<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarter ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission file number 0-23349
DISPATCH MANAGEMENT SERVICES CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3967426
(State of Incorporation) (I.R.S. Employer Identification No.)
65 WEST 36TH STREET
NEW YORK, NEW YORK 10018
(Address of principal executive offices) (Zip Code)
(212) 947-6890
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 14, 1998, there were 11,689,484 shares of Common Stock outstanding.
<PAGE> 2
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
December 31, 1997 (unaudited) and
June 30, 1998 (unaudited)
Condensed Consolidated Statements of Operations for the
Three and Six Months ended June 30, 1997 (unaudited)
and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1997 (unaudited) and 1998
(unaudited)
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Signatures
Exhibit Index
<PAGE> 3
Item 1: Financial Statements
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 354 $ 2,275
Accounts receivable, net of allowance of $- and $1,001
for doubtful accounts 19 32,517
Prepaid expenses, other assets and deferred offering
costs 6,618 4,533
-------- --------
Total current assets 6,991 39,325
Property, plant and equipment, net 30 8,509
Goodwill, net 266 103,946
Other long-term assets 748 18,692
-------- --------
Total assets $ 8,035 $170,472
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term obligations $ 1,585 $ 2,841
Accounts payable 673 5,154
Accrued liabilities and other
current liabilities 5,061 14,909
-------- --------
Total current liabilities 7,319 22,904
Long-term obligations, net of current maturities -- 28,318
Other long-term liabilities -- 3,943
-------- --------
Total liabilities 7,319 55,165
-------- --------
Preferred stock, $.01 par, 10,000,000 shares authorized
Series A: 181,446 and 0 shares issued and
outstanding, respectively 2 --
Series B: 100 and 0 shares issued and outstanding,
respectively -- --
Common stock, $.01 par, 100,000,000 shares
authorized, 846,923 and 11,640,355 shares issued
and outstanding, respectively 9 116
Additional paid-in capital 1,422 114,531
Cumulative translation adjustment -- 12
Retained earnings (accumulated deficit) (717) 648
-------- --------
Total stockholders' equity 716 115,307
-------- --------
Total liabilities and stockholders' equity $ 8,035 $170,472
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 4
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Six months ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 102 $ 51,053 $ 102 $ 75,369
Cost of revenues 94 30,965 94 45,994
----------- ----------- ----------- -----------
Gross profit 8 20,088 8 29,375
Selling, general and administrative expenses 16 14,595 30 22,125
Depreciation and amortization -- 1,182 -- 1,888
----------- ----------- ----------- -----------
Operating income (loss) (8) 4,311 (22) 5,362
Other expenses:
Interest expense -- 436 -- 664
Acquired in-process research and development -- -- -- 700
Other expense -- 57 -- 139
----------- ----------- ----------- -----------
Income (loss) before income tax provision (8) 3,818 (22) 3,859
and extraordinary item
Income tax provision -- 1,627 -- 1,700
----------- ----------- ----------- -----------
Income (loss) before extraordinary item (8) 2,191 (22) 2,159
Extraordinary loss on early extinguishment of
debt (net of income tax benefit of $384) -- -- -- 713
----------- ----------- ----------- -----------
Net income (loss) $ (8) $ 2,191 $ (22) $ 1,446
----------- ----------- ----------- -----------
Income (loss) per common share - basic
Income (loss) before extraordinary item $ (0.01) $ 0.19 $ (0.03) $ 0.24
Extraordinary item -- -- -- (0.08)
----------- ----------- ----------- -----------
Net income (loss) $ (0.01) $ 0.19 $ (0.03) $ 0.16
----------- ----------- ----------- -----------
Income (loss) per common share - diluted
Income (loss) before extraordinary item $ (0.01) $ 0.19 $ (0.03) $ 0.23
Extraordinary item -- -- -- (0.08)
----------- ----------- ----------- -----------
Net income (loss) $ (0.01) $ 0.19 $ (0.03) $ 0.15
----------- ----------- ----------- -----------
Weighted average shares
Common shares outstanding 846,923 11,545,545 846,923 9,175,915
----------- ----------- ----------- -----------
Adjusted common shares assuming exercise
of stock options 846,923 11,839,348 846,923 9,354,963
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE> 5
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended
-----------------------
June 30, June 30,
1997 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (22) $ 1,446
