionally, in an effort to control costs and focus on core
competencies, many businesses are seeking to reduce their reliance on in-house
transportation departments by turning to third-party providers for such
services. Management believes that these trends favor larger and well
capitalized courier firms such as the Company.
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The employees of "traditional" Point-to-Point courier firms typically work
in only one of the basic courier functional areas--telephone answering (call
capture), courier dispatch, or back-office accounting. Moreover, dispatchers
generally have absolute authority in assigning and routing deliveries to the
courier fleet ("Command and Control Dispatch"), whereby one person receives an
incoming call from a customer and enters pick-up and delivery information into a
computer terminal. A summary of the order is transferred to the dispatch area,
often in the form of paper tickets. The dispatcher typically analyzes the
current status, location and availability of the entire courier fleet before
assigning the order to a particular courier. The dispatcher often delays
assigning a particular order until it can be grouped with other deliveries or
assigned to a particular courier. The Company believes that providing the
dispatcher with this degree of authority may lead to late deliveries, routing
inefficiencies and favoritism between dispatchers and selected couriers,
resulting in under-utilization of the courier work force. Management believes
this leads to higher courier turnover and undue dependence of courier firms on
the dispatchers. Additionally, the Company believes that segregation of each
back-office function leads to inaccurate communications, reduced customer
service levels and inefficient staffing levels. As a result, the Company
believes that Command and Control Dispatch cannot be used for large volumes of
transactions without significant increases in labor.
THE DMS MODEL
Management has chosen to focus on the Point-to-Point delivery business
because of: (i) the customers' requirements for immediate service and
responsiveness, which management believes enables the Company to distinguish the
DMS Model from the operating methods employed by its competitors; (ii) the
Company's ability to charge premium pricing for guaranteed, on-time delivery;
and (iii) the lack of a focused national or international consolidator. Prior to
this Offering, none of the Founding Companies has incorporated every aspect of
the DMS model into their respective operations. However, since 1994, the
Company's management team has introduced certain components of the DMS Model and
has refined the DMS Model through licensing arrangements with a number of
courier firms, including 18 Founding Companies in 10 of the 20 markets in which
the Company will operate subsequent to this Offering. These companies
represented 14.2% of the Company's pro forma revenues in 1996. Following this
Offering, the Company will continue to support the conversion of the Founding
Companies to the DMS Model.
Key elements of the DMS Model include:
FUNCTIONAL OPERATING STRUCTURE. The DMS Model organizes the Company's
business into three discrete functions: (i) Dispatch Management Services; (ii)
Road Management Services; and (iii) Marketing Management Services.
- Dispatch Management Services refers to back-office functions such as
telephone answering (call capture), order taking, dispatch and back-office
accounting. Under the DMS Model, a single DMS Center is used to
consolidate the back-office functions for several independent Brands in
each geographic region in which the Company operates. Each DMS Center is
structured to facilitate interactive communication among all personnel
within the DMS Center and thereby maximize utilization of employees. DMS
Center employees are positioned around "donut" shaped work stations that
promote a constant exchange of information. Prompt capture of the
customer's call is the top priority of DMS Center personnel. In addition,
the Company cross-trains personnel to improve the quality and service
levels of each DMS Center. For example, during peak demand periods, a
greater number of employees can be made available to serve as order
capturers, while during off-peak periods, more employees can devote time
to administrative functions such as job audit and payment processing. DMS
Center personnel, including dispatchers in peak workload periods, answer
customers' calls on telephone lines dedicated to specific Brands and enter
the orders into computers using the Company's proprietary software. The
Company intends to standardize customer information, pricing and
geographic zoning data among Brands in order to permit
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the call capturers to answer telephones and enter orders more quickly and
with fewer keystrokes or chances for error than competitors' systems.
- Road Management Services refers to the management of the courier fleet.
Management believes a financially incentivized, team-oriented courier
fleet is an integral part of the success of the DMS Model. Under the DMS
Model, couriers are incentivized using an effort-based fee structure. The
couriers are compensated per delivery, with the courier fee set by
utilizing pre-determined zone pricing standards that reward the effort
needed to complete a delivery with the appropriate courier fee. Management
believes that compensating its couriers on an effort-based standard
eliminates the demotivation created by fixed salary compensation. In
addition, management believes that a commission-based structure where a
courier is paid a fixed percentage of the total delivery price creates
inefficiencies by putting the couriers' focus on the price of the
delivery, rather than the effort required to complete the delivery.
Management believes that its effort-based fee structure maximizes courier
fleet productivity and allows it to better manage its pricing policies and
gross margins. In addition, the DMS model provides couriers with the
opportunity to earn higher levels of overall compensation and for that
compensation to be aligned with the specific effort involved in making the
delivery.
Management believes that the consolidation of courier fleets for multiple
Brands in a single metropolitan area provides significant efficiencies.
Pooling the courier resources of multiple Brands in a single metropolitan
area enhances courier coverage and optimizes courier staffing levels,
which leads to an increase in overall productivity of the courier fleet.
Accordingly, subsequent to the Combinations, the Company intends to
establish a single, independent RMS Center in each of its markets. Subject
to guidelines and standards established by the Company, each RMS Center
will be responsible for hiring, training, rostering and managing the
couriers. The Company believes that segregating the courier cost and
management function into separate RMS Centers will increase the
profitability of the RMS Center and the Company by: (i) better motivating
the couriers through team management and peer governance; and (ii)
focusing the RMS Center exclusively on road management and minimizing
management costs.
- Marketing Management Services refers to the continued decentralized
promotion of each of the Founding Company's Brand name to capitalize on
its particular market niche, goodwill and established name recognition.
Former owners of 32 of the Founding Companies (representing 56.2% of the
Company's combined pro forma 1996 revenues) will enter into Brand Manager
Agreements pursuant to which such former owners will continue to have
primary responsibility for the Marketing Management Services component of
their Founding Company. See "The Company--The Combinations." Marketing
Management Services functions for Brands not covered by a Brand Manager
will be performed by an employee of the Company who will receive
performance-based compensation. In each case, a dedicated sales and
marketing team will be responsible for increasing penetration of existing
accounts and the overall revenues of their specific Brand. Each Brand will
have customized marketing materials providing customers with a summary of
frequently used time-based service levels, pricing schedules and
modification charges.
PROPRIETARY TECHNOLOGY. The Company has developed a proprietary software
system to support multiple Brands and a Free Call Dispatch environment while
facilitating the consolidation of dispatch and road management services.
Management expects that data standards used on a Company-wide basis will
simplify and streamline the Company's data entry and record keeping functions.
The Company's software automatically routes the customer's order to a
dispatcher, who announces the job to a pool of couriers under the Free Call
Dispatch system. The software allows the dispatcher to view, in a
"windows'-based environment, on a single screen, all deliveries in progress for
each courier, including an automatic, color-coded countdown of the time
remaining for each delivery. The software automatically records the job with the
proper billing rate, using standardized zone sheets, cost matrices and service
codes, and records the commission to be paid to the courier.
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UTILIZATION OF MULTIPLE BRANDS. The DMS Model is designed to support the
growth of Brands within established market niches. Maintaining the
distinctiveness of preexisting tradenames for acquired courier firms allows the
Company to capitalize on the goodwill while continuing to operate in a framework
of consolidated back-office and road work forces.
FREE CALL DISPATCH. Under the Free Call Dispatch system, immediately upon
receiving an order for delivery, the dispatcher announces the specifics of the
job to the entire courier fleet via a two-way radio. A courier who believes that
he or she can complete the pickup and delivery within the time requirements
responds to the dispatcher and requests the job based on, among other factors,
his or her proximity to the job pick-up location. The Company believes that Free
Call Dispatch, combined with effort-based compensation (including zero payout to
couriers for deliveries not made on time) improves the utilization of the
courier fleet, increases on-time deliveries and provides couriers with the
opportunity to earn higher aggregate compensation than available under the
Command and Control Dispatch or from the Company's competitors. Free Call
Dispatch allows couriers to exchange deliveries in progress. Management believes
that these hand-offs permit couriers to perform multiple deliveries all going to
the same general area, thus increasing productivity of couriers and speed of
deliveries. Additionally, bicycle couriers frequently meet with vehicle couriers
for hand-offs on downtown deliveries in certain metropolitan areas, reducing the
risk of delays from traffic jams and limited parking availability. In both
cases, the couriers themselves, rather than the dispatchers, are given the
communication and operating tools to initiate selection of work and hand-offs
between team members and among different teams.
INCENTIVIZE WORKFORCE. The Company seeks to incentivize all segments of its
workforce--DMS and RMS employees, couriers and Brand Managers--in order to
maximize operating efficiency and profitability. Employees who work in the
Company's DMS Centers will be compensated incrementally for each new back-office
task at which the employees become proficient. In addition, profit-sharing,
bonuses, stock options and other incentive compensation will be available to
employees based on the overall performance of the DMS Center. Couriers will be
compensated per delivery with effort-based compensation, with zero payout for
deliveries that are not delivered in a timely manner.
A Brand Manager will be incentivized under the Brand Manager Agreement by
receiving payments according to a formula based on the Brand's contribution.
Contribution is defined as total revenue less certain expenses attributable to
the Brands and certain administrative and corporate overhead allocations. The
Contribution Percentage (defined as the Contribution divided by total revenue of
the Brand) between 7.5% and 15% accrues to the Brand Manager. The Contribution
Percentage in excess of 15% accrues to the Brand Manager and the Company in a
proportion of 25% and 75%, respectively.
ACQUISITION STRATEGY
The Company intends to implement an aggressive acquisition program in the
highly fragmented Point-to-Point delivery industry. Management believes that the
Company will be an attractive acquirer to local and regional Point-to-Point
courier companies due to: (i) its unique operating model and proprietary
software platform, which facilitates increased levels of productivity, customer
service and profitability; (ii) the Brand Manager strategy, which allows the
seller to participate in the increased profitability and continued growth of the
Brand under the DMS Model; (iii) the increased customer account opportunities
resulting from a focus on a national brand strategy and ownership of the 1 800
DELIVER-TM- and 1 800 COURIER-TM- trade and service marks; and (iv) its strategy
for focusing exclusively on consolidating the Point-to-Point delivery market.
The Company's acquisition strategy targets growth in both existing and new
markets:
EXPANSION OF EXISTING MARKETS. The Company intends to rapidly acquire
additional businesses in each of the markets where it operates in order to
increase the utilization and market share of each DMS Center. The Company
intends to acquire Point-to-Point courier firms with strong customer
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relationships that, due to the nature of their customer base and service
levels provided, can be assimilated efficiently into existing DMS Centers.
The Company believes that these "fill-in" acquisitions will broaden the
Company's range of delivery services and increase revenues without a
corresponding increase in administrative costs. Brand Managers of existing
DMS Centers will be incentivized to seek acquisition targets in local
markets.
ENTER NEW MARKETS. The Company also intends to expand into new markets,
primarily by acquiring companies in the top U.S. metropolitan markets which
are not presently served by a DMS Center. The Company intends to be the
largest or second largest provider of Point-to-Point delivery services in
every market where it has a presence. Management will target "platform"
acquisition candidates with strong operating management and customer
relationships to form the base of a new DMS Center.
The Company's Director of Business Development will be responsible for the
acquisition program and, as part of such role, will work with regional
management to identify acquisition opportunities. In addition, several of the
Company's other senior executives and Brand Managers have held prominent
positions in national courier trade associations and have developed significant
relationships and visibility with local delivery company owners. The Company
believes that this industry presence provides a competitive advantage in
identifying appropriate acquisition candidates and executing its acquisition
strategy. Once a business is acquired, the Company will assign a team to convert
the acquired company to the DMS Model and integrate the acquisition into the
Company. Certain back-office operations, including accounting, billing, payroll
and cash management, will be performed by the Company's central office.
The Company intends to finance future acquisitions with a combination of
shares of its Common Stock and cash. For selected acquisitions, the Company
intends to retain the services of the former owners and managers through earnout
or Brand Manager agreements, which will further incentivize such retained
personnel based on the future profitability of their acquired Brands.
For a discussion of certain risks associated with the Company's future
acquisition strategy, see "Risk Factors--Risks Relating to the Company's
Acquisition Strategy" and "--Need for Additional Financing."
INTERNAL GROWTH STRATEGY
The Company intends to drive internal growth by: (i) expanding market share;
(ii) enhancing services; (iii) developing a premium national brand name; (iv)
forming strategic alliances; and (v) improving profitability.
EXPANDING MARKET SHARE. The Company intends to expand market share in
existing markets by target marketing the Company's services to specific
customer segments requiring reliable Point-to-Point delivery capabilities,
including commercial and investment firms, law firms, financial printers and
hospitals. The Company intends to continue to operate existing and acquired
Brands independently, supported by a single operations staff in each market,
in order to capitalize on existing Brand recognition and maximize revenues.
ENHANCING SERVICES. The Company intends to introduce enhanced service
to its customers, such as time critical guaranteed services in as little as
15 minutes in selected major metropolitan areas and written proof of pickup
and delivery. Further, the Company intends to expand the practice of certain
of the Founding Companies of providing hardware or software to a client to
allow them to directly place orders through their own computers instead of
the telephone. The Company believes that these direct entry capabilities and
other expanded services will facilitate the use of the Company's services by
large volume clients. The Company believes that providing customers with
these high-quality, customer-oriented services will differentiate the
Company from traditional courier firms and will generate increased demand
for the Company's services.
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DEVELOPING PREMIUM NATIONAL BRAND. As part of its marketing efforts,
the Company intends to promote its own national brand identity through its
trade and service marks 1-800-DELIVER-TM- and 1-800-COURIER-TM-. The Company
believes that the development of these national Brands will permit the
Company to better pursue national accounts that require coverage in more
than one metropolitan area. The Company believes that offering these
customers the ability to receive consolidated bills for such deliveries, as
well as uniformity of services, will result in increased revenues.
FORMING STRATEGIC ALLIANCES. The Company expects to enter into
agreements with providers of facilities management services and logistics to
enhance the Company's ability to service its customers who require strategic
stockpiling of service repair items. The Company also intends to seek
alliances that will allow it to cross-sell its Point-to-Point delivery
services to the customers of other service providers, including overnight
and same-day delivery providers, who do not focus on the Point-to-Point
delivery market. The Company does not compete in such areas other than
Point-to-Point deliveries and believes that it can enhance service offerings
of other overnight and same-day delivery service providers through these
alliances.
IMPROVING PROFITABILITY. The DMS Model is designed to improve operating
margins. The Company expects cost savings will be achieved primarily through
(i) the utilization of single back-offices to support multiple Brands and
(ii) the restructuring of courier compensation to improve road service
utilization. The Company expects additional cost savings through (i) the
consolidation of accounting, finance, management and certain other
administrative functions, (ii) the daily review of audit reports to identify
and resolve discrepancies prior to billing, and (iii) the use of uniform
monthly billing and settlement cycles.
CUSTOMERS
The Company currently has more than 20,000 customers, including professional
service organizations, large corporations, healthcare institutions and retail
and manufacturing firms. No one customer accounts for more than 5% of the
Company's sales. Customers typically do not enter into contracts for the long-
term supply of Point-to-Point delivery services.
COMPETITION
The market for Point-to-Point delivery services is highly competitive and
has low barriers to entry. Many of the Company's competitors operate in only one
location and may have more experience and brand recognition than the Company in
such local market. In addition, several large, national, publicly traded
companies have begun to consolidate the Point-to-Point delivery industry through
the acquisition of independent courier companies. Other companies in the
industry compete with the Company not only for the provision of services but
also for acquisition candidates. Some of these companies have longer operating
histories and greater financial resources than the Company. In addition, other
firms involved in segments other than Point-to-Point delivery services may
expand into the Point-to-Point market in order to provide their customers with
"one-stop" shopping of delivery and logistics services. Many of such companies
have greater financial resources and brand name recognition than the Company.
The Company believes that the principal competitive factors in the
Point-to-Point delivery industry are reliability, service flexibility and
pricing.
FINANCIAL REPORTING SYSTEMS
Management has selected the existing billing and financial system of one of
the largest Founding Companies as the basis for integrating its network of DMS
Centers into a common financial reporting platform. Information regarding
customer accounts, pricing and administrative and courier costs will be
available for management to monitor daily revenue and gross margins, thereby
enabling management to identify emerging trends and manage customer pricing and
courier fees to maximize profitability. The
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Company believes that its current financial reporting system is sufficient to
accommodate the centralization of all collections, billing and treasury
functions and to support the implementation of the Company's growth strategy.
REGULATION AND SAFETY
The Company's operations are subject to various state and local regulations
and, in many instances, require permits and licenses from state authorities. In
connection with the operation of certain motor vehicles and the handling of
hazardous materials, the Company is subject to regulation by the United States
Department of Transportation and the corresponding agencies in the states in
which such courier operations occur. The Company's relationship with its
employees is subject to regulations that relate to occupational safety, hours of
work, workers' compensation and other matters. To the extent the Company holds
licenses to operate two-way radios to communicate with couriers, the Company is
also regulated by the Federal Communications Commission. The Company believes
that it is in substantial compliance with all applicable regulatory requirements
relating to its operations. Failure of the Company to comply with the applicable
regulations could result in substantial fines or revocation of the Company's
operating permits.
The Company currently carries liability insurance which the Company believes
is adequate. In addition, independent contractors are required to maintain
liability insurance of at least the minimum amounts required by state law and to
provide the Company with a certificate of insurance verifying that they are in
compliance. Subsequent to the Offering, the Company intends to subject couriers
to periodic drug testing as well as background investigations of their records
with the Department of Motor Vehicles in the applicable states.
INTELLECTUAL PROPERTY
The Company continually develops and refines the DMS Model and enhances
existing proprietary technology. The Company primarily relies on a combination
of copyright and trade secret laws, confidentiality procedures and contractual
provisions to protect its intellectual property. Despite these protections, it
may be possible for unauthorized parties to copy, obtain or use certain portions
of the DMS Model and proprietary technology. While any misappropriation of the
Company's intellectual property could have a material adverse effect on the
Company's competitive position, the Company believes that protection of
proprietary rights is less significant to the Company's business than the
continued pursuit of its operating strategies and other factors, such as the
Company's relationship with industry participants and the experience and
abilities of its key personnel.
The Company has registered several trade and service marks, including: DMS
Corp.-TM-, 1-800-COURIER-TM- and 1-800-DELIVER-TM-. The Company also owns the
Internet domain name "www.DMS-Corp.com." The Company has no knowledge of any
specific infringement to, or any prior claims of ownership of, trademarks that
would materially adversely affect the Company's current results of operations
and financial condition. The Company intends to vigorously defend its
proprietary rights against infringement.
EMPLOYEES AND INDEPENDENT CONTRACTORS
Immediately prior to the consummation of the Combinations, the Founding
Companies employed a work force of approximately 3,287 people, including
approximately 2,738 couriers, 450 operations staff and 49 people in management
positions. Of the couriers, approximately 1,999 are employees and 739 are
independent contractors. The Company is not a party to any collective bargaining
agreements. The Company believes that its relationship with its employees is
good.
From time to time, federal and state authorities have sought to assert that
independent contractors in the Point-to-Point delivery industry, including those
utilized by the Founding Companies, are employees
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rather than independent contractors. The Company believes that independent
contractors utilized by the Company are not employees under existing
interpretations of federal and state laws. However, there can be no assurance
that federal and state authorities will not challenge this position, or that
other laws or regulations, including tax laws, or interpretations thereof, will
not change. If, as a result of any of the foregoing, the Company is required to
pay for and administer added benefits to independent owner/ operators, the
Company's operating costs would increase. See "Risk Factors--Certain Tax Matters
Related to Independent Contractors," "--Claims Exposure" and "--Dependence on
Availability of Qualified Courier Personnel."
FACILITIES
Upon consummation of the Offering and the Combinations, the Company will
operate from 51 leased facilities, which total approximately 280,000 square
feet. These facilities are principally used for operations, general and
administrative functions and training. In addition, several facilities also
contain storage and warehouse space for Company equipment and inventory as well
as for the strategic stockpiling of service repair items for certain customers.
After consummation of the Offering and the Combinations, the Company intends to
consolidate the back-office operations and to contract all of the road
operations with the RMS Center located within each market. The number of
facilities therefore will be consolidated to conform to the needs of the DMS
Centers of the Company. This is likely to result in the reduction of a number of
facilities operated by the Company. The Company has commenced the process of
evaluating its needs for facilities in the various metropolitan areas in which
it operates and identifying the existing facilities best suited for those
purposes. The Company currently cannot estimate the expenses involved in the
consolidation of its facilities or the time period during which such
consolidation will occur.
The table below summarizes the location of the Company's existing
facilities.
<TABLE>
<CAPTION>
NUMBER OF
LOCATION FACILITIES
- -------------------------------------------------------------------------------------------------------- -------------
<S> <C>
New York Metropolitan Area.............................................................................. 15
San Francisco, CA....................................................................................... 5
Atlanta, GA............................................................................................. 3
Dallas, TX.............................................................................................. 3
Denver, CO.............................................................................................. 3
Los Angeles, CA......................................................................................... 3
Seattle, WA............................................................................................. 3
Detroit, MI............................................................................................. 2
London, U.K............................................................................................. 2
Washington, D.C......................................................................................... 2
Boston, MA.............................................................................................. 1
Charlotte, NC........................................................................................... 1
Chicago, IL............................................................................................. 1
Hollis, NH.............................................................................................. 1
Houston, TX............................................................................................. 1
Minneapolis, MN......................................................................................... 1
Nashville, TN........................................................................................... 1
Phoenix, AZ............................................................................................. 1
Portland, OR............................................................................................ 1
Wellington, New Zealand................................................................................. 1
</TABLE>
The Company's corporate headquarters are located in New York, New York. The
Company believes that its properties are generally well maintained, in good
condition and adequate for its present needs.
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Furthermore, the Company believes that suitable additional or replacement space
will be available when required.
LEGAL PROCEEDINGS
The Company is, from time to time, a party to legal proceedings arising in
the normal course of its business. Management believes that none of the legal
proceedings currently outstanding will have a material adverse effect on the
Company's business, financial conditions or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers. Subsequent to the Offering, the Company
intends to appoint five additional, independent directors to the Board. These
individuals have not been identified as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
R. Gregory Kidd...................................... 38 Chairman of the Board
Linda M. Jenkinson................................... 35 Chief Executive Officer; Director
Gilbert D. Carpel.................................... 51 President
Kevin Holder......................................... 41 Chief Operating Officer
Marko Bogoievski..................................... 34 Chief Financial Officer
Lever F. Stewart..................................... 39 Director of Business Development
James K. Gardner..................................... 42 Director of Road Management Services
Bonnie Brogdon....................................... 51 Organization Effectiveness Officer
Alison Davis......................................... 36 Director
Michael Fiorito...................................... 37 Director
</TABLE>
R. GREGORY KIDD has served as the Chairman of the Board of Directors of the
Company since September 1997. From November 1996 to September 1997, Mr. Kidd was
the Chairman of the Board of Directors of Dispatch Management Services, L.L.C.,
a Point-to-Point delivery company which was merged with and into the Company.
From 1991 to 1996, Mr. Kidd was a founder of Kiwi Corp., a Point-to-Point
delivery company which purchased several courier firms to test and refine the
DMS Model. Prior to this, Mr. Kidd was a consultant with Booz Allen & Hamilton,
Inc., a management consultant firm, from 1985 until 1990. Mr. Kidd has a Masters
degree in management from the Yale School of Management.
LINDA M. JENKINSON has served as the Chief Executive Officer and a director
of the Company since August 1997. Since January 1994, Ms. Jenkinson has been
involved in developing and refining the DMS Model in the United States. From
January 1994 to August 1997, Ms. Jenkinson was with A.T. Kearney, a management
consulting firm, in various positions, where she was most recently named an
officer. From August 1991 to December 1993, Ms. Jenkinson was a Manager with
Price Waterhouse L.L.P., an accounting and consulting firm. Ms. Jenkinson has a
Masters in Business Administration from the Wharton School at the University of
Pennsylvania.
GILBERT D. CARPEL has served as President of the Company since September
1997. Since 1987, Mr. Carpel has held various senior executive positions with
Washington Express Services, Inc., a Point-to-Point delivery firm and a Founding
Company, including Chief Executive Officer (1992 to present) and Executive Vice
President (1987-1992). In addition, Mr. Carpel founded Sky Courier Network,
Inc., an air courier firm which was subsequently sold to Airborne Freight
Corporation.
KEVIN HOLDER has served as the Chief Operating Officer of the Company and
its predecessor entities since October 1995. From August 1993 to October 1995,
Mr. Holder was a Principal of Sonet Systems, Inc., a software vendor to the
courier industry. From October 1981 to August 1993, Mr. Holder was the President
of Washington Express Services, Inc., a Point-to-Point delivery firm and a
Founding Company.
MARKO BOGOIEVSKI has served as the Chief Financial Officer of the Company
since November 1997. From April 1996 to September 1997, Mr. Bogoievski was the
Chief Financial Officer of Ansett New Zealand Limited, an airline and
transportation subsidiary of News Corporation, Inc. From September 1993 to April
1996, Mr. Bogoievski was a Finance Director of Lion Nathan Limited, a
publicly-held brewer operating in Australia, New Zealand and China. Mr.
Bogoievski has a Masters in Business Administration from the Harvard Graduate
School of Business.
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JAMES K. GARDNER will serve as Director of Road Management Services and
President of the RMS subsidiaries of the Company following the consummation of
the Offering. Since February 1995, Mr. Gardner has been the President of IC
Services Corporation, an outsourcing firm for payroll and human resources. From
January 1990 to January 1995, Mr. Gardner held various positions with
Gray-Judson-Howard, a consulting firm, including Partner (1993-1995) and Vice
President (1990-1992). Mr. Gardner has a Masters of Public and Private
Management from the Yale School of Organization Management.
BONNIE BROGDON will serve as the Organization Effectiveness Officer of the
Company following the consummation of the Offering. From March 1996 to February
1997, Ms. Brogdon was the Senior Vice President of Corporate Services for Morgan
Stanley & Co., an investment bank. From September 1993 to March 1996, Ms.
Brogdon was the Senior Vice President of Corporate Services for Lehman Brothers,
Inc. an investment bank. From March 1992 to September 1993, Ms. Brogdon was the
Senior Vice President of Fulfillment Services for Shearson Lehman Brothers, an
investment bank. Ms. Brogdon has a Bachelor's degree from Auburn University.
LEVER F. STEWART has served as the Director of Business Development of the
Company since September 1997. From August 1996 to September 1997, Mr. Stewart
was the Chief Executive Officer of Atlanta Legal Couriers, Inc., a
Point-to-Point delivery company. From 1988 to 1996, Mr. Stewart was the General
Counsel and an executive officer of Rock-Tenn Company, a publicly-held national
paperboard products and packaging business. Prior to that time, Mr. Stewart was
a practicing attorney with the law firm of King & Spalding specializing in
corporate mergers and acquisitions and securities laws. Mr. Stewart has a Juris
Doctor from the Washington and Lee University School of Law.
ALISON DAVIS will become a director of the Company following the
consummation of the Offering. Since August 1993, Ms. Davis has been a Vice
President and Principal of A.T. Kearney, a management consulting firm. From
December 1991 to July 1993, Ms. Davis was a Senior Engagement Manager of
McKinsey & Company, a management consulting firm. Ms. Davis has a Masters in
Business Administration from the Harvard Graduate School of Business and the
Stanford Graduate School of Business.
MICHAEL FIORITO will become a director of the Company following the
consummation of the Offering. Since 1980, Mr. Fiorito has been the Chief
Executive Officer, President and Chairman of Total Management, LLC, and its
predecessor, EarlyBird Courier Service, Inc., a delivery company and a Founding
Company. Mr. Fiorito will also be a Brand Manager.
Subsequent to the Offering, the Board of Directors of the Company will
consist of five directors divided into three classes with each class serving for
a term of three years. At each annual meeting of stockholders, directors will be
elected by the holders of the Common Stock to succeed those directors whose
terms are expiring. See "Description of Capital Stock--Common Stock." The
Company expects that the Board of Directors will establish an Acquisition
Committee, an Audit Committee, a Compensation Committee, an Executive Committee
and a Nominating Committee. The members of each committee are expected to be
determined at the first meeting of the Board of Directors following the
consummation of the Combinations.
Messrs. Kidd, Carpel, Holder and Ms. Jenkinson have agreed to vote all the
shares of Common Stock they beneficially own in favor of electing Mr. Fiorito to
the Board of Directors.
All officers serve at the discretion of the Board of Directors.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as a director. Each director
who is not an employee of the Company or one of its subsidiaries receives a fee
of $2,000 for attendance at each Board of Directors' meeting and $1,000 for each
committee meeting (unless held on the same day as a Board of Directors'
meeting). Directors are also
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<PAGE>
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof incurred in their capacity as
directors.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
Linda M. Jenkinson, Gilbert D. Carpel, Kevin Holder, Marko Bogoievski and
Lever F. Stewart will each enter into an employment agreement (the "Employment
Agreement") with the Company providing for an annual base salary of $180,000,
$95,000, $180,000, $180,000 and $180,000, respectively. Each of the Employment
Agreements will be for a term of two years. Unless terminated or not renewed by
the Company or the executive officer, the term of the Employment Agreements will
continue thereafter on a year-to-year basis on the same terms and conditions
existing at the time of renewal. R. Gregory Kidd, the Chairman of the Company,
will not be receiving compensation from the Company, but will enter into a
non-competition agreement with the Company (the "Kidd Non-Competition
Agreement"). The Kidd Non-Competition Agreement will contain a covenant not to
compete (the "Kidd Non-Compete Covenant") with the Company for a period of the
greater of (i) three years from the date thereof or (ii) the term of his
affiliation with the Company plus one year thereafter. Each Employment Agreement
will contain a covenant not to compete (the "Employee Non-Compete Covenant")
with the Company during the term of such Employment Agreement and for a period
of one year immediately following termination of employment. Under both the Kidd
Non-Compete Covenant and the Employee Non-Compete Covenant, the party to the
Employment Agreement or the Kidd Non-Competition Agreement will be prohibited
from (i) inducing or attempting to persuade any employee of the Company to
discontinue such employment relationship, or (ii) soliciting any person,
corporation, partnership or other entity or organization which at any time
during the term of employment was a customer of the Company, except for mailings
made to the general public or segments of the general public and other forms of
general advertising shall not be included. The Kidd Non-Compete Covenant and the
Employee Non-Compete Covenant may be enforced by injunctions and shall survive
the termination of employment with the Company.
Each of the Employment Agreements will provide that, in the event of
termination of employment by the Company without cause the executive officer
will be entitled to receive from the Company: (i) any unpaid base salary,
bonuses or benefits accrued through the date of termination; (ii) reimbursement
of expenses incurred through the date of termination; (iii) the base salary for
a period of two years from the date of termination at the annual rate thereof
immediately preceding such termination; (iv) an annual bonus for a period of two
years following such termination at an annual rate equal to the executive
officer's average annual bonus over the five fiscal years of the Company (or the
period of employment if less than five years) immediately preceding the fiscal
year in which the termination occurred, payable in equal installments together
with the base salary; and (v) the continuation of group life, health and
disability benefits for a period of two years from the date of termination.
1997 STOCK INCENTIVE PLAN
No stock options were granted to, or exercised by or held by any director or
executive officer in 1996. In November 1997, the Board of Directors and the
Company's stockholders approved the Company's 1997 Stock Incentive Plan (the
"Plan"). The purpose of the Plan is to provide directors, officers, employees,
consultants and independent contractors with additional incentives by increasing
their ownership interests in the Company. Individual awards under the Plan may
take the form of one or more of: (i) either incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs"); (ii) stock appreciation rights ("SARs");
(iii) dividend equivalent rights; (iv) performance awards; (v) restricted or
deferred stock; and (vi) other awards not otherwise provided for, the value of
which is based in whole or in part upon the value of the Common Stock.
The Compensation Committee will administer the Plan and generally select the
individuals who will receive awards and the terms and conditions of those
awards. The maximum number of shares of Common
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<PAGE>
Stock that may be subject to outstanding awards, determined immediately after
the grant of any award, may not exceed the greater of shares or % of
the aggregate number of shares of Common Stock outstanding. Shares of Common
Stock which are attributable to awards which have expired, terminated or been
canceled or forfeited are available for issuance or use in connection with
future awards.
The Plan will terminate on the day preceding the tenth anniversary of the
date of its adoption unless sooner terminated by the Board of Directors. The
Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
In connection with the Offering, NQSOs to purchase a total of shares
of Common Stock of the Company will be granted to the Company's executive
officers and directors (exclusive of the non-employee director options described
below) as follows: [ ]. In addition, options to purchase approximately
shares will be granted to other employees of the Company. The grants of
all of the foregoing options will be effective as of the date of the Prospectus
and each will have an exercise price equal to the initial public offering price
per share in the Offering. Except for the options granted to and
, which will vest and become exercisable immediately, the
options will vest at the rate of 20% per year commencing on the first
anniversary of the date of this Prospectus, and will expire 10 years from the
date of grant. All of the grantees of such options will be subject to the
two-year lock-up restriction described in "Shares Eligible for Future Sale."
The Plan provides for (i) the automatic grant to each non-employee director
serving at the commencement of the Offering and each non-employee director
subsequently appointed for the first time to the Company's Board of Directors of
an option to purchase 5,000 shares, and thereafter (ii) the automatic grant to
each continuing non-employee director of an option to purchase 3,000 shares on
the first business day after the annual meeting of the stockholders of the
Company ("Directors' Options"). Directors' Options will have an exercise price
per share equal to 100% of the fair market value of such shares at the date of
grant. Directors' Options will expire at the earlier of 10 years from the date
of grant or three months after termination of service as a director for any
reason other than disability, death or for cause or for one year after
termination of service as a director by reason of the director's resignation or
removal due to disability. Directors' Options will be immediately exercisable to
the extent they were vested as of the date the director was terminated. If a
director is terminated for cause, as described in the Plan, then any options
granted to such director will immediately terminate in full and no rights
thereunder may be exercised. In addition, the Plan permits non-employee
directors to elect to receive, in lieu of cash directors' fees, shares or
credits representing "deferred shares" that may be settled at future dates, as
elected by the director. The number of shares or deferred shares received will
be equal to the number of shares which, at the date the fees would otherwise be
payable, will have an aggregate fair market value equal to the amount of such
fees.
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<PAGE>
CERTAIN TRANSACTIONS
OTHER TRANSACTIONS
On September 9, 1997, Kiwi Express Software Services, LLC ("Kiwi Express")
which developed much of the proprietary software used in the DMS Model, merged
into the Company. R. Gregory Kidd, the Chairman of the Company and Linda M.
Jenkinson, the Company's Chief Executive Officer, owned membership interests in
Kiwi Express of 64.9% and 10.0%, respectively. As consideration for the merger,
Mr. Kidd and Ms. Jenkinson are entitled to receive upon consummation of the
Offering, shares of Common Stock of the Company equal to $324,450 and $50,000,
respectively, divided by the initial public offering price. The Company believes
that the price paid to acquire Kiwi Express is at least as favorable to the
Company as would be available from an independent third party.
On September 12, 1997, the Company agreed to acquire Earlybird Courier for
$12.0 million in cash and shares of Common Stock of the Company equal to $4.6
million divided by the initial public offering price. Michael Fiorito, a
director of the Company, is a 45% shareholder of Earlybird Courier. Mr. Fiorito
has also entered into a Brand Manager Agreement with the Company. In addition,
the Company has agreed to pay Mr. Fiorito compensation equal to two weeks
revenues of any courier company acquired by the Company that is identified and
sourced by Mr. Fiorito. The Company believes that the price paid to acquire
Earlybird Courier is at least as favorable to the Company as would be available
from an independent third party.
On September 12, 1997, the Company agreed to acquire Washington Express for
shares of Common Stock of the Company equal to $2.8 million divided by at the
initial public offering price. Gilbert D. Carpel, the President of the Company,
is a 61% shareholder of Washington Express. Mr. Carpel has also entered into a
Brand Manager Agreement with the Company. The Company believes that the price
paid to acquire Washington Express is at least as favorable to the Company as
would be available from an independent third party.
On September 12, 1997, the Company agreed to acquire Kiwicorp Limited for
shares of Common Stock of the Company equal to $734,000 divided by the initial
public offering price. R. Gregory Kidd, Chairman of the Board of Directors of
the Company, is a 48% shareholder of Kiwicorp Limited. The Company believes that
the price paid to acquire Kiwicorp Limited is at least as favorable to the
Company as would be available from an independent third party.
In December 1997, Lever F. Stewart, an executive officer of the Company,
purchased for cash $150,000 principal amount of the Company's notes as part of
the December Bridge Loan. In December 1997, Michael Fiorito, a director of the
Company and a Brand Manager, purchased for cash $50,000 principal amount of the
Company's notes as part of the December Bridge Loan. In December 1997, Delores
Fiorito, the mother of Michael Fiorito, purchased for cash $50,000 principal
amount of the Company's notes as part of the December Bridge Loan.
COMPANY POLICY
In the future, any transactions with officers, directors and affiliates will
be approved by a majority of the Board of Directors, including a majority of the
disinterested members of the Board of Directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
Based on an initial public offering price of $ per share, the
following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company, after giving effect to the
Combinations and the Offering, by: (i) each person known to beneficially own
more than 5% of the outstanding shares of Common Stock; (ii) each of the
Company's directors; (iii) each named executive officer; and (iv) all executive
officers and directors as a group. All persons listed have an address in care of
the Company's principal executive offices and have sole voting and investment
power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT
- ---------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
R. Gregory Kidd.......................................................
Linda M. Jenkinson....................................................
Gilbert D. Carpel.....................................................
Michael Fiorito.......................................................
Kevin Holder..........................................................
Marko Bogoievski......................................................
Lever F. Stewart......................................................
James K. Gardner......................................................
Bonnie Brogdon........................................................
Alison Davis..........................................................
All Directors and Executive
Officers as a Group (10 persons)......................................
</TABLE>
- ------------------------
* Less than 1%
(1) Unless indicated otherwise, the address of the beneficial owners is 65 West
36th Street, New York, New York 10018.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 110,000,000 shares of
Capital Stock, par value $.01 per share, consisting of 100,000,000 shares of
Common Stock and 10,000,000 shares of preferred stock, par value $0.01 per share
(the "Preferred Stock").
COMMON STOCK
Subsequent to the Offering and the Combinations, there will be shares
of the Common Stock issued and outstanding.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of the Common Stock are entitled to such dividends as may be declared in
the discretion of the Board of Directors out of funds legally available
therefor. Holders of Common Stock are entitled to share ratably in the net
assets of the Company upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. The holders of Common Stock have no preemptive rights to purchase
shares of stock of the Company. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of the
Company. All outstanding shares of Common Stock are, and the shares of Common
Stock to be issued pursuant to this Prospectus will be upon payment therefor,
fully paid and nonassessable.
The Board of Directors is classified into three classes as nearly equal in
number as possible, with the term of each class expiring on a staggered basis.
See "Management--Board of Directors." The classification of the Board of
Directors may make it more difficult to change the composition of the Board of
Directors and thereby may discourage or make more difficult an attempt by a
person or group to obtain control of the Company. Cumulative voting for the
election of directors is not permitted, enabling holders of a majority of the
outstanding Common Stock to elect all members of the class of directors whose
terms are then expiring.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the Preferred
Stock, in each case without any further action or vote by the stockholders. The
Company has no current plans to issue any shares of Preferred Stock and,
immediately after the consummation of the Offering, no Preferred Stock will be
outstanding.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
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<PAGE>
STATUTORY BUSINESS COMBINATIONS PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have shares of
Common Stock outstanding. Of these shares, the shares of Common Stock sold
in the Offering ( shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable by persons other than affiliates of
the Company, without restriction under the Securities Act.
The remaining shares of Common will be "restricted" securities within
the meaning of Rule 144 under the Securities Act and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemptions contained in Rule 144. All
of the restricted shares will be eligible for public sale pursuant to Rule
144, after the two-year lock-up restriction described below and subject to the
volume restrictions discussed below. Pursuant to the lock-up restrictions, the
holders of these restricted shares, including the Company's executive officers,
directors and certain stockholders, have agreed that they will not, without the
prior written consent of the Company and Prudential Securities Incorporated,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise dispose of or transfer (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other disposition or transfer of) any shares of Common Stock or any
other securities convertible into, or exercisable or exchangeable for, shares of
Common Stock or other similar securities of the Company, currently beneficially
owned or hereafter acquired by such persons for a period of two years from the
consummation of this Offering. After such two-year period, the foregoing
restriction will expire and shares permitted to be sold under Rule 144 would be
eligible for sale. In addition, such executive officers, directors and certain
stockholders have also agreed that they will not, without the prior written
consent of Prudential Securities Incorporated, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise dispose of or transfer (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other disposition
or transfer of) any shares of Common Stock or any other securities convertible
into, or exercisable or exchangeable for, shares of Common Stock or other
similar securities of the Company, currently beneficially owned or hereafter
acquired by such persons for a period of 180 days from the date of this
Prospectus. The Company and Prudential Securities Incorporated, respectively,
may, in their sole discretion, at any time and without prior notice, release all
or any portion of the shares of Common Stock subject to such agreements to which
they are party.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned his or her shares for at least one year (including the prior
holding period of any prior owner other than an affiliate) is entitled to sell
within any three-month period that number of shares which does not exceed the
greater of 1% of the outstanding shares of the Common Stock, or the average
weekly trading volume during the four calendar weeks preceding each such sale.
Sales under Rule 144 also are subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not or has not
been deemed an "affiliate" of the Company for at least three months, and who has
beneficially owned shares for at least two years (including the holding period
of any prior owner other than an affiliate) would be entitled to sell such
shares under Rule 144 without regard to the limitations discussed above.
of the restricted shares are beneficially owned by persons who are affiliates of
the Company.
Upon the completion of the Offering, there will be outstanding options to
purchase shares of Common Stock, of which options to purchase shares
under the 1997 Stock Incentive Plan will be vested and immediately exercisable
at a price per share equal to the initial public offering price. The remaining
options to be granted under the 1997 Stock Incentive Plan will vest and
become exercisable at the rate of 20% per year from the date of the Prospectus
at a price per share equal to the initial public offering price. In addition,
options for the purchase of additional shares of Common Stock will remain
available for issuance under the 1997 Stock Incentive Plan following the
completion of the Offering. The Company intends to file one or more Registration
Statements on Form S-8 to register
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<PAGE>
under the Securities Act all of the shares of Common Stock that are issued
or issuable upon the exercise of stock options under the 1997 Stock Incentive
Plan. These registration statements are expected to be filed as soon as
practicable after the Offering and are expected to become effective immediately
upon filing. Shares covered by the registration statements will be eligible for
sale in the public market after the effective date of the registration
statements, subject to Rule 144 limitations applicable to affiliates of the
Company and the lock-up restrictions described above. See "Management--1997
Stock Incentive Plan."
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
56
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated is acting as the Representative, have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company, the numbers of shares of Common Stock set forth below
opposite their respective names:
<TABLE>
<S> <C>
NUMBER
UNDERWRITERS OF SHARES
- ---------------------------------------------------------------------------------------------------- ------------
Prudential Securities Incorporated..................................................................
------------
Total.............................................................................................
------------
------------
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of the Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per share;
and that such dealers may reallow a concession of $ per share to certain
other dealers. After the initial public offering, the offering price and the
concessions may be changed by the Representatives.
The Company, its executive officers and directors and certain stockholders
of the Company have agreed that they will not, without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase, or otherwise dispose of or transfer (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other disposition or transfer of) any shares of Common Stock or any other
securities convertible into, or exercisable for shares of Common Stock or other
similar securities of the Company, currently beneficially owned or hereafter
acquired by such persons, for a period of 180 days after the date of the
Prospectus. Prudential Securities Incorporated may, in its sole discretion, at
any time and without prior notice, release all or any portion of the shares of
Common Stock subject to such agreements.
The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined through negotiation between the Company and the
Representative of the Underwriters. Among the factors to be considered in making
such determination will be the prevailing market conditions, the results of
operations of the Company in recent periods relevant to its prospects and the
prospects for its industry in general, the management of the Company and the
market prices of securities for companies in businesses similar to that of the
Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M promulgated by the Securities and Exchange
Commission, pursuant to which such persons may bid for or purchase Common Stock
for the purpose of stabilizing its market price. The Underwriters also may
create a short position for the account of the Underwriters by selling more
Common Stock in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following the closing of the Offering to
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<PAGE>
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position, up to shares of Common Stock, by
exercising the Underwriters' over-allotment options referred to above. In
addition, Prudential Securities Incorporated on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or selling group member
participating in the Offering) for the account of the other Underwriters the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Akin, Gump, Strauss, Hauer &
Feld, L.L.P., Washington, D.C. Certain legal matters related to the Offering
will be passed upon for the Underwriters by Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A., Miami, Florida. Silver, Freedman & Taff, L.L.P. will
provide certain legal services on behalf of the Company in connection with the
Combinations.
EXPERTS
The financial statements of Dispatch Management Services Corp. as of
September 30, 1997 and for the nine-month period ended September 30, 1997
included in the Prospectus have been so included in reliance on the report
(which contains an explanatory paragraph relating to Dispatch Management
Services Corp.'s ability to continue as a going concern) of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The combined financial statements of Earlybird Courier Service, LLC, Total
Management Support Services, LLC and their Affiliates at December 31, 1996, and
for each of the two years in the period ended December 31, 1996, and the nine
month period ended September 30, 1997, appearing in the Prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of Atlantic Freight Systems, Inc. and
affiliated companies as of December 31, 1996 and September 30, 1997 and for the
years ended December 31, 1995 and 1996 and the nine-month period ended September
30, 1997 included in the Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements of Bullit Courier Services, Inc. as of
February 28, 1997 and February 29, 1996 and for the three years in the period
ended February 28, 1997 included in the Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing.
The financial statements of Zoom Messenger Service, Inc. as of December 31,
1996 and September 30, 1997 and for the year ended December 31, 1996 and the
nine-month period ended September 30, 1997 included in the Prospectus have been
so included in reliance on the report (which contains an explanatory paragraph
relating to Zoom Messenger's ability to continue as a going concern as described
in Note 1 to the financial statements) of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Brookside Systems and Programming Limited as of
March 31, 1996 and 1997 and for each of the three years in the period ended
March 31, 1997 included in the Prospectus and
58
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registration statement have been so included in reliance on the report of Price
Waterhouse (London, England), independent accountants, given on the authority of
such firm as experts in accounting and auditing.
The financial statements of Bridge Wharf Investments Limited as of September
30, 1996 and September 30, 1997 and for the nine-month period ended September
30, 1997 and for the two years in the period ended September 30, 1996 included
in the Prospectus have been so included in reliance on the report of Price
Waterhouse (London, England), independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of Security Despatch Limited
(excluding the mail room services operations) as of March 31, 1996 and 1997 and
for the three years in the period ended March 31, 1997 included in the
Prospectus have been so included in reliance on the report of Price Waterhouse
(London, England), independent accountants, given on the authority of said firm
as experts in accounting and auditing.
The financial statements of Aero Special Delivery Service, Inc. as of June
30, 1996 and 1997 and for the years then ended included in the Prospectus have
been so included in reliance on the report (which contains an explanatory
paragraph relating to the Aero Special Delivery Service, Inc.'s ability to
continue as a going concern as described in Note 3 to the financial statements)
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The financial statements of S-Car-Go Courier, Inc. as of December 31, 1996
and September 30, 1997, and for the years ended December 31, 1995 and 1996 and
the nine-month period ended September 30, 1997, included in the Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Gregory W. Austin, Sole Proprietorship (d/b/a
Battery Point Messenger and Alpha Express) as of December 31, 1996 and September
30, 1997, and for the years ended December 31, 1995 and 1996 and the nine-month
period ended September 30, 1997 included in the Prospectus have been so included
in reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The financial statements of Christopher D. Neal, Sole Proprietorship as of
and for the nine-month period ended September 30, 1997 included in the
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Michael S. Studebaker, Sole Proprietorship as of
and for the nine-month period ended September 30, 1997 included in the
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Washington Express Services, Inc. as of
September 30, 1997 and 1996 and for the nine-month period ended September 30,
1997 included in the Prospectus have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The financial statements of MLQ Express, Inc. as of February 28, 1996 and
1997 and for each of the three years in the period ended February 28, 1997
included in the Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The financial statements of A Courier, Inc. and Affiliates as of December
31, 1996 and September 30, 1997 and for the year ended December 31, 1996 and the
nine-month period ended September 30, 1997
59
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included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of American Eagle Endeavors, Inc. as
of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996 included in the Prospectus have been so included in
reliance on the report (which contains an explanatory paragraph relating to the
American Eagle Endeavors, Inc.'s ability to continue as a going concern as
described in Note 6 to the financial statements) of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Kangaroo Express as of December 31, 1996 and
September 30, 1997 and for the years ended December 31, 1995 and 1996 and the
nine-month period ended September 30, 1997 included in the Prospectus have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Transpeed Courier Services, Inc. as of December
31, 1996 and September 30, 1997 and years ended December 31, 1995 and 1996 and
the nine-month period ended September 30, 1997 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of National Messenger, Inc. as of September 30,
1997 and November 30, 1996 and 1995, and the ten-month period ended September
30, 1997 and for the two years ended November 30, 1996 and 1995, included in the
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Profall, Inc. as of September 30, 1997, December
31, 1996 and 1995 and for the nine-month period ended September 30, 1997 and for
the years ended December 31, 1996 and 1995, included in the Prospectus have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of A&W Couriers, Inc. as of December 31, 1996 and
September 30, 1997 and for the years ended December 31, 1995 and 1996 and the
nine-month period ended September 30, 1997, included in the Prospectus have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Fleetfoot Max, Inc. as of August 31, 1996 and
1997 and for the three years in the period ended August 31, 1997 included in the
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Expressit Couriers, Inc. as of December 31, 1996
and September 30, 1997 and for the years ended December 31, 1995 and 1996 and
the nine-month period ended September 30, 1997, included in the Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Express Enterprise, Inc.--Ground Operations as
of December 31, 1996 and September 30, 1997 for the years ended December 31,
1995 and 1996 and for the nine-month period ended September 30, 1997 included in
the Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
The financial statements of RJK Enterprises Inc. (d/b/a Deadline Express) as
of December 31, 1996 and September 30, 1997 and for the periods from March 6,
1996 to December 31, 1996 and January 1, 1997 to September 30, 1997, appearing
in the Prospectus and registration statement have been audited by Ernst
60
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& Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Upon completion of the Offering, the Company will be subject to the
information requirements of the Exchange Act, and in accordance therewith will
file reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza
Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its
regional offices located at 7 World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains an Internet web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of that site
is http://www.sec.gov.
61
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INDEX TO FINANCIAL STATEMENTS
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF DISPATCH MANAGEMENT SERVICES CORP..................
Introduction to Unaudited Pro Forma Combined Financial Statements......................................
Pro Forma Combined Balance Sheet (Unaudited)...........................................................
Pro Forma Combined Statement of Operations (Unaudited).................................................
Notes to Unaudited Pro Forma Combined Financial Statements.............................................
DISPATCH MANAGEMENT SERVICES CORP........................................................................
Report of Independent Accountants......................................................................
Balance Sheet as of September 30, 1997.................................................................
Statement of Stockholder's Equity for the period from inception (November 12, 1996) through September
30, 1997
Statement of Operations for the period from inception (November 12, 1996) through September 30, 1997
Statement of Cash Flows for the period from inception (November 12, 1996) through September 30, 1997
Notes to Financial Statements..........................................................................
EARLYBIRD COURIER SERVICE, LLC, TOTAL MANAGEMENT SUPPORT SERVICES LLC AND THEIR AFFILIATES D/B/A
EARLYBIRD COURIER......................................................................................
Report of Independent Auditors.........................................................................
Combined Balance Sheets as of December 31, 1996 and September 30, 1997.................................
Combined Statements of Operations and Retained Earnings (Accumulated Deficit) for the Years Ended
December 31, 1995 and 1996 and the Nine Months Ended September 30, 1996 (Unaudited) and 1997.........
Combined Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and the Nine Months
Ended September 30, 1996 (Unaudited) and 1997........................................................
Notes to Combined Financial Statements.................................................................
ATLANTIC FREIGHT SYSTEMS, INC. D/B/A ATLANTIC FREIGHT....................................................
Report of Independent Accountants......................................................................
Combined Balance Sheets as of December 31, 1996 and September 30, 1997.................................
Combined Statements of Income for the Two Years ended December 31, 1996 and the Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Combined Statements of Stockholders' Equity for the Two Years ended December 31, 1996 and Nine Months
ended September 30, 1997.............................................................................
Combined Statements of Cash Flows for the Two Years ended December 31, 1996 and Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Notes to Combined Financial Statements.................................................................
BULLIT COURIER SERVICES, INC. D/B/A/ BULLIT COURIER......................................................
Report of Independent Accountants......................................................................
Consolidated Balance Sheets as of February 29, 1995 and February 28, 1996 and September 30, 1997
(Unaudited)..........................................................................................
Consolidated Statement of Operations for Each of the Three Years in the Period ended February 28, 1997
and Seven Months ended September 30, 1996 (Unaudited) and 1997 (Unaudited)...........................
Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period ended
February, 1997 and Seven Months ended September 30, 1997 (Unaudited).................................
</TABLE>
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Consolidated Statements of Cash Flows for Each of the Three Years in the Period ended February, 1997
and Seven Months ended September 30, 1996 (Unaudited) and 1997 (Unaudited)...........................
Notes to Financial Statements..........................................................................
ZOOM MESSENGER SERVICE, INC..............................................................................
Report of Independent Accountants......................................................................
Balance Sheets as of December 31, 1996 and September 30, 1997..........................................
Statements of Operations for the Year ended December 31, 1996 and the Nine Months ended September 30,
1996 (Unaudited) and 1997............................................................................
Statements of Stockholder's Equity for Year ended December 31, 1996 and the Nine Months ended September
30, 1997.............................................................................................
Statements of Cash Flows for the Year ended December 31, 1996 and the Nine Months ended September 30,
1996 (Unaudited) and 1997............................................................................
Notes to Financial Statements..........................................................................
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED D/B/A FLEETWAY SYSTEMS.........................................
Report of Independent Accountants......................................................................
Balance Sheets as of March 31, 1996 and 1997 and September 30, 1997 (Unaudited)........................
Statements of Operations for Each of the Three Years in the Period ended March 31, 1997 and Six Months
ended September 30, 1996 (Unaudited) and 1997 (Unaudited)............................................
Statements of Cash Flows for Each of the Three Years in the Period ended March 31, 1997 and Six Months
ended September 30, 1996 (Unaudited) and 1997 (Unaudited)............................................
Notes to Financial Statements..........................................................................
BRIDGE WHARF INVESTMENTS LIMITED D/B/A WEST ONE..........................................................
Report of Independent Accountants......................................................................
Balance Sheets as of September 30, 1996 and 1997.......................................................
Profit and Loss Account for the each of the Three Years in the Period ended September 1997.............
Statements of Cash Flows for the each of the Three Years in the Period ended September 1997............
Notes to Financial Statements..........................................................................
SECURITY DESPATCH LIMITED (EXCLUDING THE MAIL ROOM SERVICES OPERATIONS) D/B/A SECURITY DESPATCH..........
Report of Independent Accountants......................................................................
Consolidated Balance Sheets as of March 31, 1996 and 1997 and September 30, 1997 (Unaudited)...........
Consolidated Statements of Operations for Each of the Three Years in the Period ended March 31, 1997
and Six Months ended September 30, 1996 (Unaudited) and 1997 (Unaudited).............................
Consolidated Statements of Cash Flows for Each of the Three Years in the Period ended March 31, 1997
and Six Months ended September 30, 1996 (Unaudited) and 1997 (Unaudited).............................
Notes to Consolidated Financial Statements.............................................................
</TABLE>
F-2
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AERO SPECIAL DELIVERY SERVICE, INC. D/B/A AERO DELIVERY..................................................
Report of Independent Accountants......................................................................
Balance Sheets as of June 30, 1996 and 1997 and September 30, 1997 (Unaudited).........................
Statements of Operations for the Two Years ended June 30, 1997 and the Three Months ended September 30,
1996 (Unaudited) and 1997 (Unaudited)................................................................
Statements of Stockholders' Deficiency for the Two Years ended June 30, 1997 and the Three Months ended
September 30, 1997 (Unaudited)
Statements of Cash Flows for the Two Years ended June 30, 1997 and the Three Months ended September 30,
1996 (Unaudited) and 1997 (Unaudited)................................................................
Notes to Financial Statements..........................................................................
S-CAR-GO COURIER, INC. D/B/A S-CAR-GO COURIER............................................................
Report of Independent Accountants......................................................................
Balance Sheets as of December 31, 1996 and September 30, 1997..........................................
Statements of Operations for the Two Years ended December 31, 1996 and for the Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Statements of Stockholders' Equity for the Two Years ended December 31, 1996 and the Nine Months ended
September 30, 1997...................................................................................
Statements of Cash Flows for the Two Years ended December 31, 1996 and for the Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Notes to Financial Statements..........................................................................
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP D/B/A BATTERY POINT MESSENGER AND ALPHA EXPRESS D/B/A BATTERY
POINT..................................................................................................
Report of Independent Accountants......................................................................
Statements of Assets, Liabilities and Net Assets as of December 31, 1996 and September 30, 1997........
Statements of Operations and Changes in Net Assets for the Two Years ended December 31, 1996 and the
Nine Months ended September 30, 1996 (Unaudited) and 1997............................................
Statements of Cash Flows for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Notes to Financial Statements..........................................................................
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP D/B/A ZAP COURIER AND CROSSTOWN MESSENGER.......................
Report of Independent Accountants......................................................................
Statements of Assets, Liabilities and Net Assets as of September 30, 1997..............................
Statements of Operations and Changes in Net Assets for the Nine Months ended September 30, 1996
(Unaudited) and 1997.................................................................................
Statements of Cash Flows for the Nine Months ended September 30, 1996 (Unaudited) and 1997.............
Notes to Financial Statements..........................................................................
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP D/B/A STUDEBAKER MESSENGER SERVICE............................
Report of Independent Accountants......................................................................
Statements of Assets, Liabilities and Net Assets as of September 30, 1997..............................
Statements of Operations and Changes in Net Assets for the Nine Months ended September 30, 1996
(Unaudited) and 1997.................................................................................
Statements of Cash Flows for the Nine Months ended September 30, 1996 (Unaudited) and 1997.............
Notes to Financial Statements..........................................................................
</TABLE>
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WASHINGTON EXPRESS SERVICES, INC. D/B/A WASHINGTON EXPRESS...............................................
Report of Independent Accountants......................................................................
Balance Sheets as of September 30, 1996 and 1997.......................................................
Statements of Operations for Each of the Three Years in the Period ended September 30, 1997............
Statement of Stockholders' Equity for Each of the Three Years in the Period ended September 30, 1997...
Statements of Cash Flows for Each of the Three Years in the Period ended September 30, 1997............
Notes to Financial Statements..........................................................................
MLQ EXPRESS, INC. D/B/A MLQ EXPRESS......................................................................
Report of Independent Accountants......................................................................
Balance Sheets as of February 28, 1996 and 1997 and September 30, 1997 (Unaudited).....................
Statements of Operations for Each of the Three Years in the Period ended February 28, 1997 and Seven
Months ended September 30, 1996 (Unaudited) and 1997 (Unaudited).....................................
Statements of Stockholders' Equity for Each of the Three Years in the Period ended February 28, 1997
and the Seven Months ended September 30, 1996 (Unaudited) and 1997 (Unaudited).......................
Statements of Cash Flows for Each of the Three Years in the Period ended February 28, 1997 and Seven
Months ended September 30, 1996 (Unaudited) and 1997 (Unaudited).....................................
Notes to Financial Statements..........................................................................
A COURIER, INC...........................................................................................
Report of Independent Accountants......................................................................
Combined Balance Sheets as of December 31, 1996 and September 30, 1997.................................
Combined Statements of Operations for the Year ended December 31, 1996 and the Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Combined Statements of Stockholder's Equity for Year ended December 31, 1996 and the Nine Months ended
September 30, 1997...................................................................................
Combined Statements of Cash Flows for the Year ended December 31, 1996 and the Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Notes to Financial Statements..........................................................................
AMERICAN EAGLE ENDEAVORS, INC. D/B/A 1-800 COURIER-PHOENIX, MINNEAPOLIS..................................
Report of Independent Accountant.......................................................................
Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997.............................
Consolidated Statements of Operations for the Two Years ended December 31, 1996 and Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Consolidated Statements of Stockholders' Equity (Deficit) for the Two Years ended December 31, 1996 and
Nine Months September 30, 1997.......................................................................
Consolidated Statements of Cash Flows for the Two Years ended December 31, 1996 and Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Notes to Consolidated Financial Statements.............................................................
</TABLE>
F-4
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KANGAROO EXPRESS OF COLORADO SPRINGS, INC. D/B/A KANGAROO EXPRESS........................................
Report of Independent Accountants......................................................................
Balance Sheets as of December 31, 1996 and September 30, 1997..........................................
Statements of Operations for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Statements of Stockholder's Equity for the Two Years ended December 31, 1996 and the Nine Months ended
September 30, 1997...................................................................................
Statements of Cash Flows for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Notes to Financial Statements..........................................................................
TRANSPEED COURIER SERVICES, INC. D/B/A 1-800 COURIER-DENVER..............................................
Report of Independent Accountants......................................................................
Balance Sheets as of December 31, 1996 and September 30, 1997..........................................
Statements of Operations for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Statements of Stockholder's Equity for the Two Years ended December 31, 1996 and the Nine Months ended
September 30, 1997...................................................................................
Statements of Cash Flows for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Notes to Financial Statements..........................................................................
NATIONAL MESSENGER, INC. D/B/A NATIONAL MESSENGER........................................................
Report of Independent Accountants......................................................................
Balance Sheets as of November 30, 1995 and 1996 and September 30, 1997.................................
Statements of Operations for the Two Years ended November 30, 1996 and the Ten Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Statements of Shareholders' Equity for the Two Years ended November 30, 1996 and the Ten Months ended
September 30, 1997...................................................................................
Statements of Cash Flows for the Two Years ended November 30, 1996 and the Ten Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Notes to Financial Statements..........................................................................
PROFALL, INC. D/B/A 1-800 COURIER-L.A.X..................................................................
Report of Independent Accountants......................................................................
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997.................................
Statements of Operations for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Statements of Shareholders' Equity for the Two Years ended December 31, 1996 and the Nine Months ended
September 30, 1997...................................................................................
Statements of Cash Flows for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Notes to Financial Statements..........................................................................
</TABLE>
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A&W COURIERS, INC. D/B/A A&W COURIERS....................................................................
Report of Independent Accountants......................................................................
Balance Sheets as of December 31, 1996 and September 30, 1997..........................................
Statements of Operations for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Statements of Stockholders' Equity for the Two Years ended December 31, 1996 and the Nine Months ended
September 30, 1997...................................................................................
Statements of Cash Flows for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Notes to Financial Statements..........................................................................
FLEETFOOT MAX, INC. D/B/A FLEETFOOT MESSENGER............................................................
Report of Independent Accountants......................................................................
Balance Sheets as of August 31, 1996 and 1997..........................................................
Statements of Operations for Each of the Three Years in the Period ended August 31, 1997...............
Statements of Changes in Stockholders' Equity (Deficit) for Each of the Three Years in the Period ended
August 31, 1997......................................................................................
Statements of Cash Flows for Each of the Three Years in the Period ended August 31, 1997...............
Notes to Financial Statements..........................................................................
EXPRESSIT COURIERS, INC. D/B/A 1-800 COURIER-BOSTON......................................................
Report of Independent Accountants......................................................................
Balance Sheets as of December 31, 1996 and September 30, 1997..........................................
Statements of Operations for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Statements of Changes in Stockholders' Equity for the Two Years ended December 31, 1996 and the Nine
Months ended September 30, 1997......................................................................
Statements of Cash Flows for Each of the Two Years ended December 31, 1996 and the Nine Months ended
September 30, 1996 (Unaudited) and 1997..............................................................
Notes to Financial Statements..........................................................................
EXPRESS ENTERPRISE, INC. (GROUND OPERATIONS) D/B/A EXPRESS MESSENGER.....................................
Report of Independent Accountants......................................................................
Balance Sheets as of December 31, 1996 and September 30, 1997..........................................
Statements of Operations for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Statements of Stockholders' Equity for the Two Years ended December 31, 1996 and the Nine Months ended
September 30, 1997...................................................................................
Statements of Cash Flows for the Two Years ended December 31, 1996 and the Nine Months ended September
30, 1996 (Unaudited) and 1997........................................................................
Notes to Financial Statements..........................................................................
</TABLE>
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RJK ENTERPRISES INC. D/B/A DEADLINE EXPRESS..............................................................
Report of Independent Auditors.........................................................................
Balance Sheets as of December 31, 1996 and September 30, 1997..........................................
Statements of Operations and Accumulated Deficit for the period from March 6, 1996 to December 31, 1996
and for the period from March 6, 1996 to September 30, 1996 (Unaudited) and the nine months ended
September 30, 1997...................................................................................
Statements of Cash Flows for the period from March 6, 1996 to December 31, 1996 and for the period from
March 6, 1996 to September 30, 1996 (Unaudited) and the nine months ended September 30, 1997.........
Notes to Financial Statements..........................................................................
</TABLE>
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DISPATCH MANAGEMENT SERVICES CORP.
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Dispatch Management Services Corp. (the "Company") of the
outstanding capital stock of the Founding Companies. The Company will acquire,
in separate combination transactions (the "Combinations") in exchange for cash
and shares of Common Stock, certain courier firms simultaneously with and as a
condition to the closing of the Company's initial public offering (the
"Offering"), which will be accounted for using the purchase method of
accounting. The Company has been identified as the accounting acquiror.
The unaudited pro forma combined balance sheet gives effect to the
Combinations and the Offering as if they had occurred on September 30, 1997. The
unaudited pro forma combined statements of operations give effect to these
transactions as if they had occurred on January 1, 1996.
The Company has preliminarily analyzed the savings that it expects to
realize from reductions in salaries and certain benefits to the stockholders of
the Founding Companies. To the extent the stockholders and management of the
Founding Companies have agreed prospectively to reductions in salary, bonuses,
and benefits, these net reductions have been reflected in the pro forma combined
statement of operations. With respect to other potential cost savings, the
Company has not and cannot quantify these savings until completion of the
Combinations. It is anticipated that these savings will be partially offset by
the costs of being a publicly held company and the incremental increase in costs
related to the Company's new management. However, these costs, like the savings
that they offset, cannot be quantified accurately. Neither the anticipated
savings nor the anticipated costs have been included in the pro forma combined
financial statements of the Company.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what the
Company's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates and are not necessarily
representative of the Company's financial position or results of operations for
any future period. Since the Founding Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. See "Risk Factors" included
elsewhere herein.
F-8
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DMS
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(000'S)
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WEST SECURITY AMERICAN EAGLE ATLANTIC
DMS ONE AERO EARLYBIRD BULLIT DESPATCH ENDEAVORS FREIGHT
----- ------ ------ -------- ------ ------------- -------------- ------------
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ASSETS
Current assets:
Cash and cash equivalents... 820 1,064 109 3 71 95 7
Accounts receivable, net.... 24 5,256 1,349 3,002 878 3,134 736 924
Prepaid and other current
assets.................... 3,153 272 1,456 21 71 103
----- ------ ------ -------- ------ ------ ----- -----
Total current assets...... 3,997 6,320 1,730 4,461 970 3,134 902 1,034
Property and equipment, net... 32 3,169 407 127 95 166 238 688
Other assets.................. 339 120 112 13 31 183
Goodwill, net................. 276
----- ------ ------ -------- ------ ------ ----- -----
Total assets.............. 4,644 9,609 2,137 4,700 1,078 3,300 1,171 1,905
----- ------ ------ -------- ------ ------ ----- -----
----- ------ ------ -------- ------ ------ ----- -----
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Short term debt............. 857 108 1,539 188 350 260
Accounts payable............ 4,392 400 675 181 1,998 413 696
Accrued expenses............ 2,534 461 1,009 89 96 68
Other current liabilities... 55 2,884 254 24 173 275
Payable to shareholders of
founding co...............
----- ------ ------ -------- ------ ------ ----- -----
Total current
liabilities............. 3,446 4,392 3,853 3,477 482 1,998 1,032 1,299
Long-term debt, less current
maturities................... 2,265 1,617 253 40 297
Other long term liabilities... 675 258 122
----- ------ ------ -------- ------ ------ ----- -----
Total liabilities......... 3,446 6,657 4,528 5,094 735 1,998 1,330 1,718
Stockholders' equity..........
Preferred Stock............. 2
Common Stock................ 120 200 5 25 1,989 1 15
Treasury stock.............. (1,331) (148) (262)
Additional paid-in
capital................... 1,404 69 2,459 5 74
Retained earnings........... (208) 2,832 (2,591) 863 466 (3,146) (165) 360
----- ------ ------ -------- ------ ------ ----- -----
Total stockholders'
equity.................. 1,198 2,952 (2,391) (394) 343 1,302 (159) 187
----- ------ ------ -------- ------ ------ ----- -----
Total liabilities and
stockholders' equity.... 4,644 9,609 2,137 4,700 1,078 3,300 1,171 1,905
----- ------ ------ -------- ------ ------ ----- -----
----- ------ ------ -------- ------ ------ ----- -----
<CAPTION>
WASHINGTON MLQ NAT'L 1800 BATTERY DETROIT
EXPRESS COURIER KANGAROO MESSENGER FLEETFOOT FLEETWAY DENVER POINT EXPRESS
------- ------- ------ ----- ----- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... 85 36 5 77 40 47 4
Accounts receivable, net.... 800 817 381 435 295 218 151 143 165
Prepaid and other current
assets.................... 159 68 15 8 3 6 5 12
------- ------- ------ ----- ----- ---- ----- ---- ----
Total current assets...... 1,044 921 401 520 338 218 204 152 177
Property and equipment, net... 458 171 138 70 103 66 74 5 54
Other assets.................. 36 100 9 61 456 41 42 99
Goodwill, net.................
------- ------- ------ ----- ----- ---- ----- ---- ----
Total assets.............. 1,538 1,192 548 590 502 740 319 199 330
------- ------- ------ ----- ----- ---- ----- ---- ----
------- ------- ------ ----- ----- ---- ----- ---- ----
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Short term debt............. 658 56 182 160 32 39
Accounts payable............ 241 44 28 12 490 29 5 44
Accrued expenses............ 202 127 57 59
Other current liabilities... 332 429 82 129 24 23 39
Payable to shareholders of
founding co...............
------- ------- ------ ----- ----- ---- ----- ---- ----
Total current
liabilities............. 1,231 675 166 129 321 490 270 60 181
Long-term debt, less current
maturities................... 83 73 383 149 23 30 33
Other long term liabilities... 241 391 22 9
------- ------- ------ ----- ----- ---- ----- ---- ----
Total liabilities......... 1,555 675 630 512 492 513 300 60 223
Stockholders' equity..........
Preferred Stock.............
Common Stock................ 249 2 50 320 125 1
Treasury stock.............. (126)
Additional paid-in
capital................... 18 109 33 106
Retained earnings........... (266) 499 (191) 76 53 (93) (106) 139
------- ------- ------ ----- ----- ---- ----- ---- ----
Total stockholders'
equity.................. (17) 517 (82) 78 10 227 19 139 107
------- ------- ------ ----- ----- ---- ----- ---- ----
Total liabilities and
stockholders' equity.... 1,538 1,192 548 590 502 740 319 199 330
------- ------- ------ ----- ----- ---- ----- ---- ----
------- ------- ------ ----- ----- ---- ----- ---- ----
</TABLE>
F-9
<PAGE>
DMS
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(000's)
<TABLE>
<CAPTION>
PROFALL
1-800-COURLA EXPRESS IT A&W COURIER DEADLINE ZOOM A COURIER STUDEBAKER
------------ ---------- ----------- -------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......... 42 3 133 16 88 1
Accounts receivable, net.......... 176 104 217 145 1,377 902 79
Prepaid and other current
assets.......................... 2 12 46 19 40 114
--- --- ----- --- ----- --------- ---
Total current assets............ 220 119 396 164 1,433 1,104 80
Property and equipment, net......... 70 74 59 8 47 222 28
Other assets........................ 78 2 4 415 63 2
Goodwill, net.......................
--- --- ----- --- ----- --------- ---
Total assets.................... 290 271 457 176 1,895 1,389 110
--- --- ----- --- ----- --------- ---
--- --- ----- --- ----- --------- ---
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt................... 73 900 161 14
Accounts payable.................. 24 85 86 71 498 82 3
Accrued expenses.................. 70 23 43 157 180 8
Other current liabilities......... 561 228 67 186
Payable to shareholders of
founding co.....................
--- --- ----- --- ----- --------- ---
Total current liabilities....... 655 181 314 181 1,741 423 25
Long-term debt, less current
maturities........................ 2 26
Other long term liabilities.........
--- --- ----- --- ----- --------- ---
Total liabilities............... 655 181 314 181 1,743 449 25
Stockholders' equity................
Preferred Stock...................
Common Stock...................... 10 1 3 1 19 2
Treasury stock....................
Additional paid-in capital........ 65 89 58
Retained earnings................. (440) 82 (6) 133 938 85
--- --- ----- --- ----- --------- ---
Total stockholders' equity...... (365) 90 143 (5) 152 940 85
--- --- ----- --- ----- --------- ---
Total liabilities and
stockholders' equity.......... 290 271 457 176 1,895 1,389 110
--- --- ----- --- ----- --------- ---
--- --- ----- --- ----- --------- ---
<CAPTION>
OTHER PRO FORMA
S-CAR-GO FOUNDING MERGER PRO FORMA OFFERING
ZAP COURIER COMPANIES ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
---- --------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......... 12 102 295 3,155 2,424 5,579
Accounts receivable, net.......... 154 254 1,047 23,163 23,163
Prepaid and other current
assets.......................... 9 21 5,615 (3,113) 2,502
---- --- --------- ----------- --------- ----------- -----------
Total current assets............ 175 356 1,363 31,933 (689) 31,244
Property and equipment, net......... 43 30 330 273 7,245 7,245
Other assets........................ 108 15 54 2,383 14,664 17,047
Goodwill, net....................... 70,631 70,907 70,907
---- --- --------- ----------- --------- ----------- -----------
Total assets.................... 326 401 1,747 70,904 112,468 13,975 126,443
---- --- --------- ----------- --------- ----------- -----------
---- --- --------- ----------- --------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt................... 13 73 322 5,985 (5,279) 706
Accounts payable.................. 6 32 127 10,662 (2,534) 10,662
Accrued expenses.................. 24 62 158 5,427 2,893
Other current liabilities......... 73 73 55 300 6,266 6,266
Payable to shareholders of
founding co..................... 44,522 44,522 (44,522)
---- --- --------- ----------- --------- ----------- -----------
Total current liabilities....... 116 240 662 44,822 72,862 (52,335) 20,527
Long-term debt, less current
maturities........................ 52 123 (1,669) 3,780 3,780
Other long term liabilities......... 35 1,753 1,753
---- --- --------- ----------- --------- ----------- -----------
Total liabilities............... 168 240 820 43,153 78,395 (52,335) 26,060
Stockholders' equity................
Preferred Stock................... 2 (2)
Common Stock...................... 1 34 (3,143) 30 2 32
Treasury stock.................... 1,867
Additional paid-in capital........ 161 30,299 34,949 66,310 101,259
Retained earnings................. 158 160 732 (1,272) (908) (908)
---- --- --------- ----------- --------- ----------- -----------
Total stockholders' equity...... 158 161 927 27,751 34,073 66,310 100,383
---- --- --------- ----------- --------- ----------- -----------
Total liabilities and
stockholders' equity.......... 326 401 1,747 70,904 112,468 13,975 126,443
---- --- --------- ----------- --------- ----------- -----------
---- --- --------- ----------- --------- ----------- -----------
</TABLE>
F-10
<PAGE>
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
AMERICAN
WEST SECURITY EAGLE ATLANTIC WASHINGTON
ONE AERO EARLY BIRD BULLIT DEPOSIT ENDEAVORS FREIGHT EXPRESS
------ ------ ---------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 24,148 10,998 22,894 7,696 9,440 8,536 8,728 5,800
Cost of Revenues.............. 16,029 6,333 15,860 4,639 7,146 5,293 5,941 3,164
------ ------ ---------- -------- -------- --------- -------- -----
Gross Profit................ 8,119 4,665 7,034 3,057 2,294 3,243 2,787 2,636
Operating expenses:
Sales and marketing........... 1,119 900 1,072 358 1,535 105 483
General and administrative
expenses.................... 2,112 902 670 642 998 940 693 390
Other operating expenses...... 2,838 2,853 5,436 2,116 2,232 1,532
Depreciation and
amortization................ 298 119 195 6 174 270 91
------ ------ ---------- -------- -------- --------- -------- -----
Operating income (loss)..... 1,752 (109) (339) (65) 1,296 594 (513) 140
Other (income) expense:
Interest expense............ 369 56 219 107 21 62 83 70
Other, net.................. (2) 34 85 (56) 33 36 (18)
------ ------ ---------- -------- -------- --------- -------- -----
Income (loss) before provision
for income taxes............ 1,385 (199) (643) (116) 1,275 499 (632) 88
Provision for income taxes.... 360 2 (33) 382 200 (123) 38
------ ------ ---------- -------- -------- --------- -------- -----
Net income (loss)............. 1,025 (199) (645) (83) 893 299 (509) 50
------ ------ ---------- -------- -------- --------- -------- -----
------ ------ ---------- -------- -------- --------- -------- -----
Net income per share..........
Shares used in computing pro
forma net income per share
(See Note )................
<CAPTION>
MLQ NAT'L 1800 BATTERY DETROIT
COURIER KANGAROO MESSENGER FLEETFOOT FLEETWAY DENVER POINT EXPRESS
------- -------- --------- --------- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 5,310 2,650 2,413 2,172 1,048 1,247 732 1,612
Cost of Revenues.............. 3,296 1,878 1,446 1,332 558 764 397 986
------- -------- --------- --------- -------- ------ ------- -------
Gross Profit................ 2,014 772 967 840 490 483 335 626
Operating expenses:
Sales and marketing........... 233 27 86 368 58 24 16
General and administrative
expenses.................... 991 265 454 24 572 58 31 277
Other operating expenses...... 579 405 154 250 298 113 246
Depreciation and
amortization................ 94 50 13 66 36 10 47
------- -------- --------- --------- -------- ------ ------- -------
Operating income (loss)..... 117 25 260 132 (82) 33 157 40
Other (income) expense:
Interest expense............ 43 10 57 22 19 16
Other, net.................. (38) (2) (34) 4 3
------- -------- --------- --------- -------- ------ ------- -------
Income (loss) before provision
for income taxes............ 112 17 260 109 (104) 10 154 24
Provision for income taxes.... 32 5 (54)
------- -------- --------- --------- -------- ------ ------- -------
Net income (loss)............. 80 17 255 163 (104) 10 154 24
------- -------- --------- --------- -------- ------ ------- -------
------- -------- --------- --------- -------- ------ ------- -------
Net income per share..........
Shares used in computing pro
forma net income per share
(See Note )................
</TABLE>
See notes to unaudited pro forma combined financial statements
F-11
<PAGE>
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
PRO FALL
1-800-COURLA EXPRESS IT A&W COURIERS DEADLINE ZOOM A COURIER
------------ ---------- ------------ -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... 1,212 1,343 1,560 1,177 8,404 6,020
Cost of Revenues.............. 687 897 940 753 6,314 3,447
----- ----- ----- -------- ----- ---------
Gross Profit................ 525 446 620 424 2,090 2,573
Operating expenses:
Sales and marketing
expenses.................... 27 102 143 173 530
General and administrative
expenses.................... 298 169 289 144 747 430
Other operating expenses...... 271 231 228 143 1,317 1,093
Depreciation and
amortization................ 23 44 10 191 74
----- ----- ----- -------- ----- ---------
Operating income (loss)..... (67) (25) (9) (6) (338 ) 446
Other (income) expense:
Interest expense............ 25 16 2 63 13
Other, net.................. (64) 22 (4) (5) (30 ) (27)
----- ----- ----- -------- ----- ---------
Income (loss) before provision
for income taxes............ (28) (63) (7) (1) (371 ) 460
Provision for income taxes.... 4 174
----- ----- ----- -------- ----- ---------
Net income (loss)............. (28) (63) (11) (1) (371 ) 286
----- ----- ----- -------- ----- ---------
----- ----- ----- -------- ----- ---------
Net income per share..........
Shares used in computing pro
forma net income per share
(See Note 5)................
<CAPTION>
OTHER
S-CAR-GO FOUNDING PRO FORMA PRO FORMA
STUDEBAKER ZAP COURIER COMPANIES ADJUSTMENTS COMBINED
---------- --- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... 342 941 1,263 8,719 (9,705) 136,700
Cost of Revenues.............. 202 653 801 5,213 (8,448) 86,521
--- --- --------- --------- ----------- ---------
Gross Profit................ 140 288 462 3,506 (1,257) 50,179
Operating expenses:
Sales and marketing
expenses.................... 13 63 87 240 (769) 6,993
General and administrative
expenses.................... 13 39 206 1,406 (1,982) 11,778
Other operating expenses...... 31 42 140 1,472 (2,251) 21,769
Depreciation and
amortization................ 14 3 15 173 2,016 4,032
--- --- --------- --------- ----------- ---------
Operating income (loss)..... 69 141 14 215 1,729 5,607
Other (income) expense:
Interest expense............ 1 3 2 52 1,331
Other, net.................. 92 29
--- --- --------- --------- ----------- ---------
Income (loss) before provision
for income taxes............ 68 138 12 71 1,729 4,247
Provision for income taxes.... 7 1,379 2,373
--- --- --------- --------- ----------- ---------
Net income (loss)............. 68 138 5 71 350 1,874
--- --- --------- --------- ----------- ---------
--- --- --------- --------- ----------- ---------
Net income per share.......... $ 0.19
Shares used in computing pro
forma net income per share
(See Note 5)................ 10,000
</TABLE>
See notes to unaudited pro forma combined financial statements
F-12
<PAGE>
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
AMERICAN
SECURITY EAGLE ATLANTIC WASHINGTON
DMS WEST ONE AERO EARLYBIRD BULLIT DESP ENDEAVORS FRT EXP
------- -------- ----- -------- ------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 220 20,491 9,318 10,995 6,612 7,366 5,222 6,760 4,341
Cost of revenues.............. 13,466 5,624 6,264 3,851 4,350 3,447 4,791 2,302
------- -------- ----- -------- ------ ----- ----- --------- -----
Gross Profit................ 220 7,025 3,694 4,731 2,761 3,016 1,775 1,969 2,039
Operating expenses:
Sales and marketing........... 82 714 280 274 128 1,008 108 386
General and administrative
expenses.................... 324 1,664 1,416 102 432 352 1,081 282 316
Other operating expenses...... 3,523 1,824 2,255 1,710 1,526 1,557 1,216
Depreciation and amorti-
zation...................... 4 333 131 96 5 61 130 219 83
------- -------- ----- -------- ------ ----- ----- --------- -----
Operating income (loss)..... (108) 1,423 (391) 1,998 340 949 (444) (197) 38
Other (income) expense:
Interest expense (income)... 4 291 46 355 76 29 51 50 70
Other, net.................. 61 (4) (78) (48) (16)
------- -------- ----- -------- ------ ----- ----- --------- -----
Income (loss) before pro-
vision for income taxes..... (112) 1,071 (433) 1,643 264 920 (417) (199) (16)
Provision for income taxes.... 322 70 99 266 (167) (149) (7)
------- -------- ----- -------- ------ ----- ----- --------- -----
Net income (loss)............. (112) 749 (433) 1,573 165 654 (250) (50) (9)
------- -------- ----- -------- ------ ----- ----- --------- -----
------- -------- ----- -------- ------ ----- ----- --------- -----
Net income per share
Shares used in computing pro
forma net income per share
(See Note 5)
<CAPTION>
MLQ NAT'L BATTERY DETROIT
COURIER KANGAROO MESSENGER FLEETFOOT FLEETWAY 1800DENVER POINT EXPRESS
--------- ------- ----------- ------ ---- ----- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 4,617 2,140 2,082 1,842 922 904 657 1,447
Cost of revenues.............. 2,752 1,520 1,203 1,177 418 546 334 867
--------- ------- ----- ------ ---- ----- ---- ------
Gross Profit................ 1,865 620 879 665 504 358 323 580
Operating expenses:
Sales and marketing........... 190 15 82 17 29 45 19 4
General and administrative
expenses.................... 1,396 231 353 224 96 49 22 276
Other operating expenses...... 350 123 287 249 359 100 217
Depreciation and amorti-
zation...................... 54 39 15 44 72 31 11 19
--------- ------- ----- ------ ---- ----- ---- ------
Operating income (loss)..... 225 (15) 306 93 58 (126) 171 64
Other (income) expense:
Interest expense (income)... (36) 6 39 16 16 2 12
Other, net.................. (4) (31) (3) (17)
--------- ------- ----- ------ ---- ----- ---- ------
Income (loss) before pro-
vision for income taxes..... 261 (17) 306 85 45 (125) 169 52
Provision for income taxes.... 5 35
--------- ------- ----- ------ ---- ----- ---- ------
Net income (loss)............. 261 (17) 301 50 45 (125) 169 52
--------- ------- ----- ------ ---- ----- ---- ------
--------- ------- ----- ------ ---- ----- ---- ------
Net income per share
Shares used in computing pro
forma net income per share
(See Note 5)
</TABLE>
See notes to unaudited pro forma combined financial statements
F-13
<PAGE>
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
PROFALL EXPRESS A&W
1-800-COURLA IT COURIERS DEADLINE ZOOM A COURIER STUDEBAKER
--------- -------- --------- ------ ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ 1,235 1,071 1,270 962 6,524 5,367 309
Cost of revenues........................ 606 666 770 663 4,964 3,091 179
--------- -------- --------- ------ ----- ----- -------
Gross Profit.......................... 629 405 500 299 1,560 2,276 130
Operating expenses:
Sales and marketing..................... 27 72 121 194 531 15
General and administrative expenses..... 416 84 198 121 592 422 32
Other operating expenses................ 208 178 184 133 951 1,016 30
Depreciation and amortization........... 20 35 11 142 48 9
--------- -------- --------- ------ ----- ----- -------
Operating income (loss)............... (15) 81 35 (76) (319) 259 44
Other (income) expense:
Interest expense (income)............. 19 7 (3) 73 11 1
Other, net............................ (40) 1 (72) (17) 11
--------- -------- --------- ------ ----- ----- -------
Income (loss) before provision for
income taxes........................... 6 73 38 (4) (375) 237 43
Provision for income taxes.............. 8 90
--------- -------- --------- ------ ----- ----- -------
Net income (loss)....................... 6 73 30 (4) (375) 147 43
--------- -------- --------- ------ ----- ----- -------
--------- -------- --------- ------ ----- ----- -------
Net income per share
Shares used in computing pro forma net
income per share (See Note 5)
<CAPTION>
OTHER PRO PRO
S-CAR-GO FOUNDING FORMA FORMA
ZAP COURIER COMPANIES ADJUSTMENTS COMBINED
--- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................ 593 1,251 7,282 111,800
Cost of revenues........................ 299 710 4,457 69,317
--- ------ ------ ------- --------
Gross Profit.......................... 294 541 2,825 42,483
Operating expenses:
Sales and marketing..................... 55 95 183 4,674
General and administrative expenses..... 31 185 781 (1,496) 9,982
Other operating expenses................ 84 126 1,284 19,490
Depreciation and amortization........... 10 11 117 1,557 3,307
--- ------ ------ ------- --------
Operating income (loss)............... 114 124 460 (61) 5,030
Other (income) expense:
Interest expense (income)............. 5 5 51 1,196
Other, net............................ (2) 106 (153)
--- ------ ------ ------- --------
Income (loss) before provision for
income taxes........................... 111 119 303 (61) 3,987
Provision for income taxes.............. 52 11 1,455 2,090
--- ------ ------ ------- --------
Net income (loss)....................... 111 67 292 (1,516) 1,897
--- ------ ------ ------- --------
--- ------ ------ ------- --------
Net income per share 0.19
Shares used in computing pro forma net
income per share (See Note 5) 10,000
</TABLE>
See notes to unaudited pro forma combined financial statements
F-14
<PAGE>
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
AMERICAN
SECURITY EAGLE ATLANTIC
WEST ONE AERO EARLYBIRD BULLIT DISPATCH ENDEAVORS FREIGHT WASHINGTON
-------- ----- -------- ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 18,838 8,245 16,724 5,879 6,776 6,476 6,192 4,372
Cost of revenues.............. 12,579 4,730 11,565 3,466 3,856 4,058 4,465 2,368
-------- ----- -------- ------ ------- -------- ------- --------
Gross profit................ 6,259 3,515 5,159 2,413 2,920 2,418 1,727 2,004
Operating expenses:
Sales and marketing......... 78 676 703 230 152 1,149 73 359
General and administrative
expenses.................. 1,734 1,129 388 401 370 600 393 300
Other operating expenses...... 2,853 1,681 4,017 1,613 1,341 1,379 1,160
Depreciation and
amortization................. 222 80 176 5 62 130 201 53
-------- ----- -------- ------ ------- -------- ------- --------
Operating income (loss)..... 1,372 (51) (125) 164 995 539 (319) 132
Other (income) expense:
Interest expense............ 262 41 208 72 27 49 29 44
Other, net.................. 18 24 64 8 16 (13)
-------- ----- -------- ------ ------- -------- ------- --------
Income (loss) before provision
for income taxes............. 1,092 (116) (397) 92 968 482 (364) 101
Provision for income taxes.... 282 2 47 274 197 (57) 43
-------- ----- -------- ------ ------- -------- ------- --------
Net income (loss)............. 810 (116) (399) 45 694 285 (307) 58
-------- ----- -------- ------ ------- -------- ------- --------
-------- ----- -------- ------ ------- -------- ------- --------
Net income per share..........
Shares used in computing pro
forma net income per share
(see Note 5).................
<CAPTION>
MLQ NAT'L BATTERY DETROIT
COURIER KANGAROO MESSENGER FLEETFOOT FLEETWAY 1-800DENVER POINT EXPRESS
------- ------- -------- ------ ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 3,621 2,001 1,801 1,565 867 969 532 1,222
Cost of revenues.............. 2,201 1,398 1,116 852 360 567 279 729
------- ------- -------- ------ ---- ---- ------ ------
Gross profit................ 1,420 603 685 713 507 402 253 493
Operating expenses:
Sales and marketing......... 152 21 68 17 34 42 10 17
General and administrative
expenses.................. 1,171 192 329 192 59 41 17 216
Other operating expenses...... 296 124 354 277 202 81 182
Depreciation and
amortization................. 65 26 10 48 69 28 7 35
------- ------- -------- ------ ---- ---- ------ ------
Operating income (loss)..... 32 68 154 102 68 89 138 43
Other (income) expense:
Interest expense............ (14) 7 44 6 15 2 12
Other, net.................. (2) (18) 3
------- ------- -------- ------ ---- ---- ------ ------
Income (loss) before provision
for income taxes............. 46 63 154 76 62 71 136 31
Provision for income taxes.... 3 (61)
------- ------- -------- ------ ---- ---- ------ ------
Net income (loss)............. 46 63 151 137 62 71 136 31
------- ------- -------- ------ ---- ---- ------ ------
------- ------- -------- ------ ---- ---- ------ ------
Net income per share..........
Shares used in computing pro
forma net income per share
(see Note 5).................
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-15
<PAGE>
DMS
COMBINING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(000'S)
<TABLE>
<CAPTION>
PROFALL A&W
1-800-COURLA EXPRESS IT COURIERS DEADLINE ZOOM A COURIER STUDEBAKER ZAP
------------ ---------- -------- -------- ----- --------- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 850 1,023 1,171 824 6,318 4,380 244 448
Cost of revenues.............. 489 678 683 536 4,954 2,481 140 243
----- ----- -------- --- ----- --------- --- ---
Gross profit................ 361 345 488 288 1,364 1,899 104 205
Operating Expenses:
Sales and marketing........... 6 76 103 70 305 10 49
General and administrative
expenses..................... 232 109 222 103 563 292 18 20
Other operating expenses...... 166 202 172 103 798 776 25 64
Depreciation and
amortization................. 16 36 8 178 52 6 3
----- ----- -------- --- ----- --------- --- ---
Operating income (loss)..... (53) (8) 10 (21) (245) 474 45 69
Other (income) expense:
Interest expense............ 19 13 (3) 34 8 1 3
Other, net.................. (51) 1 (3) (28) (20)
----- ----- -------- --- ----- --------- --- ---
Income (loss) before provision
for income taxes............. (21) (22) 13 (18) (251) 486 44 66
Provision for income taxes.... 2 -- 185
----- ----- -------- --- ----- --------- --- ---
Net income (loss)............. (21) (22) 11 (18) (251) 301 44 66
----- ----- -------- --- ----- --------- --- ---
----- ----- -------- --- ----- --------- --- ---
Net income per share..........
Shares used in computing pro
forma net income per share
(See Note 5).................
<CAPTION>
OTHER
FOUNDING PRO FORMA PRO FORMA
S*CAR*GO COU COMPANIES ADJUSTMENTS COMBINED
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues...................... 921 6,535 (6,879) 101,915
Cost of revenues.............. 536 3,915 (5,912) 63,332
----- --------- ----------- ---------
Gross profit................ 385 2,620 (967) 38,583
Operating Expenses:
Sales and marketing........... 75 129 (248) 4,356
General and administrative
expenses..................... 158 625 (1,733) 8,141
Other operating expenses...... 102 1,250 (1,125) 18,093
Depreciation and
amortization................. 11 134 1,501 3,162
----- --------- ----------- ---------
Operating income (loss)..... 39 482 638 4,831
Other (income) expense:
Interest expense............ 1 26 906
Other, net.................. 142 141
----- --------- ----------- ---------
Income (loss) before provision
for income taxes............. 38 314 638 3,784
Provision for income taxes.... 18 13 1,060 2,008
----- --------- ----------- ---------
Net income (loss)............. 20 301 (422) 1,776
----- --------- ----------- ---------
----- --------- ----------- ---------
Net income per share.......... $ 0.18
---------
---------
Shares used in computing pro
forma net income per share
(See Note 5)................. 10,000
---------
---------
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-16
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1--GENERAL
Dispatch Management Services Corp. (the "Company") was founded to create the
largest provider of urgent, on-demand, point-to-point courier and delivery
services in the world. The Company has conducted no operations to date and will
acquire the Founding Companies concurrently with and as a condition to the
closing of this Offering.
The historical financial statements reflect the financial position and
results of operations of the Company and the Founding Companies and were derived
from the respective Founding Companies' financial statements where indicated.
The periods included in these financial statements for the individual Founding
Companies are as of the respective periods, as indicated in the accompanying
financial statements, or a date within 93 days of December 31, 1996. The audited
historical financial statements included elsewhere herein have been included in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
80.
NOTE 2--ACQUISITION OF FOUNDING COMPANIES
Concurrently and as a condition with the closing of this Offering, the
Company will acquire the Founding Companies in separate transactions, in
exchange for cash or shares of its Common Stock or a combination of both. The
acquisitions will be accounted for using the purchase method of accounting with
the Company being identified as the accounting acquiror.
The following table sets forth the consideration to be paid (the "Purchase
Consideration") in cash and in shares of Common Stock to the common stockholders
of each of the Founding Companies, the allocation of the consideration to net
assets acquired and the resulting goodwill. For purposes of computing the
estimated purchase price for accounting purposes, the value of shares is
determined using an estimated fair value of [$11.25] per share, which represents
a discount of 25 percent from the assumed initial public offering price of
[$15.00] per share due to restrictions on the sale and transferability of the
shares issued. The total purchase consideration does not reflect contingent
consideration related to certain earn out provisions included in the definitive
agreements. These arrangements provide for the Company to pay additional
consideration, based on revenues and operating income targets, of up to $14.7
million in cash, over the eight quarters immediately following the closing of
this Offering. When these amounts are earned they will be recorded as additional
costs of the acquired companies resulting in additional goodwill.
The purchase price has been allocated to the Company's historical assets and
liabilities based on their respective carrying values, with the exception of
acquired in process research and development (R&D) activities and acquired
internally developed technology, as these carrying values are deemed to
represent the fair market value of these assets and liabilities. The fair market
value of the in process R&D and internally developed technology was determined
based on a detail analysis prepared by the Company. The allocation of the
purchase price is considered preliminary until such time as the closing of the
Offering and consummation of the combinations. The Company does not anticipate
that the final allocation of purchase price will differ significantly from that
presented.
F-17
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 2--ACQUISITION OF FOUNDING COMPANIES (CONTINUED)
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
---------------------------------
FAIR MARKET
VALUE OF ADJUSTED ALLOCATION OF
FOUNDING COMPANY SHARES STOCK CASH TOTAL NET ASSETS PURCHASE PRICE GOODWILL
- -------------------------- ---------- ----------- --------- --------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
West One.................. 165,133 $ 1,858 $ 16,208 $ 18,066 $ 2,952 $ 15,114
Aero Special Delivery
Service, Inc............ 243,000 2,734 942 3,676 (2,391) 6,067
Earlybird Courier Service,
LLC..................... 309,933 3,487 9,373 12,860 984 11,876
Bullit Services Inc....... 200,000 2,250 3,722 5,972 343 5,629
Security Despatch
Limited................. 6,736 6,736 1,302 5,434
American Eagle Endeavors,
Inc..................... 284,267 3,198 3,198 (159) 3,357
Atlantic Freight Systems,
Inc..................... 280,000 3,150 3,150 187 2,963
Washington Express
Services, Inc........... 186,133 2,094 2,094 (17) 2,111
MLQ Express, Inc.......... 4,652 4,652 517 4,135
Kangaroo Express.......... 71,933 809 809 (82) 891
National Messenger,
Inc..................... 80,687 908 245 1,153 78 1,075
Fleetfoot Max, Inc........ 85,280 959 959 10 949
Fleetway.................. 134,400 1,512 842 2,354 227 $ 700(a) 687
740(b)
1-800Denver............... 51,600 581 581 19 562
Battery Point............. 28,513 321 321 92 229
Detroit Express........... 50,000 563 563 107 456
1-800Courier LAX.......... 30,000 338 129 467 (365) 832
Expressit Couriers,
Inc..................... 42,400 477 477 90 387
A&W Couriers, Inc......... 50,307 566 566 143 423
Deadline Courier.......... 61,533 692 692 (5) 697
Zoom Courier.............. 133,333 1,500 1,500 152 1,348
A Courier................. 128,000 1,440 1,237 2,677 940 1,737
Michael Studebaker, Sole
Prop.................... 11,993 135 23 158 55 103
Chris Neil, Sole Prop
Zap..................... 31,500 354 354 59 295
S-Car-Go Courier, Inc..... 42,560 479 2 481 161 320
Other Founding
Companies............... 281,971 3,170 411 3,581 927 2,654
---------- ----------- --------- --------- ----------- ------ ---------
2,984,476 $ 33,575 $ 44,522 $ 78,097 $ 6,326 $ 1,440 $ 70,331
---------- ----------- --------- --------- ----------- ------ ---------
---------- ----------- --------- --------- ----------- ------ ---------
</TABLE>
(a) Represents amount allocated to in process research and development
activities.
(b) Represents amount allocated to acquired internally developed technology.
F-18
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 3--UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
MERGER ADJUSTMENTS OFFERING ADJUSTMENTS
------------------------------------------ PRO FORMA -------------------------------
(A) (B) (C) (D) ADJUSTMENTS (E) (F) (G)
--------- --------- --------- --- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... 66,889 (59,186) (5,279)
Accounts receivable, net.......
Prepaid and other current
assets....................... (3,113)
--------- --------- --- --- ----------- --------- --------- ---------
Total current assets....... 63,776 (59,186) (5,279)
Property and equipment, net...... 273 273
Other assets..................... 700 (700) -- 14,664
Goodwill, net.................... 70,331 300 70,631
--------- --------- --- --- ----------- --------- --------- ---------
Total assets............... 71,304 (700) 300 70,904 63,776 (44,522) (5,279)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short term debt................ (5,279)
Accounts payable...............
Accrued expenses............... (2,534)
Other current liabilities...... 300 300
Payable to shareholders of
Founding Companies........... 44,522 44,522 (44,522)
--------- --------- --- --- ----------- --------- --------- ---------
Total current
liabilities.............. 44,522 300 44,822 (2,534) (44,522) (5,279)
Long-term debt, less current
maturities...................... (1,669) (1,669)
Other long term liabilities......
--------- --------- --- --- ----------- --------- --------- ---------
Total liabilities.......... 44,522 (1,669) 300 43,153 (2,534) (44,522) (5,279)
Stockholders' equity
Preferred Stock................ (2)
Common Stock................... (3,143) (3,143) 2
Treasury stock................. 1,867 1,867
Additional paid-in capital..... (44,522) 74,821 30,299 66,310
Retained earnings.............. (572) (700) (1,272)
--------- --------- --- --- ----------- --------- --------- ---------
Total stockholders'
equity................... (44,522) 72,973 (700) 27,751 66,310 -- --
--------- --------- --- --- ----------- --------- --------- ---------
Total liabilities and
stockholders' equity..... 71,304 (700) 300 70,904 63,776 (44,522) (5,279)
--------- --------- --- --- ----------- --------- --------- ---------
--------- --------- --- --- ----------- --------- --------- ---------
<CAPTION>
POST
MERGER
ADJUSTMENTS
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...... 2,424
Accounts receivable, net.......
Prepaid and other current
assets....................... (3,113)
-----------
Total current assets....... (689)
Property and equipment, net......
Other assets..................... 14,664
Goodwill, net....................
-----------
Total assets............... 13,975
LIABILITIES AND STOCKHOLDERS' EQU
Current liabilities
Short term debt................ (5,279)
Accounts payable............... --
Accrued expenses............... (2,534)
Other current liabilities......
Payable to shareholders of
Founding Companies........... (44,522)
-----------
Total current
liabilities.............. (52,335)
Long-term debt, less current
maturities...................... --
Other long term liabilities......
-----------
Total liabilities.......... (52,335)
Stockholders' equity
Preferred Stock................ (2)
Common Stock................... 2
Treasury stock.................
Additional paid-in capital..... 66,310
Retained earnings..............
-----------
Total stockholders'
equity................... 66,310
-----------
Total liabilities and
stockholders' equity..... 13,975
-----------
-----------
</TABLE>
F-19
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 3--UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
- ------------------------
(a) Records the liability for the cash portion of the consideration to be paid
to the stockholders of the Founding Companies in connection with the
Combinations.