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Amortization and depreciation -- 1,888
Acquired in-process research and development -- 700
Early extinguishment of debt -- 713
Change in operating assets and liabilities (net of
assets acquired and liabilities assumed in business
combinations accounted for under the purchase method):
Accounts receivable (28) (5,799)
Prepaid expenses and other current assets (394) (2,347)
Accounts payable and accrued liabilities 364 2,457
-------- --------
Net cash used by operating activities (80) (942)
-------- --------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired -- (85,415)
Additions to equipment, net of disposals -- (3,071)
-------- --------
Net cash used in investing activities -- (88,486)
-------- --------
Cash flows from financing activities:
Proceeds from initial public offering, net of
underwriting discounts and other offering costs -- 76,276
Proceeds from issuance of common stock 84 --
Proceeds from long-term obligations -- 27,070
Principal payments on short-term obligations -- (6,602)
Principal payments on long-term obligations -- (5,395)
-------- --------
Net cash provided by financing activities 84 91,349
-------- --------
Net increase in cash and cash equivalents 4 1,921
Cash and cash equivalents, beginning of period -- 354
-------- --------
Cash and cash equivalents, end of period $ 4 $ 2,275
======== ========
</TABLE>
The company issued common stock and cash in connection with business
combinations accounted for under the purchase method of accounting during the
six months ended June 30, 1998. The purchase price of the acquired companies at
the dates of the acquisitions was allocated as follows:
<TABLE>
<S> <C>
Accounts receivable $ 26,686
Prepaid expenses and other assets 2,491
Property and equipment 6,129
Intangible assets 105,964
Other assets 17,204
Short-term debt (3,097)
Accounts payable (11,650)
Accrued liabilities (9,662)
Long-term debt (4,736)
Other long-term liabilities (4,215)
--------
Net assets acquired $125,114
--------
The acquisitions were funded as follows:
Common stock $ 36,857
Cash, net of cash acquired 85,415
Purchase price and acquisition costs payable 2,842
--------
$125,114
--------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 6
DISPATCH MANAGEMENT SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. Organization and Basis of Presentation
In connection with the closing of the initial public offering (the
"Offering") of the common stock, $.01 par value (the "Common Stock"), of
Dispatch Management Services Corp. (the "Company" or "DMS") in February
1998, the Company acquired, in separate combination transactions (the
"Combinations"), 38 urgent, on-demand, point-to-point courier firms and one
software firm (each, together with the software firm, a "Founding Company,"
and collectively, the "Founding Companies").
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of the Company, the
Founding Companies and the other businesses acquired subsequent to the
Offering (the "Recent Acquisitions").
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information,
the instructions to Quarterly Report Form 10-Q and Rule 10-01 of Regulation
S-X, and should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. Accordingly, significant
accounting policies and other disclosures normally provided have been
omitted since such items are disclosed therein. In the opinion of
management, the information contained herein reflects all adjustments
necessary to make the consolidated financial position, consolidated results
of operations and of cash flows for the interim periods a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
2. Initial Public Offering
On February 6, 1998, DMS completed the Offering of 6,000,000 shares
of Common Stock at $13.25 per share. In March 1998, the Underwriters
exercised their over-allotment option to purchase an additional 900,000
shares of Common Stock at the initial public offering price. The total
proceeds from the Offering of the 6,900,000 shares of Common Stock, net of
underwriter commissions and offering costs, was approximately $76,276.
The net proceeds were used primarily for the cash portion of the purchase
prices for the Founding Companies, for the early extinguishment of certain
note payable obligations of the Company which resulted in an extraordinary
loss of $713 net of income tax and for the repayment of certain
indebtedness of the Founding Companies.
Upon closing of the Offering, the Company converted the 181,446 shares of
Series A Preferred Stock into 299,225 shares of Common Stock and the 100
shares of Series B Preferred Stock into 37,736 shares of Common Stock.