(b) Records the purchase of the Founding Companies, consisting of $44,522 (net
of $14,664 of earnout) in cash and 2,984,476 shares of common stock valued
at $11.25 per share (or $33,575), for a total estimated purchase price of
$78,097. Adjustment also reflects $467 of certain assets which will not be
acquired and $1,669 of certain liabilities which will not be assumed in the
Combinations and the allocation of $700 of the purchase price to acquired
research and development activities (in-process research and development)
and $740 of acquired internally developed software at a Founding Company.
The excess purchase price over the fair value of the net assets acquired is
$70,331.
(c) Records the write-off of the acquired in-process research and development
from a Founding Company.
(d) Records the net deferred income tax liability attributable to the temporary
differences between the financial reporting and tax basis of assets and
liabilities held in S Corporations of $300 at certain Founding Companies.
(e) Records the cash proceeds from the issuance of shares of DMS Common Stock
net of estimated offering costs (based on an assumed initial public offering
of $ per share). Offering costs primarily consist of underwriting
discounts and commissions, accounting fees, legal fees and printing
expenses.
(f) Records the cash portion of the consideration to be paid to the stockholders
of the Founding Companies in connection with the Combinations ($ ) to
be paid from proceeds of the Offering and the loan receivable of $14,664
related to earnout.
(g) Records the use of a portion of the proceeds from the Offering to repay
short-term debt assumed in the Combinations.
F-20
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 4--UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statements of
operations adjustments:
FOR THE YEAR ENDED DECEMBER 31, 1996:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................................... (9,705) (9,705)
Cost of Revenues....................................... (8,448) (8,448)
--------- --- --------- --------- --------- ------
Gross Profits........................................ (1,257) (1,257)
Operating expenses:
Sales and marketing.................................... (769) (769)
General and administrative expenses.................... (1,783) (319) 120 (1,982)
Other operating expenses............................... (2,251) (2,251)
Depreciation and amortization.......................... -- 2,074 (58) 2,016
--------- --- --------- --------- --------- ------
Operating income (loss).............................. 1,783 319 (2,074) 1,701 1,729
Other (income) expense:
Interest expense
Other, net...........................................
--------- --- --------- --------- --------- ------
Income (loss) before provision for income taxes........ 1,783 319 (2,074) 1,701 1,729
Provision for income taxes............................. -- -- 1,379 1,379
--------- --- --------- --------- --------- ------
Net income (loss)...................................... 1,783 319 (2,074) 1,701 (1,379) 350
--------- --- --------- --------- --------- ------
--------- --- --------- --------- --------- ------
</TABLE>
F-21
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 4--UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...............................................
Cost of Revenues.......................................
--------- --- --------- --------- --------- ------
Gross Profits........................................
Operating expenses:
Sales and marketing....................................
General and administrative expenses.................... (875) (621) (1,496)
Other operating expenses...............................
Depreciation and amortization.......................... 1,557 1,557
--------- --- --------- --------- --------- ------
Operating income (loss).............................. 875 621 (1,557) (61)
Other (income) expense:
Interest expense
Other, net...........................................
--------- --- --------- --------- --------- ------
Income (loss) before provision for income taxes........ 875 621 (1,557) (61)
Provision for income taxes............................. 1,455 1,455
--------- --- --------- --------- --------- ------
Net income (loss)...................................... 875 621 (1,557) (1,455) (1,516)
--------- --- --------- --------- --------- ------
--------- --- --------- --------- --------- ------
</TABLE>
F-22
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 4--UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................................ (6,879) (6,879)
Cost of Revenues........................................ (5,912) (5,912)
--
--------- --------- --------- --------- ------
Gross Profits......................................... (967) (967)
Operating expenses:
Sales and marketing..................................... (248) (248)
General and administrative expenses..................... (1,541) (67) (125) (1,733)
Other operating expenses................................ (1,125) (1,125)
Depreciation and amortization........................... 1,557 (56) 1,501
--
--------- --------- --------- --------- ------
Operating income (loss)............................... 1,541 67 (1,557) 587 638
Other (income) expense:
Interest expense
Other, net............................................
--
--------- --------- --------- --------- ------
Income (loss) before provision for income taxes......... 1,541 67 (1,557) 587 638
Provision for income taxes.............................. 1,060 1,060
--
--------- --------- --------- --------- ------
Net income (loss)....................................... 1,541 67 (1,557) 587 (1,060) (422)
--
--
--------- --------- --------- --------- ------
--------- --------- --------- --------- ------
</TABLE>
- ------------------------
(a) Reflects the reductions in salaries, bonuses and benefits to the owners of
the Founding Companies to which they have agreed prospectively.
(b) Reflects the reduction in royalty payments made by certain Founding
Companies in accordance with franchise agreements which will be terminated
as a result of the Combinations.
(c) Reflects the amortization of goodwill to be recorded as a result of the
Combinations over 5 to 40-year estimated lives. The average amortization
period is 33.9 years. The estimated lives were determined based on an
analysis of the individual Founding Companies, which included the following
factors (a) the length of time the company has been in business (b)
comparable companies within the same industry and (c) the technology of the
company.
(d) Reflects the disposal of a segment of a business at one Founding Company.
Approximately 80% of the segment was disposed of subsequent to the June 30,
1997 balance sheet and management has a formal plan to dispose of the
remaining portion of the segment prior to the close of the Combinations.
(e) Reflects the incremental provision for federal and state income taxes
assuming all entities were subject to federal and state income tax and
relating to the other statements of operations' adjustments assuming a
corporate income tax rate of 40% and that a majority of the goodwill is
non-deductible.
F-23
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 5--UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
(CONTINUED)
Includes (i) shares issued to Management of DMS Corp., (ii) shares
issued to the owners of the Founding Companies, and (iii) of the
shares sold in the Offering necessary to pay the cash portion of the Purchase
Consideration.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Dispatch Management Services Corp.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Dispatch Management Services Corp.
at September 30, 1997, and the results of its operation and its cash flow for
the period from inception (November 12, 1996) to September 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the realization of the recorded assets and liabilities is
subject to the receipt of future proceeds which are currently anticipated from a
public offering. Should such proceeds not be received, there is substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Detroit, Michigan
December 5, 1997
F-25
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
<CAPTION>
ASSETS
<S> <C>
Cash and equivalents............................................................................... $ 820
Accounts receivable................................................................................ 24
Prepaid expenses................................................................................... 40
------
Total current assets........................................................................... 884
------
Equipment, net..................................................................................... 32
Debt issue costs, net of amortization of $3........................................................ 16
Goodwill, net of amortization of $2................................................................ 276
Deposit (Note 7)................................................................................... 323
Deferred offering costs............................................................................ 3,113
------
TOTAL ASSETS................................................................................... $ 4,644
------
------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Accrued liabilities................................................................................ $ 2,534
Accrued interest................................................................................... 19
Accounts payable to related parties................................................................ 36
------
Total current liabilities...................................................................... 2,589
Note payable (Note 6).............................................................................. 857
------
Total liabilities.............................................................................. 3,446
------
Stockholders' equity
Preferred stock, $.01 par, 10,000,000 shares authorized
Series A 176,515 shares issued and outstanding................................................. 2
Series B 100 shares issued and outstanding..................................................... --
Common stock, $.01 par 100,000,000 shares authorized, 10 shares issued and outstanding........... --
Additional paid-in capital......................................................................... 1,404
Accumulated deficit................................................................................ (208)
------
Total stockholders' equity..................................................................... 1,198
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $ 4,644
------
------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------
SERIES A SERIES B ADDITIONAL
COMMON PREFERRED PREFERRED COMMON PREFERRED PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK STOCK CAPITAL DEFICIT
----------- --------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization of
Company.......................... 10 $ -- $ -- $ 2 $
Issuance of Series A preferred
stock............................ 147,935 2 860
Issuance of Series A preferred
stock in relation to Note payable
(Note 6)......................... 28,580 167
Issuance of Series B preferred
stock in relation to acquisition
(Note 3)......................... 100 375
Net loss........................... (208)
----------- --------- --- ----------- ----------- ----------- -----
September 30, 1997................. 10 176,515 100 $ -- $ 2 $ 1,404 $ (208)
----------- --------- --- ----------- ----------- ----------- -----
----------- --------- --- ----------- ----------- ----------- -----
<CAPTION>
TOTAL
---------
<S> <C>
Initial capitalization of
Company.......................... $ 2
Issuance of Series A preferred
stock............................ 862
Issuance of Series A preferred
stock in relation to Note payable
(Note 6)......................... 167
Issuance of Series B preferred
stock in relation to acquisition
(Note 3)......................... 375
Net loss........................... (208)
---------
September 30, 1997................. $ 1,198
---------
---------
</TABLE>
The above statement summarizes stockholders' equity activity since the
inception of DMS LLC conformed to the current capital structure of the Company.
F-27
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(NOVEMBER 12, 1996) TO
SEPTEMBER 30, 1997
-----------------------
<S> <C>
Revenue from license fees (Note 3)......................................................... $ 219
Cost of sales (Note 3)..................................................................... 195
-----
Gross margin........................................................................... 24
General and administrative expense......................................................... 191
Depreciation and amortization.............................................................. 3
-----
Loss from operations................................................................... (170)
Interest expense........................................................................... 42
Interest income............................................................................ (4)
-----
Net income before provision for income taxes............................................... (208)
Provision for income taxes................................................................. --
-----
Net loss............................................................................... $ (208)
-----
-----
</TABLE>
F-28
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(NOVEMBER 12, 1996)
TO
SEPTEMBER 30, 1997
---------------------
<S> <C>
Cash flows from operating activities:
Net loss................................................................................ $ (208)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization......................................................... 3
Accreted interest expense............................................................. 26
Changes in assets and liabilities:
Accounts receivable and prepaid expenses............................................ 31
Accrued liabilities, interest and payables.......................................... 2,589
Deferred offering costs............................................................. (3,113)
-------
(672)
Cash flows from investing activities:
Purchase of equipment................................................................... (33)
Deposit related to acquisition.......................................................... (323)
-------
(356)
Cash flows from financing activities:
Proceeds from note payable.............................................................. 981
Proceeds from issuance of stock......................................................... 865
-------
1,846
Acquired cash from Kiwi Express Corp. LLC................................................. 2
-------
Net increase in cash and cash equivalents................................................. $ 820
-------
-------
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
As discussed in Note 3, the Company acquired Kiwi Corp. in a non-cash
transaction. Acquired net assets of Kiwi were approximately $97 and mainly
consisted of receivables from the Company.
F-29
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Dispatch Services Management Corp. (the "Company") was incorporated on
September 9, 1997. Dispatch Management Services LLC ("DMS LLC") was established
in November 1996 to create a nationwide network of same-day, on-demand delivery
services and was merged into the Company effective September 9, 1997. The owners
of DMS LLC, in connection with the merger, received in exchange for their
ownership interest in DMS LLC, common and preferred stock of the Company as
described further in Note 2. The merger was consummated to facilitate an initial
public offering of securities and was accounted for at historical cost because
the same shareholder group controlled both entities.
The Company intends to acquire a number of U.S. and foreign business (the
"Mergers"), upon consummation of an initial public offering (the "Offering") of
its common stock, and, subsequent to the Offering, continue to acquire through
merger or purchase, similar companies to expand its operations.
The Company has not conducted any significant operations to date, with
activities primarily related to the Offering and the Mergers. As of September
30, 1997, approximately $3,113 has been incurred in connection with the
Offering, and the Company has capitalized these costs as deferred offering
costs. These costs include consulting, legal and accounting fees which will be
offset against the proceeds of the Offering at closing. The Company is dependent
upon the Offering to execute the pending Mergers. There is no assurance that the
pending Mergers discussed will be completed or that the Company will be able to
generate future operating revenues.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
EQUIPMENT
Equipment generally consists of the cost of computers and office equipment
and which is being depreciated over an estimated useful life of 3 years.
Depreciation expense through September 30, 1997 aggregated $1.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of approximately three months or less at date of purchase to
be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes payable and accrued expenses approximates fair value
because of the short maturity of these instruments.
REVENUE RECOGNITION
Revenue related to sub-license fees is recognized when earned.
F-30
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
The carrying value of goodwill is assessed for recoverability by management
based on an analysis of future undiscounted cash flows from the underlying
operations. Management believes that there has been no impairment of goodwill at
September 30, 1997.
2. STOCKHOLDERS' EQUITY
Under the terms of the merger agreement of DMS LLC into the Company, a total
of 2,000,000 shares of Class A common stock of DMS LLC was exchanged for ten
shares of common stock of the Company; and each share of Class B common stock of
DMS LLC was exchanged for one share of Series A preferred stock of the Company.
Each share of Series A preferred stock will, upon the initial public offering of
securities, be converted into one share of common stock should the initial
public offering price be greater than $8.33. To the extent that the initial
public offering price is less than $8.33 per share, additional shares of common
stock will be issued such that the total value of the common stock received for
each share of Series A preferred stock will be $8.33.
In early October 1997, the Company issued 1,715 shares of Series A preferred
stock for consideration of approximately $10.
The Company's Board of Directors has adopted and the Company's stockholders
have approved a 1997 Stock Incentive Plan which is administered by the
Compensation Committee of the Company's Board of Directors (the "Committee").
The terms of the any option awards will be established by the Committee. The
Company expects to grant stock options to purchase approximately 591,000 shares
of Common Stock to employees of the Company at the initial public offering
price.
Statement of Financial Standards No. 123, "Accounting for Stock-Based
Compensation", allows entities to choose between a new fair value based method
of accounting for employee stock options or similar equity instruments and the
current intrinsic, value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25. ("APB No. 25"). Entities electing to remain
with the accounting in APB No. 25 must make pro forma disclosures of net income
and earnings per share as of the fair value method of accounting had been
applied. The Company will provide pro forma disclosure of net income and
earnings per share, as applicable, in the notes to future consolidated financial
statements.
3. ACQUISITION OF KIWI EXPRESS SOFTWARE LLC
On September 9, 1997, the Company acquired Kiwi Express Software LLC
("Kiwi") for consideration of 100 shares of Series B preferred stock. The
shareholders of Kiwi are also among the shareholders of the Company. Each share
of Series B preferred stock will, upon the initial public offering of the
Company's securities, be automatically converted into sufficient shares of
common stock, which will be subject to certain restrictions, such that the
aggregate consideration received by the Series B stockholders will equal $500.
The acquisition is accounted for as a purchase as no one shareholder controlled
both Kiwi and the Company. Goodwill related to the acquisition of Kiwi
aggregated $278 and is amortized over an estimated life of seven years.
Amortization expense through September 30, 1997 is approximately $2.
Kiwi's revenues were entirely generated through a software license and
development agreement established in December 1996 with the Company. Under this
agreement, the Company was granted an exclusive world-wide license for the use
of certain proprietary courier software owned by Kiwi and the ability to
sub-license the use of the software to courier companies. To the extent the
Company sub-licensed the use of the Kiwi software, the Company was required pay
Kiwi a license fee equal to a defined license
F-31
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
3. ACQUISITION OF KIWI EXPRESS SOFTWARE LLC (CONTINUED)
percentage (1%) of the sub-licensee's adjusted receipts related to
point-to-point delivery services. Through September 30, 1997, the Company
received approximately $219 of sub-license fees from courier companies using the
Kiwi software, of which $195 was related to periods prior to September 9, 1997
and fully remitted to Kiwi. Since Kiwi's revenues were solely from the Company,
and Kiwi was formed approximately the same time as the Company, pro forma
results of operations as if the acquisition occurred at November 12, 1996 has
not been presented because information is not deemed meaningful.
4. 1-800-DELIVER AGREEMENT
The Company has entered into a license agreement with a corporation for the
use of certain toll-free telephone numbers. The terms of the licensing agreement
required the Company to make an initial payment of $5 followed by monthly
payments thereafter of $1. The Company has the option to purchase the license
outright for a price of $100 with the sum of the initial payment and one-half of
all the license fees paid (not to exceed $50) being credited towards the
purchase price. At September 30, 1997, approximately $15 has been paid related
to this license agreement. As the phone number will not be utilized for
receiving delivery orders until after the Offering, this cost has been included
in deferred offering costs on the accompanying balance sheet.
5. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). For the
Company, SFAS No. 128 will be effective for the year ended December 31, 1997.
SFAS No. 128 simplifies the standards required under current accounting rules
for computing earnings per share and replaces the presentation of primary
earnings per share and fully-diluted earnings per share with a presentation of
basic earnings per share ("basic EPS") and diluted earnings per share ("diluted
EPS"). Basic EPS excludes dilution and is determined by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if securities and other contracts to issue common stock were
exercised or converted into common stock. Diluted EPS is computed similarly to
fully-diluted earnings per share under current accounting rules. The
implementation of SFAS No. 128 is not expected to have a material effect on the
Company's earnings per share as determined under current accounting rules.
Historical earnings per share has not been presented as such amounts are not
deemed meaningful due to the significant change in the Company's capital
structure that will occur on the consumation of the offering.
6. NOTE PAYABLE
During July 1997 the Company entered into a $1,000 loan agreement with DMS
Equity Investors Limited Partnership (" Partnership"), an unrelated party. This
note bears interest at the rate of 10% and matures the earlier of the following:
(1) a date eighteen months after the date of the note, or, (2) the closing date
of the initial public offering of the equity securities. On the maturity date,
the unpaid principal balance and accrued interest shall be due and payable in
full. The note is secured by substantially all of the assets of the Company.
In conjunction with entering into the loan agreement, the Company entered
into separate investment agreements with the members of the Partnership. Under
the terms of the investment agreements, the members of the partnership were able
to purchase 28,580 shares of common stock of DMS LLC which represented 1.4% of
the then outstanding shares for $.10/share. The members of the partnership also
have
F-32
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
6. NOTE PAYABLE (CONTINUED)
certain anti-dilution rights which entitle them to continue to own 1.4% of the
common stock of the Company calculated on a fully diluted basis after giving
effect to the issuance of securities in an initial public offering. In
accordance with Accounting Principles Board Opinion No. 14. ("APB No. 14")
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants",
the portion of the note proceeds which is allocable to the investment agreement
is considered paid-in capital. Accordingly, based on the discounted stock price,
additional paid-in capital of $164 has been recognized and a related amount of
interest expense will be recognized through the maturity date of the note.
Debt issue costs of $19 were incurred related to this note which will be
amortized over eighteen months. Interest and amortization expense recognized
related to this note aggregate $42 through September 30, 1997.
7. DEPOSIT
In August 1997 the Company entered into a definitive share purchase
agreement to acquire the outstanding shares of Brookside Systems and Programming
Limited ("Brookside") for approximately 1.8 million pounds sterling effective
contemporaneously with the Offering. Brookside develops and markets software to
the courier industry in the United Kingdom. In accordance with the share
purchase agreement, the Company made a non-refundable down-payment of
approximately $323.
8. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------
<S> <C>
Accrued accounting $ 1,886
Accrued legal 543
Other 105
------
$ 2,534
------
</TABLE>
9. UNAUDITED SUBSEQUENT EVENTS
The Company has signed definitive agreements to acquire by merger or
purchase certain assets and liabilities from approximately forty courier
companies and one software company (Founding Companies) to be effective
contemporaneously with the Offering. The aggregate consideration that will be
paid by the Company to acquire the Founding Companies is approximately $59.2
million in cash including the $14.7 million earn-out and $44.8 million in value
of shares in common stock of DMS.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Members and Stockholders
Earlybird Courier Service, LLC,
and Total Management Support Services, LLC
We have audited the accompanying combined balance sheets of Earlybird
Courier Service, LLC, Total Management Support Services, LLC and their
affiliates (collectively, the "Company"), which is comprised of the companies
listed in Note 1, as of December 31, 1996 and September 30, 1997, and the
related combined statements of operations and retained earnings (accumulated
deficit), and cash flows for each of the two years in the period ended December
31, 1996 and the nine months ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Earlybird Courier
Service, LLC, Total Management Support Services, LLC and their affiliates at
December 31, 1996 and September 30, 1997 and the combined results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996 and the nine months ended September 30, 1997 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
November 11, 1997
F-34
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 6 $ 3
Accounts receivable, less allowance for doubtful accounts of $50 (1996) and $80
(1997) (NOTE 5).................................................................. 2,462 3,002
Prepaid expenses................................................................... 99 106
Other receivable (NOTE 2).......................................................... -- 1,000
Other current assets............................................................... 2 --
Due from stockholder (NOTE 9)...................................................... 350 350
------------ -------------
Total current assets................................................................. 2,919 4,461
Property and equipment--net (NOTES 4 AND 5).......................................... 356 127
Intangible assets--net of accumulated amortization of $431 (1996) and $470 (1997)
(NOTE 5)........................................................................... 65 26
Due from affiliate................................................................... 33 --
Other noncurrent assets.............................................................. 100 86
------------ -------------
$ 3,473 $ 4,700
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable, current portion (NOTE 5)............................................ $ 1,426 $ 1,539
Accounts payable................................................................... 866 675
Accrued salaries and payroll taxes payable......................................... 274 682
Accrued expenses................................................................... 587 327
Due to affiliate................................................................... -- 4
Allowance for loss from discontinued operations (NOTE 2)........................... -- 245
Other current liabilities.......................................................... 5 5
------------ -------------
Total current liabilities............................................................ 3,158 3,477
Notes payable (NOTE 5)............................................................... 857 717
Subordinated notes payable (NOTE 5).................................................. 900 900
Commitments and contingencies (NOTE 7)
Stockholders' deficiency (NOTE 3):
Common stock....................................................................... 5 5
Additional paid-in capital......................................................... 69 69
Treasury stock..................................................................... (1,331) (1,331)
Retained earnings (accumulated deficit)............................................ (185) 863
------------ -------------
Total stockholders' deficiency....................................................... (1,442) (394)
------------ -------------
$ 3,473 $ 4,700
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-35
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(ACCUMULATED DEFICIT)
(DOLLARS IN THOUSANDS)
(NOTE 10)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31 SEPTEMBER 30
-------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales (NOTE 8)............................................. $ 21,967 $ 22,894 $ 16,724 $ 10,995
Cost of sales.................................................. 15,187 15,860 11,565 6,264
--------- --------- ----------- ---------
Gross margin................................................. 6,780 7,034 5,159 4,731
Operating expenses............................................. 4,595 5,436 4,017 2,255
Sales and marketing............................................ 1,072 1,072 703 280
General and administrative expenses............................ 506 670 388 102
Depreciation and amortization excluding amortization of
covenant not to compete...................................... 138 195 176 96
--------- --------- ----------- ---------
Operating income (loss)........................................ 469 (339) (125) 1,998
Other expenses:
Interest expense (NOTE 5).................................... 260 219 208 355
Covenant not to compete (NOTE 5)............................. 85 85 64 --
--------- --------- ----------- ---------
Income (loss) before provision for local income taxes.......... 124 (643) (397) 1,643
Provision for local income taxes (NOTE 6)...................... 30 2 2 70
--------- --------- ----------- ---------
Income (loss) from continuing operations....................... 94 (645) (399) 1,573
Discontinued operations:
Loss from operations of discontinued segment, net of gain
from the sale of certain assets (NOTE 2)................... -- -- -- (125)
Loss on discontinued segment, primarily provisions for
operating losses during phase-out period (NOTE 2).......... -- -- -- (400)
--------- --------- ----------- ---------
Net income (loss).............................................. 94 (645) (399) 1,048
Retained earnings (accumulated deficit), beginning of period... 366 460 460 (185)
--------- --------- ----------- ---------
Retained earnings (accumulated deficit), end of period......... $ 460 $ (185) $ 61 $ 863
--------- ----------- ---------
--------- --------- ----------- ---------
---------
Unaudited pro forma information (NOTE 6):
Historical income (loss) from continuing operations before
provision for income taxes................................. $ 94 $ (645) $ (399) $ 1,573
Provision (benefit) for income taxes......................... 42 (290) (180) 708
--------- --------- ----------- ---------
Pro forma net income (loss) from continuing operations......... $ 52 $ (355) $ (219) $ 865
--------- ----------- ---------
--------- --------- ----------- ---------
---------
</TABLE>
See accompanying notes.
F-36
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31
SEPTEMBER 30
-----------------
--------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Income (loss) from continuing operations...................................... $ 94 $ (645) $ (399) $ 1,573
Discontinued operations....................................................... -- -- -- (525)
--------- --------- --------- ---------
Net income (loss)............................................................. 94 (645) (399) 1,048
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 273 315 240 146
Allowance for doubtful accounts........................................... -- -- -- 30
Estimated loss on discontinued operations................................. -- -- -- 400
Gain on sale of certain assets............................................ -- -- -- (1,000)
Changes in operating assets and liabilities:
Accounts receivable....................................................... (390) (554) (525) (570)
Prepaid expenses.......................................................... (101) 7 2 (7)
Other current assets...................................................... 82 13 (13) 2
Due (to) from affiliate................................................... (1) (5) 8 37
Other noncurrent assets................................................... (71) (12) (60) 14
Accounts payable and accrued expenses..................................... 262 559 230 (452)
Accrued salaries and payroll taxes payable................................ 217 (128) 249 408
Deferred revenue.......................................................... 36 (36) (36) --
Other current liabilities................................................. (124) (2) (2) --
--------- --------- --------- ---------
Net cash provided by (used in) operating activities........................... 277 (488) (306) 56
INVESTING ACTIVITIES
Purchases of property and equipment........................................... (291) (75) (52) (32)
--------- --------- --------- ---------
Net cash used in investing activities......................................... (291) (75) (52) (32)
FINANCING ACTIVITIES
Proceeds from notes payable................................................... -- 925 649 140
Payments on notes payable..................................................... (553) (258) (187) (38)
Payments to former owners..................................................... (250) (100) (100) (129)
Financing costs............................................................... (96) -- -- --
Proceeds from subordinated notes payable...................................... 900 -- -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities........................... 1 567 362 (27)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......................... (13) 4 4 (3)
Cash and cash equivalents at beginning of period.............................. 15 2 2 6
--------- --------- --------- ---------
Cash and cash equivalents at end of period.................................... $ 2 $ 6 $ 6 $ 3
--------- --------- --------- ---------
--------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................................................. $ 250 $ 209 $ 192 $ 135
--------- --------- --------- ---------
--------- --------- --------- ---------
Local income taxes paid....................................................... $ 26 $ 2 $ 2 $ 1
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-37
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND 1997
1. BUSINESS ORGANIZATION
Earlybird Courier Service, LLC ("Earlybird LLC") is engaged in the logistics
and courier business in the New York Metropolitan area. Total Management Support
Services, LLC ("TMSS LLC") is engaged in full-service outsourcing and facilities
management for clients located in several major cities throughout the United
States. Total Management LLC is a holding company and the direct owner of
Earlybird LLC and TMSS LLC. On January 1, 1995, Earlybird Messenger Service,
Inc. transferred substantially all of its operating assets and liabilities to a
newly formed entity, Total Management LLC, which was immediately followed by a
contribution of these assets and liabilities from Total Management LLC to a
newly formed entity, Earlybird LLC. Simultaneously, Total Management Support
Services, Inc. transferred substantially all of its operating assets and
liabilities to Total Management LLC, which was immediately followed by a
contribution of these assets and liabilities from Total Management LLC to a
newly formed entity, TMSS LLC. Earlybird Messenger Service, Inc. and Total
Management Support Services, Inc. own 99% and 1%, respectively, of Total
Management LLC.
Effective January 1, 1995, one stockholder effectively owns approximately
90% of Earlybird LLC, TMSS LLC, Total Management LLC and Earlybird Messenger
Service, Inc. and approximately 60% of Total Management Support Services, Inc.
Earlybird LLC, TMSS LLC and Total Management LLC, in accordance with their
respective LLC agreements, will terminate no later than December 31, 2035.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of
Earlybird LLC, TMSS LLC, Total Management LLC, Earlybird Messenger Service, Inc.
and Total Management Support Services, Inc. all of which are under common
control (collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in the accompanying combined financial
statements.
DISCONTINUED OPERATIONS
On September 30, 1997, certain assets of the facilities management business
consisting primarily of six customer accounts were sold for $1 million,
resulting in a gain of $1 million. The sale proceeds is shown as other
receivable at September 30, 1997 and was received in October 1997. Under the
terms of the sale agreement, the Company entered into a covenant not-to-compete
in the facilities management business for
F-38
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a period of five years. Net sales, cost of sales, gross margin and accounts
receivable related to these customers were as follows (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------
1996 1996 1997
------------- ----------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Net sales............................................... $ 3,553 $ 2,527 $ 4,089
Cost of sales........................................... 2,844 1,976 3,215
------ ----------- ---------
Gross margin............................................ $ 709 $ 551 $ 874
------ ----------- ---------
------ ----------- ---------
Accounts receivable..................................... $ 218 $ 344 $ 489
------ ----------- ---------
------ ----------- ---------
</TABLE>
On October 1, 1997, the Board of Managers resolved to discontinue the
remainder of its facilities management business and the officers of the Company
were authorized to sell the remaining facilities management business or
discontinue such operations. Accordingly, the facilities management segment has
been accounted for as a discontinued operation as of September 30, 1997. The
loss from operations of the discontinued segment for the nine months ended
September 30, 1997 includes approximately $50,000 of depreciation expense, and
the aforementioned gain on the sale of certain assets of $1 million. The
estimate of anticipated losses during the phase-out period approximating
$400,000, includes the write-off of certain assets related to the discontinued
segment with a carrying value approximating $150,000. Assets related to the
discontinued segment consisting primarily of accounts receivable amounted to
approximately $1,170,000 at September 30, 1997.
UNAUDITED INFORMATION
The unaudited combined statement of operations and retained earnings
(accumulated deficit) and cash flows for the nine months ended September 30,
1996 reflects adjustments, all of which are of a normal recurring nature, which
are, in the opinion of management, necessary to a fair presentation. The results
for the interim period presented is not necessarily indicative of full year
results.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Courier services and facilities management revenues are recognized in the
period in which they are earned.
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents. The
Company maintains its cash principally in one financial institution.
F-39
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Depreciation of property and equipment is provided for on the straight-line
basis and accelerated methods over the estimated useful lives of the assets,
which range from three to eight years. Leasehold improvements are depreciated
over the lives of the respective leases.
INTANGIBLE ASSETS
Intangible assets consist of deferred financing costs and a covenant
not-to-compete. Deferred financing costs are amortized over the term of the
related financing and the covenant not-to-compete is amortized over the term of
the covenant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes payable and accrued expenses approximates fair value
because of the short maturity of these instruments. The estimated fair value of
long-term debt approximates its carrying value. Additionally, interest rates on
outstanding debt are at rates which approximate market rates for debt with
similar and average maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts receivable.
Receivables are not collateralized and, accordingly, the Company performs
ongoing credit evaluations of its customers to reduce the risk of loss.
F-40
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' DEFICIENCY (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
(NO PAR VALUE) RETAINED
----------------------------------------- ADDITIONAL EARNINGS
MEMBERS NUMBER OF PAID-IN TREASURY (ACCUMULATED
CAPITAL SHARES AMOUNT CAPITAL STOCK DEFICIT)
----------- --------------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total Management Support Services, Inc.
(200 shares authorized)................. $ -- 50 $ 1 $ 69 $ (199) $ 581
Earlybird Messenger Service, Inc. (200
shares authorized)...................... -- 35 4 -- (1,132) (215)
--
----------- ----- ----- --------- ------
Balance at December 31, 1994.............. -- 85 5 69 (1,331) 366
Earlybird Courier Service, LLC............ -- -- -- -- -- --
Total Management Support Services, LLC.... -- -- -- -- -- --
Total Management LLC...................... -- -- -- -- -- --
Net income for the year ended December 31,
1995.................................... -- -- -- -- -- 94
Balance at December 31, 1995.............. -- 85 5 69 (1,331) 460
Net loss for the year ended December 31,
1996.................................... -- -- -- -- -- (645)
Balance at December 31, 1996.............. -- 85 5 69 (1,331) (185)
Net income for the nine months ended
September 30, 1997...................... -- -- -- -- -- 1,048
Balance at September 30, 1997............. $ -- 85 $ 5 $ 69 $ (1,331) $ 863
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIENCY
------------
<S> <C>
Total Management Support Services, Inc.
(200 shares authorized)................. $ 452
Earlybird Messenger Service, Inc. (200
shares authorized)...................... (1,343)
------------
Balance at December 31, 1994.............. (891)
Earlybird Courier Service, LLC............ --
Total Management Support Services, LLC.... --
Total Management LLC...................... --
Net income for the year ended December 31,
1995.................................... 94
Balance at December 31, 1995.............. (797)
Net loss for the year ended December 31,
1996.................................... (645)
Balance at December 31, 1996.............. (1,442)
Net income for the nine months ended
September 30, 1997...................... 1,048
Balance at September 30, 1997............. $ (394)
</TABLE>
Earlybird Messenger Service, Inc. has treasury stock of 65 shares of common
stock and Total Management Support Services, Inc. has treasury stock of 50
shares of common stock.
4. PROPERTY AND EQUIPMENT
Property and equipment of continuing operations consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1996 1997
------------- -------------
<S> <C> <C>
Furniture and fixtures........................................... $ 572 $ 328
Leasehold improvements........................................... 199 63
Computer equipment............................................... 489 441
Automobiles...................................................... 8 8
------ ------
1,268 840
Less accumulated depreciation.................................... 912 713
------ ------
$ 356 $ 127
------ ------
------ ------
</TABLE>
F-41
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCING ARRANGEMENTS
NOTES PAYABLE
Notes payable consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1996 1997
------------- -------------
<S> <C> <C>
Equipment loan due to Sterling National Bank & Trust Company (a)..................... $ 17 $ --
Credit line with Sterling National Bank & Trust Company (a).......................... 1,214 1,354
Copytex equipment loan (b)........................................................... 21 --
Notes payable to former stockholder (c).............................................. 1,031 902
------ ------
2,283 2,256
Less current portion due within one year............................................. 1,426 1,539
------ ------
$ 857 $ 717
------ ------
------ ------
</TABLE>
(a) The Company has entered into several credit agreements with the Sterling
National Bank & Trust Company. These credit arrangements consisted of an
equipment loan with interest at 8.875% per annum and a short-term credit
line. The equipment loan was collateralized by equipment of the Company and
was guaranteed by officers of the Company. The loan principal was repaid
over 40 equal monthly installments with the last payment on April 1, 1997.
The short-term credit line is collateralized by accounts receivable and
bears interest at the bank's prime rate plus 1-1/4%.
(b) This loan for the purchase of equipment was repaid in 36 equal monthly
installments including interest through July 1997.
(c) Effective January 1, 1993, Earlybird Messenger Service, Inc. repurchased
stock of the company held by one of its stockholders. The purchase price was
$1,500,000 inclusive of interest at 8% per annum, payable in 96 equal
monthly installments commencing February 1, 1994. The principal amount due
on this note amounted to approximately $771,000 and $674,000 at December 31,
1996 and September 30, 1997, respectively. Earlybird Messenger Services,
Inc. also entered into a noncompetition agreement with this former
stockholder for a period of 4 years commencing January 1, 1993. As
consideration for entering into this agreement, Earlybird Messenger Service,
Inc. agreed to pay $500,000 to the former stockholder in 96 equal monthly
installments commencing in February 1, 1994. Accordingly, the covenant
not-to-compete was valued at the present value of the $500,000 to be paid
using a discount rate of 8%. The present value of the amount payable for the
covenant not-to-compete amounted to approximately $260,000 and $228,000 at
December 31, 1996 and September 30, 1997, respectively.
SUBORDINATED NOTES PAYABLE
On February 28, 1995, Total Management LLC entered into two term loan
commitments, with a venture capital group (the "Lender"), to borrow $900,000 in
installments of $500,000 and $400,000, respectively, at prime plus 1/2% with
repayment terms to commence no earlier than March 1, 1998. Simultaneously, Total
Management LLC issued to the Lender warrants to acquire up to 50% of the equity
of Total Management LLC, in lieu of repayment of the loans, subject to certain
terms and conditions. The warrants expire on February 28, 1998. Financing costs
incurred amounted to approximately $155,000 (of
F-42
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. FINANCING ARRANGEMENTS (CONTINUED)
which $60,000 was paid in 1994) and are being amortized over the three year
period ending in February 1998.
Effective January 1, 1996 through December 31, 1996, the Company was
entitled to defer the payment of interest on the subordinated notes payable.
Effective January 1, 1997, the lender irrevocably waived the payment of all
interest accrued for the period from January 1, 1996 to December 31, 1996 and
waived the accrual and payment of any future interest on the aforementioned
notes.
6. INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Total Management LLC, Earlybird LLC and TMSS LLC file
separate income tax returns and are treated as Partnerships for federal, New
York State and New York City income tax purposes. These entities file their tax
returns on the cash basis of accounting. Earlybird Messenger Service, Inc. and
Total Management Support Services, Inc. also file separate income tax returns
and have elected to be treated as S Corporations under Subchapter S of the
Internal Revenue Code. Accordingly, the Company is not subject to federal income
taxes because the stockholder includes the Company's income in his personal
income tax returns. The LLC's are subject to New York City unincorporated
business tax and the S Corporations are subject New York City Corporate income
taxes and New York State minimum tax.
The unaudited pro forma income tax information included in the combined
statements of operations and retained earnings (accumulated deficit) represents
an adjustment to record a provision (benefit) for income taxes as if the Company
had been subject to federal and state income taxes for all periods presented.
The provision (benefit) for pro forma income taxes on net income (loss) using an
effective rate of 45% differs from the amounts computed by applying the
applicable federal statutory rate (34%) due to state and local taxes.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Office space is leased under operating leases expiring through 2001. The
leases provide for minimum annual rent, plus expense escalations. The Company
leases certain equipment for periods up to five years under operating leases,
expiring through 2001.
The approximate minimum rental commitments under noncancellable leases for
office space and equipment for continuing operations are as follows (dollars in
thousands):
<TABLE>
<S> <C>
12 months ending September 30:
1998............................................... $ 175
1999............................................... 169
2000............................................... 29
2001............................................... 18
---------
Total minimum payments required...................... $ 391
---------
---------
</TABLE>
F-43
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense amounted to approximately $260,000, $355,000 and $215,000 for
the years ended December 31, 1995 and 1996 and for the nine months ended
September 30, 1997, respectively.
LITIGATION
In the normal course of business, the Company is subject to certain claims
and litigation, including unasserted claims. The Company and its counsel are of
the opinion that, based on information presently available, such legal matters
will not have a material adverse effect on the financial position or results of
operations of the Company.
8. SIGNIFICANT CUSTOMERS
For the years ended December 31, 1995 and 1996, one customer, an office
supplies manufacturer and distributor, accounted for 15% and 14%, respectively,
of the Company's total revenue.
For the year ended December 31, 1996, one customer, a financial services
firm, accounted for 12% of the Company's total revenue.
9. AMOUNT DUE FROM STOCKHOLDER
The amount due from stockholder is interest-free and has no fixed repayment
terms.
The Company has also guaranteed certain obligations of this stockholder
amounting to approximately $932,000 and $883,000 at December 31, 1996 and
September 30, 1997, respectively.
F-44
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. BUSINESS SEGMENTS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- -------------------------
1995 1996 1996 1997
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales:
Courier services.................................................... $ 13,867 $ 13,189 $ 9,845 $ 10,995
Facilities management............................................... 8,100 9,705 6,879 --
--------- --------- ------------ -----------
21,967 22,894 16,724 10,995
--------- --------- ------------ -----------
Cost of sales:
Courier services.................................................... 8,195 7,412 5,624 6,264
Facilities management............................................... 6,992 8,448 5,941 --
--------- --------- ------------ -----------
15,187 15,860 11,565 6,264
--------- --------- ------------ -----------
Gross margin:
Courier services.................................................... 5,672 5,777 4,221 4,731
Facilities management............................................... 1,108 1,257 938 --
--------- --------- ------------ -----------
6,780 7,034 5,159 4,731
--------- --------- ------------ -----------
Operating expenses:
Courier services.................................................... 3,873 3,185 2,228 2,255
Facilities management............................................... 722 2,251 1,789 --
--------- --------- ------------ -----------
4,595 5,436 4,017 2,255
--------- --------- ------------ -----------
Sales and marketing:
Courier services.................................................... 515 303 223 280
Facilities management............................................... 557 769 480 --
--------- --------- ------------ -----------
1,072 1,072 703 280
Depreciation and amortization:
Courier services.................................................... 107 137 104 96
Facilities management............................................... 31 58 72 --
--------- --------- ------------ -----------
138 195 176 96
--------- --------- ------------ -----------
General and administrative............................................ 506 670 388 102
--------- --------- ------------ -----------
Operating income (loss)............................................... $ 469 $ (339) $ (125) $ 1,998
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Identifiable assets:
Courier services.................................................... $ 2,403 $ 2,356 $ 2,775 $ 3,530
Facilities management............................................... 655 1,117 787 1,170
--------- --------- ------------ -----------
$ 3,058 $ 3,473 $ 3,562 $ 4,700
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Capital expenditures:
Courier services.................................................... $ 161 $ 23 $ 14 $ 11
Facilities management............................................... 130 52 38 21
--------- --------- ------------ -----------
$ 291 $ 75 $ 52 $ 32
--------- --------- ------------ -----------
--------- --------- ------------ -----------
</TABLE>
F-45
<PAGE>
EARLYBIRD COURIER SERVICE, LLC,
TOTAL MANAGEMENT SUPPORT SERVICES, LLC AND THEIR AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. AGREEMENT WITH DMS
Earlybird Courier Service, LLC and Total Management Support Services LLC
(collectively the LLC's) have entered into a definitive agreement dated
September 12, 1997, with Dispatch Management Services Corp. ("DMS") pursuant to
which DMS will acquire substantially all of the assets and assume substantially
all of the liabilities of the LLC's in exchange for cash and common stock of DMS
concurrent with the consummation of an initial public offering of the common
stock of DMS.
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Atlantic Freight Systems, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of combined stockholders' equity and of
combined cash flows present fairly, in all material respects, the financial
position of Atlantic Freight Systems, Inc. and affiliated companies as listed in
Note 1 at December 31, 1996 and September 30, 1997, and the results of their
operations and their cash flows for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Philadelphia, PA
December 4, 1997
F-47
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 71 $ 7
Accounts receivable, net.......................................................... 1,158 924
Prepaid and other current assets.................................................. 63 84
Related party receivable.......................................................... -- 19
------ ------
Total current assets.......................................................... 1,292 1,034
Property and equipment, net......................................................... 802 688
Other assets........................................................................ 119 183
------ ------
$ 2,213 $ 1,905
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.................................................................... $ -- $ 99
Accounts payable.................................................................. 794 696
Accrued expenses.................................................................. 64 68
Short-term lease obligations...................................................... 165 161
Related party payable............................................................. 361 275
------ ------
Total current liabilities..................................................... 1,384 1,299
Deferred income taxes............................................................... 243 93
Long-term lease obligations......................................................... 405 297
Other liabilities................................................................... 18 29
------ ------
Total liabilities............................................................. 2,050 1,718
------ ------
Commitments and contingencies: (Notes 6 and 9)
Stockholders' Equity:
Common stock $1.00 par value; 15,000 shares authorized; 15,000 shares issued...... 15 15
Paid-in-capital................................................................... -- 74
Retained earnings................................................................. 410 360
Less--Treasury stock, at cost (5,000 shares)...................................... (262) (262)
------ ------
Total stockholders' equity.................................................... 163 187
------ ------
Total liabilities and stockholders' equity.................................... $ 2,213 $ 1,905
------ ------
------ ------
</TABLE>
See accompanying notes to combined financial statements.
F-48
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales........................................................... $ 6,104 $ 8,728 $ 6,192 6,760
Cost of sales....................................................... (3,546) (5,941) (4,465) (4,791)
--------- --------- ----------- ---------
Gross margin...................................................... 2,558 2,787 1,727 1,969
Operating expenses.................................................. 1,454 2,232 1,379 1,557
Sales and marketing expenses........................................ 115 105 73 108
General and administrative expenses................................. 659 693 393 282
Depreciation and amortization....................................... 153 270 201 219
--------- --------- ----------- ---------
Operating income (loss)............................................. 177 (513) (319) (197)
--------- --------- ----------- ---------
Other (income)/expense
Interest expense.................................................. 43 83 29 50
Other (income)/expense, net....................................... (12) 36 16 (48)
--------- --------- ----------- ---------
Income (loss) before income taxes................................... 146 (632) (364) (199)
Provision (benefit) for income taxes................................ 76 (123) (57) (149)
--------- --------- ----------- ---------
Net income (loss)................................................... $ 70 $ (509) $ (307) $ (50)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-49
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
NUMBER OF
SHARES AMOUNT PAID-IN-CAPITAL TREASURY STOCK RETAINED EARNINGS TOTAL
--------------- ----------- ----------------- --------------- ------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994...................... 10,000 $ 15 $ (262) $ 849 $ 602
1995 Net income............. 70 70
------ --- --- ----- ----- ---------
Balance at December 31,
1995...................... 10,000 15 (262) 919 672
------ --- --- ----- ----- ---------
1996 Net loss............... (509) 93
Balance at December 31,
1996...................... 10,000 15 (262) 410 163
------ --- --- ----- ----- ---------
Addition to paid-in-
capital................... $ 74 74
Nine-months ended September
30, 1997 net loss......... (50) (50)
------ --- --- ----- ----- ---------
Balance at September 30,
1997...................... 10,000 $ 15 $ 74 $ (262) $ 360 $ 187
------ --- --- ----- ----- ---------
------ --- --- ----- ----- ---------
</TABLE>
See accompanying notes to financial statements
F-50
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ------------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................................... $ 70 $ (509) $ (307) $ (50)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities
Depreciation and amortization........................................... 153 270 201 219
Changes in assets and liabilities:
Accounts receivable................................................... (163) (208) (362) 233
Related party receivable.............................................. (22) 125 124 (19)
Prepaid and other current assets...................................... (3) (10) (81) (21)
Other assets.......................................................... (51) (14) (17) (64)
Accounts payable...................................................... 123 425 164 (98)
Accrued expenses and other liabilities................................ 85 (8) (5) 10
Deferred income taxes................................................. 63 (85) 108 (150)
--------- --------- ----- ---------
NET CASH PROVIDED BY (USEDFOR) OPERATING ACTIVITIES................. 255 (14) (175) 60
--------- --------- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net.................................. (531) (414) (416) (98)
--------- --------- ----- ---------
NET CASH USED FOR INVESTING ACTIVITIES.............................. (531) (414) (416) (98)
--------- --------- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in line of credit................................................ -- -- -- 99
(Payments of) borrowings from related parties............................. (33) 282 396 (12)
Principal payments under lease obligations................................ 313 175 172 (113)
--------- --------- ----- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES................ 280 457 568 (26)
--------- --------- ----- ---------
NET INCREASE(DECREASE) IN CASH AND EQUIVALENTS............................ 4 29 (23) (64)
Cash and equivalents at beginning of the period........................... 38 42 42 71
--------- --------- ----- ---------
Cash and equivalents at end of the period................................. $ 42 $ 71 $ 19 $ 7
--------- --------- ----- ---------
--------- --------- ----- ---------
Cash paid for:
Interest................................................................ $ 43 $ 83 $ 66 $ 51
Income taxes............................................................ 0 3 5 1
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Atlantic Freight Systems, Inc.; Pacific Freight Systems, Inc.; Westchester
Putnam Freight Services, Inc.; Atlantic Freight Services, Inc.; and Atlantic
Freight of ATL, Inc. provide same day, on-demand delivery services under the
trade name of Atlantic Freight Systems, Inc. These services are provided to the
metropolitan and suburban areas surrounding Newark Airport (New Jersey), JFK
Airport (New York City), Stewart Airport (Newburgh, NY), Philadelphia Airport
(Pennsylvania), Atlanta Airport (Georgia), and Savannah Airport (Georgia).
Operations at the Philadelphia, Atlanta and Savannah Airports have been
discontinued or divested by September 30, 1997. See Note 10 for further
discussion.
These financial statements present the historical financial position,
results of operations and cash flows of these combined entities and their
consolidated subsidiaries during the periods presented. These combined companies
were centrally owned and managed for all periods presented and are collectively
referred to as "Atlantic Freight Systems, Inc." or the "Company" throughout
these financial statements. All significant intercompany transactions have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of approximately three months or less
at date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets
which generally range from 3-15 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/ payable, related parties
receivable/payable and accrued expenses approximates fair value because of the
short maturity of these instruments. The estimated fair value of other long-term
liabilities approximates its carrying value. Additionally, interest rates on
outstanding debt are at rates which approximate market rates for debt with
similar terms and average maturities.
F-52
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable. The Company
provides its services predominately to the air freight forwarding industry in
the New York metropolitan area. Receivables are not collaterized and
accordingly, the Company performs ongoing credit evaluations of its customers to
reduce the risk of loss. The Company's ten largest customers accounted for
approximately 64%, 65% and 60% of sales in 1995, 1996 and the nine months ended
September 30, 1997 respectively.
MAJOR CUSTOMERS
In 1995, the Company's two largest customers accounted for approximately 23%
and 14% of sales. In 1996, the Company's two largest customers accounted for
approximately 23% and 11% of sales. For the nine months ended September 30,
1997, the Company's two largest customers accounted for approximately 20% and
10% of sales.
FISCAL YEAR
The fiscal year and each quarter of the Company ends on the Sunday nearest
to the 31st. For ease of presentation, the year-end date is presented throughout
these financial statements as December 31, for 1995 and 1996 and the nine months
ended is presented as September 30, for 1997.
INCOME TAXES
The Company is a C-Corporation for federal and state income tax purposes.
The Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (FAS 109).
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data for the nine months ended September 30, 1996 is
unaudited; however, in the opinion of the Company, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim period.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995................... $ 29 $ 222 $ (185) $ 66
Year ended December 31, 1996................... $ 66 $ 536 $ (377) $ 225
Nine-months ended September 30, 1997........... $ 225 $ 24 $ (24) $ 225
</TABLE>
The increase in the allowance for doubtful accounts receivable as of
December 31, 1996 relates to bad debts associated with the Company's operations
in Philadelphia, Atlanta and Savannah.
F-53
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Equipment........................................................ $ 181 $ 227
Furniture and fixture............................................ 14 14
Vehicles......................................................... 963 1,017
Other............................................................ 122 122
------ ------
1,280 1,380
Accumulated depreciation and amortization........................ 478 692
------ ------
$ 802 $ 688
------ ------
------ ------
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997 was approximately $149, $270 and $202,
respectively. Vehicles totaling $862 at December 31, 1996 and September 30, 1997
represent capitalized leases.
5. LINE OF CREDIT
On January 15, 1997, the Company entered into a $100 line of credit
agreement with a maturity date of January 31, 1998. Commitment fees are nominal.
Interest is variable at a per annum rate equal to the sum of 3.50% plus the
30-day commercial paper rate (9.06% at September 30, 1997). Collateral on the
line of credit consists of an equity security portfolio owned by one of the
principal shareholders of the Company. The portfolio must be valued at an
aggregate value of no less than $150.
6. LEASE COMMITMENTS
The Company leases certain warehousing and office facilities and vehicles
under capital and operating leases expiring on various dates through 2000. The
leases generally provide for the lessee to pay taxes, maintenance, insurance and
certain other operating costs of the leased property. The leases on most of the
F-54
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. LEASE COMMITMENTS (CONTINUED)
properties contain renewal provisions. Future minimum lease payments required
under leases that have noncancelable lease terms in excess of one year at
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
FISCAL YEAR LEASES LEASES
- ------------------------------------------------------------------------------------------ ------------- -----------
<S> <C> <C>
1998...................................................................................... $ 223 $ 622
1999...................................................................................... 171 490
2000...................................................................................... 85 429
2001 and thereafter....................................................................... -- 1,192
----- -----------
Total minimum lease payments............................................................ 479 $ 2,733
-----------
-----------
Imputed interest.......................................................................... 21
-----
Present value of minimum capitalized lease payments..................................... 458
-----
Current portion........................................................................... 161
-----
Long-term capitalized lease obligations................................................... $ 297
-----
-----
</TABLE>
The Company subleases certain of these leased properties to certain
customers. Total rental income, recorded as a reduction in rental expense was
$120, $109 and $199 in 1995, 1996 and 1997, respectively. Rental expense charged
to operations was approximately $330, $431 and $396 for the years ended December
31, 1995 and 1996 and the nine months ended September 30, 1997, respectively.
The aggregate future minimum rentals for subleases are $453 at September 30,
1997.
7. INCOME TAXES
The provision (benefit) for income taxes comprises:
<TABLE>
<CAPTION>
NINE-MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------
1995 1996 1997
----- --------- ---------------
<S> <C> <C> <C>
Current tax expense
Federal................................................... $ 7 $ -- $ --
State and local........................................... 2 2 1
--- --------- -----
9 2 1
Deferred tax expense (benefit).............................. 67 (125) (150)
--- --------- -----
Provision (benefit) for income taxes........................ $ 76 $ (123) $ (149)
--- --------- -----
--- --------- -----
</TABLE>
F-55
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. INCOME TAXES (CONTINUED)
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
<TABLE>
<CAPTION>
NINE-MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------
1995 1996 1997
----- --------- ---------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate (35%).............. $ 71 $ (214) $ (43)
State taxes (net of federal benefit)........................ 13 (40) (8)
Other, net.................................................. (8) 131 (98)
--- --------- -----
Provision (benefit) for income taxes...................... $ 76 $ (123) $ (149)
--- --------- -----
--- --------- -----
</TABLE>
Temporary differences giving rise to the Company's deferred tax assets and
liabilities comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets
Tax loss carryforwards........................................ $ 251 $ 293
Bad debts..................................................... 25 62
Accrued liabilities........................................... 22 18
----- -----
Gross deferred tax assets....................................... 298 273
Deferred tax valuation allowance................................ (137) (71)
----- -----
Net deferred tax assets....................................... 161 302
Deferred tax liabilities
Cash to accrual adjustment.................................... 181 148
Property and equipment........................................ 223 247
----- -----
Net deferred tax liabilities.................................. $ (243) $ (93)
----- -----
----- -----
</TABLE>
At September 30, 1997, the Company has net operating loss carryovers of
approximately $818. Due to the change in ownership as described in Note 11,
there may be limitations on the amount of these net operating losses that can be
utilized to reduce future taxable income.
8. RELATED PARTY TRANSACTIONS
The Company provided distribution services to an affiliated air freight
services company, amounting to $130, $117 and $0 in 1995, 1996 and 1997,
respectively. In December 1995, the shareholders of the Company sold their
interest in the affiliated entity to a relative of one of the principal
shareholders of the Company.
The Company provided the affiliated company with certain administrative
services, including accounting and insurance administration activities. All
costs related to these services are charged to the affiliated
F-56
<PAGE>
ATLANTIC FREIGHT SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
company using allocation methods management believes are reasonable. The
allocated charges approximated $17, $30 and $0 in 1995, 1996 and 1997,
respectively.
The Company borrows from and/or loans to, the Company's shareholders and
various relatives of the shareholders. As of December 31, 1996 and September 30,
1997, the amounts owed to related parties were $361 and $275, respectively. As
of December 31, 1996 and September 30, 1997, the amounts due from related
parties were $0 and $19, respectively. All related party loans to/from the
Company are payable upon demand. On certain related party notes payable, the
Company pays interest at a rate of 10%. Interest expense totaled $17, $18 and
$12 for related party notes payable in 1995, 1996 and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings arising in the ordinary
course of business. Based upon the information presently available and the
Company's evaluation of the proceedings pending, management believes that the
adverse determination of any such proceedings or all of them combined will not
have a material adverse effect on the Company's business or financial position
or results of operations.
10. DIVESTITURES AND ACQUISITIONS
On December 31, 1996, the Company discontinued the operations of Atlantic
Freight Services Inc., the facility serving the Philadelphia Airport. In March
1997, the Company divested itself of its Atlanta operations of Atlantic Freight
of ATL, Inc. In June 1997, the Company sold Atlantic Freight of ATL, Inc., the
remaining operation serving the Savannah Airport. The cost of these divestitures
was not material to the combined financial position of the Company. However,
these operations combined accounted for $1,103 of revenues in 1996 and $312 of
revenues for the nine months ended in 1997; these facilities commenced
operations in 1996.
In June 1997, the Company reduced its ownership interest in Lognet, Inc., a
transportation industry internet service provider, from 65% to 0%. Proceeds from
the sale approximated $50.
In June 1997, the Company purchased the assets of Stewart Inc., a competitor
serving Stewart Airport, for approximately $100.
11. UNAUDITED SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which the Company
will merge with DMS. All outstanding shares of the Company will be exchanged for
cash and common stock of DMS concurrent with the consummation of the initial
public offering of the common stock of DMS.
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
Bullit Courier Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Bullit
Courier Services, Inc., and its subsidiaries at February 28, 1997 and February
29, 1996, and the results of their operations and their cash flows for each of
the three years in the period ended February 28, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Detroit, Michigan
September 11, 1997
F-58
<PAGE>
BULLIT COURIER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, SEP. 30,
1996 1997 1997
------------- ------------- -----------
<S> <C> <C> <C>
<CAPTION>
(UNAUDITED)
Assets
<S> <C> <C> <C>
Current assets
Cash and cash equivalents.............................................. $ 150 $ 63 $ 71
Accounts receivable, less allowance for uncollectible accounts of
$18.................................................................. 697 693 878
Other assets........................................................... 57 48 21
------ ----- -----------
Total current assets............................................... 904 804 970
Property and equipment, net.............................................. 112 99 95
Deferred tax asset--noncurrent........................................... 11 44 --
Other assets............................................................. 13 13 13
------ ----- -----------
Total assets....................................................... $ 1,040 $ 960 $ 1,078
------ ----- -----------
------ ----- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities
Notes payable to former shareholder.................................... $ 9 $ 17 $ 2
Line of credit......................................................... 50 154 154
Current portion long-term debt......................................... 34 34 34
Accounts payable....................................................... 232 314 181
Payroll taxes.......................................................... 80 26 22
Accrued expenses and other liabilities................................. 97 10 89
------ ----- -----------
Total current liabilities.......................................... 502 555 482
Note payable to former shareholder....................................... 17
Bank loans payable....................................................... 306 273 253
------ ----- -----------
Total long-term debt............................................... 323 273 253
------ ----- -----------
Total liabilities.................................................. 825 828 735
------ ----- -----------
Commitments and contingencies
Stockholders' equity
Common stock, no par value, authorized 200 shares; 60 issued and
outstanding.......................................................... 25 25 25
Less--treasury stock, 140 shares repurchased........................... (148) (148) (148)
Retained earnings...................................................... 338 255 466
------ ----- -----------
Total stockholders' equity......................................... 215 132 343
------ ----- -----------
Total liabilities and stockholders' equity......................... $ 1,040 $ 960 $ 1,078
------ ----- -----------
------ ----- -----------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
------------------------------------------- --------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, SEP. 30, SEP. 30,
1995 1996 1997 1996 1997
------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................................ $ 6,856 $ 6,704 $ 7,696 $ 4,364 $ 5,297
Cost of sales........................................ 4,270 4,119 4,639 2,694 3,090
------ ------ ------ --------- ---------
Gross margin....................................... 2,586 2,585 3,057 1,670 2,207
Operating expenses................................. 1,659 1,758 2,116 1,105 1,333
Sales and marketing................................ 346 373 358 194 190
General and administrative expenses................ 511 489 642 298 315
Depreciation....................................... 23 14 6 7 4
------ ------ ------ --------- ---------
Operating income (loss).............................. 47 (49) (65) 66 365
------ ------ ------ --------- ---------
Interest expense..................................... 8 8 107 9 52
Other income......................................... (5) (12) (56) (1) --
Income (loss) before provision (benefit) for income
taxes.............................................. 44 (45) (116) 58 313
Provision (benefit) for income taxes................. 27 (11) (33) 31 102
------ ------ ------ --------- ---------
Net income (loss).................................... $ 17 $ (34) $ (83) $ 27 $ 211
------ ------ ------ --------- ---------
------ ------ ------ --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE>
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
-------------------------- --------------------------
NUMBER RETAINED NUMBER
OF SHARES AMOUNT EARNINGS OF SHARES AMOUNT
------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Stockholders' equity, February 28, 1994........................ 60 $ 25 $ 355 140 $ (148)
Net income..................................................... 17
--
--- ----- --- -----
Stockholders' equity, February 28, 1995........................ 60 25 372 140 (148)
Net loss....................................................... (34)
--
--- ----- --- -----
Stockholders' equity, February 29, 1996........................ 60 25 338 140 (148)
Net loss....................................................... (83)
--
--- ----- --- -----
Stockholders' equity, February 28, 1997........................ 60 25 255 140 (148)
Net income (unaudited)......................................... 211
--
--- ----- --- -----
Stockholders' equity, Sep. 30, 1997 (unaudited)................ 60 $ 25 $ 466 140 $ (148)
--
--
--- ----- --- -----
--- ----- --- -----
<CAPTION>
TOTAL
---------
<S> <C>
Stockholders' equity, February 28, 1994........................ $ 232
Net income..................................................... 17
---------
Stockholders' equity, February 28, 1995........................ 249
Net loss....................................................... (34)
---------
Stockholders' equity, February 29, 1996........................ $ 215
Net loss....................................................... (83)
---------
Stockholders' equity, February 28, 1997........................ 132
Net income (unaudited)......................................... 211
---------
Stockholders' equity, Sep. 30, 1997 (unaudited)................ $ 343
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE>
BULLIT COURIER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
------------------------------------------------- ------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, SEP. 30, SEP. 30,
1995 1996 1997 1996 1997
--------------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss).................................... $ 17 $ (34) $ (83) $ 27 $ 211
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation....................................... 23 14 6 7 4
Deferred taxes..................................... (49) (11) (33) 11 44
Other.............................................. 16 -- 7 -- --
Changes in assets and liabilities
Accounts receivable................................ 98 (166) 4 51 (185)
Other current assets............................... (93) 44 9 (71) 27
Accounts payable................................... (59) 86 82 (20) (133)
Payroll taxes payable.............................. 111 (31) (54) (66) (4)
Other accrued expenses............................. 18 (12) (87) 32 79
----- --- ----- ----- ---
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES..................................... 82 (110) (149) (29) 43
----- --- ----- ----- ---
CASH FLOW FROM FINANCING ACTIVITIES
Repayments on note payable to former shareholder..... (51) (39) (9) (9) (15)
Repayments on long-term bank loans................... (31) (33) (33) (19) (20)
Short-term bank borrowings, net...................... 25 25 104 73 --
----- --- ----- ----- ---
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES..................................... (57) (47) 62 45 (35)
----- --- ----- ----- ---
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 25 (157) (87) 16 8
Cash and cash equivalents, beginning of year......... 282 307 150 150 63
----- --- ----- ----- ---
Cash and cash equivalents, end of year............... $ 307 $ 150 $ 63 $ 166 $ 71
----- --- ----- ----- ---
----- --- ----- ----- ---
SUPPLEMENTAL DATA
Cash paid for
Income taxes....................................... $ 89 $ 10 $ 31 $ 10 $ 12
Interest........................................... 8 8 107 9 52
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE>
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF THE BUSINESS
Bullit Courier Services, Inc. and Subsidiaries (the Company or Bullit) was
incorporated on March 30, 1978 under the laws of the State of New York. The
Company is organized into Bullit Services, Inc. (the Parent) and its two
wholly-owned subsidiaries. The subsidiary Bullit Messenger and Manpower, Inc.
(Messenger) conducts foot messenger services and the subsidiary Bullit Motor
Services, Inc., (Motor), performs trucking services.
Messenger operates the majority of its business in the mid and downtown
areas of Manhattan and services the small parcel (one to ten pounds) sector of
delivery needs. The majority of the Company's customers are based in Manhattan.
Deliveries are made by foot and through public transportation.
Motor operates the Company's headquarters in Brooklyn, New York. Motor
services the New York metropolitan region's light-end (10 to 500 pounds) and
freight (500 to 2,000 pounds) trucking needs. Motor is generally a rush delivery
service and operations are conducted 24 hours a day, 365 days a year.
Both Messenger and Motor service the same customers from a multi-industry
base including financial institutions, the garment center and textile firms and
printers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Through the fiscal year ended February 28, 1995, Spartan Worldwide Delivery,
Inc., (Spartan), an airborne delivery services business, and through the fiscal
year ended February 28, 1996, On-Line Automated Services, a computer consulting
business, were wholly-owned subsidiaries of Bullit. Both businesses were
operated at separate locations, conducted independent operations, and did not
share costs with the parent. Only the assets and operations of Bullit Services,
Inc., and its two wholly-owned subsidiaries that exist at February 28, 1997,
Messenger and Motor, are included, accordingly, the accompanying financial
statements exclude the effects of operations of Spartan and On-Line.
PRINCIPLES OF CONSOLIDATION
All significant intercompany balances and transactions are eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
balance sheet dates and the reported amounts of revenues and expenses for the
periods presented. Actual results may differ from such estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
F-63
<PAGE>
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately three
months or less at date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and Equipment are stated at cost and are depreciated using various
accelerated methods over the estimated useful lives of the assets or the terms
of the lease, whichever is shorter, as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Equipment.............................................................................. 5
Furniture.............................................................................. 7
Vehicles............................................................................... 5
Leasehold improvements................................................................. 31.5
</TABLE>
Expenditures for equipment, furniture, leasehold improvements and vehicles
are capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred. Upon disposition of property and equipment, the cost and
accumulated depreciation are removed from the related accounts, and any
resulting gain or loss is reflected in the results of operations for the period.
INCOME TAXES
The Company applies the liability method in accounting for income taxes in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS No.
109). Under this method, deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted rates and laws that will be in
effect when the differences are expected to reverse.
CONCENTRATION OF CREDIT RISK
The Company performs messenger and truck delivery services to businesses
located principally in the New York Metropolitan region. Financial instruments
which potentially subject the Company to credit risk consists primarily of
accounts receivable, and accordingly, the Company performs ongoing credit
evaluations of its customers to reduce the risk of loss. The Company grants
credit to customers in the ordinary course of business.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the company's financial instruments, including cash, accounts
receivable, notes payable and short-term borrowings, accounts payable, and other
accrued liabilities, the carrying amounts approximate fair value due to their
short maturities. Long-term floating rate notes are carried at amounts that
approximate fair value. The estimated fair value of long-term debt is primarily
based on borrowing rates currently available to the company for bank loans with
similar terms and maturities.
F-64
<PAGE>
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of September 30, 1997 and for the seven months
ended September 30, 1996 and September 30, 1997 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
3. TRADE RECEIVABLES
At February 29, 1996, and February 28, 1997, three customers represented
20%, 10%, and 9%; and 26%, 18% and 10%, respectively, of total receivables. For
the three years ended February 28, 1997, the three customers represented 19%,
11%, and 9%; and 23%, 14%, and 12%; and 28%, 17%, and 11%, respectively, of net
sales.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts consists of the following (in
thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended February 29, 1996...................................... $ 18 $ 3 $ 3 $ 18
Year ended February 28, 1997...................................... 18 117 117 18
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1997
--------------- ---------------
<S> <C> <C>
Furniture and equipment............................................................... $ 462 $ 462
Automobiles........................................................................... 38
Leasehold improvements................................................................ 104 104
----- -----
604 566
----- -----
Less--accumulated depreciation........................................................ 492 467
----- -----
Property and equipment, net........................................................... $ 112 $ 99
----- -----
----- -----
</TABLE>
6. DEBT
LONG-TERM DEBT
The Company has obtained a Small Business Administration (SBA) loan with a
financial institution for $405 to refinance its previous debt and provide
working capital. The balance is payable over eleven
F-65
<PAGE>
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. DEBT (CONTINUED)
years at a stated interest rate of 2.75% above prime rate in effect at the
beginning of each Adjustment Period, as defined in the loan agreement (11.0% at
February 28, 1997). There are no compensating balances, however, the loan is
personally guaranteed by the officers of the Company. At February 29, 1996 and
February 28, 1997, the current and long-term portions outstanding are as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
SBA loan...................................................................... $ 340 $ 307
Less--current portion......................................................... 34 34
--------- ---------
Total long-term............................................................. $ 306 $ 273
--------- ---------
--------- ---------
</TABLE>
Annual maturity on the SBA loan outstanding at February 28, 1997 is as
follows: 1998, $34; 1999, $34; 2,000, $34; 2001, $34; 2002, $34; 2003 and
thereafter, $137. Interest expense on the SBA loan for each of the three years
ended February 28, 1997 was $38, $8, and $8, respectively.
SHORT-TERM DEBT
In addition, the Company has a line of credit with the same financial
institution, which is renewed on an annual basis. At February 29, 1996 and
February 28, 1997, borrowings under this agreement were $50 and $154 payable at
11.25% and 11.50%, respectively. Interest expense related to the credit line for
each of the three years ended February 28, 1997 was: $2, $3, and $13. At
February 28, 1997, the unused borrowing capacity under the line of credit
totaled $46.
NOTE PAYABLE TO FORMER SHAREHOLDER
The Company has a note payable to a former shareholder at a stated annual
interest of 6% related to the purchase of outstanding stock. At February 29,
1996, and February 28, 1997, the amounts due to the shareholders were as
follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Note payable.............................................................................. $ 26 $ 17
Less--current portion..................................................................... 9 17
--- ---
Total long term......................................................................... $ 17 $ --
--- ---
--- ---
</TABLE>
F-66
<PAGE>
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. INCOME TAXES
The following are the components of the income tax provision:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Current
Federal............................................................... $ 16 $ -- $ --
State and local....................................................... 11
--- --- ---
27
Deferred
Federal............................................................... (11) (33)
State and local.......................................................
--- --- ---
(11) (33)
--- --- ---
Income tax provision (benefit)........................................ $ 27 $ (11) $ (33)
--- --- ---
--- --- ---
</TABLE>
Reconciliation between income tax expense/(benefit) and the income taxes
computed by applying the U.S. statutory rate to income before income taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
<S> <C> <C> <C>
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1996 1997
--------------- --------------- ---------------
Federal income tax provision computed at U.S. statutory rate............ $ 15 $ (15) $ (39)
State and local income taxes, net of federal benefit.................... 7
Meals and entertainment................................................. 5 4 6
--- --- ---
Income tax provision (benefit).......................................... $ 27 $ (11) $ (33)
--- --- ---
--- --- ---
</TABLE>
Temporary differences giving rise to the Company's deferred tax assets are
minimal.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases offices from unrelated parties under operating lease
arrangements. Future minimum lease payments under noncancelable operating leases
with an initial or remaining term in excess of one year in effect at February
28, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
1998................................................................................. $ 59
1999................................................................................. 38
---
Total............................................................................ $ 97
---
---
</TABLE>
F-67
<PAGE>
BULLIT COURIER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTIES
On a month-to-month basis the Company leases its corporate office building
and warehousing facilities from entities controlled by officers of the Company.
Rental expense paid to related parties for each of the three years ended
February 28, 1997 was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Corporate offices......................................................................... $ 105 $ 68 $ 68
Warehouses................................................................................ 131 68 68
--------- --------- ---------
Total..................................................................................... $ 236 $ 136 $ 136
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. UNAUDITED SUBSEQUENT EVENT
The Company and its stockholders have entered into a definitive agreement
with DMS Corporation pursuant to which the Company will merge with DMS. All
outstanding shares of the Company will be exchanged for cash and common stock of
DMS concurrent with the consummation of the initial public offering of the
common stock of DMS.
F-68
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Zoom Messenger Service, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations and changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Zoom Messenger
Service, Inc. (the Company) at December 31, 1996 and September 30, 1997, and the
results of its operations and its cash flows for the year ended December 31,
1996 and the nine months ended September 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has negative working capital, it has limited
availability under its working capital line and is not generating positive cash
flow from operations. Management's plan to address these issues are summarized
in Note 1. These matters raise substantial doubt about the Company's ability to
continue as a going concern. These financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Philadelphia, Pennsylvania
December 12, 1997
F-69
<PAGE>
ZOOM MESSENGER SERVICE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash.............................................................................. $ 16 $ 16
Accounts receivable, net of allowance for doubtful accounts of $10 and $15,
respectively.................................................................... 1,506 1,377
Prepaid and other current assets.................................................. 18 40
------ ------
Total current assets............................................................ 1,540 1,433
Property and equipment, net......................................................... 56 47
Intangible assets, net of accumulated amortization of $320 and $447,
respectively...................................................................... 526 398
Other assets........................................................................ 13 17
------ ------
$ 2,135 $ 1,895
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit.................................................................... $ 803 $ 900
Accounts payable.................................................................. 381 498
Accrued expenses.................................................................. 80 157
Shareholder payable............................................................... 129 166
Capital lease obligation, current................................................. 9 8
Customer list liability........................................................... 181 12
------ ------
Total current liabilities....................................................... 1,583 1,741
Customer list long term liability................................................... 15 --
Capital lease obligation, long term................................................. 10 2
------ ------
Total liabilities............................................................... 1,608 1,743
------ ------
Commitments and contingencies (Note 9)
Stockholder's Equity
Common stock; no par value; 220 shares authorized and outstanding................... -- --
Additional paid-in-capital.......................................................... 19 19
Retained earnings................................................................... 508 133
------ ------
527 152
------ ------
Stockholders' Equity................................................................ $ 2,135 $ 1,895
------ ------
------ ------
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
ZOOM MESSENGER SERVICE, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ----------------------
<S> <C> <C> <C>
1996 1996 1997
------------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Net sales................................................................... $ 8,404 $ 6,318 $ 6,524
Cost of sales............................................................... 6,314 4,954 4,964
------ ----------- ---------
Gross margin.............................................................. 2,090 1,364 1,560
Operating expenses.......................................................... 1,317 798 951
Sales and marketing expenses................................................ 173 70 194
General and administrative expenses......................................... 747 563 592
Depreciation and amortization............................................... 191 178 142
------ ----------- ---------
Operating income (loss)..................................................... (338) (245) (319)
------ ----------- ---------
Other income (expense)
Interest expense.......................................................... (63) (34) (73)
Other, net................................................................ 30 28 17
------ ----------- ---------
Net income (loss)........................................................... $ (371) $ (251) $ (375)
------ ----------- ---------
------ ----------- ---------
Unaudited pro forma information
Pro forma net income (loss) before provision for income taxes............. $ (371) $ (251) $ (375)
Benefit (provision) for income taxes...................................... 148 100 150
------ ----------- ---------
Pro forma net income (loss) (see Note 2).................................... $ (223) $ 151 $ (225)
------ ----------- ---------
------ ----------- ---------
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
ZOOM MESSENGER SERVICE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ ADDITIONAL RETAINED STOCKHOLDER'S
SHARES AMOUNT PAID-IN CAPITAL EARNINGS EQUITY
----------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995.......................... 220 $ -- $ 19 $ 879 $ 898
Net (loss)............................................ (371) (371)
--- ----- ----- ----- -----
Balance at December 31, 1996.......................... 220 -- $ 19 508 527
Net income............................................ (375) (375)
--- ----- ----- ----- -----
Balance at September 30, 1997......................... 220 $ -- $ 19 $ 133 $ 152
--- ----- ----- ----- -----
--- ----- ----- ----- -----
</TABLE>
F-72
<PAGE>
ZOOM MESSENGER SERVICE, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ------------------------
1996 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)................................................................... $ (371) $ (251) $ (375)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities.......................................................
Depreciation and amortization.............................................. 191 178 142
Changes in assets and liabilities
Accounts receivable...................................................... (290) (146) 129
Prepaid and other assets................................................. (1) 5 (22)
Shareholder receivable / payable......................................... 153 24 37
Other assets............................................................. 0 0 (4)
Accounts payable......................................................... 173 (69) 117
Accrued expenses......................................................... 25 150 77
Customer list liability.................................................. (390) (390) (184)
----- ----- ---------
NET CASH USED FOR OPERATING ACTIVITIES................................. (510) (499) (83)
----- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.......................................... (10) (10) (5)
Capital lease payments....................................................... (10) (6) (9)
----- ----- ---------
NET CASH USED FOR INVESTING ACTIVITIES................................. (20) (16) (14)
----- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in line of credit................................................... 803 803 97
Payments on long-term debt................................................... (275) (275) 0
----- ----- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............................. 528 528 97
NET (DECREASE) INCREASE IN CASH.............................................. (2) 13 0
Cash at beginning of the period.............................................. 18 18 16
----- ----- ---------
Cash at end of the period.................................................... $ 16 $ 31 $ 16
----- ----- ---------
----- ----- ---------
Cash paid for interest....................................................... $ 56 $ 42 $ 82
----- ----- ---------
----- ----- ---------
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION/GOING CONCERN MATTER
Zoom Messenger Services, Inc. (the Company) provides same-day, on-demand
delivery services in the New York City metropolitan area.
The Company is in a negative working position, it has exhausted its
borrowing capacity and is currently generating negative cash flow from
operations. Based on these factors, it raises substantial doubt about the
Company's ability to continue as a going concern. Management plans to reduce
operating costs to improve its operations. Additionally, the Company has entered
into a definitive agreement with Dispatch Management Services Corp. pursuant to
which the Company will merge with Dispatch Management Services Corp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.
INTANGIBLE ASSETS
Intangible assets consist of customer lists and are amortized using the
straight-line method over five years. The carrying value of intangible assets is
assessed for recoverability by management based on an analysis of future
undiscounted cash flows from the underlying operations. Management believes that
there has been no impairment of intangible assets at September 30, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable/payable and accrued
expenses approximates fair value because of the short maturity of these
instruments. The estimated fair value of long-term debt approximates its
carrying value as interest rates on outstanding debt are at rates which
approximate market rates for debt with similar terms and average maturities.
F-74
<PAGE>
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentrations of credit risk consist principally of trade accounts receivable.
Receivables are not collaterized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
MAJOR CUSTOMERS
In 1996 and 1997, the Company's two largest customers accounted for
approximately 23% and 20% of sales.
INCOME TAXES
The Company has elected to have its income taxed under Section 1362 of the
Internal Revenue Code (the Subchapter S Corporation Election) which provides
that, in lieu of federal corporate income taxes, the shareholders are taxed on
the Company's income. Local taxes are immaterial.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At September 30, 1997, the
carrying amounts of the Company's net assets exceeds the tax bases by
approximately $432.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data for the nine months ended September 30, 1996 is
unaudited; however, in the opinion of the Company, the interim data includes all
adjustments, consisting only of normal recurring items, necessary for a fair
statement of the results for the interim periods.
3. ACCOUNTS RECEIVABLE
Accounts Receivable comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Accounts receivable, trade...................................... $ 1,516 $ 1,392
Allowance for doubtful accounts................................. (10) (15)
------ ------
$ 1,506 $ 1,377
------ ------
------ ------
</TABLE>
F-75
<PAGE>
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. ACCOUNTS RECEIVABLE (CONTINUED)
Allowance for doubtful accounts comprised the following:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996.................. $ 5 $ 10 $ 5 $ 10
Nine months ended September 30, 1997.......... $ 10 $ 10 $ 5 $ 15
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment comprised the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, SEPTEMBER 30,
LIFE 1996 1997
--------- --------------- ---------------
<S> <C> <C> <C>
Computer equipment.................................. 5 years $ 156 $ 158
Furniture........................................... 5 years 14 14
Office equipment.................................... 7 years 2 2
Other............................................... 39 years 10 10
----- -----
182 184
Accumulated depreciation and amortization........... (126) (137)
----- -----
$ 56 $ 47
----- -----
----- -----
</TABLE>
Computers with an aggregate cost and accumulated depreciation of $49 and
$29, respectively, in 1996 and $49 and $36, respectively, thus far in 1997, are
recorded under capital leases.
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- ---------------
<S> <C> <C>
Payroll and payroll taxes....................................... $ 14 $ 64
Commissions..................................................... 11 8
Deferred city taxes............................................. 32 21
Bank overdraft.................................................. 21 19
Other........................................................... 2 45
--- -----
Total accrued expenses........................................ $ 80 $ 157
--- -----
--- -----
</TABLE>
F-76
<PAGE>
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. LONG-TERM DEBT
Long-term debt comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Bank line of credit............................................. $ 803 $ 900
Capital lease obligations....................................... 19 10
----- -----
Total......................................................... 822 910
Less--current portion........................................... 812 908
----- -----
Long-term debt................................................ $ 10 $ 2
----- -----
----- -----
</TABLE>
The Bank line of credit is payable on demand and provides for maximum
borrowings of $900. Interest accrues at the rate of 10.25% per annum.
The Bank line of credit is secured by the Company's accounts receivable and
guaranteed by the shareholders of the Company
The Company entered into 5 year capital lease agreements in November 1993
for certain computer equipment. These leases have minimum monthly payments of
$1.
7. OPERATING LEASES
The Company leases offices in New York City pursuant to operating leases
expiring at various times to 2005. The leases contain certain escalation clauses
both for annual minimum rents and real estate taxes Future minimum lease
payments required under the agreements are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- ------------------------------------------------------------------------------------------
<S> <C>
1997...................................................................................... $ 24
1998...................................................................................... 96
1999...................................................................................... 98
2000...................................................................................... 100
2001...................................................................................... 101
2002...................................................................................... 90
---------
$ 509
---------
---------
</TABLE>
Rental expense was approximately $67 for the nine months ended September 30,
1997 and $94 for the years ended December 31, 1996.
8. INTANGIBLE ASSETS
In March 1993, April 1995, and June 1995, the Company acquired customer
lists of three other messenger services. Initial cash payments for these
customer lists were $10, $5, and $50, respectively. Included in the valuation of
these customer lists are subsequent payments based on collections or revenue of
the respective customer list.
F-77
<PAGE>
ZOOM MESSENGER SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY/SIGNIFICANT TRANSACTIONS
The following represent related party transactions or significant
transactions with entities which are dependent on the Company's business:
As of September 30, 1997, the Company has amounts payable to its
shareholders for $130 for which there are no formal repayment terms.
In addition, the shareholder payable balance at December 31, 1996 and
September 30, 1997 include other amounts payable to the shareholders for $129
and $36, respectively.
Deliveries of certain larger packages over long distances are performed by
Bonnies Messenger, Inc., an unrelated local trucking and delivery service
company. Transactions with the Company represent essentially all of Bonnies
Messenger, Inc.'s business. In addition, Bonnies Messenger, Inc.'s vehicles are
located at certain Company facilities. Amounts paid to Bonnies Messenger, Inc.
for services rendered were $3,086, $2,297 (unaudited) and $2,315 for the year
ended December 31, 1996 and the nine month periods ended September 30, 1996 and
1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
There are pending actions and contingencies arising out of the ordinary
conduct of business. In the opinion of the Company, the liability, if any,
arising from these actions will not have a material effect on the Company's
financial position, the results of its operations, or its cash flows.
In April 1995, the Company entered into an employment agreement with the
vice president of Sales through March 2002. This agreement provides for $68
salary per annum, $10 for expenses per annum, a commissions agreement plus other
benefits. This agreement arose from a customer list purchase agreement.
11. UNAUDITED SUBSEQUENT EVENTS
The company and its stockholder have entered into a definitive agreement
with DMS Corporation (DMS) pursuant to which the Company will merge with DMS.
All outstanding shares of the Company will be exchanged for cash and shares of
DMS common stock concurrent with the consummation of the initial public offering
of the common stock of DMS.
F-78
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Brookside Systems and Programming Limited
We have audited the accompanying balance sheets of Brookside Systems and
Programming Limited as of March 31, 1997 and 1996, and the related profit and
loss accounts and statements of change in cash flows for each of the three years
in the period ended March 31, 1997, all expressed in pounds sterling and
prepared on the basis set forth in Note 1 to the financial statements. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United Kingdom generally accepted
auditing standards which do not differ in any material respect from auditing
standards generally accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at March 31,
1997 and 1996, and the results of the Company's operations and its cash flows
for each of the three years in the period ended March 31, 1997 in conformity
with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles accepted in the United
States. The application of the latter would have affected the determination of
the profit/loss expressed in pounds sterling for each of the three years in the
period ended March 31, 1997 and the determination of shareholders equity and
financial position also expressed in pounds sterling at March 31, 1997 and 1996.
Note 22 to the financial statements summarizes this effect for each of the years
ended March 31, 1997 and 1996, and as at March 31, 1997 and 1996.
/s/ PRICE WATERHOUSE
Price Waterhouse
London, England
October 15, 1997
F-79
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
BALANCE SHEETS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
-------------------- ---------------
1996 1997 1997
--------- --------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
FIXED ASSETS
Intangible assets................................................................... L169 L251 L285
Tangible assets..................................................................... 34 38 41
--------- --------- -----
203 289 326
CURRENT ASSETS
Debtors due within one year......................................................... 117 88 136
Creditors: amounts falling due within one year...................................... (327) (457) (306)
--------- --------- -----
NET CURRENT LIABILITIES............................................................... (210) (369) (170)
--------- --------- -----
TOTAL ASSETS LESS CURRENT LIABILITIES................................................. (7) (80) 156
--------- --------- -----
Creditors: amounts falling due after more than one year............................. (25) (17) (14)
--------- --------- -----
CAPITAL AND RESERVES.................................................................. (32) (97) 142
--------- --------- -----
--------- --------- -----
SHARE CAPITAL--EQUITY................................................................. -- -- 200
Profit and loss account............................................................. (32) (97) (58)
--------- --------- -----
SHAREHOLDERS' FUNDS................................................................. L(32) L(97) L142
--------- --------- -----
--------- --------- -----
</TABLE>
See accompanying notes to the financial statements.
F-80
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
STATEMENTS OF OPERATIONS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR END MARCH 31, SEPTEMBER 30,
--------------------- -------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
TURNOVER.................................................................................. L 502 L 643 L 655 L 284 L 403
Cost of sales............................................................................. (346) (348) (349) (159) (186)
----- ----- ----- ----- -----
GROSS PROFIT.............................................................................. 156 295 306 125 217
Administrative expenses................................................................... (268) (286) (357) (181) (175)
----- ----- ----- ----- -----
OPERATING PROFIT/(LOSS)................................................................... (112) 9 (51) (56) 42
Interest payable and similar charges...................................................... (3) (6) (14) (4) (3)
----- ----- ----- ----- -----
PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION...................................... (115) 3 (65) (60) 39
Taxation on profits from ordinary activities.............................................. 12 -- -- -- --
PROFIT/(LOSS) ON ORDINARY ACTIVITIES AFTER TAXATION....................................... (103) 3 (65) (60) 39
----- ----- ----- ----- -----
Dividends................................................................................. -- -- -- -- --
RETAINED PROFIT FOR THE FINANCIAL YEAR.................................................... L(103) L 3 L (65) L (60) L 39
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
All amounts relate to continuing activities.
All recognised gains and losses are included in the profit and loss account.
See accompanying notes to the financial statements.
F-81
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
STATEMENTS OF CASH FLOWS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
NET CASH INFLOW FROM OPERATING ACTIVITIES............................ L 52 L 53 L 155 L 59 L 26
Returns on investments and servicing of finance...................... (3) (6) (14) (4) (4)
Capital expenditure.................................................. (62) (111) (146) (72) (66)
--------- --------- --------- --------- ---------
Cash inflow before use of liquid resources and financing............. (13) (64) (5) (17) (44)
Net financing cashflows.............................................. -- 32 (7) (8) 165
--------- --------- --------- --------- ---------
INCREASE/(DECREASE) IN CASH IN THE YEAR.............................. L (13) L (32) L (12) L 25 L 121
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to the financial statements.
F-82
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS
(POUNDS STERLING IN THOUSANDS)
1. ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following accounting policies have been applied.
The interim financial data as of September 30, 1997 and for the six months
ended September 30, 1997 and September 30, 1996 is unaudited; however in the
opinion of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim period.
TURNOVER
Turnover represents amounts invoiced, excluding value added tax, in respect
of the sale of services to customers.
RESEARCH AND DEVELOPMENT
Research expenditure is written off to the profit and loss account in the
year in which it is incurred. Development expenditure is written off in the same
way unless the directors are satisfied as to the technical, commercial and
financial viability of individual projects. In this situation, the expenditure
is deferred and amortised over the period during which the company is expected
to benefit.
DEPRECIATION
Deprecation is provided to write off cost, less estimated residual values of
all tangible fixed assets over their expected useful lives. It is calculated at
the following rates:
Fixtures, fittings and equipment 15-33 1/3% reducing balance
ASSETS HELD UNDER LEASE AGREEMENTS
Tangible assets acquired under finance lease agreements are capitalised at
cost and are written off over the shorter of their expected working lives or the
lease term. The related finance costs are charged to the profit and loss account
appropriate to the terms of the agreements.
Payments under operating leases are charged to the profit and loss account
on a straight line basis over the term of the lease.
PENSIONS
The pension costs charged in the financial statement represent the
contributions payable by the company during the year in accordance with SSAP 24.
DEFERRED TAXATION
Provision is made for deferred taxation using the liability method in
respect of all timing differences to the extent that it is probable a liability
will crystallise in the foreseeable future.
F-83
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
2. OPERATING PROFIT/(LOSS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating profit/(loss) for the year was arrived at after charging:
Depreciation of tangible fixed assets.............................. L 8 L 12 L 15
Research and development:
Amortisation of development expenditure.......................... 33 39 46
Operating lease rentals of:
Plant and machinery.............................................. 21 18 22
Land and buildings............................................... 27 15 29
Hire of plant and machinery........................................ 6 5 4
Auditors' remuneration............................................. 2 2 2
Directors' remuneration............................................ 19 9 19
--------- --------- ---------
L116 L100 L137
--------- --------- ---------
--------- --------- ---------
</TABLE>
3. EMPLOYEES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Staff costs amounted to:
Wages and salaries.................................................... L188 L195 L250
Social security costs................................................. 16 18 22
Pension costs......................................................... 10 10 11
--------- --------- ---------
L214 L223 L283
--------- --------- ---------
--------- --------- ---------
</TABLE>
4. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Bank loans and overdrafts............................................. L3 L6 L14
-- --
-- --
---
---
</TABLE>
All loans and overdrafts are wholly repayable within five years.
5. TAXATION ON PROFITS FROM ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1995 1996 1997
----- --------- ---------
<S> <C> <C> <C>
UK corporation tax..................................................... L12 L-- L--
--- --------- ---------
--- --------- ---------
</TABLE>
F-84
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DEVELOPMENT COSTS
-------------------
<S> <C>
COSTS
At March 31, 1995.......................................................... L217
Additions.................................................................. 85
-----
At March 31, 1996.......................................................... 302
Additions.................................................................. 128
-----
At March 31, 1997.......................................................... L430
-----
-----
PROVISIONS FOR DIMINUTION IN VALUE
At March 31, 1995.......................................................... L 94
Charge for year............................................................ 39
-----
At March 31, 1996.......................................................... 133
Charge for year............................................................ 46
-----
At March 31, 1997.......................................................... L179
-----
-----
NET BOOK VALUE
At March 31, 1996.......................................................... L169
-----
-----
At March 31, 1997.......................................................... L251
-----
-----
</TABLE>
7. TANGIBLE ASSETS
<TABLE>
<CAPTION>
FIXTURES, FITTINGS
AND EQUIPMENT
-------------------
<S> <C>
COSTS
At March 31, 1995............................................................ L44
Additions.................................................................... 26
---
At March 31, 1996............................................................ 70
Additions.................................................................... 19
---
At March 31, 1997............................................................ L89
---
---
DEPRECIATION
At March 31, 1995............................................................ L24
Charge for year.............................................................. 12
---
At March 31, 1996............................................................ 36
Charge for year.............................................................. 15
---
At March 31, 1997............................................................ L51
---
---
NET BOOK VALUE
At March 31, 1996............................................................ L34
---
---
At March 31, 1997............................................................ L38
---
---
</TABLE>
F-85
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
8. DEBTORS
Amounts due within one year:
<TABLE>
<CAPTION>
AS AT MARCH 31,
----------------------
1996 1997
--------- -----
<S> <C> <C>
Trade debtors............................................................... L101 L76
Other debtors............................................................... 16 12
--------- ---
L117 L88
--------- ---
--------- ---
</TABLE>
9. CREDITORS:
Amounts falling due within one year:
<TABLE>
<CAPTION>
AS AT MARCH 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Bank loans and overdrafts.................................................... L 67 L 80
Trade creditors.............................................................. 94 86
Other taxation and social security........................................... 36 104
Other creditors.............................................................. 130 187
--------- ---------
L327 L457
--------- ---------
--------- ---------
</TABLE>
The company meets its day to day working capital requirements through an
overdraft facility which is repayable on demand. The facility was last reviewed
by the company's bankers on 16 June 1997 with review dates every six months.
In August 1997 the Company received L200 from Despatch Management Services
in anticipation of its acquisition of the Company. This cash is to be retained
by the Company whether or not the acquisition proceeds.
The overdraft existing as at 30 September 1997 has now therefore been paid
off and the personal guarantee of L80 given by the directors as security for the
loan and overdraft (see note 20) has been removed. In addition to this the
directors have a loan account which it is the directors' intention should be
paid off prior to the acquisition.
The loan of L35 taken out in June 1996 (see note 10), continues to be paid
off over five years at eight hundred pounds per month.
10. CREDITORS:
Amounts falling due after more than one year:
<TABLE>
<CAPTION>
AS AT MARCH 31,
------------------------
1996 1997
----- -----
<S> <C> <C>
Loans
Wholly repayable within five years....................................... L32 L24
included in current liabilities.......................................... (7) (7)
--- ---
L25 L17
--- ---
--- ---
</TABLE>
F-86
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
11. PENSION COSTS
The company operates a defined contribution scheme for the benefit of
certain employees. The fund is administered by trustees and is separate from the
company. Contributions charged to the profit and loss account in the year amount
to L11 (1996 : L10).
12. SHARE CAPITAL
<TABLE>
<CAPTION>
AS AT MARCH 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
AUTHORIZED
100 Ordinary shares of L1 each............................................. L100 L100
--------- ---------
--------- ---------
ALLOTTED, CALLED UP AND FULLY PAID
2 Ordinary shares of L1 each............................................... L 2 L 2
--------- ---------
--------- ---------
</TABLE>
13. PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
AS AT MARCH 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Accumulated losses at 1 April............................................... L(35) L(32)
Retained profit/(loss) for the year......................................... 3 (65)
--- ---
Accumulated losses at 31 March.............................................. L(32) L(97)
--- ---
--- ---
</TABLE>
14. RECONCILIATION OF SHAREHOLDERS FUNDS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Profit/(loss) for the financial year........................................... L 3 L(65)
Shareholders' funds at the beginning of the year............................... (35) (32)
--- ---
Shareholders' funds at the end of the year..................................... L(32) L(97)
--- ---
--- ---
</TABLE>
15. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating profit/(loss)............................................... L(112) L 9 L (51)
Depreciation charges.................................................. 8 12 15
Amortization charges.................................................. 33 39 46
(Increase)/decrease in debtors........................................ 61 (62) 29
Increase in creditors................................................. 62 55 117
--------- --- ---------
Net cash inflow from operating activities............................. L 52 L 53 L156
--------- --- ---------
--------- --- ---------
</TABLE>
F-87
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
16. ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Returns on investments and servicing of finance
Interest paid........................................................ L (3) L (6) L (14)
--- --------- ---------
Net cash outflow from returns on investments and servicing of
finance............................................................ (3) (6) (14)
--- --------- ---------
--- --------- ---------
Capital expenditure and financial investment
Purchase of tangible fixed assets.................................... (13) (26) (19)
Sale of fixed assets................................................. 1 -- --
Development costs.................................................... (50) (85) (128)
--- --------- ---------
Net cash outflow for capital expenditure and financial investment.... (62) (111) (147)
--- --------- ---------
--- --------- ---------
Financing
Debt due beyond a year:
New secured loan payable within five years........................... -- 32 --
Repayment of amounts borrowed........................................ -- -- (7)
--- --------- ---------
Net cash inflow from financing....................................... -- 32 (7)
--- --------- ---------
--- --------- ---------
Net cash inflow from operating activities............................ L 52 L 53 L 156
--- --------- ---------
--- --------- ---------
</TABLE>
17. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
AT APRIL 1,
1995 CASHFLOW AT MARCH 31, 1996 CASHFLOW
--------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Overdrafts......................................... 28 32 60 13
Debt due after 1 year.............................. -- 25 25 (8)
Debt due within 1 year............................. -- 7 7 --
-- -- -- --
28 64 92 5
-- -- -- --
-- -- -- --
<CAPTION>
AT MARCH 31, 1997
-----------------
<S> <C>
Overdrafts......................................... 73
Debt due after 1 year.............................. 17
Debt due within 1 year............................. 7
--
97
--
--
</TABLE>
18. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Decrease in cash in the year........................................... L(13) L(32) L(12)
Cash inflow from (increase)/decrease in debt in the year............... -- (32) 7
--- --- ---
Increase in net debt from cashflows.................................... (13) (64) (5)
Net debt at beginning of year.......................................... (15) (28) (92)
--- --- ---
Net debt at the end of year............................................ L(28) L(92) L(97)
--- --- ---
--- --- ---
</TABLE>
F-88
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
19. ANNUAL COMMITMENTS UNDER OPERATING LEASES
The Company had annual commitments under non cancellable operating leases as
follows:
<TABLE>
<CAPTION>
AS AT MARCH 31,
-------------
1996 1997
----- -----
<S> <C> <C>
Plant and machinery:
Within one year................................................................. L 9 L10
Between two and five years...................................................... 17 17
--- ---
26 27
--- ---
--- ---
Land and buildings:
Within one year................................................................. -- --
Between two and five years...................................................... 29 29
--- ---
L29 L29
--- ---
--- ---
</TABLE>
20. RELATED PARTY TRANSACTION
The following related parties have undertaken transactions with the Company
during the year:
The directors Rebecca and Roy Clark;
Fleetway Systems Services Limited--a company owned and controlled by
both the directors;
Fleetway Systems--a partnership in which the two directors are joint
partners.
The directors have a joint loan account with the Company which provided the
Company with interest free working capital during the year.
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Directors loan.................................................................. L53 L60
</TABLE>
The directors have provided a personal guarantee of L80 to the bank as
security for the loan and overdraft.
The company Fleetway Systems Services Limited (FSSL) sells computer hardware
which is often sold in conjunction with the programming and software services of
Brookside Systems and Programming Limited. The following represents a summary of
the transactions between the two companies during the year.
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Wages costs rebilled to FSSL.................................................... L37 L42
Hardware and car leasing costs rebilled to FSSL................................. 25 73
Expenses rebilled from FSSL to Brookside........................................ 7 19
--- ---
Amount payable to FSSL at year end.............................................. L-- L11
--- ---
--- ---
</TABLE>
F-89
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
20. RELATED PARTY TRANSACTION (CONTINUED)
During the year transactions representing recharges of expenses incurred on
behalf of Fleetway Systems were made by the Company. All recharges were made at
arms-length and at a commercial rate.
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Commissions paid to Fleetway Systems.......................................... L108 L118
Costs recharged to Fleetway Systems........................................... 4 10
--------- ---------
Amounts payable to Fleetway Systems at the year end........................... L 10 L --
--------- ---------
--------- ---------
</TABLE>
21. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES (GAAP)
The financial statements included in this report have been prepared in
accordance with UK GAAP which differ in certain significant respects from US
GAAP. The main differences between UK GAAP and US GAAP which affect the
Company's net profit and net assets are set out below.
(i) Income Taxes
Under UK GAAP, deferred income taxes are accounted for to the extent that it
is considered probable that a liability or asset will crystallise in the
foreseeable future. Under US GAAP, deferred taxes are accounted for on all
temporary differences and a valuation allowance is established to reduce
deferred tax assets to the amount which "more likely than not" will be realised
in future tax returns. Deferred tax amounts also arise as a result of the other
US GAAP adjustments.
The UK deferred tax asset can be reconciled as follows to the US GAAP net
deferred tax asset:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax asset under UK GAAP............................................. LNil LNil
Tax effects on timing differences:
Tax losses................................................................. 15 22
Capital allowances......................................................... -- --
--------- ---------
Gross deferred tax assets in accordance with US GAAP......................... 15 22
Deferred tax valuation allowance............................................. (15) (22)
--------- ---------
Net deferred tax assets in accordance with US GAAP........................... LNil LNil
--------- ---------
--------- ---------
</TABLE>
(ii) Effects on Conforming to US GAAP--Impact on Net Profit
The adjustments to reported net loss required to conform with US GAAP are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1996 1997
----- ---------
<S> <C> <C>
NET PROFIT/(LOSS)
Net profit of the Group under UK GAAP........................................... L3 L(65)
--
--
---
---
Net profit under US GAAP........................................................ L3 L(65)
--
--
---
---
</TABLE>
F-90
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
21. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES (GAAP) (CONTINUED)
(iii) Effects of Conforming to US GAAP--Impact on Net Equity
The adjustments to reported net equity required to conform to US GAAP are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
SHAREHOLDERS FUNDS
Capital and reserves of the Company under UK GAAP.............................. L(32) L(12)
Adjustments:
Deferred tax................................................................... -- --
--- ---
Total US GAAP adjustments...................................................... -- --
--- ---
Approximate shareholders deficit under US GAAP................................. L(32) L(12)
--- ---
--- ---
</TABLE>
(iv) Cash Flow Information--
The Company's financial statements include Statements of Cash Flows in
accordance with UK Accounting Standard FRS 1, "Cash Flow Statements". The
statement prepared under FRS 1 (revised 1996) presents substantially the same
information as that required under US Statement of Financial Accounting Standard
No 95 (FAS 95).
Under FRS 1 (revised 1996) cash flows are presented for (i) operating
activities; (ii) returns on investments and servicing of finance; (iii)
taxation; (iv) investing activities; and (v) financing activities. FAS 95 only
requires presentation of cash flows from operating, investing and financing
activities.
Cash flows under FRS 1 (revised 1996) in respect of interest received,
interest paid (net of that capitalised), interest on finance leases and taxation
would be included within operating activities under FAS 95. Capitalised interest
would be included in investing activities under US GAAP.
Cash under FRS 1 (revised 1996) include cash in hand and deposits repayable
on demand less overdrafts repayable on demand. Under FAS 95 all short term
borrowings and bank overdrafts are included in financing activities.
F-91
<PAGE>
BROOKSIDE SYSTEMS AND PROGRAMMING LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
21. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES (GAAP) (CONTINUED)
The following statements summarise the statement of cash flows for the
Company as if they had been presented in accordance with US GAAP and include the
adjustments which reconcile cash and cash equivalents under US GAAP to cash and
cash equivalents reported under UK GAAP.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net cash inflow from operating activities.............................. L 49 L 47 L142
Net cash used in investing activities.................................. (62) (111) (147)
Net cash provided by financing activities.............................. 13 64 5
--- --- ---------
Net increase/(decrease) in cash and cash equivalents................... -- -- --
--- --- ---------
Cash under US GAAP at beginning of year................................ -- -- --
Cash under US GAAP at end of year...................................... -- -- --
Bank overdrafts and other under UK GAAP at end of year................. (28) (92) (97)
--- --- ---------
Cash/(overdraft) under UK GAAP at end of year.......................... L(28) L(92) L (97)
--- --- ---------
--- --- ---------
</TABLE>
F-92
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and shareholders of
Bridge Wharf Investments Limited
We have audited the accompanying balance sheets of Bridge Wharf Investments
Limited (the Company) as of September 30, 1997 and September 30, 1996, and the
related profit and loss accounts and statements of cash flows for each of the
three years in the period ended September 30, 1997, all expressed in pounds
sterling and prepared on the basis set forth in Note 1 to the financial
statements. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United Kingdom generally accepted
auditing standards which do not differ in any material respect from auditing
standards generally accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at September 30,
1997 and September 30, 1996, and the results of the Company's operations and its
cash flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of the consolidated profit expressed in pounds sterling for each
of the three years in the period ended September 30, 1997 and the determination
of consolidated shareholders equity and consolidated financial position also
expressed in pounds sterling at September 30, 1997, 1996 and 1995. Note 26 to
the consolidated financial statements summarises this effect for the years ended
September 30, 1997, 1996 and 1995 and as at September 30, 1997, 1996 and 1995.
/s/ PRICE WATERHOUSE
Price Waterhouse
London, England
December 12, 1997
F-93
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
BALANCE SHEET
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
FIXED ASSETS
Intangible assets............................................................................ L 89 L 75
Tangible assets.............................................................................. 1,411 1,980
--------- ---------
1,500 2,055
Current assets
Debtors due within one year.................................................................. 3,036 3,285
Cash and deposits............................................................................ 635 665
--------- ---------
3,671 3,951
Creditors: amounts falling due within one year................................................. (2,797) (2,745)
--------- ---------
NET CURRENT ASSETS............................................................................. 874 1,206
--------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES.......................................................... 2,374 3,261
Creditors: amounts falling due after more than one year........................................ (958) (1,416)
--------- ---------
CAPITAL AND RESERVES L 1,416 L 1,845
--------- ---------
--------- ---------
Share capital--equity.......................................................................... 75 75
Profit and loss account........................................................................ 1,341 1,770
--------- ---------
TOTAL SHAREHOLDERS' FUNDS...................................................................... 1,416 1,845
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements
F-94
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
PROFIT AND LOSS ACCOUNT
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
TURNOVER......................................................................... L11,840 L15,093 L17,233
Cost of sales.................................................................... (8,813) (11,592) (13,629)
--------- --------- ---------
GROSS PROFIT..................................................................... 3,027 3,501 3,604
Distribution costs............................................................... (359) (356) (340)
Administrative expenses.......................................................... (1,822) (2,097) (2,177)
Other operating income........................................................... 5 1 3
--------- --------- ---------
OPERATING PROFIT................................................................. 851 1,049 1,090
Other interest receivable and similar income..................................... 17 10 20
Interest payable and similar charges............................................. (138) (194) (227)
--------- --------- ---------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION.................................... 730 865 883
Taxation on profits from ordinary activities..................................... (225) (223) (262)
--------- --------- ---------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION..................................... 505 642 621
Dividends........................................................................ (144) (192) (192)
--------- --------- ---------
RETAINED PROFIT FOR THE FINANCIAL YEAR........................................... L 361 L 450 L 429
--------- --------- ---------
--------- --------- ---------
</TABLE>
All amounts relate to continuing activities.
All recognised gains and losses are included in the profit and loss account.
See accompanying notes to financial statements.
F-95
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
STATEMENT OF CASH FLOWS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
CASH INFLOWS FROM OPERATING ACTIVITIES.................................................. L 588 L 642 L 904
Returns on investments and servicing of finance......................................... (265) (376) (399)
Taxation................................................................................ (234) (230) (254)
Capital expenditure and financial investment............................................ (945) (271) (787)
--------- --------- ---------
Cash outflows before use of liquid resources and financing.............................. (856) (235) (536)
Financing............................................................................... 968 73 945
--------- --------- ---------
INCREASE/(DECREASE) IN CASH IN THE YEAR................................................. L 112 L(162) L 409
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS
(POUNDS STERLING IN THOUSANDS)
1. ACCOUNTING POLICIES
These financial statements have been prepared under the historical cost
convention using the following accounting policies:
TURNOVER
The turnover shown in the profit and loss account represents amounts
invoiced during the year, exclusive of Value Added Tax and trade discounts.
AMORTISATION
Amortisation is calculated so as to write off the cost of an asset, net of
anticipated disposal proceeds, over the useful economic life of that asset as
follows:
<TABLE>
<S> <C>
Goodwill............................ 10 years straight line
</TABLE>
DEPRECIATION
Depreciation is calculated so as to write off the cost of an asset, net of
anticipated disposal proceeds, over the useful economic life of that asset as
follows:
<TABLE>
<S> <C>
Freehold property................... 2% Straight line
Equipment........................... 25% reducing balance
Furniture, fixtures and fittings.... 25% reducing balance
Motor Vehicles...................... 25% reducing balance
</TABLE>
HIRE PURCHASE AGREEMENTS
Assets held under hire purchase agreements are capitalised and disclosed
under tangible fixed assets at their fair value. The capital element of the
future payments is treated as a liability and the interest is charged against
the profit and loss account so as to produce a constant periodic rate of charge
on the remaining balance of the obligation for each accounting period.
2. TURNOVER
Turnover and profit before tax are attributable to the one principal
activity of the company which is the provision of courier, messenger and car
transportation services within the UK.
3. OTHER OPERATING INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Insurance Claims......................................................... L 5 L 1 L 3
</TABLE>
F-97
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
4. OPERATING PROFIT
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating profit for the year was arrived at after charging:
Amortisation.......................................................... L 15 L 15 L 15
(Profit)/Loss on disposal of fixed assets............................. -- (4) 3
Depreciation of tangible fixed assets................................. 195 171 231
Operating lease rentals of:
Plant and machinery................................................. 32 32 28
Auditors' remuneration--Audit......................................... 9 9 9
non-Audit....................................... 2 4 2
Fixed assets scrapped................................................. -- -- 29
--------- --------- ---------
--------- --------- ---------
The average number of employees including directors employed by the
group during the year was as follows................................ 79 102 134
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
The related staff costs amounted to:
Wages and salaries............................................... L1,415 L1,810 L2,319
Social security costs............................................ 143 180 227
--------- --------- ---------
L1,558 L1,990 L2,546
--------- --------- ---------
--------- --------- ---------
</TABLE>
5. INTEREST RECEIVABLE AND SIMILAR INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Bank interest receivable................................................. L17 L10 L20
</TABLE>
F-98
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
6. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Bank interest......................................................... L 54 L 70 L100
Mortgage interest..................................................... 25 55 55
Hire purchase interest charge......................................... 2 11 24
Shareholders' loan.................................................... 25 26 18
Directors' loan interest.............................................. 32 32 30
--------- --------- ---------
L138..... L194 L227
--------- --------- ---------
--------- --------- ---------
</TABLE>
All loans and overdrafts are wholly repayable within five years.
7. TAXATION ON PROFITS FROM ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
UK corporation tax charge............................................. L225 L255 L262
Overprovision relating to prior year.................................. -- (32) --
--------- --------- ---------
L225 L223 L262
--------- --------- ---------
--------- --------- ---------
</TABLE>
The corporation tax liabilities for the years ended September 30, 1996 and
1995 have been calculated based upon computations that have been submitted to
the Inland Revenue. However, no computations submitted since 1993 have been
agreed with the Inland Revenue and they are subject to continuing
correspondence.
8. DIVIDENDS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Paid on ordinary shares............................................... L144 L192 L192
</TABLE>
F-99
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
9. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
GOODWILL
-----------
<S> <C>
COST:
Balance bought forward / carried forward for all periods............................ L145
-----
AMORTISATION
Balance brought forward September 30, 1995.......................................... 40
Amortisation charge for the year.................................................... 15
-----
Balance carried forward September 30, 1996.......................................... 55
Amortisation change for the period.................................................. 15
-----
Balance carried forward at September 30, 1997....................................... 70
-----
-----
NET BOOK VALUE:
At September 30, 1996............................................................... 90
-----
At September 30, 1997............................................................... 75
-----
-----
</TABLE>
F-100
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
10. TANGIBLE ASSETS
<TABLE>
<CAPTION>
FURNITURE,
FREEHOLD FIXTURES AND MOTOR
PROPERTY EQUIPMENT FITTINGS VEHICLES TOTAL
----------- ------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
COST
At September 30, 1995................ L712 L650 L193 L 127 L1,682
Addition............................. -- 62 30 237 329
Disposals............................ -- -- -- (10) (10)
----- ----- ----- ----- ---------
At September 30, 1996................ 712 712 223 354 2,001
Addition............................. -- 353 -- 502 855
Disposals............................ -- (68) -- (41) (109)
----- ----- ----- ----- ---------
At September 30, 1997................ 712 997 223 815 2,747
DEPRECIATION
At September 30, 1995................ 14 320 58 31 425
Disposals............................ -- -- -- (16) (56)
Charge............................... 14 88 37 32 171
----- ----- ----- ----- ---------
At September 30, 1996................ 28 409 95 58 591
Disposals............................ -- (40) -- (16) (56)
Charge............................... 14 78 32 107 231
----- ----- ----- ----- ---------
At September 30, 1997................ 42 448 127 149 766
NET BOOK VALUE
At September 30, 1996................ 684 302 128 296 1,410
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
At September 30, 1997................ L670 L549 L 96 L 666 L1,981
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
</TABLE>
The net book value of fixed assets in respect of assets held under hire
purchase contracts is L624.
11. CASH AND DEPOSITS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Cash at bank and in hand...................................................... L335 L365
Deposits lodged as security................................................... 300 300
--------- ---------
L635 L665
--------- ---------
--------- ---------
</TABLE>
Pursuant to the acquisition of the business of Rapid Despatch in October
1993, an amount of L300 has been lodged in an escrow account to act as security
for future commission payments to the previous owners of Rapid Despatch.
F-101
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
12. DEBTORS
<TABLE>
<CAPTION>
AS AT
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Amounts due within one year:
Trade debtors.............................................................. L2,974 L3,204
Prepayments and accrued income............................................. 62 81
--------- ---------
L3,036 L3,285
--------- ---------
--------- ---------
</TABLE>
13. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
AS AT
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Bank overdrafts (secured).................................................. L 379 L --
West Bromwich Building Society............................................. 8 10
Trade finance loan......................................................... 765 1,155
Trade creditors............................................................ 362 586
Other taxation and social security......................................... 700 416
Hire purchase agreements................................................... 78 221
Accruals................................................................... 298 143
Corporation tax............................................................ 207 214
--------- ---------
L2,797 L2,745
--------- ---------
--------- ---------
</TABLE>
The bank overdraft is secured by a fixed and floating charge over the assets
of the business. The trade and loan facilities are secured by a fixed charge
over the trade debtors reflected in these accounts.
14. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
AS AT
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Other creditors:
Hire purchase agreements..................................................... L 63 L 400
West Bromwich Building Society............................................... 471 462
Trade finance loan........................................................... -- 130
Shareholders' loan........................................................... 212 212
Directors' loan account...................................................... 212 212
--------- ---------
L958 L1,416
--------- ---------
--------- ---------
</TABLE>
F-102
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
14. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (CONTINUED)
The mortgage is secured by a fixed charge over the freehold property of the
company. It is repayable over twenty years and interest is charged at 11.25% per
annum fixed until November 11, 2000. The amount repayable after five years is
L395.
15. SHARE CAPITAL
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
1996 1997
------------------- ---------
<S> <C> <C>
AUTHORISED SHARE CAPITAL
1,000,000 Ordinary shares of L1 each............................ L1,000 L1,000
------ ---------
------ ---------
ALLOTTED, CALLED UP AND FULLY PAID
Equity share capital:
75,000 ordinary shares of L1 each............................... L 75 L 75
------ ---------
</TABLE>
16. RESERVES
<TABLE>
<CAPTION>
PROFIT AND
LOSS ACCOUNT
-------------
<S> <C>
At September 30, 1995........................................................... L 891
Profit for the year............................................................. L 450
------
At September 30, 1996........................................................... L1,341
------
Profit for the year............................................................. L 429
At September 30, 1997........................................................... L1,770
------
------
</TABLE>
17. RECONCILIATION OF SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
AS AT
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Profit for the financial year.............................................. L 642 L 621
Dividends.................................................................. (192) (192)
--------- ---------
Net increase in shareholders' funds........................................ 450 429
Shareholders' funds at the beginning of the year........................... 966 1,416
--------- ---------
Shareholders' funds at the end of the year................................. L1,416 L1,845
--------- ---------
--------- ---------
</TABLE>
F-103
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
18. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating profit................................................. L 851 1,049 L1,090
Amortisation..................................................... 15 15 15
Depreciation charges............................................. 195 171 231
(Profit)/loss on disposal of fixed asset......................... -- (4) 3
Loss on fixed assets scrapped.................................... 29
Increase in debtors.............................................. (635) (1,055) (250)
Increase in creditors............................................ 162 466 (214)
--------- --------- ---------
Net cash inflow from operating activities........................ L 588 L 642 L 904
--------- --------- ---------
--------- --------- ---------
</TABLE>
19. ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Returns on investments and servicing of finance
Interest received................................................... L 17 L 10 L 20
Interest paid....................................................... (136) (183) (203)
Finance charges on hire purchases................................... (2) (11) (24)
Dividends paid...................................................... (144) (192) (192)
--------- --------- ---------
Net cash outflow from returns on investments and servicing of
finance........................................................... L(265) L(376) L(399)
--------- --------- ---------
Capital expenditure and financial investment
Purchase of tangible fixed assets................................... (945) (281) (807)
Disposals........................................................... -- 10 20
Net cash outflow for capital expenditure and financial investment... L(945) L(271) L(787)
--------- --------- ---------
--------- --------- ---------
Financing
Net inflow/(outflow) from hire purchases contracts.................. L (8) L (42) L 433
Net cash inflow/(outflow) from long term loans...................... 487 (9) (16)
Net inflow from trade finance....................................... 489 124 528
--------- --------- ---------
Net cash inflow from financing...................................... L 968 L 73 L 945
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-104
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS
(POUNDS STERLING IN THOUSANDS)
20. ANALYSIS OF CHANGES IN NET DEBT CASH AT BANK AND IN HAND
<TABLE>
<CAPTION>
AT SEPTEMBER 30, CASH NON CASH AT SEPTEMBER
1994 FLOWS FLOWS 30, 1995
---------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Cash at Bank................................................. L 114 L 201 L -- L 315
Bank Overdrafts.............................................. (108) (89) -- (197)
------- --------- ----- -------------
6 112 -- 118
Debt due within one year..................................... (151) (489) -- (640)
Debt due after one year...................................... (425) (487) -- (912)
Hire purchase contracts...................................... -- 8 (142) (134)
------- --------- ----- -------------
Net debt............................................... L (570) L(856) L(142) L (1,568)
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, CASH NON CASH AT SEPTEMBER
1995 FLOWS FLOWS 30, 1996
---------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Cash at Bank................................................. L 315 L 20 L -- L 335
Bank Overdrafts.............................................. (197) (182) -- (379)
------- --------- ----- -------------
118 (162) (44)
Debt due within one year..................................... (640) (125) (8) (773)
Debt due after one year...................................... (912) 9 8 (895)
Hire purchase contracts...................................... (134) 42 (49) (141)
------- --------- ----- -------------
Net debt............................................... L (1,568) L(236) L (49) L (1,853)
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, CASH NON CASH AT SEPTEMBER
1996 FLOWS FLOWS 30, 1997
---------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Cash at Bank................................................. L 335 L 30 L -- L 365
Bank Overdrafts.............................................. (379) 379 -- --
------- --------- ----- -------------
(44) 409 365
Debt due within one year..................................... (773) (392) -- (1,165)
Debt due after one year...................................... (895) (121) -- (1,016)
Hire purchase contracts...................................... (141) (434) (47) (622)
------- --------- ----- -------------
Net debt............................................... L (1,853) L(538) L (47) L (2,438)
</TABLE>
F-105
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
21. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Increase/(decrease) in cash and cash equivalents in the
period................................................... L 112 L (162) L 409
In-flows from debts due within one year.................... (489) (125) (392)
(In-flows)/outflows from debt due after one year........... (487) 9 (121)
Non cashflows relating to hire purchase leases............. (142) (49) (47)
Net cashflow from hire purchase leases..................... 8 42 (434)
Net debt at beginning of year.............................. (570) (1,568) (1,853)
--------- --------- ---------
Net debt at end of year L (1,568) L (1,853) L (2,438)
--------- --------- ---------
--------- --------- ---------
</TABLE>
22. CONTINGENT LIABILITIES
There is a legal dispute outstanding concerning amounts owed as commission
to a third party who introduced business to the company. The directors consider,
at present, adequate provisions have been established for this potential
liability.
23. ANNUAL COMMITMENTS UNDER HIRE PURCHASE AGREEMENT
Future commitments under such agreements are as follows:
<TABLE>
<CAPTION>
AS AT SEPTEMBER 30,
------------------------
1996 1997
----- -----
<S> <C> <C>
Amounts payable within 1 year................................................ 79 262
Amounts payable between 2 to 5 years......................................... 75 443
Less: finance charges relating to future periods............................. (13) (84)
--- ---
141 621
--- ---
--- ---
</TABLE>
24. CAPITAL COMMITMENTS
There was no capital expenditure either authorised or contracted for as at
September 30, 1997, September 30, 1996 and September 30, 1995.
25. INTERESTS OF DIRECTORS IN TRANSACTIONS OF THE COMPANY
During the periods the company paid the following to Smith Summerfield &
Lewis, a firm of chartered accountants, in which the two directors of the
company are partners. The payments were made for services provided by the two
directors.
<TABLE>
<S> <C>
Year to September 30, 1995........................................... L120
Year to September 30, 1996........................................... L 84
Year to September 30, 1997........................................... L 89
</TABLE>
F-106
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
26. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES (GAAP)
The financial statements included in this report have been prepared in
accordance with UK GAAP which differ in certain significant respects from US
GAAP. The main differences between UK GAAP and US GAAP which affect the Group's
net profit and net assets are set out below.
i) Income Taxes
Under UK GAAP, deferred income taxes are accounted for to the extent that it
is considered probable that a liability or asset will crystallise in the
foreseeable future. Under US GAAP, deferred taxes are accounted for on all
temporary differences and a valuation allowance is established to reduce
deferred tax assets to the amount which "more likely than not" will be realised
in future tax returns. Deferred tax amounts also arise as a result of the other
US GAAP adjustments.
The UK deferred tax liability can be reconciled as follows to the US GAAP
net deferred tax liability:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax liability under UK GAAP................................. L Nil L Nil L Nil
Tax effects on timing differences:
Tax losses........................................................... --
Capital allowances................................................... 17 48 94
--------- --------- ---------
Gross deferred tax liability in accordance with US GAAP.............. 17 48 94
Deferred tax valuation allowance..................................... -- -- --
--------- --------- ---------
Net deferred tax liability in accordance with US GAAP................ L 17 L 48 94
--------- --------- ---------
--------- --------- ---------
</TABLE>
The US GAAP provision is comprised as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
UK Corporation tax provision......................................... L 224 L 207 L 214
--------- --------- ---------
--------- --------- ---------
Net deferred tax liability in accordance with US GAAP................ 17 48 94
--------- --------- ---------
US Corporation tax provision......................................... 241 255 308
--------- --------- ---------
--------- --------- ---------
</TABLE>
ii) Effects on Conforming to US GAAP--Impact on Net Profit
The adjustments to reported net loss required to conform with US GAAP are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
NET PROFIT
Net profit of the Group under UK GAAP................................. L505 L642 L621
Adjustments:
Tax................................................................... (17) (31) (46)
--------- --------- ---------
Total US GAAP adjustment.............................................. (17) (48) (46)
Net Profit under US GAAP.............................................. L488 L611 L575
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-107
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
26. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES (GAAP) (CONTINUED)
iii) Effects of Conforming to US GAAP--Impact on Net Equity
The adjustments to reported net equity required to conform to US GAAP are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
SHAREHOLDERS' FUNDS
Capital and reserves of the Group under UK GAAP........................................ L966 L1,416 L2,106
Adjustments:
Deferred tax........................................................................... (17) (48) (46)
--------- --------- ---------
Shareholders' funds under US GAAP...................................................... L949 L1,368 L2,060
--------- --------- ---------
--------- --------- ---------
</TABLE>
iv) Consolidated Cash Flow Information--Group
The company's financial statements include Consolidated Statements of Cash
Flows in accordance with UK Accounting Standard FRS 1, "Cash Flow Statements".
The statement prepared under FRS 1 (revised 1996) presents substantially the
same information as that required under US Statement of Financial Accounting
Standard No 95 (FAS 95).
Under FRS 1 (revised 1996) cash flows are presented for (i) operating
activities; (ii) returns on investments and servicing of finance; (iii)
taxation; (iv) investing activities; and (v) financing activities. FAS 95 only
requires presentation of cash flows from operating investing and financing
activities.
Cash flows under FRS 1 (revised 1996) in respect of interest received,
interest paid (net of that capitalised), interest on finance leases and taxation
would be included within operating activities under FAS 95. Capitalised interest
would be included in investing activities under US GAAP.
Cash under FRS 1 (revised 1996) includes cash in hand and deposits repayable
on demand less overdrafts repayable on demand. Under FAS 95 all short term
borrowings and bank overdrafts are included in financing activities.
F-108
<PAGE>
BRIDGE WHARF INVESTMENTS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
26. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES (GAAP) (CONTINUED)
The following statements summarise the statement of cash flows for the Group
as if they had been presented in accordance with US GAAP and include the
adjustments which reconcile cash and cash equivalents under US GAAP to cash and
cash equivalents reported under UK GAAP.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net cash inflow from operating activities........................... L 233 L 228 L 442
Net cash used in investing activities............................... (945) (271) (787)
Net cash provided (used for) financing activities................... 335 (243) 225
--------- --------- ---------
Net increase/(decrease) in cash and cash equivalents................ (377) (286) (120)
Cash under US GAAP at beginning of year............................. (145) (522) (809)
--------- --------- ---------
Cash under US GAAP at end of year................................... (522) (808) (929)
Trade Finance loan under UK GAAP at end of year..................... 640 765 1,285
--------- --------- ---------
Net cash/(overdraft) under UK GAAP at end of year................... L 118 L (43) L 356
--------- --------- ---------
--------- --------- ---------
</TABLE>
v) Operating statement - US Format
Despatch costs are included within Cost of Sales under UK GAAP. In
accordance with US requirements, Cost of Sales includes costs relating to Road
Management Services only. The Profit and Loss Account has been reformatted below
to reflect the US requirements.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Turnover....................................................... 11,840 15,093 17,233
Cost of sales in accordance with UK GAAP....................... (8,813) (11,592) (13,629)
US adjustment.................................................. 1,336 1,574 2,094
Cost of Sales in accordance with US............................ (7,477) (10,018) (11,535)
--------- --------- ---------
Gross margin................................................... 4,363 5,075 5,698
Net Operating expenses/income--UK GAAP......................... (2,176) (2,452) (2,514)
US adjustments................................................. (1,336) (1,574) (2,094)
Operating profit--US........................................... 851 1,049 1,090
--------- --------- ---------
</TABLE>
F-109
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and shareholders of
Security Despatch Limited
We have audited the accompanying consolidated balance sheets of Security
Despatch Limited , and its subsidiaries (the "Group"), excluding the Mail Room
Services Operations, as of March 31, 1997 and 1996, and the related consolidated
statements of operations and change in cash flows for each of the three years in
the period ended March 31, 1997, all expressed in pounds sterling and prepared
on the basis set forth in Note 1 to the consolidated financial statements. These
financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United Kingdom generally accepted
auditing standards which do not differ in any material respect from auditing
standards generally accepted in the United States. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Group at
March 31, 1997 and 1996, and the results of the Group's operations and its cash
flows for each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of the consolidated profit expressed in pounds sterling for each
of the three years in the period ended March 31, 1997 and the determination of
consolidated shareholders equity and consolidated financial position also
expressed in pounds sterling at March 31, 1997 and 1996. Note 24 to the
consolidated financial statements summarises this effect for the years ended
March 31, 1997 and 1996, and as at March 31, 1997 and 1996.
/s/ PRICE WATERHOUSE
Price Waterhouse
London, England
October 15, 1997
F-110
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
CONSOLIDATED BALANCE SHEETS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
-------------------- -------------
1996 1997 1997
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
-------------
FIXED ASSETS
Tangible assets.......................................................... L 91 L 110 L 104
Current assets
Debtors due within one year.............................................. 1,021 1,106 1,135
Intra division........................................................... 177 384 105
Debtors due in greater than one year..................................... -- 199 719
Cash at bank and in hand................................................. 31 -- --
--------- --------- -------------
1,229 1,689 1,959
Creditors: amounts falling due within one year............................... (1,118) (1,298) (1,249)
--------- --------- -------------
NET CURRENT ASSETS........................................................... 111 391 710
--------- --------- -------------
TOTAL ASSETS LESS CURRENT LIABILITIES........................................ L 202 L 501 L 814
--------- --------- -------------
--------- --------- -------------
CAPITAL AND RESERVES
Share capital--equity........................................................ 137 143 143
Share capital--non equity.................................................... 1,250 1,100 1,100
Share premium account........................................................ 752 771 771
Capital redemption reserve................................................... 616 766 766
Profit and loss account...................................................... (563) (289) 24
Goodwill..................................................................... (1,990) (1,990) (1,990)
--------- --------- -------------
TOTAL SHAREHOLDERS' FUNDS.................................................... L 202 L 501 L 814
--------- --------- -------------
--------- --------- -------------
Equity shareholders' deficit................................................. (1,048) (599) (286)
Non equity shareholders' funds............................................... 1,250 1,100 1,100
--------- --------- -------------
L 202 L 501 L 814
--------- --------- -------------
--------- --------- -------------
</TABLE>
See accompanying notes to financial statements.
F-111
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
CONSOLIDATED STATEMENTS OF OPERATIONS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR END MARCH 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
TURNOVER....................................................... L4,858 L5,240 L5,900 L2,882 L3,137
Cost of sales.................................................. 3,582 3,920 4,466 2,130 2,425
--------- --------- --------- --------- ---------
GROSS PROFIT................................................... 1,276 1,320 1,434 752 712
Administrative expenses........................................ 728 627 624 308 251
--------- --------- --------- --------- ---------
OPERATING PROFIT............................................... 548 693 810 444 461
Interest payable and similar charges........................... 16 24 13 8 14
--------- --------- --------- --------- ---------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION.................. 532 669 797 436 447
Taxation on profits from ordinary activities................... 105 220 239 143 134
--------- --------- --------- --------- ---------
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION................... 427 449 558 293 313
Dividends (non equity)......................................... 193 164 134 69 --
--------- --------- --------- --------- ---------
RETAINED PROFIT FOR THE FINANCIAL YEAR......................... L 234 L 285 L 424 L 224 L 313
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
All amounts relate to continuing activities.
All recognised gains and losses are included in the profit and loss account.
See accompanying notes to financial statements.
F-112
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(POUNDS STERLING IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH INFLOWS/(OUTFLOWS) FROM OPERATING ACTIVITIES (SEE NOTE 1 BELOW)... L 539 L 568 L 570 L 552 L 55
Returns on investments and servicing of finance........................ (208) (188) (147) (8) (14)
Taxation............................................................... (102) (97) (191) (163) (41)
Capital expenditure and financial investment........................... (31) (51) (70) (16) (20)
--------- --------- --------- --------- ---
Cash inflows/outflows before use of liquid resources and financing..... 198 232 162 365 (20)
Financing--net redemption of shares.................................... (250) (295) (125) (150) --
--------- --------- --------- --------- ---
INCREASE/(DECREASE) IN CASH IN THE YEAR................................ L (52) L (63) L 37 L 215 L(20)
--------- --------- --------- --------- ---
--------- --------- --------- --------- ---
</TABLE>
See accompanying notes to financial statements
NOTE 1
ANALYSIS OF OPERATING CASHFLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net operating cashflows (as shown above).................................. L539 L568 L570 L552 L 55
Less:
Net cashflows paid/(received) on behalf of the mailroom division.......... -- 177 207 (37) (279)
Net cashflows paid on behalf of the parent company........................ -- -- -- 10 520
Net operating cashflows relating to the courier business.................. L539 L745 L777 L525 L 296
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-113
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(POUNDS STERLING IN THOUSANDS)
1. ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following accounting policies have been applied.
Prior to February 28, 1997 Security Despatch Limited was the group's
ultimate parent company. As part of a group reorganisation in February 1997
designed to enable some shareholders to realise their investment, a newly
incorporated company Security Business Services Limited, acquired 100% of the
share capital of Security Despatch Limited. The acquisition was completed
through offering Security Despatch shareholders either shares and loan stock in
Security Business Services Limited or cash for their Security Despatch Limited
shares. The cash element of the offer was financed through a L1.75 million loan
from Barclays Bank.
In order to present meaningful comparable information, the financial
statements of Security Despatch Limited have been presented for all periods with
no adjustments made in the financial statements to reflect the effect of the
reorganisation.
The unaudited management accounts of Security Business Services Limited
indicate that in the period to March, 31 1997 no income was earned and that
expenses of L392 were charged, consisting primarily of a bonus of L343 to the
managing director and loan interest and facility fees of L49. Fixed assets at
March 31, 1997 consisted solely of the investment in Security Despatch Limited.
Net current liabilities at March 31, 1997 amounting to L210 consisted primarily
of corporation tax recoverable of L130, amounts payable in respect of payroll
taxes of L156 and amounts owed to Security Despatch Limited of L173. Borrowings
at 31 March, 1997 consisted of a L1,750 loan from Barclays Bank and loan stock
held by the shareholders of L2,111. As part of the proposed transaction the loan
stock will be acquired by the purchaser and the loan from Barclays Bank will be
repaid and will not form part of the ongoing funding.
The unaudited management accounts for the six month period ended September
30, 1997 indicate that an additional L156 was charged to the profit and loss
account, consisting of L45 salary payments to the managing director, L15 fee
payments to non executive directors and L96 interest charges. No movements
occurred in fixed assets during the period. Net current liabilities at September
30, 1997 amounting to L630 consisted primarily of corporation tax recoverable of
L130 and amounts owed to Security Despatch Limited of L719. During the period
L175 of the term loan was repaid to Barclays reducing the amount to L1,575 at
September 30, 1997. The loan stock remained unchanged at L2,111 at September 30,
1997.
BASIS OF CONSOLIDATION AND PREPARATION
The consolidated accounts include the company and its subsidiary
undertakings ("the Group"). The results of subsidiaries acquired are included
from the date of their acquisition. The group uses the acquisition method of
accounting to consolidate the results of subsidiary undertakings. All subsidiary
undertakings have been dormant since March 31, 1996.
Security Despatch Limited consists of a courier operation and a mailroom
management operation. The mailroom management operation business is being
retained by the existing management and will not form part of the operations of
the Group in the future. Therefore these financial statements have been prepared
on a carve-out basis and only reflect the historical financial position, results
of operations, and
F-114
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
1. ACCOUNTING POLICIES (CONTINUED)
cash flows of the courier operation as it will go forward, and as if the courier
operation had operated as a stand alone Group since 1994.
Transactions between the courier operation and the mail room management
operation are herein referred to as related party transactions.
Goodwill arising on the acquisition of a subsidiary is the difference
between the fair value of the consideration paid and fair value of the assets
and liabilities acquired.
Goodwill is written off directly to reserves in the year in which it arises.
TURNOVER
Turnover represents amounts invoiced, excluding value added tax, in respect
of the sale of services to customers.
COST OF SALES
Cost of sales includes wages and salaries costs incurred in the provision of
the messenger service because in the opinion of the directors this is the most
appropriate.
DEPRECIATION
Deprecation is provided to write off cost, less estimated residual values of
all tangible fixed assets over their expected useful lives. It is calculated at
the following rates:
<TABLE>
<S> <C>
Radio equipment.................................. 25% per annum
Computers........................................ 33.33% per annum
Furniture and office equipment................... 20% per annum
</TABLE>
ASSETS HELD UNDER LEASE AGREEMENTS
Tangible assets acquired under finance lease agreements are capitalised at
cost and are written off over the shorter of their expected working lives or the
lease term. The related finance costs are charged to the profit and loss account
appropriate to the terms of the agreements.
Payments under operating leases are charged to the profit and loss account
on a straight line basis over the term of the lease.
DEFERRED TAXATION
Provision is made for deferred taxation using the liability method in
respect of all timing differences to the extent that it is probable a liability
will crystallise in the foreseeable future.
F-115
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
1. ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL DATA
The interim financial data as of September 30 1997 and for the six months
ended September 30 1997 is unaudited; however, in the opinion of the Company,
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods.
2. TURNOVER
Turnover is derived from the group's operation of a courier service and is
earned entirely in the UK.
3. OPERATING PROFIT
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Operating profit for the year was arrived at after charging:
Depreciation of tangible fixed assets..................................................... L 50 L 49 L 51
Operating lease rentals of:
Plant and machinery..................................................................... 18 17 11
Land and buildings...................................................................... 33 34 34
Auditors' remuneration.................................................................... 9 9 7
--------- --------- ---------
L110 L109 L103
--------- --------- ---------
--------- --------- ---------
The average number of employees including directors employed by the group during the year
was as follows.......................................................................... 59 63 75
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
The related staff costs amounted to:
Wages and salaries................................................................... L 973 L1,100 L1,134
Social security costs................................................................ 102 106 119
--------- --------- ---------
L1,075 L1,206 L1,253
--------- --------- ---------
--------- --------- ---------
</TABLE>
4. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
<S> <C> <C> <C>
1995 1996 1997
----------- ----------- -----------
Bank loans and overdrafts................................................................. L16 L24 L13
--- --- ---
--- --- ---
</TABLE>
All loans and overdrafts are wholly repayable within five years.
F-116
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
5. TAXATION ON PROFITS FROM ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
UK corporation tax charge................................................................. L105 L204 L239
Underprovision in respect of prior years.................................................. -- 16 --
--------- --------- ---------
L105 L220 L239
--------- --------- ---------
--------- --------- ---------
</TABLE>
6. DIVIDENDS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Preference--paid.......................................................................... L193 L164 L134
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. TANGIBLE ASSETS
<TABLE>
<CAPTION>
FURNITURE
RADIO AND OFFICE
EQUIPMENT COMPUTERS EQUIPMENT TOTAL
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
COST
At March 31, 1995.................................................... L194 L109 L64 L367
Additions............................................................ 20 20 11 51
----- ----- --- ---------
At March 31, 1996.................................................... 214 129 75 418
Additions............................................................ 12 35 23 70
----- ----- --- ---------
At March 31, 1997.................................................... L226 L164 L98 L488
----- ----- --- ---------
----- ----- --- ---------
DEPRECIATION
At March 31, 1995.................................................... L154 L 86 L38 L278
Charge for year...................................................... 21 15 13 49
----- ----- --- ---------
At March 31, 1996.................................................... 175 101 51 327
Charge for year...................................................... 19 21 11 51
----- ----- --- ---------
At March 31, 1997.................................................... L194 L122 L62 L378
----- ----- --- ---------
----- ----- --- ---------
NET BOOK VALUE
At March 31, 1996.................................................... L 39 L 28 L24 L 91
----- ----- --- ---------
----- ----- --- ---------
At March 31, 1997.................................................... L 32 L 42 L36 L110
----- ----- --- ---------
----- ----- --- ---------
</TABLE>
F-117
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
8. INVESTMENTS
Details of the subsidiary undertaking are as follows:
<TABLE>
<CAPTION>
PROPORTION NATURE OF BUSINESS
COUNTRY OF OF VOTING ----------------------------------
NAME REGISTRATION RIGHTS 1995 1996 1997
- -------------------------------------------------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Security Despatch Couriers Limited................ England 100% Courier Courier Dormant
Security Despatch London Limited.................. England 100% Courier Courier Dormant
Security Despatch (Admin) Limited................. England 100% Dormant Dormant Dormant
</TABLE>
9. DEBTORS
<TABLE>
<CAPTION>
AS AT MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Amounts due within one year:
Trade debtors.................................................................................. L 968 L1,077
Other debtors.................................................................................. 6 --
Prepayments and accrued income................................................................. 47 29
--------- ---------
L1,021 L1,106
--------- ---------
--------- ---------
Amounts falling due after more than one year:
Amounts owed by parent undertaking............................................................. L -- L 199
--------- ---------
--------- ---------
</TABLE>
10. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
AS AT MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Bank overdrafts (secured)...................................................................... L 252 L 184
Trade creditors................................................................................ 147 234
Other taxation and social security............................................................. 385 413
Other creditors................................................................................ 82 84
Accruals and deferred income................................................................... 77 160
Corporation tax................................................................................ 155 207
ACT payable.................................................................................... 20 16
--------- ---------
L1,118 L1,298
--------- ---------
--------- ---------
</TABLE>
The bank overdrafts are secured by a fixed and floating charge over the
assets of the company.
F-118
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
11. SHARE CAPITAL
<TABLE>
<CAPTION>
1995 NO 1996 NO 1997 NO 1995 1996 1997
------------ ------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AUTHORIZED
Ordinary shares of 10p each........................ 1,114,443 1,114,443 1,114,443 L 111 L 111 L 111
"A" ordinary shares of L1 each..................... 20,000 20,000 20,000 20 20 20
"B" ordinary shares of 10p each.................... 592,728 592,728 592,728 59 59 59
"C" ordinary shares of 1p each..................... 651,190 651,190 651,190 7 7 7
"D" ordinary shares of L1 each..................... 20,000 20,000 20,000 20 20 20
11% cumulative preference shares of L1 each........ 1,866,176 1,866,176 1,866,176 1,866 1,866 1,866
--------- --------- ---------
L2,083 L2,083 L2,083
--------- --------- ---------
--------- --------- ---------
ALLOTTED, CALLED UP AND FULLY PAID
Ordinary shares of 10p each........................ 668,974 678,974 788,140 L 67 L 68 L 79
"A" ordinary shares of L1 each..................... 10,167 10,167 -- 10 10 --
"B" ordinary shares of 10p each.................... 592,728 592,728 592,728 59 59 59
"C" ordinary shares of 1p each..................... -- 527,466 -- 5
------------ ------------ ------------ --------- --------- ---------
Total Equity Shares................................ 1,271,869 1,281,869 1,908,334 136 137 143
11% cumulative preference shares of L1 each (non
equity).......................................... 1,250,000 1,100,000 1,550 1,250 1,100
--------- --------- ---------
L1,686 L1,387 L1,243
--------- --------- ---------
--------- --------- ---------
</TABLE>
i) During the year ended March 31, 1995 250,000 preference shares were redeemed
at par.
ii) During the year ended March 31, 1996 300,000 preference shares were
redeemed at par.
iii) During the year ended March 31, 1997:
a) 10,167 "A" ordinary shares of L1 each were exchanged for 89,166
ordinary shares of 10p each
b) The warrant holders exercised their rights to acquire 527,466 "C"
ordinary shares of 1p each at a price of 1p per share.
c) Twenty thousand options granted on July 1993 were exercised at the
option price of 100p for each ordinary 10p share.
d) The rights were waived to the options granted in September 1993 for
156,230 ordinary 10p shares at an option price of 40p.
e) During the year, 150,000 preference shares were redeemed at par. It
is planned by the directors of the company to convert the preference shares
into ordinary shares post year end.
f) The ordinary shares, "B" ordinary shares, "C" ordinary shares and "D"
ordinary shares have one vote per share held, and the "A" ordinary shares
have eight votes per share held. The preference shares have no voting
rights.
All ordinary shares have equal rights to dividends and to the assets of the
company on winding up.
F-119
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
12. RESERVES
<TABLE>
<CAPTION>
SHARE CAPITAL PROFIT
PREMIUM REDEMPTION AND LOSS
ACCOUNT RESERVE ACCOUNT GOODWILL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
At March 31, 1995................................................... L748 L316 L(548) L(1,990)
Redemption of preference shares..................................... -- 300 (300) --
Profit for the year................................................. -- -- 285 --
New shares issued................................................... 4 -- -- --
----- ----- ----- ---------
At March 31, 1996................................................... 752 616 (563) (1,990)
Redemption of preference shares..................................... -- 150 (150) --
Profit for the year................................................. -- -- 424 --
New shares issued................................................... 18 -- -- --
Share capital converted............................................. 1
----- ----- ----- ---------
At March 31, 1997................................................... L771 L766 L(289) L(1,990)
----- ----- ----- ---------
----- ----- ----- ---------
</TABLE>
13. RECONCILIATION OF SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Profit for the financial year............................................................... L 449 L 558
Dividends................................................................................... (164) (134)
--------- ---------
Retained profit for the financial year...................................................... 285 424
New shares issued........................................................................... 5 25
Goodwill written off........................................................................ -- --
Redemption of preference shares at par...................................................... (300) (150)
--------- ---------
Net increase/(decrease) in shareholders' funds.............................................. (10) 299
Shareholders' funds at the beginning of the year............................................ 212 202
--------- ---------
Shareholders' funds at the end of the year.................................................. L 202 L 501
--------- ---------
--------- ---------
</TABLE>
14. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Operating profit........................................................................ L 548 L 693 L 810
Depreciation charges.................................................................... 50 49 51
Increase in debtors..................................................................... (110) (242) (491)
Increase in creditors................................................................... 51 68 200
--------- --------- ---------
Net cash inflow from operating activities............................................... L 539 L 568 L 570
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-120
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(POUNDS STERLING IN THOUSANDS)
15. ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Returns on investments and servicing of finance.................................. L L L
Interest paid.................................................................... (16) (24) (13)
Preference dividend paid......................................................... (192) (164) (134)
--------- --------- ---------
Net cash outflow from returns on investments and servicing of finance............ L (208) L (188) L (147)
--------- --------- ---------
--------- --------- ---------
Capital expenditure and financial investment Purchase of tangible fixed assets... (31) (51) (70)
Net cash outflow for capital expenditure and financial investment................ L (31) L (51) L (70)
--------- --------- ---------
--------- --------- ---------
Financing
Issue of ordinary share capital.................................................. -- 5 25
Redemption of preference share capital........................................... (250) (300) (150)
--------- --------- ---------
Net cash outflow from financing.................................................. L (250) L (295) L (125)
--------- --------- ---------
--------- --------- ---------
</TABLE>
16. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
CASH AT BANK BANK
AND IN HAND OVERDRAFTS NET DEBT
--------------- ----------- -----------
<S> <C> <C> <C>
At April 1, 1994........................................................ L 103 L 209 L 106
Cash flows.............................................................. (71) (19) 52
----- ----- -----
At March 31, 1995....................................................... 32 190 158
Cash flows.............................................................. (1) 62 63
----- ----- -----
At March 31, 1996....................................................... 31 252 221
Cash flows.............................................................. (31) (68) (37)
----- ----- -----
At March 31, 1997....................................................... L -- L 184 L 184
----- ----- -----
----- ----- -----
</TABLE>
18. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Increase in cash in the year and movement in net debt in the year................... L 52 L 63 L (37)
Net debt at beginning of year....................................................... 106 158 221
--------- --------- ---------
Net debt at end of year............................................................. L158 L221 L184
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-121
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
19. CONTINGENT LIABILITIES
At March 31, 1997 the company had guaranteed amounts advanced to its parent,
Security Business Services Limited. At the year end the potential liability
was L1,750 (1996: Nil, 1995: L190).
The company is involved in a legal dispute in relation to a purchase
agreement whereby the company acquired the business of the plantiff.
The potential exposures relating to this claim have not been provided
against as the directors believe the claim to be wholly without foundation.
20. ANNUAL COMMITMENTS UNDER OPERATING LEASES
The Group had annual commitments under non cancellable operating leases as
follows:
<TABLE>
<CAPTION>
AS AT MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Plant and machinery:
Within one year....................................................................... L 1,106 L 9,305
Between two and five years............................................................ 16,153 1,929
--------- ---------
17,259 11,234
Land and buildings:
Within one year....................................................................... -- 34,010
Between two and five years............................................................ 34,010 --
--------- ---------
34,010 34,010
L51,269 L45,244
--------- ---------
--------- ---------
</TABLE>
21. CAPITAL COMMITMENTS
There was no capital expenditure either authorised or contracted for as at
March 31, 1995, March 31, 1996 and March 31, 1997.
22. RELATED PARTY TRANSACTIONS
During the year ended March 31, 1997, in the ordinary course of business,
management services with a value of L12 (1996: L12, 1995: L81) were received
from a company in which D J Coghlan and J B Greenbury have an interest.
The Group incurs common overhead costs for courier and mail room management
operations. These costs have been allocated to respective operations based
upon revenue generated by each operation and an estimate of time spent by
the employees on each operation. Management of the Group believes that the
current method of allocating common overhead is reasonable. Overhead costs
allocated to the mailroom management operation for the years ended March 31,
1995, 1996 and 1997 were approximately L20, L100 and L236 respectively. At
March 31 , 1996 and 1997, the Group had receivables from the mail room
management operation of L554 and L689 respectively. These are payable on
demand and do not accrue interest.
F-122
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
23. ULTIMATE PARENT COMPANY
At March 31, 1997 the company's ultimate parent company was Security
Business Services Limited. Security Business Services Limited was
incorporated on February 27, 1997 and acquired 100% of the share capital of
the company on February 28, 1997. Prior to February 28, 1997 Security
Despatch Limited regarded itself as the ultimate parent company.
24. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES
(GAAP)
The consolidated financial statements included in this report have been
prepared in accordance with UK GAAP which differ in certain significant
respects from US GAAP. The main differences between UK GAAP and US GAAP
which affect the Group's consolidated net profit and net assets are set out
below.
A) DIFFERENCES IN MEASUREMENT METHODS
i) Goodwill
Under UK GAAP, goodwill arising on acquisitions may be charged against
reserves in the year of acquisition. Negative goodwill, being the excess
of the fair value of the Group's share of net tangible assets acquired
over cost, is credited to reserves. Upon subsequent disposal of an
identification of impairment in respect of an acquired asset or entity,
the effect of any associated positive/negative goodwill is eliminated
from reserves and then charged against/credited to profit and loss.
Under US GAAP, goodwill is capitalised in the balance sheet and is
subsequently amortised over its estimated useful economic life not
exceeding 40 years. In the event of negative goodwill arising, under US
GAAP the values assigned to non current assets acquired are reduced
accordingly.
For the purposes of restating shareholders' equity in accordance with US
GAAP, identifiable intangible assets and goodwill have been reclassified
as assets less accumulated amortisation based upon their estimated useful
economic lives. Identifiable intangible assets and goodwill are amortised
over a period of ten years on a straight line basis.
ii) Income Taxes
Under UK GAAP, deferred income taxes are accounted for to the extent that
it is considered probable that a liability or asset will crystallise in
the foreseeable future. Under US GAAP, deferred taxes are accounted for
on all temporary differences and a valuation allowance is established to
reduce deferred tax assets to the amount which "more likely than not"
will be realised in future tax returns. Deferred tax amounts also arise
as a result of the other US GAAP adjustments.
F-123
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
24. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES
(GAAP) (CONTINUED)
The UK deferred tax asset can be reconciled as follows to the US GAAP net
deferred tax asset:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax asset under UK GAAP.......................................................... LNil LNil
Tax effects on timing differences:
Tax losses................................................................................ -- --
Capital allowances........................................................................ 11 12
--------- ---------
Gross deferred tax assets in accordance with US GAAP...................................... 11 12
Deferred tax valuation allowance.......................................................... Nil Nil
--------- ---------
Net deferred tax assets in accordance with US GAAP........................................ L 11 L 12
--------- ---------
--------- ---------
</TABLE>
The US GAAP provision is comprised as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
UK Corporation tax........................................................................ L221 L238
--------- ---------
--------- ---------
</TABLE>
iii) Effects on Conforming to US GAAP--Impact on Net Profit
The adjustments to reported net loss required to conform with US GAAP
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
NET PROFIT
Net profit of the Group under UK GAAP.................................................... L449 L558
Adjustments:
Amortisation of goodwill............................................................... (50) (50)
Tax.................................................................................... (1) 1
Total US GAAP adjustment................................................................. (51) (49)
Net Profit under US GAAP................................................................. L398 L509
--------- ---------
--------- ---------
</TABLE>
F-124
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
24. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES
(GAAP) (CONTINUED)
iv) Effects of Conforming to US GAAP--Impact on Net Equity
The adjustments to reported net equity required to conform to US GAAP are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
SHAREHOLDERS' FUNDS
Capital and reserves of the Group under UK GAAP...................................... L 202 L 501
Adjustments:
Goodwill gross..................................................................... 1,990 1,990
Less: accumulated depreciation..................................................... (284) (334)
Deferred tax......................................................................... 11 12
--------- ---------
Total US GAAP adjustments............................................................ 1,717 1,668
--------- ---------
Shareholders' funds under US GAAP.................................................... L1,919 L2,169
--------- ---------
--------- ---------
</TABLE>
v) Consolidated Cash Flow Information--Group
The company's financial statements include Consolidated Statements of
Cash Flows in accordance with UK Accounting Standard FRS 1, "Cash Flow
Statements". The statement prepared under FRS 1 (revised 1996) presents
substantially the same information as that required under US Statement of
Financial Accounting Standard No 95 (FAS 95).
Under FRS 1 (revised 1996) cash flows are presented for (i) operating
activities; (ii) returns on investments and servicing of finance; (iii)
taxation; (iv) investing activities; and (v) financing activities. FAS 95
only requires presentation of cash flows from operating investing and
financing activities.
Cash flows under FRS 1 (revised 1996) in respect of interest received,
interest paid (net of that capitalised), interest on finance leases and
taxation would be included within operating activities under FAS 95.
Capitalised interest would be included in investing activities under US
GAAP.
Cash under FRS 1 (revised 1996) include cash in hand and deposits
repayable on demand less overdrafts repayable on demand. Under FAS 95 all
short term borrowings and bank overdrafts are included in financing
activities.
F-125
<PAGE>
SECURITY DESPATCH LIMITED
(EXCLUDING THE MAIL ROOM SERVICES OPERATIONS)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(POUNDS STERLING IN THOUSANDS)
24. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRACTICES
(GAAP) (CONTINUED)
The following statements summarise the statement of cash flows for the
Group as if they had been presented in accordance with US GAAP and
include the adjustments which reconcile cash and cash equivalents under
US GAAP to cash and cash equivalents reported under UK GAAP.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Net cash inflow from operating activities............................................... L 447 L 336
Net cash used in investing activities................................................... (51) (70)
Net cash provided (used for) financing activities....................................... (397) (327)
--------- ---------
Net increase/(decrease) in cash and cash equivalents.................................... (1) (31)
Cash under US GAAP at beginning of year................................................. 32 31
--------- ---------
Cash under US GAAP at end of year....................................................... 31 --
Bank overdrafts and other under UK GAAP at end of year.................................. (252) (184)
--------- ---------
Net cash/(overdraft) under UK GAAP at end of year....................................... L 221 L (184)
--------- ---------
--------- ---------
</TABLE>
v) Operating statement--US Format
Despatch costs are included within Cost of Sales under UK GAAP. In
accordance with US requirements, Cost of Sales includes costs relating to
Road Management Services only. The Profit and Loss Account has been
reformatted below to reflect the US requirements.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Turnover L 4,858 L 5,240 L 5,900
Cost of sales in accordance with UK GAAP.................................. (3,582) (3,920) (4,466)
US adjustment............................................................. 723 905 1,052
Cost of Sales in accordance with US....................................... (2,859) (3,015) (3,414)
--------- --------- ---------
Gross margin.............................................................. 1,999 2,225 2,486
Net Operating expenses/income--UK GAAP.................................... (728) (627) (624)
US adjustments............................................................ (723) (905) (1,052)
Operating profit--US...................................................... 548 693 810
--------- --------- ---------
</TABLE>
F-126
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Aero Special Delivery Service, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholder's deficiency and of cash flows present fairly, in all
material respects, the financial position of Aero Special Delivery Service, Inc.
at June 30, 1996 and 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has recurring losses and a stockholder's
deficiency due to recorded liabilities for withholding taxes, interest and
penalties in dispute. The uncertainties related to these matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
September 9, 1997
F-127
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- SEPTEMBER 30,
1996 1997 1997
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 79 $ 173 $ 109
Accounts receivable, net..................................................... 1,123 1,253 1,349
Prepaid and other current assets............................................. 122 249 272
--------- --------- ------
Total current assets....................................................... 1,324 1,675 1,730
Property and equipment, net.................................................... 341 442 407
--------- --------- ------
$ 1,665 $ 2,117 $ 2,137
--------- --------- ------
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities
Accounts payable............................................................. $ 222 $ 392 $ 400
Accrued expenses............................................................. 328 362 461
Accrued payroll taxes, interest and penalties in dispute..................... 1,936 2,681 2,884
Current portion of capital lease obligation.................................. 49 89 83
Borrowings under a line of credit and notes payable.......................... 288 20 25
--------- --------- ------
Total current liabilities................................................ 2,823 3,544 3,853
Due to related party........................................................... 544 589 560
Capital lease obligation....................................................... 90 131 115
--------- --------- ------
Total liabilities.......................................................... 3,457 4,264 4,528
--------- --------- ------
Commitments and contingencies
Stockholder's deficiency
Common stock ($10 par value, 20,000 shares authorized, issued and
outstanding)............................................................... 200 200 200
Accumulated deficit.......................................................... (1,992) (2,347) (2,591)
--------- --------- ------
Total stockholder's deficiency............................................. (1,792) (2,147) (2,391)
--------- --------- ------
$ 1,665 $ 2,117 $ 2,137
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying notes to financial statements.
F-128
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED
JUNE 30, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1997 1996 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales................................................................... $ 10,496 $ 11,818 $ 2,781 $ 3,035
Cost of sales........................................................... 5,972 6,887 1,621 1,962
--------- --------- --------- ---------
Gross margin........................................................ 4,524 4,931 1,160 1,073
Operating expenses...................................................... 2,155 2,375 559 561
Sales and marketing..................................................... 865 961 226 203
General and administrative expenses..................................... 886 940 212 301
Payroll taxes, interest and penalties in dispute........................ 522 745 184 219
Depreciation and amortization........................................... 77 168 40 42
--------- --------- --------- ---------
Total expenses...................................................... 4,505 5,189 1,221 1,326
--------- --------- --------- ---------
Operating income (loss)................................................. 19 (258) (61) (253)
--------- --------- --------- ---------
Related party interest expense.......................................... 54 57 13 15
Other expense (income), net............................................. 28 40 9 (24)
--------- --------- --------- ---------
82 97 (22) (9)
--------- --------- --------- ---------
Loss before provision for income taxes.................................. (63) (355) (83) (244)
Provision for income taxes.............................................. -- -- -- --
--------- --------- --------- ---------
Net loss................................................................ $ (63) $ (355) $ (83) $ (244)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-129
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENT OF STOCKHOLDER'S DEFICIENCY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER COMMON ACCUMULATED TOTAL
OF SHARES STOCK DEFICIT DEFICIT
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, June 30, 1995............................................. 20,000 $ 200 $ (1,929) $ (1,729)
Net loss for the year ended June 30, 1996.......................... (63) (63)
----------- ----- ------------ ---------
Balance, June 30, 1996............................................. 20,000 200 (1,992) (1,792)
Net loss for the year ended June 30, 1997.......................... (355) (355)
----------- ----- ------------ ---------
Balance, June 30, 1997............................................. 20,000 200 (2,347) (2,147)
Net loss for three months ended September 30, 1997 (Unaudited)..... (244) (244)
----------- ----- ------------ ---------
Balance, September 30, 1997 (Unaudited)............................ 20,000 $ 200 $ (2,591) $ (2,391)
----------- ----- ------------ ---------
----------- ----- ------------ ---------
</TABLE>
See accompanying notes to financial statements.
F-130
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHSENDED
YEARS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1997 1996 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $ (63) $ (355) $ (83) $ (244)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.................................................. 77 168 40 42
Loss on disposition of property and equipment.................................. 10 50 -- --
Changes in assets and liabilities:
Accounts receivable.......................................................... 15 (130) (50) (96)
Prepaid and other current assets............................................. (41) (127) (62) (23)
Accounts payable............................................................. (38) 170 80 8
Accrued expenses............................................................. (40) 34 8 99
Accrued payroll taxes, interest and penalties in dispute..................... 522 745 188 203
--- --------- --- ---------
Net cash provided by (used in) operating activities............................ 442 555 121 (11)
--- --------- --- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net......................................... (132) (172) (40) (7)
--- --------- --- ---------
Net cash used for investing activities......................................... (132) (172) (40) (7)
--- --------- --- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to related party, net.............................................. 34 45 39 (29)
Repayments under line of credit and notes payable, net........................... (230) (268) (144) 5
Repayments of capital lease obligations.......................................... (35) (66) (15) (22)
--- --------- --- ---------
Net cash used for financing activities......................................... (231) (289) (120) (46)
--- --------- --- ---------
Net increase (decrease) in cash and cash equivalents............................. 79 94 (39) (64)
Cash and cash equivalents at beginning of period................................. -- 79 79 173
--- --------- --- ---------
Cash and cash equivalents at end of the period................................... $ 79 $ 173 $ 40 $ 109
--- --------- --- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................................. $ 55 $ 52 $ 13 $ 8
--- --------- --- ---------
--- --------- --- ---------
Taxes paid, net of refunds received............................................ $ 1 $ (31) $ -- $ --
--- --------- --- ---------
--- --------- --- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment under capital leases..................... $ 157 $ 147 $ 39 $ --
--- --------- --- ---------
--- --------- --- ---------
</TABLE>
See accompanying notes to financial statements.
F-131
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION AND MERGER
Aero Special Delivery Service, Inc. (the "Company"), a California
corporation in business since 1968, provides same-day, on-demand delivery
services in the San Francisco Bay Area and has four dispatching locations
throughout Northern California.
The Company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corporation ("DMS") pursuant to which the
Company will merge with DMS. All outstanding shares of the Company will be
exchanged for cash and common stock of DMS concurrent with the consummation of
the initial public offering of the common stock of DMS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to customers.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of approximately three months or less at date of purchase to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
which range from three to five years. Leasehold improvements are depreciated
over the shorter of the lease term or the asset's useful life which range from
three to four years. Expenditures for repairs and maintenance are charged to
expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/ payable and accrued expenses approximates
fair value because of the short maturity of these instruments. It is not
practical to estimate the fair value of amounts payable to related party due to
the nature of the relationship involved. The estimated fair value of borrowings
under the line of credit, notes payable and capital lease obligations
approximates their carrying value as their interest rates approximate market
rates for debt with similar terms and average maturities.
F-132
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables are
not collateralized and, accordingly, the Company performs ongoing credit
evaluations of its customers to reduce the risk of loss.
INCOME TAXES
The Company applies the liability method in accounting for income taxes in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS No.
109). Under this method, deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
ADVERTISING
The Company advertises primarily through radio, yellow pages and news print
advertisements. Advertising costs are expensed as incurred and totaled $199 and
$240 for the years ended June 30, 1996 and June 30, 1997, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data for the three months ended September 30, 1996 and
1997 is unaudited; however in the opinion of management, the interim data
includes all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
3. PAYROLL TAX ASSESSMENTS AND GOING CONCERN
The Company has received assessments from the Internal Revenue Service
("IRS") based on an audit of the Company's 1989-1993 federal payroll tax
returns. The assessments are based on the IRS's position that reimbursements
paid to owner-operator employees for automobile allowances constitute additional
compensation rather than payments made pursuant to an accountable plan under
Section 62 (c) of the Internal Revenue Code or pursuant to a valid vehicle
rental arrangement. The Company and legal counsel are contesting the IRS
assessments, and in June 1996 the Company filed a refund suit in the U.S. Court
of Federal Claims after paying one employee's withholding taxes.
As of June 30, 1996 and 1997, the Company had recorded withholding tax
liabilities of $1,176 and $1,281, respectively, for the full amount of the IRS's
assessments, including interest and penalties. The Company has offered to settle
this matter for $400, but a settlement has not been reached. In addition,
because the Company's practices for the treatment of automobile allowances paid
to employees in 1994 and years subsequent may not be in compliance with the
IRS's position, the Company has accrued an additional liability of $1,400 as of
June 30, 1997 ($760 at June 30, 1996) to cover the estimated withholding taxes,
interest and penalties on similar allowances paid in years subsequent to 1993.
Due to the recorded liabilities for the IRS assessments and additional
withholding taxes for periods not yet audited by the IRS, the Company has
recurring losses and a stockholder's deficiency at June 30, 1996 and 1997. The
Company continues to operate as a going concern and the financial statements for
the
F-133
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. PAYROLL TAX ASSESSMENTS AND GOING CONCERN (CONTINUED)
years ended June 30, 1996 and 1997 have been prepared on that basis. However,
the uncertainties related to the Company's ability to satisfy the IRS
assessments and the unasserted claim for additional taxes, interest and
penalties raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts consists of the following:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND WRITE- AT END OF
OF PERIOD EXPENSES OFFS PERIOD
------------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Year ended June 30, 1996.............................................. $ 226 $ 200 $ (254) $ 172
Year ended June 30, 1997.............................................. 172 282 (267) 187
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Vehicles........................................................................................ $ 609 $ 609
Vehicles under capital leases................................................................... 175 322
Furniture and equipment......................................................................... 48 102
Computer equipment.............................................................................. 71 124
Leasehold improvements.......................................................................... 76 82
--------- ---------
979 1,239
Accumulated depreciation and amortization....................................................... (638) (797)
--------- ---------
$ 341 $ 442
--------- ---------
--------- ---------
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Salaries and wages................................................................................ $ 125 $ 139
Payroll taxes..................................................................................... 85 94
Accrued vacation.................................................................................. 100 111
Other............................................................................................. 18 18
--------- ---------
$ 328 $ 362
--------- ---------
--------- ---------
</TABLE>
F-134
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. LINE OF CREDIT AND NOTES PAYABLE
At June 30, 1996, the Company had borrowed $57 under a line of credit
agreement with a bank. The line was unsecured and required monthly interest
payments at a variable rate of interest (11.75% at June 30, 1996). The
outstanding balance was paid in full in December 1996. At September 30, 1997 the
Company had $25 outstanding under a new agreement.
At June 30, 1996, the Company had a note payable with a balance outstanding
of $65. The note was unsecured, non-interest bearing and was paid in full by
December 1996.
At June 30, 1996 and 1997, the Company had a note payable with a balance
outstanding of $166 and $20, respectively. The note was unsecured, bore interest
at 8% and was paid in full in August 1997.
CAPITAL LEASE LIABILITY
The Company has numerous delivery vehicles under various lease agreements,
which qualify as capital leases. Future minimum lease payments related to these
agreements are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------
<S> <C>
1998...................................................................................................... $ 105
1999...................................................................................................... 81
2000...................................................................................................... 61
---------
247
Less imputed intrest...................................................................................... (27)
---------
220
Less: current portion..................................................................................... (89)
---------
$ 131
---------
---------
</TABLE>
8. INCOME TAXES
The following reconciles the federal income tax provision computed at the
U.S. federal income tax rate to the provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Tax benefit computed at federal statutory rate (34%).............................................. $ (23) $ (121)
State tax benefit................................................................................. (5) (22)
Adjustment to deferred tax asset valuation allowance.............................................. 23 139
Other............................................................................................. 5 4
--- ---------
$ -- $ --
--- ---------
</TABLE>
The Company has recorded a full valuation allowance for net deferred tax
assets which otherwise would have been recognized at June 30, 1996 and 1997.
Accordingly, no benefit has been recorded for the loss for the years then ended.
F-135
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. INCOME TAXES (CONTINUED)
Temporary differences which otherwise would give rise to deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Payroll taxes and interest in dispute........................................................ $ 776 $ 1,075
Net operating loss carryforwards............................................................. 436 135
Accrued vacation and interest................................................................ -- 176
Cash basis to accrual basis adjustment....................................................... (186) (153)
Others, net.................................................................................. 32 (7)
--------- ---------
Net deferred tax asset....................................................................... 1,058 1,226
Valuation allowance.......................................................................... (1,058) (1,226)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
At June 30, 1997, the Company had available net operating loss carryforwards
of $370 for federal income tax purposes. The carryforwards are limited to future
taxable earnings of the Company expire in 2009.
9. RELATED PARTY TRANSACTIONS AND BALANCES
Due to related party consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Note payable to stockholder, interest payable at 9%, due February 2000........................... $ 591 $ 591
Note payable to stockholder, interest payable at 9%, due July 2000............................... 28 48
Accrued interest................................................................................. 107 164
--------- ---------
726 803
Receivable from stockholder, non-interest bearing, due on demand................................. (182) (214)
--------- ---------
$ 544 $ 589
--------- ---------
--------- ---------
</TABLE>
F-136
<PAGE>
AERO SPECIAL DELIVERY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain office equipment and automobiles under operating
leases expiring on various dates through 2001. Future minimum lease payments
under operating leases that have noncancelable lease terms at June 30, 1997, are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................................... $ 213
1999.................................................................................................... 162
2000.................................................................................................... 127
2001.................................................................................................... 111
2002.................................................................................................... 9
---------
$ 622
---------
---------
</TABLE>
Rental expense charged to operations was $155 and $217 for the years ended
June 30, 1996 and 1997, respectively.
LITIGATION
In addition to the IRS assessments and additional withholding taxes in
dispute (Note 3), the Company is party to other legal proceedings arising in the
ordinary course of business. In the opinion of management, their ultimate
resolution will not have a material adverse effect on the Company's financial
position or results of operations or cash flows.
F-137
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
S-Car-Go Courier, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of
S-Car-Go Courier, Inc. at December 31, 1996 and September 30, 1997, and the
results of its operations and its cash flows for the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
November 14, 1997
F-138
<PAGE>
S-CAR-GO COURIER, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 75 $ 102
Accounts receivable............................................................... 185 254
<CAPTION>
--------------- ---------------
<S> <C> <C>
Total current assets............................................................ 260 356
Intangible assets, net.............................................................. 7 4
Property and equipment, net......................................................... 18 30
Other assets........................................................................ -- 11
<CAPTION>
--------------- ---------------
<S> <C> <C>
$ 285 $ 401
<CAPTION>
--------------- ---------------
--------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................................. $ 8 $ 3
Accrued expenses.................................................................. 117 62
Taxes payable..................................................................... 29 29
Deferred income taxes............................................................. 21 73
Notes payable to related parties.................................................. 16 73
<CAPTION>
--------------- ---------------
<S> <C> <C>
Total current liabilities....................................................... 191 240
<CAPTION>
--------------- ---------------
<S> <C> <C>
Stockholder's equity
Common stock $1.00 par value; 1,000 shares authorized and issued; 500 shares
issued and outstanding.......................................................... 1 1
Retained earnings................................................................. 93 160
<CAPTION>
--------------- ---------------
<S> <C> <C>
Total stockholder's equity...................................................... 94 161
<CAPTION>
--------------- ---------------
<S> <C> <C>
$ 285 $ 401
<CAPTION>
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to financial statements.
F-139
<PAGE>
S-CAR-GO COURIER, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
------------- ----------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................................... $ 963 $ 1,263 $ 921 $ 1,251
Cost of sales............................................... 614 801 536 710
----- ----------- ----- -----------
Gross margin............................................ 349 462 385 541
----- ----------- ----- -----------
Operating expenses.......................................... 96 140 102 126
Sales and marketing expenses................................ 32 87 75 95
General and administrative expenses......................... 110 206 158 185
Depreciation and amortization............................... 16 15 11 11
----- ----------- ----- -----------
Total expenses.......................................... 254 448 346 417
----- ----------- ----- -----------
Operating income............................................ 95 14 39 124
Interest expense............................................ 2 2 1 5
----- ----------- ----- -----------
Income before provision for income taxes.................... 93 12 38 119
Provision for income taxes.................................. 40 7 18 52
----- ----------- ----- -----------
Net income.................................................. $ 53 $ 5 $ 20 $ 67
----- ----------- ----- -----------
----- ----------- ----- -----------
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE>
S-CAR-GO COURIER, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER COMMON RETAINED TOTAL
OF SHARES STOCK EARNINGS EQUITY
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994............................................... 500 $ 1 $ 35 $ 36
Net income............................................................... 53 53
--
--- ----- -----
Balance, December 31, 1995............................................... 500 1 88 89
Net income............................................................... 5 5
--
--- ----- -----
Balance, December 31, 1996............................................... 500 1 93 94
Net income............................................................... 67 67
--
--- ----- -----
Balance, September 30, 1997.............................................. 500 $ 1 $ 160 $ 161
--
--
--- ----- -----
--- ----- -----
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE>
S-CAR-GO COURIER, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- ------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- ------------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 53 $ 5 $ 20 $ 67
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization.............................................. 16 14 11 11
Changes in assets and liabilities:
Accounts receivable...................................................... (51) (44) (37) (69)
Other assets............................................................. -- 1 2 (11)
Accounts payable......................................................... (19) 1 (7) (5)
Accrued expenses......................................................... (35) 87 63 (55)
Income taxes payable..................................................... -- 28 29 --
Deferred income taxes.................................................... 39 (22) (9) 52
--- --- --- ---------
Net cash provided by (used in) operating activities...................... 3 70 72 (10)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (4) (4) (4) (20)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of (repayments on) notes payable to related parties, net............ (4) (20) (16) 57
--- --- --- ---------
Net (decrease) increase in cash.............................................. (5) 46 52 27
Cash at beginning of period.................................................. 34 29 29 75
--- --- --- ---------
Cash at end of period........................................................ $ 29 $ 75 $ 81 $ 102
--- --- --- ---------
--- --- --- ---------
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE>
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION AND MERGER
S-Car-Go Courier, Inc. (the "Company") was incorporated in 1992. The Company
provides same-day, on-demand delivery services to customers in and around the
San Francisco Bay Area. Two major customers comprised 23% and 29% of revenues in
1995 and 1996 and 23% for the nine months ended September 30, 1997.
The Company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which the Company
will merge with DMS. All outstanding shares of the Company will be exchanged for
cash and common stock of DMS concurrent with the consummation of the initial
public offering of the common stock of DMS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized upon delivery of packages to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.
Property and equipment consists of computer equipment and vehicles with
estimated useful lives of 5 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of accounts receivable/payable and accrued expenses
approximates fair value because of the short maturity of these instruments. The
fair value of notes payable to related parties can not be estimated due to the
related party relationships involved (Note 6).
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables are
not collateralized and accordingly, the Company performs ongoing credit
evaluations of its customers to reduce the risk of loss.
INCOME TAXES
The Company is a C-Corporation for federal and state income tax purposes.
The Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (FAS 109).
F-143
<PAGE>
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data for the nine months ended September 30, 1996 is
unaudited, however, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods.
INTANGIBLE ASSET
The intangible asset is a covenant not to compete agreement entered into
with a former stockholder in connection with the redemption in 1994 of common
stock. Consideration paid for the covenant was $23, which is being amortized
over its life of 5 years.
RECLASSIFICATIONS
Certain reclassifications have been made in the financial statements to
conform to the 1997 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Equipment....................................................... $ 67 $ 67
Vehicles........................................................ 12 32
--- ---
79 99
Less: Accumulated depreciation.................................. (61) (69)
--- ---
$ 18 $ 30
--- ---
--- ---
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1996 was $11
and $10 and $8 for the nine months ended September 30, 1997.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- -----------------
<S> <C> <C>
Payroll and payroll taxes................................................. $ 43 $ 58
Bonus..................................................................... 63 --
Consulting................................................................ 11 --
Other..................................................................... -- 4
----- ---
Total accrued expenses.................................................. $ 117 $ 62
----- ---
----- ---
</TABLE>
F-144
<PAGE>
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------------
1995 1996 1997
----- --------- ---------------------
<S> <C> <C> <C>
Current tax expense
Federal............................................... $ 1 $ 23 $ --
State................................................. -- 6 --
--- --- -----
1 29 --
--- --- -----
Deferred tax expense
Federal............................................... 30 (17) 40
State................................................. 9 (5) 12
--- --- -----
39 (22) 52
--- --- -----
$ 40 $ 7 $ 52
--- --- -----
--- --- -----
</TABLE>
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------
1995 1996 1997
--------- --------- ------------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate (34%)...... $ 31 $ 4 $ 40
State taxes (net of federal benefit)................ 6 1 7
Other............................................... 3 2 5
--------- --------- -------
Provision for income taxes........................ $ 40 $ 7 $ 52
--------- --------- -------
--------- --------- -------
Effective rate.................................... 43.0% 58.3% 43.7%
--------- --------- -------
--------- --------- -------
</TABLE>
Temporary differences giving rise to the Company's deferred tax liabilities
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Deferred tax liabilities:
Accrual basis receivables/payables, net....................... $ 20 $ 72
Property and equipment........................................ 1 1
--- ---
$ 21 $ 73
--- ---
--- ---
</TABLE>
F-145
<PAGE>
S-CAR-GO COURIER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. RELATED PARTY TRANSACTIONS
NOTES PAYABLE TO RELATED PARTIES
In March 1994, the Company borrowed $50 from a relative of the stockholder.
The note matures in March 1998 and bears interest at 7% payable annually.
On May 31, 1997, the Company issued a note payable to the stockholder.
Principal is payable on demand and bears interest at 12% per annum, payable
monthly.
INVESTMENT IN RELATED PARTY
In October 1994, San Francisco Dispatch Brokerage Center, Inc. ("SFDBC"), a
California Corporation, was formed for the purpose of performing the dispatch,
billing, accounting and other related functions for four delivery service
companies in San Francisco. Upon formation of SFDBC, the Company contributed
property and equipment to SFDBC in exchange for 20% of its common stock. The
value of the property and equipment was immaterial. The Company accounts for
this investment under the cost method as results of applying the equity method
would not differ materially.
The expenses of SFDBC are allocated among the four founding delivery service
companies based on transactions and revenue volume of each. In addition, the
Company's stockholder serves as a non-compensated officer of SFDBC. The total
expenses attributed to the Company were $107 and $154 in 1995 and 1996,
respectively and $142 for the nine months ended September 30, 1997. SFDBC also
provides similar services for another delivery service company. The resulting
profit is distributed to the founding companies monthly. These profits totaled
$11 and $14 in 1995 and 1996, respectively, and $16 for the nine months ended
September 30, 1997.
F-146
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Gregory W. Austin
In our opinion, the accompanying statement of assets, liabilities and net
assets and the related statements of income and expense and changes in net
assets and of cash flows present fairly, in all material respects, the financial
position of Gregory W. Austin dba Battery Point Messenger and Alpha Express at
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997 in conformity with generally accepted accounting
principles. These financial statements are your responsibility; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
November 14, 1997
F-147
<PAGE>
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
STATEMENT OF ASSETS, LIABILITIES AND NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
Current assets:
Cash.............................................................................. $ 2 $ 4
Accounts receivable............................................................... 115 143
Prepaid and other current assets.................................................. 9 5
----- -----
Total current assets............................................................ 126 152
Property and equipment, net......................................................... 7 5
Intangible assets, net.............................................................. 21 42
----- -----
$ 154 $ 199
----- -----
----- -----
<CAPTION>
LIABILITIES AND NET ASSETS
<S> <C> <C>
Current liabilities:
Accounts payable.................................................................. $ 2 $ 5
Accrued payroll................................................................... 10 23
Borrowings under line of credit................................................... 21 32
----- -----
Total current liabilities....................................................... 33 60
Net assets.......................................................................... 121 139
----- -----
$ 154 $ 199
----- -----
----- -----
</TABLE>
See accompanying notes to financial statements.
F-148
<PAGE>
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
STATEMENT OF INCOME AND EXPENSE AND CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED SEPTEMBER 30,
DECEMBER 31,
----------------
--------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net sales........................................................................ $ 576 $ 732 $ 532 $ 657
Cost of sales.................................................................... 315 397 279 334
--------- --------- --------- ---------
Gross margin................................................................... 261 335 253 323
--------- --------- --------- ---------
Operating expenses............................................................... 82 113 81 100
Sales and marketing.............................................................. 3 24 10 19
General and administrative expenses.............................................. 26 31 17 22
Depreciation and amortization.................................................... 7 10 7 11
--------- --------- --------- ---------
118 178 115 152
--------- --------- --------- ---------
Operating income................................................................. 143 157 138 171
Interest expense................................................................. 2 3 2 2
--------- --------- --------- ---------
Net income....................................................................... 141 154 136 169
Net assets at beginning of period................................................ 46 106 106 121
Distributions to owner........................................................... (81) (139) (116) (151)
--------- --------- --------- ---------
Net assets at end of period...................................................... $ 106 $ 121 $ 126 $ 139
--------- --------- --------- ---------
--------- --------- --------- ---------
Unaudited pro forma information:
Pro forma income before income taxes........................................... $ 141 $ 154 $ 136 $ 169
Provision for income taxes..................................................... (56) (62) (54) (68)
--------- --------- --------- ---------
Pro forma net income............................................................. $ 85 $ 92 $ 82 $ 101
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-149
<PAGE>
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED SEPTEMBER 30,
DECEMBER 31,
----------------
--------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 141 $ 154 $ 136 $ 169
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization................................................. 7 10 7 11
Changes in assets and liabilities:
Accounts receivable......................................................... (49) (13) (19) (28)
Prepaid and other current assets............................................ (4) (2) 6 4
Accounts payable............................................................ 3 (4) (1) 3
Accrued expenses............................................................ 1 4 8 13
--------- --------- --------- ---------
Net cash provided by operating activities................................. 99 149 137 172
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for customer lists..................................................... (18) (12) (12) (30)
Purchases of property and equipment, net........................................ (10) -- -- --
--------- --------- --------- ---------
Net cash used for investing activities.................................... (28) (12) (12) (30)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) on line of credit, net.................................. 9 2 1 11
Distributions to owner.......................................................... (81) (139) (116) (151)
--------- --------- --------- ---------
Net cash used for financing activities.................................... (72) (137) (115) (140)
--------- --------- --------- ---------
Net (decrease) increase in cash................................................. (1) -- 10 2
Cash at beginning of period..................................................... 3 2 2 2
--------- --------- --------- ---------
Cash at end of period........................................................... $ 2 $ 2 $ 12 $ 4
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-150
<PAGE>
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND MERGER
BUSINESS ORGANIZATION
Battery Point Messenger was founded in 1988 by Gregory W. Austin. In May
1995, Battery Point Messenger purchased the customer list of Alpha Express for
$30 along with the rights to the use of such name. Battery Point Messenger and
Alpha Express (the Company) operate as a sole proprietorship and provide
same-day, on-demand delivery services predominately in the San Francisco central
business district. In July 1997 the Company purchased the customer list of A to
Z Couriers (California) Inc. for $30 and these customers are now serviced by
Battery Point Messenger and Alpha Express.
The financial statements are based on the assets, liabilities and
transactions recorded in the accounting records of Gregory W. Austin dba Battery
Point Messenger and Alpha Express. All assets and liabilities of a personal
nature are not recorded in such records and have been excluded from the
financial statements.
MERGER
The Company has entered into a definitive agreement with Dispatch Management
Services Corporation ("DMS") pursuant to which the Company will merge with the
DMS. The Company's assets will be exchanged for cash and common stock of DMS
concurrent with the consummation of the initial public offering of the common
stock of DMS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.
Property and equipment consists primarily of computer and communications
equipment and is being depreciated over 5 years.
INTANGIBLE ASSETS
The Company capitalizes the cost of purchased customer lists and amortizes
this cost over the period of the related covenants not to compete which range
from 2 to 5 years. Accumulated amortization was $9
F-151
<PAGE>
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS) (CONTINUED)
and $14 at December 31, 1996 and September 30, 1997. Amortization expense was $3
and $6 for the years ended December 31, 1995 and 1996 and $9 for the nine months
ended September 30, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable/payable and accrued
expenses approximates fair value because of the short maturity of these
instruments. Additionally, interest rates on the line of credit are approximate
market rates for debt with similar terms.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts receivable.
Receivables are not collaterized and, accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
ADVERTISING COSTS
The Company advertises through the use of color brochures and direct
mailings. Advertising costs are expensed as incurred and amounted to $2 and $20
for the years ended December 31, 1995 and 1996 and $5 for the nine months ended
September 30, 1997.
INCOME TAXES
The Company is a sole proprietorship and, accordingly, income generated from
its operations is taxed at the individual level. Therefore, a provision for
income taxes has not been provided. Prior to consummation of the merger
discussed in note 1, the Company plans to incorporate. Therefore, proforma
income tax expense has been included in the statement of income and expense and
changes in net assets to reflect the estimated income tax expense the Company
would have incurred had it been a corporation for all periods presented.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data for the nine months ended September 30, 1996 is
unaudited; however in the opinion of management, the interim data includes all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair statement of the results for the interim periods.
F-152
<PAGE>
GREGORY W. AUSTIN, SOLE PROPRIETORSHIP
DBA BATTERY POINT MESSENGER AND ALPHA EXPRESS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS) (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Communication equipment......................................... $ 24 $ 24
Computer equipment.............................................. 11 11
Other........................................................... 5 5
--- ---
40 40
Accumulated depreciation........................................ (33) (35)
--- ---
$ 7 $ 5
--- ---
--- ---
</TABLE>
Depreciation expense was $4 and $4 for the years ended December 31, 1995 and
1996 and $2 for the nine months ended September 30, 1997.
4. LINE OF CREDIT
The Company has a $33 revolving business line of credit with its primary
banking institution. Principal and interest payments, which amount to 2% of the
ending monthly balance, are paid on a monthly basis. The annual percentage rate
was 13.5% at December 31, 1995 and 1996, and 13% at September 30, 1997.
5. RELATED PARTIES
In October 1994, San Francisco Dispatch Brokerage Center, Inc. (SFDBC), a
California Corporation, was formed for the purpose of performing the dispatch,
billing, accounting and other related functions for several delivery services in
San Francisco. Upon formation of SFDBC, the Company contributed property and
equipment to SFDBC in exchange for 20% of its common stock. The value of the
property and equipment was immaterial. The Company accounts for this investment
under the cost method as the results of applying the equity method would not
differ materially.
Upon formation of the SFDBC through February 28, 1997, Gregory W. Austin
served as an officer of the SFDBC and was paid an annual salary of $24. All
salaries and expenses of the SFDBC are allocated among the four founding
delivery service companies based on transactions and revenue volume of each.
SFDBC also provided similar services to other messenger companies. The revenues
earned on these services are distributed to the founding delivery service
companies monthly, and have been classified as a reduction of operating expenses
as they are immaterial. The total expenses, net of associated revenues, charged
to the Company were $82 and $113 in 1995 and 1996 and $100 for the nine months
ended September 30, 1997.
F-153
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Christopher D. Neal
In our opinion, the accompanying statement of assets, liabilities and net assets
and the related statements of income and expense and changes in net assets and
of cash flows present fairly, in all material respects, the financial position
of Christopher D. Neal d/b/a Zap Courier and Crosstown Messenger at September
30, 1997, and the results of operations and cash flows for the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles.
These financial statements are your responsibility; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Sacramento, California
November 25, 1997
F-154
<PAGE>
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
STATEMENT OF ASSETS, LIABILITIES AND NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
---------------
<S> <C>
ASSETS
Current assets:
Cash............................................................................................. $ 12
Accounts receivable.............................................................................. 154
Other current assets............................................................................. 9
-----
Total current assets........................................................................... 175
Property and equipment, net........................................................................ 43
Intangible assets, net............................................................................. 108
-----
$ 326
-----
-----
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable................................................................................. $ 6
Accrued payroll.................................................................................. 24
Current portion of long-term debt................................................................ 73
Borrowings under line of credit.................................................................. 13
-----
Total current liabilities...................................................................... 116
Long-term debt (net of current portion)............................................................ 52
-----
Total liabilities.............................................................................. 168
Net assets......................................................................................... 158
-----
$ 326
-----
-----
</TABLE>
See accompanying notes to financial statements.
F-155
<PAGE>
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
STATEMENT OF INCOME AND EXPENSE AND CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
(UNAUDITED)
Net sales................................................................................ $ 448 $ 593
Cost of sales............................................................................ 243 299
----- -----
Gross margin........................................................................... 205 294
----- -----
Operating expenses....................................................................... 64 84
Sales and marketing...................................................................... 49 55
General and administrative expenses...................................................... 20 31
Depreciation and amortization............................................................ 3 10
----- -----
136 180
----- -----
Operating income......................................................................... 69 114
Interest expense, net.................................................................... (3) (5)
Other income............................................................................. -- 2
----- -----
Net income............................................................................... 66 111
Net assets at beginning of period........................................................ 72 82
Distributions to owner................................................................... (44) (35)
----- -----
$ 94 $ 158
----- -----
----- -----
Net assets at end of period
Unaudited pro forma information:
Pro forma income before income taxes................................................... $ 66 $ 111
Provision for income taxes............................................................. (26) (44)
----- -----
Pro forma net income..................................................................... $ 40 $ 67
----- -----
----- -----
</TABLE>
See accompanying notes to financial statements.
F-156
<PAGE>
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------------
<S> <C> <C>
1996 1997
------------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................... $ 66 $ 111
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.............................................................. 3 10
Changes in assets and liabilities:
Accounts receivable...................................................................... (24) (54)
Other current assets..................................................................... 2 (1)
Accounts payable......................................................................... 1 (8)
Accrued expenses......................................................................... 5 16
--- ---------
Net cash provided by operating activities.............................................. 53 74
--- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of customer list.................................................................... -- (10)
Purchases of property and equipment, net..................................................... (13) (35)
--- ---------
Net cash used for investing activities................................................. (13) (45)
--- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit and long-term debt, net......................................... 10 12
Distributions to owner....................................................................... (44) (35)
--- ---------
Net cash provided by (used for) financing activities................................... (34) (23)
--- ---------
Net increase in cash......................................................................... 6 6
Cash at beginning of period.................................................................. 4 6
--- ---------
Cash at end of period........................................................................ $ 10 $ 12
--- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of customer list and issuance of note payable.................................... $ -- $ 100
--- ---------
--- ---------
</TABLE>
See accompanying notes to financial statements.
F-157
<PAGE>
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION AND MERGER
BUSINESS ORGANIZATION
Zap Courier was founded in 1991 by Christopher D. Neal (the Proprietor) and
operates as a sole proprietorship. In September 1997 Zap Courier purchased the
customer list of Crosstown Messenger along with the rights to the use of such
name. The seller agreed not to compete for a period of four years. Zap Courier
provides same-day, on-demand delivery services predominately in the San
Francisco Metropolitarian Area, while Crosstown Messenger provides immediate
delivery services in the San Francisco central business district area.
Deliveries are performed by bike and vehicle messengers.
The financial statements are based on the assets, liabilities and
transactions recorded in the accounting records of Christopher D. Neal dba Zap
Courier and Crosstown Messenger (the Company). All assets and liabilities of a
personal nature not recorded in such records have been excluded from the
financial statements.
MERGER
The Company has entered into a definitive agreement with Dispatch Management
Services Corporation ("DMS") pursuant to which the Company will merge with the
DMS. The Company's assets will be exchanged for cash and common stock of DMS
Corporation concurrent with the consummation of the initial public offering of
the common stock of DMS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.
Property and equipment consists primarily of vehicles and communications
equipment and is being depreciated over 5 years.
INTANGIBLE ASSET
The $110 purchase price of the customer list and brand name of Crosstown
Messenger, and the covenant not to compete was capitalized and is being
amortized over four years using the straight-line
F-158
<PAGE>
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
method. Amortization expense for the nine months ended September 30, 1997 and
accumulated amortization at September 30, 1997 was $2. The carrying value of
intangible assets is assessed for recoverability by management based on an
analysis of future undiscounted cash flows from the underlying operations.
Management believes that there has been no impairment of intangible assets at
September 30, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable/payable, and accrued
expenses approximate fair value because of the short maturity of these
instruments. Borrowings under the line of credit approximate fair value because
the interest rate on the line of credit approximates market rates for debt with
similar terms. The carrying amount of long-term debt is considered to
approximate its fair value as the effect of imputing interest at market rates
would be immaterial.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables are
not collaterized and accordingly, the Company performs ongoing credit
evaluations of its customers to reduce the risk of loss.
ADVERTISING COSTS
The Company advertises primarily through the print media in weekly San
Francisco Bay area publications. Advertising costs are expensed as incurred and
amounted to $21 for the nine months ended September 30, 1997.
INCOME TAXES
The Company is a sole proprietorship and, accordingly, income generated from
its operations is taxed at the individual level. Therefore, a provision for
income taxes has not been provided. Prior to the consummation of the merger
described in Note 1, the Company plans to incorporate. Therefore, proforma
income tax expense has been included in the statement of income and expense and
changes in net assets to reflect the estimated income tax expense the Company
would have incurred had it been a corporation for all periods presented.
UNAUDITED FINANCIAL STATEMENTS
The interim financial data for the nine months ended September 30, 1996 is
unaudited; however in the opinion of management, the interim data includes all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair statement of the results for the interim periods.
F-159
<PAGE>
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
---------------
<S> <C>
Communication equipment........................................................ $ 13
Vehicles....................................................................... 43
---
56
Accumulated depreciation....................................................... (13)
---
$ 43
---
---
</TABLE>
Depreciation expense for the nine months ended September 30, 1997 was $8.
4. BORROWINGS
LINE OF CREDIT
The Company has a $55 revolving business line of credit with its primary
banking institution. Principal and interest payments, which amount to 2% of the
ending monthly balance, are paid on a monthly basis. The annual percentage rate
was 13.25% at September 30, 1997.
LONG-TERM DEBT
The proprietor issued a non-interest bearing promissory note for $110 in
connection with the purchase of the Crosstown Messenger customer list and brand
name discussed in Note 1. The note is secured by his interest in the Company and
three of his personal vehicles. The note payable is recorded at its gross amount
as imputed interest is immaterial. The Company also has various other notes
payable secured by vehicles of the Company with interest rates of approximately
12%. Payments under these notes are due as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................. $ 73
1999.................................................................................. 52
---------
$ 125
---------
---------
</TABLE>
5. RELATED PARTIES
In October 1994, San Francisco Dispatch Brokerage Center, Inc. (SFDBC), a
California Corporation, was formed for the purpose of performing the dispatch,
billing, accounting and other related functions for several delivery services in
San Francisco. Upon formation of SFDBC, the Company contributed property and
equipment to SFDBC in exchange for 20% of its common stock. The value of the
property and equipment was immaterial. The Company accounts for this investment
under the cost method as the results of applying the equity method would not
differ materially.
F-160
<PAGE>
CHRISTOPHER D. NEAL, SOLE PROPRIETORSHIP
DBA ZAP COURIER AND CROSSTOWN MESSENGER
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. RELATED PARTIES (CONTINUED)
Upon formation of the SFDBC to date, Christopher D. Neal has served as a
non-compensated officer of the SFDBC. All salaries and expenses of the SFDBC are
allocated among the four founding delivery service companies based on
transactions and revenue volume of each. SFDBC also provided similar services to
other messenger companies. The revenues earned on these services are distributed
to the founding delivery service companies monthly and have been classified as a
reduction of operating expenses as they are immaterial. The total expenses, net
of associated revenues, charged to the Company were $84 for the nine months
ended September 30, 1997.
F-161
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Michael S. Studebaker
In our opinion, the accompanying statement of assets, liabilities and net
assets and the related statements of income and expense and changes in net
assets and of cash flows present fairly, in all material respects, the financial
position of Michael S. Studebaker dba Studebaker Messenger Services at September
30, 1997, and the results of operations and cash flows for the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles.
These financial statements are your responsibility; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Sacramento, California
December 12, 1997
F-162
<PAGE>
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
STATEMENT OF ASSETS, LIABILITIES AND NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997
-------------------
<S> <C>
ASSETS
Current assets:
Cash......................................................................................... $ 1
Accounts receivable.......................................................................... 79
-----
Total current assets....................................................................... 80
Property and equipment, net.................................................................... 36
Other assets................................................................................... 2
-----
$ 118
-----
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable $ 3
Accrued payroll.............................................................................. 8
Borrowings under line of credit.............................................................. 14
-----
Total current liabilities.................................................................. 25
Net assets..................................................................................... 93
-----
$ 118
-----
-----
</TABLE>
See accompanying notes to financial statements.
F-163
<PAGE>
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
STATEMENT OF INCOME AND EXPENSE AND CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1996 1997
------------- ---------
<S> <C> <C>
(UNAUDITED)
Net sales.............................................................................. $ 244 $ 309
Cost of sales.......................................................................... 140 179
----- ---------
Gross margin......................................................................... 104 130
----- ---------
Operating expenses..................................................................... 25 30
Sales and marketing.................................................................... 10 15
General and administrative expenses.................................................... 18 30
Depreciation........................................................................... 6 11
----- ---------
59 86
----- ---------
Operating income....................................................................... 45 44
Interest expense....................................................................... (1) (1)
----- ---------
Net income............................................................................. 44 43
Net assets at beginning of period...................................................... 73 83
Distributions to owner................................................................. (40) (33)
----- ---------
Net assets at end of period............................................................ $ 77 $ 93
----- ---------
----- ---------
Unaudited pro forma information:
Pro forma income before income taxes................................................. $ 44 $ 43
Provisions for income taxes.......................................................... 18 17
----- ---------
Pro forma net income................................................................... $ 26 $ 26
----- ---------
----- ---------
</TABLE>
See accompanying notes to financial statements.
F-164
<PAGE>
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1996 1997
------------- ---------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................................. $ 44 $ 43
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation............................................................................ 6 11
Changes in assets and liabilities:
Accounts receivable................................................................... (19) (22)
Other assets.......................................................................... (1) (1)
Accounts payable...................................................................... (1) --
Accrued payroll....................................................................... 19 (1)
--- ---
Net cash provided by operating activities........................................... 48 30
--- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................................................... (8) (9)
--- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in borrowings under line of credit, net.............................................. 7 (1)
Distributions to owner...................................................................... (40) (33)
--- ---
Net cash used for financing activities (33) (34)
--- ---
Net (decrease) increase in cash............................................................. 7 (13)
Cash at beginning of period................................................................. 1 14
--- ---
Cash at end of period....................................................................... $ 8 $ 1
--- ---
--- ---
</TABLE>
See accompanying notes to financial statements.
F-165
<PAGE>
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION AND MERGER
Studebaker Messenger Services was founded in 1990 by Michael S. Studebaker
(the Proprietor) and operates as a sole proprietorship. Studebaker Messenger
Services is messenger service provider offering urgent point-to-point services
primarily for the San Francisco East Bay Area. Deliveries are performed by both
bike and vehicle messengers.
The financial statements are based on the assets, liabilities and
transactions recorded in the accounting records of Michael S. Studebaker dba
Studebaker Messenger Services. All assets and liabilities of a personal nature
not recorded in such records have been excluded from the financial statements.
MERGER
The Company has entered into a definitive agreement with Dispatch Management
Services Corporation ("DMS") pursuant to which the Company will merge with the
DMS. The Company's assets will be exchanged for cash and common stock of DMS
Corporation concurrent with the consummation of the initial public offering of
the common stock of DMS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.
Property and equipment consists primarily of vehicles, bikes and computer and
communication equipment and is being depreciated over 5 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable/payable and accrued
expenses approximate fair value because of the short maturity of these
instruments. Borrowings under the line of credit approximate fair value because
the interest rate on the line of credit approximate market rates for debt with
similar terms.
F-166
<PAGE>
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts receivable.
Receivables are not collaterized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
ADVERTISING COSTS
The Company advertises primarily through print media in San Francisco Bay
Area publications. Advertising costs are expensed as incurred and amounted to
$12 for the nine month period ended September 30, 1997.
INCOME TAXES
The Company is a sole proprietorship and, accordingly, income generated from
its operations is taxed at the individual level, therefore, a provision of
income taxes has not been provided. Prior to consummation of the merger
discussed in Note 1, the Company plans to incorporate. Proforma income tax
expense has been included in the statement of income and expense and changes in
net assets to reflect the estimated income tax expense the Company would have
incurred had it been a corporation for all periods presented.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data for the nine month period ended September 30,
1996 is unaudited; however in the opinion of management, the interim data
includes all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
---------------
<S> <C>
Vehicles............................................................. $ 40
Communication equipment.............................................. 14
Computer equipment................................................... 13
Furniture and fixtures............................................... 8
Other................................................................ 7
---
82
Accumulated depreciation............................................. (46)
---
$ 36
---
---
</TABLE>
F-167
<PAGE>
MICHAEL S. STUDEBAKER, SOLE PROPRIETORSHIP
DBA STUDEBAKER MESSENGER SERVICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. LINE OF CREDIT
The Company has a $19 revolving business line of credit with its primary
banking institution. Principal and interest payments, which amount to 2% of the
ending monthly balance, are paid on a monthly basis. The annual percentage rate
was 13.25% at September 30, 1997.
5. RELATED PARTIES
In October 1994, San Francisco Dispatch Brokerage Center, Inc. (SFDBC), a
California Corporation, was formed for the purpose of performing the dispatch,
billing, accounting and other related functions for several delivery services in
San Francisco. Upon formation of SFDBC, the Company contributed property and
equipment to SFDBC in exchange for 20% of its common stock. The value of the
property and equipment was immaterial. The Company accounts for this investment
under the cost method as the results of applying the equity method would not
differ materially.
Upon formation of the SFDBC through February 28, 1997, Michael S. Studebaker
served as a non-compensated officer. All salaries and expenses of the SFDBC are
allocated among the four founding delivery service companies based on
transactions and revenue volume of each. SFDBC also provided similar services to
other messenger companies. The revenues earned on these services are distributed
to the founding delivery service companies monthly and have been classified as a
reduction of operating expenses as they are immaterial. The total expenses, net
of associated revenues, charged to the Company were $30 for the nine months
ended September 30, 1997.
F-168
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Washington Express Services, Inc.
In our opinion, the accompanying balance sheets, and the related statements
of operations, of stockholders' equity (deficiency) and of cash flows present
fairly, in all material respects, the financial position of Washington Express
Services, Inc. at September 30, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Detroit, Michigan
November 7, 1997
F-169
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
ASSETS
Current assets
Cash......................................................................................... $ 7 $ 85
Accounts receivable, net..................................................................... 681 800
Loan receivable--stockholder................................................................. 90
Prepaid and other current assets............................................................. 57 159
--------- ---------
Total current assets....................................................................... 835 1,044
Property and equipment, net.................................................................... 242 458
Deposits....................................................................................... 62 36
--------- ---------
Total assets............................................................................... $ 1,139 $ 1,538
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit............................................................................... $ 403 $ 600
Accounts payable and accrued expenses........................................................ 176 241
Deferred income tax liability................................................................ 236 248
Obligations under capital leases............................................................. 33 58
Notes payable................................................................................ 77 84
--------- ---------
Total current liabilities.................................................................... 925 1,231
Long-term liabilities
Obligations under capital leases............................................................. 73 83
Notes payable................................................................................ 98
Notes payable--stockholders.................................................................. 116 143
--------- ---------
Total liabilities.......................................................................... 1,114 1,555
--------- ---------
Commitments
Stockholders' Equity
Common stock $.01 par value (100,000 shares authorized; 9,332 and 5,926 issued and
outstanding) and additional paid-in capital................................................ 377 249
Advance to stockholder (Note 14)............................................................. (135)
Accumulated deficit.......................................................................... (217) (266)
--------- ---------
Total stockholders' equity (deficiency).................................................... 25 (17)
--------- ---------
Total liabilities and stockholders' equity................................................. $ 1,139 $ 1,538
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
F-170
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Net sales............................................................................ $ 6,056 $ 5,800 $ 5,756
Cost of sales........................................................................ 3,239 3,141 2,935
--------- --------- ---------
Gross margin....................................................................... 2,817 2,659 2,821
Selling, General and Administrative Expenses
Operating expenses................................................................. 1,666 1,555 1,677
Sales and marketing................................................................ 459 483 447
General and administrative expenses................................................ 435 390 578
Depreciation and amortization...................................................... 67 91 120
--------- --------- ---------
Operating income (loss).............................................................. 190 140 (1)
Other (income) expense
Interest expense................................................................... 91 70 95
Other, net......................................................................... 4 (18) (109)
--------- --------- ---------
Income before provision for income taxes............................................. 95 88 13
Provision for income taxes........................................................... 40 38 12
--------- --------- ---------
Net income........................................................................... $ 55 $ 50 $ 1
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-171
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
EARNINGS TOTAL
COMMON ADVANCE TO (ACCUMULATED STOCKHOLDERS'
STOCK STOCKHOLDER DEFICIT) EQUITY
----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994................................ $ 377 $ -- $ (322) $ 55
Advances to stockholder...................................... (135) (135)
Net income................................................... 55 55
----- --- ----- ---
Balance at September 30, 1995................................ 377 (135) (267) (25)
Net income................................................... 50 50
----- --- ----- ---
Balance at September 30, 1996................................ 377 (135) (217) 25
Repurchase and retirement of 3,906 shares of common stock.... (158) 135 (50) (73)
Issuance of 500 shares of common stock....................... 30 30
Net income................................................... 1 1
----- --- ----- ---
Balance at September 30, 1997................................ $ 249 $ -- $ (266) $ (17)
----- --- ----- ---
----- --- ----- ---
</TABLE>
See accompanying notes to financial statements.
F-172
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net income................................................................................. $ 55 $ 50 $ 1
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation and amortization............................................................ 66 91 120
Loss on disposal of assets............................................................... 5 1
Deferred income taxes.................................................................... (20) 29 12
Changes in operating assets and liabilities:
Accounts receivable.................................................................... (1) 4 (119)
Deposits............................................................................... 2 (45) 26
Prepaid expenses....................................................................... 19 (4) (102)
Accounts payable and accrued expenses.................................................. 156 (90) 65
Accrued interest payable--shareholders................................................. 8 8 9
--- --- ---
Net cash provided by operating activities.................................................. 290 44 12
--- --- ---
INVESTING ACTIVITIES
Net cash used in investing activities-purchase of property and equipment................... (21) (111) (265)
--- --- ---
FINANCING ACTIVITIES
Increase (reduction) in line of credit..................................................... (155) 118 197
Repayments from (advances to) stockholder.................................................. (41) (55)
Proceeds from issuance of common stock..................................................... 30
Decrease (increase) in loan receivable--stockholder........................................ (90) 90
Principal payments on notes payable--stockholders.......................................... (4) (11)
Proceeds from notes payable................................................................ 77 105
Principal payments on capital lease obligations............................................ (50) (39) (36)
--- --- ---
Net cash provided by (used in) financing activities........................................ (250) 55 331
--- --- ---
Net increase (decrease) in cash............................................................ 19 (12) 78
Cash at beginning of period................................................................ -- 19 7
--- --- ---
Cash at end of period...................................................................... $ 19 $ 7 $ 85
--- --- ---
--- --- ---
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................................................... $ 83 $ 62 $ 86
--- --- ---
--- --- ---
Income taxes........................................................................... $ 14 $ 51 $ 2
--- --- ---
--- --- ---
Capital lease obligations incurred for purchase of property and equipment................ $ 73 $ 66 $ 71
--- --- ---
--- --- ---
See Note 14 for additional disclosure of non-cash transactions.