3. Business Combinations
Founding Companies
On February 11, 1998, the Company acquired all of the outstanding common
stock and/or assets of the Founding Companies simultaneously with the
closing of the Offering. The acquisitions have been accounted for using the
purchase method of accounting. The aggregate consideration paid by the
Company to acquire the Founding Companies was $45,988 in cash, excluding
$15,869, which is subject to earn-out provisions, and 3,359,659 shares of
Common Stock. The consideration does not reflect contingent consideration
which may be issued pursuant to earn out arrangements included in the
definitive agreements for the Founding Companies. Contingent consideration,
if earned, will be recorded in a manner consistent with the consideration
paid at closing for each respective Founding Company.
In connection with the acquisition of the Founding Companies, the Company
recorded liabilities for employee severance and for future operating lease
payments (the "Acquisition Liabilities"). The severance accrual relates to
the involuntary termination of approximately 85 administrative and middle
management personnel from the integration of the acquired operations. Seven
of the employees were terminated prior to June 30, 1998, and management
believes the remaining employees will be terminated by December 31, 1998.
The operating lease payment accrual relates to equipment and facility
leases assumed by the Company. The Company has either vacated the
facilities or stopped using the equipment, or expects to do so by mid-1999.
Amounts accrued represent management's estimate of the cost to exit the
facilities and equipment leases.
The Acquisition Liabilities and activity during the three month period
ended June 30, 1998 were as follows:
<PAGE> 7
<TABLE>
<CAPTION>
Amounts in thousands
----------------------
Severance Lease
Liability Liability
--------- ---------
<S> <C> <C>
Balance established in purchase accounting $1,013 $2,620
Severance payments (138)
Lease payments (89)
------ ------
Balance at June 30, 1998 $ 875 $2,531
====== ======
</TABLE>
Goodwill was increased by $3,633 during the three months ended June 30,
1998 as a result of recording the Acquisition Liabilities. Goodwill was
reduced by approximately $3,000 during the three months ended June 30, 1998
as a result of revisions to the estimated value of net assets acquired.
Recent Acquisitions
On April 7, 1998, the Company acquired Delta Air & Road Transport, Plc.
("Delta"), a London-based delivery services firm with 1997 revenues of
approximately $33,400, for a total cash purchase price of approximately
$22,300, exclusive of a $3,000 earn out. The acquisition has been accounted
for using the purchase method of accounting. The excess purchase price over
the fair value of the net assets acquired of approximately $20,633 is being
amortized over a forty-year period.
During the three months ended June 30, 1998, the Company acquired numerous
other delivery service firms (referred to jointly with Delta as "Recent
Acquisition") for aggregate consideration of approximately $4,609 in cash,
177,881 shares of Common Stock and $1,000 payable over a two year period.
One of these acquisitions has been accounted for as a pooling of interests;
however, comparative financial statements of earlier periods have not been
restated due to the immateriality of the acquisition. The remaining
acquisitions have been accounted for using the purchase method of
accounting.
The Company is in the process of analyzing its facilities, staffing and
other requirements associated with the Recent Acquisitions, and expects to
adjust the related purchase accounting during the third quarter of 1998.
The following unaudited pro forma financial information of the Company for
the six month periods ended June 30, 1997 and 1998 include the combined
operations of the Company, the Founding Companies and the Recent
Acquisitions as if the Offering and the acquisitions had occurred on
January 1, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
In thousands, except
per share data
Six months ended June 30,
-------------------------
1997 1998
------ -----
<S> <C> <C>
Revenues $95,549 $105,729
Income before extraordinary item $ 1,723 $ 3,451
Net income $ 1,723 $ 2,738
Per share data:
Income before extraordinary item $ 0.15 $ 0.29
Net income $ 0.15 $ 0.23
</TABLE>
The unaudited pro forma financial information includes adjustments to the
Company's historical results of operations which provide for reductions in
salaries, bonuses and benefits payable or provided to the acquired
companies' stockholders and managers to which they agreed prospectively,
incremental amortization of goodwill, reduction in royalty payments made by
certain Founding Companies in accordance with franchise agreements that
terminated as a result of the Combinations, income tax adjustments,
incremental interest expense associated with borrowings to fund the
acquisitions and the reduction in expense related to amounts allocated to
in-process research and development activities. This summarized pro forma
information may not be indicative of actual results if the transactions had
occurred on the dates indicated or of the results which may be realized in
the future.