</TABLE>
See accompanying notes to financial statements.
F-173
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
Washington Express Services, Inc. (the "Company") provides same-day,
on-demand delivery services in the Washington, DC metropolitan area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is primarily
provided for using the modified accelerated cost recovery system over the
estimated useful lives of the related assets (5 to 31.5 years).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable/payable, notes
receivable/payable, accrued expenses and amounts payable under line of credit
agreements approximates fair value because of the short maturity of these
instruments. The estimated fair value of long-term debt and other long-term
liabilities approximates its carrying value. Additionally, interest rates on
outstanding debt are at rates which approximate market rates for debt with
similar terms and average maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables are
not collaterized and accordingly, the Company performs ongoing credit
evaluations of its customers to reduce the risk of loss.
INCOME TAXES
The Company is a C-Corporation for federal and state income tax purposes.
The Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (FAS 109).
F-174
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended September 30, 1995...................................... $ 10 $ 25 $ (34) $ 1
Year ended September 30, 1996...................................... $ 1 $ 6 $ (1) $ 6
Year ended September 30, 1997...................................... $ 6 $ 14 $ (10) $ 10
</TABLE>
4. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets comprised the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
<S> <C> <C>
1996 1997
----- ---------
Prepaid insurance................................................................................. $ 17 $ 8
Prepaid income taxes.............................................................................. 19 13
Management fee receivable......................................................................... -- 61
Due from DMS...................................................................................... -- 59
Other............................................................................................. 21 18
--- ---------
Total prepaid and other current assets.......................................................... $ 57 $ 159
--- ---------
--- ---------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment comprised the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Computer equipment................................................................................ $ 381 $ 447
Office equipment.................................................................................. 222 461
Furniture and fixtures............................................................................ 38 46
Leasehold improvements............................................................................ -- 23
Other............................................................................................. 30 30
--------- ---------
671 1,007
Accumulated depreciation and amortization......................................................... 429 549
--------- ---------
$ 242 $ 458
--------- ---------
--------- ---------
</TABLE>
Included in property and equipment at September 30, 1996 and 1997 are assets
acquired under capital leases in the gross amount of $226 and $297 and
accumulated depreciation of $123 and $166, respectively. Related depreciation
expense aggregated $31, $46 and $43 for the years ended September 30, 1995, 1996
and 1997, respectively.
F-175
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. LINE OF CREDIT
The Company maintains a $600 revolving line of credit with a financial
institution that expires on February 28, 1998. Pursuant to the terms of the
agreement, interest is payable monthly at the rate of prime plus 1.25% (9.75% at
September 30, 1997). The line of credit is secured by the Company's accounts
receivable and equipment, and is personally guaranteed by the Company's
shareholders. The Company was in violation of certain financial covenants of the
loan agreement pertaining to tangible net worth and leverage ratios for the
years ended September 30, 1996 and 1997. However, the Company has obtained a
waiver from the financial institution.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses comprised the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Accounts payable, trade........................................................................... $ 60 $ 74
Accrued payroll................................................................................... 65 71
Accrued courier commissions....................................................................... -- 69
Income taxes payable.............................................................................. 26 --
Other............................................................................................. 25 27
--------- ---------
Total accounts payable and accrued expenses..................................................... $ 176 $ 241
--------- ---------
--------- ---------
</TABLE>
8. INCOME TAXES
The provision for income taxes comprises:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- ----- -----
Current tax expense.......................................................................... $ 60 $ 9 $ --
Deferred tax expense......................................................................... (20) 29 12
--- --- ---
Provision for income taxes................................................................... $ 40 $ 38 $ 12
--- --- ---
--- --- ---
</TABLE>
Deferred income tax assets and liabilities result from timing differences in
the recognition of revenue and expense for tax and financial reporting purposes.
Principally from the use of the accrual method of accounting for financial
reporting purposes and the cash basis of reporting for tax purposes, the Company
has recorded current net deferred income tax liabilities of $236 at September
30, 1996 and $248 at September 30, 1997, net of the tax effect of approximately
$80 in net operating loss carryforwards available to offset federal taxable
income through 2012.
F-176
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. INCOME TAXES (CONTINUED)
The temporary differences that gave to a net deferred tax liability are
shown below, net of their tax effect:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Deferred tax liability--deferred income resulting from cash versus accrual method of reporting for
income tax purposes............................................................................. $ 236 $ 280
Deferred tax asset--net operating loss carryforward............................................... -- (32)
--------- ---------
Net deferred tax liability........................................................................ $ 236 $ 248
--------- ---------
--------- ---------
</TABLE>
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Taxes computed at federal statutory rate (35%)............................................ $ 33 $ 31 $ 5
State taxes (net of federal benefit)...................................................... 8 2 --
Surcharge exemption....................................................................... (12) (8) --
Non-deductible meals and entertainment.................................................... 7 10 5
Non-deductible officers' life insurance................................................... 3 3 2
Other..................................................................................... 1 -- --
--------- --------- ---------
Provision for income taxes.............................................................. $ 40 $ 38 $ 12
--------- --------- ---------
--------- --------- ---------
Effective tax rate...................................................................... 42% 43% 92%
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan covering substantially all
of its employees. The Plan is a qualified savings plan under the provisions of
Section 401(k) of the Internal Revenue Code and allows eligible employees to
defer up to 15% of their compensation subject to the maximum allowable limit.
The Company matches one-third of the employee contribution up to the first 9%.
Plan participants are immediately vested 100% in their contributions and vest at
the rate of 20% per year in employer contributions with full vesting occurring
after five years of service. Employer contributions aggregated $20, $22 and $16
for the years ended September 30, 1995, 1996 and 1997, respectively.
F-177
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. CAPITAL LEASES
The Company has entered into lease agreements for the use of equipment
expiring at various times through July 2000 that are accounted for as capital
leases. The future minimum lease payments under the capital lease agreements are
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------
<S> <C>
1998............................................................................................ $ 72
1999............................................................................................ 65
2000............................................................................................ 24
---------
Minimum lease payments.......................................................................... 161
Less: amount representing interest.............................................................. 20
---------
Present value of minimum lease payment.......................................................... 141
Less: current portion of capital lease obligations.............................................. 58
---------
Long-term portion of capital lease obligations.................................................. $ 83
---------
---------
</TABLE>
11. NOTES PAYABLE
Notes Payable consists of the following at September 30, 1997:
<TABLE>
<S> <C> <C>
Equipment loan at an interest rate of 9.75% payable in 24 equal monthly
installments through September 1999. The Company was in violation of certain
financial covenants of the loan agreement for the years ended September 30, 1996
and 1997. However, the Company has obtained a waiver from the financial
a) institution...................................................................... $ 117
Equipment loan at an interest rate of 12.50% payable in 36 equal monthly
b) installments through September, 1999............................................. 65
---
182
Less: current portion............................................................ (84)
---
$ 98
---
---
</TABLE>
F-178
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. COMMITMENTS
The Company has entered into agreements for the lease of certain office
equipment and office space which expire at various times through November 2006.
Future minimum rental payments required under leases that have noncancelable
lease terms in excess of one year at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------
<S> <C>
1998............................................................................................ $ 60
1999............................................................................................ 57
2000............................................................................................ 48
2001............................................................................................ 50
2002............................................................................................ 48
Thereafter...................................................................................... 201
---------
$ 464
---------
---------
</TABLE>
Rental expense charged to operations was approximately $70, $60 and $74 for
the years ended September 30, 1995, 1996 and 1997, respectively.
13. STOCK OPTION AGREEMENT
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This statement is effective for fiscal years beginning after
December 15, 1995 and sets forth standards for accounting for stock-based
compensation. SFAS No. 123 allows the use of either a "fair value" based method
of accounting or the "intrinsic value" based method determined in accordance
with Accounting Principles Board ("APB") Opinion No. 25. The Company elected to
account for stock-based compensation in accordance with the intrinsic value
method of APB Opinion No. 25.
In May 1991, the Company granted one of its employees the right to purchase
up to 500 shares of the Company's common stock at an exercise price of $60 per
share. The option initially expired on October 1, 1996, but was shortly
thereafter extended to October 31, 1997 with no other revisions to the terms of
the agreement. During the year ended September 30, 1997, the Company issued 500
shares of its common stock to the employee at a price of $60 per share. In
accordance with APB No. 25, the Company has not recognized compensation expense
related either to the original issuance of this option or to its extension based
on management's estimate of the fair value of the common stock. No other stock
options were granted, exercised, forfeited or expired during the years ended
September 30, 1995, 1996 and 1997.
14. RELATED PARTY TRANSACTIONS
The Company had entered into an agreement with a stockholder whereby the
Company had the right to purchase 3,557 shares of the Company's common stock
from the shareholder at an aggregate purchase price of $190. Such shares
represented approximately 38% of the Company's outstanding common stock at
September 30, 1996. As of September 30, 1996, the Company advanced to the
shareholder amounts aggregating $135 related to the contemplated purchase of the
3,557 shares. Accordingly, such amounts advanced to the stockholder have been
classified as a reduction of stockholders' equity on the accompanying September
30, 1996 balance sheet.
F-179
<PAGE>
WASHINGTON EXPRESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company had entered into a second agreement with a stockholder whereby
the Company had the right to purchase 349 shares of the Company's common stock
from the shareholder at an aggregate purchase price of $18. Such shares
represented approximately 4% of the Company's outstanding common stock at
September 30, 1996.
During the year ended September 30, 1997, the Company exercised its rights
pursuant to the above agreements and purchased 3,906 shares of its common stock
in exchange for $208. Such shares have been subsequently retired by the Company.
In accordance with APB Opinion No. 6, the excess of purchase price over par
value was allocated between additional paid-in capital and retained earnings in
the amount of $158 and $50, respectively.
At September 30, 1996, loan receivable-stockholder comprised of a short-term
loan made to the Company's Chief Executive Officer (the "Executive") during the
year ended September 30, 1996. During the year ended September 30, 1997, such
loan was repaid to the Company by the Executive.
Notes payable-stockholders at September 30, 1996 and 1997 aggregated $116
and $143, including accrued interest of $46 and $55, respectively, and represent
unsecured loans made to the Company by two of its shareholders. The shareholder
loans are subordinate to the Company's obligations under its line of credit
agreement. Interest on the loans is accrued at the rate of 7% and 12% per annum.
Related interest expense charged to operations amounted to $8 , $8 and $9 for
the years ended September 30, 1995, 1996 and 1997, respectively.
The Company rents office space in Fairfax, Virginia, from HPHC Associates, a
partnership in which certain shareholders of the Company are partners. The
rental of this space is provided for on a month-to-month basis with no lease
commitment. For the years ending September 30, 1996 and 1997, related expenses
charged to operations aggregated approximately $11 and 21.
15. UNAUDITED SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with DMS Corporation ("DMS") pursuant to which the Company will merge with DMS.
All outstanding shares of the Company will be exchanged for cash and stock
concurrent with the consummation of the initial public offering of the common
stock of DMS.
F-180
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
MLQ Express, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of MLQ Express, Inc. at February 28,
1996 and 1997 and the results of its operations and its cash flows for the three
years in the period ended February 28, 1995, 1996 and 1997 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Atlanta, Georgia
August 27, 1997
F-181
<PAGE>
MLQ EXPRESS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 28, SEPTEMBER 30,
-------------------- -------------
1996 1997 1997
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents...................................................... $ 1 $ 1 $ 36
Accounts receivable, net....................................................... 504 763 817
Prepaid and other current assets............................................... 96 124 69
--------- --------- ------
Total current assets......................................................... 601 888 922
Property and equipment, net...................................................... 138 133 171
Other assets..................................................................... 95 86 99
--------- --------- ------
$ 834 $ 1,107 $ 1,192
--------- --------- ------
--------- --------- ------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Line of credit................................................................. $ 115 $ -- $ --
Current maturities long-term debt.............................................. 65 -- --
Accounts payable............................................................... 19 97 44
Accrued expenses............................................................... 122 179 202
Note payable--related parties.................................................. -- 394 305
Current maturities long-term debt--related parties............................. 110 -- --
Deferred income taxes.......................................................... 86 118 124
--------- --------- ------
Total current liabilities.................................................... 517 788 675
Long-term debt, net of current maturities........................................ 48 -- --
Long-term debt--related parties, net of current maturities....................... 30 -- --
--------- --------- ------
Total liabilities............................................................ 595 788 675
--------- --------- ------
Commitments and contingent liabilities
Stockholder's Equity.............................................................
Common stock, $1.00 par value; 10,000 shares authorized; 150 shares issued and
outstanding.................................................................. -- -- --
Additional paid-in capital..................................................... 18 18 18
Retained earnings.............................................................. 221 301 499
--------- --------- ------
Total stockholder's equity................................................... 239 319 517
--------- --------- ------
$ 834 $ 1,107 $ 1,192
--------- --------- ------
--------- --------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-182
<PAGE>
MLQ EXPRESS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED FEBRUARY 28, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales........................................................ $ 4,102 $ 4,053 $ 5,310 $ 2,933 $ 3,629
Cost of sales.................................................... 2,372 2,430 3,296 1,809 2,153
--------- --------- --------- --------- ---------
Gross margin................................................... 1,730 1,623 2,014 1,124 1,476
Operating expenses............................................... 515 511 579 333 405
Sales and marketing.............................................. 163 188 233 117 146
General and administrative expenses.............................. 1,124 853 991 520 675
Depreciation and amortization.................................... 88 91 94 56 41
--------- --------- --------- --------- ---------
Total expenses................................................. 1,890 1,643 1,897 1,026 1,267
--------- --------- --------- --------- ---------
Operating income (loss)........................................ (160) (20) 117 98 209
Other (income) expense
Interest expense............................................... 17 30 43 24 16
Other, net..................................................... (52) (62) (38) (24) (42)
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes.................. (125) 12 112 98 235
Provision for income taxes....................................... (6) 13 32 20 37
--------- --------- --------- --------- ---------
Net income (loss)................................................ $ (119) $ (1) $ 80 $ 78 $ 198
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-183
<PAGE>
MLQ EXPRESS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 1995, 1996 AND 1997
AND FOR THE SEVEN MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1994.............................. 150 $ -- $ 18 $ 341 $ 359
Net loss.................................................. -- -- -- (119) (119)
--- --- --- ----- -----
Balance at February 28, 1995.............................. 150 -- 18 222 240
Net loss.................................................. -- -- -- (1) (1)
--- --- --- ----- -----
Balance at February 28, 1996.............................. 150 -- 18 221 239
Net income................................................ -- -- -- 80 80
--- --- --- ----- -----
Balance at February 28, 1997.............................. 150 $ -- $ 18 $ 301 $ 319
Net income (unaudited).................................... -- -- -- 198 198
--- --- --- ----- -----
Balance at September 30, 1997 (unaudited)................. 150 $ -- $ 18 $ 499 $ 517
--- --- --- ----- -----
--- --- --- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-184
<PAGE>
MLQ EXPRESS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED FEBRUARY 28, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................... $ (119) $ (1) $ 80 $ 78 $ 198
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization................................... 88 91 94 21 41
Changes in assets and liabilities
Accounts receivable........................................... (37) (17) (259) (367) (54)
Prepaid and other current assets.............................. (9) (54) (28) -- 55
Other assets.................................................. (17) (22) (19) (19) (13)
Accounts payable.............................................. 37 (22) 78 (4) (52)
Accrued expenses.............................................. -- (26) 57 48 22
Deferred income taxes......................................... (6) 13 32 54 6
--------- --------- --------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............ (63) (38) 35 (189) 203
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................................. (102) (48) (61) (38) (79)
--------- --------- --------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES...................... (102) (48) (61) (38) (79)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
(Increase) decrease in line of credit............................... 85 30 (115) 185 --
Borrowings on notes payable......................................... 183 155 1,451 90 30
Payments on notes payable........................................... (135) (120) (1,310) (15) (119)
--------- --------- --------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............ 133 65 26 260 (89)
--------- --------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS..................... (32) (21) -- 33 35
Cash and cash equivalents at beginning of the period................ 54 22 1 1 1
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of the period...................... $ 22 $ 1 $ 1 $ 34 $ 36
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest........................................................ $ 8 $ 32 $ 45 $ 25 $ --
Income taxes.................................................... 57 44 -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-185
<PAGE>
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1996 AND 1997
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ORGANIZATION
The Company, previously Morgan, Lee, Quail and Associates, Inc., was
incorporated October 25, 1982. MLQ Express, Inc. ("MLQ" or the "Company"), a
Georgia Corporation, was re-named on June 6, 1986. The Company is organized into
two divisions. The courier division provides same-day, on-demand delivery and
logistics services in the greater Atlanta metropolitan area. The attorney
services division provides court house research and process services to law
firms, financial institutions, and environmental firms throughout the nation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when services are provided to customers.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately three
months or less at date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method and accelerated methods over the estimated useful lives
of the related assets (5 to 39 years).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes payable and accrued expenses approximates fair value
because of the short maturity of these instruments. The estimated fair value of
long-term debt approximates its carrying value. Additionally, interest rates on
outstanding debt are at rates which approximate market rates for debt with
similar terms and average maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts receivable.
Receivables are not collaterized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
F-186
<PAGE>
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1996 AND 1997
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
UNAUDITED FINANCIAL INFORMATION
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods.
INTANGIBLE ASSETS
Intangible assets represent the purchase price of acquired customer list.
Intangible assets are amortized on a straight-line basis over 60 months. The
customer list was acquired January 31, 1992 for $155. Accumulated amortization
amounted to $128 and $155 as of February 28, 1996 and 1997, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (SFAS 109).
2. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE
BEGINNING TO AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended February 28, 1996..................... $ 8 $ 2 $ (2) $ 8
Year ended February 28, 1997..................... $ 8 $ 7 $ (4) $ 11
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Equipment.................................................................... $ 222 $ 247
Furniture and fixtures....................................................... 134 146
Other........................................................................ 53 51
--------- ---------
409 444
Less accumulated depreciation................................................ (271) (311)
--------- ---------
$ 138 $ 133
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended February 28, 1995, 1996 and 1997
was approximately $57, $60 and $66, respectively.
F-187
<PAGE>
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1996 AND 1997
(DOLLARS IN THOUSANDS)
4. LINE OF CREDIT
The Company has a line of credit with a commercial bank with an available
limit of $150 which is due on demand, bears interest at prime and is guaranteed
by the sole stockholder. The line expires annually in May. As of February 28,
1996, $115 was outstanding. There were no borrowings outstanding as of February
28, 1997.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Payroll and payroll taxes..................................................... $ 33 $ 56
Commissions................................................................... 28 64
Profit sharing contribution................................................... 52 52
Other......................................................................... 9 7
--------- ---------
$ 122 $ 179
--------- ---------
--------- ---------
</TABLE>
6. EMPLOYEE BENEFITS
The Company has a profit sharing plan for all employees who meet specified
age and service requirements. Total profit sharing expense amounted to $49, $52
and $53 for the years ended February 28, 1995, 1996 and 1997, respectively.
7. INCOME TAXES
A net operating loss of $125 was generated in 1995. The net operating loss
was used to offset against taxable income in 1996 and 1997, resulting in no
current income tax expense for those periods.
The provision for income taxes consist of:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current tax expense (benefit)
Federal............................................................ $ -- $ -- $ --
State and local.................................................... -- -- --
--------- --------- ---------
-- -- --
Deferred tax expense (benefit)....................................... (6) 13 32
--------- --------- ---------
Provision for income taxes........................................... $ (6) $ 13 $ 32
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred taxes result from temporary differences in recognition of certain
items for federal income tax and financial reporting purposes. Deferred tax
liabilities are attributable to the difference created due to the Company's
accrual method of financial reporting and cash basis method of income tax
filing.
F-188
<PAGE>
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1996 AND 1997
(DOLLARS IN THOUSANDS)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Term note payable to related party due August 1998; with interest at prime
due quarterly.............................................................. $ 30 $ --
Term note payable to related party due August 1997; with interest at prime
due maturity............................................................... 60 --
Term note payable to related party due July 1996; with interest at prime due
maturity................................................................... 50 --
Installment note payable due in annual installments through December, 1998;
with interest at prime due quarterly....................................... 113 --
--------- ---------
253 --
Less current portion..................................................... (175) --
--------- ---------
$ 78 $ --
--------- ---------
--------- ---------
</TABLE>
9. RELATED PARTY
The Company entered into a one year employment contract with its sole
stockholder, expiring July 31, 1998, that provides for a base salary and
benefits which approximates $200. The agreement includes non-compete covenants.
Additionally, the Company pays the premiums on a life insurance policy for which
the sole stockholder is the beneficiary. Life insurance premiums paid by the
Company approximated $16, $11 and $19 for the years ended February 28, 1995,
1996 and 1997, respectively. The Company has prepaid lease payments for a period
of two years for an automobile used by the sole stockholder. Lease expenses
charged to operations approximates $7, $6 and $7 for the years ended February
28, 1995, 1996 and 1997, respectively.
In 1996, the Company entered into a loan agreement (the "Agreement") with
its sole stockholder. The Agreement provided the funds to reduce all of the
Company's non-related party debt and for periodic borrowings for working capital
purposes. The Agreement bears interest at prime less percent due quarterly, with
the principal balance due on demand. The outstanding balance at February 28,
1997 amounted to $394.
10. COMMITMENTS AND CONTINGENT LIABILITIES
OPERATING LEASES
The Company leases office space under an operating lease agreement and
certain operating equipment on a month to month basis. The office space lease
agreement includes a rental escalation clause
F-189
<PAGE>
MLQ EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1996 AND 1997
(DOLLARS IN THOUSANDS)
10. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
which increases annual rental by 3.5% over the previous year's rent. Future
minimum lease payments required under the noncancelable lease terms at February
28, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................. $ 126
1999.................................................................................. 138
2000.................................................................................. 78
2001.................................................................................. 10
2002.................................................................................. 10
Thereafter............................................................................ 6
---------
$ 368
---------
---------
</TABLE>
Rental expense charged to operations was approximately $76, $73 and $99 for
the years ended February 28, 1995, 1996 and 1997, respectively.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain officers which expire at
various dates through November 30, 1997. The agreements provide for salary and
payment of other benefits. The aggregate commitment for future salaries at
February 28, 1997 excluding other benefits was $320, (see note 9).
11. CONCENTRATIONS OF CREDIT RISK
The Company markets and sells its products to a broad base of clients. One
of the Company's clients, Turner Properties, Inc., accounted for approximately
19% of net sales for the year ended February 28, 1997. No other clients
constituted 10% or more of net sales.
12. BUSINESS SEGMENT
Summarized data for the Company's courier division and attorney services
division are as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues-unaffiliated customers
Courier division............................................... $ 3,528 $ 3,550 $ 4,823
Attorney service division...................................... $ 574 $ 503 $ 487
Operating income (loss)
Courier division............................................... $ (104) $ 32 $ 112
Attorney service division...................................... (56) (52) 5
</TABLE>
13. SUBSEQUENT EVENTS
The Company and its stockholder have entered into an agreement with DMS
Corporation ("DMS") pursuant to which the Company will merge with DMS. All
outstanding shares of the Company will be exchanged for cash concurrent with the
consummation of the initial public offering of the common stock of DMS.
F-190
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
A Courier, Inc. and Affiliates
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of A Courier,
Inc. and affiliates as listed in Note 1 at December 31, 1996 and September 30,
1997 and the results of their operations and their cash flows for the year ended
December 31, 1996 and the nine-month period ended September 30, 1997 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Atlanta, Georgia
December 19, 1997
F-191
<PAGE>
A COURIER, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash.............................................................................. $ 16 $ 88
Accounts receivable, net.......................................................... 845 902
Prepaid insurance................................................................. 49 2
Other current assets.............................................................. 18 15
Due from affiliate................................................................ -- 87
------ ------
Total current assets............................................................ 928 1,104
Property and equipment, net....................................................... 247 222
Goodwill, net..................................................................... 65 62
Deposits.......................................................................... -- 1
------ ------
$ 1,240 $ 1,389
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................................. $ 170 $ 82
Accrued expenses and other liabilities............................................ 72 180
Note payable--related parties..................................................... 152 100
Current maturities long-term debt................................................. 46 48
Current maturities long-term debt--related parties................................ 18 13
------ ------
Total current liabilities....................................................... 458 423
Long-term debt, net of current maturities........................................... 38 13
Long-term debt--related parties, net of current maturities.......................... 13 13
------ ------
Total liabilities............................................................... 509 449
------ ------
Commitments and contingencies
Stockholder's equity
Common stock: A Courier, Inc. $1.00 par value 500 shares authorized; 500 shares
issued and outstanding.......................................................... 1 1
Common stock: Express Management, Inc. $1.00 par value 100,000 shares authorized;
500 shares issued and outstanding............................................... 1 1
Additional paid-in capital........................................................ 2 54
Retained earnings................................................................. 727 884
------ ------
Total stockholders' equity...................................................... 731 940
------ ------
$ 1,240 $ 1,389
------ ------
------ ------
</TABLE>
See accompanying notes to combined financial statements.
F-192
<PAGE>
A COURIER, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales............................................................ $ 6,020 $ 4,380 $ 5,367
Cost of sales........................................................ 3,447 2,481 3,091
------ ------ ------
Gross margin....................................................... 2,573 1,899 2,276
Operating expenses................................................... 1,093 776 1,016
Sales and marketing.................................................. 530 305 531
General and administrative expenses.................................. 430 292 422
Depreciation and amortization........................................ 74 52 48
------ ------ ------
Operating income................................................... 446 474 259
------ ------ ------
Other (income) expense
Interest income.................................................... (1) (1) (1)
Interest expense................................................... 14 9 12
(Gain) loss on disposal of assets.................................. (6) -- 19
Other, net......................................................... (21) (20) (8)
------ ------ ------
Net income........................................................... $ 460 $ 486 $ 237
------ ------ ------
------ ------ ------
Unaudited pro forma information
Pro forma net income before provision For income taxes............. 460 486 237
Provision for income taxes......................................... $ 174 $ 185 $ 90
------ ------ ------
Pro forma net income (see Note 1).................................. $ 286 $ 301 $ 147
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to combined financial statements.
F-193
<PAGE>
A COURIER, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EXPRESS
MANAGEMENT, INC.
A COURIER, INC. ADDITIONAL
-------------------------- ------------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
----------- ------------- ----------- ----------- ------------- -----------
Balance at December 31,1995....................... 500 $ 1 500 $ 1 $ -- $ 507
Distribution to stockholders...................... (240)
Contribution from stockholders.................... 2
Net income........................................ 460
--
--- --- --- --- -----
Balance at December 31, 1996...................... 500 1 500 1 2 727
Distribution to stockholders...................... (80)
Debt converted to equity (Note 7)................. 52
Net income........................................ 237
--
--- --- --- --- -----
Balance at September 30, 1997..................... 500 $ 1 500 $ 1 $ 54 $ 884
--
--
--- --- --- --- -----
--- --- --- --- -----
<CAPTION>
<S> <C>
TOTAL
STOCKHOLDERS'
EQUITY
---------------
Balance at December 31,1995....................... $ 509
Distribution to stockholders...................... (240)
Contribution from stockholders.................... 2
Net income........................................ 460
-----
Balance at December 31, 1996...................... 731
Distribution to stockholders...................... (80)
Debt converted to equity (Note 7)................. 52
Net income........................................ 237
-----
Balance at September 30, 1997..................... $ 940
-----
-----
</TABLE>
F-194
<PAGE>
A COURIER, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
------------- --------------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities
Net income........................................................... $ 460 $ 486 $ 237
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization.................................... 74 52 48
(Gain) loss on disposal of assets................................ (6) 19
Changes in assets and liabilities................................
Accounts receivable............................................ (274) (58) (57)
Prepaid insurance and other current assets..................... (13) 32 40
Due from affiliate............................................. -- -- (87)
Deposits....................................................... (1)
Accounts payable............................................... 142 46 (88)
Accrued expenses and other current liabilities................. (19) 26 108
----- ----- -----
Net cash provided by operating activities.................... 364 584 219
Cash flows from investing activities
Purchases of property and equipment................................ (224) (168) (39)
----- ----- -----
Net cash used for investing activities....................... (224) (168) (39)
----- ----- -----
Cash flows from financing activities
Proceeds from notes payable.................................... 30 42 2
Proceeds from notes payable-related party...................... 145 40
Repayment on debt-related party................................ (57) (64) (5)
Repayment on debt-other........................................ (12) (25)
Contribution from stockholders................................. 2 2
Distribution to stockholders................................... (240) (230) (80)
----- ----- -----
Net cash used for financing activities....................... (132) (210) (108)
----- ----- -----
Net increase in cash................................................. 8 206 72
Cash at beginning of the period...................................... 8 8 16
----- ----- -----
Cash at end of the period............................................ $ 16 $ 214 $ 88
----- ----- -----
----- ----- -----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest..................................................... $ 14 $ 9 $ 12
----- ----- -----
----- ----- -----
Supplemental disclosure of non cash financing activity:
As described in Note 7 to the financial statements, the note
payable to related party of $52 was converted to equity
during the nine months ended September 30, 1997.
</TABLE>
See accompanying notes to combined financial statements
F-195
<PAGE>
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A Courier, Inc. and affiliates include A Courier, Inc. and its subsidiaries
A Courier of the Carolinas LLC and A Courier of Tennessee LLC; and Express
Management, Inc. A Courier, Inc., A Courier of the Carolinas LLC, A Courier of
Tennessee LLC and Express Management, Inc. provide same day, on-demand delivery
and scheduled courier services under the A Courier trade name in the Atlanta,
Georgia, Nashville, Tennessee and Charlotte, North Carolina metropolitan areas.
The financial statements present the combined historical financial position,
results of operations and cash flows of the above entities, including certain
minority interests, as they were centrally managed for all periods presented and
have signed a definitive agreement with Dispatch Management Services Corp., in
which all stockholder interests are to be acquired, subject to the consummation
of the initial public offering of the Common Stock of DMS as discussed in Note
10. These companies are collectively referred to as A Courier, Inc. and
affiliates or the Company throughout the financial statements. A Courier of
Connecticut, Inc., a wholly owned subsidiary of A Courier, Inc., is not being
acquired by DMS, accordingly, its financial position, results of operations and
cash flows are not included in the accompanying financial statements. All
significant intercompanying transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when services are provided to customers.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method and accelerated methods over the estimated useful lives
of the related assets (5 to 7 years).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable/payable, notes payable and
accrued expenses approximates fair value because of the short maturity of these
instruments. The estimated fair value of long-term debt approximates its
carrying value. Additionally, interest rates on outstanding debt are at rates
which approximate market rates for debt with similar terms and average
maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts receivable.
Receivables are not collateralized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
F-196
<PAGE>
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
MAJOR CUSTOMERS
For the year ended December 31,1996, the Company's largest customer
accounted for approximately 16% of sales. For the nine months ended September
30, 1997, the Company's largest customer accounted for approximately 13% of
sales.
UNAUDITED FINANCIAL INFORMATION
The interim financial data for the nine months ended September 30, 1996 is
unaudited; however, in the opinion of the Company, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim period.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and are amortized on a straight-line
basis over fifteen years. Accumulated amortization amounted to $7 and $11 as of
December 31, 1996 and September 30, 1997, respectively.
INCOME TAXES
The Company has elected to have its income taxed under Section 1362 of the
Internal Revenue Code (the Subchapter S Corporation Election) and, accordingly,
any liabilities for income taxes are the direct responsibility of the
stockholders.
There are differences between the financial statements carrying amounts and
the tax bases of existing assets and liabilities. Such differences are primarily
due to the use of the cash basis of accounting for tax purposes. At September
30, 1997, the carrying amounts of the Company's net assets exceeds the tax bases
by approximately $793.
The unaudited pro forma income tax information included in the Combined
Statements of Operations is presented in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as if the Company
had been subject to federal and state income taxes for the entire period
presented.
2. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE
BEGINNING TO AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996........................................ $ 43 $ -- $ -- $ 43
Nine Months ended September 30, 1997................................ $ 43 $ 5 $ -- $ 48
</TABLE>
F-197
<PAGE>
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------- -------------------
<S> <C> <C>
Equipment.............................................. $ 238 $ 234
Furniture and fixtures................................. 19 35
Other.................................................. 107 95
----- -----
364 364
Less accumulated depreciation.......................... (117) (142)
----- -----
$ 247 $ 222
----- -----
----- -----
</TABLE>
Depreciation expense for the year ended December 31, 1996 and for the nine
months ended September 30, 1997 was approximately $69 and $45, respectively.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- ---------------
<S> <C> <C>
Payroll and payroll taxes....................................... $ 55 $ 51
Commissions..................................................... 12 109
Other........................................................... 5 20
--- -----
Less accumulated depreciation................................... $ 72 $ 180
--- -----
--- -----
</TABLE>
5. EMPLOYEE BENEFITS
The Company has a profit sharing plan for all employees who meet specified
age and service requirements. Total profit sharing expense amounted to $4 and $2
for the year ended December 31, 1996 and for the nine months ended September 30,
1997, respectively.
F-198
<PAGE>
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Note payable due in monthly installments of $1, including interest at prime one
percent per annum through September 1998 (The prime rate at December 31, 1996 and
September 30, 1997 was 8.25% and 8.5%, respectively); secured by equipment at the
cost of $35....................................................................... $ 22 $ 13
Note payable due in monthly installments of $2, including interest at 9.25% per
annum through March 1999; secured by equipment at the cost of $60................. $ 47 $ 33
Note payable to related party due in monthly installments of $1, including interest
at 12% per annum through May 1998; secured by equipment and vehicle at the total
cost of $20....................................................................... $ 12 $ 6
Note payable to related party due in monthly installments of $1, including interest
at 12% per annum through September 1998; secured by equipment and vehicle at the
total cost of $12................................................................. $ 16 $ 6
Note payable to related party due in monthly installments of $1, including interest
at 12% per annum through November 1998; secured by equipment and vehicle at the
total cost of $3.................................................................. $ 3 $ 2
Note payable to related party due in monthly installments of $1, including interest
at 12% per annum through January 1999; secured by equipment and vehicle at the
total cost of $7.................................................................. $ -- $ 5
Note payable to related party due in monthly installments of $1, including interest
at 12% per annum through March 1999; secured by equipment and vehicle at the total
cost of $6........................................................................ $ -- $ 5
Note payable to related party due in monthly installments of $1, including interest
at 12% per annum through April 1999; secured by equipment and vehicle at the total
cost of $2........................................................................ $ -- $ 2
Note Payable due in annual installments of $15 plus interest at 6% per annum through
October 1997...................................................................... 15 15
----- ---
115 87
Total (64) (61)
----- ---
Less current portion $ 51 $ 26
</TABLE>
F-199
<PAGE>
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
6. LONG-TERM DEBT (CONTINUED)
The aggregate principal amounts of debt maturing in the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
<S> <C>
1998........................................................................... $ 71
199............................................................................ 16
2000........................................................................... --
2001........................................................................... --
2002........................................................................... --
-----
Thereafter..................................................................... $ 87
</TABLE>
NEW LOAN AGREEMENT
On October 21, 1997, the Company entered into a new loan agreement with a
financial institution for $300 with consecutive monthly payment of $10 including
interest at prime plus 0.5% through October 2000. The loan agreement
consolidated previously outstanding notes with principal indebtedness of $35 due
in September 1998 and $60 due in March 1999.
7. RELATED PARTY
Due from affiliate represents accounts receivable from an affiliated party
of A Courier, Inc.
Related party notes payable include notes payable to stockholders and a note
payable to a related party. Notes payable to stockholders represents payables to
the stockholders of A Courier, Inc., with an outstanding balance of $100 at
December 31, 1996 and September 30, 1997. The notes bear interest at 9% due
semi-annually, with the principal balance due on demand. The interest expense
for the year ended December 31, 1996 and for the nine months ended September 30,
1997 was $3 and $5, respectively.
Note payable to related party represents note payable to a partner of A
Courier of the Carolinas LLC, with an outstanding balance of $52 at December 31,
1996. This note was converted to equity during the nine months ended September
30, 1997.
8. OPERATING LEASES
The Company leases certain office and warehousing facilities under operating
lease agreement expiring on various dates through 2004.
F-200
<PAGE>
A COURIER, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
8. OPERATING LEASES (CONTINUED)
Future minimum lease payments required under the noncancelable lease terms
at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
<S> <C>
1998........................................................................... $ 152
199............................................................................ 143
2000........................................................................... 141
2001........................................................................... 140
2002........................................................................... 136
Thereafter..................................................................... 388
------
$ 1,100
</TABLE>
Rental expense charged to operations was approximately $80 and $80 for the
year ended December 31, 1996, and for the nine months ended September 30, 1997,
respectively.
9. COMMITMENT AND CONTINGENCIES
In October, 1997, the IRS proposed an assessment of approximately $177
including penalties, as a result of reclassifying the Company's independent
contractors as employees for the year ended December 31, 1995. The Company
believes, based upon its interpretation of the rules, it engages independent
contractors and has filed an appeal with the IRS, and that the ultimate
resolution of the matter will not have a material impact on its financial
position, results of operations or cash flows.
10. UNAUDITED SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with DMS Corporation ("DMS") pursuant to which the Company will acquire certain
assets and assume certain liabilities of the Company. The acquired assets and
assumed liabilities will be exchanged for cash and shares of DMS common stock
concurrent with the consummation of the initial public offering of the common
stock of DMS.
F-201
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
American Eagle Endeavors, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of American
Eagle Endeavors, Inc. and its subsidiaries at December 31, 1996 and September
30, 1997 and the results of their operations and their cash flows for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 6 to the
financial statements, the Company has negative working capital and has not
obtained a waiver with regard to its violations of certain bank covenants for an
adequate period of time. Alternative financing may be required if the Company
can not continue to obtain bank waivers. The uncertainties related to these
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plan in regard to these matters are also described
in Note 6. These financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Detroit, Michigan
November 25, 1997
F-202
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents........................................................ $ 139 $ 95
Accounts receivable, net......................................................... 843 736
Prepaid income taxes............................................................. -- 67
Prepaid and other current assets................................................. 41 4
------ ------
Total current assets........................................................... 1,023 902
Notes receivable from officers..................................................... 181 17
Other assets, net.................................................................. 14 14
Property and equipment, net........................................................ 355 238
------ ------
$ 1,573 $ 1,171
------ ------
------ ------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Bank line of credit.............................................................. $ 350
Accounts payable................................................................. $ 288 413
Accrued expenses................................................................. 110 96
Current maturities of long-term debt............................................. 143 83
Current maturities of subordinated debt to stockholders.......................... 47 90
Accrued income taxes............................................................. 240
------ ------
Total current liabilities...................................................... 828 1,032
Subordinated debt to stockholders.................................................. 268 173
Long-term debt, less current maturities............................................ 90 40
Deferred income taxes.............................................................. 116 85
------ ------
Total liabilities.............................................................. 1,302 1,330
Minority interest in subsidiary.................................................... 29 --
Commitments and contingencies (note 12)
Stockholders' equity (accumulated deficit):
Common stock $0.01 par value; 10,000,000 shares authorized; 10,500 shares issued
and outstanding................................................................ 1 1
Additional paid-in capital....................................................... 156 5
Retained earnings (accumulated deficit).......................................... 85 (165)
------ ------
Total stockholders' equity (deficit)........................................... 242 (159)
------ ------
$ 1,573 $ 1,171
------ ------
------ ------
</TABLE>
See accompanying notes to consolidated financial statements
F-203
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................................................... $ 8,573 $ 8,536 $ 6,476 $ 5,222
Cost of sales........................................................... 5,420 5,293 4,058 3,447
--------- --------- ----------- ---------
Gross margin...................................................... 3,153 3,243 2,418 1,775
Operating expenses
Sales and marketing................................................... 1,528 1,535 1,149 1,008
General and administrative expenses................................... 890 940 600 1,081
Depreciation and amortization......................................... 165 174 130 130
--------- --------- ----------- ---------
Operating income (loss)................................................. 570 594 539 (444)
--------- --------- ----------- ---------
Other (income) expense
Interest expense...................................................... 103 62 49 51
Minority interest in subsidiary net income............................ (12) 13 11
Other, net............................................................ (4) 20 (3) (78)
--------- --------- ----------- ---------
Income (loss) before provision for income taxes......................... 483 499 482 (417)
Benefit (provision) for income taxes.................................... (190) (200) (197) 167
--------- --------- ----------- ---------
Net income (loss)....................................................... $ 293 $ 299 $ 285 $ (250)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-204
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
---------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- ----------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............................... 10,500 $ 1 $ 156 $ (507) $ (350)
Net income................................................. 293 293
--------- ----- ----- ----- ---------
Balance at December 31, 1995............................... 10,500 1 156 (214) (57)
Net income................................................. 299 299
--------- ----- ----- ----- ---------
Balance at December 31, 1996............................... 10,500 1 156 85 242
Purchase and retirement of minority interest in
subsidiary............................................... (151) (151)
Net loss................................................... (250) (250)
--------- ----- ----- ----- ---------
Balance at September 30, 1997.............................. 10,500 $ 1 $ 5 $ (165) $ (159)
--------- ----- ----- ----- ---------
--------- ----- ----- ----- ---------
</TABLE>
See accompanying notes to consolidated financial statements
F-205
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------
--------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................. $ 293 $ 299 $ 285 $ (250)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities
Depreciation and amortization............................................... 165 174 130 125
Minority interest........................................................... (12) 13 11 (29)
Deferred taxes.............................................................. 165 (49) (165) (31)
Changes in assets and liabilities:
Accounts receivable....................................................... (94) 60 28 110
Prepaid and other assets.................................................. 4 (10) 34 36
Accounts payable.......................................................... 22 (94) (91) 124
Accrued expenses.......................................................... (236) 22 304 (254)
Income taxes payable...................................................... 22 237 (68)
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES.................... 329 652 536 (237)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase and retirement of minority stock..................................... (151)
(Increase) decrease in officer notes receivable............................... (181) (181) 164
Purchases of property and equipment, net...................................... (44) (81) (28) (8)
--------- --------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES.................................. (44) (262) (209) 5
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in line of credit......................................... (364) (50) 250 350
Payments on long-term debt, net............................................... 95 (262) (503) (162)
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES.................... (269) (312) (253) 188
--------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS............................... 16 78 74 (44)
Cash and equivalents at beginning of the period............................... 45 61 61 139
--------- --------- --------- ---------
Cash and equivalents at end of the period..................................... $ 61 $ 139 $ 135 $ 95
--------- --------- --------- ---------
--------- --------- --------- ---------
Schedule of noncash investing and financing activities:
Property and equipment acquired under capital lease agreements............ $ -- $ 56 $ 56 $ --
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes.............................................................. $ 4 $ 10 $ 5 $ 171
Interest.................................................................. $ 108 $ 65 $ 55 $ 58
</TABLE>
See accompanying notes to consolidated financial statements
F-206
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
American Eagle Endeavors, Inc. and Subsidiaries (the "Company") is a courier
service and facilities traffic management firm. Primary offices are located in
Minneapolis, Minnesota and Phoenix, Arizona. The Company offers traditional
business courier services, such as on-call, same day, and dock service,
specialized transportation services tailored to individual customer needs, and
warehouse distribution services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of American Eagle
Endeavors, Inc. and its majority-owned subsidiaries: American Eagle Express,
Inc. and American Eagle Express-Phoenix, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately three
months or less at date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.
The estimated lives used for computing depreciation and amortization are as
follows:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Transportation equipment.............................................................. 5 - 7
Equipment............................................................................. 5 - 7
Office furniture and fixtures......................................................... 5 - 7
Leasehold improvements................................................................ 4 - 5
</TABLE>
F-207
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences, operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the report amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/ payable and accrued expenses approximates
fair value because of the short maturity of these instruments. The estimated
fair value of long-term debt and other long-term liabilities approximates its
carrying value. Additionally, interest rates on outstanding debt are at rates
which approximate market rates for debt with similar terms and average
maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts receivable.
As described further in Note 12, a significant portion of gross receivables are
due from the franchisor. The Company performs ongoing credit evaluations of its
customers to reduce the risk of loss.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations and cash flows for the nine months
ended September 30, 1996, as presented in the accompanying unaudited financial
statements.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995....................................... $ 25 $ 38 $ (34) $ 29
Year ended December 31, 1996....................................... $ 29 $ 40 $ (26) $ 43
Period ended September 30, 1997.................................... $ 43 $ 17 $ (19) $ 41
</TABLE>
F-208
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Equipment........................................................................... $ 468 $ 489
Furniture and fixture............................................................... 332 332
Vehicles............................................................................ 128 128
Leasehold improvements.............................................................. 101 101
------ ------
1,029 1,050
Accumulated depreciation and amortization........................................... (674) (812)
------ ------
$ 355 $ 238
------ ------
------ ------
</TABLE>
Property and equipment above includes leased equipment with a cost of $144
and $145 and accumulated depreciation of $63 and $84 at December 31, 1996 and
September 30, 1997, respectively. Depreciation expense for the periods ended
December 31, 1995, 1996 and September 30, 1997 was $162, $174 and $131,
respectively.
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- -----------------
<S> <C> <C>
Payroll and payroll taxes........................................................... $ 41 $ 14
Accrued vacation.................................................................... 24 21
Other............................................................................... 45 61
----- ---
Total accrued liabilities........................................................... $ 110 $ 96
----- ---
----- ---
</TABLE>
6. NOTE PAYABLE TO BANK
The Company has a financing agreement with a bank consisting of a $350 line
of credit and a term loan (see Note 7). Outstanding borrowings bear interest at
the bank's prime lending rate plus 1.5 percent (10 percent at September 30, 1997
and 9.75 percent at December 31, 1996), are subject to borrowing base
availability, are secured by substantially all of the Company-assets, and are
guaranteed by the Company's stockholders. Outstanding borrowings against the
line of credit were $350, $0 and $50 at September 30, 1997, December 31, 1996
and 1995, respectively.
The financing agreement contains provisions requiring compliance with
several financial covenants. At December 31, 1996 and September 30, 1997, the
Company was in violation of certain covenants. A waiver of these covenant
violations was received through December 31, 1997.
F-209
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- -----------------
<S> <C> <C>
Term note payable to bank, secured by substantially all Company assets, due in
monthly installments of $10,000, plus interest at the bank's prime lending rate
plus 1.5%, to April 1998.......................................................... $ 160 $ 70
9.75% capital lease obligation, due in installments of $834, including interest to
January 2002, secured by equipment................................................ 46
10% equipment financing note, due in installments of $757, including interest to
January 1999, secured by equipment................................................ 17
Other equipment financing notes, due in 1999........................................ 10 53
----- ---
233 123
Less current maturities............................................................. 143 83
----- ---
$ 90 $ 40
----- ---
----- ---
</TABLE>
Approximate aggregate maturities of long-term debt as of September 30, 1997,
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
- ----------------------------------------------------------------------------------------------------------
<S> <C>
1997 (3 months ending December 31)........................................................................ $ 31
1998...................................................................................................... 52
1999...................................................................................................... 12
2000...................................................................................................... 8
2001...................................................................................................... 9
Thereafter................................................................................................ 11
---------
$ 123
---------
---------
</TABLE>
8. SUBORDINATED DEBT TO STOCKHOLDERS
Subordinated debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
6% stockholder note payable, due in monthly installments of $6, including interest
to August 2001, unsecured......................................................... $ 269 $ 263
14% stockholder notes payable, due on or before September 1999, unsecured........... 46
----- -----
315 263
Less current maturities............................................................. 47 90
----- -----
$ 268 $ 173
----- -----
----- -----
</TABLE>
These notes payable are subordinated to borrowings under its bank financing
agreement which allows monthly payments of $6.
F-210
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. MINIMUM LEASE PAYMENTS
The Company leases certain office space, computerized satellite vehicle
tracking systems, vehicles, and office equipment under leases expiring on
various dates through 2001. Future minimum lease payments required under leases
that have noncancelable lease terms in excess of one year at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING NONCANCELLABLE
FISCAL YEAR LEASES LEASES SUBLEASES
- ----------------------------------------------------------------------------- ----------- ----------- -----------------
<S> <C> <C> <C>
1997 (3 months ending December 31)........................................... $ 3 $ 102 $ (18)
1998......................................................................... 10 413 (50)
1999......................................................................... 10 399 (11)
2000......................................................................... 10 365
2001......................................................................... 10 83
Thereafter................................................................... 11 179
Less interest portion........................................................ (12)
--- ----------- ---
Net leases................................................................... $ 42 $ 1,541 $ (79)
--- ----------- ---
--- ----------- ---
</TABLE>
Rental expense charged to operations was approximately $208, $211 and $326,
and rental income was approximately $22, $24 and $67 for the years ended
December 31, 1995 and 1996, and period ended September 30, 1997, respectively.
10. INCOME TAXES
The provision for income taxes comprises:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Current tax expense (benefit)
Federal.......................................................................... $ 6 $ 212 $ (116)
State and local.................................................................. 2 37 (20)
--------- --------- -----
8 249 (136)
Utilization of net operating loss carryforward..................................... 147
Deferred tax expense (benefit)..................................................... 35 (49) (31)
--------- --------- -----
Provision (benefit) for income taxes............................................... $ 190 $ 200 $ (167)
--------- --------- -----
--------- --------- -----
</TABLE>
F-211
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. INCOME TAXES (CONTINUED)
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Tax provision (benefits) computed at federal statutory rate (35%).................. $ 169 $ 175 $ (146)
State taxes (net of federal benefit)............................................... 50 25 (21)
Other.............................................................................. (29)
--------- --------- -----
Provision (benefit) for income taxes............................................... $ 190 $ 200 $ (167)
--------- --------- -----
--------- --------- -----
Effective rate..................................................................... 39% 40% 40%
--------- --------- -----
--------- --------- -----
</TABLE>
Temporary differences giving rise to the Company's deferred tax assets and
liabilities comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Deferred tax assets
Allowance for doubtful accounts................................................ $ 12 $ 43 $ 42
Accrued liabilities............................................................ 22 18 18
Other.......................................................................... 11
--------- --------- -----
45 61 60
Deferred tax liabilities
Accrual to cash basis adjustment............................................... (210) (154) (115)
Other.......................................................................... (23) (30)
--------- --------- -----
Net deferred tax liability................................................... $ (165) $ (116) $ (85)
--------- --------- -----
--------- --------- -----
</TABLE>
11. RELATED PARTY TRANSACTIONS
During 1996, note agreements were executed with two of the Company's
officers. The notes receivable bear interest at 5.5% and 6.25% annually, and are
payable in balloon payments in 1999. $17 of the notes remained outstanding as of
September 30, 1997.
Franchise fees of $40 were incurred in 1996 relative to the franchise
agreements described below.
In September 1977, a subsidiary of the Company redeemed all of the shares
constituting a 20% minority interest in the subsidiary. Upon completion of this
redemption, the Company owns 100% of all subsidiaries. As the minority interest
was held by a related party, the assets and liabilities of the subsidiary are
presented at their historical cost basis.
F-212
<PAGE>
AMERICAN EAGLE ENDEAVORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. COMMITMENTS AND CONTINGENCIES
FRANCHISE AGREEMENT
During 1996, the Company entered into five-year franchise agreements with a
national same-day service courier franchisor for both the Phoenix and
Minneapolis locations. The initial franchise fee was $20 for each location and
continuing management fees are 10 percent of applicable gross receipts, as
defined by the agreement. Subsequent to year end, the management fees were
reduced to 7.25 from 8.25 percent. The stockholders of the Company are also
minority stockholders in the franchisor. In addition, at December 31, 1996, the
Company and one of its stockholders have guaranteed franchisor debt obligations
and related license payments totaling approximately $1,806, payable through
September 2007.
On September 16, 1997 the Company obtained a complete release from the
franchise agreement and all related commitments and contingencies other than
those related to the guaranteed debt obligations discussed above. In exchange
for this release the Company's principal shareholders have forfeited their
personal investments in the franchiser. Based on the financial position of the
franchisor, the Principal Shareholders believe that the Forfeited Shares in the
Franchisor have no value.
The franchiser is responsible for billing and collecting amounts from
customers approved by the Company and then submitting the receipts, less the
management fees, to the Company. Phoenix activated its franchise in October 1996
and Minneapolis activated its franchise subsequent to December 1996. Management
fees paid to the franchisor totaled approximately $38 and $250 for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
13. UNAUDITED SUBSEQUENT EVENTS
The Company and its stockholder have entered into a definitive agreement
with DMS Corporation ("DMS") pursuant to which the Company will merge with DMS.
All outstanding shares of the Company will be exchanged for cash concurrent with
the consummation of the initial public offering of the common stock of DMS.
Additionally, all obligations guaranteed by the Company, as described in Note
12, will be assumed by DMS upon consummation of the initial public offering.
F-213
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kangaroo Express
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Kangaroo Express
(the "Company") at December 31, 1996 and September 30, 1997, and the results of
its operations and its cash flows for years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Denver, Colorado
November 14, 1997
F-214
<PAGE>
KANGAROO EXPRESS
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash.............................................................................. $ 29 $ 5
Accounts receivable............................................................... 305 381
Prepaid and other current assets.................................................. 23 15
----- -----
Total current assets............................................................ 357 401
Property and equipment, net......................................................... 138 138
Notes receivable, employees......................................................... 11 6
Deposits............................................................................ 5 3
----- -----
$ 511 $ 548
----- -----
----- -----
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.................................................................. $ 16 $ 28
Accrued payroll................................................................... 70 62
Accrued vehicle leasing........................................................... 32 20
Line of credit.................................................................... 33
Current maturities long-term debt................................................. 36 23
----- -----
Total current liabilities....................................................... 154 166
Deferred rent....................................................................... 16 16
Other long-term liabilities......................................................... 300 375
Long-term debt...................................................................... 63 73
----- -----
Total liabilities............................................................... 533 630
Commitments and contingencies
Stockholders' Equity (Deficit)
Common stock $.001 par value; 100 shares authorized, issued and outstanding
Additional paid-in capital........................................................ 109 109
Retained earnings (deficit)....................................................... (131) (191)
----- -----
Total stockholders' equity (deficit)............................................ (22) (82)
----- -----
$ 511 $ 548
----- -----
----- -----
</TABLE>
See accompanying notes to financial statements.
F-215
<PAGE>
KANGAROO EXPRESS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.............................................................. $ 2,032 $ 2,650 $ 2,001 $ 2,140
Cost of sales.......................................................... 1,387 1,878 1,398 1,520
--------- --------- ----------- -----------
Gross margin......................................................... 645 772 603 620
Operating expenses..................................................... 394 405 296 350
Sales and marketing.................................................... 17 27 21 15
General and administrative expenses.................................... 211 265 192 231
Depreciation and amortization.......................................... 42 50 26 39
--------- --------- ----------- -----------
Operating income (loss).............................................. (19) 25 68 (15)
--------- --------- ----------- -----------
Other (income) expense
Interest expense..................................................... 12 10 7 6
Other, net........................................................... (2) (2) (2) (4)
--------- --------- ----------- -----------
Net income (loss)...................................................... $ (29) $ 17 $ 63 $ (17)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Unaudited pro forma information:
Pro forma net income (loss) before provision for income taxes........ $ (29) $ 17 $ 63 $ (17)
Provision (benefit) for income taxes................................. (11) 6 23 (6)
--------- --------- ----------- -----------
Pro forma net income (loss) (see Note 2)............................... $ (18) $ 11 $ 40 $ (11)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-216
<PAGE>
KANGAROO EXPRESS
STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY (DEFICIT)
----------- ----------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.............................. 100 $ -- $ 109 $ (37) $ 72
Net loss.................................................. (29) (29)
Owner's withdrawal........................................ (25) (25)
--- --- ----- ----- ---
Balance at December 31, 1995.............................. 100 109 (91) 18
Net income................................................ 17 17
Owners' withdrawal........................................ (57) (57)
--- --- ----- ----- ---
Balance at December 31, 1996.............................. 100 109 (131) (22)
Net income................................................ (17) (17)
Owners' withdrawal........................................ (43) (43)
--- --- ----- ----- ---
Balance at September 30, 1997............................. 100 $ -- $ 109 $ (191) $ (82)
--- --- ----- ----- ---
--- --- ----- ----- ---
</TABLE>
See accompanying notes to financial statements.
F-217
<PAGE>
KANGAROO EXPRESS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ------------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................ $ (29) $ 17 $ 63 $ (17)
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization............................................ 42 50 26 39
Changes in assets and liabilities:
Accounts receivable.................................................... (42) (52) (34) (76)
Prepaid expenses....................................................... 32 (20) (8) 9
Other assets........................................................... (5) 1 3 1
Accounts payable....................................................... 17 (14) (19) 12
Accrued payroll........................................................ 11 22 (2) (8)
Accrued vehicle leasing................................................ 11 4 (7) (12)
Other long-term liabilities............................................ 100 100 75 75
Deferred rent.......................................................... 16 12
--------- --------- ----- ---
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 137 124 109 23
--------- --------- ----- ---
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.......................................... (59) (48) (47) (39)
Proceeds from sale of property and equipment................................. 18
Increase in notes receivable, employees...................................... (4) (5) (5)
Proceeds from notes receivable, employees.................................... 3 4 5 5
--------- --------- ----- ---
NET CASH USED FOR INVESTING ACTIVITIES............................... (42) (49) (47) (34)
--------- --------- ----- ---
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt................................................. 57 22 22 24
Proceeds from line of credit................................................. 33
Principal payments on long-term debt......................................... (97) (44) (33) (27)
Owners withdrawal............................................................ (25) (57) (46) (43)
--------- --------- ----- ---
NET CASH USED FOR FINANCING ACTIVITIES................................. (65) (79) (57) (13)
--------- --------- ----- ---
NET INCREASE (DECREASE) IN CASH.............................................. 30 (4) 5 (24)
Cash at beginning of the period.............................................. 3 33 33 29
--------- --------- ----- ---
Cash at end of the period.................................................... $ 33 $ 29 $ 38 $ 5
--------- --------- ----- ---
--------- --------- ----- ---
Supplemental disclosures of cash flow information:
Interest paid............................................................ $ 12 $ 10 $ 7 $ 6
Supplemental schedule of noncash investing and financing activities:
The Company sold fixed assets in exchange for notes receivable as follows:
Cost of assets sold...................................................... $ -- $ 25 $ 25 $ --
Accumulated depreciation on assets sold.................................. $ -- $ 25 $ 25 $ --
Related notes receivable................................................. $ -- $ 2 $ 2 $ --
</TABLE>
See accompanying notes to financial statements.
F-218
<PAGE>
KANGAROO EXPRESS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
Kangaroo Express (the "Company") provides same-day, on-demand delivery
services in the Colorado Springs and Denver metropolitan areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets
(5 years).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/ payable and accrued expenses approximates
fair value because of the short maturity of these instruments. The estimated
fair value of long-term debt and other long-term liabilities approximates its
carrying value. Additionally, interest rates on outstanding debt are at rates
which approximate market rates for debt with similar terms and average
maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentrations of credit risk consist principally of trade accounts receivable.
Receivables are not collateralized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
INCOME TAXES
The Company has elected to be treated as a S-Corporation for federal and
state income taxes and, accordingly, any liability for income taxes are the
direct responsibility of the stockholder.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At September 30, 1997, the
financial reporting bases of the Company's net assets are less than the tax
reporting bases by approximately $415.
The unaudited pro forma tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
F-219
<PAGE>
KANGAROO EXPRESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited interim financial statements The interim financial data for the
nine months ended September 30, 1996 is unaudited; however, in the opinion of
the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim period.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- ---------------
<S> <C> <C>
Equipment........................................................................... $ 43 $ 43
Furniture and fixture............................................................... 38 52
Vehicles............................................................................ 187 212
Leasehold improvements.............................................................. 16 16
----- -----
284 323
Accumulated depreciation and amortization........................................... (146) (185)
----- -----
$ 138 $ 138
----- -----
----- -----
</TABLE>
Depreciation expense for the year ended December 31, 1996 and the nine
months ended September 30, 1997 was approximately $50 and $39, respectively.
F-220
<PAGE>
KANGAROO EXPRESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. LONG-TERM DEBT
Long-term debt outstanding consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Due March 12, 1997, bearing interest at 7.5%, secured by a 1992 Mitsubishi truck.... $ 1 $ --
Due February 18,1997, bearing interest at 7.59%, secured by a 1993 Ford Escort...... 1
Due June 14, 1998, bearing interest at 1.5% over prime rate (10%), secured by A/R
and equipment..................................................................... 12 6
Due September 25, 1998, bearing interest at 8%, secured by a 1994 Chevy Van......... 7 5
Due September 25, 1998, bearing interest at 8%, secured by a 1994 Chevy Astro Van... 7 4
Due January 1, 2001, bearing interest at 8.45%, secured by a 1995 Chevy Van......... 16 13
Due January 1, 2001, bearing interest at 8.5%, secured by a 1995 GMC Truck.......... 32 27
Due April 1, 2001, bearing interest at 8.5%, secured by a 1994 GMC Van.............. 18 15
Due July 1, 2000, bearing interest at 9.5%, secured by a 1987 Toyota Truck.......... 5 4
Due August 15, 2000, bearing interest at 8.5%, secured by a 1995 Chevy Van.......... 11
Due August 15, 2000, bearing interest at 8.5%, secured by a 1995 Chevy Van.......... 11
--- ---
Total........................................................................... 99 96
Less current portion................................................................ (36) (23)
--- ---
$ 63 $ 73
--- ---
--- ---
</TABLE>
The above term loans were due to various banks.
Maturities of long-term debt as of September 30, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------------------------
<S> <C>
1998........................................................................................ $23
1999........................................................................................ 48
2000........................................................................................ 22
2001........................................................................................ 3
--
$96
--
--
</TABLE>
F-221
<PAGE>
KANGAROO EXPRESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. LONG-TERM DEBT (CONTINUED)
On July 1, 1995, the Company entered into a credit agreement with a bank for a
$50 revolving line of credit. The line of credit bears interest at the bank's
prime rate plus 1.5%. This line of credit was replaced by a similar $75
revolving line of credit, maturing on July 1, 1997. This line of credit bears
interest at the bank's prime rate plus 1% and was renewed on June 30, 1996. On
August 1, 1997 the Company renewed their line of credit, increasing its
borrowing capacity to $100, bearing interest of 9.5% and a maturity date of
August 1, 1998. As of December 30, 1996 and September 30, 1997, $0 and $33 was
outstanding on this line of credit, respectively. The line is secured by all
accounts receivable, vehicles and computer systems. On November 5, 1997 the
Company renewed their line of credit, increasing its borrowing capacity to $150,
bearing interest of 9.5% and a maturity date of January 31, 1998.
5. OPERATING LEASES
The Company leases certain office equipment under operating leases expiring
on various dates through 2001. Future minimum lease payments required under
leases that have noncancelable lease terms in excess of one year at September
30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- ------------------------------------------------------------------------------------------
<S> <C>
1998...................................................................................... $78
1999...................................................................................... 55
2000...................................................................................... 55
2001...................................................................................... 21
---------
$209
---------
---------
</TABLE>
Rental expense charged to operations for the years ended December 31, 1995
and 1996 and the nine months ended September 30, 1997 was approximately $20, $74
and $69, respectively.
6. RELATED PARTY TRANSACTIONS
In 1995, the Company paid off a note payable due to shareholder in the
amount of $35.
7. UNAUDITED SUBSEQUENT EVENTS
The company and its stockholders have entered into a definitive agreement
with DMS Corporation ("DMS") pursuant to which the Company will merge with DMS.
All outstanding shares of the Company will be exchanged for cash and shares of
DMS common stock concurrent with the consummation of the initial public offering
of the common stock of DMS.
F-222
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Transpeed Courier Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Transpeed Courier Services, Inc.
(the "Company") at December 31, 1996 and September 30, 1997, and the results of
its operations and its cash flows for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Denver, Colorado
November 10, 1997
F-223
<PAGE>
TRANSPEED COURIER SERVICES, INC
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 47 $ 47
Accounts receivable, net of allowance for doubtful accounts of $1 at December 31,
1996 and $15 at September 30, 1997.............................................. 144 151
Prepaid and other current assets.................................................. 40 6
----- -----
Total current assets.......................................................... 231 204
Property and equipment, net......................................................... 95 74
Other non-current assets............................................................ 19 16
Goodwill and intangibles, net....................................................... 34 25
----- -----
$ 379 $ 319
----- -----
----- -----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit.................................................................... $ 120 $ 160
Accounts payable.................................................................. 30 29
Accrued liabilities............................................................... 47 57
Current maturities long-term debt................................................. 67 24
----- -----
Total current liabilities..................................................... 264 270
Long-term debt...................................................................... 26 30
----- -----
Total liabilities............................................................. 290 300
Commitments and contingencies
Stockholders' Equity
Common stock no par value; 40,000 shares authorized; 32,000 issued and outstanding
at December 31, 1996; 34,286 issued and outstanding at September 30, 1997....... 1 125
Retained earnings (deficit)....................................................... 88 (106)
----- -----
Stockholders' equity.............................................................. 89 19
----- -----
$ 379 $ 319
----- -----
----- -----
</TABLE>
See accompanying notes to financial statements.
F-224
<PAGE>
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ------------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................................................... $ 1,100 $ 1,247 $ 969 $ 904
Cost of sales........................................................... 746 764 567 546
--------- --------- ----- ---------
Gross margin.......................................................... 354 483 402 358
Operating expenses...................................................... 214 298 202 359
Sales and marketing..................................................... 46 58 42 45
General and administrative expenses..................................... 59 58 41 49
Depreciation and amortization........................................... 31 36 28 31
--------- --------- ----- ---------
Operating income (loss)............................................... 4 33 89 (126)
--------- --------- ----- ---------
Other (income) expense
Interest expense...................................................... 15 19 15 16
Other, net............................................................ 8 4 3 (17)
--------- --------- ----- ---------
Net income (loss)....................................................... $ (19) $ 10 $ 71 $ (125)
--------- --------- ----- ---------
--------- --------- ----- ---------
Unaudited pro forma information:
Pro forma net income (loss) before provision for income taxes......... $ (19) $ 10 $ 71 $ (125)
Provision (benefit) for income taxes.................................. (3) 2 14 (7)
--------- --------- ----- ---------
Pro forma net income (loss) (See Note 2)................................ $ (16) $ 8 $ 57 $ (118)
--------- --------- ----- ---------
--------- --------- ----- ---------
</TABLE>
See accompanying notes to financial statements
F-225
<PAGE>
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
---------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............................................... 32,000 $ 1 $ 103 $ 104
Net loss................................................................... (19) (19)
Owners withdrawals......................................................... (6) (6)
--------- ----- ----- ---------
Balance at December 31, 1995............................................... 32,000 1 78 79
Net income................................................................. 10 10
--------- ----- ----- ---------
Balance at December 31, 1996............................................... 32,000 1 88 89
Stock dividend on common stock............................................. 2,286 69 (69) --
Shareholder payment on behalf of the Company............................... 55 55
Net loss................................................................... (125) (125)
--------- ----- ----- ---------
Balance at September 30, 1997.............................................. 34,286 $ 125 $ (106) $ 19
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
See accompanying notes to financial statements.
F-226
<PAGE>
TRANSPEED COURIER SERVICES, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ------------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................................... $ (19) $ 10 $ 71 $ (125)
Adjustments to reconcile net income to net cash provided by (used for)
operating activities
Depreciation and amortization....................................... 31 36 28 31
Shareholder payment on behalf of the Company........................ 55
Provision for doubtful accounts..................................... 14
Loss on sale of property and equipment.............................. 6
Changes in assets and liabilities net of effects of the purchase of
Maxwell Express Courier
Accounts receivable............................................. (78) 25 (49) (21)
Prepaid expenses and other current assets....................... (14) (9) 24 34
Accounts payable................................................ 25 (3) (14) (1)
Accrued liabilities............................................. 22 11 (6) 10
Other non-current assets........................................ (19) (20) 3
--------- --------- ----- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES............ (33) 57 34 --
--------- --------- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment..................................... (57) (41) (3) (5)
Proceeds from sales of assets........................................... 4
Payment for purchase of Maxwell Express Courier, net of cash acquired... (28)
--------- --------- ----- ---------
NET CASH USED FOR INVESTING ACTIVITIES.......................... (85) (41) (3) (1)
--------- --------- ----- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in line of credit................................... 89 20 20 40
Proceeds from long-term debt............................................ 65 67 22
Principal payments on long-term debt.................................... (39) (57) (45) (61)
--------- --------- ----- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES............ 115 30 (25) 1
--------- --------- ----- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (3) 46 6 --
Cash and cash equivalents at beginning of the period.................... 4 1 1 47
--------- --------- ----- ---------
Cash and cash equivalents at end of the period.......................... $ 1 $ 47 $ 7 $ 47
--------- --------- ----- ---------
--------- --------- ----- ---------
Supplemental disclosures of cash flow information:
Interest paid....................................................... $ 14 $ 18 $ 15 $ 15
</TABLE>
Supplemental schedule of noncash investing and financing activities:
The Company purchased Maxwell Express Courier in 1995 for $28. In
conjunction with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired......................................... $ 48
Cash paid............................................................. 28
---
Notes payable issued.................................................. $ 20
---
---
</TABLE>
See accompanying notes to financial statements.
F-227
<PAGE>
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
Transpeed Courier Services, Inc., d/b/a 1-800-Courier "Denver", (the
"Company') is a full service courier company providing transportation of time
sensitive shipments between points in Colorado and national same-day air courier
service.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
approximately three months or less at date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets (
3 to 7 years).
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, a non-compete agreement,
trade names and customer lists, which are being amortized on a straight-line
basis over 5 years. The carrying value of the intangible assets are assessed for
the recoverability of management based on an analysis of undiscounted expected
future cash flows. The Company believes that there has been no impairment
thereof as of September 30, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable and accrued expenses approximates fair value because of the
short maturity of these instruments. The estimated fair value of long-term debt
approximates its carrying value. Additionally, interest rates on outstanding
debt are at rates which approximate market rates for debt with similar terms and
average maturities.
F-228
<PAGE>
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentrations of credit risk consist principally of trade accounts receivable.
Receivables are not collateralized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
INCOME TAXES
The Company has elected to be treated as a S-Corporation for federal and
state income taxes and, accordingly, any liability for income taxes are the
direct responsibility of the stockholders.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At December 31, 1996, the
financial reporting bases of the Company's net assets exceeds the tax reporting
bases by approximately $124.
The unaudited pro forma tax information included in the Statements of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data for the nine months ended September 30, 1996 is
unaudited; however, in the opinion of the Company, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim period.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Computers and equipment......................................... $ 58 $ 51
Vehicles........................................................ 103 105
----- -----
161 156
Accumulated depreciation and amortization....................... (66) (82)
----- -----
$ 95 $ 74
----- -----
----- -----
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1996, and for
the nine months ended September 30, 1997 was approximately $22, $24, and $22,
respectively.
4. ACQUISITION OF MAXWELL COURIER EXPRESS
On June 12, 1995, the Company acquired substantially all of the assets of
Maxwell Courier Express in exchange for total consideration of $48 consisting of
cash and promissory notes. The acquisition was accounted for using the purchase
method and the excess of cost over fair value of the asset acquired of $20
F-229
<PAGE>
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. ACQUISITION OF MAXWELL COURIER EXPRESS (CONTINUED)
was allocated to goodwill, which is being amortized on a straight-line basis
over 5 years. The fair value of the acquired assets and liabilities at the
acquisition date are as follows:
<TABLE>
<S> <C>
Equipment............................................................. $ 8
Non-compete agreement................................................. 20
Goodwill.............................................................. 20
---
$ 48
---
---
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Goodwill........................................................ $ 22 $ 22
Non-compete agreement........................................... 20 20
Customer list................................................... 18 18
Trade names..................................................... 5 5
--- ---
65 65
Accumulated amortization........................................ (31) (40)
--- ---
$ 34 $ 25
--- ---
--- ---
</TABLE>
Amortization expense for the years ended December 31, 1995 and 1996, and the
nine months ended September 30, 1997 was approximately $9, $12, and $9,
respectively.
6. ACCRUED LIABILITIES
Accrued liabilities comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Payroll and payroll taxes....................................... $ 33 $ 37
Other........................................................... 14 20
--- ---
$ 47 $ 57
--- ---
--- ---
</TABLE>
F-230
<PAGE>
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. LONG-TERM DEBT
Long-term debt outstanding consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Notes payable to banks:
Due in monthly installments through February 24, 1997, bearing interest at 9.5%,
secured by radios................................................................. $ 2 $ --
Due in monthly installments through March 24, 1998, bearing interest at 11%, secured
by equipment...................................................................... 9 2
Due in monthly installments though May 2, 1998, bearing interest at 11%, secured by
vehicle........................................................................... 9 4
Due in monthly installments through October 31, 1999, bearing interest at 10%,
secured by vehicles............................................................... 20 16
Due in monthly installments through November 26, 1999, bearing interest at 10%,
secured by vehicle................................................................ 6 5
Due in monthly installments through February 12, 2000, bearing interest at 10%,
secured by vehicle................................................................ 5
Notes payable to corporations and individuals:
Due December 31, 1996, bearing interest at 10%
Due in monthly installments through June 1, 1998, bearing interest at 10%........... 11 6
Due in monthly installments through September 9, 1997 at December 31, 1996 and
August 9, 1996 at December 31, 1995, bearing interest at 9.5%..................... 36
Due June 30, 2000, bearing interest at 10%.......................................... 16
--- ---
Total........................................................................... 93 54
Less current portion................................................................ (67) (24)
--- ---
$ 26 $ 30
--- ---
--- ---
</TABLE>
Maturities of long-term debt as of September 30, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
- ----------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................... $ 24
1999.................................................................................... 13
2000.................................................................................... 17
---
$ 54
---
---
</TABLE>
In August 1997, the Company entered into a credit agreement with a bank for
a $50 revolving line of credit. The line of credit bears interest at 11% and
matures on November 25, 1997. The line of credit is secured with a deed of trust
on a stockholder's home. As of September 30, 1997 the balance outstanding on the
line of credit was $50.
In November 1996, the Company entered into a credit agreement with a bank
for a $150 revolving line of credit. The line of credit bears interest at the
banks prime rate plus 1% (actual rate of 10% at September 30, 1997) and matures
on November 18, 1997. The line of credit is secured by all accounts
F-231
<PAGE>
TRANSPEED COURIER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. LONG-TERM DEBT (CONTINUED)
receivable and equipment. As of December 31, 1996, and September 30, 1997 the
balance outstanding on the line of credit was $120, and $110, respectively.
8. OPERATING LEASES
The Company leases certain office equipment under operating leases expiring
on various dates through 2000. Future minimum lease payments required under
leases that have noncancelable lease terms in excess of one year at September
30, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
- --------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................. $ 68
1999.................................................................................. 54
2000.................................................................................. 49
2001.................................................................................. 12
---------
$ 183
---------
---------
</TABLE>
Rental expense charged to operations was approximately $26 for the years
ended December 31, 1995 and 1996 and $20 for the nine months ended September 30,
1997.
9. STOCKHOLDER'S EQUITY
On August 1, 1997, the Company declared a stock dividend (2,286 shares). The
stock dividend was recorded as a reduction of retained earnings and an increase
in common stock.
On August 1, 1997, a stockholder of the Company transferred 1,829 shares of
common stock to an employee for past service. The value of the shares
transferred of $55 was recorded as compensation expense in the nine months ended
September 30, 1997.
10. FRANCHISEE AGREEMENT
In December 1996, the Company became a franchisee of 1-800-COURIER. The
franchise agreement requires that the Company pay franchise fees of 8.5% of
revenue collected. Franchise fees for the nine months ended September 30, 1997
were approximately $83.
11. UNAUDITED SUBSEQUENT EVENTS
The company and its stockholders have entered into a definitive agreement
with DMS Corporation ("DMS") pursuant to which the Company will merge with DMS.
All outstanding shares of the Company will be exchanged for cash concurrent with
the consummation of an initial public offering of the common stock of DMS.
F-232
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of National Messenger, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of National Messenger,
Inc. at September 30, 1997 and November 30, 1996 and 1995, and the results of
its operations and its cash flows for the ten months ended September 30, 1997
and for the years ended November 30, 1996 and 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Los Angeles, California
December 5, 1997
F-233
<PAGE>
NATIONAL MESSENGER, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, SEPTEMBER 30,
-------------------- ---------------
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 103 $ 90 $ 77
Accounts receivable, net of allowance for doubtful accounts of $8, $22, and
$32............................................................................ 205 309 435
Prepaid and other current assets................................................. 5 4 8
--------- --------- -----
Total current assets........................................................... 313 403 520
Property and equipment, net........................................................ 3 50 70
--------- --------- -----
$ 316 $ 453 $ 590
--------- --------- -----
--------- --------- -----
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued compensation............................................................. $ 49 $ 67 $ 59
Advances from shareholders....................................................... 70 70 70
--------- --------- -----
Total current liabilities...................................................... 119 137 129
--------- --------- -----
Other long-term liabilities........................................................ 200 300 383
--------- --------- -----
Commitments
Shareholders' equity (deficit):
Common stock without par value; 100,000 shares authorized; 1,800 shares issued
and outstanding................................................................ 2 2 2
Retained earnings (deficit)...................................................... (5) 14 76
--------- --------- -----
Total shareholders' equity (deficit)........................................... (3) 16 78
--------- --------- -----
$ 316 $ 453 $ 590
--------- --------- -----
--------- --------- -----
</TABLE>
See accompanying notes to financial statements.
F-234
<PAGE>
NATIONAL MESSENGER, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED TEN MONTHS ENDED
NOVEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.............................................................. $ 1,728 $ 2,413 $ 2,001 $ 2,313
Cost of sales.......................................................... 1,029 1,446 1,240 1,337
--------- --------- ----------- ---------
Gross margin......................................................... 699 967 761 976
Operating expenses..................................................... 123 154 138 137
Selling and marketing expenses......................................... 72 86 75 91
General and administrative expenses.................................... 321 454 365 392
Depreciation and amortization.......................................... 7 13 11 17
--------- --------- ----------- ---------
Income before provision for income taxes............................... 176 260 172 339
Provision for income taxes............................................. 4 5 3 5
--------- --------- ----------- ---------
Net income............................................................. $ 172 $ 255 $ 169 $ 334
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Unaudited pro forma information (Note 2):
Income before provision for income taxes............................. 176 260 172 339
Pro forma provision for income taxes................................. 70 104 69 136
--------- --------- ----------- ---------
Pro forma net income................................................... $ 106 $ 156 $ 103 $ 203
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
See accompanying notes to financial statements.
F-235
<PAGE>
NATIONAL MESSENGER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------------ EARNINGS/
SHARES AMOUNT (DEFICIT) TOTAL
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 1, 1994............................................... 1,800 $ 2 $ 23 $ 25
Net income.............................................................. 172 172
Dividends paid.......................................................... (200) (200)
----- ----------- ----------- ---------
Balance at November 30, 1995.............................................. 1,800 2 (5) (3)
Net income.............................................................. 255 255
Dividends paid.......................................................... (236) (236)
----- ----------- ----------- ---------
Balance at November 30, 1996.............................................. 1,800 2 14 16
Net income.............................................................. 334 334
Dividends paid.......................................................... (272) (272)
----- ----------- ----------- ---------
Balance at September 30, 1997............................................. 1,800 $ 2 $ 76 $ 78
----- ----------- ----------- ---------
----- ----------- ----------- ---------
</TABLE>
See accompanying notes to financial statements.
F-236
<PAGE>
NATIONAL MESSENGER, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEARS ENDED
NOVEMBER 30, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 172 $ 255 $ 169 $ 334
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 7 13 11 17
Provision for doubtful accounts........................................ 8 14 11 10
Changes in assets and liabilities:
Accounts receivable.................................................. (44) (118) (52) (136)
Prepaid expenses and other current assets............................ (5) 1 1 (4)
Other long-term liabilities.......................................... 100 100 83 83
Accrued compensation................................................. 15 18 12 (8)
--------- --------- --------- ---------
Net cash provided by operating activities.......................... 253 283 235 296
--------- --------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment........................................ (3) (60) (60) (37)
--------- --------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Dividends paid............................................................. (200) (236) (205) (272)
--------- --------- --------- ---------
Net increase (decrease) in cash............................................ 50 (13) (30) (13)
Cash at beginning of the period............................................ 53 103 103 90
--------- --------- --------- ---------
Cash at end of the period.................................................. $ 103 $ 90 $ 73 $ 77
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-237
<PAGE>
NATIONAL MESSENGER, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
National Messenger, Inc. (the "Company") primarily provides same-day pick-up
and delivery services of documents and parcels to customers throughout Southern
California. The Company's operations are conducted from its headquarters located
in Costa Mesa, California and a branch facility located in Ontario, California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the related assets (5
years).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable and accrued expenses
approximates fair value because of the short maturity of these instruments. The
fair value of advances from shareholders is not determinable due to their
related party nature.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables are
not collateralized and accordingly, the Company performs ongoing credit
evaluations of its customers to reduce the risk of loss. Such losses have
historically been immaterial and within management expectations.
F-238
<PAGE>
NATIONAL MESSENGER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Changes in allowance for doubtful accounts consist of the following:
<TABLE>
<S> <C>
Balance at November 30, 1994.......................................... $ --
Charge to costs and expenses.......................................... 8
---
Balance at November 30, 1995.......................................... 8
Charge to costs and expenses.......................................... 14
---
Balance at November 30, 1996.......................................... 22
Charge to costs and expenses.......................................... 10
---
Balance at September 30, 1997......................................... $ 32
---
---
</TABLE>
INCOME TAXES
The Company has elected to be treated as a cash basis S-Corporation for
federal and state income tax purposes, and, accordingly, any liabilities for
federal income taxes are the direct responsibility of the shareholders. The
Company is only subject to California state income taxes at a rate of 1.5
percent on taxable income. At September 30, 1997, the net difference between the
tax bases and the reported amounts of the Company's assets and liabilities
approximated $30.
The unaudited pro forma income tax information included in the Statements of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for all periods presented.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of September 30, 1996 and for the ten months
ended September 30, 1996 are unaudited; however, in the opinion of the Company,
the interim data includes all adjustments, consisting of only normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods.
3. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Furniture and fixtures............................................................ $ 5 $ 5 $ 5
Machinery and equipment........................................................... 37 97 134
Vehicles.......................................................................... 16 16 16
--- --------- -----
58 118 155
Accumulated depreciation.......................................................... (55) (68) (79)
--- --------- -----
$ 3 $ 50 $ 76
--- --------- -----
--- --------- -----
</TABLE>
F-239
<PAGE>
NATIONAL MESSENGER, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. COMMITMENTS
The Company leases its facilities under operating leases expiring on various
dates through 1998. Future minimum lease payments through August of 1998
required under leases that have noncancelable lease terms total approximately
$36 as of September 30, 1997.
Rental expense charged to operations was approximately $28, $41 and $30 for
the periods ended November 30, 1995 and 1996 and September 30, 1997,
respectively.
5. RELATED PARTY TRANSACTIONS
The Company has non-interest bearing advances, repayable upon demand, from
shareholders totaling $70 at November 30, 1995 and 1996 and September 30, 1997.
These advances were paid in full by the Company in October 1997.
6. UNAUDITED SUBSEQUENT EVENTS
The Company and its shareholders have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which DMS will
acquire certain assets and assume certain liabilities of the Company. The
acquired assets and assumed liabilities will be exchanged for cash and shares of
DMS common stock concurrent with the consummation of the initial public offering
of the common stock of DMS.
F-240
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Profall, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Profall, Inc. at September 30, 1997
and December 31, 1996 and 1995, and the results of its operations and its cash
flows for the nine months ended September 30, 1997 and for the years ended
December 31, 1996 and 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Los Angeles, California
December 5, 1997
F-241
<PAGE>
PROFALL, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- ---------------
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $ 1 $ -- $ 42
Accounts receivable............................................................ 85 142 176
Prepaid and other current assets............................................... 5 3 2
--------- --------- -----
Total current assets......................................................... 91 145 220
Property and equipment, net...................................................... 72 89 70
--------- --------- -----
$ 163 $ 234 $ 290
--------- --------- -----
--------- --------- -----
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................... $ 38 $ 53 $ 24
Accrued compensation........................................................... 33 46 70
Payables to affiliate.......................................................... 26 54 99
Notes payable.................................................................. 132 120 159
Advances from shareholders..................................................... 293 303 303
Advances from affiliate........................................................ 28 48 --
--------- --------- -----
Total current liabilities.................................................... 550 624 655
--------- --------- -----
Commitments (Note 5)
Shareholders' deficit:
Common stock, without par value; 1,000,000 shares authorized; 2,000 shares
issued and outstanding....................................................... 10 10 10
Additional paid-in capital..................................................... 21 46 65
Accumulated deficit............................................................ (418) (446) (440)
--------- --------- -----
Total shareholders' deficit.................................................. (387) (390) (365)
--------- --------- -----
$ 163 $ 234 $ 290
--------- --------- -----
--------- --------- -----
</TABLE>
See accompanying notes to financial statements.
F-242
<PAGE>
PROFALL, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- ------------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................................................... $ 993 $ 1,212 $ 850 $ 1,235
Cost of sales........................................................... 588 687 489 606
--------- --------- ----- ---------
Gross margin.......................................................... 405 525 361 629
Operating expenses...................................................... 215 271 166 208
General and administrative expenses..................................... 361 298 232 416
Depreciation and amortization........................................... 14 23 16 20
--------- --------- ----- ---------
Operating loss.......................................................... (185) (67) (53) (15)
--------- --------- ----- ---------
Other (income) expense
Interest expense...................................................... 21 25 19 19
Other, net............................................................ (42) (64) (51) (40)
--------- --------- ----- ---------
(Loss) income before provision for income taxes......................... (164) (28) (21) 6
Provision for income taxes.............................................. -- -- -- --
--------- --------- ----- ---------
Net (loss) income $ (164) $ (28) $ (21) $ 6
--------- --------- ----- ---------
--------- --------- ----- ---------
Unaudited pro forma information (Note 2):
(Loss) income before provision for income taxes....................... (164) (28) (21) 6
Pro forma provision for income taxes.................................. -- -- -- --
--------- --------- ----- ---------
Pro forma net (loss) income $ (164) $ (28) $ (21) $ 6
--------- --------- ----- ---------
--------- --------- ----- ---------
</TABLE>
See accompanying notes to financial statements.
F-243
<PAGE>
PROFALL, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1995................................. 2,000 $ 10 $ -- $ (254) $ (244)
Net loss.................................................. (164) (164)
Imputed interest on advances from shareholders............ 21 21
----- --- --- ----- ---------
Balances at December 31, 1995............................... 2,000 10 21 (418) (387)
Net loss.................................................. (28) (28)
Imputed interest on advances from shareholders............ 25 25
----- --- --- ----- ---------
Balances at December 31, 1996............................... 2,000 10 46 (446) (390)
Net income................................................ 6 6
Imputed interest on advances from shareholders............ 19 19
----- --- --- ----- ---------
Balances at September 30, 1997.............................. 2,000 $ 10 $ 65 $ (440) $ (365)
----- --- --- ----- ---------
----- --- --- ----- ---------
</TABLE>
See accompanying notes to financial statements.
F-244
<PAGE>
PROFALL, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- ------------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................... $ (164) $ (28) $ (21) $ 6
Adjustments to reconcile net (loss) income to net cash provided by (used
in) operating activities:
Depreciation and amortization............................................ 14 23 16 20
Imputed interest on advances from shareholders........................... 21 25 19 19
Changes in assets and liabilities:
Accounts receivable.................................................... (13) (57) (44) (34)
Prepaid and other current assets....................................... (5) 2 1 1
Accounts payable....................................................... 15 15 22 (29)
Accrued compensation................................................... 16 13 5 24
Payables to affiliate.................................................. 22 28 21 45
--------- --- --- ---------
Net cash provided by (used in) operating activities.................. (94) 21 19 52
--------- --- --- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................ (25) (40) (40) (1)
--------- --- --- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from shareholders................................................. 85 10 10 --
Advances from affiliate.................................................... 28 20 20 --
Proceeds from notes payable................................................ -- -- -- 150
Repayments to affiliate.................................................... -- -- -- (48)
Repayments of notes payable................................................ -- (12) (10) (111)
--------- --- --- ---------
Net cash provided by (used in) financing activities.................. 113 18 20 (9)
--------- --- --- ---------
Net increase (decrease) in cash............................................ (6) (1) (1) 42
Cash at beginning of the period............................................ 7 1 1 --
--------- --- --- ---------
Cash at end of the period.................................................. $ 1 $ -- $ -- $ 42
--------- --- --- ---------
--------- --- --- ---------
</TABLE>
See accompanying notes to financial statements.
F-245
<PAGE>
PROFALL, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
Profall, Inc. (dba 1-800 Courier) (the "Company") primarily provides
same-day pick-up and delivery services of documents and parcels to customers
throughout Southern California. The Company's operations are conducted from its
headquarters located in Santa Fe Springs, California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets
(5 years).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable and payable, accrued
expenses and debt approximates fair value because of the short maturity of these
instruments. The fair value of advances from shareholders and affiliate is not
determinable due to their related party nature.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentrations of credit risk consist principally of trade accounts receivable.
For the nine months ended September 30, 1997, two customers accounted for $354
and $129 of net sales, respectively. Accounts receivable for these customers
were $50 and $9 at September 30, 1997, respectively. In 1996, one customer
accounted for $154 of net sales. Accounts receivable related to this customer
totaled $24 at December 31, 1996. Receivables are not collaterized and
accordingly, the Company performs ongoing credit evaluations of its customers to
reduce the risk of loss. Such losses have historically been immaterial and
within management expectations.
INCOME TAXES
The Company has elected to be treated as a cash basis S-Corporation for
federal and state income tax purposes, and, accordingly, any liabilities for
federal income taxes are the direct responsibility of the shareholders. The
Company is only subject to California state income taxes at a rate of 1.5
percent on taxable income. At September 30, 1997, the net difference between the
tax bases and the reported amounts of the Company's assets and liabilities
approximated $20.
The unaudited pro forma income tax information included in the Statements of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for
F-246
<PAGE>
PROFALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes," as if the Company had been subject to federal and state income
taxes for all periods presented.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of and for the six months ended September 30,
1996 are unaudited; however, in the opinion of the Company, the interim data
includes all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of the results for the interim period.
3. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------
1995 1996 1997
----- --------- ---------------
<S> <C> <C> <C>
Vehicles........................................................ $ 93 $ 133 $ 134
Accumulated depreciation........................................ (21) (44) (64)
--- --------- -----
$ 72 $ 89 $ 70
--- --------- -----
--- --------- -----
</TABLE>
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- ---------------
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Note payable secured by a vehicle; payments, including interest
at 9% per annum, are due monthly through November, 1998...... $ 23 $ 16 $ 10
Non-interest bearing note payable to franchisor................ 109 104 6
Bank line of credit, maximum aggregate borrowings of $150, due
on or before May, 1998; interest at 2.0% above banks base
rate, as defined (totaling 10.5% per annum at September 30,
1997), payable monthly, guaranteed by the shareholders of the
Company...................................................... -- -- --
Note payable, guaranteed by the shareholders of the Company,
payments, including interest at 2.5% above the bank's base
rate, as defined (totaling 11% per annum at September 30,
1997), are due monthly through May, 2002..................... -- -- 143
--------- --------- -----
$ 132 $ 120 $ 159
--------- --------- -----
--------- --------- -----
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company operates under a franchise agreement with Express-It Courier
Systems, Inc. The agreement is effective for an initial term of five years
expiring in September 1999 during which the Company can only terminate the
agreement with the consent of the franchisor. The Company has the right to renew
the franchise agreement for two successive five-year periods.
F-247
<PAGE>
PROFALL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Pursuant to the terms of the agreement, the franchisor provides continuing
services including billings and collections, customer service and training. The
Company was required to remit fees for such services ranging from 14% to 19% and
10% to 14% of gross receipts, as defined, in 1995 and 1996, respectively.
Subsequent to December 31, 1996, the fees for such services range from 8% to 10%
of gross receipts, as defined. Under this agreement the Company paid $183, $143
and $103 in 1995, 1996 and the nine months ended September 30, 1997,
respectively. These amounts are included in general and administrative expenses
in the accompanying financial statements.
The Company leases certain equipment under noncancelable lease obligations.
Total rental expense under such operating leases was approximately $0, $40 and
$47 in 1995, 1996 and the nine months ended September 30, 1997, respectively.
Minimum rental payments at September 30, 1997 under noncancelable operating
leases that have initial or remaining lease terms in excess of one year are as
follows:
<TABLE>
<S> <C>
1997................................................................. $ 15
1998................................................................. 63
1999................................................................. 63
2000................................................................. 20
---------
$ 161
---------
---------
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company has non-interest bearing advances from shareholders and an
affiliate at December 31, 1995 and 1996 and September 30, 1997 totaling $321,
$351 and $303, respectively. Interest has been imputed at prevailing market
rates aggregating $21, $25 and $19 for the years ended December 31, 1995 and
1996 and the nine months ended September 30, 1997, respectively.
The Company's operations are conducted from within a facility leased and
occupied by an affiliate. No formal sublease agreement exists. Charges for rent
expense are based on occupied space and aggregated $21, $23 and $18 for the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1997, respectively. These charges have been provided for in general and
administrative expenses and included in payables to affiliate in the
accompanying financial statements.
Sales to an affiliate totaled $21, $53 and $65 in 1995, 1996 and the nine
months ended September 30, 1997, respectively. Accounts receivable from such
affiliate aggregated $3, $6 and $0 at December 31, 1995 and 1996 and September
30, 1997, respectively.
7. UNAUDITED SUBSEQUENT EVENTS
The Company and its shareholders have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which DMS will
acquire certain assets and assume certain liabilities of the Company. The
acquired assets and assumed liabilities will be exchanged for cash and shares of
DMS common stock concurrent with the consummation of the initial public offering
of the common stock of DMS.
F-248
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
A&W Couriers, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of A&W Couriers, Inc. at December 31,
1996 and September 30, 1997 and the results of its operations and its cash flows
for the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Austin, Texas
December 12, 1997
F-249
<PAGE>
A&W COURIERS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 131 $ 133
Investments....................................................................... 21 19
Accounts receivable, less allowances for doubtful accounts of $30................. 148 217
Prepaid and other current assets.................................................. 29 27
----- -----
Total current assets............................................................ 329 396
Property and equipment, net....................................................... 21 59
Other assets...................................................................... 10 2
----- -----
$ 360 $ 457
----- -----
----- -----
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities
Accounts payable and accrued expenses............................................. $ 36 $ 86
Accrued commissions--related parties.............................................. 211 228
----- -----
Total current liabilities....................................................... 247 314
Commitments and contingencies
Stockholder's equity:
Common stock $1.00 par value; 40,000 shares authorized; 2,632 shares issued and
outstanding..................................................................... 3 3
Additional paid-in capital........................................................ 58 58
Retained earnings................................................................. 52 82
----- -----
Total Stockholder's equity...................................................... 113 143
----- -----
$ 360 $ 457
----- -----
----- -----
</TABLE>
See accompanying notes to financial statements.
F-250
<PAGE>
A&W COURIERS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 31,
-------------------- ----------------------
1995 1996 1996 1997
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................................................. $ 1,461 $ 1,560 $ 1,171 $ 1,270
Cost of sales......................................................... 893 940 683 770
--------- --------- ----------- ---------
Gross margin........................................................ 568 620 488 500
Selling, general and administrative expenses
Operating expenses.................................................. 198 228 172 184
Sales and marketing................................................. 127 102 76 72
General expenses.................................................... 323 289 222 198
Depreciation........................................................ 11 10 8 11
--------- --------- ----------- ---------
659 629 478 465
--------- --------- ----------- ---------
Operating income (loss)............................................. (91) (9) 10 35
Interest income..................................................... 4 4 3 3
Other income (expense).............................................. 15 (2) -- --
--------- --------- ----------- ---------
Income before provision for income taxes.............................. (72) (7) 13 38
Income tax expense.................................................... 3 4 2 8
--------- --------- ----------- ---------
Net income (loss) $ (75) $ (11) $ 11 $ 30
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
See accompanying notes to financial statements.
F-251
<PAGE>
A&W COURIERS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............................................ 3 $3 $58 $138 $ 199
Net loss.............................................................. -- -- -- (75) (75)
-- --
--- -------- -----
Balance at December 31, 1995............................................ 3 3 58 63 124
Net loss.............................................................. -- -- -- (11) (11)
-- --
--- -------- -----
Balance at December 31, 1996............................................ 3 3 58 52 113
Net income............................................................ -- -- -- 30 30
-- --
--- -------- -----
Balance at September 30, 1997........................................... 3 $3 $58 $ 82 $ 143
-- --
-- --
--- -------- -----
--- -------- -----
</TABLE>
See accompanying notes to financial statements.
F-252
<PAGE>
A&W COURIER, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ------------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ (75) $ (11) $ 11 $ 30
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation............................................................. 11 10 8 11
Loss on disposal of equipment............................................ -- 2 2 --
Unrealized (gain) loss on short-term investments......................... (2) -- (3) 2
Changes in assets and liabilities:
Accounts receivable.................................................... (24) (7) 17 (69)
Prepaid and other current assets....................................... -- -- (15) 2
Other Assets........................................................... (4) (3) (4) 8
Accounts payable....................................................... (5) 2 (1) 3
Accrued expenses....................................................... 52 41 38 64
--------- --------- ----- ---------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES................. (47) 34 53 51
--------- --------- ----- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.......................................... (13) -- -- (49)
--------- --------- ----- ---------
NET CASH USED FOR INVESTING ACTIVITIES............................... (13) -- -- (49)
--------- --------- ----- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................. (60) 34 53 2
Cash and equivalents at beginning of period.................................. 157 97 97 131
--------- --------- ----- ---------
Cash and equivalents at end of period........................................ $ 97 $ 131 $ 150 $ 133
--------- --------- ----- ---------
--------- --------- ----- ---------
Supplemental disclosures of cash paid for income taxes....................... $ -- $ 3 $ 3 $ 4
--------- --------- ----- ---------
--------- --------- ----- ---------
</TABLE>
See accompanying notes to financial statements.
F-253
<PAGE>
A&W COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
A&W Couriers, Inc. (the "Company") provides same-day, on-demand delivery
services in the Houston, Texas metropolitan area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately three
months or less at date of purchase to be cash equivalents.
INVESTMENTS
Investments consist of equity securities and corporate bonds. Under the
Provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the Company classifies
its investments as trading securities with unrealized gains and losses included
in earnings. Unrealized gains of $2 and $- for the years ended December 31, 1995
and 1996, respectively, and $2 for the nine months ended September 30, 1997 are
included in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the related assets,
generally five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable and accrued expenses approximates fair value because of the
short maturity of these instruments.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts receivable.
Receivables are not collateralized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
F-254
<PAGE>
A&W COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company is a C-Corporation for federal and state income tax purposes.
The Company accounts for income taxes using the an asset and liability method
under the provisions of Statement of Financial Accounting Standards No. 109,
"ACCOUNTING FOR INCOME TAXES" (FAS 109). Under FAS 109, deferred income taxes
are recognized for the tax consequences of "temporary differences" by applying
enacted statutory rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Additionally, the effect on deferred taxes of a change in tax rates
is recognized in earnings in the period that includes the enactment date.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data for the nine months ended September 30, 1996 is
unaudited; however, in the opinion of the Company, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods.
3. PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets comprised the following:
<TABLE>
<CAPTION>
DECEMBER 1, SEPTEMBER 30,
1996 1997
--------------- -----------------
<S> <C> <C>
Prepaid expenses................................................. $ 28 $ 16
Other............................................................ 1 11
--- ---
$ 29 $ 27
--- ---
--- ---
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- ---------------
<S> <C> <C>
Equipment....................................................... $ 43 $ 92
Furniture and fixtures.......................................... 12 12
Vehicles........................................................ 23 23
--- -----
78 127
Accumulated depreciation........................................ 57 68
--- -----
$ 21 $ 59
--- -----
--- -----
</TABLE>
F-255
<PAGE>
A&W COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Payroll and payroll taxes....................................... $ 16 $ 19
Accrued commissions--other...................................... 11 49
Other........................................................... 9 18
--- ---
Total accrued expenses........................................ $ 36 $ 86
--- ---
--- ---
</TABLE>
6. INCOME TAXES
The provision for income taxes is comprised of current Federal income tax
expense of $3 and $4 for the years ended December 31, 1995 and 1996,
respectively, and $8 for the nine months ended September 30, 1997.
The provision for income taxes differs from income taxes computed by
applying the U.S. statutory federal income tax rate as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------- SEPTEMBER 30,
1995 1996 1997
--------- ----- -----------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate (15%)................. $ (11) $ (1) $ 6
Change in valuation allowance.................................. 13 3 3
Other.......................................................... 1 2 (1)
--- --- ---
Provision for income taxes..................................... $ 3 $ 4 $ 8
--- --- ---
--- --- ---
Effective rate................................................. 4% 57% 21%
--- --- ---
--- --- ---
</TABLE>
Temporary differences giving rise to the Company's deferred tax assets
comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
--------------- ---------------
<S> <C> <C>
Deferred tax assets
Accounts receivable allowances................................ $ 5 $ 5
Accrued liabilities........................................... 36 38
Other......................................................... 3 2
--- ---
44 45
Deferred tax liabilities--prepaid expenses...................... (4) (2)
--- ---
40 43
Less valuation allowance........................................ (40) (43)
--- ---
$ -- $ --
--- ---
--- ---
</TABLE>
F-256
<PAGE>
A&W COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. INCOME TAXES (CONTINUED)
A valuation allowance has been provided based on management's assessment of
the ultimate realization of the deferred tax assets.
7. RELATED PARTY TRANSACTIONS
At December 31, 1996 and September 30, 1997, the Company had $1 note
receivable from shareholder. At December 31, 1996 and September 30, 1997, the
Company had commissions payable to current and former shareholders of the
Company of $211 and $228, respectively. Commissions are generally calculated as
4% of revenue and are payable on demand.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES. The Company leases certain office equipment under
operating leases expiring on various dates through December 2001. Future minimum
lease payments required under leases that have noncancelable lease terms in
excess of one year at September 30, 1997 are as follows:
<TABLE>
<S> <C>
Three Months Ending December 31, 1997................................ $ 7
Fiscal year 1998..................................................... 28
Fiscal year 1999..................................................... 28
Fiscal year 2000..................................................... 30
Fiscal year 2001..................................................... 10
---------
$ 103
---------
---------
</TABLE>
Rental expense charged to operations was approximately $24 and $26 for the
years ended December 31, 1995 and 1996 and $23 for the nine months ended
September 30, 1997.
LITIGATION. The Company is, from time to time, a party to litigation
arising in the normal course of business, most of which involve claims for
personal injury and property damage incurred in connection with its operations.
Management believes that none of these actions will have a material adverse
impact on the financial position, results of operations or cash flows of the
Company.
9. UNAUDITED SUBSEQUENT EVENT
The Company and its stockholder have entered into a definitive agreement
with Dispatch Management Services Corp. ("DMS") pursuant to which DMS will
acquire the outstanding shares of the Company. The acquired shares will be
exchanged for cash and shares of DMS common stock concurrent with the
consummation of the initial public offering of the common stock of DMS.
F-257
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Fleetfoot Max, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Fleetfoot Max, Inc.
at August 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended August 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Seattle, Washington
October 7, 1997
F-258
<PAGE>
FLEETFOOT MAX, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 26 $ 40
Accounts receivable, net..................................................................... 249 295
Prepaid assets............................................................................... 19 3
--------- ---------
Total current assets....................................................................... 294 338
Property and equipment, net.................................................................... 107 103
Deferred tax asset............................................................................. 61 14
Investments.................................................................................... 20
Deposits....................................................................................... 27 27
--------- ---------
Total assets............................................................................... $ 489 $ 502
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................................. $ 7 $ 12
Accrued expenses............................................................................. 106 127
Notes payable................................................................................ 4
Current maturities long-term debt............................................................ 192 176
Current portion of capital lease obligation.................................................. 13 6
--------- ---------
Total current liabilities.................................................................. 322 321
Long-term debt, net of current maturities...................................................... 236 149
Capital lease obligation, net of current portion............................................... 22
--------- ---------
Total liabilities.......................................................................... 558 492
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity (deficit):
Common stock, par value $0.05 per share; 500,000,000 shares authorized; 1,000,000 shares
issued and 212,857 shares outstanding...................................................... 50 50
Additional paid-in capital................................................................... 33 33
Retained earnings (accumulated deficit)...................................................... (26) 53
--------- ---------
57 136
Less: common stock in treasury at cost (787,143 shares)........................................ (126) (126)
--------- ---------
Total shareholders' equity (deficit)....................................................... (69) 10
--------- ---------
Total liabilities and shareholders' equity (deficit)....................................... $ 489 $ 502
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-259
<PAGE>
FLEETFOOT MAX, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Net sales............................................................................ $ 1,702 $ 2,042 $ 2,427
Cost of sales........................................................................ 1,015 1,220 1,557
--------- --------- ---------
Gross margin..................................................................... 687 822 870
Operating expenses................................................................... 306 351 380
Sales and marketing.................................................................. 21 20 23
General and administrative........................................................... 259 257 279
Depreciation and amortization........................................................ 64 53 52
--------- --------- ---------
Operating income................................................................. 37 141 136
Other (income) expense
Interest expense................................................................... 72 59 54
Other, net......................................................................... (11) (18) (44)
--------- --------- ---------
Income (loss) before provision for income taxes.................................. (24) 100 126
Provision for (benefit attributable to) income taxes................................. (61) 47
--------- --------- ---------
Net income (loss).................................................................... $ (24) $ 161 $ 79
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-260
<PAGE>
FLEETFOOT MAX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED AUGUST 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK CAPITAL EARNINGS TREASURY
-------------------------- IN EXCESS (ACCUMULATED COMMON
SHARES PAR VALUE OF PAR DEFICIT) STOCK
----------- ------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
August 31, 1994................................ 1,000 $ 50 $ 33 $ (163) $ (126)
Net loss....................................... (24)
----- --- --- ----- -----
Balances at, August 31, 1995................... 1,000 50 33 (187) (126)
Net income..................................... 161
----- --- --- ----- -----
Balances at, August 31, 1996................... 1,000 50 33 (26) (126)
Net income..................................... 79
----- --- --- ----- -----
Balances at, August, 1997...................... 1,000 $ 50 $ 33 $ 53 $ (126)
----- --- --- ----- -----
----- --- --- ----- -----
<CAPTION>
TOTAL
EQUITY
(DEFICIT)
-----------
<S> <C>
August 31, 1994................................ $ (206)
Net loss....................................... (24)
-----
Balances at, August 31, 1995................... (230)
Net income..................................... 161
-----
Balances at, August 31, 1996................... (69)
Net income..................................... 79
-----
Balances at, August, 1997...................... $ 10
-----
-----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-261
<PAGE>
FLEETFOOT MAX, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................................... $ (24) $ 161 $ 79
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating
activities:
Depreciation and amortization............................................................ 64 53 52
(Gain) loss on sale of property and equipment............................................ (10) (1) 4
Changes in assets and liabilities:
Accounts receivable.................................................................... (61) (27) (46)
Prepaid assets......................................................................... (3) 16
Deposits............................................................................... (2) (6)
Accounts payable....................................................................... (6) 5
Accrued expenses....................................................................... 13 5 21
Deferred tax asset..................................................................... (61) 47
--------- --------- ---
Net cash provided by (used for) operating activities................................. (20) 115 178
--------- --------- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................................ (6) (21) (24)
Investments................................................................................ (20)
Proceeds from sale of assets............................................................... 12 2 2
--------- --------- ---
Net cash provided by (used for) investing activities................................. 6 (19) (42)
--------- --------- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable................................................................. (7) (4)
Repayment of long-term liabilities......................................................... (47) (53) (103)
Repayment of capital lease obligations..................................................... (2) (15) (15)
--------- --------- ---
Net cash used for financing activities............................................... (49) (75) (122)
--------- --------- ---
Net increase (decrease) in cash and equivalents............................................ (63) 21 14
Cash and equivalents at beginning of the period............................................ 68 5 26
--------- --------- ---
Cash and equivalents at end of the period.................................................. $ 5 $ 26 $ 40
--------- --------- ---
--------- --------- ---
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired under capital lease........................................ $ 30 $ -- $ 30
--------- --------- ---
--------- --------- ---
Interest paid.............................................................................. $ 72 $ 58 $ 51
--------- --------- ---
--------- --------- ---
</TABLE>
The accompanying notes are an integral part of these financial statements.
262
<PAGE>
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BUSINESS ORGANIZATION
Fleetfoot Max, Inc. (the "Company") was incorporated in 1980 under the laws
of the state of Washington. The Company provides same day, on demand delivery
services in the Seattle Commercial Zone which extends from Everett to Tacoma and
all of the eastern communities of King County.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of approximately three
months or less at date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets
(5 to 7 years). Capital leases are stated at the present value of the future
minimum lease payments and amortized over the life of the lease. Capital lease
amortization is included in depreciation expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable, notes receivable/ payable and accrued expenses approximates
fair value because of the short maturity of these instruments. The estimated
fair value of long-term debt and other long-term liabilities approximates its
carrying value. Additionally, interest rates on outstanding debt are at rates
which approximate market rates for debt with similar terms and average
maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk consist principally of trade accounts receivable.
Receivables are not collateralized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss.
F-263
<PAGE>
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company is a C-Corporation for federal income tax purposes. The Company
accounts for income taxes using the liability method under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".
Deferred tax assets and liabilities arise primarily as a result of net
operating loss carry-forwards and differences in the method of accounting for
depreciation.
EARNINGS PER SHARE
Information regarding earnings per share has not been provided because the
capital structure is not indicative of the capital structure subsequent to the
agreement with DMS Corporation ("DMS") as further discussed in Note 11.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING AT END
OF PERIOD WRITE-OFFS OF PERIOD
------------- ------------- -------------
<S> <C> <C> <C>
Year ended August 31, 1995...................................................... $ 9 $ 11 $ 12
Year ended August 31, 1996...................................................... $ 12 $ 12 $ 13
Year ended August 31, 1997...................................................... $ 13 $ 2 $ 15
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Equipment..................................................................... $ 162 $ 183
Furniture and fixtures........................................................ 12 5
Vehicles...................................................................... 123 64
Leasehold improvements........................................................ 54 63
--------- ---------
351 315
Accumulated depreciation and amortization..................................... (244) (212)
--------- ---------
$ 107 $ 103
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended August 31, 1995, 1996, and 1997 was
approximately $64, $53 and $52, respectively.
Equipment includes the cost of equipment of $30 held by the Company under
capital lease agreements described in Note 6 for both years ending August 31,
1996 and 1997. The accumulated amortization relating to these assets aggregated
$18 and $0, respectively, at August 31, 1996 and 1997.
F-264
<PAGE>
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Payroll and payroll taxes..................................................... $ 66 $ 85
Deferred salaries............................................................. 22 22
Other......................................................................... 18 20
--------- ---------
Total accrued expenses...................................................... $ 106 $ 127
--------- ---------
--------- ---------
</TABLE>
6. LEASES
The Company leases certain office space under operating lease agreements and
certain office equipment under capital and operating leases expiring on various
dates through 1999. Future minimum lease payments required under leases that
have noncancelable lease terms in excess of one year at August 31, 1997 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1998..................................................................... $ 10 $ 108
1999..................................................................... 10 87
2000..................................................................... 10 25
2001..................................................................... 6
--- -----
Total minimum lease payments............................................. 36 $ 220
-----
-----
Amount representing interest............................................. 8
---
Present value of net minimum payments.................................... 28
Current portion.......................................................... 6
---
$ 22
---
---
</TABLE>
Rental expense attributed to office space was approximately $45, $42 and $43
for the years ended August 31, 1995, 1996 and 1997, respectively.
7. LONG-TERM DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Government agency note....................................................... $ 178 $ 143
Convertible debentures with majority shareholder and other related parties... 150 115
Unsecured promissory note with majority shareholder.......................... 70 58
Other subordinated notes..................................................... 30 9
--------- ---------
428 325
Less: current portion........................................................ (192) (176)
--------- ---------
$ 236 $ 149
--------- ---------
--------- ---------
</TABLE>
F-265
<PAGE>
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. LONG-TERM DEBT (CONTINUED)
On January 14, 1994, the Company received a U.S. Small Business
Administration Note of $250. The note accrues interest at the prime rate plus
2.75% per annum which was 11.0% and 11.25% at August 31, 1996, and 1997,
respectively. Interest is accrued, due and payable monthly, in installments,
including principal, until December 14, 2000. The note is collateralized by all
properties acquired with the proceeds of this loan and certain vehicles and
equipment.
Convertible debentures were issued to the majority shareholder of the
Company and other related parties between July 31, 1990 and March 10, 1993. The
holder of the note has the option at any time to convert the principal amount
outstanding into common shares of the Company at a conversion price of $2.50 for
one common share. The debenture notes accrue interest at 15% per annum and
interest is accrued, due and payable monthly. The Company is obligated to repay
the principal five years from the date of agreements. Principle may be prepaid,
in whole or in part, at any time, without penalty. As of August 31, 1997, $115
of the debentures were past due and continued accruing interest per the existing
terms of the note. In September 1997, Fleetfoot Max's President converted $110
of convertible debentures into 44,000 shares of Fleetfoot Max, Inc. common
stock.
On March 5, 1991, the Company entered into a $115 promissory note agreement
with the majority shareholder of the Company. The note accrues interest at a
rate of 12% per annum. Principal and interest are payable in monthly
installments of $2 until March 2001.
Other subordinated notes consist of a leasehold improvement loan and
miscellaneous vehicle loans. The loans accrue interest at rates between 7.25%
and 10% and mature on multiple dates between fiscal 1995 and fiscal 1998.
Fixed and determinable maturities of long-term debt at August 31, 1997 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31,
- --------------------------------------------------------------------------------------
<S> <C>
1998.................................................................................. $ 176
1999.................................................................................. 58
2000.................................................................................. 65
2001.................................................................................. 26
---------
$ 325
---------
---------
</TABLE>
8. INCOME TAXES
The provision for income taxes comprised the following:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- -----
Current tax expense (benefit)........................................... $ (9) $ 38 $ 45
Deferred tax expense (benefit).......................................... (1) (7) 2
Change in valuation allowance........................................... 10 (92)
--- --- ---
Provision for (benefit attributable to) income taxes.................... $ -- $ (61) $ 47
--- --- ---
--- --- ---
</TABLE>
F-266
<PAGE>
FLEETFOOT MAX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
8. INCOME TAXES (CONTINUED)
Temporary differences giving rise to the Company's deferred tax assets and
liabilities comprised the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------
<S> <C> <C>
1996 1997
----- -----
Net operating loss.............................................................. $ 50 $ 5
Depreciation and amortization................................................... 4 1
A/R reserve and accrued liabilities............................................. 7 8
--- ---
Net deferred tax asset.......................................................... $ 61 $ 14
--- ---
--- ---
</TABLE>
At August 31, 1997, the Company has a net operating loss carry-forward of
approximately $13 which will expire in the year 2014, if not previously
utilized. Should certain changes in the Company's ownership occur, there could
be a limitation on the utilization of its net operating loss.
The effective income tax rate varies from the statutory tax rate for the
year ended August 31, 1996 primarily due to the Company eliminating the
previously recorded valuation allowance for deferred tax assets based
management's assessment of the likelihood of realizing such deferred tax assets.
9. RELATED PARTY TRANSACTIONS
In 1991, the Company entered into a royalty agreement with ABC Messengers,
an unrelated party. On November 29, 1993, Fleetfoot Max's President and General
Manager purchased the royalty contract from ABC Messengers. Pursuant to the
agreement the President and General Manager of Fleetfoot Max, Inc. received a
monthly royalty of 10-16% of sales related to ABC Messengers' customer base for
the remaining period of the outstanding contract. Amounts paid under the royalty
agreement to the related parties were $54, $54 and $5 for the years ending
August 31, 1995, 1996 and 1997, respectively. The agreement expired in September
1996.
10. LITIGATION
Certain pending litigation relating to matters that are in the ordinary
course of the Company's business activities are not expected to have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
11. UNAUDITED SUBSEQUENT EVENTS
The Company and its shareholder have entered into a definitive agreement
with DMS Corporation pursuant to which the Company will merge with DMS. All
outstanding shares of the Company will be exchanged for cash and shares of DMS
common stock concurrent with the consummation of the initial public offering of
the common stock of DMS.
F-267
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Expressit Couriers, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of shareholder's equity, and of cash flows present fairly, in all
material respects, the financial position of Expressit Couriers, Inc. (the
Company) at December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Detroit, Michigan
November 11, 1997
F-268
<PAGE>
EXPRESSIT COURIERS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash.............................................................................. $ 1 $ 3
Accounts receivable, net.......................................................... 94 104
Prepaid and other current assets.................................................. 15 12
----- -----
Total current assets............................................................ 110 119
Property and equipment, net......................................................... 111 74
Shareholder receivable.............................................................. 61 73
Initial franchise fee............................................................... 5
----- -----
$ 282 $ 271
----- -----
----- -----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit.................................................................... $ 61 $ 57
Accounts payable.................................................................. 118 85
Accrued expenses.................................................................. 30 23
Current maturities long-term debt................................................. 45 16
----- -----
Total current liabilities....................................................... 254 181
Long-term debt...................................................................... 11
----- -----
Total liabilities............................................................... 265 181
Commitments and contingencies (Note 9)
STOCKHOLDER'S EQUITY
Common stock; no par value; 15,000 shares authorized; 1,000 issued and
outstanding....................................................................... 1 1
Retained earnings................................................................... 16 89
----- -----
Stockholder's Equity................................................................ 17 90
----- -----
$ 282 $ 271
----- -----
----- -----
</TABLE>
See accompanying notes to financial statements.
F-269
<PAGE>
EXPRESSIT COURIERS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.................................................................. $ 1,703 $ 1,343 $ 1,023 $ 1,071
Cost of sales.............................................................. 1,135 897 678 666
--------- --------- --------- ---------
Gross margin............................................................. 568 446 345 405
Operating expenses......................................................... 210 231 202 178
Sales and marketing expenses............................................... 61 27 6 27
General and administrative expenses........................................ 223 177 101 81
Depreciation and amortization.............................................. 41 44 36 35
--------- --------- --------- ---------
Operating income (loss).................................................... 33 (33) 0 84
--------- --------- --------- ---------
Other income (expense)
Interest expense......................................................... (12) (16) (13) (7)
Other, net............................................................... 15 (14) (9) (4)
--------- --------- --------- ---------
Net income (loss).......................................................... $ 36 $ (63) $ (22) $ 73
--------- --------- --------- ---------
--------- --------- --------- ---------
Unaudited pro forma information
Pro forma net income (loss) before provision for income taxes............ $ 36 $ (63) $ (22) $ 73
Benefit (provision) for income taxes..................................... (16) 24 8 (32)
--------- --------- --------- ---------
Pro forma net income (loss) (see Note 2)................................... $ 20 $ (39) $ (14) $ 41
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-270
<PAGE>
EXPRESSIT COURIERS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994........................................... 1,000 1 43 44
Net income............................................................. 36 36
--
----- --- ---
Balance at December 31, 1995........................................... 1,000 1 79 80
Net (loss)............................................................. (63) (63)
--
----- --- ---
Balance at December 31, 1996........................................... 1,000 1 16 17
Net income............................................................. 73 73
--
----- --- ---
Balance at September 30, 1997.......................................... 1,000 $ 1 $ 89 $ 90
--
--
----- --- ---
----- --- ---
</TABLE>
F-271
<PAGE>
EXPRESSIT COURIERS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ------------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................................... $ 36 $ (63) $ (22) $ 73
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities
Depreciation and amortization..................................... 41 44 36 35
(Gain)/loss on sale of property and equipment..................... (15) 14 9 4
Changes in assets and liabilities
Accounts receivable............................................. 10 76 63 (10)
Prepaid and other assets........................................ 9 3 (8) 3
Shareholder receivable.......................................... (26) (23) (25) (12)
Accounts payable................................................ 49 6 15 (33)
Accrued expenses................................................ (39) 8 16 (7)
--- --- --- ---
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES.......... 65 65 84 53
--- --- --- ---
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................................... (84) (4) (3)
Purchase of franchise................................................. (20)
Proceeds from sale of property........................................ 27 5 5 16
--- --- --- ---
NET CASH USED FOR INVESTING ACTIVITIES........................ (57) 1 5 (7)
--- --- --- ---
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in line of credit................................. (1) (6) (5) (4)
Payments on long-term debt............................................ (54) (63) (54) (40)
Proceeds from borrowings.............................................. 43 2
--- --- --- ---
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES.......... (12) (67) (59) (44)
--- --- --- ---
NET INCREASE (DECREASE) IN CASH....................................... (4) (1) 30 2
Cash at beginning of the period....................................... 6 2 2 1
--- --- --- ---
Cash at end of the period............................................. $ 2 $ 1 $ 32 $ 3
--- --- --- ---
--- --- --- ---
Cash paid for interest................................................ $ 12 $ 16 $ 13 $ 7
--- --- --- ---
--- --- --- ---
</TABLE>
See accompanying notes to financial statements.
F-272
<PAGE>
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
Expressit Couriers, Inc. (the Company) provides same-day, on-demand delivery
services in the Boston, Massachusetts metropolitan area. In September 1996, the
Company entered into a franchise agreement with 800-Courier, Inc. using the name
and business system of 800-Courier, Inc. Under the franchise agreement, the
Company pays a fee of 8 and 1/4% of the Company's gross receipts to 800-Courier,
Inc. In 1997, the Company paid an initial franchise fee of $20. Franchise fees
for the year ended December 31, 1996 and the nine months ended September 30,
1997 approximated $28 and $71, respectively.
On September 9, 1997, the Company has entered into an agreement with
800-Courier, Inc., whereby effective December 24, 1997 the franchise agreement
between the Company and 800-Courier, Inc. will be terminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.
INITIAL FRANCHISE FEE
Amortized using the straight-line method over one year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts
receivable/payable and accrued expenses approximates fair value because of the
short maturity of these instruments. The estimated fair value of long-term debt
approximates its carrying value as interest rates on outstanding debt are at
rates which approximate market rates for debt with similar terms and average
maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables are
not collaterized and accordingly, the Company performs ongoing credit
evaluations of its customers to reduce the risk of loss.
F-273
<PAGE>
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sales from the Company's top three customers represented 16%, 10% and 10% of
net sales for the nine months ended September 30, 1997, respectively.
Approximately 54% of accounts receivable at September 30, 1997 were from these
customers.
INCOME TAXES
The Company has elected to have its income taxed under Section 1362 of the
Internal Revenue Code (the Subchapter S Corporation Election) which provides
that, in lieu of federal corporate income taxes, the shareholder is taxed on the
Company's income.
There are differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At September 31, 1997, the
carrying amounts of the Company's net assets exceeds the tax bases by
approximately $32.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and state income taxes for the entire periods presented.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of September 30, 1996 and for the nine months
ended September 30, 1996 is unaudited; however, in the opinion of the Company,
the interim data includes all adjustments, consisting only of normal recurring
items, necessary for a fair statement of the results for the interim periods.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Accounts receivable, trade.......................................................... $ 102 $ 104
Allowance for doubtful accounts..................................................... (8)
----- -----
$ 94 $ 104
----- -----
----- -----
</TABLE>
Allowance for doubtful accounts comprised the following:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996...................................... $ 8 $ 8 $ (8) $ 8
Nine months ended September 30, 1997.............................. $ 8 $ -- $ (8) $ --
</TABLE>
F-274
<PAGE>
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. PREPAID AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Prepaid insurance................................................................... $ 8 $ 5
Security deposits................................................................... 5 5
Other............................................................................... 2 2
--- ---
$ 15 $ 12
--- ---
--- ---
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, SEPTEMBER 30,
LIFE 1996 1997
--------- --------------- ---------------
<S> <C> <C> <C>
Radio equipment......................................................... 5 years $ 66 $ 66
Office equipment........................................................ 7 years 35 38
Vehicles................................................................ 5 years 121 79
Other................................................................... 39 years 6 6
--------- --- ---
228 189
Accumulated depreciation and amortization............................... (117) (115)
--------- --- ---
$ 111 $ 74
--------- --- ---
--------- --- ---
</TABLE>
Vehicles with an aggregate cost and accumulated depreciation of $57 and $29,
respectively, at December 31, 1996 and at September 30, 1997, were recorded
under capital leases.
6. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Payroll and payroll taxes........................................................... $ 23 $ 21
Other............................................................................... 7 2
--- ---
Total accrued expenses.......................................................... $ 30 $ 23
--- ---
--- ---
</TABLE>
7. DEBT
The Bank line of credit is payable on demand and provides for maximum
borrowings of $75. Interest accrues at the bank's prime rate plus 1.75% (9.50%
at September 30, 1997).
F-275
<PAGE>
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. DEBT (CONTINUED)
Long-term debt comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Bank term loan...................................................................... $ 11 $ --
Notes payable....................................................................... 28 16
Capital lease obligations........................................................... 17
--- ---
Total........................................................................... 56 16
Less--current portion............................................................... 45 16
--- ---
Long-term debt.................................................................. $ 11 $ --
--- ---
--- ---
</TABLE>
The Bank term loan is secured by all the assets of the Company and
guaranteed by the shareholder of the Company. The loan was payable through
August 1997 in monthly principle payments of $1 plus interest at the bank's
prime rate plus 2% (10.25% at December 31, 1996).
Notes payable are secured by certain vehicles. The notes are payable in
monthly aggregate principle amounts of $1 plus interest at 8.5% through August
1998.
The Company leases certain equipment under arrangements which have been
classified as capital leases. The leases have minimum monthly payments of $2 and
are secured by certain equipment utilized in the business. The leases are
further guaranteed by the shareholder of the Company.
Aggregate annual payments on long-term debt are: 1997--$45; 1998--$11. At
the end of the lease terms, the Company has the option to purchase the vehicles
under capital lease arrangements for minor amounts.
8. OPERATING LEASES
The Company leases certain premium seating at a Boston sports arena under a
license agreement expiring on September 30, 2004. Future minimum license and
ticket fee payments required under the agreement are as follows:
<TABLE>
<S> <C>
1998................................................................................. $ 23
1999................................................................................. 23
2000................................................................................. 23
2001 through 2004.................................................................... 73
---------
$ 142
---------
---------
</TABLE>
Rental expense was approximately $27 for the nine months ended September 30,
1997 and $22 for the year ended December 31, 1996.
F-276
<PAGE>
EXPRESSIT COURIERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS
The Company leases office space from a realty trust where the shareholder of
the Company is the beneficiary. The lease expires on July 31, 1998 with an
option to renew for one year. Rent expenses related to this lease agreement
approximated $13 in 1996 and $10 in the nine months ended September 30, 1997.
Shareholder receivable represents a receivable from the shareholder of the
Company. There are no formal repayment terms.
10. COMMITMENTS AND CONTINGENCIES
The Company was self-insured for workers' compensation insurance for the
periods September 22, 1995 to December 27, 1995 and June 29, 1996 through
December 2, 1996. In the opinion of the Company, the liability, if any, arising
from workers' compensation claims relating to these periods will not have a
material effect on the Company's financial position or the results of its
operations.
There are pending actions and contingencies arising out of the ordinary
conduct of business. In the opinion of the Company, the liability, if any,
arising from these actions will not have a material effect on the Company's
financial position, the results of its operations, or its cash flows.
11. UNAUDITED SUBSEQUENT EVENTS
The company and its stockholder have entered into a definitive agreement
with DMS Corporation (DMS) pursuant to which the Company will merge with DMS.
All outstanding shares of the Company will be exchanged for cash and shares of
DMS common stock concurrent with the consummation of the initial public offering
of the common stock of DMS.
F-277
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Express Enterprise, Inc.--Ground Operations
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity, and of cash flows present
fairly, in all material respects, the financial position of the Ground
Operations of Express Enterprise, Inc. (the Company), at December 31, 1996 and
September 30, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1995 and 1996, and for the nine-month period ended
September 30, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Detroit, Michigan
November 21, 1997
F-278
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
Current assets
Cash.............................................................................. $ 13 $ --
Accounts receivable, net.......................................................... 90 165
Other current assets.............................................................. 12
----- -----
Total current assets............................................................ 103 177
Property and equipment, net......................................................... 61 54
Deposits............................................................................ 14 12
Amount receivable from an affiliate................................................. 131 87
----- -----
$ 309 $ 330
----- -----
----- -----
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Book overdraft.................................................................... $ -- $ 39
Accounts payable.................................................................. 44 44
Accrued expenses.................................................................. 80 59
Current maturities of long-term debt and capital lease obligations................ 46 39
----- -----
Total current liabilities....................................................... 170 181
Long-term debt, net of current portion.............................................. 60 33
Capital lease obligation, net of current portion.................................... 24 9
----- -----
Total liabilities............................................................... 254 223
----- -----
Commitments and contingencies
Stockholders' equity
Common stock; $1.0 par value; 50,000 shares authorized; 1,000 shares issued and
outstanding..................................................................... 1 1
Retained earnings--Ground Operations.............................................. 54 106
----- -----
55 107
----- -----
$ 309 $ 330
----- -----
----- -----
</TABLE>
See accompanying notes to financial statements.
F-279
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.................................................................. $ 1,344 $ 1,612 $ 1,222 $ 1,447
Cost of sales.............................................................. 812 986 729 867
--------- --------- --------- ---------
Gross margin............................................................. 532 626 493 580
--------- --------- --------- ---------
Operating expenses......................................................... 202 246 182 217
Sales and marketing........................................................ 30 16 17 4
General and administrative expenses........................................ 238 277 216 276
Depreciation............................................................... 53 47 35 19
--------- --------- --------- ---------
523 586 450 516
--------- --------- --------- ---------
Operating income........................................................... 9 40 43 64
Other (income) expense
Interest expense......................................................... 16 16 12 12
Other.................................................................... (3)
--------- --------- --------- ---------
Net (loss) income.......................................................... $ (4) $ 24 $ 31 $ 52
--------- --------- --------- ---------
--------- --------- --------- ---------
Unaudited pro forma information
Pro forma net income before provision for income tax....................... $ (4) $ 24 $ 31 $ 52
Provision for income taxes................................................. 8 10 12
--------- --------- --------- ---------
Pro forma net (loss) income................................................ $ (4) $ 16 $ 21 $ 40
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-280
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS--
-------------------------- GROUND
SHARES AMOUNT OPERATIONS TOTAL
----------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............................................... 1,000 $ 1 $ 34 $ 35
Net loss................................................................... (4) (4)
--
----- ----- ---------
Balance at December 31, 1995............................................... 1,000 1 30 31
Net income................................................................. 24 24
--
----- ----- ---------
Balance at December 31, 1996............................................... 1,000 1 54 55
Net income................................................................. 52 52
--
----- ----- ---------
Balance at September 30, 1997.............................................. 1,000 $ 1 $ 106 $ 107
--
--
----- ----- ---------
----- ----- ---------
</TABLE>
See accompanying notes to financial statements.
F-281
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------
--------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income....................................................... $ (4) $ 24 $ 31 $ 52
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities
Depreciation.......................................................... 53 47 35 19
Changes in assets and liabilities:
Accounts receivable................................................. (14) (16) (35) (75)
Other assets........................................................ (12) 10 2 (10)
Accounts payable and overdraft...................................... 37 (11) 69 39
Accrued expenses.................................................... 63 17 (43) (21)
Amount receivable from affiliate.................................... (61) (30) (42) 44
--- --- --- ---
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............... 62 41 17 48
--- --- --- ---
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment.................................................. (32) (7) (15)
Proceeds from sale of equipment......................................... (3) 3
--- --- --- ---
NET CASH USED FOR INVESTING ACTIVITIES............................ (35) (7) (12)
--- --- --- ---
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term loans........................................... 32 50
Repayment of long-term loans............................................ (56) (60) (13) (35)
Repayment of capital lease obligation................................... (4) (11) (4) (14)
--- --- --- ---
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES.............. (28) (21) (17) (49)
--- --- --- ---
NET (DECREASE) INCREASE IN CASH......................................... (1) 13 (13)
Cash at beginning of the period......................................... 1 13
--- --- --- ---
Cash at the end of the period........................................... $ -- $ 13 $ -- $ --
--- --- --- ---
--- --- --- ---
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest.................................. $ 16 $ 16 $ 12 $ 12
--- --- --- ---
--- --- --- ---
</TABLE>
See accompanying notes to financial statements
F-282
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ORGANIZATION
Express Enterprise, Inc., operates business as Express Messenger Services,
Inc., (the Company) and provides same-day, on-demand delivery and logistics
services in the Detroit, Michigan metropolitan area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Effective January 1, 1997, the Company transferred its air operations to
another affiliate, Express Core, Inc. As a result of this transfer, all the
related assets and liabilities of the air operations were transferred at net
book value. These financial statements have been prepared on a carve-out basis
and exclude the air operations for all periods presented.
Transactions between the ground operations and the air operations are herein
referred to as "related party" transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when packages are delivered to the customer.
PROPERTY AND EQUIPMENT
Vehicles, equipment under capital lease, leasehold improvements and
equipment are carried at cost. Depreciation is provided using the accelerated
method over the estimated useful lives of the related assets (generally five
years). Assets subject to capital leases are amortized using the accelerated
method over the estimated useful lives, or over the terms of the leases, if
shorter.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable/payable, and accrued
expenses approximates fair value because of the short maturity of these
instruments. The estimated fair value of long-term debt and capital lease
obligations approximates its carrying value. Additionally, interest rates on
outstanding debt are at rates which approximate market rates for debt with
similar terms and average maturities.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentrations of credit risk consist principally of trade accounts receivable.
Receivables are not collateralized and accordingly, the Company performs ongoing
credit evaluations of its customers to reduce the risk of loss. In 1996 and
1997, the Company's two largest customers accounted for approximately 25% of
sales.
F-283
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company files consolidated federal and state income returns for both
ground and air operations. As discussed in Note 2, the unaudited pro forma
income tax information included in the Statement of Operations is presented in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income taxes", as if the Company's ground operations had been individually
subject to Federal and State income taxes for the entire periods presented.
There are differences between the financial statement carrying amounts and
the tax bases of existing asset and liabilities. At December 31, 1996 and
September 30, 1997, the tax basis of the Company's net assets and liabilities
exceed the financial reporting bases by approximately $12 and $12, respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data for the nine months ended September 30, 1996, is
unaudited; however, in the opinion of the Company, the interim data includes all
adjustments, consisting only or normal recurring adjustments, necessary for a
fair statement of the results for the interim periods.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996....................................... $ -- $ 10 $ -- $ 10
Nine months ended September 30, 1997............................... $ 10 $ -- $ -- $ 10
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- ---------------
<S> <C> <C>
Current assets
Leasehold Improvement......................................... $ 3 $ 9
Furniture and equipment....................................... 65 73
Vehicles...................................................... 69 36
Equipment under capital lease................................. 58 59
----- -----
195 177
Accumulated depreciation and amortization..................... (134) (123)
----- -----
$ 61 $ 54
----- -----
----- -----
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1996 was
approximately $53 and $47, respectively, and for the period ended September 30,
1997 was $19.As of December 31, 1996 and September 30, 1997, vehicles amounting
to approximately $80 and equipment under capital leases of
F-284
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. PROPERTY AND EQUIPMENT (CONTINUED)
approximately $58 are secured as a collateral for long-term debt and capital
lease obligations of the Company.
5. ACCRUED EXPENSES
Accrued expenses comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Payroll and payroll taxes....................................... $ 75 $ 45
Accrued Vacation................................................ 2 14
Other........................................................... 3
--- ---
Total accrued expenses.......................................... $ 80 $ 59
--- ---
--- ---
</TABLE>
6. OPERATING LEASES
The Company leases all of its employees, including the officers of the
Company, from a staffing corporation based in Chicago, Illinois. The expenses
related to the employees, including fringe benefits and payroll taxes, for the
years ended December 31, 1995 and 1996 were approximately $389 and $528,
respectively, and for the nine-month period ending September 30, 1997 were $340.
The Company leases various vehicles and equipment under operating lease
agreements. Rent expense related to these leases for the years ended December
31, 1995 and 1996 was $38 and $84, respectively, and for the nine-month period
ending September 30, 1997 was $59.
The Company leases its facility in Romulus, Michigan, under a noncancellable
operating lease. The agreement provides for minimum lease payments and
additional rentals based upon common area expenses. The lease contains renewal
as well as purchase operations. Rent expense related to the lease for the years
ended December 31, 1995 and 1996 was $67 and $67, respectively, and for the
nine-month period ending September 30, 1997 was $19.
The Company entered into a lease agreement during March 1997 to rent office
space in downtown Detroit, Michigan, under a noncancellable operating lease.
Rent expense related to the office space was $2 for the nine-month period ending
September 30, 1997.
Minimum lease payments for the fiscal years ending December 31:
<TABLE>
<S> <C>
1998.................................................................. $ 61
1999.................................................................. 18
2000.................................................................. 6
---
$ 85
---
---
</TABLE>
F-285
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- -----------------
<S> <C> <C>
Installment note due in monthly installments of $814, which includes interest at
10%, expiring February 2001....................................................... $ 38 $ 35
Installment note due in monthly installments of $308, which includes interest at
16%, expiring February 1997....................................................... 1
Installment note due in monthly installments of $451, which includes interest at
7.5%, expiring June 1998.......................................................... 8 4
Installment note due in monthly installments of $411, which includes interest at
9.5%, expiring April 1998......................................................... 7 4
Installment note due in monthly installments of $194, which includes interest at
7.75%, expiring April 1999........................................................ 5
Installment note due in monthly installments of $511, which includes interest at
7.75%, expiring October 1999...................................................... 16
Installment note due in monthly installments of $394, which includes interest at
10.7%, expiring November 1999..................................................... 121 10
Installment note due in monthly installments of $309, which includes interest at
7.4%, expiring April 1997......................................................... 1
----- ---
Total long-term debt............................................................ 88 53
Less--current portion of long-term debt............................................. 28 20
----- ---
$ 60 $ 33
----- ---
----- ---
</TABLE>
The following is a summary of principal maturities of long-term debt as of
September 30, 1997:
<TABLE>
<S> <C>
1998.................................................................. $ 20
1999.................................................................. 11
2000.................................................................. 9
2001.................................................................. 9
2002.................................................................. 4
---
$ 53
---
---
</TABLE>
Interest expense on the long-term debt for the period ended December 31,
1996 and 1995 was $16 and $16, respectively, and for the nine-month period
ending September 30, 1997 was $12.
F-286
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. CAPITAL LEASE OBLIGATIONS
The Company has acquired various equipment under the provisions of capital
lease agreements. These lease obligations consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------------
<S> <C> <C>
Capital lease obligation due in monthly installments of $143, payable through June
1997.............................................................................. $ 1 $ --
Capital lease obligation, due in monthly installments of $194, payable through
December 1997..................................................................... 2 1
Capital lease obligation, due in monthly installments of $313, payable through May
1999.............................................................................. 10 6
Capital lease obligation due in monthly installments of $697, payable through
September 1998.................................................................... 15 9
Capital lease obligation due in monthly installments of $837, payable through April
1999.............................................................................. 24 17
--- ---
Total minimum lease payments........................................................ 52 33
Amount representing interest........................................................ 10 5
--- ---
Present value of net minimum lease payment.......................................... 42 28
Less current maturities............................................................. 18 19
--- ---
$ 24 $ 9
--- ---
--- ---
</TABLE>
The following is a summary of future minimum lease payments due under
capital lease arrangements as of September 30, 1997:
<TABLE>
<S> <C>
1998.................................................................. $ 19
1999.................................................................. 9
---
$ 28
---
---
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company incurs common overhead costs for ground and air divisions. These
costs have been allocated to respective divisions based upon revenue generated
by each division and estimate of time spent by the employees on each division.
Management of the Company believes the current allocation method of allocating
common overhead is reasonable. Overhead costs allocated to air divisions for the
period ended December 31, 1995 and 1996 were approximately $27 and $104
respectively and for the period ended September 30, 1997 was $36. At December
31, 1995 and 1996 and September 30, 1997, the Company had a receivable from the
air division of the Company of $101, $131 and $72, respectively. This receivable
is receivable on-demand and does not accrue interest.
Additionally, the Company incurs direct expenses for an affiliated company,
Logistics, whose operations are similar to those of the ground operations.
Through a contractual arrangement, Logistics records 20% of revenue billed to
its customers and the Company records 80% of revenue which is applied against
F-287
<PAGE>
EXPRESS ENTERPRISE, INC.--
GROUND OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
such direct expenses. For the nine-month period ending September 30, 1997, sales
to Logistics customers were approximately $39 for the Company. Direct expenses
for Logistics for the nine-month period ended September 30, 1997 was
approximately $23. The Company also incurs common overhead costs on behalf of
Logistics. At September 30, 1997, the Company had a receivable from Logistics of
$15. This receivable is a receivable on demand and does not accrue interest.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of business, most of which involve claims for personal injury and
property damage incurred in connection with its obligation. Management believes
that none of these actions will have a material impact on the Company's
financial position, results of operations, or cash flows.
11. UNAUDITED SUBSEQUENT EVENTS
The Company and its stockholders have entered into a definitive agreement
with DMS Corporation (DMS) pursuant to which DMS Corp. will acquire certain
assets and assume certain liabilities of the Company. The acquired assets and
assumed liabilities will be exchanged for cash and shares of DMS Corp. common
stock concurrent with the consummation of the initial public offering of the
common stock of DMS Corp.
F-288
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
RJK Enterprises Inc. (D.B.A. Deadline Express)
We have audited the accompanying balance sheets of RJK Enterprises Inc. (the
"Company") as of December 31, 1996 and September 30, 1997, and the related
statements of operations and accumulated deficit and cash flows for the period
from March 6, 1996 to December 31, 1996 and the nine months ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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, the financial statements referred to above present fairly,
in all material respects the financial position of RJK Enterprises Inc. at
December 31, 1996 and September 30, 1997 and the results of its operations and
its cash flows for the period from March 6, 1996 to December 31, 1996 and for
the nine months ended September 30, 1997 in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
December 5, 1997
F-289
<PAGE>
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 1996 30, 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable..................................................................... 127,270 145,564
Prepaid expenses and other current assets............................................... 2,502 8,601
Due from officer........................................................................ 10,000 10,000
---------- ----------
Total current assets...................................................................... 139,772 164,165
Furniture and fixtures, at cost........................................................... 11,000 11,000
Accumulated depreciation.................................................................. (1,572) (2,751)
---------- ----------
Net furniture and fixtures................................................................ 9,428 8,249
Other assets.............................................................................. 4,000 4,000
---------- ----------
$ 153,200 $ 176,414
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses................................................... $ 61,155 $ 70,838
Management services (NOTE 3)............................................................ 25,434 43,169
Loans payable to stockholder (NOTE 2)................................................... 67,000 67,000
---------- ----------
Total current liabilities................................................................. 153,589 181,007
Common stock, no par value, 1000 shares authorized, issued and outstanding................ 1,000 1,000
Accumulated deficit....................................................................... (1,389) (5,593)
---------- ----------
Net stockholder's deficiency.............................................................. (389) (4,593)
---------- ----------
$ 153,200 $ 176,414
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-290
<PAGE>
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MARCH 6, MARCH 6, NINE MONTHS
1996 TO 1996 TO ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Revenue from courier services............................................ $1,177,265 $ 824,108 $ 962,090
Management services (NOTE 3)............................................. 753,446 535,815 663,219
Selling, general and administrative expenses............................. 429,617 308,973 374,715
------------ ------------- -------------
1,183,063 844,788 1,037,934
Operating loss........................................................... (5,798) (20,680) (75,844)
Other income (NOTE 4).................................................... 4,409 3,109 71,640
------------ ------------- -------------
Net loss................................................................. (1,389) (17,571) (4,204)
Accumulated deficit at beginning of period............................... -- -- (1,389)
------------ ------------- -------------
Accumulated deficit at end of period..................................... $ (1,389) $ (17,571) $ (5,593)
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See accompanying notes.
F-291
<PAGE>
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM MARCH 6,
MARCH 6, 1996 TO NINE MONTHS
1996 TO SEPTEMBER ENDED
DECEMBER 30, SEPTEMBER
31, 1996 1996 30, 1997
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net loss................................................................. $ (1,389) $ (17,571) $ (4,204)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation........................................................... 1,572 1,100 1,179
Changes in operating assets and liabilities net of effect of
acquisition of JRED Enterprises, Inc. in 1996 (NOTE 1):
Accounts receivable.................................................. (5,050) (9,378) (18,294)
Prepaid expenses and other current assets............................ (2,502) (13,035) (6,099)
Due from officer..................................................... (10,000) (400) --
Accounts payable and accrued expenses................................ (84,302) (43,260) 9,683
Management services.................................................. 25,434 23,993 17,735
----------- ----------- ------------
Net cash used in operating activities.................................... (76,237) (58,551) --
INVESTING ACTIVITIES
Cash acquired (NOTE 1)................................................... 8,237 8,237 --
----------- ----------- ------------
Net cash provided by investing activities................................ 8,237 8,237 --
FINANCING ACTIVITIES
Issuance of common stock................................................. 1,000 1,000 --
Net increase in loans payable to stockholder............................. 67,000 57,000 --
----------- ----------- ------------
Net cash provided by financing activities................................ 68,000 58,000 --
----------- ----------- ------------
Net increase in cash and cash equivalents................................ -- 7,686 --
Cash and cash equivalents at beginning of period......................... -- -- --
----------- ----------- ------------
Cash and cash equivalents at end of period............................... $ -- $ 7,686 $ --
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See accompanying notes.
F-292
<PAGE>
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
NOTES TO FINANCIAL STATEMENTS
PERIODS FROM MARCH 6, 1996 TO DECEMBER 31, 1996 AND FROM
MARCH 6, 1996 TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997
(INFORMATION FOR THE PERIOD FROM MARCH 6, 1996 TO SEPTEMBER 30, 1996 IS
UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
RJK Enterprises Inc. "d.b.a. Deadline Express" (the "Company") was
incorporated on March 6, 1996 in the State of Illinois. The Company operates as
a courier service covering the Chicago area. Effective March 8, 1996, the
Company acquired certain assets and liabilities of JRED Enterprises, Inc.
"d.b.a. Deadline Express" pursuant to an assignment for the benefit of the
creditors of JRED Enterprises, Inc. "d.b.a. Deadline Express". The assets
acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Assets:
Cash............................................................................ $ 8,237
Accounts receivable............................................................. 122,220
Furniture and fixtures.......................................................... 11,000
Deposit and other assets........................................................ 4,000
---------
$ 145,457
---------
---------
Liabilities:
Accounts payable and accrued expenses........................................... $ 145,457
---------
---------
</TABLE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEPRECIATION
Depreciation of furniture and fixtures is provided for on an accelerated
method over the estimated useful lives (five years) of the assets.
REVENUE RECOGNITION
Courier services revenues are recognized in the period in which they are
earned.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
INCOME TAXES
The Company operates under the provisions of Subchapter S of the Internal
Revenue Code and, consequently, in not subject to federal income tax; rather the
stockholder is liable for individual income taxes on his share of taxable
income.
F-293
<PAGE>
RJK ENTERPRISES INC.
(D.B.A. DEADLINE EXPRESS)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
UNAUDITED INFORMATION
The unaudited financial statements, for the period from March 6, 1996 to
September 30, 1996 reflect adjustments, all of which are of a normal recurring
nature, which are, in the opinion of management, necessary to a fair
presentation. The results for the interim periods presented are not necessarily
indicative of full year results.
2. LOANS PAYABLE TO STOCKHOLDER
Loans payable to stockholder consist of amounts due to the Company's
stockholder. Such loans are interest-free and were paid on October 28, 1997.
3. MANAGEMENT SERVICES
The Company has an agreement with Union Services of Chicago Inc. ("USC") (a
company owned by an officer of the Company). Under the terms of this agreement,
USC provides various services including the administration and payment of wages,
payroll taxes and workers' compensation. USC is compensated for such services
based on a formula, as defined. The agreement has no defined term and will
continue until terminated with 30 days notice by either party.
4. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Office space is leased under an operating lease expiring on August 31, 1998.
The lease provides for minimum monthly rent of $2,700, plus expense escalations
($2,525 through August 31, 1997).
Rent expense amounted to approximately $2,600 per month. Other income
primarily represents rental income from the sub-leasing of a portion of the
office space on a month-to-month basis.
F-294
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THE PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THE PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 13
The Company.................................... 22
Use of Proceeds................................ 26
Dividend Policy................................ 26
Capitalization................................. 27
Dilution....................................... 28
Selected Pro Forma Combined Founding Companies'
Financial Data............................... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 31
Business....................................... 38
Management..................................... 47
Certain Transactions........................... 51
Principal Stockholders......................... 52
Description of Capital Stock................... 53
Shares Eligible for Future Sale................ 55
Underwriting................................... 57
Legal Matters.................................. 58
Experts........................................ 58
Additional Information......................... 61
Index to Financial Statements.................. F-1
</TABLE>
[ ] Shares
DISPATCH MANAGEMENT
SERVICES CORP.
Common Stock
-------------
PROSPECTUS
-------------
PRUDENTIAL SECURITIES INCORPORATED
January , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 27,146
NASD Filing Fee.................................................... 9,700
Nasdaq National Market Listing Fee.................................
Accounting Fees and Expenses.......................................
Legal Fees and Expenses............................................
Printing Expenses..................................................
Transfer Agent's Fees..............................................
Miscellaneous......................................................
---------
Total.......................................................... $
---------
---------
</TABLE>
- ------------------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
ITEM. 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL") empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been made to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of
II-1
<PAGE>
any other rights to which the indemnified party may be entitled; that
indemnification provided for by Section 145 shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and empowers the corporation to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not eliminate
or limit the liability of a director: (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from
which the director derived an improper personal benefit.
Article Eighth of the Company's Certificate of Incorporation, as amended,
states that:
"No director of the corporation shall be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit."
In addition, Article VIII of the Company's Bylaws further provides that the
Company shall indemnify its officers and directors against any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative brought by any party,
the Company or on behalf of the Company by reason of the fact that they are an
officer or director of the Company, or servicing at request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. Such expenses may be advanced by the Company
upon receipt of an undertaking by the officer or director to repay such amount
if it is determined that they are not entitled to indemnification. The Company
will continue to provide such indemnification to any person who has ceased to be
an officer or director of the Company.
The Company intends to enter into indemnification agreements with each of
its executive officers and directors which indemnifies such person to the
fullest extent permitted by its Certificate of Incorporation, its Bylaws and the
DGCL. The Company also intends to obtain directors and officers liability
insurance.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities by
the Company during the past three years that were not registered under the
Securities Act.
(i) The Company was incorporated in September 1997. The Company is the
successor in interest by merger (the "Merger") to Dispatch Management
Services, LLC ("DMS LLC"), a Nevada limited liability company that was
formed in November 1996 to pursue a consolidation of the courier industry.
Prior to the Merger, DMS LLC issued membership interests to certain
employees and third-party investors of DMS LLC in the transactions set forth
below. The Company is also the successor in interest by merger of Kiwi
Express Software, L.L.C., a Delaware limited liability company.
II-2
<PAGE>
(ii) As of December 1, 1996, DMS LLC issued Class A membership interests
to five individuals who were executive officers and directors of DMS LLC and
to Kiwi Partners Inc., a corporation owned by persons unaffiliated with the
Company. The offer and sale of these membership interests and shares of DMS
were exempt from registration under the Securities Act of 1933 in reliance
on Section 4(2) thereof because the offers and sales were made to executive
officers or directors of DMS LLC or to sophisticated investors who had
access to information about DMS LLC and were able to bear the risk of loss
of their investment. After the Merger these Class A membership were
converted into shares of Common Stock of the Company.
(iii) In July 1997, DMS Equity Investors Limited Partnership made the
Bridge Loan to DMS LLC and received Class B membership interests in DMS LLC
that after the Merger were converted into shares of Series A Preferred Stock
of the Company that upon the completion of the Offering converts into shares
of Common Stock representing a 1.4% interest in the Company. The offer and
sale of these securities were exempt from registration under the Securities
Act of 1933 in reliance on Section 4(2) thereof because the offers and sales
were made to sophisticated investors who had access to information about the
Company and were able to bear the risk of loss of their investment.
(iv) Between May and September, 1997, DMS LLC issued Class B membership
interests in DMS LLC to thirty-three individuals who purchased such
interests for cash. The offer and sale of these membership interests of DMS
LLC were exempt from registration under the Securities Act of 1933 in
reliance on Section 4(2) thereof because the offers and sales were made to
sophisticated investors who had access to information about the Company and
were able to bear the risk of loss of their investment or who were executive
officers and directors of DMS LLC. After the Merger these Class B membership
interests were converted into shares of Series A Preferred Stock of the
Company that upon completion of the Offering converts into shares of Common
Stock.
(v) In September to November, 1997, the Company entered into acquisition
agreements with the Founding Companies as described in "The Company." The
offer and sale of these shares of the Company were exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) thereof because
the offers and sales were made to sophisticated investors who had access to
information about the Company and were able to bear the risk of loss of
their investment.
(vi) In December 1997, the Company issued notes to certain individuals
in connection with the December Bridge Loan. The offer and sale of these
securities were exempt from registration under the Securities Act of 1933 in
reliance on Section 4(2) thereof because the offers and sales were made to
sophisticated investors who had access to information about the Company and
were able to bear the risk of loss of their investment.
Although the issuances of Common Stock to senior executives and to former
stockholders of the Founding Companies may be integrated among themselves, in
reliance on the safe harbor provided by Rule 152 under the Securities Act of
1933 for transactions not involving any public offering even if the issuer
subsequently files a registration statement, such Common Stock should not be
integrated with the issuance of Common Stock in the registered public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
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EXHIBIT
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*1.1 -- Form of Underwriting Agreement.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
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<C> <C> <S>
**2.1 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp., Early
Bird Courier Service, LLC and Total Management, LLC and Michael Fiorito.
**2.2 -- Agreement, dated as of September 15, 1997, by and among Dispatch Management Services Corp., Aero
Special Delivery Service, Inc. and Jeanne Sparks.
**2.3 -- Agreement, dated as of September 30, 1997, by and among Dispatch Management Services Corp.,
Bullit Courier Services, Inc. and Theo Nicholoudis.
**2.4 -- Agreement, dated as of September 16, 1997, by and among Dispatch Management Services Corp.,
Security Business Services, Ltd., James Brett Greenbury, Kelly Donovan, Scawton Limited,
Lyon-Burwell Limited, Arazan Limited and Foreign & Colonial Enterprise Trust plc.
**2.5 -- Agreement, dated as of September 11, 1997, by and among Dispatch Management Services Corp.,
American Eagle Endeavors, Inc., Barry Anderson, Cheryl O'Toole and Lawrence O'Toole.
2.6 -- Agreement, dated as of October 31, 1997, by and among Dispatch Management Services Corp.,
Atlantic Freight Systems, Inc., Thomas A. Bartley and Perry Barbaruolo.
**2.7 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Express It Couriers, Inc. and James M. Shaughnessy.
**2.8 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Washington Express Services, Inc., Gilbert D. Carpel, Michael D. Holder, Michael K. Miller and
Peter Butler.
**2.9 -- Agreement, dated as of September 26, 1997, by and among Dispatch Management Services Corp., MLQ
Express, Inc. and John W. Wilcox, Jr.
**2.10 -- Agreement, dated as of September 19, 1997, by and among Dispatch Management Services Corp., Time
Couriers, LLC, Tom Cromwell, William Krupman, Michael Stone, Peter Begley, Thomas Hagerty,
Kimberly Cilley, Christopher Hart, and DMS Subsidiary Number .
**2.11 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Eveready Express Corp., Marlene R. Spirt and Mary B. Spirt.
**2.12 -- Agreement, dated as of September 14, 1997, by and among Dispatch Management Services Corp.,
Kangaroo Express of Colorado Springs, Inc. and Doris Orner.
**2.13 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
National Messenger, Inc., Robert D. Swineford and Steven B. Swineford.
**2.14 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Fleetfoot Max, Inc., Gary Brose, The King Company, KPM, Helen King, Robert Lewis, Jim Brose,
Barbara Lawrence, Robert L. King, John Sangster, Patsy Sangster, PB Securities for the benefit
of Robert L. King, PB Securities for the benefit of Helen King, Gordon Lawrence, Pat Lawrence,
Melissa Lawrence, K. Lawrence and Creative Consulting Corp.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
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<C> <C> <S>
**2.15 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Profall, Inc., Thomas Westfall, Alyson Westfall, David Prosser, Adrienne Prosser and DMS
Subsidiary Number .
**2.16 -- Agreement, dated as of September 11, 1997, by and among Dispatch Management Services Corp.,
Express Enterprises, Inc., Paul J. Alberts and Donald E. Stoelt.
**2.17 -- Agreement, dated as of October 23, 1997, by and among Dispatch Management Services Corp., A & W
Couriers, Inc. and Joan Levy.
**2.18 -- Agreement, dated as of October 10, 1997, by and among Dispatch Management Services Corp., Express
It, Inc., and Dave Clancy.
**2.19 -- Agreement, dated as of September 18, 1997, by and among Dispatch Management Services Corp.,
Deadline Acquisition Corp., Edward V. Blanchard, Jr., Melba Anne Hill and Scott T. Milakovich.
**2.20 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Kiwicorp Limited, Lynette Williams, Tom Finlay and DMS Subsidiary Number .
**2.21 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Transpeed Courier Services, Inc., Richard A. Folkman, Stacey J. Folkman, Trey Lewis and Evelyn
R. Folkman.
**2.22 -- Agreement, dated as of September 15, 1997, by and among Dispatch Management Services Corp.,
Clover Supply, Inc., and John J. Walker.
**2.23 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp., S Car
Go Courier, Inc. and Michael Cowles.
**2.24 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Christian Delivery & Chair Service, Inc., Leo J. Gould and DMS Subsidiary Number .
**2.25 -- Agreement, dated as of October 9, 1997, by and among Dispatch Management Services Corp., Striders
Courier, Inc., Tammy K. Patterson and Merlene Y. Flores.
**2.26 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp. and
Gregory Austin, trading as Battery Point Messengers.
**2.27 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
United Messengers, Inc., and Marla Kennedy.
**2.28 -- Agreement, dated as of September 17, 1997, by and among Dispatch Management Services Corp.,
United Messengers, Inc. and Marla Kennedy.
**2.29 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Christopher Neal and DMS Subsidiary Number .
**2.30 -- Agreement, dated as of October 4, 1997, by and among Dispatch Management Services Corp.,
TimeCycle Couriers, Inc., Eric D. Nordberg and Jeffrey Appeltans.
**2.31 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Rocket Courier Services, Inc., Sean Leonce, Grace Leonce and Samer Hassan.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
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<C> <C> <S>
**2.32 -- Agreement, dated as of September 14, 1997, by and among Dispatch Management Services Corp. and
Michael Studebaker.
**2.33 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Delivery Incorporated and Gary Brose.
**2.34 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp., AFS
Courier Systems, Inc. and Frank L. Mullins.
**2.35 -- Share Purchase Agreement, dated as of August 20, 1997, by and among Dispatch Management Services
LLC, Alice Rebecca Clark, Roy Clark, Trustees of the Roy Clark (Life Interest) Settlement 1997,
Trustees of the Alice Rebecca Clark (Discretionary) Settlement 1997, Matthew Clark, Simon Clark
and Brookside Systems and Programming Limited.
**2.36 -- Agreement, dated as of October 6, 1997, by and among Dispatch Management Services Corp., Bridge
Wharf Investments Limited and Riverbank Limited.
**2.37 -- Brand Manager Agreement, dated as of September 14, 1997, between Dispatch Management Services
Corp. and Barry Anderson (Minneapolis).
**2.38 -- Brand Manager Agreement, dated as of September 12, 1997, between Dispatch Management Services
Corp. and Frank L. Mullins.
**2.39 -- Brand Manager Agreement, dated as of September 25, 1997, between Dispatch Management Services
Corp. and Leo J. Gould and Jodi Gould.
**2.40 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and John J. Walker.
**2.41 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Dave Clancy.
**2.42 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Allen Orner.
**2.43 -- Brand Manager Agreement, dated as of September 12, 1997, between Dispatch Management Services
Corp. and Kiwicorp Limited.
**2.44 -- Brand Manager Agreement, dated as of October 9, 1997, between Dispatch Management Services Corp.
and Tammy K. Patterson and Merlene Y. Flores.
**2.45 -- Brand Manager Agreement, dated as of October 8, 1997, between Dispatch Management Services Corp.
and Tom Cromwell and Peter Begley.
**2.46 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Jeff Appeltans
and Eric D. Nordberg.
**2.47 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Marla Kennedy.
**2.48 -- Brand Manager Agreement, dated as of September 10, 1997, between Dispatch Management Services
Corp. and James Michael Shaughnessy.
**2.49 -- Brand Manager Agreement, dated as of September , 1997, between Dispatch Management Services
Corp. and Barry Anderson (Phoenix).
**2.50 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Joan Levy.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
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<C> <C> <S>
**2.51 -- Brand Manager Agreement, dated as of September 21, 1997, between Dispatch Management Services
Corp. and Christopher Neal.
**2.52 -- Brand Manager Agreement, dated as of September 12, 1997, between Dispatch Management Services
Corp., Leon Spirt and Jack Spirt.
**2.53 -- Brand Manager Agreement, dated as of September 12, 1997, between Dispatch Management Services
Corp. and Dispatch Management Services Corp. of the National Capital Area, Inc
**2.54 -- Brand Manager Agreement, dated as of September 15, 1997, between Dispatch Management Services
Corp. and The Delivery Company Limited.
2.55 -- Brand Manager Agreement, dated as of October 1, 1997, between Dispatch Management Services Corp.
and Creative Consulting Corp.
2.56 -- Brand Manager Agreement, dated as of October 1, 1997, between Dispatch Management Services Corp.
and Creative Consulting Corp.
*2.57 -- Brand Manager Agreement, dated November 1, 1997, between Dispatch Management Services Corp. and
Atlantic Transportation Consultants, Inc.
2.58 -- Agreement, dated as of October 31, 1997, among Dispatch Management Services Corp., Pacific
Freight Systems, Inc., Thomas A. Bartley and Perry Barbaruolo.
2.59 -- Agreement, dated December 2, 1997, among Dispatch Management Services Corp., Munther Hamoudi and
DMS Subsidiary Number .
2.60 -- Agreement, dated November 21, 1997, among Dispatch Management Services Corp., Zoom Messenger
Service, Inc. and Frank Nizzare.
**3.1 -- Form of Certificate of Incorporation.
**3.2 -- Amended and Restated Bylaws.
*5.1 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to the legality of the securities being
registered.
10.1 -- Form of Officer and Director Indemnification Agreement.
*10.2 -- Form of Employment Agreement.
*10.3 -- Form of Non-Competition Agreement.
10.4 -- Form of 1997 Stock Incentive Plan.
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in Exhibit 5.1).
23.2 -- Consents of Price Waterhouse LLP.
23.3 -- Consents of Ernst & Young LLP.
**23.4 -- Consents to Become Directors.
24.1 -- Powers of Attorney (included in signature page).
27 -- Financial Data Schedule.
</TABLE>
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* To be filed by amendment.
** Previously filed on November 10, 1997.
II-7
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on the 24th day of December, 1997.
<TABLE>
<S> <C> <C>
DISPATCH MANAGEMENT SERVICES CORP.
By: /s/ LINDA M. JENKINSON
-----------------------------------------
Linda M. Jenkinson
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Know All Men By These Presents, that each of the persons whose name and
signature appears below constitutes and appoints Linda M. Jenkinson, R. Gregory
Kidd and Marko Bogoievski each of them, his or her true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and any and all Registration Statements filed
pursuant to Rule 462 under the Securities Act, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his or her substitute or substitutes may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
DISPATCH MANAGEMENT SERVICES CORP.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ LINDA M. JENKINSON
- ------------------------------ Chief Executive Officer December 24, 1997
Linda M. Jenkinson
/s/ R. GREGORY KIDD
- ------------------------------ Chairman December 24, 1997
R. Gregory Kidd
/s/ MARKO BOGOIEVSKI
- ------------------------------ Chief Financial Officer December 24, 1997
Marko Bogoievski
II-9
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[S- PAGES]
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
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*1.1 -- Form of Underwriting Agreement.
**2.1 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp., Early
Bird Courier Service, LLC and Total Management, LLC and Michael Fiorito.
**2.2 -- Agreement, dated as of September 15, 1997, by and among Dispatch Management Services Corp., Aero
Special Delivery Service, Inc. and Jeanne Sparks.
**2.3 -- Agreement, dated as of September 30, 1997, by and among Dispatch Management Services Corp.,
Bullit Courier Services, Inc. and Theo Nicholoudis.
**2.4 -- Agreement, dated as of September 16, 1997, by and among Dispatch Management Services Corp.,
Security Business Services, Ltd., James Brett Greenbury, Kelly Donovan, Scawton Limited,
Lyon-Burwell Limited, Arazan Limited and Foreign & Colonial Enterprise Trust plc.
**2.5 -- Agreement, dated as of September 11, 1997, by and among Dispatch Management Services Corp.,
American Eagle Endeavors, Inc., Barry Anderson, Cheryl O'Toole and Lawrence O'Toole.
2.6 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Atlantic Freight Systems, Inc., Thomas A. Bartley and Perry Barbaruolo.
**2.7 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Express It Couriers, Inc. and James M. Shaughnessy.
**2.8 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Washington Express Services, Inc., Gilbert D. Carpel, Michael D. Holder, Michael K. Miller and
Peter Butler.
**2.9 -- Agreement, dated as of September 26, 1997, by and among Dispatch Management Services Corp., MLQ
Express, Inc. and John W. Wilcox, Jr.
**2.10 -- Agreement, dated as of September 19, 1997, by and among Dispatch Management Services Corp., Time
Couriers, LLC, Tom Cromwell, William Krupman, Michael Stone, Peter Begley, Thomas Hagerty,
Kimberly Cilley, Christopher Hart, and DMS Subsidiary Number .
**2.11 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Eveready Express Corp., Marlene R. Spirt and Mary B. Spirt.
**2.12 -- Agreement, dated as of September 14, 1997, by and among Dispatch Management Services Corp.,
Kangaroo Express of Colorado Springs, Inc. and Doris Orner.
**2.13 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
National Messenger, Inc., Robert D. Swineford and Steven B. Swineford.
**2.14 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Fleetfoot Max, Inc., Gary Brose, The King Company, KPM, Helen King, Robert Lewis, Jim Brose,
Barbara Lawrence, Robert L. King, John Sangster, Patsy Sangster, PB Securities for the benefit of
Robert L. King, PB Securities for the benefit of Helen King, Gordon Lawrence, Pat Lawrence,
Melissa Lawrence, K. Lawrence and Creative Consulting Corp.
**2.15 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Profall, Inc., homas Westfall, Alyson Westfall, David Prosser, Adrienne Prosser and DMS
Subsidiary Number .
**2.16 -- Agreement, dated as of September 11, 1997, by and among Dispatch Management Services Corp.,
Express Enterprises, Inc., Paul J. Alberts and Donald E. Stoelt.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
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<C> <C> <S>
**2.17 -- Agreement, dated as of October 23, 1997, by and among Dispatch Management Services Corp., A & W
Couriers, Inc. and Joan Levy.
**2.18 -- Agreement, dated as of October 10, 1997, by and among Dispatch Management Services Corp., Express
It, Inc., and Dave Clancy.
**2.19 -- Agreement, dated ]as of September 18, 1997, by and among Dispatch Management Services Corp.,
Deadline Acquisition Corp., Edward V. Blanchard, Jr., Melba Anne Hill and Scott T. Milakovich.
**2.20 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Kiwicorp Limited, Lynette Williams, Tom Finlay and DMS Subsidiary Number .
**2.21 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Transpeed Courier Services, Inc., Richard A. Folkman, Stacey J. Folkman, Trey Lewis and Evelyn R.
Folkman.
**2.22 -- Agreement, dated as of September 15, 997, by and among Dispatch Management Services Corp., Clover
Supply, Inc., and John J. Walker.
**2.23 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp., S Car
Go Courier, Inc. and Michael Cowles.
**2.24 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Christian Delivery & Chair Service, Inc., Leo J. Gould and DMS Subsidiary Number .
**2.25 -- Agreement, dated as of October 9, 1997, by and among Dispatch Management Services Corp., Striders
Courier, Inc., Tammy K. Patterson and Merlene Y. Flores.
**2.26 -- Agreement, date as of September 12, 1997, by and among Dispatch Management Service Corp. and
Gregory Austin, trading as Battery Point Messengers.
**2.27 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
United Messengers, Inc., and Marla Kennedy.
**2.28 -- Agreement, dated as of September 17, 1997, by and among Dispatch anagement Services Corp., United
Messengers, Inc. and Marla Kennedy.
**2.29 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp.,
Christopher Neal and DMS Subsidiary Number .
**2.30 -- Agreement, dated as of October 4, 1997, by and among Dispatch Management Services Corp.,
TimeCycle Couriers, Inc., Eric D. Nordberg and Jeffrey Appeltans.
**2.31 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Rocket Courier Services, Inc., Sean Leonce, Grace Leonce and Samer Hassan.
**2.32 -- Agreement, dated as of September 14, 997, by and among Dispatch Management Services Corp. and
Michael Studebaker.
**2.33 -- Agreement, dated as of September 10, 1997, by and among Dispatch Management Services Corp.,
Delivery Incorporated and Gary Brose.
**2.34 -- Agreement, dated as of September 12, 1997, by and among Dispatch Management Services Corp., AFS
Courier Systems, Inc. and Frank L. Mullins.
**2.35 -- Share Purchase Agreement, dated as of August 20, 1997, by and among Dispatch Management Services
LLC, Alice Rebecca Clark, Roy Clark, Trustees of the Roy Clark (Life Interest) Settlement 1997,
Trustees of the Alice Rebecca Clark (Discretionary) Settlement 1997, Matthew Clark, Simon Clark
and Brookside Systems and Programming Limited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
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<C> <C> <S>
**2.36 -- Agreement, dated as of October 6, 1997, by and among Dispatch Management Services Corp., Bridge
Wharf Investments Limitedv and Riverbank Limited.
**2.37 -- Brand Manager Agreement, dated as of September 14, 1997, between Dispatch Management Services
Corp. and Barry Anderson (Minneapolis).
**2.38 -- Brand Manager Agreement, dated as of September 12, 1997, between Dispatch Management Services
Corp. and Frank L. Mullins.
**2.39 -- Brand Manager Agreement, dated as of September 25, 1997, between Dispatch Management Services
Corp. and Leo J. Gould and Jodi Gould.
**2.40 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and John J. Walker.
**2.41 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Dave Clancy.
**2.42 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Allen Orner.
**2.43 -- Brand Manager Agreement, dated as of September 12, 1997, between Dispatch Management Services
Corp. and Kiwicorp Limited.
**2.44 -- Brand Manager Agreement, dated as of October 9, 1997, between Dispatch Management Services Corp.
and Tammy K. Patterson and Merlene Y. Flores.
**2.45 -- Brand Manager Agreement, dated as of October 8, 1997, between Dispatch Management Services Corp.
and Tom Cromwell and Peter Begley.
**2.46 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Jeff Appeltans
and Eric D. Nordberg.
**2.47 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Marla Kennedy.
**2.48 -- Brand Manager Agreement, dated as of September 10, 1997, between Dispatch Management Services
Corp. and James Michael Shaughnessy.
**2.49 -- Brand Manager Agreement, dated as of September , 1997, between Dispatch Management Services
Corp. and Barry Anderson (Phoenix).
**2.50 -- Brand Manager Agreement, undated, between Dispatch Management Services Corp. and Joan Levy.
**2.51 -- Brand Manager Agreement, dated as of September 21, 1997, between Dispatch Management Services
Corp. and Christopher Neal.
**2.52 -- Brand Manager Agreement, dated as of September 12, 1997, between Dispatch Management Services
Corp., Leon Spirt and Jack Spirt.
**2.53 -- Brand Manager Agreement, dated as of September 12, 1997, between Dispatch Management Services
Corp. and Dispatch Management Services Corp. of the National Capital Area, Inc..
**2.54 -- Brand Manager Agreement, dated as of September 15, 1997, between Dispatch Management Services
Corp. and The Delivery Company Limited.
2.55 -- Brand Manager Agreement, dated as of October 1, 1997, between Dispatch Management Services Corp.
and Creative Consulting Corp.
2.56 -- Brand Manager Agreement, dated as of October 1, 1997, between Dispatch Management Services Corp.
and Creative Consulting Corp.
*2.57 -- Brand Manager Agreement, dated November 1, 1997, between Dispatch Management Services Corp. and
Atlantic Transportation Consultants, Corp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- ---------
<C> <C> <S>
2.58 -- Agreement, dated as of October 31, 1997, among Dispatch Management Services Corp., Pacific
Freight Systems, Inc., Thomas A. Bartley and Perry Barbaruolo.
2.59 -- Agreement, dated December 2, 1997, among Dispatch Management Services Corp., Munther Hamoudi and
DMS Subsidiary Number .
2.60 -- Agreement, dated November 21, 1997, among Dispatch Management Services Corp., Zoom Messenger
Service, Inc. and Frank Nizzare.
**3.1 -- Form of Certificate of Incorporation.
**3.2 -- Amended and Restated Bylaws.
*5.1 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to the legality of the securities being
registered.
10.1 -- Form of Officer and Director Indemnification Agreement.
*10.2 -- Form of Employment Agreement.
*10.3 -- Form of Non-Competition Agreement.
10.4 -- Form of 1997 Stock Incentive Plan.
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in Exhibit 5.1).
23.2 -- Consents of Price Waterhouse LLP.
23.3 -- Consents of Ernst & Young LLP.
**23.4 -- Consents to Become Directors.
24.1 -- Powers of Attorney (included in signature page).
27 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed on November 10, 1997.
<PAGE>
EXHIBIT 2.55
BRAND MANAGER AGREEMENT
THIS AGREEMENT is entered into this 1st day of October, 1997, by and
between DISPATCH MANAGEMENT SERVICES CORP., a Delaware corporation ("DMS
Corp.") and CREATIVE CONSULTING CORP., A Washington corporation located at
2228 Eastmont Way, Seattle, Washington 98199 (the "Brand Manager").
WITNESSETH:
WHEREAS, DMS Corp. owns companies providing time-critical and related
services;
WHEREAS, DMS Corp. wishes to retain the services of the Brand Manager to
manage the business owned by DMS Corp. known as Delivery Incorporated (the
"Brand") as an independent entity;
WHEREAS, the Brand Manager wishes to be retained by DMS Corp. to manage
the Brand as an independent entity; and
WHEREAS, the parties hereto wish to set forth the terms and conditions
pursuant to which the Brand Manager will manage the Brand.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties, it is agreed as follows:
1. Services. DMS Corp. hereby retains the Brand Manager, as an
independent entity, to manage the Brand, and the Brand Manager hereby accepts
such engagement, all upon the terms and conditions herein provided. During
the term of this Agreement, the Brand Manager covenants to manage the Brand
in a reasonable and judicious manner, using its best efforts to maximize
Brand Contribution (defined as total revenue less total expenses, before
taxes, in accordance with U.S. GAAP except as otherwise set forth in Exhibit
1 attached hereto) and revenue of the Brand. For purposes of clarification,
except where otherwise provided in this Agreement, DMS Corp. will not have
the right to direct or control the Brand Manager as to the details of when,
where and how its responsibilities under this Agreement are to be performed.
<PAGE>
2. Conduct of Business Through DMS Corp.
Notwithstanding anything in this Agreement to the contrary, the
Brand Manager covenants and agrees that all of the Brand's business
(including but not limited to dispatching services, other back-office
functions, and road management services) shall be conducted, processed and
serviced through DMS Corp., its affiliates, or an entity designated by DMS
Corp., and the failure to do so shall be grounds for DMS Corp. to terminate
this Agreement immediately.
The Brand Manager also covenants and agrees that the Brand will be
managed pursuant to the "DMS Model" (as defined below), subject to a
transition period as mutually determined by the Brand Manager and DMS Corp.
For purposes of this Agreement, the "DMS Model" shall mean the use of DMS
Corp.'s licensed software, consolidation of back-office operations through a
DMS Center; standardized delivery zones, costing, services and data entry;
profit-incentivized workers; and other methods of doing business in effect
from time to time which are intended to be consistent with the industry's
then-current best practices as determined by DMS Corp.
3. Revenue Maintenance; Brand Contribution Percentage Maintenance.
(a) Revenue Maintenance. The Brand Manager shall be responsible
for maintaining and growing the revenue base of the Brand. The Brand Manager
must maintain a revenue base of at least $207,835 for the Brand during any
twelve month calendar period (January 1-December 31). For purposes of this
paragraph 3(a), the revenue base of the Brand from the date of the Initial
Public Offering of DMS Corp.'s common stock through December 31, 1998 shall
be annualized.
As set forth in paragraph 6 hereinbelow, the Brand Manager's failure to
maintain a minimum revenue base of $207,835 during any twelve month calendar
period shall be grounds for termination of this Agreement by DMS Corp.
(b) Brand Contribution Percentage Maintenance. The Brand Manager
shall be responsible for maintaining and growing the "Brand Contribution
Percentage" (defined as Brand Contribution as a percentage of the brand's
total revenue). The relative performance of the Brand's Brand Contribution
Percentage, compared to the Brand Contribution Percentage of all other DMS
Corp. brands, will be evaluated on a regular (quarterly) basis by DMS Corp.
and provided to the DMS Corp. Business Steering Committee for review. If,
for three consecutive review periods, the
2
<PAGE>
Brand's Brand Contribution Percentage falls in the bottom 10% of the Brand
Contribution Percentage achieved by all DMS Corp. brands, DMS Corp. will have
the right, upon approval by the Business Steering Committee, to terminate
this Agreement in accordance with the provisions of paragraph 6 hereinbelow.
The Brand Manager, on at least 60 days' advance notice from DMS Corp.,
will be responsible for preparing a budget, forecasting expense items under
its control for each fiscal quarter in the upcoming fiscal year. Such budget
will be submitted to the DMS Corp. Business Steering Committee for approval,
and such approval shall not be unreasonably withheld unless the submitted
budget targets a Brand Contribution Percentage in the bottom 10% of the Brand
Contribution Percentages targeted by all DMS Corp. brands.
4. Brand Manager Compensation.
(a) Contribution -Based Compensation Structure. During the term of
this Agreement, the Brand Manager shall be compensated by DMS Corp. based on
the revenue/Brand Contribution formula set forth in Exhibit 1, which exhibit
is attached hereto and incorporated herein by reference.
(b) Treatment of Uncollectible Accounts Receivable. DMS Corp.
and/or its agents agree to make a good faith effort to collect all
receivables of the Brand for a period of ninety days after billing and
posting of revenues. Any receivables not collected within such ninety day
period shall be written off by DMS Corp. and assigned back to the Brand
Manager for further collection action. The Brand Contribution shall be
calculated by increasing the expenses for the calendar month immediately
following such ninety day period by 100% of the amount of receivables written
off by DMS Corp. so as to compensate DMS Corp. for the uncollected amount.
If any portion of such uncollected amount is collected in the future, such
portion shall be included as revenue for the month in which it is received.
(c) Cash/Equity Mix of Compensation. The Brand Manager's
compensation, as determined in accordance with Exhibit 1 attached hereto,
shall be paid partly in cash, and partly by the issuance to the Brand Manager
of registered, unrestricted common stock of DMS Corp. The cash/equity
compensation to be paid by DMS Corp. to the Brand Manager is set forth in
Exhibit 2, which exhibit is attached hereto and incorporated herein by
reference.
3
<PAGE>
(d) Minimum Retainer; Deferred Compensation. For the services
rendered by the Brand Manager pursuant to this Agreement, DMS Corp. shall
pay the Brand Manager a minimum retainer in the amount of $1,126.00 per
month, in arrears, payable on the 25th day of the calendar month immediately
following the month for which the retainer is being paid. DMS Corp. will
provide the Brand Manager with a monthly statement of the Brand Manager's
total earned margin for the Brand. Any additional cash compensation, and all
compensation payable in common stock of DMS Corp. to which the Brand Manager
is entitled pursuant to this Agreement will be paid on a deferred basis on or
about the January 15th following the year in which such compensation is
earned.
(e) Expense Reimbursement and Benefits. Expense reimbursement and
benefits policies of the Brand will be determined by the Brand Manager,
subject to generally accepted accounting principles and applicable tax laws
and regulations. The Business Steering Committee of DMS Corp. will provide
the Brand Manager with a list of guidelines as to appropriate reimbursement
and benefits policies for use by the Brand Manager. In the event that a
particular expense reimbursement or benefit is not clearly within the
guidelines supplied by the Business Steering Committee, then the Brand
Manager shall submit the issue to the Business Steering Committee for
approval prior to claiming the reimbursement or benefit as a deduction by the
Brand.
Notwithstanding the foregoing, to the extent an expense is reported for
the Brand which expense is determined to be (either wholly or partly)
non-deductible for tax purposes, the Brand Contribution shall be reduced by
adding (as an additional expense for purposes of calculating Brand
Contribution) that amount of additional taxes incurred by DMS Corp. as a
result of such non-deductibility.
5. Term. The term of this Agreement shall begin as of the date of the
Initial Public Offering of DMS Corp.'s common stock, and unless terminated in
accordance with the provisions of paragraph 6 hereinbelow, shall terminate
two (2) years thereafter. Thereafter, this Agreement shall be automatically
renewed for successive one year periods, unless the Brand Manager shall give
written notice to the contrary at least 90 days prior to the termination of
the initial one year period or any succeeding one year period thereafter, or
unless this Agreement is terminated in accordance with the provisions of
paragraph 6 hereinbelow.
4
<PAGE>
6. Termination.
(a) Termination Rights. In addition to the provisions for
termination provided elsewhere in this Agreement, this Agreement may be
terminated at any time upon the mutual consent, given in writing effective
upon delivery, of DMS Corp. and the Brand Manager. The Brand Manager shall
have the unilateral right to give DMS Corp. notice of an intention to
voluntarily withdraw from this Agreement on six months written notice. In
the event of such voluntary withdrawal, or in the event of termination of
this Agreement by DMS Corp. or the DMS Corp. Business Steering Committee
pursuant to this paragraph 6, the right to re-issue a Brand Manager Agreement
for the Brand rests solely with DMS Corp. This Agreement may also be
terminated by DMS Corp. upon the happening of any of the following
circumstances: (i) Brand Manager's failure to conduct all of the Brand's
business through DMS Corp., its affiliates or designee as required pursuant
to paragraph 2 above; (ii) failure to maintain the minimum revenue base set
forth in paragraph 3(a) above; (iii) the Brand's Brand Contribution
Percentage falling, for three (3) consecutive review periods, in the bottom
10% of the Brand Contribution Percentage achieved by all other DMS Corp.
brands; (iv) the Brand Manager's violation of the Non-Competition Agreement
dated the 10th day of September, 1997 between the parties hereto; or (v)
conduct constituting "termination for just cause" at any time during the term
of the Agreement. For purposes of this Agreement, "termination for just
cause" shall mean termination for: (a) proven dishonesty in the course of
managing the Brand; (b) conviction of the Brand Manager for violation of any
criminal law; or (c) declaration of bankruptcy, composition of creditors,
attachment of the Brand Manger's interest or rights under this Agreement and
similar occurrences.
(b) Cure Period. Compliance with the terms of this Brand Manager
Agreement shall be determined by the judgment of the Business Steering
Committee of DMS Corp., except that DMS Corp. shall be solely responsible for
determining whether the Agreement may be terminated pursuant to the
provisions of Sections 6(a)(i), 6(a)(iv) or 6(a)(v) above. Members of the
Business Steering Committee will include other active brand managers engaged
by DMS Corp., and the head of the Business Steering Committee will be the
President of DMS Corp. In the event that the Business Steering Committee
determines that the Brand Manager has defaulted in its obligations under this
Agreement, the Brand Manager shall receive written notice thereof, and
(except for
5
<PAGE>
termination by DMS Corp. under Sections 6(a)(i), 6(a)(iv) or 6(a)(v), any of
which shall be grounds for immediate termination without opportunity for
cure) shall be given a cure period during which the Brand Manager shall be
permitted to address and rectify the default. In the case of a failure to
achieve the minimum revenue base required under Paragraph 3(a) above, the
Brand Manager shall be deemed to have addressed and rectified the default if,
during the calendar quarter immediately following the date on which the Brand
Manager receives notice of such default, the annualized revenue for the Brand
equals or exceeds the minimum revenue base set forth in Paragraph 3(a). In
the case of the Brand's Brand Contribution Percentage falling, for three (3)
consecutive review periods, in the bottom 10% of the Brand Contribution
Percentage achieved by all other DMS Corp. brands, the Brand Manager shall be
deemed to have addressed and rectified the default if, during the calendar
quarter immediately following the date on which the Brand Manager receives
notice of such default, the Brand's Brand Contribution Percentage falls in
the top 90% of the Brand Contribution Percentage achieved by all other DMS
Corp. brands. In the event that the default has not been addressed and
rectified within the specified cure period, as determined in the sole
discretion of the Business Steering Committee, the Business Steering
Committee will submit a recommendation to all brand managers that this
Agreement be terminated (the "Recommendation of Termination"). Unless
greater than one third of all DMS Corp. brand managers send the Business
Steering Committee written objection to such termination within fourteen (14)
days after the date of the Recommendation of Termination, this Agreement will
be terminated immediately thereafter and the Brand Manager will be so
notified in writing. Upon termination, all keys, identification materials,
and proprietary information and the like will be returned to DMS Corp.
7. Miscellaneous.
(a) Payment in local currency. All references to the measurement,
determination or payment of money under this Agreement, are to be in the
currency of the area in which the Brand Manager will perform its services.
The equity portion of the Brand Manager's compensation payable under this
Agreement need not be listed on a stock exchange, but in the event such
equities are listed, they shall be listed on such exchange as DMS Corp. shall
determine in its sole discretion.
6
<PAGE>
(b) No Employment Agreement. This Agreement does not create an
employer/employee relationship between the parties hereto. Except where
otherwise provided in this Agreement, DMS Corp. has no right to control and
direct the Brand Manager in the performance of its obligations under this
Agreement. Rather, the Brand Manager is recognized as an independent entity.
(c) Binding Effect; Assignability. This Agreement shall be binding
upon and shall inure to the benefit of DMS Corp. and the Brand Manager, and
their respective successors and/or permitted assigns. The Brand Manager
shall have the right to assign its rights and obligations under this
Agreement to another individual or entity with prior written approval of DMS
Corp. only, which approval shall not be unreasonably withheld or delayed.
The Brand Manager's request for approval of such an assignment shall include
the name of the assignee; DMS Corp. shall approve such assignment unless the
assignee or an affiliate of the assignee is, in the reasonable judgment of
DMS Corp., a competitor of DMS Corp.
(d) Governing Law; Severability. This Agreement shall be governed
by the laws of the State of Delaware, without regard to such state's
conflicts of law principles. The Brand Manager hereby agrees to the personal
jurisdiction of the state and federal courts in Delaware. The provisions of
this Agreement shall be deemed severable, and the invalidity or
unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
(e) Entire Agreement. This Agreement constitutes the entire
Agreement between the parties as to the subject matter hereof, and will not
be superseded by any prior Agreement, covenant, or law other than that
imposed by the State of Delaware.
(f) No Waiver. No waiver by DMS Corp. shall constitute a waiver as
to any subsequent act and this agreement may not be amended or modified
except in writing signed by the parties.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
DISPATCH MANAGEMENT SERVICES CORP.
"DMS CORP."
/s/Linda Jenkinson
--------------------------------------------------
Linda Jenkinson
Chief Executive Officer
WITNESS: "BRAND MANAGER"
/s/ Gary Brose
- ------------------------ --------------------------------------------------
Gary Brose
President
8
<PAGE>
Exhibit 2.56
BRAND MANAGER AGREEMENT
THIS AGREEMENT is entered into this 1st day of October, 1997, by and
between DISPATCH MANAGEMENT SERVICES CORP., a Delaware corporation ("DMS Corp.")
and CREATIVE CONSULTING CORP., a Washington corporation located at 2228 Eastmont
Way, Seattle, Washington 98199 (the "Brand Manager").
WITNESSETH:
WHEREAS, DMS Corp. owns companies providing time-critical and related
services;
WHEREAS, DMS Corp. wishes to retain the services of the Brand Manager to
manage the business owned by DMS Corp. known as Fleetfoot Max, Inc. (the
"Brand") as an independent entity;
WHEREAS, the Brand Manager wishes to be retained by DMS Corp. to manage the
Brand as an independent entity; and
WHEREAS, the parties hereto wish to set forth the terms and conditions
pursuant to which the Brand Manager will manage the Brand.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties, it is agreed as follows:
1. Services. DMS Corp. hereby retains the Brand Manager, as an
independent entity, to manage the Brand, and the Brand Manager hereby accepts
such engagement, all upon the terms and conditions herein provided. During the
term of this Agreement, the Brand Manager covenants to manage the Brand in a
reasonable and judicious manner, using its best efforts to maximize Brand
Contribution (defined as total revenue less total expenses, before taxes, in
accordance with U.S. GAAP except as otherwise set forth in Exhibit 1 attached
hereto) and revenue of the Brand. For purposes of clarification, except where
otherwise provided in this Agreement, DMS Corp. will not have the right to
direct or control the Brand Manager as to the details of when, where and how its
responsibilities under this Agreement are to be performed.
<PAGE>
2. Conduct of Business Through DMS Corp.
Notwithstanding anything in this Agreement to the contrary, the Brand
Manager covenants and agrees that all of the Brand's business (including but not
limited to dispatching services, other back-office functions, and road
management services) shall be conducted, processed and serviced through DMS
Corp., its affiliates, or an entity designated by DMS Corp., and the failure to
do so shall be grounds for DMS Corp. to terminate this Agreement immediately.
The Brand Manager also covenants and agrees that the Brand will be managed
pursuant to the "DMS Model" (as defined below), subject to a transition period
as mutually determined by the Brand Manager and DMS Corp. For purposes of this
Agreement, the "DMS Model" shall mean the use of DMS Corp.'s licensed software,
consolidation of back-office operations through a DMS Center; standardized
delivery zones, costing, services and data entry; profit-incentivized workers;
and other methods of doing business in effect from time to time which are
intended to be consistent with the industry's then-current best practices as
determined by DMS Corp.
3. Revenue Maintenance; Brand Contribution Percentage Maintenance.
(a) Revenue Maintenance. The Brand Manager shall be responsible
for maintaining and growing the revenue base of the Brand. The Brand Manager
must maintain a revenue base of at least $2,398,878 for the Brand during any
twelve month calendar period (January 1-December 31). For purposes of this
paragraph 3(a), the revenue base of the Brand from the date of the Initial
Public Offering of DMS Corp.'s common stock through December 31, 1998 shall be
annualized.
As set forth in paragraph 6 hereinbelow, the Brand Manager's failure to
maintain a minimum revenue base of $2,398,878 during any twelve month calendar
period shall be grounds for termination of this Agreement by DMS Corp.
(b) Brand Contribution Percentage Maintenance. The Brand Manager
shall be responsible for maintaining and growing the "Brand Contribution
Percentage" (defined as Brand Contribution as a percentage of the brand's total
revenue). The relative performance of the Brand's Brand Contribution
Percentage, compared to the Brand Contribution Percentage of all other DMS Corp.
brands, will be evaluated on a regular (quarterly) basis by DMS Corp. and
provided to the DMS Corp. Business Steering Committee for review. If, for three
consecutive review periods, the
2
<PAGE>
Brand's Brand Contribution Percentage falls in the bottom 10% of the Brand
Contribution Percentage achieved by all DMS Corp. brands, DMS Corp. will have
the right, upon approval by the Business Steering Committee, to terminate this
Agreement in accordance with the provisions of paragraph 6 hereinbelow.
The Brand Manager, on at least 60 days' advance notice from DMS Corp., will
be responsible for preparing a budget, forecasting expense items under its
control for each fiscal quarter in the upcoming fiscal year. Such budget will
be submitted to the DMS Corp. Business Steering Committee for approval, and such
approval shall not be unreasonably withheld unless the submitted budget targets
a Brand Contribution Percentage in the bottom 10% of the Brand Contribution
Percentages targeted by all DMS Corp. brands.
4. Brand Manager Compensation.
(a) Contribution -Based Compensation Structure. During the term of
this Agreement, the Brand Manager shall be compensated by DMS Corp. based on the
revenue/Brand Contribution formula set forth in Exhibit 1, which exhibit is
attached hereto and incorporated herein by reference.
(b) Treatment of Uncollectible Accounts Receivable. DMS Corp. and/or
its agents agree to make a good faith effort to collect all receivables of the
Brand for a period of ninety days after billing and posting of revenues. Any
receivables not collected within such ninety day period shall be written off by
DMS Corp. and assigned back to the Brand Manager for further collection action.
The Brand Contribution shall be calculated by increasing the expenses for the
calendar month immediately following such ninety day period by 100% of the
amount of receivables written off by DMS Corp. so as to compensate DMS Corp. for
the uncollected amount. If any portion of such uncollected amount is collected
in the future, such portion shall be included as revenue for the month in which
it is received.
(c) Cash/Equity Mix of Compensation. The Brand Manager's
compensation, as determined in accordance with Exhibit 1 attached hereto, shall
be paid partly in cash, and partly by the issuance to the Brand Manager of
registered, unrestricted common stock of DMS Corp. The cash/equity
compensation to be paid by DMS Corp. to the Brand Manager is set forth in
Exhibit 2, which exhibit is attached hereto and incorporated herein by
reference.
3
<PAGE>
(d) Minimum Retainer; Deferred Compensation. For the services
rendered by the Brand Manager pursuant to this Agreement, DMS Corp. shall pay
the Brand Manager a minimum retainer in the amount of $9,622.00 per month, in
arrears, payable on the 25th day of the calendar month immediately following the
month for which the retainer is being paid. DMS Corp. will provide the Brand
Manager with a monthly statement of the Brand Manager's total earned margin for
the Brand. Any additional cash compensation, and all compensation payable in
common stock of DMS Corp. to which the Brand Manager is entitled pursuant to
this Agreement will be paid on a deferred basis on or about the January 15th
following the year in which such compensation is earned.
(e) Expense Reimbursement and Benefits. Expense reimbursement and
benefits policies of the Brand will be determined by the Brand Manager, subject
to generally accepted accounting principles and applicable tax laws and
regulations. The Business Steering Committee of DMS Corp. will provide the
Brand Manager with a list of guidelines as to appropriate reimbursement and
benefits policies for use by the Brand Manager. In the event that a particular
expense reimbursement or benefit is not clearly within the guidelines supplied
by the Business Steering Committee, then the Brand Manager shall submit the
issue to the Business Steering Committee for approval prior to claiming the
reimbursement or benefit as a deduction by the Brand.
Notwithstanding the foregoing, to the extent an expense is reported for the
Brand which expense is determined to be (either wholly or partly) non-deductible
for tax purposes, the Brand Contribution shall be reduced by adding (as an
additional expense for purposes of calculating Brand Contribution) that amount
of additional taxes incurred by DMS Corp. as a result of such non-deductibility.
5. Term. The term of this Agreement shall begin as of the date of the
Initial Public Offering of DMS Corp.'s common stock, and unless terminated in
accordance with the provisions of paragraph 6 hereinbelow, shall terminate two
(2) years thereafter. Thereafter, this Agreement shall be automatically renewed
for successive one year periods, unless the Brand Manager shall give written
notice to the contrary at least 90 days prior to the termination of the initial
one year period or any succeeding one year period thereafter, or unless this
Agreement is terminated in accordance with the provisions of paragraph 6
hereinbelow.
4
<PAGE>
6. Termination.
(a) Termination Rights. In addition to the provisions for
termination provided elsewhere in this Agreement, this Agreement may be
terminated at any time upon the mutual consent, given in writing effective upon
delivery, of DMS Corp. and the Brand Manager. The Brand Manager shall have the
unilateral right to give DMS Corp. notice of an intention to voluntarily
withdraw from this Agreement on six months written notice. In the event of such
voluntary withdrawal, or in the event of termination of this Agreement by DMS
Corp. or the DMS Corp. Business Steering Committee pursuant to this paragraph 6,
the right to re-issue a Brand Manager Agreement for the Brand rests solely with
DMS Corp. This Agreement may also be terminated by DMS Corp. upon the happening
of any of the following circumstances: (i) Brand Manager's failure to conduct
all of the Brand's business through DMS Corp., its affiliates or designee as
required pursuant to paragraph 2 above; (ii) failure to maintain the minimum
revenue base set forth in paragraph 3(a) above; (iii) the Brand's Brand
Contribution Percentage falling, for three (3) consecutive review periods, in
the bottom 10% of the Brand Contribution Percentage achieved by all other DMS
Corp. brands; (iv) the Brand Manager's violation of the Non-Competition
Agreement dated the 10th day of September, 1997 between the parties hereto; or
(v) conduct constituting "termination for just cause" at any time during the
term of the Agreement. For purposes of this Agreement, "termination for just
cause" shall mean termination for: (a) proven dishonesty in the course of
managing the Brand; (b) conviction of the Brand Manager for violation of any
criminal law; or (c) declaration of bankruptcy, composition of creditors,
attachment of the Brand Manager interest or rights under this Agreement and
similar occurrences.
(b) Cure Period. Compliance with the terms of this Brand Manager
Agreement shall be determined by the judgment of the Business Steering Committee
of DMS Corp., except that DMS Corp. shall be solely responsible for determining
whether the Agreement may be terminated pursuant to the provisions of Sections
6(a)(i), 6(a)(iv) or 6(a)(v) above. Members of the Business Steering Committee
will include other active brand managers engaged by DMS Corp., and the head of
the Business Steering Committee will be the President of DMS Corp. In the event
that the Business Steering Committee determines that the Brand Manager has
defaulted in its obligations under this Agreement, the Brand Manager shall
receive written notice thereof, and (except for
5
<PAGE>
termination by DMS Corp. under Sections 6(a)(i), 6(a)(iv) or 6(a)(v), any of
which shall be grounds for immediate termination without opportunity for cure)
shall be given a cure period during which the Brand Manager shall be permitted
to address and rectify the default. In the case of a failure to achieve the
minimum revenue base required under Paragraph 3(a) above, the Brand Manager
shall be deemed to have addressed and rectified the default if, during the
calendar quarter immediately following the date on which the Brand Manager
receives notice of such default, the annualized revenue for the Brand equals or
exceeds the minimum revenue base set forth in Paragraph 3(a). In the case of
the Brand's Brand Contribution Percentage falling, for three (3) consecutive
review periods, in the bottom 10% of the Brand Contribution Percentage achieved
by all other DMS Corp. brands, the Brand Manager shall be deemed to have
addressed and rectified the default if, during the calendar quarter immediately
following the date on which the Brand Manager receives notice of such default,
the Brand's Brand Contribution Percentage falls in the top 90% of the Brand
Contribution Percentage achieved by all other DMS Corp. brands. In the event
that the default has not been addressed and rectified within the specified cure
period, as determined in the sole discretion of the Business Steering Committee,
the Business Steering Committee will submit a recommendation to all brand
managers that this Agreement be terminated (the "Recommendation of
Termination"). Unless greater than one third of all DMS Corp. brand managers
send the Business Steering Committee written objection to such termination
within fourteen (14) days after the date of the Recommendation of Termination,
this Agreement will be terminated immediately thereafter and the Brand Manager
will be so notified in writing. Upon termination, all keys, identification
materials, and proprietary information and the like will be returned to DMS
Corp.
7. Miscellaneous.
(a) Payment in local currency. All references to the measurement,
determination or payment of money under this Agreement, are to be in the
currency of the area in which the Brand Manager will perform its services. The
equity portion of the Brand Manager's compensation payable under this Agreement
need not be listed on a stock exchange, but in the event such equities are
listed, they shall be listed on such exchange as DMS Corp. shall determine in
its sole discretion.
6
<PAGE>
(b) No Employment Agreement. This Agreement does not create an
employer/employee relationship between the parties hereto. Except where
otherwise provided in this Agreement, DMS Corp. has no right to control and
direct the Brand Manager in the performance of its obligations under this
Agreement. Rather, the Brand Manager is recognized as an independent entity.
(c) Binding Effect; Assignability. This Agreement
shall be binding upon and shall inure to the benefit of DMS Corp. and the Brand
Manager, and their respective successors and/or permitted assigns. The Brand
Manager shall have the right to assign its rights and obligations under this
Agreement to another individual or entity with prior written approval of DMS
Corp. only, which approval shall not be unreasonably withheld or delayed. The
Brand Manager's request for approval of such an assignment shall include the
name of the assignee; DMS Corp. shall approve such assignment unless the
assignee or an affiliate of the assignee is, in the reasonable judgment of DMS
Corp., a competitor of DMS Corp.
(d) Governing Law; Severability. This Agreement shall be governed by
the laws of the State of Delaware, without regard to such state's conflicts of
law principles. The Brand Manager hereby agrees to the personal jurisdiction of
the state and federal courts in Delaware. The provisions of this Agreement
shall be deemed severable, and the invalidity or unenforceability of any
provision shall not affect the validity or enforceability of the other
provisions hereof.
(e) Entire Agreement. This Agreement constitutes the entire
Agreement between the parties as to the subject matter hereof, and will not be
superseded by any prior Agreement, covenant, or law other than that imposed by
the State of Delaware.
(f) No Waiver. No waiver by DMS Corp. shall
constitute a waiver as to any subsequent act and this agreement may not be
amended or modified except in writing signed by the parties.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
DISPATCH MANAGEMENT SERVICES CORP.
"DMS CORP."
/s/Linda Jenkinson
------------------------------------
Linda Jenkinson
Chief Executive Officer
WITNESS: "BRAND MANAGER"
/s/Gary Brose
- ------------------------- ------------------------------------
Gary Brose
President
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Exhibit 2.58
AGREEMENT
This Agreement (the "Agreement") is entered into as of the 31st day of
October, 1997, by and among Dispatch Management Services Corp., a Delaware
corporation and successor in interest to Dispatch Management Services LLC by
merger (the "Company"), Pacific Freight Systems, Inc., a New York corporation
(the "Corporation"), and Thomas A. Bartley and Perry Barbaruolo, the
shareholders of the Corporation (collectively, the "Shareholders"). Unless
defined herein, all capitalized terms used in this Agreement shall have the
meaning given them in the Operating Agreement of Dispatch Management Services
LLC dated December 1, 1996 by and between the Members of Dispatch Management
Services LLC, as amended (the "Operating Agreement").
W I T N E S S E T H
WHEREAS, the Shareholders own all of the issued and outstanding shares of
capital stock of the Corporation (the "Stock");
WHEREAS, subject to the conduct of the due diligence examination to begin
following the execution of this Agreement, and further subject to the terms and
conditions set forth herein, the Shareholders desire to sell all of their
respective right, title and interest in the Stock to the Company, and the
Company desires to purchase the Stock;
WHEREAS, upon the satisfactory completion of the due diligence examination,
the delivery of the financial statements, schedules, disclosure documents,
questionnaires and other information required by this Agreement, and approval of
the same by the Company, the parties hereto will close in escrow pursuant to the
terms and conditions set forth herein;
WHEREAS, upon satisfaction of the conditions set forth herein, the escrow
will be terminated, and the sale of the Stock will be consummated;
WHEREAS, the parties intend that, immediately following the execution of
this Agreement, the Company will enter into non-competition agreements with the
Shareholders and non-competition agreements with certain employees of the
Corporation in the form attached hereto as Exhibit A (such non-competition
agreements, together with all other agreements which are entered into by the
parties hereto pursuant to this Agreement or in connection with any of the
transactions contemplated hereby, the "Related Agreements"); and
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WHEREAS, simultaneously with the execution of this Agreement, the Company
and the Shareholders intend to enter into agreements (the "Atlantic and
Westchester Acquisition Agreements") pursuant to which the Company will acquire
from the Shareholders all of the outstanding shares of capital stock of Atlantic
Freight Systems, Inc. ("Atlantic") and Westchester Freight Systems, Inc.
("Westchester"); and
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the representations,
warranties, covenants and agreements herein contained, and for the sum of $10.00
paid by the Company to the Shareholders, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Closing in Escrow
1.1. Overview. Upon execution of this Agreement, the Shareholders and
the Corporation shall be obliged to deliver to the Company, within thirty (30)
days after execution of this Agreement: (i) the audited and unaudited financial
statements required pursuant to Section 1.3 below and (ii) the agreements
required pursuant to Section 3.1 below.