4. Debt
On June 11, 1998, the Company entered into a $60,000 senior credit facility
with a group of lenders with NationsBank, N.A. as administrative agent. The
facility consists of a revolving line of credit and a letter of credit
facility. The facility was expanded to $105,000 effective August 12, 1998.
The facility is secured by substantially all the assets of the Company and
contains restrictive covenants including restrictions on dividends and
certain financial measurement requirements.
The revolving line of credit bears interest determined by reference to the
administrative agent's base rate or the LIBOR rate, plus marginal rates
based on performance measurements. The weighted average interest rate on
the outstanding facility was 7.15% at June 30, 1998. Interest payments are
due at intervals ranging between one and three months and the maturity date
of the facility is May 21, 2001.
$27,070 of the line of credit was outstanding at June 30, 1998, and
approximately $38,000 was outstanding at August 13, 1998. Commitment fees
on the unused portion of the facility range from .25% to .375% per annum
based on performance measurements. The Company had $4,900 of letters of
credit outstanding at June 30, 1998.
5. Stockholders' Equity and Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires the reporting and display of comprehensive
income and its components in the financial statements.
<PAGE> 8
SFAS No. 130 also requires the Company to classify items of other
comprehensive income or loss by their nature in financial statements.
Changes in stockholders' equity and comprehensive income during the six
months ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Stockholders' Comprehensive
Equity Income
------------- -------------
<S> <C> <C>
Stockholders' equity at December 31, 1997 $ 716
Issuance of Common Stock in connection
with public offering, net of offering costs
and underwriter discounts 76,276
Issuance of Common Stock in connection
with acquisitions 36,857
Comprehensive loss
Net income 1,446 $ 1,446
Foreign currency translation adjustment 12 12
--------
Total $ 1,458
-------- --------
Shareholders equity balance at June 30, 1998 $115,307
--------
</TABLE>
6. New Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS
131 introduces a management approach model for segment reporting. This
approach is based on the way that the chief operating decision maker
organizes segments within a company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure,management structure or in any other
manner in which management disaggregates a company. SFAS 131 is effective
for fiscal years beginning after December 15, 1997 and does not need to be
applied to interim statements in the initial year of application. The
Company intends to adopt this standard when required and is in the process
of determining the effect of SFAS 131 on the Company's financial
statements.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. When used herein, the words "anticipate",
"believe" , "estimate", "intend", "may", "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in the Company's Registration Statement
on Form S-4 as filed on May 29, 1998, as well as those discussed under the
heading "Factors Affecting the Company's Business". The Company does not
undertake any obligation to revise these forward-looking statements to reflect
any future events or circumstances.
Introduction
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto
appearing elsewhere herein. All dollar amounts are expressed in thousands,
except for per share data.
Overview
The Company was formed in 1997 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 conducted no significant
operations until the closing of the Offering and the Combinations on February
11, 1998.
Results of Operations - The Company
The Company conducted no significant operations from its inception through the
Offering and the Combinations. For accounting purposes and the presentation of
the actual financial results herein, February 11, 1998 has been used as the
effective date of the Combinations. The Company incurred various legal,
accounting and printing costs in connection with the Offering and the
Combinations, which were funded by the proceeds from the Offering.
Revenues for the three and six months ended June 30, 1998, were $51,053 and
$75,369, respectively, and gross profit for the three and six months was $20,088
and $29,375, respectively. Operating income was $4,311 and $5,362 for the three
and six months ended June 30, 1998. Net income was $2,191 for the three month
period and net income before extraordinary item was $2,159 for the six month
period. Net income before extraordinary items for the six month period includes
a $700 one-time, non-cash charge of acquired in-process research and
development. The net income of $1,446 for the six month period includes an
extraordinary loss of $713 net of income taxes related to the early
extinguishment of certain notes payable obligations. For a discussion of pro
forma operations for the six months ended June 30, 1998 and 1997, see the
Results of Operations - Pro Forma.
Liquidity and Capital Resources - The Company
As of June 30, 1998, the Company had working capital of approximately $16,421
and cash of approximately $2,275. The Company paid off at the closing of the
Offering substantially all of the Founding Companies' debt obligations except to
the extent such obligations related to capitalized lease obligations and certain
debt obligations of Bridge Wharf Investments Limited (d/b/a/ West One).