After approval of the same by the Company, and prior to filing the
registration statement with the Securities and Exchange Commission relating to
the initial public offering of the common stock, par value $.01 per share, of
the Company (the "Initial Public Offering"), the Company will deliver to the
Shareholders a disclosure document, together with a notice (the "Notice")
specifying the date (which shall be at least five days after receipt of the
Notice) by which the Shareholders must execute and deliver satisfactory
shareholder representation letters in order to consummate the sale of the Stock
pursuant to the terms of this Agreement. The Shareholders shall (i) purchase
the assets of the Corporation (at then current book value) listed in Exhibit A-1
hereto and (ii) assume the liabilities of the Corporation listed on Exhibit A-1
immediately as of prior to the Closing Date. If, prior to the Closing Date, the
Shareholders do not pay cash to the Corporation for the aggregate book value of
such assets then the amount of the Purchase Price (as defined below) shall be
reduced by such aggregate book value. Prior to the Closing, the Shareholders
shall cause certain employees of the Corporation to be terminated from
employment by the Corporation. If,
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prior to the Closing Date (as defined in Section 1.4 below): (i) the
Shareholders do not purchase the (unwanted) assets specified by the Company in
Exhibit A-1, then such assets will be acquired by the Company without any
adjustment to the Purchase Price (as defined in Section 1.3 below); (ii) the
Shareholders do not assume the (unwanted) liabilities specified by the Company
in Exhibit A-1, then the Company will reduce the cash portion of the purchase
price by the dollar amount of any such liabilities (including early repayment
costs, if any) of the Corporation existing as at the Closing Date; (iii) the
Corporation has not terminated the employment of the (unwanted) employees
specified by the Company in the Notice, then the Company will make a reasonable
estimate of the costs and expenses to be incurred in connection with such
terminations of employment, and the Company will reduce the cash portion of the
purchase price by the amount of such reasonable estimate; and (iv) in the event
that prior to the Closing Date the Corporation terminates its cross dock
business, the lessors of property leased by the Corporation for use in such
business under leases listed in Exhibit A-2 have not consented in writing to
such action as the Company agrees in writing shall relieve the Corporation and
its successors of all liability under such leases after the Closing Date, the
Company shall reduce the cash portion of the Purchase Price by the amount of all
liability of the Corporation and its successors under such leases after the
Closing Date.
Upon timely delivery from all of the Shareholders of shareholder
representation letters relating to this Agreement and the Atlantic and
Westchester Acquisition Agreements satisfactory to the Company, the parties will
close in escrow (the "Closing in Escrow") pursuant to the terms and conditions
of this Agreement. Such Closing in Escrow shall take place at the offices of
Silver, Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., 7th Floor,
Washington, D.C. 20005 (or such other place as is mutually agreed upon by the
parties) within thirty (30) days (or such shorter period as is specified in the
Notice) after timely delivery of such satisfactory shareholder representation
letters from the Shareholders.
In the event that one or more of the Shareholders do not timely
deliver such satisfactory shareholder representation letters (as determined in
the sole discretion of the Company), this Agreement will be of no further force
or effect, except for any and all obligations under Sections 3.2
(confidentiality), 1.3 (reimbursement of audit expenses) and 8.2 (effect of
termination under Section 8.1), which obligations will survive termination of
this Agreement.
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1.2 Closing in Escrow Deliveries and Other Actions.
(a) Shareholders' and Corporation's Deliveries at Closing in
Escrow. At the Closing in Escrow, the Shareholders shall deliver the following
to the law firm of Silver, Freedman & Taff, L.L.P., as escrow agent: (i)
certificates representing all of the Stock with duly executed stock powers
conveying the Stock represented thereby to the Company, free and clear of all
liens, security interests and claims, encumbrances or other rights of third
parties of any nature whatsoever, and granting unrestricted title to and
possession of the Stock to the Company; (ii) the Corporation's corporate minute
book, including the Stock Certificate Book and all of the original share
certificates representing shares of the Corporation's capital stock at one time
issued (but no longer issued and outstanding) to former Shareholders of the
Corporation; (iii) all consents, waivers, and authorizations necessary or
appropriate for the consummation of the transactions contemplated by this
Agreement; (iv) agreements assigning to the Corporation all of the Shareholders'
and/or third parties' right, title and interest in and to all Intellectual
Property (as defined in Section 2.14(d) hereinbelow) owned by the Shareholders
and/or third parties and heretofore licensed to or used by the Corporation; (v)
Certificate of Good Standing for the Corporation as issued by the Secretary of
State of New York; (vi) the certificates, dated the Closing in Escrow Date,
required pursuant to Sections 7.2(a) and 7.2(b) hereinbelow; and (vii) the
opinion of counsel to the Shareholders and the Corporation as to such matters as
counsel to the Company and the Corporation may reasonably require, including but
not limited to such counsel's opinion that: (A) the Corporation is in good
standing; (B) the Corporation is authorized to conduct its business in each
jurisdiction in which it is doing business; (C) the Shareholders and the
Corporation have the full power to enter into and perform their respective
obligations under this Agreement; (D) this Agreement constitutes the legal,
valid and binding obligations of the Corporation and the Shareholders, and the
Related Agreements to which the Shareholders are a party, constitute the legal,
valid and binding obligations of the Shareholders, each enforceable in
accordance with their respective terms (except as enforcement may be limited by
bankruptcy, insolvency and other similar laws affecting the enforcement of
creditor's rights, and principles of equity); and (E) neither the Corporation
nor the Shareholders are threatened with or affected by any actions, proceedings
or investigations wherein an unfavorable decision, ruling or finding could have
a material adverse effect on the financial condition or operation of the
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Corporation, or could prevent, enjoin or otherwise affect the transactions
contemplated by this Agreement or the Related Agreements.
(b) Further Actions. On or after the Closing in Escrow, the
parties hereto shall enter into, execute and deliver such other and further
agreements, documents and instruments, as any of them may reasonably request,
for the purpose of effectuating the transactions contemplated by this Agreement.
(c) Consummation of Sale. Upon Closing in Escrow, subject to
the terms and conditions of this Agreement, the Company will be obligated to
purchase the Stock, and the Shareholders will be obliged to sell the Stock, at
the purchase price specified in Section 1.3 below, on the Closing Date specified
in Section 1.4 below.
1.3. Purchase Price. The purchase price for the Stock (the
"Purchase Price") shall be One Million Dollars ($1,000,000), subject to
adjustment (if any) as provided in Section 1.1 above, and subject to further
adjustment (if any) as a result of a reduction in the Maximum Earn-Out (as
defined in this Section 1.3 below).
Unless the Company gives the Shareholders written notice to the
contrary, the Shareholders shall deliver to the Company, within thirty (30)
days after execution of this Agreement: (i) audited financial statements of the
Corporation, including balance sheets dated as of December 31, 1994, 1995 and
1996, and income statements and cash flow statements for each of the three
twelve month periods ended on such dates; (ii) unaudited financial statements of
the Corporation, including a balance sheet dated as of June 30, 1996, and an
income statement and cash flow statement for the twelve month period ended on
June 30, 1996: and (iii) unaudited, reviewed financial statements of the
Corporation, including a balance sheet dated as of June 30, 1997 and an income
statement and a cash flow statement for the six month period ended June 30,
1997. The intent of providing the audited financial statements referred to in
the foregoing sentence is to resolve any auditing issues prior to calculation of
the Purchase Price, so that the Purchase Price may be quickly and efficiently
calculated. In the event that the closing of the Initial Public Offering has
not occurred on or before November 12, 1997, but does occur on or before
December 12, 1997, then in that event, in lieu of the unaudited, reviewed
financial statements of the Corporation for the six month period ended June 30,
1997, the Shareholders shall deliver to the Company, within thirty days
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after written request from the Company: (i) an updated set of audited financial
statements of the Corporation, including a balance sheet dated as of June 30,
1997, and income statements and cash flow statements for the six month period
ended June 30, 1997; (ii) unaudited financial statements for the Corporation,
including a balance sheet dated as of September 30, 1996, and an income
statement and cash flow statement for the twelve month period ended on September
30, 1996; and (iii) unaudited, reviewed financial statements of the Corporation,
including a balance sheet dated as of September 30, 1997 and income statements
and cash flow statements for the three month period ended September 30, 1997.
In the event that the closing of the Initial Public Offering has not occurred on
or before December 12, 1997, then upon written request from the Company given on
or before March 1, 1998, the Shareholders shall deliver to the Company, within
thirty days after written request from the Company, such additional audited
and/or unaudited, reviewed financial statements of the Corporation as the
Company may reasonably request.
All of the financial statements referred to in this Section 1.3 shall
be prepared (or reviewed, as the case may be) by Price Waterhouse LLP. At the
request of the Company, such statements shall reflect the financial results of
the Corporation as if the Corporation, Atlantic and Westchester were one
corporation. The cost of providing all of the financial statements required by
this Section 1.3, within the prescribed time limits, shall be the sole
responsibility of the Shareholders, provided that the Company will, upon the
request of the Shareholders, advance such costs on behalf of the Shareholders.
In the event that all of the Shareholders do not timely deliver satisfactory
shareholder representation letters and complete the Closing in Escrow, the
Shareholders shall immediately refund to the Company any such advanced costs; in
the event that all such shareholder representation letters are satisfactory and
are timely received, and the Closing in Escrow is completed, the Shareholders
shall be relieved of their obligation to refund to the Company any such
advanced costs.
The Company shall pay thirty percent (30%) of the Purchase Price in
cash (the "Maximum Earn-Out"), which is subject to reduction in accordance with
the terms of the next paragraph, and seventy percent (70%) of the Purchase
Price in (restricted) stock of the Company (the "Company Stock"), at the
Closing. The number of shares of Company Stock to be issued as partial payment
of the Purchase Price shall be equal to the aggregate dollar value of the stock
component
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of the Purchase Price divided by the Initial Public Offering price per share as
set forth on the cover page of the prospectus relating to the Initial Public
Offering, provided that no fractional shares shall be issued and the value of
any fractional shares shall be paid in cash at the per share value of the Common
Stock in the Initial Public Offering. The Shareholders acknowledge that the
sale of the Company Stock will be restricted for a period of time by virtue of a
"lock-up" agreement which may be imposed by the Company, and the Shareholders
shall execute such a "lock-up" agreement, as may be required by the Company, by
which the sale of the Company Stock is restricted (perhaps prohibited) for a
period of two (2) years from the date of the closing of the Initial Public
Offering. The Purchase Price payable to the Shareholders shall be allocated
between them in accordance with written direction to the Company signed by each
of the Shareholders.
The Maximum Earn-Out shall be earned by the Shareholders ratably over
the 8 quarter annual periods beginning January 1, 1998 and ending December 31,
1999 provided that the Corporation achieves the targeted performance standards,
i.e., the Revenue Maintenance requirement (the "Revenue Requirement") and the
Brand Contribution Percentage Maintenance requirement (the "Margin Requirement")
set forth in Exhibit B attached hereto. In the event that the Corporation fails
to achieve either the Margin Requirement or the Revenue Requirement set forth in
Exhibit B during any calendar quarter, then for each calendar quarter in which
the Corporation fails to achieve such Margin Requirement or Revenue Requirement,
the cash portion of the Purchase Price shall be reduced by one-eighth (1/8) of
the Maximum Earn-Out. The Maximum Earn-Out, less any reductions as set forth in
this paragraph, is hereinafter referred to as the "Earn-Out". The Earn-Out
shall bear interest at the rate of 7% per annum commencing as of the Closing
Date (i.e., once the Earn-Out is determined, the Shareholders will be due such
amount plus interest at the rate of 7% per annum on such amount, accrued from
the Closing Date until the date of payment of the Earn-Out to the Shareholders).
The Earn-Out shall be paid to the Shareholders promptly following calculation of
the Corporation's performance for the quarter ending December 31, 1999. The
Company covenants and agrees to maintain sufficient cash, or availability of
cash (e.g., by way of a line of credit) in order to fund the Earn-Out.
It is understood by the parties that the Company intends to merge the
Corporation, Atlantic and Westchester into a wholly owned subsidiary of the
Company. For purposes of determining
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whether the Corporation has achieved the Revenue Requirement and the Margin
Requirement prior to such merger, the Corporation's performance shall be
determined as if the Corporation, Atlantic and Westchester were one corporation.
At the request of the Shareholders made to the Company in writing not later
than the Closing in Escrow, the Company shall (immediately after Closing) make a
loan to the Shareholders, collectively, in an amount equal to up to and
including 30% of the Purchase Price. Said loan by the Company to the
Shareholders (the "Shareholder Loan") shall bear interest at a rate of seven
percent (7%) per annum, and shall be secured by all of the Company Stock paid as
part of the Purchase Price at Closing. The collateral security agreement
evidencing the collateralization of the Shareholder Loan with the Company Stock
and the Earn-Out shall be on such terms as are reasonably acceptable to the
Company, which terms shall include, but shall not be limited to, the retention
of all of the Company Stock by the Company until full repayment of the
Shareholder Loan (including accrued interest). The Shareholders shall have the
right to prepay the Shareholder Loan (plus accrued interest) at any time without
penalty and shall have the right to direct the Company to offset the balance due
under the Shareholder Loan (plus accrued interest) against the Earn-Out as
earned each quarter. The Shareholder Loan shall mature as of the date that the
Earn-Out is payable. In the event that the Shareholder Loan (including accrued
interest) is not repaid in full upon maturity, the Company shall enjoy all
rights of a secured party under the Uniform Commercial Code then in effect in
the State of Maryland, provided that the Company's only recourse shall be first
against the remaining Earn-Out and then against the Company Stock it holds as
collateral, and there shall not be any recourse against the Shareholders
individually.
1.4. Time and Place of Closing. Unless this Agreement shall have been
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 8.1., and subject to the satisfaction or waiver of the
conditions set forth in Section 7, the purchase and sale of the Stock pursuant
to this Agreement (the "Closing") shall take place at the offices of Silver,
Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., Suite 700E, Washington,
D.C. 20005, contemporaneously with the closing of the Initial Public Offering
unless the Initial Public Offering does not occur by March 31, 1998, in which
case this Agreement shall be rendered null and void,
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or unless another date, time or place is agreed to in writing by the parties
hereto (the day on which the Closing takes place being the "Closing Date").
At the Closing: (i) Silver, Freedman and Taff, L.L.P. shall deliver
to the Company the certificates, minute book, documents, and other materials
theretofore held in escrow from the Closing in Escrow; (ii) the Shareholders
shall deliver to the Company updated consents, waivers and authorizations as
referred to in Section 1.2(a)(iii) above, updated Certificates of Good Standing
as referred to in Section 1.2(a)(v) above, updated certificates, dated the
Closing Date, required pursuant to Sections 7.2(a) and 7.2(b) below, and an
updated opinion of counsel as referred to in Section 1.2(a)(vii) above; and
(iii) the Company shall deliver the Purchase Price to the Shareholders (less the
Maximum Earn-Out, which shall be payable to the Shareholders pursuant to the
terms of Section 1.3 above, and with the Company Stock collateralized against
the Shareholder Loan being delivered to the Company as appropriate).
2. Representations, Warranties and Covenants of the Corporation and the
Shareholders.
The Corporation and the Shareholders hereby jointly and severally
represent, warrant and covenant to the Company as follows:
2.1. Organization, Standing and Power. The Corporation is a "C"
Corporation duly organized, validly existing and in good standing under the laws
of the State of New York, and has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. The Corporation is duly qualified and in good standing to conduct
business in each jurisdiction in which the business it is conducting, or the
operation, ownership or leasing of its properties, makes such qualification
necessary.
2.2. Authority and Enforceability. The Shareholders and the
Corporation have all requisite legal right, power and authority to enter into
this Agreement and each of the Related Agreements to which they are a party and
to agree to the transactions contemplated hereby and thereby and to perform all
of their respective obligations hereunder and thereunder. This Agreement
constitutes the legal, valid and binding obligations of the Shareholders and the
Corporation, and each of the Related Agreements to which the Shareholders are a
party constitute the legal, valid and binding obligations of the Shareholders,
each enforceable in accordance with their respective terms,
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subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights and
remedies generally and subject, as to enforceability, to general principles of
equity.
2.3. Capital Structure, Due Authorization and Issuance. The capital
structure of the Corporation consists solely of 200 shares of no par value
capital stock of which 20 shares are and will be as of the Closing in Escrow
Date and the Closing Date issued and outstanding. All issued and outstanding
shares of the capital stock of the Corporation have been duly authorized and
validly issued, are fully paid and non-assessable, and were issued in compliance
with all federal and applicable state securities laws.
2.4 Title to Stock. The Shareholders owns all of the issued and
outstanding shares of the capital stock of the Corporation, free and clear of
any and all claims, liens, restrictions, pledges, charges, options, security
interests, encumbrances or other rights of third parties, including any imposed
by law. There are no other shares of capital stock or other equity or debt
securities of the Corporation, of any kind or class whatsoever, authorized,
issued or outstanding, or any warrants, options, subscription rights, or any
other rights, agreements, or commitments of any nature relating to the issuance
of, or granting of, rights to acquire any shares of capital stock or such
securities of the Corporation.
2.5 Title to and Condition of the Corporation's Assets. The
Corporation has good, insurable and marketable title to all of the assets set
forth in the Financial Statements (as defined in Section 2.11 hereinbelow),
except that this representation and covenant does not apply (i) as of the
Closing Date to those assets purchased by the Shareholders pursuant to Section
1.1, and (ii) in the event that prior to the Closing Date the Corporation
terminates its cross dock business to such assets related to such business which
the Corporation sells. Except as disclosed on Exhibit C, none of the
Corporation's assets is subject to any restriction, mortgage, pledge, lien,
security interest, lease, charge, encumbrance, objection or joint ownership,
other than liens for current real or personal property taxes not yet due and
payable. The Corporation's assets are in good operating condition and repair,
ordinary wear and tear excepted.
2.6. Sufficiency of Assets. The assets set forth in the Financial
Statements (as defined in Section 2.11 hereinbelow) include all the assets and
properties used or employed in the
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business presently conducted by the Corporation, excluding, in the event that
the Corporation terminates its cross dock business, such assets and properties
and properties related to such business which the Corporation sells.
Immediately after the consummation of the transactions contemplated by this
Agreement to be effected at the Closing, the Corporation will (i) have all
right, title, and interest in and to, or will have a valid right to use, without
liability to third party(ies), such assets and properties; and (ii) have all
assets, rights, employees, subcontractors and other persons and items which are
reasonably necessary to carry on the business and operations of the Corporation
after the Closing Date in substantially the same manner as presently conducted
by the Corporation other than the Corporation's cross dock business and
operations in the event that the Corporation terminates such business and
operations. Provided, that as of the Closing Date, this Section 2.6 does not
apply to those assets purchased by the Shareholders pursuant to Section 1.1
hereof.
2.7. No Violations Resulting From Transactions. The execution and
delivery of this Agreement by the Shareholders and the Corporation, and each of
the Related Agreements to which they are a party, and the consummation of the
transactions contemplated hereby and thereby by the Shareholders and the
Corporation will not (a) conflict with or violate any provision of the articles
or certificate of incorporation or by-laws of the Corporation, (b) except as set
forth in Exhibit D, require any consent, waiver, approval, authorization,
permission, or filing with or notification to, any third party, (c) result in or
constitute a default, or require any consent or approval of or notice to any
person or entity, or result in the creation of an encumbrance, under or pursuant
to (i) any of the contracts to which the Corporation is a party (including but
not limited to contracts of insurance and leases as applicable), or (ii) any
other material agreements to which any of the Shareholders is a party, or (d)
violate any law applicable to the Shareholders or the Corporation.
2.8. Compliance with Laws.
(a) The Corporation is, and at all times during the past three
years has been, in material compliance with all applicable laws; and
(b) The Corporation has not received, and does not know of the
issuance or threatened issuance by any governmental entity of, any notices of
violation or alleged violation of any applicable law. The Company has been
provided with true and complete copies of (i) all
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injunctions, judgments, orders or consent or similar decrees or agreements of
any governmental entity to which the Corporation is currently subject (or which
the Corporation was subject to during the previous three years), and (ii) all
correspondence through the date hereof with respect to any of the matters
referred to in clause (b) or clause (i) of this Section 2.8. None of the
Shareholders nor the Corporation is aware of any proposed legislation or law
which is reasonably expected to be enacted and which, if so enacted, could
reasonably be expected to have a material adverse effect on the Corporation.
2.9. Litigation. There is no action, suit, claim, investigation or
proceeding, whether at law or in equity (each, a "Legal Proceeding"), pending
or, to the knowledge of the Shareholders and/or the Corporation, threatened,
that questions the validity of this Agreement or the Related Agreements or any
action taken or to be taken by the Shareholders or the Corporation in connection
with the consummation of the transactions contemplated hereby or thereby or
which seeks to prohibit, enjoin or otherwise challenge any of the transactions
contemplated hereby or thereby. Exhibit E sets forth an accurate and complete
list, and a brief description (setting forth the names of the parties involved,
the court or other governmental or mediating entity involved, the relief sought
and the substantive allegations and the status thereof), of each Legal
Proceeding pending or, to the knowledge of the Corporation and/or the
Shareholders, threatened against or affecting the Corporation. To the knowledge
of the Corporation and/or the Shareholders, no event has occurred and no
circumstance, matter or set of facts exist which would constitute a valid basis
for the assertion by any third party of any claim or Legal Proceeding, other
than those listed on Exhibit E. Except as set forth in Exhibit E, there is no
outstanding or, to the knowledge of the Corporation and/or the Shareholders,
threatened, judgment, injunction, order or consent or similar decree or
agreement (including, without limitation, any consent or similar decree or
agreement with any governmental entity) against, affecting or naming the
Corporation.
2.10. Financial Advisors.
(a) Except as set forth on Exhibit F attached hereto, no person
or entity has acted directly or indirectly as a broker, finder or financial
advisor for or to the Shareholders
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and/or the Corporation in connection with the negotiations relating to or the
transactions contemplated by this Agreement or the Related Agreements; and
(b) Except as set forth on Exhibit F attached hereto, no person
or entity is entitled to any fee or commission or like payment, or expense
reimbursement, in respect thereof based in any way on agreements, arrangements
or understandings made by or on behalf of the Corporation and/or the
Shareholders hereunder or thereunder. The Shareholders hereby agree that all
such fees, commissions or like payments, or expense reimbursement as shall
appear on Exhibit F attached hereto shall be for the sole joint and several
account of the Shareholders and shall be paid in full by them at the Closing in
Escrow.
2.11. Financial Statements; Receivables. Attached hereto as
Exhibit G are true, correct and complete copies of the Corporation's most recent
unaudited financial statements which, together with the financial statements
(including the notes and exhibits thereto) to be delivered pursuant to Section
1.3 herein (the "Financial Statements") were and will be prepared in accordance
with the books and records of the Corporation, are and will be complete and
correct in all material respects, have and will have been prepared in accordance
with U.S. generally accepted accounting principles ("GAAP"), applied
consistently with the past practices of the Corporation, except where otherwise
specifically noted therein, and present and will present fairly in all material
respects the financial position, results of operations and changes in financial
position or cash flows, whichever is applicable, of the Corporation as at the
dates and for the periods indicated (subject, in the case of the unaudited
financial statements, to normal year-end audit adjustments). Without limiting
the foregoing, no undisclosed liabilities or obligations of any nature (whether
known or unknown, or absolute, accrued, contingent or otherwise) shall exist as
at Closing in Escrow or the Closing not reflected in the most recently dated
balance sheet supplied to the Company. The Corporation has paid all federal,
state and local income, profits, franchises, sales, use, occupation, property,
excise and payroll taxes, and all license fees and other charges imposed upon
it, and has timely filed all tax returns and related documents required to be
filed with any governmental authority. There are no outstanding or proposed
statements of deficiency in tax payments to any federal, state, local or foreign
government with respect to the Corporation for any tax period. As of the dates
such Financial Statements were and will be prepared, all accounts receivable
reflected on the Financial
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Statements (i) have and will have arisen from bona fide transactions in the
ordinary course of the Corporation's business, consistent with its past
practices and (ii) are good and collectible at the aggregate recorded amounts
thereof, net of any applicable reserves for returns or doubtful accounts which
are reflected in such Financial Statements (such reserves, the "Reserves"); such
Reserves are adequate and reasonable and were established in accordance with
GAAP.
2.12. Default. The Corporation is not in material default of any
of its obligations, contracts, or commitments in any respect, or in breach of
any negative or affirmative covenants placed on it by its creditors, and none of
the Corporation or the Shareholders have been notified of any such defaults or
breaches.
2.13. Absence of Certain Developments.
(a) There has been no event, condition or state of facts of any
character that has had or is reasonably likely to have a material adverse effect
on the Corporation.
(b) The Corporation has not entered into any transaction or
contract, or conducted its business, other than in the ordinary course
consistent with past practice, except with respect to termination of the
Corporation's cross dock business.
2.14. Intellectual Property.
(a) List of Intellectual Property; Sufficiency. Exhibit H sets
forth a list of all Intellectual Property (as defined in Section 2.14.(d)
hereinbelow) which is owned by the Shareholders and/or the Corporation, licensed
by the Shareholders and/or the Corporation, licensed to the Shareholders and/or
the Corporation, or otherwise used or able to be used in the business conducted
by the Corporation (other than commonly-used computer software which is
generally available to the public and the use rights to which were legally
acquired by the Corporation either for free or through established retail
facilities) and indicates, with respect to each item of Intellectual Property
listed thereon, the owner thereof and, if applicable, the name of the licensor
and licensee thereof and the terms of such license or other contract relating
thereto. Except as disclosed on Exhibit H, the Corporation owns or has the
lawful right to use all of the Intellectual Property as currently used or as
necessary for the conduct of its business as now conducted. After Closing, the
Corporation will have the right to use all of the Intellectual Property as
currently used or as necessary for the conduct of the Corporation's business as
now conducted.
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(b) Title; Validity; Pending Applications; Infringements, Etc.
(i) Except for Intellectual Property licensed to the
Shareholders and/or the Corporation and except as disclosed on Exhibit H, the
Corporation has full legal and beneficial ownership (free and clear of any and
all encumbrances) of all of the Intellectual Property, and neither the
Corporation nor any of the Shareholders has received any notice or claim
(whether written, oral or otherwise) challenging the Corporation's ownership or
rights in such Intellectual Property or suggesting that any other entity has any
claim of legal or beneficial ownership with respect thereto. Neither the
Shareholders nor the Corporation are in default under any license agreements
pertaining to the Intellectual Property used in the Corporation's business and
licensed to the Shareholders and/or the Corporation; all such license agreements
are valid and in full force and effect, and shall continue in full force and
effect as to the Corporation after Closing.
(ii) All of the Intellectual Property is legally valid and
enforceable without any qualification, limitation or restriction on its use
except as disclosed in Exhibit H, and neither the Corporation nor any of the
Shareholders has received any notice or claim (whether written, oral or
otherwise) challenging the validity or enforceability of any such Intellectual
Property;
(iii) Neither the use of any of the Intellectual
Property nor any other Intellectual Property used by the Corporation will
conflict with, infringe upon, violate or interfere with, or constitute an
appropriation of, any right, title or interest held by any other person or
entity, and there have been no claims made with respect thereto;
(iv) No other person or entity is infringing in any respect
on any part of the Intellectual Property. The Corporation has not conducted its
business, and has not used or enforced (or failed to use or enforce) any
Intellectual Property, in a manner that would result in the abandonment,
cancellation or unenforceability of any item of Intellectual Property, and the
Corporation has not taken or failed to take any action that would result in the
forfeiture or relinquishment of any Intellectual Property used in the conduct of
its business as now conducted;
(v) Except as set forth in Exhibit H, the Corporation has
no liability or obligations to any third parties incident to the Intellectual
Property used or able to be used by the Corporation in the conduct of its
business as heretofore conducted; and
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(vi) The Corporation has timely met all of its obligations
to any third parties incident to the Intellectual Property used or able to be
used by the Corporation in the conduct of its business as heretofore conducted,
and such obligations have been and will be correctly and adequately disclosed in
the Financial Statements.
(c) Protection and Maintenance of Intellectual Property.
(i) The Corporation has taken all reasonable steps to (x)
protect its rights to the Intellectual Property, and (y) to prevent the
unauthorized use by any other person or entity; and
(ii) The Corporation shall use all reasonable efforts to
maintain, or cause to be maintained, the Intellectual Property in full force and
effect through the Closing and, without limitation, has renewed or has made, and
will make within any applicable renewal period ending on or prior to the Closing
Date, application to renew all of the Intellectual Property subject to
expiration on or prior to the Closing Date. Neither the Corporation or any of
the Shareholders has granted to any other Person or entity any rights or
permissions to use any of the Intellectual Property.
(d) Definition of Intellectual Property. For purposes of this
Agreement, the term "Intellectual Property" means any patent, copyright,
trademark, trade name, service mark, service name, brand mark, brand name, logo,
corporate name, Internet domain name or industrial design, any registrations
thereof and pending applications therefor (to the extent applicable), any other
intellectual property right (including, without limitation, any know-how, trade
secret, trade right, formula, conditional or proprietary report or information,
customer or membership list, any marketing data, and any computer program,
software, database or data right), and license or other contract (including
without limitation license(s) to use specific telephone numbers and/or radio
channels/frequencies) relating to any of the foregoing, and any goodwill
associated with any business owning, holding or using any of the foregoing.
2.15. Insurance. The Corporation currently maintains, and as of
the Closing in Escrow and the Closing Date will maintain, valid insurance
policies, which polices provide adequate coverage, within terms of scope and
amount of coverage, for its assets, properties and operations. There are no
pending material insurance claims by the Corporation as to which the applicable
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insurers have denied coverage. In addition, there exist no material claims
under such insurance that have not been properly filed by the Corporation.
During the past two years, the Corporation has not been refused any insurance
coverage by any insurer from which the Corporation has sought coverage.
2.16. Leases. Except as set forth on Exhibit I, the Corporation
is not a lessee or tenant of any real or personal property.
2.17. Labor Agreements. The Corporation is not a party to any
collective bargaining agreement. Except as set forth in Exhibit J, the
Corporation is not bound by any severance pay requirements or agreements, or any
other agreement, handbook, manual, or benefit book referring to, relating to, or
involving its employees.
2.18. Employee Benefit Plans. Except as set forth on Exhibit K
hereto, the Corporation does not maintain or contribute to, and it has no
liability or obligation with respect to any formal or informal stock option,
profit sharing, pension, retirement, bonus, stock bonus, thrift-savings,
incentive, benefit, welfare, cafeteria, medical insurance, dental insurance,
life insurance, accidental death and dismemberment insurance, disability
insurance or other similar plan, policy or arrangement (collectively referred to
herein as the "Plans"). The Corporation is not in default under the terms of
any of the Plans. The Corporation has made all contributions to each of the
Plans required by the terms of the respective Plans, as well as all
contributions required to be made in order to satisfy all requirements of law.
Each of the Plans has sufficient assets to satisfy (under reasonable and
permitted actuarial assumptions) its obligations on a termination basis, and the
level of contributions required pursuant to the terms of each Plan is sufficient
to satisfy (under reasonable and permitted actuarial assumptions) the
obligations of such Plan on a continuing basis for benefits accrued to date.
2.19. Compliance With ERISA. The Corporation's Plans are
currently in compliance in all respects with the Employee Retirement Income
Security Act of 1974 and the regulations promulgated thereunder (collectively,
"ERISA"). Except as set forth on Exhibit L hereto, no employee benefit plan and
no trust created thereunder has ever been terminated by the Corporation. No
liability to the Pension Benefit Guaranty Corporation ("PBGC") has been or is
expected to be incurred by the Corporation with respect to the Plans. Neither
the Corporation nor any of the Plans has ever experienced an accumulated funding
deficiency (as defined in Section 302
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of ERISA and Section 412 of the Internal Revenue Code of 1986, as amended (the
"Code")), whether or not waived, with respect to any employee benefit plan and
no such accumulated funding deficiency currently exists. Except as set forth on
Exhibit L hereto, the Corporation is not required, and has not been required in
the past, to make any payments or contributions under the terms of any
"multi-employer plan" (as defined in Section 3(37) of ERISA and Section 414(f)
of the Code) or by any collective bargaining agreement with respect to any
employee benefit plan. Neither the Corporation nor any of the Plans has ever
incurred any withdrawal liability (including any contingent or secondary
withdrawal liability) within the meaning of Section 4201 and Section 4204 of
ERISA with respect to any multi-employer plan. The Corporation and the trustees
or the administrators of the Plans have provided continuation of coverage
notices to employees and their dependents as required by the Consolidated
Omnibus Budget Reconciliation Act of 1986, as amended ("COBRA"), and has
complied with all such continuation of coverage requirements. The execution and
delivery of this Agreement will not involve a prohibited transaction within the
meaning of ERISA or Section 4975 of the Code.
2.20. Employee Relations. The Corporation is in substantial
compliance with all applicable federal, state and local laws, statutes,
regulations, orders, codes, ordinances, guidelines, executive orders, contractor
requirements, judicial and administrative judgments and determinations to which
the Corporation is or was a party, and any other authority governing the
Corporation with respect to its employees and workplaces (hereinafter
collectively referred to as the "Applicable Employment Standards"), including,
but not limited to, employment, employment practices, fringe benefits, terms and
conditions of employment, termination of employment, severance or separation
pay, workers' compensation, disability, entitlements, unemployment insurance,
employment screening, wage-hour, employment discrimination on any basis, equal
employment opportunity, individual employee rights, affirmative action,
occupational health and safety, and immigration and right to work requirements.
Such compliance by the Corporation includes, but is not limited to, Title VII of
the Civil Rights Act of 1964, as amended, including the Civil Rights Act of
1991; the National Labor Relations Act of 1935, as amended; the Fair Labor
Standards Act of 1938, as amended; the Occupational Safety and Health Act of
1970, as amended; the Equal Pay Act of 1963, as amended; the Age Discrimination
in Employment Act of 1967, as amended; the Americans with
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Disabilities Act of 1990; the Family Medical Leave Act of 1993; the Immigration
Reform and Control Act of 1986 (together with the regulations promulgated
thereunder, hereinafter collectively referred to as "IRCA"); the Worker
Adjustment and Retraining Notification Act; the Employee Polygraph Protection
Act; the Drug-Free Workplace Act of 1988; the Health Insurance Portability and
Accountability Act of 1996; the Code; the regulations promulgated under each
such act; and any and all other federal, state and local laws, regulations and
requirements of any nature applicable to the Corporation. The Corporation
further represents that it is not in arrears in the payment of wages to any
employee (except to the extent of its normal payroll practices), and there are
no claims, liabilities, demands or causes of action, realized or unrealized,
actual, potential or contingent, pursuant to statutory rights or in tort,
contract or otherwise, against the Corporation arising out of or in connection
with any event, fact, circumstance or occasion relating to any applicant for
employment, the employment of any employee or the separation from employment of
any employee.
2.21. Licenses. The Corporation and its employees and agents have
all licenses, permits, orders, approvals and authorizations necessary for the
conduct of its business as presently conducted. The Corporation and its
employees and agents have all licenses, permits, orders, approvals and
authorizations necessary for the operation of the real and personal property
presently leased to, owned or operated by the Corporation. None of the permits
issued to the Corporation will be adversely affected by the consummation of the
transactions contemplated by this Agreement. No suspension or cancellation of
any such licenses, permits, orders, approvals or authorizations is pending or,
to the best of the Corporation's and/or the Shareholders' knowledge, threatened.
2.22. Criminal Practices. The Corporation is not engaged and has
not been engaged in any criminal practices, including, but not limited to,
payoffs, kickbacks or illegal gifts.
2.23. Contracts. Each of the contracts to which the Corporation
is a party (the "Contracts") (i) is valid and enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and subject,
as to enforceability, to general principles of equity; (ii) no Default (as
defined below) exists under any Contract either by the Corporation or by any
other party thereto; (iii) neither the Corporation nor the Shareholders is aware
of the assertion by any third party of any claim of Default or breach under any
of the Contracts; and (iv) neither the Corporation nor the
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Shareholders is aware of any present intention on the part of any significant
customer or supplier or other business partner of the Corporation to either (x)
terminate or significantly change its existing business relationship with the
Corporation either now or in the foreseeable future, or (y) fail to renew or
extend its existing business relationship with the Corporation at the end of the
term of any existing contractual arrangement such entity may have with the
Corporation. For purposes of this Agreement, the term "Default" means, with
respect to any Contract, (x) any material breach of, or material default under,
such Contract, (y) any event, other than the normal passage of time, which would
(either with or without notice or lapse of time or both) give rise to any right
of termination, cancellation or acceleration of, or any obligation to repay,
with respect to such Contract, or (z) any event, other than the normal passage
of time, which would result in either a significant increase in the obligations
or liabilities of, or a loss of any significant benefit of, the party in
question under such Contract.
Copies of all written contracts, and a description of all oral contracts,
to which the Corporation is a party, are attached hereto as Exhibit M.
2.24. Misrepresentation. Neither this Agreement (including the
Exhibits hereto) or any Related Agreement or any information supplied to the
Company by or on behalf of the Corporation and/or the Shareholders in connection
with this Agreement, the Related Agreements or the transactions contemplated
hereby or thereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statement contained herein or therein, in light of the circumstances under which
they were made, not misleading.
3. Additional Representations, Warranties and Covenants of the
Shareholders.
3.1. Non-Competition and Other Covenants of the Shareholders and
Certain Employees of the Corporation. Each of the Shareholders and the certain
employees of Atlantic noted on Exhibit A attached hereto shall have at the
Closing in Escrow entered into agreements, the form of which is attached to this
Agreement as Exhibit A.
3.2. Confidentiality. The Shareholders shall abide by the terms of
the Confidentiality Agreement between the Corporation and the Company (or the
Company's predecessor, Dispatch Management Services LLC) executed on July 18,
1997 as if such agreement had been entered into by the Corporation in place of
Atlantic. The Shareholders and the Corporation
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both acknowledge and agree that the Company shall have the right to disclose
certain information concerning the Corporation to third parties (which third
parties will in turn be bound by an agreement similar to the Confidentiality
Agreement), for such general corporate purposes as includes but is not limited
to obtaining financing and/or underwriting, and for general marketing purposes.
3.3. Assets Related to Cross Dock Business. In the event that prior
to the Closing Date the Corporation terminates its cross dock business, any
assets related to such business sold by the Corporation shall be sold for not
less than the fair market value of such assets and the proceeds of such sales
shall be retained by the Corporation.
3.4. Leases Related to the Cross Dock Business. In the event that
prior to the Closing Date, the Corporation terminates its cross dock business,
the Shareholders shall use their best efforts to cause the lessors of properties
leased by the Corporation for use in such business under leases listed in
Exhibit A-2 to consent in writing to such action as the Company agrees in
writing shall relieve the Corporation and its successors of all liability under
such leases after the Closing Date.
4. Representations and Warranties of the Company
The Company represents and warrants to the Shareholders as follows:
4.1. Organization, Standing and Power. The Company is duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. The Company is
duly qualified and in good standing to conduct business in each jurisdiction in
which the business it is conducting, or the operation, ownership or leasing of
its properties, makes such qualification necessary.
4.2. Authority and Enforceability. The Company has all requisite
power and authority to execute and deliver this Agreement and each of the
Related Agreements to which it is a party and to perform fully its obligations
hereunder and thereunder. The execution and delivery of this Agreement and each
of the Related Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary
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action on the part of the Company. This Agreement and each of the Related
Agreements to which it is a party have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the Company
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity).
4.3. No Violations Resulting From Transactions. The execution and
delivery by the Company of this Agreement and each of the Related Agreements to
which it is a party and the consummation of the transactions contemplated hereby
and thereby by the Company, will not (a) conflict with or violate any provision
of the Certificate of Incorporation or By-laws of the Company, (b) except as
set forth on Exhibit D, require any consent, waiver, approval, authorization or
permission of, or filing with or notification to, any third party, (c) result in
or constitute a default, or require any consent or approval of or notice to any
person or entity under or pursuant to any of the contracts to which the Company
is a party; or (d) violate any applicable laws.
4.4. Compliance with Laws.
(a) The Company is, and at all times since its inception has
been, in material compliance with all applicable laws; and
(b) The Company has not received, and does not know of the
issuance or threatened issuance by any governmental entity of, any notices of
violation or alleged violation of any applicable law. The Shareholders have
been provided with true and complete copies of (i) all injunctions, judgments,
orders or consent or similar decrees or agreements of any governmental entity to
which the Company is currently subject (or to which the Company was subject
since its inception), and (ii) all correspondence through the date hereof with
respect to any of the matters referred to in clause (b) or clause (i) of this
Section 4.4.
4.5. Litigation. There is no Legal Proceeding pending or, to the
knowledge of the Company, threatened that questions the validity of this
Agreement or the Related Agreements or any action taken or to be taken by the
Company in connection with the consummation of the transactions contemplated
hereby or thereby or which seeks to prohibit, enjoin or otherwise challenge any
of the
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transactions contemplated hereby or thereby. Exhibit E sets forth an accurate
and complete list, and a brief description (setting forth the names of the
parties involved, the court or other governmental or mediating entity involved,
the relief sought and the substantive allegations and the status thereof), of
each Legal Proceeding pending or, to the knowledge of the Company, threatened
against or affecting the Company. To the knowledge of the Company, no event has
occurred and no circumstance, matter or set of facts exist which would
constitute a valid basis for the assertion by any third party of any claim or
Legal Proceeding, other than those listed on Exhibit E. Except as set forth in
Exhibit E, there is no outstanding or, to the knowledge of the Company,
threatened, judgment, injunction, order or consent or similar decree or
agreement (including, without limitation, any consent or similar decree or
agreement with any governmental entity) against, affecting or naming the
Company.
4.6. Default. The Company is not in material default of any of its
obligations, contracts, or commitments in any respect, or in breach of any
negative or affirmative covenants placed on it by its creditors, and the Company
has not been notified of any such defaults or breaches.
4.7. Misrepresentation. Neither this Agreement (including the
Exhibits hereto) or any Related Agreement or any information supplied to the
Shareholders by or on behalf of the Company in connection with this Agreement,
the Related Agreements or the transactions contemplated hereby or thereby
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statement contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
5. Covenants Relating to Conduct of Business
During the period from the date of this Agreement and continuing until
the Closing Date, the Shareholders and the Corporation, jointly and severally,
covenant and agree that (except as expressly contemplated or permitted by this
Agreement, or to the extent that the Company shall otherwise consent in
writing):
5.1. Conduct of the Business Pending the Closing Date. The
Corporation shall:
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(a) except with respect to termination of its cross dock
business, conduct its business only in the ordinary course, consistent with
past practice;
(b) except with respect to termination of its cross dock
business, use its best efforts to (i) preserve the present business
operations, organization (including, without limitation, management and the
sales force) and goodwill of its business and (ii) preserve the present
relationship of the Corporation with Persons having business dealings with
the Corporation;
(c) comply with all laws and with all contractual and other
obligations applicable to it;
(d) not change its Articles of Incorporation or By-laws;
(e) not issue or contract to issue any stock, securities,
options, or debt which is convertible to stock or securities;
(f) not declare or agree to declare or otherwise make any
dividend or other distribution or payment in respect of the Stock;
(g) except with respect to termination of its cross dock
business, other than in the ordinary course of business consistent with past
practice, not sell, transfer, assign, pledge, encumber or otherwise dispose
of any of its assets;
(h) not acquire any material properties or assets and not
sell, assign, transfer, convey, lease or otherwise dispose of any of its
material properties, excluding, in the event that the Corporation terminates
its cross dock business, material properties related to such business;
(i) maintain its present fire and extended coverage insurance
or equivalent coverage on all of its assets and on all real and personal
property leased to it;
(j) promptly notify the Company of (i) the occurrence of any
matter which may have a material adverse effect on its business or its
assets, and (ii) any Legal Proceeding commenced by or against it or any Legal
Proceeding commenced or threatened relating to the transactions contemplated
by this Agreement;
(k) not agree to anything prohibited by this Agreement or
anything which would make any of the representations and warranties of the
Shareholders or the Corporation in this Agreement or the Related Agreements
untrue or incorrect in any material respect.
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6. Additional Agreements and Representations.
6.1. Access to Information. The Shareholders and the Corporation
agree that, prior to the Closing Date, the Company shall be entitled (at its
sole expense), through its officers, employees and representatives
(including, without limitation, its legal advisors and accountants), to make
such investigation of the properties, businesses and operations and financial
condition of the Corporation and examination of its books and records as the
Company may reasonably request, and to make extracts and copies of such books
and records. Any such investigation and examination shall be conducted
during regular business hours and under reasonable circumstances, and the
Shareholders and the Corporation shall cooperate fully therein. In order
that the Company may have full opportunity to make such physical, business,
accounting and legal review, examination or investigation as it may
reasonably request of the affairs of the Corporation, the Corporation and the
Shareholders shall use their respective best efforts to cause the
Corporation's officers, employees, consultants, agents, accountants,
attorneys and other representatives to cooperate fully with such Company
representatives in connection with such review and examination.
6.2. Non-solicitation Pending Closing. After execution of this
Agreement, and through the Closing Date, neither the Corporation nor the
Shareholders shall pursue, initiate, encourage or engage in any negotiations
or discussions with any third parties concerning the sale of the Corporation,
its assets, or any part thereof or concerning the terms and conditions of
this Agreement.
6.3. Additional Agreements. Each of the parties hereto agrees to
use their respective best efforts to (i) take, or cause to be taken, all
appropriate action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement and the
Related Agreements, (ii) obtain all licenses, permits, consents, approvals,
authorizations, qualifications and orders of governmental entities, third
parties and parties to contracts with the Corporation as are necessary for
consummation of the transactions contemplated by this Agreement and the
Related Agreements, and (iii) fulfill all conditions precedent applicable to
such party pursuant to this Agreement and the Related Agreements. In case at
any time after the Closing Date any further action
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is necessary or desirable to carry out the purposes of this Agreement or the
Related Agreements, each party hereto shall use their respective best efforts
to take or cause to be taken all such necessary action.
6.4. Notification of Certain Matters. The Corporation and the
Shareholders shall give prompt notice to the Company of (a) any notice of, or
other communication relating to, a default under any contract material to the
financial condition, properties, business operations, or results of
operations of the Corporation to which it is a party or is subject, (b) any
notice or other communication from any third party alleging that the consent
of such third party is or may be required in connection with the transactions
contemplated by this Agreement or any of the Related Agreements, or (c) any
material adverse change in the properties, business operations, results of
operations, financial condition or prospects of the Corporation, other than
changes resulting from general economic conditions. In addition, the
Corporation and the Shareholders shall be required to update the schedules
and other information supplied pursuant to this Agreement at such time as the
information contained therein changes in any material respect.
6.5 Working Capital as of the Closing Date. The Shareholders shall
ensure that the aggregate working capital (defined as the excess of current
(liquid) assets over current liabilities) of the Corporation, Atlantic and
Westchester as of the Closing Date is at least equal to Seven Hundred Fifty
Thousand Dollars ($750,000) (the "Prescribed Working Capital"). For purposes
of determining whether the aggregate working capital of the Corporation,
Atlantic and Westchester is at least equal to the Prescribed Working Capital
as of the Closing Date, the Company will cause to be prepared, promptly
following the Closing, balance sheets of the Corporation, Atlantic and
Westchester as of the Closing Date. Such balance sheets shall be prepared in
accordance with GAAP, and shall include full accrual of all assets and
liabilities as of the Closing Date (including, but not limited to, accrued
tax liabilities as if the tax year ended on the Closing Date). In the event
that the Corporation, Atlantic and Westchester have in the aggregate less
than the Prescribed Working Capital as of the Closing Date, as determined by
such balance sheets, the Shareholders shall forthwith pay the Company an
amount equal to the difference between the actual working capital as of the
Closing Date and the Prescribed Working Capital (the "Shortfall"). If the
Shareholders do not pay the Shortfall to the Company within five (5) days
after demand, then, in addition to all other
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remedies which the Company may have, the Company may deduct the amount of the
Shortfall from any of the obligations of the Company to the Shareholders
(including, but not limited to, the Earn-Out to which the Shareholders may be
entitled thereafter). To the extent that the Shareholders satisfy their
obligation with respect to the Shortfall under this Agreement, they shall
have no such obligation under the Atlantic and Westchester Acquisition
Agreements.
In the event that the Shareholders shall notify the Company in writing
within five days after demand is made by the Company for payment of the
Shortfall of their decision to dispute the amount of the Shortfall, the
Company shall forthwith instruct Price Waterhouse LLP to audit the balance
sheets of the Corporation, Atlantic and Pacific Westchester as of the Closing
Date, and to calculate the working capital therein in accordance with GAAP.
Price Waterhouse LLP shall then determine the amount of the Shortfall as set
out in this paragraph 6.5, whose decision shall be final and binding on the
parties hereto. The Shareholders shall forthwith pay to the Company the
amount of such Shortfall, together with fifty percent (50%) of the cost of
the audit conducted by Price Waterhouse LLP. In the event Price Waterhouse
LLP determines the Shortfall to have been zero, the entire cost of such audit
shall be borne by the Company.
7. Conditions Precedent.
7.1. Conditions to Obligations of All Parties. The respective
obligations of each party under this Agreement shall be subject to the
satisfaction prior to the Closing in Escrow Date and the Closing Date of the
following conditions:
(a) Governmental Approvals. All authorizations, consents,
orders or approvals of, or declarations or filings with, or expirations of
waiting periods imposed by, any governmental entity, requisite to the
transactions contemplated hereby, shall have been filed, occurred or have
been obtained, as the case may be.
(b) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the transactions contemplated by this Agreement shall be
in effect; provided that prior to invoking this condition, each party shall
use their best efforts to have any such order, injunction, legal restraint or
prohibition vacated.
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7.2. Conditions to Obligations of the Company. The obligations of
the Company to effect the transactions contemplated by this Agreement are
subject to the satisfaction of the following conditions (which are for the
exclusive benefit of the Company, any or all of which may be waived in whole
or in part by the Company):
(a) Representations and Warranties. The representations and
warranties of the Corporation and the Shareholders set forth in this
Agreement and the Atlantic and Westchester Acquisition Agreements (without
regard to any supplements or updates thereto) shall be true and correct in
all respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of a specified, earlier date) as of
the Closing in Escrow Date and the Closing Date as though made on and as of
the Closing in Escrow Date and the Closing Date, respectively, except as
otherwise contemplated by such agreements, and the Company shall have
received a certificate from the Shareholders and the Corporation (signed by
each of the Shareholders and a senior executive officer of the Corporation)
certifying to such effect.
(b) Performance of Obligations. The Corporation and the
Shareholders shall each have performed all obligations required to be
performed by each such party under this Agreement and under the Atlantic and
Westchester Acquisition Agreements at or prior to the Closing in Escrow Date
and the Closing Date, respectively, and the Company shall have received a
certificate from the Shareholders and the Corporation (signed by each of the
Shareholders and a senior executive officer of the Corporation) certifying to
such effect.
(c) No Material Adverse Change. Since the date of this
Agreement, there shall have been no change, occurrence or circumstance
resulting in, or which could reasonably likely result in, individually or in
the aggregate, a material adverse effect on the Corporation, its assets or
its business.
(d) Contractual Consents. The Corporation and/or the
Shareholders shall have given all notices to, and obtained all consents,
approvals or authorizations of or from, any individual, corporation or other
party which may be necessary to permit the consummation of the transactions
contemplated hereby (including, without limitation, any consents required
under the Contracts).
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(e) Related Agreements. Each of the Related Agreements to
which the Shareholders are a party shall have been duly executed and
delivered by such party. In addition, the Related Agreements shall have been
entered into by the respective parties thereto.
(f) No Long Term Debt. At the Closing Date, the Corporation
shall have no long term debt (excluding lease obligations).
7.3. Conditions to Obligations of the Corporation and the
Shareholders. The obligations of the Corporation and the Shareholders to
effect the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions (which are for the exclusive benefit
of the Corporation and the Shareholders, any or all of which may be waived in
whole or in part by the Corporation or the Shareholders).
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct in all respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of a specified, earlier
date) as of the Closing in Escrow Date and the Closing Date as though made on
and as of the Closing in Escrow Date and the Closing Date, respectively,
except as otherwise contemplated by this Agreement.
(b) Performance of Obligations. The Company shall have
performed all obligations required to be performed by it under this Agreement
and under the Atlantic and Westchester Acquisition Agreements at or prior to
the Closing in Escrow Date and the Closing Date, respectively.
(c) Related Agreements. Each of the Related Agreements shall
have been duly executed and delivered by the parties thereto.
8. Termination.
8.1 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual written consent of the Company and the
Shareholders;
(b) by either the Company or the Shareholders, if the closing
of the Initial Public Offering does not occur by March 31, 1998;
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(c) by the Company in the event that the Anti-Dilution Rights
(as defined in the Operating Agreement) are not preserved; or
(d) by the Company in the event that one or more of the
Shareholders do not timely deliver shareholder representation letters
satisfactory to the Company relating to this Agreement and the Atlantic and
Westchester Acquisition Agreements.
8.2. Effect of Termination Under Section 8.1. In the event of
termination of this Agreement or termination of either of the Atlantic and
Westchester Acquisition Agreements by either the Company or the Shareholders
as provided in Section 8.1 of this Agreement or Section 8.1 of either of the
Atlantic and Westchester Acquisition Agreements, this Agreement shall
forthwith become void and there shall be no liability or obligation on the
part of any party hereto or any of its respective Affiliates, officers,
directors or shareholders except (i) for the obligation of the Shareholders
to refund to the Company the audit expenses as set forth in Section 1.3 of
this Agreement; (ii) for any and all obligations under the confidentiality
provisions contained in Section 3.2 of this Agreement; and (iii) to the
extent that such termination results from the willful breach by a party
hereto of any of its representations or warranties, or of any of its
covenants or agreements, as set forth in this Agreement. A Shareholder's
election not to deliver a shareholder representation letter shall not be
deemed a willful breach of this Agreement by the Shareholders. In the event
that termination results from the willful breach by a party hereto of any of
its representations or warranties, or of any of its covenants or agreements,
as set forth in this Agreement, the breaching party shall be liable to the
non-breaching party for all direct damages (but not indirect or
consequential damages) incurred as a result of such willful breach.
9. Indemnification.
9.1. Indemnification.
(a) Indemnification by the Corporation and the Shareholders.
The Corporation and the Shareholders each hereby agree to jointly and
severally indemnify, defend and hold harmless the Company and its respective
officers, directors, employees and agents (collectively, the "Indemnitee")
from and against and in respect of any and all Losses (as defined below) to
the extent resulting from, arising out of, relating to, imposed upon or
incurred by the Indemnitee by
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reason of: (i) the conduct of business by the Corporation prior to the
Closing Date (but only to the extent that the amount of such Loss was not a
stated liability on the Corporation's most recently dated balance sheet
delivered to the Company); and (ii) any inaccuracy in or breach of any of the
Corporation's or the Shareholders' representations, warranties, covenants or
agreements contained in this Agreement, the Related Agreements or in any
other agreement or document entered into or delivered on or after the date
hereof in connection with this Agreement or any of the transactions
contemplated hereby and/or thereby. Provided, however, the indemnification
by the Corporation and the Shareholders under this Section 9.1.(a) shall
include direct damages only (and not indirect or consequential damages). For
purposes of this Agreement, the term "Losses" means any and all deficiencies,
judgments, settlements, demands, claims, actions or causes of action,
assessments, liabilities, losses, damages (whether direct, indirect or
consequential), interest, fines, penalties, costs and expenses (including,
without limitation, reasonable legal, accounting and other costs and expenses
incurred in connection with investigating, defending, settling or satisfying
any and all demands, claims actions, causes of action, suits, proceedings,
assessments, judgments or appeals, and in seeking indemnification therefor).
The term "Losses" shall also include any costs of preparing tax returns or
amended tax returns for the Corporation for periods prior to the Closing Date
and payment of taxes and interest and penalties thereon as a consequence of
errors and omissions in tax returns filed, or failure to file tax returns, by
the Corporation prior to the Closing Date; and, in the event that prior to
the Closing Date the Corporation terminates its cross dock business, shall
include any and all liability of the Corporation under the leases listed in
Exhibit A-2 after the Closing Date except to the extent of (i) any reduction
to the cash portion of the Purchase Price under Section 1.1 attributable to
such liability and (ii) any payments actually made by subtenants under such
leases.
(b) Indemnification by the Company. The Company hereby agrees
to indemnify, defend and hold harmless the Shareholders from and against and
in respect of any and all Losses resulting from, arising out of, relating to,
imposed upon or incurred by the Shareholders by reason of any inaccuracy in
or breach of any of the Company's representations, warranties, covenants or
agreements contained in this Agreement or in any other agreement or document
entered into or delivered by the Company on or after the date hereof in
connection with this Agreement or any of the transactions contemplated hereby
and/or thereby. Provided, however, the indemnification
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by the Company under this Section 9.1.(b) shall include direct damages only
(and not indirect or consequential damages) and shall be limited in the
aggregate to the Purchase Price.
9.2. Notice. If any claims in respect of Losses shall be asserted
against any party hereto or any of their respective successors in respect of
which such entity proposes to demand indemnification from any of the other
parties hereto under Section 9.1 hereof, the party seeking such
indemnification shall notify the other such parties in a reasonably prompt
manner; provided that failure to give such reasonably prompt notice shall not
release, waive or otherwise affect any party's obligations with respect
thereto except to the extent such party can demonstrate it was actually and
materially prejudiced as a result thereof.
10. General Provisions.
10.1. Survival of Representations, Warranties and Agreements.
The representations, warranties and agreements in this Agreement shall
survive the Closing.
10.2. Notices. Any notice or communication required or
permitted hereunder shall be in writing and either delivered personally or
telecopied or sent by overnight courier, or by certified or registered mail,
postage prepaid, and shall be deemed to be given, dated and received when so
delivered personally or by courier or telecopied, or, if mailed, five
business days after the date of mailing to the following address or telecopy
number, or to such other address or addresses as such Person may subsequently
designate by written notice given hereunder:
(a) if to Company, to:
Dispatch Management Services Corp.
12240 Indian Creek Court
Beltsville, Maryland 20705
Attention: Linda Jenkinson, Chief Executive Officer
(b) if to the Corporation or the Shareholders, to:
Thomas A. Bartley
2 Lakeview Drive
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Perrinville, NJ 08510
Perry Barbaruolo
5 Oak Hill Drive
Clarksburg, NJ 08510
Joseph G. Milizio
Capell & Vishnick
3000 Marcus Avenue
Lake Success, NY 11042
10.3. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be considered an original and all of
which shall be considered one and the same agreement and shall become
effective when two or more counterparts have been signed by each of the
parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
10.4. Entire Agreement; No Third Party Beneficiaries. This
Agreement (together with the Related Agreements and any other documents and
instruments referred to herein) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereto and is not
intended to confer upon any Person other than the parties hereto any rights
or remedies hereunder. Subject to applicable law, this Agreement may be
amended, modified or supplemented only by written agreement of all parties
hereto with respect to any of the terms contained herein, and each party
hereto agrees to be bound by any such amendment, modification or supplement.
10.5. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Maryland, without
giving effect to the principles of conflicts of law thereof.
10.6. Severability. If any term or other provision of this
Agreement is invalid, illegal or unenforceable, all other provisions of this
Agreement shall remain in full force and effect
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so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially averse to any party. In the
event that the enforceability of any non-competition or similar covenants
contained herein or in any Related Agreement is called into question as the
result of time, geographical or other applicable limitations specified in
such covenants, such time, geographical or other applicable limitations shall
be deemed modified to the minimum extent necessary to render the applicable
provisions of such covenants enforceable.
10.7. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
10.8. Specific Performance. The parties hereto acknowledge that
irreparable damage would result if any of the covenants of this Agreement
were not specifically enforced, and they therefore consent that the rights
and obligations of the parties under this Agreement may be enforced by a
decree of specific performance issued by a court of competent jurisdiction.
Such remedy shall, however, not be exclusive and shall be in addition to any
other remedies which any party may have under this Agreement or otherwise.
Without limiting the foregoing, the Corporation and the Shareholders
acknowledge that the failure to comply with any of the provisions of Sections
3.1, 3.2. and 6.2 hereof will result in irreparable harm for which there is
no adequate remedy at law and that the Company and/or the Corporation shall
be entitled, without the necessity of proving actual damages, to injunctive
relief in addition to damages and all other remedies which may otherwise be
available to the Company and/or the Corporation.
10.9. Fees and Expenses. All costs and expenses, including but
not limited to all fees and expenses of attorneys, lenders, financial
advisers and accountants, in connection with the negotiation, execution and
delivery of this Agreement, the Related Agreements and the consummation of
the transactions contemplated hereby and thereby, shall be paid by the party
incurring such costs and expenses.
10.10. Arbitration. Other than the Company's right to institute
legal action for a breach of the confidentiality, non-competition and
non-solicitation covenants set forth in Sections 3.1, 3.2 and 6.2
hereinabove, any issue, controversy, dispute or claim arising out of or
relating to this Agreement or its alleged breach that cannot be resolved by
mutual agreement shall be resolved
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<PAGE>
exclusively by arbitration by a single arbitrator in either the District of
Columbia or New York City, at the option of the Company, in accordance with
the commercial arbitration rules of the American Arbitration Association
("AAA") and judgment on the award rendered by the arbitrator may be entered
by any court having jurisdiction thereof. It is acknowledged by the
Corporation and the Shareholders that money damages are inadequate to
compensate the Company and/or the Corporation for a breach of the terms of
this Agreement, and that the Company and/or the Corporation shall be entitled
to specific performance of the terms of this Agreement. The arbitrator may
enter a default decision against any party who fails to participate in the
proceeding. The decision of the arbitrator shall be final, conclusive,
binding and non-appealable. The losing party shall pay all costs and
expenses of arbitration.
The arbitrator shall be selected by consent of the parties, if possible.
If the parties fail to reach agreement upon appointment of the arbitrator
within ten days after a demand for arbitration is made, the arbitrator shall
be selected from a list of proposed arbitrators submitted by AAA. The
selection process shall be that which is set forth in the AAA commercial
arbitration rules then prevailing, except that (1) the number of preemptory
strikes shall not be limited, and (2) if the parties fail to select the
arbitrator from three lists, AAA shall have the power to make an appointment.
If
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<PAGE>
an arbitrator should die, withdraw, or otherwise become incapable of serving,
a replacement shall be selected and appointed in a like manner.
10.11 Disclosure to Third Parties. The Company shall have the
right to disclose to third parties, in whatever manner the Company may
determine, the fact that this Agreement has been executed, the names of the
parties to this Agreement and the terms hereof.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by or
on behalf of each of the parties hereto as of the date first above written.
"COMPANY"
DISPATCH MANAGEMENT SERVICES CORP.
By: /s/Linda Jenkinson
------------------------------------
Name: Linda Jenkinson
Title: Chief Executive Officer
"CORPORATION"
Attest: PACIFIC FREIGHT SYSTEMS, INC.
By: /s/Thomas A. Bailey
- ------------------------ ------------------------------------
Name:
Title:
Witness: "SHAREHOLDERS"
/s/Thomas A. Bartley
- ------------------------ ----------------------------------------
Thomas A. Bartley
Witness:
/s/Perry Barbaruolo
- ------------------------ -----------------------------------------
Perry Barbaruolo
37
<PAGE>
Exhibit 2.59
AGREEMENT
This Agreement (the "Agreement") is entered into as of the 2nd day of
December, 1997, by and among Dispatch Management Services Corp., a Delaware
corporation and successor in interest to Dispatch Management Services LLC by
merger (the "Company"), Munther Hamoudi, an individual, (the "Business
Contribution Member"), and DMS Subsidiary Number ___, a Delaware corporation
(the "Specific Company Subsidiary"). Unless defined herein, all capitalized
terms used in this Agreement shall have the meaning given them in the Operating
Agreement of Dispatch Management Services LLC dated December 1, 1996 by and
between the Members of Dispatch Management Services LLC, as amended (the
"Operating Agreement").
W I T N E S S E T H
WHEREAS, the Business Contribution Member owns the business trading as "1
800 San Diego," which is in the business of providing time-critical, on demand,
point-to-point delivery services (such business, and any other lines of business
related thereto, the "Business");
WHEREAS, subject to the terms and conditions set forth herein, the Business
Contribution Member desires to sell to the Company all the Business Contribution
Member's right, title and interest in and to the Assets (as defined in Section
1.2(a) below) for the Purchase Price (as defined in Section 1.4 below);
WHEREAS, upon the delivery of the financial statements, schedules,
disclosure documents, and other information required by this Agreement, and
approval of the same by the Company, the parties hereto will close pursuant to
the terms and conditions set forth herein;
WHEREAS, upon satisfaction of the conditions set forth herein, the sale of
the Assets will be consummated;
WHEREAS, at Closing (as hereinafter defined) under this Agreement, the
Company will contribute to the Specific Company Subsidiary all of the Company's
right, title and interest in and to the Assets, in exchange for 100% of the
equity ownership in the Specific Company Subsidiary;
WHEREAS, the Specific Company Subsidiary intends to enter into an
employment agreement with James Stern in the form attached hereto as Exhibit A,
as well as a non-competition agreement
<PAGE>
in the form attached hereto as Exhibit B (such employment agreement and
non-competition agreement, together with all other agreements which are entered
into by the parties hereto pursuant to this Agreement or in connection with any
of the transactions contemplated hereby, the "Related Agreements");
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the representations,
warranties, covenants and agreements herein contained, and for the sum of $10.00
paid by the Company to the Business Contribution Member, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Overview
Upon execution of this Agreement, the Business Contribution Member
shall be obliged to deliver to the Company: (i) the unaudited financial
statements required pursuant to Section 1.4 below and (ii) the agreements
required pursuant to Section 3.1 below.
1.2 Definitions.
(a) Definition of Assets. For purposes of this Agreement, the
term "Assets" shall mean and include the following assets of the Business
Contribution Member:
(i) Those agreed upon assets (including radio channels) set
forth on Exhibit C attached hereto;
(ii) All rights to the trade name "1 800 San Diego", the
brand name, logos, and other Intellectual Property as defined in Section
2.11.(d) hereinbelow, customer lists, goodwill and other intangible assets; and
(iii) All rights, claims, and interests of the Business
Contribution Member, as of the Closing Date, under and with respect to agreed
upon contracts (the "Contracts"), as set forth on Exhibit D attached hereto.
To the extent that the assignment of the rights, claims and interests of
the Business Contribution Member under any of the Contracts requires the consent
of a third party (as set forth in Exhibit E hereto), and such third party's
consent to assignment is not secured prior to Closing hereunder, the parties
hereto shall use their best efforts to place the Specific Company Subsidiary in
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a position to receive the benefits of the Business Contribution Member's rights,
claims and interest in such Contracts during the term of such Contracts. The
parties' efforts to this end shall be made in a lawful and commercially
reasonable manner.
1.3. Closing Deliveries and Other Actions.
(a) Deliveries at Closing. In addition to the execution and
delivery of documents as and when otherwise required by the terms of this
Agreement, at the Closing the Business Contribution Member shall deliver (i) a
bill of sale, (ii) an instrument of assignment and assumption (the form and
substance of which shall be reasonably acceptable to the Company), (iii) any
other instruments of conveyance or transfer which may be necessary in the sole
discretion of the Company, including, without limitation, any instruments of
assignment in connection with the Intellectual Property and the Contracts, each
in form and substance reasonably acceptable to the Company, pursuant to which
the Business Contribution Member shall convey, assign, transfer and deliver to
the Company all right, title and interest in, to and under the Assets, free and
clear of any and all Encumbrances (as defined in Section 2.3(a) below), and (iv)
the opinion of his counsel as to such matters as counsel to the Company may
reasonably require, including but not limited to such counsel's opinion that:
the Business Contribution Member is authorized to conduct his business in each
jurisdiction in which he is doing business; the Business Contribution Member has
full power to enter into and perform his obligations under this Agreement, as
well the Related Agreements to which he is a party; this Agreement, and the
Related Agreements to which the Business Contribution Member is a party,
constitute legal, valid and binding obligations of the Business Contribution
Member, enforceable in accordance with their respective terms (except as
enforcement may be limited by bankruptcy, insolvency and other similar laws
affecting the enforcement of creditor's rights, and principles of equity); and
the Business Contribution Member is not threatened with or affected by any
actions, proceedings or investigations wherein an unfavorable decision, ruling
or finding could have a materially adverse effect on the financial condition or
operation of the Business and/or the Assets, or could prevent, enjoin or
otherwise affect the transactions contemplated by this Agreement. At the
Closing, the Company shall deliver the Purchase Price to the Business
Contribution Member (less the Maximum Earn-Out, which shall be payable to the
Business Contribution Member pursuant to the terms of Section 1.4 above).
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(b) Further Actions. The parties hereto shall enter into,
execute and deliver such other and further agreements, documents and
instruments, as any of them may reasonably request, for the purpose of
effectuating the transactions contemplated by this Agreement. Without limiting
the foregoing, the Business Contribution Member shall take whatever steps are
necessary (such as filings with the United States Patent and Trademark Office)
to transfer the Intellectual Property to the Specific Company Subsidiary.
(c) Time and Place of Closing. Unless this Agreement shall have
been terminated and the transactions herein contemplated shall have been
abandoned pursuant to Section 8.1., and subject to the satisfaction or waiver of
the conditions set forth in Section 7, the purchase and sale of the Assets,
pursuant to this Agreement (the "Closing") shall take place at the offices of
Silver, Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., Suite 700E,
Washington, D.C. 20005, contemporaneously with the closing of the Initial
Public Offering unless the Initial Public Offering does not occur by March 31,
1998, in which case this Agreement shall be rendered null and void, or unless
another date, time or place is agreed to in writing by the parties hereto (the
day on which the Closing takes place being the "Closing Date").
1.4. Purchase Price. The purchase price for the Assets (the
"Purchase Price"), shall be $45,000.00 subject to adjustment (if any) as a
result of a reduction in the Maximum Earn-Out (as defined in this Section 1.4
below).
The parties hereto agree to allocate the Purchase Price to the Assets
in accordance with the manner set forth on Schedule 1.4 attached hereto and in
accordance with the applicable provisions of Section 1060 of the Code (the
"Price Allocation"). Accordingly, each party to this Agreement shall adopt and
utilize such Price Allocation for purposes of all tax returns filed by them and
shall not voluntarily take any position inconsistent therewith in connection
with any examination of any tax return, any refund claim, any litigation
proceeding or otherwise. Each of the Company and the Business Contribution
Member shall file on a timely basis a Form 8594 in accordance with the
requirements of Section 1060 of the Code and the provisions of this Section 1.4.
In the event that the Price Allocation is disputed by an taxing authority, the
party receiving notice of the dispute shall promptly notify the other parties
hereto of such dispute and the parties hereto shall consult with each other
concerning resolution of the dispute.
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The Company shall pay $25,000.00 of the Purchase Price in cash at the
Closing and the remaining $20,000.00 (the "Maximum Earn-Out"), which is subject
to the terms of the next paragraph.
The Maximum Earn-Out shall be earned by the Business Contribution
Member if the two following items are satisfied: (i) the three drivers that are
currently employed by the Business are still employed by the Specific Company
Subsidiary on the date six months after the Closing, and (ii) the Specific
Company Subsidiary achieves revenue in the sixth full calendar month following
the Closing of at least $7,500.00. The Company shall pay the Business
Contribution Member $20,000 promptly following verification that both of the
foregoing items have been satisfied.
2. Representations, Warranties and Covenants of the Business Contribution
Member.
The Business Contribution Member hereby represents, warrants and
covenants to the Company as follows:
2.1. Power. The Business Contribution Member has all requisite power
and authority to own, lease and operate his properties (including, without
limitation, the Assets) and to carry on his business as now being conducted
(including, without limitation, the Business). The Business Contribution Member
is duly qualified to conduct business in each jurisdiction in which the business
he is conducting (including, without limitation, the Business), or the
operation, ownership or leasing of his properties (including, without
limitation, the Assets), makes such qualification necessary.
2.2. Authority and Enforceability.
(a) Matters Relating to the Business Contribution Member. The
Business Contribution Member has all requisite power and authority to execute
and deliver this Agreement and each of the Related Agreements to which he is a
party and to perform fully his obligations hereunder and thereunder. The
execution and delivery of this Agreement, the Related Agreements and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary action on the part of the Business Contribution
Member. This Agreement and each of the Related Agreements to which the Business
Contribution Member is a party has been duly executed and delivered by the
Business Contribution Member, and this Agreement and each of the Related
Agreements to which the Business Contribution Member is a party constitute the
legal, valid and
5
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binding obligations of the Business Contribution Member, enforceable against the
Business Contribution Member in accordance with their respective terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights and
remedies generally and subject, as to enforceability, to general principles of
equity (regardless of whether enforceability is considered in a proceeding at
law or in equity).
2.3. Title to Assets; Condition.
(a) The Business Contribution Member owns beneficially and of
record, and has good and marketable title to, the Assets, free and clear of any
Encumbrances. For purposes of this Agreement, the term "Encumbrances" shall
mean restrictions, conditions, covenants, liens, easements, charges,
encroachments or any other matter affecting fee simple title.
(b) Upon consummation of the transactions contemplated at the
Closing, the Company will acquire good and marketable title to the Assets, free
and clear of any Encumbrances. All tangible assets conveyed hereunder are in
good working condition and repair, except for reasonable wear and tear.
2.4. Sufficiency of Assets. The Assets include substantially all the
assets and properties used or employed by the Business Contribution Member in
the Business as presently conducted. Immediately after giving effect to the
transfer of the Assets at Closing by the Business Contribution Member, and the
consummation of the other transactions contemplated pursuant to this Agreement
to be effected at the Closing, the Company will (i) have all right, title, and
interest in and to, or will have a valid right to use, without liability to
third party(ies), the Assets; and (ii) have all assets, rights, employees,
subcontractors and other persons and items which are reasonably necessary to
carry on the business and operations of the Business after the Closing Date in
substantially the same manner as presently conducted by the Business
Contribution Member.
2.5. No Violations Resulting From Transactions. The execution and
delivery by the Business Contribution Member of this Agreement and each of the
Related Agreements to which they are, respectively, a party, and the
consummation of the transactions contemplated hereby and thereby by each of the
Business Contribution Member will not (a) except as set forth in Exhibit E,
require any consent, waiver, approval, authorization or permit of, or filing
with or notification to, any third party, (b) result in or constitute a default,
or require any consent or approval of or notice to any
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<PAGE>
person or entity, or result in the creation of an Encumbrance, under or pursuant
to (i) any of the Contracts, or (ii) any other material agreements to which the
Business Contribution Member is a party, or (c) violate any law applicable to
the Business Contribution Member or by which any of the Assets is bound.
2.6. Compliance with Laws.
(a) The Business Contribution Member is, and at all times during
the past three years has been, in material compliance with all laws applicable
to the Business Contribution Member or to the conduct of the business or
operations of the Business Contribution Member or the Business or the use of his
properties (including any leased properties) and assets (including, without
limitation, the Assets); and
(b) The Business Contribution Member has not received, and does
not know of the issuance or threatened issuance by any governmental entity, of
any notices of violation or alleged violation of any law applicable to the
Business Contribution Member or the Business. The Business Contribution Member
has provided the Company with true and complete copies of (i) all injunctions,
judgments, orders or consent or similar decrees or agreements of any
governmental entity to which the Business Contribution Member or the Business is
currently subject (or which the Business Contribution Member or the Business was
subject to during the previous three years) or which are otherwise applicable to
the Business Contribution Member or the Assets or to the conduct of the
Business, and (ii) all correspondence from the date hereof with respect to any
of the matters referred to in clause (b) or clause (i) of this Section 2.6. The
Business Contribution Member is not aware of any proposed legislation or law
which is reasonably expected to be enacted and which, if so enacted, could
reasonably be expected to have a material adverse effect on either the Business
or the Business Contribution Member.
2.7. Litigation. There is no action, suit, claim, investigation or
proceeding, whether at law or in equity (each, a "Legal Proceeding"), pending
or, to the knowledge of the Business Contribution Member, threatened that
questions the validity of this Agreement or the Related Agreements or any action
taken or to be taken by the Business Contribution Member in connection with the
consummation of the transactions contemplated hereby or thereby or which seeks
to prohibit, enjoin or otherwise challenge any of the transactions contemplated
hereby or thereby. Exhibit H sets
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forth an accurate and complete list, and a brief description (setting forth the
names of the parties involved, the court or other governmental or mediating
entity involved, the relief sought and the substantive allegations and the
status thereof), of each Legal Proceeding pending or, to the knowledge of the
Business Contribution Member, threatened against or affecting the Business
Contribution Member, the Business or any of the Assets. To the knowledge of the
Business Contribution Member, no event has occurred and no circumstance, matter
or set of facts exist which would constitute a valid basis for the assertion by
any third party of any claim or Legal Proceeding, other than those listed on
Exhibit H. Except as set forth in Exhibit H, there is no outstanding or, to the
knowledge of the Business Contribution Member, threatened judgment, injunction,
order or consent or similar decree or agreement (including, without limitation,
any consent or similar decree or agreement with any governmental entity)
against, affecting or naming the Business Contribution Member, the Business or
any of the Assets.
2.8. Financial Advisors.
(a) Except as set forth on Exhibit I attached hereto, no person
or entity has acted directly or indirectly as a broker, finder or financial
advisor for or to the Business Contribution Member in connection with the
negotiations relating to or the transactions contemplated by this Agreement or
the Related Agreements; and
(b) Except as set forth on Exhibit I attached hereto, no person
or entity is entitled to any fee or commission or like payment, or expense
reimbursement, in respect thereof based in any way on agreements, arrangements
or understandings made by or on behalf of the Business Contribution Member.
Such fees, commissions, like payments or expense reimbursements as are described
on Exhibit I attached hereto shall remain liabilities and expenses of the
Business Contribution Member exclusively.
2.9. Financial Statements; Receivables. Attached hereto as Exhibit J
are true, correct and complete copies of the most recent unaudited financial
statements for the Business have been prepared in accordance with U.S. generally
accepted accounting principles ("GAAP"), applied consistently with the past
practices of the Business, except where otherwise specifically noted therein,
and present and will present fairly in all material respects the financial
position, results of operations and changes in financial position or cash flows,
whichever is applicable, of the Business as at the dates
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and for the periods indicated (subject, in the case of the unaudited financial
statements, to normal year-end audit adjustments). Without limiting the
foregoing, no undisclosed liabilities or obligations of any nature (whether
known or unknown, or absolute, accrued, contingent or otherwise) shall exist as
at the Closing not reflected in the Business's most recently dated balance sheet
supplied to the Company. The Business Contribution Member has paid all federal,
state and local income, profits, franchises, sales, use, occupation, property,
excise and payroll taxes, and all license fees and other charges imposed upon
him, and has timely filed all tax returns and related documents required to be
filed with any governmental authority. There are no outstanding or proposed
statements of deficiency in tax payments to any federal, state, local or foreign
government with respect to the Business Contribution Member for any tax period.
As of the dates such Financial Statements were and will be prepared, all
accounts receivable reflected on the Financial Statements (i) have and will have
arisen from bona fide transactions in the ordinary course of the Business
Contribution Member's business, consistent with his past practices, and (ii) are
good and collectible at the aggregate recorded amounts thereof, net of any
applicable reserves for returns or doubtful accounts which are reflected in such
Financial Statements (such reserves, the "Reserves"); such Reserves are adequate
and reasonable and were established in accordance with GAAP.
2.10. Absence of Certain Developments.
(a) There has been no event, condition or state of facts of any
character that has had or is reasonably likely to have a material adverse effect
on the Assets or the Business.
(b) The Business Contribution Member has not entered into any
transaction or contract, or conducted his business, other than in the ordinary
course consistent with past practice.
2.11. Intellectual Property.
(a) List of Intellectual Property; Sufficiency. Exhibit K sets
forth a list of all Intellectual Property (as defined in Section 2.11.(d)
hereinbelow) which is owned by the Business Contribution Member, licensed by the
Business Contribution Member, licensed to the Business Contribution Member, or
otherwise used or able to be used in the Business (other than commonly-used
computer software which is generally available to the public and the use rights
to which were legally acquired by the Business Contribution Member either for
free or through established retail
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facilities) and indicates, with respect to each item of Intellectual Property
listed thereon, the owner thereof and, if applicable, the name of the licensor
and licensee thereof and the terms of such license or other contract relating
thereto. The Business Contribution Member owns or has the lawful right to use
all Intellectual Property as currently used or as necessary for the conduct of
the Business as now conducted. After Closing, the Specific Company Subsidiary
will have the right to use all of the Intellectual Property as currently used or
as necessary for the conduct of the Business as now conducted.
(b) Title; Validity; Pending Applications; Infringements, Etc.
(i) Except for Intellectual Property licensed to the
Business Contribution Member, the Business Contribution Member has full legal
and beneficial ownership (free and clear of any and all Encumbrances) of all of
the Intellectual Property , and the Business Contribution Member has not
received any notice or claim (whether written, oral or otherwise) challenging
the Business Contribution Member's ownership or rights in such Intellectual
Property or suggesting that any other entity has any claim of legal or
beneficial ownership with respect thereto; the Business Contribution Member has
all legal and other rights required to transfer the ownership of the
Intellectual Property to the Company at the Closing as contemplated hereby;
(ii) All of the Intellectual Property is legally valid and
enforceable without any qualification, limitation or restriction on his use, and
the Business Contribution Member has not received any notice or claim (whether
written oral or otherwise) challenging the validity or enforceability of any
such Intellectual Property;
(iii) Neither the use of any of the Intellectual
Property nor any other Intellectual Property used by the Business Contribution
Member will conflict with, infringe upon, violate or interfere with or
constitute an appropriation of any right, title or interest held by any other
person or entity, and there have been no claims made with respect thereto;
(iv) No other person or entity is infringing in any respect
on any part of the Intellectual Property. The Business Contribution Member has
not conducted his business (including, without limitation, the Business), and
has not used or enforced (or failed to use or enforce) any Intellectual
Property, in a manner that would result in the abandonment, cancellation or
unenforceability of any item of Intellectual Property, and the Business
Contribution Member has not
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taken or failed to take any action that would result in the forfeiture or
relinquishment of any Intellectual Property used in the conduct of his business
as now conducted (including, without limitation, the Business);
(v) Except as set forth in Exhibit K, the Business
Contribution Member has no liability or obligations to any third parties
incident to the Intellectual Property used or able to be used by the Business
Contribution Member in the conduct of his business (including, without
limitation, the Business) as heretofore conducted; and
(vi) The Business Contribution Member has timely met all of
his obligations to any third parties incident to the Intellectual Property used
or able to be used by the Business Contribution Member in the conduct of his
business (including, without limitation, the Business) as heretofore conducted,
and such obligations have been and will be correctly and adequately disclosed in
the Financial Statements.
(c) Protection and Maintenance of Intellectual Property.
(i) The Business Contribution Member has taken all
reasonable steps to (x) protect the Business Contribution Member's rights to the
Intellectual Property, and (y) to prevent the unauthorized use by any other
person or entity; and
(ii) The Business Contribution Member shall use all
reasonable efforts to maintain, or cause to be maintained, the Intellectual
Property in full force and effect through the Closing and, without limitation,
has renewed or has made, and will make within any applicable renewal period
ending on or prior to the Closing Date, application to renew all of the
Intellectual Property subject to expiration on or prior to the Closing Date.
The Business Contribution Member has not granted to any other Person or entity
any rights or permissions to use any of the Intellectual Property.
(d) Definition of Intellectual Property. For purposes of this
Agreement, the term "Intellectual Property" means any patent, copyright,
trademark, trade name, service mark, service name, brand mark, brand name, logo,
corporate name, Internet domain name or industrial design, any registrations
thereof and pending applications therefor (to the extent applicable), any other
intellectual property right (including, without limitation, any know-how, trade
secret, trade right, formula, conditional or proprietary report or information,
customer or membership list, any
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marketing data, and any computer program, software, database or data right), and
license or other contract (including without limitation license(s) to use
specific telephone numbers and/or radio channels/frequencies) relating to any of
the foregoing, and any goodwill associated with any business owning, holding or
using any of the foregoing.
2.12. Insurance. The Business Contribution Member currently
maintains, and as of the Closing Date will maintain, valid insurance policies,
which polices provide adequate coverage, within terms of scope and amount of
coverage, for the Assets and the operations conducted by the Business. From and
after Closing, the Specific Company Subsidiary will be solely responsible for
the insurance set forth in Exhibit L. In the event that such insurance policies
are unable to be assumed by the Specific Company Subsidiary directly from and
after Closing, the Business Contribution Member hereby agrees to keep such
insurance policy(ies) in full force and effect for 60 days after Closing, at the
Specific Company Subsidiary's expense, to allow the Specific Company Subsidiary
to arrange his own such insurance policy(ies). There are no pending material
claims against such insurance by the Business Contribution Member as to which
the applicable insurers have denied coverage. In addition, there exist no
material claims under such insurance that have not been properly filed by the
Business Contribution Member. During the past two years, the Business
Contribution Member has not been refused any insurance coverage by any insurer
from which the Business Contribution Member has sought coverage.
2.13. Contracts. Each of the Contracts (i) is valid and
enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity); (ii) no Default (as defined below) exists under
any Contract either by the Business Contribution Member or by any other party
thereto; (iii) the Business Contribution Member is not aware of the assertion by
any third party of any claim of Default or breach under any of the Contracts;
and (iv) the Business Contribution Member is not aware of any present intention
on the part of any significant customer or supplier or other business partner of
the Business Contribution Member to either (x) terminate or significantly change
its existing business
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relationship with the Business Contribution Member either now or in the
foreseeable future, or (y) fail to renew or extend its existing business
relationship with the Business Contribution Member at the end of the term of any
existing contractual arrangement such entity may have with the Business
Contribution Member. For purposes of this Agreement, the term "Default" means,
with respect to any Contract, (x) any breach of or default under such Contract,
(y) any event, other than the normal passage of time, which would (either with
or without notice or lapse of time or both) give rise to any right of
termination, cancellation or acceleration or any obligation to repay with
respect to such Contract, or (z) any event, other than the normal passage of
time, which would result in either a significant increase in the obligations or
liabilities of, or a loss of any significant benefit of, the party in question
under such Contract.
2.14. Misrepresentation. Neither this Agreement (including the
Exhibits hereto) or any Related Agreement or any information supplied to the
Company by or on behalf of the Business Contribution Member in connection with
this Agreement, the Related Agreements or the transactions contemplated hereby
or thereby contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statement
contained herein or therein, in light of the circumstances under which they were
made, not misleading. The Business Contribution Member knows of no facts which
are reasonably likely to cause a material adverse effect on the Assets or the
Business.
3. Additional Representations, Warranties and Covenants of the Business
Contribution Member.
3.1. Non-Competition and Other Covenants of the Business Contribution
Member, and Certain Employees of the Business Contribution
Member.
The Business Contribution Member, and certain employees of the
Business Contribution Member noted on Exhibit B attached hereto, shall have, at
the Closing entered into agreements, the form of which is attached to this
Agreement as Exhibit B.
3.2. Confidentiality. The Business Contribution Member shall abide by
the terms of the Confidentiality Agreement between the Business Contribution
Member and the Company (or the Company's predecessor, Dispatch Management
Services LLC) executed on ____________. The Business Contribution Member and
the Specific Company Subsidiary each acknowledge and agree that the Company
shall have the right to disclose certain information concerning the Specific
Company Subsidiary, the Assets and/or the Business to third parties (which third
parties will in turn
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be bound by an agreement similar to the Confidentiality Agreement), for such
general corporate purposes as includes but is not limited to obtaining financing
and/or underwriting, and for general marketing purposes.
4. Representations and Warranties of the Company
The Company represents and warrants to the Business Contribution
Member as follows:
4.1. Organization, Standing and Power. The Company is duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. The Company is
duly qualified and in good standing to conduct business in each jurisdiction in
which the business it is conducting, or the operation, ownership or leasing of
its properties, makes such qualification necessary.
4.2. Authority and Enforceability. The Company has all requisite
power and authority to execute and deliver this Agreement and each of the
Related Agreements to which it is a party and to perform fully its obligations
hereunder and thereunder. The execution and delivery of this Agreement and each
of the Related Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company. This Agreement and each of the
Related Agreements to which it is a party have been duly executed and delivered
by the Company, and constitute the legal, valid and binding obligations of the
Company enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity).
4.3. No Violations Resulting From Transactions. The execution and
delivery by the Company of this Agreement and each of the Related Agreements to
which it is a party and the consummation of the transactions contemplated hereby
and thereby by the Company, will not (a) conflict with or violate any provision
of the Certificate of Incorporation or By-laws of the Company, or (b) except as
set forth on Exhibit E, require any consent, waiver, approval, authorization or
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permission of, or filing with or notification to, any third party; (c) result
in or constitute a default, or require any consent or approval of or notice to
any person or entity under or pursuant to any of the contracts to which the
Company is a party; or (d) violate any applicable laws.
4.4. Compliance with Laws.
(a) The Company is, and at all times since its inception has
been, in material compliance with all applicable laws; and
(b) The Company has not received, and does not know of the
issuance or threatened issuance by any governmental entity of, any notices of
violation or alleged violation of any applicable law. The Business Contribution
Member has been provided with true and complete copies of (i) all injunctions,
judgments, orders or consent or similar decrees or agreements of any
governmental entity to which the Company is currently subject (or to which the
Company was subject since its inception), and (ii) all correspondence through
the date hereof with respect to any of the matters referred to in clause (b) or
clause (i) of this Section 4.4.
4.5. Litigation. There is no Legal Proceeding pending or, to the
knowledge of the Company, threatened that questions the validity of this
Agreement or the Related Agreements or any action taken or to be taken by the
Company in connection with the consummation of the transactions contemplated
hereby or thereby or which seeks to prohibit, enjoin or otherwise challenge any
of the transactions contemplated hereby or thereby. Exhibit H sets forth an
accurate and complete list, and a brief description (setting forth the names of
the parties involved, the court or other governmental or mediating entity
involved, the relief sought and the substantive allegations and the status
thereof), of each Legal Proceeding pending or, to the knowledge of the Company,
threatened against or affecting the Company. To the knowledge of the Company, no
event has occurred and no circumstance, matter or set of facts exist which would
constitute a valid basis for the assertion by any third party of any claim or
Legal Proceeding, other than those listed on Exhibit H. Except as set forth in
Exhibit H, there is no outstanding or, to the knowledge of the Company,
threatened, judgment, injunction, order or consent or similar decree or
agreement (including, without limitation, any consent or similar decree or
agreement with any governmental entity) against, affecting or naming the
Company.
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4.6. Default. The Company is not in material default of any of its
obligations, contracts, or commitments in any respect, or in breach of any
negative or affirmative covenants placed on it by its creditors, and the Company
has not been notified of any such defaults or breaches.
4.7. Misrepresentation. Neither this Agreement (including the
Exhibits hereto) or any Related Agreement or any information supplied to the
Business Contribution Member by or on behalf of the Company in connection with
this Agreement, the Related Agreements or the transactions contemplated hereby
or thereby contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statement
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
5. Covenants Relating to Conduct of Business
During the period from the date of this Agreement and continuing until
the Closing Date, the Business Contribution Member covenants and agrees that
(except as expressly contemplated or permitted by this Agreement, or to the
extent that the Company shall otherwise consent in writing):
5.1. Conduct of the Business Until the Closing Date. The Business
Contribution Member shall be obligated to:
(a) conduct the Business only in the ordinary course, consistent
with past practice;
(b) use his best efforts to (i) preserve the present business
operations, organization (including, without limitation, management and the
sales force) and goodwill of the Business and (ii) preserve the present
relationship of the Business Contribution Member with Persons having business
dealings with the Business Contribution Member;
(c) comply with all laws and with all contractual and other
obligations applicable to the Business Contribution Member;
(d) not subject any of the Assets to any Encumbrance;
(e) not acquire any material properties or assets and not sell,
assign, transfer, convey, lease or otherwise dispose of any of the material
properties of the Business (including but not limited to the Assets);
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(f) promptly notify the Company of (i) the occurrence of any
matter which may have a material adverse effect on the Business or the Assets,
and (ii) any Legal Proceeding commenced by or against the Business Contribution
Member or any Legal Proceeding commenced or threatened relating to the
transactions contemplated by this Agreement.
(g) not agree to do anything prohibited by this Agreement or
anything which would make any of the representations and warranties of the
Business Contribution Member in this Agreement or the Related Agreements untrue
or incorrect in any material respect.
6. Additional Agreements and Representations.
6.1. Access to Information. The Business Contribution Member agrees
that, prior to the Closing Date, the Company shall be entitled (at its sole
expense), through its officers, employees and representatives (including,
without limitation, its legal advisors and accountants), to make such
investigation of the properties, businesses and operations and financial
condition of the Business and the Business Contribution Member and examination
of his books and records as the Company may reasonably request, and to make
extracts and copies of such books and records. Any such investigation and
examination shall be conducted during regular business hours and under
reasonable circumstances, and the Business Contribution Member shall cooperate
fully therein. In order that the Company may have full opportunity to make such
physical, business, accounting and legal review, examination or investigation as
it may reasonably request of the affairs of the Business and the Business
Contribution Member, the Business Contribution Member shall use his best efforts
to cause the Business Contribution Member's officers, employees, consultants,
agents, accountants, attorneys and other representatives to cooperate fully with
such Company representatives in connection with such review and examination.
6.2. Non-solicitation Pending Closing. After execution of this
Agreement, and through the Closing Date, the Business Contribution Member shall
not pursue, initiate, encourage or engage in any negotiations or discussions
with any third parties concerning the sale of the Business, the Assets, or any
part thereof or concerning the terms and conditions of this Agreement.
6.3. Additional Agreements. Each of the parties hereto agrees to use
their respective best efforts to (i) take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to
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consummate and make effective the transactions contemplated by this Agreement
and the Related Agreements, (ii) obtain all licenses, permits, consents,
approvals, authorizations, qualifications and orders of governmental entities,
third parties and parties to Contracts with the Business Contribution Member as
are necessary for consummation of the transactions contemplated by this
Agreement and the Related Agreements, and (iii) fulfill all conditions precedent
applicable to such party pursuant to this Agreement and the Related Agreements.
In case at any time after the Closing Date any further action is necessary or
desirable to carry out the purposes of this Agreement or the Related Agreements,
each party hereto shall use their respective best efforts to take or cause to be
taken all such necessary action.
6.4. Notification of Certain Matters. The Business Contribution
Member shall give prompt notice to the Company of (a) any notice of, or other
communication relating to, a default under any contract material to the
financial condition, properties, business operations, or results of operations
of the Business and/or the Business Contribution Member to which he is a party
or is subject, (b) any notice or other communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement or any of the
Related Agreements, or (c) any material adverse change in the properties
(including but not limited to the Assets), business operations, results of
operations, financial condition or prospects of the Business, other than changes
resulting from general economic conditions. In addition, the Business
Contribution Member shall be required to update the schedules and other
information supplied pursuant to this Agreement at such time as the information
contained therein changes in any material respect.
7. Conditions Precedent.
7.1. Conditions to Obligations of All Parties. The respective
obligations of each party under this Agreement shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) Governmental Approvals. All authorizations, consents,
orders or approvals of, or declarations or filings with, or expirations of
waiting periods imposed by, any governmental entity, requisite to the
transactions contemplated hereby, shall have been filed, occurred or have been
obtained, as the case may be.
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(b) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect; provided that prior to invoking this condition, each party shall use
their best efforts to have any such order, injunction, legal restraint or
prohibition vacated.
7.2. Conditions to Obligations of the Company. The obligations of the
Company to effect the transactions contemplated by this Agreement are subject to
the satisfaction of the following conditions (which are for the exclusive
benefit of the Company, any or all of which may be waived in whole or in part by
the Company):
(a) Representations and Warranties. The representations and
warranties of the Business Contribution Member set forth in this Agreement (with
regard to any supplements or updates thereto) shall be true and correct in all
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of a specified, earlier date) as of the
Closing Date as though made on and as of the Closing Date, respectively, except
as otherwise contemplated by this Agreement, and the Company shall have received
a certificate from the Business Contribution Member certifying to such effect.
(b) Performance of Obligations. The Business Contribution
Member shall each have performed all obligations required to be performed by
each such party under this Agreement at or prior to the Closing Date and the
Company shall have received a certificate from the Business Contribution Member
certifying to such effect.
(c) No Material Adverse Change. Since the date of this
Agreement, there shall have been no change, occurrence or circumstance resulting
in, or which could reasonably likely result in, individually or in the
aggregate, a material adverse effect on the Assets or the Business.
(d) Contractual Consents. The Business Contribution Member
shall have given all notices to, and obtained all consents, approvals or
authorizations of or from, any individual, corporation or other party which may
be necessary to permit the consummation of the transactions contemplated hereby
(including, without limitation, any consents required under the Contracts, or
which may be required to permit the change of ownership of any of the Assets).
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(e) Related Agreements. Each of the Related Agreements to which
the Business Contribution Member is a party shall have been duly executed and
delivered by such party. In addition, the Related Agreements shall have been
entered into by the respective parties thereto.
(f) Termination of Franchise Agreement. The Business
Contribution Member must terminate his Franchise Agreement with 800 Couriers,
Inc.
7.3. Conditions to Obligations of the Business Contribution Member.
The obligation of the Business Contribution Member to effect the transactions
contemplated by this Agreement are subject to the satisfaction of the following
conditions (which are for the exclusive benefit of the Business Contribution
Member), any or all of which may be waived in whole or in part by the Business
Contribution Member.
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
in all respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of a specified, earlier date) as of the
Closing Date as though made on and as of the Closing Date except as otherwise
contemplated by this Agreement.
(b) Performance of Obligations. The Company shall have
performed all obligations required to be performed by it under this Agreement at
or prior to the Closing Date.
(c) Related Agreements. Each of the Related Agreements shall
have been duly executed and delivered by the parties thereto.
8. Termination.
8.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) by mutual written consent of the Company and the Business
Contribution Member;
(b) by either the Company or the Business Contribution Member,
if the closing of the Initial Public Offering does not occur by March 31, 1998;
(c) by the Company in the event that the Anti-Dilution Rights
(as defined in the Operating Agreement) are not preserved; or
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(d) by the Company in the event that the Business Contribution
Member does not timely deliver representation letters satisfactory to the
Company.
8.2. Effect of Termination Under Section 8.1. In the event of
termination of this Agreement by either the Company or the Business Contribution
Member as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of any party hereto or
any of its respective Affiliates, officers, directors or shareholders except (i)
for any and all obligations under the confidentiality provisions contained in
Section 3.2 of this Agreement; and (ii) to the extent that such termination
results from the willful breach by a party hereto of any of its representations
or warranties, or of any of its covenants or agreements, as set forth in this
Agreement. In the event that termination results from the willful breach by a
party hereto of any of its representations or warranties, or of any of its
covenants or agreements, as set forth in this Agreement, the breaching party
shall be liable to the non-breaching party for all direct damages (but not
indirect or consequential damages) incurred as a result of such willful breach.
9. Indemnification.
9.1. Indemnification.
(a) Indemnification by the Business Contribution Member. The
Business Contribution Member hereby agrees to indemnify, defend and hold
harmless the Company, the Specific Company Subsidiary, and their respective
officers, directors, employees and agents (collectively, the "Indemnitee") from
and against and in respect of any and all Losses (as defined below) to the
extent resulting from, arising out of, relating to, imposed upon or incurred by
the Indemnitee by reason of: (i) the conduct of the Business prior to the
Closing Date, (ii) any inaccuracy in or breach of any of the Business
Contribution Member's representations, warranties, covenants or agreements
contained in this Agreement, the Related Agreements or in any other agreement
or document entered into or delivered on or after the date hereof in connection
with this Agreement or any of the transactions contemplated hereby and thereby,
(ii) any liability or obligation of the Business Contribution Member, and (iii)
any non-compliance with any notice requirement, if any, which may be contained
in the Uniform Commercial Code as adopted by the State of New York relating to
bulk sales. Provided, however, the indemnification by the Business Contribution
Member under this Section 9.1.(a) shall include direct damages only (and not
indirect or consequential damages). For
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purposes of this Agreement, the term "Losses" means any and all deficiencies,
judgments, settlements, demands, claims, actions or causes of action,
assessments, liabilities, losses, damages (whether direct, indirect or
consequential), interest, fines, penalties, costs and expenses (including,
without limitation, reasonable legal, accounting and other costs and expenses
incurred in connection with investigating, defending, settling or satisfying any
and all demands, claims actions, causes of action, suits, proceedings,
assessments, judgments or appeals, and in seeking indemnification therefor).
(b) Indemnification by the Company. The Company hereby agrees
to indemnify, defend and hold harmless the Business Contribution Member from and
against and in respect of any and all Losses resulting from, arising out of,
relating to, imposed upon or incurred by the Business Contribution Member by
reason of any inaccuracy in or breach of any of the Company's representations,
warranties, covenants or agreements contained in this Agreement or in any other
agreement or document entered into or delivered by the Company on or after the
date hereof in connection with this Agreement or any of the transactions
contemplated hereby and/or thereby. Provided, however, the indemnification by
the Company under this Section 9.1.(b) shall include direct damages only (and
not indirect or consequential damages) and shall be limited in the aggregate to
the Purchase Price.
9.2. Notice. If any claims in respect of Losses shall be asserted
against any party hereto or any of their respective successors in respect of
which such entity proposes to demand indemnification from any of the other
parties hereto under Section 9.1 hereof, the party seeking such indemnification
shall notify the other such parties in a reasonably prompt manner; provided that
failure to give such reasonably prompt notice shall not release, waive or
otherwise affect any party's obligations with respect thereto except to the
extent such party can demonstrate it was actually and materially prejudiced as a
result thereof.
10. General Provisions.
10.1. Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements in this Agreement shall survive the
Closing.
10.2. Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally or telecopied or
sent by overnight courier, or by certified or registered mail, postage prepaid,
and shall be deemed to be given, dated and received when so
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delivered personally or by courier or telecopied, or, if mailed, five business
days after the date of mailing to the following address or telecopy number, or
to such other address or addresses as such Person may subsequently designate by
written notice given hereunder:
(a) if to Company, to:
Dispatch Management Services Corp.
12240 Indian Creek Court
Beltsville, Maryland 20705
Attention: Linda Jenkinson, Chief Executive Officer
(b) if to the Business Contribution Member, to:
Munther Hamoudi
3765 Hillview Way
Oceanside, California 92056
10.3. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be considered an original and all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
10.4. Entire Agreement; No Third Party Beneficiaries. This
Agreement (together with the Related Agreements and any other documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereto and is not intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder.
Subject to applicable law, this Agreement may be amended, modified or
supplemented only by written agreement of all parties hereto with respect to any
of the terms contained herein, and each party hereto agrees to be bound by any
such amendment, modification or supplement.