On June 11, 1998, the Company entered into a $60,000 senior credit facility with
a group of lenders with NationsBank, N.A. as administrative agent. The facility
consists of a revolving line of credit and a letter of credit facility. The
facility was expanded to $105,000 effective August 12, 1998. The facility is
secured by substantially all the assets of the Company and contains restrictive
covenants including restrictions on dividends and certain performance
measurement requirements.
The revolving line of credit bears interest determined by reference to the
administrative agent's base rate or the LIBOR rate, plus marginal rates based on
performance measurements. The weighted average interest rate on the outstanding
facility was 7.15% at June 30, 1998. Interest payments
<PAGE> 10
are due at intervals ranging between one month and three months and the maturity
date of the facility is May 21, 2001.
$27,070 of the line of credit was outstanding at June 30, 1998. Commitment fees
on the unused portion of the facility range from .25% to .375% per annum based
on performance measurements. The Company has $4,900 of letters of credit
outstanding at June 30, 1998.
The Company anticipates that its current cash on hand, cash flow from operations
and additional financing available under the existing line of credit will be
sufficient to meet the Company's liquidity requirements for its operations. The
Company is currently, and intends to continue, pursuing additional acquisitions,
which are expected to be funded through a combination of cash and the issuance
of the Company's shares of Common Stock. To the extent that the Company elects
to pursue acquisitions involving the payment of significant amounts of cash (to
fund the purchase price of such acquisitions and the repayment of assumed
indebtedness) and the existing line of credit is inadequate, the Company is
likely to require additional sources of financing (debt or equity financing) to
fund such non-operating cash needs.
Management expects the Company's capital expenditures, consisting primarily of
communications equipment and improvements to related technology, to increase as
its operations continue to expand. However, the amount of these capital
expenditures is expected to remain relatively minor compared to the cash
requirements related to the Company's acquisition program. The Company does not
have significant capital expenditure requirements to replace or expand the
number of vehicles used in its operations because substantially all of its
drivers are owner-operators who provide their own vehicles.
Results of Operations - Pro Forma
The following unaudited pro forma statements of operations of the Company for
the six month periods ended June 30, 1998 and 1997 include the combined
operations of the Company, the Founding Companies and the Recent Acquisitions as
if the Offering, the Combinations and the Recent Acquisitions had occurred on
January 1, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------- Percent
1997 1998 Change
-------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues $ 95,549 $105,729 10.7%
Costs of revenues 59,344 64,392 8.5
-------- -------- ---------
Gross profit 36,205 41,337 14.2
Selling, general and administrative 29,235 31,417 7.5
Depreciation and amortization 2,895 2,753 (4.9)
-------- -------- ---------
Operating income 4,075 7,167 75.9
Interest and other expense, net 855 1,161 35.8
-------- -------- ---------
Income before income taxes and
extraordinary item 3,220 6,006 86.5
Provision for income taxes 1,497 2,555 70.7
-------- -------- ---------
Income before extraordinary item $ 1,723 $ 3,451 100.3%
======== ======== =========
Income per share before
Extraordinary item - diluted $ .15 $ .29
======= ========
</TABLE>
The unaudited pro forma statements of operations include adjustments to the
Company's historical results of operations which provide for (1) reductions in
salaries, bonuses and benefits payable or provided to stockholders and managers
of the Founding Companies and the Recent Acquisitions to which they agreed
prospectively; (2) amortization of goodwill as a result of the Combinations to
be recorded over a period of 5 to 40 years; (3) reduction in royalty payments
made by certain Founding Companies in accordance with franchise agreements that
terminated as a result of the
<PAGE> 11
combinations; (4) income tax adjustments as follows: (a) incremental provision
for federal and state income taxes assuming all entities were subject to federal
and state income taxes, (b) federal and state income taxes relating to the other
statement of operations adjustments and (c) incremental provision for income
taxes due to non-deductible goodwill; (5) incremental interest expense
associated with borrowings to fund the acquisitions; and (6) the reduction in
expense related to amounts allocated to in-process research and development
activities. The number of shares used in computing income per share before
extraordinary item - diluted includes the weighted average outstanding common
shares at June 30, 1998 (11,545,545 shares) and 293,303 incremental shares for
potential common shares from stock options using the treasury stock method.