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10.5. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Maryland, without giving
effect to the principles of conflicts of law thereof.
10.6. Severability. If any term or other provision of this
Agreement is invalid, illegal or unenforceable, all other provisions of this
Agreement shall remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially averse to any party. In the event that the enforceability of any
non-competition or similar covenants contained herein or in any Related
Agreement is called into question as the result of time, geographical or other
applicable limitations specified in such covenants, such time, geographical or
other applicable limitations shall be deemed modified to the minimum extent
necessary to render the applicable provisions of such covenants enforceable.
10.7. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
10.8. Specific Performance. The parties hereto acknowledge that
irreparable damage would result if any of the covenants of this Agreement were
not specifically enforced, and they therefore consent that the rights and
obligations of the parties under this Agreement may be enforced by a decree of
specific performance issued by a court of competent jurisdiction. Such remedy
shall, however, not be exclusive and shall be in addition to any other remedies
which any party may have under this Agreement or otherwise. Without limiting
the foregoing, the Business Contribution Member acknowledge that the failure to
comply with any of the provisions of Sections 3.1, 3.2. and 6.3 hereof will
result in irreparable harm for which there is no adequate remedy at law and that
the Company and/or the Specific Company Subsidiary shall be entitled, without
the necessity of proving actual damages, to injunctive relief in addition to
damages and all other remedies which may otherwise be available to the Company
and/or the Specific Company Subsidiary.
10.9. Fees and Expenses. All costs and expenses, including but
not limited to all fees and expenses of attorneys, lenders, financial advisers
and accountants, in connection with the negotiation, execution and delivery of
this Agreement, the Related Agreements and the consummation
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of the transactions contemplated hereby and thereby, shall be paid by the party
incurring such costs and expenses.
10.10. Arbitration. Other than the Company's right to institute
legal action for a breach of the confidentiality, non-competition and
non-solicitation covenants set forth in Sections 3.1, 3.2 and 6.3 hereinabove,
any issue, controversy, dispute or claim arising out of or relating to this
Agreement or its alleged breach that cannot be resolved by mutual agreement
shall be resolved exclusively by arbitration by a single arbitrator in either
the District of Columbia or New York City, at the option of the Company, in
accordance with the commercial arbitration rules of the American Arbitration
Association ("AAA") and judgment on the award rendered by the arbitrator may be
entered by any court having jurisdiction thereof. It is acknowledged by the
Business Contribution Member that money damages are inadequate to compensate the
Company and/or the Specific Company Subsidiary for a breach of the terms of this
Agreement, and that the Company and/or the Specific Company Subsidiary shall be
entitled to specific performance of the terms of this Agreement. The arbitrator
may enter a default decision against any party who fails to participate in the
proceeding. The decision of the arbitrator shall be final, conclusive, binding
and non-appealable. The losing party shall pay all costs and expenses of
arbitration.
The arbitrator shall be selected by consent of the parties, if possible.
If the parties fail to reach agreement upon appointment of the arbitrator within
ten days after a demand for arbitration is made, the arbitrator shall be
selected from a list of proposed arbitrators submitted by AAA. The selection
process shall be that which is set forth in the AAA commercial arbitration rules
then prevailing, except that (1) the number of preemptory strikes shall not be
limited, and (2) if the parties fail to select the arbitrator from three lists,
AAA shall have the power to make an appointment. If an arbitrator should die,
withdraw, or otherwise become incapable of serving, a replacement shall be
selected and appointed in a like manner.
10.11 Disclosure to Third Parties. The Company shall have the
right to disclose to third parties, in whatever manner the Company may
determine, the fact that this Agreement has been executed, the names of the
parties to this Agreement and the terms hereof.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
or on behalf of each of the parties hereto as of the date first above written.
"COMPANY"
Attest: DISPATCH MANAGEMENT SERVICES CORP.
By: /s/ Linda Jenkinson
_________________________ ________________________________________
Name: Linda Jenkinson
Title: Chief Executive Officer
"BUSINESS CONTRIBUTION MEMBER"
Attest: MUNTHER HAMOUDI
By:/s/ Munther Hamoudi
_________________________ ________________________________________
"SPECIFIC COMPANY SUBSIDIARY"
Attest:
________________________________________
By: /s/ Linda Jenkinson
_________________________ ________________________________________
Name: Linda Jenkinson
Title: Chief Executive Officer
<PAGE>
Exhibit 2.6
AGREEMENT
This Agreement (the "Agreement") is entered into as of the 31st day of
October, 1997 by and among Dispatch Management Services Corp., a Delaware
corporation and successor in interest to Dispatch Management Services LLC by
merger (the "Company"), Atlantic Freight Systems, Inc., a New York corporation
(the "Corporation"), and Thomas A. Bartley and Perry Barbaruolo, the
shareholders of the Corporation (collectively, the "Shareholders"). Unless
defined herein, all capitalized terms used in this Agreement shall have the
meaning given them in the Operating Agreement of Dispatch Management Services
LLC dated December 1, 1996 by and between the Members of Dispatch Management
Services LLC, as amended (the "Operating Agreement").
W I T N E S S E T H
WHEREAS, the Shareholders own all of the issued and outstanding shares of
capital stock of the Corporation (the "Stock");
WHEREAS, subject to the conduct of the due diligence examination to begin
following the execution of this Agreement, and further subject to the terms and
conditions set forth herein, the Shareholders desire to sell all of their
respective right, title and interest in the Stock to the Company, and the
Company desires to purchase the Stock;
WHEREAS, upon the satisfactory completion of the due diligence examination,
the delivery of the financial statements, schedules, disclosure documents,
questionnaires and other information required by this Agreement, and approval of
the same by the Company, the parties hereto will close in escrow pursuant to the
terms and conditions set forth herein;
WHEREAS, upon satisfaction of the conditions set forth herein, the escrow
will be terminated, and the sale of the Stock will be consummated;
WHEREAS, the parties intend that, immediately following the execution of
this Agreement, the Company will enter into non-competition agreements with the
Shareholders and non-competition agreements with certain employees of the
Corporation in the form attached hereto as Exhibit A (such non-competition
agreements, together with all other agreements which are entered into by the
parties hereto pursuant to this Agreement or in connection with any of the
transactions contemplated hereby, the "Related Agreements"); and
<PAGE>
WHEREAS, simultaneously with the execution of this Agreement, the Company
and the Shareholders intend to enter into agreements (the "Pacific and
Westchester Acquisition Agreements") pursuant to which the Company will acquire
from the Shareholders all of the outstanding shares of capital stock of Pacific
Freight Systems, Inc. ("Pacific") and Westchester Freight Systems, Inc.
("Westchester"); and
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the representations,
warranties, covenants and agreements herein contained, and for the sum of $10.00
paid by the Company to the Shareholders, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Closing in Escrow
1.1. Overview. Upon execution of this Agreement, the Shareholders and
the Corporation shall be obliged to deliver to the Company, within thirty (30)
days after execution of this Agreement: (i) the audited and unaudited financial
statements required pursuant to Section 1.3 below and (ii) the agreements
required pursuant to Section 3.1 below.
After approval of the same by the Company, and prior to filing the
registration statement with the Securities and Exchange Commission relating to
the initial public offering of the common stock, par value $.01 per share, of
the Company (the "Initial Public Offering"), the Company will deliver to the
Shareholders a disclosure document, together with a notice (the "Notice")
specifying the date (which shall be at least five days after receipt of the
Notice) by which the Shareholders must execute and deliver satisfactory
shareholder representation letters in order to consummate the sale of the Stock
pursuant to the terms of this Agreement. The Shareholders shall (i) purchase
the assets of the Corporation (at then current book value) listed in Exhibit A-1
hereto and (ii) assume the liabilities of the Corporation listed on Exhibit A-1
immediately as of prior to the Closing Date. If, prior to the Closing Date, the
Shareholders do not pay cash to the Corporation for the aggregate book value of
such assets then the amount of the Purchase Price (as defined below) shall be
reduced by such aggregate book value. Prior to the Closing, the Shareholders
shall cause certain employees of the Corporation to be terminated from
employment by the Corporation. If,
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prior to the Closing Date (as defined in Section 1.4 below): (i) the
Shareholders do not purchase the (unwanted) assets specified by the Company in
Exhibit A-1, then such assets will be acquired by the Company without any
adjustment to the Purchase Price (as defined in Section 1.3 below); (ii) the
Shareholders do not assume the (unwanted) liabilities specified by the Company
in Exhibit A-1, then the Company will reduce the cash portion of the purchase
price by the dollar amount of any such liabilities (including early repayment
costs, if any) of the Corporation existing as at the Closing Date; and (iii)
the Corporation has not terminated the employment of the (unwanted) employees
specified by the Company in the Notice, then the Company will make a reasonable
estimate of the costs and expenses to be incurred in connection with such
terminations of employment, and the Company will reduce the cash portion of the
purchase price by the amount of such reasonable estimate.
Upon timely delivery from all of the Shareholders of shareholder
representation letters relating to this Agreement and the Pacific and
Westchester Acquisition Agreements satisfactory to the Company, the parties will
close in escrow (the "Closing in Escrow") pursuant to the terms and conditions
of this Agreement. Such Closing in Escrow shall take place at the offices of
Silver, Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., 7th Floor,
Washington, D.C. 20005 (or such other place as is mutually agreed upon by the
parties) within thirty (30) days (or such shorter period as is specified in the
Notice) after timely delivery of such satisfactory shareholder representation
letters from the Shareholders.
In the event that one or more of the Shareholders do not timely
deliver such satisfactory shareholder representation letters (as determined in
the sole discretion of the Company), this Agreement will be of no further force
or effect, except for any and all obligations under Sections 3.2
(confidentiality), 1.3 (reimbursement of audit expenses) and 8.2 (effect of
termination under Section 8.1), which obligations will survive termination of
this Agreement.
1.2 Closing in Escrow Deliveries and Other Actions.
(a) Shareholders' and Corporation's Deliveries at Closing in
Escrow. At the Closing in Escrow, the Shareholders shall deliver the following
to the law firm of Silver, Freedman & Taff, L.L.P., as escrow agent: (i)
certificates representing all of the Stock with duly executed stock powers
conveying the Stock represented thereby to the Company, free and clear of all
liens, security interests and claims, encumbrances or other rights of third
parties of any nature
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whatsoever, and granting unrestricted title to and possession of the Stock to
the Company; (ii) the Corporation's corporate minute book, including the Stock
Certificate Book and all of the original share certificates representing shares
of the Corporation's capital stock at one time issued (but no longer issued and
outstanding) to former Shareholders of the Corporation; (iii) all consents,
waivers, and authorizations necessary or appropriate for the consummation of the
transactions contemplated by this Agreement; (iv) agreements assigning to the
Corporation all of the Shareholders' and/or third parties' right, title and
interest in and to all Intellectual Property (as defined in Section 2.14(d)
hereinbelow) owned by the Shareholders and/or third parties and heretofore
licensed to or used by the Corporation; (v) Certificate of Good Standing for the
Corporation as issued by the Secretary of State of New York and a similar
certificate from the Secretary of State of New Jersey indicating that the
Corporation is qualified to do business in New Jersey; (vi) the certificates,
dated the Closing in Escrow Date, required pursuant to Sections 7.2(a) and
7.2(b) hereinbelow; and (vii) the opinion of counsel to the Shareholders and the
Corporation as to such matters as counsel to the Company and the Corporation may
reasonably require, including but not limited to such counsel's opinion that:
(A) the Corporation is in good standing; (B) the Corporation is authorized to
conduct its business in each jurisdiction in which it is doing business; (C) the
Shareholders and the Corporation have the full power to enter into and perform
their respective obligations under this Agreement; (D) this Agreement
constitutes the legal, valid and binding obligations of the Corporation and the
Shareholders, and the Related Agreements to which the Shareholders are a party,
constitute the legal, valid and binding obligations of the Shareholders, each
enforceable in accordance with their respective terms (except as enforcement may
be limited by bankruptcy, insolvency and other similar laws affecting the
enforcement of creditor's rights, and principles of equity); and (E) neither the
Corporation nor the Shareholders are threatened with or affected by any actions,
proceedings or investigations wherein an unfavorable decision, ruling or finding
could have a material adverse effect on the financial condition or operation of
the Corporation, or could prevent, enjoin or otherwise affect the transactions
contemplated by this Agreement or the Related Agreements.
(b) Further Actions. On or after the Closing in Escrow, the
parties hereto shall enter into, execute and deliver such other and further
agreements, documents and instruments,
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<PAGE>
as any of them may reasonably request, for the purpose of effectuating the
transactions contemplated by this Agreement.
(c) Consummation of Sale. Upon Closing in Escrow, subject to
the terms and conditions of this Agreement, the Company will be obligated to
purchase the Stock, and the Shareholders will be obliged to sell the Stock, at
the purchase price specified in Section 1.3 below, on the Closing Date specified
in Section 1.4 below.
1.3. Purchase Price. The purchase price for the Stock (the
"Purchase Price") shall be Four Million Dollars ($4,000,000), subject to
adjustment (if any) as provided in Section 1.1 above, and subject to further
adjustment (if any) as a result of a reduction in the Maximum Earn-Out (as
defined in this Section 1.3 below).
Unless the Company gives the Shareholders written notice to the
contrary, the Shareholders shall deliver to the Company, within thirty (30)
days after execution of this Agreement: (i) audited financial statements of the
Corporation, including balance sheets dated as of December 31, 1994, 1995 and
1996, and income statements and cash flow statements for each of the three
twelve month periods ended on such dates; (ii) unaudited financial statements of
the Corporation, including a balance sheet dated as of June 30, 1996, and an
income statement and cash flow statement for the twelve month period ended on
June 30, 1996: and (iii) unaudited, reviewed financial statements of the
Corporation, including a balance sheet dated as of June 30, 1997 and an income
statement and a cash flow statement for the six month period ended June 30,
1997. The intent of providing the audited financial statements referred to in
the foregoing sentence is to resolve any auditing issues prior to calculation of
the Purchase Price, so that the Purchase Price may be quickly and efficiently
calculated. In the event that the closing of the Initial Public Offering has
not occurred on or before November 12, 1997, but does occur on or before
December 12, 1997, then in that event, in lieu of the unaudited, reviewed
financial statements of the Corporation for the six month period ended June 30,
1997, the Shareholders shall deliver to the Company, within thirty days after
written request from the Company: (i) an updated set of audited financial
statements of the
5
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Corporation, including a balance sheet dated as of June 30, 1997, and income
statements and cash flow statements for the six month period ended June 30,
1997; (ii) unaudited financial statements for the Corporation, including a
balance sheet dated as of September 30, 1996, and an income statement and cash
flow statement for the twelve month period ended on September 30, 1996; and
(iii) unaudited, reviewed financial statements of the Corporation, including a
balance sheet dated as of September 30, 1997 and income statements and cash flow
statements for the three month period ended September 30, 1997. In the event
that the closing of the Initial Public Offering has not occurred on or before
December 12, 1997, then upon written request from the Company given on or before
March 1, 1998, the Shareholders shall deliver to the Company, within thirty days
after written request from the Company, such additional audited and/or
unaudited, reviewed financial statements of the Corporation as the Company may
reasonably request.
All of the financial statements referred to in this Section 1.3 shall
be prepared (or reviewed, as the case may be) by Price Waterhouse LLP. At the
request of the Company, such statements shall reflect the financial results of
the Corporation as if the Corporation, Pacific and Westchester were one
corporation. The cost of providing all of the financial statements required by
this Section 1.3, within the prescribed time limits, shall be the sole
responsibility of the Shareholders, provided that the Company will, upon the
request of the Shareholders, advance such costs on behalf of the Shareholders.
In the event that all of the Shareholders do not timely deliver satisfactory
shareholder representation letters and complete the Closing in Escrow, the
Shareholders shall immediately refund to the Company any such advanced costs; in
the event that all such shareholder representation letters are satisfactory and
are timely received, and the Closing in Escrow is completed, the Shareholders
shall be relieved of their obligation to refund to the Company any such
advanced costs.
The Company shall pay thirty percent (30%) of the Purchase Price in
cash (the "Maximum Earn-Out"), which is subject to reduction in accordance with
the terms of the next paragraph, and seventy percent (70%) of the Purchase
Price in (restricted) stock of the Company (the "Company Stock"), at the
Closing. The number of shares of Company Stock to be issued as partial payment
of the Purchase Price shall be equal to the aggregate dollar value of the stock
component of the Purchase Price divided by the Initial Public Offering price per
share as set forth on the cover
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page of the prospectus relating to the Initial Public Offering, provided that
no fractional shares shall be issued and the value of any fractional shares
shall be paid in cash at the per share value of the Common Stock in the Initial
Public Offering. The Shareholders acknowledge that the sale of the Company
Stock will be restricted for a period of time by virtue of a "lock-up" agreement
which may be imposed by the Company, and the Shareholders shall execute such a
"lock-up" agreement, as may be required by the Company, by which the sale of the
Company Stock is restricted (perhaps prohibited) for a period of two (2) years
from the date of the closing of the Initial Public Offering. The Purchase Price
payable to the Shareholders shall be allocated between them in accordance with
written direction to the Company signed by each of the Shareholders.
The Maximum Earn-Out shall be earned by the Shareholders ratably over
the 8 quarter annual periods beginning January 1, 1998 and ending December 31,
1999 provided that the Corporation achieves the targeted performance standards,
i.e., the Revenue Maintenance requirement (the "Revenue Requirement") and the
Brand Contribution Percentage Maintenance requirement (the "Margin Requirement")
set forth in Exhibit B attached hereto. In the event that the Corporation fails
to achieve either the Margin Requirement or the Revenue Requirement set forth in
Exhibit B during any calendar quarter, then for each calendar quarter in which
the Corporation fails to achieve such Margin Requirement or Revenue Requirement,
the cash portion of the Purchase Price shall be reduced by one-eighth (1/8) of
the Maximum Earn-Out. The Maximum Earn-Out, less any reductions as set forth in
this paragraph, is hereinafter referred to as the "Earn-Out". The Earn-Out
shall bear interest at the rate of 7% per annum commencing as of the Closing
Date (i.e., once the Earn-Out is determined, the Shareholders will be due such
amount plus interest at the rate of 7% per annum on such amount, accrued from
the Closing Date until the date of payment of the Earn-Out to the Shareholders).
The Earn-Out shall be paid to the Shareholders promptly following calculation of
the Corporation's performance for the quarter ending December 31, 1999. The
Company covenants and agrees to maintain sufficient cash, or availability of
cash (e.g., by way of a line of credit) in order to fund the Earn-Out.
It is understood by the parties that the Company intends to merge the
Corporation, Pacific and Westchester into a wholly owned subsidiary of the
Company. For purposes of determining whether the Corporation has achieved the
Revenue Requirement and the Margin Requirement prior
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to such merger, the Corporation's performance shall be determined as if the
Corporation, Pacific and Westchester were one corporation.
At the request of the Shareholders made to the Company in writing not later
than the Closing in Escrow, the Company shall (immediately after Closing) make a
loan to the Shareholders, collectively, in an amount equal to up to and
including 30% of the Purchase Price. Said loan by the Company to the
Shareholders (the "Shareholder Loan") shall bear interest at a rate of seven
percent (7%) per annum, and shall be secured by all of the Company Stock paid as
part of the Purchase Price at Closing. The collateral security agreement
evidencing the collateralization of the Shareholder Loan with the Company Stock
and the Earn-Out shall be on such terms as are reasonably acceptable to the
Company, which terms shall include, but shall not be limited to, the retention
of all of the Company Stock by the Company until full repayment of the
Shareholder Loan (including accrued interest). The Shareholders shall have the
right to prepay the Shareholder Loan (plus accrued interest) at any time without
penalty and shall have the right to direct the Company to offset the balance due
under the Shareholder Loan (plus accrued interest) against the Earn-Out as
earned each quarter. The Shareholder Loan shall mature as of the date that the
Earn-Out is payable. In the event that the Shareholder Loan (including accrued
interest) is not repaid in full upon maturity, the Company shall enjoy all
rights of a secured party under the Uniform Commercial Code then in effect in
the State of Maryland, provided that the Company's only recourse shall be first
against the remaining Earn-Out and then against the Company Stock it holds as
collateral, and there shall not be any recourse against the Shareholders
individually.
1.4. Time and Place of Closing. Unless this Agreement shall have been
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 8.1., and subject to the satisfaction or waiver of the
conditions set forth in Section 7, the purchase and sale of the Stock pursuant
to this Agreement (the "Closing") shall take place at the offices of Silver,
Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., Suite 700E, Washington,
D.C. 20005, contemporaneously with the closing of the Initial Public Offering
unless the Initial Public Offering does not occur by March 31, 1998, in which
case this Agreement shall be rendered null and void, or unless another date,
time or place is agreed to in writing by the parties hereto (the day on which
the Closing takes place being the "Closing Date").
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At the Closing: (i) Silver, Freedman and Taff, L.L.P. shall deliver
to the Company the certificates, minute book, documents, and other materials
theretofore held in escrow from the Closing in Escrow; (ii) the Shareholders
shall deliver to the Company updated consents, waivers and authorizations as
referred to in Section 1.2(a)(iii) above, updated Certificates of Good Standing
as referred to in Section 1.2(a)(v) above, updated certificates, dated the
Closing Date, required pursuant to Sections 7.2(a) and 7.2(b) below, and an
updated opinion of counsel as referred to in Section 1.2(a)(vii) above; and
(iii) the Company shall deliver the Purchase Price to the Shareholders (less the
Maximum Earn-Out, which shall be payable to the Shareholders pursuant to the
terms of Section 1.3 above, and with the Company Stock collateralized against
the Shareholder Loan being delivered to the Company as appropriate).
2. Representations, Warranties and Covenants of the Corporation and the
Shareholders.
The Corporation and the Shareholders hereby jointly and severally
represent, warrant and covenant to the Company as follows:
2.1. Organization, Standing and Power. The Corporation is a "C"
Corporation duly organized, validly existing and in good standing under the laws
of the State of New York, and has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. The Corporation is duly qualified and in good standing to conduct
business in each jurisdiction in which the business it is conducting, or the
operation, ownership or leasing of its properties, makes such qualification
necessary.
2.2. Authority and Enforceability. The Shareholders and the
Corporation have all requisite legal right, power and authority to enter into
this Agreement and each of the Related Agreements to which they are a party and
to agree to the transactions contemplated hereby and thereby and to perform all
of their respective obligations hereunder and thereunder. This Agreement
constitutes the legal, valid and binding obligations of the Shareholders and the
Corporation, and each of the Related Agreements to which the Shareholders are a
party constitute the legal, valid and binding obligations of the Shareholders,
each enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now
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or hereafter in effect relating to creditors' rights and remedies generally and
subject, as to enforceability, to general principles of equity.
2.3. Capital Structure, Due Authorization and Issuance. The capital
structure of the Corporation consists solely of 200 shares of no par value
capital stock of which 66.66 shares are and will be as of the Closing in Escrow
Date and the Closing Date issued and outstanding. All issued and outstanding
shares of the capital stock of the Corporation have been duly authorized and
validly issued, are fully paid and non-assessable, and were issued in compliance
with all federal and applicable state securities laws.
2.4 Title to Stock. The Shareholders owns all of the issued and
outstanding shares of the capital stock of the Corporation, free and clear of
any and all claims, liens, restrictions, pledges, charges, options, security
interests, encumbrances or other rights of third parties, including any imposed
by law. There are no other shares of capital stock or other equity or debt
securities of the Corporation, of any kind or class whatsoever, authorized,
issued or outstanding, or any warrants, options, subscription rights, or any
other rights, agreements, or commitments of any nature relating to the issuance
of, or granting of, rights to acquire any shares of capital stock or such
securities of the Corporation.
2.5 Title to and Condition of the Corporation's Assets. The
Corporation has good, insurable and marketable title to all of the assets set
forth in the Financial Statements (as defined in Section 2.11 hereinbelow),
except that this representation and covenant does not apply as of the Closing
Date to those assets purchased by the Shareholders pursuant to Section 1.1.
Except as disclosed on Exhibit C, none of the Corporation's assets is subject to
any restriction, mortgage, pledge, lien, security interest, lease, charge,
encumbrance, objection or joint ownership, other than liens for current real or
personal property taxes not yet due and payable. The Corporation's assets are
in good operating condition and repair, ordinary wear and tear excepted.
2.6. Sufficiency of Assets. The assets set forth in the Financial
Statements (as defined in Section 2.11 hereinbelow) include all the assets and
properties used or employed in the business presently conducted by the
Corporation. Immediately after the consummation of the transactions
contemplated by this Agreement to be effected at the Closing, the Corporation
will (i) have all right, title, and interest in and to, or will have a valid
right to use, without liability to third
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party(ies), such assets and properties; and (ii) have all assets, rights,
employees, subcontractors and other persons and items which are reasonably
necessary to carry on the business and operations of the Corporation after the
Closing Date in substantially the same manner as presently conducted by the
Corporation. Provided, that as of the Closing Date, this Section 2.6 does not
apply to those assets purchased by the Shareholders pursuant to Section 1.1
hereof.
2.7. No Violations Resulting From Transactions. The execution and
delivery of this Agreement by the Shareholders and the Corporation, and each of
the Related Agreements to which they are a party, and the consummation of the
transactions contemplated hereby and thereby by the Shareholders and the
Corporation will not (a) conflict with or violate any provision of the articles
or certificate of incorporation or by-laws of the Corporation, (b) except as set
forth in Exhibit D, require any consent, waiver, approval, authorization,
permission, or filing with or notification to, any third party, (c) result in or
constitute a default, or require any consent or approval of or notice to any
person or entity, or result in the creation of an encumbrance, under or pursuant
to (i) any of the contracts to which the Corporation is a party (including but
not limited to contracts of insurance and leases as applicable), or (ii) any
other material agreements to which any of the Shareholders is a party, or (d)
violate any law applicable to the Shareholders or the Corporation.
2.8. Compliance with Laws.
(a) The Corporation is, and at all times during the past three
years has been, in material compliance with all applicable laws; and
(b) The Corporation has not received, and does not know of the
issuance or threatened issuance by any governmental entity of, any notices of
violation or alleged violation of any applicable law. The Company has been
provided with true and complete copies of (i) all injunctions, judgments, orders
or consent or similar decrees or agreements of any governmental entity to which
the Corporation is currently subject (or which the Corporation was subject to
during the previous three years), and (ii) all correspondence through the date
hereof with respect to any of the matters referred to in clause (b) or clause
(i) of this Section 2.8. None of the Shareholders nor the Corporation is aware
of any proposed legislation or law which is reasonably expected to be enacted
and which, if so enacted, could reasonably be expected to have a material
adverse effect on the Corporation.
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2.9. Litigation. There is no action, suit, claim, investigation or
proceeding, whether at law or in equity (each, a "Legal Proceeding"), pending
or, to the knowledge of the Shareholders and/or the Corporation, threatened,
that questions the validity of this Agreement or the Related Agreements or any
action taken or to be taken by the Shareholders or the Corporation in connection
with the consummation of the transactions contemplated hereby or thereby or
which seeks to prohibit, enjoin or otherwise challenge any of the transactions
contemplated hereby or thereby. Exhibit E sets forth an accurate and complete
list, and a brief description (setting forth the names of the parties involved,
the court or other governmental or mediating entity involved, the relief sought
and the substantive allegations and the status thereof), of each Legal
Proceeding pending or, to the knowledge of the Corporation and/or the
Shareholders, threatened against or affecting the Corporation. To the knowledge
of the Corporation and/or the Shareholders, no event has occurred and no
circumstance, matter or set of facts exist which would constitute a valid basis
for the assertion by any third party of any claim or Legal Proceeding, other
than those listed on Exhibit E. Except as set forth in Exhibit E, there is no
outstanding or, to the knowledge of the Corporation and/or the Shareholders,
threatened, judgment, injunction, order or consent or similar decree or
agreement (including, without limitation, any consent or similar decree or
agreement with any governmental entity) against, affecting or naming the
Corporation.
2.10. Financial Advisors.
(a) Except as set forth on Exhibit F attached hereto, no person
or entity has acted directly or indirectly as a broker, finder or financial
advisor for or to the Shareholders and/or the Corporation in connection with the
negotiations relating to or the transactions contemplated by this Agreement or
the Related Agreements; and
(b) Except as set forth on Exhibit F attached hereto, no person
or entity is entitled to any fee or commission or like payment, or expense
reimbursement, in respect thereof based in any way on agreements, arrangements
or understandings made by or on behalf of the Corporation and/or the
Shareholders hereunder or thereunder. The Shareholders hereby agree that all
such fees, commissions or like payments, or expense reimbursement as shall
appear on Exhibit F attached hereto shall be for the sole joint and several
account of the Shareholders and shall be paid in full by them at the Closing in
Escrow.
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2.11. Financial Statements; Receivables. Attached hereto as
Exhibit G are true, correct and complete copies of the Corporation's most recent
unaudited financial statements which, together with the financial statements
(including the notes and exhibits thereto) to be delivered pursuant to Section
1.3 herein (the "Financial Statements") were and will be prepared in accordance
with the books and records of the Corporation, are and will be complete and
correct in all material respects, have and will have been prepared in accordance
with U.S. generally accepted accounting principles ("GAAP"), applied
consistently with the past practices of the Corporation, except where otherwise
specifically noted therein, and present and will present fairly in all material
respects the financial position, results of operations and changes in financial
position or cash flows, whichever is applicable, of the Corporation as at the
dates and for the periods indicated (subject, in the case of the unaudited
financial statements, to normal year-end audit adjustments). Without limiting
the foregoing, no undisclosed liabilities or obligations of any nature (whether
known or unknown, or absolute, accrued, contingent or otherwise) shall exist as
at Closing in Escrow or the Closing not reflected in the most recently dated
balance sheet supplied to the Company. The Corporation has paid all federal,
state and local income, profits, franchises, sales, use, occupation, property,
excise and payroll taxes, and all license fees and other charges imposed upon
it, and has timely filed all tax returns and related documents required to be
filed with any governmental authority. There are no outstanding or proposed
statements of deficiency in tax payments to any federal, state, local or foreign
government with respect to the Corporation for any tax period. As of the dates
such Financial Statements were and will be prepared, all accounts receivable
reflected on the Financial Statements (i) have and will have arisen from bona
fide transactions in the ordinary course of the Corporation's business,
consistent with its past practices and (ii) are good and collectible at the
aggregate recorded amounts thereof, net of any applicable reserves for returns
or doubtful accounts which are reflected in such Financial Statements (such
reserves, the "Reserves"); such Reserves are adequate and reasonable and were
established in accordance with GAAP.
2.12. Default. The Corporation is not in material default of any
of its obligations, contracts, or commitments in any respect, or in breach of
any negative or affirmative covenants placed on it by its creditors, and none of
the Corporation or the Shareholders have been notified of any such defaults or
breaches.
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2.13. Absence of Certain Developments.
(a) There has been no event, condition or state of facts of any
character that has had or is reasonably likely to have a material adverse effect
on the Corporation.
(b) The Corporation has not entered into any transaction or
contract, or conducted its business, other than in the ordinary course
consistent with past practice.
2.14. Intellectual Property.
(a) List of Intellectual Property; Sufficiency. Exhibit H sets
forth a list of all Intellectual Property (as defined in Section 2.14.(d)
hereinbelow) which is owned by the Shareholders and/or the Corporation, licensed
by the Shareholders and/or the Corporation, licensed to the Shareholders and/or
the Corporation, or otherwise used or able to be used in the business conducted
by the Corporation (other than commonly-used computer software which is
generally available to the public and the use rights to which were legally
acquired by the Corporation either for free or through established retail
facilities) and indicates, with respect to each item of Intellectual Property
listed thereon, the owner thereof and, if applicable, the name of the licensor
and licensee thereof and the terms of such license or other contract relating
thereto. Except as disclosed on Exhibit H, the Corporation owns or has the
lawful right to use all of the Intellectual Property as currently used or as
necessary for the conduct of its business as now conducted. After Closing, the
Corporation will have the right to use all of the Intellectual Property as
currently used or as necessary for the conduct of the Corporation's business as
now conducted.
(b) Title; Validity; Pending Applications; Infringements, Etc.
(i) Except for Intellectual Property licensed to the
Shareholders and/or the Corporation and except as disclosed on Exhibit H, the
Corporation has full legal and beneficial ownership (free and clear of any and
all encumbrances) of all of the Intellectual Property, and neither the
Corporation nor any of the Shareholders has received any notice or claim
(whether written, oral or otherwise) challenging the Corporation's ownership or
rights in such Intellectual Property or suggesting that any other entity has any
claim of legal or beneficial ownership with respect thereto. Neither the
Shareholders nor the Corporation are in default under any license agreements
pertaining to the Intellectual Property used in the Corporation's business and
licensed
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to the Shareholders and/or the Corporation; all such license agreements are
valid and in full force and effect, and shall continue in full force and effect
as to the Corporation after Closing.
(ii) All of the Intellectual Property is legally valid and
enforceable without any qualification, limitation or restriction on its use
except as disclosed in Exhibit H, and neither the Corporation nor any of the
Shareholders has received any notice or claim (whether written, oral or
otherwise) challenging the validity or enforceability of any such Intellectual
Property;
(iii) Neither the use of any of the Intellectual
Property nor any other Intellectual Property used by the Corporation will
conflict with, infringe upon, violate or interfere with, or constitute an
appropriation of, any right, title or interest held by any other person or
entity, and there have been no claims made with respect thereto;
(iv) No other person or entity is infringing in any respect
on any part of the Intellectual Property. The Corporation has not conducted its
business, and has not used or enforced (or failed to use or enforce) any
Intellectual Property, in a manner that would result in the abandonment,
cancellation or unenforceability of any item of Intellectual Property, and the
Corporation has not taken or failed to take any action that would result in the
forfeiture or relinquishment of any Intellectual Property used in the conduct of
its business as now conducted;
(v) Except as set forth in Exhibit H, the Corporation has
no liability or obligations to any third parties incident to the Intellectual
Property used or able to be used by the Corporation in the conduct of its
business as heretofore conducted; and
(vi) The Corporation has timely met all of its obligations
to any third parties incident to the Intellectual Property used or able to be
used by the Corporation in the conduct of its business as heretofore conducted,
and such obligations have been and will be correctly and adequately disclosed in
the Financial Statements.
(c) Protection and Maintenance of Intellectual Property.
(i) The Corporation has taken all reasonable steps to (x)
protect its rights to the Intellectual Property, and (y) to prevent the
unauthorized use by any other person or entity; and
(ii) The Corporation shall use all reasonable efforts to
maintain, or cause to be maintained, the Intellectual Property in full force and
effect through the Closing and,
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without limitation, has renewed or has made, and will make within any applicable
renewal period ending on or prior to the Closing Date, application to renew all
of the Intellectual Property subject to expiration on or prior to the Closing
Date. Neither the Corporation or any of the Shareholders has granted to any
other Person or entity any rights or permissions to use any of the Intellectual
Property.
(d) Definition of Intellectual Property. For purposes of this
Agreement, the term "Intellectual Property" means any patent, copyright,
trademark, trade name, service mark, service name, brand mark, brand name, logo,
corporate name, Internet domain name or industrial design, any registrations
thereof and pending applications therefor (to the extent applicable), any other
intellectual property right (including, without limitation, any know-how, trade
secret, trade right, formula, conditional or proprietary report or information,
customer or membership list, any marketing data, and any computer program,
software, database or data right), and license or other contract (including
without limitation license(s) to use specific telephone numbers and/or radio
channels/frequencies) relating to any of the foregoing, and any goodwill
associated with any business owning, holding or using any of the foregoing.
2.15. Insurance. The Corporation currently maintains, and as of
the Closing in Escrow and the Closing Date will maintain, valid insurance
policies, which polices provide adequate coverage, within terms of scope and
amount of coverage, for its assets, properties and operations. There are no
pending material insurance claims by the Corporation as to which the applicable
insurers have denied coverage. In addition, there exist no material claims
under such insurance that have not been properly filed by the Corporation.
During the past two years, the Corporation has not been refused any insurance
coverage by any insurer from which the Corporation has sought coverage.
2.16. Leases. Except as set forth on Exhibit I, the Corporation
is not a lessee or tenant of any real or personal property.
2.17. Labor Agreements. The Corporation is not a party to any
collective bargaining agreement. Except as set forth in Exhibit J, the
Corporation is not bound by any severance pay requirements or agreements, or any
other agreement, handbook, manual, or benefit book referring to, relating to, or
involving its employees.
2.18. Employee Benefit Plans. Except as set forth on Exhibit K
hereto, the Corporation does not maintain or contribute to, and it has no
liability or obligation with respect to
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any formal or informal stock option, profit sharing, pension, retirement, bonus,
stock bonus, thrift-savings, incentive, benefit, welfare, cafeteria, medical
insurance, dental insurance, life insurance, accidental death and dismemberment
insurance, disability insurance or other similar plan, policy or arrangement
(collectively referred to herein as the "Plans"). The Corporation is not in
default under the terms of any of the Plans. The Corporation has made all
contributions to each of the Plans required by the terms of the respective
Plans, as well as all contributions required to be made in order to satisfy all
requirements of law. Each of the Plans has sufficient assets to satisfy (under
reasonable and permitted actuarial assumptions) its obligations on a termination
basis, and the level of contributions required pursuant to the terms of each
Plan is sufficient to satisfy (under reasonable and permitted actuarial
assumptions) the obligations of such Plan on a continuing basis for benefits
accrued to date.
2.19. Compliance With ERISA. The Corporation's Plans are
currently in compliance in all respects with the Employee Retirement Income
Security Act of 1974 and the regulations promulgated thereunder (collectively,
"ERISA"). Except as set forth on Exhibit L hereto, no employee benefit plan and
no trust created thereunder has ever been terminated by the Corporation. No
liability to the Pension Benefit Guaranty Corporation ("PBGC") has been or is
expected to be incurred by the Corporation with respect to the Plans. Neither
the Corporation nor any of the Plans has ever experienced an accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the Internal
Revenue Code of 1986, as amended (the "Code")), whether or not waived, with
respect to any employee benefit plan and no such accumulated funding deficiency
currently exists. Except as set forth on Exhibit L hereto, the Corporation is
not required, and has not been required in the past, to make any payments or
contributions under the terms of any "multi-employer plan" (as defined in
Section 3(37) of ERISA and Section 414(f) of the Code) or by any collective
bargaining agreement with respect to any employee benefit plan. Neither the
Corporation nor any of the Plans has ever incurred any withdrawal liability
(including any contingent or secondary withdrawal liability) within the meaning
of Section 4201 and Section 4204 of ERISA with respect to any multi-employer
plan. The Corporation and the trustees or the administrators of the Plans have
provided continuation of coverage notices to employees and their dependents as
required by the Consolidated Omnibus Budget Reconciliation Act of 1986, as
amended ("COBRA"),
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and has complied with all such continuation of coverage requirements. The
execution and delivery of this Agreement will not involve a prohibited
transaction within the meaning of ERISA or Section 4975 of the Code.
2.20. Employee Relations. The Corporation is in substantial
compliance with all applicable federal, state and local laws, statutes,
regulations, orders, codes, ordinances, guidelines, executive orders, contractor
requirements, judicial and administrative judgments and determinations to which
the Corporation is or was a party, and any other authority governing the
Corporation with respect to its employees and workplaces (hereinafter
collectively referred to as the "Applicable Employment Standards"), including,
but not limited to, employment, employment practices, fringe benefits, terms and
conditions of employment, termination of employment, severance or separation
pay, workers' compensation, disability, entitlements, unemployment insurance,
employment screening, wage-hour, employment discrimination on any basis, equal
employment opportunity, individual employee rights, affirmative action,
occupational health and safety, and immigration and right to work requirements.
Such compliance by the Corporation includes, but is not limited to, Title VII of
the Civil Rights Act of 1964, as amended, including the Civil Rights Act of
1991; the National Labor Relations Act of 1935, as amended; the Fair Labor
Standards Act of 1938, as amended; the Occupational Safety and Health Act of
1970, as amended; the Equal Pay Act of 1963, as amended; the Age Discrimination
in Employment Act of 1967, as amended; the Americans with Disabilities Act of
1990; the Family Medical Leave Act of 1993; the Immigration Reform and Control
Act of 1986 (together with the regulations promulgated thereunder, hereinafter
collectively referred to as "IRCA"); the Worker Adjustment and Retraining
Notification Act; the Employee Polygraph Protection Act; the Drug-Free Workplace
Act of 1988; the Health Insurance Portability and Accountability Act of 1996;
the Code; the regulations promulgated under each such act; and any and all other
federal, state and local laws, regulations and requirements of any nature
applicable to the Corporation. The Corporation further represents that it is
not in arrears in the payment of wages to any employee (except to the extent of
its normal payroll practices), and there are no claims, liabilities, demands or
causes of action, realized or unrealized, actual, potential or contingent,
pursuant to statutory rights or in tort, contract or otherwise, against the
Corporation arising out of or in connection with any event, fact, circumstance
or occasion relating to any applicant for
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employment, the employment of any employee or the separation from employment of
any employee.
2.21. Licenses. The Corporation and its employees and agents have
all licenses, permits, orders, approvals and authorizations necessary for the
conduct of its business as presently conducted. The Corporation and its
employees and agents have all licenses, permits, orders, approvals and
authorizations necessary for the operation of the real and personal property
presently leased to, owned or operated by the Corporation. None of the permits
issued to the Corporation will be adversely affected by the consummation of the
transactions contemplated by this Agreement. No suspension or cancellation of
any such licenses, permits, orders, approvals or authorizations is pending or,
to the best of the Corporation's and/or the Shareholders' knowledge, threatened.
2.22. Criminal Practices. The Corporation is not engaged and has
not been engaged in any criminal practices, including, but not limited to,
payoffs, kickbacks or illegal gifts.
2.23. Contracts. Each of the contracts to which the Corporation
is a party (the "Contracts") (i) is valid and enforceable in accordance with
its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity;
(ii) no Default (as defined below) exists under any Contract either by the
Corporation or by any other party thereto; (iii) neither the Corporation nor
the Shareholders is aware of the assertion by any third party of any claim of
Default or breach under any of the Contracts; and (iv) neither the
Corporation nor the Shareholders is aware of any present intention on the
part of any significant customer or supplier or other business partner of the
Corporation to either (x) terminate or significantly change its existing
business relationship with the Corporation either now or in the foreseeable
future, or (y) fail to renew or extend its existing business relationship
with the Corporation at the end of the term of any existing contractual
arrangement such entity may have with the Corporation. For purposes of this
Agreement, the term "Default" means, with respect to any Contract, (x) any
material breach of, or material default under, such Contract, (y) any event,
other than the normal passage of time, which would (either with or without
notice or lapse of time or both) give rise to any right of termination,
cancellation or acceleration of, or any obligation to repay, with respect to
such Contract, or (z) any event, other than the normal passage of time, which
would result in either a significant increase in
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the obligations or liabilities of, or a loss of any significant benefit of, the
party in question under such Contract.
Copies of all written contracts, and a description of all oral contracts,
to which the Corporation is a party, are attached hereto as Exhibit M.
2.24. Misrepresentation. Neither this Agreement (including the
Exhibits hereto) or any Related Agreement or any information supplied to the
Company by or on behalf of the Corporation and/or the Shareholders in connection
with this Agreement, the Related Agreements or the transactions contemplated
hereby or thereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statement contained herein or therein, in light of the circumstances under which
they were made, not misleading.
3. Additional Representations, Warranties and Covenants of the
Shareholders.
3.1. Non-Competition and Other Covenants of the Shareholders and
Certain Employees of the Corporation. Each of the Shareholders and the certain
employees of the Corporation noted on Exhibit A attached hereto shall have at
the Closing in Escrow entered into agreements, the form of which is attached to
this Agreement as Exhibit A.
3.2. Confidentiality. The Shareholders shall abide by the terms of
the Confidentiality Agreement between the Corporation and the Company (or the
Company's predecessor, Dispatch Management Services LLC) executed on July 18,
1997. The Shareholders and the Corporation both acknowledge and agree that the
Company shall have the right to disclose certain information concerning the
Corporation to third parties (which third parties will in turn be bound by an
agreement similar to the Confidentiality Agreement), for such general corporate
purposes as includes but is not limited to obtaining financing and/or
underwriting, and for general marketing purposes.
4. Representations and Warranties of the Company
The Company represents and warrants to the Shareholders as follows:
4.1. Organization, Standing and Power. The Company is duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite power and
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authority to own, lease and operate its properties and to carry on its business
as now being conducted. The Company is duly qualified and in good standing to
conduct business in each jurisdiction in which the business it is conducting, or
the operation, ownership or leasing of its properties, makes such qualification
necessary.
4.2. Authority and Enforceability. The Company has all requisite
power and authority to execute and deliver this Agreement and each of the
Related Agreements to which it is a party and to perform fully its obligations
hereunder and thereunder. The execution and delivery of this Agreement and each
of the Related Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company. This Agreement and each of the
Related Agreements to which it is a party have been duly executed and delivered
by the Company, and constitute the legal, valid and binding obligations of the
Company enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity).
4.3. No Violations Resulting From Transactions. The execution and
delivery by the Company of this Agreement and each of the Related Agreements to
which it is a party and the consummation of the transactions contemplated hereby
and thereby by the Company, will not (a) conflict with or violate any provision
of the Certificate of Incorporation or By-laws of the Company, (b) except as
set forth on Exhibit D, require any consent, waiver, approval, authorization or
permission of, or filing with or notification to, any third party, (c) result in
or constitute a default, or require any consent or approval of or notice to any
person or entity under or pursuant to any of the contracts to which the Company
is a party; or (d) violate any applicable laws.
4.4. Compliance with Laws.
(a) The Company is, and at all times since its inception has
been, in material compliance with all applicable laws; and
(b) The Company has not received, and does not know of the
issuance or threatened issuance by any governmental entity of, any notices of
violation or alleged violation of
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any applicable law. The Shareholders have been provided with true and complete
copies of (i) all injunctions, judgments, orders or consent or similar decrees
or agreements of any governmental entity to which the Company is currently
subject (or to which the Company was subject since its inception), and (ii) all
correspondence through the date hereof with respect to any of the matters
referred to in clause (b) or clause (i) of this Section 4.4.
4.5. Litigation. There is no Legal Proceeding pending or, to the
knowledge of the Company, threatened that questions the validity of this
Agreement or the Related Agreements or any action taken or to be taken by the
Company in connection with the consummation of the transactions contemplated
hereby or thereby or which seeks to prohibit, enjoin or otherwise challenge any
of the transactions contemplated hereby or thereby. Exhibit E sets forth an
accurate and complete list, and a brief description (setting forth the names of
the parties involved, the court or other governmental or mediating entity
involved, the relief sought and the substantive allegations and the status
thereof), of each Legal Proceeding pending or, to the knowledge of the Company,
threatened against or affecting the Company. To the knowledge of the Company, no
event has occurred and no circumstance, matter or set of facts exist which would
constitute a valid basis for the assertion by any third party of any claim or
Legal Proceeding, other than those listed on Exhibit E. Except as set forth in
Exhibit E, there is no outstanding or, to the knowledge of the Company,
threatened, judgment, injunction, order or consent or similar decree or
agreement (including, without limitation, any consent or similar decree or
agreement with any governmental entity) against, affecting or naming the
Company.
4.6. Default. The Company is not in material default of any of its
obligations, contracts, or commitments in any respect, or in breach of any
negative or affirmative covenants placed on it by its creditors, and the Company
has not been notified of any such defaults or breaches.
4.7. Misrepresentation. Neither this Agreement (including the
Exhibits hereto) or any Related Agreement or any information supplied to the
Shareholders by or on behalf of the Company in connection with this Agreement,
the Related Agreements or the transactions contemplated hereby or thereby
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statement contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
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5. Covenants Relating to Conduct of Business
During the period from the date of this Agreement and continuing until
the Closing Date, the Shareholders and the Corporation, jointly and severally,
covenant and agree that (except as expressly contemplated or permitted by this
Agreement, or to the extent that the Company shall otherwise consent in
writing):
5.1. Conduct of the Business Pending the Closing Date. The
Corporation shall:
(a) conduct its business only in the ordinary course, consistent
with past practice;
(b) use its best efforts to (i) preserve the present business
operations, organization (including, without limitation, management and the
sales force) and goodwill of its business and (ii) preserve the present
relationship of the Corporation with Persons having business dealings with the
Corporation;
(c) comply with all laws and with all contractual and other
obligations applicable to it;
(d) not change its Articles of Incorporation or By-laws;
(e) not issue or contract to issue any stock, securities,
options, or debt which is convertible to stock or securities;
(f) not declare or agree to declare or otherwise make any
dividend or other distribution or payment in respect of the Stock;
(g) not sell, transfer, assign, pledge, encumber or otherwise
dispose of any of its assets, except in the ordinary course of business
consistent with past practice;
(h) not acquire any material properties or assets and not sell,
assign, transfer, convey, lease or otherwise dispose of any of its material
properties;
(i) maintain its present fire and extended coverage insurance or
equivalent coverage on all of its assets and on all real and personal property
leased to it;
(j) promptly notify the Company of (i) the occurrence of any
matter which may have a material adverse effect on its business or its assets,
and (ii) any Legal Proceeding commenced by or against it or any Legal Proceeding
commenced or threatened relating to the transactions contemplated by this
Agreement;
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(k) not agree to anything prohibited by this Agreement or
anything which would make any of the representations and warranties of the
Shareholders or the Corporation in this Agreement or the Related Agreements
untrue or incorrect in any material respect.
6. Additional Agreements and Representations.
6.1. Access to Information. The Shareholders and the Corporation
agree that, prior to the Closing Date, the Company shall be entitled (at its
sole expense), through its officers, employees and representatives (including,
without limitation, its legal advisors and accountants), to make such
investigation of the properties, businesses and operations and financial
condition of the Corporation and examination of its books and records as the
Company may reasonably request, and to make extracts and copies of such books
and records. Any such investigation and examination shall be conducted during
regular business hours and under reasonable circumstances, and the Shareholders
and the Corporation shall cooperate fully therein. In order that the Company
may have full opportunity to make such physical, business, accounting and legal
review, examination or investigation as it may reasonably request of the affairs
of the Corporation, the Corporation and the Shareholders shall use their
respective best efforts to cause the Corporation's officers, employees,
consultants, agents, accountants, attorneys and other representatives to
cooperate fully with such Company representatives in connection with such review
and examination.
6.2. Non-solicitation Pending Closing. After execution of this
Agreement, and through the Closing Date, neither the Corporation nor the
Shareholders shall pursue, initiate, encourage or engage in any negotiations or
discussions with any third parties concerning the sale of the Corporation, its
assets, or any part thereof or concerning the terms and conditions of this
Agreement.
6.3. Additional Agreements. Each of the parties hereto agrees to use
their respective best efforts to (i) take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement and the Related Agreements, (ii)
obtain all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental entities, third parties and parties to
contracts with the Corporation as are
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necessary for consummation of the transactions contemplated by this Agreement
and the Related Agreements, and (iii) fulfill all conditions precedent
applicable to such party pursuant to this Agreement and the Related Agreements.
In case at any time after the Closing Date any further action is necessary or
desirable to carry out the purposes of this Agreement or the Related Agreements,
each party hereto shall use their respective best efforts to take or cause to be
taken all such necessary action.
6.4. Notification of Certain Matters. The Corporation and the
Shareholders shall give prompt notice to the Company of (a) any notice of, or
other communication relating to, a default under any contract material to the
financial condition, properties, business operations, or results of operations
of the Corporation to which it is a party or is subject, (b) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement or any of the Related Agreements, or (c) any material adverse change
in the properties, business operations, results of operations, financial
condition or prospects of the Corporation, other than changes resulting from
general economic conditions. In addition, the Corporation and the Shareholders
shall be required to update the schedules and other information supplied
pursuant to this Agreement at such time as the information contained therein
changes in any material respect.
6.5 Working Capital as of the Closing Date. The Shareholders shall
ensure that the aggregate working capital (defined as the excess of current
(liquid) assets over current liabilities) of the Corporation, Pacific and
Westchester as of the Closing Date is at least equal to Seven Hundred Fifty
Thousand Dollars ($750,000) (the "Prescribed Working Capital"). For purposes of
determining whether the aggregate working capital of the Corporation, Pacific
and Westchester is at least equal to the Prescribed Working Capital as of the
Closing Date, the Company will cause to be prepared, promptly following the
Closing, balance sheets of the Corporation, Pacific and Westchester as of the
Closing Date. Such balance sheets shall be prepared in accordance with GAAP,
and shall include full accrual of all assets and liabilities as of the Closing
Date (including, but not limited to, accrued tax liabilities as if the tax year
ended on the Closing Date). In the event that the Corporation, Pacific and
Westchester have in the aggregate less than the Prescribed Working Capital as of
the Closing Date, as determined by such balance sheets, the Shareholders shall
forthwith pay the Company an
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amount equal to the difference between the actual working capital as of the
Closing Date and the Prescribed Working Capital (the "Shortfall"). If the
Shareholders do not pay the Shortfall to the Company within five (5) days after
demand, then, in addition to all other remedies which the Company may have, the
Company may deduct the amount of the Shortfall from any of the obligations of
the Company to the Shareholders (including, but not limited to, the Earn-Out to
which the Shareholders may be entitled thereafter). To the extent that the
Shareholders satisfy their obligation with respect to the Shortfall under this
Agreement, they shall have no such obligation under the Pacific and Westchester
Acquisition Agreements.
In the event that the Shareholders shall notify the Company in writing
within five days after demand is made by the Company for payment of the
Shortfall of their decision to dispute the amount of the Shortfall, the
Company shall forthwith instruct Price Waterhouse LLP to audit the balance
sheets of the Corporation, Pacific and Westchester as of the Closing Date,
and to calculate the working capital therein in accordance with GAAP. Price
Waterhouse LLP shall then determine the amount of the Shortfall as set out in
this paragraph 6.5, whose decision shall be final and binding on the parties
hereto. The Shareholders shall forthwith pay to the Company the amount of
such Shortfall, together with fifty percent (50%) of the cost of the audit
conducted by Price Waterhouse LLP. In the event Price Waterhouse LLP
determines the Shortfall to have been zero, the entire cost of such audit
shall be borne by the Company.
7. Conditions Precedent.
7.1. Conditions to Obligations of All Parties. The respective
obligations of each party under this Agreement shall be subject to the
satisfaction prior to the Closing in Escrow Date and the Closing Date of the
following conditions:
(a) Governmental Approvals. All authorizations, consents,
orders or approvals of, or declarations or filings with, or expirations of
waiting periods imposed by, any governmental entity, requisite to the
transactions contemplated hereby, shall have been filed, occurred or have been
obtained, as the case may be.
(b) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or
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other legal restraint or prohibition preventing the consummation of the
transactions contemplated by this Agreement shall be in effect; provided that
prior to invoking this condition, each party shall use their best efforts to
have any such order, injunction, legal restraint or prohibition vacated.
7.2. Conditions to Obligations of the Company. The obligations of the
Company to effect the transactions contemplated by this Agreement are subject to
the satisfaction of the following conditions (which are for the exclusive
benefit of the Company, any or all of which may be waived in whole or in part by
the Company):
(a) Representations and Warranties. The representations and
warranties of the Corporation and the Shareholders set forth in this Agreement
and the Pacific and Westchester Acquisition Agreements (without regard to any
supplements or updates thereto) shall be true and correct in all respects as of
the date of this Agreement and (except to the extent such representations and
warranties speak as of a specified, earlier date) as of the Closing in Escrow
Date and the Closing Date as though made on and as of the Closing in Escrow Date
and the Closing Date, respectively, except as otherwise contemplated by such
agreements, and the Company shall have received a certificate from the
Shareholders and the Corporation (signed by each of the Shareholders and a
senior executive officer of the Corporation) certifying to such effect.
(b) Performance of Obligations. The Corporation and the
Shareholders shall each have performed all obligations required to be performed
by each such party under this Agreement and under the Pacific and Westchester
Acquisition Agreements at or prior to the Closing in Escrow Date and the Closing
Date, respectively, and the Company shall have received a certificate from the
Shareholders and the Corporation (signed by each of the Shareholders and a
senior executive officer of the Corporation) certifying to such effect.
(c) No Material Adverse Change. Since the date of this
Agreement, there shall have been no change, occurrence or circumstance resulting
in, or which could reasonably likely result in, individually or in the
aggregate, a material adverse effect on the Corporation, its assets or its
business.
(d) Contractual Consents. The Corporation and/or the
Shareholders shall have given all notices to, and obtained all consents,
approvals or authorizations of or from, any individual, corporation or other
party which may be necessary to permit the consummation of the transactions
contemplated hereby (including, without limitation, any consents required under
the Contracts).
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(e) Related Agreements. Each of the Related Agreements to which
the Shareholders are a party shall have been duly executed and delivered by such
party. In addition, the Related Agreements shall have been entered into by the
respective parties thereto.
(f) No Long Term Debt. At the Closing Date, the Corporation
shall have no long term debt (excluding lease obligations).
7.3. Conditions to Obligations of the Corporation and the
Shareholders. The obligations of the Corporation and the Shareholders to effect
the transactions contemplated by this Agreement are subject to the satisfaction
of the following conditions (which are for the exclusive benefit of the
Corporation and the Shareholders, any or all of which may be waived in whole or
in part by the Corporation or the Shareholders).
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
in all respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of a specified, earlier date) as of the
Closing in Escrow Date and the Closing Date as though made on and as of the
Closing in Escrow Date and the Closing Date, respectively, except as otherwise
contemplated by this Agreement.
(b) Performance of Obligations. The Company shall have
performed all obligations required to be performed by it under this Agreement
and under the Pacific and Westchester Acquisition Agreements at or prior to the
Closing in Escrow Date and the Closing Date, respectively.
(c) Related Agreements. Each of the Related Agreements shall
have been duly executed and delivered by the parties thereto.
8. Termination.
8.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) by mutual written consent of the Company and the
Shareholders;
(b) by either the Company or the Shareholders, if the closing of
the Initial Public Offering does not occur by March 31, 1998;
(c) by the Company in the event that the Anti-Dilution Rights
(as defined in the Operating Agreement) are not preserved; or
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<PAGE>
(d) by the Company in the event that one or more of the
Shareholders do not timely deliver shareholder representation letters
satisfactory to the Company relating to this Agreement and the Pacific and
Westchester Acquisition Agreements.
8.2. Effect of Termination Under Section 8.1. In the event of
termination of this Agreement or termination of either of the Pacific and
Westchester Acquisition Agreements by either the Company or the Shareholders as
provided in Section 8.1 of this Agreement or Section 8.1 of either of the
Pacific and Westchester Agreements, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of any party hereto or
any of its respective Affiliates, officers, directors or shareholders except (i)
for the obligation of the Shareholders to refund to the Company the audit
expenses as set forth in Section 1.3 of this Agreement; (ii) for any and all
obligations under the confidentiality provisions contained in Section 3.2 of
this Agreement; and (iii) to the extent that such termination results from the
willful breach by a party hereto of any of its representations or warranties, or
of any of its covenants or agreements, as set forth in this Agreement. A
Shareholder's election not to deliver a shareholder representation letter shall
not be deemed a willful breach of this Agreement by the Shareholders. In the
event that termination results from the willful breach by a party hereto of any
of its representations or warranties, or of any of its
covenants or agreements, as set forth in this Agreement, the breaching party
shall be liable to the non-breaching party for all direct damages (but not
indirect or consequential damages) incurred as a result of such willful breach.
9. Indemnification.
9.1. Indemnification.
(a) Indemnification by the Corporation and the Shareholders.
The Corporation and the Shareholders each hereby agree to jointly and severally
indemnify, defend and hold harmless the Company and its respective officers,
directors, employees and agents (collectively, the "Indemnitee") from and
against and in respect of any and all Losses (as defined below) to the extent
resulting from, arising out of, relating to, imposed upon or incurred by the
Indemnitee by reason of: (i) the conduct of business by the Corporation prior to
the Closing Date (but only to the extent that the amount of such Loss was not a
stated liability on the Corporation's most recently
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dated balance sheet delivered to the Company); and (ii) any inaccuracy in or
breach of any of the Corporation's or the Shareholders' representations,
warranties, covenants or agreements contained in this Agreement, the Related
Agreements or in any other agreement or document entered into or delivered on or
after the date hereof in connection with this Agreement or any of the
transactions contemplated hereby and/or thereby. Provided, however, the
indemnification by the Corporation and the Shareholders under this Section
9.1.(a) shall include direct damages only (and not indirect or consequential
damages). For purposes of this Agreement, the term "Losses" means any and all
deficiencies, judgments, settlements, demands, claims, actions or causes of
action, assessments, liabilities, losses, damages (whether direct, indirect or
consequential), interest, fines, penalties, costs and expenses (including,
without limitation, reasonable legal, accounting and other costs and expenses
incurred in connection with investigating, defending, settling or satisfying any
and all demands, claims actions, causes of action, suits, proceedings,
assessments, judgments or appeals, and in seeking indemnification therefor).
(b) Indemnification by the Company. The Company hereby agrees
to indemnify, defend and hold harmless the Shareholders from and against and in
respect of any and all Losses resulting from, arising out of, relating to,
imposed upon or incurred by the Shareholders by reason of any inaccuracy in or
breach of any of the Company's representations, warranties, covenants or
agreements contained in this Agreement or in any other agreement or document
entered into or delivered by the Company on or after the date hereof in
connection with this Agreement or any of the transactions contemplated hereby
and/or thereby. Provided, however, the indemnification by the Company under
this Section 9.1.(b) shall include direct damages only (and not indirect or
consequential damages) and shall be limited in the aggregate to the Purchase
Price.
9.2. Notice. If any claims in respect of Losses shall be asserted
against any party hereto or any of their respective successors in respect of
which such entity proposes to demand indemnification from any of the other
parties hereto under Section 9.1 hereof, the party seeking such indemnification
shall notify the other such parties in a reasonably prompt manner; provided that
failure to give such reasonably prompt notice shall not release, waive or
otherwise affect any party's obligations with respect thereto except to the
extent such party can demonstrate it was actually and materially prejudiced as a
result thereof.
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10. General Provisions.
10.1. Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements in this Agreement shall survive the
Closing.
10.2. Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally or telecopied or
sent by overnight courier, or by certified or registered mail, postage prepaid,
and shall be deemed to be given, dated and received when so delivered personally
or by courier or telecopied, or, if mailed, five business days after the date of
mailing to the following address or telecopy number, or to such other address or
addresses as such Person may subsequently designate by written notice given
hereunder:
(a) if to Company, to:
Dispatch Management Services Corp.
12240 Indian Creek Court
Beltsville, Maryland 20705
Attention: Linda Jenkinson, Chief Executive Officer
(b) if to the Corporation or the Shareholders, to:
Thomas A. Bartley
2 Lakeview Drive
Perrinville, NJ 08510
Perry Barbaruolo
5 Oak Hill Drive
Clarksburg, NJ 08510
Joseph G. Milizio
Capell & Vishnick
3000 Marcus Avenue
Lake Success, NY 11042
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10.3. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be considered an original and all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
10.4. Entire Agreement; No Third Party Beneficiaries. This
Agreement (together with the Related Agreements and any other documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereto and is not intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder.
Subject to applicable law, this Agreement may be amended, modified or
supplemented only by written agreement of all parties hereto with respect to any
of the terms contained herein, and each party hereto agrees to be bound by any
such amendment, modification or supplement.
10.5. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Maryland, without giving
effect to the principles of conflicts of law thereof.
10.6. Severability. If any term or other provision of this
Agreement is invalid, illegal or unenforceable, all other provisions of this
Agreement shall remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially averse to any party. In the event that the enforceability of any
non-competition or similar covenants contained herein or in any Related
Agreement is called into question as the result of time, geographical or other
applicable limitations specified in such covenants, such time, geographical or
other applicable limitations shall be deemed modified to the minimum extent
necessary to render the applicable provisions of such covenants enforceable.
10.7. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
10.8. Specific Performance. The parties hereto acknowledge that
irreparable damage would result if any of the covenants of this Agreement were
not specifically enforced, and
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<PAGE>
they therefore consent that the rights and obligations of the parties under this
Agreement may be enforced by a decree of specific performance issued by a court
of competent jurisdiction. Such remedy shall, however, not be exclusive and
shall be in addition to any other remedies which any party may have under this
Agreement or otherwise. Without limiting the foregoing, the Corporation and the
Shareholders acknowledge that the failure to comply with any of the provisions
of Sections 3.1, 3.2. and 6.2 hereof will result in irreparable harm for which
there is no adequate remedy at law and that the Company and/or the Corporation
shall be entitled, without the necessity of proving actual damages, to
injunctive relief in addition to damages and all other remedies which may
otherwise be available to the Company and/or the Corporation.
10.9. Fees and Expenses. All costs and expenses, including but
not limited to all fees and expenses of attorneys, lenders, financial advisers
and accountants, in connection with the negotiation, execution and delivery of
this Agreement, the Related Agreements and the consummation of the transactions
contemplated hereby and thereby, shall be paid by the party incurring such costs
and expenses.
10.10. Arbitration. Other than the Company's right to institute
legal action for a breach of the confidentiality, non-competition and
non-solicitation covenants set forth in Sections 3.1, 3.2 and 6.2 hereinabove,
any issue, controversy, dispute or claim arising out of or relating to this
Agreement or its alleged breach that cannot be resolved by mutual agreement
shall be resolved exclusively by arbitration by a single arbitrator in either
the District of Columbia or New York City, at the option of the Company, in
accordance with the commercial arbitration rules of the American Arbitration
Association ("AAA") and judgment on the award rendered by the arbitrator may be
entered by any court having jurisdiction thereof. It is acknowledged by the
Corporation and the Shareholders that money damages are inadequate to compensate
the Company and/or the Corporation for a breach of the terms of this Agreement,
and that the Company and/or the Corporation shall be entitled to specific
performance of the terms of this Agreement. The arbitrator may enter a default
decision against any party who fails to participate in the proceeding. The
decision of the arbitrator shall be final, conclusive, binding and
non-appealable. The losing party shall pay all costs and expenses of
arbitration.
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The arbitrator shall be selected by consent of the parties, if possible.
If the parties fail to reach agreement upon appointment of the arbitrator within
ten days after a demand for arbitration is made, the arbitrator shall be
selected from a list of proposed arbitrators submitted by AAA. The selection
process shall be that which is set forth in the AAA commercial arbitration rules
then prevailing, except that (1) the number of preemptory strikes shall not be
limited, and (2) if the parties fail to select the arbitrator from three lists,
AAA shall have the power to make an appointment. If an arbitrator should die,
withdraw, or otherwise become incapable of serving, a replacement shall be
selected and appointed in a like manner.
10.11 Disclosure to Third Parties. The Company shall have the
right to disclose to third parties, in whatever manner the Company may
determine, the fact that this Agreement has been executed, the names of the
parties to this Agreement and the terms hereof.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by or on
behalf of each of the parties hereto as of the date first above written.
"COMPANY"
DISPATCH MANAGEMENT SERVICES CORP.
By: /s/Linda Jenkinson
-------------------------------
Name: Linda Jenkinson
Title: Chief Executive Officer
"CORPORATION"
Attest: ATLANTIC FREIGHT SYSTEMS, INC.
_________________________ By: /s/Thomas A. Bartley
-------------------------------
Name:
Title:
Witness: "SHAREHOLDERS"
__________________________ /s/Thomas A. Bartley
-------------------------------
Thomas A. Bartley
Witness:
__________________________ /s/Perry Barbaruolo
-------------------------------
Perry Barbaruolo
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<PAGE>
Exhibit 2.60
AGREEMENT
This Agreement (the "Agreement") is entered into as of the 21st day of
November, 1997 , by and among Dispatch Management Services Corp., a Delaware
corporation and successor in interest to Dispatch Management Services LLC by
merger (the "Company"), Zoom Messenger Service, Inc., a New York corporation
(the"Corporation"), and Frank Nizzare (the "Shareholder"). Unless defined
herein, all capitalized terms used in this Agreement shall have the meaning
given them in the Operating Agreement of Dispatch Management Services LLC dated
December 1, 1996 by and between the Members of Dispatch Management Services LLC,
as amended (the "Operating Agreement").
W I T N E S S E T H
WHEREAS, the Shareholder owns all of the issued and outstanding shares of
capital stock of the Corporation (the "Stock");
WHEREAS, subject to the conduct of the due diligence examination to begin
following the execution of this Agreement, and further subject to the terms and
conditions set forth herein, the Shareholder desires to sell all of their
respective right, title and interest in the Stock to the Company, and the
Company desires to purchase the Stock;
WHEREAS, upon the satisfactory completion of the due diligence examination,
the delivery of the financial statements, schedules, disclosure documents,
questionnaires and other information required by this Agreement, and approval of
the same by the Company, the parties hereto will close in escrow pursuant to the
terms and conditions set forth herein;
WHEREAS, upon satisfaction of the conditions set forth herein, the escrow
will be terminated, and the sale of the Stock will be consummated;
WHEREAS, the parties intend that, immediately following the execution of
this Agreement, the Company will enter into non-competition agreements with the
Shareholder, Antoine Lakah, and certain employees of the Corporation in the form
attached hereto as Exhibit A (such non-competition agreements, together with all
other agreements which are entered into by the parties hereto pursuant to this
Agreement or in connection with any of the transactions contemplated hereby, the
"Related Agreements"); and
<PAGE>
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the representations,
warranties, covenants and agreements herein contained, and for the sum of $10.00
paid by the Company to the Shareholder, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Closing in Escrow
1.1. Overview. Upon execution of this Agreement, the Shareholder and
the Corporation shall be obliged to deliver to the Company, within thirty (30)
days after execution of this Agreement: (i) the audited and unaudited financial
statements required pursuant to Section 1.3 below; (ii) the schedules required
pursuant to Section 2 below; and (iii) the agreements required pursuant to
Section 3.1 below.
After approval of the same by the Company, and prior to filing the
registration statement with the Securities and Exchange Commission relating to
the initial public offering of the common stock, par value $.01 per share, of
the Company (the "Initial Public Offering"), the Company will deliver to the
Shareholder a disclosure document, together with a notice (the "Notice")
specifying the date by which the Shareholder must execute and deliver
satisfactory shareholder representation letters in order to consummate the sale
of the Stock pursuant to the terms of this Agreement. Prior to the Closing
Date (as defined in Section 1.4 below) the Shareholder shall assume those
liabilities of the Corporation set forth in Schedule 1.1 attached hereto. If,
prior to the Closing Date, the Shareholder does not assume the liabilities
specified in Schedule 1.1, then the Company will reduce the cash portion of the
purchase price by the dollar amount of any such liabilities (including early
repayment costs, if any) of the Corporation existing as at the Closing Date.
Upon timely delivery from the Shareholder of a shareholder representation
letter satisfactory to the Company, the parties will close in escrow (the
"Closing in Escrow") pursuant to the terms and conditions of this Agreement.
Such Closing in Escrow shall take place at the offices of Silver, Freedman &
Taff, L.L.P., 1100 New York Avenue, N.W., 7th Floor, Washington, D.C. 20005 (or
such other place as is mutually agreed upon by the parties) within thirty (30)
days (or such
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shorter period as is specified in the Notice) after timely delivery of a
satisfactory shareholder representation letter from the Shareholder.
In the event that the Shareholder does not timely deliver a
satisfactory shareholder representation letter (as determined in the sole
discretion of the Company), this Agreement will be of no further force or
effect, except for any and all obligations under Sections 3.2 (confidentiality),
1.3 (reimbursement of audit expenses) and 8.2 (effect of termination under
Section 8.1), which obligations will survive termination of this Agreement.
1.2 Closing in Escrow Deliveries and Other Actions.
(a) Shareholder and Corporation's Deliveries at Closing in
Escrow. At the Closing in Escrow, the Shareholder shall deliver the following
to the law firm of Silver, Freedman & Taff, L.L.P., as escrow agent: (i)
certificates representing all of the Stock with duly executed stock powers
conveying the Stock represented thereby to the Company, free and clear of all
liens, security interests and claims, encumbrances or other rights of third
parties of any nature whatsoever, and granting unrestricted title to and
possession of the Stock to the Company (1); (ii) the Corporation's corporate
minute book, including the Stock Certificate Book and all of the original share
certificates representing shares of the Corporation's capital stock at one time
issued (but no longer issued and outstanding) to former shareholders of the
Corporation; (iii) all consents, waivers, and authorizations necessary or
appropriate for the consummation of the transactions contemplated by this
Agreement; (iv) agreements assigning to the Corporation all of the Shareholder's
and/or third parties' right, title and interest in and to all Intellectual
Property (as defined in Section 2.14(d) hereinbelow) owned by any of the
Shareholder's and/or third parties and heretofore licensed to or used by the
Corporation; (v) Certificate of Good Standing for the Corporation as issued by
the Secretary of State of New York; (vi) the certificates, dated the Closing in
Escrow Date, required pursuant to Sections 7.2(a) and 7.2(b) hereinbelow; and
(vii) the opinion of counsel to the Shareholder and the Corporation as to such
matters as counsel to the Company may reasonably require, including but not
limited to such counsel's opinion that: (A) the Corporation is in good
standing; (B) the Corporation is authorized to conduct its business in each
jurisdiction in which it is doing business; (C) the Shareholder and the
- -------------------
(1) The Company acknowledges receipt of the November 13, 1997 Agreement between
Frank Nizzare and Antoine Lakah pursuant to which Nizzare agrees to purchase
from Lakah all shares held by Lakah in the Corporation.
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Corporation have the full power to enter into and perform their respective
obligations under this Agreement; (D) this Agreement constitutes the legal,
valid and binding obligations of the Corporation and the Shareholders, and the
Related Agreements to which the Shareholders are a party, constitute the legal,
valid and binding obligations of the Shareholder, each enforceable in accordance
with their respective terms (except as enforcement may be limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditor's
rights, and principles of equity); and (E) neither the Corporation nor the
Shareholder are threatened with or affected by any actions, proceedings or
investigations wherein an unfavorable decision, ruling or finding could have a
material adverse effect on the financial condition or operation of the
Corporation, or could prevent, enjoin or otherwise affect the transactions
contemplated by this Agreement or the Related Agreements.
(b) Further Actions. On or after the Closing in Escrow, the
parties hereto shall enter into, execute and deliver such other and further
agreements, documents and instruments, as any of them may reasonably request,
for the purpose of effectuating the transactions contemplated by this Agreement.
(c) Consummation of Sale. Upon Closing in Escrow, subject to
the terms and conditions of this Agreement, the Company will be obligated to
purchase the Stock, and the Shareholder will be obliged to sell the Stock, at
the purchase price specified in Section 1.3 below, on the Closing Date
specified in Section 1.4 below.
1.3. Purchase Price. The purchase price for the Stock (the
"Purchase Price") shall be equal to Four Million Dollars ($4,000,000), subject
to adjustment (if any) as provided in Section 1.1 above, and subject to further
adjustment (if any): (i) as a result of an increase in the Purchase Price as a
result of the Merrill Increase (as defined in the Section 1.3 below); or (ii) as
a result of a reduction in the Maximum Earn-Out (as defined in this Section 1.3
below). The Purchase Price shall not include any payment for the Corporation's
security deposits; provided that the security deposits have not been applied as
rent or other obligations of the Corporation prior to the Closing Date, then,
the security deposits shall be paid over to the Shareholder once the same have
been returned to the Corporation.
Unless the Company gives the Shareholder written notice to the
contrary, the Shareholders shall deliver to the Company, within thirty (30)
days after execution of this Agreement:
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(i) audited financial statements of the Corporation, including balance sheets
dated as of December 31, 1994, 1995 and 1996, and income statements and cash
flow statements for each of the three twelve month periods ended on such dates;
(ii) unaudited financial statements of the Corporation, including a balance
sheet dated as of June 30, 1996, and an income statement and cash flow statement
for the twelve month period ended on June 30, 1996: and (iii) unaudited,
reviewed financial statements of the Corporation, including a balance sheet
dated as of June 30, 1997 and an income statement and a cash flow statement for
the six month period ended June 30, 1997. The intent of providing the audited
financial statements referred to in the foregoing sentence is to resolve any
auditing issues prior to calculation of the Purchase Price, so that the Purchase
Price may be quickly and efficiently calculated. In the event that the closing
of the Initial Public Offering has not occurred on or before November 12, 1997,
but does occur on or before December 12, 1997, then in that event, in lieu of
the unaudited, reviewed financial statements of the Corporation for the six
month period ended June 30, 1997, the Shareholder shall deliver to the Company,
within thirty days after written request from the Company: (i) an updated set of
audited financial statements of the Corporation, including a balance sheet dated
as of June 30, 1997, and income statements and cash flow statements for the six
month period ended June 30, 1997; (ii) unaudited financial statements for the
Corporation, including a balance sheet dated as of September 30, 1996, and an
income statement and cash flow statement for the twelve month period ended on
September 30, 1996; and (iii) unaudited, reviewed financial statements of the
Corporation, including a balance sheet dated as of September 30, 1997 and income
statements and cash flow statements for the three month period ended September
30, 1997. In the event that the closing of the Initial Public Offering has not
occurred on or before December 12, 1997, then upon written request from the
Company given on or before March 1, 1998, the Shareholder shall deliver to the
Company, within thirty days after written request from the Company, such
additional audited and/or unaudited, reviewed financial statements of the
Corporation as the Company may reasonably request.
All of the financial statements referred to in this Section 1.3 shall
be prepared (or reviewed, as the case may be) by Price Waterhouse LLP. The cost
of providing all of the financial statements required by this Section 1.3,
within the prescribed time limits, shall be the sole responsibility of the
Shareholder, provided that the Company will, upon the request of the
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Shareholders, advance such costs on behalf of the Shareholders. In the event
that all of the Shareholders do not timely deliver satisfactory shareholder
representation letters and complete the Closing in Escrow, the Shareholder shall
immediately refund to the Company any such advanced costs; in the event that
such shareholder representation letter is satisfactory and is timely received,
and the Closing in Escrow is completed, the Shareholder shall be relieved of his
obligation to refund to the Company any such advanced costs.
If, prior to Closing, Merrill transfers its local courier business
back to the Corporation, the Purchase Price shall be increased (the "Merrill
Increase") by 2/3 of the annualized revenue from such business prior to Closing,
but only if: (i) Merrill indicates in writing that it is transferring such
business back to be exclusively serviced by the Corporation; (ii) such services
are not provided on behalf of Early Bird; and (iii) Early Bird receives no
compensation as a result of the Corporation providing such services.
The Company shall pay Fifty Percent (50%) of the Purchase Price in
cash (the "Maximum Earn-Out"), which is subject to reduction in accordance with
the terms of the next paragraph, and Fifty Percent (50%) of the Purchase Price
in (restricted) stock of the Company (the "Company Stock"), at the Closing. The
number of shares of Company Stock to be issued as partial payment of the
Purchase Price shall equal the aggregate dollar value of the stock component of
the Purchase Price divided by the initial offering price per share as set forth
on the cover page of the prospectus relating to the initial public offering.
The Shareholder acknowledges that the sale of the Company Stock will be
restricted for a period of time by virtue of a "lock-up" agreement which may be
imposed by the Company, and the Shareholder shall execute such a "lock-up"
agreement, as may be required by the Company, by which the sale of the Company
Stock is restricted (perhaps prohibited) for a period of two (2) years from the
date of the closing of the Initial Public Offering.
The Maximum Earn-Out shall be earned by the Shareholder ratably over
the 4 semi-annual periods beginning January 1, 1998 and ending December 31, 1999
provided that the Corporation achieves the targeted performance standards set
forth in Exhibit B attached hereto. In the event that the Corporation fails to
achieve the margin requirement set forth in Exhibit B during any semi-annual
period, then for each semi-annual period in which the Corporation fails to
achieve such margin requirement, the cash portion of the Purchase Price shall be
reduced by one fourth (1/4)
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of the Maximum Earn-Out. In the event that the Corporation achieves the margin
requirement during the relevant semi-annual period, but fails to achieve the
revenue requirement set forth in Exhibit B, then for each semi-annual period,
the cash portion of the Purchase Price shall be reduced by: (i) one fourth (1/4)
of the Maximum Earn-Out, multiplied by: (ii) a fraction, the numerator of which
is the difference between the actual revenue achieved during such semi-annual
period and the revenue requirement for such semi-annual period as set forth in
Exhibit B, and the denominator of which is the revenue required during such
semi-annual period as set forth in Exhibit B. The Maximum Earn-Out, less any
reductions as set forth in this paragraph, is hereinafter referred to as the
"Earn-Out". The Earn-Out shall bear interest at the rate of 7% per annum
commencing as of the Closing Date (i.e., once the Earn-Out is determined, the
Shareholder will be due such amount plus interest at the rate of 7% per annum on
such amount, accrued from the Closing Date until the date of payment of the
Earn-Out to the Shareholder). The Earn-Out shall be paid to the Shareholder
promptly following calculation of the Corporation's performance for the
semi-annual period ending December 31, 1999. The Company covenants and agrees
to maintain sufficient cash, or availability of cash (e.g., by way of a line of
credit) in order to fund the Earn-Out.
The Company shall (contemporaneously with the Closing) make a loan to the
Shareholder, in an amount equal to up to 50% of the Purchase Price. Said loan
by the Company to the Shareholder (the "Shareholder Loan") shall bear interest
at a rate of seven percent (7%) per annum, and shall be secured by all of the
Company Stock paid as part of the Purchase Price at Closing. The collateral
security agreement evidencing the collateralization of the Shareholder Loan with
the Company Stock and the Earn-Out shall be on such terms as are reasonably
acceptable to the Company, which terms shall include, but shall not be limited
to, the retention of all of the Company Stock by the Company until full
repayment of the Shareholder Loan (including accrued interest). The Shareholder
shall have the right to prepay the Shareholder Loan (plus accrued interest) at
any time without penalty and shall have the right to direct the Company to
offset the balance due under the Shareholder Loan (plus accrued interest)
against the Earn-Out as earned each semi-annual period. The Shareholder Loan
shall mature as of the date that the Earn-Out is payable. In the event that the
Shareholder Loan (including accrued interest) is not repaid in full upon
maturity, the Company shall enjoy all rights of a secured party under the
Uniform Commercial Code then in effect in the State of Maryland, provided
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that the Company's only recourse shall be first against the remaining Earn-Out
and then against the Company Stock it holds as collateral, and there shall not
be any recourse against the Shareholder individually.
1.4. Time and Place of Closing. Unless this Agreement shall have been
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 8.1., and subject to the satisfaction or waiver of the
conditions set forth in Section 7, the purchase and sale of the Stock pursuant
to this Agreement (the "Closing") shall take place at the offices of Silver,
Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., Suite 700E, Washington,
D.C. 20005, contemporaneously with the closing of the Initial Public Offering
unless the Initial Public Offering does not occur by March 31, 1998, in which
case this Agreement shall be rendered null and void, or unless another date,
time or place is agreed to in writing by the parties hereto (the day on which
the Closing takes place being the "Closing Date").
At the Closing: (i) Silver, Freedman and Taff, L.L.P. shall deliver
to the Company the certificates, minute book, documents, and other materials
theretofore held in escrow from the Closing in Escrow; (ii) the Shareholder
shall deliver to the Company updated consents, waivers and authorizations as
referred to in Section 1.2(a)(iii) above, updated Certificates of Good Standing
as referred to in Section 1.2(a)(v) above, updated certificates, dated the
Closing Date, required pursuant to Sections 7.2(a) and 7.2(b) below, and an
updated opinion of counsel as referred to in Section 1.2(a)(vii) above; and
(iii) the Company shall deliver the Purchase Price to the Shareholder (less the
Maximum Earn-Out, which shall be payable to the Shareholder pursuant to the
terms of Section 1.3 above, and with the Company Stock collateralized against
the Shareholder Loan being delivered to the Company as appropriate).
2. Representations, Warranties and Covenants of the Corporation and the
Shareholder.
The Corporation and the Shareholder hereby jointly and severally
represent, warrant and covenant to the Company as follows:
2.1. Organization, Standing and Power. The Corporation is a "C"
Corporation duly organized, validly existing and in good standing under the laws
of the State of New York, and
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has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. The Corporation
is duly qualified and in good standing to conduct business in each jurisdiction
in which the business it is conducting, or the operation, ownership or leasing
of its properties, makes such qualification necessary.
2.2. Authority and Enforceability. The Shareholder and the
Corporation have all requisite legal right, power and authority to enter into
this Agreement and each of the Related Agreements to which they are a party and
to agree to the transactions contemplated hereby and thereby and to perform all
of their respective obligations hereunder and thereunder. This Agreement
constitutes the legal, valid and binding obligations of the Shareholder and the
Corporation, and each of the Related Agreements to which the Shareholders are a
party constitute the legal, valid and binding obligations of the Shareholder,
each enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity.
2.3. Capital Structure, Due Authorization and Issuance. The capital
structure of the Corporation consists solely of 220 shares of no par value
capital stock of which 220 shares are and will be as of the Closing in Escrow
Date and the Closing Date issued and outstanding. All issued and outstanding
shares of the capital stock of the Corporation have been duly authorized and
validly issued, are fully paid and non-assessable, and were issued in compliance
with all federal and applicable state securities laws.
2.4 Title to Stock. The Shareholder owns all of the issued and
outstanding shares of the capital stock of the Corporation, free and clear of
any and all claims, liens, restrictions, pledges, charges, options, security
interests, encumbrances or other rights of third parties, including any imposed
by law. There are no other shares of capital stock or other equity or debt
securities of the Corporation, of any kind or class whatsoever, authorized,
issued or outstanding, or any warrants, options, subscription rights, or any
other rights, agreements, or commitments of any nature relating to the issuance
of, or granting of, rights to acquire any shares of capital stock or such
securities of the Corporation.
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2.5 Title to and Condition of the Corporation's Assets. Subject to
the liens and contracts disclosed in the Exhibits to this Agreement, the
Corporation has good, insurable and marketable title to all of the assets set
forth in the Financial Statements (as defined in Section 2.11 hereinbelow).
Except as disclosed on Exhibit C (or on any of the other Exhibits to this
Agreement), none of the Corporation's assets is subject to any restriction,
mortgage, pledge, lien, security interest, lease, charge, encumbrance, objection
or joint ownership, other than liens for current real or personal property taxes
not yet due and payable. The Corporation's assets are in good operating
condition and repair, ordinary wear and tear excepted.
2.6. Sufficiency of Assets. The assets set forth in the Financial
Statements (as defined in Section 2.11 hereinbelow) include all the assets and
properties used or employed in the business presently conducted by the
Corporation. Immediately after the consummation of the transactions
contemplated by this Agreement to be effected at the Closing, the Corporation
will (i) have all right, title, and interest in and to, or will have a valid
right to use, without liability to third party(ies), such assets and properties;
and (ii) have all assets, rights, employees, subcontractors and other persons
and items which are reasonably necessary to carry on the business and operations
of the Corporation after the Closing Date in substantially the same manner as
presently conducted by the Corporation.
2.7. No Violations Resulting From Transactions. The execution and
delivery of this Agreement by the Shareholder and the Corporation, and each of
the Related Agreements to which they are a party, and the consummation of the
transactions contemplated hereby and thereby by the Shareholder and the
Corporation will not (a) conflict with or violate any provision of the articles
or certificate of incorporation or by-laws of the Corporation, (b) except as set
forth in Exhibit D, require any consent, waiver, approval, authorization,
permission, or filing with or notification to, any third party, (c) result in or
constitute a default, or require any consent or approval of or notice to any
person or entity, or result in the creation of an encumbrance, under or pursuant
to (i) any of the contracts to which the Corporation is a party (including but
not limited to contracts of insurance and leases as applicable), or (ii) any
other material agreements to which the Shareholder is a party, or (d) violate
any law applicable to the Shareholder or the Corporation. The parties hereto
acknowledge that the Corporation will be required to satisfy its debt to certain
secured creditors out
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of the proceeds of sale; without limiting the foregoing, the Corporation and the
Shareholder acknowledge and agree that the cash proceeds from sale otherwise
accruing to the Shareholder shall be used to pay: (a) the balance on the
Corporation's revolving line of credit in favor of Merchant's Bank of New York;
and (b) the Purchase Price for shares in the Corporation held by Antoine Lakah.
2.8. Compliance with Laws.
(a) The Corporation is, and at all times during the past three
years has been, in material compliance with all applicable laws; and
(b) The Corporation has not received, and does not know of the
issuance or threatened issuance by any governmental entity of, any notices of
violation or alleged violation of any applicable law. The Company has been
provided with true and complete copies of (i) all injunctions, judgments, orders
or consent or similar decrees or agreements of any governmental entity to which
the Corporation is currently subject (or which the Corporation was subject to
during the previous three years), and (ii) all correspondence through the date
hereof with respect to any of the matters referred to in clause (b) or clause
(i) of this Section 2.8. Neither the Shareholder nor the Corporation is aware
of any proposed legislation or law which is reasonably expected to be enacted
and which, if so enacted, could reasonably be expected to have a material
adverse effect on the Corporation.
2.9. Litigation. There is no action, suit, claim, investigation or
proceeding, whether at law or in equity (each, a "Legal Proceeding"), pending
or, to the knowledge of the Shareholder and/or the Corporation, threatened, that
questions the validity of this Agreement or the Related Agreements or any action
taken or to be taken by the Shareholder or the Corporation in connection with
the consummation of the transactions contemplated hereby or thereby or which
seeks to prohibit, enjoin or otherwise challenge any of the transactions
contemplated hereby or thereby. Exhibit E sets forth an accurate and complete
list, and a brief description (setting forth the names of the parties involved,
the court or other governmental or mediating entity involved, the relief sought
and the substantive allegations and the status thereof), of each Legal
Proceeding pending or, to the knowledge of the Corporation and/or the
Shareholders, threatened against or affecting the Corporation. To the knowledge
of the Corporation and/or the Shareholder, no event has occurred and no
circumstance, matter or set of facts exist which would constitute a valid basis
for the assertion
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by any third party of any claim or Legal Proceeding, other than those listed on
Exhibit E. Except as set forth in Exhibit E, there is no outstanding or, to the
knowledge of the Corporation and/or the Shareholder, threatened, judgment,
injunction, order or consent or similar decree or agreement (including, without
limitation, any consent or similar decree or agreement with any governmental
entity) against, affecting or naming the Corporation.
2.10. Financial Advisors.
(a) Except as set forth on Exhibit F attached hereto, no person
or entity has acted directly or indirectly as a broker, finder or financial
advisor for or to the Shareholder and/or the Corporation in connection with the
negotiations relating to or the transactions contemplated by this Agreement or
the Related Agreements; and
(b) Except as set forth on Exhibit F attached hereto, no person
or entity is entitled to any fee or commission or like payment, or expense
reimbursement, in respect thereof based in any way on agreements, arrangements
or understandings made by or on behalf of the Corporation and/or the Shareholder
hereunder or thereunder. The Shareholder hereby agrees that all such fees,
commissions or like payments, or expense reimbursement as shall appear on
Exhibit F attached hereto shall be for the sole joint and several account of the
Shareholder and shall be paid in full by them at the Closing in Escrow.
2.11. Financial Statements; Receivables. Attached hereto as
Exhibit G are true, correct and complete copies of the Corporation's most recent
unaudited financial statements which, together with the financial statements
(including the notes and exhibits thereto) to be delivered pursuant to Section
1.3 herein (the "Financial Statements") were and will be prepared in accordance
with the books and records of the Corporation, are and will be complete and
correct in all material respects, have and will have been prepared in accordance
with U.S. generally accepted accounting principles ("GAAP"), applied
consistently with the past practices of the Corporation, except where otherwise
specifically noted therein, and present and will present fairly in all material
respects the financial position, results of operations and changes in financial
position or cash flows, whichever is applicable, of the Corporation as at the
dates and for the periods indicated (subject, in the case of the unaudited
financial statements, to normal year-end audit adjustments). Without limiting
the foregoing, no undisclosed liabilities or obligations of any nature (whether
known or unknown, or
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absolute, accrued, contingent or otherwise) shall exist as at Closing in Escrow
or the Closing not reflected in the most recently dated balance sheet supplied
to the Company. The Corporation has paid all federal, state and local income,
profits, franchises, sales, use, occupation, property, excise and payroll taxes,
and all license fees and other charges imposed upon it, and has timely filed all
tax returns and related documents required to be filed with any governmental
authority. There are no outstanding or proposed statements of deficiency in tax
payments to any federal, state, local or foreign government with respect to the
Corporation for any tax period. As of the dates such Financial Statements were
and will be prepared, all accounts receivable reflected on the Financial
Statements (i) have and will have arisen from bona fide transactions in the
ordinary course of the Corporation's business, consistent with its past
practices, and (ii) are good and collectible at the aggregate recorded amounts
thereof, net of any applicable reserves for returns or doubtful accounts which
are reflected in such Financial Statements (such reserves, the "Reserves"); such
Reserves are adequate and reasonable and were established in accordance with
GAAP.
2.12. Default. The Corporation is not in material default of any
of its obligations, contracts, or commitments in any respect, or in breach of
any negative or affirmative covenants placed on it by its creditors, and the
Shareholder has been notified of any such defaults or breaches.
2.13. Absence of Certain Developments.
(a) There has been no event, condition or state of facts of any
character that has had or is reasonably likely to have a material adverse effect
on the Corporation.
(b) The Corporation has not entered into any transaction or
contract, or conducted its business, other than in the ordinary course
consistent with past practice.
2.14. Intellectual Property.
(a) List of Intellectual Property; Sufficiency. Exhibit H sets
forth a list of all Intellectual Property (as defined in Section 2.14.(d)
hereinbelow) which is owned by the Shareholder and/or the Corporation, licensed
by the Shareholder and/or the Corporation, licensed to the Shareholder and/or
the Corporation, or otherwise used or able to be used in the business conducted
by the Corporation (other than commonly-used computer software which is
generally available to the public and the use rights to which were legally
acquired by the Corporation either for free or through established retail
facilities) and indicates, with respect to each item of Intellectual
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Property listed thereon, the owner thereof and, if applicable, the name of the
licensor and licensee thereof and the terms of such license or other contract
relating thereto. The Corporation owns or has the lawful right to use all of
the Intellectual Property as currently used or as necessary for the conduct of
its business as now conducted. After Closing, the Corporation will have the
right to use all of the Intellectual Property as currently used or as necessary
for the conduct of the Corporation's business as now conducted.
(b) Title; Validity; Pending Applications; Infringements, Etc.
(i) Except for Intellectual Property licensed to the
Shareholder and/or the Corporation, the Corporation has full legal and
beneficial ownership (free and clear of any and all encumbrances) of all of the
Intellectual Property, and neither the Corporation nor the Shareholder has
received any notice or claim (whether written, oral or otherwise) challenging
the Corporation's ownership or rights in such Intellectual Property or
suggesting that any other entity has any claim of legal or beneficial ownership
with respect thereto. Neither the Shareholder nor the Corporation are in
default under any license agreements pertaining to the Intellectual Property
used in the Corporation's business and licensed to the Shareholder and/or the
Corporation; all such license agreements are valid and in full force and effect,
and shall continue in full force and effect as to the Corporation after Closing.
(ii) All of the Intellectual Property is legally valid and
enforceable without any qualification, limitation or restriction on its use, and
neither the Corporation nor any of the Shareholder has received any notice or
claim (whether written, oral or otherwise) challenging the validity or
enforceability of any such Intellectual Property;
(iii) Neither the use of any of the Intellectual
Property nor any other Intellectual Property used by the Corporation will
conflict with, infringe upon, violate or interfere with, or constitute an
appropriation of, any right, title or interest held by any other person or
entity, and there have been no claims made with respect thereto;
(iv) No other person or entity is infringing in any respect
on any part of the Intellectual Property. The Corporation has not conducted its
business, and has not used or enforced (or failed to use or enforce) any
Intellectual Property, in a manner that would result in the abandonment,
cancellation or unenforceability of any item of Intellectual Property, and the
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Corporation has not taken or failed to take any action that would result in the
forfeiture or relinquishment of any Intellectual Property used in the conduct of
its business as now conducted;
(v) Except as set forth in Exhibit H, the Corporation has
no liability or obligations to any third parties incident to the Intellectual
Property used or able to be used by the Corporation in the conduct of its
business as heretofore conducted; and
(vi) The Corporation has timely met all of its obligations
to any third parties incident to the Intellectual Property used or able to be
used by the Corporation in the conduct of its business as heretofore conducted,
and such obligations have been and will be correctly and adequately disclosed in
the Financial Statements.
(c) Protection and Maintenance of Intellectual Property.
(i) The Corporation has taken all reasonable steps to (x)
protect its rights to the Intellectual Property, and (y) to prevent the
unauthorized use by any other person or entity; and
(ii) The Corporation shall use all reasonable efforts to
maintain, or cause to be maintained, the Intellectual Property in full force and
effect through the Closing and, without limitation, has renewed or has made, and
will make within any applicable renewal period ending on or prior to the Closing
Date, application to renew all of the Intellectual Property subject to
expiration on or prior to the Closing Date. Neither the Corporation nor the
Shareholder has granted to any other Person or entity any rights or permissions
to use any of the Intellectual Property.
(d) Definition of Intellectual Property. For purposes of this
Agreement, the term "Intellectual Property" means any patent, copyright,
trademark, trade name, service mark, service name, brand mark, brand name, logo,
corporate name, Internet domain name or industrial design, any registrations
thereof and pending applications therefor (to the extent applicable), any other
intellectual property right (including, without limitation, any know-how, trade
secret, trade right, formula, conditional or proprietary report or information,
customer or membership list, any marketing data, and any computer program,
software, database or data right), and license or other contract (including
without limitation license(s) to use specific telephone numbers and/or radio
channels/frequencies) relating to any of the foregoing, and any goodwill
associated with any business owning, holding or using any of the foregoing.
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2.15. Insurance. The Corporation currently maintains, and as of
the Closing in Escrow and the Closing Date will maintain, valid insurance
policies, which polices provide adequate coverage, within terms of scope and
amount of coverage, for its assets, properties and operations. There are no
pending material insurance claims by the Corporation as to which the applicable
insurers have denied coverage. In addition, there exist no material claims
under such insurance that have not been properly filed by the Corporation.
During the past two years, the Corporation has not been refused any insurance
coverage by any insurer from which the Corporation has sought coverage.
2.16. Leases. Except as set forth on Exhibit I, the Corporation
is not a lessee or tenant of any real or personal property.
2.17. Labor Agreements. The Corporation is not a party to any
collective bargaining agreement. Except as set forth in Exhibit J, the
Corporation is not bound by any severance pay requirements or agreements, or any
other agreement, handbook, manual, or benefit book referring to, relating to, or
involving its employees.
2.18. Employee Benefit Plans. Except as set forth on Exhibit K
hereto, the Corporation does not maintain or contribute to, and it has no
liability or obligation with respect to any formal or informal stock option,
profit sharing, pension, retirement, bonus, stock bonus, thrift-savings,
incentive, benefit, welfare, cafeteria, medical insurance, dental insurance,
life insurance, accidental death and dismemberment insurance, disability
insurance or other similar plan, policy or arrangement (collectively referred to
herein as the "Plans"). The Corporation is not in default under the terms of
any of the Plans. The Corporation has made all contributions to each of the
Plans required by the terms of the respective Plans, as well as all
contributions required to be made in order to satisfy all requirements of law.
Each of the Plans has sufficient assets to satisfy (under reasonable and
permitted actuarial assumptions) its obligations on a termination basis, and the
level of contributions required pursuant to the terms of each Plan is sufficient
to satisfy (under reasonable and permitted actuarial assumptions) the
obligations of such Plan on a continuing basis for benefits accrued to date.
2.19. Compliance With ERISA. The Corporation's Plans are
currently in compliance in all respects with the Employee Retirement Income
Security Act of 1974 and the regulations promulgated thereunder (collectively,
"ERISA"). Except as set forth on Exhibit L hereto, no
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employee benefit plan and no trust created thereunder has ever been terminated
by the Corporation. No liability to the Pension Benefit Guaranty Corporation
("PBGC") has been or is expected to be incurred by the Corporation with respect
to the Plans. Neither the Corporation nor any of the Plans has ever experienced
an accumulated funding deficiency (as defined in Section 302 of ERISA and
Section 412 of the Internal Revenue Code of 1986, as amended (the "Code")),
whether or not waived, with respect to any employee benefit plan and no such
accumulated funding deficiency currently exists. Except as set forth on Exhibit
L hereto, the Corporation is not required, and has not been required in the
past, to make any payments or contributions under the terms of any
"multi-employer plan" (as defined in Section 3(37) of ERISA and Section 414(f)
of the Code) or by any collective bargaining agreement with respect to any
employee benefit plan. Neither the Corporation nor any of the Plans has ever
incurred any withdrawal liability (including any contingent or secondary
withdrawal liability) within the meaning of Section 4201 and Section 4204 of
ERISA with respect to any multi-employer plan. The Corporation and the trustees
or the administrators of the Plans have provided continuation of coverage
notices to employees and their dependents as required by the Consolidated
Omnibus Budget Reconciliation Act of 1986, as amended ("COBRA"), and has
complied with all such continuation of coverage requirements. The execution and
delivery of this Agreement will not involve a prohibited transaction within the
meaning of ERISA or Section 4975 of the Code.
2.20. Employee Relations. The Corporation is in substantial
compliance with all applicable federal, state and local laws, statutes,
regulations, orders, codes, ordinances, guidelines, executive orders, contractor
requirements, judicial and administrative judgments and determinations to which
the Corporation is or was a party, and any other authority governing the
Corporation with respect to its employees and workplaces (hereinafter
collectively referred to as the "Applicable Employment Standards"), including,
but not limited to, employment, employment practices, fringe benefits, terms and
conditions of employment, termination of employment, severance or separation
pay, workers' compensation, disability, entitlements, unemployment insurance,
employment screening, wage-hour, employment discrimination on any basis, equal
employment opportunity, individual employee rights, affirmative action,
occupational health and safety, and immigration and right to work requirements.
Such compliance by the Corporation includes, but is not limited to, Title VII of
the
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Civil Rights Act of 1964, as amended, including the Civil Rights Act of 1991;
the National Labor Relations Act of 1935, as amended; the Fair Labor Standards
Act of 1938, as amended; the Occupational Safety and Health Act of 1970, as
amended; the Equal Pay Act of 1963, as amended; the Age Discrimination in
Employment Act of 1967, as amended; the Americans with Disabilities Act of 1990;
the Family Medical Leave Act of 1993; the Immigration Reform and Control Act of
1986 (together with the regulations promulgated thereunder, hereinafter
collectively referred to as "IRCA"); the Worker Adjustment and Retraining
Notification Act; the Employee Polygraph Protection Act; the Drug-Free Workplace
Act of 1988; the Health Insurance Portability and Accountability Act of 1996;
the Code; the regulations promulgated under each such act; and any and all other
federal, state and local laws, regulations and requirements of any nature
applicable to the Corporation. The Corporation further represents that it is
not in arrears in the payment of wages to any employee (except to the extent of
its normal payroll practices), and there are no claims, liabilities, demands or
causes of action, realized or unrealized, actual, potential or contingent,
pursuant to statutory rights or in tort, contract or otherwise, against the
Corporation arising out of or in connection with any event, fact, circumstance
or occasion relating to any applicant for employment, the employment of any
employee or the separation from employment of any employee.
2.21. Licenses. The Corporation and its employees and agents have
all licenses, permits, orders, approvals and authorizations necessary for the
conduct of its business as presently conducted. The Corporation and its
employees and agents have all licenses, permits, orders, approvals and
authorizations necessary for the operation of the real and personal property
presently leased to, owned or operated by the Corporation. None of the permits
issued to the Corporation will be adversely affected by the consummation of the
transactions contemplated by this Agreement. No suspension or cancellation of
any such licenses, permits, orders, approvals or authorizations is pending or,
to the best of the Corporation's and/or the Shareholder's knowledge, threatened.
2.22. Criminal Practices. The Corporation is not engaged and has
not been engaged in any criminal practices, including, but not limited to,
payoffs, kickbacks or illegal gifts.
2.23. Contracts. Each of the contracts to which the Corporation
is a party (the "Contracts") (i) is valid and enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and
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remedies generally and subject, as to enforceability, to general principles of
equity; (ii) no Default (as defined below) exists under any Contract either by
the Corporation or by any other party thereto; (iii) neither the Corporation nor
the Shareholder is aware of the assertion by any third party of any claim of
Default or breach under any of the Contracts; and (iv) neither the Corporation
nor the Shareholder is aware of any present intention on the part of any
significant customer or supplier or other business partner of the Corporation to
either (x) terminate or significantly change its existing business relationship
with the Corporation either now or in the foreseeable future, or (y) fail to
renew or extend its existing business relationship with the Corporation at the
end of the term of any existing contractual arrangement such entity may have
with the Corporation. For purposes of this Agreement, the term "Default" means,
with respect to any Contract, (x) any material breach of, or material default
under, such Contract, (y) any event, other than the normal passage of time,
which would (either with or without notice or lapse of time or both) give rise
to any right of termination, cancellation or acceleration of, or any obligation
to repay, with respect to such Contract, or (z) any event, other than the normal
passage of time, which would result in either a significant increase in the
obligations or liabilities of, or a loss of any significant benefit of, the
party in question under such Contract.
Copies of all written contracts, and a description of all oral contracts,
to which the Corporation is a party, are attached hereto as Exhibit M.
2.24. Misrepresentation. Neither this Agreement (including the
Exhibits hereto) or any Related Agreement or any information supplied to the
Company by or on behalf of the Corporation and/or the Shareholder in connection
with this Agreement, the Related Agreements or the transactions contemplated
hereby or thereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statement contained herein or therein, in light of the circumstances under which
they were made, not misleading.
3. Additional Representations, Warranties and Covenants of the
Shareholder.
3.1. Non-Competition and Other Covenants of the Shareholder and
Certain Employees of the Corporation. The Shareholder and the certain employees
of the Corporation noted
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on Exhibit A attached hereto shall have at the Closing in Escrow entered into
agreements, the form of which is attached to this Agreement as Exhibit A.
3.2. Confidentiality. The Shareholder shall abide by the terms of the
Confidentiality Agreement between the Corporation and the Company (or the
Company's predecessor, Dispatch Management Services LLC) executed on November
18, 1997. The Shareholder and the Corporation both acknowledge and agree that
the Company shall have the right to disclose certain information concerning the
Corporation to third parties (which third parties will in turn be bound by an
agreement similar to the Confidentiality Agreement), for such general corporate
purposes as includes but is not limited to obtaining financing and/or
underwriting, and for general marketing purposes.
4. Representations and Warranties of the Company
The Company represents and warrants to the Shareholder as follows:
4.1. Organization, Standing and Power. The Company is duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. The Company is
duly qualified and in good standing to conduct business in each jurisdiction in
which the business it is conducting, or the operation, ownership or leasing of
its properties, makes such qualification necessary.
4.2. Authority and Enforceability. The Company has all requisite
power and authority to execute and deliver this Agreement and each of the
Related Agreements to which it is a party and to perform fully its obligations
hereunder and thereunder. The execution and delivery of this Agreement and each
of the Related Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company. This Agreement and each of the
Related Agreements to which it is a party have been duly executed and delivered
by the Company, and constitute the legal, valid and binding obligations of the
Company enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity).
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4.3. No Violations Resulting From Transactions. The execution and
delivery by the Company of this Agreement and each of the Related Agreements to
which it is a party and the consummation of the transactions contemplated hereby
and thereby by the Company, will not (a) conflict with or violate any provision
of the Certificate of Incorporation or By-laws of the Company, (b) except as
set forth on Exhibit D, require any consent, waiver, approval, authorization or
permission of, or filing with or notification to, any third party, (c) result in
or constitute a default, or require any consent or approval of or notice to any
person or entity under or pursuant to any of the contracts to which the Company
is a party; or (d) violate any applicable laws.
4.4. Compliance with Laws.
(a) The Company is, and at all times since its inception has
been, in material compliance with all applicable laws; and
(b) The Company has not received, and does not know of the
issuance or threatened issuance by any governmental entity of, any notices of
violation or alleged violation of any applicable law. The Shareholder has been
provided with true and complete copies of (i) all injunctions, judgments, orders
or consent or similar decrees or agreements of any governmental entity to which
the Company is currently subject (or to which the Company was subject since its
inception), and (ii) all correspondence through the date hereof with respect to
any of the matters referred to in clause (b) or clause (i) of this Section 4.4.
4.5. Litigation. There is no Legal Proceeding pending or, to the
knowledge of the Company, threatened that questions the validity of this
Agreement or the Related Agreements or any action taken or to be taken by the
Company in connection with the consummation of the transactions contemplated
hereby or thereby or which seeks to prohibit, enjoin or otherwise challenge any
of the transactions contemplated hereby or thereby. Exhibit E sets forth an
accurate and complete list, and a brief description (setting forth the names of
the parties involved, the court or other governmental or mediating entity
involved, the relief sought and the substantive allegations and the status
thereof), of each Legal Proceeding pending or, to the knowledge of the Company,
threatened against or affecting the Company. To the knowledge of the Company, no
event has occurred and no circumstance, matter or set of facts exist which would
constitute a valid basis for the assertion by any third party of any claim or
Legal Proceeding, other than those listed on Exhibit E. Except as set forth
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in Exhibit E, there is no outstanding or, to the knowledge of the Company,
threatened, judgment, injunction, order or consent or similar decree or
agreement (including, without limitation, any consent or similar decree or
agreement with any governmental entity) against, affecting or naming the
Company.
4.6. Default. The Company is not in material default of any of its
obligations, contracts, or commitments in any respect, or in breach of any
negative or affirmative covenants placed on it by its creditors, and the Company
has not been notified of any such defaults or breaches.
4.7. Misrepresentation. Neither this Agreement (including the
Exhibits hereto) or any Related Agreement or any information supplied to the
Shareholder by or on behalf of the Company in connection with this Agreement,
the Related Agreements or the transactions contemplated hereby or thereby
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statement contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
5. Covenants Relating to Conduct of Business
During the period from the date of this Agreement and continuing until
the Closing Date, the Shareholder and the Corporation, jointly and severally,
covenant and agree that (except as expressly contemplated or permitted by this
Agreement, or to the extent that the Company shall otherwise consent in
writing):
5.1. Conduct of the Business Pending the Closing Date. The
Corporation shall:
(a) conduct its business only in the ordinary course, consistent
with past practice;
(b) use its best efforts to (i) preserve the present business
operations, organization (including, without limitation, management and the
sales force) and goodwill of its business and (ii) preserve the present
relationship of the Corporation with Persons having business dealings with the
Corporation;
(c) comply with all laws and with all contractual and other
obligations applicable to it;
(d) not change its Articles of Incorporation or By-laws;
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(e) not issue or contract to issue any stock, securities,
options, or debt which is convertible to stock or securities;
(f) not declare or agree to declare or otherwise make any
dividend or other distribution or payment in respect of the Stock;
(g) not sell, transfer, assign, pledge, encumber or otherwise
dispose of any of its assets, except in the ordinary course of business
consistent with past practice;
(h) not acquire any material properties or assets and not sell,
assign, transfer, convey, lease or otherwise dispose of any of its material
properties;
(i) maintain its present fire and extended coverage insurance or
equivalent coverage on all of its assets and on all real and personal property
leased to it;
(j) promptly notify the Company of (i) the occurrence of any
matter which may have a material adverse effect on its business or its assets,
and (ii) any Legal Proceeding commenced by or against it or any Legal Proceeding
commenced or threatened relating to the transactions contemplated by this
Agreement;
(k) not agree to anything prohibited by this Agreement or
anything which would make any of the representations and warranties of the
Shareholder or the Corporation in this Agreement or the Related Agreements
untrue or incorrect in any material respect.
6. Additional Agreements and Representations.
6.1. Access to Information. The Shareholder and the Corporation agree
that, prior to the Closing Date, the Company shall be entitled (at its sole
expense), through its officers, employees and representatives (including,
without limitation, its legal advisors and accountants), to make such
investigation of the properties, businesses and operations and financial
condition of the Corporation and examination of its books and records as the
Company may reasonably request, and to make extracts and copies of such books
and records. Any such investigation and examination shall be conducted during
regular business hours and under reasonable circumstances, and the Shareholder
and the Corporation shall cooperate fully therein. In order that the Company
may have full opportunity to make such physical, business, accounting and legal
review, examination or investigation as it may reasonably request of the affairs
of the Corporation, the Corporation and the Shareholder shall use their
respective best efforts to cause the Corporation's officers, employees,
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consultants, agents, accountants, attorneys and other representatives to
cooperate fully with such Company representatives in connection with such review
and examination.
6.2. Non-solicitation Pending Closing. After execution of this
Agreement, and through the Closing Date, neither the Corporation nor the
Shareholder shall pursue, initiate, encourage or engage in any negotiations or
discussions with any third parties concerning the sale of the Corporation, its
assets, or any part thereof or concerning the terms and conditions of this
Agreement.
6.3. Additional Agreements. Each of the parties hereto agrees to use
their respective best efforts to (i) take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement and the Related Agreements, (ii)
obtain all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental entities, third parties and parties
to contracts with the Corporation as are necessary for consummation of the
transactions contemplated by this Agreement and the Related Agreements, and
(iii) fulfill all conditions precedent applicable to such party pursuant to this
Agreement and the Related Agreements. In case at any time after the Closing
Date any further action is necessary or desirable to carry out the purposes of
this Agreement or the Related Agreements, each party hereto shall use their
respective best efforts to take or cause to be taken all such necessary action.
6.4. Notification of Certain Matters. The Corporation and the
Shareholder shall give prompt notice to the Company of (a) any notice of, or
other communication relating to, a default under any contract material to the
financial condition, properties, business operations, or results of operations
of the Corporation to which it is a party or is subject, (b) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement or any of the Related Agreements, or (c) any material adverse change
in the properties, business operations, results of operations, financial
condition or prospects of the Corporation, other than changes resulting from
general economic conditions. In addition, the Corporation and the Shareholder
shall be required to
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update the schedules and other information supplied pursuant to this Agreement
at such time as the information contained therein changes in any material
respect.
6.5 Working Capital as of the Closing Date. The Shareholder shall
ensure that the Corporation has working capital as of the Closing Date equal to
at least one-twelfth (1/12) of the Purchase Price (as increased as a result of
the Merrill Increase, bur without regard to any reduction in the Maximum
Earn-Out). For purposes of this Section 6.5, "working capital" shall be defined
as the excess of current (liquid) assets over current liabilities. For purposes
of determining whether the Corporation had the required working capital as of
the Closing Date, the Company will cause to be prepared, promptly following the
Closing, a balance sheet of the Corporation as of the Closing Date. Such
balance sheet shall be prepared in accordance with GAAP, and shall include full
accrual of all assets and liabilities of the Corporation as of the Closing Date
(including, but not limited to, accrued tax liabilities as if the tax year ended
on the Closing Date). In the event that the Corporation has less than the
prescribed working capital as of the Closing Date, as determined by such balance
sheet, the Shareholder shall forthwith pay the Company an amount equal to the
difference between the actual working capital as of the Closing Date and the
required working capital (the "Shortfall"). If the Shareholders do not pay the
Shortfall to the Company within five (5) days after demand, then, in addition to
all other remedies which the Company may have, the Company may deduct the amount
of the Shortfall from any of the obligations of the Company to the Shareholder
(including, but not limited to, the Earn-Out to which the Shareholder may be
entitled thereafter).
In the event that the Shareholder shall notify the Company in writing
within five days after demand is made by the Company for payment of the
Shortfall of their decision to dispute the amount of the Shortfall, the Company
shall forthwith instruct Price Waterhouse LLP to audit the balance sheet of the
Corporation as of the Closing Date, and to calculate the working capital therein
in accordance with GAAP. Price Waterhouse LLP shall then determine the amount
of the Shortfall as set out in this paragraph 6.5, whose decision shall be final
and binding on the parties hereto. The Shareholder shall forthwith pay to the
Company the amount of such Shortfall, together with fifty percent (50%) of the
cost of the audit conducted by Price Waterhouse LLP. In the event Price
Waterhouse LLP determines the Shortfall to have been zero, the entire cost of
such audit shall be borne by the Company.
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7. Conditions Precedent.
7.1. Conditions to Obligations of All Parties. The respective
obligations of each party under this Agreement shall be subject to the
satisfaction prior to the Closing in Escrow Date and the Closing Date of the
following conditions:
(a) Governmental Approvals. All authorizations, consents,
orders or approvals of, or declarations or filings with, or expirations of
waiting periods imposed by, any governmental entity, requisite to the
transactions contemplated hereby, shall have been filed, occurred or have been
obtained, as the case may be.
(b) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect; provided that prior to invoking this condition, each party shall use
their best efforts to have any such order, injunction, legal restraint or
prohibition vacated.
7.2. Conditions to Obligations of the Company. The obligations of the
Company to effect the transactions contemplated by this Agreement are subject to
the satisfaction of the following conditions (which are for the exclusive
benefit of the Company, any or all of which may be waived in whole or in part by
the Company):
(a) Representations and Warranties. The representations and
warranties of the Corporation and the Shareholder set forth in this Agreement
(without regard to any supplements or updates thereto) shall be true and correct
in all respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of a specified, earlier date) as of the
Closing in Escrow Date and the Closing Date as though made on and as of the
Closing in Escrow Date and the Closing Date, respectively, except as otherwise
contemplated by this Agreement, and the Company shall have received a
certificate from the Shareholder and the Corporation (signed by the Shareholder
and a senior executive officer of the Corporation) certifying to such effect.
(b) Performance of Obligations. The Corporation and the
Shareholder shall each have performed all obligations required to be performed
by each such party under this Agreement at or prior to the Closing in Escrow
Date and the Closing Date, respectively, and the
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Company shall have received a certificate from the Shareholder and the
Corporation (signed by the Shareholder and a senior executive officer of the
Corporation) certifying to such effect.
(c) No Material Adverse Change. Since the date of this
Agreement, there shall have been no change, occurrence or circumstance resulting
in, or which could reasonably likely result in, individually or in the
aggregate, a material adverse effect on the Corporation, its assets or its
business.
(d) Contractual Consents. The Corporation and/or the
Shareholder shall have given all notices to, and obtained all consents,
approvals or authorizations of or from, any individual, corporation or other
party which may be necessary to permit the consummation of the transactions
contemplated hereby (including, without limitation, any consents required under
the Contracts).
(e) Related Agreements. Each of the Related Agreements to which
the Shareholder is a party shall have been duly executed and delivered by such
party. In addition, the Related Agreements shall have been entered into by the
respective parties thereto.
7.3. Conditions to Obligations of the Corporation and the Shareholder.
The obligations of the Corporation and the Shareholder to effect the
transactions contemplated by this Agreement are subject to the satisfaction of
the following conditions (which are for the exclusive benefit of the Corporation
and the Shareholder, any or all of which may be waived in whole or in part by
the Corporation or the Shareholder).
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
in all respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of a specified, earlier date) as of the
Closing in Escrow Date and the Closing Date as though made on and as of the
Closing in Escrow Date and the Closing Date, respectively, except as otherwise
contemplated by this Agreement.
(b) Performance of Obligations. The Company shall have
performed all obligations required to be performed by it under this Agreement at
or prior to the Closing in Escrow Date and the Closing Date, respectively.
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(c) Related Agreements. Each of the Related Agreements shall
have been duly executed and delivered by the parties thereto.
8. Termination.
8.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) by mutual written consent of the Company and the
Shareholder;
(b) by either the Company or the Shareholder, if the closing of
the Initial Public Offering does not occur by March 31, 1998;
(c) by the Company in the event that the Anti-Dilution Rights
(as defined in the Operating Agreement) are not preserved; or
(d) by the Company in the event that the Shareholder does not
timely deliver a shareholder representation letter satisfactory to the Company.
8.2. Effect of Termination Under Section 8.1. In the event of
termination of this Agreement by either the Company or the Shareholder as
provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of any party hereto or any of
its respective Affiliates, officers, directors or shareholders except (i) for
the obligation of the Shareholder to refund to the Company the audit expenses as
set forth in Section 1.3 of this Agreement; (ii) for any and all obligations
under the confidentiality provisions contained in Section 3.2 of this Agreement;
and (iii) to the extent that such termination results from the willful breach by
a party hereto of any of its representations or warranties, or of any of its
covenants or agreements, as set forth in this Agreement. In the event that
termination results from the willful breach by a party hereto of any of its
representations or warranties, or of any of its covenants or agreements, as set
forth in this Agreement, the breaching party shall be liable to the
non-breaching party for all direct damages (but not indirect or consequential
damages) incurred as a result of such willful breach.
9. Indemnification.
9.1. Indemnification.
(a) Indemnification by the Corporation and the Shareholder. The
Corporation and the Shareholder each hereby agree to jointly and severally
indemnify, defend and hold harmless the Company and its respective officers,
directors, employees and agents (collectively,
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the "Indemnitee") from and against and in respect of any and all Losses (as
defined below) to the extent resulting from, arising out of, relating to,
imposed upon or incurred by the Indemnitee by reason of: (i) the conduct of
business by the Corporation prior to the Closing Date (but only to the extent
that the amount of such Loss was not a stated liability on the Corporation's
most recently dated balance sheet delivered to the Company); and (ii) any
inaccuracy in or breach of any of the Corporation's or the Shareholder's
representations, warranties, covenants or agreements contained in this
Agreement, the Related Agreements or in any other agreement or document entered
into or delivered on or after the date hereof in connection with this Agreement
or any of the transactions contemplated hereby and/or thereby. For purposes of
clarification, the Corporation and the Shareholder shall indemnify the
Indemnitee from and against any liability for the revolving line of credit with
Merchant's Bank of New York disclosed on Exhibit C (which liability is to be
paid out of the cash proceeds from the sale), and for any ultimate liability for
the pending litigation disclosed on Exhibit E. Provided, however, the
indemnification by the Corporation and the Shareholder under this Section
9.1.(a) shall include direct damages only (and not indirect or consequential
damages). For purposes of this Agreement, the term "Losses" means any and all
deficiencies, judgments, settlements, demands, claims, actions or causes of
action, assessments, liabilities, losses, damages (whether direct, indirect or
consequential), interest, fines, penalties, costs and expenses (including,
without limitation, reasonable legal, accounting and other costs and expenses
incurred in connection with investigating, defending, settling or satisfying any
and all demands, claims actions, causes of action, suits, proceedings,
assessments, judgments or appeals, and in seeking indemnification therefor).
(b) Indemnification by the Company. The Company hereby agrees
to indemnify, defend and hold harmless the Shareholder from and against and in
respect of any and all Losses resulting from, arising out of, relating to,
imposed upon or incurred by the Shareholder by reason of any inaccuracy in or
breach of any of the Company's representations, warranties, covenants or
agreements contained in this Agreement or in any other agreement or document
entered into or delivered by the Company on or after the date hereof in
connection with this Agreement or any of the transactions contemplated hereby
and/or thereby. Provided, however, the indemnification by the Company under
this Section 9.1.(b) shall include direct damages only (and not indirect or
consequential damages) and shall be limited in the aggregate to the Purchase
Price.
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9.2. Notice. If any claims in respect of Losses shall be asserted
against any party hereto or any of their respective successors in respect of
which such entity proposes to demand indemnification from any of the other
parties hereto under Section 9.1 hereof, the party seeking such indemnification
shall notify the other such parties in a reasonably prompt manner; provided that
failure to give such reasonably prompt notice shall not release, waive or
otherwise affect any party's obligations with respect thereto except to the
extent such party can demonstrate it was actually and materially prejudiced as a
result thereof.
10. General Provisions.
10.1. Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements in this Agreement shall survive the
Closing.
10.2. Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally or telecopied or
sent by overnight courier, or by certified or registered mail, postage prepaid,
and shall be deemed to be given, dated and received when so delivered personally
or by courier or telecopied, or, if mailed, five business days after the date of
mailing to the following address or telecopy number, or to such other address or
addresses as such Person may subsequently designate by written notice given
hereunder:
(a) if to Company, to:
Dispatch Management Services Corp.
12240 Indian Creek Court
Beltsville, Maryland 20705
Attention: Linda Jenkinson, Chief Executive Officer
(b) if to the Corporation or the Shareholder, to:
Zoom Messenger Service, Inc.
180 Broadway
New York, New York 10038
Attention: Frank Nizzare, President
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10.3. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be considered an original and all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
10.4. Entire Agreement; No Third Party Beneficiaries. This
Agreement (together with the Related Agreements and any other documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings both written and oral, among the parties
with respect to the subject matter hereto and is not intended to confer upon any
Person other than the parties hereto any rights or remedies hereunder. Subject
to applicable law, this Agreement may be amended, modified or supplemented only
by written agreement of all parties hereto with respect to any of the terms
contained herein, and each party hereto agrees to be bound by any such
amendment, modification or supplement.
10.5. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Maryland, without giving
effect to the principles of conflicts of law thereof.
10.6. Severability. If any term or other provision of this
Agreement is invalid, illegal or unenforceable, all other provisions of this
Agreement shall remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially averse to any party. In the event that the enforceability of any
non-competition or similar covenants contained herein or in any Related
Agreement is called into question as the result of time, geographical or other
applicable limitations specified in such covenants, such time, geographical or
other applicable limitations shall be deemed modified to the minimum extent
necessary to render the applicable provisions of such covenants enforceable.
10.7. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
10.8. Specific Performance. The parties hereto acknowledge that
irreparable damage would result if any of the covenants of this Agreement were
not specifically enforced, and
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they therefore consent that the rights and obligations of the parties under this
Agreement may be enforced by a decree of specific performance issued by a court
of competent jurisdiction. Such remedy shall, however, not be exclusive and
shall be in addition to any other remedies which any party may have under this
Agreement or otherwise. Without limiting the foregoing, the Corporation and the
Shareholder acknowledge that the failure to comply with any of the provisions of
Sections 3.1, 3.2. and 6.2 hereof will result in irreparable harm for which
there is no adequate remedy at law and that the Company and/or the Corporation
shall be entitled, without the necessity of proving actual damages, to
injunctive relief in addition to damages and all other remedies which may
otherwise be available to the Company and/or the Corporation.
10.9. Fees and Expenses. All costs and expenses, including but
not limited to all fees and expenses of attorneys, lenders, financial advisers
and accountants, in connection with the negotiation, execution and delivery of
this Agreement, the Related Agreements and the consummation of the transactions
contemplated hereby and thereby, shall be paid by the party incurring such costs
and expenses.
10.10. Arbitration. Other than the Company's right to institute
legal action for a breach of the confidentiality, non-competition and
non-solicitation covenants set forth in Sections 3.1, 3.2 and 6.2 hereinabove,
any issue, controversy, dispute or claim arising out of or relating to this
Agreement or its alleged breach that cannot be resolved by mutual agreement
shall be resolved exclusively by arbitration by a single arbitrator in either
the District of Columbia or New York City, at the option of the Company, in
accordance with the commercial arbitration rules of the American Arbitration
Association ("AAA") and judgment on the award rendered by the arbitrator may be
entered by any court having jurisdiction thereof. It is acknowledged by the
Corporation and the Shareholder that money damages are inadequate to compensate
the Company and/or the Corporation for a breach of the terms of this Agreement,
and that the Company and/or the Corporation shall be entitled to specific
performance of the terms of this Agreement. The arbitrator may enter a default
decision against any party who fails to participate in the proceeding. The
decision of the arbitrator shall be final, conclusive, binding and
non-appealable. The losing party shall pay all costs and expenses of
arbitration.
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The arbitrator shall be selected by consent of the parties, if possible.
If the parties fail to reach agreement upon appointment of the arbitrator within
ten days after a demand for arbitration is made, the arbitrator shall be
selected from a list of proposed arbitrators submitted by AAA. The selection
process shall be that which is set forth in the AAA commercial arbitration rules
then prevailing, except that (1) the number of preemptory strikes shall not be
limited, and (2) if the parties fail to select the arbitrator from three lists,
AAA shall have the power to make an appointment. If an arbitrator should die,
withdraw, or otherwise become incapable of serving, a replacement shall be
selected and appointed in a like manner.
10.11 Disclosure to Third Parties. The Company shall have the
right to disclose to third parties, in whatever manner the Company may
determine, the fact that this Agreement has been executed, the names of the
parties to this Agreement and the terms hereof.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
or on behalf of each of the parties hereto as of the date first above written.
"COMPANY"
DISPATCH MANAGEMENT SERVICES CORP.
By: /s/ Linda Jenkinson
---------------------------
Name: Linda Jenkinson
Title: Chief Executive Officer
Attest: "CORPORATION"
Zoom Messenger Service, Inc.
_________________________ By: /s/ Frank Nizzare
---------------------------
Frank Nizzare:
President:
Witness: "SHAREHOLDER"
__________________________ /s/ Frank Nizzare
--------------------------
Frank Nizzare
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<PAGE>
Exhibit 10.1
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") dated as of _________,
1997, between Dispatch Management Services Corp., a Delaware corporation (the
"Company"), and ____________ ("Indemnitee").
RECITALS
A. Indemnitee is a _________________________________ of the Company and
in such capacity is performing a valuable service to the Company.
B. The Company's Amended and Restated Bylaws (the "Bylaws") provide for
the indemnification of directors or officers of the Company.
C. The Certificate of Incorporation of the Company, as amended (the
"Certificate"), provides that the Company shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended from time to time, indemnify the directors and officers
of the Company and advance expenses incurred by such directors and officers
in proceedings to which they may be party as a result of their status as
directors and officers. The Company may, in its discretion, indemnify other
persons from time to time on terms and conditions deemed appropriate by the
Company's Board of Directors (the "Corporation Law").
D. The Corporation Law specifically provides that indemnification and
advancement of expenses provided in such statute shall not be exclusive of
any other rights under any agreement, and thereby contemplates that
agreements may be entered into between the Company and members of the Board
of Directors or officers of the Company with respect to the indemnification
of such directors or officers.
E. In accordance with the authorization provided in the Corporation
Law, the Company may purchase and maintain a policy or policies of directors'
and officers' liabilities insurance (the "Insurance") covering certain
liabilities which may be incurred by the Company's directors and officers in
the performance of their services to the Company.
F. The general availability of directors' and officers' liability
insurance covering certain liabilities which may be incurred by the Company's
directors and officers in the performance of their services to the Company
and the applicability, amendment and enforcement of statutory and bylaw
provisions have raised questions concerning the adequacy and reliability of
the protection afforded to directors and officers.
G. In order to induce Indemnitee to serve as a _______________________
of the Company for the current term and for any subsequent term to which he
is elected or
<PAGE>
nominated, the Company has deemed it to be in its best interest to enter into
this Agreement with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's agreement to serve as a
_____________________________________ of the Company after the date hereof,
the parties hereto agree as follows:
1. Definitions.
As used in this Agreement, the following terms shall have the following
meanings:
(a) Change in Control. A "Change in Control" shall be deemed to have
occurred if:
(i) any person or entity, or group of persons or entities acting
together, other than the Company or an employee benefit plan of the
Company, acquires directly or indirectly the Beneficial Ownership (as
defined in Section 13(d) of the Securities Exchange Act of 1934, as
amended) of any voting security of the Company and immediately after
such acquisition such person, entity or group is, directly or
indirectly, the Beneficial Owner of voting securities representing 33%
or more of the total voting power of all of the then-outstanding
voting securities of the Company and has a larger percentage of voting
securities of the Company than any other person, entity or group
holding voting securities of the Company, unless the transaction
pursuant to which such acquisition is made is approved by at least
two-thirds (2/3) of the Board of Directors (the "Board");
(ii) the following individuals no longer constitute a majority of
the members of the Board: (A) the individuals who, as of the closing
date of the Company's initial public offering, constitute the Board
(the "Original Directors"); (B) the individuals who thereafter are
elected to the Board and whose election, or nomination for election,
to the Board was approved by a vote of at least two-thirds (2/3) of
the Original Directors then still in office (such directors becoming
"Additional Original Directors" immediately following their election);
and (C) the individuals who are elected to the Board and whose
election, or nomination for election, to the Board was approved by a
vote of at least two-thirds (2/3) of the Original Directors and
Additional Original Directors then still in office (such directors
also becoming "Additional Original Directors" immediately following
their election);
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation
of any such transaction if stockholder approval is not obtained, other
than any such transaction which
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<PAGE>
would result in at least 75% of the total voting power represented by
the voting securities of the surviving entity outstanding immediately
after such transaction being Beneficially Owned by at least 75% of the
holders of outstanding voting securities of the Company immediately
prior to the transaction, with the voting power of each such
continuing holder relative to other such continuing holders not
substantially altered in the transaction; or
i) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., 50% or more of the total assets of the
Company).
(b) Reviewing Party. A "Reviewing Party" means (i) the Board or a
committee of directors of the Company, who are not officers, appointed by
the Board, provided that a majority of such directors are not parties to
the claim or (ii) special, independent counsel selected and appointed by
the Board or by a committee of directors of the Company who are not
officers.
2. Indemnification of Indemnitee.
The Company hereby agrees that it shall hold harmless and indemnify
Indemnitee to the fullest extent authorized and permitted by the provisions
of the Certificate and Bylaws and the provisions of the Corporation Law, or
by any amendment thereof, but in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than the Certificate, Bylaws or Corporation Law
permitted the Company to provide prior to such amendment, or other statutory
provisions authorizing or permitting such indemnification which is adopted
after the date hereof.
3. Insurance.
3.1 Insurance Policies. So long as Indemnitee may be subject to any
possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that Indemnitee is or was a director or officer, to the
extent that the Company maintains one or more insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms, to
the maximum extent of the coverage applicable to any director or officer then
serving the Company.
3.2 Maintenance of Insurance. The Company shall not be required to
maintain the Insurance or any policy or policies of comparable insurance, as
the case may be, if such insurance is not reasonably available or if, in the
reasonable business judgment of the Board of the Company which shall be
conclusively established by such determination by the Board, or any
appropriate committee thereof, either (i) the premium cost for such insurance
is substantially disproportionate to the amount of coverage thereunder or
(ii) the coverage
3
<PAGE>
provided by such insurance is so limited by exclusions that there is
insufficient benefit from such insurance.
3.3 Self-Insurance. To the extent Indemnitee is not indemnified under
other Sections of this Agreement and is not fully, by reason of deductible or
otherwise, covered by directors' and officers' liability insurance, the
Company shall maintain self-insurance for, and thereby indemnify and hold
harmless, Indemnitee from and against any and all expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any possible claim or
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, in which Indemnitee was or is made
party or was or is involved by reason of the fact that Indemnitee is or was a
director or officer of the Company. Notwithstanding the foregoing, payments
of self-insurance under this Section to Indemnitee by the Company shall not
exceed the amount of $5,000,000 for any event and further shall be limited in
accordance with Section 5 hereof. An "event" as used in the preceding
sentence in reference to a limitation on self-insurance shall include the
same acts or omissions by Indemnitee and interrelated, repeated or continuous
acts or omissions.
4. Additional Indemnification.
Subject only to the exclusions set forth in Section 5 hereof, the Company
hereby agrees that it shall hold harmless and indemnify Indemnitee.
(a) against any and all expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, including an action by or on behalf of
stockholders of the Company or by or in the right of the Company, to which
Indemnitee is, was or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Indemnitee is, was or at any time
becomes a director, officer, employee or agent of the Company, or is or was
serving or at any time serves at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Indemnitee
by the Company under the non-exclusivity provisions of the Corporation Law.
5. Limitations on Additional Indemnification.
No indemnification pursuant to this Agreement shall be paid by the Company:
(a) in respect to any transaction if it shall be determined by the
Reviewing Party, or by final judgment or other final adjudication, that
Indemnitee derived an improper personal benefit;
4
<PAGE>
(b) on account of Indemnitee's conduct which is determined by the
Reviewing Party, or by final judgment or other final adjudication, to have
involved acts or omissions not in good faith, intentional misconduct or a
knowing violation of law; or
(c) if the Reviewing Party or a court having jurisdiction in the
matter shall determine that such indemnification is in violation of the
Certificate, the Bylaws or the law.
6. Advancement of Expenses.
In the event of any threatened or pending action, suit or proceeding in
which Indemnitee is a party or is involved and which may give rise to a right
of indemnification under this Agreement, following written request to the
Company by Indemnitee the Company shall promptly pay to Indemnitee amounts to
cover expenses incurred by Indemnitee in such proceeding in advance of its
final disposition upon the receipt by the Company of (i) a written
undertaking executed by or on behalf of Indemnitee to repay the advance if it
shall ultimately be determined that Indemnitee is not entitled to be
indemnified by the Company as provided in this Agreement and (ii)
satisfactory evidence as to the amount of such expenses.
7. Repayment of Expenses.
Indemnitee agrees that Indemnitee shall reimburse the Company for all
reasonable expenses paid by the Company in defending any civil, criminal,
administrative or investigative action, suit or proceeding against Indemnitee
in the event and only to the extent that it shall be determined by final
judgment or other final adjudication that Indemnitee is not entitled to be
indemnified by the Company for such expenses under the provisions of the
Corporation Law or any applicable law.
8. Determination of Indemnification; Burden of Proof.
With respect to all matters concerning the rights of Indemnitee to
indemnification and payment of expenses under this Agreement or under the
provisions of the Certificate and Bylaws now or hereafter in effect, the
Company shall appoint a Reviewing Party and any determination by the
Reviewing Party shall be conclusive and binding on the Company and
Indemnitee. If under applicable law, the entitlement of Indemnitee to be
indemnified under this Agreement depends on whether a standard of conduct has
been met, the burden of proof of establishing that Indemnitee did not act in
accordance with such standard of conduct shall rest with the Company.
Indemnitee shall be presumed to have acted in accordance with such standard
and entitled to indemnification or advancement of expenses hereunder, as the
case may be, unless, based upon a preponderance of the evidence, it shall be
determined by the Reviewing Party that Indemnitee did not meet such standard.
For purposes of this Agreement, unless otherwise expressly stated herein,
the termination of any action, suit or proceeding by judgment, order,
settlement, whether with or without court approval, or conviction, or upon a
plea of nolo contendere or its equivalent shall not create a presumption that
Indemnitee did not
5
<PAGE>
meet any particular standard of conduct or have any particular belief or that a
court has determined that indemnification is not permitted by applicable law.
9. Effect of Change in Control.
If there has not been a Change in Control after the date of this
Agreement, the determination of: (i) the rights of Indemnitee to
indemnification and payment of expenses under this Agreement or under the
provisions of the Certificate and the Bylaws; (ii) standard of conduct; and
(iii) evaluation of the reasonableness of amounts claimed by Indemnitee shall
be made by the Reviewing Party or such other body or persons as may be
permitted by the Corporation Law. If there has been a Change in Control after
the date of this Agreement, such determination and evaluation shall be made
by a special, independent counsel who is selected by Indemnitee and approved
by the Company, which approval shall not be unreasonably withheld, and who
has not otherwise performed services for Indemnitee or the Company.
10. Continuation of Indemnification.
All agreements and obligations of the Company contained herein shall
continue during the period that Indemnitee is a director, officer, employee
or agent of the Company, or is or was serving at the request of the Company
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, and shall continue
thereafter so long as Indemnitee shall be subject to any possible claim or
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that
Indemnitee was a director or officer of the Company or serving in any other
capacity referred to herein.
11. Notification and Defense of Claim.
Promptly after receipt by Indemnitee of notice of the commencement of any
action, suit or proceeding, Indemnitee shall, if a claim in respect hereof is
to be made against the Company under this Agreement, notify the Company of
the commencement thereof; provided, however, that delay in so notifying the
Company shall not constitute a waiver or release by Indemnitee of rights
hereunder and that omission by Indemnitee to so notify the Company shall not
relieve the Company from any liability which it may have to Indemnitee
otherwise than under this Agreement. With respect to any such action, suit or
proceeding as to which Indemnitee notifies the Company of the commencement
thereof:
(a) The Company shall be entitled to participate therein at its own
expense; and
(b) Except as otherwise provided below, to the extent that it may wish,
the Company, jointly with any other indemnifying party similarly notified,
shall be entitled to assume the defense thereof and to employ counsel
reasonably satisfactory to Indemnitee. After notice from the Company to
Indemnitee of its election to so assume the defense thereof, the Company
shall not be liable to Indemnitee under this Agreement for any legal or
other expenses subsequently incurred by Indemnitee in
6
<PAGE>
connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. Indemnitee shall have the
right to employ counsel of his own choosing in such action, suit or
proceeding but the fees and expenses of such counsel incurred after notice
from the Company of assumption by the Company of the defense thereof shall
be at the expense of Indemnitee unless (i) the employment of counsel by
Indemnitee has been specifically authorized by the Company, such
authorization to be conclusively established by action by disinterested
members of the Board though less than a quorum; (ii) representation by the
same counsel of both Indemnitee and the Company would, in the reasonable
judgment of Indemnitee and the Company, be inappropriate due to an actual
or potential conflict of interest between the Company and Indemnitee in the
conduct of the defense of such action, such conflict of interest to be
conclusively established by an opinion of counsel to the Company to such
effect; (iii) the counsel employed by the Company and reasonably
satisfactory to Indemnitee has advised Indemnitee in writing that such
counsel's representation of Indemnitee would likely involve such counsel in
representing differing interests which could adversely affect the judgment
or loyalty of such counsel to Indemnitee, whether it be a conflicting,
inconsistent, diverse or other interest; or (iv) the Company shall not in
fact have employed counsel to assume the defense of such action, in each of
which cases the fees and expenses of counsel shall be paid by the Company.
The Company shall not be entitled to assume the defense of any action, suit
or proceeding brought by or on behalf of the Company or as to which a
conflict of interest has been established as provided in (ii) hereof.
Notwithstanding the foregoing, if an insurance company has supplied
directors' and officers' liability insurance covering an action, suit or
proceeding, then such insurance company shall employ counsel to conduct the
defense of such action, suit or proceeding unless Indemnitee and the
Company reasonably concur in writing that such counsel is unacceptable.
(c) The Company shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any
action or claim in any manner which would impose any liability or penalty
on Indemnitee without Indemnitee's written consent. Neither the Company
nor Indemnitee shall unreasonably withhold consent to any proposed
settlement.
12. Enforcement.
(a) The Company expressly confirms and agrees that it has entered into
this Agreement and assumed the obligations imposed on the Company hereby in
order to induce Indemnitee to serve as a director or officer of the Company
and acknowledges that Indemnitee is relying upon this Agreement in
continuing in such capacity.
(b) If a claim for indemnification or advancement of expenses is not paid
in full by the Company within thirty (30) days after a written claim by
Indemnitee has been received by the Company, Indemnitee may at any time
assert the claim and bring suit against the Company to recover the unpaid
amount of the claim. In the event
7
<PAGE>
Indemnitee is required to bring any action to enforce rights or to collect
moneys due under this Agreement and is successful in such action, the
Company shall reimburse Indemnitee for all of Indemnitee's reasonable
attorneys' fees and expenses in bringing and pursuing such action.
13. Proceedings by Indemnitee.
The Company shall not be liable to make any payment under this Agreement in
connection with any action, suit or proceeding, or any part thereof, initiated
by Indemnitee unless such action, suit or proceeding, or part thereof, (i) was
authorized by the Company, such authorization to be conclusively established by
action by disinterested members of the Board though less than a quorum or (ii)
was brought by Indemnitee pursuant to Section 12(b) hereof.
14. Effectiveness.
This Agreement is effective for, and shall apply to, (i) any claim which
is asserted or threatened before, on or after the date of this Agreement but
for which no action, suit or proceeding has been brought prior to the date
hereof and (ii) any action, suit or proceeding which is threatened before, on
or after the date of this Agreement but which is not pending prior to the
date hereof. This Agreement shall not apply to any action, suit or proceeding
which was brought before the date of this Agreement. So long as the foregoing
is satisfied, this Agreement shall be effective for, and be applicable to,
acts or omissions occurring prior to, on or after the date hereof.
15. Non-exclusivity.
The rights of Indemnitee under this Agreement shall not be deemed
exclusive, or in limitation of, any rights to which Indemnitee may be
entitled under any applicable common or statutory law, or pursuant to the
Certificate, the Bylaws, a vote of the stockholders or otherwise.
16. Other Payments.
The Company shall not be liable to make any payment under this Agreement
in connection with any action, suit or proceeding against Indemnitee to the
extent Indemnitee has otherwise received payment of the amounts otherwise
payable by the Company hereunder.
17. Subrogation.
In the event the Company makes any payment under this Agreement, the
Company shall be subrogated, to the extent of such payment, to all rights of
recovery of Indemnitee with respect thereto, and Indemnitee shall execute all
agreements, instruments, certificates or other documents and do or cause to
be done all things necessary or appropriate to secure such
8
<PAGE>
recovery rights to the Company including, without limitation, executing such
documents as shall enable the Company to bring an action or suit to enforce such
recovery rights.
18. Survival; Continuation.
The rights of Indemnitee under this Agreement shall inure to the benefit
of Indemnitee, his heirs, executors, administrators, personal representatives
and assigns, and this Agreement shall be binding upon the Company, its
successors and assigns. The rights of Indemnitee under this Agreement shall
continue so long as Indemnitee may be subject to any action, suit or
proceeding because of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. If the Company, in a
single transaction or series of related transactions, sells, leases,
exchanges, or otherwise disposes of all or substantially all of its property
and assets, the Company shall, as a condition precedent to any such
transaction, cause effective provision to be made so that the persons or
entities acquiring such property and assets shall become bound by and replace
the Company under this Agreement.
19. Amendment and Termination.
No amendment, modification, termination or cancellation of this Agreement
shall be effective unless made in writing signed by both parties hereto.
20. Headings.
Section headings of the sections and paragraphs of this Agreement have
been inserted for convenience of reference only and do not constitute a part
of this Agreement.
21. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally, mailed by
certified mail (return receipt requested) or sent by overnight delivery
service, cable, telegram, facsimile transmission or telex to the parties at
the following addresses or at such other addresses as shall be specified by
the parties by like notice:
(a) if to the Company:
Dispatch Management Services Corp.
65 West 36th Street
New York, New York 10018
Attn: Chief Executive Officer
9
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with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1333 New Hampshire Avenue, N.W.
Washington, DC 20036
Attn: Bruce S. Mendelsohn
(b) if to the Indemnitee
Dispatch Management Services Corp.
65 West 36th Street
New York, New York 10018
Attn: [Indemnitee]
Notice so given shall, in the case of notice so given by mail, be deemed to
be given and received on the fourth calendar day after posting, in the case
of notice so given by overnight delivery service, on the date of actual
delivery and, in the case of notice so given by cable, telegram, facsimile
transmission, telex or personal delivery, on the date of actual transmission
or, as the case may be, personal delivery.
22. Severability.
If any provision of this Agreement shall be held to be illegal, invalid
or unenforceable under any applicable law, then such contravention or
invalidity shall not invalidate the entire Agreement. Such provision shall be
deemed to be modified to the extent necessary to render it legal, valid and
enforceable, and if no such modification shall render it legal, valid and
enforceable, then this Agreement shall be construed as if not containing the
provision held to be invalid, and the rights and obligations of the parties
shall be construed and enforced accordingly.
23. Complete Agreement.
This Agreement, those documents expressly referred to herein and other
documents of even date herewith embody the complete agreement and
understanding among the parties and supersede and preempt any prior
understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any
way.
24. Counterparts.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, with the same effect as if
all parties had signed the same document. All such counterparts shall be
deemed an original, shall be construed together and shall constitute one and
the same instrument.
10
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25. CHOICE OF LAW. THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW,
AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
DISPATCH MANAGEMENT SERVICES CORP.
By:________________________________
Linda Jenkinson
Chief Executive Officer
_______________________________
__________________, Indemnitee
11
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Exhibit 10.4
DISPATCH MANAGEMENT SERVICES CORP.
1997 STOCK INCENTIVE PLAN
(As Adopted November [ ], 1997)
<PAGE>
DISPATCH MANAGEMENT SERVICES CORP.
1997 STOCK INCENTIVE PLAN
1. Purpose.
The purpose of this Plan is to strengthen Dispatch Management Services
Corp., a Delaware corporation (the "Company"), by providing an incentive to its
employees, officers, consultants and directors and thereby encouraging them to
devote their abilities and industry to the success of the Company's business
enterprise. It is intended that this purpose be achieved by extending to
employees, officers, consultants and directors of the Company and its
Subsidiaries an added long-term incentive for high levels of performance and
unusual efforts through the grant of Incentive Stock Options, Nonqualified Stock
Options, Stock Appreciation Rights, Dividend Equivalent Rights, Performance
Awards and Restricted Stock (as each term is herein defined).
2. Definitions.
For purposes of the Plan:
2.1 "Adjusted Fair Market Value" means, in the event of a Change in
Control, the greater of (i) the highest price per Share paid to holders of the
Shares in any transaction (or series of transactions) constituting or resulting
in a Change in Control or (ii) the highest Fair Market Value of a Share during
the ninety (90) day period ending on the date of a Change in Control.
2.2 "Affiliate" means any entity, directly or indirectly, controlled
by, controlling or under common control with the Company or any corporation or
other entity acquiring, directly or indirectly, all or substantially all the
assets and business of the Company, whether by operation of law or otherwise.
2.3 "Agreement" means the written agreement between the Company and
an Optionee or Grantee evidencing the grant of an Option or Award and setting
forth the terms and conditions thereof.
2.4 "Award" means a grant of Restricted Stock, a Stock Appreciation
Right, a Performance Award, a Dividend Equivalent Right or any or all of them.
2.5 "Board" means the Board of Directors of the Company.
2.6 "Cause" means:
<PAGE>
(a) for purposes of Section 6.4, the commission of an act of
fraud or intentional misrepresentation or an act of embezzlement,
misappropriation or conversion of assets or opportunities of the Company or any
of its Subsidiaries; and
(b) in all other cases, (i) intentional failure to perform
reasonably assigned duties, (ii) dishonesty or willful misconduct in the
performance of duties, (iii) involvement in a transaction in connection with the
performance of duties to the Company or any of its Subsidiaries which
transaction is adverse to the interests of the Company or any of its
Subsidiaries and which is engaged in for personal profit or (iv) willful
violation of any law, rule or regulation in connection with the performance of
duties (other than traffic violations or similar offenses).
2.7 "Change in Capitalization" means any increase or reduction in the
number of Shares, or any change (including, but not limited to, a change in
value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company or another corporation, by reason of a
reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up, issuance of warrants or rights or debentures, stock
dividend, stock split or reverse stock split, cash dividend, property dividend,
combination or exchange of shares, repurchase of shares, change in corporate
structure or otherwise.
2.8 A "Change in Control" shall mean the occurrence during the term
of the Plan of:
(a) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any "Person" (as
the term person is used for purposes of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), immediately after which
such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of [thirty] percent ([30]%) or more of the
then outstanding Shares or the combined voting power of the Company's then
outstanding Voting Securities; provided, however, in determining whether a
Change in Control has occurred, Shares or Voting Securities which are acquired
in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an
acquisition which would cause a Change in Control. A "Non-Control Acquisition"
shall mean an acquisition by (i) an employee benefit plan (or a trust forming a
part thereof) maintained by (A) the Company or (B) any corporation or other
Person of which a majority of its voting power or its voting equity securities
or equity interest is owned, directly or indirectly, by the Company (for
purposes of this definition, a "Subsidiary"), (ii) the Company or its
Subsidiaries, or (iii) any Person in connection with a "Non-Control Transaction"
(as hereinafter defined);
(b) The individuals who, as of the date of the consummation of
the Company's Initial Public Offering are members of the Board (the "Incumbent
Board"), cease for any reason to constitute at least two-thirds of the members
of the
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Board; provided, however, that if the election, or nomination for election by
the Company's common stockholders, of any new director was approved by a vote
of at least two-thirds of the Incumbent Board, such new director shall, for
purposes of this Plan, be considered as a member of the Incumbent Board;
provided further, however, that no individual shall be considered a member of
the Incumbent Board if such individual initially assumed office as a result
of either an actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
(c) The consummation of:
(i) A merger, consolidation or reorganization with or into
the Company or in which securities of the Company are issued,
unless such merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction" shall mean
a merger, consolidation or reorganization with or into the
Company or in which securities of the Company are issued where:
(A) the stockholders of the Company, immediately
before such merger, consolidation or reorganization, own
directly or indirectly immediately following such merger,
consolidation or reorganization, at least [fifty] percent
([50]%) of the combined voting power of the outstanding
voting securities of the corporation resulting from such
merger or consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such
merger, consolidation or reorganization,
(B) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board
of directors of the Surviving Corporation, or a corporation
beneficially directly or indirectly owning a majority of the
Voting Securities of the Surviving Corporation, and
(C) no Person other than (i) the Company, (ii) any
Subsidiary, (iii) any employee benefit plan (or any trust
forming a part thereof) that, immediately prior to such
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merger, consolidation or reorganization, was maintained by
the Company or any Subsidiary, or (iv) any Person who,
immediately prior to such merger, consolidation or
reorganization had Beneficial Ownership of [thirty] percent
([30]%) or more of the then outstanding Voting Securities or
Shares, has Beneficial Ownership of [thirty] percent ([30]%)
or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities or its
common stock.
(ii) A complete liquidation or dissolution of the Company;
or
(iii) The sale or other disposition of all or
substantially all of the assets of the Company to any Person
(other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then
outstanding Shares or Voting Securities as a result of the acquisition of
Shares or Voting Securities by the Company which, by reducing the number of
Shares or Voting Securities then outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Persons, provided that if
a Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of Shares or Voting Securities by the Company, and
after such share acquisition by the Company, the Subject Person becomes the
Beneficial Owner of any additional Shares or Voting Securities which
increases the percentage of the then outstanding Shares or Voting Securities
Beneficially Owned by the Subject Person, then a Change in Control shall
occur.
If an Eligible Individual's employment is terminated by the Company
without Cause prior to the date of a Change in Control but the Eligible
Individual reasonably demonstrates that the termination (A) was at the
request of a third party who has indicated or intention or taken steps
reasonably calculated to effect a change in control or (B) otherwise arose in
connection with, or in anticipation of, a Change in Control which has been
threatened or proposed, such termination shall be deemed to have occurred
after a Change in Control for purposes of this Plan provided a Change in
Control shall actually have occurred.
2.9 "Code" means the Internal Revenue Code of 1986, as amended.
2.10 "Committee" means a committee, as described in Section 3.1,
appointed by the Board from time to time to administer the Plan and to
perform the functions set forth herein.
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2.11 "Company" means Dispatch Management Services Corp.
2.12 "Director" means a director of the Company.
2.13 "Director Option" means an Option granted pursuant to Section 6.
2.14 "Disability" means:
(a) in the case of an Optionee or Grantee whose employment
with the Company or a Subsidiary is subject to the terms of an employment
agreement between such Optionee or Grantee and the Company or Subsidiary,
which employment agreement includes a definition of "Disability", the term
"Disability" as used in this Plan or any Agreement shall have the meaning set
forth in such employment agreement during the period that such employment
agreement remains in effect; and
(b) in all other cases, the term "Disability" as used in this
Plan or any Agreement shall mean a physical or mental infirmity which impairs
the Optionee's or Grantee's ability to perform substantially his or her
duties for a period of one hundred eighty (180) consecutive days.
2.15 "Division" means any of the operating units or divisions of the
Company designated as a Division by the Committee.
2.16 "Dividend Equivalent Right" means a right to receive all or
some portion of the cash dividends that are or would be payable with respect
to Shares.
2.17 "Eligible Director" means a director of the Company who is not
an employee of the Company or any Subsidiary.
2.18 "Eligible Individual" means any director
[(other than an Eligible Director)], officer or employee of the Company or a
Subsidiary, or any consultant or advisor who is receiving cash compensation
from the Company or a Subsidiary, designated by the Committee as eligible to
receive Options or Awards subject to the conditions set forth herein.
2.19 "Employee Option" means an Option granted pursuant to Section 5.
2.20 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.21 "Fair Market Value" on any date means the [closing]
[average of the high and low] sales prices of the Shares on such date on the
principal national
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securities exchange on which such Shares are listed or admitted to trading,
or, if such Shares are not so listed or admitted to trading, the average of
the per Share closing bid price and per Share closing asked price on such
date as quoted on the National Association of Securities Dealers Automated
Quotation System or such other market in which such prices are regularly
quoted, or, if there have been no published bid or asked quotations with
respect to Shares on such date, the Fair Market Value shall be the value
established by the Board in good faith and, in the case of an Incentive Stock
Option, in accordance with Section 422 of the Code.
2.22 "Grantee" means a person to whom an Award has been granted
under the Plan.
2.23 "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
2.24 "Initial Public Offering" means the consummation of the first
public offering of Shares pursuant to a registration statement (other than on
Form S-8 or successor forms) filed with, and declared effective by, the
Securities and Exchange Commission.
2.25 "Nonemployee Director" means a director of the Company who is a
"nonemployee director" within the meaning of Rule 16b-3 promulgated under the
Exchange Act.
2.26 "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
2.27 "Option" means a Nonqualified Stock Option, an Incentive Stock
Option, a Director Option, or any or all of them.
2.28 "Optionee" means a person to whom an Option has been granted
under the Plan.
2.29 "Outside Director" means a director of the Company who is an
"outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.30 "Parent" means any corporation which is a parent corporation
(within the meaning of Section 424(e) of the Code) with respect to the
Company.
2.31 "Performance Awards" means Performance Units, Performance
Shares or either of both of them.
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2.32 "Performance Cycle" means the time period specified by the
Committee at the time Performance Awards are granted during which the
performance of the Company, a Subsidiary or a Division will be measured.
2.33 "Performance Objectives" has the meaning set forth in
Section 11.
2.34 "Performance Shares" means Shares issued or transferred to an
Eligible Individual under Section 11.
2.35 "Performance Units" means Performance Units granted to an
Eligible Individual under Section 11.
2.36 "Plan" means the Dispatch Management Services Corp. 1997 Stock
Incentive Plan, as amended and restated from time to time.
2.37 "Pooling Transaction" means an acquisition of the Company in a
transaction which is intended to be treated as a "pooling of interests" under
generally accepted accounting principles.
2.38 "Restricted Stock" means Shares issued or transferred to an
Eligible Individual pursuant to Section 10.
2.39 "Shares" means the common stock, par value $[ ] per
share, of the Company.
2.40 "Stock Appreciation Right" means a right to receive all or some
portion of the increase in the value of the Shares as provided in Section 8
hereof.
2.41 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect
to the Company.
2.42 "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of
the Code applies.
2.43 "Ten-Percent Stockholder" means an Eligible Individual, who, at
the time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, or of a Parent or a Subsidiary.
3. Administration.
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3.1 The Plan shall be administered by the Committee, which shall
hold meetings at such times as may be necessary for the proper administration
of the Plan. The Committee shall keep minutes of its meetings. A quorum shall
consist of not fewer than two members of the Committee and a majority of a
quorum may authorize any action. Any decision or determination reduced to
writing and signed by a majority of all of the members of the Committee shall
be as fully effective as if made by a majority vote at a meeting duly called
and held. Prior to the date of an Initial Public Offering, the Committee
shall consist of at least two (2) directors of the Company and may consist of
the entire Board. From and after the date of an Initial Public Offering, the
Committee shall consist of at least two (2) directors of the Company and may
consist of the entire Board; provided, however, that (A) if the Committee
consists of less than the entire Board, each member shall be a Nonemployee
Director and (B) to the extent necessary for any Option or Award intended to
qualify as performance-based compensation under Section 162(m) of the Code to
so qualify, each member of the Committee, whether or not it consists of the
entire Board, shall be an Outside Director. No member of the Committee shall
be liable for any action, failure to act, determination or interpretation
made in good faith with respect to this Plan or any transaction hereunder,
except for liability arising from his or her own willful misfeasance, gross
negligence or reckless disregard of his or her duties. The Company hereby
agrees to indemnify each member of the Committee for all costs and expenses
and, to the extent permitted by applicable law, any liability incurred in
connection with defending against, responding to, negotiating for the
settlement of or otherwise dealing with any claim, cause of action or dispute
of any kind arising in connection with any actions in administering this Plan
or in authorizing or denying authorization to any transaction hereunder.
3.2 Subject to the express terms and conditions set forth herein,
the Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to whom Employee
Options shall be granted under the Plan and the number of such Employee
Options to be granted and to prescribe the terms and conditions (which need
not be identical) of each such Employee Option, including the purchase price
per Share subject to each Employee Option, and make any amendment or
modification to any Option Agreement consistent with the terms of the Plan;
(b) select those Eligible Individuals to whom Awards shall be
granted under the Plan and to determine the number of Stock Appreciation
Rights, Performance Awards, Shares of Restricted Stock and/or Dividend
Equivalent Rights to be granted pursuant to each Award, the terms and
conditions of each Award, including the restrictions or Performance
Objectives relating to Shares, the maximum value of each Performance Share
and make any amendment or modification to any Award Agreement consistent with
the terms of the Plan;
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(c) to construe and interpret the Plan and the Options and
Awards granted hereunder and to establish, amend and revoke rules and
regulations for the administration of the Plan, including, but not limited
to, correcting any defect or supplying any omission, or reconciling any
inconsistency in the Plan or in any Agreement, in the manner and to the
extent it shall deem necessary or advisable so that the Plan complies with
applicable law including Rule 16b-3 under the Exchange Act and the Code to
the extent applicable, and otherwise to make the Plan fully effective. All
decisions and determinations by the Committee in the exercise of this power
shall be final, binding and conclusive upon the Company, its Subsidiaries,
the Optionees and Grantees, and all other persons having any interest therein;
(d) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee or Grantee on an individual basis
without constituting a termination of employment or service for purposes of
the Plan;
(e) to exercise its discretion with respect to the powers and
rights granted to it as set forth in the Plan; and
(f) generally, to exercise such powers and to perform such
acts as are deemed necessary or advisable to promote the best interests of
the Company with respect to the Plan.
4. Stock Subject to the Plan.
4.1 The maximum number of Shares that may be made the subject of
Options and Awards granted under the Plan is [ ]; provided,
however, [that in the aggregate, not more than one-third of the number of
allotted Shares may be made the subject of Restricted Stock Awards under
Section 10 of the Plan (other than shares of Restricted Stock made in
settlement of Performance Units pursuant to Section 11.2(b)]. The maximum
number of Shares that an Eligible Individual may receive [in any calendar year
period] in respect of Options and Awards may not exceed [ ]
Shares. The maximum dollar amount of cash or the Fair Market Value of Shares
that any Eligible Individual may receive [in any calendar year] during the term
of the Plan in respect of Performance Units denominated in dollars may not
exceed [$ ]. Upon a Change in Capitalization, the maximum number
of Shares referred to in the first two sentences of this Section 4.1 shall be
adjusted in number and kind pursuant to Section 13. The Company shall reserve
for the purposes of the Plan, out of its authorized but unissued Shares or out
of Shares held in the Company's treasury, or partly out of each, such number of
Shares as shall be determined by the Board.
4.2 Upon the granting of an Option or an Award, the number of
Shares available under Section 4.1 for the granting of further Options and
Awards shall be reduced as follows:
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(a) In connection with the granting of an Option or an Award
(other than the granting of a Performance Unit denominated in dollars), the
number of Shares shall be reduced by the number of Shares in respect of which
the Option or Award is granted or denominated.
(b) In connection with the granting of a Performance Unit
denominated in dollars, the number of Shares shall be reduced by an amount
equal to the quotient of (i) the dollar amount in which the Performance Unit
is denominated, divided by (ii) the Fair Market Value of a Share on the date
the Performance Unit is granted.
4.3 Whenever any outstanding Option or Award or portion thereof
expires, is canceled or is otherwise terminated for any reason without having
been exercised or payment having been made in respect of the entire Option or
Award, the Shares allocable to the expired, canceled or otherwise terminated
portion of the Option or Award may again be the subject of Options or Awards
granted hereunder.
4.4 Unless otherwise stated in the applicable Agreement, whenever
any portion of the purchase price of an Option is paid in previously owned
Shares, the Optionee shall be granted a new Option covering the same number
of Shares used to pay such portion of the purchase price. Such new Option
shall have a per share purchase price equal to the Fair Market Value of a
Share on the date of exercise of the first Option, shall be exercisable six
months after the date of grant of the new Option, and shall terminate on the
same date as the first Option.
5. Option Grants for Eligible Individuals.
5.1 Authority of Committee. Subject to the provisions of the Plan,
the Committee shall have full and final authority to select those Eligible
Individuals who will receive Employee Options, and the terms and conditions
of the grant to such Eligible Individuals shall be set forth in an Agreement.
5.2 Purchase Price. The purchase price or the manner in which the
purchase price is to be determined for Shares under each Employee Option
shall be determined by the Committee and set forth in the Agreement;
provided, however, that the purchase price per Share under each
[Incentive Stock][Employee] Option shall not be less than 100% of the Fair
Market Value of a Share on the date the Employee Option is granted (110% in
the case of an Incentive Stock Option granted to a Ten-Percent Stockholder).
5.3 Maximum Duration. Employee Options granted hereunder shall be
for such term as the Committee shall determine, provided that an Incentive
Stock Option shall not be exercisable after the expiration of ten (10) years
from the date it is granted (five (5) years in the case of an Incentive Stock
Option granted to a Ten-Percent Stockholder) and a Nonqualified Stock Option
shall not be exercisable after the
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expiration of ten (10) years from the date it is granted. The Committee may,
subsequent to the granting of any Employee Option, extend the term thereof,
but in no event shall the term as so extended exceed the maximum term
provided for in the preceding sentence.
5.4 Vesting. Subject to Section 7.4, each Employee Option shall
become exercisable in such installments (which need not be equal) and at such
times as may be designated by the Committee and set forth in the Agreement.
To the extent not exercised, installments shall accumulate and be
exercisable, in whole or in part, at any time after becoming exercisable, but
not later than the date the Employee Option expires. The Committee may
accelerate the exercisability of any Employee Option or portion thereof at
any time.
5.5 Modification. No modification of an Employee Option shall
adversely alter or impair any rights or obligations under the Employee Option
without the Optionee's consent.
6. Option Grants for Nonemployee Directors.
6.1 Grant. Director Options shall be granted (i) to Eligible
Directors who become members of the Board after the Initial Public Offering
upon election or appointment and (ii) to all Eligible Directors who are
members of the Board as follows:
(a) Initial Grant. Each Eligible Director who becomes a
Director after the date of the Initial Public Offering shall, upon becoming a
Director, be granted a Director Option in respect of [ ]
Shares.
(b) Annual Grant. Each Eligible Director shall be granted a
Director Option in respect of [ ] Shares on the first business day
[after the annual meeting of the stockholders of the Company] [of (month)] in
each year that the Plan is in effect provided that the Eligible Director is a
Director on such date. All Director Options shall be evidenced by an
Agreement containing such other terms and conditions not inconsistent with
the provisions of this Plan as determined by the Board; provided, however,
that such terms shall not vary the price, amount or timing of Director
Options provided under this Section 6, including provisions dealing with
vesting, forfeiture and termination of such Director Options.
6.2 Purchase Price. The purchase price for Shares under each
Director Option shall be equal to 100% of the Fair Market Value of such
Shares on the date the Director Option is granted.
6.3 Vesting. Subject to Sections 6.4 and 7.4, each Director Option
shall become fully vested and exercisable with respect to [ %] of the
Shares subject thereto on each of the [ ] anniversaries of the date of
grant; provided, however, that the Optionee continues to serve as a Director
as of such date. If an Optionee ceases to
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serve as a Director for any reason, the Optionee shall have no rights with
respect to any Director Option which has not then vested pursuant to the
preceding sentence and the Optionee shall automatically forfeit any Director
Option which remains unvested.
6.4 Duration. Subject to Section 7.4, each Director Option shall
terminate on the date which is the tenth anniversary of the date of grant,
unless terminated earlier as follows:
(a) If an Optionee's service as a Director terminates for any
reason other than Disability, death or Cause, the Optionee may for a period
of three (3) months after such termination exercise his or her Option to the
extent, and only to the extent, that such Option or portion thereof was
vested and exercisable as of the date the Optionee's service as a Director
terminated, after which time the Option shall automatically terminate in full.
(b) If an Optionee's service as a Director terminates by
reason of the Optionee's resignation or removal from the Board due to
Disability, the Optionee may, for a period of one (l) year after such
termination, exercise his or her Option to the extent, and only to the
extent, that such Option or portion thereof was vested and exercisable, as of
the date the Optionee's service as Director terminated, after which time the
Option shall automatically terminate in full.
(c) If an Optionee's service as a Director terminates for
Cause, the Option granted to the Optionee hereunder shall immediately
terminate in full and no rights thereunder may be exercised.
(d) If an Optionee dies while a Director or within three (3)
months after termination of service as a Director as described in clause (a)
of this Section 6.4 or within twelve (12) months after termination of service
as a Director as described in clause (b) of this Section 6.4, the Option
granted to the Optionee may be exercised at any time within twelve (12)
months after the Optionee's death by the person or persons to whom such
rights under the Option shall pass by will, or by the laws of descent or
distribution, after which time the Option shall terminate in full; provided,
however, that an Option may be exercised to the extent, and only to the
extent, that the Option or portion thereof was exercisable on the date of
death or earlier termination of the Optionee's services as a Director.
6.5 Limitations on Amendment. The provisions in this Section 6
shall not be amended more than once every six months, other than to comport
with changes in the Code or the rules and regulations thereunder.
7. Terms and Conditions Applicable to All Options.
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7.1 Non-Transferability. Unless set forth in the Agreement
evidencing the Option (other than an Incentive Stock Option) at the time of
grant or at any time thereafter, an Option granted hereunder shall not be
transferable by the Optionee to whom granted except by will or the laws of
descent and distribution [or pursuant to a domestic relations order (within
the meaning of Rule 16a-12 promulgated under the Exchange Act)], and an
Option may be exercised during the lifetime of such Optionee only by
the Optionee or his or her guardian or legal representative. The terms of
such Option shall be final, binding and conclusive upon the beneficiaries,
executors, administrators, heirs and successors of the Optionee.
7.2 Method of Exercise. The exercise of an Option shall be made
only by a written notice delivered in person or by mail to the Secretary of
the Company at the Company's principal executive office, specifying the
number of Shares to be purchased and accompanied by payment therefor and
otherwise in accordance with the Agreement pursuant to which the Option was
granted. The purchase price for any Shares purchased pursuant to the exercise
of an Option shall be paid, as determined by the Committee in its discretion,
in either of the following forms (or any combination thereof): (i) cash or
(ii) the transfer of Shares to the Company upon such terms and conditions as
determined by the Committee. In addition, both Employee Options and Director
Options may be exercised through a registered broker-dealer pursuant to such
cashless exercise procedures [(other than Share withholding)] which are, from
time to time, deemed acceptable by the Committee, and the Committee may
authorize that the purchase price payable upon exercise of an Employee Option
may be paid by having Shares withheld that otherwise would be acquired upon
such exercise. Any Shares transferred to the Company (or withheld upon
exercise) as payment of the purchase price under an Option shall be valued at
their Fair Market Value on the day preceding the date of exercise of such
Option. The Optionee shall deliver the Agreement evidencing the Option to the
Secretary of the Company who shall endorse thereon a notation of such
exercise and return such Agreement to the Optionee. No fractional Shares (or
cash in lieu thereof) shall be issued upon exercise of an Option and the
number of Shares that may be purchased upon exercise shall be rounded to the
nearest number of whole Shares.
7.3 Rights of Optionees. Optionee shall be deemed for any purpose
to be the owner of any Shares subject to any Option unless and until (i) the
Option shall have been exercised pursuant to the terms thereof, (ii) the
Company shall have issued and delivered Shares to the Optionee, and (iii) the
Optionee's name shall have been entered as a stockholder of record on the
books of the Company. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such Shares, subject to
such terms and conditions as may be set forth in the applicable Agreement.
7.4 Effect of Change in Control. In the event of a Change in
Control, all Options outstanding on the date of such Change in Control shall
become immediately and fully exercisable. In addition, to the extent set
forth in an Agreement evidencing the grant of an Employee Option, an Optionee
will be permitted to surrender to the Company
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for cancellation within sixty (60) days after such Change in Control any
Employee Option or portion of an Employee Option to the extent not yet
exercised and the Optionee will be entitled to receive a cash payment in an
amount equal to the excess, if any, of (x) (A) in the case of a Nonqualified
Stock Option, the greater of (1) the Fair Market Value, on the date preceding
the date of surrender, of the Shares subject to the Employee Option or
portion thereof surrendered or (2) the Adjusted Fair Market Value of the
Shares subject to the Employee Option or portion thereof surrendered or (B)
in the case of an Incentive Stock Option, the Fair Market Value, on the date
preceding the date of surrender, of the Shares subject to the Employee Option
or portion thereof surrendered, over (y) the aggregate purchase price for
such Shares under the Employee Option or portion thereof surrendered. In the
event an Optionee's employment with, or service as a Director of, the Company
terminates following a Change in Control, each Option held by the Optionee
that was exercisable as of the date of termination of the Optionee's
employment or service shall remain exercisable for a period ending not before
the earlier of (A) the first anniversary of the termination of the Optionee's
employment or service or (B) the expiration of the stated term of the Option.
8. Stock Appreciation Rights.
The Committee may in its discretion, either alone or in connection
with the grant of an Employee Option, grant Stock Appreciation Rights in
accordance with the Plan, the terms and conditions of which shall be set
forth in an Agreement. If granted in connection with an Option, a Stock
Appreciation Right shall cover the same Shares covered by the Option (or such
lesser number of Shares as the Committee may determine) and shall, except as
provided in this Section 8, be subject to the same terms and conditions as
the related Option.
8.1 Time of Grant. A Stock Appreciation Right may be granted (i)
at any time if unrelated to an Option, or (ii) if related to an Option,
either at the time of grant, or at any time thereafter during the term of the
Option.
8.2 Stock Appreciation Right Related to an Option.
(a) Exercise. A Stock Appreciation Right granted in connection
with an Option shall be exercisable at such time or times and only to the
extent that the related Options are exercisable, and will not be transferable
except to the extent the related Option may be transferable. A Stock
Appreciation Right granted in connection with an Incentive Stock Option shall
be exercisable only if the Fair Market Value of a Share on the date of
exercise exceeds the purchase price specified in the related Incentive Stock
Option Agreement.
(b) Amount Payable. Upon the exercise of a Stock Appreciation
Right related to an Option, the Grantee shall be entitled to receive an
amount determined by multiplying (A) the excess of the Fair Market Value of a
Share on
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the date preceding the date of exercise of such Stock Appreciation Right over
the per Share purchase price under the related Option, by (B) the number of
Shares as to which such Stock Appreciation Right is being exercised.
Notwithstanding the foregoing, the Committee may limit in any manner the
amount payable with respect to any Stock Appreciation Right by including such
a limit in the Agreement evidencing the Stock Appreciation Right at the time
it is granted.
(c) Treatment of Related Options and Stock Appreciation Rights
Upon Exercise. Upon the exercise of a Stock Appreciation Right granted in
connection with an Option, the Option shall be canceled to the extent of the
number of Shares as to which the Stock Appreciation Right is exercised, and
upon the exercise of an Option granted in connection with a Stock
Appreciation Right, the Stock Appreciation Right shall be canceled to the
extent of the number of Shares as to which the Option is exercised or
surrendered.
8.3 Stock Appreciation Right Unrelated to an Option. The Committee
may grant to Eligible Individuals Stock Appreciation Rights unrelated to
Options. Stock Appreciation Rights unrelated to Options shall contain such
terms and conditions as to exercisability (subject to Section 8.7), vesting
and duration as the Committee shall determine, but in no event shall they
have a term of greater than ten (10) years. Upon exercise of a Stock
Appreciation Right unrelated to an Option, the Grantee shall be entitled to
receive an amount determined by multiplying (A) the excess of the Fair Market
Value of a Share on the date preceding the date of exercise of such Stock
Appreciation Right over the Fair Market Value of a Share on the date the
Stock Appreciation Right was granted, by (B) number of Shares as to which the
Stock Appreciation Right is being exercised. Notwithstanding the foregoing,
the Committee may limit in any manner the amount payable with respect to any
Stock Appreciation Right by including such a limit in the Agreement
evidencing the Stock Appreciation Right at the time it is granted.
8.4 Method of Exercise. Stock Appreciation Rights shall be
exercised by a Grantee only by a written notice delivered in person or by
mail to the Secretary of the Company at the Company's principal executive
office, specifying the number of Shares with respect to which the Stock
Appreciation Right is being exercised. If requested by the Committee, the
Grantee shall deliver the Agreement evidencing the Stock Appreciation Right
being exercised and the Agreement evidencing any related Option to the
Secretary of the Company who shall endorse thereon a notation of such
exercise and return such Agreement to the Grantee.
8.5 Form of Payment. Payment of the amount determined under
Sections 8.2(b) or 8.3 may be made in the discretion of the Committee solely
in whole Shares in a number determined at their Fair Market Value on the date
preceding the date of exercise of the Stock Appreciation Right, or solely in
cash, or in a combination of cash and Shares. If the Committee decides to
make full payment in Shares and the amount
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payable results in a fractional Share, payment for the fractional Share will
be made in cash.
8.6 Modification or Substitution. Subject to the terms of the
Plan, the Committee may modify outstanding Awards of Stock Appreciation
Rights or accept the surrender of outstanding Awards of Stock Appreciation
Rights (to the extent not exercised) and grant new Awards in substitution for
them. Notwithstanding the foregoing, no modification of an Award shall
adversely alter or impair any rights or obligations under the Agreement
without the Grantee's consent.
8.7 Effect of Change in Control. In the event of a Change in
Control, all Stock Appreciation Rights shall become immediately and fully
exercisable. In addition, to the extent set forth in an Agreement evidencing
the grant of a Stock Appreciation Right unrelated to an Option, a Grantee
will be entitled to receive a payment from the Company in cash or stock, in
either case, with a value equal to the excess, if any, of (A) the greater of
(x) the Fair Market Value, on the date preceding the date of exercise, of the
underlying Shares subject to the Stock Appreciation Right or portion thereof
exercised and (y) the Adjusted Fair Market Value, on the date preceding the
date of exercise, of the Shares over (B) the aggregate Fair Market Value, on
the date the Stock Appreciation Right was granted, of the Shares subject to
the Stock Appreciation Right or portion thereof exercised. In the event a
Grantee's employment with the Company terminates following a Change in
Control, each Stock Appreciation Right held by the Grantee that was
exercisable as of the date of termination of the Grantee's employment shall
remain exercisable for a period ending not before the earlier of the first
anniversary of (A) the termination of the Grantee's employment or (B) the
expiration of the stated term of the Stock Appreciation Right.
9. Dividend Equivalent Rights.
Dividend Equivalent Rights may be granted to Eligible Individuals
[and Eligible Directors] in tandem with an Option or Award or as a separate
award. The terms and conditions applicable to each Dividend Equivalent Right
shall be specified in the Agreement under which the Dividend Equivalent Right
is granted. Amounts payable in respect of Dividend Equivalent Rights may be
payable currently or deferred until the lapsing of restrictions on such
Dividend Equivalent Rights or until the vesting, exercise, payment,
settlement or other lapse of restrictions on the Option or Award to which the
Dividend Equivalent Rights relate. In the event that the amount payable in
respect of Dividend Equivalent Rights are to be deferred, the Committee shall
determine whether such amounts are to be held in cash or reinvested in Shares
or deemed (notionally) to be reinvested in Shares. If amounts payable in
respect of Dividend Equivalent Rights are to be held in cash, there may be
credited at the end of each year (or portion thereof) interest on the amount
of the account at the beginning of the year at a rate per annum as the
Committee, in its discretion, may determine. Dividend Equivalent Rights may
be settled
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in cash or Shares or a combination thereof, in a single installment or
multiple installments.
10. Restricted Stock.
10.1 Grant. The Committee may grant Awards to Eligible Individuals
of Restricted Stock, which shall be evidenced by an Agreement between the
Company and the Grantee. Each Agreement shall contain such restrictions,
terms and conditions as the Committee may, in its discretion, determine and
(without limiting the generality of the foregoing) such Agreements may
require that an appropriate legend be placed on Share certificates. Awards of
Restricted Stock shall be subject to the terms and provisions set forth below
in this Section 10.
10.2 Rights of Grantee. Shares of Restricted Stock granted pursuant
to an Award hereunder shall be issued in the name of the Grantee as soon as
reasonably practicable after the Award is granted provided that the Grantee
has executed an Agreement evidencing the Award, the appropriate blank stock
powers and, in the discretion of the Committee, an escrow agreement and any
other documents which the Committee may require as a condition to the
issuance of such Shares. If a Grantee shall fail to execute the Agreement
evidencing a Restricted Stock Award, the appropriate blank stock powers and,
in the discretion of the Committee, an escrow agreement and any other
documents which the Committee may require within the time period prescribed
by the Committee at the time the Award is granted, the Award shall be null
and void. At the discretion of the Committee, Shares issued in connection
with a Restricted Stock Award shall be deposited together with the stock
powers with an escrow agent (which may be the Company) designated by the
Committee. Unless the Committee determines otherwise and as set forth in the
Agreement, upon delivery of the Shares to the escrow agent, the Grantee shall
have all of the rights of a stockholder with respect to such Shares,
including the right to vote the Shares and to receive all dividends or other
distributions paid or made with respect to the Shares.
10.3 Non-transferability. Until all restrictions upon the Shares of
Restricted Stock awarded to a Grantee shall have lapsed in the manner set
forth in Section 10.4, such Shares shall not be sold, transferred or
otherwise disposed of and shall not be pledged or otherwise hypothecated, nor
shall they be delivered to the Grantee.
10.4 Lapse of Restrictions.
(a) Generally. Restrictions upon Shares of Restricted Stock
awarded hereunder shall lapse at such time or times and on such terms and
conditions as the Committee may determine. The Agreement evidencing the Award
shall set forth any such restrictions.
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(b) Effect of Change in Control. Unless the Committee shall
determine otherwise at the time of the grant of an Award of Restricted Stock,
the restrictions upon Shares of Restricted Stock shall lapse upon a Change in
Control. The Agreement evidencing the Award shall set forth any such
provisions.
10.5 Modification or Substitution. Subject to the terms of the
Plan, the Committee may modify outstanding Awards of Restricted Stock or
accept the surrender of outstanding Shares of Restricted Stock (to the extent
the restrictions on such Shares have not yet lapsed) and grant new Awards in
substitution for them. Notwithstanding the foregoing, no modification of an
Award shall adversely alter or impair any rights or obligations under the
Agreement without the Grantee's consent.
10.6 Treatment of Dividends. At the time an Award of Shares of
Restricted Stock is granted, the Committee may, in its discretion, determine
that the payment to the Grantee of dividends, or a specified portion thereof,
declared or paid on such Shares by the Company shall be (i) deferred until
the lapsing of the restrictions imposed upon such Shares and (ii) held by the
Company for the account of the Grantee until such time. In the event that
dividends are to be deferred, the Committee shall determine whether such
dividends are to be reinvested in shares of Stock (which shall be held as
additional Shares of Restricted Stock) or held in cash. If deferred dividends
are to be held in cash, there may be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of
the year at a rate per annum as the Committee, in its discretion, may
determine. Payment of deferred dividends in respect of Shares of Restricted
Stock (whether held in cash or as additional Shares of Restricted Stock),
together with interest accrued thereon, if any, shall be made upon the
lapsing of restrictions imposed on the Shares in respect of which the
deferred dividends were paid, and any dividends deferred (together with any
interest accrued thereon) in respect of any Shares of Restricted Stock shall
be forfeited upon the forfeiture of such Shares.
10.7 Delivery of Shares. Upon the lapse of the restrictions on
Shares of Restricted Stock, the Committee shall cause a stock certificate to
be delivered to the Grantee with respect to such Shares, free of all
restrictions hereunder.
11. Performance Awards.
11.1 (a) Performance Objectives. Performance Objectives for
Performance Awards may be expressed in terms of (i) earnings per Share, (ii)
Share price, (iii) pre-tax profits, (iv) net earnings, (v) return on equity
or assets, (vi) revenues, (vii) EBITDA, (viii) market share or market
penetration or (ix) any combination of the foregoing. [Consider Other
Criteria] [Also consider indicating whether goal is determined before or after
accounting changes, special charges, foreign currency effects, acquisitions,
divestitures or other extraordinary events.] Performance Objectives may be in
respect of the performance of the Company and its Subsidiaries (which may be
on a consolidated basis), a Subsidiary or a Division. Performance Objectives
may be absolute or relative
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<PAGE>
and may be expressed in terms of a progression within a specified range. The
Performance Objectives with respect to a Performance Cycle shall be
established in writing by the Committee by the earlier of (i) the date on
which a quarter of the Performance Cycle has elapsed or (ii) the date which
is ninety (90) days after the commencement of the Performance Cycle, and in
any event while the performance relating to the Performance Objectives remain
substantially uncertain. At the time of the granting of a Performance Award
and to the extent permitted under Section 162(m) of the Code and the
regulations thereunder, the Committee may provide for the manner in which the
Performance Objectives will be measured to reflect the impact of specified
corporate transactions, extraordinary events, accounting changes and other
similar events.
(b) Determination of Performance. Prior to the vesting,
payment, settlement or lapsing of any restrictions with respect to any
Performance Award made to a Grantee who is subject to Section 162(m) of the
Code, the Committee shall certify in writing that the applicable Performance
Objectives have been satisfied.
11.2 Performance Units. The Committee, in its discretion, may grant
Awards of Performance Units to Eligible Individuals, the terms and conditions
of which shall be set forth in an Agreement between the Company and the
Grantee. Performance Units may be denominated in Shares or a specified dollar
amount and, contingent upon the attainment of specified Performance
Objectives within the Performance Cycle, represent the right to receive
payment as provided in Section 11.2(b) of (i) in the case of
Share-denominated Performance Units, the Fair Market Value of a Share on the
date the Performance Unit was granted, the date the Performance Unit became
vested or any other date specified by the Committee, (ii) in the case of
dollar-denominated Performance Units, the specified dollar amount or (iii) a
percentage (which may be more than 100%) of the amount described in clause
(i) or (ii) depending on the level of Performance Objective attainment;
provided, however, that, the Committee may at the time a Performance Unit is
granted specify a maximum amount payable in respect of a vested Performance
Unit. Each Agreement shall specify the number of Performance Units to which
it relates, the Performance Objectives which must be satisfied in order for
the Performance Units to vest and the Performance Cycle within which such
Performance Objectives must be satisfied.
(a) Vesting and Forfeiture. Subject to Sections 11.1(b) and
11.4, a Grantee shall become vested with respect to the Performance Units to
the extent that the Performance Objectives set forth in the Agreement are
satisfied for the Performance Cycle.
(b) Payment of Awards. Subject to Section 11.1(b), payment to
Grantees in respect of vested Performance Units shall be made as soon as
practicable after the last day of the Performance Cycle to which such Award
relates unless the Agreement evidencing the Award provides for the deferral
of payment, in which event the terms and conditions of the deferral shall be
set forth in the Agreement. Subject to
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Section 11.4, such payments may be made entirely in Shares valued at their
Fair Market Value as of the day preceding the date of payment or such other
date specified by the Committee, entirely in cash, or in such combination of
Shares and cash as the Committee in its discretion shall determine at any
time prior to such payment; provided, however, that if the Committee in its
discretion determines to make such payment entirely or partially in Shares of
Restricted Stock, the Committee must determine the extent to which such
payment will be in Shares of Restricted Stock and the terms of such
Restricted Stock at the time the Award is granted.
11.3 Performance Shares. The Committee, in its discretion, may
grant Awards of Performance Shares to Eligible Individuals, the terms and
conditions of which shall be set forth in an Agreement between the Company
and the Grantee. Each Agreement may require that an appropriate legend be
placed on Share certificates. Awards of Performance Shares shall be subject
to the following terms and provisions:
(a) Rights of Grantee. The Committee shall provide at the
time an Award of Performance Shares is made the time or times at which the
actual Shares represented by such Award shall be issued in the name of the
Grantee; provided, however, that no Performance Shares shall be issued until
the Grantee has executed an Agreement evidencing the Award, the appropriate
blank stock powers and, in the discretion of the Committee, an escrow
agreement and any other documents which the Committee may require as a
condition to the issuance of such Performance Shares. If a Grantee shall fail
to execute the Agreement evidencing an Award of Performance Shares, the
appropriate blank stock powers and, in the discretion of the Committee, an
escrow agreement and any other documents which the Committee may require
within the time period prescribed by the Committee at the time the Award is
granted, the Award shall be null and void. At the discretion of the
Committee, Shares issued in connection with an Award of Performance Shares
shall be deposited together with the stock powers with an escrow agent (which
may be the Company) designated by the Committee. Except as restricted by the
terms of the Agreement, upon delivery of the Shares to the escrow agent, the
Grantee shall have, in the discretion of the Committee, all of the rights of
a stockholder with respect to such Shares, including the right to vote the
Shares and to receive all dividends or other distributions paid or made with
respect to the Shares.
(b) Non-transferability. Until any restrictions upon the
Performance Shares awarded to a Grantee shall have lapsed in the manner set
forth in Sections 11.3(c) or 11.4, such Performance Shares shall not be sold,
transferred or otherwise disposed of and shall not be pledged or otherwise
hypothecated, nor shall they be delivered to the Grantee. The Committee may
also impose such other restrictions and conditions on the Performance Shares,
if any, as it deems appropriate.
(c) Lapse of Restrictions. Subject to Sections 11.1(b) and
11.4, restrictions upon Performance Shares awarded hereunder shall lapse and
such Performance Shares shall become vested at such time or times and on such
terms,
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<PAGE>
conditions and satisfaction of Performance Objectives as the Committee may,
in its discretion, determine at the time an Award is granted.
(d) Treatment of Dividends. At the time the Award of
Performance Shares is granted, the Committee may, in its discretion,
determine that the payment to the Grantee of dividends, or a specified
portion thereof, declared or paid on actual Shares represented by such Award
which have been issued by the Company to the Grantee shall be (i) deferred
until the lapsing of the restrictions imposed upon such Performance Shares
and (ii) held by the Company for the account of the Grantee until such time.
In the event that dividends are to be deferred, the Committee shall determine
whether such dividends are to be reinvested in shares of Stock (which shall
be held as additional Performance Shares) or held in cash. If deferred
dividends are to be held in cash, there may be credited at the end of each
year (or portion thereof) interest on the amount of the account at the
beginning of the year at a rate per annum as the Committee, in its
discretion, may determine. Payment of deferred dividends in respect of
Performance Shares (whether held in cash or in additional Performance
Shares), together with interest accrued thereon, if any, shall be made upon
the lapsing of restrictions imposed on the Performance Shares in respect of
which the deferred dividends were paid, and any dividends deferred (together
with any interest accrued thereon) in respect of any Performance Shares shall
be forfeited upon the forfeiture of such Performance Shares.
(e) Delivery of Shares. Upon the lapse of the restrictions on
Performance Shares awarded hereunder, the Committee shall cause a stock
certificate to be delivered to the Grantee with respect to such Shares, free
of all restrictions hereunder.
11.4 Effect of Change in Control. In the event of a Change in
Control:
(a) With respect to Performance Units, the Grantee shall (i)
become vested in a percentage of Performance Units as determined by the
Committee at the time of the Award of such Performance Units and as set forth
in the Agreement and (ii) be entitled to receive in respect of all
Performance Units which become vested as a result of a Change in Control a
cash payment within ten (10) days after such Change in Control in an amount
as determined by the Committee at the time of the Award of such Performance
Unit and as set forth in the Agreement.
(b) With respect to Performance Shares, restrictions shall
lapse immediately on all or a portion of the Performance Shares as determined
by the Committee at the time of the Award of such Performance Shares and as
set forth in the Agreement.
(c) The Agreements evidencing Performance Shares and
Performance Units shall provide for the treatment of such Awards (or portions
thereof) which do not become vested as the result of a Change in Control,
including, but not limited to, provisions for the adjustment of applicable
Performance Objectives.
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11.5 Modification or Substitution. Subject to the terms of the
Plan, the Committee may modify outstanding Performance Awards or accept the
surrender of outstanding Performance Awards and grant new Performance Awards
in substitution for them. Notwithstanding the foregoing, no modification of a
Performance Award shall adversely alter or impair any rights or obligations
under the Agreement without the Grantee's consent.
12. Effect of a Termination of Employment.
The Agreement evidencing the grant of each Option and each Award
shall set forth the terms and conditions applicable to such Option or Award
upon a termination or change in the status of the employment of the Optionee
or Grantee by the Company, a Subsidiary or a Division (including a
termination or change by reason of the sale of a Subsidiary or a Division),
which, except for Director Options, shall be as the Committee may, in its
discretion, determine at the time the Option or Award is granted or
thereafter.
13. Adjustment Upon Changes in Capitalization.
(a) In the event of a Change in Capitalization, the Committee
shall conclusively determine the appropriate adjustments, if any, to (i) the
maximum number and class of Shares or other stock or securities with respect
to which Options or Awards may be granted under the Plan, (ii) the maximum
number and class of Shares or other stock or securities with respect to which
Options or Awards may be granted to any Eligible Individual during the term
of the Plan, (iii) the number and class of Shares or other stock or
securities which are subject to outstanding Options or Awards granted under
the Plan and the purchase price therefor, if applicable, (iv) the number and
class of Shares or other securities in respect of which Director Options are
to be granted under Section 6 and (v) the Performance Objectives.
(b) Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and
only to the extent otherwise permitted by Sections 422 and 424 of the Code.
(c) If, by reason of a Change in Capitalization, a Grantee of
an Award shall be entitled to, or an Optionee shall be entitled to exercise
an Option with respect to, new, additional or different shares of stock or
securities, such new, additional or different shares shall thereupon be
subject to all of the conditions, restrictions and performance criteria which
were applicable to the Shares subject to the Award or Option, as the case may
be, prior to such Change in Capitalization.
14. Effect of Certain Transactions.
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Subject to Sections 7.4, 8.7, 10.4(b) and 11.4 or as otherwise
provided in an Agreement, in the event of (i) the liquidation or dissolution
of the Company or (ii) a merger or consolidation of the Company (a
"Transaction"), the Plan and the Options and Awards issued hereunder shall
continue in effect in accordance with their respective terms, except that
following a Transaction each Optionee and Grantee shall be entitled to
receive in respect of each Share subject to any outstanding Options or
Awards, as the case may be, upon exercise of any Option or payment or
transfer in respect of any Award, the same number and kind of stock,
securities, cash, property or other consideration that each holder of a Share
was entitled to receive in the Transaction in respect of a Share; provided,
however, that such stock, securities, cash, property, or other consideration
shall remain subject to all of the conditions, restrictions and performance
criteria which were applicable to the Options and Awards prior to such
Transaction.
15. Interpretation.
Following the required registration of any equity security of the
Company pursuant to Section 12 of the Exchange Act:
(a) The Plan is intended to comply with Rule 16b-3 promulgated
under the Exchange Act and the Committee shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent therewith. Any
provisions inconsistent with such Rule shall be inoperative and shall not
affect the validity of the Plan.
(b) Unless otherwise expressly stated in the relevant
Agreement, each Option, Stock Appreciation Right and Performance Award
granted under the Plan is intended to be performance-based compensation
within the meaning of Section 162(m)(4)(C) of the Code. The Committee shall
not be entitled to exercise any discretion otherwise authorized hereunder
with respect to such Options or Awards if the ability to exercise such
discretion or the exercise of such discretion itself would cause the
compensation attributable to such Options or Awards to fail to qualify as
performance-based compensation.
16. Pooling Transactions.
Notwithstanding anything contained in the Plan or any Agreement to
the contrary, in the event of a Change in Control which is also intended to
constitute a Pooling Transaction, the Committee shall take such actions, if
any, as are specifically recommended by an independent accounting firm
retained by the Company to the extent reasonably necessary in order to assure
that the Pooling Transaction will qualify as such, including but not limited
to (i) deferring the vesting, exercise, payment, settlement or lapsing of
restrictions with respect to any Option or Award, (ii) providing that the
payment or settlement in respect of any Option or Award be made in the form
of cash,
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<PAGE>
Shares or securities of a successor or acquirer of the Company, or a
combination of the foregoing, and (iii) providing for the extension of the
term of any Option or Award to the extent necessary to accommodate the
foregoing, but not beyond the maximum term permitted for any Option or Award.
17. Termination and Amendment of the Plan.
The Plan shall terminate on the day preceding the tenth anniversary
of the date of its adoption by the Board and no Option or Award may be
granted thereafter. Subject to Section 6.5, the Board may sooner terminate
the Plan and the Board may at any time and from time to time amend, modify or
suspend the Plan; provided, however, that:
(a) no such amendment, modification, suspension or termination
shall impair or adversely alter any Options or Awards theretofore granted
under the Plan, except with the consent of the Optionee or Grantee, nor shall
any amendment, modification, suspension or termination deprive any Optionee
or Grantee of any Shares which he or she may have acquired through or as a
result of the Plan; and
(b) to the extent necessary under applicable law, no amendment
shall be effective unless approved by the stockholders of the Company in
accordance with applicable law.
18. Non-Exclusivity of the Plan.
The adoption of the Plan by the Board shall not be construed as
amending, modifying or rescinding any previously approved incentive
arrangement or as creating any limitations on the power of the Board to adopt
such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options otherwise than under the
Plan, and such arrangements may be either applicable generally or only in
specific cases.
19. Limitation of Liability.
As illustrative of the limitations of liability of the Company, but
not intended to be exhaustive thereof, nothing in the Plan shall be construed
to:
(i) give any person any right to be granted an Option or
Award other than at the sole discretion of the Committee;
(ii) give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;
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<PAGE>
(iii) limit in any way the right of the Company or any
Subsidiary to terminate the employment of any person at any time;
or
(iv) be evidence of any agreement or understanding,
expressed or implied, that the Company will employ any person at
any particular rate of compensation or for any particular period
of time.
20. Regulations and Other Approvals; Governing Law.
20.1 Except as to matters of federal law, the Plan and the rights of
all persons claiming hereunder shall be construed and determined in accordance
with the laws of the State of [ ] without giving effect to
conflicts of laws principles thereof.
20.2 The obligation of the Company to sell or deliver Shares with
respect to Options and Awards granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by
governmental agencies as may be deemed necessary or appropriate by the
Committee.
20.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock
Options the tax benefits under the applicable provisions of the Code and
regulations promulgated thereunder.
20.4 Each Option and Award is subject to the requirement that, if at
any time the Committee determines, in its discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
Award or the issuance of Shares, no Options or Awards shall be granted or
payment made or Shares issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or
obtained free of any conditions as acceptable to the Committee.
20.5 Notwithstanding anything contained in the Plan or any Agreement
to the contrary, in the event that the disposition of Shares acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), and is
not otherwise exempt from such registration, such Shares shall be restricted
against transfer to the extent required by the Securities Act and Rule 144 or
other regulations thereunder. The Committee may require any individual
receiving Shares pursuant to an Option or Award granted under the Plan, as a
condition
25
<PAGE>
precedent to receipt of such Shares, to represent and warrant to the Company
in writing that the Shares acquired by such individual are acquired without a
view to any distribution thereof and will not be sold or transferred other
than pursuant to an effective registration thereof under said Act or pursuant
to an exemption applicable under the Securities Act or the rules and
regulations promulgated thereunder. The certificates evidencing any of such
Shares shall be appropriately amended to reflect their status as restricted
securities as aforesaid.
21. Miscellaneous.
21.1 Multiple Agreements. The terms of each Option or Award may
differ from other Options or Awards granted under the Plan at the same time,
or at some other time. The Committee may also grant more than one Option or
Award to a given Eligible Individual during the term of the Plan, either in
addition to, or in substitution for, one or more Options or Awards previously
granted to that Eligible Individual.
21.2 Withholding of Taxes.
(a) At such times as an Optionee or Grantee recognizes taxable
income in connection with the receipt of Shares or cash hereunder (a "Taxable
Event"), the Optionee or Grantee shall pay to the Company an amount equal to
the federal, state and local income taxes and other amounts as may be
required by law to be withheld by the Company in connection with the Taxable
Event (the "Withholding Taxes") prior to the issuance, or release from
escrow, of such Shares or the payment of such cash. The Company shall have
the right to deduct from any payment of cash to an Optionee or Grantee an
amount equal to the Withholding Taxes in satisfaction of the obligation to
pay Withholding Taxes. In satisfaction of the obligation to pay Withholding
Taxes to the Company, the Optionee or Grantee may make a written election
(the "Tax Election"), which may be accepted or rejected in the discretion of
the Committee, to have withheld a portion of the Shares then issuable to him
or her having an aggregate Fair Market Value equal to the Withholding Taxes.
(b) If an Optionee makes a disposition, within the meaning of
Section 424(c) of the Code and regulations promulgated thereunder, of any
Share or Shares issued to such Optionee pursuant to the exercise of an
Incentive Stock Option within the two-year period commencing on the day after
the date of the grant or within the one-year period commencing on the day
after the date of transfer of such Share or Shares to the Optionee pursuant
to such exercise, the Optionee shall, within ten (10) days of such
disposition, notify the Company thereof, by delivery of written notice to the
Company at its principal executive office.
21.3. Effective Date. The effective date of this Plan shall be
as determined by the Board, subject only to the approval by the affirmative
vote of the holders of a majority of the securities of the Company present,
or represented,
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and entitled to vote at a meeting of stockholders duly held in accordance
with the applicable laws of the State of [ ] within
twelve (12) months of the adoption of the Plan by the Board.
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-39971) of our
reports as of the dates and the related financial statements of the companies
listed below which appear in such Prospectus. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
<TABLE>
<CAPTION>
PRICE WATERHOUSE LLP OFFICE
COMPANY DATE CITY, STATE
- ---------------------------------------------------------- ---------------------- -----------------------------
<S> <C> <C>
Dispatch Management Services Corp. December 5, 1997 Detroit, Michigan
Atlantic Freight Systems, Inc. December 4, 1997 Philadelphia, Pennsylvania
Aero Special Delivery Service, Inc. September 9, 1997 Sacramento, California
Gregory W. Austin (dba Battery Point Messenger and Alpha
Express) November 14, 1997 Sacramento, California
Washington Express Services, Inc. November 7, 1997 Detroit, Michigan
MLQ Express, Inc. August 27, 1997 Atlanta, Georgia
American Eagle Endeavors, Inc. November 25, 1997 Detroit, Michigan
A&W Couriers, Inc. December 12, 1997 Austin, Texas
Fleetfoot Max, Inc. October 7, 1997 Seattle, Washington
Expressit Couriers, Inc. November 11, 1997 Detroit, Michigan
Express Enterprise, Inc.--Ground Operations November 21, 1997 Detroit, Michigan
Bullit Courier Services, Inc. September 11, 1997 Detroit, Michigan
Profall, Inc. December 5, 1997 Los Angeles, California
Kangaroo Express November 14, 1997 Denver, Colorado
National Messenger, Inc. December 5, 1997 Los Angeles, California
S-Car-Go Courier, Inc. November 14, 1997 Sacramento, California
Transpeed Courier Services, Inc. November 10, 1997 Denver, Colorado
A Courier, Inc. and Affiliates December 16, 1997 Atlanta, Georgia
Zoom Messenger Service Inc. December 12, 1997 Philadelphia, Pennsylvania
Christopher D. Neal (dba Zap Courier and Crosstown
Messenger) November 25, 1997 Sacramento, California
Michael S. Studebaker (dba Studebaker Messenger Service) December 12, 1997 Sacramento, California
</TABLE>
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
December 24, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-1 (No. 333-39971) of our
reports as of the dates and the related financial statements of the companies
listed below which appear in such Prospectus. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
<TABLE>
<CAPTION>
COMPANY DATE
- -------------------------------------------------------------------------- -------------------------------------
<S> <C>
Brookside Systems and Programming Limited October 15, 1997
Bridge Wharf Investments Limited December 12, 1997
Security Despatch Limited (excluding the mail room services operations) October 15, 1997
</TABLE>
/s/ PRICE WATERHOUSE
PRICE WATERHOUSE
London, England
December 24, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 11, 1997, with respect to the combined
financial statements of Earlybird Courier Service, LLC, Total Management
Supports Services, LLC and their Affiliates included in Amendment No. 1 to the
Registration Statement (Form S-1 No.333-39971) and related Prospectus of
Dispatch Management Services Corp. for the registration of its common stock.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
December 24, 1997
<PAGE>
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 5, 1997, with respect to the financial
statements of RJK Enterprises Inc. (D.B.A. Deadline Express) included in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-39971) and
related Prospectus of Dispatch Management Services Corp. for the registration of
its common stock.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
December 24, 1997
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> NOV-20-1996
<PERIOD-END> SEP-30-1997
<CASH> 820
<SECURITIES> 0
<RECEIVABLES> 24
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 884
<PP&E> 33
<DEPRECIATION> 1
<TOTAL-ASSETS> 4,644
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0
2
<COMMON> 0
<OTHER-SE> 1,196
<TOTAL-LIABILITY-AND-EQUITY> 4,644
<SALES> 219
<TOTAL-REVENUES> 219
<CGS> 0
<TOTAL-COSTS> 195
<OTHER-EXPENSES> 190
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (208)
<INCOME-TAX> 0
<INCOME-CONTINUING> (208)
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<CHANGES> 0
<NET-INCOME> (208)
<EPS-PRIMARY> 0
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</TABLE>