This summarized pro forma information may not be indicative of actual results if
the transactions had occurred on the dates indicated or of the results which may
be realized in the future. The pro forma results do not reflect the expected
benefits and cost reductions anticipated by the Company, future corporate costs,
or interest income on Offering proceeds.
Pro forma revenues increased by approximately $10,180. This increase was
primarily attributable to the addition of significant new accounts or service
contracts at several of the Founding Companies, and the expansion of delivery
services or the purchase of additional customer lists.
Pro forma cost of revenues increased approximately $5,048. This increase was
generally consistent with the respective increases in revenues. As a percentage
of pro forma revenues, cost of revenues decreased from 62.1% for the six months
ended June 30, 1997, to 60.9% for the six months ended June 30, 1998, primarily
as a result of consolidation of administrative activities and improvements in
productivity of the overall North American courier fleet.
Pro forma year-to-date selling, general and administrative expenses increased
approximately $2,182. This increase primarily related to costs incurred related
to the additional infrastructure required to support the acquisition of new
accounts. As a percentage of pro forma revenues, sales, general and
administrative expenses decreased from 30.6% for the six months ended June 30,
1997, to 29.7% for the six months ended June 30, 1998, primarily as a result of
rationalization of facilities in several key operating centers.
Pro forma year-to-date depreciation and amortization expense decreased by $142.
The decrease was primarily attributable to certain property and equipment
previously utilized by the Founding Companies, which were not acquired by the
Company, including the facility owned by Bridge Wharf Investments Limited (d/b/a
West One).
Pro forma consolidated operating income increased $3,092 as a result of the
factors discussed above.
Pro forma year-to-date interest and other expense increased $306 as a result of
changes in other income and expense items. Pro forma interest expense remained
relatively constant between the periods.
Recently Issued Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
introduces a management approach model for segment reporting. This approach is
based on the way that the chief operating decision maker organizes segments
within a company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure or management structure or in any other manner in which management
disaggregates a company. SFAS 131 is effective for fiscal years beginning after
December 15, 1997 and does not need to be applied to interim statements in the
initial year of application. The Company intends to adopt this standard when
required and is in the process of determining the effect of SFAS 131 on the
Company's financial statements.
Factors Affecting the Company's Business
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. The Company's point-to-point
delivery services business is subject to seasonal influences. The Company's
revenues and profitability in its business have generally been lower in the
summer months. As the Company's mix of businesses
<PAGE> 12
evolves through future acquisitions, these seasonal fluctuations may change. In
addition, quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
general economic conditions, and the retroactive restatement of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
CONVERSION TO THE DMS MODEL. The Company intends to convert the existing
operations of additional acquired target companies 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 market and may have a
material adverse effect on the Company's business, financial condition or
results of operations.
INTERNATIONAL OPERATIONS. A significant portion of the Company's revenues are
generated in the United Kingdom. For the three month period ended June 30, 1998,
revenues in the United Kingdom accounted for approximately 40% of total
consolidated revenues. The conversion rate between the British Pound Sterling
and the U.S. dollar during 1998 has been approximately the same as the
comparable periods in 1997, although there can be no assurance that fluctuations
in such currency exchange rate will not in the future have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company intends to continue to focus significant attention and resources on
international expansion in the future and expects foreign sales to continue to
represent a significant portion of the Company's total sales. In addition to
currency exchange rates, the Company's operations in foreign markets are subject
to a number of inherent risks, including new and different legal, regulatory and
competitive requirements, difficulties in staffing and managing foreign
operations, risks specific to different business lines that the Company may
enter into, and other factors.
ACQUISITIONS. The Company depends upon organic growth and acquisition to
increase its earnings. There can be no assurance that the Company will complete
acquisitions in a manner that coincides with the end of its fiscal quarters. The
failure to complete acquisitions on a timely basis could have a material adverse
effect on the Company's quarterly results. Likewise, delays in implementing
planned integration strategies and activities also could adversely affect the
Company's quarterly earnings.
In addition, there can be no assurance that acquisitions will be available to
the Company on favorable terms. If the Company is unable to use the Company's
Common Stock as consideration in acquisitions, for example, because it believes
that the market price of the Common Stock is too low or because the owners of
potential acquisition targets conclude that the market price of the Company's
Common Stock is too volatile, the Company would need to use cash to make such
acquisitions. This might adversely affect the pace of the Company's acquisition
program and the impact of acquisitions on the Company's quarterly results. In
addition, the consolidation of the domestic courier industry has reduced the
number of larger companies available for sale, which could lead to higher prices
being paid for the acquisition of the remaining domestic, independent companies.
The failure to acquire additional businesses or to acquire such businesses on
favorable terms in accordance with the Company's growth strategy could have a
material adverse impact on growth.
There can be no assurance that companies that have been acquired, or that may be
acquired in the future, will achieve sales and profitability levels that justify
the investment therein. Acquisitions may involve a number of special risks that
could have a material adverse effect on the Company's operations and financial
performance, including adverse short-term effects on the Company's reported
operating results; diversion of management's attention; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets.
COMPETITION. The Company operates in a highly competitive environment. In the
markets in which it operates, the Company generally competes with a large number
of smaller, independent companies, many of which are well-established in their
markets. Several of its large competitors
<PAGE> 13
operate in many of its geographic markets, and other competitors may choose to
enter the Company's geographic and product markets in the future. No assurances
can be given that competition will not have an adverse effect on the Company's
business.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
<PAGE> 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Form 8-K dated April 21, 1998 and amended on August 14, 1998 reported an
acquisition under Item 2 and incorporated by reference historical and proforma
financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISPATCH MANAGEMENT SERVICES CORP.
August 14, 1998 By: /s/ Marko Bogoievski
- --------------- -----------------------------
Date Marko Bogoievski
Chief Financial Officer
<PAGE> 15
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
11.1 Statement Regarding Computation of Net Income Per Share
27.1 Financial data schedule
<PAGE> 1
EXHIBIT 11.1
DISPATCH MANAGEMENT SERVICES CORP. STATEMENT REGARDING COMPUTATION OF NET
INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 2,191 $ (8) $ 2,159 $ (22)
Extraordinary item-loss on early
extinguishment of debt, net of income taxes 713
------- ------- ------- -------
Net income (loss) $ 2,191 $ (8) $ 1,446 $ (22)
======= ======= ======= =======
Weighted average shares outstanding 11,546 847 9,176 847
======= ======= ======= =======
Loss before extraordinary item $ .19 $ (.01) $ .24 $ .03
Extraordinary item-loss on early
extinguishment of debt, net of income taxes (.08)
------- ------- ------- -------
Net income (loss) per share $ .19 $ (.01) $ .16 $ .03
======= ======= ======= =======
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 2,191 $ (8) $ 2,159 $ (22)
Extraordinary item-loss on early
extinguishment of debt, net of income taxes
713
------- ------- ------- -------
Net income (loss) $ 2,191 $ (8) $ 1,446 $ (22)
======= ======= ======= =======
Weighted average shares outstanding 11,546 847 9,176 847
Potential common shares from stock options 293 179
------- ------- ------- -------
Total weighted average shares outstanding 11,839 847 9,355 847
======= ======= ======= =======
Income (loss) before extraordinary item $ .19 $ (.01) $ .23 $ .03
Extraordinary item-loss on early
extinguishment of debt, net of income taxes (.08)
------- ------- ------- -------
Net income (loss) per share $ .19 $ (.01) $ .15 $ .03
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,275
<SECURITIES> 0
<RECEIVABLES> 33,518
<ALLOWANCES> 1,001
<INVENTORY> 0
<CURRENT-ASSETS> 39,325
<PP&E> 8,509
<DEPRECIATION> 737
<TOTAL-ASSETS> 170,422
<CURRENT-LIABILITIES> 22,904
<BONDS> 0
0
0
<COMMON> 116
<OTHER-SE> 115,191
<TOTAL-LIABILITY-AND-EQUITY> 115,307
<SALES> 51,053
<TOTAL-REVENUES> 51,053
<CGS> 30,965
<TOTAL-COSTS> 14,595
<OTHER-EXPENSES> 1,239
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 436
<INCOME-PRETAX> 3,818
<INCOME-TAX> 1,627
<INCOME-CONTINUING> 2,191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,191
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
